Milk in the New England and Other Marketing Areas; Proposed Rule and Opportunity To File Comments, Including Written Exceptions, on Proposed Amendments to Marketing Agreements and Orders

7 CFR part Marketing area

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

1000.............................. General Provisions of Federal Milk

Marketing Orders.

1001.............................. New England.

1002.............................. New York-New Jersey.

1004.............................. Middle Atlantic.

1005.............................. Carolina.

1006.............................. Upper Florida.

1007.............................. Southeast.

1012.............................. Tampa Bay.

1013.............................. Southeastern Florida.

1030.............................. Chicago Regional.

1032.............................. Southern Illinois-Eastern Missouri.

1033.............................. Ohio Valley.

1036.............................. Eastern Ohio-Western Pennsylvania.

1040.............................. Southern Michigan.

1044.............................. Michigan Upper Peninsula.

1046.............................. Louisville-Lexington-Evansville.

1049.............................. Indiana.

1050.............................. Central Illinois.

1064.............................. Greater Kansas City.

1065.............................. Nebraska-Western Iowa.

1068.............................. Upper Midwest.

1076.............................. Eastern South Dakota.

1079.............................. Iowa.

1106.............................. Southwest Plains.

1124.............................. Pacific Northwest.

1126.............................. Texas.

1131.............................. Central Arizona.

1134.............................. Western Colorado.

1135.............................. Southwestern Idaho-Eastern Oregon.

1137.............................. Eastern Colorado.

1138.............................. New Mexico-West Texas.

1139.............................. Great Basin.

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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This proposed rule consolidates the current 31 Federal milk

marketing orders into 11 orders. This consolidation is proposed to

comply with the 1996 Farm Bill which mandates that the current Federal

milk orders be consolidated into between 10 to 14 orders by April 4,

1999. This proposed rule also sets forth two options for consideration

as a replacement for the Class I price structure and proposes replacing

the basic formula price with a multiple component pricing system. This

proposed rule also establishes a new Class IV which would include milk

used to produce nonfat dry milk, butter, and other dry milk powders;

reclassifies eggnog and cream cheese; and addresses other minor

classification changes. Part 1000 is proposed to be expanded to include

sections that are identical to all of the consolidated orders to assist

in simplifying and streamlining the orders.

DATES: Comments must be submitted on or before March 31, 1998.

ADDRESSES: Comments (two copies) should be submitted to Richard M.

McKee, Deputy Administrator, Dairy Programs, USDA/AMS, Room 2968, South

Building, P.O. Box 96456, Washington, DC 20090-6456. Comments also may

be sent by fax to (202) 690-3410. Additionally, comments may be

submitted via E-mail to: Milk__Order__R[email protected].

All comments should be identified with the docket number found in

brackets in the heading of this document. To facilitate the review

process, please state the particular topic(s) addressed, from the

following list, at the beginning of the comment: consolidation, basic

formula price, Class I price structure, other class prices,

classification, provisions applicable to all orders, regional issues

(please specify: Northeast, Southeast, Midwest, Western), and

miscellaneous and administrative. If comments submitted pertain to a

specific order, please identify such order.

Comments are also being requested on the Executive Order 12866

analysis, the Regulatory Flexibility Act analysis, and the Paperwork

Reduction Act analysis.

Additionally, comments may be sent via E-mail to:

Milk__Order__R[email protected].

All comments submitted in response to this proposal will be

available for public inspection at the USDA/AMS/Dairy Programs, Order

Formulation Branch, Room 2968, South Building, 14th and Independence

Ave., S.W., Washington, D.C., during normal business hours (7 CFR

1.27(b)). All persons wanting to view the comments are requested to

make an appointment in advance by calling Richard M. McKee at (202)

720-4392.

FOR FURTHER INFORMATION CONTACT: John F. Borovies, Branch Chief, USDA/

AMS/Dairy Programs, Order Formulation Branch, Room 2971, South

Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 720-6274.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Legislative and Background Requirements

Legislative Requirements

Background

Actions Completed

Public Interaction

Public Input

Executive Order 12988

Executive Order 12866

The Regulatory Flexibility Act and the Effects on Small

Businesses

Paperwork Reduction Act of 1995

Preliminary Statement

II. Discussion of Material Issues and Proposed Amendments to the

Orders

Consolidation of marketing areas

Basic formula price replacement and other class price issues

Class I price structure

Classification of milk and related issues

Provisions applicable to all orders

Regional Issues:

Northeast Region

Southeast Region

Midwest Region

Western Region

Miscellaneous and Administrative:

Consolidation of the marketing service, administrative expense,

and producer-settlement funds

Consolidation of the transportation credit balancing funds

Proposed general findings

III. Order Language

General provisions

Northeast order provisions

Appalachian order provisions

Florida order provisions

Southeast order provisions

Mideast order provisions

Upper Midwest order provisions

Central order provisions

Southwest order provisions

Arizona-Las Vegas order provisions

Western order provisions

Pacific Northwest order provisions

IV. Appendix

A: Summary of Preliminary Suggested Order Consolidation Report

B: Summary of Pricing Options

C: Summary of Classification Report

D: Summary of Identical Provisions Report

E: Summary of Basic Formula Price Report

F: Summary of Revised Preliminary Suggested Order Consolidation

Report

I. Legislative and Background Requirements

Legislative Requirements

Section 143 of the Federal Agriculture Improvement and Reform Act

of 1996. (Farm Bill), 7 U.S.C. 7253, requires that by April 4, 1999,\1\

the current Federal

[[Page 4803]]

milk marketing orders be consolidated into between 10 to 14 orders. The

Secretary of Agriculture (Secretary) is also directed to designate the

State of California as a Federal milk order if California dairy

producers petition for and approve such an order. In addition, the Farm

Bill provided that the Secretary may address related issues such as the

use of utilization rates and multiple basing points for the pricing of

fluid milk and the use of uniform multiple component pricing when

developing one or more basic prices for manufacturing milk. Besides

designating a date for completion of the required consolidation, the

Farm Bill further requires that no later than April 1, 1997, the

Secretary shall submit a report to Congress on the progress of the

Federal order reform process. The report must cover three areas: a

description of the progress made towards implementation, a review of

the Federal order system in light of the reforms required, and any

recommendations considered appropriate for further improvements and

reforms. This report was submitted to Congress on April 1, 1997.

Finally, the 1996 Farm Bill specifies that USDA use informal rulemaking

to implement these reforms.\2\

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

\1\ Section 143(b)(2) requires that a proposed rule be published

by April 4, 1998 and Section 143(b)(3) provides that ``in the event

that the Secretary is enjoined or otherwise restrained by a court

order from publishing or implementing the consolidation and related

reforms under subsection (a), the length of time for which that

injunction or other restraining order is effective shall be added to

the time limitations specified in paragraph (2) thereby extending

those time limitations by a period of time equal to the period of

time for which the injunction or other restraining order is

effective.''

\2\ Since this proceeding was initiated on May 2, 1996, the

Black Hills, South Dakota and the Tennessee Valley orders have been

terminated. Effective October 1, 1996, the operating provisions of

the Black Hills were terminated (61 FR 47038), and the remaining

administrative provisions were terminated effective December 31,

1996 (61 FR 67927). Effective October 1, 1997, the operating

provisions of the Tennessee Valley order were terminated (62 FR

47923). The remaining administrative provisions of the Tennessee

Valley order will be terminated before this consolidation process is

completed.

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

Background

The authorization of informal rulemaking to achieve the mandated

reforms of the Farm Bill has resulted in a rulemaking process that is

substantially different from the formal rulemaking process required to

promulgate or amend Federal orders. The formal rulemaking process

requires that decisions by USDA be based solely on the evidentiary

record of a public hearing held before an Administrative Law Judge.

Formal rulemaking involves the presentation of sworn testimony, the

cross-examination of witnesses, the filing of briefs, the issuance of a

recommended decision, the filing of exceptions, the issuance of a final

decision that is voted on by affected producers, and upon approval by

producers, the issuance of a final order.

The informal rulemaking process does not require these procedures.

Instead, informal rulemaking provides for the issuance of a proposed

rule by the Agricultural Marketing Service, a period of time for the

filing of comments by interested parties, and the issuance of a final

rule by the Secretary, which would become effective if approved by the

requisite number of producers in a referendum.

Full participation by interested parties is essential in the reform

of Federal milk orders. The issues are too important and complex for

this proposed rule to be developed without significant input from all

facets of the dairy industry. The experience, knowledge, and expertise

of the industry and public are integral to the development of the

proposed rule. To ensure maximum public input into the process while

still meeting the legislated deadline of April 4, 1999, USDA developed

a plan of action and projected time line. The plan of action developed

consists of three phases: developmental, rulemaking, and

implementation.

The first phase of the plan was the developmental phase. The use of

a developmental phase allowed USDA to interact freely with the public

to develop viable proposals that accomplish the Farm Bill mandates, as

well as related reforms. The USDA met with interested parties to

discuss the reform progress, assisted in developing ideas or provided

data and analysis on various possibilities, issued program

announcements, and requested public input on all aspects of the Federal

order program. The developmental phase began on April 4, 1996, and

concludes with the issuance of this proposed rule.

The second phase of the plan is the rulemaking phase. The

rulemaking phase begins with the issuance and publication of this

proposed rule. This proposed rule provides the public 60 days to submit

written comments on the proposal to USDA. These comments will be

reviewed and considered prior to the issuance of a final rule.

The third and final phase of the plan is the implementation phase.

The implementation phase will begin after the final rule is published

in the Federal Register. This phase will consist of informational

meetings conducted by Market Administrator personnel. The objective of

the informational meetings is to inform producers and handlers about

the newly consolidated orders and explain the projected effects on

producers and handlers in the new marketing order areas. After

informational meetings have been held, referendums will be conducted.

Upon approval of the consolidated orders and related reforms by the

required number of producers in each marketing area, a final order

implementing the new orders will be issued and published in the Federal

Register.

Although all of the issues regarding Federal milk order reform are

interrelated, USDA has established several committees to address

specific issues. The use of committees has allowed the reform process

to be divided into more manageable tasks. The committees will work

throughout the developmental and rulemaking phases. The committees that

have been established are: Price Structure, Basic Formula Price,

Identical Provisions, Classification, and Regional. The Regional

committee is divided into four sub-committees: Midwest, Northeast,

Southeast, and West. Committee membership consists of both field and

headquarters Dairy Programs personnel. The committees have been given

specific assignments related to their designated issue and have been

meeting since May 1996.

In addition to utilizing USDA personnel, partnerships have been

established with two university consortia to provide expert analyses on

the issues relating to price structure and basic formula price options.

Dr. Andrew Novakovic of Cornell University led the analysis on price

structure and published a staff paper entitled ``U.S. Dairy Sector

Simulator: A Spatially Disaggregated Model of the U.S. Dairy Industry''

and a research bulletin entitled ``An Economic and Mathematical

Description of the U.S. Dairy Sector Simulator''\3\ Dr. Ronald Knutson

of Texas A&M University led the analysis on basic formula price options

and published two working papers entitled ``An Economic Evaluation of

Basic Formula Price (BFP) Alternatives'' and ``The Modified Product

Value and Fresh Milk Base Price Formulas as BFP Alternatives.''\4\

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

\3\ Copies of this report may be obtained by contacting Ms.

Wendy Barrett, Cornell University, ARME, 348 Warren Hall, Ithaca, NY

14853-7801, (607) 255-1581.

\4\ Copies of these reports may be obtained by contacting Dr.

Ronald Knutson, Agricultural and Food Policy Center, Dept. of Ag.

Economics, Texas A&M University, College Station, TX 77843-2124,

(409) 845-5913.

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

Actions Completed

USDA has maintained continual contact with the industry regarding

the reform process. To begin, on May 2, 1996, the Agricultural

Marketing Service (AMS) Dairy Division issued a memorandum to

interested parties announcing the planned procedures for

[[Page 4804]]

implementing the Farm Bill.\5\ In this memorandum, all interested

parties were requested to submit ideas on reforming Federal milk

orders, specifically as to the consolidation and pricing structure of

orders. Input was requested by July 1, 1996.

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

\5\ Copies of this announcement and all subsequent announcements

and reports can be obtained from Dairy Programs at (202) 720-4392,

any Market Administrator office, or via the Internet at http://

www.ams.usda.gov/dairy/.

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

On June 24, 1996, USDA issued a press release announcing that a

public forum would be held in Madison, Wisconsin, on July 29, 1996. The

forum would address price discovery techniques for the value of milk

used in manufactured dairy products. Thirty-one Senators, Congressmen,

university professors, representatives of processor and producer

organizations, and dairy farmers made presentations at the forum.

On October 24, 1996, AMS Dairy Division issued a memorandum to

interested parties requesting input regarding all aspects of Federal

milk order reform and specifically as to its impact on small

businesses. USDA anticipates that the consolidation of Federal orders

will have an economic impact on handlers and producers affected by the

program, and USDA wants to ensure that, while accomplishing their

intended purpose, the newly consolidated Federal orders will not unduly

inhibit the ability of small businesses to compete.

On December 3, 1996, AMS Dairy Division issued a memorandum to

interested parties announcing the release of the preliminary report on

Federal milk order consolidation. The report recommends the

consolidation of the current 32 Federal milk orders into ten orders.

(See Appendix A for report summary.) The memorandum requested input

from all interested parties on the recommended consolidated orders and

on any other aspect of the milk marketing order program by February 10,

1997.

On March 7, 1997, AMS Dairy Division issued a memorandum to

interested parties announcing the release of three reports that

addressed the Class I price structure, the classification of milk, and

the identical provisions contained in a Federal milk order. The price

structure report consisted of a summary report and a technical report

and discussed several options for modifying the Class I price

structure. (See Appendix B for report summary.) The classification

report recommended the reclassification of certain dairy products,

including the removal of Class III-A pricing for nonfat dry milk. (See

Appendix C for report summary.) The identical provisions report

recommended simplifying, modifying, and eliminating unnecessary

differences in Federal order provisions. (See Appendix D for report

summary.) Comments on the contents of these reports, as well as on any

other aspect of the program, was requested from interested parties by

June 1, 1997.

On April 18, 1997, AMS Dairy Division issued a memorandum to

interested parties announcing the release of the preliminary report on

Alternatives to the Basic Formula Price (BFP). The report contained

suggestions, ideas, and initial findings for BFP alternatives. Over

eight categories of options were identified with four options

recommended for further review and discussion. (See Appendix E for

report summary.) The memorandum requested input from all interested

parties on a BFP alternative and on any other aspect of the milk

marketing order program by June 1, 1997.

On May 20, 1997, AMS Dairy Division issued a memorandum to

interested parties announcing the release of a revised preliminary

report on Federal milk order consolidation. The revisions were based on

the input received from interested parties in response to the initial

preliminary report on order consolidation. (See Appendix F for report

summary.) Instead of recommending 10 consolidated orders as in the

first report, the revised report recommended 11 consolidated orders and

suggested the inclusion of some currently unregulated territory. The

memorandum requested comments from all interested parties on the

recommended consolidated orders and on any other aspect of the milk

marketing order program by June 15, 1997.

To elicit further input on the role of the National Cheese Exchange

price in calculating the basic formula price, on January 29, 1997, the

Secretary sissued a press release announcing steps being taken by USDA

to address concerns raised by dairy producers about how milk prices are

calculated. In the press release, the Secretary requested further

comments from interested parties about the use of the National Cheese

Exchange in the determination of the basic formula price, which is the

minimum price that handlers must pay dairy farmers for milk used to

manufacture Class III products (butter and cheese) and the price used

to establish the Class I and Class II prices. These comments were

requested by March 31, 1997, and have been useful in analyzing

alternatives to the basic formula price in context of the order reform

process.

Public Interaction

As a result of these announcements and the forum, more than 1,600

individual comments have been received by USDA. In addition to the

individual comments, more than 3000 form letters have been received.

All comments were reviewed by USDA personnel and are available for

public inspection at USDA. To assist the public in accessing the

comments, USDA contracted to have the comments scanned and published on

a CD. The use of this technology has allowed interested parties

throughout the United States access to the information received by

USDA.

USDA also made all publications and requests for information

available on the Internet. A separate page under the Dairy Division

section of the AMS Homepage was established to provide information

about the reform process. To assist in transmitting correspondence to

USDA, a special electronic mail [email protected]

was opened to receive input on Federal milk order reforms.

USDA personnel met continually with interested parties from May

1996 through the issuance of this proposed rule to gather information

and ideas on the consolidation of Federal milk orders. During this time

period, USDA personnel addressed over 250 groups comprised of more than

22,000 individuals on various issues related to Federal order reform.

USDA personnel also conducted in-person briefings for both the

Senate and House Agricultural Committees on the progress of Federal

milk order reforms. Since May 1996, seven briefings were conducted for

the committees. The briefings advised the committees of the plan of

action for implementing the Farm Bill mandates; explained the

preliminary report on the consolidation of Federal milk orders;

explained the contents of the reports addressing Class I price

structure, classification of milk, identical provisions and basic

formula price; and discussed the congressional report.

Public Input

To ensure the involvement of all interested parties, particularly

small businesses as defined in the following Initial Regulatory

Flexibility Analysis, in the process of Federal order reform, three

primary methods of contact have been used: direct written notification,

publication of notices through various media forms, and speaking and

meeting with organizations and individuals regarding the issue of

Federal order

[[Page 4805]]

reforms. In addition, information has been made available to the public

via the Internet. USDA also made one written program announcement

specifically requesting information from small businesses.

All announcements made by USDA have been mailed to over 20,000

interested parties, State Governors, State Department of Agriculture

Secretaries or Commissioners, and the national and ten regional Small

Business Administration offices. In addition, most dairy producers

under the orders were notified through regular market service bulletins

published by Market Administrators on a monthly basis. Press releases

were issued by USDA for the May 2, 1996, December 3, 1996, January 29,

1997, March 7, 1997, and May 20, 1997, announcements, and for the July

31, 1996, public forum.\6\ These press releases were distributed to

approximately 33 wire services and trade publications and to each State

Department of Agriculture Communications Officer. These methods of

notification helped to ensure that virtually all identified small

businesses were contacted.

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

\6\ Copies of these press releases may be obtained from Dairy

Programs at (202) 720-4392, or via the Internet at http://

www.ams.usda.gov/news/newsrel.htm.

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

Departmental personnel, both in the field and from Washington,

actively met with interested parties to gather input and to clarify and

refine ideas already submitted. Formal presentations, round table

discussions, and individually scheduled meetings between industry

representatives and Departmental personnel were held. Over 250

organizations and more than 22,000 individuals were reached through

this method. Of these individuals, approximately 13,400 were identified

as small businesses.

As a result of the requests for information, publication of

informational reports, meetings with interested parties, and the

comments, AMS has prepared this proposed rule which contains proposals

addressing the following issues: the consolidation of marketing areas;

basic formula price replacement and other class price issues; Class I

price structure; classification of milk; provisions applicable to all

orders; regional issues relating to the Northeast, Southeast, Midwest,

and Western areas; and various other miscellaneous and administrative

issues. Each proposal is discussed in detail following this preliminary

statement that includes Executive Order 12988 and 12866 discussions,

the Regulatory Flexibility Analysis, and the Paperwork Reduction

Analysis.

Executive Order 12988

This proposed rule has been reviewed under Executive Order 12988,

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

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

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

irreconcilable conflict with the 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 request

modification or exemption from such order by filing 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 law. 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.

Executive Order 12866

The Department is issuing this proposed rule in conformance with

Executive Order 12866. This proposed rule has been determined to be

economically significant for the purposes of Executive Order 12866.

When proposing a regulation which is determined to be economically

significant, agencies are required, among other things, to: assess the

costs and benefits of available regulatory alternatives; base

regulatory decisions on the best reasonably-obtainable technical,

economic, and other information; avoid duplicative regulations; and

tailor regulations to impose the least burden on society consistent

with obtaining regulatory objectives. Therefore, to assist in

fulfilling the objectives of Executive Order 12866, the USDA prepared

an initial Regulatory Impact Analysis (RIA). Information contained in

the RIA pertaining to the costs and benefits of the revised regulatory

structure are summarized in the following analysis. Copies of the RIA

can be obtained from Dairy Programs at (202) 720-4392, any Market

Administrator office, or via the Internet at http://www.ams.usda.gov/

dairy.

This rule proposes the consolidation of the current 31 Federal milk

marketing order areas into 11 marketing order areas. The proposed

marketing areas are: Northeast, Mideast, Upper Midwest, Central,

Appalachian, Southeast, Florida, Southwest, Arizona-Las Vegas, Western,

and Pacific Northwest. The consolidated marketing areas consist

primarily of territory that is in the current Federal order markets. In

addition, they would include some previously unregulated territory. At

this time, California is not proposed as a Federal order. This

consolidation is proposed to comply with the 1996 Farm Bill that

mandates the current Federal milk order marketing areas be consolidated

into between 10 to 14 marketing areas by April 4, 1999. This proposed

rule also sets forth two options for consideration as a replacement for

the Class I price structure and proposes replacing the basic formula

price with a multiple component pricing system. These changes are

proposed to address concerns that the current system of pricing Class I

milk may not adequately reflect the value of Class I milk at various

locations or the value of milk used in manufacturing products. The 1996

Farm Bill identified these as related issues that may be addressed in

the consolidation of milk marketing orders. The proposed rule further

proposes changes to classification of milk by establishing a new Class

IV which would include milk used to produce nonfat dry milk, butter,

and other dry milk powders; the reclassification of eggnog and cream

cheese; and other minor changes. These proposed changes should improve

handler reporting and accounting procedures thereby providing for

greater market efficiencies. Finally, this proposed rule expands Part

1000 to include provisions that are identical within each consolidated

order to assist in simplifying the orders. These provisions include the

definitions of route disposition, plant, distributing plant, supply

plant, nonpool plant, handler, other source milk, fluid milk product,

fluid cream product, cooperative association, and commercial food

processing establishment. In addition, the milk classification section,

pricing provisions, and most of the provisions relating to payments

have been included in the General Provisions. These proposed changes

adhere with the efforts of the National Performance Review--Regulatory

Reform Initiative to simplify, modify,

[[Page 4806]]

and eliminate unnecessary repetition of regulations. Unique regional

issues or marketing conditions have been considered and included in

each market's order provisions. Not all of these changes would be

considered economically significant; however, changes dealing with

marketing area consolidation, the basic formula price, and the Class I

pricing structure may be significant and are described further in the

following sections.

Economic Impacts of Consolidation

It is impossible to determine the economic effects of the proposed

marketing area consolidation on handlers, producers and consumers

without using assumptions about the specific order provisions contained

in the consolidated order areas. The only effect consolidation, as a

single factor, can have on the various market participants is its

effect on the percentage of milk used in different classes within the

proposed consolidated orders. Without assumptions that include the

specific class prices and milk uses in different products, there are no

means of quantifying the economic effects of consolidation.

Handlers would be affected by class prices, which would be

determined by the Class I price surface option that is selected, and by

the minimum prices contained in all of the orders for milk used in

Classes II, III and IV. Handlers similarly located would be subject to

the same minimum Class I, Class II, Class III and Class IV prices for

milk. Such handlers would also be subject to the same minimum prices to

be paid to producers.

Dairy farmers would be affected by the proposed consolidation of

marketing areas because changes in utilization percentages would result

in changes in blend prices. As in the case of effects on handlers,

however, it is impossible to accurately determine a separate

consolidation effect on producers, defined in monetary terms. The

closest approximation to such an estimate would be the ``weighted

average utilization value'' (WAUV). These ``prices'' reflect only the

change in value that can be attributed to changes in utilization rates,

with no assumptions about changes in the levels of the various class

prices. Such estimates, of necessity, would reflect only anticipated

changes in blend prices, using class prices that would no longer be in

effect under the consolidated orders. To the extent that the WAUV

computations reflect some of the effect of the effect of consolidation

on producer prices, they are included in this analysis. It should be

noted, however, that all producers in any given current area would be

affected to an equal extent by the consolidation factor.

The following table shows the potential impact of three order

consolidation options on producers who supply each of the current

Federal milk marketing order areas via WAUV ``prices''. The three

consolidated options are (1) the consolidated marketing areas suggested

in the December 1996 initial Preliminary Report on Order Consolidation;

(2) the consolidated marketing areas suggested in the May 1997 Revised

Preliminary Report on Order Consolidation; and (3) the consolidated

marketing areas suggested in this proposed rule.

Weighted Average Utilization Values (WAUV)

[Based on October 1995 information]

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

Consolidated Market Marketing areas in Initial Marketing Areas in Revised Marketing Areas in Proposed

--------------------------------------------------------- Consol. Report (Dec. 96) Consol. Report (May 97) Rule (Option 3)

(Option 1) (Option 2) -------------------------------

---------------------------------------------------------------- Consol. Mkt. WAUV ($/cwt)

Consol. Mkt. WAUV ($/cwt) Consol. Mkt. WAUV ($/cwt) -------------------------------

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

Current Markets WAUV using WAUV using WAUV using WAUV using WAUV using WAUV using

Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt.

Utilization Utilization Utilization Utilization Utilization Utilization

($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt)

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

Northeast............................................... .............. $13.46 .............. $13.48 .............. $13.47

New England (F.O. 1)................................ $13.50 13.48 $13.52 13.51 $13.52 13.49

NY-NJ (F.O. 2)...................................... 13.44 13.48 13.48 13.50 13.45 13.48

Middle Atlantic (F.O. 4)............................ 13.45 13.39 13.45 13.41 13.44 13.40

Appalachian............................................. .............. 14.13 .............. 13.96 .............. 13.97

Carolina (F.O. 5)................................... 14.23 14.21 14.23 14.19 14.23 14.20

Tenn. Valley (F.O. 11).............................. 13.92 13.95 13.92 13.93 13.92 13.94

Lville-Lex-Evan (F.O. 46)........................... n/a n/a 13.35 13.39 13.35 13.40

Florida................................................. .............. 15.05 .............. 15.05 .............. 15.05

Upper Florida (F.O. 6).............................. 14.67 14.78 14.67 14.78 14.67 14.78

Tampa Bay (F.O. 12)................................. 15.09 15.04 15.09 15.04 15.09 1504

SE Florida (F.O. 13)................................ 15.42 15.31 15.42 15.31 15.42 15.31

Southeast............................................... .............. 14.26 .............. 14.25 .............. 14.24

Southeast (F.O. 7).................................. 14.26 14.26 14.25 14.25 14.24 14.27

Mideast................................................. .............. 12.96 .............. 12.94 .............. 12.92

Ohio Valley (F.O. 33)............................... 12.99 13.02 12.99 13.01 12.99 13.00

E. Ohio-W. PA (F.O. 36)............................. 13.07 13.00 13.10 12.99 13.07 12.97

S. Michigan (F.O. 40)............................... 12.75 12.86 12.75 12.84 12.75 12.83

MI Upper Penin. (F.O. 44)........................... 12.81 12.62 12.81 12.62 12.81 12.61

Lville-Lex-Evan (F.O. 46)........................... 13.35 13.06 n/a n/a n/a n/a

Indiana (F.O. 49)................................... 12.97 12.94 12.97 12.93 12.97 12.92

Upper Midwest........................................... .............. 12.60 .............. 12.62 .............. 12.60

Chicago Reg. (F.O. 30).............................. 12.62 12.62 12.62 12.61 12.62 12.62

MI Upper Penin. (F.O. 44)........................... R R R R R R

Neb.-W. Iowa (F.O. 65).............................. n/a n/a 12.63 12.74 n/a n/a

Upper Midwest (F.O. 68)............................. 12.55 12.56 12.55 12.54 12.55 12.56

E. South Dakota (F.O. 76)........................... n/a n/a 12.81 12.65 n/a n/a

Iowa (F.O. 79)...................................... n/a n/a 12.69 12.67 n/a n/a

[[Page 4807]]

Central................................................. .............. 13.16 .............. 13.21 .............. 12.95

S. IL-E. MO (F.O. 32)............................... 12.93 12.90 13.00 12.95 13.00 12.88

Central IL (F.O. 50)................................ 13.03 12.74 13.03 12.78 13.03 12.72

Greater K. City (F.O. 64)........................... 13.22 12.90 13.22 12.95 13.22 12.88

Neb.-W. Iowa (F.O. 65).............................. 12.63 12.81 n/a n/a 12.63 12.79

E. South Dakota (F.O. 76)........................... 12.81 12.68 n/a n/a 12.81 12.67

Iowa (F.O. 79)...................................... 12.71 12.71 n/a n/a 12.71 12.70

SW Plains (F.O. 106)................................ 13.31 13.33 13.31 13.41 13.08 13.29

E. Colorado (F.O. 137).............................. 13.27 13.31 13.27 13.38 13.27 13.27

Southwest............................................... .............. 13.36 .............. 13.39 .............. 13.39

Texas (F.O. 126).................................... 13.49 13.48 13.49 13.46 13.49 13.46

Central AZ (F.O. 131)............................... 13.26 13.17 n/a n/a n/a n/a

NM-W. Texas (F.O. 138).............................. 13.00 13.09 13.00 13.07 13.00 13.07

Arizona-Las Vegas....................................... .............. n/a .............. 13.26 .............. 13.26

Central AZ (F.O. 131)............................... n/a n/a 13.26 13.29 13.26 13.29

Western................................................. .............. 12.79 .............. 12.78 .............. 12.78

W. Colorado (F.O. 134).............................. 13.41 12.84 13.41 12.82 13.41 12.82

SW ID-E. OR (F.O. 135).............................. 12.63 12.68 12.63 12.68 12.63 12.68

Great Basin (F.O. 139).............................. 12.83 12.81 12.81 12.79 12.81 12.79

Pacific Northwest....................................... .............. 12.45 .............. 12.44 .............. 12.44

Pacific NW (F.O. 124)............................... 12.45 12.45 12.44 12.44 12.44 12.44

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

n/a: Not applicable

R: Restricted

For each option, a weighted average use value (WAUV) is computed

for (a) the consolidated order; (b) the current order with current use

of milk; and (c) the current order with projected use of milk in the

consolidated order. The difference between the weighted average use

values in (b) and (c) represents the potential impact on producers.

For example, in this proposed rule, the New England (F.O. 1)

market's WAUV using its current utilization is $13.52 per cwt. When the

three markets are consolidated and the new consolidated utilization is

used to calculate the WAUV, New England's WAUV would be $13.49 per cwt.

In this comparison, the potential impact on producers supplying the New

England market area would be a decrease of three cents per cwt.

Each of the three options assumes the pool distributing plant

standards suggested for each of the consolidated orders in this

proposed rule; thus the calculated values in the preceding table are

not directly comparable to the WAUV values published with either the

initial or the revised reports on order consolidation.

Economic Impact of Basic Formula Price Proposal

A number of options for determining a basic formula price were

considered and analyzed in the process of developing the proposed basic

formula price (BFP). In addition to the proposed method of pricing

components based on their value in manufactured products, other options

examined by both the Agricultural Marketing Service's Basic Formula

Price Replacement Committee \7\ and the University Study Committee

(USC), led by Dr. Ronald D. Knutson of Texas A & M University, were:

economic formulas, futures markets, cost of production, competitive pay

pricing, and pricing differentials only.

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

\7\ The Basic Formula Price Committee was established in May

1996 to consider replacements for the basic formula price during the

Federal order reform process. This committee and others established

are described further in the ``Background'' portion of this proposed

rule.

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

Descriptions of the two Committees' analyses, and results of their

work are included in ``A Preliminary Report on Alternatives to the

Basic Formula Price,'' published in April 1997 by the Basic Formula

Price Committee, Dairy Division, AMS; \8\ and the following reports

from the Agricultural and Food Policy Center, Texas A&M University

System:

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

\8\ Copies of this report can be obtained from Dairy Programs at

(202) 720-4392, any Market Administrator office, or via the Internet

at http://www.ams.usda.gov/dairy/.

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

``An Economic Evaluation of Basic Formula Price (BFP)

Alternatives,'' AFPC Working Paper 97-2, June 1997.

``Evaluation of Final Four Basic Formula Price Options,'' AFPC

Working Paper 97-9, August 1997.\9\

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

\9\ Copies of these reports may be obtained by contacting Dr.

Ronald Knutson, Agricultural and Food Policy Center, Dept. of Ag.

Economics, Texas A&M University, College Station, TX 77843-2124, or

(409) 845-5913.

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The primary criterion used by the BFP Committee was that any

replacement BFP option reflect the supply of and demand for milk used

in manufactured dairy products. At the same time, one of the USC's

critical criteria for a replacement BFP was that it reliably reflect

market conditions for all manufactured products.

In trying to determine the most appropriate replacement for the

current BFP, which uses a survey of prices paid by manufacturing plants

for non-Grade A milk updated by a product price

[[Page 4808]]

formula, the goal of both groups was a market-based alternative. The

BFP Committee measured the extent to which each pricing option met its

primary goal by tracking the options against the current BFP for a

period of prior months.\10\ The USC Committee used an econometric

procedure to test the ability of the alternatives they considered to

reflect supply and demand.

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\10\ It was assumed that the current BFP successfully reflects

the supply and demand for milk used in manufactured products.

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

To the extent the goal of identifying a BFP that reflects the value

of milk used in manufactured products is capable of attainment, all

market participants--handlers, producers, and consumers--would be

affected by the BFP replacement in the same manner as if they were

operating in a free market, with no external impacts caused by

regulation. Consumers can be assured that the prices generally charged

for dairy products are prices that reflect, as closely as possible, the

forces of supply and demand in the market.

Of the options considered and analyzed, both groups studying the

issue determined that the option of pricing components of milk

according to their value in manufactured products, as reflected by the

sales prices of those products, best approximates the intersection of

supply and demand for milk used in manufactured dairy products.

Economic Impact of Multiple Component Pricing Provisions

Seven of the 11 proposed orders provide for milk to be paid for on

the basis of its components (multiple component pricing, or MCP). Five

of the 7 MCP orders also provide for milk values to be adjusted

according to the somatic cell count of producer milk. The equipment

needed for testing milk for its component content can be very expensive

to purchase, and requires highly-skilled personnel to maintain and

operate. The cost of infra-red analyzers ranges from just under

$100,000 to $200,000. The infra-red machines that are used by most

laboratories will test for total solids and somatic cells at the same

time the butterfat and protein tests are done.

Some additional information is necessary from handlers on their

monthly reports of receipts and utilization to assure that producers

are paid correctly. In particular, handlers would be required to report

pounds of protein, pounds of other solids, and, in 5 of the orders,

somatic cell information. This data would be required from each handler

for all producer receipts, including milk diverted by the handler,

receipts from cooperatives as handlers pursuant to Sec. 1000.9(c), and,

in some cases, receipts of bulk milk received by transfer or diversion.

Since producers would be receiving payments based on the component

levels of their milk, the payroll reports that handlers supply to

producers must reflect the basis for such payment. Therefore, the

handler would be required to supply the producer not only with the

information currently supplied, but also: (a) the pounds of butterfat,

the pounds of protein, and the pounds of other solids contained in the

producer's milk, as well as the producer's average somatic cell count;

and (b) the minimum rates that are required for payment for each

pricing factor and, if a different rate is paid, the effective rate

also. It should be noted that handlers already are required to report

information relative to pounds of production, butterfat, and rates of

payment for butterfat and hundredweight of milk.

Of over 74,000 producers whose milk was pooled in December 1996

under 23 orders that would be part of consolidated orders providing for

multiple component pricing, the milk of 52,500 of these producers was

pooled under 13 orders that currently have MCP. Handlers in these

markets already have incurred the initial costs of testing milk for its

component content and have already made the needed transition to

reporting the additional information required for component pricing of

milk.

Of the remaining 21,750 producers who would be affected by MCP

provisions under a Federal order, the milk of approximately 13,000 of

these producers currently is received by handlers who test or have the

capability of testing for multiple components and, in many cases,

somatic cells. Many of these handlers also report component results to

the producers with their payments. Almost all of the producers whose

milk currently is not being tested or paid for on the basis of

components are located in the New England and New York-New Jersey

marketing areas, which would be consolidated with the Middle Atlantic

area into the proposed Northeast order.

Accommodation has been made to ameliorate handlers' expenses of

testing producer milk for component content. As component pricing plans

have been adopted under a number of the present Federal milk orders

since 1988, the component testing needed to implement these pricing

plans has been performed by the market administrators responsible for

the administration of the orders involved for handlers who are not

equipped to make all of the determinations required under the amended

orders. This policy would continue under this proposed rule. Thus,

handlers who are unable to obtain the equipment and personnel needed to

accomplish the required testing for component pricing would be able to

rely on the market administrators to verify or establish the tests

under which producers are paid.

Economic Impacts of Class I Price Changes

Several different options were considered for pricing fluid or

Class I milk. These pricing options included using a market-driven

basic formula price plus differentials based on location, differentials

based on the ratio of milk used for fluid purposes compared to all

other uses, flat differentials, flat differentials modified in high

Class I use areas, and differentials based on the demand for fluid milk

within a designated marketing area and the associated transportation

costs. Other options considered would have decoupled Class I pricing

from the basic formula price or pooled Class I differentials only

(i.e., eliminated the basic formula price entirely). Finally,

suggestions were considered to base Class I pricing on the cost of

production and to base differentials on only regional supply and demand

conditions. After analyzing these options and more than 1400 letters

that were submitted from interested persons, the Department narrowed

the pricing options to four and conducted extensive quantitative and

qualitative analysis on them. The four options selected include

location-specific differentials, relative value-specific differentials,

and decoupled Class I prices with adjustors. Although four Class I

price structure options are analyzed in the RIA, only two options are

considered as viable replacements for the current Class I price

structure in the proposed rule. However, comments are requested on all

options prior to determining which option should be adopted.

Three of the four pricing options in the RIA assume that milk would

be classified in the four classes of use detailed in the proposed rule.

One option in the RIA has only two classes of milk and thus is not

detailed in the proposed rule. For purposes of the RIA analysis, Class

IV milk is priced using the proposed butter-nonfat dry milk product

formula, but since the product prices proposed for use in the formula

are not presently available, the Chicago Mercantile Exchange spot price

for

[[Page 4809]]

butter and the average nonfat dry milk wholesale price reported by

USDA's Dairy Market News for the Western States are substituted. Also,

Class III milk is priced using the proposed cheese product formula, and

the Class II milk price for the month is equal to the Class IV price

for the month plus 70 cents per hundredweight (cwt).

The initial RIA assesses costs and benefits for dairy farmers,

fluid milk processors, dairy product manufacturers, and consumers. The

impact of each of the four Class I pricing options is measured as a

change from a baseline. The model baseline was adapted from the USDA

dairy baseline estimate published as part of the President's Budget for

Fiscal Year 1998.\11\ That baseline, which is a national annual

projection of the supply-demand-price situation for milk and dairy

products, was the basis for the market-by-market baseline of the model.

Both the President's Budget Baseline and the model baseline assume the

same program assumptions: namely, that the price support program will

be phased out by December 31, 1999, that the Dairy Export Incentive

Program will continued to be utilized, and that the Federal Milk Order

Program will be continued at the same level of class prices currently

in existence. Assumptions also are made concerning the cost of

production--especially feed, the commercial utilization of milk and

dairy products, commercial inventories, and imports. All parameters,

except those associated with the changes in the Federal Milk Order

Program, are assumed to remain unchanged.

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

\11\ See Agricultural Baseline Projections to 2005, Reflecting

the 1996 Farm Act, Interagency Agricultural Projections Committee,

U.S. Department of Agriculture, Office of the Chief Economist, World

Agricultural Outlook Board, Staff Report, WAOB-97-1 and ``Budget of

the United States Government, Fiscal Year 1998.''

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

To evaluate the impacts on dairy farmers, fluid milk processors,

and dairy product manufacturers of the four selected Class I pricing

options, a baseline estimate was constructed assuming that the current

32 orders \12\ would continue through the study period, 1999-2004. To

make comparisons, proposed pricing points for the proposed 11

consolidated orders were identified to correspond with the base pricing

zones of the 32 current marketing orders. For example, for the

consolidated Appalachian Region order, which would have the city of

Charlotte as its base pricing point, prices also were identified for

Knoxville and Louisville. These 3 pricing points correspond with the

base pricing points of the 3 markets that are to be combined into the

Appalachian regional order.

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

\12\ The following analyses were completed prior to the

termination of the Tennessee Valley marketing order and thus the

results identify it as a pricing point. Most of the plants and milk

of the former Tennessee Valley market have become regulated under

either the Southeast order or the Carolina order.

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

Location-Specific Differentials (Option 1A) Analysis

This option would establish a nationally coordinated system of

location-specific Class I price differentials reflecting the relative

economic value of milk by location. An important feature of the option

is that it would also include location adjustments that geographically

align minimum Class I milk prices paid by fluid milk processors

nationwide regardless of defined milk marketing area boundaries or

order pooling provisions. It is based on the economic efficiency

rationale presented in Cornell University research on the U.S. dairy

sector.\13\ A basic premise of this option is that the value of milk

varies according to location across the United States. The concepts of

spatial price value and relative price relationships together with

marketing data and expert knowledge of local conditions and marketing

practices and a review of supply and demand conditions are used to

develop a national Class I price structure.

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

\13\ Bishop, Phillip, James Pratt, Eric Erba, Andrew Novakovic,

and Mark Stephenson, An Economic and Mathematical Description of the

U.S. Dairy Sector Simulator, Research Bulletin 97-09, A Publication

of the Cornell Program on Dairy Markets and Policy, Department of

Agricultural, Resource, and Managerial Economics, Cornell

University, July 1997.

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

Overall, the magnitude of changes in price and income under this

option compared to the baseline are small. The all-milk price for all

Federal order markets combined during the 1999-2004 period is estimated

to average 5 cents per cwt higher. For all of the U.S. the all-milk

price is estimated to average 3 cents higher. The average all-milk

price at the basing point of 18 current markets could experience

increases of 1 to 29 cents per cwt. At the basing point of the 13

markets, the average all-milk price could decrease from 3 to 83 cents

per cwt.

The 5 markets with the greatest increases in all-milk prices were

Eastern Colorado ($0.29), New York-New Jersey ($0.28), Tampa Bay

($0.26), Southwest Plains ($0.25), and Upper Florida ($0.24). The

market with the greatest reduction in price was Western Colorado

(-$0.83), Central Illinois (-$0.66), Greater Kansas City (-$0.53),

Eastern South Dakota (-$0.51), and Southern Illinois-Eastern Missouri

(-$0.34). The annual average all-milk price in the previously-

unregulated areas of New York and New England declined $0.87 per cwt.

Changes in gross cash receipts, as expected, moved in the same

direction as the change in the all-milk price in a given market. Over

the period 1999-2004, location-specific differentials raised gross

receipts in 18 markets. It appears that the estimated average annual

receipts for producers in the current New York-New Jersey market

increased by $37.2 million. However, most of this increase was the

result of adding to the all-milk price the current $0.15 reduction on

all milk marketings for transportation. It is expected that this

apparent increase in the all-milk price and dairy farmer income would

be offset by a like amount by increased transportation costs paid by

the producer. The markets with the greatest estimated increase in gross

receipts for milk marketing were Southwest Plains ($11.8 million),

Chicago Regional ($10.9 million), Southern Michigan ($10.7 million),

New England ($7.4 million), and Eastern Colorado ($7.2 million). Gross

receipts in the current Chicago Regional and Upper Midwest markets may

have been expected to increase more since this option increased the

Class I differentials at those points substantially. However, this

option also envisions the expansion of transportation credits within

the merged order to move milk which is expected to use 20 percent of

the dollars generated by the higher Class I differentials. Over-order

charges which currently fund transportation credits are expected to be

reduced by a like amount.

The largest estimated decreases in cash receipts occur in the

Southern Illinois-Eastern Missouri (-$8.5 million), Great Basin (-$4.1

million), Middle Atlantic (-$2.9 million), Texas (-$2.5 million), and

Greater Kansas City (-$2.5 million) markets. Nine other current markets

would lose average annual gross cash receipts during the period 1999-

2004 of less than $2.0 million each. The previously unregulated areas

of New York and New England would lose an estimated average of $16.9

million in annual gross receipts from milk marketings. Under location-

specific differentials the estimated average annual gross receipts for

all Federal order markets combined increased by $68.1 million and the

entire US increased $53.1 million compared to the baseline for the

1999-2004 period.

Fluid processors in 21 of the 32 Federal order market areas face

increased Class I differentials if this

[[Page 4810]]

option were adopted compared with Class I differentials under the

baseline. Fluid processors in four of the Federal order markets and in

the previously-unregulated areas of New York and New England would see

no changes in Class I differentials. Fluid processors in the remaining

seven Federal order markets would see decreases in Class I

differentials compared with the baseline. The increases in

differentials ranged from $0.01 per cwt in the New England and New

York-New Jersey markets to $0.50 per cwt in the Upper Midwest.

Decreases in Class I differentials would range from $0.03 per cwt in

the Middle Atlantic to $0.25 per cwt in New Mexico-West Texas. Those

fluid processors facing higher Class I differentials would see their

monthly obligations to the markets' producer-settlement funds increase

while those facing lower Class I differentials would see their

obligations decrease.

With virtually no change in the amount of milk available for

manufacturing, manufacturers of dairy products would face nearly the

same supply and demand conditions that they now face when buying milk

or selling dairy products. Manufacturers in the Southwest, where milk

marketings are expected to decline, may have less milk to process while

manufacturers in the Upper Midwest may find that they have slightly

more milk for manufacturing.

Relative Value-Specific Differentials (Option 1B) Analysis

Like a location-specific differential structure, a relative value-

specific differential structure would also establish a nationally

coordinated system of Class I price differentials and adjustments that

recognizes several low pricing areas. Option 1B relies on a least cost

optimal solution from the USDSS model to develop a Class I price

structure that is based on the most efficient assembly and shipment of

milk and dairy products to meet all market demands for milk and its

products. Option 1B relies more on the market and the negotiating

ability of processors and producers to generate higher prices when

needed to provide the necessary incentive to move milk in order to

satisfy demand.

Three methods of phasing into the Class I differentials under

Option 1B were evaluated. First, a 20-percent gradual phase-in was

analyzed; then, a transitional phase-in that would offset any lost

revenue was analyzed; and finally, a revenue-enhancement phase-in that

would add additional revenue into the Class I price structure was

analyzed.

Phase-in Method 1

With the gradual phase-in, the estimated all-milk price for all

Federal order markets combined during the 1999-2004 period could

average 8 cents per cwt lower than the baseline. The estimated average

all-milk price at the basing point of 11 Federal order markets could

increase from 1 to 32 cents per cwt. At the basing point of the other

21 Federal order markets, the all-milk price is estimated to decrease

from 1 to 58 cents per cwt.

The 5 markets with the greatest estimated increases in average all-

milk prices, for the 1999-2004 period are: New Mexico-West Texas

($0.32), Chicago Regional ($0.19), Tampa Bay ($0.19), Nebraska-Western

Iowa ($0.17), and Southwest Idaho-Eastern Oregon ($0.15). The 5 Federal

order markets with the greatest estimated reductions in price are:

Eastern South Dakota (-$0.58), Michigan Upper Peninsula (-$0.55),

Western Colorado (-$0.55), Greater Kansas City (-$0.53), and Carolina

(-$0.46). The annual average all-milk price in the previously

unregulated areas of New York and the New England states is estimated

to decline by $0.96 per cwt compared to the baseline.

Over the period 1999-2004, 1B differentials could lower producer

gross cash receipts from minimum order prices in 21 of the Federal

order markets. The five current markets that would have the greatest

decreases were: Texas (-$36.8 million), Middle Atlantic (-$26.2

million), Upper Midwest (-$15.9 million), Carolina (-$15.2 million),

and Southeast (-$12.5 million). The annual average reduction in

estimated gross receipts in the previously unregulated areas of New

York and the New England states is estimated at $18.5 million from the

baseline. Estimated gross receipts increased in 11 markets. The five

markets that would have the greatest increases in gross receipts were:

Chicago Regional ($31.5 million), New Mexico-West Texas ($9.1 million),

Southern Michigan ($6.6 million), Southwestern Idaho-Eastern Oregon

($5.8 million), and New York-New Jersey ($5.3 million).

Phase-in Method 2

A possible modification to the relative value-specific

differentials would be to initially raise Class I differentials by 55

cents per cwt above the level called for in the first year of

transition. During the second year, Class I differentials would be set

at 35 cents above the transition level; the third year, 20 cents above;

and the fourth year, 10 cents above the called-for transition

differentials. At the beginning of the fifth year, Class I

differentials would be fully phased in and no assistance provided.

Under this phase-in method, the estimated all-milk price for all

Federal order markets combined during the 1999-2004 period could

average 4 cents per cwt lower than the baseline. The estimated average

all-milk price at the basing point of 12 Federal order markets could

increase from 3 to 36 cents per cwt. At the basing point of 20 Federal

order markets, the all-milk price is estimated to decrease from 2 to 53

cents per cwt from the baseline.

The five markets with the greatest estimated increases in average

all-milk prices, per cwt, for the 1999-2004 period are: New Mexico-West

Texas ($0.36), Tampa Bay ($0.32), Nebraska-Western Iowa ($0.22), Upper

Florida ($0.20), and Chicago Regional ($0.23). The five markets with

the greatest estimated reductions in price are: Eastern South Dakota

(-$0.53), Western Colorado (-$0.52), Michigan Upper Peninsula (-$0.49),

Greater Kansas City (-$0.48), and Texas (-$0.34). The annual average

all-milk price in the previously unregulated areas of New York and the

New England states is estimated to decline by $0.93 per cwt compared to

the baseline.

Over the period 1999-2004, this phase-in option would lower

estimated producer gross cash receipts attributable to minimum order

prices in 19 of the Federal order markets. The 5 markets with the

greatest estimated decreases were Texas (-$32.6 million), Middle

Atlantic (-$22.8 million), Upper Midwest (-$13.9 million), Carolina

(-$10.7 million), and Arizona-Las Vegas (-$7.6 million). The annual

average reduction in estimated gross receipts in the previously

unregulated areas of New York and the New England states is $17.8

million lower than the baseline. Gross receipts from milk marketings

could increase in the following markets: Chicago Regional ($34.4

million), New York-New Jersey ($11.7 million), Southern Michigan ($10.4

million), New Mexico-West Texas ($10.4 million), and Tampa Bay ($7.0

million). Total estimated cash receipts for the combined current

Federal orders would average $40 million less for the 6-year period.

Phase-in Method 3

Another phase-in option would enhance prices during the transition

period by $1.10 for first year phase-in differentials, $0.70 in the

second year, $.40 in the third year, and $.20 in the fourth year. The

additional price enhancement provided to dairy farmers

[[Page 4811]]

under this method is intended to help producers make the necessary

investments and other changes to compete in a more market-oriented

economy. At the beginning of the fifth year, Class I differentials

would be fully phased in at the Option 1B levels.

With the use of additional revenue under this phase-in option, the

estimated all-milk price for all Federal order markets combined during

the 1999-2004 period could be expected to be unchanged from the

baseline. The estimated average all-milk price at the basing point of

15 Federal order markets would increase from 1 to 43 cents per cwt. At

the basing point of the other 17 Federal order markets, the all-milk

price is estimated to decrease from 3 to 52 cents per cwt.

The five markets with the greatest estimated increases in average

all-milk prices, per cwt, for the 1999-2004 period were: Tampa Bay

($0.43) New Mexico-West Texas ($0.41), Upper Florida ($0.32), Nebraska-

Western Iowa ($0.26), and South Eastern Florida ($0.26). The five

markets with the greatest estimated reductions in price were: Western

Colorado (-$0.52), Eastern South Dakota (-$0.49), Greater Kansas City

(-$0.44), Michigan Upper Peninsula (-$0.43), and Texas (-$0.33). The

annual average all-milk price in the previously unregulated areas of

New York and the New England states is estimated to decline by $0.88

per cwt compared to the baseline. Total estimated cash receipts for the

combined current Federal order markets would average $34.9 million

higher for the 6-year period.

Over the period 1999-2004, this phase-in option could lower

estimated producer gross cash receipts from milk marketings in 16 of

the current markets. The five current markets with the greatest

decreases were: Texas (-$28.2 million), Middle Atlantic (-$19.0

million), Upper Midwest (-$14.6 million), Carolina (-$6.5 million) and

Arizona-Las Vegas (-$6.0 million). The annual average reduction in

estimated gross receipts in the previously unregulated areas of New

York and the New England states is estimated at $16.9 million from the

baseline. Gross receipts from milk marketings increased in 16 markets.

The five markets that would have the greatest increases were: Chicago

Regional ($33.5 million), New York-New Jersey ($19.0 million), Southern

Michigan ($14.4 million), New Mexico-West Texas ($11.7 million), and

Tampa Bay ($9.8 million).

Decoupled Baseline Class I Price with Adjustors (Option 5) Analysis

A third option analyzed in the RIA would retain the current Class I

differentials, but floor Class I prices in all markets at their 1996

average levels. Adjustments to this price would be made based on

changes in fluid use rates and short term costs of production (i.e.,

feed costs). Under this option, the all-milk price for all Federal

order markets combined would increase $0.07 per cwt and the U.S. is

projected to increase $0.03 per cwt over the 6-year period. In 19 of

the Federal order markets, the average all-milk price would be higher

by $0.01 to $0.50 per cwt. In 12 Federal order markets, the average

all-milk price would decrease from $0.03 to $0.82 per cwt.

Flooring the Class I prices at the average 1996 levels would result

in higher Class I prices in all markets in 1999 and 2000 and higher

all-milk prices in most markets when compared to the baseline. These

increased incentives for milk production would result in greater

volumes of milk for manufacturing and lower manufacturing prices.

Location-Specific Differentials (Option 6) Analysis

This option would establish minimum prices for milk used in Class I

by adding market-specific Class I differentials to the proposed Class

II price. Class II would contain all manufactured products and would be

priced by a cheese product price formula using the National

Agricultural Statistical Service surveyed 40-pound cheddar cheese price

times 9.87 plus the Chicago Mercantile Exchange Grade A butter price

times 0.238 less $1.80. The Class I differentials in this option would

be phased in over a five-year period.

In general, the Class I differentials in the central section of the

country would be reduced while those in the Northwest, New England and

Florida are increased. After the proposed price surface is fully phased

in, 20 markets would have Class I differentials that are reduced and 10

markets would have increases.

Under this option, the all-milk price for all Federal order markets

combined would decline $0.10 per cwt over the six year period. In 23 of

the Federal order markets, the average all-milk price would decline by

less than $0.01 to $0.95 per cwt. In 9 orders, the all-milk price would

increase $0.02 to $0.19 per cwt.

Gross cash receipts from milk marketings in the combined Federal

orders would average $148.8 million less than the baseline for the 6-

year period. Cash receipts would be lower in 23 markets and higher in 9

markets. Because of this decline in cash receipts and since it is

inconsistent with the four-class system contained in the proposed rule,

this Class I price option is not detailed in the Class I price

structure section of the proposed rule. This two-class pricing system

was found to be insufficient to recognize the different use-values of

milk for reasons set forth in the Basic Formula Replacement and

Classification portions of this proposed rule.

Other Impacts of Pricing Options

The potential impacts of the options analyzed in the initial RIA on

retail prices, and thus consumers, is less certain than the impacts on

other sectors of the dairy industry. In general, changes in farm milk

prices and wholesale prices are passed onto consumers. However, the

timing and the degree of these pass-throughs is uncertain. It is

assumed that all changes in farm milk prices (fluid processor costs)

and the wholesale costs of manufactured products would be passed on to

the retail level without any changes in the farm-processor-retail or

farm-wholesale-retail margins.

Because of the bulky and perishable nature of packaged fluid milk,

all international trading of dairy products, with the exception of

limited exports of fluid milk to Mexico, is in manufactured products.

An appendix table in the initial RIA details USDA's baseline estimates

of international and domestic prices for butter and nonfat dry milk.

Neither location-specific differentials nor relative value-specific

differentials are expected to have a significant impact on domestic,

wholesale dairy product prices and therefore little effect on

international trade of manufactured dairy products.

Economic Impacts of Classification Changes

The classification of milk recommendations should not have a

significant economic impact on any dairy industry participants. This

proposed rule provides uniform milk classification provisions for the

newly consolidated milk orders. The recommendations should improve

reporting and accounting procedures for handlers and provide for

greater market efficiencies.

Most of the changes regarding milk classification provisions

proposed for the newly consolidated orders would simplify order

language and remove obsolete language.

[[Page 4812]]

This proposed rule contains a modified fluid milk product

definition and recommends that certain products be reclassified. The

revised fluid milk product definition proposed for the new orders

should provide more consistency in determining the classification of

products. The inclusion of eggnog to the list of fluid milk products

and the reclassification of cream cheese from Class III to Class II

will cause a nominal increase in the cost of the finished product.

However, these changes, which will be applicable to all handlers

regulated under the new orders, should not have a significant impact on

the retail price of these products. Although producers will benefit

from these products being reclassified into higher utilization classes,

the impact of the product classification changes on the blend price to

producers will be marginal.

Another modification includes the reclassification of butter and

whole milk powder from Class III to Class IV. This change merely places

these market-clearing products in the new Class IV with nonfat dry

milk. The change promotes market efficiency and should have a minimal

impact on producers' blend prices.

One recommendation with possible economic implications concerns the

treatment of milk used to produce bulk sweetened condensed milk/skim

milk. Some commenters argued that the wide price difference that

sometimes exists between the Class II price and the Class III-A price

has put manufacturers of sweetened condensed milk at a competitive

disadvantage with manufacturers of nonfat dry milk, which can be

substituted for bulk sweetened condensed milk and skim milk in some

higher-valued products.

Although this proposed rule does not recommend a reclassification

for milk used in bulk sweetened condensed milk, it does propose a

change in the relationship between the Class II and IV prices which

should eliminate the price disparity that now, at times, exists. As

discussed in the ``Class III and Class III-A (i.e., Class IV) Milk''

section of this proposed rule, the proposed new Class II price will be

equal to the Class IV price plus a 70-cent differential. The coupling

of the Class II and Class IV prices will largely remove the incentive

to substitute nonfat dry milk for bulk sweetened condensed milk.

The recommendations regarding shrinkage provisions should provide

equity among handlers, improve market efficiencies, and facilitate

accounting procedures. This proposed rule provides that shrinkage be

assigned pro rata based on a handler's utilization. As discussed in the

``Shrinkage and Overage'' section of this proposed rule, this

modification should result in a slight increase (i.e., one cent per

cwt.) in the blend price paid to producers.

For the reasons stated above, the milk classification provisions

proposed herein should have little economic impact on dairy industry

participants.

The Regulatory Flexibility Act and the Effects on Small Businesses

Pursuant to the requirements set forth in the Regulatory

Flexibility Act (RFA) (5 U.S.C. 601 et seq.), the Agricultural

Marketing Service (AMS) has considered the economic impact of the

proposed rule on small entities and has prepared this initial

regulatory flexibility analysis. The RFA provides that when preparing

such analysis an agency shall address: the reasons, objectives, and

legal basis for the proposed rule; the kind and number of small

entities which would be affected; the projected recordkeeping,

reporting, and other requirements; and federal rules which may

duplicate, overlap, or conflict with the proposed rule. Finally, any

significant alternatives to the proposal should be addressed. This

initial regulatory flexibility analysis considers these points and the

impact of this proposed regulation on small entities, and evaluates

alternatives that would accomplish the objectives of the rule without

unduly burdening small entities or erecting barriers that would

restrict their ability to compete in the dairy industry.

This regulatory action is being considered in accordance with

Section 143 of the Federal Agriculture Improvement and Reform Act of

1996, 7 U.S.C. 7253, (the Farm Bill) which requires the Secretary of

Agriculture (Secretary) to consolidate the existing 31 Federal milk

marketing orders, as authorized by the Agricultural Marketing Agreement

Act of 1937, into between 10 and 14 orders. The Secretary is also

directed to designate the State of California as a Federal milk order

if California dairy producers petition for and approve such an order.

Finally, the Farm Bill specifies that the Department of Agriculture use

informal rulemaking to implement these reforms. The Farm Bill requires

that a proposed rule be published by April 4, 998, and all reforms of

the Federal milk order program be completed by April 4, 1999.

In addition to these required mandates, the Farm Bill provides that

the Secretary may address related issues such as the use of utilization

rates and multiple basing points for the pricing of fluid milk and the

use of uniform multiple component pricing when developing one or more

basic formula prices for manufacturing milk. This proposed rule also

sets forth two options for consideration as a replacement for the Class

I price structure and proposes replacing the basic formula price with a

multiple component pricing system. These changes are proposed to

address concerns that the current system of pricing Class I milk may

not adequately reflect the value of Class I milk at various locations

or the value of milk used in manufacturing products. The 1996 Farm Bill

identified these as related issues that may be addressed in the

consolidation of milk marketing orders. The proposed rule further

proposes changes to classification of milk by establishing a new Class

IV which would include milk used to produce nonfat dry milk, butter,

and other dry milk powders; the reclassification of eggnog and cream

cheese; and other minor changes. These proposed changes should improve

handler reporting and accounting procedures thereby providing for

greater market efficiencies. Finally, this proposed rule expands Part

1000 to include provisions that are identical within each consolidated

order to assist in simplifying the orders. These provisions include the

definitions of route disposition, plant, distributing plant, supply

plant, nonpool plant, handler, other source milk, fluid milk product,

fluid cream product, cooperative association, and commercial food

processing establishment. In addition, the milk classification section,

pricing provisions, and most of the provisions relating to payments

have been included in the General Provisions. These proposed changes

adhere with the efforts of the National Performance Review--Regulatory

Reform Initiative to simplify, modify, and eliminate unnecessary

repetition of regulations. Unique regional issues or marketing

conditions have been considered and included in each market's order

provisions.

The purpose of the RFA is to fit regulatory actions to the scale of

business subject to the actions in order that small businesses would

not be unduly or disproportionately burdened. To accomplish this

purpose, it first is necessary to define a small business. According to

the Small Business Administration's definition of a ``small business,''

a dairy farm is a ``small business'' if it has an annual gross revenue

of less than $500,00 and a handler is a ``small business'' if it has

fewer than 500 employees. For the purposes of determining which dairy

[[Page 4813]]

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. During the process of developing this proposed rule,

USDA identified approximately 80,000 of the 83,000 dairy producers

(farmers) that have their milk pooled under a Federal order as small

businesses. Thus, small businesses represent approximately 96 percent

of the producers in the United States. On the processing side, there

are over 1,200 plants associated with Federal orders, and of these

plants, approximately 700 qualify as ``small businesses'' representing

about 55 percent of the total.

During August 1997, there were 524 fully regulated handlers (343

distributing and 181 supply plants), 134 partially regulated handlers

and 111 producer-handlers submitting reports under the Federal milk

marketing order program. During 1996, 83,012 dairy farmers delivered

over 104.5 billion pounds of milk to handlers regulated under the milk

orders. This volume represents 69 percent of all milk marketed in the

U.S. and 72 percent of the milk of bottling quality (Grade A) sold in

the country. The value of the milk delivered to Federal milk order

handlers at minimum order blend prices was nearly $14.6 billion.

Producer deliveries of milk used in Class I products (mainly fluid milk

products) totaled 45.5 billion pounds--43.5 percent of total Federal

order producer deliveries. More than 200 million Americans reside in

Federal order marketing areas--77 percent of the total U.S. population.

The Federal milk order program is designed to set forth the terms

of trade between buyers and sellers of fluid milk. A Federal order

enforces the minimum price that processors (handlers) in a given

marketing area must pay producers or farmers for milk according to how

it is utilized. A Federal order further requires that the payments for

milk be pooled and paid to individual dairy farmers or cooperative

associations on the basis of a uniform or average price. It is

important to note that a Federal milk order, including the pricing and

all other provisions, only becomes effective after approval, through a

referendum, by dairy farmers associated with the order.

Development of the proposed rule began with the premise that no

additional burdens should be placed on the industry as a result of

Federal order consolidation and reform. As a step in accomplishing the

goal of imposing no additional regulatory burdens, a review of the

current reporting requirements was completed pursuant to the Paperwork

Reduction Act of 1995 (44 U.S.C. Chapter 35). In light of this review,

it was determined that this proposed rule would have little impact on

reporting, recordkeeping, or other compliance requirements because

these would remain almost identical to the current Federal order

program. No new forms have been proposed; however, some additional

reporting would be necessary in the proposed orders that would be

adopting multiple component pricing if the current orders do not

already have these provisions.

There are two principal reporting forms for handlers to complete

each month that are needed to administer the Federal milk marketing

orders. The forms are used to establish the quantity of milk used and

received by handlers, the pooling status of the handler, the class-use

of the milk used by the handler, and the butterfat content and amounts

of other components of the milk. This information is used to compute

the monthly uniform price paid to producers in each of the markets.

Handlers in the marketing areas adopting multiple component pricing

would be required to complete additional information regarding the

components of the milk. This information would be necessary to enable

their values of milk to be determined on the basis of these components

and to assure that producers are paid correctly. Many handlers already

collect and report this information.

This proposed rule does not require additional information

collection that requires clearance by the OMB beyond the currently

approved information collection. The primary source of data used to

complete the forms are routinely used in most business transactions.

Forms require only a minimal amount of information which can be

supplied without data processing equipment or a trained statistical

staff. Thus, the information collection and reporting burden is

relatively small. Requiring the same reports for all handlers does not

significantly disadvantage any handler that is smaller than industry

average.

New territory, or pockets of unregulated territory within and

between current order areas has been included in the proposed

consolidated marketing areas where such expansion would not have the

effect of fully regulating plants that are not now regulated. The

addition can benefit regulated handlers by eliminating the necessity of

reporting sales outside the Federal order marketing area for the

purpose of determining pool qualification. Where such areas can be

added to a consolidated area without having the effect of causing the

regulation of any currently-unregulated handler, they are proposed to

be added.

Handlers not currently fully regulated under Federal orders may

become regulated for two main reasons: first, in the process of

consolidating marketing areas, some handlers who currently are

partially regulated may become fully regulated because their sales in

the combined marketing areas would meet the pooling standards of a

suggested consolidated order area. Second, previously unregulated area

in New York, Vermont, New Hampshire and Massachusetts was added on the

basis of requests and supporting information. As a result, previously

unregulated handlers would become fully regulated. Because of these two

reasons, 24 additional plants are expected to become fully regulated

under the program. Of these 24 plants, it is estimated that 15 are

small businesses that would need to comply with the reporting,

recordkeeping, and compliance requirements. The completion of these

reports would require a person knowledgeable about the receipt and

utilization of milk and milk products handled at the plant. This most

likely would be a person already on the payroll of the business such as

a bookkeeper, controller or plant manager. The completion of the

necessary reporting, recordkeeping, and compliance requirements would

not require any highly specialized skills and should not require the

addition of personnel to complete. In fact, much of the information

that handlers report to the market administrator is readily available

from normally maintained business records, and as such, the burden on

handlers to complete these recordkeeping and reporting requirements is

expected to be minimal. In addition, assistance in completing forms is

readily available from market administrator offices. A description of

the forms and a complete Paperwork Reduction Act analysis follows this

section.

No other burdens are expected to fall upon the dairy industry as a

result of overlapping Federal rules. This proposed regulation does not

duplicate,

[[Page 4814]]

overlap or conflict with any existing Federal rules.

To ensure that small businesses are not unduly or

disproportionately burdened based on this proposed regulation,

consideration was given to several options with the intention of

mitigating negative impacts. Three options, including two suggested in

the preliminary reports issued by AMS in December 1996 and May 1997,

were considered with regard to the consolidation of Federal orders,

five options were considered as replacements for the basic formula

price, and seven options were considered with regard to the development

of a new Class I price structure. The following options were considered

by AMS prior to and during the development of the proposed regulation.

Consolidation Options

It is impossible to determine the economic effects of marketing

area consolidation on handlers, producers and consumers without using

assumptions about the specific order provisions contained in the

consolidated order areas. The only effect consolidation, as a single

factor, can have on the various market participants is through changes

in the percentage of milk used in different classes within the proposed

consolidated orders. Without assumptions that include the specific

class prices and milk uses in different products, there are no means of

quantifying the economic effects of consolidation.

Handlers would be affected by class prices, which would be

determined by the Class I price surface option that is selected, and by

the minimum prices contained in all of the orders for milk used in

Classes II, III and IV. The Class I price surface options considered

could have impacts on small handler entities, however, handlers

similarly located would be subject to the same minimum Class I prices,

regardless of the size of their operations, and all handlers would be

subject to the same minimum prices for Class II, Class III and Class IV

milk. Such handlers would also be subject to the same minimum prices to

be paid to producers.

Producers may be somewhat more affected by consolidation of

marketing areas because changes in utilization percentages would result

in changes in blend prices. As in the case of effects on handlers,

however, it is impossible to determine a separate consolidation effect

on producers, defined in monetary terms. The closest approximation to

such an estimate would be the ``weighted average utilization value''

(WAUV). These ``prices'' reflect only the change in value that can be

attributed to changes in utilization rates, with no assumptions about

changes in the levels of the various class prices. Such estimates, of

necessity, reflect only anticipated changes in blend prices, using

class prices that would no longer be in effect under the consolidated

orders. To the extent that the WAUV computations reflect some of the

effect of consolidation on producer prices, they are included in this

analysis under each option discussion. It should be noted, however,

that all producers in any given current area would be affected to an

equal extent by the consolidation factor, with no disproportionate

effect on small dairy farmer entities.

The following table shows the potential impact of three order

consolidation options on producers who supply each of the current

Federal milk marketing order areas via WAUV ``prices''. The three

consolidated options are (1) the consolidated marketing areas suggested

in the December 1996 initial Preliminary Report on Order Consolidation;

(2) the consolidated marketing areas suggested in the May 1997 Revised

Preliminary Report on Order Consolidation; and (3) the consolidated

marketing areas suggested in this proposed rule.

Weighted Average Utilization Values (WAUV)

[Based on October 1995 information ($/cwt)]

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

Consolidated Market Marketing Areas in Initial Marketing Areas in Revised Marketing Areas in Proposed

--------------------------------------------------------- Consol. Report (Dec. 96) Consol. Report (May 97) Rule (Option 3)

(Option 1) (Option 2) -------------------------------

---------------------------------------------------------------- Consol. Mkt. WAUV ($/cwt)

Consol. Mkt. WAUV ($/cwt) Consol. Mkt. WAUV ($/cwt) -------------------------------

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

Current Markets WAUV using WAUV using WAUV using WAUV using WAUV using WAUV using

Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt.

Utilization Utilization Utilization Utilization Utilization Utilization

($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt)

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

Northeast............................................... $13.46 $13.48 $13.47

New England (F.O. 1)................................ 13.50 13.48 13.52 13.51 13.52 13.49

NY-NJ (F.O. 2)...................................... 13.44 13.48 13.48 13.50 13.45 13.48

Middle Atlantic (F.O.4)............................. 13.45 13.39 13.45 13.41 13.44 13.40

Appalachian............................................. 14.13 13.96 13.97

Carolina (F.O. 5)................................... 14.23 14.21 14.23 14.19 14.23 14.20

Tenn. Valley (F.O. 11).............................. 13.92 13.95 13.92 13.93 13.92 13.94

Lville-Lex-Evan (F.O. 46)........................... n/a n/a 13.35 13.39 13.35 13.40

Florida................................................. 15.05 15.05 15.05

Upper Florida (F.O. 6).............................. 14.67 14.78 14.67 14.78 14.67 14.78

Tampa Bay (F.O. 12)................................. 15.09 15.04 15.09 15.04 15.09 15.04

SE Florida (F.O. 13)................................ 15.42 15.31 15.42 15.31 15.42 15.31

Southeast............................................... 14.26 14.25 14.24

Southeast (F.O. 7).................................. 14.26 14.26 14.25 14.25 14.24 14.27

Mideast................................................. 12.96 12.94 12.92

Ohio Valley (F.O. 33)............................... 12.99 13.02 12.99 13.01 12.99 13.00

E. Ohio-W. PA (F.O. 36)............................. 13.07 13.00 13.10 12.99 13.07 12.97

S. Michigan (F.O. 40)............................... 12.75 12.86 12.75 12.84 12.75 12.83

MI Upper Penin. (F.O. 44)........................... 12.81 12.62 12.81 13.262 12.81 12.61

Lville-Lex-Evan (F.O. 46)........................... 13.35 13.06 n/a n/a n/a n/a

Indiana (F.O. 49)................................... 12.97 12.94 12.97 12.93 12.97 12.92

Upper Midwest........................................... 12.60 12.62 12.60

[[Page 4815]]

Chicago Reg. (F.O. 30).............................. 12.62 12.62 12.62 12.61 12.62 12.62

MI Upper Penin. (F.O. 44)........................... R R R R R R

Neb.-W. Iowa (F.O. 65).............................. n/a n/a 12.63 12.74 n/a n/a

Upper Midwest (F.O. 68)............................. 12.55 12.56 12.55 12.54 2.55 12.56

E. South Dakota (F.O. 76)........................... n/a n/a 12.81 12.65 n/a n/a

Iowa (F.O. 79)...................................... n/a n/a 12.69 12.67 n/a n/a

Central................................................. 13.16 13.21 12.95

S. IL-E MO (F.O. 32)................................ 12.93 12.90 13.00 12.95 13.00 12.88

Central IL (F.O. 50)................................ 13.03 12.74 13.03 12.78 13.03 12.72

Greater K. City (F.O. 64)........................... 13.22 12.90 13.22 12.95 13.22 12.88

Neb.-W. Iowa (F.O. 65).............................. 12.63 12.81 n/a n/a 12.63 12.79

E. South Dakota (F.O. 76)........................... 12.81 12.68 n/a n/a 12.81 12.67

Iowa (F.O. 79)...................................... 12.71 12.71 n/a n/a 12.71 12.70

SW Plains (F.O. 106)................................ 13.31 13.33 13.31 13.41 13.08 13.29

E. Colorado (F.O. 137).............................. 13.27 13.31 13.27 13.38 13.27 13.27

Southwest............................................... 13.36 13.39 13.39

Texas (F.O. 126).................................... 13.49 13.48 13.49 13.46 13.49 13.46

Central AZ (F.O. 131)............................... 13.26 13.17 n/a n/a n/a n/a

NW-W Texas (F.O. 138)............................... 13.00 13.09 13.00 13.07 13.00 13.07

Arizona-Las Vegas....................................... n/a 13.26 13.26

Central AZ (F.O. 131)............................... n/a n/a 13.26 13.29 13.26 13.29

Western................................................. 12.79 12.78 12.78

W. Colorado (F.O. 134).............................. 13.41 12.84 13.41 12.82 13.41 12.82

SW ID-E. OR (F.O. 135).............................. 12.63 12.68 12.63 12.68 12.63 12.68

Great Basin (F.O. 139).............................. 12.83 12.81 12.81 12.79 12.81 12.79

Pacific Northwest....................................... 12.45 12.44 12.44

Pacific NW (F.O. 124)............................... 12.45 12.45 12.44 12.44 12.44 12.44

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

n/a: not applicable.

R: Restricted.

For each option, a weighted average use value (WAUV) is computed

for (a) the consolidated order; (b) the current order with current use

of milk; and (c) the current order with projected use of milk in the

consolidated order. The difference between the weighted average use

values in (b) and (c) represents the potential impact on producers.

For example, in this proposed rule, the New England (F.O. 1)

market's WAUV using its current utilization is $13.52 per cwt. When the

three markets are consolidated and the new consolidated utilization is

used to calculate the WAUV, New England's WAUV would be $13.49 per cwt.

In this comparison, the potential impact on producers supplying the New

England market area would be a decrease of three cents per cwt.

Each of the three options assumes the pool distributing plant

standards suggested for each of the consolidated orders in this

proposed rule; thus the calculated values in the preceding table are

not directly comparable to the WAUV values published with either the

initial or the revised reports on order consolidation.

During the process of developing this proposed rule, AMS issued two

reports suggesting 10 and 11 marketing area boundaries, respectively,

to meet the requirements of the 1996 Farm Bill. The marketing areas

defined in these reports were based primarily on an analysis of receipt

and distributing data from fluid distributing plants in October 1995.

Over 900 comments regarding consolidation issues received thus far in

the development process also have been considered: almost 50 comments

prior to the December 1996 release of the Preliminary Report on Order

Consolidation (Option 1); an additional 60 comments prior to the May

1997 release of the Revised Preliminary Report on Order Consolidation

(Option 2); and another 800 comments since release of the revised

report. These comments were filed primarily by producers and handlers.

Incorporated in the marketing area boundaries suggested in the revised

report and in the proposed consolidation in this rule (Option 3) are

both information contained in the comments as well as data gathered to

update the information on which the earlier report(s) were based where

questions were raised about the boundaries of suggested marketing areas

and where marketing changes had occurred.

Option 1 (Preliminary Report on Order Consolidation, December 1996)

Based on seven criteria: ((1) Overlapping route disposition; (2)

overlapping areas of milk supply; (3) number of handlers within a

market; (4) natural boundaries; (5) cooperative association service

areas; (6) features common to existing orders, such as similar multiple

component pricing plans; and (7) milk utilization in common dairy

products), 10 marketing areas (Northeast, Appalachian, Florida,

Southeast, Mideast, Upper Midwest, Central, Southwest, Western and

Pacific Northwest) were suggested in this

[[Page 4816]]

report. Data were gathered relating to the receipts and distribution of

fluid milk products for all known distributing plants located in the 47

contiguous States, not including the State of California, for the month

of October 1995.

The current Federal orders that comprise the initially-suggested

consolidated areas are as follows: NORTHEAST--current marketing areas

of the New England, New York-New Jersey, and Middle Atlantic Federal

milk orders; APPALACHIAN--current marketing areas of the Carolina and

Tennessee Valley Federal milk orders, and a portion of the Louisville-

Lexington-Evansville Federal milk order; FLORIDA--current marketing

areas of the Upper Florida, Tampa Bay, and Southeastern Florida Federal

milk orders; SOUTHEAST--current marketing areas of the Southeast

Federal milk order, plus 1 county from the Louisville-Lexington-

Evansville Federal milk order marketing area, 15 currently unregulated

Kentucky counties, and 2 currently unregulated northeast Texas

counties; MIDEAST--current marketing areas of the Ohio Valley, Eastern

Ohio-Western Pennsylvania, Southern Michigan, and Indiana Federal milk

orders, plus most of the current marketing area of the Louisville-

Lexington-Evansville Federal milk order, Zone 2 of the Michigan Upper

Peninsula Federal milk order, and 12 counties of the Southern Illinois-

Eastern Missouri Federal milk order; UPPER MIDWEST--current marketing

areas of the Chicago Regional and Upper Midwest Federal milk orders,

plus Zones I and I(a) of the Michigan Upper Peninsula Federal milk

order and seven unregulated or partly regulated Wisconsin counties;

CENTRAL--current marketing areas of the Southern Illinois-Eastern

Missouri (less 12 counties included in the suggested Mideast marketing

area), Central Illinois, Greater Kansas City, Nebraska-Western Iowa

(less 11 currently-regulated counties suggested to be unregulated),

Eastern South Dakota, Iowa, Southwest Plains, and Eastern Colorado

Federal milk orders, plus 63 currently-unregulated counties in seven of

the states; SOUTHWEST--current marketing areas of the Texas, New

Mexico-West Texas, and Central Arizona Federal milk orders; WESTERN--

current marketing areas of the Western Colorado, Southwestern Idaho-

Eastern Oregon, and Great Basin Federal milk orders; and PACIFIC

NORTHWEST--current marketing area of the Pacific Northwest Federal milk

order plus 1 currently-unregulated county in Oregon.

Based on the WAUV calculations shown in the previous table,

utilization rate changes due to consolidation could affect producer

prices. The column labeled ``Option 1'' shows the WAUV for the

consolidated order and each of the current orders suggested in the

December 1996 report.

In the Northeast market, producers currently affiliated with the

New England and Middle Atlantic would have negative impacts on their

WAUV, respectively, while New York-New Jersey producers would be

positively impacted. In the Appalachian market, Carolina producers

should expect some negative impacts due to consolidation, while

Tennessee Valley producers would experience positive effects from this

consolidation. In the Florida market, Upper Florida producers would

gain while Tampa Bay and Southeastern Florida producers would have a

negative impact resulting from this consolidation. The Southeast market

remains virtually the same as it does currently and thus, no or little

impact on producer prices would be expected. In the Mideast market,

producers affiliated with the Ohio Valley and Southern Michigan Federal

orders would probably see increases in blend prices due to this

consolidation, while producers affiliated with the Eastern Ohio-Western

Pennsylvania, Michigan Upper Peninsula, Louisville-Lexington-Evansville

and Indiana Federal orders would see decreases. In the Upper Midwest

market, the Upper Midwest producers should see slight increases while

Chicago Regional producers would probably have no impact due to this

consolidation. Of all the consolidated markets, producers in the

current Orders that compose the Central market probably would see the

largest changes due to this consolidation: producers with the Nebraska-

Western Iowa, Southwest Plains and Eastern Colorado markets may see

increases, while producers affiliated with the Southern Illinois-

Eastern Missouri, Central Illinois, Greater Kansas City, and Eastern

South Dakota markets may see decreases. Producers with the Iowa market

would probably have no impact due to this suggested Central market

consolidation. In the Southwest market, producers affiliated with the

New Mexico-West Texas would see increases due to this consolidation

while Texas and Central Arizona producers would see decreases. In the

Western market, Southwestern Idaho-Eastern Oregon producers would see

increases but Western Colorado and Great Basin producers would see

decreases. The Pacific Northwest market remains virtually the same as

it does currently and thus, no or little impact on producer prices

would be expected.

Of approximately 83,000 dairy producers delivering milk to handlers

regulated under the milk orders, about 80,000 are considered to be

small businesses under the production guideline of less than 326,000

pounds per month.

As stated above, handlers are impacted more significantly by class

prices and minimum prices than by expected utilization changes

resulting from consolidation. Of the 371 distributing plants expected

to be fully regulated under this 10-market suggested configuration

under the assumptions used in the December 1996 report, an estimated

193 plants are small businesses under the criteria provided by the SBA

(under 500 employees).

Option 2 (Revised Preliminary Report on Order Consolidation, May 1997)

Eleven marketing areas were suggested in this second report.

Because numerous comments indicated that the boundaries of some

marketing areas should be re-evaluated, and also because regulatory

shifts and distributing plant distribution areas had occurred, more

detailed and updated data was obtained. The same seven criteria used in

Option 1 were applied in this option as well. Modifications were made

to the Northeast, Appalachian, Southeast, Mideast, Upper Midwest,

Central, Southwest and Western regions, as follows (only the changes to

these orders are noted): NORTHEAST--Addition of contiguous unregulated

areas of New Hampshire, Vermont and New York; the western non-Federally

regulated portion of Massachusetts, the Western New York State order

area, and Pennsylvania Milk Marketing Board Areas 2 and 3 in

northeastern Pennsylvania; APPALACHIAN--Addition of all of the

Louisville-Lexington-Evansville Federal order (with the exception of

one county included in the suggested Southeast market) and 26

currently-unregulated counties in Indiana and Kentucky; SOUTHEAST--

Minus 2 currently-unregulated counties in northeast Texas (in the

suggested Southwest market); MIDEAST--Addition of Pennsylvania Milk

Marketing Board Area 6 (in western/central Pennsylvania) and 2

currently-unregulated counties in New York, and minus the Louisville-

Lexington-Evansville Federal order area, 12 counties in Illinois, and

unregulated counties in Indiana and Kentucky (in the suggested

Appalachian market); UPPER MIDWEST--Addition of the Iowa, Eastern South

Dakota, and most of

[[Page 4817]]

the Nebraska-Western Iowa Federal order areas, plus currently-

unregulated counties in Iowa and Nebraska; CENTRAL--Addition of 12

counties in the current Southern Illinois-Eastern Missouri Federal

order that initially were suggested as part of the consolidated Mideast

area, and minus the Eastern South Dakota, Iowa, and most of the

Nebraska-Western Iowa Federal order marketing area; SOUTHWEST--Addition

of 2 currently-unregulated northeast Texas counties that initially were

suggested as part of the consolidated Southeast market and 47

currently-unregulated counties in southwest Texas, and minus the

Central Arizona marketing area; ARIZONA-LAS VEGAS--this new eleventh

marketing area composed of the current marketing area of the Central

Arizona Federal order and the Clark County, Nevada, portion of the

current Great Basin marketing area, plus eight currently-unregulated

Arizona counties; and WESTERN--Minus Clark County, Nevada. The FLORIDA

and PACIFIC NORTHWEST marketing areas did not change from the

preliminary report.

Based on the WAUV calculations shown in the previous table,

utilization rate changes due to consolidation could affect producer

prices. The column labeled ``Option 2'' shows the WAUV for the

consolidated order and each of the current orders suggested in the May

1997 report.

In the Northeast market, producers currently affiliated with the

New England and Middle Atlantic orders would have negative impacts on

their WAUV, respectively, while New York-New Jersey producers would

remain unchanged. In the Appalachian market, Carolina producers should

expect some negative impacts due to consolidation, while Tennessee

Valley and Louisville-Lexington-Evansville producers would experience

positive effects from this consolidation. In the Florida market, Upper

Florida producers would gain while Tampa Bay and Southeastern Florida

producers would have a negative impact resulting from this

consolidation. The Southeast market remains virtually the same as it

does currently and thus, little impact on producer prices would be

expected. In the Mideast market, producers affiliated with the Ohio

Valley and Southern Michigan Federal orders would probably see

increases in blend prices due to this consolidation, while producers

affiliated with the Eastern Ohio-Western Pennsylvania, Michigan Upper

Peninsula, and Indiana Federal orders would see decreases. In the Upper

Midwest market, the Nebraska-Western Iowa producers should see

increases, while Chicago Regional, Upper Midwest, Eastern South Dakota,

and Iowa producers would have a decrease in producer prices due to this

consolidation. In the Central market, producers with the Southwest

Plains and Eastern Colorado markets would see increases, while

producers affiliated with Southern Illinois-Eastern Missouri, Central

Illinois, and Greater Kansas City markets may see decreases. In the

Southwest market, producers affiliated with New Mexico-West Texas would

see increases due to this consolidation while Texas producers would see

decreases. The added Arizona-Las Vegas market is virtually the same as

the Central Arizona market but a positive impact on producer prices may

result from an additional handler. In the Western market, Southwestern

Idaho-Eastern Oregon producers would see increases but Western Colorado

and Great Basin producers would see decreases. The Pacific Northwest

market remains virtually the same as it does currently and thus, no or

little impact on producer prices would be expected.

Of approximately 83,000 dairy producers delivering milk to handlers

regulated under the milk orders, about 80,000 are considered to be

small businesses under the production guideline of less than 326,000

pounds per month. In addition, it is estimated that about 13 percent of

the total milk production in Pennsylvania is represented only by the

Pennsylvania Milk Marketing Board. Under this option, this production

would be added to the Federal order pool and affect an undetermined

number of businesses which would include both small and large

producers.

As stated above, handlers are impacted more significantly by class

prices and minimum prices than by expected utilization changes

resulting from consolidation. Of the 379 plants expected to be fully

regulated under this 11-market suggested configuration under the

assumptions used in the May 1997 report, 175 plants are estimated to be

small businesses on the basis of fewer than 500 employees.

The preliminary consolidation report (Option 1) stated that the

Farm Bill requirement to consolidate existing marketing areas did not

specify expansion of regulation to previously non-Federally regulated

areas where such expansion would have the effect of regulating handlers

not currently regulated. However, on the basis of data, views and

arguments filed by interested persons in response to the initial

Preliminary Report (Option 1) requesting that currently non-Federally

regulated areas be added to some consolidated marketing areas, the

revised Preliminary Report (Option 2) suggests that such areas be added

to several consolidated areas, the Northeast and Mideast market areas

in particular. Approximately 20 handlers who would have been affected

by the expansion of Federal order areas into currently non-Federally

regulated areas were notified of the possible change in their status

and encouraged to comment.

Handlers located in Pennsylvania Milk Marketing Board Areas 2, 3

and 6 are regulated under the State of Pennsylvania if they do not have

enough sales in any Federal order area to meet an order's pooling

standards. If such plants do meet Federal order pooling standards, the

State continues to enforce some of its regulations in addition to

Federal order regulations. As state-regulated handlers, they must pay a

Class I price for milk used in fluid products which is often higher

than the Federal order price would be. Inclusion of the Pennsylvania-

regulated handlers in the consolidated marketing area would have little

effect on handlers' costs of Class I milk (or might reduce them), while

reducing producer returns.

Option 3: The Proposed Consolidation

The proposed consolidation is a result of extensive analysis of

data as previously indicated and consideration of public comments

submitted in response to Options 1 and 2. Extensive outreach, which is

explained in the ``Public Input'' section, was completed. After

compiling this information, the proposed order consolidation was

developed to ensure industry integrity.

Eleven marketing areas are proposed in this rule, including

modifications to some of the 11 marketing orders suggested in Option 2.

Marketing data was further examined for some of the suggested

consolidated marketing areas to determine the most appropriate

configurations of the consolidated areas. Primary criteria continues to

be the seven used in the two earlier reports on order consolidation. As

a result of further analysis, the configurations of the Northeast,

Mideast, Southeast, Upper Midwest and Central areas have changed

significantly from those suggested in Option 2, and minor changes have

been made to the Appalachian area. The modifications for these areas

from the revised preliminary report (Option 2) are as follows:

NORTHEAST--Minus some previously suggested area to be included in the

Northeast (the southern tier of 3 western New York counties and

Pennsylvania Milk Marketing Board Areas 2 and 3); APPALACHIAN--Minus

five Kentucky counties that were part of the former

[[Page 4818]]

Paducah order area, now suggested to be in the Southeast market;

SOUTHEAST--Addition of 11 northwest Arkansas and 22 entire and 1

partial Missouri counties currently part of the Southwest Plains

Federal order, 6 Missouri counties currently part of the Southern

Illinois-Eastern Missouri Federal order, 16 currently unregulated

southeast Missouri counties, 20 currently unregulated Kentucky counties

(were suggested to be in the Appalachian market); MIDEAST--Minus the

current Pennsylvania Milk Marketing Board Area 6 and two southwestern

New York counties, all currently non-Federally regulated; UPPER

MIDWEST--Minus the Iowa, Eastern South Dakota, Nebraska-Western Iowa

Federal order areas; CENTRAL--Addition of the Iowa, Eastern South

Dakota, Nebraska-Western Iowa Federal order areas, 68 currently-

unregulated counties in Kansas, Missouri, Illinois, Iowa, Nebraska and

Colorado, and minus 11 northwest Arkansas and 22 entire and 1 partial

Missouri counties currently part of the Southwest Plains Federal order,

6 Missouri counties currently part of the Southern Illinois-Eastern

Missouri Federal order, and 16 currently unregulated southeast Missouri

counties. The FLORIDA, SOUTHWEST, ARIZONA-LAS VEGAS, WESTERN and

PACIFIC NORTHWEST marketing areas did not change from the revised

preliminary report.

Based on the WAUV calculations shown in the previous table,

utilization rate changes due to consolidation could affect producer

prices. The column labeled ``Proposed Rule'' shows the WAUV for the

consolidated order and each of the current orders suggested in this

proposed rule.

In the Northeast market, for producers currently affiliated with

the New York-New Jersey order, the proposed option would have positive

impacts on their WAUV, while New England and Middle Atlantic producers

would be negatively impacted. In the Appalachian market, Carolina

producers should expect some negative impacts due to consolidation,

while Tennessee Valley and Louisville-Lexington-Evansville producers

would experience positive effects from this consolidation. In the

Florida market, Upper Florida producers would gain while Tampa Bay and

Southeastern Florida producers would have a negative impact resulting

from this consolidation. With the addition of marketing area to the

Southeast, the WAUV for Southeast producers may be expected to be

positively impacted. In the Mideast market, producers affiliated with

the Ohio Valley and Southern Michigan Federal orders would probably see

increases in blend prices due to this consolidation, while producers

affiliated with the Eastern Ohio-Western Pennsylvania, Michigan Upper

Peninsula, and Indiana Federal orders would see decreases. In the Upper

Midwest market, the Upper Midwest producers should see slight

increases, while Chicago Regional producers would have no impact due to

this consolidation. In the Central market, producers with the Nebraska-

Western Iowa and Southwest Plains markets would see increases,

producers affiliated with Southern Illinois-Eastern Missouri, Central

Illinois, Greater Kansas City, Eastern South Dakota, and Iowa markets

may see decreases, and Eastern Colorado producers would see no impact.

In the Southwest market, producers affiliated with New Mexico-West

Texas would see increases due to this consolidation while Texas

producers would see decreases. Producers in the Arizona-Las Vegas

market may receive a positive impact on producer prices due to an

additional handler regulated in this order area. In the Western market,

Southwestern Idaho-Eastern Oregon producers would see increases but

Western Colorado and Great Basin producers would see decreases. The

Pacific Northwest market remains virtually the same as it does

currently and thus, no or little impact on producer prices would be

expected.

Of approximately 83,000 dairy producers delivering milk to handlers

regulated under the milk orders, about 80,000 are considered to be

small businesses under the production guideline of less than 326,000

pounds per month. The additional estimated 13 percent of Pennsylvania's

total milk production represented by the Pennsylvania Milk Marketing

Board which would have been added in Option 2, would not be included

under this option.

As stated above, handlers are impacted more significantly by class

prices and minimum prices than by expected utilization changes

resulting from consolidation. Of the 337 plants expected to be fully

regulated under this 11-market proposed configuration, 164 plants are

estimated to be small businesses on the basis of fewer than 500

employees.

Based on the comments received in response to the revised

preliminary report (Option 2) it has been determined that consolidation

of the existing orders does not necessitate expansion of the

consolidated orders into areas in which handlers are subject to minimum

Class I pricing under State regulation, especially when the states'

Class I prices exceed or equal those that would be established under

Federal milk order regulation. Such regulation would have the effect of

reducing returns to producers already included under State regulation

without significantly affecting prices paid by handlers who compete

with Federally-regulated handlers.

In an effort to avoid extending Federal regulation to handlers

whose primary sales areas are outside current Federal order marketing

areas, but who already are subject to similar minimum uniform pricing

under State regulation, the in-area Class I disposition percentage

portion of the pool distributing plant definition is proposed to be 25

percent for the Northeast order and 30 percent for the Mideast order,

instead of the 10 or 15 percent used in the other nine consolidated

order areas. It is estimated that five plants in Pennsylvania, Maryland

and Virginia that would have been fully regulated using 15 percent

would remain partially regulated, as they currently are, using 25 and

30 percent, respectively. At least three of these five handlers meet

the small business criteria.

Exempt Plants

Options 2 and 3 both recognize the Identical Provisions Committee

\14\ determination than a handler distributing less than 150,000 pounds

per month of fluid milk products does not have a significant

competitive effect on the market, and that handlers of such size

should, therefore, be exempt from the pricing and pooling provisions of

the orders. The level of route disposition required before an exempt

plant becomes regulated varies in the current orders. As recommended,

any plant with route disposition during the month of 150,000 pounds or

less would be exempt in the consolidated orders. This limit reflects

the maximum amount of fluid milk products allowed by an exempt plant in

any current Federal milk order and ensures plants that are currently

exempt from regulation would remain so. Under this proposed rule, it is

expected that 36 distributing plants that otherwise would be identified

as fully regulated plants are identified as exempt plants. Therefore

under this provision, these plants would not be subject to the pricing

and pooling provisions of their respective order.

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

\14\ The Identical Provisions Committee was established in May

1996 to address uniformity in order provisions during the Federal

order reform process. This committee and others established are

described further in the ``Background'' portion of this proposed

rule.

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

Although 150,000 pounds of fluid milk disposition per month may

[[Page 4819]]

represent a level at which exempting a distributing plant could be

expected not to have a serious detrimental impact on the ability of a

Federal milk order to provide for uniform pricing to handlers and

producers, it would be quite difficult to select a higher level of

exemption without compromising the purposes of the regulation. The

under-500-employee definition of a small business assures that nearly

all single-plant milk handlers would qualify as a small business. Many

of the ``small'' businesses may be among the largest competitors in a

particular market.

In addition, numbers of employees could be expected to vary greatly

with the nature of a plant's operation. For instance, the number of

persons employed by two plants processing and distributing equal

volumes of fluid milk products could be very different if one plant

contracts out its producer milk hauling, laboratory operations and

packaged product distribution, while the other plant performs all of

these operations with its own employees. For this reason alone, it

would be inappropriate to exempt handlers from regulation, or to impose

differing regulatory burdens, on the basis of their size beyond the

minimal size determined to be less than a significant competitive force

in the market.

Many current Federal orders also provide regulatory exemption for a

plant operated by a state or Federal government agency. For example,

some states have dairy farm and plant operations that provide milk for

their prison populations. As recommended, regulatory exemption would be

continued under the consolidated orders unless pool plant status is

desired. Additionally, regulatory exemption is intended to include

colleges, universities and charitable institutions because these

institutions generally handle fluid milk products internally and have

little or no impact in the mainstream commercial market. However, in

the event that these entities do distribute fluid milk through

commercial channels, route sales by such entities, including government

agencies, would be monitored to determine if Federal regulations should

apply. Under this proposed rule, it is expected that 18 distributing

plants would be identified as exempt based on their institutional

status.

Producer-handlers

Also exempt from full regulation would be those entities that

operate as both a producer and a handler. A primary basis for exempting

producer-handlers from the pricing and pooling provisions of a milk

order is that these entities are customarily small businesses that

operate essentially in a self-sufficient manner. During August 1997,

111 producer-handlers submitted reports under the Federal milk

marketing order program.

Basic Formula Price Options

A number of options for determining a basic formula price were

considered and analyzed in the process of developing the proposed basic

formula price (BFP). In addition to the proposed method of pricing

components based on their value in manufactured products, other options

examined, by both the Agricultural Marketing Service's Dairy Division

Basic Formula Price Replacement Committee and by the University Study

Committee (USC), led by Dr. Ronald D. Knutson of Texas A & M

University, were: economic formulas, futures markets, cost of

production, competitive pay pricing, and pricing differentials only.

Descriptions of the two Committees' analyses, and results of their

work are included in ``A Preliminary Report on Alternatives to the

Basic Formula Price,'' published in April 1997 by the Basic Formula

Price Committee, Dairy Division, AMS; and the following reports from

the Agricultural and Food Policy Center, Texas A&M University System:

``An Economic Evaluation of Basic Formula Price (BFP)

Alternatives,'' AFPC Working Paper 97-2, June 1997.

``Evaluation of `Final' Four Basic Formula Price Options,'' AFPC

Working Paper 97-9, August 1997.\15\

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

\15\ These reports can be obtained from the Agricultural and

Food Policy Center, Department of Agricultural Economics, Texas A&M

University, College Station, Texas 77843-2124, telephone (409) 845-

5913 or on the Internet at http://AFPC1.TAMU.EDU.

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

The primary criterion used by the Dairy Division BFP Committee was

that any replacement BFP option reflect the supply of and demand for

milk used in manufactured dairy products. At the same time, one of the

USC's critical criteria for a replacement BFP was that it reliably

reflect market conditions for all manufactured products.

In trying to determine the most appropriate replacement for the

current BFP, which uses a survey of prices paid by manufacturing plants

for non-Grade A milk updated by a product price formula, the goal of

both groups was a market-based alternative. The BFP Committee measured

the extent to which each pricing option met its primary goal by

tracking the options against the current BFP for a period of prior

months, on the basis of the assumption that the current BFP

successfully reflects the supply and demand for milk used in

manufactured products. The USC Committee used an econometric procedure

to test the ability of the alternatives they considered to reflect

supply and demand.

To the extent the goal of identifying a BFP that reflects the value

of milk used in manufactured products is capable of attainment, all

market participants would be affected by the BFP replacement in the

same manner as if they were operating in a free market, with no

external impacts caused by regulation. To the extent the goal is

achieved, then, there would be no uneven impact on market participants

on the basis of size. All market participants, (handlers, producers and

consumers), would be affected in the same manner as if there were no

regulation. However, the existence of minimum order pricing serves to

assure that small handlers pay no more for their milk than larger

entities (unless the market allows higher prices to be exacted from

small buyers), and that small producers receive the same minimum

uniform price for the milk or components of milk they produce as large

producers. Consumers can be assured that the prices generally charged

for dairy products are prices that reflect, as closely as possible, the

forces of supply and demand in the market.

Of the options considered and analyzed, both groups studying the

issue determined that the option of pricing components of milk

according to their value in manufactured products, as reflected by the

sales prices of those products, best approximates the intersection of

supply and demand for milk used in manufactured dairy products.

Manufacturing Allowances

Make allowances or manufacturing allowances, one of the factors

incorporated in the formulas for determining component values, may

reflect more closely the manufacturing costs of large firms than those

of small firms. These manufacturing costs would be used to adjust the

sales prices of dairy products to the value of milk purchased to make

the products. To the extent these allowances fail to reflect the full

cost of manufacturing, they may require handlers to pay more for milk

than they can realize from the sale of their products. On the other

hand, if the manufacturing allowances more than cover the cost of

manufacturing, handlers may be assured of extra margins.

Although it may appear that the use of make allowances in the

computation

[[Page 4820]]

of component prices would advantage large processors because of

possible economies of scale, these economies exist regardless of

whether they are recognized in price computations. If the assumption is

made that economies of scale exist in dairy plants and that large

plants are more efficient than small plants, a manufacturing allowance

that fully covers a small handler's cost of making products would

merely increase the profit margin of its larger competitors. At the

same time, producers unfairly would be required to subsidize the

manufacturing costs of handlers who use their milk, and consumers would

pay more for their dairy products than the costs of production and

processing would justify.

An attempt has been made, using Cornell University studies of

manufacturing costs at a number of manufacturing plants distributed

around the U.S., to arrive at economically defensible make allowances.

Since it is difficult to distinguish the differential effects of

market-based component pricing on small and large firms engaged in

manufacturing dairy products, reliance would be placed on industry

participants to comment on these facets of the proposed BFP

replacement.

Impact of Multiple Component Pricing Provisions on Small Entities

Seven of the eleven proposed orders provide for milk to be paid for

on the basis of its components (multiple component pricing, or MCP).

Five of the seven MCP orders also provide for milk values to be

adjusted according to the somatic cell count of producer milk. The

equipment needed for testing milk for its component content can be very

expensive to purchase, and requires highly-skilled personnel to

maintain and operate. The cost of infra-red analyzers ranges from just

under $100,000 to $200,000. The infra-red machines that are used by

most laboratories would test for total solids and somatic cells at the

same time the butterfat and protein tests are done.

No new report forms are needed under multiple component pricing;

however, some additional reporting is necessary to enable handlers'

values of milk to be determined on the basis of components, and to

assure that producers are paid correctly. For the market administrators

to compute the producer price differential, handlers would need to

supply additional information on their currently-required monthly

reports of receipts and utilization. In addition to the product pounds

and butterfat currently reported, handlers would be required to report

pounds of protein, pounds of other solids, and, in 5 of the orders,

somatic cell information. This data would be required from each handler

for all producer receipts, including milk diverted by the handler,

receipts from cooperatives as 9(c) handlers (that is, the cooperative

acts as a handler); and, in some cases, receipts of bulk milk received

by transfer or diversion.

Since producers would be receiving payments based on the component

levels of their milk, the payroll reports that handlers supply to

producers must reflect the basis for such payment. Therefore the

handler would be required to supply the producer not only with the

information currently supplied, but also, (a) the pounds of butterfat,

the pounds of protein, and the pounds of other solids contained in the

producer's milk, as well as the producer's average somatic cell count,

and (b) the minimum rates that are required for payment for each

pricing factor and, if a different rate is paid, the effective rate

also. Many handlers already report this additional information. It

should be noted that handlers already are required to report

information relative to pounds of production, butterfat and rates of

payment for butterfat and hundredweight of milk to the appropriate

Market Administrator.

Of over 74,000 producers whose milk was pooled in December 1996

under 23 of the current orders that would be part of consolidated

orders providing for multiple component pricing, the milk of 52,500 of

these producers was pooled under 13 current orders that have MCP.

Handlers in these markets already have incurred the initial costs of

testing milk for its component content, and have made the needed

transition to reporting the component contents of milk receipts on

their handler reports to the market administrators, and on their

reports of what they have paid producers.

Of the remaining 21,750 producers who would be affected by MCP

provisions under a Federal order (including an estimated 20,650

producers qualifying as small businesses), the milk of approximately

13,000, or 60 percent, currently is received by handlers who test or

have the capability of testing for multiple components and, in many

cases, somatic cells. Many of these handlers also report component

results to the producers with their payments. Almost all of the

producers whose milk currently is not being tested or paid for on the

basis of components are located in the New England and New York-New

Jersey marketing areas, which would be consolidated with the Middle

Atlantic area into the proposed Northeast order.

Accommodation has been made to ameliorate handlers' expenses of testing

producer milk for component content

As component pricing plans have been adopted under a number of the

present Federal milk orders since 1988, the component testing needed to

implement these pricing plans has been performed by the market

administrators responsible for the administration of the orders

involved for handlers who have not been equipped to make all of the

determinations required under the amended orders. It has been made

clear in the decisions under which these plans have been adopted that

handlers who would find it unduly burdensome to obtain the equipment

and personnel needed to accomplish the required testing may rely on the

market administrators to verify or establish the tests under which

producers are paid. As noted above, however, many handlers not now

subject to MCP provisions under Federal orders have nevertheless

already undertaken multiple component testing and payment programs.

Pricing Options

Several pricing options, as discussed below, were considered as

replacements for the current Class I price structure. Five of the

options were determined to have a negative impact on small businesses,

albeit slight or significant. These options included relative use

differentials, flat differentials, modified flat differentials, demand

based differentials, and a decoupled baseline Class I price with

adjustors. In addition to the impacts on small businesses, these

options were not considered viable based on additional qualitative

analysis contained in the findings and conclusions of the proposed

rule.

Relative Use Differentials

The use of relative use differentials based on Class I utilizations

was considered as an option for replacing the Class I price structure.

Using this concept, the relative use Class I differential would equal

$1.60 per hundredweight plus the relative use ratio times $1.00. A 25

percent limit would be applied so the new differential would not exceed

125 percent of the current differential nor fall to less than 75

percent of the current differential. A percentage limit was placed on

the differential changes to temper adjustments based on market supply

and demand conditions.

The advantages of the system are that it allows Class I

differentials to adapt to

[[Page 4821]]

supply and demand conditions within a given marketing area based on

changes in the utilization. However, because the differentials would be

allowed to change independently from neighboring areas, serious

problems arise with order-to-order alignment.

The next table illustrates the Class I differentials under the

proposed consolidated orders. These differentials are not location-

specific within the applicable orders. For purposes of this analysis

and to provide a basis for comparison within the proposed consolidated

orders, a weighted average Class I differential has been calculated for

each order, based on October 1995 data. This weighted average

differential is computed by multiplying the percentage of Class I milk

in each of the current orders that comprise the consolidated order by

the applicable current order differential and adding the resulting

amounts. This weighted average differential is not location specific

for the consolidated order.

Relative Use Class I Differentials in Proposed Orders

[Based on October 1995 Data]

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

Relative use + $1.60 = Weighted Maximum diff.

Proposed order \1\ ratio \2\ class I diff. average diff. range (75%- New diff ($/ Change in

(percent) ($/cwt) ($/cwt) \3\ 125%) cwt) diff. ($/cwt)

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

Northeast............................................... 0.92 2.52 3.14 2.35-3.93 2.52 -0.62

Appalachian............................................. 4.60 6.20 2.79 2.09-3.49 3.49 0.70

Southeast............................................... 5.76 7.36 3.04 2.28-3.80 3.80 0.76

Florida................................................. 7.54 9.14 3.89 2.92-4.86 4.86 0.97

Mideast................................................. 1.26 2.86 1.91 1.43-2.39 2.39 0.48

Central................................................. 0.95 2.55 2.52 1.89-3.15 2.55 0.03

Up. Midwest............................................. 0.53 2.13 1.32 0.99-1.65 1.65 0.33

Southwest............................................... 0.93 2.53 3.01 2.26-3.76 2.53 -0.48

AZ-Las Vegas............................................ 1.04 2.64 2.46 1.85-3.08 2.64 0.18

Western................................................. 0.42 2.02 1.84 1.38-2.30 2.02 0.18

Pacific NW.............................................. 0.55 2.15 1.90 1.43-2.38 2.15 0.25

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

\1\ Based on the 11 proposed orders contained in this proposed rule.

\2\ Relative use ratio = Class I all other uses.

\3\ Weighted average differential for the consolidated order is computed by summing the product of the percentage of Class I milk in each current order

multiplied by the applicable current order differential.

The review of this option indicates that differentials would

probably have a minimal impact on small businesses, both processors and

producers. For a majority of the Federal order system, producers and

processors would experience Class I price increases. However, due to

offsetting factors impacts would be reduced.

Class I differentials are estimated to increase from $0.00 to $0.48

in the Central, Mideast, and Midwestern regions. Currently, over-order

charges are significantly higher and would largely absorb these

differential increases. Impacts on small producers and processors would

be minimal.

The Northeastern marketing area could be affected significantly by

the adoption of a relative use differential because of the decrease in

Class I prices and because this area has a high concentration of small

businesses, both producers and processors. There are approximately

18,860 small producers and 280 small processors located in this region.

Processors would pay on average $0.62 less for Class I milk as compared

to the current system. Producers would likely turn to over-order

charges to try to make up for their lost revenue. If this were to

occur, then small processors and producers would be placed at a

competitive disadvantage to large businesses because often the small

businesses do not maintain the resources needed to effectively

negotiate for supplies of milk. However, historically this region has

had difficulty maintaining a large over-order premium structure and

assumptions are that this would continue. If so, then all producer

income would decrease slightly possibly impacting the market's milk

supplies.

Large increases in Class I differentials would occur in the orders

located in the Southeast. There are approximately 4,000 small producers

and 30 small handlers in the Florida and Southeast areas. Class I

handlers would experience increased competition from lower cost

handlers in nearby markets. This may have a greater impact on small

processors because of their ability to compete based on available

resources. Although higher differentials would be returned to producers

through the Federal order uniform price, overall producers in the

Southeast markets would probably not experience any significant gains

from these increased differentials due to reduced over-order premiums

being charged. However, this would benefit small producers who may not

be able to negotiate as effectively for over-order prices.

The Southwest market is the other market to experience decreases in

differentials. Approximately 1,400 small producers and 30 small

handlers would be impacted by the decrease in Class I prices. Over-

order charges currently are relatively small in this market and an

attempt to increase the charges would likely occur. However, producer

groups have had the same difficulty as the Northeast in maintaining an

over-order structure. A $0.48 drop in the average differential in the

Southwestern market would surely be felt by producers and accelerate

the exodus of producers from the East Texas supply area, most likely

smaller producers who may not have significant resources to adapt to

the lowered prices or who would not be able to negotiate for higher

over-order prices. Producers in New Mexico and West Texas would also be

affected, but the impact may not be as severe.

Processors in this region may benefit from the decrease in Federal

order prices. However, if there is an increase in the over-order prices

that the processors must pay, then the amount gained from the decrease

would be lessened. In fact, if over-order pricing is implemented then

small processors may be at a disadvantage because they may not be able

to compete for milk beyond the reduction in Class I prices.

In the Western regions, Class I differentials are expected to

increase slightly. Over-order charges in these markets are not as great

as in the Midwestern markets and would probably be unable to totally

absorb the Class I price increase. Producer pay

[[Page 4822]]

prices and Class I handler costs would increase slightly. All producers

would benefit from the price increase, including about 690 small

producers. However, about 50 small processors may be at a disadvantage.

Small processors may not have the additional revenue necessary to adapt

to the $0.18 to $0.25 per hundredweight increase in Class I prices.

Because of the limited effect of overall Class I differential

changes within individual orders, relative use differentials would have

a minimal effect on small businesses, both producers and processors.

Areas that have decreases in Class I differentials would have a minimal

negative impact on producer pay prices. Over 20,000 producers, or about

95 percent of all producers, in these regions are categorized as small

businesses. On the other hand, handlers in areas with larger increases

in the Class I differentials would experience increased competition

from lower cost regions. Location advantages of some small handlers

would disappear while others emerge. Handler equity in these competing

markets could erode placing some small handlers under greater risk.

Approximately 300 handlers in the Northeast and Southwest markets are

categorized as small handlers, about half of the total number of

handlers.

However, the adoption of a relative use differential could have a

significant impact on small businesses, both producers and processors

that are located in adjacent orders. Because Class I prices would be

able to change independently from each other, significant Class I price

variances may begin to exist. As Class I utilization changes, these

changes may be significant. This lack of alignment between bordering

orders would increase competition in areas where Class I price

differences are significant having a greater impact on small

businesses.

Flat Differentials

The use of flat differentials was considered as an option for

replacing the Class I price structure. Under this system, all Class I

differentials would be established at $1.60 regardless of the location.

Establishing the differentials at an equal level throughout the United

States does not recognize the location value associated with milk.

Because this value would not be reflected in the minimum price under

the Federal order program, flat differentials could affect small

businesses, as shown by the following table.

Flat Class I Differentials in Proposed Orders

(Based on October 1995 Data)

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

Weighted

Flat average Change ($/

Suggested consolidated order \1\ differential differential cwt)

($/cwt) ($/cwt) \2\

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

Northeast....................................................... 1.60 3.14 -1.54

Appalachian..................................................... 1.60 2.79 -1.19

Southeast....................................................... 1.60 3.04 -1.44

Florida......................................................... 1.60 3.89 -2.29

Mideast......................................................... 1.60 1.91 -0.31

Central......................................................... 1.60 2.52 -0.92

Upper Midwest................................................... 1.60 1.32 0.28

Southwest....................................................... 1.60 3.01 -1.41

AZ-Las Vegas.................................................... 1.60 2.46 -0.86

Western......................................................... 1.60 1.84 -0.24

Pacific NW...................................................... 1.60 1.90 -0.30

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

\1\ Based on the 11 proposed orders contained in this proposed rule.

\2\ Weighted average differential for the consolidated order is computed by summing the product of the

percentage of Class I milk in each current order multiplied by the applicable current order differential.

The review of this option indicates that flat differentials could

change the competitive relationship between large and small processors

and producers. Large processors could have a competitive advantage over

small processors in negotiating with producers for supplies of milk at

prices above the established minimum price. Likewise, large producers

could have a better bargaining position when competing with small

producers to supply a processor.

In all areas of the United States, with the exception of the Upper

Midwest, producers and processors would experience significant

decreases in the Class I price. The largest decrease would occur in the

Florida order with the Class I price decreasing $2.29 per

hundredweight. This would result in approximately a $2.06 decrease in

the uniform price paid to producers. Although over-order pricing has

been effective in Florida, it is unlikely that the over-order prices

would be able to offset this total decrease. Data regarding over-order

pricing are not published but an indication of the level is provided by

comparing the Federal order Class I milk price to the announced

cooperatives Class I price. In

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