Milk in the Southern Michigan Marketing Area; Decision on Proposed Amendments to Marketing Agreement and to Order

SUMMARY: This final decision adopts a multiple component pricing (MCP)

plan in the Southern Michigan Federal milk order. The three components

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

The proposed plan includes adjustments to the producer protein price

based on the somatic cell count of producer milk. The decision also

adopts changes in qualifying shipments from pool supply plants and

gives the market administrator the authority to adjust the monthly

shipping percentage requirements for both proprietary and cooperative

supply plants or units of supply plants. In addition, the maximum

allowable administrative and marketing service assessment rates are

increased to 4 and 7 cents, respectively. The amendments are based on

industry proposals considered at public hearings held during February

1993 and March 1994 in Novi, Michigan, and in Grand Rapids, Michigan,

respectively.

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)

720-7183.

SUPPLEMENTARY INFORMATION: This administrative action is governed by

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

Code and therefore is excluded from the requirements of Executive Order

12866.

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

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

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

Marketing Service has certified that this rule will not have a

significant economic impact on a substantial number of small entities.

The amended order 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 3, 1992; published December 10,

1992 (57 FR 58418).

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

January 29, 1993 (58 FR 6447).

Recommended Decision: Issued November 29, 1993; published December

6, 1993 (58 FR 64176).

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

February 24, 1994 (59 FR 8874).

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

published April 13, 1994 (59 FR 17497).

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

May 23, 1994 (59 FR 26603).

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

33418).

Revised Recommended Decision: Issued December 2, 1994; published

December 14, 1994 (59 FR 64464).

Extension of Time for Filing Exceptions: Issued January 18, 1995;

published January 24, 1995 (60 FR 4571).

Preliminary Statement

Public hearings were held upon proposed amendments to the marketing

agreement and the order regulating the handling of milk in the Southern

Michigan marketing area. The hearings were 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 Novi, Michigan, on February 17-18, 1993, and at Grand

Rapids, Michigan, on March 1, 1994. The February 1993 hearing was held

pursuant to a notice of hearing issued December 3, 1992 (57 FR 58418),

and a supplemental notice of hearing issued January 19, 1993 (58 FR

6447). The March 1994 reopened hearing was held pursuant to a notice of

hearing issued February 18, 1994 (59 FR 8874).

Upon the basis of the evidence introduced at the February 1993

hearing and the record thereof, the Administrator, on November 29,

1993, issued a recommended decision containing notice of the

opportunity to file written exceptions thereto. The proceeding was

reopened; an emergency decision and final rule pertaining to the

``lock-in'' provision (Issues 7 and 8) were published on May 23, 1994

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

December 2, 1994, the Administrator issued a revised 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 2, one sentence is added in paragraph 1, one

paragraph is added after paragraph 7, paragraph 13 is revised, and one

paragraph is added after paragraph 13.

[[Page 43067]]

2. Under Issue 3, two sentences are added to paragraph 2, two

paragraphs are added after paragraph 46, the fourth sentence of

paragraph 47 is revised, one paragraph is added after paragraph 47, one

paragraph is added after paragraph 56, one paragraph is added after

paragraph 69, one sentence is added after the third sentence of

paragraph 70, the last sentence of paragraph 70 is revised, one

paragraph is added after paragraph 71, two paragraphs are added after

paragraph 72, one paragraph is added after paragraph 74, one paragraph

is added after paragraph 78, one sentence is added after the first

sentence of paragraph 87, one sentence is added at the end of paragraph

89, and three sentences are added at the end of paragraph 90.

3. Under Issue 4, paragraph 1 is revised, the third sentence of

paragraph 3 is revised, the first sentence of paragraph 33 is modified,

ten paragraphs are added after paragraph 41, the second sentence of

paragraph 42 is deleted, three paragraphs are added after paragraph 42,

paragraph 45 is revised, one paragraph is added after paragraph 45, one

paragraph is added after paragraph 50, four paragraphs are added after

the table following paragraph 50, paragraphs 51, 52, 53, and 54 are

deleted, paragraph 58 is revised, and one paragraph is added after

paragraph 58.

4. Under Issue 9, paragraph 1 is revised, two paragraphs are added

after paragraph 1, the second sentence of paragraph 3 is revised, five

paragraphs are added after paragraph 3, paragraph 4 is deleted,

paragraph 5 is revised, and one paragraph is added after paragraph 5.

5. Throughout this proposed rule, non-substantive changes to the

revised recommended decision, such as referring to Michigan Milk

Producers Associations as MMPA, were made to increase consistency.

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

1. Pool supply plant definition.

2. Modification of cooperative pool supply plant shipping

requirement by market administrator.

3. Multiple component pricing.

4. Somatic cell adjustment.

5. Administrative assessment.

6. Marketing service assessment.

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

8. Emergency action with respect to Issue 7.

9. Conforming changes.

No comments were received in response to the November 1993

recommended decision regarding the pool supply plant definition,

administrative assessment, and marketing service assessment provisions

(Issues 1, 5, and 6, respectively) that were considered at the initial

1993 hearing. Therefore, this decision contains no changes regarding

those issues from the decisions published December 6, 1993 (58 FR

64176), and December 14, 1994 (59 FR 64464).

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

March 1, 1994, and discussed in the revised recommended decision.

Comments on the revised recommended decision were received regarding

modification of the pool supply plant shipping standard, multiple

component pricing, and somatic cell adjustment (Issues 2, 3, and 4,

respectively). The comments are summarized and addressed under the

appropriate issue. The discussion of Issue 3, multiple component

pricing, is revised to reflect comments received and responses to those

comments. The conclusions of Issue 3 remain as recommended in the

revised decision. Based on comments received and reexamination of the

hearing record, Issues 2 and 4 are revised in this final decision.

Issue 9, conforming changes, has been revised to reflect changes in the

decision regarding Issues 2 and 4.

Issues 7 and 8 were addressed in an emergency partial final

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

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

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

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. Pool supply plant definition. A witness for Michigan Milk

Producers Association (MMPA) testified during the initial hearing in

support of the cooperative's proposal which would amend the pool supply

plant definition to include as qualifying shipments transfers of milk

to a partially regulated distributing plant. The witness testified that

MMPA supplies bulk milk to a local partially regulated distributing

plant that has substantial Class I and Class II utilization but

receives no credit for such sales toward fulfilling the pool supply

plant shipping requirement. The witness explained that the shipment is

a bulk transfer from the cooperative (MMPA) to the nonpool plant, with

its classification determined during the pooling process. MMPA's post-

hearing brief contended that adoption of the proposed amendment would

eliminate the inequity caused by such transfers.

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

marketwide Class I utilization percentage, which includes the portion

of the transfer classified as Class I, determines the minimum

qualifying shipping requirement for the same month of the following

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

determining whether pooling standards have been met.

The MMPA witness testified that the partially regulated plant

historically had been a pool distributing plant but recently had become

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

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

approximately 40 percent. According to the witness, the partially

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

which the proposed amendment would apply. A post-hearing brief filed by

National Farmers Organization (NFO) supported adoption of the proposed

amendment. There was no opposition to the proposal.

Testimony in the record illustrates that the partially regulated

distributing plant is indeed satisfying Class I needs in the

marketplace through the use of pooled milk, thereby benefitting the

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

a partially regulated distributing plant when determining the

qualifications of pool supply plants should be adopted.

2. Modification of pool supply plant shipping standard by market

administrator. A proposal to give the market administrator the

discretionary authority to administratively change the shipping

percentages upward or downward for a supply plant or a unit of supply

plants being qualified by a cooperative association should be adopted.

This decision extends the market administrator's discretionary

authority to include proprietary supply plants. The proposed provisions

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

where the market administrator, upon request or upon recognizing a

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

be taken to change the shipping percentage requirements. The percentage

change required would be based upon the evidence that the market

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

The order currently provides that for a cooperative's balancing

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

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

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

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

for any

[[Page 43068]]

sort of discretionary authority to change pool supply plant shipping

requirements. To adjust the shipping percentage requirements, either

the requirements must be suspended or permanent changes must be sought

through amendments to the order.

The director of bulk milk sales for MMPA testified in support of

the cooperative's proposal at the reopened hearing. The proponent's

intent is to allow for the adjustment of these requirements on a more

timely basis than can be done under the current provisions.

The MMPA witness testified that the current order provision is

designed to establish a performance standard that reflects the Class I

needs of the local market and assures fluid processors that their

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

self-adjusting mechanism because the current month's shipping

requirements are based on the market requirements from the previous

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

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

conditions have changed to such an extent that necessary corrections to

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

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

shipping percentages are determined by the percentage of producer milk

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

monthly producer receipts. The witness stated that if milk that

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

utilization percentage for the order would change, in turn affecting

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

combining this possible decrease in pool receipts with an increase in

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

shipping requirements. He said that the shipping percentages

established may not reflect the following year's actual fluid

requirements from the local and distant markets.

The witness noted that two current options to adjust the shipping

percentage requirements, suspension or permanent amendment to the order

provisions, are time-consuming and may require unwarranted drastic

action.

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

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

briefs.

Dean Foods Company's (Dean Foods) exception to the revised

recommended decision agreed that this proposal's adoption would allow

for greater flexibility than currently exists. However, Dean Foods

contended that by not extending authority for the market administrator

to modify shipping standards for proprietary supply plants, the revised

recommended decision excludes proprietary and favors cooperative supply

plants. The exception noted that market conditions would affect

proprietary and cooperative supply plants similarly; hence, the

flexibility of standards should be available to all supply plants.

The record evidence indicates that empowering the market

administrator with the authority to adjust the pool supply plant

shipping requirements should result in more timely changes in

comparison to current procedures. A more flexible and efficient process

would result by authorizing the market administrator to adjust the

requirements to either encourage shipments or discourage uneconomic

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

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

plant performance standards when market conditions change from one year

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

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

process, would not provide a timely response.

Thus, the proposal to give the market administrator discretionary

authority to revise the supply plant shipping standards should be

adopted. Doing so will provide a means of making appropriate

adjustments in this pooling provision as market conditions indicate a

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

to changed conditions can be provided under such a provision.

There is no apparent reason why restrictions should be imposed to

limit the market administrator's authority to change the pooling

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

exercised with impartiality and integrity. Moreover, without

restrictions more appropriate responses over a broader range of changed

conditions may be obtained. Limitations on the authority to revise

shipping percentages could result in the market administrator being

unable to either increase or decrease the requirements to the full

extent necessary in a given situation.

It should be noted that, to the extent appropriate shipping

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

be desirable for the market administrator to revise the requirements

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

changed, the market administrator would again review the situation and

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

arrangement will serve the market well and provide less uncertainty as

to what the requirements will be.

Testimony by proponent at the hearing stated that because

proprietary supply plants have different qualifying standards than

cooperative supply plants, the proposal did not need to be applied to

proprietary supply plants. Proprietary plants have a fixed

qualification percentage of 30 percent of the total quantity of Grade A

milk received at the plant each month. The order allows both

proprietary and cooperative supply plants to qualify automatically

during the months of March through August based on performance during

the previous September through February.

The proposal published in this proceeding's hearing notice did not

limit the scope of the market administrator's authority to adjust

shipping percentages to cooperative-operated supply plants only. Though

no testimony was offered to include proprietary supply plants, it is

reasonable to extend the market administrator's authority to adjust the

shipping percentages for either or both cooperative- or proprietary-

operated pool supply plants. Market conditions affect all plants, no

matter whether operated by cooperatives or proprietors, and the

recommended decision would have been unnecessarily restrictive.

Whenever the market administrator believes that a change in the

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

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

considered and invite interested persons to comment. This procedure

will assure that all potentially affected persons can have their views

and other pertinent information fully considered by the market

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

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

shipments by supply plants is contemplated and also is an appropriate

requirement for the new authority provided herein.

3. Multiple Component Pricing. A multiple component pricing (MCP)

plan should be adopted in the Southern Michigan Federal milk marketing

order. The pricing plan would be patterned after the multiple component

pricing plan initially proposed by Leprino Foods Company (Leprino) and

supported by MMPA, Independent Cooperative Milk Producers Association

(ICMPA), and several other dairy

[[Page 43069]]

organizations. Producers would be paid on the basis of three components

in the milk: butterfat, protein, and the remaining fluid portion that

is the ``fluid carrier'' of the butterfat and protein ingredients.

Producers would also share in the value of the pool's Class I and Class

II uses. A somatic cell adjustment would apply to the protein prices

paid to all producers no matter how the milk was used.

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

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

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

in Classes I and II. The protein price paid by handlers for Class II

and Class III milk will be adjusted based on the somatic cell content

of the milk. This somatic cell adjustment is discussed fully under

Issue 4.

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

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

multiplied by the prices per hundredweight of milk testing 3.5 percent

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

Adjustments for such items as overage, reclassified inventory,

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

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

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

price per hundredweight for milk testing 3.5 percent butterfat to be

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

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

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

differential. The butterfat differential is computed by multiplying the

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

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

Department of Agriculture (USDA), by 0.138 and subtracting the

Minnesota-Wisconsin price (the M-W) at test, also as reported by USDA,

multiplied by 0.0028.

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

1993. MMPA and ICMPA, the two original proponents of multiple component

pricing under the order, requested reopening the February 1993

proceeding to consider proposals to modify the MCP plan recommended by

the USDA for the Southern Michigan Order in a decision issued November

29, 1993 (58 FR 64176). MMPA and ICMPA represent approximately 80

percent of producer milk in the Order.

The November 1993 recommended decision included a thorough analysis

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

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

proceeding initiated on February 17, 1993. This revised recommended

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

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

entire record of the proceeding which includes the reopened hearing

held March 1, 1994.

The MCP plan in the original recommended decision would have priced

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

recommended MCP plan generally was patterned after the plan adopted for

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

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

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

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

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

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

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

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

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

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

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

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

somatic cell count of the milk.

MMPA and ICMPA endorsed the recommendation to adopt MCP, but

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

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

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

administered through the Federal order system. Proponents' witness

testified that the adopted plan should be equitable to both producers

and processors and should send the correct economic signals from the

marketplace to the farmer. The witness testified that when the

proponents initially proposed a multiple component pricing plan for the

Southern Michigan order, their intent was not to create conflicting

economic signals for farmers and processors. Proponents' witness stated

that the recommended MCP plan could send conflicting signals to

handlers and producers by overstating the value of protein in producer

milk. The witness stated that such overstatement would create an

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

time would encourage farmers to produce high-protein milk.

In the reopened hearing, MMPA and ICMPA specifically requested

further consideration of the MCP approach proposed by Leprino in the

original proceeding. Because other hearing participants had been given

insufficient advance notice of Leprino's pricing plan to adequately

evaluate the proposal and cross-examine the Leprino witnesses, the

Leprino proposal was not considered as a viable alternative in the

recommended decision. After having an opportunity for extensive review

of the Leprino proposal after the initial hearing, the proponents

concluded that the Leprino alternative was a better alternative than

the one in the recommended decision.

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

butterfat and protein component prices based on market values for

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

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

are subtracted. Proponents' witness testified that because butterfat

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

respectively, they are reflective of economic conditions with a known

degree of precision. Proponents' witness agreed with the original

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

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

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

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

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

and protein components.

Proponents' witness gave two reasons for wanting to consider the

Leprino proposal instead of supporting the recommended MCP plan. The

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

The witness stated that the recommended decision equates the protein

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

values protein on the basis of its cheese yield potential.

The proponents' witness stated that the Leprino proposal uses a

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

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

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

that the protein price determined through the Van Slyke formula

accurately reflects the incremental value of protein in milk and would

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

handler.

[[Page 43070]]

The proponents' witness suggested that the protein price should be

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

blocks of Cheddar cheese as representing the current market value for

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

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

manufacturers recognize in pricing their product. The witness testified

that the block price better reflects the Southern Michigan commercial

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

barrel cheese price would reflect a surplus commodity price, a

situation that does not exist in this order.

The second reason that proponents' witness gave for supporting the

Leprino proposal is that this plan moderates the impact that component

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

scientifically shown to have as direct a relationship between yield and

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

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

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

powder in comparison to the value from cheese manufacture.

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

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

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

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

value on protein. The brief further contended that the recommended

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

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

economic value of protein to dairy product processors may bear little

resemblance to the skim residual.

A Leprino witness testified again at the reopened hearing in

support of Leprino's proposal. Leprino operates two manufacturing

plants in the Southern Michigan marketing area that process over 40

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

marketed in the Southern Michigan order area. Leprino also manufactures

and distributes mozzarella cheese to the food service industry

throughout the country.

In testimony at the reopened hearing, the Leprino witness supported

the pooling and producer pay price proposals suggested by MMPA and

ICMPA. The witness reiterated the characteristics and merits of

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

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

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

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

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

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

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

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

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

higher levels of protein.

The Leprino witness stated that the original recommended decision

in the proceeding would have replaced this current system with another

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

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

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

creates a residual protein value which reflects more than the true

value of protein to manufacturers. The witness stated that the

recommended decision ignores the value and importance of milk

components other than butterfat and protein and places a value on

protein that cannot be recovered from the marketplace by most

manufacturers of butter, nonfat dry milk, or cheese.

The Leprino witness stated that encouragement needs to be given to

producers to produce milk with higher protein content and to

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

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

producers to produce higher-protein milk while allowing handlers to

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

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

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

interest of long-term stability in milk pricing.

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

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

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

brief described Leprino's proposal as achieving the economic balance

necessary for processors to pay producers for milk with higher protein

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

stated that consumers also would benefit by receiving dairy products

with potentially higher-protein contents without unwarranted

inflationary price increases.

The Leprino witness stated that pricing the butterfat component

provides producers with an economic incentive to produce the butterfat

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

processors exists for butterfat in finished products such as butter,

fluid milk, cheese, and other products.

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

protein component gives producers an economic incentive to increase the

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

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

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

based on recognized Cheddar cheese yields using the modified Van Slyke

formula.

The Leprino witness suggested that the NCE price reflects the

market value of cheese and that the NCE price multiplied by a

representative yield factor (calculated via the Van Slyke formula)

would establish the value of a pound of protein to a cheese

manufacturer. He stated that either the block or the barrel price could

be used to represent the Cheddar cheese market price, and stated a

preference for the barrel price.

Leprino's exception to the original recommended decision and

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

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

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

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

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

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

which currently cannot be tied specifically to an individual component

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

milk.

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

trade association for manufacturers, processors, and marketers of all

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

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

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

The witness testified that NCI supports the adoption of a single

uniform three-component pricing system in all orders where a

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

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

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

applying MCP to Class I milk would be inappropriate because there

exists no measurable or

[[Page 43071]]

discernable advantage to varying protein levels for milk used as a

fluid beverage.

The pricing plan supported by NCI is identical to the proposal

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

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

from processing milk with higher protein contents by seeking out and

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

that any formula which prices protein higher than its value in

producing cheese will cut into processor margins and cause cheese

manufacturers to seek out lower-protein milk.

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

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

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

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

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

National Cheese Exchange.

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

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

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

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

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

count adjustment included in the recommended decision.

The Kraft brief asserted that the Leprino plan would avoid

establishing conflicting economic signals from a protein price which is

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

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

positive refinement in the evolution of MCP plans under the Federal

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

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

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

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

plan contained in the recommended decision.

The Kraft brief stated that no proposal at the reopened hearing

accounted for handler manufacturing costs when protein is converted

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

all proposals overstate the protein component in raw producer milk.

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

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

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

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

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

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

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

effectively assign some finished product packaging value to milk

protein.

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

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

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

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

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

a volume basis would only partially correct the current provisions

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

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

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

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

NAJ is a national dairy farmer organization that assists members in

marketing their milk. The NAJ witness testified that NAJ's primary

mission since 1976 has been the promotion of multiple component pricing

with the goal of implementing a uniform MCP plan throughout the Federal

order system.

In the reopened hearing, the NAJ witness supported the proposal

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

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

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

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

that the NAJ proposal, after pricing the butterfat and protein

components, places the residual value on other nonfat nonprotein

solids.

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

to provide dairy producers with an economic incentive to produce

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

because a direct relationship exists between product yields and the

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

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

economic value. The witness stated that an economically and justifiably

high protein price is needed to encourage producers to increase the

ratio of protein to fat in their milk production.

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

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

pricing all components in skim milk corrects the inadequacy of the

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

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

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

proposal allows handlers to purchase milk more in accordance with its

economic return and still gives handlers the incentive to procure and

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

calculating the same protein and other solids price for both handlers

and producers.

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

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

in milk protein, and described the whey protein concentrate (WPC) price

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

witness contended that the protein price computed under the NAJ

proposal provides more equitable returns to both handlers and producers

in comparison to the other proposals presented at the reopened hearing.

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

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

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

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

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

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

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

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

other cheeses more than any other cheese price.

The witness stated that the residual under the NAJ proposal

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

difference between the value determined by product prices and the

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

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

an incentive to produce something in milk other than water.

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

Cooperative (Tri-State), a qualified cooperative with about 640 members

marketing milk in several orders, including the Southern Michigan

order.

Several participants in the proceeding expressed opposition to

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

MMPA's post-

[[Page 43072]]

hearing brief asserted that placing market values on whey protein and

non-fat non-protein solids (principally lactose) assigns values to

these solids that are not present in the marketplace.

The Leprino witness opposed including whey in the computation of

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

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

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

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

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

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

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

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

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

cheese support price.

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

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

achieves this objective by providing for a higher protein component

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

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

The Leprino witness stated that use of a residual solids approach

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

witness stated that using a residual fluid approach ascribes all the

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

and thus is easier and less costly to administer.

At the initial hearing session, two witnesses testified that

protein testing is already widespread in the Southern Michigan market

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

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

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

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

method is approved by the Association of Official Analytical Chemists,

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

those of the Babcock test for butterfat.

A MMPA quality control witness testified that protein tests on

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

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

instruments and currently are testing producer milk for protein a

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

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

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

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

tests per month for both protein and somatic cell count.

After issuance of the revised recommended decision, comments that

specifically pertained to multiple component pricing generally

supported its adoption in the Southern Michigan marketing area. Of the

comments received by hearing participants, Leprino and NCI supported

the recommended ``Leprino Plan.''

Several exceptions to the revised recommended decision advocated

consistency of multiple component pricing plans across orders. NCI

advocated the importance of consistent plans in those orders with a

significant quantity of manufacturing milk and production of a

significant quantity of cheese. A joint exception filed on behalf of

Country Fresh, Inc. (Country Fresh) and Parmalat USA Corporation

(Parmalat) advocated consistency of plans across orders, and commented

that component pricing plans implemented within the Federal milk order

system have become more complex. NAJ and Tri-State also commented on

the lack of uniformity between the recommended multiple component

pricing plans for this Southern Michigan proceeding and the proceeding

involving five midwest markets (DA-92-27).

The Southern Michigan order should be amended to include multiple

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

records of this proceeding, the proposed multiple component pricing

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

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

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

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

Handlers would pay all producers for butterfat directly and would

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

Class II and Class III milk. Because milk used for Class III-A purposes

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

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

pricing plan.

Dean Foods and several other fluid milk processors concurred with

the revised recommended decision that multiple component pricing should

apply to Class II and Class III milk only, while Class I milk should

continue to be priced on a butterfat-skim volume basis. Numerous

comments filed regarding the proposed somatic cell adjustment on Class

I milk also stated that MCP should not be applied to Class I. This

decision has neither recommended nor adopted provisions that would

price Class I milk on its protein and fluid carrier residual

components.

The record indicates that a large percentage of the producers

pooled under the Southern Michigan order are already eligible for or

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

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

record also shows that the diverse component pricing programs that

currently exist promote disorderly and inefficient marketing conditions

in the procurement of milk supplies by competing handlers. The

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

The adoption of multiple component pricing will allow the Order to

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

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

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

proponents argue would be the case under the original recommended

decision.

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

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

bottling purposes is processed into cheese, is appropriate. Record

evidence in this proceeding clearly shows that demand for protein is

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

nutritional, and economic value in the marketplace. The functional

characteristics of protein allow it to form the matrix in the

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

formation in the manufacture of certain products and provides some

required nutrients in the human diet.

Milk containing a higher percentage of protein will result in

greater yields of most manufactured products than milk with a lower

protein test. Additionally, handlers receiving milk that results in

greater volumes of finished products such as cheese and cottage cheese

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

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

dairy farmer producing milk that yields greater amounts of finished

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

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

sending an economic signal to dairy farmers will encourage them to

maximize the production of those

[[Page 43073]]

components which have the greatest demand in the marketplace.

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

criteria of measurability, intrinsic value, and variability. The

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

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

variability in butterfat testing because protein does not separate as

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

manufacturing sector in the form of improved product yield and product

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

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

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

nutritional product. The criterion of variability is necessary to

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

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

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

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

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

the Southern Michigan market, and its qualification under the three

criteria above, protein appears to be an appropriate component for

pricing milk in Federal Order 40.

Hearing evidence from all parties indicates that pricing milk in

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

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

adequately describe, accurately value, or be a sufficiently precise

method for classifying and pricing milk used for manufactured products.

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

driven. Deriving butterfat and protein values from finished product

prices will send the appropriate economic signals to producers and

handlers by indicating current market supply and demand conditions for

dairy products containing these components of milk.

At issue is the specific design for the revised recommended MCP

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

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

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

supported by Tri-State and the American Jersey Cattle Club (the NAJ

plan).

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

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

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

protein price from the NCE block cheese and whey protein concentrate

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

remaining nonfat nonprotein solids. Each component of the multiple

component pricing plan recommended for adoption will be discussed

separately.

The variety of multiple component pricing plans in Federal milk

orders reflect different industry proposals, different hearing records,

different marketing conditions, a continual refinement in multiple

component pricing plans, and an attempt to acknowledge and lend

uniformity to what is occurring in the marketplace. It seems reasonable

to believe that multiple component pricing plans will improve as the

industry develops more experience with them.

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

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

change the way butterfat currently is valued.

This decision continues the historical relationship of the values

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

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

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

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

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

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

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

milk is easily achieved.

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

will be determined by multiplying the butterfat differential by 965 and

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

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

Protein. The protein price for milk pooled under the Southern

Michigan Federal milk order should be calculated by multiplying the

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

Exchange at Green Bay, WI, by 1.32, without including a value for whey

protein.

No opposition was expressed at the hearing to pricing protein on

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

between participants came in determining the appropriate level of the

protein price.

The original Leprino proposal would calculate the protein price by

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

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

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

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

would calculate the protein price by multiplying the monthly average

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

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

1993.

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

block Cheddar (normally higher than barrel) and adds a WPC price in

order to account for all milk protein and to give farmers an incentive

to produce protein rather than to reflect the additional value

manufacturers realize from increased protein. The NAJ proposal would

calculate the protein price in two parts: (1) multiply the NCE monthly

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

average WPC price multiplied by a yield factor of 0.735. The sum of

these two values would equal the protein price. NAJ's formula would

have resulted in average protein prices, per pound, of $2.0738 in 1992

and $2.1664 in 1993.

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

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

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

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

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

Because the percent of the skim milk value allocated to protein

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

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

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

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

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

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

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

Undisputed by hearing participants was the 1.32 factor, which

represents the pounds of 38 percent moisture Cheddar cheese obtained

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

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

The hearing record indicates that the modified Van Slyke formula

accurately measures incremental changes in protein. This accuracy

supports the concept that

[[Page 43074]]

cheese plants would be able to maintain consistent margins from the

processing of small increases of protein content in milk. Assuming

butterfat is constant, a change of protein by one pound in this formula

will change cheese yield by 1.32 pounds. Therefore, the 1.32 factor is

appropriate for determining an order protein price based on a market-

determined cheese price.

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

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

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

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

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

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

economic differences in costs of manufacturing being reflected in the

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

simplifies the process.

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

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

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

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

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

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

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

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

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

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

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

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

cheese prices.

In comments filed in response to the revised recommended decision,

NAJ and Tri-State supported the use of the NCE 40-pound block cheese

price to calculate the protein price and adjust the protein price for

somatic cell count level. However, Dean Foods, Farmers Dairies, Inc.,

Anderson-Erickson Dairy Company (Anderson-Erickson), and Southern Food

Groups, Inc., took exception to using the 40-pound block Cheddar cheese

price in determining the protein value and the somatic cell adjustment,

and instead supported using the barrel Cheddar cheese price. The

exceptions stated that prices in the Federal order program are based on

a concept of minimum prices and the barrel Cheddar cheese price would

better approximate a minimum price.

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

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

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

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

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

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

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

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

Cheddar cheese price has been determined to be the appropriate price to

be used in determining the protein value and adjust for somatic cell

count in a separate proceeding involving five midwest markets. The

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

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

Sugar, and Cocoa Exchange futures price of cheese; and in California's

4b price.

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

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

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

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

establishing a sufficiently high protein price to accomplish the goal

of encouraging producers to produce protein without having a

detrimental impact on handlers.

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 protein formula proposed by NAJ also would include the value of

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

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

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

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

respectively.

Dean Foods concurred with the revised recommended decision that the

value of protein in whey should not be included in the protein price

calculation.

NAJ and Tri-State excepted to the calculation of the protein price

in the revised recommended decision, advocating instead their proposal

from the reopened hearing. The groups disagreed with the revised

recommended decision's conclusion that because whey processing

facilities do not currently exist in the Southern Michigan marketing

area, whey should not be included in the protein price calculation. The

groups also contended that the NAJ plan would allow for more uniform

gross margins for all component levels than would the Leprino plan. The

exception questioned whether the Department was more interested in

providing returns to producers or manufacturers.

The whey protein factor should not be included in the computation

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

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

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

market price for whey protein concentrate, the highest-priced whey

product, ignores the diversity of whey handling operations and

practices that exist throughout the dairy industry.

Whey protein concentrate manufacturing involves sophisticated and

expensive technology used by very few manufacturers, and apparently by

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

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

cheese manufacturing represented a disposal problem involving costs

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

protein price at this point in the development of whey disposal

technology would result in including the potential revenue associated

with whey, but none of its actual cost.

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. 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 market place, 2) components will be priced at levels that inform

producers about which component has the greatest

[[Page 43075]]

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 M-W price.

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

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

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

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

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

average protein test of the M-W price survey milk. Because the

computation of the fluid carrier price is based on a residual value,

the fluid carrier price could be negative. In this instance, the fluid

carrier price would remain negative, instead of adjusting either the

butterfat or protein prices.

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

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

reflects factors such as volume premiums, cheese yield premiums,

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

that exceed the butterfat differential, and pure competition for

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

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

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

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

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

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

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

butter, yogurt, cheeses, and nonfat dry milk.

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

component to represent the residual value of the hundredweight of

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

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

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

$3.39 in 1992 and $3.68 in 1993.

An alternative residual price was proposed by NAJ, which would

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

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

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

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

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

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

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

solids price per pound. This proposed residual would have provided

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

respectively.

NAJ and Tri-State took exception to the revised recommended

decision's placement of the residual value of the M-W price, after

butterfat and protein are accounted for, on a fluid carrier component.

These two groups advocated the position contained in their proposal

that the residual value should be placed on other nonfat nonprotein

solids. The groups contended that the solids in milk have value, allow

manufactured products to hold water, and thus should be included in the

MCP plan. They argued that the fluid carrier residual would not provide

the correct incentive for producers.

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

other nonfat solids. The nonfat nonprotein solids component principally

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

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

the butterfat and protein component values of milk, which are

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

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

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

nonfat nonprotein component would overstate the true economic value of

lactose after accounting for processing costs and ignore the value of

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

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

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

produce higher solids while sending a conflicting signal to

manufacturers.

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

the components in the payment plan must represent the difference

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

component prices. The fluid carrier is this component.

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

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

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

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

no longer represent the true market value associated with protein.

Consequently, producers and handlers would receive an inappropriate

economic signal from the adjusted price.

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

should be placed on the fluid carrier component. Hearing record

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

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

competition for milk supply. The fluid carrier value would represent

these factors. The hearing record also shows that moisture standards

exist for all dairy products. The fluid carrier component recognizes

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

the producer. Lastly, the correct economic signals relating to

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

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

to connect the value of milk components in manufactured dairy products

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

Miscellaneous. The butterfat and protein component prices will be

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

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

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

significantly over expressing the prices to the nearest cent. The fluid

carrier price will be expressed on a per hundredweight basis, rounded

to the nearest whole cent.

For the purpose of allocating protein and fluid carrier to the

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

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

therefore be allocated proportionately based on the percentage of

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

In contrast to other orders that have multiple component pricing

provisions, this decision incorporates only one protein price. The

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

incorporated within the computation of the producer price differential.

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

handler and producer protein prices, and resulting confusion over which

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

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

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

The producer price differential, which represents the additional

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

[[Page 43076]]

positive or negative effect of Class III-A, will be determined by

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

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

III-A product pounds. The differential value is adjusted, when

appropriate, for shrinkage and overage, inventory reclassification,

receipts of other source milk allocated to Class I, receipts from

unregulated supply plants, and location adjustments.

For the purpose of eliminating differences between handler and

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

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

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

the protein and fluid carrier contained in all producer milk subtracted

from, the differential pool. The difference in the somatic cell

adjustment on the value of protein in Class II and Class III and on

producers' value of protein also will be absorbed in the differential

pool. The accumulated total for all handlers then will be adjusted by

total producer location adjustments and one-half the unobligated

balance in the producer-settlement fund. The resulting value then will

be divided by the total pounds of producer milk in the pool, with an

amount not less than six cents or more than seven cents per

hundredweight deducted. The result is the producer price differential

to be paid to producers on a per hundredweight basis.

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

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

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

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

positive contribution from the differential prices. A negative producer

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

Class III price.

The Leprino panel testifying at the initial hearing session

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

total Kjeldahl nitrogen because only true protein has real value to

processors. In comments filed after the revised recommended decision,

Leprino encouraged the Department to develop information concerning the

testing for true protein in the future.

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

hearing record lacks sufficient discussion of the benefits of

specifying testing for true protein versus total protein. Approved

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

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

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

necessary to specify such testing in the orders. When (or if) the

industry does move to testing for true protein, this decision should

not be viewed as a hindrance to that conversion. In no way does this

decision mandate a specific testing procedure. At such time as a change

to testing for true protein may occur, a change in the 1.32 factor may

be necessary.

4. Somatic cell adjustment. The value of milk should reflect the

level of somatic cells contained in that milk. The adjustment in value

should be made by adjusting the protein price paid by handlers for

Class II and Class III milk, and the protein price paid to producers,

for the somatic cell count (SCC) of the milk. This decision modifies

the revised recommended decision, in which a somatic cell count

adjustment would have been made to protein prices paid to producers for

all classes of milk. The somatic cell adjustment recommended is derived

from the reduction in cheese yield as the somatic cell level goes from

zero to 1,000,000, converted to a value per pound of protein.

Adjusting protein prices paid to producers by SCC was proposed

during the initial hearing as part of a multiple component pricing

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

processors and a trade association for fluid milk processors filed

exceptions to the recommended decision. Although this specific issue

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

the reopened hearing session testified against inclusion of a somatic

cell adjustment in addition to filing exceptions to the recommended

decision and briefs after the reopened hearing.

Each of these four parties opposed the recommended application of

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

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

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

exceptions to the original recommended decision, reopened hearing

testimony, briefs filed after the reopened hearing, and exceptions to

the revised recommended decision. Most of the exceptions, reopened

hearing testimony, and briefs reiterated what was presented during the

initial hearing and in post-hearing briefs. Unless specified, the

following evidence was given at the initial hearing.

The director of milk sales for MMPA stated that the functional

value of protein in the production of manufactured dairy products and

its role in providing wholesome flavor and nutritional value in fluid

milk products is affected by the SCC level of the raw milk supply.

Therefore, the witness asserted, elevated SCC levels and raw bacteria

counts diminish the functional value of all milk. According to the

witness, the damage is irreversible and cannot be restored by a

mechanical process at a dairy plant.

The MMPA witness testified that high SCC levels are accompanied by

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

increased susceptibility of the fat component to attack by these

enzymes. The witness explained that the undesirable enzymes attack the

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

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

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

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

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

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

survive normal pasteurization and continue the process of deterioration

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

Therefore, he testified, protein payments to producers should reflect

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

The director of member services and quality control for MMPA

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

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

witness explained that white blood cells and epithelial cells known as

somatic cells are secreted during the process to destroy the invading

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

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

Another witness testified for MMPA that somatic cells seem to have

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

enzymatic characteristics of milk. The witness explained that the

enzymes generated by somatic cells degrade the casein and change its

functional attributes. He pointed out that some changes include higher

losses in cheese yield, differences in flavor characteristics, and

changes in other functional characteristics that may weaken the

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

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

off-

[[Page 43077]]

flavors, which produce a flavor that would be noticeable to a consumer.

The witness explained that free fatty acids are one component that

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

off-flavors.

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

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

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

therefore unaffected by pasteurization or ultra-high temperature

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

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

cooled quickly and held at refrigeration temperature, further damage is

minimized. The witness explained that producers can reduce the average

somatic cell count of their milk through better management and proper

adjustment and maintenance of milking equipment.

The MMPA quality control employee stated that SCC standards were

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

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

public health significance in the milk supply. The witness explained

that the condition of mastitis and the subsequent increase of somatic

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

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

increasing whey protein, chloride, and sodium levels.

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

within quality premium programs throughout the United States, including

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

marketing cooperatives in Michigan use the Optical Somatic Cell Count

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

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

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

Association of Official Analytical Chemists (AOAC). Another MMPA

witness stated that instruments are available and currently are being

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

protein and somatic cell count.

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

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

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

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

explained that most producers whose milk is pooled under Federal Order

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

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

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

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

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

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

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

Another MMPA representative testified that the proposed neutral zone

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

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

Order 40.

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

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

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

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

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

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

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

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

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

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

after the reopened hearing. The brief asserted that the recommended

decision recognizes the impact that SCC levels have on the functional

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

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

and Indiana orders greatly exceed the four to six cents per

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

price resulting from the somatic cell adjustment.

The regional dairy director for National Farmers Organization (NFO)

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

The witness stated that uniformity in the pricing provisions of Orders

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

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

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

orders, differences in order provisions will cause confusion and

disorderly marketing conditions.

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

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

incorporation of an SCC adjustment would destroy the flexibility of

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

SCC adjustment would overstate the importance of SCC among other

factors used in determining milk quality and elevate SCCs to a

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

this disproportionate emphasis on SCCs is exacerbated by the inherent

vagaries of testing for SCCs.

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

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

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

witness testified at the multiple component pricing hearing for Orders

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

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

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

butterfat or protein.

A Kraft witness stated at the initial hearing that Kraft supports

the inclusion of somatic cell adjustments in any component pricing

plan. The witness noted that testimony and evidence in previous

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

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

value of protein in milk.

During the initial hearing, the witness for Country Fresh, a fluid

milk and Class II processor in Order 40, supported an SCC adjustment on

all classes of milk, but recommended that the size of the proposed

adjustment be reduced substantially. Under his recommended changes to

the proposal, the witness stated that based on the peak cheese prices

during 1992, the maximum plus and minus somatic cell adjustments would

have been 15 cents a hundredweight. He argued that combined, this would

create a range of about 30 cents, as the most the market can bear

without creating a disincentive against receiving high-quality milk.

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

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

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

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

witness testified that the average somatic cell count in the Southern

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

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

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

700,000 and up.

The witness continued by stating that if the somatic cell program

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

the Southern

[[Page 43078]]

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

cell program be tried in a moderate rather than a radical manner.

Otherwise, the witness claimed, chaotic marketing conditions could be

created which would result in a new hearing being held in the not-too-

distant future to amend the order. Country Fresh's brief further noted

testimony of MMPA, Leprino, and NFO which asserted that there are other

factors involved in high quality milk besides SCC.

In an exception to the recommended decision, in testimony during

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

changed its position and expressed opposition to an SCC adjustment to

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

brief, Country Fresh proposed to modify the recommended Southern

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

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

Ohio-Western Pennsylvania, and Indiana marketing orders. Country

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

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

The Country Fresh witness testified that uniformity of pricing

provisions across Federal orders is important because a substantial

overlap in Class I sales and raw milk procurement exists between

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

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

the Indiana or the Ohio Valley Federal orders.

Country Fresh's brief asserted that implementing an SCC adjustment

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

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

brief stated that disruptive and inequitable marketing conditions would

result for handlers regulated under the Southern Michigan order

relative to handlers regulated under orders in which no SCC adjustment

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

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

Class I milk in Southern Michigan relative to neighboring orders.

The Country Fresh witness estimated that on a total milk supply

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

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

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

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

milk supply as was recommended in Southern Michigan.

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

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

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

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

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

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

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

decision.

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

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

opposed the inclusion of somatic cell counts as part of the pricing

structure as it would relate to Class I fluid handlers. Kroger operates

a pool distributing plant regulated under Order 40. Dean Foods has been

marketing milk in the Southern Michigan market for over 30 years and

operates a bottling plant known as Liberty Dairy in Evert, Michigan.

MIF is a national trade association with 215 member companies located

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

products nationwide.

The division manager of milk procurement for Kroger argued that

there is no economic justification to include a somatic cell adjustment

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

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

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

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

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

adoption of the MMPA proposal would make it impossible for processors

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

uncompetitive Class II and Class III market conditions for Order 40

processors compared to their competitors regulated under other orders.

The Kroger representative continued by stating that Kroger is not

opposed to a proposal which introduces multiple component pricing with

protein pricing and a somatic cell adjustment for milk processed in

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

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

somatic cell count adjustment would have a potential benefit to

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

Class I milk was reiterated in an exception to the recommended

decision.

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

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

inequitable marketing conditions for Order 40 handlers versus their

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

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

eliminate the advance knowledge fluid milk processors currently have of

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

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

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

the SCC level in raw milk.

MIF expressed concern that milk processors would incur increased

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

product sales because consumers are unable to differentiate between low

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

from both procuring low SCC milk and more frequent product testing

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

milk sales. Exceptions to the recommended decision, testimony during

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

these arguments opposing an SCC adjustment on Class I milk.

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

evidence that the level of somatic cells results in any appreciable

difference in the attributes of fluid milk, particularly attributes

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

MMPA as failing to make an absolute statement regarding quantifiable

economic benefits to fluid milk use resulting from lower somatic cell

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

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

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

Federal order system to adopt a policy and administer practices which

allocate economic advantages and disadvantages among certain segments

of the dairy industry.

The witness for Dean Foods stated that there is no scientific

evidence which shows that handlers or consumers benefit from lower

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

pricing structure of producer milk within the Federal order system

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

Dean Foods supports the

[[Page 43079]]

inclusion of SCC premiums in Class II or Class III producer milk where

there is evidence of improved yields due to reduced levels of somatic

cells.

Dean Foods' exception to the original recommended decision

reiterated arguments made by Country Fresh and MIF. Additionally, Dean

Foods' exception noted that a six cent per hundredweight adjustment in

the Class I price would equal 0.005 cents per gallon and would amount

to additional costs between $180,000 and $200,000 per year for the

Liberty Dairy bottling plant. The exception stated that the plant, at

which 85 to 90 percent of receipts are used in Class I, currently has a

premium program which includes an SCC adjustment as one of the factors

in pricing milk. Dean Foods noted, however, that SCC alone is not

considered to be a quality enhancer for Class I products.

The Leprino panel that testified in the original hearing stated

that Leprino supports the inclusion of SCC adjustments to value protein

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

notably low psychrotrophic bacteria count and low raw bacteria count.

Additionally, the panel also testified that Leprino opposes quality

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

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

recommended that yield factors used to value somatic cell counts should

be conservative, given the conflicting scientific evidence, and should

be uniform across Federal orders.

According to testimony at the original hearing by the Leprino

production manager, Leprino participates in milk quality programs based

on several parameters, providing incentives for producers with high-

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

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

were introduced into evidence and referenced in the recommended

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

witness argued that each study shows different yield impacts at

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

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

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

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

not rest solely on somatic cell counts.

The Leprino witness testified that scientific evidence indicates

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

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

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

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

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

milk quality conditions that can affect cheese yield. The witness

recommended that USDA use a conservative approach given the

Department's limited experience with mandated milk quality criteria for

payment purposes. The witness urged that the adjustments be uniform

between all Federal orders to ensure orderly marketing.

The Leprino quality assurance director testified that the two

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

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

the DMSCC is a tedious method which takes extensive training and

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

estimated that equipment for performing SCC tests by the DMSCC method

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

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

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

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

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

The Leprino quality witness expressed opposition to the proposed

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

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

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

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

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

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

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

highest adjustment category of 750,000 SCC per milliliter.

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

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

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

The witness stated that SPC gives an indication of sanitary practices

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

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

valuing milk. She added that psychrotrophic bacteria are those bacteria

capable of appreciable growth under commercial refrigeration,

regardless of the optimal growth temperature of the organisms.

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

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

yields.

Leprino's exception to the recommended decision stated that the

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

payment purposes without consideration of the other raw milk quality

attributes opposes all the market practices currently operating in the

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

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

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

asserted that this program would include multiple minimum raw milk

quality attributes such as raw bacteria counts and psychrotrophic

bacteria counts.

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

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

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

brief suggested that the order provisions should include authority for

handlers to submit individual plans for market administrator approval

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

payment to all producers reflects the monthly minimum pay price under

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

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

or high SCC milk on manufactured product production without requiring a

rigid schedule of order-specified adjustments in milk costs based on

various levels of SCC.

Although there was little opposition to the incorporation of some

form of somatic cell adjustment, a number of exceptions were filed in

response to the revised recommended decision on this issue. The

exceptions focused primarily on the effect the proposed somatic cell

adjustment would have on fluid milk handlers. None of the comments

filed in response to the revised recommended decision supported a

somatic cell adjustment on Class I milk.

Dean Foods, NCI, Prairie Farms Dairy, Inc., and Kroger each opposed

including any somatic cell adjustment within the Federal milk order

program. Dean Foods contended that the quality of milk and milk

products has been and should continue to be tested and enforced by

other agencies through the PMO. However, Dean Foods did not oppose an

adjustment on Class III milk, stating that if any segment of the dairy

industry is able to promote a component in milk or enhance quality that

will increase

[[Page 43080]]

profitability, that component or quality factor should be included in

Federal milk orders.

Thirty of the 31 exceptions received to the revised recommended

decision commented on the proposed somatic cell adjustment to protein

prices paid to producers for all classes of milk. Six of the exceptors

had participated in either or both of the hearings in this proceeding:

Country Fresh and Parmalat (joint brief), Dean Foods, Kroger, Leprino,

MIF, and NCI. Of the other 24 exceptions received, only one handler is

located physically in the Southern Michigan marketing area. Most

exceptions primarily addressed the issue of a proposed somatic cell

adjustment on Class I milk.

Most exceptions regarding a somatic cell adjustment repeated

opposition to a somatic cell adjustment on Class I milk as set forth by

MIF in testimony, post-hearing brief, and exceptions to the revised

recommended decision. The exceptors all gave the same six reasons for

their opposition: 1) there was not enough scientific evidence at the

hearing to support 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 market place, 5) a somatic cell

adjustment would eliminate advance Class I pricing, and 6) Federal

orders should not be involved in quality issues.

Dean Foods' exception contended that placing a somatic cell

adjustment on Class I milk does not conform to the Agricultural

Marketing Agreement Act of 1937 because the price will not be ``uniform

as to all handlers.'' Dean Foods claimed that including a somatic cell

adjustment on all classes of milk would add to the profitability of

manufacturing handlers but result in a loss of profitability to fluid

milk handlers. This would occur, according to the exception, because

while both types of handlers would be charged more for low SCC milk,

the manufacturing handlers would be able to recover the cost (through

increased yields) while the fluid milk handlers would not.

Regarding arguments that the advance nature of Class I price

announcements would be eliminated, Dean Foods' exception disputed the

revised recommended decision's comment that any change would be

expected to be minimal. Dean Foods contended that any change that is

unknown is not ``minimal'' when bidding for contracts.

Dean Foods' exception also contended that basing the somatic cell

adjustment formula on cheese yields proves that fluid milk does not

gain a quantifiable economic benefit from milk with low somatic cells.

Country Fresh and Parmalat's joint exception noted that under the

revised recommended decision, the somatic cell adjustment on Class I

milk would benefit producers by rewarding lower herd SCC. The brief

contended that the somatic cell adjustment would give Class I handlers

an incentive to procure lower quality, thus less costly, milk.

Sani-Dairy filed an exception to the somatic cell adjustment

included in the revised recommended decision. This handler, partially

regulated under the Eastern Ohio-Western Pennsylvania Federal milk

order (Order 36), which adjusts the protein price for the somatic cell

count in Class II and Class III milk, claimed that the somatic cell

adjustment on Class II milk has increased Sani-Dairy's costs. The

exception contended increased costs have occurred because 1) SCC levels

in milk are improving due to higher milk standards, 2) the calculation

tables for Order 36 are set to higher counts than the milkshed average,

and 3) difficulty exists in recouping extra costs, particularly from

cottage cheese, in a plant with mixed utilization of milk.

In addition to opposing a somatic cell adjustment on Class I milk,

Anderson-Erickson also opposed a somatic cell adjustment on specific

Class II products (dairy desserts and ice cream).

A somatic cell count adjustment should be adopted because it

reflects the value of the level of somatic cells contained in milk.

There was significant testimony during the initial hearing that

elevated levels of somatic cells diminish the functional value of milk

in all uses. A reduction in the yield of cheese and other curd-based

manufactured products, an increased rate of off-flavors, and a

reduction in the shelf-life of fluid products all result from elevated

levels of somatic cells.

The recommended decision proposed that the adjustment be applied to

protein prices received by producers for 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 differential per

hundredweight. The recommended application also would have assured that

all handlers' obligations would reflect the quality of the milk they

receive.

Although many of the objections to a somatic cell adjustment on all

milk are not persuasive, as noted in the revised recommended decision,

this decision has been changed 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. As a result, the somatic cell adjustment

will be included in the pool computation, so handlers will have to

report producer somatic cell count information for all producers with

their reports of receipts and utilization.

The decision to omit application of a somatic cell adjustment on

milk used in Class I 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. Because 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.

The proponents' proposed neutral zone of 300,000 to 450,000 has

been reduced to between 301,000 and 400,000 to better reflect the

market's average somatic cell count and to correspond more closely with

the multiple component pricing plan adopted for Orders 33, 36 and 49.

Although increments of 100,000 were proposed, this decision breaks down

somatic cell adjustments into increments of 50,000. Increments of

50,000 assure producers that if slight testing inaccuracies (which may

be greater in the case of somatic cells than for butterfat or protein)

cause their protein price to be adjusted to the next level, that

adjustment will not represent the entire value of a 100,000 increment

of SCC.

In addition, because of the reduction in the maximum permissible

SCC, 750,000 and over will become the maximum increment for which

protein prices will be adjusted for somatic cell content. It is

possible that some Grade A producers may have an average SCC of 750,000

or more for a month without losing Grade A status because of

differences between the market administrators and health departments in

the number of leucocyte (somatic

[[Page 43081]]

cell) tests taken in a given period of time. In cases where a handler

has not determined a monthly average SCC for a producer, it will be

determined by the market administrator.

Because the value of milk has been shown to be affected by the

level of somatic cells, appropriate adjustments must be determined to

apply to the various levels of somatic cells. These adjustments will be

used to adjust handlers' values of protein in Classes II and III and

the protein prices paid to individual producers. The somatic cell

adjustment to handlers' value of milk will be computed by multiplying

the appropriate constant for each handler's weighted average somatic

cell count by the monthly average 40-pound block cheese price at the

National Cheese Exchange as published monthly by the Dairy Division.

The resulting somatic cell adjustment applied to the protein in milk

used in Class II and Class III will be combined with plus and minus

somatic cell adjustments to the protein in producer milk. Because of

the necessity of pooling the somatic cell adjustments in order to avoid

affecting the Class I price of milk to handlers, it will be necessary

for the somatic cell information for all producer milk to be reported

with handlers' reports of receipts and utilization.

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. 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.

The somatic cell adjustment to be used in determining protein

prices paid to producers is derived from the reduction in cheese yield

as the somatic cell level goes from zero to 1,000,000, converted to a

value per pound of protein. The evidence contained in the hearing

record shows that there is a one percent reduction in cheese yields as

somatic cells increase to 100,000, and cheese yields decline an

additional two to three percent as somatic cells increase from 100,000

to 1,000,000. There is also a maximum yield loss of about two percent

as SCCs increase from 100,000 to 750,000. This decision reflects the

proportional change in cheese yields as the SCC level changes.

The constant to be used for calculating somatic cell adjustments

was computed by dividing the change in cheese yields attributable to

changes in somatic cell counts by a representative protein test of

producer milk (3.2 percent). As proposed, the adjustment to the

producer protein price for somatic cell content would be computed by

multiplying the cheese price by a factor that varies with the somatic

cell level and dividing the result by the representative protein

percent used in calculating the handler protein price.

MMPA's proposed factors varied from .20 for a somatic cell count

below 100,001 to -.20 for a somatic cell count above 750,000. Leprino's

proposed factors varied from .20 to -.25, and Country Fresh proposed

factors varied from .128 to -.128. This decision includes factors that

vary from .25 to -.25 and are based on the reduction in cheese yield

associated with varying somatic cell counts. Although .20 was the

maximum positive factor proposed, .25 should not overcompensate

producers for producing the highest quality milk.

The factors adopted in this decision are similar to the ones

proposed, with the largest difference occurring at SCC levels below

151,000 and above 500,000. Record testimony reveals that milk

containing between 100,000 and 200,000 SCC yields the greatest benefits

and milk containing more than 500,000 SCC yields the greatest losses in

cheese production. Evidence also reveals that SCC per milliliter of

milk typically ranges between 200,000 and 400,000. Therefore, it is

logical to assume that the majority of Order 40 producers' SCCs will

fall within the 200,000 to 400,000 range.

As shown in Table 1, the factors to be used in adjusting handler

and producer protein prices for somatic cell content do not reflect a

linear relationship between cheese yields and somatic cells because the

relationship between these factors is not linear. Dividing these

factors by a standard protein content of 3.2 yields the constants shown

in Table 1 to be used for computing the somatic cell adjustment. Use of

a constant substantially simplifies the computation of the somatic cell

adjustment without changing the corresponding value. This result occurs

because the protein percentage must change by a considerable amount

before the adjustment will change. Therefore, the somatic cell

adjustment will be calculated by multiplying the constant corresponding

to each somatic cell count interval by the average price of 40-pound

block cheese at the National Cheese Exchange as reported monthly by the

Dairy Division.

As an example, using the 1993 average 40-pound NCE block cheese

price of $1.2857 per pound, the adjustment results in an estimated

range of 20 cents per pound of protein (or 64 cents per hundredweight

of 3.2 percent protein milk). The range of the adjustment is from a

somatic cell count of fewer than 50,000 (plus 10 cents per pound of

protein) to a somatic cell count of 750,000 or above (minus 10 cents

per pound of protein).

Table 1.--Factors and Constants To Be Used in Computing the Somatic Cell

Adjustment

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

Constants

for

computing

Somatic cell counts Factors the somatic

cell

adjustment

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

1 to 50,000.................................. .250 .078125

51,000 to 100,000............................ .200 .062500

101,000 to 150,000........................... .150 .046875

151,000 to 200,000........................... .100 .031250

201,000 to 250,000........................... .050 .015625

251,000 to 300,000........................... .025 .0078125

301,000 to 350,000........................... .000 .0000000

351,000 to 400,000........................... .000 .0000000

401,000 to 450,000........................... -.025 -.0078125

451,000 to 500,000........................... -.050 -.015625

[[Page 43082]]

501,000 to 550,000........................... -.075 -.0234375

551,000 to 600,000........................... -.100 -.031250

601,000 to 650,000........................... -.125 -.0390625

651,000 to 700,000........................... -.150 -.046875

701,000 to 750,000........................... -.200 -.062500

751,000 to above............................. -.250 -.078125

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

Monitoring by the market administrator of somatic cell testing,

which already clearly affects the payments made to most of the

producers pooled under the Southern Michigan order, will assure as much

uniformity and accuracy as possible in the testing procedures. Also,

because over 50 percent of the milk pooled under this order 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

area.

The hearing evidence indicates that low SCC levels contribute to

both increased yields of manufactured products and quality

characteristics (taste and keeping) for milk and dairy products. In

terms of yield, the economic benefits from low SCC levels are more

tangible and measurable to manufacturing handlers than to fluid milk

handlers. Placing a somatic cell adjustment on Class II and Class III

milk is reasonable because milk quality will be reflected in product

yields and manufacturing handlers will be better able to recover their

costs than would fluid milk handlers.

The PMO states, ``Regulatory requirements have a fundamental

purpose, protection of public health, and are not intended to and do

not address microbiologic issues that relate to economic factors and

consumer preference or acceptance of products such as cheese.'' The

intent of placing an adjustment for somatic cell count under Federal

milk order provisions is not to set standards for milk. Instead the

intent is to recognize that the quality of milk, as measured by the

SCC, is a factor in improving yields of cheese and other manufactured

products and therefore is an indication of the economic value of the

milk.

It should be remembered that as milk from farms is commingled, the

SCC of the entire load will tend toward the average for the market.

Over the course of a month, it is unlikely that the average producer

milk receipts will vary more than 100,000 SCCs from the average for the

market, even for handlers who make a concerted effort to attract a

high-quality milk supply. The primary impact of the SCC adjustment

would be felt by producers.

The argument that somatic cell counts have wider fluctuations than

butterfat or protein tests is apparently valid. However, the hearing

record does not contain evidence that any problems resulting from

variability in testing outweighs the benefits of including SCC

adjustments in the MCP plan. As specified in the Agricultural Marketing

Agreement Act of 1937, one of the functions of the market administrator

is ``Providing . . . for the verification of weights, sampling and

testing of milk purchased from producers.'' 7 U.S.C. 608c(5)(E).

Because the market administrator will now be verifying the sampling and

testing of milk for somatic cells, the variation in somatic cell levels

due to testing should be minimized much as the differences in butterfat

tests due to testing variations were minimized when the Federal milk

order program was first instituted.

The Agricultural Marketing Agreement Act of 1937 in 7 U.S.C.

Sec. 608c(5) authorizes the Secretary to adjust minimum prices paid to

producers based upon the quality of the milk purchased. Therefore, the

argument that somatic cells cannot be used as a criterion for adjusting

a producer's pay price is invalid. Furthermore, the hearing record

shows that the level and presence of somatic cells directly affect the

quality and grade of milk in that SCCs above a certain level result in

the loss of a producer's Grade A permit.

Record evidence indicates that SCC is only one of the factors that

affect milk quality. However, there is not enough substantial evidence

to include other factors, such as psychotrophic and raw bacteria count,

as criteria used to determine milk quality for payment purposes.

Testimony indicates that there may be merit in including other quality

factors besides SCC in Federal milk order pricing, but further study of

the role of such other factors in affecting the value of milk is

needed. In any case, the inclusion of other quality factors in this

proceeding goes beyond the scope of the hearing notice.

Because the NCI suggestion for individual handler SCC payment plans

was made in a brief filed after the reopened hearing rather than being

included in the notice for either the initial or the reopened hearing,

interested persons had no opportunity for cross-examination. Therefore,

the concept cannot be considered as an alternative to the proposed SCC

adjustment schedule, as it is beyond the scope of the proceeding. It

should be noted that adjusting the minimum producer milk price for SCC

does not preclude other premiums paid by a handler.

In addition, although the Agricultural Marketing Agreement Act of

1937 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 as suggested by NCI 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.

5. Administrative assessment. The maximum allowable rate of

assessment to be paid by handlers to cover the cost of administering

the Southern Michigan order should be increased to 4 cents per

hundredweight. The assessment would continue to be applied to the same

milk to which the present assessment applies. The Act specifies that

persons who are regulated shall pay the cost of operating the program

through an assessment on the milk handled by regulated persons who are

defined as

[[Page 43083]]

handlers under the order. The present 2-cent per hundredweight maximum

allowable rate of assessment has been provided for the administration

of Order 40 since the order became effective on December 1, 1960.

The 2-cent increase in the maximum allowable rate was proposed by

MMPA. During the initial hearing, a witness for the cooperative

association testified that the present ceiling on the deduction rate

for administrative services does not adequately compensate the market

administrator for all services rendered. In a post-hearing brief, MMPA

stated that the market administrator should have the authority to

collect revenue necessary to perform the duties required by

regulations. There was no other testimony on this proposal at the

hearing. NFO's brief expressed support for MMPA's proposal.

The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern

Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)

are administered under the supervision of a single market

administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal

Orders 33 and 36 were administered by another market administrator.

The Balance Sheets and Income and Expense Statements for the

Administrative Fund are compiled by the market administrator and

reported annually to regulated handlers as well as to other interested

parties. Record data for the years 1990 and 1991 show that the

administrative expenses associated with the operation of Orders 40 and

44 exceeded the income the market administrator received from

assessments by $80,000. However, when the four markets were

consolidated in 1992, income exceeded expenses by $400,000. The change

indicates that Orders 33 and 36 are bearing some of the financial

responsibilities of Orders 40 and 44.

The witness for MMPA stated that the current rates of assessment

for Federal Orders 33 and 36 are higher than for Orders 40 and 44.

Furthermore, the witness noted, the recent recommended decision for

Orders 33 and 36 sets the maximum allowable deduction rate for

administrative services at 4 cents per hundredweight.

Handlers and producers serving the market have jointly asked that a

new multiple component pricing program be provided to adjust the value

of milk used by regulated handlers and payments to producers. The

implementation and administration of that pricing plan for Order 40 may

require the purchase of some new laboratory equipment and the

performance of additional administrative duties. Many of the testing

expenses associated with the multiple component pricing plan would be

paid for with money from the marketing service fund. However, because

the value of milk used by handlers in Classes I, II and III would be

established on the basis of the milk's butterfat, protein, fluid

carrier, and somatic cell content, some of the expenses related to

establishing the level of these factors in producer milk likely would

be paid for with money from the administrative fund. Thus, there is no

reason to expect the expenses of administering the order to decline.

Providing a higher maximum rate of assessment in the order does not

mean that the higher rate will apply automatically when the amended

order becomes effective. The amendment gives the market administrator

the discretionary authority to set the rate at any level up to the

maximum specified in the order. When the amended order becomes

effective, the market administrator may decide that no change in the

effective assessment rate is necessary or that some increase to a level

less than the maximum allowed is warranted. Further, an increase in the

maximum rate will assure that Order 40 will bear, with Orders 33 and

36, an equitable share of the cost of operating the market

administrator's office.

6. Marketing service assessment. The maximum rate of deduction from

payments to nonmember producers for the cost of providing marketing

services such as butterfat, protein, somatic cell testing, and market

information for nonmember producers should be increased to 7 cents per

hundredweight under the Southern Michigan order. The increase is needed

to assure sufficient revenue to cover the expenses incurred by the

market administrator in providing such services to producers who are

not members of a qualified cooperative association. Currently, the

maximum allowable deduction for such services is 5 cents per

hundredweight. Like the administrative assessment, this maximum rate

has been effective since December 1, 1960.

During the initial hearing, MMPA proposed that the maximum

allowable assessment rate for marketing services be increased to 7

cents per hundredweight. The MMPA representative testified that the

market administrator provides services which involve verification of

weights, samples and tests of milk received from producers, as well as

providing market information to producers who are not members of a

cooperative association. The witness and MMPA's post-hearing brief

stated that in order for the market administrator to adequately perform

the duties required by the order, he must be allowed to have the

authority to collect the revenue necessary to provide those services. A

post-hearing brief filed on behalf of NFO supported MMPA's proposal.

There was no opposition to the proposal.

The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern

Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)

are administered under the supervision of a single market

administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal

Orders 33 and 36 were administered by another market administrator.

The Balance Sheets and Income and Expense Statements for the

Marketing Service Fund are compiled by the market administrator and

reported annually to nonmember producers as well as to other interested

parties. Record data for the years 1990 and 1991 show that the expenses

incurred by the market administrator in providing marketing services

exceeded income by about $54,000. In 1992, when the statements for the

four markets were combined, expenses exceeded income by approximately

$116,000.

It is evident from the foregoing that the 5-cent deduction from

producer payments for marketing services in the Southern Michigan order

has been inadequate to cover the costs incurred in the performance of

such duties by the market administrator. It also shows that the

financial situation worsened when the statements were combined in 1992.

The increase will align the maximum marketing service assessment rate

of Order 40 with that recently adopted for Orders 33 and 36. In

addition, the multiple component pricing plan recommended in this

decision will require additional testing activities. Because not all

handlers are equipped to make all of the determinations that will be

required under the amended order, many of these duties will have to be

performed by the market administrator responsible for administering the

order.

The 7-cent maximum rate of deduction for marketing services

proposed by MMPA should be provided in Order 40. The higher rate should

give the market administrator the necessary flexibility to conduct

effective marketing service programs, including any additional duties

relating to the implementation and administration of the new pricing

program that will be incorporated in the order.

Provision of a 7-cent maximum rate does not mean that the 7-cent

rate will

[[Page 43084]]

become effective automatically. Maximum rather than fixed rates of

deduction are specified in the orders because the relationship between

income and expenses for the fund is subject to many variables. Changes

in the pounds of nonmember milk marketed and the rate assessed on these

marketings increase or decrease the income of the marketing service

fund, while changes in order requirements and the expenses of providing

marketing services result in changes in total outlays.

An increase in the maximum allowable assessment will give the

market administrator the discretionary authority to set the rates of

deduction for marketing services at levels necessary to cover the

expense of providing marketing services. The market administrator may

use his discretionary authority to determine if rates below the upper

limits adopted in the amended order will provide sufficient funding to

conduct an adequate program for nonmember producers.

9. Conforming changes. To accommodate multiple component pricing, a

number of changes need to be made in the current order provisions of

the Southern Michigan order. To compute a handler's obligation and the

producer price differential, several prices need to be defined. The

Class I differential price should be defined as the difference between

the current month's Class I price and the current month's Class III

price. The Class II differential price should be defined as the

difference between the current month's Class II price and the current

month's Class III price. 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.

These differential prices should not be confused with the fixed

values that are added to the M-W price for the second preceding month

to arrive at the Class I and Class II prices for the current month. It

should also be pointed out that these differential prices may be

negative, which currently happens when the M-W 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, rounded to the nearest full cent. Prices for

butterfat, protein, and fluid carrier residual were defined previously

within this decision.

Because producer location adjustments are not changed in this

decision, the application of such adjustments to the producer price

differential remains unchanged.

To enable the market administrator to compute the producer price

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 and somatic cell information. This

information will be required from each handler for all producer

receipts, including milk diverted by the handler, receipts from

cooperatives as 9(c) handlers, and receipts of bulk milk received by

transfer or diversion.

Handlers purchasing milk from cooperative pool plants will have

their obligations for Class I milk computed 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 adjusted

for somatic cell count, plus the hundredweight of fluid carrier at the

fluid carrier price, plus the pounds of butterfat at the butterfat

price; and for Class III milk the protein pounds times the protein

price adjusted for somatic cell count, plus the hundredweight of fluid

carrier at the fluid carrier price, plus the pounds of butterfat at the

butterfat price. Payment for 9(c) milk will be based on the producer

price differential adjusted for location at the plant of receipt plus

the value of protein adjusted for somatic cell count, fluid carrier,

and butterfat contained in the milk.

Because 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 also with: (a) the pounds of

butterfat, the pounds of protein, and the hundredweight of fluid

carrier contained in the producer's milk, as well as the producer's

average somatic cell count, and (b) the minimum rate that is required

for payment for each pricing factor and, if a different rate is paid,

the effective rate also.

A 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, (f) the value of

handler location adjustments, (g) Class III-A credits, (h) the pounds

of skim milk in Class I times the skim milk price, (i) the pounds of

protein in Class II and Class III times the protein price adjusted for

the average somatic cell count of the handler's producer milk receipts,

and (j) the hundredweight of fluid carrier in Class II and Class III

times the fluid carrier price.

The pounds of protein in Class II and Class III will be determined

by multiplying the percent protein 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. The hundredweight of fluid carrier

in Class II and Class III will be determined by subtracting from the

pounds of skim milk allocated to Class II and Class III the pounds of

protein in 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, plus or minus the net somatic cell adjustment of producer milk

received by the handler, (c) the total hundredweight of fluid carrier

contained in the producer milk times the fluid carrier price, and (d)

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 Southern Michigan order, which

includes 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.

NCI's exception requested that sufficient time be allowed following

issuance of the final decision to implement the MCP plan. Although a

similar request in the five midwest markets multiple component

proceeding was responded to favorably, that request was made by a

number of producer groups and handlers in those marketing areas. There

were no Southern Michigan handlers or producer groups who indicated any

need for a delay in the

[[Page 43085]]

implementation of the provisions proposed in this decision. Therefore,

such a delay is not warranted in this proceeding.

Rulings on Proposed Findings and Conclusions

Briefs and proposed findings and conclusions were filed on behalf

of certain interested parties. These briefs, proposed findings and

conclusions and the evidence in the record were considered in making

the findings and conclusions set forth above. To the extent that the

suggested findings and conclusions filed by interested parties are

inconsistent with the findings and conclusions set forth herein, the

requests to make such findings or reach such conclusions are denied for

the reasons previously stated in this decision.

General Findings

The findings and determinations hereinafter set forth supplement

those that were made when the Southern Michigan order was first issued

and when it was amended. The previous findings and determinations are

hereby ratified and confirmed, except where they may conflict with

those set forth herein.

(a) The tentative marketing agreement and the order, as hereby

proposed to be amended, and all of the terms and conditions thereof,

will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2

of the Act are not reasonable in view of the price of feeds, available

supplies of feeds, and other economic conditions which affect market

supply and demand for milk in the marketing area, and the minimum

prices specified in the tentative marketing agreement and the order, as

hereby proposed to be amended, are such prices as will reflect the

aforesaid factors, insure a sufficient quantity of pure and wholesome

milk, and be in the public interest;

(c) The tentative marketing agreement and the order, as hereby

proposed to be amended, will regulate the handling of milk in the same

manner as, and will be applicable only to persons in the respective

classes of industrial and commercial activity specified in, a marketing

agreement upon which a hearing has been held; and

(d) It is hereby found that the necessary expense of the market

administrator for the maintenance and functioning of such agency will

require the payment by each handler, as his pro rata share of such

expense, 4 cents per hundredweight or such lesser amount as the

Secretary may prescribe, with respect to milk specified in Sec. 1040.85

of the aforesaid tentative marketing agreement and the order as

proposed to be amended.

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 order regulating the handling of milk in the Southern

Michigan marketing area, 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.

Determination of Producer Approval and Representative Period

May 1995 is hereby determined to be the representative period for

the purpose of ascertaining whether the issuance of the order, as

amended and as hereby proposed to be amended, regulating the handling

of milk in the Southern Michigan marketing area is approved or favored

by producers, as defined under the terms of the order 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 area.

List of Subjects in 7 CFR Part 1040

Milk marketing orders.

Dated: August 11, 1995.

Patricia Jensen,

Acting Assistant Secretary, Marketing and Regulatory Programs.

Order Amending the Order Regulating the Handling of Milk in the

Southern Michigan Marketing Area

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 order was first issued and when it was

amended. The previous findings and determinations are hereby ratified

and confirmed, except where they may conflict with those set forth

herein.

(a) Findings. A public hearing was held upon certain proposed

amendments to the tentative marketing agreement and to the order

regulating the handling of milk in the Southern Michigan marketing

area. 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 order 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 area. The minimum

prices specified in the order 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;

(3) The said order as hereby amended regulates 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, a

marketing agreement upon which a hearing has been held; and

(4) It is hereby found that the necessary expense of the market

administrator for the maintenance and functioning of such agency will

require the payment by each handler, as his pro rata share of such

expense, of 4 cents per hundredweight or such lesser amount as the

Secretary may prescribe, with respect to milk specified in

Sec. 1040.85.

Order Relative to Handling

It is therefore ordered, that on and after the effective date

hereof, the handling of milk in the Southern Michigan marketing area

shall be in conformity to and in compliance with the terms and

conditions of the order, as amended, and as hereby amended, as follows:

[[Page 43086]]

The provisions of the proposed marketing agreement and order

amending the order contained in the revised recommended decision issued

by the Administrator, Agricultural Marketing Service, on December 2,

1994, and published in the Federal Register on December 14, 1994 (59 FR

64464), shall be and are the terms and provisions of this order,

amending the order, and are set forth in full herein, subject to the

following modifications:

a. A change in the application of the market administrator's

discretion to modify supply plant shipping percentages has been made to

Sec. 1040.7(b) by removing (6)(iii) and adding (7).

b. Changes in the treatment of the somatic cell adjustment require

modification of reporting requirements in Sec. 1040.30(a).

c. Additional changes due to the treatment of the somatic cell

adjustment have been made by adding Sec. 1040.50(l), deleting

Sec. 1040.64, and modifying Sec. 1040.60(a)(5).

d. Changes for the purpose of more easily accommodating Class III-A

provisions have been made by adding Secs. 1040.50(g) and 1040.60(a)(3)

and deleting Sec. 1040.61(a)(3).

e. A change for the purpose of conforming with amendments resulting

from the Class II pricing proceeding has been made in Sec. 1040.53(b).

f. Changes for the purpose of conforming with amendments resulting

from the M-W replacement proceeding have been made in Sec. 1040.74.

g. Changes for the purpose of correcting or clarifying order

language have been made in the introductory text and paragraph (k)

(formerly (j)) of Sec. 1040.50, Sec. 1040.60(a)(6), Sec. 1040.61(a)(4)

and (5), Sec. 1040.62(e), Sec. 1040.63(a), (c), and (d),

Sec. 1040.71(a)(2)(ii) and (a)(2)(iv), Sec. 1040.73(b)(1)(ii) and (c),

and Sec. 1040.75(a)(1).

Accordingly, this decision proposes 7 CFR Chapter X be amended as

follows:

PART 1040--MILK IN THE SOUTHERN MICHIGAN MARKETING AREA

1. The authority citation for 7 CFR Part 1040 continues to read as

follows:

Authority: 7 U.S.C. 601-674.

2. Section 1040.7 is amended by adding paragraphs (b)(5)(iii) and

(b)(7) to read as follows:

Sec. 1040.7 Pool Plant.

* * * * *

(b) * * *

(5) * * *

(iii) Partially regulated distributing plants that are neither

other order plants, producer-handler plants, nor exempt plants and from

which there is route disposition in consumer-type packages or dispenser

units in the marketing area during the month.

* * * * *

(7) The shipping percentages determined pursuant to paragraphs

(b)(1) or (b)(6) of this section may be increased or decreased by the

market administrator if the market administrator finds that such

revision is necessary to encourage needed shipments or to prevent

uneconomic shipments. Before making such a finding, the market

administrator shall investigate the need for revision either on the

market administrator's own initiative or at the request of interested

parties. If the investigation shows that a revision of the shipping

requirements might be appropriate, the market administrator shall issue

a notice stating that the revision is being considered and invite data,

views, and arguments. Any request for revision of shipping percentages

shall be filed with the market administrator no later than the 15th day

of the month prior to the month for which the requested revision is

desired to be effective.

* * * * *

3. Section 1040.30 is amended by revising paragraphs (a) and (c),

and removing paragraph (d), to read as follows:

Sec. 1040.30 Reports of receipts and utilization.

* * * * *

(a) Each handler described in Sec. 1040.9(a), (b), and (c) shall

report for each of its operations the following information:

(1) Product pounds, pounds of butterfat, pounds of protein, 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, and

(ii) Receipts of milk from handlers described in Sec. 1040.9(c).

(2) Product pounds and pounds of butterfat contained in:

(i) Receipts by transfer or diversion of bulk fluid milk products;

(ii) Receipts of fluid milk products not included in (a)(1) or

(a)(2)(i) 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. 1040.40(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, 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.

4. Section 1040.31 is amended by revising paragraph (a) to read as

follows:

Sec. 1040.31 Payroll reports.

(a) On or before the 20th day after the end of each month, each

handler described in Sec. 1040.9(a), (b), and (c) shall report to the

market administrator its producer payroll for such month, in the detail

prescribed by the market administrator, showing for each producer:

(1) The producer's name and address;

(2) The total pounds of milk received from such producer, with its

protein and butterfat percentage;

(3) The total pounds of butterfat contained in the producer's milk;

(4) The total pounds of protein contained in the producer's milk;

(5) The somatic cell count of the producer's milk;

(6) The amount, or the rate per hundredweight, or rate per pound of

component, the somatic cell adjustment to the protein price, the gross

amount due, the amount and nature of any deductions, and the net amount

paid.

* * * * *

5. Section 1040.41 is amended by revising the second sentence of

paragraph (c) to read as follows:

Sec. 1040.41 Shrinkage.

* * * * *

(c) * * * If the operator of the plant to which the milk is

delivered purchases such milk on the basis of weights determined by

farm bulk tank calibration, with protein and butterfat tests and

somatic cell counts determined from farm bulk tank samples, the

applicable percentage for the cooperative association shall be zero.

6. Section 1040.50 is amended by revising the section heading,

introductory text and paragraph (a), and adding paragraphs (e) through

(l), to read as follows:

Sec. 1040.50 Class and component prices.

Subject to the provisions of Sec. 1040.52, the class prices per

hundredweight of milk containing 3.5 percent butterfat

[[Page 43087]]

and the component prices per hundredweight or per pound for the month

shall be as follows:

(a) Class I price. The Class I price shall be the basic formula

price for the second preceding month plus $1.75.

* * * * *

(e) Class I differential price. The Class I differential price

shall be the difference between the current month's Class I and Class

III price (this price may be negative).

(f) Class II differential price. The Class II differential price

shall be the difference between the current month's Class II and Class

III price (this price may be negative).

(g) Class III-A differential price. The Class III-A differential

price shall be the difference between the current month's Class III-A

and Class III price (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) Fluid carrier price. The fluid carrier price per hundredweight,

rounded to the nearest whole 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 (this price may be negative).

(l) Somatic cell adjustment. For each producer, an adjustment to

the protein price for the somatic cell count of the producer's milk

shall be determined by multiplying the constant associated with the

appropriate somatic cell count interval in the following table by the

simple average price for the month of 40-pound blocks of Cheddar cheese

at the National Cheese Exchange as reported by the Department. If a

handler has not determined a monthly average somatic cell count, it

will be determined by the market administrator.

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

Constants

for

computing

Somatic cell counts the somatic

cell

adjustment

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

1 to 50,000............................................... .078125

51,000 to 100,000......................................... .062500

101,000 to 150,000........................................ .046875

151,000 to 200,000........................................ .031250

201,000 to 250,000........................................ .015625

251,000 to 300,000........................................ .0078125

301,000 to 350,000........................................ .000000

351,000 to 400,000........................................ .000000

401,000 to 450,000........................................ -.0078125

451,000 to 500,000........................................ -.015625

501,000 to 550,000........................................ -.0234375

551,000 to 600,000........................................ -.031250

601,000 to 650,000........................................ -.0390625

651,000 to 700,000........................................ -.046875

701,000 to 750,000........................................ -.062500

751,000 and above......................................... -.078125

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

7. Section 1040.53 is revised to read as follows:

Sec. 1040.53 Announcement of class and component prices.

On or before the 5th day of the month, the market administrator

shall announce the following prices and any other price information

deemed appropriate:

(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 fluid carrier price for the preceding month;

(i) The butterfat differential for the preceding month;

8. The section heading in Sec. 1040.60 and the undesignated

centerheading preceding it, the introductory text, and paragraphs (a)

and (f) are revised to read as follows:

Producer Price Differential

Sec. 1040.60 Handler's value of milk.

For the purpose of computing a handler's obligation for producer

milk, the market administrator shall determine for each month the value

of milk of each handler with respect to each of the handler's pool

plants and of each handler described in Sec. 1040.9(b) and (c), as

follows:

(a) Calculate the following values:

(1) Multiply the total hundredweight of producer milk in Class I as

determined pursuant to Sec. 1040.44(c) by the Class I differential

price for the month;

(2) Add an amount obtained by multiplying the total hundredweight

of producer milk in Class II as determined pursuant to Sec. 1040.44(c)

by the Class II differential price for the month;

(3) Add an amount obtained by multiplying the total hundredweight

of producer milk eligible to be priced as Class III-A by the Class III-

A differential price for the month;

(4) Add an amount obtained by multiplying the hundredweight of skim

milk in Class I as determined pursuant to Sec. 1040.44(a) by the skim

milk price;

(5) Add an amount obtained by multiplying the pounds of skim milk

in Class II and Class III as determined pursuant to Sec. 1040.44(a

This text is long and has been trimmed here. Open the source document for the complete record.