Milk in the Carolina, Tennessee Valley, and Louisville-Lexington- Evansville Marketing Areas; Recommended Decision and Opportunity to File Written Exceptions on Proposed Amendments to Tentative Marketing Agreements and to Orders

7 CFR Part Marketing area AO Nos.

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

1005...... Carolina................................ AO-388-A8

1011...... Tennessee Valley........................ AO-251-A39

1046...... Louisville-Lexington-Evansville......... AO-123-A66

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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

SUMMARY: This recommended decision would amend the pooling standards of

the Tennessee Valley and Carolina orders; modify the marketing areas of

the Tennessee Valley and Louisville-Lexington-Evansville orders; change

the location adjustment under the Carolina order for plants located in

the Middle Atlantic marketing area; and change the base-paying months

under the Carolina order.

DATES: Comments are due on or before September 25, 1995.

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

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

Agriculture, Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist,

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

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

SUPPLEMENTARY INFORMATION: This administrative action is governed by

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

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

Order 12866.

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

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

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

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

significant economic impact on a substantial number of small entities.

The amendments would permit plants to be regulated under the order in

which they are physically located.

The amendments to the rules proposed herein have been reviewed

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

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

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

policies, unless they present an irreconcilable conflict with this

rule.

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

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

exhausted before parties may file suit in court. Under section

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

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

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

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

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

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

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

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

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

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

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

Prior document in this proceeding:

Notice of Hearing: Issued November 21, 1994; published November 25,

1994 (59 FR 60574).

Preliminary Statement

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

recommended decision with respect to proposed amendments to the

tentative marketing agreements and the orders regulating the handling

of milk in the Carolina, Tennessee Valley, and Louisville-Lexington-

Evansville marketing areas. This notice is issued pursuant to the

provisions of the Agricultural Marketing Agreement Act and the

applicable rules of practice and procedure governing the formulation of

marketing agreements and marketing orders (7 CFR part 900).

Interested parties may file written exceptions to this decision

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

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

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

written submissions made pursuant to this notice will be made available

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

business hours (7 CFR 1.27(b)).

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

a public hearing held at Charlotte, North Carolina, on January 4, 1995,

pursuant to a notice of hearing issued November 21, 1994 (59 FR 60574).

The material issues on the record of hearing relate to:

1. Marketing area modifications to the Tennessee Valley and

Louisville-Lexington-Evansville orders;

2. Where to regulate a distributing plant that meets the pooling

standards of more than one order;

3. Supply plant pooling standards under the Tennessee Valley order;

4. Distributing plant pooling standards under the Carolina order;

5. Location adjustments under the Carolina order; and

6. Base-paying months under the Carolina order.

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. Marketing Area Modifications to the Tennessee Valley (Order 11) and

Louisville-Lexington-Evansville (Order 46) Orders

Six now-unregulated Kentucky counties between the Order 11 and

Order 46 marketing areas should be added to the Order 11 marketing area

and one county that is now part of the Order 46 marketing area should

be removed and added to the Order 11 marketing area.

A spokesman for Southern Belle Dairy Company, Inc., testified that

the six

[[Page 43987]]

unregulated counties--Clay, Jackson, Laurel, McCreary, Owsley, and

Rockcastle--and the one Order 46 county--Pulaski--are in an area that

is closely associated with the Tennessee Valley marketing area. He

pointed out, for example, that two Order 11 pool plants--the Flav-O-

Rich plant at London and the Southern Belle plant at Somerset--are in

Laurel and Pulaski Counties, respectively.

The witness indicated that Southern Belle had sales in each of the

counties proposed to be added to the marketing area. He also introduced

data showing that 79 percent of the fluid milk sales in the seven-

county area came from the Southern Belle and Flav-O-Rich plants. He

said that a majority of the sales in Pulaski County also came from

Order 11 plants.

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

in post-hearing briefs.

The six now-unregulated Kentucky counties should be added to the

Order 11 marketing area and Pulaski County should be removed from the

Order 46 marketing area and added to the Order 11 marketing area. This

seven-county area is closely associated with the Tennessee Valley

market and its addition to the Order 11 marketing area, in conjunction

with the pooling standards adopted in this decision, will add

regulatory stability for the plants with sales in this area. There are

no plants in this seven-county area other than the Southern Belle and

Flav-O-Rich plants and none outside of this area that would become

regulated as a result of the addition of this territory to the

Tennessee Valley marketing area.

2. Where to Regulate a Distributing Plant That Meets the Pooling

Standards of More Than One Order

The pooling standards of the Tennessee Valley and Carolina orders

should be modified to fully regulate a distributing plant that is

located within their respective marketing areas and that meets the

pooling standards of Secs. 1011.7(a) or 1005.7(a), respectively, even

if the plant meets the pooling standards of another order and has more

route disposition in such other order's marketing area.

These amendments will allow a distributing plant at Kingsport,

Tennessee, that is located within the Tennessee Valley marketing area

and that meets all of the pooling standards of the Tennessee Valley

order to be regulated under that order rather than under the Carolina

order, despite the plant's having greater sales in the Carolina

marketing area. Similarly, they will allow a distributing plant located

at Somerset, Kentucky--which, as recommended under Issue No. 1, would

be part of the Order 11 marketing area--to be regulated under Order 11

even if the plant should develop greater sales in the marketing area of

Order 46 or some other order's marketing area. Finally, the amendments

will permit a plant located at Greenville, South Carolina (in the Order

5 marketing area), to be regulated under Order 5 even if the plant has

more sales in the Southeast marketing area (Order 7).

These recommendations and the proposals which prompted them stem

from various pricing problems under these orders that have come about

for a variety of reasons, including the fact that the marketing areas

may not have grown as fast as handlers' distribution areas. The pricing

problems identified on the record of this proceeding relate to Land-O-

Sun Dairies, Inc., at Kingsport, Tennessee; Southern Belle Dairy

Company at Somerset, Kentucky; and Superbrand Dairy Products, Inc., at

Greenville, South Carolina.

Land-O-Sun Dairies, Inc., operates a plant at Kingsport, Tennessee,

which is in the Tennessee Valley marketing area. Because of this

plant's greater route disposition in the Carolina marketing area, it

has been regulated under that order. During the past three years

(January 1992-November 1994), the blend price at Kingsport under Order

5 has averaged 14 cents below the blend price at that location under

Order 11. In some months, the difference has been as high as 32 cents.

Although the Class I price at Kingsport is identical under both of

these orders, the Tennessee Valley order's higher Class I utilization--

e.g., 82.03 percent for Order 11 compared to 77.96 percent for Order 5

during the first 10 months of 1994--has led to a higher blend price

under that order at Kingsport during nearly every month for the past

three years.

A spokesman for Land-O-Sun testified that the Kingsport plant

handles approximately 12 million pounds of milk per month and that

about one-third of its Class I sales are distributed on routes within

the Tennessee Valley marketing area and the remaining two-thirds within

the Carolina marketing area.

The witness testified that Land-O-Sun purchases its raw milk supply

from 140 dairy farmers located in northeast Tennessee and southwest

Virginia within 100 miles of the Kingsport plant. He noted that this

area is also the supply area for other Order 11 pool plants. As a

result, he said, any blend price difference to producers in this common

supply area leads to market instability. Because the Order 11 blend

price is higher than the Order 5 blend price, he stated, Land-O-Sun is

forced to pay over-order prices to retain its producers. He indicated

that Land-O-Sun could not consistently pay these higher prices and

remain a viable business entity.

Southern Belle Dairy at Somerset, Kentucky, has been regulated

under Order 11 since 1989. In recent years, the plant has had nearly

equal sales in the Order 46 and Order 11 marketing areas. If regulation

of the plant had shifted to Order 46, the applicable Class I

differential price would be 19 cents lower than under Order 11 (i.e.,

$2.26 compared to $2.45), but the blend price difference would be even

more substantial. For example, in the past 35 months (January 1992-

November 1994), the Order 46 blend price averaged 30 cents below the

Order 11 blend price at Somerset. In some months during this period,

the difference in blend prices was as much as 67 cents.

At the hearing, a Southern Belle spokesman testified that the

handler sought the marketing stability that would be provided by

regulating the plant under Order 11 based upon its location within the

Order 11 marketing area. The spokesman stated that Southern Belle would

experience procurement problems if it could only pay its producers the

Order 46 blend price in competition with Order 11 handlers--such as the

Flav-O-Rich plant at London, Kentucky, 37 miles east of Somerset--which

also procure milk from the same supply area. He also cited the

marketing instability that would result from the plant shifting back

and forth between the two orders, particularly in view of the differing

base and excess payment plans to producers in each of these orders.

Superbrand Dairy Products at Greenville, South Carolina, has been

regulated under the Georgia order since May 1992 despite the fact that

it is located within the marketing area of the Carolina order and meets

the pooling standards of that order.

A spokesman for Mid-America Dairymen, Inc. (Mid-Am), which has a

full supply contract with the Superbrand plant, testified that the

Carolina order should be amended to provide the same type of pooling

standard that has been proposed for the Tennessee Valley order and that

was incorporated in the Department's recommended (and final) decisions

for the new Southeast order.1 Inclusion of

[[Page 43988]]

this provision in each of these orders will provide regulatory

compatibility throughout the Southeast, he said.

\1\ Official notice is taken of the final decision for the

Southeast order issued on May 3, 1995 (60 FR 25014).

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

The witness stated that the Mid-Am proposal would return the

Superbrand plant to its former status as a pool plant under Order 5. In

terms of its sales and procurement pattern, the plant is more closely

associated with the Carolina market, he added.

The Mid-Am spokesman testified that the proposed change in pooling

standards is a departure from the traditional method of determining

where a distributing plant should be regulated when it meets the

pooling standards of more than one order. The traditional method, he

explained, regulated a plant wherever it had the most sales. He said

that the principle behind that practice was to insure that all handlers

having sales in an order area were subject to the same regulatory

provisions as their competition. However, he added, with the advent of

large processing plants with sales distribution over wide geographic

areas, the traditional method of pooling distributing plants has become

obsolete.

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

in post-hearing briefs.

For the most part, Federal milk orders have traditionally regulated

plants according to where they had the most sales. The reasoning behind

that policy has been to ensure that all handlers having sales in a

Federal order marketing area were subject to the same minimum prices

(adjusted for plant location) and other regulatory provisions as their

competition. When these provisions were first incorporated in orders,

markets were primarily local in nature. At any given location, it was

common for Class I prices to differ among orders, and it was common for

each order to have a unique set of provisions.

Most of the provisions in Federal milk orders today are

standardized. For example, all orders have uniform classification and

allocation provisions. Similarly, most Federal order Class I prices are

properly aligned. As noted above, for example, the Class I price at

Kingsport, Tennessee, is the same whether Land-O-Sun's plant is

regulated under Order 5 or Order 11; the Southern Belle plant at

Somerset, Kentucky, would be subject to a higher Class I price under

Order 11 than would apply at the plant under Order 46; and the

Superbrand plant at Greenville would be subject to the same Class I

price whether it was regulated under Order 5 or Order 7.

Consequently, it must be concluded that the competitive equity that

was, and continues to be, sought by having competing handlers subject

to the same rules and Class I prices can be achieved in these marketing

areas by pooling distributing plants under the orders applicable to the

marketing areas in which the plants are located. Specifically, the

pooling standards of the Tennessee Valley and Carolina orders should be

amended to fully regulate all distributing plants that meet the orders'

pooling standards and that are located within their respective

marketing areas.

Under the provisions adopted here for the Carolina and Tennessee

Valley orders, a plant that qualifies as a pool distributing plant and

which is located within the marketing area will be regulated under the

order applicable to that marketing area even if it meets the pooling

standards of another order and has greater sales in such other order's

marketing area. The nearby Southeast order, Louisville-Lexington-

Evansville order, and Upper Florida order contain provisions

(Secs. 1007.7(g)(4), 1046.7(e)(3), and 1006.7(d)(3), respectively) that

conform to the proposed provisions by yielding regulation of such

plants to the other order.

Orders 5 and 11 also should be modified to recognize another

order's primacy to regulate a plant that meets such other order's

pooling standards and that is within the other order's marketing area.

This is accomplished in Secs. 1005.7(e)(3) and 1011.7(e)(3).

A clarifying change should also be made to Secs. 1005.7(e)(5) and

1011.7(e)(5). At present, these paragraphs, which are designated as

Secs. 1005.7(d)(4) and 1011.7(d)(4), state that ``the term pool plant

shall not apply to a plant qualified pursuant to paragraph (b) of this

section which also meets the pooling requirements for the month under

another Federal order.'' A problem could arise with this language

because during certain months of the year a supply plant may qualify as

a pool plant by shipping less than 50 percent of its receipts to

distributing plants. For example, if a supply plant shipped 40 percent

of its receipts to pool distributing plants under Order 5 and 40

percent of its receipts to distributing plants under Order 11, both

orders, pursuant to the language quoted above, would yield regulation

of the plant to the other order, leaving the plant in a state of

regulatory limbo. To prevent this unlikely event from occurring, the

paragraph should be modified to read: ``The term pool plant shall not

apply to a plant qualified pursuant to paragraph (b) of this section if

the plant has automatic pooling status under another Federal order or

if the plant meets the pooling requirements of another Federal order

during the month and makes greater qualifying shipments to plants

regulated under such other order than to plants regulated under this

order.''

3. Supply Plant Pooling Standards Under the Tennessee Valley Order

The supply plant pooling provisions for the Tennessee Valley order

should be amended to provide automatic pooling status for a supply

plant which met the order's shipping standards during the preceding

months of July through February.

Armour Food Ingredients Company (Armour) proposed the change in

supply plant pooling standards. A spokesman for Armour testified that

the company operates a supply plant at Springfield, Kentucky, that has

been a pool plant under Order 11 since August 1992. He said that the

facility is a ``dual Grade A/Grade B plant.'' The Grade A part of the

plant is used to assemble Grade A milk from producers' farms for

transshipment to pool distributing plants, while the Grade B facility

is used to process surplus milk into Class III products, he explained.

The witness testified that Order 11 now requires Armour to ship

milk to distributing plants every month of the year. However, much less

milk is needed from Armour during the spring than during the other

months of the year, he said. Consequently, he concluded, Armour and its

distributing plant customers are incurring receiving and hauling costs

for no other purpose than to satisfy the order's shipping requirements.

The witness introduced an exhibit which showed that from August

1992 through October 1994 Armour shipped a monthly average of 71

percent of its receipts to pool distributing plants. The exhibit also

showed that when shipments of surplus milk from these same pool

distributing plants to Armour were subtracted from the receipts from

Armour, the distributing plants, on average, kept 34 percent of the

milk that was sent to them.

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

in post-hearing briefs.

The provision proposed by Armour is included in many Federal milk

orders because of the seasonal variation in milk production. This

variation is also evident in the Tennessee Valley market. In 1993, the

average daily production per producer in this market was 2,220 pounds.

However, this daily average reached a low of 1,941 pounds during the

month of July and peaked at 2,481 pounds during May. As a group, the

months of March through June had a

[[Page 43989]]

daily average of 2,375 pounds, compared to 2,149 pounds during the

months of July through February.

There is no merit in requiring supply plants to receive, reload,

and ship milk to distributing plants if the milk is not needed or if

closer milk is available directly from producers' farms. In addition to

the statistics suggesting that supply plant shipments during the months

of March through June are unnecessary, the lack of any contradictory

testimony from Order 11 distributing plant operators must be

interpreted as concurrence with the view that supply plant shipments

are simply not needed during the months of March through June. In view

of this evidence, the proposal should be adopted.

Section 1011.7(b)(3) of the Tennessee Valley order, as proposed to

be amended here, also should be modified to clarify what would happen

if a shipping requirement were instituted during the months of March

through June pursuant to Sec. 1011.7(b)(4). First, it should be

understood that a new supply plant or one that did not meet the order's

shipping requirements during the months of July through February would

be subject to the 40 percent supply plant shipping requirement now in

the order.

If the market is short of milk during the ``free-ride'' months of

March through June and the market administrator determines that

additional milk is needed from pool supply plants pursuant to

Sec. 1011.7(b)(4), any increase in shipping percentage would be added

to the percentage that is then applicable to the plant. For instance,

if the market administrator determines that a 10-percentage point

increase in shipments is needed, a plant that would have had to ship 40

percent of its receipts would be required to ship 50 percent. However,

a plant in ``free-ride'' status, which normally would not have had to

make any shipments, would have to ship 10 percent. The market

administrator's ability to require additional milk from supply plants,

even during the free-ride period of March through June, will help to

ensure that the market has adequate supplies of milk for fluid use

during all months of the year.

At the present time, Secs. 1005.7(b) and 1011.7(b) of the Carolina

and Tennessee Valley orders, respectively, authorize the Director of

the Dairy Division to adjust supply plant shipping standards to obtain

needed shipments of milk or to prevent uneconomic shipments. This

provision was not an issue at the hearing. However, in conjunction with

the other changes in pooling provisions recommended in this decision,

it is recommended that authority to adjust supply plant shipping

standards be given to the market administrator of Orders 5 and 11.

With all of the marketing information immediately available to him

or her, the market administrator is in an ideal position to sense the

changing needs of the market and to obtain industry views concerning

the desirability of adjusting supply plant shipping requirements. As a

result, the market administrator will be able to attend to the need for

such temporary revisions in a timely fashion. Since this change was not

discussed at the hearing, it will not be carried forth to the final

decision in the face of industry opposition. It is being recommended

here as a modification that would better serve the changing needs of

handlers and producers under the Carolina and Tennessee Valley orders.

A similar conforming change also should be made in

Sec. 1011.13(e)(3) of the Tennessee Valley order for the same reasons.

This change would allow the market administrator to increase or

decrease, by 10 percentage points, the diversion limitations applicable

to a proprietary bulk tank handler.

4. Distributing Plant Pooling Standards Under the Carolina Order

Proposals to amend the Order 5 in-area route disposition

requirement for pool distributing plants should not be adopted.

At the present time, a distributing plant must dispose of at least

60 percent of its fluid milk product receipts in Class I during the

months of August through November, January, and February and at least

40 percent in each of the other months to qualify as a pool plant under

Order 5. In addition, at least 15 percent of the plant's route

disposition must be in the marketing area.

Milkco, Inc., testified in support of its proposal to change the

in-area route disposition standard of Order 5 from 15 percent to 10

percent. At the hearing, Milkco modified its proposal to the lesser of

1500 pounds daily or 10 percent of a plant's fluid milk receipts sold

as Class I.

A witness representing Milkco, Carolina Dairies, Hunter Farms,

Inc., Dairy Fresh, Inc., and Pine State Creamery testified that the

original proposal had been modified to include language similar to that

contained in the recommended decision of the proposed Southeast Federal

order.

The witness testified that the reason for proposing a change in the

in-area route disposition requirement was that partially regulated

handlers were constantly increasing their Class I distribution into the

Order 5 marketing area. He estimated that the average distribution for

1994 was between 25 million and 35 million pounds. He claimed that this

distribution is attributed to sales from partially regulated plants

located in Virginia.

The witness explained that the Virginia State Milk Commission

prices Class I sales made outside the State of Virginia at the Federal

order Class II price. He said that this creates a problem of

accountability for those Class I sales moving from Virginia to another

State. He claimed that the possibility exists that, in some instances,

not all of those sales may be accounted for and paid for at the

appropriate price.

The witness stated that the proposed amendment would provide

uniformity between Order 5 and surrounding orders. He also claimed that

the proposed change would not be burdensome to handlers located in

Virginia if these handlers are already paying prices equivalent to, or

greater than, the Order 5 Class I price.

The general manager for Carolina Virginia Milk Producers

Association (CVMPA) also testified in support of the revised proposal.

He stated that the proposal would provide uniformity between Order 5

and neighboring orders and that it would eliminate potential inequities

between Order 5 handlers and handlers regulated by the Virginia Milk

Commission.

The CVMPA representative asserted that the proposal would regulate

some partially regulated plants that may be subject to a lower price

for milk used in fluid milk products than fully regulated plants under

Order 5. He explained that handlers regulated under Order 5 must pay at

least the minimum Federal order class prices for their milk. He claimed

that plants located in Virginia and regulated by the Virginia Milk

Commission have a competitive advantage on raw milk costs compared to

handlers fully regulated under Order 5. The witness indicated that the

Class I price established and regulated by the Virginia Milk Commission

has historically been higher than the Order 5 price but that the

Commission requires that only the Class II price be paid for sales out

of the State.

The CVMPA witness testified that sales from partially regulated

handlers located in Virginia into the Carolina marketing area have a

significant impact on the market. Since January 1992, he pointed out,

sales from these plants have ranged from one to three million pounds of

Class I sales or between .84

[[Page 43990]]

and 2.26 percent of total route disposition in Order 5. He said that

while these Class I sales from Virginia partially regulated plants are

confined to a small portion of the marketing area, they have had a

disruptive effect on the market in eastern North Carolina.

The CVMPA representative testified that Federal orders contiguous

to the Carolina marketing area have more restrictive pool plant

requirements than the Carolina order. He noted that the Tennessee

Valley order's in-area route disposition requirement was 10 percent and

that the recommended Southeast order would fully regulate handlers if a

plant distributed either 10 percent of its total fluid milk receipts or

at least 1500 pounds of Class I sales per day in the marketing area.

Such requirements are appropriate for orders with relatively high Class

I utilization, he said.

Maryland & Virginia Milk Producers Cooperative Association, Inc.

(MVMPCA), proposed a change to the Order 5 in-area route disposition

requirement that would have exactly the opposite effect of Milkco's

proposal. The MVMPCA proposal would base the in-area requirement on 15

percent of ``dairy farmer receipts'' rather than 15 percent of ``total

route disposition.'' Because dairy farmer receipts would be larger than

total route disposition, the proposal would have the effect of making

it more difficult to qualify for full regulation under Order 5.

A spokesman for MVMPCA testified that the proposed change would

amend the Order 5 provision to conform more closely with the provisions

of the Middle Atlantic order (Order 4). He said that these definitions

should be more closely aligned to allow distributing plants in the

Commonwealth of Virginia, which are partially regulated under both

Orders 4 and 5, to be subject to the same in-area route distribution

standard under either Federal order.

Without alignment of these provisions, he said, there could be

results which are neither intended nor orderly. For instance, he

stated, a plant could have more route sales in Order 4 but become fully

regulated under Order 5.

The witness stated that there are currently three dairies partially

regulated in both Orders 4 and 5: Richfood at Richmond, Virginia; Land-

O-Sun Dairies, Inc., at Portsmouth, Virginia; and Marva Maid Dairy at

Newport News, Virginia. He said that these Virginia plants are the only

partially regulated distributing plants subject to Order 5 other than

the several plants which distribute long-shelf-life fluid milk products

in a broad geographic area over most of the United States.

Consequently, he concluded, the MVMPCA proposal would not have a

substantial impact upon any other plants.

A witness representing Richfood Dairy, Inc. (Richfood), Richmond,

Virginia, testified in opposition to Milkco's proposal to reduce the

Order 5 in-area route disposition requirement and in support of

Richfood's proposal to increase the requirement from 15 percent to 20

percent.

The witness stated that Richfood has about 83 percent of its fluid

milk product sales in that part of Virginia that is outside the Middle

Atlantic (Order 4) marketing area. The plant has approximately 12

percent of its sales in the Carolina marketing area, 4 percent in the

Order 4 marketing area, and the remaining 1 or 2 percent in the Ohio

Valley marketing area. Richfood's sales into the Carolina marketing

area account for about 1 percent of the market's total in-area sales,

according to the witness.

The Richfood witness stated that Richfood primarily has fluid milk

sales in the eastern Virginia market with some in the western Virginia

market. During October 1994, the witness noted, the eastern and western

markets' Class I prices were $16.29 and $16.02, respectively. He said

that these Virginia prices, based on the way in which Federal order

Class I prices are set, would represent October Class I differentials

of $4.56 for the eastern market and $4.29 for the western market.

Federal order Class I differentials of this magnitude, he emphasized,

are not even found in Miami, the highest priced location under the

Federal order system. These facts, he claimed, show that purchasers of

raw milk in Virginia do not have an unfair competitive advantage over

handlers regulated under a Federal order. He concluded that a plant

with 10 percent of its sales in the Carolina marketing area and 80

percent in Virginia should not be forced to be fully regulated under

Order 5.

The administrator of the Virginia State Milk Commission (the

Commission) testified in opposition to Milkco's original proposal. The

administrator stated that pooling Virginia plants that have less than

15 percent of their total sales in a Federal order marketing area would

be disruptive to the Commission's ability to price and pool milk in the

Virginia marketing areas. He argued that there are less intrusive ways

to accomplish class price integrity for pooling producer milk.

The witness stated that the Commission was willing to assist the

Department to ensure proper reporting and pricing within Federal milk

marketing areas to alleviate the concerns of those who have doubts that

Virginia's out-of-area prices are being enforced. The witness explained

that the Commission has the ability to report sales by Virginia plants

into Federal orders in a timely and accurate manner, and is willing to

provide such information to the appropriate Federal order market

administrator to help enforce proper pricing.

Neither Milkco's proposal, which would make it easier to fully

regulate an out-of-area plant, nor MVMPCA's or Richfood's proposal,

which would make it harder to fully regulate an out-of-area plant,

should be adopted.

Proponents of Milkco's proposal argued that the amount of sales

into the Carolina marketing area from partially regulated plants

located in Virginia is constantly increasing due to the presence of

these plants. Record evidence does not support this argument. For

instance, route disposition in Order 5 by partially regulated plants

during the months of July through October 1994 was lower than for the

same period of 1993. In addition, statistics show that in-area route

disposition into Order 5 from partially regulated plants located in

Virginia have been at a relatively constant level over the past two

years. For example, in 1993 and 1994, the average share of total Order

5 Class I route disposition from these plants was 2.05 and 1.95

percent, respectively.

No evidence presented at the hearing supported the arguments

advanced by Milkco and CVMPA concerning the alleged competitive

advantage that partially regulated plants in Virginia have in the

Carolina marketing area. The record is devoid of any data to support

this claim.

With respect to proponents' arguments that changes in Order 5 would

bring this order into conformance with the Middle Atlantic order or the

Southeast order, marketing conditions in the Carolina order do not

warrant any change to the in-area route disposition requirement for

this reason. Moreover, it is not clear why differences in the in-area

route disposition requirements of these orders would matter in most

circumstances. The only area where this issue seems to be particularly

acute is in Virginia. Even in Virginia, however, there is an

insufficient basis to conclude that any competitive advantage exists

that would warrant undermining of the Virginia State Milk Commission

regulation.

The in-area route disposition requirement is a locally tailored

standard that indicates when a plant is

[[Page 43991]]

sufficiently associated with a market to warrant full regulation under

the order regulating that marketing area. Whether the standard should

be 10 percent or 15 percent depends upon particular circumstances in

that area and the demonstrated need for one standard or the other.

Based on the testimony and data in this hearing record, the present 15

percent in-area route disposition requirement under Order 5 should

remain unchanged.

5. Location Adjustments Under the Carolina Order

The location adjustment under the Carolina order for a location

within the Middle Atlantic Federal order marketing area should be

determined by subtracting the Order 4 Class I price at that location

from the base zone Class I price specified in Order 5.

At the present time, the Order 5 location adjustment for a plant

located in the State of Maryland is based upon the shortest hard-

surfaced highway distance, as determined by the market administrator,

that such plant is from Greensboro, North Carolina. Once that distance

is determined, it is broken down into 10-mile increments (except for

the last increment, which may be smaller than 10 miles), which are then

multiplied by 2.5 cents to determine the location adjustment. Thus, for

example, the location adjustment for a plant that is located 295 miles

from Greensboro would be 75 cents (i.e., 30 x 2.5=.75).

Maryland and Virginia Milk Producers Cooperative Association

proposed a change in the location adjustment applicable to its butter/

powder plant at Laurel, Maryland. Initially, the cooperative proposed

treating the Laurel plant as if it were within the State of Virginia;

this would result in a zero location adjustment at Laurel. However, at

the hearing a spokesman for the cooperative stated that it would

support an alternative proposal that would subtract the Order 4 Class I

differential price at Laurel (i.e., $3.03) from the Order 5 Class I

price at Greensboro (i.e., $3.08), which results in a location

adjustment of minus 5 cents. The witness stated that ``our only caveat

to this pricing formula is that the Order 5 language should be amended

so that the price at Strasburg, Virginia, is established on the same

basis as the price at Laurel, Maryland.''

The cooperative's spokesman testified that MVMPCA supplies the

Kroger Westover Dairy Order 5 pool distributing plant at Lynchburg,

Virginia, on a year-round basis. In addition, he said that since 1992

the cooperative has supplied supplemental milk to nine other Order 5

distributing plants on a seasonal basis.

The witness said that MVMPCA has served as a seasonal balancing

agent in supplying Order 5 plants. He introduced an exhibit showing

that MVMPCA's monthly sales to Order 5 plants reach a peak during the

short production months of July through October.

The witness stated that when producers' milk is not needed by Order

5 plants, it is diverted to MVMPCA's butter-powder plant at Laurel,

which serves as a major balancing plant for the Middle Atlantic region.

The witness also noted that there is another balancing facility for

Order 5 surplus milk--the Valley Milk butter/powder plant located at

Strasburg, Virginia--which is approximately 80 miles west of Laurel and

outside of any Federal order marketing area. He said that Order 5 now

prices milk in an inequitable manner by providing a base zone uniform

price for milk that is diverted to Strasburg, but a minus 75-cent

location adjustment for milk that is diverted to Laurel.

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

in the post-hearing briefs that were filed.

MVMPCA's argument and alternative proposal for pricing milk at

Laurel is persuasive and should be adopted. The location adjustment at

Laurel clearly should not be minus 75 cents. It should be minus 5

cents, the difference between the Order 5 base zone Class I price and

the Order 4 Class I price at Laurel.

The appropriate Federal order Class I price at Laurel, Maryland, is

the price established for that location under the Middle Atlantic

Federal order, which encompasses Laurel. Thus, if a distributing plant

located at Laurel were to become regulated under Order 5, its Class I

price would be the same as the price that would apply under Order 4.

This would ensure competitive pricing among competing handlers.

Determining location adjustments for plants in this manner helps to

assure the proper alignment of Class I prices throughout the Federal

order system and to minimize procurement problems for plants that are

located in one Federal order marketing area but regulated under a

different order.

The evidence introduced by MVMPCA shows that its producers

supplying the Order 5 market are located as far south as the Virginia/

North Carolina border and as far north as Cumberland County, Maryland.

The exhibit, for example, shows that MVMPCA has producers in Halifax

County, Virginia, just north of the Order 5 base zone. When producer

milk from Halifax is delivered to a distributing plant at Lynchburg or

to a North Carolina handler in the base zone, the milk is priced at the

base zone price. Yet, under present order provisions, if the milk is

not needed for fluid use by an Order 5 distributing plant and must be

diverted to MVMPCA's butter-powder plant at Laurel, 247 miles away, it

receives 75 cents less than the base zone price. Consequently, not only

does MVMPCA receive a much lower price for this milk, it also absorbs

the hauling cost to get the milk to Laurel.

A location adjustment of minus 5 cents at Laurel will narrow the

difference to 5 cents between the Laurel and Strasburg plants. This

adjustment should alleviate the inequity that now exists in pricing

between the two plants. To further reduce the difference in price by

imposing a minus 5-cent location adjustment at Strasburg, as suggested

by MVMPCA, would entail changing location adjustments throughout the

State of Virginia, which goes beyond the scope of the hearing

proposals.

6. Base-Paying Months Under the Carolina Order

Maryland & Virginia Milk Producers Cooperative Association, Inc.,

originally submitted a proposal to delete the month of June from the

base-paying period of the Order 5 base and excess payment plan. At the

hearing, however, the cooperative modified its proposal to add the

month of February as well as delete the month of June. As modified, the

base-paying months would be February through May.

The MVMPCA witness stated that the purpose of the base-excess plan

is to provide producers with an incentive to level their production on

a seasonal basis. He indicated that the plan encourages production

during the months when milk is needed for fluid use and discourages

production during flush production months. Under current marketing

conditions, he contended, June is not a surplus month but a month when

supplemental supplies are frequently needed by Order 5 distributing

plants. Likewise, he asserted that February is a month of substantial

surplus production and should be added to the base-paying period rather

than remain a base neutral month.

During 1992 and 1993, the MVMPCA witness noted, daily average

production per Order 5 producer from May to June declined about 8

percent, from 4,259 pounds per day to 3,978, and from 4,424 to 4,076,

respectively. However, he indicated that daily average production in

Order 5 in February 1993 of 4,684 pounds was the highest production

[[Page 43992]]

month of the year, and production in February 1992 was the third

highest month.

The witness also testified that a collateral consequence of

including June as a base paying month is that when supplemental

supplies are needed under Order 5, unnecessary and inefficient

movements of milk are required to avoid the penalty of absorbing the

excess price for supplies of milk that are required for the market's

Class I needs. The witness explained that when supplemental milk is

needed during the month of June, MVMPCA avoids the penalty of receiving

only the excess price for milk delivered directly from producers' farms

by instead delivering plant milk from its Laurel plant. To do this,

however, the cooperative must receive the milk at Laurel, reload it

onto a tank truck, and ship it to an Order 5 distributing plant. He

said that the modified proposal would eliminate unnecessary and

inefficient movements of milk for the sole purpose of avoiding the

order's excess price.

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

in post-hearing briefs.

The modified proposal to change the base-paying period from March

through June to February through May should be adopted. The removal of

June and the addition of February to the base-paying period would bring

the base-paying months into closer conformity with the Class I needs of

the market.

For the past three years, the average Class I utilization in

January has been 77.8 percent while the June Class I utilization has

averaged 79.8 percent for this same time period. By comparison, the

average Class I utilization for the months of February through May has

been 75.6, 75.7, 73.9, and 75.1 percent, respectively. The record also

shows that June is a month in which supplemental supplies of milk are

needed to meet the Class I needs of the market.

On the basis of the statistical data and the testimony presented at

the hearing, the month of February should be included in the base-

paying period and June deleted to change the base-paying period to

February through May. These changes should result in a base and excess

plan that better serves the needs of the market and that will avoid the

unnecessary and inefficient movements of needed supplemental milk

described by MVMPCA.

Several conforming changes in order language have been made in

response to the addition of February and the removal of June as a base-

paying month. In Sec. 1005.32(a), dealing with ``other reports,'' the

words ``March through June'' should be changed to ``February through

May''. In the introductory text of Sec. 1005.61(a) and in

Sec. 1005.61(a)(5), the words ``July through February'' must be changed

to ``June through January'', and in Sec. 1005.61(b) the words ``March

through June'' must be changed to ``February through May''. In

Secs. 1005.90, 1005.91, and 1005.93(b) the words ``March through June''

must be changed to ``February through May'', and the words ``February

1'' in Sec. 1005.93(b) and Sec. 1005.94 should be changed to ``January

1'' to maintain the existing relationship between the start of the

base-paying period and the time when transfers must be completed

without the imposition of conditions concerning the receipt or transfer

of additional base. Finally, ``March 1'' should be changed to

``February 1'' in Sec. 1005.93(e).

Motion for a New Hearing

Purity Dairy and Fleming Dairy, both of Nashville, Tennessee,

argued that the remedies proposed at this hearing were not sufficient

to address some major problems. They maintain that while the proposed

amendments would temporarily correct some problems, in the long run

these remedies would only make the problems worse. They urged the

Secretary to hold a new hearing to consider a merger of Orders 5, 11,

and 46 or the merger of Orders 5 and 11 with the proposed Southeast

marketing area.

A major study of Orders 5, 11, and 46 and other marketing areas is

currently underway at Cornell University. One of the purposes of this

study is to develop recommendations for a merged order in this area.

There have been several major changes in cooperative

representation, supply arrangements, and plant ownership in these

markets. Milk has been shifting among the markets. The alleged problem

in south central Kentucky of misaligned uniform prices causing Purity

and Fleming to be at a competitive disadvantage for milk supplies has

been corrected by the association of additional milk with Order 11,

which has lowered that order's Class I utilization. There is no point

in considering a merger of orders in this area until such time as

producers and handlers propose such a merger. For all of these reasons,

the motion to hold a new hearing is denied.

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 aforesaid orders were first issued and

when they were amended. The previous findings and determinations are

hereby ratified and confirmed, except where they may conflict with

those set forth herein.

(a) The tentative marketing agreements and the orders, as hereby

proposed to be amended, and all of the terms and conditions thereof,

will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2

of the Act are not reasonable in view of the price of feeds, available

supplies of feeds, and other economic conditions which affect market

supply and demand for milk in the marketing areas, and the minimum

prices specified in the tentative marketing agreements and the orders,

as hereby proposed to be amended, are such prices as will reflect the

aforesaid factors, insure a sufficient quantity of pure and wholesome

milk, and be in the public interest;

(c) The tentative marketing agreements and the orders, as hereby

proposed to be amended, will regulate the handling of milk in the same

manner as, and will be applicable only to persons in the respective

classes of industrial and commercial activity specified in, marketing

agreements upon which a hearing has been held; and

(d) All milk and milk products handled by handlers, as defined in

the tentative marketing agreements and the orders as hereby proposed to

be amended, are in the current of interstate commerce or directly

burden, obstruct, or affect interstate commerce in milk or its

products.

Recommended Marketing Agreements and Order Amending the Orders

The recommended marketing agreements are not included in this

decision because the regulatory provisions thereof would be the same as

those contained in the orders, as hereby proposed to be amended. The

following order amending the orders, as amended, regulating the

handling of milk in the aforesaid marketing areas is recommended as the

detailed and

[[Page 43993]]

appropriate means by which the foregoing conclusions may be carried

out.

List of Subjects in 7 CFR Parts 1005, 1011, and 1046

Milk marketing orders.

For the reasons set forth in the preamble, title 7, parts 1005,

1011, and 1046 are proposed to be amended as follows:

1. The authority citation for 7 CFR parts 1005, 1011, and 1046

continues to read as follows:

Authority: 7 U.S.C. 601-674.

PART 1005--MILK IN THE CAROLINA MARKETING AREA

2. In Sec. 1005.7, the reference ``(d)'' in the introductory text

is revised to read ``(e)'', in paragraph (b) the words ``Director of

the Dairy Division'' and ``Director'' are changed to ``market

administrator'' wherever they appear, paragraph (d) is redesignated as

paragraph (e) and revised, and a new paragraph (d) is added to read as

follows:

Sec. 1005.7 Pool plant.

* * * * *

(d) A plant located within the marketing area (other than a

producer-handler plant or a governmental agency plant) that meets the

qualifications described in paragraph (a) of this section regardless of

its quantity of route disposition in any other Federal order marketing

area.

(e) The term ``pool plant'' shall not apply to the following

plants:

(1) A producer-handler plant;

(2) A governmental agency plant;

(3) A plant with route disposition in this marketing area that is

located within the marketing area of another Federal order and that is

fully regulated under such order;

(4) A plant qualified pursuant to paragraph (a) of this section

which is not located within any Federal order marketing area but which

also meets the pooling requirements of another Federal order and from

which there is a greater quantity of route disposition, except filled

milk, during the month in such other Federal order marketing area than

in this marketing area; and

(5) A plant qualified pursuant to paragraph (b) of this section if

the plant has automatic pooling status under another Federal order or

if the plant meets the pooling requirements of another Federal order

during the month and makes greater qualifying shipments to plants

regulated under such other order than to plants regulated under this

order.

Sec. 1005.32 [Amended]

3. In Sec. 1005.32(a), the words ``March through June'' are revised

to read ``February through May'' wherever they appear.

4. In Sec. 1005.53, paragraph (a)(6) is redesignated as paragraph

(a)(7) and revised, and a new paragraph (a)(6) is added to read as

follows:

Sec. 1005.53 Plant location adjustments for handlers.

* * * * *

(a) ***

(6) For a plant located within the Middle Atlantic Federal Order

Marketing Area (Part 1004), the adjustment shall be computed by

subtracting the base zone Class I price specified in Sec. 1005.50(a)

from the Class I price applicable at such plant under the Middle

Atlantic Federal Order; and

(7) For a plant located outside the areas specified in paragraphs

(a)(1) through (a)(6) of this section, the adjustment shall be a minus

2.5 cents for each 10 miles or fraction thereof (by the shortest hard-

surfaced highway distance as determined by the market administrator)

that such plant is from the nearer of the city halls in Greenville,

South Carolina, or Charlotte or Greensboro, North Carolina.

* * * * *

Sec. 1005.61 [Amended]

5. In Sec. 1005.61 paragraphs (a) introductory text and (a)(5), the

words ``July through February'' are revised to read ``June through

January'' and in paragraph (b) the words ``March through June'' are

revised to read ``February through May''.

Secs. 1005.90 and 1005.91 [Amended]

6. In Secs. 1005.90 and 1005.91, the words ``March through June''

are revised to read ``February through May'' wherever they appear.

Sec. 1005.93 [Amended]

7. In Sec. 1005.93 paragraph (b), the words ``March through June''

are revised to read ``February through May'' wherever they appear, the

words ``February 1'' are revised to read ``January 1'', and in

paragraph (e) the words ``March 1'' are revised to read ``February 1''.

Sec. 1005.94 [Amended]

8. In Sec. 1005.94, the words ``February 1'' are revised to read

``January 1''.

PART 1011--MILK IN THE TENNESSEE VALLEY MARKETING AREA

9. Section 1011.2 is amended by revising paragraph (b) to read as

follows:

Sec. 1011.2 Tennessee Valley Marketing Area.

* * * * *

(b) In Kentucky, the counties of Bell, Breathitt, Clay, Harlan,

Jackson, Knott, Knox, Laurel, Leslie, Letcher, McCreary, Owsley, Perry,

Pulaski, Rockcastle, and Whitley.

* * * * *

10. In Sec. 1011.7, the reference ``(d)'' in the introductory text

is revised to read ``(e)'', paragraph (b) is revised, paragraph (d) is

redesignated as paragraph (e) and revised, and a new paragraph (d) is

added to read as follows:

Sec. 1011.7 Pool plant.

* * * * *

(b) A plant, other than a plant described in paragraph (a) of this

section, from which fluid milk products, except filled milk, are

shipped to plants described in paragraph (a) of this section subject to

the following additional conditions:

(1) During the months of August through November, January and

February, such shipments must equal not less than 60 percent (40

percent during the months of December and March through July) of the

total quantity of milk approved by a duly constituted regulatory agency

for fluid consumption that is received during the month at such plant

from handlers described in Sec. 1011.9(c) and (d) and from dairy

farmers, including milk that is diverted from the plant pursuant to

Sec. 1011.13 but excluding milk diverted to the plant;

(2) The operator of a plant described in this paragraph may include

milk diverted from the plant to plants described in paragraph (a) of

this section for up to one-half of the shipments required pursuant to

this paragraph;

(3) A plant which meets the shipping requirements specified in this

paragraph during the months of July through February shall be a pool

plant during the following months of March through June unless the milk

received at the plant does not continue to meet the requirements of a

duly constituted regulatory agency, the plant fails to meet a shipping

requirement instituted pursuant to paragraph (b)(4) of this section, or

a written application is filed by the plant operator with the market

administrator on or before the first day of any such month requesting

that the plant be designated a nonpool plant for such month and for

each subsequent month through June during which it would not otherwise

qualify as a pool plant; and

(4) The shipping requirements described in paragraphs (b)(1) and

(b)(3) of this section may be increased or

[[Page 43994]]

decreased up to 10 percentage points by the market administrator if he

or she finds that revision is necessary to obtain needed shipments or

to prevent uneconomic shipments. Before making such a finding, the

market administrator shall investigate the need for revision either at

his or her own initiative or at the request of interested persons. If

the investigation shows that a revision may be appropriate, the market

administrator shall issue a notice stating that the revision is being

considered and invite data, views, and arguments.

(c) ***

(d) A plant located within the marketing area (other than a

producer-handler plant or a governmental agency plant) that meets the

qualifications described in paragraph (a) of this section regardless of

its quantity of route disposition in any other Federal order marketing

area.

(e) The term ``pool plant'' shall not apply to the following

plants:

(1) A producer-handler plant;

(2) A governmental agency plant;

(3) A plant with route disposition in this marketing area that is

located within the marketing area of another Federal order and that is

fully regulated under such order;

(4) A plant qualified pursuant to paragraph (a) of this section

which is not located within any Federal order marketing area but which

also meets the pooling requirements of another Federal order and from

which there is a greater quantity of route disposition, except filled

milk, during the month in such other Federal order marketing area than

in this marketing area; and

(5) A plant qualified pursuant to paragraph (b) of this section if

the plant has automatic pooling status under another Federal order or

if the plant meets the pooling requirements of another Federal order

during the month and makes greater qualifying shipments to plants

regulated under such other order than to plants regulated under this

order.

Sec. 10011.13 [Amended]

11. In Sec. 1011.13 paragraph (e)(3), the words ``Director of the

Dairy Division'' and ``Director'' are revised to read ``market

administrator'' wherever they appear.

PART 1046--MILK IN THE LOUISVILLE-LEXINGTON-EVANSVILLE MARKETING

AREA

Sec. 1046.2 [Amended]

12. In Sec. 1046.2, under ``Kentucky Counties'' the word

``Pulaski'' is removed.

Dated: August 17, 1995.

Lon Hatamiya,

Administrator.

[FR Doc. 95-20968 Filed 8-23-95; 8:45 am]

BILLING CODE 3410-02-P