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

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1005, 1007, 1011, and 1046

[Docket No. AO-388-A9, et al.; DA-96-08]

Milk in the Carolina and Certain Other Marketing Areas; Partial

Recommended Decision on Proposed Amendments to Marketing Agreements and

Orders

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7 CFR part Marketing area Docket No.

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1005.................. Carolina................ AO-388-A9

1007.................. Southeast............... AO-366-A38

1011.................. Tennessee Valley........ AO-251-A40

1046.................. Louisville-Lexington- AO-123-A67

Evansville.

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AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This partial recommended decision denies proposed amendments

to 4 Federal milk orders in the Southeastern United States involving

deductions from the minimum uniform price to producers and the

definition of ``producer'' specified in the orders. The decision is

based upon public hearings held May 15-16, 1996, in Charlotte, North

Carolina, and December 17-18, 1996, in Atlanta, Georgia.

DATES: Comments are due not later than August 22, 1997.

ADDRESSES: Comments (4 copies) should be filed with the Hearing Clerk,

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

Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist,

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

Building, P.O. Box 96456, Washington, DC 20090-6456, (Tel: 202/690-

1932; E-mail:[email protected]).

SUPPLEMENTARY INFORMATION: This administrative action is governed by

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

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

Order 12866.

This recommended decision denies the proposed amendments to the

order. In any event, the proposals were not intended to have a

retroactive effect. Furthermore, even if adopted, the proposed

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

policies, unless they present an irreconcilable conflict with this

rule.

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

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

exhausted before parties may file suit in court. Under section

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

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

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

accordance with the law and request a modification of the order or to

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

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

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

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

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

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

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

Small Business Consideration

Actions under the Federal milk order program are subject to the

Regulatory Flexibility Act (Pub. L. 96-354, 5 U.S.C. 601-612). This Act

seeks to ensure that, within the statutory authority of a program, the

regulatory and informational requirements are tailored to the size and

nature of small businesses. For the purpose of the Act, a dairy farm is

a small business if it has an annual gross revenue of less than

$500,000, and a dairy products manufacturer is a ``small business'' if

it has fewer than 500 employees. For the purpose of determining which

dairy farms are ``small businesses,'' the $500,000 per year criterion

was used to establish a production guideline of 326,000 pounds per

month. Although this guideline does not factor in additional monies

that may be received by dairy producers, it should be an inclusive

standard for most ``small'' dairy farmers. For purposes of determining

a handler's size, if the plant is part of a larger company operating

multiple plants that collectively exceed the 500-employee limit, the

plant will be considered a large business even if the local plant has

fewer than 500 employees.

The milk of approximately 8,600 producers is pooled on the

Carolina, Southeast, Tennessee Valley and Louisville-Lexington-

Evansville milk orders. Of these producers, 95 percent produce below

the 326,000-pound production guideline and are considered to be small

businesses.

There are 43 handlers operating pool plants under the four orders.

Of these handlers, 22 have fewer than 500 employees and qualify as

small businesses.

Additionally, under the Regulatory Flexibility Act the agency

examines the impact of a proposed rule on small entities. The

Agricultural Marketing Service has determined that neither the denial,

nor the adoption, of this proposed rule involving deductions from the

minimum payments to producers will have a significant economic impact

on a substantial number of small entities under current marketing

conditions. Dairy farmers are presently receiving the minimum order

prices and should continue to do so given the current level of over-

order premiums now in effect. Similarly, neither adoption nor denial of

the proposed amendments will have any effect on handlers' costs under

the orders because handlers are voluntarily paying producer prices in

excess of the minimum prices specified in the orders. Furthermore, for

the long term, the issue of deductions from minimum payments will be

considered as part of the Federal order reform in connection with the

Federal Agriculture Improvement and Reform Act of 1996 which requires

an examination of the Federal milk order system. The concerns of small

businesses will be addressed throughout the review process.

Additionally, neither the denial, nor the adoption, of the proposal

to modify the definition of ``producer'' under the 4 orders will have a

significant economic impact on a substantial number of small entities.

Producer

[[Page 39471]]

pooling standards already exist in the 4 orders to assure an adequate

association by producers in meeting the fluid milk needs of the

markets. Also, the denial of such proposal maintains the existing

regulatory burden, and will not place any additional responsibilities

on handlers operating under the orders.

Prior documents in this proceeding:

Notice of Hearing: Issued May 1, 1996; published May 3, 1996 (61 FR

19861).

Tentative Partial Final Decision: Issued July 12, 1996; published

July 18, 1996 (61 FR 37628).

Interim Amendment of Orders: Issued August 2, 1996; published

August 9, 1996 (61 FR 41488).

Extension of Time for Filing Comments to the Tentative Decision:

Issued August 16, 1996; published August 23, 1996 (61 FR 43474).

Extension of Time for Filing Comments to the Tentative Decision:

Issued October 18, 1996; published October 25, 1996 (61 FR 55229).

Notice of Reopened Hearing: Issued November 19, 1996; published

November 25, 1996 (61 FR 59843).

Partial Final Decision: Issued May 12, 1997; published May 20, 1997

(62 FR 27525).

Preliminary Statement

A public hearing was held to consider proposed amendments to the

marketing agreements and the orders regulating the handling of milk in

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

provisions of the Agricultural Marketing Agreement Act of 1937, as

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

Part 900), in Charlotte, North Carolina, on May 15-16, 1996, and in

Atlanta, Georgia, on December 17-18, 1996. Notice of the initial

hearing was issued on May 1, 1996, and published May 3, 1996 (61 FR

19861).

An interim order amending the orders with regard to transportation

credits was issued on August 2, 1996, and published August 9, 1996 (61

FR 41488). The interim amendments became effective on August 10, 1996.

The Department reopened the hearing to hear additional evidence

regarding the transportation credit issue and also to hear a related

``producer'' definition proposal. This hearing was held on December 17-

18, 1996, in Atlanta, Georgia, following the notice of such reopened

hearing issued on November 19, 1996, and published on November 25, 1996

(61 FR 59843).

Interested parties were given until June 17, 1996, to file post-

hearing briefs regarding the deductions from the minimum price proposal

as published in the Federal Register and as modified at the hearing.

Regarding the additional proposal concerning the definition of a

``producer'' heard at the reopened hearing, interested parties were

given until February 7, 1997, to file post-hearing briefs.

Interested parties may file written exceptions to this decision

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

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

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

written submissions made pursuant to this notice will be made available

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

business hours (7 CFR 1.27(b)).

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

1. Transportation credits for supplemental bulk milk received for

Class I use.

2. Deductions from the minimum uniform price to producers.

3. Whether emergency marketing conditions in the 4 regulated

marketing areas warrant the omission of a recommended decision with

respect to Issue No. 1 and the opportunity to file written exceptions

thereto.

4. The definition of producer.

This partial recommended decision deals only with Issues 2 and 4.

Issue 1 was discussed in the tentative partial final decision issued

July 12, 1996 (61 FR 37628) and has been considered separately in a

partial final decision. Issue 3 was discussed in the tentative partial

final decision also, and is now moot.

Findings and Conclusions

The following findings and conclusions on the material issues are

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

Material Issue #2--Deductions From the Minimum Uniform Price to

Producers

A proposal by Hunter Farms and Milkco, Inc., seeks to clarify the

minimum payment to producers for Federal Milk Orders 1005, 1007, 1011,

and 1046. Under the proposal, a handler (except a cooperative acting in

its capacity as a handler pursuant to paragraph 9(b) or 9(c)) may not

reduce its obligations to producers or cooperatives by permitting

producers or cooperatives to provide services which are the

responsibility of the handler. According to the proposal, such services

include: (1) preparation of producer payroll; (2) conduct of screening

tests of tanker loads of milk required by duly constituted regulatory

authorities before milk may be transferred to the plant's holding tanks

and any other tanker load tests required to establish the quantity and

quality of milk received; and (3) any services for processing or

marketing of raw milk or marketing of packaged milk by the handler. The

proposal should be denied on the basis of this record.

The Vice President of Hunter Farms, which operates plants regulated

under Order 5 at High Point and Charlotte, North Carolina, testified

that Hunter purchases milk from Piedmont Milk Sales, Carolina-Virginia

Milk Producers Association (CVMPA), Mid-America Dairymen, Inc. (Mid-

Am), and Cooperative Milk Producers Association. The witness explained

that CVMPA and Mid-Am are cooperative associations, while Piedmont Milk

Sales is a marketing agent handling the milk of non-member producers.

The witness testified that beginning in late 1994 and through the

early fall of 1995, marketing conditions in the Southeast were so

competitive among supply organizations that handlers were able to

purchase raw milk from producers and cooperatives at Federal minimum

order prices without any over-order premiums being charged. With the

elimination of over-order premiums, he said, questions arose as to who

must pay for services associated with the receipt of milk at regulated

plants. He explained that when there were sufficient over-order

premiums, it was assumed that the premiums included payment for the

services associated with the receipt of milk at the plant. However,

from December 1994 until September 1995, he said that competing

handlers who received milk from cooperative associations at the minimum

order price did not fully compensate the cooperatives for the services

that were provided.

The witness stated that when Hunter began purchasing milk from

Piedmont at the minimum Federal order price, the market administrator

of Order 5 took the position that they must also pay for the services

that were provided by the dairy farmers marketing their milk through

Piedmont and, therefore, issued underpayment notices to Hunter for milk

received from Piedmont for the December 1994 through September 1995

period. He said the market administrator refused to examine the issue

of whether cooperative associations which provided similar services for

competing handlers also should be compensated for those services.

The witness pointed out that over-order premiums have now returned

to Order 5, so the question of what constitutes a minimum payment to

producers has become less urgent. He

[[Page 39472]]

emphasized, however, that the problem is capable of repetition since

premiums in this area could be reduced or disappear entirely.

Therefore, he said, it is important to resolve this issue before it

arises again.

The witness testified that without a change in the order, when

prices paid are at Federal order minimums, handlers purchasing milk

from non-member producers will be at a competitive disadvantage for the

purchase of raw milk vis-a-vis their competitors who purchase from

cooperatives. This will occur, he said, because the market

administrator takes the position that cooperatives can provide free

services for their customers but non-member producers serving competing

handlers cannot provide the same services without charging over-order

prices.

Noting that the sale of packaged milk is extremely competitive, the

Hunter representative testified that requiring one handler to pay more

than another simply because the handler purchases milk from non-member

producers results in immediate irreparable harm to the handler paying

more for its milk because the handler will lose milk sales. He said

that the current policy results in non-uniform prices paid by handlers

in violation of the Agricultural Marketing Agreement Act. Not only is

this result discriminatory and unfair, he said, it also leads to lower

prices for all producers, members as well as non-members, because

cooperatives tend to provide more, not fewer, services in competing for

sales with non-members. Therefore, he concluded, cooperatives also

would benefit from a clarification of the rules defining Federal

minimum order prices.

All of the orders involved in this proceeding should be amended to

resolve this issue according to the Hunter Vice-President because

Hunter and Milkco compete for raw milk procurement and sales of

packaged products with handlers from each of the 4 orders. Moreover, he

said, premiums returned to all 4 orders at the same time, which

indicates that the cooperatives treat handlers in these 4 orders

identically.

A second witness representing Hunter Farms and Milkco, Inc.,

explained the proposal of these handlers in more detail. This witness,

a consultant with a long history in Federal milk order regulation,

explained that the proposal describes 3 categories of services.

The first service described by the witness is the preparation of a

producer payroll report. He said that the orders are fairly uniform as

to the requirement for such reports, which show each producer's name

and address, the total pounds of milk received from the producer, the

average butterfat content of the milk, the price per hundredweight, the

gross amount due, the amount and nature of any deductions, and the net

amount paid.

A second service described by the witness is the testing of

incoming tanker loads of milk, as required by health regulations, to

assure the milk meets minimum quality standards. The witness reasoned

that if there is a legal requirement for this test to be performed, the

cost of the test should be borne by the plant operator. He added that

the order requires the plant operator to test and weigh the milk to

establish the pounds of milk received and the butterfat content of the

milk. The witness noted that in other parts of the country, these tests

are handled differently. In the Indiana, Eastern Ohio-Western

Pennsylvania, Southern Michigan, and Chicago Regional marketing areas,

which provide for component pricing of milk, the market administrator

has assumed the function of testing milk for butterfat and other

components, and has increased the marketing service charges to non-

member producers from 5 to 7 cents to cover these services. He

concluded that the market administrators in those areas obviously

consider these tests to be a producer responsibility.

The witness stated that there is a somewhat similar situation in

Orders 5, 7, 11, and 46 because tests conducted by the market

administrators are used to establish the amount of butterfat in milk

receipts, which is a basis for payment to the producer. He said that

the Department should address this inconsistency by determining whether

these tests are the plant operator's responsibility or a producer's

responsibility.

The third service described by the witness includes any costs

associated with processing raw milk or marketing milk in bulk or

packaged form. The addition of this specific order language, he said,

would support the historical position of the Department that the

handler is responsible for the costs associated with the processing

and/or marketing of all milk received.

The witness stressed that the thrust of this proposal is to ensure

equality in the cost of milk among regulated handlers. He said that

current administrative practice in this area requires handlers

receiving milk from non-member producers to absorb the cost of a

variety of services which are provided at no extra charge to handlers

receiving milk from cooperative associations. Thus, he concluded, these

orders are not impacting uniformly on handlers who buy milk from

cooperatives versus those handlers who buy from non-members, nor are

they being uniformly applied to producers who are members of a

cooperative versus those who are not members of a cooperative. By

clearly defining what services are the responsibility of plant

operators, regardless of the source of the milk received, this lack of

uniformity can be corrected, he said.

The General Manager of Carolina-Virginia Milk Producers Association

or CVMPA offered qualified support for the Hunter-Milkco proposal. He

said that from a philosophical point of view CVMPA would agree that if

producers provide the services specified by the proponents--plus any

additional services that are provided to a handler by a cooperative

association--handlers should be charged the costs associated with these

services. He said that, with these modifications, CVMPA could support

the proposal.

The witness stated that, to assure that cooperative members are not

allowed to pay the cost of services given to handlers, the list of

services in the Milkco-Hunter proposal should be expanded to cover

tanker washing and tagging, supplying milk to handlers on an irregular

delivery schedule, field work, disposing of surplus milk during months

when the supply is above local needs, and importing supplemental milk

for Class I use during periods of short production.

While expressing the hope that market conditions do not return to

the zero over-order prices that existed in 1994 and 1995, the CVMPA

General Manager stated that the proposal, as modified by CVMPA's

suggestions, could help decrease the likelihood that cooperative

members would have to bear the costs resulting from these

circumstances. He said CVMPA appreciated Milkco and Hunter Farm's

attempt to address these circumstances.

A spokesman for Milkco Inc. testified that Milkco, a fluid milk

processing plant located in Asheville, North Carolina regulated under

Order 5, receives milk from cooperative associations as well as

independent producers marketing their milk through Piedmont Milk Sales.

The witness testified in support of Hunter's position as it pertains to

proposal number 2 and stated that Milkco received underpayment notices

from the market administrator for the December 1994 through October

1995 period on milk received from independent dairy farmers, but did

not receive underpayment notices on milk received

[[Page 39473]]

under the same or similar conditions from cooperative associations.

Testimony was also offered by a representative of Mid-America

Dairymen, Inc. (Mid-Am) involving proposal number two. Mid-Am testified

that it was not appropriate for proposal two to be heard under the same

procedure as a hearing called to consider a proposal on marketwide

service payments. Mid-Am also objected to the narrowness of Hunter-

Milkco's proposal. Mid-Am argued that the issue of minimum payments to

producers is national in scope, and should not be limited to the 4

Southeastern orders. This issue, Mid-Am suggests, should be addressed

by the Secretary within the context of the Federal order reform as

required by the 1996 Farm Bill on a national basis. In addition, the

Mid-Am representative objected to such proposal on grounds of lack of

notice to interested parties.

The administrative law judge presiding over the hearing overruled

Mid-Am's objection to hearing proposal number 2, noting that the

Secretary had given interested parties the minimum 3-day notice

requirement specified in 7 CFR 900.4(a). He also indicated that this

proposal, unlike proposal number 1, was being considered on a non-

emergency basis and that, accordingly, interested parties had more than

adequate time to brief it, discuss it, and consider it.

Briefs

Briefs were submitted by interested parties both in support of and

in opposition to this proposal. Proponents, Hunter Farms and Milkco,

Inc., submitted a brief in support of their proposal, emphasizing the

points made on the hearing record.

Hunter and Milkco maintain that uniform applicability in the

treatment of handlers is essential, and any lack of uniformity is in

violation of the Agricultural Marketing Agreement Act, as amended.

Referring to an earlier proceeding, In re: Kraftco Corp., which dealt

with uniform applicability, proponents state that ``* * * all handlers

must be treated identically with respect to receipt of services on

their entire milk supply in the relevant marketing area.'' It is argued

that issuance of underpayment notices only on that milk which was

received from independent producers who contracted with a specific

marketing agency does not promote uniformity and is discriminatory.

Proponents addressed the issue of uniformity, not only among

handlers, but also among producers. Hunter and Milkco state that

independent producers may be subject to discriminatory treatment and

lose their market as handlers find it cheaper to purchase milk from

cooperatives that absorb costs which nonmembers cannot. In addition, it

is argued that cooperative associations which provide services free of

charge either believe ``* * * they were providing these services as

additional services over and above that required by the Federal order,

or they knowingly provided services to handlers which were the

responsibility of handlers for free * * *''. The decision to perform

such services at no charge must be taken into consideration when

determining whose responsibility they are.

Hunter and Milkco's brief also addresses the objections made by

Mid-Am to this proposal. The handlers maintain that Mid-Am's objection

to their proposal based on grounds of lack of notice is unfounded

because the notice given was adequate. In addition, Hunter and Milkco

argue that the suggestion by Mid-Am that this proposal be considered on

a national basis is unjustified. Proponents maintain that the problem

which has prompted this proposal is specific to the Federal order under

consideration, and no evidence was presented to show that this problem

exists in other regions of the United States.

Fleming Companies, Inc., also filed a brief in support of this

proposal. Fleming states that ``* * * To the extent such services

primarily benefit producers, it is appropriate that producers be

authorized to contract for such services, and to allow a deduction for

the reasonable value of such services.''

In addition, Fleming writes that as a buyer of milk from both

independent producers as well as cooperative associations, it is

concerned that without the clarification offered by the proposal,

equity among member producers and non-member producers may be

jeopardized. Fleming argues that price uniformity may not be maintained

if cooperative associations are able to assume the cost of producer-

oriented services, but handlers receiving independent milk are not

permitted to make a deduction for these services even if authorized by

the producer.

A brief filed by Mid-America Dairymen, Inc., emphasized the

cooperative's strong opposition to the proposal. Mid-Am argues that the

alleged underpayment problems, which the proponents believe will be

resolved by such proposal, are not isolated to the Carolina Federal

milk marketing order, and that such a problem could occur under any of

the other Federal milk marketing orders in a situation when no over-

order charges exist. For this reason, Mid-Am believes that this issue

should be considered on a national basis. Mid-Am also believes that

with the resumption of over-order pricing within the Carolina order,

there is no urgent need to adopt the proposed amendments.

In addressing which services are the responsibility of handlers as

opposed to those of producers, Mid-Am states that it is clear that the

costs for butterfat testing are borne by all producers, and the costs

of testing milk in tankers for antibiotics are borne by all handlers

regardless of their source of supply. Mid-Am argues that no confusion

exists as to who is responsible for these tests and, therefore, they

should not be included in the proposed amendments.

Mid-Am concludes its brief by reiterating its request that this

issue be remanded to the Secretary for further consideration on a

national basis. It suggests that this issue be evaluated under the

current review of the Federal Milk Marketing Order system as required

by the 1996 Farm Bill.

The Kroger Co. states in its brief that proposal 2 is worthy of

study and should be considered by the Secretary in the context of all

Federal milk marketing orders. According to Kroger, any decision made

on this issue should pertain to all Federal milk marketing orders. Like

Mid-Am, Kroger suggests addressing this proposal within the context of

the review of the Federal Milk Order Program as mandated by the 1996

Farm Bill.

Conclusion

Federal orders enforce the payment of minimum prices for milk to

producers by handlers. Under orders, payment for milk received from

producers may not be less than the uniform price as announced each

month by the market administrator, except to producers who receive

payment from their cooperative association. A cooperative association

under the authorizing legislation may blend the net proceeds of its

sales of milk for payment to its member producers. The enforcement of

minimum prices for milk ensures that each producer receives a uniform

proportion of the returns from higher valued fluid (Class I) milk sales

as well as the lower returns from milk used in lower class uses.

Payments to a producer by a handler, however, can be reduced to

reflect ``proper deductions authorized in writing by such producer.''

Historically, such deductions from minimum milk prices of only two

basic types have been permitted. The two types of deductions permitted

are (1) payments that are

[[Page 39474]]

made by a handler on behalf of the producer to creditors of the

producer, and (2) payments that are obligations of the producer in the

production of milk and the transportation costs for delivery to the

handler's plant. Such creditors for goods and services have included

banks, other lenders, feed companies, veterinarians, machinery dealers,

etc. Examples of payments associated with the production of milk and

the delivery to the handler's plant would include feed, supplies,

equipment and hauling. Handlers are not required to make payments to

creditors on behalf of producers but are permitted to do so if the

deductions are proper and authorized. Such permission recognizes that

handlers frequently make payments to producer's creditors as a service

to the producers. The term ``proper'' is included to prevent

unwarranted deductions from minimum prices for milk.

The authorization by a producer of a certain deduction may not be

proper and thus disallowed by the market administrator. Producers

cannot give up their rights to receive the uniform price by a deduction

that is not of the two types described above.

Additionally, under the 4 orders handlers are required to deduct 5

to 7 cents per hundredweight from payment to independent producers for

marketwide services which is paid to the market administrator. This

marketwide service fee is used to provide market information and to

check the accuracy of the testing and weighing of milk for producers

who are not receiving such services from a cooperative association.

The record of this hearing clearly points to a conceptual

difference among market participants concerning what constitutes

minimum prices to producers. To a large extent, this difference results

from changing market conditions, new technologies, and order amendments

reflecting these changes. The end result is that interpretations under

various orders differ concerning the responsibilities of plant

operators and the responsibilities of producers or their cooperative

associations.

Proponents would have the Secretary resolve this issue by

delineating those services that are the responsibility of plant

operators and those services that belong in the domain of producers.

Furthermore, proponents apparently would have the Secretary determine a

rate for each service so that if a producer or cooperative association

provided the service for a plant operator, that plant operator could

simply compensate the producer/cooperative according to the rate set

forth in the order.

One of the obvious problems in dealing with a proposal of this

nature is to determine which services are, in fact, the responsibility

of the handler and which are the responsibility of the cooperative

association supplying milk to that handler. The record shows that the

proponent handlers--Milkco and Hunter-- clearly have a different

conception of their responsibility than does CVMPA, which agrees with

them in principle but differs with them in specifics. While the

proponents consider handler responsibilities to be payroll costs,

screening of incoming milk, and all costs associated with marketing

milk once it enters the plant, CVMPA maintains that those

responsibilities should include tanker washing and tagging, ordering

milk on an irregular delivery schedule, field work that is provided by

the cooperative association, disposing of surplus milk during months

when the supply is above local needs, and importing supplemental milk

for Class I use during periods of short production.

It is apparent that there is a significant difference of opinion

concerning the services for which handlers should be responsible.

Although evidence was not presented concerning the rates that should be

associated with each of these services, there is no doubt that there

would be clear differences of opinion in that area as well.

It would be particularly difficult to establish uniform rates for

the services suggested by CVMPA. For example, there was no indication

of the cost of providing milk to a handler 4 times per week as opposed

to 3 times per week. Similarly, there was no testimony or data

concerning the cost of handling a market's surplus milk.

The single issue prompting the Milkco-Hunter proposal was the

alleged inequity between handlers buying cooperative association milk

at minimum order prices--but with services provided by the

cooperative--and handlers buying milk from non-members at minimum order

prices but without the services that their competitors received with

their cooperative-supplied milk.

At the hearing, proponent's expert witness said that producers

should have the right to market their milk through a marketing agent if

they so choose. Setting aside the question of the legality of marketing

agents under the Sherman Antitrust Act, if a producer contracts with an

agent to market his/her milk, some means must be devised to pay that

agent for the services provided. This raises the question of whether

deductions to the marketing agent authorized in writing by the producer

are ``proper'' deductions under the order.

Assuming there is no legal obstacle to the use of a marketing

agent, the marketing agent presumably would be the party responsible

for selling the producer's milk to a handler and might collect the

payment from the handler on behalf of the producer, if the producer has

provided this authorization to the marketing agent. In such a case,

another question that must be clarified is whether a handler's payment

of the minimum order price to a producer's marketing agent should be

deemed to be a payment of the minimum order price to the producer, just

as it is in the case of a cooperative association.

At the hearing, proponent's expert witness was questioned about the

desirability of simply treating all deductions authorized in writing by

a producer as ``proper'' deductions. The witness indicated that there

have been cases in the past where producers have been coerced--for fear

of losing their market--into authorizing deductions that were not

proper deductions, as determined by the market administrator. To the

extent that this exists, the witness said, the Secretary would not be

enforcing minimum uniform prices to handlers.

Provisions dealing with the minimum payment that handlers are

required to pay producers are at the core of each milk order. They

should be based upon the same policy considerations and should not

differ from one order to another. Therefore, we concur with the

suggestions made by The Kroger Company and Mid-America Dairymen, Inc.,

to consider this important issue as part of the Federal order reform.

The record of this hearing demonstrates a clear disagreement among

market participants concerning the division of services between

producers and handlers. In view of this disagreement, the importance of

this issue to the program, the current review of all Federal order

provisions in connection with the 1996 Farm Bill, and the lack of a

present problem in these four orders, the proposal of Hunter/Milkco

should be denied. However, the terms of the proposal, the briefs

dealing with the proposal, the relevant transcript and exhibits from

the hearing, and this recommended decision should be considered in

conjunction with the reform of Federal milk orders mandated by the

Federal Agriculture Improvement and Reform Act of 1996.

The 1996 Act requires the Secretary of Agriculture to merge the

existing 33 Federal milk orders (currently 32 orders) into no more than

14, and no less than 10, milk orders by April 1,

[[Page 39475]]

1999. As part of this process, the Department is undertaking a complete

review of all of the provisions in Federal milk orders in an effort to

determine which provisions would best meet the needs of the

consolidated orders in the next century. This review provides an ideal

opportunity to study this important issue. It will incorporate the

views and experiences of many different market administrator offices

and it will solicit the views of interested parties to comment on the

provisions that are recommended for the newly consolidated orders.

As pointed out by Hunter and Milkco in their brief, the

underpayment problem which they experienced has been rendered moot with

the return of over-order premiums. Although these premiums could again

disappear, bringing the uniform pricing issue to the fore once again,

this is not likely to happen in the near future. Nevertheless, if this

should happen, proponents could request relief through other means

pending final resolution of this matter.

Material Issue #4--Definition of Producer

A proposal to modify the definition of producer for Federal Milk

Orders 1005, 1007, 1011, and 1046 should also be denied on the basis of

the testimony and evidence received at the reopened hearing.

The spokesman for Mid-America Dairymen, Inc. (Mid-Am), Carolina-

Virginia Milk Producers Association (CVMPA), and Maryland-Virginia Milk

Producers Association, proponents of the proposal to modify the current

producer definition, testified that the elimination of the base-excess

plans for each of the orders will allow for the pooling of milk not

historically associated with these markets. Mid-AM's proposal to

further define producer qualification, he stated, aims at minimizing

this exposure, which would be detrimental to Southeastern dairy

farmers.

The spokesman offered testimony explaining that base-excess plans

(included in each of the 4 orders at the time of the reopened hearing,

but terminated from each order effective January 1, 1997, as a result

of the expiration of legislative authority to include such plans in

Federal milk orders) have substantially removed the incentive for a

dairy farmer who was associated with another market during the base-

building months to become a producer under one of these 4 orders during

the base-paying months. He expressed concern that with the elimination

of such plans, no provisions would exist to prevent a dairy farmer from

pooling any milk diverted or delivered within limits to pool plants

under the orders during the former base-paying months.

After explaining the current provisions regarding the definition of

producer, the spokesman testified that Mid-Am's proposal is almost

identical to Order 46's current provision applicable to producers

supplying a country plant, which excludes a person with respect to any

milk produced by him or her that is received or diverted from a country

plant in any month of March through August, unless at least 60 days'

production from such farm was producer milk during the preceding

September through February period.

The witness stated that the proposed provisions for the 4 orders

will exclude from the producer definition, during the flush production

months of February through May, any dairy farmer who delivered more

than 40 percent of his or her milk to plants as other than ``producer

milk'' during the months of August through November. The proposed

provisions, according to the witness, are designed to restrict those

producers not normally associated with such orders from pooling their

milk during the flush production months when it is not needed to supply

fluid needs if they have not pooled such milk during the prior short

months when supplies were needed.

In addition, the spokesman stated that for the purpose of

determining the percentage of a producer's milk that was pooled during

the prior August through November period, deliveries to plants as

producer milk under the 4 orders should be considered deliveries under

the applicable order. He testified that this proviso is necessary to

accommodate: (1) the historical shifting of producers between the 4

orders; (2) the shifting of pool distributing plants; and (3) the

shifting of producer milk due to the opening and closing of pool plants

in the 4-order area.

The witness also testified that the proposal, as found in the

notice of hearing, should be modified to include a new subparagraph in

Section 44 of the orders which is necessary to define the

classification of the milk received. Also, the witness added that there

is a revision to Section 60 involving the pricing of the milk as

classified in Section 44. This addition to order language, according to

the spokesman, would require the receiving handler to pay into the pool

the difference between the Class I price and the Class III price.

When asked about administrative costs associated with the relevant

proposal, the witness contended that there should be no noticeable

difference between costs associated with the producer qualification

proposal and costs associated with the base-excess plan. In conclusion,

Mid-Am's spokesman testified that the adoption of such proposal is

necessary to foster orderly marketing in the area and protect producer

pools of the 4 southeastern orders.

A representative of CVMPA testified that CVMPA fully supports the

producer qualification proposal to make sure that high Class I

utilization markets in the Southeast do not carry surplus from other

surrounding markets resulting in low Class I utilization rates during

the flush months of production. He maintained that the proposal

benefits producers, processors, and consumers by maintaining fluid

supplies, while encouraging the survival of local producers.

A representative from Associated Milk Producers, Inc. (AMPI),

Southern Region, a cooperative association representing over 2,500

dairy farmers in the South and Southwest, testified in opposition to

Mid-Am's proposal to modify the producer definition of the 4 orders.

The witness also maintained that such proposal is not related to the

issue of transportation credits, and should, therefore, not be included

in the reopened hearing.

According to the spokesman, the current producer pooling

requirements under Order 7 are more restrictive than the proposed

producer qualification requirements; thus, the proposal actually

constructs an additional layer of unnecessary pooling requirements. The

witness claimed that no handlers are currently abusing the order by

diverting the maximum amount allowable under the provisions of Order 7;

otherwise, he argued, such a high percentage of Class I utilization

would not be maintained.

AMPI's witness also testified that it is apparent that the

proponents intend to replace the base-excess plans in the 4 orders.

However, such an alternative is not viable, he argued, because

sufficient protection for local producers already exists. While

acknowledging the existence of such ``dairy farmers for other market''

provisions in other Federal orders, the spokesman testified that the

Southeast markets will not benefit from such a provision. If the

proposal is nevertheless adopted, he said, AMPI recommends a

modification to the proposal such that milk imported from outside the

marketing area that is received at a fully or partially regulated plant

during any month of the year must be allocated to Class I and the

handler of origin must be compensated at the receiving plant's Class I

price.

[[Page 39476]]

A second representative from AMPI also testified regarding Mid-AM's

proposal to incorporate a ``dairy farmer for other markets'' provision

in the 4 orders. She stated that administration of such a provision

would create additional costs and place a more serious burden on the

cooperative. According to the witness, additional time and resources

would be necessary to adapt AMPI's procedures to the new provision,

including greater technical and manual assistance.

A representative of Piedmont Milk Sales testified that Piedmont

supports the concept that a producer must make his milk available to

the Class I market when it is needed in the fall or short period in

order to be allowed to pool his milk in the same market during the

spring or flush months. He contended that such a limitation assures

that the producer who receives the blend price enhanced by the Class I

value in those markets has actually earned it.

A spokesman for Fleming Dairy, which operates pool distributing

plants in Nashville, Tennessee, and Baker, Louisiana, testified in

support of Mid-Am's proposal, but suggested that the producer

qualification period should be July through November, rather than

August through November.

Additionally, a representative of Barber Pure Milk Co., a pool

plant operator in Birmingham, Alabama, and Dairy Fresh Corporation, a

pool plant operator in Greensboro, Alabama, testified in support of

Mid-AM's producer qualification proposal. He suggested that any milk

which is delivered directly from the farm and is received at a pool

plant should qualify as producer milk, but any milk which is diverted

should not.

Briefs. Select Milk Producers submitted a brief in opposition to

the proposed changes in the producer definition. According to Select, a

similar proposal was introduced during the Southeast merger proceedings

and was subsequently denied due to the lack of justification for such a

provision. Select's brief indicated that the pooling standards and

diversion limitations provided in the orders give the market

administrator enough flexibility to prevent distant milk from being

associated with the 4 markets; therefore, a ``dairy farmer for other

markets'' provision is not needed in these orders.

A brief filed on behalf of AMPI argued that the ``dairy farmer for

other markets'' proposal submitted by Mid-Am and CVMPA and heard at the

reopened hearing was in violation of the rules of practice and

procedure governing the proceedings of marketing agreements and orders.

AMPI maintains that this proposal does not qualify as an issue related

to transportation credits, and therefore, should not have been

discussed at the reopened hearing. Additionally, AMPI argued that the

hearing record lacks the necessary evidence that would support adoption

of such proposal. While reiterating its opposition to the additional

work associated with implementation of the proposal as testified to at

the reopened hearing, AMPI's brief also opposed the notion that in Mid-

Am and CVMPA's proposal determination of a producer's eligibility would

not only be dependent upon the amount of milk pooled under the order in

which the producer is seeking producer status, but also upon the volume

of milk pooled by that producer for the subject months in all 4 of the

orders. According to AMPI, there is no justification or evidence which

supports the proposed ``dairy farmer for other markets'' provision.

CVMPA, one of the proponents of the producer qualification

proposal, filed a brief in support of its proposal reiterating the

arguments presented during the reopened hearing. In its brief, CVMPA

pointed out that its proposal would not create a barrier to entry into

these markets as was testified to by a representative of AMPI. CVMPA

argued that such a proposal would actually encourage milk to be pooled

when local supplies are inadequate to meet Class I needs. While

acknowledging that diversion limitations and producer touch-base

provisions currently in effect under the subject orders do provide

limited Class I utilization protection for the markets, CVMPA argued

that these limitations are insufficient to protect producers who have

pooled their milk during the fall months from being displaced by

producers entering those markets during the spring flush months in

order to take advantage of the high Class I utilization percentages

reflected in the high blend prices of these southeastern markets.

CVMPA also addressed the argument made by AMPI that the proposal

would create an additional administrative burden for both the market

administrators' offices and reporting handlers. According to CVMPA, no

additional work would be created by the proposal, and the

administration of the proposed provision would be easier than that

associated with the former base-paying plans. CVMPA also expanded the

proposal to allow a producer to qualify as a producer in the spring if

his/her farm had not delivered Grade A milk from such farm during the

previous August through November period. Furthermore, CVMPA stated that

the producer's eligibility should be based upon the proportion of Grade

A milk delivered from the farm in the previous fall in order to prevent

a producer who is converting from Grade B to Grade A or a producer who

lost his/her Grade A permit from being penalized.

A brief was also filed by Mid-Am in support of the proposal to

modify the producer definition. In addition to reiterating the

arguments testified to during the reopened hearing, Mid-Am's brief

stated that the proposed producer qualification provisions are

necessary to foster orderly marketing in the area and also to protect

the producer pools of the 4 orders. In its brief, Mid-Am also contends

that the only opposition to the proposal testified to during the

hearing was made by AMPI, which would be prevented from rotating their

producers' milk in order to receive transportation credits. Mid-Am

requests that the proposed provisions be implemented at the earliest

possible date.

Conclusion. The record of the reopened hearing does not clearly

demonstrate the need to amend the producer definition of Orders 5, 7,

11, and 46. Current safeguards exist to ensure that sufficient supplies

of milk are made available for fluid use without the unwarranted

pooling of additional supplies of milk that are not associated with

serving the fluid market.

Proponents of this proposal believe that the termination of

seasonal base plans will create disorderly marketing conditions in the

4 orders. However, the testimony and evidence received at the December

17-18, 1996, hearing do not sufficiently support this argument.

According to the proponents, the termination of seasonal base plans,

effective January 1, 1997, removes the incentive for producers to pool

their milk during the short months when milk is needed in the Southeast

because they will no longer receive the higher base prices for their

milk during the following flush months. While it is feared by the

proponents that the termination will open up the 4 Southeast markets to

those producers not normally associated with such markets, but who seek

to take advantage of the high Class I utilization rates, the record was

unconvincing in its need for modification of the producer definition

for this reason.

It is apparent that the proposal was initiated in response to the

elimination of seasonal base plans in Federal milk orders. In other

words, the proposed modification of the producer definition is intended

to fill the void left by the removal of the base-excess plans. However,

changing the producer definition should not be compared to

[[Page 39477]]

the incorporation of base plans in the orders. Base plans are

instituted in order to level out production throughout the year so that

adequate milk supplies are ensured during the short production months,

while discouraging surplus supplies in the flush production months. The

base plans also did have the effect of preventing producers not

normally associated with a market from entering such market during the

flush production months because they would have received the low,

excess price for their milk. Nevertheless, the removal of base plans

does not by itself necessitate amending the orders.

The orders currently have strict pooling requirements. For example,

as was testified to at the reopened hearing by AMPI's spokesman, the

pooling requirements for Order 7 specify that a producer's milk must be

received at least 4 days at a pool plant to be eligible to be pooled

during the months of December through June. Additionally, there is a 50

percent diversion limitation in Order 7 to nonpool plants for those

same months. The Carolina and Tennessee Valley orders also have

diversion limitations for cooperative associations during most months

of 25 percent of the total quantity of producer milk. They also

maintain pooling requirements specifying how many days a month producer

milk must be received at pool plants. The Louisville-Lexington-

Evansville order specifies a diversion limitation based upon the number

of days that a producer's milk is diverted during a month. The evidence

in this proceeding is insufficient to conclude that the current pooling

standards will not recognize the seasonally varying needs for milk for

fluid use. The creation of additional producer pooling standards is

unnecessary and unwarranted on the basis of the record herein and,

therefore, the proposal should be denied.

Rulings on Proposed Findings and Conclusions

Briefs and proposed findings and conclusions were filed on behalf

of certain interested parties. These briefs, proposed findings and

conclusions, and the evidence in the record were considered in making

the findings and conclusions set forth above. To the extent that the

suggested findings and conclusions filed by interested parties are

inconsistent with the findings and conclusions set forth herein, the

requests to make such findings or reach such conclusions are denied for

the reasons previously stated in this decision.

Dated: July 17, 1997.

Lon Hatamiya,

Administrator, Agricultural Marketing Service.

[FR Doc. 97-19370 Filed 7-22-97; 8:45 am]

BILLING CODE 3410-02-P