Milk in the New England and Other Marketing Areas; Decision on Proposed Amendments to Marketing Agreements and to Orders
Federal RegisterApr 2, 1999
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Text
7 CFR Part Marketing area
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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.
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SUMMARY: This final decision consolidates the current 31 Federal milk
marketing orders into 11 orders. This consolidation complies with the
1996 Farm Bill which mandates that the current Federal milk orders be
consolidated into between 10 to 14 orders. This decision also conforms
to the Omnibus Consolidated and Emergency Supplemental Appropriations
Bill, which requires that this decision be issued between February 1
and April 4, 1999, and extends the time for implementing Federal milk
order reform amendments to October 1, 1999. This decision sets forth a
replacement for the Class I price structure and replaces the basic
formula price with a multiple component pricing system. This decision
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 addresses other minor classification changes.
Part 1000 is expanded to include sections that are identical to all of
the consolidated orders to assist in simplifying and streamlining the
orders.
This decision does not provide for conducting referendums of
producers to determine if they approve of the issuance of the
consolidated orders.
DATES: A notice to conduct a referendum on each of the consolidated
orders will be published separately at a future date.
FOR FURTHER INFORMATION CONTACT: John F. Borovies, Branch Chief, USDA/
AMS/Dairy Programs, Order Formulation Branch, Room 2971, South
Building, PO Box 96456, Washington, DC 20090-6456, (202) 720-6274, e-
mail address John__F__B[email protected] (after
[[Page 16027]]
April 19, 1999, the e-mail address will change to
John.B[email protected]).
For specific information on the Final Regulatory Impact Analysis
and the Civil Rights Impact Analysis contact: John R. Mengel, Chief
Economist, USDA/AMS/Dairy Programs, Office of Chief Economist, Room
2753, South Building, PO Box 96456, Washington, DC 20090-6456, (202)
720-4664, e-mail address John__R__M[email protected] (after April 19,
1999, the e-mail address will change to John.M[email protected]).
SUPPLEMENTARY INFORMATION:
Major changes from the proposed rule issued on January 21, 1998,
are as follows:
1. Consolidation of Marketing Areas
(a) The Western New York State order was removed from the proposed
Northeast marketing area.
(b) Six currently-unregulated counties were removed from the
consolidated Central marketing area.
(c) The current Western Colorado order was moved from the
consolidated Western order to the consolidated Central marketing area
along with 7 currently-unregulated Colorado counties.
2. Basic Formula Price Replacement
(a) The proposed Class III and Class IV pricing formulas are
revised to adjust for product yields and make allowances that result in
lowering the Class III and IV prices.
(b) Barrel cheese prices (NASS survey) are included in the Class
III price formula.
(c) The basis for measuring the protein content in milk is changed
from a test for total nitrogen to a test for true protein.
(d) Advance pricing for Class I will continue to be provided, but
with a shorter time period (7 days vs. 25 days) prior to the effective
month. The proposed rule had suggested a 6-month declining average
mover.
(e) Provides for advance pricing for skim milk in Class II uses in
the same manner as for Class I.
3. Class I Price Structure
Adopts a Class I price structure that uses the generally higher
differential levels as proposed in Option 1A while retaining the
pricing surface of the Department's preferred option.
4. Classification
(a) Cream cheese is moved from Class II to Class III.
(b) Shrinkage calculations are revised.
Table of Contents
I. Prior documents
II. Legislative and Background Requirements
Legislative Requirements
Background
Actions Completed During Developmental Phase
Actions Completed During Rulemaking Phase
Public Interaction and Input
Executive Order 12988
Executive Order 12866
Civil Rights Analysis Executive Summary
The Regulatory Flexibility Act and the Effects on Small
Businesses
Paperwork Reduction Act of 1995
Request for Public Input on Analyses
Preliminary Statement
III. 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 pricing 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
General findings
IV. Order Language
General provisions
Northeast order provisions
Appalachian order provisions
Florida order provisions
Southeast order provisions
Upper Midwest order provisions
Central order provisions
Mideast order provisions
Pacific Northwest order provisions
Southwest order provisions
Arizona-Las Vegas order provisions
Western order provisions
V. 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. Prior Documents
Prior documents in this proceeding include:
Proposed Rule: Issued January 21, 1998; published January 30, 1998
(63 FR 4802).
Correction: Issued February 19, 1998; published February 25, 1998
(63 FR 9686).
Extension of Time: Issued March 10, 1998; published March 13, 1998
(63 FR 12417).
II. Legislative and Background Requirements
Legislative Requirements
Section 143 of the Federal Agriculture Improvement and Reform Act
of 1996 (Farm Bill), 7 USC 7253, required that by April 4,
1999,1 the current Federal milk marketing orders issued
under the Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), be consolidated into between 10 to 14 orders
2. 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.3
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\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 order 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.
\3\ The Omnibus Consolidated and Emergency Supplemental
Appropriations Bill, passed in October 1998, extended the time frame
for implementing Federal milk order reform amendments from April 4,
1999, to October 1, 1999. The extension specifies that the final
decision, defined as the final rule for purposes of this
legislation, will be issued between February 1 and April 4, 1999,
with the new amendments becoming effective on October 1, 1999. The
legislation also provides that California has from the date of
issuance of the final decision until September 30, 1999, to become a
separate Federal milk marketing order.
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Besides designating a date for completion of the required
consolidation, the Farm Bill further required that no later than April
1, 1997, the Secretary shall submit a report to Congress on the
progress of the Federal order reform process that included: a
description of the progress made toward implementation, a review of the
Federal order system in light of the reforms
[[Page 16028]]
required, and any recommendations considered appropriate for further
improvements and reforms. This report was submitted to Congress on
April 1, 1997.4
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\4\ Copies of the Report to Congress can be obtain- ed from
Dairy Programs at (202) 720-4392 or via the Internet at http://
www.ams.usda.gov/dairy/.
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Finally, the 1996 Farm Bill specified that USDA use informal
rulemaking to implement these reforms.
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
decision by the Secretary. Referendums will be conducted to determine
approval of the final decision by the requisite number of producers
before the new orders will become effective.
Full participation by interested parties has been essential in the
reform of Federal milk orders. The issues are too important and complex
to be developed without significant input from all facets of the dairy
industry. The experience, knowledge, and expertise of the industry and
public have been integral to the development of the rule. To ensure
that maximum public input into the process was received, 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 accomplished the Farm Bill mandates,
as well as related reforms. The USDA met with interested parties to
discuss the reform process, 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
concluded with the issuance of the proposed rule on January 21, 1998
(68 FR 4802).
The second phase of the plan is the rulemaking phase. The
rulemaking phase began with the issuance and publication of the
proposed rule. The proposed rule provided the public 60 days to submit
written comments on the reform proposals to USDA. On March 10, 1998,
(68 FR 12417) the comment period was extended for an additional 30 days
until April 30, 1998. In addition to requests for written comments,
four listening sessions were held to receive verbal comments on the
proposed rule. All comments were reviewed and considered prior to the
issuance of this rule.
The third and final phase of the plan is the implementation phase.
The implementation phase begins after this rule is published in the
Federal Register. This phase consists of informational meetings
conducted by Market Administrator personnel and
referendums.5 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 are held, the
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.
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\5\ As previously noted, this is also the time period in which
California can consider becoming a Federal order based on the
Omnibus Consolidated and Emergency Supplemental Appropriations Bill
provisions.
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Although all of the issues regarding Federal milk order reform are
interrelated, USDA established several committees to address specific
issues. The use of committees allowed the reform process to be divided
into more manageable tasks. The committees worked throughout the
developmental and rulemaking phases. The committees established were:
Price Structure, Basic Formula Price, Identical Provisions,
Classification, and Regional. The Regional committee was divided into
four subcommittees: Midwest, Northeast, Southeast, and West. Committee
membership consisted of both field and headquarters Dairy Programs
personnel. The committees were given specific assignments related to
their designated issue and began meeting in May 1996.
In addition to utilizing USDA personnel, partnerships were
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'' 6 Dr.
Ronald Knutson of Texas A&M University led the analysis on basic
formula price options and published three working papers entitled ``An
Economic Evaluation of Basic Formula Price (BFP) Alternatives'', ``The
Modified Product Value and Fresh Milk Base Price Formulas as BFP
Alternatives'', and ``Evaluation of `Final' Four Basic Formula Price
Options''. 7
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\6\ Copies of these reports may be obtained by contacting Ms.
Wendy Barrett, Cornell University, ARME, 348 Warren Hall, Ithaca, NY
14853-7801, (607) 255-1581,
\7\ 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.
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Actions Completed During Developmental Phase
USDA maintained frequent 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 implementing the Farm Bill
8. 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.
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\8\ 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/.
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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
[[Page 16029]]
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 anticipated that the consolidation of Federal orders
would have an economic impact on handlers and producers affected by the
program, and USDA wanted to ensure that, while accomplishing their
intended purpose, the newly consolidated Federal orders would 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 suggested the
consolidation of the then current 32 Federal milk orders into ten
orders. (See Appendix A for report summary.) The memorandum requested
input from all interested parties on the suggested 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, were 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 suggesting 10 consolidated orders as in the first
report, the revised report suggested 11 consolidated orders and
suggested the inclusion of some currently unregulated territory. The
memorandum requested comments from all interested parties on the
suggested 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 issued 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 were useful in analyzing alternatives
to the basic formula price in context of the order reform process.
Actions Completed During Rulemaking Phase
On January 21, 1998, USDA issued a proposed rule (68 FR 4802) that
recommended consolidating the current 31 orders into 11 orders,
proposed two options for consideration as a replacement for the Class I
price structure, and recommended replacing the basic formula price. The
proposed rule also recommended establishing a new Class IV which would
include milk used to produce nonfat dry milk, butter, and other dry
milk powders; recommended reclassifying eggnog and cream cheese,
addressing other minor classification issues; and recommended expanding
part 1000 to include sections that are identical to all of the
consolidated orders. A Preliminary Regulatory Impact Analysis (PRIA)
was also issued that evaluated the costs and benefits of the proposed
rule contents and alternatives. Comments were requested on the proposed
rule and the PRIA on or before March 31, 1998. An informational packet
describing the contents of the proposed rule was sent to interested
parties.
On March 10, 1998, USDA issued a document that extended the time
for filing comments on the proposed rule an additional 30 days, until
April 30, 1998. The document also announced that USDA would conduct
four listening sessions to assist interested parties in submitting
comments to USDA. The listening sessions were held on March 30 in
Atlanta, Georgia; Liverpool, New York; and Dallas, Texas; and on March
31 in Green Bay, Wisconsin.
On April 15, 1998, AMS Dairy Programs announced the issuance of a
report entitled ``Report on the Impacts of the Federal Order Reform
Proposals on Food and Nutrition Service Programs, Participants, and
Administering Institutions'' by the Food and Nutrition Service of USDA.
The report analyzed the potential impacts of the milk order reform
pricing proposals contained in the proposed rule on the Food Stamp
Program, the Women, Infants, and Children Program, and the National
School Lunch and Breakfast Programs.9 The report indicated
that adoption of the proposed rule with either Class I price structure
would have minimal economic impact on these programs. Comments on the
report were requested by April 30, 1998. No comments were received.
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\9\ Copies of this report can be obtained from Dairy Programs at
(202) 720-4392, or via the Internet at http://www.ams.usda.gov/
dairy/.
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Public Interaction and Input
As a result of the developmental phase announcements and forum,
more than 1,600 individual comments were received by USDA. In addition
to the individual comments, more than 2,000 form letters were received.
As a result of the rulemaking phase proposed rule and listening
sessions, nearly 4,500 additional comments were received. A further
breakdown of the rulemaking comments by issue is as follows: 1,273
consolidation; 376 basic formula price; 4,224 Class I price structure;
101 classification; and 79 provisions applicable to all orders.
The proposed rule provided interested parties an opportunity to
file comments until March 31, 1998. This period was later extended to
April 30, 1998. Over 205 comments were
[[Page 16030]]
postmarked after the April 30th deadline. Most of these comments did
not raise any issues that were not previously addressed by comments
timely submitted and considered in this rulemaking.
All comments that were reviewed by USDA personnel were available
for public inspection at USDA. To assist the public in accessing the
comments, USDA contracted to have the comments scanned and published on
compact discs. The use of this technology 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 Programs
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 account--
[email protected] opened to receive input on Federal
milk order reforms.
USDA personnel met frequently with interested parties from May 1996
through the issuance of the proposed rule to gather information and
ideas on the consolidation and reform 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, nine 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; discussed the congressional report; and explained the
proposed rule contents.
To ensure the involvement of all interested parties, particularly
small businesses as defined in the Initial Regulatory Flexibility
Analysis (IRFA), in the process of Federal order reform, three primary
methods of contact were 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
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. Comments
were also specifically requested on the IRFA published in the January
21, 1998, proposed rule. More than 1,000 comments were received from
interested parties that specifically stated or documented they were
small businesses. However, this number may not be fully representative
of the number of small businesses that actually submitted comments
because a majority of commenters did not indicate their size. A few
comments specifically addressed the IRFA, Executive Order 12866, and
the paperwork reduction analysis.
All announcements and an information packet summarizing the
proposed rule were 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; for the July 31, 1996, public
forum; for the January 21, 1998, proposed rule; and for the March 30
and 31, 1998, listening sessions and extension of time for submitting
comments.10 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.
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\10\ 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.
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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.
Executive Order 12988
This final decision has been reviewed under Executive Order 12988,
Civil Justice Reform. This rule is not intended to have a retroactive
effect. If adopted, this 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 (AMAA), as
amended, 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 the final decision in conformance with
Executive Order 12866. The final decision is determined to be
economically significant for the purposes of Executive Order 12866.
When adopting regulations which are 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 Department
prepared a final Regulatory Impact Analysis (RIA) for this action.
Information contained in the RIA pertains to the costs and benefits of
the revised regulatory structure and is 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 regulatory action is in accordance with section 143 of the
[[Page 16031]]
Federal Agriculture Improvement and Reform Act of 1996, 7 U.S.C. 7253,
(the Farm Bill) which required the Secretary of Agriculture (Secretary)
to consolidate the existing 31 Federal milk marketing orders, as
authorized by the AMAA, into between 10 and 14 orders. The Farm Bill
further 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 formula prices for manufacturing milk. The
Secretary was 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 specified that the
Department of Agriculture use informal rulemaking to implement these
reforms.
The Farm Bill required that a proposed rule be published by April
4, 1998, and all reforms of the Federal milk order program be completed
by April 4, 1999. However, the Omnibus Consolidated and Emergency
Supplemental Appropriations Bill, passed in October 1998, extended the
time frame for implementing Federal milk order reform amendments from
April 4, 1999, to October 1, 1999. The extension specified that the
final decision, defined as the final rule for purposes of this
legislation, be issued between February 1 and April 4, 1999, with the
new amendments becoming effective on October 1, 1999. The legislation
also provides that California has from the date of issuance of the
final decision until September 30, 1999, to become a separate Federal
milk marketing order.
The final decision sets forth the consolidation of the current 31
Federal milk orders into 11 orders. The marketing areas are: Northeast,
Mideast, Upper Midwest, Central, Appalachian, Southeast, Florida,
Southwest, Arizona-Las Vegas, Western, and Pacific Northwest. Several
issues related to the consolidation of Federal milk orders are also
addressed. The final decision contains a replacement for the current
Class I price structure and the basic formula price (BFP). The final
decision adopts a Class I price structure that uses the proposed Option
1B price surface as modified to provide for better alignment of Class I
prices and increases the differential level by 40 cents. The current
BFP is replaced with a multiple component pricing system that derives
component values from surveyed prices of manufactured dairy products.
These changes set the stage for increasing efficiencies in supplying
the milk needs of Class I markets and address concerns that the BFP is
no longer a statistically significant measure of the value of
manufacturing milk.
The rule also classifies milk into four classes according to the
products made from such milk. Milk used to produce defined fluid milk
products is classified as Class I milk. Milk used to produce defined
soft manufactured products is classified as Class II milk. Class III
milk is milk used to produce cream cheese and defined hard manufactured
cheeses, and Class IV milk is milk used to produce butter and all milk
powders.
The minimum monthly price for milk classified as Class I is equal
to the Class I differential specified for each marketing order plus the
Class I price mover announced on or before the 23rd day of the month
preceding the month for which the price is being announced. The Class I
price mover is equal to the higher result from the formulas used to
establish Class III and Class IV prices using weighted average prices
for manufactured products as published by the National Agricultural
Statistics Service (NASS) for the most recent two weeks preceding the
23rd of the month. Weekly prices are weighted by sales volumes reported
by NASS.
Finally, this rule expands Part 1000 to include provisions that are
identical within each consolidated order to assist in simplifying the
regulations. 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 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.
In the summary of the initial RIA for the January 21, 1998,
proposed rule, the economic impact of certain individual sections of
the regulations were discussed that were considered to be economically
significant. Not all of the changes contained in the proposed rule were
considered economically significant. The sections individually
addressed in the January 21st proposed rule were marketing area
consolidation, the BFP, the Class I pricing structure and
classification provisions. Since these are adopted together in the
final decision, this analysis reviews the impacts of adopting all of
the provisions simultaneously on the dairy industry. The analysis also
reviews the impacts of adopting the provisions contained in the January
21st proposed rule with two alternative Class I pricing structures.
The final RIA and the final decision explain in detail the
components adopted in the Federal order regulations and analyzed by the
model. A review of the projected economic impacts of the final decision
and the projected economic impacts of the alternatives that were
considered on dairy producers, processors, consumers, and international
trade follows. The projected impacts are compared to the baseline
projections over a 6-year period from the years of 2000-2005. The
baseline assumes that the Class III price would be the BFP, the Class
II price would be the BFP plus 30 cents, each region's Class I price
would be the BFP plus the current Class I differential and the Class
III-a price would continue. The RIA details the impacts of the final
decision and the other options considered on each current order, the
Federal orders combined, the State of California, and the United
States.
The following table summarizes the impacts of adopting the newly
consolidated orders and their specific provisions, including the Class
I price structure adopted in this final decision. The table also
provides data detailing the projected impacts of the consolidated
orders and the specific provisions utilizing the two alternative Class
I price structures--Location-Specific Differentials (Option 1A) and
Relative-Value Specific Differentials (Option 1B). Since adopting new
Federal milk order provisions affect both the regulated dairy industry
and associated producers, as well as the unregulated and State
regulated dairy industries, a comparison of the impacts both Federally
and U.S.-wide are included where possible.
[[Page 16032]]
Comparisons of Certain Impacts of Consolidated Order Changes Utilizing Three Price Structures on Federal Order
(Fed) and U.S. Data: 6-year Averages (2000-2005)1
----------------------------------------------------------------------------------------------------------------
Change from baseline
-----------------------------------------
Unit Baseline Final Modified Modified
decision option 1B option 1A
----------------------------------------------------------------------------------------------------------------
Class I Diff. (Fed).............. $/cwt................ 2.56 -0.29 -0.69 0.04
Class I price (Fed).............. $/cwt................ 16.22 -0.19 -0.49 0.08
Class I price (U.S.)............. $/cwt................ 16.26 -0.14 -0.38 0.06
All-Milk Price (Fed)............. $/cwt................ 15.23 -0.02 -0.10 0.03
All-Milk Price (U.S.)............ $/cwt................ 14.73 0.00 -0.05 0.04
Milk Marketings (Fed) 2.......... mil lbs.............. 111,182.0 8.3 -130.8 149.0
Milk Marketings (U.S.)........... mil lbs.............. 165,142.2 15.2 -90.9 128.7
Class I use (Fed)................ mil lbs.............. 46,955.7 42.0 106.7 -16.6
Class I use (U.S.)............... mil lbs.............. 58,782.2 37.7 98.8 -14.9
Cash Receipts (Fed) 3............ mil $................ 16,944.5 -2.5 -128.4 104.9
Cash Receipts (U.S.) 4........... mil $................ 24,347.9 3.5 -89.9 77.0
Retail Price (Fed)............... $/gal................ ............ -0.02 -0.04 0.01
Fluid Expend. (Fed).............. mil $................ 7,617.8 -80.2 -215.4 36.4
Fluid Expend. (U.S.)............. mil $................ 9,562.0 -79.1 -209.7 31.3
Manufac. Expend. (Fed)........... mil $................ 9,326.7 77.7 87.0 68.5
Manufac. Expend. (U.S.).......... mil $................ 14,785.9 82.5 119.8 45.7
----------------------------------------------------------------------------------------------------------------
\1\ Includes the effects of the Class II, III, and IV pricing formulas.
\2\ Changes in the Final Decision and Modified Option 1A marketings do not include the additional milk from the
Upper Midwest and Chicago Regional orders that is expected to be pooled under these options.
\3\ Cash receipts do not reflect the termination of the $0.15 per hundredweight transportation credit in the New
York-New Jersey order and exclude the income from additional pooled milk in the consolidated Upper Midwest
order for the Final Decision and Modified Option 1A.
\4\ Cash receipts do not reflect the termination of the $0.15 per hundredweight transportation credit in the New
York-New Jersey order and exclude the income from additional pooled milk in the consolidated Upper Midwest
order for the Final Decision and Modified Option 1A.
As is evidenced by the summary table, the economic impacts
resulting from the adoption of the final decision are minimal when
compared to the total values included in the Federal order system and
in the U.S. This is also true with the alternative options that were
considered. Changes in the all-milk price, milk marketings, Class I
use, and cash receipts all represent less than one percent of the total
baseline projections. Although the total impacts are minimal from a
national perspective, producers, processors, and consumers may
experience a greater impact on a more localized level as is described
in the RIA.
The consolidation of Federal milk orders into 11 orders with the
adopted price structure and all other provision modifications of the
final decision best adheres to the requirements of the Farm Bill while
fulfilling the objectives of the AMAA. The changes adopted in the final
decision enhance the efficiencies of fluid milk markets while
maintaining equity among processors of fluid milk selling in marketing
order areas and among dairy farmers supplying the areas' fluid demands.
The final decision provisions achieve this while having minor overall
impacts on the Federal order system and on the U.S. dairy industry.
Although both of the alternatives considered also have minimal impacts,
the final decision best achieves economic efficiencies, equity, and
program objectives.
Final Decision
A brief review of the impacts that are projected to occur with the
implementation of the final decision are:
Producers. In general, producers in markets located in the western,
southwestern, and northeastern areas of the U.S. may not fare as well
as producers located in other parts of the country, as measured by the
all-milk price and cash receipts from milk marketings. The average all-
milk price for the combined Federal order markets is expected to
average $0.02 per hundredweight lower than the baseline. The average
all-milk price is projected to increase in 13 current markets from
$0.01 to $0.52 per hundredweight and decrease in 19 markets from $0.01
to $0.50. One market is estimated to average unchanged. The average
all-milk price throughout the entire U.S. is projected to remain
unchanged. It is important to recognize that the all-milk price can be
impacted considerably by the change in the Class I utilization due to
consolidation and the necessary alignment of Class I prices within
consolidated areas.
Over the 2000-2005 period, gross cash receipts within the Federal
order system are expected to increase an estimated $222.3 million
primarily because of changes in transportation payments and the pooling
of additional milk under the Federal order system. After adjusting for
these changes, annual cash receipts are projected to decline from the
baseline an average of $2.5 million during the 6-year period. With the
baseline cash receipts averaging $16,944.5 million this represents a
very insignificant reduction. Fifteen markets are projected to have
increases with 18 markets projected to have decreases.
Processors. Since the final decision is expected to have little
effect on where milk is produced, little impact is expected on fluid
milk processors or manufacturers of dairy products. Impacts on fluid
milk processors will likely result from changes in the minimum Class I
and Class II prices that are the handler's obligation under the Federal
order system. Fluid processors in 14 of the current Federal order
markets will experience increased differentials, while processors in 17
of the markets will see decreases. Fluid processors in two markets will
see no change. The estimated weighted average Class I differential for
all current Federal order markets would decrease $0.29 per
hundredweight. The all-market average Federal order Class I price would
decrease $0.19 per hundredweight when compared to the baseline during
the years of 2000-2005. The value of manufacturing milk would be
increased, on average, $82.5 million per year during the six-year
period.
Consumers. Since adoption of the final decision is projected to
result in a slight decrease in the average Class I
[[Page 16033]]
price for the years of 2000-2005, it is expected that average retail
prices will decrease about $0.02 per gallon. On an individual order
basis, the changes in the average retail price per gallon may range
from an increase of $0.06 to a decrease of $0.09. Although consumers
will be spending less on fluid milk products, consumption is projected
to remain relatively unchanged.
International Trade. Adopting the final decision is not expected to
have a significant impact on domestic butter and nonfat dry milk prices
and therefore, little change in international trade is expected.
International trade of raw milk and fluid milk products between the
United States, Mexico, and Canada should be unaffected. However, the
increase in the Class II price could negatively affect the Mexican
market for those products.
Other Alternatives
Although implementation of the consolidated orders with either the
Option 1B or Option 1A price surface would still result in less than a
projected one percent change in overall Federal order and U.S. prices,
cash receipts, and marketings, these two alternatives do not promote
market efficiencies, equity or program objectives as well as the
provisions adopted and would not result in the most preferable
allocation of resources over time. A brief review of the impacts that
were projected to occur with the implementation of these two
alternatives are:
Producers. In general, Option 1B would have reduced producer income
in total and would have reduced the proportion of the Class I value
represented in Federal order pools. Mainly producers located in the
Upper Midwest and Florida areas would have benefitted while producers
throughout the rest of the U.S. would have been negatively impacted.
The all-milk price for all Federal order markets combined was expected
to average $0.10 per hundredweight lower than the baseline during the
years of 2000-2005. The average all-milk price was projected to
increase in 10 current markets from $0.06 to $0.42 per hundredweight
and decrease in 23 markets from $0.01 to $0.61 during this time period.
This would have resulted in changing the gross cash receipts on an
individual order basis during this period ranging from an annual
average decrease of $48.4 million to an increase of $38.5 million.
Overall, gross cash receipts would have averaged $128.4 million less
than currently received.
Under Option 1A the all-milk price for all Federal order markets
combined was expected to average $0.03 per hundredweight higher than
the baseline during the years of 2000-2005. The average all-milk price
was projected to increase in 15 current markets from $0.01 to $0.34 per
hundredweight and decrease in 18 markets from $0.01 to $0.66. These
changes would have resulted in changing the gross cash receipts on an
individual order basis during this period ranging from an annual
average decrease of $10.3 million to an increase of $48.4 million.
Overall, gross cash receipts would have averaged $104.9 million higher
than currently received.
Processors. Since Option 1B would have lowered the Class I
differentials by a weighted average of $0.69 per hundredweight, the
all-market average Class I price charged to fluid handlers would have
declined by $0.49 per hundredweight when compared to the baseline
during the years of 2000-2005. Lower Class I prices would have been
expected to increase sales of fluid milk within the Federal order
system by an annual average of 106.7 million pounds, representing less
than a one percent increase. Similar responses would have occurred
throughout the U.S. Fluid processors would have benefitted from lower
fluid milk prices and increased fluid milk sales.
Option 1A would have increased Class I differentials by a weighted
average of $0.04 per hundredweight resulting in the all-market average
Class I price charged to fluid handlers increasing by $0.08 per
hundredweight when compared to the baseline during the years of 2000-
2005. Since the impact of the increased Class I prices would have
resulted in an insignificant decrease in fluid milk consumption within
the Federal order system, a decrease of 16.6 million pounds, and within
the U.S., a decrease of 14.9 million pounds, this option would have
little expected overall effect on processors or manufacturers of dairy
products.
Consumers. Since adoption of Option 1B was projected to result in a
decrease in the average Class I price for the period 2000-2005, it was
expected that retail prices would decrease an average of $0.04 per
gallon. On an individual order basis the changes in the average retail
price per gallon would have ranged from an increase of $0.03 to a
decrease of $0.12. As a result of the overall price decrease, consumers
would have spent less on fluid milk products while increasing
consumption. The increase in fluid consumption was estimated to be less
than one percent.
Since adoption of Option 1A was projected to result in an increase
in the average Class I price for the period of the years 2000-2005, it
was expected to minimally increase retail prices an average of $0.01
per gallon. On an individual order basis the changes in the average
retail price per gallon would have ranged from an increase of $0.05 to
a decrease of $0.01. As a result of the price increase, consumers would
have spent slightly more on fluid milk products and purchased about the
same amount of milk for fluid use.
International Trade. Options 1B or 1A were not expected to have a
significant impact on domestic butter and nonfat dry milk prices and
therefore, little change in international trade would have resulted.
International trade of raw milk and fluid milk products between the
United States, Mexico, and Canada would have been unaffected.
In response to the final decision, the Food and Nutrition Service
updated the analysis on the impacts of Federal Order reform provisions
on Food and Nutrition Service programs, participants, and administering
institutions. The updated report analyzes the potential impacts of the
milk order reform pricing provisions contained in the final decision on
the Food Stamp Program, the Women, Infants, and Children Program, and
the National School Lunch and Breakfast Programs. The report also
analyzes impacts of adopting either of the alternative Class I price
structure options. The report indicates that adoption of the final
decision provisions, as well as either of the alternatives considered,
will have minimal economic impact on these programs. This report is
included in the final RIA appendix.
The impacts of the provisions adopted in the final decision or
either of the alternatives considered are minimal when compared to the
total marketings and revenue generated in the dairy industry both on a
national and Federal order basis. However, neither of the alternative
options considered would appear to improve market efficiencies or
equity as well as adopting the provisions contained in the final
decision. Based on the analyses completed, the final decision
regulations have been tailored to impose the least burden on society
while meeting regulatory objectives. In doing so, these regulations
will replace current regulations and will not duplicate any current
regulations that may exist.
Civil Rights Impact Analysis Executive Summary
Pursuant to Departmental Regulation (DR) 4300-4, a Civil Rights
Impact Analysis (CRIA) reviews the final
[[Page 16034]]
decision regarding reforms to the Federal Milk Marketing Order program
to identify any provisions within the final decision with actual or
potential adverse effects for minorities, women, and persons with
disabilities.
The CRIA includes descriptions of (1) the purpose of performing a
CRIA; (2) the civil rights policy of the U.S. Department of Agriculture
(USDA); and (3) basics of the Federal milk marketing order program are
provided for background information. The civil rights impact analysis
of Federal Order Reform meets the requirements prescribed by DR 4300-4.
As part of the analysis, the extensive outreach efforts of USDA through
the entire reform process and after the final decision is published are
highlighted. Additionally, statistical detail is provided of the
characteristics of the dairy producer and general populations located
within the current and consolidated marketing areas.
The analysis discloses no potential for affecting dairy farmers
with specific characteristics differently than the general population
of dairy farmers. All producers, regardless of race, national origin,
or disability choosing to deliver milk to a Federal order regulated
handler will receive the minimum blend price.
Copies of the Civil Rights Impact Analysis 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/.
The Regulatory Flexibility Act and the Effects on Small Businesses
Pursuant to the requirements set forth in the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), the Agricultural Marketing
Service (AMS) has considered the economic impact of the rule on small
entities and has prepared this final regulatory flexibility analysis.
The Regulatory Flexibility Act provides, in summary, that when
preparing such analysis an agency shall address: The need for and
objectives of the rule; summary of the significant issues raised in
public comments, agency assessment of the issues raised, and changes
made to the proposed rule based on these issues; the kind and number of
small entities affected; the recordkeeping, reporting, and other
requirements; and steps taken to minimize the economic impact on small
entities.
This regulatory action is in accordance with section 143 of the
Federal Agriculture Improvement and Reform Act of 1996, 7 U.S.C. 7253,
(the Farm Bill) which required the Secretary of Agriculture (Secretary)
to consolidate the existing 31 Federal milk marketing orders, as
authorized by the Agricultural Marketing Agreement Act of 1937 (AMAA),
into between 10 and 14 orders. The Farm Bill further 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. The Secretary was 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 specified that the Department of Agriculture use informal
rulemaking to implement these reforms.
The Farm Bill required that a proposed rule be published by April
4, 1998, and all reforms of the Federal milk order program be completed
by April 4, 1999. However, the Omnibus Consolidated and Emergency
Supplemental Appropriations Bill, passed in October 1998, extended the
time frame for implementing Federal milk order reform amendments from
April 4, 1999, to October 1, 1999. The extension specified that the
final decision, defined as the final rule for purposes of this
legislation, be issued between February 1 and April 4, 1999, with the
new amendments becoming effective on October 1, 1999. The legislation
also provides that California has from the date of issuance of the
final decision until September 30, 1999, to become a separate Federal
milk marketing order.
The final decision sets forth the consolidation of the current 31
Federal milk orders into 11 orders. Several issues related to the
consolidation of Federal milk orders are also addressed. The final
decision contains a replacement for the Class I price structure and the
basic formula price. These changes set the stage for increasing
efficiencies in supplying the milk needs of Class I markets and address
concerns that the BFP is no longer a statistically significant measure
of the value of manufacturing milk. The final decision also changes the
classification of milk by (1) establishing Class IV provisions which
would include milk used to produce nonfat dry milk, butter, and other
dry milk powders; (2) reclassifying eggnog; and (3) making other minor
classification changes. These changes recognize the position of butter
and milk powders as residual products that balance the supply of milk
with overall demand, and equalize the cost of competing products.
Finally, this final decision expands part 1000 to include provisions
that are identical within each consolidated order to assist in
simplifying the regulations. 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 some of the provisions relating to payments have been
included in the General Provisions. These 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 Regulatory Flexibility Act is to fit regulatory
actions to the scale of business subject to the actions in order that
small businesses are not 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 $500,000 and a handler is a
``small business'' if it has fewer than 500 employees. For the purposes
of determining which dairy farms are ``small businesses,'' the $500,000
per year criterion was used to establish a production guideline of
326,000 pounds per month. Although this guideline does not factor in
additional monies that may be received by dairy producers, it should be
an inclusive standard for most ``small'' dairy farmers. For purposes of
determining a handler's size, if the plant is part of a larger company
operating multiple plants that collectively exceed the 500-employee
limit, the plant will be considered a large business even if the local
plant has fewer than 500 employees.
Based on 1996 data, USDA identified approximately 80,000 of the
83,000 dairy producers (farmers) that had their milk pooled under a
Federal order as small businesses. Thus, small businesses represent
approximately 96 percent of the producers in the United States. By 1997
the total number of dairy producers that had their milk pooled under a
Federal order had declined to about 79,000. It is estimated that nearly
76,000 are small businesses.
During 1997, 78,590 dairy farmers delivered over 105.2 billion
pounds of milk to handlers regulated under the milk orders. This volume
represents 68 percent of all milk marketed in the U.S.
[[Page 16035]]
and 70 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 $14.0 billion. Producer
deliveries of milk used in Class I products (fluid milk products)
totaled 44.9 billion pounds-- 42.7 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.
On the processing side, there are over 1,200 individual plants
associated with Federal orders, and of these plants, approximately 700
qualify as ``small businesses'' representing about 55 percent of the
total. During October 1997, there were more than 485 fully regulated
handlers (306 distributing plants of which 111 were small businesses
and nearly 180 supply plants of which about 50 percent were small
businesses), 51 partially regulated handlers of which 28 were small
businesses and 111 producer-handlers of which all were considered small
businesses for purposes of this final RFA, submitting reports under the
Federal milk marketing order program.
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 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 producers 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 producers associated with the order.
Development of this final decision 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 final decision 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 are required; however, some additional reporting
will be necessary in the orders that are adopting multiple component
pricing if the current orders do not contain these provisions. Overall,
there would be slight change in the burdens placed on the dairy
industry.
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, 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
will be required to complete additional information regarding the
components of the milk and to assure that proper payments are made to
producers. This information is necessary to establish the values of
milk on the basis of milk components and to assure that producers are
paid correctly. Many handlers already collect and report this
information.
This rule does not involve additional information collection that
requires clearance by the Office of Management and Budget beyond the
currently approved information collection. The primary sources 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
the industry average.
New territory, or pockets of unregulated territory within and
between current order areas has been included in the consolidated
marketing areas where such expansion will not have the effect of fully
regulating plants that are not now regulated. The addition of these
areas benefits 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 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 meet the pooling standards of a
consolidated order area. Second, a previously unregulated area in New
York, Vermont, New Hampshire and Massachusetts was added on the basis
of supporting information. As a result, previously unregulated handlers
would become fully regulated. Because of these two reasons, 11
additional plants are expected to become fully regulated under the
program. Of these 11 plants, it is estimated that 5 are small
businesses that would need to comply with the reporting, recordkeeping,
and compliance requirements. The completion of these reports will
require a person knowledgeable about the receipt and utilization of
milk and milk products handled at the plant. This most likely will 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 does 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 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. The regulations contained in this
final decision do not duplicate, overlap or conflict with any existing
Federal rules.
Public Comments
More than 1,000 comments were received from interested parties that
specifically stated or documented they were small businesses. However,
this number may not be fully representative of the number of small
businesses that actually submitted comments because a majority of
commenters did not indicate their size. Of the comments submitted, the
majority were received from dairy producers. The comments from the
producers primarily addressed the issues of Class I pricing and
consolidation.
A few comments were received that specifically addressed the
initial regulatory flexibility analysis (IRFA).
[[Page 16036]]
These comments also addressed the issues of Class I pricing and
consolidation and further addressed the issue of producer-handler
regulation. The Small Business Administration submitted views
specifically addressing exempt plant status and requesting further
analysis of the impact of consolidation on previously unregulated
entities, if possible.
Nearly all of the 1,000 comments addressed Class I pricing and
discussed the impact of Option 1A or Option 1B on dairy producers'
income. A majority of these comments supported Option 1A because it
would maintain the revenue necessary to stay in business. Many
commenters opposing Option 1B argued that the Class I differential
decreases that would occur under this option would result in financial
losses that would force many dairy farmers out of business. Comments
filed by service providers such as feed and implement stores that
claimed to be small businesses commented on the negative impact lower
prices received by dairy producers had on surrounding community
businesses. One commenter supporting Option 1A further stated that in
order to comply with the purposes and objectives of the Regulatory
Flexibility Act, as stated in the IRFA, a Class I price structure that
avoids a burdensome financial impact on dairy farmers must be adopted.
About 200 of the comments received from declared small businesses
addressed consolidation issues. These comments focused on the impact of
including or excluding currently-unregulated areas. A majority of the
comments focused on the Northeast order and the inclusion or exclusion
of the currently-unregulated territories in New York, Pennsylvania, and
Maryland. Comments supporting the inclusion of currently-unregulated
territory discussed the need to include this territory to prevent
inequitable, unfair and disorderly marketing conditions. One supporting
commenter noted that the expansion into unregulated areas would result
in more small businesses becoming subject to Federal order regulation
but the commenter did not believe that it would unduly impact their
ability to compete. Commenters opposing the inclusion of currently-
unregulated Pennsylvania territory argued that producer returns would
decline if handlers in this area were subject to Federal order
regulations.
A few comments were received addressing the extent of regulation
applied to producer-handlers. One commenter, a small business producer-
handler, indicated that the combination of new definitions and
classification of milk provisions will result in its regulation. The
commenter argued that this effect is contrary to the IRFA that stated
``no additional regulatory burdens should be placed on the industry''
and to the intent of the proposed rule that stated the changes were not
intended to fully regulate any producer-handler that is currently
exempt from regulation. Other commenters suggested that producer-
handlers should not be exempt from regulation if their route
disposition of Class I products at wholesale exceeds 500,000 pounds per
month or if they have retail sales other than at a retail establishment
located on the premises of the producer-handler's plant. They argued
that producer-handlers with route disposition above this limit cannot
be considered small businesses and should be subject to regulation.
After reviewing the public comments filed by small businesses in
combination with updated marketing data and information and updated
analyses, changes were made to the provisions contained in the proposed
rule. Not all of the changes requested by small businesses were
feasible but when changes were beneficial to small businesses without
affecting the objectives of the rule, they were incorporated. The
changes made to the proposed rule, based in part on small business
comments, are discussed below by issue.
Consolidation
The proposed rule advanced 11 consolidated Federal milk marketing
orders. The marketing areas of these orders were expanded to include
currently-unregulated areas if this did not result in the regulation of
any currently-unregulated handlers or was not an area in which handlers
are subject to minimum Class I pricing provisions under State
regulations. After reviewing the issue in light of the public comments
and updating the initial analysis based on more recent marketing data,
11 consolidated orders are adopted in the final decision, the same
number as proposed in the January 21, 1998, rule, but with significant
modifications being made to the marketing areas of the proposed
Northeast and Western orders, and minor modifications to the marketing
areas of the proposed Southeast, Mideast, Upper Midwest and Central
orders. The final decision continues to omit currently-unregulated
areas specified in the January 21st proposed rule and also omits
currently-unregulated areas that comprise a significant distribution
area for currently-unregulated handlers, some of which were proposed to
be included in consolidated areas.
Numerous comments were received from small businesses supporting
the inclusion of currently-nonregulated areas in the Northeast order.
However, after considering the requirements of the Farm Bill, the
consolidation of the existing orders does not necessitate expansion of
the consolidated orders into unregulated areas or 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 could 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.
Two changes made to the prior proposed rule as a result of comments
submitted by small businesses related to the exclusion of territory in
the consolidated marketing areas. These changes occurred in the Mideast
and Central orders. The changes ensure that two currently-unregulated
handlers maintain this status.
One change occurred in the Mideast order. Based on a comment
received from Toft Dairy, Incorporated (Toft Dairy), a small business
dairy processor, and Sandusky County Milk Producers Association, a
dairy cooperative representing dairy farmers classified as small
businesses, one partial and three entire counties in north Central Ohio
are excluded from the Mideast marketing area. These areas are currently
unregulated. The proposed rule had suggested including this currently-
unregulated territory in the Mideast marketing area which would have
resulted in the regulation of Toft Dairy. Since the intent of the
consolidating marketing orders was not to cause the regulation of any
currently-unregulated handler, these areas have been removed from the
marketing area of the Mideast order. Toft Dairy will remain an
unregulated processor unless its sales area changes significantly.
Another change occurred in the Central order. Based on a comment
received from Central Dairy, Incorporated (Central Dairy), a small
business dairy processor, six currently-unregulated counties in
northeast Missouri that were proposed to be included in the Central
order are excluded from the marketing area. These areas are currently
unregulated. Central Dairy opposed inclusion of these six counties
because the handler plans to expand its distribution into this
[[Page 16037]]
area. Again, since the intent of consolidating marketing orders was not
to cause the regulation of any currently-unregulated handler these
areas have been removed from the marketing area of the Central order.
Producer-Handlers
Another change to the proposed rule resulting from public comments
involves producer-handlers. Since the intent of the proposed rule was
not to increase regulation to any currently-unregulated producer-
handlers, minor modifications have been made to the classification of
milk provisions applicable to all orders and to the producer-handler
definition in certain individual orders.
A comment submitted by Promised Land Dairy, a producer-handler
defined as a small business, stated that the change in the
classification of milk provisions combined with other order changes
would result in their regulation. Promised Land Dairy argues that the
addition of the words ``or acquired for distribution'' in
Sec. 1000.44(a)(3)(iv) would force milk delivered by a producer-handler
to any store associated with a regulated handler to be sold at no more
than the Class III price because it would be considered a receipt from
a producer-handler. Promised Land Dairy argued that this would force
producer-handlers to become fully regulated. In addition, they argued
that changes made to the Southwest order's producer-handler definition
are not warranted and would further result in the regulation of
Promised Land Dairy.
The changes in the proposed rule were not intended to fully
regulate any producer-handler that is currently exempt from regulation.
Producer-handlers have been exempt from the pricing and pooling
provisions of the orders for several reasons. First, the care and
management of the dairy farm and other resources necessary for own-farm
production and the management and operation of the processing are the
personal enterprise and risk of the owner. Second, typically producer-
handlers are small businesses that operate in a self-sufficient manner.
Finally, producer-handlers do not have an advantage as either producers
or handlers so long as they are responsible for balancing their fluid
milk needs and cannot transfer balancing costs to other market
participants.
While the provisions objected to by Promise Land Dairy would not
directly regulate this entity, they could have a very serious negative
economic impact on its continued operations as a producer-handler.
Because it is still the intent of the Department to allow currently-
unregulated producer-handlers to maintain this status, changes have
been made to Sec. 1000.44(a)(3)(iv) in the general provisions by
removing the words ``or acquired for distribution'' and re-adding these
words to Sec. 1124.44, and changes have been made to the individual
order definitions of producer-handlers. Hence, no changes are made in
the final decision to regulate a producer-handler that is currently
exempt from regulation.
Additional comments submitted by small businesses regarding
producer-handlers advocated implementing a limitation on the exemption
of producer-handlers based on size. The commenters suggested that the
producer-handler exemption should be limited to those whose Class I
route disposition is 500,000 pounds or less, or whose entire Class I
disposition of fluid milk is made as retail sales from a retail
establishment located on the premises of the producer-handler's
processing plant.
Since the intent of the final decision is not to regulate any
currently-unregulated producer-handlers, these requests have been
denied. A review of October 1997 producer-handler route disposition
data indicates that if a 500,000 pound Class I route disposition limit
were implemented, 20 producer-handlers out of 111 producer-handlers,
would become regulated. The Department's reasons for exempting
producer-handlers as discussed previously have not changed and the
intent of this rule is not to make changes to regulate currently-
unregulated producer-handlers regardless of size. Consequently, these
suggested changes have not been included in the final decision.
Class I Price Structure
Another change to the proposed rule, resulting in part from the
public comments received, involves the Class I price structure. In the
proposed rule the Department advanced two main price options--1A and
1B. The Department indicated a preference for Option 1B because it was
more market-oriented. However, the Department recognized in the
proposed rule that Option 1B would result in lower Class I prices and
lower blend prices which would have a significant economic impact on
small businesses, particularly producers. To lessen the impact, three
phase-in program options were proposed to be adopted in conjunction
with Option 1B. The objective of the phase-in programs was to provide
dairy producers and processors the opportunity to adjust marketing
practices to adapt to more market-determined Class I prices.
A majority of the public comments received from small businesses
supported Option 1A. Many of the commenters opposing Option 1B
indicated that the price levels established under this price structure
would be significantly lower than present levels, and as a result,
they--primarily dairy producers--would be forced out of business. Of
the commenters supporting Option 1B, few supported the adoption of a
phase-in program.
Option 1B was preferred by the Department because it would move the
dairy industry into a more market-determined pricing system.
Establishing a national Class I price structure based on results from
the U.S. Dairy Sector Simulator model,11 developed and
administered by Cornell University, may increase market efficiencies in
the dairy industry and lowering the differentials would allow marketing
conditions to have a greater impact on actual Class I prices paid to
producers who service the Class I market. The Department recognized
that this would impact small businesses, both producer and processors,
because less of the actual value of Class I milk would be regulated. In
the proposed rule the Department stated the following:
---------------------------------------------------------------------------
\11\ The U.S. Dairy Sector Simulator model is used to evaluate
the geographic or ``spatial'' value of milk and milk components
across the U.S. under the assumption of globally efficient markets.
A more detailed description of the model is contained in the
decision.
``Smaller, less efficient producers would likely have a greater
responsibility to bargain with processors for over-order premiums
that adequately cover their costs. With processors less likely to
face similar raw product costs, less efficient small processors may
have to negotiate and/or sustain over-order price levels necessary
to attract and maintain a sufficient supply of milk. Large
businesses, both producers and processors, may be in a better
---------------------------------------------------------------------------
competitive position to do this.'' (63 FR 4912)
After reviewing the public comments and updating marketing data and
analyses of Option 1A and Option 1B, the Department adopted a Class I
price structure that provides greater structural efficiencies in the
assembly and shipment of milk and dairy products. The adopted Class I
pricing structure establishes a price surface that utilizes USDSS model
results adjusted for all known plant locations and establishes
differential levels that will result in prices that generate sufficient
revenue to assure an adequate supply of milk. The differential levels
will better maintain equity by raising the level 40 cents per
hundredweight higher than the level proposed in Option 1B. The higher
differential level reduces the likelihood
[[Page 16038]]
of class-price inversions, where the Class I prices are below the
manufacturing milk prices for the month. Updated analysis conducted by
the Interagency Dairy Analysis Team in the final Regulatory Impact
Analysis 12 indicates that increasing the differential level
lessens the economic impact of moving toward more market-orientation on
small businesses.
---------------------------------------------------------------------------
\12\ Copies of the Regulatory Impact Analysis 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.
---------------------------------------------------------------------------
Exempt Plant Limits
The Office of the Chief Counsel for Advocacy (Office of Advocacy)
of the U.S. Small Business Administration submitted views on the IRFA
pursuant to its authority under the Regulatory Flexibility Act, 5
U.S.C. 601, as amended by the Small Business Regulatory Enforcement
Fairness Act, Pub. L. 104-121, 110 Stat. 866 (1996). With regard to the
impact of the order consolidation and pricing formulae, the Office of
Advocacy stated that these issues should be left to the regulated
community and the Department. The Office of Advocacy did comment that a
system that ``best resembles the free market and imposes the least
burden on the industry would be the best alternative.''
The Office of Advocacy requested an explanation of how the 150,000
pound handler exemption was derived and a determination of whether this
exemption could be increased. They questioned whether a greater number
of small entities would benefit from an increase in the limit. The
Office of Advocacy further requested additional analysis on the impact
of the consolidation of orders on previously unregulated entities, if
possible.
The 150,000 pound handler exemption was determined after reviewing
provisions currently contained in the Federal milk marketing orders.
The 150,000 pound exemption was the highest level currently utilized,
with some orders containing no such exemption. A review of the impact
of this exemption level on distributing plants that were fully
regulated in October 1997 indicated that 15 plants, 14 of which are
small businesses, would become exempt from regulation based on this
provision. In addition, five partially-regulated plants, four of which
are small businesses, would also become exempt. No public comments were
received addressing this issue.
Federal milk order regulations must balance the interests of small
business dairy producers versus small business dairy processors.
Although only processors are regulated under Federal milk orders,
producers receive benefits from the regulations. Thus, whenever dairy
processors are exempt from Federal order regulations they are not
required to pay dairy producers minimum Federal order prices. Exempting
processors from regulation directly impacts dairy producers.
Based on October 1997 data, a review of the impacts of increasing
the exemption levels on processors was completed. As expected,
increasing the level would allow additional processors to become
exempt. In October 1997, 54 handlers had route disposition equal to or
less than 150,000 pounds. An additional 57 handlers had route
disposition between 150,000 to 1,000,000 pounds and 327 handlers had
route disposition greater than 1 million pounds.
Although it may appear that increasing the exemption level would
not result in exempting many additional plants, these plants receive
milk from a significant number of producers, a majority of whom are
small businesses. In addition, contrary to the intent of benefitting
small businesses by increasing the exemption level, more handlers that
are considered large businesses could become exempt from regulation.
Implementing the 150,000 pound level results in two large businesses
currently regulated (one fully-regulated and one partially-regulated)
becoming exempt plants. When more large businesses become exempt it not
only impacts producers, but also impacts other regulated handlers.
In an attempt to maintain a balance between the interests of both
small handlers and small dairy producers, the 150,000 pound exemption
is maintained. Based on previous experience, the exemption of plants of
this size poses no economic threat to the order's regulated handlers.
Minimization of Significant Economic Impacts on Small Businesses
The Department developed the final decision aware of the impacts of
its adoption on small businesses, both dairy producers and processors.
In the final decision, the Department has minimized the significant
economic impacts of these regulations on small entities to the fullest
extent reasonably possible while adhering to the stated objectives. The
Department reviewed the regulatory and financial burdens resulting from
these regulations and determined, to the fullest extent possible, the
impact on small businesses' abilities to compete in the market place.
The Department reviewed the regulations from both the small producer
and small processor perspectives attempting to maintain a balance
between these competing interests.
The Farm Bill mandated that the current 31 orders be consolidated
into between 10 to 14 orders. The Farm Bill also specified that other
issues could be addressed. Eleven orders are adopted in the final
decision as well as a new Class I price structure, a basic formula
price replacement, classification of milk provisions, and the
establishment of identical provisions in all orders where possible. The
objectives of the final decision are (1) to comply with the
requirements of the Farm Bill and (2) to make other changes in order
provisions consistent with the goals and requirements of the AMAA. The
focus of these changes is to enhance the efficiencies of fluid milk
markets while maintaining equity among processors of fluid milk selling
in marketing order areas and among dairy producers supplying the areas'
fluid demands.
Federal milk order regulations do not disparately apply to small
and large businesses. If a handler is regulated under a Federal milk
order, the provisions of that order apply the same to all handlers
regardless of size. Likewise, if a producer's milk is associated with a
Federal order pool, the same pricing and payment provisions will be
utilized for all producers regardless of size. This final decision
addresses several issues and adopts provisions that will continue to
apply equally to all businesses, both large and small. The provisions
adopted herein attempt to reduce the economic impact of Federal milk
order regulations on small businesses to the most reasonable extent
possible.
After reviewing submitted comments and updating marketing data and
analyses, changes were made to the provisions contained in the proposed
rule. The IRFA discussed the projected impacts of the primary
components of the proposed rule on small entities. These included
consolidation, basic formula price, Class I price structure, and
classification. Because Federal order provisions are interrelated, it
was difficult to determine the overall impact of each component on
small entities because the proposed rule contained two pricing options.
To the fullest extent possible, such estimations were set forth in the
proposed rule.
Below is a description of the primary components contained in the
final decision that were discussed in the IRFA. For comparison
purposes, impacts resulting from each component
[[Page 16039]]
are briefly discussed. Because this rule establishes the specific
provisions to be contained in Federal milk marketing orders, analysis
of the impacts of the consolidated orders on small businesses is
provided.
Consolidation
The IRFA discussed three order consolidation options: (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 the proposed rule. Determining the specific economic impacts of
marketing area consolidation on handlers, producers, and consumers is
difficult. The IRFA detailed the assumptions utilized to quantify the
economic effects of consolidation. The IRFA included an analysis of
each of the three consolidation options on the weighted average use
value to determine the potential impacts of each option on producers.
The IRFA also included projections regarding the number of handlers
that would be regulated under the consolidation options and the number
of these handlers that are small businesses.
The consolidation of orders adopted in the final decision is a
result of the examination and analysis of more recent marketing data in
combination with the comments received on the proposed rule. This
resulted in modifying significantly from the proposed rule the
marketing areas of the Northeast and Western orders, and in making
minor modifications to the marketing areas of the proposed Southeast,
Mideast, Upper Midwest and Central orders. The consolidated orders
adopted in the final decision are as follows (* denotes changes made
from the proposed rule):
*1. NORTHEAST--current marketing areas of the New England, New
York-New Jersey and Middle Atlantic Federal milk orders, with the
addition of: the contiguous unregulated areas of New Hampshire,
northern New York and Vermont; and the non-Federally regulated portions
of Massachusetts. *The Western New York State order area (ten entire
and 5 partial western New York counties) proposed to be included in the
expanded Northeast order area has been omitted.
2. APPALACHIAN--Current marketing areas of the Carolina and
Louisville-Lexington-Evansville (minus Logan County, Kentucky) Federal
milk orders plus the marketing area of the former Tennessee Valley
order, with the addition of 21 currently-unregulated counties in
Indiana and Kentucky.
3. FLORIDA--current marketing areas of the Upper Florida, Tampa
Bay, and Southeastern Florida Federal milk orders.
*4. SOUTHEAST--current marketing area of the Southeast Federal milk
order, plus 1 county from the Louisville-Lexington-Evansville Federal
milk order marketing area; plus 11 northwest Arkansas counties and 22
entire Missouri counties that currently are part of the Southwest
Plains marketing area; plus 6 Missouri counties that currently are part
of the Southern Illinois-Eastern Missouri marketing area; plus 16
currently unregulated southeast Missouri counties (including 4 that
were part of the former Paducah marketing area); plus 20 currently-
unregulated Kentucky counties (including 5 from the former Paducah
marketing area).
*A partial Missouri county that has been part of the Southwest
Plains marketing area will become completely unregulated.
*5. MIDEAST--current marketing areas of the Ohio Valley, Eastern
Ohio-Western Pennsylvania, Southern Michigan and Indiana Federal milk
orders, plus Zone 2 of the Michigan Upper Peninsula Federal milk order,
and most currently-unregulated counties in Michigan, Indiana and Ohio.
*One partial and 3 entire counties in north central Ohio are left
unregulated, as they represent the distribution area of a currently-
partially regulated distributing plant (Toft Dairy in Sandusky, Ohio).
*6. UPPER MIDWEST--current marketing areas of the Chicago Regional,
Upper Midwest, Zones I and I(a) of the Michigan Upper Peninsula Federal
milk orders, and unregulated portions of Wisconsin. *The Iowa Federal
order marketing area portion of one Illinois county is added to the
consolidated Upper Midwest marketing area and the Chicago Regional
portion of another Illinois county is removed and added to the
consolidated Central area.
*7. CENTRAL--current marketing areas of the Southern Illinois-
Eastern Missouri, Central Illinois, Greater Kansas City, Southwest
Plains, Eastern Colorado, Nebraska-Western Iowa, Eastern South Dakota,
Iowa (* less the portion of an Illinois county that will become part of
the consolidated Upper Midwest area) and *Western Colorado Federal milk
orders, * plus the portion of an Illinois county currently in the
Chicago Regional Federal order area, minus 11 northwest Arkansas
counties and 1 partial and 22 entire Missouri counties that are part of
the current Southwest Plains marketing area, minus 6 Missouri counties
that are part of the current Southern Illinois-Eastern Missouri
marketing area, plus 54 currently-unregulated counties in Kansas,
Missouri, Illinois, Iowa, Nebraska and Colorado, plus 8 counties in
central Missouri *(six fewer than in the proposed rule) that are not
considered to be part of the distribution area of an unregulated
handler in central Missouri, *plus 7 currently unregulated Colorado
counties located between the current Western and Eastern Colorado order
areas.
8. SOUTHWEST--current marketing areas of Texas and New Mexico-West
Texas Federal milk orders, with the addition of two currently-
unregulated northeast Texas counties and 47 currently-unregulated
counties in southwest Texas.
9. ARIZONA-LAS VEGAS--current marketing area of Central Arizona,
plus the Clark County, Nevada, portion of the current Great Basin
marketing area, plus eight currently-unregulated Arizona counties.
*10. WESTERN--current marketing areas of the Southwestern Idaho-
Eastern Oregon and Great Basin Federal milk orders, minus Clark County,
Nevada. *The Western Colorado order area, proposed to be included in
the Western order area, is instead included in the consolidated Central
order.
11. PACIFIC NORTHWEST--current marketing area of the Pacific
Northwest Federal milk order plus 1 currently-unregulated county in
Oregon.
The consolidated orders presented herein reflect the most
appropriate boundaries for the purpose of implementing the requirements
of the Farm Bill. These orders attempt to avoid extending regulation to
handlers whose primary sales areas are outside current Federal order
marketing areas and who are not subject to Federal order regulation.
These orders also minimize the regulatory burden placed on handlers.
Based on October 1997 data, it is projected that 306 distributing
plants will be fully regulated and 32 distributing plants will be
exempt. The number of fully-regulated small businesses will be 111. The
number of fully-regulated small businesses is down from 164, a 32
percent decline from the proposed rule. This is mainly a result from
either large business acquisitions of these small businesses or because
they have gone out of business. Two small businesses that are currently
unregulated will become regulated and, as mentioned previously, 14
fully regulated and four partially-regulated small businesses will
become exempt.
[[Page 16040]]
Basic Formula Price
The IRFA reviewed the basic formula price replacement options
considered. These options included pricing components based on their
value in manufactured products which was proposed and is adopted in the
final decision, economic formulas, futures markets, cost of production,
competitive pay pricing, and pricing differentials only.
The rule closely follows the pricing plan described in the proposed
rule by replacing the current basic formula price (BFP) with a multiple
component pricing system that derives component values from surveyed
prices of manufactured dairy products. The adopted pricing system
determines butterfat prices for milk used in Class II, Class III and
Class IV products from a butter price; protein and other solids prices
for milk used in Class III products from cheese and whey prices; and
nonfat solids prices for milk used in Class II and Class IV products
from nonfat dry milk product prices. The specific formulas used to
calculate the prices are described in complete detail in the final
decision.
All market participants, both large and small, would be affected by
the BFP replacement in the same manner. There would be no uneven impact
on market participants on the basis of size. However, the existence of
minimum order pricing serves to assure that large handlers pay no less
for their milk than smaller entities, and that small producers receive
at least 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.
Impact of Multiple Component Pricing Provisions on Small Entities
As set forth in the proposed rule, seven of the 11 orders adopted
in the final decision provide for milk to be paid for on the basis of
its components--multiple component pricing (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 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.
Class I Price Structure
The IRFA discussed two price structure options--location-specific
differentials (Option 1A) and relative-value specific differentials
(Option 1B). The IRFA set forth the projected impacts that these two
price structures would have on producers and processors.
The price structure adopted in this final decision resulted from an
examination and review of more recent marketing data in combination
with the comments received on the proposed rule. As discussed
previously, the Department adopted a Class I price structure that
provides greater structural efficiencies in the assembly and shipment
of milk and dairy products. The adopted Class I pricing structure
establishes a price surface that utilizes
[[Page 16041]]
USDSS model results adjusted for all known plant locations and
establishes differential levels that will result in prices that
generate sufficient revenue to assure an adequate supply of milk. The
differential levels will better maintain equity by raising the level 40
cents per hundredweight higher than the level proposed in Option 1B.
The higher differential level reduces the likelihood of class-price
inversions, where the Class I prices are below the manufacturing milk
prices for the month. Updated analysis conducted by the Interagency
Dairy Analysis Team in the final Regulatory Impact Analysis
13 indicates that increasing the differential level lessens
the economic impact of moving toward more market-orientation on small
businesses.
---------------------------------------------------------------------------
\13\ Copies of the Regulatory Impact Analysis 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.
---------------------------------------------------------------------------
The adopted Class I price structure reduces Class I differentials
from current levels in 17 markets ranging from $0.04 per hundredweight
in the Ohio Valley order to $1.18 per hundredweight in the Eastern
Colorado order. Option 1B would have reduced differentials from current
levels in 29 markets ranging from $0.01 in Central Illinois order to
$1.58 in the Eastern Colorado order. The adopted Class I price
structure will increase Class I differentials in 14 markets ranging
from $0.08 in the Greater Kansas City order to $0.57 in the
Southeastern Florida order and leaves two orders unchanged. Option 1B
would have increased Class I differentials in only two markets--$0.15
in Chicago Regional and $0.17 in Southeastern Florida--and would have
left two orders unchanged. Option 1A would have increased differentials
in 21 markets ranging from $0.01 per hundredweight in New England, New
York-New Jersey, and Unregulated New York and New England to $0.50 in
the Upper Midwest order, lowered differentials in seven markets from
$0.04 in Ohio Valley to $0.18 in Eastern Colorado, and left four
markets unchanged.
Although the adopted Class I price structure will result in price
changes that affect both large and small entities, this option best
meets the objectives of the AMAA. The adopted Class I price structure
recognizes that there are limitations in the extent that the
marketplace can be relied upon to establish prices to producers that
are equitable and reasonable given marketing conditions. Similarly, it
recognizes that handlers will be assured a higher degree of price
equity. The adopted Class I price structure best provides the
incentives necessary for increased efficiency in the organization and
distribution of the milk supply and dairy products.
Classification Provisions
The IRFA discussed the classification of milk provisions contained
in the proposed rule. The IRFA concluded that the classification of
milk provisions would not have a significant economic impact on a
substantial number of small entities. With two primary exceptions,
these changes are adopted in the final decision. The two exceptions
are: (1) Leaving cream cheese as a Class III product as currently
classified, and (2) leaving the fluid milk product exclusion standard
for products packaged in ``all-metal, hermetically-sealed containers''
as currently classified. In addition, other minor changes have been
made including revising the shrinkage provisions to more closely
resemble current provisions, re-adding the provision for milk that is
dumped or used for animal feed, and classifying inventory of fluid milk
products and fluid cream products in bulk form in Class IV. One
additional change, as previously discussed in the comment section, was
made to ensure that producer-handlers that are not currently regulated
by the Federal order program will maintain this status. The provisions
improve reporting and accounting procedures for handlers and provide
for greater market efficiencies.
Conclusion
A review of the impacts on small entities of consolidating the
current Federal milk orders into 11 orders in conjunction with the
basic formula price replacement, classification provisions, and the
three different Class I price structure options, indicates that the
provisions set forth in the final decision adhere to the mandates of
the Farm Bill, and provides more market efficiencies while minimizing
the impact of these regulations on small entities. Since the Federal
order program serves to benefit dairy producers by regulating dairy
processors through classified pricing, provisions must be established
that maintain a balance between the interests of small dairy producers
and processors. The provisions contained in the final decision best
maintain this balance.
The adoption of the consolidated orders and the provisions
contained therein, including the adopted Class I price structure, will
affect some small entities. Producers located in the western,
southwestern, and northeastern areas may not fare as well as producers
in other parts of the country when comparing the all-milk prices and
cash receipts from milk marketings to current baseline projections.
These producers represent approximately one-third of the total
producers associated with Federal orders. Of these producers, about 30
percent are considered small businesses. When compared to the baseline,
over a 6-year period from the years of 2000-2005, the all-milk price
for all Federal orders is expected to decrease an average of $0.02 per
hundredweight. Changes in the all-market price on an individual order
basis is projected to range from a decrease of $0.50 per hundredweight
to an increase of $0.52 per hundredweight. Cash receipts are expected
to increase by an estimated $222.3 million primarily because of changes
in transportation payments and the pooling of additional milk. After
adjusting for these changes, cash receipts are projected to decline
from the baseline an average of $2.5 million during the 6-year period.
With the baseline cash receipts averaging $16,944.5 million this
represents a very small reduction.
Since the final decision is projected to have minor effects on
where milk is produced, little impact is expected on processors or
manufacturers of dairy products. A majority of the fully-regulated
processors associated with Federal orders will benefit from a decrease
in Class I prices. About 209 processors, 74 of which are small
businesses, would experience decreases ranging from $0.04 to $1.18 per
hundredweight. About 69 processors, 22 of which are small businesses,
located primarily in the Midwest and Florida areas, would experience
Class I price increases ranging from $0.08 to $0.57 per hundredweight.
About 28 processors, 14 of which are small businesses, would experience
no change in Class I prices.
Implementing the consolidated orders with the modified Option 1B
price structure would have a significant impact on many small entities,
both producers and processors. Producers located everywhere except the
Midwest and Florida regions would have been negatively impacted. When
compared to the baseline, over a 6-year period from the years of 2000-
2005, the all-milk price for all Federal orders was projected to
annually average $0.09 per hundredweight lower, with individual order
changes ranging from -$0.61 per hundredweight to $0.42 per
hundredweight. Cash receipts were expected to annually average over
$100 million less than the baseline, a .01 percent decrease.
[[Page 16042]]
Most fully-regulated fluid processors would have benefitted from
the decrease in Class I differentials. Lower differentials would have
reduced Class I prices in 29 of the current markets from between $0.01
to $1.58 per hundredweight. Two markets would have had increases of
$0.15 and $0.17 per hundredweight in Class I prices. When compared to
the baseline, the Class I price for all Federal orders was projected to
average $0.49 per hundredweight lower over a 6-year period from the
years of 2000-2005. Lower Class I prices would have been expected to
increase U.S. sales of fluid milk by 98.8 million pounds annually. Most
fluid processors would have benefitted from the lower fluid milk prices
and increased fluid milk sales.
Although most fluid processors would have benefitted from the
consolidation of orders with the modified Option 1B price surface, only
about one-third of the fully-regulated plants are small businesses and
these plants may have been negatively impacted. With less of the actual
value of fluid milk represented by the minimum prices established by
Federal orders, more emphasis would have been placed on processors' and
producers' abilities to negotiate and/or sustain over-order prices that
might be necessary to maintain an adequate supply of milk. This would
have resulted in less handler equity which could have placed small
processors at a disadvantage in competing for a supply of milk.
Adoption of this option would have resulted in large fluid
processors benefitting from the regulations at the expense of more than
50 percent of the total producers who would have experienced price
decreases. Additionally, small processors would not have been assured
equity in competing with large businesses for a milk supply. Hence, the
Department determined the impact of consolidating orders with the
modified Option 1B price structure would have had a more burdensome
financial impact on a significant number of small businesses.
Implementing the consolidated orders with the Option 1A price
structure would have minimal overall impact on small businesses. When
compared to the baseline, the all-milk price for all Federal orders was
projected to average $0.03 per hundredweight higher, with individual
order changes ranging from -$0.66 per hundredweight to $0.34 per
hundredweight over a 6-year period from the years of 2000-2005. Cash
receipts were expected to average over $482.1 million more than the
baseline, a .02 percent increase. Nearly 50 percent of the producers
would have benefitted from this modest increase.
Since this option is projected to have minor effects on where milk
is produced, little impact would have been expected on processors or
manufacturers of dairy products. Option 1A would have increased Class I
differentials by an average of $0.04 per hundredweight resulting in the
all-market average Class I price charged to fluid handlers increasing
by $0.08 per hundredweight when compared to the baseline during the
years of 2000-2005. Processors would have experienced a Class I price
increase in 21 of the current orders ranging from $0.01 to $0.50 per
hundredweight, affecting nearly 190 fully-regulated processors of which
about one-third are small businesses. Since the impact of the increased
Class I prices would have resulted in an insignificant decrease in
fluid milk consumption within the Federal order system, a decrease of
17.1 million pounds, and within the U.S., a decrease of 14.9 million
pounds, this option would have little expected effect on processors or
manufacturers of dairy products.
Implementing the consolidated orders with the Option 1A price
structure would likely have minimized the financial impact of Federal
milk orders on small entities. However, this option does not facilitate
the movement towards a more efficient system of supplying fluid milk to
meet market demands within the Federal order regulatory program.
Although this option minimizes the impact of regulations on small
businesses, it does not best meet the desired outcomes and objectives
of the final decision.
The provisions adopted in the final decision best fulfill the
requirements of the AMAA while minimizing the regulatory burdens on
small businesses. The consolidated orders, with the adopted Class I
price structure and other provisions, ensures that the Federal order
program will continue to establish and maintain market stability and
orderly marketing conditions for milk. The adopted provisions will
further provide that milk prices are established at levels high enough
to generate sufficient revenue for producers to maintain adequate
supplies of milk while providing equity to handlers. The provisions
contained in the final decision do not unduly or disproportionately
burden small businesses.
Paperwork Reduction Act of 1995
The information collection requirements contained in this decision
previously were approved by the Office of Management and Budget (OMB)
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35)
under OMB control number 0581-0032, through September 30, 2001.
The amendments set forth in the final decision do not contain
additional information collections that require clearance by the OMB
under the provisions of 44 U.S.C. Chapter 35. Following is a general
description of the reporting and recordkeeping requirements, reasons
for these requirements and an estimate of the annual burden on the
dairy industry.
Title: Report Forms Under Federal Milk Orders (From Milk Handlers
and Milk Marketing Cooperatives).
OMB Control Number: 0581-0032.
Expiration Date of Approval: September 30, 2001.
Type of Request: Extension and revision of a currently approved
information collection.
Abstract: Federal Milk Marketing Order regulations authorized under
the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C.
601-674), require milk handlers to report in detail the receipt and
utilization of milk and milk products handled at each of their plants
that are regulated by a Federal Order. The data are needed to
administer the classified pricing system and related requirements of
each Federal Order.
Rulemaking amendments to the orders must be approved in referenda
conducted by the Secretary.
The terms of each of the current milk marketing orders are found at
7 CFR parts 1001-1199; the terms of each of the proposed orders in this
document are found at 7 CFR parts 1001-1135. The authority for
requiring reports is found at 8c(5) and (7) and 8d of the Act. The
current authority for requiring records to be kept is found in the
general provisions at 7 CFR part 1000.5. In the final decision, this
authority is found in the general provisions at 7 CFR part 1000.27. The
Act also provides for milk marketing agreements, but there are none in
effect.
A Federal milk marketing order is a regulation issued by the
Secretary of Agriculture that places certain requirements on the
handling of milk in the area it covers. It requires that handlers of
milk for a marketing area pay not less than certain minimum class
prices according to how the milk is used. These prices are established
under an order on the basis of evidence concerning the supply and
demand conditions for milk in the market. A milk order requires that
payments for milk be pooled and paid to individual farmers or
cooperative associations of
[[Page 16043]]
farmers on the basis of a uniform or average price. Thus, all eligible
farmers (producers) share in the market wide use-values of milk by
regulated handlers.
The Report of Receipts and Utilization and the Producer Payroll
Report are completed by regulated milk handlers and milk marketing
cooperatives and are the principal reporting forms needed to administer
Federal milk marketing orders.
The orders also provide for the public dissemination of market
statistics and other information for the benefit of producers,
handlers, and consumers. Each milk order is administered by a market
administrator who is an agent of the Secretary of Agriculture. Part of
the market administrator's duties are to prescribe reports required of
each handler, and to assure that handlers properly account for milk and
milk products, and that such handlers pay producers and associations of
producers according to the provisions of the order. The market
administrator employs a staff that verifies handlers' reports by
examining records to determine that the required payments are made to
producers. Most reports required from handlers are submitted monthly to
the market administrator. Confidentiality of information collection is
assured through section 608(d) of the Act, which imposes substantial
penalties on anyone violating these confidentiality requirements.
The forms used by the market administrators are required by the
respective milk orders that are authorized by the Act. The forms are
authorized either in the general provisions (Part 1000) or in the
sections of the respective orders. The forms are used to establish the
quantity of milk received by handlers, the pooling status of handlers,
the class-use of the milk used by the handler and the butterfat content
and amounts of other components of the milk.
The frequency of performing these recordkeeping and reporting
duties varies according to the form; the frequency ranges from ``on
occasion'' to ``annually'' but ``monthly'' is perhaps most common. In
general, most of the information that handlers report to the market
administrator is readily available from normally maintained business
records. Thus, 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.
Regarding the use of improved information technology to reduce the
reporting and recordkeeping burden, the information requested is the
minimum necessary to carry out the program. Since the type of
information required to be collected and the certification and
reporting of that information is required, no other alternative to the
mode of information collection has been found. However, where possible,
reported information is accepted using computer tapes or diskettes as
alternatives to submitting the requested information on these report
forms. Comments were requested to help assess the number of handlers
using computers, word processors and other electronic equipment to
create and store documents, as well as the extent to which the Internet
is used to exchange information.
We are confident that the information we collect does not duplicate
information already available. Dairy Programs has an ongoing
relationship with many organizations in the dairy industry that also
respond to other governmental agencies. Thus, we are aware of the
reports dairy industry organizations are submitting to other government
agencies.
Information collection requirements have been reduced to the
minimum requirements of the orders, thus minimizing the burden on all
handlers--those considered to be small as well as large entities. Forms
require only a minimal amount of information which can be supplied
without data processing equipment or a trained statistical staff. The
primary source of data used to complete the forms are routinely used in
all business transactions. Thus, the information collection and
reporting burden is relatively small. Requiring the same reporting
requirements for all handlers does not significantly disadvantage any
handler that is smaller than industry average.
If the collection of this information were conducted less
frequently, data needed to keep the Secretary informed concerning
industry operations would not be available. Timing and frequency of the
various reports are such to meet the needs of the industry and yet
minimize the burden of the reporting public.
The collection of the required information is conducted in a manner
consistent with guidelines in 5 CFR 1320.6. The orders require that the
market administrator compute monthly minimum prices to producers based
on monthly information. Without monthly information, the market
administrator, for example, would not have the information to compute
each monthly price, nor to know if handlers were paying producers on
dates prescribed in the order, such as the partial payment for milk
received the first 15 days of the month and the final payment which is
payable after the end of the month. The Act imposes penalties for order
violations, such as the failure to pay producers not later than
prescribed dates. The orders require payments to and from the producer-
settlement fund to be made monthly. Also, class prices are based on the
monthly Basic Formula price series.
Annual Reporting and Recordkeeping Burden
Estimate of Burden: Public reporting burden for this collection of
information is estimated to average 0.87 hours per response.
Respondents: Milk Handlers and Milk Marketing Cooperatives.
Estimated Number of Respondents: 772.
Estimated Number of Responses per Respondent: 35.
Estimated Total Annual Burden on Respondents: 23,858 hours.
Estimated annual cost to respondents for report preparation:
$276,514 (23,858 hours at $11.59 per hour). Although hourly rates vary
among handlers in various localities, the wage paid to clerical workers
engaged in report preparation is estimated to be comparable to about a
grade GS-7, step 1.
It is important to note that the burden being reported is an
estimate of the amount of time that would be required of current
program participants.
It is expected that the final decision should have little impact on
the reporting and recordkeeping burden on handlers regulated under the
Federal milk marketing order program. In fact, as a result of the
consolidation of Federal orders from 31 to 11 as proposed, an overall
reduction in reporting and recordkeeping requirements may occur due to
greater uniformity in forms used and fewer ``special'' forms that
currently apply to one or a few orders. There should also be a
reduction in the burden on handlers that currently file reports for
individual orders that are being consolidated.
Non-substantial changes would be necessary on the required reports
and records to correctly identify the new Federal market order (e.g.
the current--and separate--reports for the Upper Florida, Tampa Bay and
Southeastern Florida marketing areas would be combined into one report
for the Florida marketing area).
[[Page 16044]]
Request for Public Input on Analyses
Comments on the Executive Order 12866 analysis, the initial
regulatory flexibility analysis, and the paperwork reduction analysis
were requested in the proposed rule, which was published in the Federal
Register on January 30, 1998. Specifically, interested parties were
invited to submit comments on the regulatory and informational impacts
of this proposed rule on small businesses. More than 1,000 comments
were received from interested parties that specifically stated or
documented they were small businesses. However, this number may not be
fully representative of the number of small businesses that actually
submitted comments because a majority of commenters did not indicate
their size. A few comments specifically addressed the initial
regulatory flexibility analysis (IRFA), the Executive Order 12866, and
the Paperwork Reduction Analysis. These comments have been considered
and addressed above.
Preliminary Statement
The material issues in this rule relate to:
1. Consolidation of marketing areas.
2. Basic formula price replacement and other class price issues.
3. Class I pricing structure.
4. Classification of milk and related issues.
5. Provisions applicable to all orders.
6. Regional issues:
a. Northeast Region.
b. Southeast Region.
c. Midwest Region.
d. Western Region.
7. Miscellaneous and administrative matters.
a. Consolidation of the marketing service, administrative expense,
and producer-settlement funds.
b. Consolidation of the transportation credit balancing funds.
c. General findings.
II. Discussion of Material Issues and Amendments to the Orders
A discussion and explanation of the material issues and
determinations contained in this rule are as follows:
1. Consolidation of Marketing Areas
Subtitle D, Chapter 1 of the 1996 Farm Bill, entitled
``Consolidation and Reform of Federal Milk Marketing Orders,''
requires, among other things, that the Federal milk marketing orders be
limited to not less than 10 and not more than 14. Nearly 1,300 public
comments received in response to the proposed rule addressed the
subject of order consolidation. Preceding the proposed rule, two
preliminary reports on order consolidation were issued by the
Agricultural Marketing Service's Dairy Division, in December 1996 and
May 1997. The proposed rule, issued in January 1998, included
consideration of public comments received in response to these
preliminary reports.
The 1996 Farm Bill specifically provides for the inclusion of
California as a separate Federal milk order, but the provision is
contingent upon petition and approval by California producers. The
Omnibus Consolidated and Emergency Supplemental Appropriations Bill,
passed in October 1998, extended the time for implementing Federal milk
order reform amendments from April 4, 1999 to October 1, 1999. The
legislation provides that California has from the date of issuance of
this final decision until September 30, 1999, to become a separate
Federal milk order. This additional time is intended to allow
California dairy interests the opportunity review this final decision
to determine whether a Federal milk order for California, consistent
with the provisions adopted for the consolidated orders, would best
meet their milk marketing regulatory needs.
Over 150 comments were received that addressed the issue of a
Federal milk order for California, with approximately 120 of them being
a form letter advocating a California Federal milk order. These
comments, and a number of additional individual comments, came
primarily from commenters outside California who expressed a need for
California and Federal order prices for milk used in manufactured
products to be in closer alignment to eliminate California
manufacturers' perceived competitive advantage in product prices.
Interest in a Federal milk order has been expressed by some
California producers, but for the most part California commenters
expressed a desire to have a chance to study and comment on this final
decision before deciding whether to pursue a proposal for a California
Federal order.
The preliminary reports, the proposed rule, and this final decision
concerning order consolidation were prepared using data gathered about
receipts and distribution of fluid milk products by all known
distributing plants located in the 47 contiguous states, not including
the State of California. Data describing the sources and disposition of
fluid milk products for the month of October 1995 were used to compile
the initial Preliminary Report. In response to comments and questions
about certain marketing area boundaries and changes in marketing
conditions in some of the markets after publication of the initial
Preliminary Report, data concerning those markets was updated to
January 1997, and more detailed information was gathered regarding the
geographic distribution of route sales by individual handlers and their
specific sources of producer milk. The updated and more detailed data
were used in re-examining the appropriate boundaries of the initially-
suggested Northeast, Appalachian, Southeast, Mideast, Central, and
Western marketing areas for the Revised Preliminary Report on Order
Consolidation. The Revised Preliminary Report, in turn, was modified on
the basis of comments received for development of the proposed rule.
Nearly 1,300 comments filed in response to the proposed rule had
some applicability to the topic of order consolidation. Approximately
750 of these comments were received as 6 form letters, one of which
(filed by approximately 120 commenters) advocated a national marketing
area map comprised of 10 order areas covering all of the contiguous 48
states. The other form letters advocated the addition of currently-
unregulated area to the Northeast area. Another 350 comments also
addressed the desirability of adding unregulated areas to the proposed
consolidated marketing areas (primarily the Northeast), with only about
55 of these being opposed to the inclusion of unregulated areas.
The comments specifically applicable to each of the consolidated
marketing areas are described in the sections dealing with the
individual consolidated areas.
In combination with consideration of the comments received, data
similar to that gathered for October 1995 were compiled for October
1997 to determine whether the consolidated marketing areas delineated
in the proposed rule continued to represent the most appropriate
boundaries for the purpose of implementing the requirements of the 1996
Farm Bill.
The October 1997 data allowed a ``snapshot'' of the marketing
patterns of fluid milk processors for that month. The regulatory status
of distributing plants for October 1997 is known, and the regulatory
status of each plant could be projected on the basis of the plant's
receipts and dispositions, and where its milk was distributed. The
information in the sections entitled ``Distributing Plants'' within the
description of each marketing area are based on the October data, as
are the lists of plants and pool plant status following the
consolidation portion of this decision. It should be
[[Page 16045]]
understood that the regulatory status of any plant can change whenever
its operations or areas of distribution change.
The result of the examination and analysis of the more recent data
in combination with the comments on the proposed rule was to modify
significantly from the proposed rule the marketing areas of the
proposed Northeast and Western orders, and to make very minor
modifications to the marketing areas of the proposed Southeast,
Mideast, Upper Midwest and Central orders.
As in the case of data referring to the operations of less than
three handlers or producers in the preliminary reports and proposed
rule, some of the data used to determine the consolidated areas is
restricted from use by the public because it refers to individual fluid
milk distributing plants and the origins of producer milk supply for
those plants. However, the basis for the marketing area boundaries is
described as specifically as possible without divulging such
proprietary information.
The same seven primary criteria as were used in the two preliminary
reports and the proposed rule were used to determine which markets
exhibit a sufficient degree of association in terms of sales,
procurement, and structural relationships to warrant consolidation. The
criteria are as follows:
1. Overlapping route disposition. The movement of packaged milk
between Federal orders indicates that plants from more than one Federal
order are in competition with each other for Class I sales. In
addition, a degree of overlap that results in the regulatory status of
plants shifting between orders creates disorderly conditions in
changing price relationships between competing handlers and neighboring
producers. This criterion is considered to be the most important.
2. Overlapping areas of milk supply. This criterion applies
principally to areas in which major proportions of the milk supply are
shared between more than one order. The competitive factors affecting
the cost of a handler's milk supply are influenced by the location of
the supply. The pooling of milk produced within the same procurement
area under the same order facilitates the uniform pricing of producer
milk. Consideration of the criterion of overlapping procurement areas
does not mean that all areas having overlapping areas of milk
procurement should be consolidated. An area that supplies a minor
proportion of an adjoining area's milk supply with a minor proportion
of its own total milk production while handlers located in the area are
engaged in minimal competition with handlers located in the adjoining
area likely does not have a strong enough association with the
adjoining area to require consolidation.
For a number of the consolidated areas it would be very difficult,
if not impossible, to find a boundary across which significant
quantities of milk are not procured for other marketing areas. In such
cases, analysis was done to determine where the minimal amount of route
disposition overlap between areas occurred, and the criterion of
overlapping route disposition generally was given greater weight than
overlapping areas of milk supply. Some analysis also was done to
determine whether milk pooled on adjacent markets reflects actual
movements of milk between markets, or whether the variations in amounts
pooled under a given order may indicate that some milk is pooled to
take advantage of price differences rather than because it is needed
for Class I use in the other market.
3. Number of handlers within a market. Formation of larger-size
markets is a stabilizing factor. Shifts of milk and/or plants between
markets becomes less of a disruptive factor in larger markets. Also,
the existence of Federal order markets with handlers too few in number
to allow meaningful statistics to be published without disclosing
proprietary information should be avoided.
4. Natural boundaries. Natural boundaries and barriers such as
mountains and deserts often inhibit the movement of milk between areas,
and generally reflect a lack of population (limiting the range of the
consumption area) and lack of milk production. Therefore, they have an
effect on the placement of marketing area boundaries. In addition, for
the purposes of market consolidation, large unregulated areas and
political boundaries also are considered a type of natural barrier.
5. Cooperative association service areas. While not one of the
first criteria used to determine marketing areas, cooperative
membership often may be an indication of market association. Therefore,
data concerning cooperative membership can provide additional support
for combining certain marketing areas.
6. Features or regulatory provisions common to existing orders.
Markets that already have similar regulatory provisions that recognize
similar marketing conditions may have a head start on the consolidation
process. With calculation of the basic formula price replacement on the
basis of components, however, this criterion becomes less important.
The consolidation of markets having different payment plans will be
more dependent on whether the basic formula component pricing plan is
appropriate for a given consolidated market, or whether it would be
more appropriate to adopt a pricing plan using hundredweight pricing
derived from component prices.
7. Milk utilization in common dairy products. Utilization of milk
in similar manufactured products (cheese vs. butter-powder) was also
considered to be an important criterion in determining how to
consolidate the existing orders.
Comments on Consolidation Criteria
Most of the comments relative to order consolidation criteria were
submitted prior to publication of the proposed rule. It was the overall
opinion of the commenters that overlapping route disposition and milk
procurement are the most important criteria to consider in the
consolidation process. In addition, Class I use percentages and
regulation on the basis of handler location were noted as important
criteria to consider. To some extent, the consolidated marketing areas
included in this final decision do combine markets with similar Class I
utilization rates rather than markets that would result in Class I use
percentages being more uniform between markets. This result occurs
because adjoining markets, where most of the sales and procurement
competition takes place between handlers regulated under different
orders, tend to have similar utilization rates rather than because the
criterion is one that should be used to determine appropriate
consolidations. Also, Class I utilization rates are a function of how
much milk is pooled on an order with a given amount of Class I use.
Differences in rates, to the extent they result in differences in blend
prices paid to producers, provide an incentive for milk to move from
markets with lower Class I utilization percentages to markets with
higher Class I use.
Regulation of processors on the basis of their location rather than
their sales areas has largely been incorporated in the consolidated
orders by a provision that would pool a handler under the order for the
area in which the handler is located unless more than 50 percent of the
handler's Class I route dispositions are distributed in another order
area. This provision should help to assure that the order under which a
distributing plant is pooled will not change from month to month, and
that a plant operator is subject to the same provisions, such as
producer pay prices, as are its primary competitors.
[[Page 16046]]
The consolidated orders also include provisions that lock plants
processing primarily ultra-high temperature (UHT) or extended shelf-
life milk into regulation under the order for the area in which the
plant is located. Such plants often have widely dispersed route sales
into a number of order areas, with sporadic deliveries to different
areas. Without some type of lock-in provision, such a plant may be
pooled in several different orders in as many months. At the same time,
the plant's milk supply generally is procured from a given group of
producers located in the same area as the UHT (or extended shelf-life)
plant. Having the plant pooled under a succession of different orders
with widely varying blend prices creates a disorderly condition for the
producers involved.
On the basis of the distributing plant pooling standards included
for all eleven orders in this final decision, there are three non UHT
pool distributing plants that would have more sales in an order area
other than the one in which they are regulated. Two of these plants are
the Superbrand Dairy Products distributing plant in Greenville, South
Carolina, and the Kroger Dairy distributing plant in Winchester,
Kentucky, both located in the Appalachian order, but which likely will
qualify for pooling under the Southeast and Mideast orders. In
addition, the Hiland Dairy plant in Fayetteville, Arkansas, in the
Southeast consolidated area, likely will qualify for pooling under the
Central order. In cases in which these plants compete almost entirely
for a producer milk supply in the area in which they are located, lock-
in provisions are incorporated to assure that the plant is pooled where
located for the purpose of competitive equity.
Some changes in regulatory status are expected to occur because of
the addition of regulated area (in the Northeast), the consolidation of
marketing areas, changes in pooling standards, and changes in the
definitions of types of plants. The expected changes are based on data
collected for October 1997 and may differ in some respects at the time
the consolidated orders go into effect.
The regulatory status of three Vermont handlers is expected to
change from partially regulated to fully regulated because a
significant percentage of their sales is in areas that will be added to
the Northeast consolidated marketing area, and a partially-regulated
New York handler is expected to meet the pooling standards because of
the consolidation of marketing areas. Two other currently partially
regulated handlers, one in New York and one in Vermont, are expected to
become fully regulated because the pooling provisions of the
consolidated order will be more like those of all the other orders than
is currently the case in the New York-New Jersey order. Two plants that
currently are fully regulated on the basis of the ``grandfather''
clause of the New York-New Jersey order will become partially regulated
when this provision ceases to exist.
In the consolidated Appalachian marketing area, two distributing
plants, one currently unregulated and one partially regulated, would
become fully regulated as a result of including the marketing area of
the Tennessee Valley order, terminated in October 1997. These plants
both were fully regulated under the Tennessee Valley order, and lost
their regulatory status as a result of the termination.
A plant currently partially regulated under the Southeast order
would become fully regulated as a result of ``locking in'' to
regulation plants that distribute primarily UHT or extended shelf-life
products. Another Southeast distributing plant, currently fully
regulated, would become partially regulated because of failure to meet
the consolidated order's pooling standards.
Two distributing plants that currently are partially regulated
under the Chicago Regional order would become fully regulated under the
consolidated Upper Midwest order because of a change in the definition
of receipts that are used in the calculation of percentage of total
receipts used in route disposition for the determination of pool
status.
Three plants, one in each of the consolidated Upper Midwest,
Central, and Pacific Northwest marketing areas, would change regulatory
status as depicted in the attached list of distributing plants and
regulatory status. These plants are distributing plants that are listed
as being fully regulated in October 1997 and becoming either partially
regulated or exempt under the consolidated orders. These plants, having
small amounts of route dispositions, actually were pooled on the basis
of their performance as supply plants or as part of supply plant units.
It is unknown whether they will continue to qualify as pool supply
plants, but will not meet the pool distributing plant standards of the
consolidated orders.
In the Pacific Northwest, the Oregon and Washington State prison
systems both operate fluid processing plants that have route
distribution in commercial channels, competing with regulated handlers.
These plants are not currently fully regulated. Under the consolidated
order, one of the plants will be partially regulated only with respect
to its commercial sales, and the other will be exempt on the basis of
size.
Several comments advocated that all of a state's territory should
be included in one Federal order to assure that all producers in a
state are paid on an equitable basis, or to make it easier to maintain
state statistical data. One of the primary reasons for Federal milk
orders is that milk marketing occurs readily across state boundaries,
making state milk marketing regulation more difficult to enforce. It is
important that Federal milk marketing areas continue to recognize the
free interstate movement of milk to and from milk plants. There are
cases where natural boundaries such as mountains or rivers may result
in part of a state having a closer marketing relationship with an
adjoining state than with other areas of the same state.
Although the Revised Preliminary Report suggested that several
currently non-Federally regulated areas be added to some consolidated
marketing areas, the proposed rule omitted areas in which handlers are
subject to minimum Class I pricing under State regulation unless the
affected handlers or States requested inclusion. This final decision
continues to omit such areas, and also omits currently-unregulated
areas that comprise a significant distribution area for currently-
unregulated handlers, some of which were proposed to be included in
consolidated areas.
Considering the requirements of the 1996 Farm Bill, consolidation
of the existing orders does not necessitate expansion of the
consolidated orders into unregulated areas or 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 could 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.
However, there are numerous counties and portions of counties
located within and between Federal order marketing areas that have not
been included in the defined order areas during the course of the more
than 60 years the program has developed. In some cases, these small
areas were left unregulated many years ago to maintain the unregulated
status of a small handler. In others, these areas probably formed a
``buffer'' between separate
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smaller order areas and were not incorporated when the smaller orders
were merged. Some of these areas form ``buffer'' zones today between
current order areas that will be consolidated in the course of this
process. These areas should be included in the defined consolidated
marketing areas if their inclusion would not have the effect of
regulating any unregulated handlers who currently distribute milk in
these areas. The issue of whether to regulate currently-unregulated
areas is discussed in more detail with regard to the individual
consolidated marketing areas in the sections of this decision dealing
with those areas, especially the Northeast area.
The occurrence of partial counties in marketing area definitions
should be minimized for the purpose of simplifying handlers' reporting
burden. The continued existence of these unregulated areas, partially
regulated counties, and counties split between marketing areas serves
only to complicate the reporting of route dispositions outside the
marketing area by regulated distributing plant handlers for the purpose
of determining pool qualifications and increase the costs of
administering the orders.
In order to avoid extending Federal regulation to handlers whose
primary sales areas are outside current Federal order marketing areas
and who currently are not subject to Federal order regulation, it has
been determined that the appropriate in-area Class I disposition
percentage portion of the pool distributing plant definition is 25
percent for all orders. Discussion of this provision is included in the
section of this decision dealing with identical provisions. The 25-
percent level of in-area sales will assure that currently-regulated
handlers retain their pool status. At the same time, increasing from
current levels the percentage of in-area sales required for pool status
under the consolidated orders will allow State-regulated and most other
non-Federally regulated handlers to operate at their current level of
sales within Federal order areas without being subject to full Federal
order regulation.
Cornell University Study
In addition to AMS' analysis of the receipt and distribution data
in the development of this decision, researchers at Cornell University
also provided input on potential consolidated marketing areas early in
the Federal order reform process. This input was part of Cornell's
partnership agreement with AMS to provide alternative analyses on
Federal order reform issues. These researchers used an economic model
(the Cornell U.S. Dairy Sector Simulator, or USDSS), to determine 10-14
optimal marketing areas. Cornell's first options for 10-14 marketing
areas were presented at an October 1996 invitational workshop for dairy
economists and policy analysts held in Atlanta, Georgia. Based on USDSS
model results, these options would result in minimum cost flows of milk
using the known concentrations of milk production and population,
without considering the location of milk plants. The marketing area
maps that were circulated using these first results were those
referenced by interested persons who cited the Cornell results in their
comments on the Preliminary Reports on Order Consolidation and on the
proposed rule.
A second set of options was presented by Cornell researchers in
spring 1997. These options were generated with a further-developed
USDSS model. In updating the model, the researchers enhanced the inputs
to its model as a means of better reflecting the actual structure of
the national market for fluid milk products. These model updates
allowed for determination of the minimum cost flows of: milk,
intermediate and final products from producers to plants; from plants
to plants; and from plants to consumers on the basis of the locations
of milk supplies, dairy product processing plants, and consumers. The
enhanced model is intended to provide for geographic market definition
on the basis of a resulting set of optimal, efficient simulated flows
of milk and dairy products between locations.
Although the USDSS model considers important factors such as milk
supply and demand locations and transportation constraints in
determining the optimal consolidated marketing areas, it aggregates
processing locations, sometimes at locations that are not
representative of where substantial volumes of milk are processed. In
addition, the model does not consider several important factors such as
large areas that are not Federally regulated and certain economic
factors which influence the movement of milk.
AMS is unaware of any other analyses performed to determine or
suggest consolidated marketing areas.
As noted before, AMS' analysis focused initially on distributing
plant receipts and distribution information for October 1995, updated
as needed for further analysis during development of the proposed rule.
Equivalent data was gathered for October 1997 to assure that the
consolidated marketing areas continue to represent actual marketing
relationships between the current order areas, with more current
information used as needed for further analysis. The data gathered by
the Dairy Division from Federal Milk Market Administrators reflects
actual movements of milk, both from production areas to processing
plants, and from processing plants to consumption areas. This final
decision considers this data, the seven criteria described fully above,
and information provided by the USDSS model analysis.
The consolidated marketing area options presented by Cornell are
not adopted because the USDSS model does not adequately reflect issues
or factors that strongly affect which current marketing areas are most
closely related. For this reason, this decision is based on data
reflecting actual distribution and procurement by fluid milk processing
plants.
Marketing Areas
Following are maps of the current marketing areas and the 11
consolidated marketing areas, followed by brief descriptions of the
marketing areas (with those modified from the Proposed Rule, and the
modifications, marked by*) and the major reasons for consolidation. A
more detailed description of each consolidated order follows this
summary.
At the end of the Order Consolidation portion of this decision is
appended a list of distributing plants associated with each
consolidated marketing area, with each plant's expected regulatory
status, determined on the basis of data describing the plants'
operations during October 1997.
BILLING CODE 3410-02-P
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