Compact Over-Order Price Regulation

NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Chapter XIII

Compact Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Proposed rule.

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SUMMARY: This rule proposes a compact cover-order price regulation for

the territorial region of the six New England states, in the amount of

$16.94 (Zone 1), for six months duration. The Northeast Dairy Compact

Commission (Compact Commission) establishes this price regulation based

on its determination that it is necessary to assure the viability of

dairy farming in New England and to assure the region's consumers of a

continued adequate, local supply of fresh and wholesome milk,

reasonably priced.

DATES: Comments must be received by May 12, 1997.

ADDRESS: Comments should be submitted to the Northeast Dairy Compact

Commission, 43 State Street, P.O. Box 1058, Montpelier, VT 05601. The

complete file for this proposed rule is available for public inspection

during normal business hours at the offices of the Commission.

FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director,

Northeast Dairy Compact Commission at the above address or by telephone

at (802) 229-1941 phone or by facsimile at (802) 229 -2028.

SUPPLEMENTARY INFORMATION:

Background

The Compact Commission was established under authority of the

Northeast Interstate Dairy Compact (Compact). The Compact was enacted

into law by each of the six participating New England states as

follows: Connecticut--Pub. L. 93-370; Maine--Pub. L. 89-437, as

amended, Pub. L. 93-320; Massachusetts--Pub. L. 93-370; New Hampshire--

Pub. L. 93-184-A; Rhode Island--Pub. L. 93-336; Vermont--Pub. L. 89-95,

as amended, 93-97. Consistent with Article I, Section 10 of the United

States Constitution, Congress consented to the Compact in Pub. L. 104-

127 (FAIR ACT), Section 147, codified at 7 U.S.C. Sec. 7256.

Subsequently the United States Secretary of Agriculture, pursuant to

the FAIR ACT, authorized implementation of the Compact.

Section 8 of the Compact empowers the Compact Commission to engage

in a broad range of activities that are designed to ``promote

regulatory uniformity, simplicity and interstate cooperation.'' For

example, the Compact authorizes the Compact Commission to engage in a

range of investigations of the existing milk programs of both the

participating states and the federal milk marketing system, to make

recommendations to participating states, and to improve industry

relations as a whole. See Compact, Art. IV, Sec. 8.

In addition to the powers conferred by Section 8, the Compact also

authorizes the Compact Commission to consider adopting a compact over-

order price regulation. See Compact, Art., IV, Sec. 9. A ``compact

over-order price'' is defined as:

A minimum price required to be paid to producers for Class I

milk established by the Commission in regulations adopted pursuant

to sections nine and ten of this compact, which is above the price

established in federal marketing orders or by state farm price

regulation in the regulated area. Such price may apply throughout

the region or in any part or parts thereof as defined in the

regulations of the commission.

See Compact, Art. II, Sec. 2(8); see also Compact, Art. IV, Sec. 9

(``The Commission is hereby empowered to establish the minimum price

for milk to be paid by pool plants, partially regulated plants and all

other handlers receiving milk from producers located in a regulated

area.'')

Such price regulation establishes the minimum procurement price to

be paid by fluid milk processors to farmers used for New England fluid

milk consumption. The regulated price established by the Compact

Commission is actually an incremental amount above, or ``over-order''

(Federal Order #1) the minimum price for the same milk established by

Federal Milk Market Order.

Section 11 of the Compact specifically delineates the procedures

that the Commission must employ in the event it wishes to promulgate an

over-order price regulation.

Before promulgation of any regulations establishing a compact

over-order price or commission marketing order, including any

provision with respect to milk supply under subsection 9(f), or

amendment thereof, as provided in Article IV, the commission shall

conduct an informal rulemaking proceeding to provide interested

persons with an opportunity to present data and views. Such

rulemaking proceeding shall be governed by section four of the

Federal Administrative Procedures Act, as amended (5 U.S.C.

Sec. 553). In addition, the commission shall, to the extend

practicable, publish notice of rulemaking proceedings in the

official register of each participating state. Before the initial

adoption of regulations establishing a compact over-order price or a

commission marketing order and thereafter before any amendment with

regard to prices or assessments, the commission shall hold a public

meeting. The commission may commence a rulemaking proceeding on its

own initiative or may in its sole discretion act upon the petition

of any person including individual milk producers, any organization

of milk producers or handlers, general farm organizations, consumer

or public interest groups, and local, state or federal officials.

Pursuant to Sec. 11 of the Compact, the Compact Commission issued a

Notice of Hearing on December 13, 1996, and held public hearings on

December 17 and 19, 1996. The Notice also invited the public to submit

written comments through January 2, 1997. Following the close of this

comment period, the Commission met on January 16, 1997 and established

three working groups to consider the testimony and data submitted. The

Commission issued a Notice of Additional Comment Period on March 14,

1997. This comment period closed on March 31, 1997; the reply comment

period closed April 9, 1997.

Statement of Required Findings of Fact

Sec. 12(a) of the Compact directs the Commission to make four

findings of fact as the basis for promulgating a compact over-order

price regulation.

(a) In addition to the concise general statement of basis and

purpose required by section 4(b) of the Federal Administrative

Procedure Act, as amended (5 U.S.C. Sec. 553(c)), the commission shall

make findings of fact with respect to:

(1) Whether the public interest will be served by the

establishment of minimum milk prices to dairy farmers under Article

IV.

(2) What level of prices will assure that procedures receive a

price sufficient to cover their costs of production and will elicit

an adequate supply of milk for the inhabitants of the regulated area

and for manufacturing purposes.

(3) Whether the major provisions of the order, other than those

fixing minimum milk prices, are in the public interest and are

reasonably designed to achieve the purposes of the order.

(4) Whether the terms of the proposed regional order or

amendment are approved by producers as provided in section thirteen.

Compact Art. V. Sec. 12.

For purposes of clarity, the analysis of the testimony and comment

first addresses the substance of findings (2) above, or the level of

price needed by producers to cover their costs of production and which

will elicit an adequate supply of milk for inhabitants. The conclusion

of that analysis is that the current pay price is not sufficient to

cover cost of production or to elicit an adequate supply of milk for

inhabitants. Based on that determination the

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resulting analysis addresses the substance of finding (1) above, or

whether the establishment of minimum milk prices to dairy farmers would

serve the public interest.

Summary of Comment

I. Finding

What level of prices will assure that producers receive a price

sufficient to cover their costs of production and will elicit an

adequate supply of milk for the inhabitants of the regulated area and

for manufacturing purposes.\1\

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\1\ The Compact Commission has determined that the findings here

required need not contain any determination with respect to the

provision of milk supplies utilized for manufactured purposes. Under

current circumstances, the Compact Commission is authorized to

regulate only the price of milk used for fluid consumption. See 7

U.S.C. Sec. 7256(2) (``The Northeast Interstate Dairy Compact

Commission shall not regulate Class II, Class III, or Class III-A

milk used for manufacturing purposes or any other milk, other than

Class I fluid milk, as defined by a Federal milk marketing order

issued under 7 U.S.C. Sec. 608c of this title, reenacted with

amendments by the Agricultural Marketing Agreement Act of 1937.'')

The Commission has concluded that the finding provision with regard

to milk used for manufactured purposes stems from the Compact's

alternative authority to regulate that additional milk supply with a

Commission marketing order. See Compact, Article IV, Sec. 9(c).

Under the Compact, however, this authority could be utilized only in

the event the federal Market Order System is eliminated. See Compact

Article IV, Secs. 9(a) and (c). This is not presently the case.

Morever, this residual authority was struck by the Congress when it

approved the Compact. Pub. L. 104-127(2). Accordingly, because the

Commission has authority only to regulate the price of milk used for

fluid milk purposes, its findings only deal with fluid milk supply

and consumption issues.

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This finding requires consideration of the core issues regarding

the financial health of the region's dairy farmers and the Compact's

associated purpose of assuring the region's adequate supply of milk.

More specifically, this finding requires the Commission to make a

determination of the price level necessary both to ensure the

continuing financial viability of New England dairy farms and to elicit

an adequate supply for the region's fluid, or milk beverage,

consumption.

Section 9(e) of the Compact provides guidance to the Commission

with regard to the factors to be considered in analyzing the cost of

production issue. That section directs the Commission.

to consider the * * * costs of production including, but not limited

to the price of feed, the cost of labor including the reasonable

value of the producer's own labor and management, machinery expense,

and interest expense. Section 9(e) also guides this inquiry by

requiring the Commission to consider ``the price necessary to yield

a reasonable return to the producer and distributor.

Based upon this statutory guidance, the Commission sought testimony

and comment on the following subjects and issues:

(1) Farmer costs of production, including the components

identified by Compact Section 9(e), and the pay price needed to

yield a reasonable rate of return to producers; and

(2) Prevailing pay prices received by dairy farmers in the New

England region; and

(3) The balance between production and consumption of fluid milk

products.\2\

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\2\ 61 CFR 65604.

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A. Issue: Farmer Cost of Production and the Pay Price Needed To Yield a

Reasonable Rate of Return to Producers

The comment received makes clear that, despite the approach of

Section 9(e), there is very little agreement on what ``costs'' should

be included in the cost of production, and even how they should be

calculated. Beyond actual cash costs, there is considerable

disagreement over whether to include or exclude, and how best to

consider, depreciation, family living costs, return or equity, a

reasonable value for the farmer's own labor, and debt service. There

was no common definition throughout the testimony among farmers or

economists. Farmers, themselves, quite frequently, excluded the value

of their own labor and or depreciation in calculating their own costs

of production.

The diversity of comment makes clear the difficulties of cost of

production analysis. Cost of production can and do vary widely from

farm to farm and year to year.\3\ Even one commenter who opposed the

adoption of a price regulation agreed that there is a lack of consensus

on the amounts that should be considered in calculating costs of

production.\4\ University of Vermont dairy economist Rick Wackernagel

suggests the difficulty of isolating the cost of producing a

hundredweight of milk from what is typically a diversified farming

operation, and that any such attempt is at best ``an approximation.\5\

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\3\ See December 19, 1996 hearing transcript (12/19/96 HT):

Putnam at 141, 148-49; Stevens at 158-60; Carlson, at 232-34;

Buelow, at 248; Beach at 288-90; Platt, at 292.

\4\ Vetne, 12/19/96 HT at 264-66.

\5\ Wackernagel, Compilation of January 2, 1997 Written Comment

(1/2/97 WC) at 482-83.

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As will be discussed, despite the diversity of their analytical

approach, the comments do reflect near unanimous agreement on at least

three important aspects of the cost of production equation:

(1) For an extended period of time prices have not covered the

full costs of production, however defined,

(2) price instability has caused financial stress and made it

impossible for farmers to plan financially; and

(3) over time, net, ``mail box'' price levels received by

farmers have not kept up with inflation.

In addition, the Compact Commission will review the comments

relating to the structure and health of the New England dairy industry.

The Compact Commission's review of comment under this section

includes a comprehensive survey of the testimony and comment received

from dairy farmers, and a response to opposing comments received. The

Commission notes that very few conflicting comments were submitted for

consideration.

(1) Price Insufficiency

Commenters indicated again and again that, in general, farmers in

New England had done a good job of holding down costs of production in

response to flat milk prices by increasing productivity and

efficiency.\6\ According to one survey of New England farmers, however,

this efficiency and productivity has not equated to profitability.

According to the survey conducted by the Farm Credit Services, forty-

two percent of the farms had a negative cash margin in 1995.\7\

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\6\ See DeGues, 1/2/97 WC at 74; Sciabarrasi, 1/2/97 WC at 309;

and Smith, 12/17/96 HT at 36.

\7\ See Smith, 12/17/96 HT at 36.

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This survey included seventy-three New England farmers who

participate in Agrifax, a financial accounting service provided to

farmers by local Farm Credit Associations. Despite the relatively small

size of the survey sample, the results are useful to the Commission

because, according to the authors, survey participants are generally

larger and perhaps better managed than the average dairy farm in New

England. The survey indicates that the average adjusted cost of

producing milk by New England farms in this survey in 1995 was $15.37

per hundredweight, when including a 4% rate of return on equity. Before

the 4% rate of return on equity the net cost of production was

14.25.\8\

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\8\ See Smith, 12/17/96 HT at 36.

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Smith concluded

When you consider the average price received by farmers in our

survey for New England was $13.70 per hundredweight in 1995, it is

not surprising that many dairy farms are having financial

difficulty.\9\

\9\ Smith, 12/17/96 HT at 36.

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There was also abundant evidence in the record that costs of

production for 1996 will likely be as high or even higher than in 1995

and again not be covered by the price received. Jim Putnam, a Senior

Vice President with First Pioneer Farm Credit Bank, for

[[Page 23034]]

example, testified that he ``would estimate probably a dime or more

higher in 96'' primarily as a result of a 29% increase in purchased

feed prices which can account for up to 50% of the cost of production

in New England.\10\ The average 1996 mailbox price in New England was

measured as $14.25, leaving a shortfall of over $1.00, against this

commenter's estimated cost of production.

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\10\ Putnam, 12/19/96 HT at 148-149; see also Smith, 12/17/96 HT

at 38; Andrew, 1/2/97 WC at 5.

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Farmers consistently referred to the fact that low farm prices made

it difficult for them to reach their ``break-even'' point, let alone

generate any meaningful return.\11\ As one witness testified:

\11\ See Mason, 12/17/96 HT at 87; d'Boer, 12/17/96 at 192;

Putnam, 12/19/96 HT at 144-45, 146.

I have two young children and she'll say gee, Dad, we've had a

break-even for less price this year for a lower milk price and let's

go out and eat and I've got to explain to her that when you break

even, you don't eat, that's just paying the operating expenses and

says nothing about investing in your business and making it a long

range commitment.\12\

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\12\ Holmes, 12/17/96 at 93.

Other farmer-witness testified that they, themselves, were living

below the poverty line and were eligible to participate in the WIC

program.\13\

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\13\ See Mason, 12/17/96 HT at 85-86.

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The result of these depressed prices and the inability to make ends

meet will, according to one commenter, cause farmers to ``tighten their

belt'' or ``hunker down'' and ``wait out the point in time when they'll

go back to breakdown.'' \14\ Farmers, thus, are struggling to make ends

meet.

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\14\ Putnam, 12/19/96 at 147-48.

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The testimony and comments also made clear that this failure of

milk prices to cover, or even meet, the costs of production is not a

short-lived phenomenon, but rather, is part of a long-term trend that

extends back into the mid-1980s. Numerous studies, which were

corroborated by substantial anecdotal evidence from farmers, documented

the chronic price insufficiency over the last decade.

The USDA Economic Research Service estimates that during the 1985

to 1990 period, cash receipts of Northeastern dairy farmers rose from

$13.96 to $16.00 per hundredweight while the cost of production jumped

from $12.06 to $16.46. In 1990, dairy farmers in the Northeast average

a net loss of .46 cents per hundredweight of milk sold.\15\

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\15\ Pelsue, 1/2/97 W/C at 274.

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Several other studies reached similar conclusions. For example, in

a study commissioned by the Maine Milk Commission submitted by Mike

Wiers, the Commission's Chair, economists Robert Milligan and Wayne

Knoblauch analyzed total costs of production (cash costs, depreciation,

a 5% return on equity, and a return on the farmer's labor) in Maine and

the five Southern New England states of Vermont, New Hampshire,

Massachusetts, Connecticut and Rhode Island--the six Compact states.

They found that for Maine the total costs of production per

hundredweight to be $17.24 in 1982 and $17.17 in 1987. For the Southern

New England States, the costs were $16.65 and $16.62 respectively.\16\

For these years, the Market Administrator's Report indicates that the

blend prices for Order 1, Zone 21 were $13.61 and $12.56, reflecting

pay prices below the costs of production.

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\16\ In reply comment, Bill Gillmeister indicated that the

higher cost of production in southern New England was a significant

issue that must be addressed. See Gillmeister, Reply Comment, (RC)

April 9, 1997. The Commission agrees that the loss of milk supply

nearest to the population centers is an issue of utmost concern, and

the reasons for this particular decline should be most carefully

scrutinized. As described at footnote 3, the Commission has

concluded that it should initiate a regional cost of production

study by the close of the regulation adopted under this rule. The

comparative costs of production within the region will be a key part

of this analysis.

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University of Vermont Extension economist Rick Wackernagel

submitted a study which relief upon an analysis of farm income and

expense data from Agrifax and ELFAC farms to estimate costs of

production for 1988 through 1990. The costs considered included cash

operating expenses, capital costs (other than land) and the labor

provided by the farm family; they did not provide for any return on the

owner's equity in land. According to this study, net costs of

production on these Vermont farms in 1988 were about $13 per

hundredweight. In 1990, they had risen to $15 per hundredweight.\17\ By

comparison, the Market Administrator's Report indicates blend prices

for 1988 and 1990, Order 1, Zone 21 were $12.22 and $13.95,

respectively. This study again confirms the fact that prices were

inadequate to enable farmers to meet the break-even point.

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\17\ Wackernagel, 1/2/97 W/C at 515.

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Economist Neil Pelsue submitted another study of the costs of

production in Vermont, conducted by the Community Development and

Applied Economics Department at the University of Vermont.\18\ This

study analyzed cost of production by considering all cash expenses,

capital replacement costs, and unpaid farm labor, using a hired wage

rate. For 1990, the study found the average cost of production to be

$14.33 per hundredweight, or about $0.67 less than the Wackernagel

study determination. When the economic or ``full ownership'' costs of

production was analyzed, however, which included a residual return to

management and risk, the measurement of cost of production ballooned to

an average of $16.41 per hundredweight. This determination is

substantially higher than the Wackernagel analysis and well above the

reported blend price of $13.95 for the year.

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\18\ Pelsue 1/2/97 W/C at 282.

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The Pelsue study also determined that nearly two-thirds of the

surveyed farms had negative residual returns. The study concluded, that

``[m]ore than half of the survey farms had economic costs of production

that exceeded their receipts. This implies that if current market

conditions do not improve, those farms may find it hard to continue

operating in the long run.'' \19\

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\19\ Pelsue, 1/2/97 W/C at 282.

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Vermont Department of Agriculture economist Reenie De Geus provided

testimony indicating that:

In 1995, the most recent year, costs of production averaged

$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower

[sic] than the actual milk prices received of $13.23. In fact, in

each of the last 5 years, milk price received was lower than the

cost of production by an average of $1.08.\20\

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\20\ De Geus, 1/2/97 WC at 74.

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Finally, as mentioned above, there was near unanimous testimony

from farmers that price levels were inadequate to enable them to cover

their costs of production. As one commenter summarized, the result of

these chronically depressed prices will be ``attrition.'' \21\

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\21\ Putnam, 12/19/96 HT at 148.

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The evidence submitted to the Commission regarding the inadequacy

of prices paid to farmers currently and over an extended period of time

is persuasive. Although the degree of the price inadequacy varies from

commenter to commenter, the evidence supports the conclusion that costs

of production exceed prices paid to farmers. \22\

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\22\ The Commission again notes the disparities in study

methodologies. While repeating its belief in the broad breadth and

strength of these studies for the conclusion that current prices are

not covering costs of production, the Commission also has identified

the need for a uniform, regional, cost of production study, to be

initiated before the close of the regulation imposed by this rule.

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(2) Price Instability

Abundant testimony in the record indicates that price instability,

and wide fluctuations in the price of milk, were significant sources of

financial stress for the dairy industry. These wide

[[Page 23035]]

variations in price made it difficult for farmers to make good business

decisions and to plan financially. Robert Wellington, Vice President of

Agri-Mark, testified that:

* * * data from the New England Market Administrator's office show*-

*-*the price volatility exhibited in the past 12 months is triple

that experienced in 1981 and much larger than most of the 1980's and

nearly all of the 1990's. This combination of lower prices with

unpredictable volatility has made business planning nearly

impossible and has put severe financial strain on most farms. \23\

\23\ Wellington, 3/31/97 AC.

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Robert Smith of the Farm Credit System testified with respect to

price instability that:

The volatility in milk prices makes it very difficult for

farmers to effectively plan and make the type of investment

necessary to position themselves for the future. The Commission can

play a major role in helping to reduce this volatility through

establishing a higher minimum Class I price. This will help keep

farmers and land in business and maintain a stronger agriculture

industry in New England for future generations. It will enable dairy

farmers to make necessary investments to enhance efficiencies and

will benefit communities with enhanced economic activity. \24\

\24\ Smith, 12/17/96 at 39.

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Comments from farmers expressing frustration over the wide swings

in milk prices were abundant and adamant. Tom Magnant, a dairy farmer

from Franklin Vermont testified: ``We find it very difficult to make

ends meet with the milk prices that fluctuate between $11.00 and $15.00

a hundredweight.'' \25\

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\25\ Magnant, 12/17/96 at 227.

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Jeffrey Holmes, a farmer from Langdon, New Hampshire testified

that:

I think one of the key things that's going to be gained from

this potential floor price and Mr. Smith alluded to that is the

stability of the price to the producer. We have no say in what we

get and that's been true for years and years, but in this day and

age of tight margins we really need to plan on a certain price.

We're making borrowing decisions on variations of ten, twenty and

thirty cents a hundred and the last two months we dropped 2 dollars

and I don't know what the figure is--$2.50 with a little over a

month warning that was coming and it's really a farce that we have

to make long range plans based on that type of marketplace. \26\

\26\ Holmes 12/17/96 at 92-93.

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Jim Jenks, a farmer from Danville, Vermont, testified:

I regret that I'm not a more prudent businessman but one thing I

know is if we're going to make a good decision with respect to

putting my family's equity on the line, we need to know something

about the stability of our markets and our future. So with regard to

the Compact Commission and the price that they could set, one thing

that we're really looking for is stability. We need price. And

there's a lot of other factors. But stability and a price that goes

with it is really critical.\27\

\27\ Jenks, 12/17/96 HT at 153.

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Ralph McNall, a dairy farmer and a Director of the Vermont St.

Albans Cooperative Creamery testified that:

Price stability is the greatest potential benefit of the

Compact. Within our own business costs have increased dramatically

in the last five years. The improvements or expansions have been

difficult to justify or prepare for with the fluctuations of the

price paid for milk. I fully support the Compact and its potential

to stabilize the milk price to allow my business to plan its

future.\28\

\28\ McNall, 12/17/96 HT at 221.

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Charles Telly, a dairy farmer from Dunstable Mass testifying on

behalf of the National Grange: ``I am increasingly concerned about the

fluctuating prices * * * It is difficult for me to plan out--to

financially plan out my future three, five or ten years in advance

because of the uncertainty I face each month with the ever changing

milk price''.\29\

\29\ Telly, 12/19/96 HT at 123.

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These comments are persuasive, and they demonstrate the need for

price stability in the region in order to avoid the harmful effects of

price volatility.

(3) Failure of Milk Prices to Account for Inflation

Both economists and farmers identified the failure of milk prices

to keep up with inflation as a factor contributing to farm financial

stress. A recent study conducted and submitted by University of Vermont

dairy economist, Rick Wackernagel presented a comprehensive analysis of

the impact of these two variables--price insufficiency and inflation--

upon farm profitability.\30\ Because of its comprehensive approach, the

Commission finds this study persuasive and relies on it extensively.

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\30\ Wackernagel, 1/2/97 W/C at 467 et seq.

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The Wackernagel study analyzes the economic effects of three

different price trajectories for two different farm sizes--an 80 cow

herd and a 350 cow herd. Wackernagel's first trajectory used a macro-

economic model developed by the Food and Agriculture Policy Research

Institute (FAPRI) for 1997 modified to reflect local price levels and

yields as a base. The base scenario is premised upon a Class I price of

$16.17 per hundredweight at Zone 21 and a blend price of $14.70 per

hundredweight. Under this scenario, both farms operate at low to modest

levels of profitability. They are stressed financially during several

periods of price instability and by a general downward trend in price,

however. The financial results for these two farm sizes are ``marginal

to somewhat unattractive'' at these price levels, providing ``an

extremely modest return on investment of 0.4 to 3.0%''.\31\

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\31\ Wackernagel, 1/2/97 W/C at 473.

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The second trajectory attempts to moderate price instability by

holding the Class I price constant. Wackernagel estimates that the

Class I price accounts for about forty percent of the variation in the

blend price and that stabilizing the Class I price could potentially

reduce the variability of the blend price by about half. The economic

impact of this approach upon farm income and survival, however, was

similar to the base (first) trajectory, suggesting that price

instability is not the only factor placing financial stress on these

farming operations. Inflation, was a factor as well, as Wackernagel

explains: ``The Consumer Price Index (CPI) shows a third source of

financial stress for these farms, inflation. In contract to its steady

upward progression, the first two trajectories have downward

trends.\32\

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\32\ Wackernagel, 1/2/97 W/C at 473.

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Wackernagel's third price trajectory raises the Class I price to

$17 per hundredweight (Zone 21), yielding a project blend price of

$15.45, and increases the Class I price by one-half the rate of

inflation in subsequent years. This price trajectory has the greatest

positive impact on retention of equity, net farm income and

survivability, even though its upward slope is less than that of the

CPI.

Farmers also identified inflation as a significant source of

financial stress. Ellen Paradee, a dairy farmer from Grand Isle,

Vermont testified that:

Since 1985, our property taxes have increased two hundred

percent. Our grain costs have increased one hundred percent. And our

utility costs have increased one hundred and twenty five percent. In

1985, the average blend price for Zone 25 was $12.57 per

hundredweight. In 1995, the average blend price was $12.56 per

hundredweight. Essentially, there has been no increase in the blend

price. If the price of milk had kept pace with inflation, it would

be approximately $26 per hundredweight.\33\

\33\ Paradee, 12/17/96 HT at 232.

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Ralph McNall commenting on his own farm finances and inflation

said:

* * * utility cost, electricity, for example, has gone from, in the

year 1991 it's gone from $3,600 to $5,800 for an increase of fifty

two percent.

Purchased feed is another example--$37,000 to $76,000 for an

increase of one hundred and five percent. Fertilizer--$4,900 to

$8,100 for an increase of sixty six percent . . . It is important

to note that steps have been taken to reduce electricity costs, for

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instance through plate coolers and heat reclaimers within the milk

house and yet as I said before the cost went up fifty percent.

Reliance on purchased fertilizer has been reduced, supposedly,

through the installation and utilization of liquid manure.\34\

\34\ McNall, 12/17/96 HT at 222 and 223.

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John Mordasky, dairy farmer and Legislator from Stafford,

Connecticut, said:

I lost from eight to ten thousand dollars a year in the last

four years and I feel that this has come about because the relative

price of milk has stayed the same. Fuel has gone up, grain has

jumped out of sight and it just--all the other costs that are

involved--equipment, parts--have gone very, very, high and they're

not relative anymore.\35\

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

\35\ Mordasky, 12/19/06 HT at 12.

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

(4) Structure and Health of the New England Dairy Industry

The comment received also makes clear the devastating impact that

chronic price insufficiency, price instability, and the failure of milk

prices to keep up with inflation over the last decade has had, and will

continue to have, on the structure and health of the New England dairy

industry absent intervention through regulation by the Compact

Commission.\36\

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

\36\ One commenter felt that the Commission should not take

action because he believed that other regions of the country were

losing dairy farmers at a faster rate than New England. See Tipton,

WC 1/2/97 at 462. A finding that New England is losing farmers

faster than any other part of the country is unnecessary to

establishing an over-order price regulation.

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

According to the extensive testimony by University of New Hampshire

Extension Specialist Michael Sciabarrasi, the character of the New

England dairy industry is still predominantly family owned and

operated, made up of mostly small to medium sized producers, and is

heavily dependent on family labor.\37\ Maintenance of this market

structure premised on family farms is precisely the express purpose of

the Compact. See Compact Article I, Sec. 1.\38\

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

\37\ Sciabarrasi, 1/2/97 WC at 309.

\38\ Three commenters expressed the opinion that the market

should be left to work without regulation, even if this meant

continued farm loss. (Baker, 12/17/96 HT at 185, Schnittker, 1/2/97

WC at 313 and Vetne, 12/19/96 HT at 269.) As one Commenter

recognized, this is essentially a question of public policy. In

response, the Commission refers to the Compact's Statement of

Purpose, that ``dairy farmers are essential to the region's rural

communities and character'' and are ``an integral component of the

region's economy.'' Compact Article I, Sec. 1.

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

Mr. Sciabarrasi's conclusions were corroborated by much of the

evidence adduced at the hearings. There is abundant evidence that many

of the region's farms are small to medium-sized. Likewise, there is

substantial anecdotal evidence of heavy dependency on family labor,

much of which often goes unpaid.\39\

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

\39\ See 12/17/96 HT: Mason at 87; Olson at 146; d'Boer at 192.

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

The testimony of Robert Smith, with the Yankee Farm Credit Bank and

Farm Credit of Maine, described the effect of the industry's chronic

distress upon this basic market structure. According to Smith, ``The

number of dairy farms in New England declined by 41% over the past 10

years. (1985-1995) During this period the number of cows has declined

24%, total production has declined 4% and land used in farms fell by

nearly 600,000 acres.'' \40\ According to another commenter, New

England has lost dairy farmers at a rate of about 40% faster than the

national average, between 1987 and 1992.\41\

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

\40\ Smith, 12/17/96 at 34.

\41\ Ed Barron, 12/17/96 HT at 60.

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

Statistics cited by another commenter indicate these problems are

particularly severe in the southern portion of the Compact region.

Massachusetts, the most populous state, has seen the greatest effect,

showing a 35% decline in cow numbers and a 20% decline in milk

production during the period of 1986 through 1995. Each of the two

other southern New England states, Connecticut and Rhode Island, have

also shown substantial declines in farms, cow numbers and production

See New England Agricultural Statistics, 1995-96, USDA, Page 68.\42\

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

\42\ William Zweigbaum, U-NH Extension 3/31/97 AC.

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

The economic literature submitted into the record addressing this

issue likewise concludes that inadequate milk prices threaten the long-

run survival of small and medium-sized farms. Quiroga & Bravo-Ureta,

``Short- and Long-Run Adjustments in Dairy Production: A Profit

Function Analysis,'' 24 Journal of Applied Economics 607-16 (1992).\43\

In this study, the authors extracted data from Vermont farms between

1966 and 1988 and applied that data to econometric models to test the

effects of milk price reductions on several factors, including farm

size. The results of their analysis were consistent with the view that

low milk prices threaten the economic viability of small- and medium-

sized dairy farms in the short run, and continue the trend towards

fewer, and larger, dairy farms over the long run. Yet, it is precisely

this fear of continuing attrition among the region's small rural dairy

farmers that led to the enactment of the Compact, and prompted the

Commission to undertake this proceeding. See, e.g., Compact, Art. I,

Sec. 1.

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

\43\ Bravo-Ureta, 1/2/97 WC.

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

(5) Comments and Testimony From Farmers

In the language of economists, the Commission was told that a farm

can continue to operate in the short term only if market prices cover

variable costs. In the long term, it must cover the total cost of

production and marketing or the farm will cease operating.

(WC 282 Pelsue) Farmers were more likely to describe this situation

as living off their depreciation or living off their equity, in terms

evidencing both frustration and humor.

Connecticut dairy farmer, Mavis Collins, testified that:

People in fact used to ask us ``what will you do with all the

money from selling your development rights'' and we jokingly would

reply, ``We'll farm until the money is all gone.'' And

unfortunately, that's almost what's happened. This year alone we had

to use $24,000 of our savings plus $11,000 from creditors in order

to keep up with current bills. * * * \44\

\44\ Collins, 12/19/96 HT at 56.

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

Wendy Kennedy a farm wife and owner of a farm accounting and tax

service told the Commission:

I pulled out the full time dairy farmers from my files. (25

files) The average income from their Schedule F which is where you

report farm income was a negative $5,263 for last year. (1995) * * *

With a negative bottom line of $5,263 these families are living off

their depreciation or selling off their assets to live * * * You

can't run a business like that and be in business next year.\45\

\4\ Kennedy, 12/19/96 HT at 239-240.

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

Nowhere was the gap between cash receipts and costs of production

more apparent than when farmers talked about family living expenses or

any return for their family's labor: A Massachusetts dairy farmer

testified: ``My brother Edward and I milk about one hundred cows in

Westhampton, Mass. Ed and I take a draw of $300 per week and each of us

work about one hundred hours per week (6 a.m.-8 p.m. 7 days).\46\

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

\46\ Parsons, 1/2/97 WC at 236.

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

Jan d'Boer who milks 95 cows with his family told the Commission:

``We looked it over and we came up with about 35 hours of family labor

a day * * * And the wages per hour we came up with after we figured it

all out is $2.55 an hour.'' \47\

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

\47\ d'Boer, 12/17/96 at 192.

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

John Potter, a Washington, Connecticut dairy farmer: ``My costs

show $7.17 to produce milk, January through November. That's not

including anything for family living. That doesn't include anything for

depreciation or paying back debt.'' \48\

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

\48\ Porter, 12/19/96 HT at 226.

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[[Page 23037]]

Joanne Reynolds, nurse and farm wife: ``In 1996, our milk price

averaged $14.88, but our expenses averaged $12.73. These expenses do

not reflect depreciation, debt principal or family living expense. What

other segment of society works 4000 hours a year, has a $500,000

investment and is basically living off of depreciation.'' \49\

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

\49\ Reynolds, 1/2/97 W/C at 293.

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

John Mordasky testified that: ``In the last four years, in order to

support my wife and myself we lived on our depreciation and my

legislative pay.'' \50\

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

\50\ Mordasky, 12/19/96 HT at 10.

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

John Devine of Devine farms of Massachusetts testified, `` * * * we

had the accountant pull off the facts from April to November and we had

a net loss of $12,877.23.'' \51\

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

\51\ Devine, 12/19/96 HT at 220.

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

Wayne Bissonette a dairy farmer from Hinesburg, Vermont told the

Commission that:

* * * long term decisions * * * [are] becoming increasingly

difficult as milk prices swing more dramatically with no apparent

link to other costs and market forces * * * ``I consider myself to

be a fairly efficient farmer,'' he said, ``and I believe that I

could make money with a blend price of $14.50. This does not allow

for much return on my equity but at this level I would be paying

income tax.''

Alice Allen a dairy farmer from Wells River, Vermont said:

In 1973, when my husband and I first began shipping milk, we

were receiving $7.50/cwt (federal Order 1) for milk. We were paying

$60 a ton for excellent quality 2nd cut hay and $80 a ton for 20%

protein. In 1996, we are receiving $15.37/cwt and paying $145 a ton

for second cut hay and $250 a ton for 20% protein concentrate.\52\

\52\ Allen, 1/2/97 W/C at 3.

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

Scott Mason, a registered jersey farmer from Coos County testified

that:

I'm looking at a break-even cost for my farm of $14.31. This

price does not include any figure for return to equity or family

labor. So 14.31 is I work 70 hours a week for nothing, my wife works

approximately 30 hours a week on the farm for nothing, and we risked

every last penny that we have for no return.\53\

\53\ Mason, 12/7/96 HT at 87.

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

Leon Berthiaume the general manager of the St. Albans Cooperative

in St. Albans Vermont testified in summary with respect to the members

of his cooperative that:

* * the average size farm for the St. Albans Coop Creamery produces

1.6 million pounds of milk per year and through these statistics

[UVM and USDA] we know the net cost of production, not including

return on investment would be in the range of $13.50 to $14.25 per

hundredweight.\54\

\54\ Berthiaume, 12/17 HT at 93 et seq.

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

The strength and consistency of the evidence in the record with

respect to the impact on farmers of their inability to cover their

costs of production provides stark evidence to the Commission of the

severity of the problems facing the region's dairy farmers, as well as

the consequences of inaction.

B. Issue: Prevailing Pay Prices Received by Dairy Farmers in the New

England Region

The issue of the pay prices received by New England dairy farmers

is important because it bears directly on determining the necessary

level of any Compact Over-order Price Regulation that might be imposed.

According to a review of the statistical data and the comment

received, prevailing farm prices are a function of two computations:

federally regulated uniform (or ``blend'') prices and net or

``mailbox'' price.

Statistics published by the Market Order # 1 Administrator provide

comprehensive and complete data to address the first part of this

issue--the market structure of federal, minimum, price regulation.

These statistics are compiled by the Market Administrator as part of

the regulation of the federal order, by law, and are published monthly,

annually, and in ten-year compilation form. See 7 C.F.R.

Sec. 100.3(c)(4), (9). They serve as the common basis for all New

England regional dairy marketing analysis and, together with similar

statistics supplied for other regions, form the basis for national

analysis.\55\

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

\55\ submitted for reference by De Geus and Gilmeister, 3/3/97

AC.

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

These statistics report the precise minimum uniform or ``blend''

prices paid to dairy farmers under federal regulation. According to the

statistics, these prices are announced and paid monthly, using one

hundred pounds (cwt) of milk as the unit of measure.

General managers and economists employed by cooperatives of dairy

farmers which operate in the region described in comprehensive detail

the integration of market forces at work in the regulated marketplace.

According to these commenters, farmers receive from the marketplace a

``mailbox'' or net pay price, which accounts for a variety of market

payments received and costs incurred for the sale of the milk they

produce. \56\

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

\56\ According to Wellington et al, (AC 3/31/97) and pursuant to

federal Market Order # 1, the cost of transporting the bulk fluid

milk from the farm to the processing plant is a key cost to farmers

which reduces the prevailing farm price. This issue is discussed in

more detail in the next finding section.

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

The following chart illustrates these two price computations of

prevailing pay prices of the region's dairy farmers.

[[Page 23038]]

Class I, Blend and Mailbox Prices 1995-1996

[Per CWT]

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

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

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

1995

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

Class I.................................................. 15.10 14.62 14.59 15.03 15.13 14.4 14.36 14.66 14.47 14.79 15.32 15.85

Blend.................................................... 13.12 13.13 13.25 13.19 13.27 12.84 12.83 13.24 13.32 13.7 14.24 14.43

Mail box................................................. 11.83 11.86 11.98 11.93 11.92 11.39 11.35 11.71 11.88 12.42 13.14 13.20

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

1996

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

Class I.................................................. 16.11 16.15 15.97 15.83 15.94 16.33 17.01 17.16 17.73 18.18 18.61 17.37

Blend.................................................... 13.79 13.63 13.55 13.53 13.84 14.53 15.25 15.48 15.96 16.04 15.65 14.37

Mail box................................................. 13.38 13.23 13.14 13.08 13.49 14.08 14.77 15 15.55 15.83 15.37 14.12

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

[[Page 23039]]

C. Issue: The Balance Between Production and Consumption of Fluid Milk

Products

As noted, the finding analysis regarding the price calculation

simultaneously accounts for the level required to ensure the region's

local supply of fluid milk products and the amount needed to cover cost

of production. Section 9(e) of the Compact specifically requires the

Compact Commission to consider the balance between production and

consumption of milk and fluid milk products in the regulated area.

Inquiry under this issue assisted the Commission in determining

whether the region presently is being supplied locally or has become

dependent upon supply from distant sources, notwithstanding any present

price disparity between cost of production and the pay price. This

understanding allowed the Commission to determine the degree to which

price regulation is needed to sustain current, sufficient, local

supply, and the degree to which it is also needed to encourage and

ensure new and added local supply.

According to data, the six state, New England, region draws

approximately seventy percent of the raw product supply needed for the

consumption of all milk products, fluid and manufactured, from New

England farmers. The total volume of milk supplied for the region is

approximately five billion pounds. The predominant remainder is

supplied by New York farmers, who have traditionally made up a

substantial portion of the New England milkshed. Less than three

percent of the raw milk supply for the New England market is produced

outside of the six state/New York milkshed.

According to the Market Order statistics, approximately fifty

percent of this raw product milk supply is processed for consumption as

fluid, or drinking milk, in the New England region. The raw product

supply for this in-region fluid production and consumption draws from

both the New England and New York farmers comprising the New England

milkshed. At present, approximately 98 percent of the fluid milk

products consumed in the region are produced by fluid processing plants

located in New England. The remaining two percent of fluid milk

consumption is supplied by packaged milk products imported by plants

nearby to New England. A small percentage of the in-region fluid

production is similarly exported for consumption in the immediate areas

adjacent to New England.

The Market Order statistics also describe with particularity that

the remainder of the raw product milk supply is processed within New

England into manufactured dairy products. In contrast to fluid milk

products, these manufactured dairy products are consumed both within

and outside the New England region.

It is universally understood that the same raw product supply can

be used for both fluid, processing and manufacturing purposes. Given

this substitutability, and assuming reliance upon farmers in New York

State as part of the milkshed, the Commission concludes that New

England is, overall, presently in stable balance of regional production

and consumption of fluid milk products.

At the same time, the Market Order statistics describe a marked

decline in production over time in every individual New England state

except Vermont.\57\

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

\57\ See also New England Agriculture statistics, submitted by

William Zweigbaum, A/C 3/31/97.

Receipts of Milk From Producers, By States

[Thousand Pounds]

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

Year CT Me MA NH NY RI VT All States

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

1985............................................ 594,785 345,956 540,143 338,028 1,284,015 39,722 2,256,595 5,399,244

1986............................................ 574,279 333,124 506,773 343,806 1,280,331 36,912 2,266,222 5,341,447

1987............................................ 541,118 293,373 450,524 301,738 1,313,635 36,198 2,236,238 5,172,824

1988............................................ 515,512 262,059 418,055 281,403 1,391,994 34,490 2,214,116 5,117,629

1989............................................ 502,716 217,437 400,105 268,453 1,388,680 29,651 2,167,758 4,974,803

1990............................................ 494,619 216,586 407,704 280,201 1,455,463 29,805 2,229,961 5,114,341

1991............................................ 504,516 253,383 412,990 294,185 1,545,890 30,056 2,268,174 5,309,194

1992............................................ 525,702 260,759 427,407 307,159 1,560,245 28,853 2,367,566 5,477,691

1993............................................ 504,282 288,776 424,836 310,463 1,443,447 28,266 2,345,423 5,345,493

1994............................................ 491,495 296,500 398,271 299,911 1,283,684 27,161 2,301,044 5,098,521

1995............................................ 487,493 346,443 400,501 314,610 1,417,034 28,536 2,375,518 5,370,135

1996............................................ 457,230 388,684 388,227 312,293 1,459,469 26,850 2,350,348 5,383,101

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

Source: New England Market Order Administrator's Statistical Summaries.

Milk Marketed by Producers: Sold to Plants and Dealers: by State

[Million Pounds]

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

YR CT ME MA NH RI VT Total NE

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

1986......................................................... 575 670 535 362 36.0 2405 4583.0

1987......................................................... 540 654 480 314 36.0 2370 4385.0

1988......................................................... 515 620 437 296 35.0 2350 4253.0

1989......................................................... 500 585 422 286 30.0 2295 4118.0

1990......................................................... 495 590 436 297 30.2 2330 4178.2

1991......................................................... 505 600 440 313 33.4 2370 4261.4

1992......................................................... 526 623 454 328 32.3 2474 4437.3

1993......................................................... 527 645 452 320 31.9 2470 4445.9

1994......................................................... 514 621 431 308 31.2 2422 4327.2

1995......................................................... 508 625 426 322 32.1 2507 4420.1

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

Source: MILK: Annual Quantities Used and Marketed by Producers, 1986-1995 New England Agricultural Statistics, 1995-1996.

[[Page 23040]]

This statistical picture of decline is further corroborated by the

previously cited testimony of Smith and Baron. According to Smith,

``The number of dairy farms in New England declined by 41% over the

past 10 years. (1985-1995) During this period the number of cows has

declined by 24%, total production has declined 4% and land used in

farms fell by nearly 600,000 acres.'' \58\ According to another

commenter, New England has lost dairy farmers at a rate of about 40%

faster than the national average, between 1987 and 1992.\59\

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

\58\ Smith, 12/17/96 HT at 34.

\59\ Barron, 12/17/96 HT at 60.

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

According to statistics cited by another commenter, problems are

especially severe in the southern portion of the Compact region.

Massachusetts, the most populous state, has seen the greatest effect,

showing a 35% decline in cow numbers and a 20% decline in milk

production during the period of 1986 through 1995. Each of the two

other southern New England states, Connecticut and Rhode Island, have

also shown substantial declines in farms, cow numbers and

production.\60\

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

\60\ See New England Agricultural Statistics, 1995-96, USDA,

Page 68.

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

Another commenter indicates that milk production in New York state,

the supplemental portion of the New England milkshed has also declined.

Citing USDA statistics, this commenter states that ``New York milk

production was down 4 percent in February 1997 compared to one year

ago.'' \61\

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

\61\ Wellington et al, 3/31/97 AC at 6.

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

This commenter also indicates that the milkshed has expanded in

area as production closer to the production centers has declined:

The milk supply area for the New England market has steadily

increased over time as dairy farmers in the region have gone out of

business. When the New England Order was promulgated more than

twenty years ago, the supply area, or milkshed, covered all the six

New England states and a dozen or so eastern New York counties.

Recent information provided by the Market Administrator's Office

shows that the New England market now receives milk from thirty four

New York counties as far west as Ontario County. Ontario County is

about 360 miles distance from Boston. This distant milk is primarily

needed to satisfy the daily Class I needs of New England bottlers

during the peak demand period in late summer and fall when schools

go back into session and milk supplies are seasonably at their

lowest level. The New England milkshed has increased in size by

approximately 10 miles.\62\

\62\ Wellington et al, 3/31/97 AC at 6.

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

From the comment and statistics, therefore, the Compact Commission

concludes that production and consumption in New England, though

presently in balance, are operating in a balance that is under

tremendous stress. The supply most local to the population centers, or

that provided by southern New England farms, has been greatly

diminished and is in fact disappearing. Production at the outer reaches

of the milkshed has been able to replace this loss of the most local

supply. Yet this more distance supply is itself under stress and is in

fact in decline, causing the outer boundaries of the milkshed to be

expanded.

The Compact Commission consequently concludes that the present

stress on the balance between the region's production and consumption

must be relieved if the region is to continue to be provided an

adequate, local supply of fluid milk. The Commission concludes that the

present balance likely will not be maintained and could soon begin to

significantly erode, which would threaten the region's supply, if the

stress is not relieved. To ensure a continuing balance, the present,

local supply must at least be stabilized, if not increased.

Furthermore, the present, distant supply itself must be stabilized as

well, to ensure that the milkshed does not reach further west.

D. Summary Analysis of Costs of Production and Sufficient Price

Based on this summary of comment and analysis under issues (1), (2)

and (3) above, the Commission concludes the chronic loss of dairy

operations in the region, and thereby the stress on the region's local

supply of milk, is a direct result of the volatility of farmer milk

prices and their chronic insufficiency, including the failure of prices

to adjust for inflation.

The Commission further concludes, accordingly, that price

regulation is necessary to address the chronic pricing problems and to

continue the assurance of an adequate, local supply of milk for the

region.

Price Volatility, Cost of Production and Chronic Insufficiency of

Price, and the Failure of Price To Adjust for Inflation

1. Price Volatility

The concern with price volatility is described in detail above. The

Commission concludes that this price volatility can and should be

addressed directly by Compact Over-order price regulation. Compact

Over-order price regulation can minimize and even eliminate price

volatility by establishing a level, Class I, floor price that combines

the Federal Order minimum price with a ``floating'' Over-order price.

Such a combined floor price will serve to eliminate the volatile swings

in federal Class I pricing.

More specifically, the precise amount of the ``floating'' component

of the Compact Over-order Price Regulation will be the difference in

amount between the federal, regulated, price that is announced monthly

and the amount of Compact Over-order Price Regulation itself. As

explained below, the Commission is adopting a combined, federal Order

and Compact Over-order, Class I price of $16.94 (Zone 1). The

``floating'' or ``Over-order'' component of the Compact price

regulation will be the difference between the announced Federal Order,

Class I, Zone 1 price for each month and $16.94.

2. Cost of Production and Chronic Insufficiency of Price

The evidence in the record suggests that the costs of production in

the New England states, within the meaning of the required finding, is

best defined as a range. The Compact Commission draws this conclusion

for two reasons. First, both the farm testimony and that of the

region's dairy economists indicates that costs of production vary from

farm to farm. Second, the testimony of the dairy economists themselves

define a wide range of values.

The range presented in their study data varied widely, between

approximately $13.50 and $17.24 per cwt. Leon Berthiaume testified that

costs of production among members of a substantial Vermont cooperative

ranged from $13.50-$14.25; on behalf of the Vermont Department of

Agriculture, Reenie De Gues testified that Vermont production costs

were $14.06; University of Vermont economist Rick Wackernagel testified

that costs were at $15.00; Neil Pelsue testified of costs equaling

$16.41; Bob Smith described costs of $15.37; The Economic Research

Service provided an estimate of at $16.46; Milligan and Knoblauch

concluded that production costs were as high as $17.24.

These variances can be explained by several factors, including the

different time frames surveyed, the different data relied upon, and the

different costs included in the survey evaluations. Despite the

recognized, inherent, limitations resulting from this variability, this

data base is still most comprehensive, and allows the Commission to

settle upon a range of cost of production that is most reliable.

To establish its range, the Compact Commission has referred to the

above series of summary numbers and eliminated the high and low values.

The

[[Page 23041]]

Compact Commission then matched this range against the variety of

anecdotal statements presented by dairy farmers in testimony and

comment. Accordingly, the Compact Commission determines that, for

purposes of analysis under this rule, the range of New England cost of

production is reliably understood to be somewhere between $14.06 and

$16.46 per cwt.

As described earlier in detail, the data, comment and testimony

received demonstrated overwhelmingly that New England farmer pay prices

are and have been chronically below this defined range of cost of

production. The Compact Commission further concludes that the amount of

this insufficiency is also best described as a range.

As described earlier, the USDA Economic Research Service estimate

that during the 1985 to 1990 period, cash receipts of Northeastern

dairy farmers rose from $13.96 to $16.00 per hundredweight while the

cost of production increased from $12.06 to $16.46. This describes a

deficiency in price range of $1.90-$0.46. Vermont Department of

Agriculture economist Reenie De Geus provided testimony indicating

that:

In 1995, the most recent year, costs of production averaged

$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower

than the actual milk prices received of $13.23. In fact, in each of

the last 5 years, milk price received was lower [sic] than the cost

of production by an average of $1.08.\63\

\63\ De Geus, 1/2/97 WC at 74.

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

Using the figures here identified, the Commission accepts this

comment and concludes that cost of production exceeds farmer pay price

by an amount in the range of $0.46-$1.90.

As cited earlier, Ms. De Gues provides some context for this

apparent range in deficiency:

In good years, we find that the cost of production tends to rise

with the price of milk. With the extra cash farmers replace worn out

equipment and make repairs that may have been delayed for years.

When the price of milk drops below cost, they consume some of the

equity in their farms to meet family living expenses and cash flow

demands.\64\

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

\64\ De Geus, 1/2/97 WC at 75.

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

3. Adjustment for Inflation--Determination of Specific Price Amount and

Formula

As described earlier, the chronic insufficiency in price can be

traced to a number of sources. The Compact Commission has determined

that the single most readily identifiable basis of price insufficiency

is the failure of farm prices to adjust to inflation over time.\65\

Given this readily apparent concern from the hearing record, in the

subsequent Notice of Comment, the Compact Commission specifically

sought comment as follows:

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

\65\ The Commission here specifically notes the determination of

Professor Wackerngel's analysis regarding the significance of

inflation. Wackernagel, 1/2/97 WC at 473.

The Commission is considering a possible Compact over-order

price regulation that will be based, at least in part, on an

adjustment for inflation to the Class I, fluid milk price, over

time. The Commission seeks comment on the advisability of such an

approach, as well as possible methodologies for determining the

impact that such an adjustment would have on the Class I, fluid milk

price, over time.\66\

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

\66\ 62 FR 12252.

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

In response, the Commission received a combined comment from Reenie

DeGeus and Bill Gillmeister, dairy economists for the Vermont and

Massachusetts Departments of Agriculture, respectively, providing a

detailed analysis on this point. They proposed a one-time adjustment of

the Class I price, (Zone 1) using 1991 as the base year for the

adjustment. They proposed using the 1990 CPI as the base index, given

that the Compact expressly uses this base year for adjusting the cap on

its regulatory authority. See Compact Section 9(b). They suggest

further using the CPI-U Boston as the appropriate, more local indicator

of the inflation factor.

This equation yields a Class I, Zone 1 price of $16.94 per cwt. for

1997.

The Commission accepts the recommendation of these two state

agriculture department economists. 1991 is a reasonable year to use for

the historic period; 1991 prices were markedly low, following an

historic year of high prices. This erratic fluctuation in prices was of

similar type to the recent swing of November, 1996-January, 1997, and

thus provides a recent and analogous, relevant time period for the

inflation adjustment. In addition, as the commenters note, using the

low point, 1991, of this last pricing cycle ensures that the inflation

adjustment will be appropriately limited.

Wellington, et al. also submitted comment in response, indicating

concern with the use of an automatic inflation adjustment. They

indicated that inflation must be accounted for as a dynamic factor of

retail prices as well as farmer cost of production. They indicated that

the price regulation, including all relevant factors, should be

assessed every six to twelve months, rather than made to adjust to a

single static indicator.\67\

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

\67\ Wellington et al at 11. Another commenter expressed similar

concern. See Vetne, 12/19/96 HT at 269.

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

The Compact Commission accepts this comment, as well. The

Commission agrees that the inflation adjustment should not serve as the

single, permanent, function of price adjustment. Rather, it serves as

the initial, limited, regulatory response to the defined chronic market

problems of price insufficiency and volatility.

The Compact Commission further agrees that the overall price

regulation adopted by this rule must be revisited after the passage of

some time rather than imposed permanently. As discussed throughout this

summary of comment, the Commission has determined that the duration of

the rule will be six months. This will allow the Commission to assess

again the broader market circumstances in the manner contemplated by

the commenters.

Accordingly, the Compact Commission has adopted the price/inflation

adjustment presented by DeGues and Gillmeister, which accounts for this

six month duration of the rule. Given that this six month period will

be from July-December, 1997, the Commission adopts their calculation of

price, adjusted for inflation for 1997, of $16.94 (Zone 1).

The Compact Commission recognizes that this price level, in itself,

will not be sufficient to cover the defined range of deficiency between

current farmer pay prices and cost of production. The Commission

expects instead the combined benefits of price enhancement and

stability to result in the positive impact on the region's milk supply,

as contemplated by the finding analysis under this section.

The Commission here expressly refers to and relies upon the

analysis of Professor Wackernagel, which assessed the impact on

profitability of a Class I price of $16.89 (Zone 1) ($16.17 Zone 21).

The price analyzed is thus directly in line with that adopted by the

Commission. According to this analysis, farms operating in such a

stabilized pricing environment would remain under stress financially,

but would show some improved financial performance, able to operate at

low to modest levels of profitability.\68\

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

\68\ Wackernagel, 1/2/97 WC at 473.

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

The Commission, again, concludes that this price level is the

appropriate, initial increment to establish, for the defined period of

six months. This initial, limited duration of the regulation will allow

the Commission

[[Page 23042]]

soon to revisit again the issues raised by this finding analysis. For

that next time, The Commission's inquiry will have the benefit of the

performance of the existing price regulation. Such a record will aid

the Commission's analysis.

II. Finding

Whether the public interest will be served by the establishment of

minimum milk prices to dairy farmers under Article IV.

The Commission referred to the Compact's express Statement of

Purpose in determining the intended meaning of ``public interest'', as

used in this finding. The Statement of Purpose declares at the outset

that:

The mission of the commission is to take such steps as are

necessary to assure the continued viability of dairy farming in the

northeast, and to assure consumers of an adequate, local supply of

pure and wholesome milk.

The participating states find and declare that the dairy

industry is the paramount agricultural activity of the northeast.

Dairy farms, and associated suppliers, marketers, processors and

retailers, are an integral component of the region's economy. Their

ability to provide a stable, local supply of pure, wholesome milk is

a matter of great importance to the health and welfare of the

region.

Compact Art. I, Sec. 1.

Section 9(e) of the Compact provides further guidance with regard

to the intended meaning of ``public interest''. This section provides a

concise but non-exhaustive list of criteria for the Commission to

consider ``in determining the price''. Compact Art. IV Sec. 9(e).

Pursuant to that section:

[T]he commission shall consider the balance between production

and consumption of milk and milk products in the regulated area, the

costs of production including, but not limited to the price of feed,

the cost of labor including the reasonable value of the producer's

own labor and management, machinery expense, and interest expense,

the prevailing price of milk outside the regulated area, the

purchasing power of the public and the price necessary to yield a

reasonable return to the producer and distributor.

Based on the inclusion of this broad list of criteria, the Compact

Commission determined that it must balance the interest of all market

participants described by the Statement of Purpose--processors,

retailers and consumers, along with farmers.\69\ This necessarily

requires a broad inquiry, one that takes into account the common

interest of all market participants in the maintenance of dairy farming

in the region.

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

\69\ Neil Marcus, President of Marcus Dairy, Inc. emphasized the

importance of considering the impact of the Compact on all market

participants in his testimony. See HT 82-83; 12/19 Marcus.

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

The Compact Commission thereby identified four main components of

the ``public interest'' contemplated by this Finding: (i) Assuring the

continued viability of dairy farming in the region, (ii) assuring

simultaneously the continued viability of associated suppliers,

marketers, processors and retailers, (iii) benefiting consumers through

the maintenance of an adequate supply of milk, reasonably priced, and

(iv) maintaining a local supply of milk.

Based on this definition of ``public interest'', the Commission

sought comment on the following subjects and issues:

(1) The balance between production and consumption in the region--

the pay price needed to yield a reasonable rate of return to producers

and to ensure an adequate supply of milk for the region.

(2) The prevailing farm prices for Class I, fluid milk, inside and

outside the New England region,

(3) The prevailing processing and wholesale costs for Class I,

fluid milk, inside and outside the New England region,

(4) The costs of transporting bulk fluid milk products to plants

located within the New England region,

(5) The costs of delivering fluid milk products processed outside

the New England region to outlets within the region,

(6) The purchasing power of the general public,

(7) The elasticity of demand for fluid milk products,

(8) The cost of retailing fluid milk products,

(9) The prevailing retail prices for Class I, fluid milk, inside

and outside the New England region,

(10) The potential impact of a flat, combined, regulated, Federal

Order and Compact Over-Order price on the wholesale market for fluid

milk products,

(11) The potential impact of a flat, combined, regulated, Federal

Order and Compact Over-Order price on the retail market for fluid milk

products,

(12) The potential impact of a flat, combined, regulated, Federal

Order and Compact Over-Order price on school lunch programs.

(13) The potential impact of a flat, combined, regulated, Federal

Order and Compact Over-Order price on the Women, Infants and Children

Special Supplemental Nutrition Program of the United States Child

Nutrition Act of 1966.\70\

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

\70\ See 61 CFR 65604; 62 CFR 12252.

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

A. Issue: The Balance Between Production and Consumption in the

Region--The Pay Price Needed To Yield a Reasonable Rate of Return to

Producers and to Ensure an Adequate Supply of Milk for the Region

This issue is the premise for the remaining discussion of the

public interest in regulated milk pricing.\71\ The remaining discussion

is triggered by the Compact Commission's determination that such farm

price regulation is necessary, both to yield a reasonable rate of

return to producers and to ensure an adequate, local, supply of milk

for the region.

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

\71\ As noted previously, this issue is raised specifically by

Compact Section (e).

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

This issue was previously addressed in detail in the previous

finding section. In summary, the Compact Commission concluded that

farmer pay prices must be enhanced, stabilized and adjusted for

inflation. The Commission thereby determined that a flat, combined,

federal Class I and Compact Over-Order Price Regulation in the amount

of $16.94 (Zone 1) per cwt was necessary to accomplish these

objectives.

B. Issue: Prevailing Farm Prices Inside and Outside the New England

Region

Compact Section 9(e) provides specifically for consideration of

this issue. Mailbox price statistics allow for a determination of

present comparison of milk prices in adjacent markets. The following

chart submitted as part of a written comment describes these

comparative prices.\72\

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

\72\ Wellington et al, 3/31/97 AC appendix.

[[Page 23043]]

Mailbox Milk Prices for Selected Federal Milk Orders

[Dollars per hundredweight]

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

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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

1995

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

New England................................................. $11.83 $11.86 $11.98 $11.93 $11.92 $11.39 $11.35 $11.71 $11.88 $12.42 $13.14 $13

NY/NJ....................................................... 12.00 12.02 12.14 11.88 11.82 11.45 11.39 11.74 12.01 12.61 13.17 13

Middle Atlantic............................................. 12.15 12.07 12.06 11.83 11.86 11.50 11.60 12.14 12.26 12.82 13.50 13

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

1996

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

New England................................................. 13.38 13.23 13.14 13.08 13.49 14.08 14.77 15.00 15.55 15.83 15.37 14

NY/NJ....................................................... 13.44 13.29 13.18 13.16 13.70 14.10 14.82 15.05 15.68 15.68 14.82 13

Middle Atlantic............................................. 13.57 13.27 12.86 12.76 13.41 14.40 15.07 15.49 16.05 15.84 15.55 14

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

Source: Exhibit Co-op #1C & #1D, Additional Comment as submitted by Robert Wellington, on behalf of Agri-Mark Dairy Co-op, St. Albans Co-op Creamery, & Independent Dairymen's Co-op.

[[Page 23044]]

From this chart, it can be seen that 1995 mailbox prices for the

New England market were consistently less than those for the New York-

New Jersey and Middle Atlantic markets, but by relatively small

amounts. This data further indicates that prices throughout the three-

market area are presently in relative alignment.

C. Issue: Costs of Transporting Bulk Fluid Milk Products to Plants

Located Within the New England Region

As made clear by comment received, and based on common knowledge,

the cost of transporting bulk fluid milk products is most significant

to the calculation of the cost of the delivered raw product to the

processing plant, because of the significant expense involved. It is

thus a critical input of the wholesale and, hence, the retail

price.\73\

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

\73\ The broader issues of impact on the wholesale and retail

markets are analyzed at the end of this finding section.

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

According to Wellington et al, ``[d]ue to its bulkiness, milk is

expensive to transport. Back haul opportunities to lower transportation

costs are also more limited with milk due to its sanitary standards and

large volume which moves on a daily basis.'' \74\

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

\74\ Wellington et al, 3/31/97 AC at 4.

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

According to the reported statistics, the regulated price itself

accounts for the transportation costs of raw fluid milk supplies.

Market Order #1 establishes a zone differential to account for this

transportation cost. This differential is established per cwt. in an

amount equal to 3.6 cents per ten miles transported. According to

Wellington et al, this rate has not changed since 1982.

Market Order #1 uses zone 21 as the representative zone for farm

pricing. 7 CFR 1001.50(a). This zone is 210 miles from the Boston, or

city, zone. 7 CFR 1001.52(d). The cost of transportation from this

representative zone 21 to the city, zone 1, is 72 cents per cwt. 7 CFR

1001.52(g).

Further, according to Wellington et al, a 1994 consolidation of

federal orders in the southern market established a rate of 3.9 cents/

cwt per ten miles transported. There is no explanation as to whether

the higher rate for the new southern order better reflects costs in the

Northeast, although that is the inference, or whether the higher cost

is attributable to market conditions in the south. The comment does

identify with specificity a higher cost of transportation for the Agri-

Mark cooperative, which represents approximately half of all New

England farmers. This cost is represented as 4 cents/cwt for each ten

miles transported.

D. Issue: Prevailing Processing and Wholesale Costs for Class I, Fluid

Milk, Inside and Outside the New England Region

This issue is significant because processing and delivery are the

only intermediate stops in the commercial channel for milk between farm

and retail outlet other than transport of the raw supply. The delivered

cost to the retail outlet can thus be determined as a function of a

relatively few variables.

Although the Compact Commission requested comment on this issue, it

did not receive data regarding processing and wholesale costs specific

to the New England market. While two of the fluid milk processors doing

business in the New England market did submit comment,\75\ along with a

trade organization from New York state,\76\ none of these comments

presented data with regard to costs of operation.

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

\75\ Neil Marcus on behalf of Marcus Dairy, 12/19/96 HT at 81

and 1/2/96 AC; Donald Turner, Turner's Dairy, 12/19/96 HT at 176.

\76\ Bruce Krupke on behalf of New York State Dairy Foods, Inc.

3/31/97 AC; John H. Vetne, on behalf of New England Dairies, Inc. 3/

31/97 AC.

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

A very recent and comprehensive national study of 35 plant

operations submitted by a group of dairy economists from Cornell

University provides useful guidance to the Commission on this issue. R.

Aplin, E. Erba, M. Stephenson, ``An Analysis of Processing and

Distribution Productivity and Costs in 35 Fluid Milk Plants'', February

1997, R.B. 97-03, Cornell University. The study is particularly useful

because fourteen of plants studied, though unnamed, are identified as

being located in the Northeast.

The study indicates that the processing and wholesale costs for

Class I milk are a function of three variables: (1) the procurement

cost for the raw product supply, in significant part, combined with (2)

processing, delivery and sales costs for servicing the retail outlet,

and (3) return on capital.

An extract entitled ``Presentation at IDFA Annual Meeting in

Dallas, Texas (October 1996) was also submitted. This extract provides

``estimated costs of marketing 2% lowfat milk through supermarkets, New

York Metro Area, $ per gallon, 1995.'' In this extract, the raw product

cost is identified as $1.31 per gallon. (This is in line with the net

combined regulated and ``over-order'' Class I price for the New England

market.) According to the study, there is an additional plant cost of

$0.24 per gallon and a package cost of $0.10 per gallon. There are

additional delivery, selling and general and administrative costs,

totaling $0.22. Finally, the extract identifies a return for cost of

capital in the amount of $0.06.

The study thus identifies a total, delivered, processing and

wholesale cost of $1.93 per gallon.

The Economic Research Service of the United States Department of

Agriculture also provides a breakdown of wholesale costs, nationally,

per half gallon.\77\ According to this study, for 1992, the farm value

was $0.597; assembly and procurement totaled $0.058; the processing

cost was $0.191; and wholesaling costs were $0.196. Total costs per

half-gallon equal $1.042 according to this ERS study. For comparison

purposes, assuming equal costs per gallon as the costs per half gallon

in the study, this would mean a total delivered cost of $2.08 per

gallon, or $0.15 more than shown in the Aplin study.

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

\77\ Food Cost Review, 1995/AER-729. (Submitted as reference

source by DeGuess and Gilmeister, 3/31/97 AC.)

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

The ERS study further notes that ``processing costs have remained

stable since 1986 (through 1992), after rising 16 percent from 1982

through 1986.\78\

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

\78\ AER 726 at 26.

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

Both the Aplin study and extract, and the ERS study, indicate that

processing plants are covering their margins. The Aplin extract also

provides a precise indicator of the ``return for cost of capital.''

This amount is identified by the extract as $0.06, or only a three

percent return.

E. Issue: Costs of Delivering Fluid Milk Products Processed Outside the

New England Region to Outlets Within the Region

This issue is significant for two reasons. First, these identified

costs complete the description of delivered cost to the retail outlet.

Second, the issue inquires into whether finished, Packaged milk

products transported from plants located away from the region's

population centers can serve as a substitute supply for the finished

product provided by more local plants.

The Compact Commission requested but did not receive data regarding

packaged product delivery costs specific to the New England market. The

Cornell University study cited above \79\ sheds light on this issue.

According to the study, costs of delivery for packaged fluid milk

products range from $0.216 to $0.541 per case, with an average cost of

38.8 cents per case, or about $0.097 cents per gallon. (There are 4

gallons/case.) \80\

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

\79\ Aplin et al, R.B. 97-03, Cornell University, February,

1997.

\80\ Aplin et al at 21.

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

[[Page 23045]]

With regard to the possibility of substitution of packaged milk

supply, as discussed in the first finding analysis, the Market Order

statistics makes clear that the major processing facilities servicing

the New England region are currently located nearby the population

centers of the region they serve. These plants currently provide for

almost all of the market's supply of finished product. At present,

then, there is almost no substitution for this local supply of finished

packaged product with finished product imported from distant plants.

The detailed analysis of the Aplin study provides insight into this

settled market pattern. Cost of operating a delivery vehicle

contributed an average of 43 percent of the delivery cost per case. The

remainder of the cost is attributable to driver labor cost. (Vehicle

operating cost ranged from 21 percent to 53 percent. \81\ The study

further indicated that these costs were for routes serving large

customers, and that route costs for serving smaller customers ``is

expected to be much higher.''

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

\81\ Aplin et al at 48.

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

Most significantly, route labor productivity was shown by the study

to decrease substantially with greater distance traveled and on routes

with numerous customer stops. A 1.0 percent increase in miles traveled

per month increased direct delivery cost by 2.9 percent per case. A 1.0

percent increase in customer stops made per month increased the cost by

1.1 percent per case. Not surprisingly, the study concludes that plants

located in more densely populated areas had lower direct delivery

costs.\82\

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

\82\ Aplin et al at 54

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

This delivery cost analysis of the Cornell study thus explains the

present market pattern: Plants located near population centers are the

most cost effective. According to this pattern, the market should

continue to consist of plants located nearby the population centers,

plants which are supplied with raw product from the milkshed and which

in turn provide finished product to the region's retail outlets.

F. Issue: The Price Needed to Yield a Reasonable Rate of Return to

Processors of Fluid Milk Products

This inquiry is derived directly from Section 9(e) of the Compact

and is significant in view of the Compact's emphasis on the financial

health of the entire dairy industry. The focus of the inquiry is the

determination of a price that ensures a reasonable rate of return. It

is of present significance for the baseline determination of whether

processing plants are currently covering costs of production.

The Compact Commission did not receive information with regard to

the price required to yield a reasonable rate of return specifically to

New England fluid processors. According to the extract of the Aplin et

al, Cornell study cited above, return for cost of capital for the

nearby New York metro area plant equaled $0.06 per gallon.

The Compact Commission concludes that this data may be relied upon

to determine that the region's fluid processors are presently covering

their costs with a return on capital, however slight. As noted, the

Aplin study was a number of nationally representative fluid plants, of

which fourteen were from the Northeast. It is reasonable to assume that

a representative number of these region-wide plants in turn were from

the New England area, and that the extract chosen by the authors may be

understood as representing this group as a whole, including New England

plants.

G. Issue: The Purchasing Power of the General Public

This inquiry is also drawn directly from Section 9(e) of the

Compact. The Compact Commission concludes that the Compact focuses

primary concern on the consumer interest because milk is a staple

product. The impact of price regulation upon the consumer's ability to

pay is thus a critical part of the Compact Commission's assessment of

the public interest under this finding section.

To sharpen inquiry under this broader issue, the Compact Commission

sought comment on a number of issues relating to the potential impact

of price regulation on consumers. These issues include: The elasticity

of demand for fluid milk products, the costs of retailing Class I,

fluid milk in the New England region, the prevailing retail prices for

Class I, fluid milk, inside and outside the New England region, the

cost of retailing fluid milk products, and the potential impact of a

flat, combined regulated, Federal Order and Compact Over-Order price on

the retail market for fluid milk products.\83\

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

\83\ See 61 CFR 65604; 62 CFR 12252.

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

The Compact Commission also focused specific attention on the

potential impact of price regulation on lower income consumers.

Specifically, the Commission sought comment on the potential impact of

a flat, combined, regulated, Federal Order and Compact Over-Order price

on the Women, Infants and Children Special Supplemental Nutrition

Program of the United States Child Nutrition Act of 1966, and the

impact of such a price on the school lunch program.\84\

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

\84\ See 61 CFR 65604; 62 CFR 12252.

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

Each of these issues is addressed in turn.

H. Issue: The Elasticity of Demand for Fluid Milk Products

Citing recent studies, Wellington et al identify the demand

coefficient for fluid milk as 3.1. This means that a ten percent

increase in price will result in a 3.1 decrease in demand.\85\

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

\85\ Wellington et al, 3/31/97 AC.

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

In response to this comment, Thomas Conway, Esq., former Counsel

and former Executive Director of the New York State Legislative

Commission Dairy Industry Development, submitted a study of ``Consumer

Response to the Unprecedented Rise in the Retail Price of Fluid Milk in

1989-1990'' (Consumer Response).\86\ This study focused on the actual

impact on consumption of a relatively large increase in retail milk

prices during late 1989 and early 1990.

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

\86\ New York State Legislative Commission of Dairy Industry

Development, August, 1990.

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

The study group was of four regions, including the Northeast.

During this time, the price of milk rose to $2.67 a gallon, a $0.34

increase. Directly contrary to the traditional analysis of the

elasticity of demand for milk, consumption actually increased rather

than decreased in two of the regions studied. In the Northeast, the

15.04 percent price increase in the Northeast was matched by lower

sales of only 0.98, or well below that expected based on any of the

demand coefficients identified above.

The study concludes ``that other factors were more important than

price to the determination of consumer demand for fluid milk''.\87\

Other factors included growth in personal income, demographic factors,

advertising and increased concerns over health and nutrition.

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

\87\ Consumer Response at 11.

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

While this study is now dated, the Compact Commission accepts its

basic premise that analysis of the impact must account for the market

function as a whole, rather than focus upon a strict elasticity of

demand equation. Nonetheless, the Commission remains aware of the

importance of accounting for the direct impact on consumption that an

increase in retail prices may have.

I. Issue: Costs of Retailing Class I, Fluid Milk in the New England

Region

The Commission did not receive comment with specific regard to New

England costs of retailing. As noted, the

[[Page 23046]]

Aplin et al, extract of the Cornell study identified a total delivery

cost of $1.93. Adding an identified supermarket cost and return of

$0.19 establishes for this extract a retail cost of $2.12.

The ERS study identified a total delivered cost of $1.04 and a

retailing cost of $0.35, for a total retail cost $1.39 per half gallon.

The retail cost component for the ERS study is substantially higher

than that for the Aplin study. The ERS study indicates part of this

cost may represent wholesaling formerly performed by processors, which

would explain at least part of the difference.

The Commission concludes that the more recent Cornell extract

provides a useful benchmark for assessing New England costs of

retailing.

J. Issue: Prevailing Retail Prices for Class I, Fluid Milk, Inside and

Outside the New England Region

There are two significant concerns raised by this issue. First, the

inquiry addresses the benchmark question of whether retail margins are

covering costs, much as the earlier inquiry addressed whether processor

margins were sufficient to cover costs. Second, the inquiry must

consider the relative retail costs beyond the area subject to Compact

Over-order Price Regulation, as part of the ongoing process of

assessment of the potential impact of price regulation on the region's

retail prices.

James G. Hines, Director of Dairy Services, submitted for the

record copies of the tracking studies of retail prices conducted by The

International Association of Milk Control Agencies. The Association

tracks and publishes monthly price surveys from a number of markets

nationwide. The following is an extract from three markets:

[[Page 23047]]

Retail Prices--Different Markets

[1995-1996]

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

Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.

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

1995

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

MA (Boston)................................................. $2.49 $2.09 $2.49 $1.99 $2.29 $2.39 $2.39 $2.49 $2.49 $2.49 $2.09 $2.49

NY (Albany)................................................. 2.18 2.18 2.18 2.16 2.16 2.15 2.17 2.17 2.17 2.17 2.19 2.23

NJ (North).................................................. 2.55 2.56 2.53 2.53 2.53 2.53 2.54 2.53 2.52 2.55 2.56 2.57

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

1996

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

MA (Boston)................................................. 2.19 2.29 1.99 2.49 2.59 2.29 2.59 2.59 2.29 2.59 ......... .........

NY (Albany)................................................. 2.23 2.23 2.25 2.26 2.25 2.32 2.4 2.42 2.42 2.46 ......... .........

NJ (North).................................................. 2.56 2.57 2.59 2.59 2.58 2.58 2.65 ......... 2.67 2.67 ......... .........

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

Source: International Association of Milk Control Agencies.

[[Page 23048]]

The Aplin et al extract identified a total, delivered cost of

$1.93, and a total retail cost of $2.12, including combined retail cost

and return on capital. The Compact Commission concludes from this

survey of prices that, as measured against their identified delivered

cost, New England retailers are currently covering their costs of

production with an adequate return on capital.

The Commission further concludes that this on-going Agencies' study

of markets both within and outside the New England region provides the

basis for the Commission to monitor the impact of regulation on New

England retail prices. The Commission will be able to utilize this

study data and compare the current, relative alignment in prices

between the New England and New York regions against the relative

alignment once price regulation is in place.\88\

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

\88\ Retail prices are also being monitored currently in

Connecticut, Vermont and Maine. The Commission will have to

establish a tracking program in Rhode Island.

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

K. Issue: The Potential Impact of a Flat, Combined, Regulated Order and

Compact Over-Order Price on the Wholesale Market for Fluid Milk in the

Region

The purpose of this most critical inquiry is to address the

potential impact on the wholesale market of price regulation.

Commenters described a number of potential concerns and potential

benefits. The benefits described were premised on the value of price

stabilization. The concerns raised related to the potential for market

distortion and competitive harm to current market participants.

In reply comment, Berthiaume \89\ described the benefit of a

stabilized pricing as imposed by this rule. He indicated that Compact

Over-order price regulation would bring stability to the regulated

Class I price, and not merely as a floor price. ``The value of a flat

regulated minimum Class I price is that the wholesale cost of milk

would and could be anticipated.''

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

\89\ Berthiaume, Reply comment; April 8, 1997 (RC).

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

The Commission agrees with this statement and adopts it as a

finding with respect to this issue. As discussed above, farm prices

have been marked by persistent, erratic fluctuations which translate

directly into the wholesale price. The Commission concludes that, while

processors are currently covering their margins, minimization of such

persistent fluctuations in price can only serve as a benefit to

stability of firm participants in the wholesale market.

Other commenters expressed concern about the potential for market

distortion which price regulation could bring. Wellington et al

expressed a concern that price regulation could distort the

traditional, market driven, pattern of raw product supply provided by

New England and New York farmers. The concern raised is that the

Compact Over-order price regulation could create an incentive for

increased milk supply from more distant portions of the milkshed in New

York. This would represent a market distortion directly contrary to the

intended purpose of the Compact.

These commenters qualified their concern by noting that processors

``will be reluctant to disrupt their current supply sources in reaction

to a Compact program which is officially of limited duration.'' \90\ In

his testimony at the hearing, Wellington also stated his opinion that

such market change was not likely to occur as long as the Commission

did not increase the regulated Class I price above $17.00.\91\

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

\90\ Wellington et al, AC 3/3197 at 6.

\91\ Wellington, 12/19/97 HT, pages 50-51.

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

Neil Marcus, President of Marcus Dairy, Inc., described other

potential market distortions that could result from price regulation.

His concerns also centered on the alignment of a market subject to

combined, Compact, and Federal Order regulation with adjoining markets

regulated only under Federal Order.\92\ The particular circumstances of

the Marcus Dairy operation heightened his concern. According to the

commenter, Marcus Dairy is located in Connecticut, on the border of New

York. The commenter described the supply of packaged dairy products

subject to price regulation under Federal Order 2 which is sold in New

England and expressed concern that this milk must not escape

regulations under the Compact. According to Marcus, such uniform

regulation is necessary to ensure that the current, market, pattern of

the supply of packaged product in the marketplace is maintained.

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

\92\ Marcus, 12/19/96 HT at 84-98.

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The Commission concludes that market alignment of prices and

uniformity of regulation must be considered in establishing over-order

price regulation. Present market patterns within the region and between

the region and adjacent areas are derived from the integrated formula

of Class I pricing in the federal Market Order System, which includes

pricing under more than one federal Order. There is no doubt the

Compact will introduce a new feature of market structure by adjusting

the Class I price, in effect, for only one Order.

At the same time, even given that the Compact will introduce a

novel feature of market structure, the Commission does not determine

that market distortion will necessarily occur. The technical provisions

of the Compact Over-order price regulation are precisely patterned upon

the underlying federal Order System in significant part. This provides

a structural basis for concluding that such distortion should not

occur.

Nonetheless, the concerns raised by the commenters with regard to

the potential for market distortion were a central consideration in the

Commission's deliberations over price regulation. These concerns were

also a controlling factor in the Commission's fashioning of the six

months', limited duration, for the initial price regulation. The

Commission here specifically notes Wellington et al's assertion that a

``limited duration'' of price regulation will minimize the potential

for distortion of the market caused by the Compact Commission's initial

price regulation.

L. Issue: The Potential Impact of a Flat, Combined, Regulated Federal

Order and Compact Over-Order Price on Retail Prices for Fluid Milk

Products

The Compact Commission sought comment on the critical issue of the

potential impact, if any, of a flat, combined, regulated Federal Order

and Compact Over-order price on retail prices for fluid milk products.

After reviewing all of the comments and testimony submitted, the

Compact Commission concludes that the price regulation will have a

positive impact on retail prices. The Commission determines that

preventing further erosion of the milkshed through price regulation

will itself have a positive impact on retail prices, in large part

because of the avoidance of increased transportation costs. The

Commission concludes that the further benefits of price stability will

trace through the farm and wholesale markets to the end-point, retail

market, and have a further, positive impact on retail prices.

The Commission bases its conclusion on the following analysis:

1. Change in the Epicenter of Milk Production and the Impact on Retail

Prices

The Compact Commission previously determined that there has been a

distinct movement away over time of the epicenter of the region's milk

supply. The loss of dairy farms in the New England region, and in

particular,

[[Page 23049]]

in the Southern New England region, has forced the epicenter of the

region's production further and further from the region's population

centers. This movement has involved both the loss of supply by farms

closest to the population centers and the replacement of that supply by

more distant farms, primarily in New York and Vermont. The location of

these more distant farms themselves, in turn, has moved ever father

away from the region's population centers.\93\

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\93\ The 1989 Massachusetts Extension Order, at page 14, cites

testimony that the transportation costs for this most distant supply

``would currently run $2.00 to $2.50/cwt (17-22 cents/gal) and would

require capital investments that few truckers would be willing to

undertake.'' Extension Order at 14.

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This feature of the stressed circumstance of the region's milk

supply described in the first finding analysis has had a direct,

adverse impact on retail milk prices. The Commission bases this

conclusion in part on the determination that transportation costs are a

significant input of the retail price for milk. As noted, the federal

Market Order System allows 72 cents per cwt to cover transportation

costs from the representative ``country'' zone to the Boston, ``city''

zone.\94\ This single cost input, alone, accounts for over three

percent of the total delivered cost to the retail outlet, when measured

against the Aplin et al extract identification of $1.93 for delivered

cost/gallon. (11.6 gallons per cwt). It follows, by definition, that an

increase in transportation costs attributable to greater hauling

distance will result in an increase in retail prices.

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

\94\ The discussion, supra, of transportation costs indicates

that this regulated calculation of cost does not fully account for

the true cost.

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

The Commission's conclusion is also premised on a similar finding

contained in the December 29, 1989 extension of the Massachusetts Milk

Stabilization Order. This Order found that a 50 mile shift in milk

prices causes a three cent increase in milk prices.

The evidence in the record thus demonstrates that the epicenter of

the region's milkshed has moved away from the population center to a

significant degree, and that this shift has had a measurable impact on

retail prices. The Compact Commission concludes that this adverse

impact on retail prices will continue as long as the milkshed is not

stabilized.

2. Risk Avoidance in Commodity Purchasing--The Benefits of Price

Stabilization

Senator Patrick Leahy submitted extended comment referencing

studies in the economic literature of the adverse effects of commodity

price uncertainty and, conversely, the utility of price stability.\95\

One article described so-called ``risk avoidance'' pricing strategy in

the wheat industry. The analysis indicated that increased price

uncertainty and variability in the wheat industry led to significant

increases in retail wheat marketing margins.\96\ The article determined

both theoretically and empirically that increased price variability

results in higher margins. The authors theorized and then demonstrated

empirically that the uncertainty created by wholesale price volatility,

in essence, drives the retailer to retain a larger margin. The retailer

acts to retain such a larger margin to avoid the risk created by the

uncertainty in wholesale costs.\97\

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\95\ Senator Patrick J. Leahy, WC 1/297.

\96\ Brorsen, Chavas, Grant and Schnake, ``Marketing Margins and

Price Uncertainty: The Case of the U.S. Wheat Market,'' Amer. J.

Agr. Econ., (August, 1985) 521-527.

\97\ The analysis is confirmed with regard to market conduct and

performance in the beef industry. Holt, ``Risk Response in the Beef

Marketing Channel: A Multivariate Generalized ARCH-M Approach'',

Amer.

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The logical implication of this theory is that price stabilization

reduces or eliminates the retailers' need to act in such a risk-

avoiding manner, because the volatility and uncertainty that drove that

behavior is reduced or eliminated.

The analysis of Hahn et al \98\ demonstrates convincingly that

price volatility within the meaning of the authors above cited defines

market conduct and performance of the fluid milk industry. The pattern

of pricing conduct described by these authors is consistent with the

risk-avoidance strategy described by Brosen et al and Holt.

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

\98\ See Hansen, Hahn, and Weimar, ``Determinants of the Farm-

to-Retail Milk Price Spread'', Agriculture Information Bulletin

Number 693 (March 1994). See also Kinnucan and Forker, ``Asymetry in

Farm-Retail Price Transmission for Major Dairy Products'', Amer. J.

Ag. Econ., 285-292 (May, 1987).

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Based on this analysis, the Commission concludes that New England

retail prices likely will respond positively to the stabilization of

the wholesale price input which will result from imposition of Compact

Over-order Price Regulation. The price established by this rule will be

a certain one; Berthiaume suggests that the combined, federal Order and

Compact Over-order price will not vary for the six month term of its

duration. At least for the short-term duration of this price

regulation, the uncertainty of price variability in the region's Class

I market will have been significantly reduced if not eliminated.

According to the analysis described above, the Compact Commission

concludes that retail margins and, hence, prices, should positively

adjust, accordingly.\99\

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\99\ The Commission recognizes that at least one comment

suggested that the ``impact'' of any price regulation would be a

straight dollar-for-dollar ``pass through'' from processors to

consumers, resulting higher retail prices. Alan Rosenfeld, December

19, 1996 at pages 183 et seq. The Commission is not persuaded by

Rosenfeld's predictions for several reasons. It is, in the

Commission's view, contrary to the weight of the comments submitted

and the prevailing economic literature and anecdotal evidence. More

fundamentally, however, it is not descriptive and provides no

reasoned explanation for the conclusion expressed therein. Nor does

it respond in any way to the comprehensive literature suggesting

precisely the opposite conclusion.

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3. The Experience of the Southeast Region of the United States

Received comment and statistics indicate that the adverse

experience of the southeast states could well serve as a model for the

future of New England's supply pattern and retail prices, if the

present stress on the milkshed is not abated. Many of those states have

lost a significant measure of their local milk supply. For the

southeast as a whole, between 1980 and 1995, the number of dairy farms

declined from 33,900 to 7,250.\100\ In Georgia, the percentage of milk

supplied by Georgia farmers declined from 84% in 1973 to 50% in

1988.\101\

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\100\ National Agricultural Statistics Service, ``Milk

Production'', 1970-1995.

\101\ Gilmeister, 3/31/97 at 10.

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Two commenters, Ronald Harrell, Ph.D., of the Louisiana Farm Bureau

Federation, Inc., and G.A. Benson, Ph.D., and Associate Professor and

Extension Economist in the Department of Agriculture at North Carolina

State University, voiced graphic concerns over the dwindling local milk

supply patterns in the Southern states. According to Dr. Benson:

Because milk production is decreasing, and because of seasonal

imbalances between production and sales, more milk must be imported

from out-of-region sources in the fall. The seasonal ``surplus'' in

the spring months has virtually disappeared. Supplementary or other

source milk is more expensive than locally produced milk because of

give-up charges, transportation costs, and differences in

classification in the originating and receiving orders. These

statistics are not collected on a regular basis or published, but a

reliable source in one of the regional cooperatives informed me that

last year they imported an average of 8.5% of the total milk they

needed to meet customer needs as supplementary milk at an average

cost of $1.92 per 100 lb. above the cost of producer milk in the

federal order. * * * On Average, this supplementary milk [reported

by another cooperative] cost $2.58 per 100 lb. more than

[[Page 23050]]

local milk. It came from a variety of sources and the added costs

ranged from a low of $1.52 per 100 lb. to a high of $4.15 per 100

lb.\102\

\102\ Dr. G.A. Benson, 327/97 AC at 2.

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The comment indicated that dairy cooperatives were currently

absorbing the cost as a loss rather than passing it on to customers,

but that this is an unsustainable market pattern.\103\

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

\103\ Gillmeister's analysis at 6-7 (sic) also indicates that

southern retail costs are not reflecting these market conditions.

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

The Commission is concerned that if the continued stress on the

milkshed for the New England region continues unabated, without

Commission intervention, then the New England states will begin to

approach the increased market uncertainty currently facing the Southern

states. Accordingly, the Commission bases its determination of the

present need for Compact Over-order Price Regulation on the current

experience on the southern states. The Commission concludes the Compact

was designed precisely to avoid such a market pattern as currently

experience by the southeast, and to permit the New England region to

test the efficacy of the over-order price mechanism as a device for

curtailing these very problems.

4. Summary Analysis

The Commission has analyzed the data and the comments submitted on

the question of the impact of Compact Over-order Price regulation on

retail prices and concluded the consumer component of the ``public

interest'' will be served in the manner contemplated by the finding

under this section. The Commission concludes that alleviating the

stress on the milkshed will itself have a stabilizing impact on retail

prices, if not result in outright reduction.

The Commission further determines that stabilization of the

wholesale price will likely result in stabilized, and reduced, consumer

prices. The Commission here notes, in summary, that an established

price of $16.94 for July-December of 1997, in combination with the

federal, Market Order #1 announced prices for January through May,

1997, would yield an average Class I (Zone 1) price for these 11 months

of 1997 in the amount of $16.15.\104\ This compares with the 1996

average price of $16.86.\105\

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\104\ Prices announced for Market Order 1, Zone 1 prices:

January--$14.85; February--$14.58; March--$15.18; April--$15.70;

May--$15.73.

\105\ Wellington, Appendix to 12/19/96 HT Testimony, Table 1.

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By contrast, as expressed by Gillmeister, there would be ``a

considerable cost to consumers if nothing is done to assist farmers in

New England.'' \106\

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\106\ Gillmeister comment, 3/31/97 at 8.

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M. Issue: The Potential Impact of a Flat Combined Regulated Federal

Order and Compact Over-Order Price on the School Lunch Program

Consistent with the need to protect the interests of consumers, the

Commission sought comment on the impact, if any, of a flat, combined,

federal Market Order price and Compact Over-order Price Regulation on

the fluid milk procurement process in the context of the school lunch

(and breakfast) programs. The comment received, while limited, does

provide the Commission with an adequate basis to make an informed

decision on this question.

Senator Jeffords submitted an analysis by the United States

Department of Agriculture indicating total annual consumption of fluid

milk by school districts amounted to 12,798,000 gallons.\107\ This

amounts to 148,456,800 pounds of milk, or approximately 5.9 percent of

all fluid milk consumed in the region.

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\107\ RC 4/9/97.

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The comment also contained a discussion of a study by the General

Accounting Office that described a comprehensive, 1980s Justice

Department investigation into bid rigging associated with this market.

The study describes how the school lunch program is designed to operate

through a competitive bidding process, by which individual districts

solicit bids for the supply of their milk program demands.

This description is, in effect, one of a competitive marketplace,

despite the involvement of the government subsidization. The contracts

between the districts and the suppliers result from a competitive

bidding process, with price levels a function of market forces of

supply and demand. The Compact Commission thereby concludes that the

impact of Compact Over-order Price Regulation on the school lunch and

breakfast programs can be understood as consistent with the impact of

regulation on the larger, overall, retail market.

As discussed below, such analysis is distinctly different from the

analysis of the potential impact of regulation on the Women, Infants

and Children Special Supplemental Nutrition Program of the United

States Child Nutrition Act of 1966, which is a capped reimbursement

program.

N. Issue: The Potential Impact of a Flat, Combined, Regulated Federal

Order and Compact Over-Order Price on the Women, Infants and Children

Special Supplemental Nutrition Program of the United States Child

Nutrition Act of 1966

Section 10 of the Compact sets forth a nonexhaustive list of issues

that the Commission may, in its discretion, address in a Compact over-

order price regulation. Subsection 10 therein provides that a price

regulation may contain ``[p]rovisions for reimbursement to participants

of the Women, Infants and Children Special Supplemental Food Program of

the United States Child Nutrition Act of 1966.'' (WIC Program).

The Commission has been most concerned from the outset of its

regulatory process with ensuring that this program is not adversely

affected. Accordingly, the Commission sought, and received, testimony

and both individual and joint written comments from each of the state

WIC directors addressing the potential consequences of an over-order

price regulation on the administration of the WIC Program.

The Commission is particularly impressed with the expertise and

knowledge of these witnesses regarding the administration of the

program. In light of the absence of any comments opposing the proposals

set forth in the joint WIC directors' comments, the Commission hereby

adopts that written statement, set forth in its entirety below.

About the WIC Program

The Special Supplemental Nutrition Program for Women, Infants and

Children (WIC) is a unique health and nutrition program serving women

and children with--or at risk of developing--nutrition-related health

problems. WIC provides access to healthcare, free nutritious food, and

nutrition information to help keep low to moderate income pregnant

women, infants and children under five healthy and strong.

WIC provides a monthly `prescription' for nutritious foods tailored

to supplement the individual dietary needs of each participant. Foods

include milk, cheese, eggs, cereal, fruit juice and peanut butter.

Included foods are specifically chosen to provide high levels of

protein, iron, calcium, and Vitamins A and C--nutrients that have been

scientifically shown to be lacking or needed in extra amounts in the

diets of the WIC-eligible population. These five nutrients--plus

calories and other essential nutrients provided by the WIC food

prescription--are critical for good health, during periods of growth

and

[[Page 23051]]

development. Milk and other dairy products play a large and important

role in every participant's food package. WIC also distributes coupons

for fresh produce--redeemable at local farmers' markets--in conjunction

with State Departments of Agriculture.

WIC is a prevention program designed to influence lifetime

nutrition and health behaviors. Ongoing nutrition education--the

centerpeice of WIC--is designed to ensure that program participants

continue to make healthy choices at the grocery store even when they

are no longer eligible.

WIC Works

WIC is widely acknowledged to be effective in the prevention of

immediate health problems and in the improvement of long-term health

outcomes. More than 70 evaluation studies have demonstrated the

effectiveness of WIC and documented medical, health and nutrition

successes for women, infants, and children:

Women participating in the WIC Program have improved

diets, received prenatal care earlier and have improved pregnancy

outcomes

Infants born to WIC mothers have better birth weights,

larger head size, and are less likely to be premature

WIC infants and children consume more iron, vitamin C and

other nutrients, resulting in improved growth and nutritional status

Children enrolled in WIC are more likely to have regular

medical care and immunizations, and demonstrate better cognitive

performance

WIC families buy more nutritious foods than non-WIC

families.

And WIC saves money! Studies have also shown that WIC is cost

effective. Every WIC dollar spent on pregnant women produces $1.92 to

$4.21 in Medicaid savings for newborns and their mothers.

How WIC Works

The WIC Program is a Federally funded program carried out according

to provisions of the Federal Child Nutrition Act. The Program is funded

through the Food and Consumer Service of the United States Department

of Agriculture (USDA).

The Program is administered on the local level by State WIC

Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode

Island, the Vermont State Departments of Public Health (the States).

State funds are also provided in Massachusetts. Participants are issued

WIC checks or vouchers at local agencies for WIC authorized foods. The

checks or vouchers--which do not have a predetermined value--are

redeemed at authorized retail stores at current store prices in

accordance with posted prices. The checks are processed through the

banking system for reimbursement, except in New Hampshire where

vouchers are paid through a state accounting system. Prepayment edits

are performed on each check to ensure that specific food purchasing,

pricing and payment requirements are met.

The average number of women and children provided WIC benefits and

services in August, 1996 in the New England States was 212,760--

individual State WIC participation was: Connecticut 47,673,

Massachusetts 99,643; Maine 20,243; New Hampshire 14,700; Rhode Island

17,360; and Vermont 13,141 (Final August, 1997 FSC 298 Reports). These

numbers do not include infants also served by the WIC Program.

WIC is not an entitlement program. As such, the number of

participants that WIC is able to serve at any time is dependent upon

availability of funds from Federal and State sources, and the costs of

WIC food items. The national appropriation for WIC is capped by

Congress. The amount of USDA funding each State received is determined

through complex formulae taking into account such factors as the number

of people served and the funding level of the previous year. The grant

determines the number of people who can be serviced--not the number of

people in need.

Since the amount of funds is fixed, any increase in the price of

WIC foods has the effect of reducing the number of women and children

the available grant dollars can serve. USDA estimated that there are

9.4 million women, infants, and children in the US who meet WIC's

income eligibility guidelines (185% of the Federal poverty level.) The

national WIC fiscal year 1997 Federal appropriation is approximately $4

billion. This sum would serve only about 5.5 million at full retail

prices, about 60% of the eligible persons.

All the States have instituted measures to stretch food funds to

the maximum, including restrictions on container size, brands and

product price, requiring least expensive brands, competitive store

selection procedures, and manufacturers' rebates on infant formula and

infant cereal. Nationally, these measures have brought over $1 billion

in savings, which are then used to provide services to an additional

1.9 million needy mothers and children. In New England, over 75,000

women and children receive WIC services as a direct result of these

cost savings measures, the most significant of which are the result of

cooperative projects of State WIC directors working together on an

interstate basis.

Still, more than 20% of eligible women and children remain

unserved. WIC's current funding is estimated to be $100 million short

for this year, with several States reducing caseloads. Funding

prospects for next year are not any better, and State WIC programs in

New England are not eligible to receive funding to offset the impact of

an Over-Order Price Regulation.

As such, it is imperative that WIC's funds be held harmless from

adverse impact due to a Regulation.

The WIC Program and the Milk Over-Order Price Regulation

The WIC Program recognizes the important role that farms and

farmers play in New England, including ensuring an ongoing supply of

fresh milk at competitive prices, keeping important industry--and

jobs--in our area, and providing open space that increases quality of

life for all New England residents. The WIC Program also understands

the need for dairy farmers' relief.

WIC is a major purchaser of locally produced dairy products in the

New England region. Because, however, WIC recognizes the importance of

dairy products at critical times of child development, and therefore,

must continue its milk purchases, the Program must be concerned with

the fact that food cost increases have a direct, inverse effect on the

number of participants WIC is able to serve. An increase in milk prices

is of particular concern because of the large quantity of milk WIC

purchases each month.

Milk purchases are some 35% of WIC food dollars spent by

participants. The number of quarts of Class 1 fluid milk purchased by

WIC participants in New England in August 1996 was 3,779,015, which

represents approximately 3.7% of the total amount sold by New England

producers in the Region. WIC Class 1 fluid milk purchases in quarts by

State were: Connecticut 1,100,000; Massachusetts, 1,481,163; Maine

457,852; New Hampshire 230,000; Rhode Island 300,000; and Vermont

210,000.

Given current WIC participation levels, a 1 cents per quart

wholesale price increase in Class 1 Fluid milk reflected at the retail

level would translate into an increase in monthly WIC program

expenditures of $37,790 for New England as a whole. This increase would

necessitate a decrease in monthly program funded participation of

1,260. A 5 cents per quart milk retail price increase would result in

an increase in monthly

[[Page 23052]]

WIC expenditures of $189,950 and a participation decrease of 6,302.

In order to maintain services to eligible persons, without

compromising the nutritional health effectiveness of its food benefits

if food costs rise, WIC managers must achieve offsets to increased food

benefit expenditures and use those offsets to serve a significant

portion of the eligible women and children in need. Further, if the

States in New England must reduce or limit participation levels due to

higher Class 1 fluid milk costs, there will be negative impact on

Federal WIC funding to the New England Region--and on the amount of

milk purchased.

As important, low income women and children who WIC is not able to

serve because of increased food costs will not receive the essential

medical, health and nutritional benefits of WIC participation. It is

critical, then, that the intended benefits to the regional economy and

the continuation of dairy farming in New England not accrue at the cost

of a significant risk to maternal and child health stemming from

Regulation-related costs to WIC.

Retail Price Impact of An Over-Order

The Northeast Interstate Dairy Compact enables participating States

collectively to regulate the New England farm price for Class 1 fluid

milk, thereby enhancing and stabilizing dairy farmer income. This

Regulation may have the effect of increasing the price paid for Class 1

fluid milk by WIC participants at retail stores, if the regulated farm

price increase translates directly into an increase at the retail

level. Other goals are to stabilize processor and retailer costs and

consumer prices.

Concomitantly, the findings of Hansen et al \108\ with regard to

the variability of milk farm prices and asymmetric price transmission

are the basis for the theory that an Over-Order Price Regulation of

Class 1 fluid milk which brings about stable farm prices for Class 1

fluid milk will result in price stability--and potential price

decreased--in Class 1 milk at the retail level for consumers over a

period of time. Testing this concept, presented by US Senator Patrick

Leahy of Vermont in public comment before the Northeast Dairy Compact

Commission, would appear viable with regard to the impact of a

Regulation on consumer milk prices.

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

\108\ Hahn et al, ``Determinants of the Farm-to Retail Milk

Price Spread'', Agriculture Information Bulletin #693, March 1994.

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

Demonstration Period and Continuing Assessment of Impact

The New England State WIC Programs understand that the Compact is

considering an Over-Order Price Regulation on Class 1 fluid milk for a

specific period of time. The State directors believe it appropriate

that any initial Regulation be in effect for a limited period, such as

six months. A potential outcome of such a demonstration could provide

evidence which supports that milk farm price stability due to a

Regulation will result in price stability, and perhaps decreases and

related savings, on Class 1 fluid milk purchases by consumers--

including WIC participants--over time.

To measure and document the impact of a Regulation, the Commission

will need to develop systems and methodologies to gather, track and

analyze Class 1 fluid milk retail price data in order to accurately

assess and evaluate any Regulation-related adverse or beneficial impact

on costs to consumers and WIC, and to make related adjustments to

assure that the public interest is served and consumers and the WIC

Program and its participants are protected. Such an analytical

framework should include information which is appropriate to milk

purchasing and pricing at both the New England Regional and individual

State levels--including each State's WIC programs--comprising

representative samples of market areas and retail store types,

proportion of sales by package size (quarts, half falls and gallons),

and the degrees to which retail price fluctuations differ for package

sizes in relation to each other, since data reflect WIC operations and

purchasing patterns in each State. WIC participants often purchase 2

half gallon containers, and the majority do not have ready access to

supermarkets, especially for frequent purchase of a perishable product

such as milk.

As important, analysis should include development of a baseline by

which changes over time will be measured, as well as evaluation of the

relationship between changes in the Regulation and Class 1 fluid milk

prices at retail levels over time and the cost impact to WIC. WIC does

not specify the fat content of milk purchased. Tracking and measuring

product differentials based on fat content; therefore, it is not

necessary to any WIC cost impact methodology.

Post Demonstration Reimbursement System

Given such analysis and evaluation and sufficient evidence,

Commission reimbursement to WIC could be then based upon the Over-Order

Price Regulation and--specifically, on the amount of any portion of the

retail cost for Class 1 fluid milk to WIC attributable to the

Regulation which would encompass and respond to individual state WIC

programs.

Demonstration Period Reimbursement System

WIC recognized, however, that the theory and data which may justify

the adoption of a demonstration period Regulation does not provide

demonstrated, proven assurance that there would be no cost increase to

WIC on its Class 1 fluid milk purchases. Notwithstanding any public

interest or other justification for a Regulation, in the absence of

such current evidence that a Regulation would be either cost neutral or

beneficial to WIC's present year funding, the Commission should provide

a way to protect and hold harmless the WIC Program--and its

participants--in the New England States from potential increases in the

Class 1 fluid milk retail price during a period of a demonstration

Over-Order Price Regulation, for at least the period of any

demonstration Regulation. It is clearly a part of the public interest

under any Regulation to protect WIC's limited funds and the full number

of women and children WIC would otherwise serve. WIC cannot support a

Regulation which would leave women's and children's health and

nutritional status at risk because appropriated WIC funds were diverted

to pay higher milk prices, rather than remaining with the WIC Program

to provide benefits to participants.

As such, the State WIC Programs in New England propose a method by

which the WIC Program will be held harmless from any impact related to

a demonstration of a Compact Over-Order Price Regulation for Class 1

fluid milk. The Commission would reimburse each respective State WIC

Program. The amount of reimbursement would be based on (1) the

quantities of milk purchased with WIC checks and (2) the amount of any

Compact Over-Order Price Regulation.

This would allow the Commission to implement a Compact

demonstration Regulation, providing essential relief to dairy farmers,

and WIC could continue to serve the maximum number of participants in

each State allowed by the grants during an Over-Order demonstration.

This would also allow the Commission a period of time to develop a more

finely attuned analysis of the impact of the Regulation, and the

develop methods to most accurately

[[Page 23053]]

ascertain any cost to WIC and the most appropriate reimbursement

levels.

The principles of the interim mechanism proposed by the State

directors are:

1. The Commission should establish a Reserve Account, to assure

that funds are on hand for timely reimbursement by the Commission to

the States. This account will be funded from the Compact over-order

price regulation based on the recent percentage of total milk sold in

New England purchased by WIC participants.

2. Any Commission Over-Order Price Regulation in a given month will

result in a cent for cent reimbursement for Class 1 fluid milk paid for

by each State WIC Program in that month. The amount of reimbursement

will be based on the quantities of milk actually paid for by each WIC

state. Funds in the Reserve Account will only be drawn by individual

States in proportion to the Over-Order Regulation. Unused funds would

return to the Commission.

3. Each State WIC Program will invoice the Commission on a monthly

basis for reimbursement due. When the refund amounts are small,

individual States may elect to bill up to 3 months in one invoice to

avoid unnecessary administrative costs for both parties.

Formal Agreement

Implementation will take place under the terms and conditions of a

formal agreement between the Commission and the States, entered into by

the State WIC Programs acting as a single entity. Such an agreement

must contain the above provisions for interim reimbursement

determination and procedures, continuing assessment of impact, how the

parties will change to any post demonstration reimbursement system,

conditions for mutual agreement for modifications to the agreement,

term of the agreement and conditions for mutual or either party

termination prior to expiration of the agreement.

The above proposal by the State WIC Programs in New England and any

subsequent agreement are subject to approval by the Food and Consumer

Service of the USDA. The State WIC Programs will collaborate with the

Compact Commission and USDA Food and Consumer Service to develop and

implement agreement provisions and operating procedures for any

reimbursement system which meet the requirements of Compact legislation

and Federal WIC guidance, rules and regulations.

Public Interest Finding--Summary Analysis

In view of this comprehensive marketwide analysis, the Compact

Commission concludes that Compact Over-order Price Regulation in the

amount of $16.94, for six months' duration, will ensure the ``public

interest'' is served in the manner contemplated by the finding analysis

under this section. The stated amount represents a limited market

adjustment that accounts for its potential impact on all levels of the

market, from farm to retail.

As noted throughout the analysis under this and the previous

finding section, the Compact Commission has accounted for a number of

potential market impacts in fashioning this initial, limited

regulation. Most particularly, the Commission is concerned about the

potential for market dysfunction in the wholesale market, and with

regard to unanticipated impacts on consumer prices.

The Commission has concluded that the regulation should not

adversely affect the wholesale market and should, indeed, have a

positive impact on retail prices. Yet the Commission has purposefully

limited the duration of the initial regulation to ensure against

unanticipated consequences. As a final safeguard against unanticipated,

adverse consequences, the Commission has acted to ``hold harmless'' the

WIC program, despite its conclusion of the remoteness of such

unanticipated consequences occurring.

The Compact Commission concludes further that the limited duration

of this initial regulation ensures that its impact across markets can

be carefully monitored and evaluated from the outset and then

reconsidered as soon as a record has been established. Accordingly, the

Commission will attempt specifically to monitor and assess the pattern

of raw product supplies from New York and New England farms and the

movement of packaged milk into the market from plants outside the

region, as well as the impact of price regulation on retail prices,

including the school lunch program, and the WIC program.\109\

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\109\ In reply comment, John Ghiorzi, Regional Director,

supplemental Food Programs, Northeast Region, USDA, suggested that

the demonstrational nature of the initial regulation would be better

served if the initial period were eight or twelve months instead of

six months. The Commission acknowledges this point. The Commission

has determined still that a useful empirical record can be developed

in six months', and that the relative efficacy of this record must

be considered along with the other factors at issue in determining

the proper duration of the initial regulation. The Commission has

accordingly settled upon six months as the proper length of time.

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III. Finding

Whether the major provisions of the order, other than those fixing

minimum milk prices, are in the public interest and are reasonably

designed to achieve the purposes of the order.

The Compact Commission's responsibility to consider the public

interest with respect to the non-price aspects of regulation are

evident in two areas: First, as required by Compact Article IV, Section

9(f), the Commission has acted to insure that its regulation does not

create an incentive for dairy farmers to produce additional, surplus

supplies of milk, and second, the Commission's regulation is uniform

and equitable and does not unduly distort traditional markets and

marketing channels.

1. Surplus Production

Compact Requirement

Compact Section 9(f) provides that ``when establishing a Compact

over-order price, the Commission shall take such action as necessary

and feasible to ensure that the over-order price does not create an

incentive for producers to generate additional supplies of milk.''

Compact, Article IV, Sec. 9(f).

Accordingly, the Compact Commission sought comment on:

The appropriate, necessary and feasible, action to take, as

required by the Compact, to ensure that Compact Over-order Price

Regulation does not result in additional supplies of milk.\110\

\110\ 62 CFR 12252.

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The Commission concludes that specific action is not necessary at

the present time in light of the limited duration of the price

regulation established by this rule. The Commission draws this

conclusion from actual and projected data of regional and national

production levels,\111\ which indicate it is most unlikely that

additional supplies of milk will be produced by New England as a

region. The Commission also concludes from the testimony of farmers

about their production planning decisions that it is unlikely

individual farmers will make decisions to increase production based

upon imposition of this price regulation.

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\111\ See discussion, infra, of CCC purchase requirement.

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The record contains abundant evidence demonstrating that farmers

plan their activities based on the anticipated long-run rather than

short-range changes in market structure. As cited previously, one dairy

economist

[[Page 23054]]

testified that price fluctuations and market instability ``makes it

very difficult for farmers to effectively plan and make the type of

investment necessary to position themselves for the future.'' \112\ Jim

Jenks, a dairy farmer from Vermont, echoed these sentiments. He

testified, in essence, that the instabilities in the prices and in the

market structure made such an investment too risky of a proposition to

pursue. ``[I]f we're going to make a good decision with respect to

putting my family's equity on the line, we need to know something about

the stability of our markets and our future.'' \113\

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\112\ Smith, 12/17/96 HT at 38.

\113\ Jenks, 12/17/96 HT at 153.

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Similar sentiments were expressed by Charlie Telly, a dairy farmer

from Massachusetts. ``It is difficult for me to plan out--to

financially plan out my future three, five or ten years in advance

because of the uncertainty I face each month with the ever changing

milk price.'' \114\

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\114\ Telly, 12/19/96 HT at 123.

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Combined with the statistical data of the lack of probability of

region-wide production increases, this individual testimony leads the

Commission to conclude that a price regulation of limited duration

likely would not affect production behavior within the meaning of

Section 9(f).\115\

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\115\ The rule's intended benefit regarding the maintenance and

stabilization of the milkshed relates to promoting the viability of

farming units rather than the promotion of increased production. It

is expected that the rule will promote this benefit, despite its

limited duration, by serving as a basis for existing producers to

remain in production.

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Requirement of Enabling Legislation

Pub. L. 104-127(5) states that:

[b]fore the end of each fiscal year that a Compact price

regulation is in e

This text is long and has been trimmed here. Open the source document for the complete record.