Compact Over-Order Price Regulation

SUMMARY: This rule amends the current Compact Over-Order Price

Regulation to exempt from the regulation any fluid milk sold in eight-

ounce containers distributed by handlers under open competitive bid

contracts and sold by School Food Authorities in New England during the

1998-1999 contract year, to the extent an increased cost of such milk

is documented as attributable to operation of the price regulation. The

Compact Commission will reimburse School Food Service Authorities for

such documented increased costs.

EFFECTIVE DATE: April 1, 1998.

ADDRESSES: Northeast Dairy Compact Commission, 43 State Street, P.O.

Box 1058, Montpelier, Vermont 05601.

FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director,

Northeast Dairy Compact Commission at the above address or by telephone

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

SUPPLEMENTARY INFORMATION:

Background

The Compact Commission was established under authority of the

Northeast Interstate Dairy Compact (``Compact''). The Compact was

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

follows: Connecticut--Pub. L. 93-320; Maine--Pub. L. 89-437, as

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

Pub. L. 93-106; Vermont--Pub. L. 89-95, as amended, 93-57. Consistent

with Article I, Section 10 of the United States Constitution, Congress

consented to the Compact in Pub. L. 104-127 (FAIR ACT), Section 147,

codified at 7 U.S.C. sec. 7256. Subsequently, the United States

Secretary of Agriculture, pursuant to 7 U.S.C. sec. 7256(1) authorized

implementation of the Compact.

Section 8 of the Compact empowers the Compact Commission to engage

in a broad range of activities designed to ``promote regulatory

uniformity, simplicity and interstate cooperation.'' For example, the

Compact authorizes the Compact Commission to engage in a range of

inquiries into the existing milk programs of both the participating

states and the federal milk marketing system, to make recommendations

to participating states, and to work to improve industry relations as a

whole. See Compact, Art. IV, section 8.

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

authorizes the Compact Commission to consider adopting a compact Over-

order Price Regulation. See Compact, Art. IV, section 9. A compact

over-order price is defined as:

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

milk established by the Commission in regulations adopted pursuant

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

established in federal marketing orders or by state farm price

regulation in the regulated area. Such price may apply throughout

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

regulations of the Commission.

Compact, Art. II, section 2(8).

The regulated price authorized by the Compact is actually an

incremental amount above, or ``over-order'' the minimum price for the

same milk established by Federal Milk Market Order #1. The price

regulation establishes the minimum procurement price to be paid by

fluid milk processors for milk that is ultimately utilized for fluid

milk consumption in the New England region. Price regulation also

provides for payment of a uniform ``over-order'' price, out of the

proceeds of the price regulation, to dairy farmers making up the New

England milkshed, regardless of the utilization of their milk. See

Compact, Art. IV, section 9 (``The Commission is hereby empowered to

establish the minimum price for milk to be paid by pool plants,

partially regulated plants and all other handlers receiving milk from

producers located in a regulated area.'')

Section 11 of the Compact delineates the administrative procedure

the Compact Commission must follow in deciding whether to adopt or

amend a price regulation:

Before promulgation of any regulations establishing a compact

over-order price or commission marketing order, including any

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

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

conduct an informal rulemaking proceeding to provide interested

persons with an opportunity to present data and views. Such

rulemaking proceeding shall be governed by section four of the

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

Sec. 553). In addition, the Commission shall, to the extent

practicable, publish notice of rulemaking proceedings in the

official register of each participating state. Before the initial

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

commission marketing order and thereafter before any amendment with

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

hearing. The Commission may commence a rulemaking proceeding on its

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

of any person including individual milk producers, any organization

of milk producers or handlers, general farm organizations, consumer

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

As part of any rulemaking procedure to establish or amend a price

regulation, Section 12(a) of the Compact, directs the Commission to

make four findings of fact with respect to:

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

establishment of minimum milk prices to dairy farmers under Article

IV.

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

price sufficient to cover their costs of production and will elicit

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

and for manufacturing purposes.

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

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

reasonably designed to achieve the purposes of the order.

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

amendment are approved by producers as provided in section thirteen.

Compact, Art. V, Section 12.

Pursuant to Section 11 of the Compact, the Compact Commission

initiated its first rulemaking procedure in December, 1996.1

The rulemaking culminated on May 30, 1997 with the issuance of a final

rule establishing a compact over-order price regulation for the period

July 1, 1997-December 31, 1997.2 On September 8, 1997, the

Compact Commission issued notice of proposed rulemaking to consider

whether to extend the price regulation beyond the present December 31,

1997 expiration date and whether to amend the regulation

generally.3 On November 25, 1997, a final rule was issued

extending the price regulation through to sunset of the Compact

enabling

[[Page 10105]]

legislation, and amending the technical regulation in certain

instances.4

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\1\ The Commission issued a notice of Hearing on December 13,

1996, 61 FR 65604, and held public hearings on December 17 and 19,

1996. The notice also invited the public to submit written comments

through January 2, 1997. Following the close of this comment period,

the Commission met on January 16, 1997 and established three working

groups to consider the testimony and data submitted. The Commission

issued a notice of Additional Comment Period on March 14, 1997, 62

FR 12252. This comment period closed on March 31, 1997; the reply

comment period closed April 9, 1997. Based on the testimony and

comment received, the Compact Commission issued a proposed rule on

April 28, 1997 to adopt price regulation, 62 FR 23032. As part of

the proposed rule, the Commission published for comment technical

regulations to be codified at 7 CFR 1300, et seq. Minor corrections

to the proposed rule were published May 8, 1997, 62 FR 25140, to

provide clarification and to correct errors. The Compact Commission

received additional comment in response to the proposed rule issued

April 28, 1997.

\2\ 62 FR 29627 (May 30, 1997).

\3\ 62 FR 47156 (September 8, 1997)

\4\ 62 FR 62810 (November 25, 1997)

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On December 11, 1997 (62 FR 65226), the Compact Commission issued a

notice of proposed rulemaking 5 to exempt from the

regulation fluid milk distributed by handlers under open and

competitive bid contracts for the 1998-1999 contract year with New

England School Food Authorities for child nutrition programs qualified

for reimbursement under the National School Lunch Act and the Child

Nutrition Act.6 The Notice set a public hearing for December

29, 1997, as required by Section 11 of the Compact, and, pursuant to

the Commission's bylaws, invited the public to submit written comments

through January 12, 1998.

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\5\ The proposed rulemaking stemmed from the report of a

Commission Ad Hoc Committee established pursuant to the final rule

adopted on November 25, 1997. The rule charged the task force with

assessing the impact of the Compact over-order price regulation on

school food service programs and to ``make recommendations as to

whether the region's school food service programs should receive

reimbursement for some or all of any increased costs attributable to

the price regulation and, if so, the method for reimbursing the

appropriate authorities.'' 62 FR 62820.

\6\ National School Lunch Act of 1946, Pub. L. 79-396; Child

Nutrition Act of 1966, Pub.L. 89-642.

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Based on the oral testimony and written comment received, and by

reference to the reasoning set forth in its previous and final rules,

the Compact Commission hereby amends the current Compact Over-order

Price Regulation to exempt from the regulation fluid milk distributed

by handlers under open and competitive bid contracts for the 1998-1999

contract year and sold by School Food Authorities, to the extent that

an increased cost for such milk can be documented as attributable to

operation of the price regulation.

The technical provisions of the Compact Over-order Price Regulation

is codified at 7 CFR 1300 through 1308.1. The rule amends the

regulation by adding a new paragraph (e) to 7 CFR 1301.13 Exempt milk.

Immediately following is a summary analysis and response to the

comments received during the present rulemaking procedure. A more

detailed review and response follows, organized around the finding

analysis required by Section 12 of the Compact.

I. Summary Analysis of Comments Received in Response to the Proposed

Rule and Compact Commission's Response

The Commission duly considered oral and written comment received at

the December 29, 1997 7 hearing and the considered

additional comments received by the Compact Commission's published

deadline of January 12, 1998. The Compact Commission met on January 26,

1998 to consider and act on the comment received.8

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\7\ December 11, 1997, 62 FR 65226.

\8\ Public Notice of the January 26, 1998 meeting was published

originally on January 9, 1998, 63 FR 1396. The meeting was

rescheduled for January 26, 1998 (63 FR 3267, published January 22,

1998).

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Fifty-one separate comments were received during the hearing and

written comment period. Of the total commenters, thirty-one expressed

support for the regulation's amendment and fifteen expressed opposition

to its amendment. The remaining five commenters took no apparent

position on the proposal.

Ten of the fourteen commenters opposing the amendment were farmers.

The remainder included representatives of farmer groups or

organizations representing farmers. Five farmers spoke in support of

the exemption.9 Nine of the remainder of the thirty-two

commenters supporting the amendment were directly employed in providing

school lunches to schools, including representatives from Canton,

Walpole, Pittsfield, Wakefield, Essex, and Quincy, Massachusetts. The

remaining commenters in support of the exemption are a diverse group,

including representatives of the region's departments of agriculture,

officials of dairy farmer cooperatives and other farmer organizations,

and a state legislative representative from Massachusetts.

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\9\ One farmer, Bill Peracchio, initially testified against the

exemption at the public hearing, but subsequently submitted written

testimony in support of the exemption.

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Those farmers opposed to the amendment spoke of their strong

support for the Compact and the need to keep the price regulation

intact. Most of these commenters spoke in specific terms of the

importance of the price regulation to the viability of their farming

operations, but only in general terms with regard to its possible

impact on school food service programs. The commenters who testified in

favor of the exemption as food service program administrators provided

specific evidence of the potential cost to their programs caused by the

price regulation, and the importance of exemption from such cost. They

described how food service programs are non-profit and predominantly

self-supporting, and can absorb increased cost inputs only by price

increases for meals or a la carte items. These commenters also

emphasized the nutritional importance of milk. Many referred to the

existing exemption in the price regulation for the Special Supplemental

Nutrition Program for Women, Infants and Children (WIC) as a

justification for treating school food service programs in a similar

manner.

Other commenters who spoke in favor of establishing an exemption

for school food service programs cautioned against making the exemption

broader than necessary. Rather than exempting all milk sold to schools

for the entire amount of the over-order price regulation, as in the WIC

model, these commenters stressed the need for an exemption procedure by

which only the actual, documented, amount of increased cost for milk

sold in eight-ounce containers directly attributable to the price

regulation would be reimbursed.10

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\10\ These commenters included representatives from the

Connecticut Farm Bureau, Agri-Mark, Inc., Massachusetts Cooperative

Milk Producer's Federation, Independent Dairymen's Association, St.

Albans Cooperative Creamery, Inc. and the Connecticut, Massachusetts

and Vermont Departments of Agriculture.

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The November 25, 1997 final rule establishing the present Compact

over-order price regulation, as well as its predecessor promulgated May

30, 1997, defined as a governing principle the importance of assuring

that the regulation does not adversely affect operation of child

nutrition programs. Stemming in part from this governing principle,

despite the Commission's overall determination that the end-consumer

market would be positively affected by operation of the price

regulation over time, the Commission established an exemption for the

WIC program. This exemption was established in part because of the

determination that the WIC program is unique as a capped entitlement

program, but also out of an abundance of caution to assure that the

program would be ``held harmless'' against any unanticipated short-term

market distortions or other consequences attributable to the price

regulation.

Following from this underlying, governing principle, the Commission

is persuaded by the comment received in the present rulemaking

procedure of the need to establish a limited exemption for school food

service programs.11 The Commission is responding, at bottom,

to the universal understanding of the nutritional importance of milk

for child nutrition, and the central role that school food service

programs play in providing for child nutrition.

[[Page 10106]]

Accordingly, the Commission hereby amends the price regulation to

exempt milk sold in eight-ounce containers by school food service

programs during the 1998-1999 school year, to the extent an increased

cost attributable to operation of the price regulation is documented.

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\11\ As explained below, the comment received makes clear that

the exemption should apply to all milk served by school food service

programs rather than only milk provided through government

supplemental nutrition programs by schools, as set forth in the

proposed rule.

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The comments received with regard to the significant concerns and

relative positions on the critical issues invoked by the finding

analysis mandated by Section 12(a) of the Compact are now addressed in

detail.

II. Summary and Further Explanation of Findings Regarding Amendment

As noted above, Section 12(a) of the Compact directs the Commission

to make four findings of fact before an amendment of the over-order

price regulation can become effective.

The first finding considers whether the establishment of an

exemption mechanism for milk sold in eight-ounce containers by school

food service programs serves the public interest. The Compact

Commission finds that the public interest will be served by a

reimbursement process for the school year contract period for 1998-

1999, or September, 1998-June, 1999.12

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\12\ As developed further below, the Commission notes that the

Compact sunsets by law no later than April, 1999, so that the actual

term of the exemption is in reality from September, 1998-April,

1999.

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The second finding considers the level of producer price needed to

cover costs of production and to assure an adequate local supply of

milk. The Compact Commission finds that the exemption for milk sold in

eight-ounce containers by school food service programs will reduce the

net producer price established under the regulation by approximately

three percent. Such a reduction will adversely affect to some degree

the regulation's intended function as contemplated under this finding

analysis. Nonetheless, the Commission concludes that this impact must

be balanced within the overall context of the public interest

contemplated under the first finding analysis, in which the paramount

importance of child nutrition programs is overriding.

The fourth finding, requiring the determination of whether the

amendment has been approved by producer referendum pursuant to Article

IV, Section 12 of the Compact, is invoked in this instance given that

the amendment will affect the level of the price regulation on the

producer side. In this final rule, as in the previous final rules, the

Compact Commission makes this finding premised upon certification of

the referendum's results published separately in this Federal Register.

The procedure for such certification is set forth infra in the section

of this rule addressing the fourth finding.13

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\13\ The third finding requires a determination of whether the

provisions of the regulation other than those establishing minimum

milk prices are in the public interest. The amendment serves only to

establish a direct exemption from the price regulation itself. The

matter of the public interest is thereby addressed under the first

required finding and not under this finding. In any event, the

Commission concludes that the price regulation, with operation of

the amendment, remains in the public interest in the manner

contemplated by this finding.

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A. Whether an Amendment to the Price Regulation Establishing A

Reimbursement Provision for Milk Sold in Eight-Ounce Containers by

School Food Service Programs Will Serve the Public Interest

As one of the four underlying findings required for the

establishment of price regulation, the Compact Commission must

determine:

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

establishment of minimum milk prices to dairy farmers under Article

IV.

Compact, Art. V., Section 12(a)(1).

In its prior rulemakings, as part of a broad ranging consideration

of the public interest in price regulation, the Compact Commission

directly addressed the anticipated impact of the price regulation on

child supplemental nutrition programs. The Commission there determined

that school food services programs operate essentially in accordance

with the broad parameters of the competitive retail marketplace,

whereby the price for school milk sold in eight-ounce containers is set

through an open, competitive, bid process. Based on a direct reference

to a General Accounting Office study's description of the programs, the

Commission determined that:

The National School Lunch Act of 1946 (Pub. L. 79-396) and the

Child Nutrition Act of 1966 (Pub. L. 89-642) authorize USDA to

reimburse state and local school authorities--under grant

agreements--for some or all of the costs of these programs.

Reimbursements are based on either the number of meals served or the

number of half pints served. The schools use these funds, as well as

state and local funds and moneys collected from students, to

purchase food, including milk, for these programs. These purchases

are made through either sealed bid or negotiated procurements.

USDA's regulations require that these procurements be conducted in a

manner that provides for the maximum amount of open and free

competition.14

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\14\ GAO Report 13-239877 at p. 2 (October 16, 1992) submitted

by Jim Jeffords as Additional Reply Comment, April 9, 1997; see also

62 FR 23050.

All commenters in the present rulemaking procedure, whether for or

against an exemption, agree on the importance of school food service

programs in ensuring that children have the opportunity to eat a

nutritious and balanced meal at lunchtime during the school day (and at

breakfast, where such meals are available). According to the comment

received, milk provides 23-38 percent of the daily calcium requirement

critical to bone development, depending on age, as well as other

important nutrients and vitamins.15

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\15\ Nancy E. Sandbach, Director of Nutrition Education, New

England Dairy and Food Council, WC, January 5, 1998.

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One registered dietician explained why milk is such a valued and

critical source of child nutrition:

Now there are other sources of calcium. They include broccoli,

kale, turnip and beet greens, canned fish, tofu, dried peas and

beans. Frankly, none of these are really popular with children. So

you can see that not only the most economical but the most

acceptable source of calcium is milk or milk products.16

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\16\ Lois Black, Registered Dietician, Hamilton-Wenham Regional

School District, December 29, 1997, Public Hearing at 43.

One farm couple, though opposed to an exemption, summed up the

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universal understanding of milk's importance as a nutritional source:

Nutritionally, young children should consume their minimum daily

requirements of calcium to avoid later skeletal problems. Calcium is

stored as money in the bank for use in later life.17

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\17\ Jacqueline and Dale Lewis, WC, January 12, 1998.

The Commission received extensive, additional comment from

directors of school food services programs about the operation and

financing of these programs, and about the significance and relative

cost of milk to the success of these programs.18 The food

service program directors described how their programs are for the most

part self-funding, or without external funding from municipalities or

state government, and receive only partial reimbursement from the

federal government. The non-profit nature of the programs was also

delineated. For example, the profit and loss statement for one program

disclosed a total profit of $707.48 against total expenditures of

$701,218.05, and it was explained that this surplus was intended as a

carry-

[[Page 10107]]

over to cover initial costs for the subsequent school

year.19

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\18\ Tina Lauersdorf, Food Service Director, Wakefield, MA

Public Schools, December 29, 1997, Public Hearing at p. 25; Lois

Black, Registered Dietician, Hamilton-Wenham, MA Regional School

District, PH at p. 41; and Jaqueline Morgan, Food Services Director,

Walpole, MA Public Schools, PH at p. 80. See also Allen Brown,

Kenneth Leon and Marsha J. Maher, Canton, MA Public Schools, WC,

December 22, 1997.

\19\ Jaqueline Morgan, Food Services Director, Walpole, MA

Public Schools, WC, January 9, 1998.

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Sales of milk by school food service programs, predominantly in

eight-ounce containers, were described as occurring in two forms,

either as part of a breakfast or lunch meal package or a la Carte.

Lunch meal prices, including the milk container, are in the range of

$1.00-$1.75.20 A la Carte milk prices ranged from $0.35-

$0.50 per container.

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\20\ Lois Black, Registered Dietician, Hamilton-Wenham Regional

School District, December 29, 1997, Public Hearing at 77; Jaqueline

Morgan, Food Services Director, Walpole, MA Public Schools, December

29, 1997, Public Hearing at p. 129.

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These commenters, as well as others,21 described the

milk procurement process for school food service programs. Supply

contracts for a subsequent school year are put out to bid by individual

districts or consortiums of districts, usually in April or May. After a

review process, the contracts are let in July. By law, Massachusetts'

school districts must accept the lowest bid received.

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\21\ See e.g. William J. Gillmeister, Economist, Massachusetts

Department of Agriculture, WC, January 12, 1998.

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Bids and contracts take two forms, variable or fluctuating, and

fixed. Fluctuating bids and contracts account for the variability in

the vendor/processor's procurement cost, attributable to the monthly

changes in federal milk market order pricing for fluid, or Class I

milk. Fluctuating bids and contracts account for these changes by the

establishment of a benchmark price as of a particular month, with

allowance for subsequent changes in the market order price. Fixed bids

and contracts do not allow for any such variability in the school

program procurement price; the inherent variability in the processor's

cost is built into the price upfront, and applies for the duration of

the contract.22

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\22\ See Jaqueline Morgan, WC January 9, 1998, ``Cooperative

Purchasing, Specifications for Milk and Milk Products, FY 1997-98'';

see also William J. Gillmeister, WC, January 12, 1998.

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According to statistics provided by the Massachusetts Department of

Agriculture, approximately half each of all contracts are let by the

fixed and variable methods. Also according to the Department's

statistics, school food service program sales of milk amount to

approximately three to four percent of all total fluid milk sales in

the New England region.

All commenters associated with school food service programs were

unanimous in expressing their concern that the programs are extremely

sensitive to cost increases for milk. All expressed the concern that

increases in milk costs could adversely affect their ability to provide

milk to schoolchildren. These commenters all indicated that they

understood the Compact price regulation as causing such a price

increase, with the resulting adverse impact on their programs. For this

reason, all commenters associated with school food service programs

requested an exemption from the price regulation for their milk

purchases.

As noted by many other commenters, however, the commenters

associated with the school food service programs based their

calculations of the potential or actual impact of the price regulation

on a clearly inaccurate and incomplete understanding of the price

regulation's operation.23 Despite their apparent knowledge

of the monthly variability in milk pricing, the food service program

commenters expressed their opinions of the regulation's potential

annual impact by reference to a letter from one vendor, describing the

regulation's impact for only the one month of September, 1997. Even

accounting for the well-understood arcane nature of milk market

regulation, such incomplete analysis is by definition limited in terms

of its benefit for understanding the dynamics between the price

regulation and the region's school lunch programs.

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\23\ See e.g. Leon Berthiaume, WC, January 12, 1998; Bob

Wellington, WC, January 9, 1998.

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The Commission further notes that the stated concerns expressed

with regard to the potential impact of the price regulation come

predominantly from food service programs in the state of Massachusetts.

While comment in support of the exemption was received from a Food

Service program provider in New Hampshire and in Vermont, all other

commenters associated with food service programs were from

Massachusetts. From the comment received, it is apparent that the

concerns of many of these Massachusetts-based programs stemmed from the

unsuccessful attempt by one vendor, West Lynn Creamery, Inc., to

increase the fixed contract price to a number of school districts the

vendor supplied, after the price regulation went into effect. Though

unsuccessful, the attempt apparently served to bring operation of the

price regulation to the attention of these commenters.24

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\24\ ``When food service directors got this letter [from West

Lynn Creamery announcing the intended price increase] the phone was

ringing * * *'' Jaqueline Morgan, December 29, 1997, Public Hearing,

p. 119.

The comment about this vendor's competitive conduct in the 1997-

1998 bid process, and that of others, also may indicate that the

price regulation could have created a downward pressure on milk

prices in the manner contemplated by the Commission's analysis in

the final rule adopting the price regulation. According to the

testimony, West Lynn's attempt to increase the contract price for

its milk after the price regulation went into effect may have

ultimately been unsuccessful because ``* * * they would no longer be

the lowest bidder so instead of going out to re-bid, West Lynn

absorbed the cost into their price.'' Jaqueline Morgan, PH p. 119.

This commenter subsequently qualified her statement by indicating

that she was describing the experience of a program other than her

own. While somewhat uncertain, the hearing testimony indicated

further that more than the one vendor used this pricing strategy of

not incorporating the price regulation into their bid price. ``We

were informed by Nature's Best that they were not going to pass the

price along to our collaborative.'' Jaqueline Morgan, PH at p. 109;

see also Lois Black, PH at p. 47-48, indicating that Turner's Dairy

did not include the price regulation in its bid. Such a pricing

strategy of not incorporating anticipated price increases into a

bid, whether based on the regulation's establishment of a flat

procurement price or otherwise, could thus in fact have resulted in

the positive, competitive-based, impact on prices anticipated by the

rulemaking process.

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Notwithstanding these vagaries in the testimony, the Compact

Commission is persuaded that the comment received indicates that the

price regulation may serve, at least in the short-term, to increase the

cost of milk provided by school food service programs, and that such

increase would have an adverse impact on the effectiveness of these

vital child nutrition programs. Accordingly, the Commission hereby

determines that the establishment of an exemption from the price

regulation to preclude such an adverse impact best serves the public

interest.

Many commenters other than representatives of school food service

programs support this conclusion. For example, Leon Graves, Vermont

Commissioner of Agriculture, testified that:

The agricultural community understands the need to err on the

side of caution regarding supplemental nutrition programs. As

farmers are benefiting from the Compact Regulation, we recognize

that the nutrition and well-being of children should not be at risk

as a result of our efforts. If there is evidence in the record to

demonstrate that increased milk contract prices are harming schools

involved in child nutrition programs, then as was done with WIC, it

would be prudent for the Commission to grant an exemption for milk

in school meal programs as well.25

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\25\ Leon Graves, PH at p.145.

Frank Mattheson, a dairy farmer from Littleton, MA echoed the

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Commissioner's sentiment:

I am concerned that even one child or school district is hurt by

the Compact.26

\26\ Frank Mattheson, WC, January 9, 1998.

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The Commission accepts the approach of those commenters supporting

an exemption premised on reimbursement of only higher costs that can be

documented as attributable to the

[[Page 10108]]

price regulation.27 Simple reference to the difference

between the federal milk market order price structure and the compact

``over-order'' price regulation would, for most months at least, result

by definition in the determination that the price regulation causes an

increased procurement cost to the school food service programs. It is

apparent from the comment received, however, that the bid process is in

fact competitive and that, while changes in the federal milk market

order price are used as a benchmark, the federal pricing structure is

not the only component of the vendors' respective cost structures.

Diverse costs associated with the particular circumstances of the

multi-varied school food service programs,28 as well as

differing overheads, all can affect a vendor's particular bid. Given

that some vendors apparently chose not to include it in their bids,

incorporation of the price regulation's impact into the cost structure,

itself, may also be a consideration, strategic or otherwise.

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\27\ Dan Stevens, President, Massachusetts Cooperative Milk

Producer's Federation, WC, January 9, 1998; Sally Beach, General

Manager, Independent Dairymen's Cooperative Association, December

29, 1997, Public Hearing at p. 12; Leon Berthiaume, General Manager,

and Diane Bothfeld, St. Albans Cooperative Creamery, Inc., WC,

January 12, 1998 and December 29, 1997, Public Hearing at p. 8; Gabe

Moquin, Connecticut Department of Agriculture, WC, January 9, 1998;

Leon Graves, Commissioner, Vermont Department of Agriculture,

December 29, 1997, Public Hearing at p. 14; Bob Wellington, Senior

Vice President, Agri-Mark, Inc., WC, January 9, 1998.

\28\ Bids and contracts must expressly account for equipment use

and even the provision of straws. (Provided free of charge by

Nature's Best). Other considerations are frequency of delivery and

the number of ``drops'' per territory. Jaqueline Morgan, December

29, 1997, Public Hearing at p. 103-104.

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The Commission concludes that it is appropriate to establish the

exemption in this format based on the further determination that such a

requirement will not work undue hardship on the school food service

programs. The programs currently document and report monthly milk sales

for purposes of receiving federal reimbursement. Under this system of

reimbursement, all food service programs in each state report to the

respective state department of education.29 The data and

procedure for reporting sales currently in use can be relied upon and

tailored for purposes of the compact price regulation exemption.

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\29\ Jaqueline Morgan, WC, January 9, 1998; William J.

Gillmeister, WC, January 12, 1998.

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The procedure utilized will be modified to include a certification

process from each school food service program vendor, establishing that

the compact price regulation has been included in whole or in part in

the contract price, and identifying the precise unit cost amount

attributable to the price regulation. Vendors will be required to

disclose in their bids the underlying cost components resulting in the

identified unit price amount. These should include overhead and other

standard cost components and the manner and degree to which the federal

pricing structure has been incorporated. The Commission again concludes

that such a requirement will not work a hardship, given that the

vendors must currently make certain certifications as part of the

current bid process, as well as account for the interplay between

compact and federal price regulation in their composition of fixed and

variable bids.30

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\30\ Jaqueline Morgan, WC, January 9 and 12, 1998.

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To establish the precise mechanics of the reimbursement procedure,

the Compact Commission will enter into a memorandum of understanding

with the state departments of education, or other agency as

appropriate, not later than May 1, 1998. The memorandum of

understanding shall include provisions for certification by supplying

vendor/processors that their bid and contract cost structures do in

fact incorporate the over-order price obligation, in whole or in part,

and provisions for defining the components of cost structure to be

provided in support of such certification. The memorandum shall also

establish the procedure for providing reimbursement to the school food

service programs. This procedure shall provide for quarterly

reimbursement, unless it is determined that a different reimbursement

time frame would be more efficient and appropriate, and the appropriate

amount to be escrowed by the Commission. The memorandum of

understanding shall in addition contain provisions to ensure the

confidentiality of the bid process.

The exemption is made applicable to all milk sold by school food

service programs, rather than only milk qualified for reimbursement

under federal child nutrition programs. According to the comment, the

reimbursements are imbedded into the revenue structure for the school

food service programs. The degree to which the reimbursements reduce

program costs for milk, as opposed to the total food costs, cannot

thereby be readily identified. As a result, to accomplish its purpose,

all milk must be covered by the exemption.31

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\31\ The exemption is limited to the sale of half-pint

containers, the basic sales unit for the school food service

programs. See Gabe Moquin, Connecticut Department of Agriculture,

WC, January 9, 1998.

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The exemption is limited with regard to its application in time and

duration. Based on the comment received describing a competitive

bidding process for the 1997-1998 contract year, it is apparent that

the exemption must be made prospective, only. It would not be

appropriate to interfere with or alter contractual arrangements already

established. It is also apparent that the exemption must be limited to

apply only to the 1998-1999 contract year, given the Compact's

scheduled sunset of no later than April, 1999.

Some of the school food service program directors testifying at the

December 29, 1997 Hearing suggested use of the WIC Program exemption

procedure as the means to establish the exemption for school milk

sales. The WIC Program exemption procedure is not applicable to the

school food service programs. As noted, milk is provided in bulk

deliveries by single vendors directly to the school food service

programs. By contrast, there is no differentiation between or among the

variety of fluid milk brands and products supplied to retailers for

sale to WIC Program participants and that supplied for sale to all

other consumers. On the other end of the transaction, school food

service programs sell only program milk in a narrow readily definable

transaction pattern, in contrast to the diverse pattern of retail sales

to WIC Program participants.

Several commenters opposed establishment of the exemption based on

the concern that petitions for additional exemptions would necessarily

follow.32 The Commission declines to rely on this stated

concern as wholly speculative. A number of farmer commenters also

expressed concern that the Commission was making its decision for

political reasons.33 The Commission responds by emphasizing

that the decision arises only out of its assessment of the public

interest as expressly required by the Compact, based on the record

before it as developed through the regulatory hearing process, pursuant

to Art. IV, section 12 of the Compact.

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\32\ See e.g. Doug Carlson, December 29, 1997, Public Hearing at

p. 167.

\33\ See e.g. Mathew Freund, PH at p. 154; and Dave Jacquier, PH

at p. 159. In this regard, the Commission is responding particularly

to the testimony of Mr. Jacquier, as well as that of Douglas P.

Gillespie, Director of Governmental Relations, MA Farm Bureau

Federation, Inc., WC, January 12, 1998.

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Some commenters indicated that the marginal cost to the school food

service programs which may be attributed to the price regulation does

not justify the exemption. The Commission responds

[[Page 10109]]

by referring to the substantial and diverse comment highlighting the

specific importance of school food service programs to the promotion of

child nutrition. The Commission's decision to establish this exemption

is in large part based on the determination that any adverse impact on

these particular programs, so targeted for the promotion of child

nutrition, is significant and must be avoided.

On the diametrically opposed end of the spectrum, two commenters

expressing support for the exemption based their position on the view

that the demonstrated need for the exemption should serve in effect as

the basis for extinguishing the entire price regulation.34

The Commission responds to these commenters by reference to the

reasoning of the price regulation describing the expected positive

impact on all segments of the marketplace, from farmgate to retail,

including low-income consumers.

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\34\ Arthur S. Jaeger, Executive Director, Public Voice for Food

& Health Policy, WC, January 12, 1998; Joyce Campbell, Massachusetts

ACORN, WC January 12, 1998.

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Finally, the Compact Commission notes that the public interest

analysis of the rules establishing and extending the price regulation

included a balancing of the interests of all persons affected by the

price regulation. In this instance, the interests of farmers and

processors must be balanced with the interests of the school food

service programs, and their clients-children.

The Compact Commission determines that establishment of the instant

exemption will not adversely affect the interests of processors. As

described above, processor/vendors will retain the discretion to make

strategic bid pricing decisions with regard to incorporation of the

impact of the price regulation on their costing structures, including a

simple pass through, should that be their strategic choice. As also

described above, the Commission concludes that the certification and

documentation procedure to be established by the memorandum of

understanding will not cause undue hardship for processor/vendors.

With regard to the farmer interest, the Commission concludes that

the exemption will have an adverse impact by reducing the net payment

to producers. As explained in detail below, it is expected that the net

payment will be reduced by approximately three percent for the ten-

month period September 1998-June 1999. It is to be noted that the over-

order price regulation will remain in effect for the summer months of

July and August, when federally-established milk prices are

traditionally at their low point, and the over-order price at the

corresponding highest amounts. The Commission nonetheless concludes

that this adverse impact on the farmer pay price must be balanced

against the documented potential for harm to the school food service

programs.

For all the reasons set forth above, the Commission concludes that

the public interest will best be served by the establishment of an

exemption from the price regulation and reimbursement procedure for

fluid milk distributed by handlers under open competitive bid contracts

and sold by School Food Authorities in New England during the 1998-1999

contract year, to the extent an increased cost of such milk is

documented as attributable to operation of the over-order price

regulation.

B. The Exemption's Impact on the Price Level Needed To Assure a

Sufficient Price to Producers and an Adequate Local Supply of Milk

As one of the four underlying findings required for the

establishment of price regulation, the Commission must determine:

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

price sufficient to cover their costs of production and will elicit

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

and for manufacturing purposes.35

\35\ The Commission limited its assessment to issues relating to

the fluid milk market, given the limitations on its authority to

regulate the price of milk used for manufacturing purposes. See

Compact, section 9(a); see also 7 U.S.C. Sec. 7256(2). At the same

time, for purposes of this analysis, it must be recognized that the

present supply needs for manufacturing purposes are not available

for fluid usage.

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Compact Art. V, Section 12(a).

In the prior rulemakings, the Commission's deliberations regarding

the level of price required to cover costs of production focused again

on the variety of cost inputs identified in Section 9(e) of the

Compact. With regard to the price needed to elicit an adequate local

supply of milk, the Commission reviewed the nature of the balance of

production and consumption in the region, as also called for by Section

9(e) of the Compact. This required review prompted the determination

that farm prices have been insufficient to cover costs of production

over time (``price insufficiency''), and the degree to which such

insufficiency has affected the balance of production and consumption in

the region. Assessment of this issue also required consideration of the

wide swings over time in farmer pay prices under federal regulation,

which have caused farm financial stress and made it difficult for

farmers to plan financially (``price instability''), and the failure of

farmer pay prices to keep up with inflation.

To determine the required benchmark cost of production, the

Commission's analysis surveyed the various cost inputs as required

under Section 9(e) of the Compact, including by reference to the

numerous studies on the subject.36 Based on data received

from farmers and a comprehensive assessment of a number of these

studies, the Commission concluded that the range of the costs of

production for New England is somewhere between $14.06 and $16.46. By

reference to prevailing federal milk market order prices, the

Commission concluded that an over-order pay price in the range of

$0.46-$1.90 was necessary to bring farmer pay prices up to the level

necessary to cover cost of production. 37 Assuming Class I

utilization of 50 percent, this means that price regulation in the

amounts of $0.92-$3.80 would be necessary to achieve the necessary

range of over-order payment.

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\36\ 62 FR 29632-33.

\37\ See 62 FR 29633 (final rule); 62 FR 23040-41 (proposed

rule)

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In addition to the relatively discrete assessment of the level

needed to cover cost of production, the required finding with regard to

pay price accounts for the broader assessment of the price level needed

to elicit an adequate supply of milk. In the prior rulemaking, the

Compact Commission determined that the Compact, Section 9(e) scrutiny

of the balance of production and consumption of fluid, or beverage,

milk in the region is critical to this additional

assessment.38 The Commission determined that production and

consumption are presently in balance, but in a state of balance of

pronounced and unsustainable stress that must be alleviated.

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\38\ See 62 FR 29634-35.

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Assessment of how to alleviate the stress on the region's supply of

milk through price regulation required the Commission to consider how

best to alleviate the stress under which producers operate. This

inquiry naturally reverted back to the issue of the degree to which

farmer pay prices are not sufficient to cover costs of production. In

addition, as previously determined, the review led the Commission to

conclude that the nature of the persistently unstable farmer pay prices

and the degree to which farmer prices have failed to keep pace with

inflation are also structural factors of stress.

[[Page 10110]]

Based on this combined analysis, the Commission determined that a

compact over-order price of $16.94 would yield sufficient return to

farmers to bring the producer price into the low range of that required

to cover cost of production. The Commission further concluded that

establishment of the over-order Class I obligation as a flat price

would also serve to stabilize the producer price, yielding benefits to

producers in this regard as well.

The following chart indicates that the price regulation is yielding

the anticipated results with regard to producer prices. The current,

average, producer price of $0.93 is at the low end of the range

identified as required to bring producer prices up to a level

sufficient to cover costs of production. Similarly, the current,

average, regulated blend price of $14.07 is just over the low end of

the identified threshold of $14.06 which defines the price needed to

cover costs of production. The chart also indicates that the price

regulation is providing stability to producer pay prices relative to

what they would have been in its absence.

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

Fed order #1 Compact over- Fed order #1 Company Combined

class I price order blend price producer producer

(Zone 1) obligation (Zone 21) price price

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

July............................ $13.94 $3.00 $11.97 $1.28 $13.25

Aug............................. 13.98 2.96 12.26 1.31 13.57

Sept............................ 14.10 2.84 12.54 1.36 14.17

Oct............................. 15.31 1.63 13.60 0.81 14.44

Nov............................. 16.03 0.91 14.10 0.44 14.54

Dec............................. 16.07 0.87 14.06 0.40 14.46

Jan............................. 16.20 0.74 .............. .............. ..............

Feb............................. 16.53 0.41 .............. .............. ..............

Avg............................. 15.27 1.67 13.09 0.93 14.07

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It is estimated that the exemption and reimbursement for school

food service programs will cause a 3 percent decrease in the producer

pay price.\39\ Based on the current average pay price of $0.93, this

would result in a decrease in the pay price of approximately $0.03.

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\39\ See William J. Gillmeister, WC, January 12, 1998.

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This decrease will bring the producer pay price still nearer to the

bottom range of that identified as necessary to bring prices in

relative alignment with costs. It is of course apparent that any

reduction in the producer pay price will adversely affect the price

regulation's intended function with regard to enhancement of producer

income. Nonetheless, the amount of the decrease must be understood in

view of the fact that the regulation will continue to provide

significant stability to producer prices. Accordingly, the Commission

concludes that the price regulation, as amended to include an exemption

for milk sold by school food service programs will remain at a level

sufficient to assure that producer costs of production are covered and

to elicit an adequate supply of fluid milk for the region.

III. Required Findings of Fact

Pursuant to Compact Art. V, Sec. 12, the Compact Commission hereby

finds:

(1) That the public interest will be served by the establishment

[amendment] of minimum milk price [regulation] to dairy farmers

under Article IV.

(2) That a level price of $16.94, [accounting for a school lunch

exemption], will assure that producers receive a price sufficient to

cover their costs of production and will elicit an adequate supply

of milk for the inhabitants of the regulated area and for

manufacturing purposes.

(3) That the terms of the proposed price regulation were

approved by producers by referendum. \40\

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\40\ Section 13 of the Compact requires that the Commission

conduct a referendum among producers and that, at least, two-thirds

of the voting producers approved the regulation. A separate notice

in the Federal Register certifies the results of the referendum

pursuant to the following Referendum Approval Certification

Procedure:

The Compact Commission resolves and adopts this procedure for

certifying whether the price regulation adopted by this final rule

has been duly approved by producer referendum in accordance with

Compact Article V, section 12.

Mae Schmidle, Vice-Chair is hereby designated as ``Referendum

Agent'' and authorized to administer this procedure.

The designated Referendum Agent shall:

1. Verify all ballots with respect to timeliness, producer

eligibility, cooperative identification, authenticity and other

steps taken to avoid duplication of ballots. Verification of ballots

shall include those cast individually by block vote. Ballots

determined by the Referendum Agent to be invalid shall be marked

``disqualified'' with a notation of the reason for disqualification.

Disqualified ballots shall not be considered in determining approval

or disapproval of the regulation.

2. Compute and certify the following:

A. The total number of ballots cast.

B. The total number of ballots disqualified.

C. The total number of verified ballots cast in favor of the

price.

D. The total number of verified ballots cast in opposition to

the price regulation.

E. Whether two-thirds of all verified ballots were cast in the

affirmative.

3. Report to the Executive Director of the Compact Commission

the certified computations and results of the referendum under

Section 2.

4. At the completion of his or her work, seal all ballots,

including the disqualified ballots, and shall submit a final report

to the Executive Director stating all actions taken in connection

with the referendum. The final report shall include all ballots cast

and all other information furnished to or compiled by the Referendum

Agent.

The ballots cast, the identity of any person or cooperative, or

the manner in which any person or cooperative voted, and all

information furnished to or compiled by the Referendum Agent shall

be regarded as confidential.

The Executive Director shall publish the certified results of

the referendum in the Federal Register.

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List of Subjects in 7 CFR Part 1301

Milk.

Codification in Code of Federal Regulations

For the reasons set forth in the preamble, the Commission amends 7

CFR part 1301 as follows:

PART 1301--[AMENDED]

1. The authority for part 1301 continues to read as follows:

Authority: 7 U.S.C. 7256.

2. Section 1301.13 is amended by adding paragraph (e) to read as

follows:

Sec. 1301.13 Exempt milk.

* * * * *

(e) Effective April 1, 1998, all fluid milk distributed by handlers

in eight-ounce containers under open and competitive bid contracts for

the 1998-1999 contract year with School Food Authorities in New

England, as defined by 7 CFR 210.2, to the extent that the school

authorities can demonstrate and document that the costs of such milk

have been increased by operation of the Compact Over-order Price

Regulation. In no event shall such increase exceed the amount of the

Compact over-order obligation. Documentation of increased costs shall

be in accordance with a memorandum of understanding entered into

between the Compact Commission and the appropriate state agencies not

[[Page 10111]]

later than May 1, 1998. The memorandum of understanding shall include

provisions for certification by supplying vendor/processors that their

bid and contract cost structures do in fact incorporate the over-order

price obligation, in whole or in part, and provisions for defining the

components of cost structure to be provided in support of such

certification. The memorandum shall also establish the procedure for

providing reimbursement to the school food service programs, including

the scheduling of payments and the amount to be escrowed by the

Commission to account for such payments.

Daniel Smith,

Executive Director.

[FR Doc. 98-4140 Filed 2-26-98; 8:45 am]

BILLING CODE 1650-01-P