Federal Register /Vol. 64, No. 63/Friday, April 2, …...16126 Federal Register/Vol. 64, No. 63/Friday, April 2, 1999/Proposed Rules percent of the total quantity of milk physically

16125Federal Register / Vol. 64, No. 63 / Friday, April 2, 1999 / Proposed Rules

destroyed the market for sweetenedcondensed milk.

Hershey Foods Corporation filed acomment letter objecting to thedifference in classification for fresh milkused to make chocolate compared tofresh milk used to make powder that isused to make chocolate. Specifically,Hershey argued that the Class IIclassification for fresh milk used tomake chocolate, compared to the ClassIV classification for milk used to makepowder that is subsequently used inchocolate violates the Act because suchmilk starts out in the same form and isused for the same purpose.

Hershey explained that whole milk,sugar, cocoa butter, and chocolate liquorare used to make ‘‘chocolate crumb,’’which is further processed to makechocolate. According to Hershey, thechocolate crumb has a moisture contentof only 1 percent, which means that ifa manufacturer receives fresh wholemilk, it must remove 99 percent of thewater from it in order for the milk toperform its function in the chocolate.An alternative to starting with wholemilk and drying it is to purchase wholemilk powder and mix it with the sugar,cocoa butter, and chocolate liquor tomake the chocolate crumb.

Hershey argues that maintaining thecurrent disparate classifications forfresh milk used to make chocolate andfresh milk that is first dried and thenused to make chocolate, in combinationwith the proposed 70-cent Class IIdifferential, will pressure manufacturersto change their manufacturing processesand formulas, reduce the use of freshmilk and increase the use of milkpowders, reduce milk solids in productformulas, replace milk solids with lowercost alternatives, and might eveninfluence the location of chocolatemanufacturing plants. Hershey alsonotes that the State of California doesnot discriminate between manufacturersof chocolate, but instead prices all milkused to manufacture chocolate in thesame class whether the chocolatemanufacturer begins its process withfluid milk, sweetened condensed milk,evaporated milk, nonfat dry milk, orwhole milk powder.

Galloway and Hershey conclude thatthere is no justification for pricing milkused to make sweetened condensedmilk or chocolate crumb in a higherclass than milk used to producepowdered milk. However, Gallowaystates, if sweetened condensed milk iskept in a class higher than powder, thedifferential for that class should be nomore than 30 cents per hundredweight.

Bulk sweetened condensed milk/skimmilk is used as an intermediate productin ice cream, candy, and other

manufactured products. However, thesemanufactured products can also bemade from powdered milk. Whenpowder prices are low relative to theClass II price, there is an economicincentive for powder to be substitutedfor bulk sweetened condensed milk. Asa result, there must be an economicrelationship between the Class II priceand the cost of using alternative dry orconcentrated products to make Class IIproducts. Under current pricingprovisions, the Class II price can beexcessive relative to using nonfat drymilk since the Class II price is a measureof the value of milk in cheese (the ClassIII price) plus a differential.

Conceptually, we do not believe thatthe value of milk used in demand-driven products like chocolate andsweetened condensed milk that is usedin food products is the same as milk thatis sometimes made into powder for lackof any other use. The major point of theability to substitute among forms ofmilk, sweetened condensed milk, andnonfat dry milk in certain uses is thatthere is a fixed relationship between theClass II and Class IV price. Theappropriate price relationship isdiscussed in the Class II pricing sectionof this decision.

In the proposed rule, no allowancewas provided for dumped milk or milkused for animal feed, and a Class IIIclassification was recommended formilk lost in a fire, flood, or accident.Many handlers and the National MilkProducers Federation objected to theremoval of the Class III classification formilk that is dumped or used as animalfeed.

On the basis of the comments filed onthis issue, a surplus use has beenestablished for milk that is dumped orused as animal feed. The priceapplicable to such use will be the lowestclass price for the month.

4h. Shrinkage and OverageShrinkage is experienced by handlers

in milk processing operations and in thereceipt of farm bulk tank milk atreceiving stations and processing plants.Milk is unavoidably lost as it remains inpipe lines, adheres to tanker walls and/or other plant equipment, and is washedaway in the cleaning operations. Inaddition, unexpected losses, includingspillage or leaking packages, alsocontribute to shrinkage.

In the proposed rule, we proposed apro rata assignment of shrinkage basedon a handler’s utilization. In otherwords, each handler’s shrinkage wouldhave been classified according to thehandler’s use of milk that was not lostin transit or processing. We believedthat the adoption of such a provision

would have simplified both orderlanguage and accounting procedures,and we thought that it would beacceptable to handlers because,although in some cases it increased theircosts slightly, the change appliedequally to everyone.

There were very few comment lettersthat supported the proposal and anoverwhelming number of commentsurging us to keep the current provision.Many of the opponents were high ClassI utilization handlers who complainedthat the proposed change wouldreclassify their shrinkage from Class IIIto Class I, increasing their costs for thislost milk.

It was not only handlers that dislikedthe proposed shrinkage provision.Several producer organizations,including Dairy Farmers of America andthe National Milk Producers Federation,also voiced their opposition to theproposal. Most of the comment lettersurged us to retain the key features of thepresent shrinkage provision, but therewere comments suggesting a simplerprovision.

Based on the comments received, thisfinal decision retains, in large part, thepresent method of calculating shrinkageallowances and pricing shrinkage, butwith certain modifications. Just as in thecurrent provisions, there are specifiedallowances for shrinkage. The majordifference is that shrinkage is notautomatically assigned to a specifiedclass, as it is now, but rather is assignedto the ‘‘lowest-priced class.’’ Thischange was made to conform with thenew 4-class pricing system and, moreimportantly, to recognize that there isno fixed relationship between classprices because of the different formulasused to compute them. For example,because the formulas for Class III and IVprices are not directly related, it cannotbe known in advance which class pricewill be lowest. Since the relationshipbetween class prices will vary from onemonth to the next, under the provisionadopted here shrinkage may be pricedin Class III one month and in Class IVthe next. It is necessary to priceshrinkage in the lowest-priced class toavoid the situation where a cheeseplant, for example, would have to paymore for its shrinkage than it would formilk used in cheese. Such would be thecase if shrinkage was always priced inClass IV and the Class IV price exceededthe Class III price. Pricing shrinkage inthe lowest-priced class prevents thisproblem.

As noted, the current shrinkageallowances has been retained in therevised provision. Thus, a pool plantoperator would receive a lowest-pricedclass shrinkage allowance based on 2

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percent of the total quantity of milkphysically received at the plant directlyfrom producers’ farms on the basis offarm weights and tests, plus 1.5 percentof bulk milk received on a basis otherthan farm weights and tests, and minus1.5 percent of the quantity of bulk milktransferred to other plants, excludingconcentrated milk transferred to anotherplant for an agreed-upon use other thanClass I. A cooperative associationhandler that delivers milk to pool plantson a basis other than farm weights andtests would receive a shrinkageallowance of .5 percent of the totalquantity of milk picked up at producers’farms. Shrinkage in excess of theseallowances will be assigned in seriesstarting with Class I to the extent ofavailable utilization.

The shrinkage provision adopted forthe new orders contains language toaccommodate shrinkage associated with‘‘concentrated milk.’’ Prior to the 1993classification decision, condensed milk,which is made for use in ice cream andother manufactured products, was not afluid milk product. Hence, it was notaddressed by the shrinkage provision.This changed after the decision,however, when condensed milk becamea fluid milk product. In making thischange to the fluid milk productdefinition, certain conforming changesthat should have been made in theshrinkage provisions were overlooked.The current proceeding involving allFederal orders has been the firstopportunity to rectify this oversight.During the interim period, the uniqueproblem associated with condensedmilk has been handled administratively.Thus, the new language added to theshrinkage provision does not representa change from the way the rules havebeen administered but merely codifiesthem.

Some plants receive milk fromproducers, condense (i.e., concentrate)the milk into a product that contains notmore than 50 percent total milk solids,and then transfer this product on anagreed-upon basis to another plant foruse in some product other than a fluidmilk product (e.g., ice cream). In thiscase, the first plant should retain thefull 2 percent shrinkage allowancebecause it incurs processing shrinkagein the course of concentrating—i.e.,most likely condensing—the milk. Theplant purchasing this concentrated (i.e.,condensed) milk should get noshrinkage allowance on this milk sincethe designated use of this milk is fornon-fluid use. Accordingly, the value ofany shrinkage incurred in furtherprocessing this concentrated milkwould not be much less than its usevalue.

As noted elsewhere in this decision,a recent development in milk processingis the use of on-farm filtering equipment(e.g., reverse osmosis or ultra-filtration)to concentrate milk before it is shippedto a plant for use in a variety of milkproducts. Although this milk falls underthe same broad ‘‘concentrated milk’’category as condensed milk, it isactually a very different product whichcan conceivably be used for fluid use aswell as in a manufactured product suchas cheese or ice cream. Thus, languageis needed in the shrinkage provision todifferentiate this type of concentratedmilk from condensed milk. We haveaccommodated these 2 types ofconcentrated milk by allowing theshipping and receiving handlers to agreeon the use of this milk. Accordingly, ifa handler receives concentrated milkfrom another plant by agreement for usein Class II, III, or IV, the receivinghandler will get no shrinkage on thismilk. If no such agreement is specified,however, the receiving handler will getthe 1.5 percent shrinkage allowance,just as would be the case forunconcentrated milk that was receivedfrom another plant.

For example, milk may beconcentrated at a plant by using reverseosmosis or ultra-filtration techniquesand then be transferred to a 2nd plantfor use in a fluid milk product. In suchcase, the milk will not be transferred byagreement for other than Class I use, butinstead will be allocated to use at the2nd plant receiving this concentratedmilk. In this instance, it is appropriateto treat this milk just likeunconcentrated milk that is received ata plant and then transferred to a 2ndplant. Thus, the first plant will initiallyget a 2 percent shrinkage allowance forthe milk received from producers, butwill be required to subtract 1.5 percentfrom the 2 percent when the milk, eventhough concentrated, is transferred tothe 2nd plant. The 2nd plant will get ashrinkage allowance based on 1.5percent of the reconstituted volume ofthe concentrated milk. In other words,for accounting purposes the water thatwas initially removed from the milk willbe added back to the concentrated milkbefore computing the 1.5 percentshrinkage allowance for the 2nd plant.

In the example above, theconcentrated milk will likely be from afarm plant which concentrates its milkbefore shipping it using either reverseosmosis (RO) or ultra-filtration (UF). Asexplained in the uniform provisiondiscussion in this final decision, milkfrom a single farm with RO or UFequipment will be treated as producermilk of the first pool plant receiving thismilk. However, when the milk of 2 or

more producers is commingled on afarm with RO or UF equipment, thatfarm will be treated as a plant and thedairy farmer owning or leasing the farmwill be the responsible handler for all ofthe milk processed that month.

The shrinkage provision in this finaldecision differs from the currentshrinkage provisions in one otherrespect. At the present time, when amanufacturing facility that hasabsolutely no Class I utilization has‘‘excess shrinkage’’ (i.e., shrinkage thatexceeds its 2 percent shrinkageallowance) the excess shrinkage isassigned to Class I even though theplant has no Class I utilization. Thus,the milk that is ‘‘lost’’ by the plant isactually priced higher than the milk thatis ‘‘used’’ by the plant.

Under the proposed provision, suchexcess shrinkage would be assigned towhatever utilization the plant has,starting with Class I. In the case of acheese plant that has no utilizationother than Class III, the excess shrinkagewould be assigned to Class III.

After shrinkage is assigned pursuantto § 1000.43(b) of the proposed orders,it will be added to a handler’s reportedutilization to arrive at the ‘‘grossutilization in each class.’’ The grossutilization in each class will then becarried over to § 1000.44, where it willbe used to allocate the handler’s receiptsto its gross utilization of such receipts.

Overage occurs when the reportedutilization of producer milk exceeds thereported quantity of producer milkreceived. Overage, as well as shrinkage,can occur for a number of reasons butis usually the result of record-keepingand measurement errors.

As set forth in the proposed rule,overage would have been classified bybeing prorated to a handler’s reportedutilization. It then would have beensubtracted from the handler’s reportedutilization to arrive at the grossutilization in each class which wouldhave been used to allocate a handler’sreceipts in § 1000.44.

No comments were receivedspecifically focusing on the proposedtreatment of overage, undoubtedlybecause the proration of overage doesnot have the same financial impact asthe proration of shrinkage. Nevertheless,in conjunction with the change in thetreatment of shrinkage, the treatment ofoverage also should remain the same asit is now in the orders. Accordingly, inthis final decision, overage is classifiedin § 1000.44(a)(11) by subtracting theexcess pounds of skim milk andbutterfat from each class, beginningwith Class IV. This treatment isidentical to the way overage is classifiedunder the present orders in section



44(a)(14), except for the fact that now—since there is no Class IV—theallocation begins with Class III.

4i. Classification of Transfers andDiversions (§ 1000.42)

Certain changes have been made tothe classification of transfers anddiversions section of the orders tosimplify and clarify order language. Thechanges discussed in this final decisionare virtually identical to those containedin the proposed rule, except for minorcorrections and conforming changesnecessitated by other changes in orderprovisions. There were very fewcomments pertaining to this section ofthe proposed rule. Those that werereceived supported the changesproposed.

At the present time, in many orders ifany milk that is diverted from one orderto another for requested Class II or IIIuse is assigned to Class I, the dairyfarmer who shipped that milk is definedas a producer under the order receivingthe milk with respect to that portion ofthe milk assigned to Class I. In otherorders under similar conditions, thedairy farmer becomes a producer on thereceiving order for all of the milkdiverted even though only a portion ofthe milk was classified as Class I. Whenthis type of adjustment is necessary, thediverting handler is informed by themarket administrator’s office that thereis not enough Class II or III useremaining in the receiving plant toabsorb all of the milk diverted. In suchcase, the diverting handler may pickwhich load or loads of diverted milkwill become producer milk under thereceiving order.

Since the orders are not preciselyclear on how inter-order diverted milkshould be handled, some modificationis needed in the order language. Undermost orders, and as provided in thisfinal decision, milk may be divertedfrom one order to another for arequested use other than Class I.However, if there is not enough Class II,III, or IV utilization in the receivingplant to be assigned to the divertedmilk, some milk may have to beassigned to Class I. When this happens,the practical administrative problemsinvolve determining which milk ofwhich dairy farmers and which loads ofmilk will be shifted as producer milkfrom one order to another.

Market administrators should begiven some flexibility to handle theseadministrative problems on a market-by-market and case-by-case basis. As apractical matter, most milk divertedbetween orders is diverted bycooperative associations that reblendproceeds to their members. In most

cases, it makes little difference to acooperative association whether a dairyfarmer is a producer on one order oranother order; any differences in blendprices between the orders will bewashed out in the reblending process. Inthe case of milk of nonmemberproducers that is diverted betweenorders, however, differences could arisein a producer’s net proceeds for themonth depending upon how much milkwas pooled in each order. Therefore,these situations should be handled insuch a way as to be least disruptive toindividual dairy farmers.

A market administrator does notknow until handlers’ reports have beenreceived that some portion of milkreported as diverted to another ordercannot be absorbed by the amount ofnon-Class I utilization in the receivingorder’s plant. In such case, the divertinghandler should be given the option ofdesignating the entire load of divertedmilk as producer milk at the plantphysically receiving the milk.Alternatively, if the diverting handlerwishes, it may designate which dairyfarmers on the diverted load of milk willbe designated as producers under theorder physically receiving the milk. Asa last resort, the market administratorwill prorate the portion of diverted milkamong all the dairy farmers whose milkwas received from the diverting handleron the last day of the month, then thesecond-to-last day, and continuing inthat fashion until the diverted milk thatis in excess of Class II, III, and IV usehas been assigned as producer milkunder the receiving order.

A conforming change that should bemade in each order relates to milk thatis transferred or diverted for Class II orIII use. Presently, milk may betransferred or diverted on a requestedClass II or III basis. However, with 4classes of utilization in the new orders,milk could be diverted for requestedClass IV use also. Rather than specifying‘‘Class II, III, or IV,’’ however, the ordersshould simply state ‘‘other than Class I’’to accommodate a system of more than3 classes. This language is simpler,shorter, and accomplishes the same end.

To simplify and clarify theclassification of transfers and diversionsof bulk fluid milk products and bulkfluid cream products from a pool plantto a nonpool plant, which are classifiedby assigning the nonpool plant’sutilization to its receipts, the phrase,‘‘excluding the milk equivalent of bothnonfat milk solids and concentratedmilk used in the plant during themonth,’’ has been added in§ 1000.42(d)(2)(i). This language willhelp to clarify the steps to be followedin verifying the utilization of bulk fluid

milk and cream at the nonpool plant. Ithas been added to ensure administrativeconsistency and does not represent achange in the application of thisprovision.

In § 1000.42(d)(2)(vi), the allocationprocess for bulk fluid milk transferredfrom pool plants to nonpool plants ismodified such that any remainingunassigned receipts of bulk fluidproducts be assigned, pro rata amongsuch plants, to the extent possible firstto any remaining Class I utilization andthen to all other utilization, in sequencebeginning with the lowest class at thenonpool plant. This change returns theorder language to the assignmentsequence that was adopted in theUniform Classification Decision of 1974.Receipts from pool plants should not begiven preference by assigning such milkto the available Class II use beforeassigning receipts from dairy farmerswho constitute the regular source ofmilk for such nonpool plant. Generally,milk transferred or diverted from poolplants to nonpool plants is surplus milkand would be used in storablemanufactured products, such as nonfatdry milk and butter. By assigningtransferred or diverted milk to anonpool plant’s Class II utilization first,the pool plant operator is forced toaccount for this milk at the Class IIprice, even though the nonfat dry milkor other surplus product that was madewith the milk is of a lesser value. Thisprocess will prevent the assignment ofreceipts at a higher utilization than theactual utilization.

Receipts of bulk fluid cream productsat nonpool plants from pool plants andplants regulated under other Federalorders, similarly, will be assigned to thelowest class utilization first. Generally,a plant operator will use its regularsource of supply in the highest valueduses before using alternative supplies.Thus, if a nonpool plant receives creamfrom a pool plant or a plant regulatedunder another Federal order, it is likelythat the regulated plants were trying todispose of their excess cream. Thenonpool plant receiving the cream willmost likely use it for manufacturingpurposes; therefore, it should beassigned to the lowest class first. Thepriority given to regular source suppliesis recognized and the provisionmodified to reflect this.

4j. General Classification Rules(§ 1000.43)

For classification purposes, the milkof a cooperative bulk tank handler—i.e.,a ‘‘9(c) handler’’—that is delivered to apool plant will be treated as ‘‘producermilk’’ of the pool plant operator. This



change will shorten and simplify theallocation section.

The computation and classification ofshrinkage and overage have been addedto this section. This will eliminateSection 41, the section previously usedfor this purpose. Also, the lastparagraph of Section 43 has beenremoved because milk for Class IV usenow would be classified in Section 44of the orders.

No comments were receivedpertaining to this section.

4k. Classification of Producer Milk(§ 1000.44)

A handler may receive milk from aproducer, a cooperative associationacting as a handler on bulk tank milk,by transfer from another pool plant, orfrom ‘‘other sources’’ such as nonpoolplants, partially regulated plants, andplants that are regulated under otherorders. Because of this diversity insources of receipt, it is necessary in amilk order to go through an allocationsequence to determine which source ofmilk gets priority to a particular class ofutilization and to determine howproducer milk was used. In some orders,this allocation sequence is done on asystem-wide basis; in others, it is donefor each plant receiving producer milk.

Section 44 is one of the mostcomplicated and difficult-to-understandsections in a milk order. Consequently,an attempt has been made to simplifyand shorten it. Part of this task wasmade easier by proposed changes toother sections (e.g., elimination of filledmilk, elimination of individual handlerpools, and modification of the treatmentof inter-order transfers and diversions).

All orders are not now uniform in theclassification of producer milk. Forexample, some orders (e.g., ChicagoRegional) provide for system allocationwhile others allocate receipts on a plant-by-plant basis for a multiple planthandler.

Under the consolidated orders, milkwill be allocated on a plant-by-plantbasis, as modified to reflect otherchanges proposed herein. The systemallocation method that is found in someorders is based upon a set of marketingconditions concerning the locations ofhandlers’ plants and the market’savailable milk supply in relation tothose plants. These provisions wereintended to stop abuses that occurredwhen milk was transferred from onemarket to another. Rather than permitan inter-order transfer to be assigned ata handler’s high Class I utilization plant,while the handler’s producer milk wasassigned to lower use value at anotherof its plants, the system allocationprovisions assigned the transfers on the

basis of the handler’s utilization at allplants combined. The objective was toprevent more distant other order milkfrom being assigned to Class I use at theexpense of producers who were locatednearer to the city markets and whorepresented the normal source of supplyfor the markets’ fluid milk needs.

The 11 new orders do not fit withinthe parameters of the classical modelwhere a major consumption area issurrounded by production areas. Themarketing areas proposed for theconsolidated orders span several statesand have a number of major populationcenters. They also have pockets of milkproduction that, in a number of cases,are in higher-priced areas than some ofthe fluid milk plants within themarketing area. This milk may not beeconomically available to a fluid milkplant several hundred miles away. Infact, it may be that a plant near theperiphery of a multi-state market mayfind its closest and cheapest source ofsupply from outside the market ratherthan from within the marketing area.Accordingly, the system allocation rulesare not supported by current marketingconditions. Therefore, all orders havebeen modified to allocate milk only ona plant-by-plant basis rather than on asystem basis.

Another change that has been made inthe allocation section concerns the ‘‘98/2’’ rule. At the present time, only 98percent of the packaged fluid milkproducts transferred between orders isallocated to Class I; the remaining 2percent is allocated to Class III. Thisprovision, originating from the June 19,1964, ‘‘compensatory payment’’decision, was adopted to provide anallowance for ‘‘route returns.’’According to that decision, ‘‘it isreasonable to expect some route returnswill be associated with inter-markettransfers just as there are in connectionwith milk locally processed in thereceiving market . . . a small allowanceof 2 percent for such returns, whichmust fall into surplus use, should beincluded to avoid such over-assignmentin Class I.’’ (29 FR 9120).

This final decision classifies routereturns based upon the use of suchreturns. If route returns are used foranimal feed, an ‘‘other use’’classification is provided and such milkis priced at the lowest class price for themonth. If route returns are used to makeanother product, such as cottage cheesefor example, the milk would bereclassified as Class II. Thisclassification not only applies topackaged products made from producermilk, but also includes packagedproducts that were received from other

plants, distributed on routes, and thenreturned to the last plant of receipt.

A handler transferring packaged fluidmilk products to another handler’s plantmay incur some lost product en route tothe buying handler’s plant. In such case,the transferring handler may report suchproduct as route returns and account forthe milk used in such product at thelowest class price.

In view of the reclassification forroute returns for either handler involvedin an inter-order transfer who reportssuch returns, subject to marketadministrator verification, it is notnecessary to classify interorder transfersof fluid milk products at 98 percentClass I and 2 percent Class III becausethis rule overcompensates handlers forroute returns and unfairly reducesincome to producers. For these reasons,the ‘‘98/2’’ rule has been eliminated.

In addition to the changes discussedabove, Section 44 has been shortenedand simplified by removing unnecessaryreferences that serve to confuse thelanguage rather than make it easier tounderstand. Where possible, simplerlanguage has been used to replacelengthy section references.

No comments were receivedsupporting or opposing theserecommendations.

4l. Conforming Changes to OtherSections (§§ ——.14, ——.41, and——.60).

Paragraph (b) of the other source milkdefinition has been removed to reflectthe fact that all packaged fluid creamproducts now would be accounted foron a used-to-produce basis. Also, aspreviously noted, the simpler andshorter treatment for shrinkage shortensthe existing shrinkage provision to thepoint where it is no longer necessary tokeep a separate section for it. Therefore,a separate section for shrinkage iseliminated and the revised contents ofthat section are now incorporated as anew paragraph (b) in § 1000.43. Finally,conforming changes have been made to§ ——.60 (Handler’s value of milk forcomputing the uniform price) to reflectthe elimination of filled milk from theorder, and to reflect changes inreferences due to other modificationssuch as the changes in the treatment ofshrinkage and overage.

4m. Organic milkDuring the development stage of the

order reform process, a proposal wasreceived from Horizon Foods to exemptorganic milk from pricing and poolingunder Federal milk orders.

In 1990, Congress passed, and thePresident signed into law, the OrganicFood Production Act of 1990 (7 U.S.C.



6501 et seq.), establishing the firstFederal standards for organic foodproducts. A proposed rule was issuedon December 5, 1997, and published inthe Federal Register on December 16,1997 (62 FR 65849), to implement theNational Organic Program.

Organic dairy products can now befound in many, if not most, majorgrocery chains in metropolitan areas.The retail price of organic dairyproducts is well above non-organicproducts. In addition to carrying organicmilk, many supermarkets now also carryorganic yogurt, sour cream, butter, andother organic dairy products. All ofthese products are priced well abovetheir non-organic counterparts.

Processors of organic milk have askedfor exemption from Federal regulation.In a May 20, 1997, letter to theDepartment, Horizon Foods argued that(1) organic milk is a differentcommodity; (2) the market for organicdairy products is a niche market; and (3)Federal order regulation of organic milkis contrary to the intent of the OrganicFoods Production Act because it doesnot ‘‘facilitate interstate commerce infresh and processed food that isorganically produced.’’ Horizon’sproposed solution was to exemptorganic milk from the producer milkdefinition if the milk is produced on acertified organic farm and if the brokerpays the producer at least 110% of themonth’s Class I price for such milk.

The proposal to exempt organic milkfrom Federal order pricing is denied forseveral reasons. First, contrary to theassertions of Horizon Foods that allorganic milk is priced at 110% of theClass I price, regardless of how the milkis used, there is evidence that someorganic milk has been pooled andpriced as non-organic milk under someorders, including the Chicago Regionaland Southern Michigan orders, forexample. Second, although the retailprice of organic milk is well above non-organic milk, we believe that organicmilk competes with the regulatedmarket and, therefore, also must be fullyregulated. Third, if Congress wished toexempt organic milk from Federal milkorder regulation, they could have doneso either in the Organic FoodsProduction Act or in the 1996 FederalAgricultural Improvement and ReformAct; but they did not. Fourth, there isno indication that all processors oforganic milk price their receipts thesame way as Horizon Foods. Even ifthey did, however, the one class/oneprice system currently used by Horizoncould be a temporary phenomenon dueto the rapidly expanding market fororganic products. The day may comewhen the organic market becomes

saturated and milk in excess of fluidneeds must be disposed of atcompetitive prices. If and when thishappens, it is likely that some form ofclassified pricing will be implemented.Finally, the Act provides for classifyingand pricing milk on the basis of its formand use. As a result, different costs thatmay be associated with producingorganic milk or other types of milk arenot relevant. For these reasons, it wouldbe inappropriate at this time to exemptorganic milk from pooling or to provideany other type of special treatment forit under the guise of Federal orderreform.

No comments were filed concerningthis issue with the exception of HorizonFoods, which continued to support itsproposal.

4n. Allocation of Location AdjustmentCredits

A provision that is now common tomost orders has not been carriedforward to the consolidated orders. Thisprovision, which allocates locationadjustment credits that are applied totransfers of bulk fluid milk productsbetween pool plants, is commonlyfound in Section 52 of most currentorders (See, for example, §§ 1001.53(h),1007.52(b), 1030.52(c), or 1079.52(d)).

Under most orders, intra marketshipments of milk between handlers areassigned to Class I use, unless bothhandlers agree on a lower classification.Milk that is assigned to Class I use ispriced at the receiving plant subject toa location adjustment credit that mayapply if it is demonstrated that suchmilk is actually needed for Class I use.If the credit is applied, the milk ispriced at the transferring plant. Thisassignment of location adjustmentcredits is intended to prevent the use ofpool proceeds to pay the hauling costfor the transfer of bulk milk betweenpool plants when the intended use ofthe milk is for other than Class I use.

To carry out this concept, theprovision typically assigns a pooldistributing plant’s Class I use first to itsmilk receipts directly from producers,then to bulk milk received from acooperative bulk tank handler, then tomilk received by diversion from anotherpool plant, and then to packaged fluidmilk products received from other poolplants. The remaining Class I use in thedistributing plant is then assigned tobulk milk received by transfer fromother pool plants. In some orders, thisremaining Class I use is assigned prorata to all of the pool plants from whichbulk milk was obtained. In other orders,the remaining Class I milk is firstassigned to pool plants with the sameClass I price and then, in sequence, to

pool plants with progressively lowerClass I prices.

This final decision is based on thepremise that Class I milk does not havethe same value at every location. Forthis reason, Class I differentials havebeen established for each order withlocation adjustments that result inestablishing a unified Class I pricestructure that applies to every countyand city in the contiguous 48 states.Given this approach, it is no longerappropriate to classify a bulk movementof milk as Class I milk in one section ofthe order and then in another section ofthe order depart from the principle ofpricing such Class I milk at the plantwhere it was physically received.

In actual practice, a distributing plantdoes not receive a fixed amount of milkeach day of the week. Some days areheavy bottling days when more milk isneeded for Class I use. On such days, adistributing plant may not be able toobtain enough local milk to meet itsClass I needs and may have to importplant milk from more distant locations.At the end of the month, however, whenthe allocation of location adjustmentcredits takes place, it may appear thatthere was more than enough local milkto meet the distributing plant’s fluidneeds, even though this was not the casewhen recapped on a daily basis.Nevertheless, the allocation provisionallocates location adjustment creditsbased on monthly volumes of milk, notdaily volumes, so the supply plantcould be in a position where it receivesno Class I location adjustment crediteven though the milk was indeedshipped for Class I use.

Some of the new orders havetransportation credit provisions thatprovide for hauling credits on bulk milkreceived by transfer from a plantregulated under another Federal orderand assigned to Class I use at thereceiving plant. To arrive at theclassification of such milk, the milk isassigned to the lower of the receivingplant’s or the receiving market’s Class Iutilization. When milk is purchased inthis manner, the transportation cost ofthe milk assigned to Class I is absorbed,for the most part, by the transportationcredit that is provided for the handlerpurchasing the milk without regard towhether milk could have beenpurchased from a closer source ofsupply.

Finally, the current application of theprovision in question can result in asituation where there is more incentiveto receive bulk milk transferred from aplant regulated under another Federalorder than from a plant regulated underthe same order, whether or not anyother transportation credits are



involved. Should this occur, it canresult in a transfer of Class I sales to thetransferring plant’s Federal ordermarket.

For all of the reasons cited above, theallocation of location adjustment creditshas been removed from the orders.Several comment letters were receivedsupporting this change; none werereceived in opposition to it.

5. Provisions Applicable to All OrdersIn addition to the terms and

conditions of milk orders previouslydescribed, there are a number of otherprovisions common to all milk ordersthat describe and define those personsand plants affected by the regulatoryplan of the program. Different marketingconditions in the consolidated areas,together with institutional factors, donot lend themselves to an entirelyuniform set of provisions for all orders.Consequently, in each of theconsolidated orders there are provisionsthat are unique to each order.

This part of the final decisiondiscusses the nature of these commonorder provisions, their purpose, andwhether or not a provision can beuniformly applied to all orders. When aprovision does not lend itself to uniformapplication, it is discussed insubsequent sections of this final ruletogether with the provisions unique toeach of the individual orders.

To the extent that provisions can beuniformly applicable for all of theconsolidated orders, they are includedin Part 1000, the General Provisions ofFederal Milk Marketing Orders whichare, by reference, already a part of eachmilk order. Thus, as provided here, theGeneral Provisions include thedefinitions of route disposition, plant,distributing plant, supply plant,nonpool plant, handler, other sourcemilk, fluid milk product, fluid creamproduct, cooperative association, andcommercial food processingestablishment. In addition, the GeneralProvisions include the milkclassification section of the order,pricing provisions, and some of theprovisions relating to payments. Theseadditions to the General Provisionsshould make milk order provisionsmore understandable to the generalpublic by removing the differences thatnow exist and by consolidating uniformprovisions in one place. Thus, aninterested person would only have toread one ‘‘nonpool plant’’ section, forinstance, to understand how that term isapplied to all orders. By contrast, at thepresent time, ‘‘nonpool plant’’ isdefined in every order and there areslight differences in the definition fromone order to the next.

No comments to the proposed rulewere received with regard to most of theprovisions discussed in this section. Tothe extent that there were comments,they are specifically discussed below.Most of the provisions in the proposedrule are adopted without substantivechange. Any substantive changes arespecifically discussed below.

The Concept of Pooling Milk ProceedsAll Federal milk orders today, save

one, provide for the marketwide poolingof milk proceeds among all producerssupplying the market. The oneexception to this form of pooling isfound in the Michigan Upper Peninsulamarket, where individual handlerpooling has been used.

Marketwide sharing of the classifieduse value of milk among all producersin a market is one of the most importantfeatures of a Federal milk marketingorder. It ensures that all producerssupplying handlers in a marketing areareceive the same uniform price for theirmilk, regardless of how their milk isused. This method of pooling is widelysupported by the dairy industry and hasbeen universally adopted for the 11consolidated orders.

There were a number of proposals andpublic comments considered indetermining how Federal milk ordersshould pool milk and which producersshould be eligible to have their milkpooled in the consolidated orders. Manyof these comments advocated a policy ofliberal pooling, thereby allowing thegreatest number of dairy farmers toshare in the economic benefits that arisefrom the classified pricing of milk.

A number of comments supportedidentical pooling provisions in allorders, but others stated that poolingprovisions should reflect the unique andprevailing supply and demandconditions in each marketing area.Fundamental to most pooling proposalsand comments was the notion that thepooling of producer milk should beperformance-oriented in meeting theneeds of the fluid market. This, ofcourse, is logical since a purpose of theFederal milk order program is to ensurean adequate supply of milk for fluid use.

A suggestion for ‘‘open pooling,’’where milk can be pooled anywhere,has not been adopted, principallybecause open pooling provides noreasonable assurance that milk will bemade available in satisfying the fluidneeds of a market. Proposals to createand fund ‘‘stand-by’’ pools are similarlyrejected for the same reason.

The pooling provisions for theconsolidated orders provide areasonable balance between encouraginghandlers to supply milk for fluid use

and ensuring orderly marketing byproviding a reasonable means forproducers within a common marketingarea to establish an association with thefluid market. Obviously, matching thesegoals to the very disparate marketingconditions found in different parts ofthe country requires customizedprovisions to meet the needs of eachmarket. For example, in the Floridamarketing area, where close to 90percent of the milk in the pool will beused for fluid use, pooling standardswill require a high degree of associationwith the fluid market and will permit arelatively small amount of milk to besent to manufacturing plants for use inlower-valued products. In the UpperMidwest market, on the other hand, arelatively small percentage of milk willbe needed for fluid use. Accordingly,under the pooling standards for thatorder smaller amounts of milk will berequired to be delivered to fluid milkplants and larger amounts of milk willbe permitted to be sent to manufacturingplants for use in storable products suchas butter, nonfat dry milk, and hardcheese. The specific pooling provisionsadopted for each order are discussed indetail in the sections of this documentpertaining to each of the consolidatedorders.

Route DispositionRoute disposition is a measure of fluid

milk sales in commercial channels. It isdefined to mean the amount of milkdelivered by a distributing plant to aretail or wholesale outlet (except aplant), either directly or through anydistribution facility (includingdisposition from a plant store, vendor orvending machine), of a fluid milkproduct in consumer-type packages ordispenser units that is classified as ClassI milk.

The route disposition definitionadopted here differs from the definitioncontained in some current orders.Presently, the route dispositiondefinition of several orders makesreference to plant movements ofpackaged fluid milk products betweendistributing plants with respect todetermining if such transfers should beconsidered ‘‘route disposition’’ of thetransferring plant or the receiving plant.As provided here, however, this issue isaddressed in section 7(a) of the poolplant section, which essentially treatssuch transfers as if they were routedisposition.

PlantA plant definition is included in all

orders to specify what constitutes anoperating entity for pricing andregulatory purposes. As provided in



§ 1000.4 of the General Provisions, aplant is the land, buildings, facilities,and equipment constituting a singleoperating unit or establishment at whichmilk or milk products are received,processed, or packaged. This is meant toencompass all departments, includingthose where milk products are stored,such as a cooler. The plant definitiondoes not include a physically separatefacility without stationary storage tanksthat is used only as a reload point fortransferring bulk milk from one tank toanother, or a physically separate facilitythat is used only as a distribution pointfor storing packaged fluid milk productsin transit for route disposition.

To account for regional differencesand practices in transporting milk, someof the consolidated orders provide forthe use of reload points for transportingbulk milk that do not have stationarystorage tanks.

Farm-Separated MilkWith the advent of new technology for

on-farm separation of milk into itscomponents, some additional regulatorylanguage has been added to the plantdefinition to specify who is theresponsible handler for the milk or milkcomponents leaving the farm and howthese components will be classified andpriced. This determination will bebased, in part, on whether the farmprocessing facility is a plant.

Ultrafiltration (UF) is a membraneprocess that transfers water and low-molecular weight compounds through amembrane while retaining suspendedsolids, colloids, and large organicmolecules. It selectively fractionatessome milk solids components andselectively concentrates other solidscomponents of milk.

When a UF membrane is used, water,lactose, uncomplexed minerals andother low-molecular-weight organiccompounds pass through the membrane.For example, if unaltered milkcontaining 3.5 percent fat, 3.1 percentprotein, and 4.9 percent lactose is runthrough a UF membrane until half of theoriginal volume is eliminated, theremaining product not passing throughthe membrane (i.e., retentate) willcontain all of the fat and protein butonly half of the lactose. The permeate(i.e., that part of the original milk thatdoes pass through the membrane) willcontain water, lactose, non-proteinnitrogen, and about one-sixth of theminerals.

Reverse osmosis (RO) is also amembrane process, but the membraneshave much smaller pores than UFmembranes, allowing only the water topass through. The end productessentially is concentrated milk.

At the present time, both reverseosmosis and ultrafiltration systems arebeing utilized on some farms,principally large farms in thesouthwestern United States. Theproduct shipped from these farms (i.e.,the retentate) currently is sent toprocessing plants for use inmanufactured products but it could beused in a range of milk products.

The retentate received from a farmwith a UF or RO system will be treatedas producer milk at the pool plant atwhich the milk is physically receivedor, if the retentate is shipped to anonpool plant, as producer milkdiverted to a nonpool plant. In eithercase, the milk or milk components willbe priced at the pool plant or nonpoolplant where the milk is physicallyreceived.

To be considered a farm and aproducer, as opposed to a plant and ahandler, an RO or UF unit must beunder the same ownership as the farmon which it is located and only milkfrom that farm or other farms under thesame ownership may be processedthrough the unit. The produceroperating the unit shall be responsiblefor providing records of the dailyweights of the milk going through theunit. Also, the producer must providesamples for each load of milk goingthrough the unit and must furnish thereceiving plant with a manifest on eachload of retentate showing the scaleweight along with samples of theretentate. Finally, the produceroperating the RO or UF unit mustmaintain records of all transactionswhich must be available to the MarketAdministrator upon request. If theproducer does not meet theserecordkeeping and reportingrequirements, the unit will beconsidered to be a plant.

RO and UF retentate will beconsidered to be producer milk at theplant which receives it. The pounds ofRO and UF retentate received will bepriced according to the skim-equivalentpounds of such milk. The skim-equivalent pounds for RO retentate willbe determined by dividing the solids-not-fat pounds in the retentate by theaverage producer solids-not-fat in theskim portion of the producer milk usedin the product. The butterfat poundswould then be added to this number toarrive at the product skim-equivalentpounds.

In computing the fluid equivalent ofUF retentate, the fluid equivalent factorshould be computed by dividing thetrue protein test in the skim milkportion of the retentate by the trueprotein test in the skim milk portion ofthe producer milk used in the product.

Adding the butterfat pounds to thiscomputation will yield the productequivalent pounds.

In addition to having UF and ROequipment, some farms today may havea separator to separate skim milk fromcream before they leave the farm. Rulesare also established for this type ofoperation.

Skim milk and cream going through afarm separator also should be treated asproducer milk if received at a pool plantor diverted to a nonpool plant. Theproducer will be required to obtain scaleweights and tests on each load of skimand cream shipped along with samplesof each. The same ownership,recordkeeping, sampling and reportingrequirements that apply to RO and UFunits will also be applicable.

In formulating a policy for thetreatment of RO and UF retentate, it isimportant to recognize that the milkproduced on a farm with RO or UFequipment is fully available to meet theneeds of the fluid market, either beforeor after passing through such units.Therefore, there should be no questionconcerning the propriety of pooling thismilk along with other producers’ milk.

At this writing, the Food and DrugAdministration (FDA) has not yetdecided whether UF retentate can bereconstituted and sold as fluid milk.However, FDA has approved the use ofUF retentate in certain cheese productson a trial basis. Therefore, beforereceiving UF retentate for use in anyproduct, handlers should be certain thatsuch use has been approved by the FDA.

Distributing PlantA distributing plant is defined as a

plant that is approved by a dulyconstituted regulatory agency to handleGrade A milk and at which fluid milkproducts are processed or packaged andfrom which there is route disposition ortransfers of packaged fluid milkproducts to other plants. Thisdefinition, and the following supplyplant definition, are essentially the sameas those found in present orders, exceptfor minor changes made to conformwith the pool plant provisions adoptedfor the consolidated orders.

Supply PlantA supply plant is a regular or reserve

supplier of bulk milk for the fluidmarket that helps to coordinate thesupply of milk with the demand formilk in a market. As defined in thisdecision, a supply plant is a plantapproved by a duly constitutedregulatory agency for the handling ofGrade A milk that receives milk directlyfrom dairy farmers and transfers ordiverts fluid milk products to other



plants or manufactures dairy productson its premises.

Pool PlantThe pool plant definition of each

order describes those plants whichreceive milk that shares in themarketwide pool. It provides standardsto identify those plants engaged inserving the fluid needs of the marketingarea. Pool plants serve the fluid marketto a degree that warrants their producerssharing in the added value that derivesfrom the classified pricing of milk.While the pool plant definition in everyconsolidated order provides for a set ofcommon principles, the standardsapplicable to pool plants differ amongthe consolidated orders, reflecting thefact that marketing conditions varyacross the country. The goal in draftingpooling standards is to ensure both anadequate supply of milk for fluid useand orderly marketing by allowing allmilk in a marketing area the opportunityto serve the fluid market and therebyshare in the pool.

There are 2 performance standardsapplicable to pool distributing plants inthe consolidated orders. The firststandard, which varies among orders,requires a distributing plant to have aminimum Class I utilization. Since routedisposition includes only Class I milk,the specific standard is a measure of adistributing plant’s route disposition asa percent of its total receipts of fluidmilk products. This standard isgenerally directly related to the market’sClass I utilization. Accordingly, in thehigher Class I utilization markets in theSoutheast, the overall route dispositionstandard is 50 percent. In a market suchas the Upper Midwest, on the otherhand, where Class I utilization will bemuch lower, the overall routedisposition standard is only 15 percent.The specific standards for eachconsolidated order are discussed inSection 6 of this decision.

One change common to all ordersfrom the proposed rule to this finaldecision is the substitution of ‘‘totalreceipts of fluid milk products’’ for‘‘receipts of bulk fluid milk products’’ incomputing the total and in-areadisposition for a distributing plant. Thischange was made to achieve consistencyin accounting for packaged receipts at adistributing plant that are subsequentlydisposed of as route disposition ortransferred to another plant. Since allsuch disposition will count towardsmeeting an order’s specified poolingstandards, receipts of such productsfrom another plant also should becounted as part of the plant’s receipts.

Once it is determined that adistributing plant is sufficiently

associated with the fluid market to sharein the pool, a second standarddetermines if the plant is sufficientlyassociated with a particular market toshare in the pool applicable to thatmarket. The ‘‘in-area’’ standard adoptedfor the consolidated orders requires thata distributing plant have 25 percent ofits route disposition within a marketingarea before it can be fully regulated bythe order covering that marketing area.

The 15 percent in-area standard in theproposed rule has been changed to 25percent for all orders to reflect thelarger, merged marketing areas that areadopted. This change should not affectthe regulatory status of any currentdistributing plant.

At the present time, some ordersdescribe the in-area route dispositionstandard as a percent of plant receipts,while in other orders it is described asa percent of route disposition. For thenew orders, the in-area standard for allorders is expressed as a percent of totalroute disposition. This methodologywill ensure that the in-area routedisposition standard never exceeds thetotal route disposition standard, asituation that is now possible under theterms of the present Upper Midwestorder. For most orders, this change willmake little difference and should notresult in regulating any plant that isnow unregulated.

Under the consolidated orders, adistributing plant that has sales in morethan one Federal order marketing areawill be regulated, for the most part,under the order in which it has the mostsales. There are certain exceptions tothis rule, however, particularly in the 3Southeast orders, where the shifting ofplants among markets has createddisorderly marketing conditions inrecent times. In the Florida, Southeast,and Appalachia orders, a distributingplant that is located within themarketing area and that meets theorder’s pooling standards will beregulated under that order even thoughit might have more route disposition insome other marketing area.

When the regulation of a plant doesshift from one order to another, the shiftwill only occur after the plant has hadgreater sales in such other market for 3consecutive months. This provision willprovide some stability to avoid thefrequent shifting of regulation betweenorders.

To facilitate proper administrationand accounting, all orders currentlyprovide that packaged fluid milkproducts transferred from one handlerto another be treated as inter-handlertransfers, with each transaction properlyidentified and specifically reported toaffected market administrators. This

should continue in the consolidatedorders. However, for the single purposeof qualifying a plant as a pooldistributing plant, the pool distributingplant definition has been modified totreat transfers of packaged fluid milkproducts to other plants as if they wereroute disposition of the transferringplant for the purpose of identifying theplant’s association with the fluidmarket. This is necessary to preclude aplant from becoming partially regulatedif the plant shipped significantquantities of packaged fluid milkproducts to another distributing plant. Aconforming change has been made tothe distributing plant definition in§ 1000.5 to reflect this change.

A special pool distributing plantprovision (i.e., Section 7(b) of theconsolidated orders) has been adoptedfor distributing plants that distributeultra-pasteurized or aseptically-processed fluid milk products. Suchplants must be located in the marketingarea and must process a certainpercentage of their milk receipts intoultra-pasteurized or aseptically-processed fluid milk products duringthe month. The minimum percentageused for each order in Section 7(b) isequal to the total route dispositionpercentage required in Section 7(a) ofthe order for distributing plantsprocessing standard shelf-life fluid milkproducts. However, unlike the standardsfor a 7(a) plant, there is no routedisposition standard for a 7(b) plant tomeet.

Plants specializing in ultra-pasteurized or aseptically-processedfluid milk products tend to have erraticprocessing and distribution patternsreflecting the long-life nature of theproduct they process. In some months,they may process fluid milk productsbut have little or no route dispositionbecause the products are stored ininventory. In addition, these plantsoften have much wider distributionpatterns than do other distributingplants and, under current orders,frequently shift regulation from oneorder to another. This shiftingregulation is disruptive to the producersand/or cooperatives supplying theseplants and is an additional regulatoryburden to the plant operator.

To provide regulatory stability forthese plants, they will be treated as afully regulated plant if they process aminimum percent of their milk receiptsinto ultra-pasteurized or aseptically-processed fluid milk products duringthe month. Having met this standard,which varies among orders, they willnot shift regulation to another ordersimply because they have more routedisposition in such other order’s



15 As used in parts 1000 through 1135, the termconcentrated milk means milk that contains not lessthan 25.5 percent, and not more than 50 percent,total milk solids. It may include milk that has beencondensed or milk that has been filtered using suchmethods as reverse osmosis and ultra-filtration.Concentrated milk may be pasteurized and it maybe homogenized.

marketing area. In fact, they need nothave any route disposition in the orderin which they are located to remainregulated. However, if they do not meetthe processing standard of the order inwhich they are located but do meet the7(a) standards for a distributing plantunder one or more other orders, theywill become regulated under the orderin which they have the most routedisposition. If they continue to qualifyfor pool status on this basis, they maybe subject to regulatory shifts dependingupon the pattern of their routedisposition.

Pool Supply Plant

Performance standards for poolsupply plants are designed to attract anadequate supply of milk to meet thedemands for fluid milk in a market. Poolsupply plants move milk to pooldistributing plants that service themarketing area.

The pool supply plant definition, likethe distributing plant definition, doesnot lend itself to uniform application inall consolidated orders. Consequently,pool supply plant performancestandards should be establishedaccording to regional needs. Thespecific standards adopted in each orderare described in section 7(c) of each neworder and are explained in more detailin the regional discussions of thisdocument.

In most current orders, a pool supplyplant does not include any portion of aplant that is not approved for handlingGrade A milk and that is physicallyseparated from a portion of the plantthat has such approval. Some inspectionagencies render only one type ofapproval for an operation. Toaccommodate those areas where splitoperations are permitted, some of theconsolidated orders provide for aphysically separated portion of the plantas a ‘‘nonpool plant.’’

Pooling Options

Unit Pooling

Unit pooling allows 2 or more plantslocated in the marketing area andoperated by the same handler to qualifyfor pool status as a unit by meeting thetotal and in-area route dispositionstandard as if they were a single pooldistributing plant. To qualify as a unit,at least one of the plants in the unit—i.e., the primary plant— must qualify asa pool distributing plant on its ownstanding and the other plants in the unitmust process only Class I or Class IImilk products.

Unit pooling serves to accommodateand provide a flexible regulatoryapproach in addressing the

specialization of plant operations. It alsominimizes unintended regulatory effectsthat may cause the uneconomical andinefficient movement of milk for thesole purpose of retaining pool status.However, some conditions need to besatisfied for unit pooling. The ‘‘other’’plant(s) of the pool unit—i.e., the plantsthat would not qualify for pool status asa single plant—must be located in anequivalent or a lower price zone thanthe primary pool distributing plant. Thiscondition is required to assure that thetransportation of milk for Class II useswill not be subsidized through themarketwide pool and to assure pricingequity to all handlers processing ClassII products that do not use unit pooling.Unit pooling status must be requested inwriting and approved by the marketadministrator for its properimplementation and administration.

System PoolingSupply plants and reserve supply

plants provide a benefit to the marketbecause they are required to meetcertain performance standards insupplying the needs of the fluid market.They also serve to balance the market.Because handlers often operate morethan one supply plant within themarket, some of the merged orders allowa single proprietary handler or one ormore cooperative associations tocombine their plants into systems forthe purpose of meeting the order’sperformance standards for pooling.Under system pooling, 2 or more plantsin a system can qualify for pool statusby meeting the applicable performancestandards in the same manner as asingle plant. However, not all plants ina system of supply plants must transferor divert milk to a distributing plant. Inrecognition of this fact, the supply plantdefinition in § 1000.6 has been modifiedto conform with this provision.

Adjustment of Pooling StandardsThe consolidated orders provide the

market administrator with authority toadjust shipping standards for supplyplants, reserve supply plants, balancingplants, and supply plant units if he/shefinds that such revision is necessary toencourage needed shipments or toprevent uneconomic shipments of milk.A finding by the market administratorthat adjustments are warranted wouldfollow an investigation conducted onthe market administrator’s owninitiative or at the request of interestedparties. Before making a finding thatrevisions are warranted, the marketadministrator would notify interestedparties of this possibility and invitedata, views, and arguments. If themarket administrator determines that a

revision is warranted, he/she shallprovide written notification tointerested parties of such revision atleast one day before the revision goesinto effect.

This provision allows the marketadministrator to respond promptly tochanges in local marketing conditionsand should result in better service to thedairy industry and to the public. Theauthority given to the marketadministrator to make neededadjustments in the manner specified iscommensurate with the authoritiesalready delegated by the Secretary to themarket administrator.

As provided in the proposed rule, themarket administrator would have hadthe authority to adjust pooling standardsfor distributing plants as well as supplyplants. However, such authority has notbeen provided in any of the currentmarketing orders except for theSoutheast, and in that market it hasnever been needed. Consequently, itwas concluded that any changes thatmay need to be made to pooldistributing plant standards can best behandled through normal amendatoryand suspension procedures.

Treatment of Concentrated Milk

An issue related to pooling thatshould be clarified with the issuance ofnew orders is the treatment ofconcentrated milk that is shippedbetween plants.

Prior to the 1993 classificationdecision, condensed milk was notdefined as a fluid milk product.Accordingly, when condensed milk wasshipped from a supply plant to adistributing plant it was not counted asa qualifying shipment for the purpose ofdetermining the pool status of thesupply plant. By the same token, whena distributing plant received a shipmentof condensed milk from another plant,the condensed milk was excluded fromthe distributing plant’s receipts for thepurpose of computing the pool plantstatus of the distributing plant.

In the 1993 classification decision,condensed milk was redefined asconcentrated milk 15 and was includedin the fluid milk product definition. Anunintended consequence of this changewas that certain plants which had neverbeen pool plants before suddenlybecame pool plants because of theirshipments of condensed milk, and



certain distributing plants that had beenpool plants suddenly found themselvesunable to qualify as pool plants becausetheir receipts of ‘‘fluid milk products’’were enlarged to include theircondensed milk receipts. Whenhandlers complained about theseunforseen and unexplained changes, itwas decided administratively tocontinue the previous treatment forcondensed milk until the orders couldbe amended.

The consolidated orders shouldcontinue this special treatment forcondensed milk. Although condensedmilk conceivably may be reconstitutedfor fluid use, as a practical matter thisis rarely, if ever, done. Sometimes,condensed milk is used to fortify fluidmilk, but for the most part condensedmilk is made to be used in ice creammix or some other manufactured dairyproduct.

When condensed milk is transferredfrom the plant of origin to a distributingplant in the same or another order, it isgenerally transferred, by agreement, forClass II or III use. Using this criteria asa distinguishing feature of this product,the pool supply plant provision of eachorder should exclude from qualifyingshipments to distributing plants‘‘concentrated milk transferred, byagreement, for other than Class I use.’’By the same token, a distributing plantalso should exclude from its receipts,for pooling purposes, ‘‘concentratedmilk received, by agreement, for otherthan Class I use.’’

Using this language will preserve theregulatory treatment that has applied tocondensed milk for many years. At thesame time, however, this languageallows flexibility for different treatmentin the case of concentrated milk that isnot destined for Class II or III use.

In recent years, there has been muchgreater use of filtering equipment toremove water from milk at the farm.This technology may be used to reducehauling costs in shipping milk longdistances for use as fluid milk products.Although this concentrated milk is notat present being used for fluid use, thissituation may change in the future. Forthis reason, it is reasonable to providesome flexibility in handling this type ofproduct for both shrinkage and poolingpurposes. At this point in time, webelieve that the best way to provide thisflexibility is to allow the handlersinvolved in making and using thisproduct to decide among themselveshow it will be used and reported,knowing ahead of time the shrinkageand pooling implications involved withthese decisions. Thus, if concentratedmilk is purchased from another plant byagreement for other than Class I use, the

buying handler understands that therewill be no shrinkage allowance allowedon the milk. The buying handler alsoknows that the volume of concentratedmilk received will not be counted as aplant receipt for the purpose ofdetermining its pool status.

A supply plant shipping concentratedmilk for Class II use may or may notwish to be pooled under a Federal order.If the plant wished to be treated as anonpool plant, concentrated milk couldbe transferred for Class II or III use byagreement with the receiving handler. Insuch case, the transfer of concentratedmilk would not be counted as aqualifying shipment in meeting the poolsupply plant shipping standards and thereceipt of concentrated milk at thedistributing plant would not be countedas part of the distributing plant’sreceipts for purposes of computing itstotal route disposition. Of course, theagreement to transfer milk for a pre-arranged use is contingent upon thereceiving distributing plant havingsufficient Class II or III utilization toabsorb these receipts.

On the other hand, if a supply plantmaking concentrated milk wished toqualify for pool status, it could simplytransfer concentrated milk to a pooldistributing plant without specifying itsdesignated use. In such case, theshipment would count as a qualifyingshipment for the purpose of meeting theorder’s pool supply plant shippingrequirements provided that thedistributing plant receiving theconcentrated milk was a pool plant.Since the receipt of concentrated milkwould be counted as part of thereceiving distributing plant’s receipts indetermining the distributing plant’spool status under the order, the plantwould have to have sufficient Class Isales to maintain its identity with thefluid market. If the distributing plantdid not have sufficient Class I use tomeet the order’s pooling standards, itwould not be qualified to have itsreceipts pooled under the order and, byextension, neither would the supplyplant that shipped the concentratedmilk to the distributing plant.

This regulatory flexibility forconcentrated milk should accommodatevaried situations in the consolidatedorders. It will follow the historicaltreatment for condensed milk but, at thesame time, it will provide for new usesand treatment for other types ofconcentrated milk.

Nonpool PlantA definition is provided in all orders

describing plants which receive, processor package milk, but which do notsatisfy the standards for being a pool

plant. While providing for such adefinition may appear redundant, thisprovision is useful to more clearlydefine the extent of regulationapplicable to plants.

Nonpool plants should include aplant that is fully regulated underanother Federal order, a producer-handler plant, a partially regulateddistributing plant, an unregulatedsupply plant, and an exempt plant. Thedefinitions for these nonpool plants arenot materially different than thoseprovided in the current orders with thepossible exception of an ‘‘exemptplant.’’

Certain plants are exempt fromregulation under Federal milk orders.These plants fall into 4 categories: (1)Plants that are operated by agovernmental agency which have noroute disposition in commercialchannels; (2) plants operated by acollege or university that dispose offluid milk products only through theirown facilities with no route dispositionin commercial channels; (3) plants fromwhich the total route disposition is forindividuals or institutions for charitablepurposes without remuneration; and (4)plants that have route disposition of150,000 pounds or less during themonth. These types of plants have littleimpact on the regulated market andneed not be regulated to ensure theintegrity of the regulatory plan.

A number of Federal orders exemptfrom regulation small distributing plantswhich, because of their size, do notsignificantly impact competitiverelationships among handlers in themarket. The level of route dispositionrequired before an exempt plantbecomes regulated varies in the currentorders. As adopted for the mergedorders, any plant with route dispositionduring the month of 150,000 pounds orless would be exempt from regulation.This limit reflects the maximum amountof fluid milk products allowed by anexempt plant in any current Federalmilk order and ensures that plantscurrently exempt from regulation willremain exempt.

Many current Federal orders alsoprovide regulatory exemption for a plantoperated by a state or Federalgovernmental agency. For example,some states have dairy farm and plantoperations that provide milk for theirprison populations. As provided herein,regulatory exemption would becontinued under the consolidatedorders unless pool plant status isrequested.

Regulatory exemption also shouldapply to colleges, universities, andcharitable institutions because theseinstitutions generally handle fluid milk



products internally and have no impactin the mainstream commercial market.However, in the event that these entitiesdistribute fluid milk throughcommercial channels, route sales bysuch entities, including governmentagencies, will be monitored todetermine if Federal regulation shouldapply.

The determination and verification ofexempt plant status will, from time totime, necessitate the need for the marketadministrator to require reports andinformation deemed appropriate for thesole purpose of making thisdetermination. Such authority iscurrently provided in orders and shouldcontinue.

Handler

Federal milk orders regulate thosepersons who buy milk from dairyfarmers. Such persons are calledhandlers under the order. These personshave a financial responsibility forpayments to dairy farmers for milk inaccordance with its classified use. Theymust file reports with the marketadministrator detailing their receiptsand utilization of milk.

The handler definition adopted forthe consolidated orders includes theoperator of a pool plant, a cooperativeassociation that diverts milk to nonpoolplants or delivers milk to pool plants forits account, and the operator of a‘‘nonpool plant,’’ which wouldencompass a producer-handler, apartially regulated distributing plant, aplant fully regulated under anotherFederal order, an unregulated supplyplant, and an exempt plant.

In addition, ‘‘third party’’organizations that are not otherwiseregulated under provisions of an orderare included in the handler definition.This category includes any person whoengages in the business of receivingmilk from any plant for resale anddistribution to wholesale and retailoutlets, brokers or others who negotiatethe purchase or sale of fluid milkproducts or fluid cream products fromor to any plant, and persons who, bypurchase or direction, cause the milk ofproducers to be picked up at the farmand/or moved to a plant. Suchintermediaries provide a service to thedairy industry. These persons are not,however, recognized or regulated asentities required to make minimumpayments to producers. The expandedmarketing chain brought about by suchintermediaries has made it increasinglydifficult for the market administrator totrack the movement of milk from farmsto consumers. The revised handlerdefinition enables the market

administrator to more readily identifythose entities.

Producer-Handler

It has been a long-standing policy toexempt from full regulation many ofthose entities that operate as both aproducer and a handler. Generally, aproducer-handler is any person whoprovides satisfactory proof to the marketadministrator that the care andmanagement of the dairy farm and otherresources necessary for own-farmproduction and the management andoperation of the processing plant are thepersonal enterprise and risk of suchperson. A primary basis for exemptingproducer-handlers from the pricing andpooling provisions of a milk order isthat these entities are customarily smallbusinesses that operate essentially in aself-sufficient manner. Also, during thehistory of producer-handler exemptionfrom full regulation there has been nodemonstration that such entities have anadvantage as either producers orhandlers so long as they are responsiblefor balancing their fluid milk needs andcannot transfer balancing costs,including the cost of disposing ofreserve milk supplies, to other marketparticipants.

The current orders have varyingproducer-handler definitions thataddress specific marketing conditionsand circumstances. For example, theyspecify different limits on the amount ofmilk that producer-handlers maypurchase and retain their exempt status.Some modifications have been made tothe producer-handler provisions in theconsolidated orders for standardization.However, no changes have been madethat would intentionally regulate aproducer-handler that is currentlyexempt from regulation under theircurrent operating procedures. Becausethe producer-handler provision isslightly different from one order to thenext, the specific details regarding eachdefinition are described in the regionaldiscussions that follow. Any generalprovision in the proposed rule, such asthe phrase ‘‘or acquired for distribution’’in § 1000.44(a)(3)(iv), that would havechanged the status of a currentproducer-handler has been eliminated.

Public comments were receivedregarding the extent of regulation thatshould apply to producer-handlers. Themajority of public comments supportedthe status-quo regarding the regulatorytreatment of producer-handlers,emphasizing that they should remainexempt from regulation in accordancewith current order provisions and thatthe provisions should be regional innature so as not to affect or change the

current regulatory status of producer-handlers.

One of the public comments receivedproposed that the exemption ofproducer-handlers from the regulatoryplan of milk orders be eliminated. Thisproposal is denied. In the legislativeactions taken by the Congress to amendthe AMAA since 1965, the legislationhas consistently and specificallyexempted producer-handlers fromregulation. The 1996 Farm Bill, unlikeprevious legislation, did not amend theAMAA and was silent on continuing topreserve the exemption of producer-handlers from regulation. However, pastlegislative history is replete with thespecific intent of Congress to exemptproducer-handlers from regulation. If ithad been the intent of Congress toremove the exemption, Congress wouldlikely have spoken directly to the issuerather than through omission oflanguage that had, for over 30 years,specifically addressed the regulatorytreatment of producer-handlers.

Since producer-handlers are intendedto be exempt from most regulation,some means must be provided todetermine and to verify producer-handler status. Accordingly, the marketadministrator is provided with theauthority to require reports and otherinformation deemed appropriate todetermine that an entity satisfies therequirements for producer-handlerstatus. Such authority is currentlyprovided in the orders and shouldcontinue.

Producer

Under all orders, producers are dairyfarmers that supply the market withmilk for fluid use or who are at leastcapable of doing so if necessary.Producers are eligible to share in therevenue that accrues from marketwidepooling of milk. The producerdefinitions of the individual orders aredescribed under the regionaldiscussions later in this document.Responding to regional needs, producerdefinitions will differ by order withrespect to the degree of association thata dairy farmer must demonstrate with amarket.

A dairy farmer may not be considereda producer under more than one Federalmilk order with respect to the samemilk. If a dairy farmer’s milk is divertedby a handler regulated under oneFederal order to a plant regulated underanother Federal order, and the milk isallocated at the receiving plant (byrequest of the diverting handler) to ClassII, III or IV, the dairy farmer willmaintain producer status in the originalorder from which milk was diverted.



Since producer-handlers and exemptplants are specifically exempt fromFederal order pricing provisions, theterm producer should not include aproducer-handler as defined in anyFederal order. Likewise, the termproducer should not apply to anyperson whose milk is delivered to anexempt plant, excluding producer milkdiverted to such exempt plant. Some ofthe new orders (See Orders 1001, 1124,1131, and 1134) also exclude fromproducer status a dairy farmer whosemilk is received at a nonpool plant asother than producer milk. The reasonsfor including this provision areexplained in the regional discussionsdescribing those orders.

Producer MilkThe producer milk definition

identifies the milk of producers whichis eligible for inclusion in a particularmarketwide pool. This definition isspecific to each consolidated order,reflecting the fact that marketingconditions differ among regions.

In general, the definition of producermilk for all consolidated orderscontinues to include the milk of aproducer which is received at a poolplant or which is received by acooperative association in its capacity asa handler. Most current orders considermilk to be ‘‘received’’ when it isphysically unloaded at the plant and theconsolidated orders would continue thattreatment.

In order to promote the efficienthandling of milk, all orders currentlyallow a handler to move producer milk,within certain specified limits, from aproducer’s farm to a plant other than thehandler’s own plant. This is referred toas a ‘‘diversion’’ of milk. Under theconsolidated orders, the definition ofproducer milk allows unlimiteddiversions to other pool plants, therebyproviding maximum flexibility inefficiently supplying the fluid market.

Under some orders, unlimiteddiversions to nonpool plants would alsobe allowed once a dairy farmer hasbecome associated with a particularorder. Under other orders, however, aproducer would be required to ‘‘touchbase’’ at a pool plant one or more timeseach month and, in addition, aggregatediversion limits may be applied to ahandlers’ total diversions. The specifictouch base and diversion limits aredescribed in the regional discussionspertaining to each order.

Even for orders without any diversionlimits, there is a practical limit to howmuch milk may be diverted from a poolplant because of the pooling standardsthat must be met. For a pool supplyplant, for example, there is a standard

computed by dividing the amount ofmilk shipped to distributing plants by aplant’s total receipts. As provided in theorders, ‘‘receipts’’ include milk that isphysically received at the plant as wellas diverted to nonpool plants. Thisinclusion of diverted milk in a plant’sreceipts automatically limits the amountof milk that may be diverted by thoseplants. Thus, the maximum quantity ofmilk that such plants would be able todivert and still maintain their pool plantstatus would be 100 percent less thepool plant shipping standards for themonth.

This treatment of diverted milk willmitigate the need for suspending orderdiversion limitations, an action that isquite common in some of the currentorders. Unlimited diversions for manyof the new orders will allow formaximum efficiency in balancing themarket’s milk supply. The marketadministrator’s ability to adjustshipping percentages for pool supplyplants, pool reserve supply plants, andbalancing plants will ensure that anadequate supply of milk is available forthe fluid market without the impositionof diversion limits.

While a one-time producer ‘‘touchbase’’ standard and virtually unlimiteddiversions are appropriate for most ofthe consolidated Federal orders, theyare not appropriate for certain ‘‘deficit’’markets in the Southeast. For theseorders, touch base requirements anddiversion limits provide another tool toensure that an adequate supply of fluidmilk is available to meet the markets’needs. The specific standards for theseorders are discussed in the regionalsection of this document.

In order to provide regulatoryflexibility and marketing efficiencies, allof the new orders having diversionlimits allow the market administrator toincrease or decrease these limits onrelatively short notice. This provisioncurrently exists in some Federal ordersand has proven to be a responsive,efficient, and effective way to deal withrapidly changing marketing conditions.

Cooperative Association

All current orders provide a definitionfor dairy farmer cooperative associationsthat market milk on behalf of their dairyfarmer members. Providing for auniform definition of a cooperativeassociation facilitates the administrationof the various order provisions as theyapply to such producer organizationsand recognizes the unique standinggranted to dairy farmer cooperativesunder the Capper-Volstead Act. Dairyfarmer cooperatives are responsible formarketing the majority of the milk

supplied to regulated handlers underthe Federal order system.

As provided herein, a cooperativeassociation means any cooperativemarketing association of producerswhich the Secretary determines, afterapplication for such recognition by thecooperative, is qualified as such underthe provisions of the Act of Congress ofFebruary 18, 1922, as amended, knownas the ‘‘Capper-Volstead Act’’.Additionally, the new orders continueto require that a cooperative associationhave full authority in the sale of themilk of its members and that it beengaged in making collective sales ormarketings of milk or milk products forits dairy farmer members.

Several current orders provide adefinition for a federation of 2 or morecooperative associations. As adoptedhere, all consolidated orders recognize afederation of cooperatives as satisfyingthe cooperative definition for thepurposes of determining milk paymentsand pooling. Individual cooperatives ofa federation of cooperatives must alsomeet the criteria as set forth forindividual cooperative associations andtheir federations as incorporated understate laws.

Handler Reports

All current orders require handlers tosubmit monthly reports detailing thesources and uses of milk and milkproducts so that market average usevalues, or blend prices, can bedetermined and administered. Payrollreports and other reports required by themarket administrator are also providedfor in the orders. The order language forthe consolidated orders is similar to thatcontained in current orders. The dateswhen reports are due in the marketadministrator’s office differ slightly byorder according to custom and industrypractice.

Announcements by the MarketAdministrator

In the course of administering theorder, the market administrator isrequired to make severalannouncements each month withrespect to classification, class prices andcomponent prices, an ‘‘equivalentprice’’ when necessary, and variousproducer prices. As adopted here, theseprovisions are uniform and are nearlyidentical to current order provisions,with the exception of section 62(Announcement of producer prices),which differs to some extent amongorders depending on the degree ofcomponent pricing used in the order.



Producer-Settlement Fund

In all of the current and consolidatedorders, handlers are required to payminimum class prices for the milkreceived from producers. Theseproceeds are blended through themarketwide pool so that producers arereturned a uniform, or blend, price fortheir milk. The mechanism for theequalization of a handler’s use value ofmilk is the producer-settlement fund. Itis established and administered by themarket administrator for each order.

The producer-settlement fund ensuresthat all handlers are able to return themarket blend price to producers whosemilk was pooled under the order.Payments into the producer-settlementfund are made each month by handlerswhose total classified use value of milkexceeds the value of such milkcalculated at the uniform price (or atcomponent prices for those orders withcomponent pricing). Similarly,payments out of the producer-settlementfund are made each month to anyhandler whose use value is below thevalue of milk at the uniform price orcomponent prices, as the case may be.The transfer of funds enables handlerswith a use value below the average forthe market to pay their producers thesame uniform price as handlers whoseClass I utilization exceeds the marketaverage. This provision is uniform forall consolidated orders.

The consolidated orders vary withrespect to dates for payments to theproducer-settlement fund, due largely toindustry practices and regionalpreferences. Each consolidated orderprovides for payment dates, and theyare specific for each consolidated order.

In view of the need to make timelypayment to handlers from the producer-settlement fund, it is essential thatmoney due the fund be received by thedue date. Accordingly, under all of thenew orders payment to the producer-settlement fund will be consideredmade upon receipt by the marketadministrator.

The new orders specify that paymentcannot be received on a nonbusinessday. Therefore, if the due date for apayment, including a payment to orfrom the producer-settlement fund, fallson a Saturday, Sunday, or nationalholiday, the payment would not be dueuntil the next business day. This isspecified in § 1000.90 of the GeneralProvisions.

Payments to Producers and CooperativeAssociations

The AMAA provides that handlersmust pay to all producers and producerassociations the uniform price. The

existing orders generally allow properdeductions authorized by the producerin writing. Proper deductions are thosethat are unrelated to the minimum valueof milk in the transaction between theproducer and handler. Producerassociations are allowed by the statue to‘‘reblend’’ their payments to theirproducer members. The CapperVolstead Act and the AMAA make itclear that cooperative associations havea unique role in this regard.

The payment provisions to producersand cooperatives for the consolidatedorders vary with respect to paymentfrequency, timing, and amount. Thesedifferences are generally consistent withcurrent order provisions and withindustry practices and customs in eachof the new marketing areas.

Each of the new orders will requirehandlers to make at least one partialpayment to producers in advance of theannouncement of the applicableuniform prices. The Florida order willrequire 2 partial payments, mirroringthe payment schedule now provided inthe 3 separate Florida orders.

The amount of the partial paymentvaries among the new orders, reflectingthe anticipated uniform price. Thus, forexample, in the Upper Midwest order,the partial payment rate for milkreceived during the first 15 days of themonth will be not less than the lowestannounced class price for the precedingmonth. By comparison, the partialpayment for the Florida order for milkreceived during the first 15 days of themonth will be at a rate that is not lessthan 85 percent of the precedingmonth’s uniform price, adjusted forplant location.

The final payment for milk under thenew orders will be required to be madeso that it is received by producers nolater than 2 days after the required pay-out date of monies from the producer-settlement fund.

Cooperatives will be paid by handlersfor bulk milk and skim milk on theterms described for individualproducers except that payment will bedue one day earlier. Providing for anearlier payment date for cooperativeassociations is warranted because it willpermit the cooperative association thetime needed to distribute payments toindividual producer members. Thecooperative payment language in eachof the consolidated orders has beenexpanded to include bulk milk and skimsold by cooperatives from their poolplants as well as by cooperatives actingas handlers for milk delivered directlyfrom producers’ farms.

When bulk milk is received bytransfer from a cooperative’s pool plant,a minimum payment should be required

for such milk just as if it were producermilk received directly from producers’farms. Many, but not all, of the currentorders have such a provision.

For Class I bulk milk that is receivedfrom a cooperative’s pool plant, theminimum Class I price level for suchmilk should be the price applicable atthe location of the receiving handler’splant. In the case of such transfers, it ispresumed that milk will move fromlower-priced areas to higher-pricedareas. Under these circumstances, partof the transportation cost in moving themilk is covered by the difference in theClass I prices at the receiving plant andshipping plant.

Pricing Class I transfers at thereceiving plant’s location ensures that ahandler would not have an incentive toreceive more distant plant milk insteadof closer milk directly from producers’farms. It also ensures that all similarly-located pool plants will pay the sameminimum prices for their receiptsregardless of whether the milk comesfrom another plant or directly fromproducers. Finally, it ensures that thehandler receiving transferred milk paysat least a portion of the transportationcost to move the milk to its plant. Sincetransportation cost is likely to exceedthe difference in prices between thetransferor and transferee plants, thedifference in cost will have to be madeup through over-order premiums.

All of the payment dates are receiptdates. Since payment cannot be receivedon a non-business day, payment datesthat fall on a Saturday, Sunday, ornational holiday will be delayed untilthe next business day. While this hasthe effect of delaying payment tocooperatives and producers, the delay isoffset by the shift from ‘‘date ofpayment’’ to ‘‘date of payment receipt.’’

Minimum Payments to ProducersIn a proceeding involving the current

Carolina, Southeast, Louisville-Lexington-Evansville, and the formerTennessee Valley Federal milk orders(Orders 5, 7, 46, and 11, respectively),a proposal was made to clarify whatconstitutes a minimum payment toproducers. The proposal wasrecommended by Hunter Farms(Hunter) and Milkco Inc. (Milkco), 2handlers regulated under the currentCarolina order. Under the proposal, ahandler (except a cooperative acting inits capacity as a handler pursuant toparagraph 9(b) or 9(c)) may not reduceits obligations to producers orcooperatives by permitting producers orcooperatives to provide services whichare the responsibility of the handler.According to the Hunter/Milkcoproposal, such services include: (1)



Preparation of producer payroll; (2)conduct of screening tests of tankerloads of milk; and (3) any services forprocessing or marketing of raw milk ormarketing of packaged milk by thehandler.

At the May 1996 hearing,representatives of Hunter and Milkcotestified that both handlers receive milkfrom cooperative associations andPiedmont Milk Sales, a marketing agenthandling the milk of non-memberproducers. The Hunter representativeexplained that due to competitivemarketing conditions in the Southeastin late 1994 and early 1995 handlerswere able to purchase milk supplies atFederal order minimum prices withoutany over-order premiums being charged.As a result of the absence of over-orderpremiums, the representative stated,Hunter received underpayment noticesfrom the market administrator on milkthat it had received from Piedmont MilkSales.

Hunter argued that the problem ofwhat constitutes a minimum payment toproducers should be clarified topreclude another underpaymentsituation should premiums againdisappear in the future. If this issue isnot resolved, according to Hunter, itwill suffer a loss of milk sales and itsproducers will receive lower prices.Hunter stated that the current policy isdiscriminatory and unfair and thateveryone would benefit from aclarification of the rules definingFederal order minimum prices.

Based on the testimony presented atthe public hearing and commentsreceived, the Department issued a finaldecision on July 16, 1998 (63 FR 39039),denying the Hunter/Milkco proposal.However, the decision stated that thisissue should be revisited as part ofFederal order reform.

In the proposed rule for Federal orderreform, interested parties were invitedto comment on this issue. Only oneFederal order reform comment, besidesHunter/Milkco’s, discussed this issue.This comment letter, filed by the samelaw firm that represents Hunter/Milkco,expressed sentiments nearly identical tothose that have been expressed byHunter/Milkco.

Based on our review of thesecomments, we continue to believe thatincorporation of Hunter/Milkco’sproposed language in the consolidatedFederal orders will not necessarily solvethe handler equity problem but couldcreate a host of additional problems. Forthe reasons stated in the aforementionedfinal decision, the proposal is againdenied for the consolidated orders.

Payment Obligation of a PartiallyRegulated Distributing Plant

All current and consolidated ordersprovide a method for determining thepayment obligations due to producersby handlers that operate plants whichare not fully regulated under anyFederal order. These unregulatedhandlers are not required under thescope of Federal milk order regulationto account to dairy farmers for theirmilk at classified prices or to return aminimum uniform price to producerswho have supplied the handler withmilk. However, such handlers may sellfluid milk on routes in a regulated areain competition with handlers who arefully regulated. Therefore, the regulatoryplan of Federal milk orders provides aminimum degree of regulation to allhandlers who have routes sales in aregulated marketing area. This isnecessary so that classified pricing andpooling provisions of an order can bemaintained. It is also necessary so thatorderly marketing conditions can beassured with respect to handlers beingcharged the classified value under anorder for the milk they purchase fromdairy farmers. Without this provision,milk prices in an order would not beuniform among handlers competing forsales in the marketing area, a milkpricing requirement of the AMAA.

There are 3 regulatory optionsavailable to a partially regulatedhandler. First, the handler can purchaseClass I milk that is priced under aFederal order in an amount equal to, orin excess of, quantities sold in themarketing area. Second, a payment maybe made by the partially regulatedhandler into the producer-settlementfund of the regulated market at a rateequal to the difference between theClass I price and the uniform price ofthe regulated market. Finally, theoperator of a partially regulated plantcan demonstrate that the payment for itstotal supply of milk received from dairyfarmers was equal to the amount whichthe partially regulated plant would havebeen required to pay if the plant hadbeen fully regulated. This amount maybe paid entirely to the dairy farmers thatsupplied the handler or in part to thosedairy farmers with the balance paid intothe producer-settlement fund of theregulated market.

The regulatory options describedabove and the payment option forreconstituted milk have worked well inthe current orders and are continueduniformly in § 1000.76 for theconsolidated orders.

Adjustment of Accounts

All current orders provide for themarket administrator to adjust, based onverification of a handler’s reports,books, records, or accounts, any amountdue to or from the market administrator,or to a producer or a cooperativeassociation. This provision is continuedin the consolidated orders. Theprovision requires the marketadministrator to provide promptnotification to a handler of any amountso due and requires payment adjustmentto be made on or before the next datefor making payments as set forth in theprovisions under which the error(s)occurred.

Charges on Overdue Accounts

All current orders provide for anadditional charge to handlers who fail tomake required payments to theproducer-settlement fund when due.Such payments include payments to theproducer-settlement fund, payments toproducers and cooperative associations,payments by a partially regulateddistributing plant, assessments for orderadministration and marketing service,and certain other payment obligations inorders with specialized provisions suchas transportation credits. This shouldcontinue to be provided for in theconsolidated orders.

In order to discourage late payments,a 1.0 percent charge per month isincorporated in the consolidated orders.This rate represents the mid-point in therange of charges by all orders presently.Overdue charges shall begin the dayfollowing the date an obligation wasdue. Any remaining amount due will beincreased at the rate of 1.0 percent onthe corresponding day of each monthuntil the obligation is paid in full.

All overdue charges would accrue tothe administrative assessment fund. Thelate-payment charge is to be a penaltythat is meant to induce compliance withthe payment terms of the order. If late-payment charges for monies due onproducer milk were to accrue to thebalance owed to either producers,cooperatives or producers/cooperativesvia the producer-settlement fund, itcould result in such producers andcooperatives being less concernedwhether they are paid on time. Byplacing late-payment charges in theadministrative fund, however,cooperatives and producers would notbe placed in a position where theywould prefer to be paid several days lateso that they would receive the late-payment charges (or increase the levelof producer prices due to late paymentfee accrual to the producer-settlementfund). This is of particular concern in



markets with a single dominantcooperative. Additionally, by havinglate-payment fees accrue to theadministrative fund, monies are madeavailable to enforce late-paymentprovisions that would otherwise have tobe generated through handlers’administrative assessments.

Assessment for Order Administration

The AMAA provides that the cost oforder administration shall be financedby an assessment on handlers. Underthe consolidated orders, a maximumrate of 5 cents per hundredweight isprovided. This assessment would applyto all of a handler’s receipts pooledunder the order.

Deduction for Marketing Services

As in most current orders, theconsolidated orders provide for thefurnishing of marketing services toproducers for whom cooperativeassociations do not perform services.Such services include providing marketinformation and establishing orverifying weights, samples, and tests ofmilk received from such producers. Inaccordance with the Act, a marketingservices provision must benefit allnonmember producers under the order.

The market administrator maycontract with a qualified agent,including a cooperative association, toprovide such services. The cost of suchservices should be borne by theproducers for whom the services areprovided. Accordingly, each handlerwill be required to deduct a maximumof 7 cents per hundredweight fromamounts due each producer for whom acooperative association is not providingsuch services. All amounts deductedmust be paid to the marketadministrator not later than the due datefor payments to the producer-settlementfund.

6a. Northeast Region

The Northeast Marketing Area

The recommended consolidatedNortheast order differs significantlyfrom other consolidated orders. Inaddition to merging three existingFederal milk orders, the Northeast orderalso calls for expansion in the northernregion of New York state, and allcurrently unregulated areas of the NewEngland states (except Maine).

While the current New England(Order 1) and Middle Atlantic (Order 4)orders have similar provisions foradjusting producer blend prices in amanner identical to plant priceadjustments for location, the currentNew York-New Jersey (Order 2) orderemploys a ‘‘farm-point’’ pricing method.

This decision adopts a plant-pointpricing methodology in the consolidatedNortheast order. This method is used inevery other current marketing area andin every consolidated marketing area.This represents a considerable change inhow milk will be priced for thosehandlers and producers whose milkcurrently is priced under the provisionsof the New York-New Jersey order.

In addition to the different pricingprovisions of the three existing orders,other important differences and relatedprovisions need to be addressed in theNortheast regional order that willaccomplish the goals of the AMAA.These include what is commonlyreferred to in the New York-New Jerseyorder as the ‘‘pass through’’ provision;the need for providing marketwideservice payments in the form ofcooperative service payments andbalancing payments that currently existin the New York-New Jersey order anddo not exist in either the current NewEngland or Middle Atlantic orders.Additionally, the three current northeastorders also provide for seasonaladjustments to the Class III and IIIAprice.

It is fair to observe that the currentorder most affected by the consolidationis the New York-New Jersey order. Inaddition to the differences alreadydescribed, certain terms and provisionsof the Northeast order are also differentin how they are described and presentedbut are nevertheless consistent withexisting provisions that accomplish thegoals of the AMAA. This is less of anissue for those entities that areaccustomed to the terminology ofprovisions used in the New England andMiddle Atlantic orders. The followingpresents a discussion of therecommended order provisions andissues that are unique to theconsolidated Northeast order.

Plant

The plant definition for theconsolidated Northeast order shoulddiffer from that of the otherconsolidated orders by allowingstationary storage tanks to be used asreload points. This exception to theplant definition is warranted for theconsolidated Northeast order due tocertain unique conditions that affect theability of handlers and haulers toassemble milk in an efficient mannerand subsequently transport it to a plantthat actually processes milk intofinished dairy products, including fluidmilk products. This exception wouldnot consider the reload point or facilityas a point from which to price producermilk. Rather, milk once assembled

would be shipped to a processing plantwhere it would be priced.

A portion of the Northeast milksupply is derived from some 200 smalldairy farms located in Maine. Becausemuch of this state is serviced bysecondary and rural winding roads, thecurrent New England order hasprovided for reload points as a workablesolution to the inherent haulingdifficulties in transporting relativelysmall loads of milk from the countrysideto reload points and facilities withstationary storage tanks that do notserve as a pricing point. This shouldcontinue to be provided for in theconsolidated Northeast order. Not toprovide this accommodation wouldadversely affect a substantial number ofsmall producers and the milk haulersthat service them.

Pool PlantThe pool distributing and pool supply

plant definitions of the consolidatedNortheast order use the standard orderlanguage format used in other orders,combined with performance standardsthat are adapted to marketing conditionsin the Northeast.

The pool distributing plant definitionspecifies that a pool distributing plantmust have 25 percent or more of its totalphysical receipts of fluid milkdistributed as route disposition and thatat least 25 percent of route dispositionbe within the marketing area. The 25percent level of total receipts distributedon routes is reasonably high enough toestablish a distributing plant’sassociation with the fluid milk market.The in-area route distributionperformance standard level of 25percent is adopted because it tends tominimize changing the regulatory statusof handlers from their current regulatorystatus by the Federal order program thatmay result from the consolidation ofexisting orders. The 25 percent in-areasales standard is also a reasonablemeasure for identifying a level at whicha distributing plant is sufficientlyassociated with the marketing area.

As already discussed, theconsolidated Northeast order and othernearby consolidated marketing ordersdo not call for expansion to includecertain currently unregulated areas. Thisincludes areas in the states of New York,Pennsylvania, Virginia, and the entirestate of Maine. Some distributing plantsin these areas are not currentlyregulated, or are only partially regulatedto the extent they have some Class Isales in regulated areas. A 25 percent in-area route distribution level will serveto ensure or minimize any changes intheir current regulatory status under theFederal program that result from



consolidation of the three northeastmarketing areas into a single new order.

Unit pooling, wherein two or moreplants operated by the same handlerlocated in the marketing area canqualify for pooling as a unit by meetingthe total and in-area route distributionrequirements of a pool distributingplant, is included in the consolidatedNortheast order. Providing for unitpooling provides a degree of regulatoryflexibility for handlers by recognizingspecialization of plant operations.

Due primarily to positions offered bymany of the major Northeast dairycooperatives and theirrecommendations on appropriate poolsupply plant performance requirements,the consolidated Northeast order supplyplant performance requirementsinitially should be set to require that inthe months of August and December, atleast 10 percent of the total quantity ofbulk milk that is received at a supplyplant be shipped to distributing plants.For the months of September throughNovember, such shipments by poolsupply plants should be at least 20percent. To the extent that a supplyplant has met these performancerequirements, no performancerequirement is recommended for themonths of January through July.However, a supply plant that has notmet these performance requirementswill need to meet a 10 percentperformance requirement in each of themonths of January through July in orderto qualify as a pool supply plant.

This decision also provides for asystem of supply plants for theconsolidated Northeast order. Thisprovision allows two or more supplyplants operated by the same handler, orby one or more cooperative associationsto be qualified for pool plant status bymeeting the shipping standards in thesame manner as a single supply plantsubject to certain conditions. Theseconditions include written notificationto the market administrator of the plantsthat will be included in the system, howpool status of plants will be affected ifindividual plants are removed from thesystem, and provisions for adding plantsto the system.

Producer-HandlerThe producer-handler definition for

the consolidated Northeast order limitsreceipts to no more than 150,000pounds of fluid milk products fromhandlers fully regulated under anyFederal order. While the proposed ruleaddressed significant limitations onproducer-handlers with respect to howit distributes their milk, this decisionremoves such limitations. The intent ofproviding an appropriate producer-

handler definition was to cause nochange in the regulatory status of anyknown producer-handler currently inoperation in the Northeast order region.However, the three orders beingconsolidated have significantdifferences in the extent of control aproducer-handler must retain over itsdistribution practices. The currentMiddle Atlantic region does not limitthe distribution facilities that may beused by a producer-handler. Thus, anylimitation with respect to distributioncould either cause a current producer-handler to loose such status, or maycause the need for a producer-handler tomodify its business practices. Therefore,the producer-handler definition adoptedherein removes any restrictions on howit distributes its products.

Also removed from the producer-handler definition is the provision thata producer-handler would not includeany producer who also operates adistributing plant if it is requested thattheir dairy farm and plant be operatedas separate entities. Removing thiscomponent of the producer-handlerdefinition tends to strengthen theprinciple that producer-handlers relyprimarily on their own farm productionto bear the burden of balancing theirfluid sales and to find outlets for theirsurplus production.

ProducerThe producer definition of the

consolidated Northeast order definesand describes those dairy farmers whoare properly associated with theNortheast marketing area and who willshare in the benefits that accrue fromthe marketwide pooling of milk underthe order.

The producer definition establishesseasonal limitations for determining if adairy farmer is considered to be aproducer under the order. Basically, theorder prohibits a dairy farmer frombeing a producer under the order duringthe flush production period if the dairyfarmer did not supply the market duringthe months of relatively shortproduction when milk supplies areneeded most to meet fluid demands.Accordingly, the producer definitiondoes not include dairy farmers whosemilk during any month of Decemberthrough June is received at a pool plantor by a cooperative association handlerif the operator of the pool plant or thecooperative association caused the milkfrom such producer’s farm to bedelivered to any plant as other thanproducer milk as defined in theproducer milk provision of theNortheast order, or any other Federalmilk order during the same month, ineither of the two preceding months, or

during any of the months of Julythrough November.

Similarly, a dairy farmer would not beconsidered a producer under the orderfor any month of July through Novemberif any milk of the dairy farmer isreceived at a pool plant or by acooperative association handler if thepool plant operator or the cooperativeassociation caused the dairy farmer’smilk to be delivered to any plant asother than producer milk, as defined inthis proposed order, or in any otherFederal milk order during the samemonth.

Producer MilkThe producer milk definition of the

consolidated Northeast order followsthe general structure and format of otherconsolidated orders. It differs from otherconsolidated orders in that it requirescooperative handlers to organize reportsof producer receipts that originateoutside of the states included in themarketing area, or the states of Maine orWest Virginia, into reporting units witheach unit separately reporting receipts.

No diversion limits are established asthey are in other consolidated orders.However, diversions are limited infunctional terms. The maximumquantity of milk that a supply plantwould be able to divert and stillmaintain pool plant status would be 100percent minus the applicable shippingstandard. This should provide for amaximum amount of flexibility inmarketing milk in the most efficientmanner to balance fluid milk needs.

Component PricingThe consolidated Northeast order will

employ a component pricing plan in theclassified pricing of milk under theorder as previously discussed in theBFP section of this decision. This isconsistent with positions taken andproposals offered by major cooperativegroups in the Northeast who supply alarge percentage of the milk needs of themarket. However, on the basis of publiccomments, the consolidated Northeastorder will not contain a somatic-celladjustor.

In response to the proposed rule, onemajor association representing primarilymilk processors and dairy productmanufacturers in New York expressedopposition to employing a multiplecomponent pricing plan in theNortheast order. Their objection to itsadoption is that it will be burdensomefor handlers. This was expressedprimarily as burdens associated withchanging from farm-point pricing toplant-point pricing of milk and changesthat handlers would need to make forproducer pay-roll purposes and in the



accounting software that they contendwould entail considerable cost outlays.Also expressed in opposition to itsadoption was that multiple componentpricing does not favor fluid milkhandlers, that it is designed primarilyfor high-solids producers andmanufacturers, that it may result inmanufacturers having to pay premiumsto attract high-solids milk, and that itrewards some producers while reducingpay prices to others.

These objections are unpersuasive.Multiple component pricing is a methodfor determining, among other things,how producer milk will be priced underthe order on a basis beyond just skimmilk and butterfat. Components of milkhave values that are recognized by themarketplace and producers haveexpressed the desire for having their payprices adjusted according to suchvalues. Nevertheless, it does not affectthe total per hundredweight value ofmilk. Additionally, multiple componentpricing does not either favor or disfavorfluid milk handlers as the multiplecomponent pricing plan adopted for theNortheast order will continue to priceClass I milk on the basis of skim milkand butterfat.

It should be noted that there are manymultiple component pricing plansoperated by many handlers in thenortheast region. The existence of suchplans provides evidence that it isappropriate and reasonable to formalizea multiple component pricing plan forthe consolidated Northeast marketingorder, especially when there is strongsupport for it by producers. To theextent that there are so many similarplans, it should not be particularlyburdensome for a one-time change byhandlers in their accounting systems fordetermining producer payroll.

Farm-Point vs. Plant Point PricingAt issue in merging the three

northeast marketing areas is the use oftwo distinct pricing methods for milk.The Middle Atlantic and New Englandmarketing areas employ a system ofplant-point pricing. This pricing methodis also employed in every othermarketing area in the Federal ordersystem. Only the New York-New Jerseymarketing area uses what is called‘‘farm-point’’ pricing. This decisionadopts plant-point pricing as the pricingmethod for the consolidated Northeastorder.

Plant-point pricing of milk that ispooled under an order prices milk f.o.b.the plant of first receipt. The cost ofhauling from the farm to the plant is theresponsibility of the producer. When thereceiving handler is also the hauler,orders permit the handlers in making

payments to each producer to deducthauling costs up to the full amountauthorized in writing by the producer.

As originally employed in the NewYork-New Jersey order (Order 2), farm-point pricing establishes the price formilk by the zone (distance from marketcomputed from the nearer of the basingpoints) of the township in which aproducer’s milkhouse is located. Whiletermed ‘‘farm-point,’’ farms are groupedby their township location because thisis the nearest practicable proxy foractual farm location. In functionalterms, when a handler picks up milk ata producer’s farm, the handler takes titleof the milk at the time and point ofpickup. Accordingly, there were noadjustments in payments to producersto cover any part of the cost of pickupor hauling in moving milk to thehandler’s plant. Farm-point pricingfundamentally shifts the cost oftransporting milk from the producer tothe handler. Farm-point pricing hasbeen in effect in Order 2 since 1961.While the fundamental concept of farm-point pricing has been retained withrespect to its overall structure of mileagezones, other order provisions wereadopted subsequent to its establishmentand modified over time so that farm-point pricing could remain viable whileallowing handlers to charge some of thecost of hauling producers’ milk to theplant of first receipt.

In the decision that established farm-point pricing (25 FR 8610, Sept. 7,1960), prevailing marketing conditionsserved to warrant this type of pricingsystem. At that time, the emergence ofbulk-tank milk began to take on a degreeof prominence in the milk supply ofOrder 2. Prior to the adoption of farm-point pricing (1959), about 8 percent ofthe producers had bulk tanks,accounting for at least 14 percent of thevolume of milk associated with themarket. About 92 percent of producersdelivered their milk at their ownexpense directly to plants in 40 quartcans. Most of the milk can-deliveredwas from farms within a radius of notmore than 15 miles from the plant. Themilk of producers who had converted tobulk tanks, in some instances, washauled more than 200 miles from farmto city plants, but the majority of bulktank milk was moved much shorterdistances to country receiving plants.The decision cited that in October,1959, milk was received from 49,719producers at 691 plants.

When milk was delivered in cans toa handler’s plant, the plant was thelocation at which milk was weighed,sampled for butterfat and quality, andwhere cans were washed. It was at theplant that milk was accepted or rejected.

It was the place where milk was cooledand co-mingled with other individualproducer’s milk. More importantly, itwas the place where control of the milkpassed from producer to the plantoperator or from which the milk wasmoved by the plant to other plants forfluid or manufacturing uses. Minimumprices required by the order to be paidby handlers were adjusted for thelocation of the plant at which milk wasreceived from dairy farmers.

Bulk tank milk brought a set of newfactors. When milk was transferred froma producer’s bulk tank to the hauler, thepoint of transfer was also the pointwhere several functions are performed.Milk in a producer’s bulk tank hasalready been cooled, and therefore is notsubject to the early delivery deadlines.The weight of milk was determined atthe bulk tank, and samples were takenfor butterfat and quality. It was also herethat the individual producer’s milk wasrejected or accepted and lost its identityby being co-mingled with other milk.

Numerous problems arose inregulating the handling of bulk tankmilk in an order where poolingdepended upon direct delivery from thefarm to a pool plant and under whichminimum class prices and the uniformprices to be paid to producers wasreflective of the location of the plantwhere delivery was made:

1. Administrative problems associatedwith bulk tank handling arose,particularly where and when milk wasregarded to have been received. Bulktank milk provided the opportunity todeliver milk to different plants, somepool and some nonpool. Where a giventank load of milk was unloaded if itwent to two or more plants of the sameor different handlers on the same daywas difficult to determine.

2. The incentive arose (because of theadministrative difficulty of determiningwhen and where milk was received) forhandlers to behave in a way that wouldresult in the maximum exclusion ofmilk from the pool for fluid use outsidethe marketing area.

3. The incentive arose for themaximum inclusion in the pool of milkin fluid and manufacturing uses.

4. The incentive and opportunityarose for handlers to select one ofseveral plants for receipt of bulk tankmilk, with or without manipulation ofhauling charges. This distorted andimpinged upon the effectiveness of theminimum price provisions of the order,especially in the case of relatively longhauls of bulk tank milk.

The 1961 decision that establishedfarm-point pricing provided eightscenarios that demonstrated howhandlers behaved so as to minimize



their pricing obligations to producers.Most of the scenarios arose from theinability to determine when milk wasreceived at a plant. In order to mitigatesuch circumstances, several things weredone. Foremost was the establishmentof farm-point pricing on the basis ofbulk tank units and the designation ofeach bulk tank unit as either a pool ornonpool unit and defining thecircumstances under which suchdesignations could be changed.

The pricing of milk at the farmeliminated the incentive for handlers toattempt to make it appear that the plantof receipt was other than the plantwhere milk is actually received andhandled. It was made crystal clear thatdelivery and receipt of bulk milk takesplace at the farm. Once acquired by thehandler, the plant or plants to which themilk may be delivered depended ondecision of the handler, not theproducer. Under these circumstances,where the milk was actually used wasnot a factor to be reflected in theminimum producer price. The operatorof the bulk tank unit was defined as thehandler and the point of receipt of milk.This entity was responsible forestablishing the unit, and it held theresponsibility for reporting, accounting,pooling and paying producers.Additionally, the decision concludedthat the price at which the farm bulktank is accounted for to the pool shouldbe the minimum class price adjusted forlocation of the farm, and that paymentsby handlers directly to producers beadjusted to reflect all locationdifferentials based on where farms arelocated and where bulk tank milk wasreceived.

A proposal that would have alloweda tank truck service charge authorizedby the producer but not in excess of 20cents per hundredweight (cwt.), andestablish that payments to cooperativeswhich serve as handlers operating abulk tank unit should be at the pricereflecting transportation and (the thenexisting) direct delivery differentialapplicable at the handler’s plant wheremilk is delivered by the cooperative wasnot incorporated into the order. At thattime, it was found that plant haulingcharges averaged nearly 20 cents percwt. This was offered as rationale for anegotiable 20 cent per cwt. charge byhandlers for hauling. Arguments notwithstanding, the underlying conceptsembodied in farm-point pricing causedthe Department to not allow for anyhauling deduction by handlers.

Shortly after the implementation offarm-point pricing, the need to amendthe order to keep farm-point pricingviable arose. The first occurrence was in1963. In the 1963 decision (28 FR

11956, Oct. 31, 1963), it was noted thatthere had been significant changes inmarketing conditions that arose fromestablishing farm-point pricing in 1961.These included the reduction inpremiums to bulk tank producers ingeneral; the reluctance of proprietaryhandlers to receive bulk tank milk fromindividual producers because of thehauling costs they would incur; thedifferences in pricing can and bulk tankmilk; and a slowdown in the trend ofconversion from can milk to bulk tankmilk. The 1963 decision, inacknowledgment of changing marketingconditions, incorporated an authorized10-cent per cwt. charge for haulingunder the Order, provided thatproducers authorized this maximumlevel in writing.

In the 1963 decision, the Secretaryfound that allowing for a limitedauthorized service charge for haulingbulk tank milk at a maximum rate of 10cents per cwt. was sufficient. This waslargely based on the fact that handlerswere not then charging for bulk tankpickup and hauling, but rather werepaying premiums for bulk tank milk.Additionally, can-milk direct deliveredby producers to plants was still verymuch the norm. While bulk tank milkwas growing, it had not yet accountedfor a majority of milk pooled on theorder.

This decision raised, for the first timewith respect to farm-point pricing, themaintenance of orderly conditions anduniform pricing to handlers on all milkpriced and pooled under the order.Because bulk tank milk is priced bytownship zone, (the best proxy for afarm’s location) all farms in anyparticular township have the same valueassigned to their milk. However, thedecision found it necessary to reflectappropriate uniform pricing of bulk tankmilk because it has differing valuesdependent on the accessibility andrelative location of individual farmswithin the township. With this finding,it was determined that responsibility forhauling to the township pricing pointshould be borne by the producer withappropriate safeguards to protect theproducer. Therefore, a maximumnegotiable hauling charge from handlersof 10 cents per cwt. was brought underthe order.

By 1970, marketing conditions in theNew York-New Jersey market hadchanged to the point where handlerswere authorized to receive a full 10-centhauling credit for each cwt. of bulk tankmilk which was disposed of formanufacturing uses. Additionally, thenegotiable 10-cent hauling charge toproducers for a handler’s cost offsetestablished by the 1963 decision was

retained. However, the 10-centnegotiable limit was limited tomanufacturing milk. Can-milk at thistime represented about 25 percent of thetotal amount of milk pooled in Order 2,with the balance being bulk tank milk.

Proponents supporting this change tothe order claimed, and the decisionaffirmed, that the manufacturing pricefor milk in Order 2 was not properlyaligned with manufacturing class pricesin adjacent Federal orders. In thisdecision (35 FR 15927, Oct. 9, 1970) theSecretary found that to the extent thatOrder 2 handlers had borne thetransportation costs associated with thepickup and movement of bulk tank milkused in manufacturing from the farm tothe plant, Order 2 handler costsexceeded the price which handlers inadjacent order markets were required topay for milk used in manufacturing. Byadopting this transportation credit forhandlers, there was no need to adoptother proposals that would havelowered the manufacturing price formilk under the other northeasternorders or lower the Class I price for milkin Order 2 as had been proposed.

By 1977, some 16 years after theadoption of farm-point pricing,marketing conditions had changed againand the issue of providing for moreequitable competition among handlersboth within the Order 2 market andbetween other orders took on primaryimportance. By this time, can-milk wasabout 3 percent of the market, with thebalance represented by bulk tank milk,the near inverse of the marketingconditions prevailing in 1961. Thetransportation credit that had beenestablished for handlers in the 1970decision for manufacturing milk wasnow extended to all milk received byhandlers. The transportation credit wasincreased to 15 cents per cwt., plus anadditional 15-cent maximum negotiablecredit above the ‘‘automatic’’ 15 centsbecause total average transportationcosts were found to be about 30 centsper cwt. For reasons nearly identical tothe 1963 and 1970 decisions,‘‘formalizing’’ the negotiable haulingcharge was not adopted because ofneeded flexibility in accounting for milkmovements from the farm to thetownship pricing point (42 FR 41582,Aug. 17, 1977). In that decision theSecretary also raised the direct deliverydifferential from 5 cents to 15 cents percwt. in the 1–70 mile zone for can-milkdelivered by farmers to plants withinthis zone, and changed thetransportation adjustment rate from 1.2cents per cwt. for each 10 miles to 1.5cents per cwt. for each 10-mile zonebeyond the 201–210 zone, and 1.8 cents



per cwt. for each 10-mile zone withinthe 201–210 mile zone.

Cooperatives were of the strongopinion that the cost of milk assemblyand transportation are the marketingcosts of the handler and not producers.However, they also indicated thatchanges were warranted in the orderbecause of the failure of neighboringmarkets to adopt farm-point pricing.

Comparative examples of handlerprice inequities with respect to theircost of milk was amply demonstratedfor both intra and inter marketsituations. With respect to inappropriateprice alignment between orders, thecompetitive relationships betweenOrder 2 and Order 4 were closelyexamined. On intra-order movements ofmilk, it was shown that Class I handlersin New York City had a significantlylower procurement cost for direct-shipover bulk tank milk because bulk tankmilk from ‘‘distant’’ supply plants hadhigher transfer and over-the-roadhauling costs. Supply plant milk at thecity represented about 80 percent ofmilk receipts at city plants. The inter-market situation demonstrated thathandlers in Philadelphia accounted formilk at prices lower than New Yorkhandlers. Order 4 handlers were in aposition to establish lower resale pricesfor fluid milk than their competitors inthe New York market because theburden of increased hauling costs felllargely on Order 2 handlers. As in 1970,other proposals were denied in light ofadopting the 15-cent hauling credit forhandlers. These other proposalsincluded lowering Class I and themanufacturing price for milk in theorder by 15 cents per cwt.

By 1981, bulk tank milk accounted fornearly the entire milk supply pooled onOrder 2—about 99.6 percent. As theresult of a hearing held in June 1980, inthe final decision (FR 46 33008, June 25,1981) the Secretary again amended thetransportation credit provisions of theorder. The 15 cents per cwt credit forhandlers was retained; however, the 15-cent negotiable transportation servicecharge was modified to allow handlersto negotiate with producers for anyfarm-to-first plant hauling cost in excessof the 15-cent transportation credit, plus‘‘the amount that the class use value ofthe milk at the location of the plant offirst receipt was in excess of its class usevalue at the location where milk wasreceived in the bulk tank unit fromwhich the milk was transferred.’’According to the 1981 decision, thisamendment would adjust haulingallowances for handlers to more closelyrelate the location value of milk to thecosts incurred in transporting milk fromfarms and country plants to distributing

plants in the major consumption areasof the market. Additionally, the decisionindicated that this change was necessaryto reflect current marketing conditionsand permit a more equitable competitivesituation for regulated handlers, both onan intra market and inter market basis.The decision also applied a 15-centdirect delivery differential for bulk tankmilk received at plants within 70 milesof New York City on the basis that adirect delivery differential is applicableto milk received in cans at a plant in the1–70 mile zone.

In the 1981 decision, the Secretaryfound that the majority of milk movedto distributing plants in 1979 from the1–70 mile zone moved directly fromfarms. This accounted for about 58percent of the milk in this zone with 48percent being reloaded. Moreover, thedecision found that Order 2 plantslocated in northern New Jersey receiveddirect shipped milk as did handlerslocated in Order 4. Thus, inter marketprice alignment needed to be structuredprimarily on the basis of handlersobtaining direct shipped milk.

A federation of cooperativeassociations representing Order 4producers proposed that Order 2 beamended to return to plant-pointpricing, with the direct deliverydifferential being reduced to 10 centsper cwt, and that the Class I differentialat the base zone of Order 2 be increasedfrom the $2.25 level then in effect, to$2.40. This federation of cooperativesbelieved that this ‘‘package’’ of ordermodifications would provide for properprice alignment between Order 2 andOrder 4. While the decision did applydifferent transportation rates at a rate of1.8 cents per cwt. outside the base zoneof the Order (201–210) and a rate of 2.2cents per cwt. inside the base zone, itdid not provide for a return to plant-point pricing.

While the decision did not adoptplant point pricing, the decision didacknowledge that the amendmentsadopted tended to establish plantpricing with respect to the classifiedprices to handlers. However, farm-pointpricing was retained with respect tohow producers were paid. With thisbeing the case, the basic substantivedifference between the amendments andplant pricing is the impact on themovement of milk to higher-pricedzones for manufacturing use. Underplant pricing, the minimum uniformprice payable to producers applies at thelocation of the plant of first receipt andhandlers receive a credit from theproducer settlement fund at suchuniform price. The decision alsoconcluded that plant-point pricing forproducers would provide a greater

incentive to haul direct-shipped milk tocity plants for manufacturing uses, sincethere would be a credit from the pool forthe full amount by which the uniformprice transportation differential at thecity plant exceeds the transportationdifferential for the zone of the bulk tankunit. Adopting plant-point pricing forproducers would have had the effect ofencouraging milk to move longdistances to city plants formanufacturing uses when transportationsavings could be realized if such milkstayed nearer to manufacturing plantsgenerally located in the milkshed.

Farm-point pricing has undergonemany evolutionary changes from itsinception in 1961. The original rationalefor farm-point pricing, free hauling andthe administrative difficulty ofdetermining when milk from bulk tankunits was received seems far removedfrom present-day marketing conditionsand the rationale for continuing it.There were a number of years thathearings were necessary to firstrecognize that the burden oftransportation costs rested withhandlers. This resulted in handlersbeing able to successfully argue thatwith this burden, it became much moredifficult for the order to establish andmaintain uniform prices to handlers asrequired by section 608(5)(c) of theAMAA. This is evidenced by the natureof the decisions of 1963, 1970, 1977,and 1981. Much ‘‘repair’’ to other orderprovisions were also needed to retainfarm-point pricing.

Few comments were received inresponse to the recommended adoptionof plant-point pricing by current Order2 entities. One New Jersey entitythought that its elimination wouldeventually lead to increased haulingcosts borne by producers. Anothercomment received from a tradeorganization representing fluid milkprocessors and dairy productmanufacturers, thought that too muchemphasis was placed on the ‘‘free-hauling’’ to the detriment of otherdesirable features embodied in farm-point pricing. Most important was thisentity’s view that farm-point pricingprovides for increased flexibility and inproviding for automatic incentives forthe most efficient hauls of milk for/byhandlers in assembling and movingmilk while not affecting the price paidto dairy farmers.

The arguments for retaining farm-point pricing are not persuasive in lightof the detailed discussion on the entirelife-cycle of its history discussed above.This is not to discount the importanceof the certain desirable features of farm-point pricing that led to its adoptionand that have been articulated over the



years for its retention in the New York-New Jersey marketing area.Nevertheless, farm-point pricing hasoutlived its intended purpose and theSecretary determines that it will not beretained in a consolidated Northeastorder.

The Need for a Producer-PriceMechanism

As discussed above, farm-pointpricing for producers did provide somerational pricing incentives to promoteefficiency within the Order 2 marketingarea. This can reasonably be summed upby concluding that farm-point pricingwould not provide, as plant-pointpricing would, incentives to haul direct-shipped milk to city plants formanufacturing uses, since there wouldnot be a credit from the pool for the fullamount by which a uniform pricetransportation differential at the cityplant exceeds the transportationdifferential for the zone of the bulk tankunit. Adopting plant pricing would havehad the effect of encouraging milk tomove long distances to city plants formanufacturing uses when transportationsavings could be realized if such milkstayed nearer to manufacturing plantsgenerally located in the milkshed.

In an effort to address the dairyindustry structures that have evolvedover the past four decades in the threecurrent northeast marketing areas,efforts were undertaken by a majorgroup of dairy farmer cooperatives inthe northeast to address what thepricing implications are to producersand handlers as the region moves to aunified plant-point pricing method.This has resulted in a proposal by theAssociation of Dairy Cooperatives in theNortheast (ADCNE) that include St.Albans Cooperative Creamery, Inc.,Land O’Lakes, Upstate FarmsCooperative, Inc., Agri-Mark, Inc., DairyFarmers of America, Inc., DairyleaCooperative Inc., and Maryland &Virginia Milk Producers CooperativeAssociation Inc. These dairy farmercooperatives account for well over halfof the milk that would be pooled andpriced under the proposed consolidatedNortheast order. Their proposal calls forestablishing a producer differentialstructure that would ‘‘overlay’’ the ClassI differential structure that would applyin the consolidated Northeast order.

The structure proposed is a county-based plant-point price structure,providing for 14 zones thataccommodate the need to reflectexisting and longstanding competitiveprice relationships among plants, whileintegrating the farm and plant pointpricing systems currently used inOrders 1, 2, and 4 and with currently

state-regulated areas that fall outside ofthe proposed marketing area. Further,the ADCNE proposed prices at the majorcities in the Northeast, includingBoston, New York City, Philadelphia,Baltimore, and Washington, D.C.,included specific Class I differentiallevels that are somewhat different fromthose presented in the Option 1A ClassI price surface. For example, therecommended decision recommended aNew York City Class I differential of$3.15, while ADCNE proposed $3.20. Ingeneral, the ADCNE proposal assumedthat the Class I differential structure thatwould be adopted was Option 1A,which is the Class I pricing option theystrongly support, and also is the ClassI pricing option overwhelminglysupported in public comments receivedfrom interested parties from thenortheast.

With respect to a producer differentialsurface, the ADCNE proposed that adebit of 5 cents per cwt. be made to theblend price applicable at non-distributing plants in certain zones. Theneed for the debit, according to theADCNE proposal, is to make deliveriesto distributing plants somewhat moreattractive to producers, while decreasingthe amount by which manufacturingplants draw on the marketwide pool fortransportation values, offering also thatsuch a debit is economically justifiedand authorized by the AMAA.According to ADCNE, it is distributingplants that provide the revenue—in theform of Class I values—which form theblend price paid to producers.Deliveries to manufacturing plants donot contribute to increasing the value tothe marketwide pool. The debit,according to ADCNE, is a reflection inpart of the Order 2 system, which haspriced some 50 percent of the milk inthe northeast region, and which doesnot provide location-basedtransportation payments for movementsfrom farms to manufacturing plants. TheADCNE proposal provides thatdeliveries to Class I plants are rewardedunder this system with an additional 5-cent payment from the pool for themarketwide benefit conferred by adistributing plant’s utilization.

For the Western New York State orderarea, ADCNE also proposed a broad areain which a producer differential of $2.40per cwt. to producers would be payableon deliveries of producer milk at allplant locations in this area. This portionof the price surface proposed by ADCNEpurports to be reflective of the majorhistorical movements of milk from eastto west in the region which returned theeastern farm point price to dairy farmersunder Order 2’s farm-point pricesystem, and that the Western New York

State order has not had any locationdifferentials, thereby establishing a‘‘flat’’ price surface in the area. If thoseplants, for producer pricing purposes,were zoned lower in value reflecting thewesterly and northerly distance fromNew York City or Philadelphia, ADCNEis of the view that the ability of bothdistributing and supply plants to attractan adequate supply of milk could be injeopardy. Furthermore, the expectationthat Class I utilization of the proposedMideast order will be nearly 10 percenthigher than the Class I utilization in theNortheast order was also offered insupport of the ADCNE-proposedproducer differential level in this area.

The ADCNE proposal alsorecommended producer differentiallevels in areas that they believed shouldbe included in either the consolidatedNortheast order or the Mideast order.Additionally, the ADCNE proposal alsoaddressed producer differential levels atother locations outside of the Northeastregion.

Additional supporting and amplifyingcomments were also provided byDairylea. These comments supportedthe major themes offered in the ADCNEproposal for a producer differentialoverlay to Class I differential levels.Dairylea stated that moving directly toa plant-point pricing method wouldaccentuate ‘‘existing inequities andmarket dysfunctions.’’ Dairylea furthercommented that a plant-pointdifferential schedule would maintaincurrent inter-plant price differences inthe current New England and MiddleAtlantic orders, but would worsen themfor New York manufacturing plants,many of which are cooperativelyowned. Their view of the ADCNEpricing proposal was that it maintainseconomic incentives for milk to move toClass I distributing plants, wouldprovide for more balanced procurementequity among competing manufacturingplants, maintains equitable producerpricing when milk is marketed bytransporting it from a higher priced zoneto a lower priced zone, and provides astructure that allows for adequate blendprice levels in all areas of the Northeastmilkshed.

Dairylea further commented thatunder plant-point pricing, existing‘‘near-in’’ manufacturing plants (plantslocated in a relatively high differentiallocation) would enjoy a procurementadvantage relative to their competitorsthat are located in a lower-pricedlocation. Dairylea recommendednarrowing the price differences betweenmanufacturing plants that compete forproducer milk. To do this, Dairyleasupported lowering producerdifferentials for manufacturing plants



that are located in high-valued locationsand increasing those differentials atmanufacturing plants in areas that havelower location values. Dairyleaadvocated the ADCNE proposal for aproducer differential that is 5 centslower than those of Class I plants whensuch plants are located in the samepricing zones. Dairylea’s view of thisdesign results in maintaining, or slightlyincreasing, producer differentialsapplicable at Class I plants and reducingthose applicable at ‘‘near-in’’manufacturing plants. At the same time,this would provide for increasingproducer differentials at manufacturingplants in central, western, and northernNew York. According to Dairylea, thisproducer pricing surface would presenta more equitable marketing environmentthan strict plant-point pricing currentlyemployed in Orders 1 and 4, while atthe same time not threatening theviability of manufacturing plants inthose areas of a consolidated Northeastmarketing area.

A major theme of Dairylea was itsview that Federal milk orders and theirprovisions should foster an environmentunder which manufacturing plants areprovided equal cost and procurementability, and not disfavor suchmanufacturing plants located in highmilk production areas where Class Idifferentials are lower. Dairylea alsostated that the final rule of 1991 thatrealigned intra-order prices in Order 2resulted in harm to producers innorthern and western New York. Whileit is not appropriate to specificallyrevisit this issue and decision here,official notice is taken of the finaldecision (55 FR 50934, December 11,1990) that realigned Class I differentialsin the three existing northeast marketingareas.

Comments supporting the ADCNEproposal for a producer pricing surfacewere also offered by Upstate FarmsCooperative, Inc. The Upstate Farmsviews served to reiterate the majorthemes developed in the ADCNEproposal.

Agri-Mark, a part of ADCNE, filedseparate and dissenting views on theADCNE proposal. Conceptually, Agri-Mark noted that plant and farm-pointpricing are different, but noted furtherthat the differences are not alwaysunfavorable. Agri-Mark submitted thatunder plant-point pricing, all producersshipping to the same plant receive thesame minimum order blend priceregardless of where their farm is located.Under farm-point pricing, farmersshipping to the same plant receivedifferent prices under the orderdepending on where their farm islocated. Farms closer to New York City,

Agri-Mark noted, receive a higher pricethan farms farther from the city, eventhough their milk ends up in the sameplace.

Agri-Mark noted that mostmanufacturing plants, especially cheeseplants, were built in the northeast priorto the adoption of farm-point pricingand not in response to it. Rather, saysAgri-Mark, these plants were built attheir present locations because of theirproximity to abundant milk supplies.The procurement problems formanufacturing plants that Order 2entities alert us to did not arise in NewEngland manufacturing plants underplant-point pricing even though theseplants were located as far north aspossible within the milkshed for NewEngland.

Simply put, Agri-Mark believes thatrather than decreasing the differentialbetween manufacturing plants and citydistributing plants, an increase isjustified. They are also of the opinionthat manufacturing plants located farfrom higher-priced zones will maintainan advantage even with the adoption ofstrict plant-point pricing because thismilk does not need to travel longdistances to reach manufacturing plants.Agri-Mark indicates that the ADCNEproposal would cause Agri-Markproducers to receive lower prices thatcompetitive price relationships do notwarrant.

The Agri-Mark view of Federal milkmarketing orders differed substantiallyfrom the views expressed by Dairylea.Agri-Mark stated that the role of Federalmilk marketing orders is to treat allproducers equitably relative to howtheir milk is used and not to weakenprice integrity by causing destructivecompetition among producers for sale toClass I outlets. This is bestaccomplished, according to Agri-Mark,with appropriate pooling requirementsand Class I differentials to satisfy theClass I demands of the market. Agri-Mark fears that if the regulatory pricingplan gives a distributing plant anadvantage over a cooperativemanufacturing/balancing plant in thesame zone, that plant can use thisadvantage for itself instead of passing italong to farmers to offset transportingtheir milk to market.

Lastly, in their opposition to theADCNE proposal, Agri-Mark noted thatno manufacturing plant has been builtin any city zone for decades, noting thatthe only significant plants in such areasfor the northeast are older plantsproducing nonfat dry milk and butterand which serve to balance the Class Ineeds of city markets, concluding thatsuch plants are there for common senseand efficiency reasons. In support of

this observation, Agri-Mark noted thatexisting Class I differentials have notbeen adjusted to more fully account forincreases in hauling costs.

A producer pricing differentialstructure that differs from a Class Idifferential is denied. The issue beforethe Department is to minimize theimpact of the change from farm-point toplant-point pricing on producers as partof adopting plant-point pricing for thenew consolidated order. The change toplant-point pricing will affectapproximately one-half of the producersin the consolidated marketing area andis a significant departure from historicalmethods of distributing the revenue thataccrues from classified pricing toproducers whose milk is pooled underthe current New York-New Jersey order.Plants, however, will not experiencesignificant change since plants currentlyregulated under Order 2 already accountto the marketwide pool at the Class Ilocation differential value. The issuethen, tends to focus on how to pool anddistribute the revenue as equitably aspossible to producers. Of the few publiccomments that were received on thisissue in response to the January 30,1998, proposed rule, it was requestedthat this issue be reconsidered.However, no new or persuasivearguments were advanced that wouldcause a change in denying this proposal.

Competitive equity betweenmanufacturing plants is already ensuredby the classified prices applicable tohandlers who operate such plants. Infact, this decision adopts uniform ClassIII and Class IV prices that areapplicable for all locations. The moreappropriate issue this proposal seems toaddress is that manufacturing plants areoften cooperatively owned. All entities,including cooperatives in their capacityas handlers, account to the marketwidepool at the manufacturing price for milkreceived at their plants. The price paidto producers is the blend price for allmilk pooled on the market that waspriced according to its use.Cooperatively owned manufacturingplants located in higher priced areaswill pay a higher blend price toproducers who deliver milk to thatlocation provided they meet theperformance requirements for beingpooled, thereby demonstrating theappropriate degree of association withthe market. In this regard, it is worthyto note that not all manufacturing plantsin the high-valued zones in the NewYork marketing area are pool plants.Blend prices are adjusted everywhereaccording to the location value of theplant. Adjusting producer blend priceson the basis of whether or not milk wasdelivered to a distributing plant or to a



manufacturing plant seems to create aform of producer price discriminationthat classified pricing and themechanism of marketwide pooling andits related provisions attempt tomitigate. Such marketwide poolingprovisions provide a degree of equity toproducers in the form of a uniformblend price adjusted only for thelocation value on all milk pooled on themarket. Classified pricing andmarketwide pooling have served well tomitigate the price competition betweenproducers seeking preferred higher-valued outlets for their milk, while atthe same time ensuring handlersuniform prices, adjusted only forlocation, in the prices they pay for milk.

Marketwide Service PaymentsCooperative Service Payments—

Cooperative service payments, as part ofa marketwide service payment provisionfor the consolidated Northeast order,should not be included in aconsolidated Northeast order. Asoriginally proposed by ADCNE, a 2-centper cwt. payment would be made out ofthe marketwide pool to cooperativesand non-cooperative entities for fundinginformation-gathering and servicesrelated to amending Federal milkmarketing order provisions that wouldbe of marketwide benefit. Cooperativeservice payments of this sort currentlyare provided for under terms of the NewYork-New Jersey order, but are notprovided for in either the New Englandor Middle Atlantic orders. However,under the New York-New Jersey order,cooperative service payments are madeonly to qualified cooperatives that meetthe conditions specified under the orderand does not provide for such paymentsto non-cooperative entities. Incomments provided in response to theproposed rule published on January 30,1998, the ADCNE withdrew thiscomponent of their marketwide servicepayment proposal.

Rationale offered in support of acooperative service type payment tocooperatives and non-cooperativeentities was based on recognizing that ina regulatory pool structure, privateparties provide important services thatare of benefit to everyone involved inthe marketwide pool, including thepromulgation, amendments to, andadministration of the order. Not toprovide a mechanism for the recovery ofa portion of the expense involved inproviding such services woulddisadvantage those incurring theseexpenses while everyone in the marketbenefits as a result of these services.

Qualification criteria presented forentities eligible to receive this paymentincluded a demonstration to the market

administrator that it providesinformation with respect to marketorder prices and marketing conditions,that it has retained legal and economicstaff or consulting personnel available toparticipate in marketing orderamendatory proceedings, to consultwith the market administrator withrespect to marketing order issues, andthat the entity pool at least 2.5 percentof the order’s total milk volume.

There is not a compelling reason toadopt this sort of compensatory plan toreimburse those entities that incur thesecosts. Market administrators and theirstaffs make themselves available to meetwith, discuss, and aid in formulatingpositions that reflect marketingconditions as a normal part of theirduties. Additionally, there arenumerous provisions in the order thatrequire as a matter of course theissuance of reports, prices, and otherinformation that affect all marketingorder participants and that provide aservice to the entities affected by theregulatory plan of the order. Finally, noother current or consolidated orderprovides for such cost compensation.Cooperative and proprietary handlers inthe New England and Middle Atlanticmarketing areas included in theconsolidated Northeast order, as well asentities in all other marketing areas havenot experienced or have demonstratedany of the harm or ‘‘disadvantage’’ thatarises, or may arise, if such costs are notshared by the entire pool of producersin the marketing area. This decision canonly assume that industry participantsthat have an interest in developing thepromulgation and amendments tomarketing orders would be willing to doso at their own expense. The positionsand arguments offered are largely issuesof the self-interest of entities. As such,self-interest may or may not be ofmarketwide benefit.

Balancing Payments—A marketwideservice payment plan which wouldcompensate qualified handlers thatperform market balancing should not beincluded in the consolidated Northeastorder at this time.

The original proposal for providingbalancing payments from themarketwide pool was intended to reflectthe additional costs that handlers incurin balancing the Class I needs of themarket and clearing the market oftemporary milk surpluses. According tothe proponents, these balancing costsare not fully recoverable from Class Ihandlers; however, the benefit thatresults from this service being providedis a benefit of all producers in themarket.

Handlers that incur the costs wouldbe those handlers that would receive

partial cost reimbursement of 4 centsper cwt. Cooperatives would be eligibleto form common marketing agencies orfederations for purposes of qualifyingfor balancing payments. Such handlerswould include those who: (1)Demonstrate ownership or operation ofa balancing plant with the capacity toprocess a million pounds of milk perday into storable products such ascheese, butter, and nonfat dry milk andwho also represent at least 2.5 percentof the total volume of milk pooled underthe order; (2) have under contract, andthe obligation to pool on a year-roundbasis, at least 8 percent of the market’smilk volume; (3) own a balancing plantthat must be made available to otherhandlers or cooperatives at the requestof the market administrator; (4) qualifyto provide pool producers with atemporary market for their milk for upto 30 days at the request of the marketadministrator; and (5) demonstrate tothe market administrator that theirutilization of milk in Class I uses isgreater than the minimum shipmentsrequired for pool plant qualificationunder the order.

ADCNE modified the above describedoriginal proposal for balancingpayments. The modified proposal callsfor a balancing payment of 6 cents percwt. and revised criteria for thoseentities eligible to receive balancingpayments from the marketwide pool. Aswith their original proposal, they are ofthe opinion that a system ofreimbursement is necessary to offsetcosts associated with absorbing, orbalancing, the daily, weekly, andseasonal fluctuation in Class I demandin the market. Balancing paymentswould be made on qualifying pounds ofpooled milk delivered to manufacturingmilk plants. Additionally, this milkwould be subject to a ‘‘call’’ by themarket administrator during times whenthere is additional need for milk bydistributing plants in the market.

The modified proposal would providebalancing payments to any handler inany month in which the handler’sdeliveries of milk to distributing plantsare greater than 20 percent but less than65 percent of its total pooled milkvolume. According to ADCNE, the lowerpercentage requires handlers tomaintain a constant, significantassociation with the Class I market andis higher than the level required byother handlers for pooling qualification.Additionally, the 65 percent, saysADCNE, serves to limit participation tohandlers with substantial quantities ofreserve milk not dedicated to the ClassI market. Qualifying deliveries would bedetermined on a ‘‘net shipment’’ basis toprevent the reshipment of milk



deliveries that would otherwise qualifyfor balancing payments. Payment wouldbe made on the reserve volumes of milk.In the event that the marketadministrator issues a ‘‘call’’ foradditional milk deliveries todistributing plants, the volume of milkdelivered to non-distributing plants inthe prior month by handlers subject tothe call would be used as a basis forrequiring handlers to make additionalshipments to distributing plants on apro-rata basis. For example, ifparticipating handlers in the priormonth had delivered 100 millionpounds of milk to non-distributingplants and the market needed 10 millionpounds of milk delivered to distributingplants, each handler subject to the callwould be obligated to deliver anadditional volume of milk todistributing plants equal to 10 percentof its deliveries to non-distributingplants in the prior month. ADCNEviewed their balancing paymentprovision as establishing a ‘‘standbypool’’ of milk among qualifyinghandlers who elect to participate.Participation in the pool would entitlethe qualified handler to a payment of 6cents per hundredweight, determinedmonthly, on the handler’s deliveries tomanufacturing plants, but would alsoobligate the handler to deliveradditional quantities in the event of a‘‘call’’ for up to one year after abalancing payment has been received.

According to ADCNE, the costsinvolved with matching the demands ofthe Class I market with the totalproduction of milk are costs whichmarketing handlers, proprietary andcooperative alike, must absorb. Thesecosts are neither fully reflected in ClassI prices, nor in over-order handlingcharges and are not uniformly sharedthroughout the market, while the ClassI value is shared equally within themarketwide pool, says ADCNE. Theunique structural characteristics of thenortheast’s markets and thepreponderance of producers deliveringdirectly to proprietary Class I handlerson a regular basis, says ADCNE,prevents supplying handlers fromrecovering these costs from Class Ihandlers.

According to the ADCNE, theproposed Northeast marketing area willcomprise the largest Class I market inthe Federal order system and alsorepresent the largest pool in the countryin terms of producer milk. According toADCNE, monthly Class I sales will beapproximately 900 million pounds andwill be more than 65 percent greaterthan the next largest consolidatedorder’s Class I pool. ADCNE says thishuge Class I market presents significant

challenges to its suppliers with respectto balancing daily, weekly and seasonalneeds and sets the Northeast order apartfrom other orders.

The ADCNE offers additionaljustification for balancing payments, inpart, by drawing on the example ofother orders providing for marketwideservice payments for offsetting theadditional costs of moving milk fromassembly areas and for plant-to-plantmovements of milk. ADCNE notes thatsuch payments from the marketwidepool are provided for in recognition ofthe marketwide benefit that accrues toall market participants when the costs ofmilk assembly and the movement ofmilk are shared by all producers.

Other public comments similarlyarticulated the uniqueness of the currentNew York market and its role as part ofthe consolidated Northeast marketingarea. One commenter observed that theNortheast marketing area, and New Yorkin particular, is unique in terms of themix of producers who are representedby cooperative membership and thosethat are not. According to thiscommenter, about 65 percent of theproducers in New York are representedby cooperatives, while the remaining 35percent are independent producers tothe market. Further, noted thiscommenter, it has been cooperativesthat have, since the 1960’s, taken overthe role of balancing the Class I needsof the market by moving milk around ona daily basis between distributing andmanufacturing plants. According to thiscommenter, such was and shouldcontinue to be an important factor toconsider for the larger consolidatedmarket that expects to need about twothirds of its milk supply balancedbetween an expected 45 percent Class Iand about 20 percent Class II utilization.This commenter was of the opinion thatmarkets characterized by very highcooperative membership already spreadthe costs of balancing uniformly over alarge pool of producers.

All other public comments supportedinclusion of balancing payments in theconsolidated Northeast order. Thesecomments similarly called attention tothe unique structure of the Northeastmarketing area, primarily in terms of thenumber of producers represented bycooperatives and the relatively highnumber of independent milk producersand the unequal costs that would beincurred by producers who incur theadditional costs of balancing the fluidneeds of the market. While there wasspecific recognition of the importantrole that cooperatives play in balancingthe market, it was generally thought thatif balancing payments would beprovided for in the consolidated order,

they should be made available tocooperative and proprietary handlersalike.

The consolidated Northeast marketingarea is expected to retain a uniquefeature of the existing New York-NewJersey marketing area—a relatively highpercentage of producers who are notmembers of cooperatives. As ofDecember 1997, the current New York-New Jersey market had about 68 percentof its milk and about 69 percent of itsproducers represented by cooperatives.In the consolidated Northeast marketingarea, the expected amount of milkrepresented by cooperatives willincrease to about 76 percent with about75 percent of the number of producerrepresented by cooperatives. While thepercent of milk volume and number ofproducers represented by cooperativesis growing, the volume of milk andnumber of independent producersremains significant. This is especiallyimportant given the role of cooperativeswho operate manufacturing plants andwho provide and incur the costsassociated with balancing the Class Ineeds of the market. Without providingfor some cost offset for balancing, about26 percent of the milk and about 25percent of the producers would not besharing in the burden of balancing themarket.

The revised criteria presented by theADCNE seem reasonable in determiningwhich handlers would be eligible toreceive balancing payments from themarketwide pool. The qualificationstandards for receiving balancingpayments (to any handler that ships atleast 20 percent, but less than 65percent of the total volume of milkpooled on the market to distributingplants) also seems reasonable in light ofthe order’s pooling standards. Further,determining qualifying shipments on a‘‘net shipment’’ basis is similarly aprudent safeguard to reasonably assurethat milk is delivered into, and notshipped back out of distributing plantsand supply plants for the sole purposeof qualifying for balancing payments. Italso provides for ensuring a temporarymarket (up to 31 days) to any producerswho would have lost their normalmarket outlet as a condition foreligibility in receiving balancingpayments.

However, the revised proposal wouldhave payments made only on milk usedin manufacturing products. In practicethis would mean that handlers with thegreatest volume of milk going tomanufacturing plants would receive alarger share of balancing paymentswhile at the same time would berequired to provide the least additionalClass I milk to the market. Observed



another way, the less commitment ahandler has to the Class I market, thelarger the balancing payments.Additionally, basing balancingpayments criteria on onlymanufacturing milk seems to provide adisincentive to handlers in serving theClass I market needs because handlersthat would provide additional Class Imilk would lose 6 cents per cwt. Lastly,basing balancing payments on justmanufacturing milk seems to provide anunwarranted monetary incentive tocause additional milk to associate withthe marketwide pool for the solepurpose of receiving an additional 6cents per cwt.

In addition to the above concern onlimiting balancing payments tomanufacturing milk, the reasons for notrecommending balancing payments forthe consolidated Northeast orderarticulated in the proposed rule werenot all sufficiently addressed. Theproposed Northeast order consolidatestwo current orders, New England andthe Middle Atlantic, that do notcurrently provide for balancing costoffsets to handlers for such purposes.These markets have not experienced anyundue harm or disadvantage by notproviding for this sort of cost offset. Tothe extent that further analysis on theneed for balancing payments can restupon the high percentage ofindependent milk that is expected to berepresented in the consolidatedNortheast order, such analysis doesprovide a legitimate and importantfactor in further considering theappropriateness of a balancing paymentprovision.

The proposed rule also indicated thatbalancing payments should not beadopted because an appropriate classprice has been provided for marketclearing purposes—the Class IIIA price.It is a price that is applicable in allcurrent northeast orders, and iscontinued in this decision as the ClassIV price. While these two class pricesare not the same, (as explained in theBFP section of this decision) they areconceptually similar in that handlershave been provided with a marketclearing price and further compensationbeyond this does not appear to bewarranted.

Lastly, the proposed rule indicatedthat the original 4-cent per cwt.balancing payment level wasunexplained with respect to howadequately it tends to offset balancingcosts. The same is also observed for themodified payment level of 6 cents percwt. Subsequent to the publication ofthe proposed rule, public commentsreceived in letters and from publicforums and ‘‘listening sessions’’ did

result in being able to extrapolate asingle cooperative entity’s cost forbalancing, however, this measure mayor may not be appropriate forcharacterizing or determining theproposed payment level.

The ‘‘Pass-Through’’ ProvisionCurrently, the New York order

provides for what is commonly referredto as the ‘‘pass-through’’ provision. Theintent of this provision is to provide fora degree of competitive equity forhandlers that must pay at least theorder’s Class I price for milk so that theycan compete with handlers inunregulated areas that do not. Thisprovision has been in place in the NewYork order since 1957 and is a part ofhow the order allocates and classifiesmilk. In functional terms, the pass-through provision removes the amountof milk distributed outside of themarketing area from the full Class Iallocation provisions of the order,thereby providing a degree of pricerelief to handlers who compete withother handlers who are not held to thepricing provisions of the order inunregulated areas. Regulated New Yorkhandlers currently compete withunregulated handlers in the unregulatedareas of Pennsylvania and other areas inthe northeast region.

The current provisions of the NewEngland and Middle Atlantic orders donot have this provision although theytoo adjoin similar non-Federallyregulated areas. Handlers regulated bythese two orders also compete withthese same unregulated handlers forClass I sales. The merging andexpansion of these three northeastorders continue to result in areas thatadjoin the recommended Northeastorder that would not be regulated.

While there were proposals both forand against retaining a pass-throughprovision in the consolidated order, theneed for it was expressed on the basisof the extent to which the Northeastconsolidated order would be expandedto include currently unregulated areas.Generally, handlers support continuingto provide for a pass-through provision,and this position can only be consideredreinforced given the limited degree ofexpansion of the consolidated Northeastorder. If the entire Northeast regionwould fall under Federal milk orderregulation, the need for the pass-throughwould be moot. These observationsremain valid in light of the publiccomments received in response to theproposed rule published on January 30,1998.

The pass-through provision,notwithstanding the limited extent ofmarketing area expansion, or in light of

few public comments supporting itscontinuation, is not included in theconsolidated Northeast order for thesame compelling reasons articulated inthe proposed rule published on January30, 1998. Class I prices charged tohandlers that compete within themarketing area for fluid sales aredetermined by the location value ofmilk delivered to their plants. The ClassI differential structure adopted in thisdecision recognizes the location value ofmilk for Class I uses and is designed tocause milk to be delivered to bottlingplants to satisfy fluid demands.Accordingly, handlers located in high-valued pricing areas will be charged forthe location value of Class I milk at theirplant locations regardless of whether ornot they compete with other handlersfor fluid sales in areas where thelocation value of Class I milk at theseplant locations are lower. This locationvalue pricing principle is extended tohandlers competing for sales withhandlers who do not pay the same pricefor Class I milk in unregulated areas.

Seasonal Adjustments to the Class IIIand Class IV Prices

The three northeast orders to beconsolidated into a single Northeastorder currently provide for a seasonaladjustor on Class III and Class IIIA milkprices. These provisions have been apart of these three orders for more than30 years. Prior to the adoption of theMinnesota-Wisconsin (M–W) priceseries in the mid-1970’s, these marketsestablished the equivalent of themodern Class III price on the basis ofwhat was known as the U.S. AverageManufacturing Grade Milk Price Series(U.S. Average Price Series).

The U.S. Average Price Series was acompetitive pay price series, butdiffered from the M–W in that itrecorded price averages consistentlybelow the M–W that was rapidly beingadopted elsewhere in the country as theappropriate price for surplus uses ofmilk and used as a price mover forhigher-valued class prices. Given thenational marketplace in which surplusdairy products compete for sales, amechanism was needed to align thesetwo differing price series. Accordingly,seasonal adjustments to the Class IIIprice were developed and made a partof these orders. These seasonal adjustorswere found not only to be warranted forbetter price coordination between thesetwo price series, but also served toencourage handlers to dispose of themaximum amount of milk in Class Iuses.

By the mid-1970’s, the M–W wasadopted to replace the U.S. AveragePrice Series and the seasonal adjustors



were retained. The reason for retainingthese adjustments were to encouragehandlers to make more milk readilyavailable for fluid use in the shortproduction months and to facilitate theorderly disposition of excess reservemilk supplies in flush productionmonths. Although some regional pricedisparity was acknowledged to resultfrom retaining these adjustments, theywere nevertheless retained becausethere was no evidence that providing forsuch adjustment had led to anyinterregional problems in the marketingof the reserve milk supply.

Agri-Mark, a major cooperative in thenortheast, proposed that seasonaladjustments continue in theconsolidated Northeast order. The mainthrust of their proposal was that marketswith relatively high Class I use create aburden on the manufacturing sector intheir areas. They view seasonaladjustments as also assisting in sendingthe proper economic signal tomanufacturers. This is important,according to Agri-Mark, because theseasonal adjustment provides aneconomic ‘‘disincentive’’ for Class IIIand Class IV manufacturers to use milkin the fall when less producer milk isavailable and additional supplies areneeded for Class I uses.

Seasonal adjustors to the Class III andClass IV prices are not incorporated intothe provisions of the consolidatedNortheast order. This decision providesa much more permanent replacementfor the current BFP. Because Class IIIand Class IV product price formulas areincorporated in all consolidated orders,there is no compelling reason offered tocontemplate continuing seasonaladjustments to Class III and Class IVprices. They are also not provided inorders that are expected to have Class Iutilizations similar to that anticipated inthe consolidated Northeast order andwho similarly have importantmanufacturing activity.

6b. Southeast RegionThe 3 proposed orders for the

Southeastern United States—Florida,Southeast, and Appalachian—are facedwith a different set of marketingconditions than other orders. TheSoutheastern United States is one of thefastest growing areas of the country interms of population growth and is themost deficit area in terms of milkproduction per capita. From 1988 to1997, the population of the 12Southeastern states rose from 57.9million to 65.1 million.

While population has been increasingin the Southeast, milk production in the12 Southeast States (i.e., Alabama,Arkansas, Florida, Georgia, Kentucky,

Louisiana, Mississippi, North Carolina,South Carolina, Tennessee, Virginia,and West Virginia) has beendecreasing—from 15.4 billion pounds in1988 to 13.6 billion pounds in 1997.The net result of these opposite trendsis a widening gap between the localsupply of milk for fluid use and thedemand for such milk. This is evidentby the drop in per capita milkproduction for these 12 states, from 265pounds per capita in 1988 to 210pounds per capita in 1997.

Unlike other parts of the country, theSoutheast has few facilities for handlingsurplus milk. Consequently, surplusproduction during the months ofJanuary through June must, in somecases, be shipped hundreds of miles forprocessing at manufacturing plantsgenerally to the north. For this reason,the provisions in these orders must beaimed at the twin goals of encouragingsupplemental milk to move to thesemarkets during the short productionmonths—generally July throughDecember—and they must alsodiscourage supplemental milk frommoving to these markets when it is notneeded in the flush productionmonths—generally January throughJune—because such milk would simplydisplace local milk and increase the costof disposing of such milk for surplususe.

Very few comments were receivedwith respect to the order provisionsproposed for the Appalachian, Florida,and Southeast orders. Most of thecomments that were received endorsedthe proposed provisions. A fewcomment letters stated that seasonalpricing provisions should be includedin the Southeast orders and a fewcomment letters suggested that the ClassI price mover for the Southeast shouldbe a 12-month moving average ratherthan the proposed 6-month movingaverage. These comments are discussedin the pricing sections of this finaldecision. Other comments received arediscussed below.

Transportation credits. As a result ofthe need to import milk to the Southeastfrom many areas outside the Southeastduring certain months of the year,transportation credit provisions wereincorporated in the Carolina, Southeast,Tennessee Valley, and Louisville-Lexington-Evansville orders in August1996. These provisions provide creditsto handlers who incur additional coststo import supplemental milk for fluiduse for markets during the shortproduction months of July throughDecember. The provisions restrict theuse of credits by handlers to milkreceived from producers and plantslocated outside of the marketing areas.

The credits are also restricted to milkreceived from producers who supply themarkets only during the short seasonand are not applicable to milk ofproducers who supply the marketthroughout the year.

Following the initial implementationof transportation credits in August 1996,the provisions were modified in a finaldecision issued on May 12, 1997. Theamendments became effective onAugust 1, 1997.

Transportation credit provisions areretained in the new Southeast andAppalachian orders but have not beenincluded in the Florida order.

Only a few comments filed inresponse to the proposed rulespecifically addressed the issue oftransportation credits. Two producersrequested that transportation credits beremoved from the orders because theyhave not performed as expected. Ahandler who supported transportationcredits for the Southeast andAppalachian orders suggested that theprovisions also be included in theFlorida order.

In the past 5 years, dairy cooperativesrepresenting the large majority ofproducers in the Southeast havestrongly supported transportation creditprovisions for the Southeast andAppalachian orders because theprovisions have been helpful inobtaining supplemental supplies of milkfor fluid use and in sharing the costsassociated with those supplementalsupplies more equitably among allhandlers in the market. They have not,however, been supported by the 2cooperative associations which supplythe Florida market and there is noindication that such provisions areneeded to more equitably share the costsof supplying that market withsupplemental milk. There was noindication from the public commentsthat were received that thesecooperative positions have changed.

With the addition of northwestArkansas and southern Missouri to theSoutheast marketing area, milk fromthese 2 areas will be ineligible fortransportation credits under theSoutheast and Appalachian orders. Thischange in the application of the creditsis consistent with the logic forincorporating these 2 areas in theSoutheast marketing area. Specifically,northwest Arkansas and southernMissouri are regular sources of supplyfor handlers in the Southeast marketingarea and, in addition, include plantsthat compete for sales with handlersregulated under the Southeast order.Accordingly, the producers in these 2areas will share in the pool proceeds ofthe Southeast market. Of course, since



transportation credits are designed toattract supplemental milk to the marketfor fluid use from producers who are notregularly associated with the market,transportation credits should not applyto a farm or a plant in northwestArkansas or that portion of southernMissouri that is to be included in theSoutheast marketing area.

Two other changes have been made inthe transportation credit provisions ofOrders 5 and 7. First, at the presenttime, if a dairy farmer is a producerunder the order for more than 2 monthsof the January through June period andmore than 50 percent of the dairyfarmer’s milk is received as producermilk under the order during those 2months, the dairy farmer’s milk isineligible for transportation creditsduring the following months of Julythrough December. This rule should bemodified.

Experience with the transportationcredit provision in the Southeastindicates that the months of January andJune are transition months. In someyears, supplemental milk is neededduring those months, but in other yearsit is not. Indeed, it is for this reason thatthe market administrator has been giventhe authority to extend transportationcredits to these months upon findingthat the extension is necessary to assurethe market of an adequate supply ofmilk for fluid use. When the marketadministrator makes a finding thatJanuary or June should be included inthe transportation credit period, thesemonths are excluded from therestriction of the orders, as describedabove. Sometimes, however, in these 2months it is not apparent thatsupplemental milk will be needed untilafter the month begins. In this case, itis too late for the market administratorto include these months in thetransportation credit period, but it is nottoo late for a cooperative association orhandler needing supplemental milkfrom arranging for such milk to bebrought into the market. The problem indoing so, however, is that without beingvery careful it is easy to disqualify adairy farmer’s milk for transportationcredits by receiving producer milk fromthe dairy farmer for more than 2 monthsor by exceeding the 50 percent limit.

In view of this problem, the monthsduring which a dairy farmer may not bea producer have been changed fromJanuary through June to Februarythrough May. This will provide greaterflexibility to receive supplemental milkwhen needed without disqualifying adairy farmer’s milk from transportationcredits.

The other change that has been madeto the transportation credit provisions

has to do with the computation of thecredit with respect to milk shippeddirectly from producers’ farms. Atpresent, the market administrator mustdetermine an origination point for thismilk and once the point is determinedascertain what the Class I differential,adjusted for location, would be at thatpoint. If the origination point is withina Federal order marketing area, theapplicable Class I differential is the onethat would apply at the originationpoint under the order regulating thatarea. However, if the origination point isin an unregulated county, a Class Idifferential, adjusted for location, iscomputed based upon the provisions ofthe order receiving the milk (i.e., atpresent Order 5, 7, or 46).

The different methods now used tocompute the Class I differential at theorigination point for a load of milkoccasionally leads to very differenttransportation credits for a load of milkoriginating within a Federal ordermarketing area compared to anotherload of milk that originates from a pointjust outside of that marketing area. Atthe time when the transportation creditprovisions were adopted, there was nota better way of determining the Class Idifferential at an origination pointoutside of a marketing area becausethere was no single Class I pricingsurface. Consequently, with 31 differentorders, there were probably 31 differentClass I differentials that would haveapplied in that unregulated countybased on the location adjustmentsprovided in the 31 different orders.Under the circumstances, it appeared tobe most reasonable to use the Class Idifferential that would apply under theorder receiving the milk.

With the national Class I price surfaceadopted in this final decision, there isa single Class I differential for everycounty in the 48 states. Consequently,§ 1005.82(d)(3)(v) and § 1007.82(d)(3)(v)have been changed to use the Class Idifferential specified in § 1000.52 forpurposes of determining the price to beused at the origination point of a loadof milk shipped directly fromproducers’ farms. This change willremove the large disparities that cannow exist in computing transportationcredits for similarly-located milk.

One final change has been made inparagraph (d)(3)(i) of §§ 1005.82 and1007.82. At the present time, 2 methodsare provided for determining theorigination point for a load ofsupplemental milk directly fromproducers’ farms. The origination pointmay be the city nearest to the farm ofthe last producer whose milk is on atank truck. Alternatively, the haulermay stop at an independently-operated

truck stop and obtain a weightcertificate indicating the weight of thetruck and its contents, the date and timeof weighing, and the location of thetruck stop.

The latter option has never been usedto establish an origination point duringthe life of this provision, perhapsbecause it is not cost effective to stopand weigh a load of milk. For thisreason, it should be removed from theorder.

Pooling standards. Several commentletters from producers and producerorganizations expressed support for thepooling provisions recommended in theproposed rule for the proposedsoutheast orders. The commentsemphasized the necessity to incorporatestrict performance standards in theseorders. Commentors argued that suchstandards would ensure that the marketsare adequately supplied throughout theyear in an orderly manner and preventopportunistic pooling which, theycontend, would lower the blend pricesto producers serving these marketsthroughout the year, thereby decreasingproduction in these already-deficitmarkets and forcing handlers to payhigher prices to obtain supplementarymilk.

The comments leading to theproposed rule and those submitted inresponse to it endorsed poolingstandards at levels that are as strict orstricter than current regulations andemphasized that the southeastern milkmarketing orders should providepooling standards that reflect the deficitnature of these markets. Thesecomments are embodied in thestandards adopted for these orders.

The pool plant provisions adopted forthe Appalachian, Florida, and Southeastorders closely follow the provisionsnow contained in the southeast orders.These provisions are appropriate for theneeds of these seasonally-deficitmarkets.

Section 7(a) of each Federal milkorder describes the pooling standardsfor a distributing plant. To qualify forpooling under each of the 3 orders, adistributing plant must have routedisposition equal to at least 50 percentof the total fluid milk productsphysically received at the plant. Inaddition, at least 25 percent of theplant’s receipts must be disposed of asroute disposition in the marketing area.These standards will ensure that adistributing plant meeting them isclosely associated with the fluid marketand, therefore, should be part of themarketwide pool.

At the present time, the Carolinaorder has a 15 percent in-area routedisposition standard, while the



Southeast, Upper Florida, Tampa Bay,Southeastern Florida, and Louisville-Lexington-Evansville orders have a 10percent standard. This level is raised to25 percent under the merged orders.The reason for raising this standard to25 percent is to better identify thoseplants which should be fully regulatedunder the larger, merged orders. With 11large markets, instead of 31 smallermarkets, the higher 25 percent standard,which is uniform for all 11 markets, willbetter maintain the regulatory status ofplants throughout the country. It willleave unregulated, or partially regulated,those plants which have only a smallamount of their sales within a Federalorder marketing area.

Paragraph (b) of section 7 willaccommodate the pooling of plants thatspecialize in extended shelf-life fluidmilk products (i.e., 60–90 days)requiring refrigeration. There are at least3 such plants in the southeast markets:the Ryan Foods Company plants inJacksonville, Florida, and Murray,Kentucky, and the Dasi Products plantin Decatur, Alabama.

Unlike a typical distributing plant, aplant specializing in extended shelf-lifeproducts may have a more erraticprocessing schedule, reflecting thelonger shelf life of the productspackaged at the plant. Consequently, aplant’s Class I utilization may varyconsiderably from month to month. Inthe past, such variability has resulted inshifting pool status for some of theseplants from one order to another. Insome months, the plant may have beenpartially regulated, even though all ofthe milk received at the plant waspriced under the order. This type ofregulatory instability is not conducive toorderly marketing. To provide greaterregulatory stability for these plants, theyshould be fully regulated pool plants ifthey are located in the marketing area,have route disposition in the marketingarea during the month, and process amajority of their milk receipts into fluidmilk products. This provision will notguarantee that a plant qualifies as afully-regulated pool plant every month;some months a plant may fail to processa ‘‘majority’’ of its milk receipts intofluid milk products. Nevertheless, theprovision will guarantee that when aplant qualifies for pool plant status, itwill be qualified under the same orderall the time unless it fails to have anyroute disposition in the marketing areain which it is located.

One change in section 7(a) and (b) ofeach order will help to stabilize the poolstatus of an extended shelf-life plant. Atthe present time in most orders, whenpackaged fluid milk products that aretransferred from one plant to another

plant are ultimately delivered from the2nd plant to a retail or wholesale outlet,these sales are considered to be theroute disposition of the 2nd plant.However, as adopted in this finaldecision, such transfers will be treatedas route disposition from the 1st plantfor the purpose of determining its poolstatus. Since some plants specializing inextended shelf-life products transfersuch products between plants, thischange will make it more likely thatsuch plants will have route dispositionin the marketing area.

Almost all of the dairy productmanufacturing plants in the Southeastare ‘‘balancing plants’’ operated bycooperative associations. These‘‘balancing plants’’ qualify for poolingbased upon the performance of thecooperative association, not uponshipments from the plant alone.

A balancing plant may qualify forpool plant status based upon shipmentsdirectly from producers’ farms as wellas shipments from the plant. To qualifyas a balancing plant, the plant must belocated within the order’s marketingarea. This requirement ensures that milkpooled through the balancing plant iseconomically available to processors offluid milk if needed. However, in thecase of the Appalachian order only, abalancing plant also may be located inthe State of Virginia. This provision hasbeen in the Carolina order and shouldbe continued in the Appalachian order.The performance standards for abalancing plant require that 60 percentof a cooperative’s producer receipts bedelivered to pool distributing plantsevery month of the year. This provisionis identical under the 3 southeastorders.

Each of the 3 orders also containspooling standards for a supply plant.For the Appalachian and Southeastorders, a supply plant must ship at least50 percent of the milk received duringthe month from dairy farmers andcooperative bulk tank handlers. Theplant’s receipts include milk that isdiverted from the plant as well as milkphysically received at the plant. In thecase of the Florida order, the shippingpercentage is slightly higher at 60percent.

Unlike supply plant provisions inother orders, the supply plantprovisions in the 3 southeast orders donot recognize shipments directly fromproducers’ farms as qualifyingshipments for a supply plant. At thepresent time, there are no plantsqualifying as ‘‘pool supply plants’’under any of the southeast orders.

Kraft Foods, Inc., submitted acomment in opposition to the supplyplant provision proposed for the

Southeast order, arguing that it shouldbe permitted to pool its Bentonville,Arkansas, cheese plant based on milkdiverted from this plant directly fromproducers’ farms to pool distributingplants. Kraft argues that the proposedpool supply plant provision of Order 7would require it to physically receivemilk at its plant, reload it onto a truck,and ship it to pool distributing plants inorder for the Bentonville plant to meetthe supply plant shipping standards ofOrder 7.

Currently, there are no pool supplyplants on the Southeast, Appalachian,or Florida orders. When supplementalmilk is needed for these markets, mostof the milk comes directly fromproducers’ farms, some of which can fillan over-the-road tank truck severaltimes a day. With farms of this size,there is obviously no need to aggregatethe milk from several farms at a supplyplant.

A primary mission of mostcooperatives supplying the Southeast isto provide milk to handlers for fluid useand to dispose of milk when not neededfor fluid use efficiently. The orderprovisions should accommodate andencourage efficient milk handlingpractices.

The cooperative balancing plantprovision is intended to allowcooperatives to supply the fluid marketin the most efficient manner possibleand also to process milk efficientlywhen such milk is not needed for fluiduse. In the Southeast region, thedominant cooperative operates butter-powder plants in Kentucky andLouisiana and one cheese plant inTennessee. Oftentimes during the year,these plants are completely idle whenall available milk is needed for Class Iand II use.

In the Southeast, where fluid handlersare subject to relatively high Class Iprices, order provisions should aid themin procuring milk supplies by providingstringent pooling standards. This willhelp to ensure that the Class I pricesapplicable to these handlers will servetheir purpose in generating uniformprices that will attract milk for fluid use.The supply plant provisions proposedby Kraft are neither needed norsupported by the vast majority ofparticipants in these markets andtherefore are not adopted.

It is not necessary to seasonally adjustthe supply plant and balancing plantshipping requirements for the 3southeast orders because the standardsproposed are flexible enough toaccommodate the disposal of surplusmilk during the flush productionseason. In addition, each of the 3 orderscontains a provision to allow the market



administrator to increase or decreaseshipping requirements and otherpooling standards by up to 10percentage points. This provision also isincluded in the producer milk section ofall 3 orders with respect to thepercentage of milk that may be divertedand in the number of days that aproducer’s milk must be received at apool plant.

In addition to the provisionsdescribed above, each of the southeastorders contains a provision to allow unitpooling of distributing plants operatedby the same handler. This provision hasbeen in the Southeast order since 1995.

Some distributing plants may meetthe pooling standards of more than oneorder. Consequently, it is necessary tospecify the rules for determining wherea plant will be regulated. Under thesoutheast orders, if a plant meets thepooling standards of the order and islocated in the order’s respectivemarketing area, the plant will beregulated under that order even if it hasgreater sales in some other order’smarketing area. This provision hasevolved as a result of several pricealignment problems in the Southeastinvolving a plant located in onemarketing area but regulated underanother order. In every such case, aplant’s supply of milk was put injeopardy as a result of a lower blendprice under the order in which itbecame regulated based on its sales.Notwithstanding the merging of severalof the smaller markets in the Southeast,this provision should be retained for thesoutheast orders to preclude a repetitionof this problem. There was widespreadsupport in comment letters for retentionof this provision.

In the case of a distributing plant thatis not located within any order’smarketing area, a different standardshould apply. Since, in this case, itcannot be presumed with certainty thata plant is most closely associated withthe market in which it is located, itsassociation with a market should bedetermined based upon where it has themost sales.

Producer-handler. The producer-handler provision for the 3 southeastorders is very similar to the currentprovisions. There were no commentsreceived in opposition to this provision.

To qualify as a producer-handler, adairy farmer would have to have routedisposition in excess of 150,000 poundsper month; otherwise, the producer’splant would be exempt from regulationpursuant to a provision that has beenuniformly adopted for all orders. Inaddition, a dairy farmer may receive nofluid milk products from sources otherthan his or her farm. Finally, the dairy

farmer must provide proof satisfactoryto the market administrator that the careand management of the dairy animalsand other resources necessary toproduce all Class I milk handled, andthe processing and packagingoperations, are his/her own enterpriseand are operated at his/her own risk.

At the present time, there are fewerthan 5 producer-handlers operating inthe southeast markets. The status ofthese handlers occasionally fluctuatesbetween being fully regulated plants insome months and producer-handlers inother months. None of these operationswould lose their status as producer-handlers under the provision adoptedfor the new southeast orders.

Producer/Producer milk. Theproducer and producer milk definitionsadopted for the 3 southeast orders arenearly identical to the provisions nowin the individual orders. Theseprovisions define which dairy farmersare eligible to share in the proceeds ofthe marketwide pool.

A producer is defined as a dairyfarmer whose milk is received at a poolplant, diverted to a nonpool plant, orreceived by a cooperative associationacting as a bulk tank handler. Itexcludes a producer-handler, a dairyfarmer whose milk is delivered to anexempt plant, or a dairy farmer whosemilk is reported as diverted milk underthe provisions of another Federal order.

The diversion limits that are specifiedin the producer milk section of the neworders are slightly different among the 3southeast orders. To qualify fordiversion to a nonpool plant, aminimum amount of a producer’s milkmust be received at a pool plant duringthe month (i.e., this is called a ‘‘touch-base’’ requirement). Under theAppalachian order, 6 days’’ productionmust be received at a pool plant duringeach of the months of July throughDecember, and 2 days’ production mustbe received at a pool plant during eachof the other months of the year. Underthe Southeast order, 10 days’ productionis required to be delivered to a poolplant during each of the months of Julythrough December to qualify aproducer’s milk for diversion to anonpool plant. During the months ofJanuary through June, 4 days’production is be required to bedelivered to a pool plant.

Under the proposed Florida order,which will have a higher Class Iutilization and less need to divert milk,a producer is required to deliver at least10 days’ production to a pool plantduring every month of the year in orderto be eligible for diversion to a nonpoolplant. These proposed standards are

comparable to those required under theseparate Florida orders.

The total quantity of milk which maybe diverted by a pool plant operator orcooperative association during themonth also varies by market as well asby month. Under the Appalachianorder, a pool plant operator orcooperative association is permitted todivert 25 percent of its producer milkduring the months of July throughNovember, January and February.During the months of December andMarch through June, the total diversionlimit increases to 40 percent of producermilk receipts. In the Southeast order, atotal diversion limit of 33 percent isprovided during the months of Julythrough December, and 50 percentduring the other months. The diversionlimits under the Florida order are 20percent during the months of Julythrough November, 25 percent duringthe months of December throughFebruary, and 40 percent during allother months.

The ‘‘touch base’’ requirements andgross diversion limits described aboveare adjustable by the marketadministrator to assure orderlymarketing and/or efficient handling ofmilk in the marketing area. Thisprocedure is described in§§ 1005.13(d)(7), 1006.13(d)(6), and1007.13(d)(7).

Although a ‘‘dairy farmer for othermarkets’’ provision was requested forthe new orders by some producerorganizations, it was opposed by others.This provision is not included in the 3southeast orders at this time. Such aprovision could restrict the freemovement of milk as needed amongmarkets. The proposed diversion limitsand touch-base requirements in thesoutheast orders should preclude theassociation of milk with these marketswhen such milk is not needed at poolplants.

Reports of receipts and utilization. Toaccommodate the payment scheduledesired for the 3 southeast orders, thehandler’s report of receipts andutilization must be in the marketadministrator’s office no later than the7th day of the month. The producerpayroll report will be required by the20th day of the month. The informationto be included in these proposed reportsis essentially identical to the currentorder provisions.

Payments for milk. The southeastorders provide uniform paymentschedules for payments to and from theproducer-settlement fund. Payment tothe producer-settlement fund must bemade by the 12th day of the month andpayment from the producer-settlementfund must be made one day later.



In the case of payments to producersand cooperative associations, themerged Florida order will maintain thelongstanding 3-payment schedule thathas been part of the present Floridaorders for many years. The partialpayments to producers under the newFlorida order must be made on the 20thday of the month for milk receivedduring the first 15 days of the monthand on the 5th day of the followingmonth for milk received during theremainder of the month. The rate ofpayment will be at not less than 85percent of the preceding month’suniform price, adjusted for plantlocation and for proper deductionsauthorized in writing by the producer.The final payment for milk receivedduring the previous month must bemade on or before the 15th day of themonth.

The Appalachian and Southeastorders adopted here have identicalpayment schedules. The partialpayment for milk received during thefirst 15 days of the month must be madeon the 26th day of the month, and therate of payment must be 90 percent ofthe preceding month’s uniform price.The final payment must be received bythe producer on or before the 14th dayof the following month. The rate of finalpayment for all 3 orders is the precedingmonth’s uniform price adjusted forbutterfat, plant location, partialpayments, marketing services, andproper deductions authorized in writingby the producer. Each order will requirepayment to a cooperative association tobe made one day earlier than thepayment to an individual producer.

It should be noted that the paymentdates described above may be delayed ifthe payment is due on a Saturday,Sunday, or national holiday. In suchcase, the payment will be due on thenext day that the market administrator’soffice is open for business. This newrule is provided in § 1000.90.

6c. Midwest Region

Upper Midwest Order

Pool PlantThe pool distributing and pool supply

plant definitions of the consolidatedUpper Midwest order should use thestandard order language used in otherorders, adapted to marketing conditionsin the Upper Midwest.

The pool distributing plant definitionspecifies that for a plant to be a pooldistributing plant, it must have 15percent or more of its total receipts offluid milk distributed as routedisposition. This percentage isconsiderably lower than the percentageused in the Chicago Regional order,

which varies from 30 percent to 45percent depending on the month.However, the current Upper Midwestorder uses a percentage based on themarketwide Class I percentage for thesame month of the previous year.During ‘‘normal’’ months thispercentage is approximately 15 percent.When some milk is held off the pool foreconomic reasons (primarily unusualprice differences between classes), thepercentage may vary considerably,ranging from the ‘‘normal’’ 15 percent toover 50 percent.

In addition to specifying the routedisposition percentage at 15 percent, thepercentage would be calculated on thebasis of the total receipts of fluid milkproducts physically received at thedistributing plant. Currently both theChicago Regional and Upper Midwestorders include milk diverted from thedistributing plant in the total bulkreceipts used to compute the routedisposition percentage. Use of aconstant percentage at approximatelythe market Class I percentage, andremoving diverted milk from adistributing plant’s receipts indetermining its regulatory status, willreduce the current opportunitiesavailable to distributing plants tobecome partially regulated bymanipulating their reported receipts anddiversions of milk. In addition, thelanguage adopted should eliminatemonth-to-month uncertainty caused bybasing handlers’ regulatory status on themarket’s fluctuating utilizationpercentage.

The Identical Provisions Committeerecommended that the in-areadistribution criteria for pool distributingplants be 15 percent of total routedisposition, and that percentage wasincluded in the proposed rule. However,it was determined that a 25-percentstandard for in-area sales would beappropriate for all markets to assure thathandlers not already regulated wouldnot become regulated solely because oforder consolidation. The Committeeexplained that use of total routedisposition rather than bulk receipts asthe denominator would reduceopportunities for handlers tomanipulate the manner in which theymay report their operations to avoidregulation. Currently in the ChicagoRegional and Upper Midwest orders thein-area route disposition standard (10percent in Chicago Regional and 15percent in Upper Midwest) is computedusing the same basis (bulk receipts,including diversions) as is used todetermine whether a plant meets thedefinition of a pool distributing plant.

Provision is made for a single handlerto form a unit of distributing plants and

manufacturing plants, all of which mustbe located within the marketing area.The unit would have to meet therequirements for a pool distributingplant and at least one of the plants inthe unit must meet the pool distributingplant requirements as a separate plant.Plants not meeting the pool distributingplant definition will be required to havedisposition of packaged fluid milkproducts, packaged fluid creamproducts, or cottage cheese and othersoft manufactured products of at leasthalf of their receipts of Grade A bulkfluid milk products, including milkdiverted by the plant operator.

Manufacturing plants traditionallyhave been included in units withdistributing plants because themanufacturing plants producedproducts such as packaged fluid cream,sour cream, and cottage cheese that aremarketed in conjunction with bottledfluid milk products. In addition, someof these plants produce a limitedquantity of fluid milk products.Handlers have argued that the operatorof a free-standing manufacturing plantthat manufactures these complementaryproducts should be able to pool its milksupply for both (or for several) plants asif all of the products were made in thebottling plant.

Both the Chicago Regional and UpperMidwest orders contain a provision fora distributing plant unit. Although thecurrent Chicago Regional order does notspecify the types of products that maybe manufactured at plants in the unit,the Upper Midwest order does. It isreasonable to place restrictions on thetypes of products that are disposed offrom the manufacturing plants in theunit, since these plants will receive thebenefits reserved for pool distributingplants and shipments from supplyplants to the plants in the unit will beconsidered in determining pool supplyplant qualifications.

A pool supply plant operator shouldship as qualifying shipments at least 10percent of the plant’s receipts of milkfrom producers, including milk divertedby the handler, each month. As in thecurrent Chicago Regional order, suchshipments may be made to pooldistributing plants, pool distributingplant units, plants of producer-handlers,partially regulated distributing plants,or distributing plants fully regulated byother Federal milk orders. The extent ofshipments to partially regulateddistributing plants to be used forqualification would be limited to thequantity classified as Class I. Qualifyingshipments to distributing plantsregulated by other Federal milk ordersshould be limited to the quantityshipped to pool distributing plants, and



may not be agreed-upon Class II, ClassIII or Class IV utilization. Shipmentsdirectly from farms to pool distributingplants and to plants contained in pooldistributing plant units should beincluded as shipments that help to meetthe percentage qualification standard.

The 10 percent shipping requirementadopted in this decision isapproximately 5 percentage points lessthan the anticipated Class I percentagefor the consolidated Upper Midwestorder. The 10 percent shipping standardis greater than the current individualsupply plant shipping standard andequal to the maximum shippingpercentage required of pool units duringthe qualifying period in the currentChicago Regional order. The standardunder the current Upper Midwest order,which uses the Class I use percentage ofthe same month in the previous year asthe supply plant shipping percentage,would exceed the adopted percentage.Also under the current Upper Midwestorder, a reserve supply plant must ship10 percent of its receipts to pooldistributing plants during Januarythrough June, and the marketwide ClassI percentage for the same months of thepreceding year for the months of Julythrough December.

Several handlers, including a largecooperative association, a cheesemakers’organization, and a fluid milk handler,filed comments stating that the 10percent shipping standard for supplyplants is too high for this market witha Class I utilization percentage thatrarely would exceed 20 percent.

The 10-percent shipping percentage isbelow the estimated Class I percentagefor the consolidated Upper Midwestorder and should be appropriate, evenin view of the fact that manydistributing plants have a supply ofmilk from their own producers. InSeptember 1997, approximately 27percent of the milk pooled or receivedat distributing plants in the ChicagoRegional order was pooled as producermilk with the distributing plantoperators as the handlers, rather than asproducer milk pooled by cooperativesand other handlers. The milk pooled bydistributing plant handlers accountedfor approximately 12 percent of the totalmilk pooled in September 1997 (orapproximately 5 percent of the totalmilk that would have been pooled if allof the milk eligible to be pooled inSeptember 1997 had been pooled).Approximately 7 percent of the Class Iproducer milk, or approximately 2percent of the total producer milk,pooled under the Upper Midwest orderis pooled by distributing plantoperators. The combination of thesupply plant shipping percentage and

the percentage of milk pooled directlyby distributing plant handlers wouldappear sufficient to meet anticipatedClass I needs in the consolidated UpperMidwest order. The 10 percent supplyplant shipping percentage also shouldbe appropriate to avoid unnecessary anduneconomic shipments.

It should be remembered that theprovisions adopted in this decision willallow the market administrator toincrease or decrease the requiredshipping percentage on a marketwide orselected area basis if deemed necessaryto assure an adequate supply of milk topool distributing plants or to preventuneconomic shipments of milk. If theshipping percentage is increased by themarket administrator, shipments madefor the purpose of meeting the increasedpercentage may be made only to pooldistributing plants or plants containedin pool distributing plant units.

A comment filed by a cheesemakers’organization expressed concern aboutthe potential competitive inequities of aprovision enabling the marketadministrator to change the shippingpercentage for a selected portion of themarketing area. This provision hasexisted in the current Upper Midwestorder for some time without resulting inany controversy. The provision probablywill be more useful with theconsiderable enlargement of themarketing area through consolidation. Itmay be more inequitable to requireincreased shipments from plants in, forinstance, Grand Forks, North Dakota, tosupply deficits in the Chicago area (700miles distant) than it currently would beto require those plants to increasequalifying shipments so thatdistributing plants in the Twin Citiesarea (300 miles away) will be able toobtain needed supplies. It should beremembered that there are plentifulsupplies of milk produced within 100–200 miles of any part of this marketingarea. Certainly care will be taken toassure that handlers are not placed atsignificant competitive disadvantage.

Groups of two or more supply plantswill be allowed to form systems ofsupply plants for the purpose of meetingthe shipping requirements, by shippingthe same percentage as that required forindividual pool supply plants that arenot part of such a system. These poolsupply plant systems may consist ofplants of the same handler or more thanone handler, and may contain bothproprietary and cooperative handlers.The only requirement affecting anindividual plant within the unit is thatthe plant must be physically locatedwithin the marketing area. Thisrestriction is necessary to preventdistant plants from receiving the

benefits of participating in themarketwide pool without having anactual association with the market.

Several plants located outside theboundaries of the consolidatedmarketing area currently are included insupply plant units by a ‘‘grandfatherclause’’ in the Upper Midwest order.The order will provide that these plantsmay continue to be included in a supplyplant system if they so desire as long asthey maintain continuous pool plantstatus.

Handlers may form supply plantsystems by filing a written request byJuly 15, listing the plants to be in thesystem. Such a system will remain ineffect from August 1 through July 31 ofthe following year. These dates deviatefrom those provided for other ordersbecause of the difference in seasonalproduction variations between this andother orders. The handler or handlersestablishing the system may also deletea plant from the system or dissolve thesystem by submitting a written requestto the market administrator. Any plantdeleted from a system, or plants thatwere part of a system that wasdiscontinued, may not be part of asystem until the following August.

Provisions that allow handlers to addplants to a system under certaincircumstances and to allow systems toreorganize in the event a plant changesownership or in the event of a businessfailure by a handler are alsoincorporated in the order. A systemfailing to meet pooling standards will beallowed to drop plants from the systemuntil the system does qualify. Thehandler responsible for assuring that thesystem qualifies must notify the marketadministrator of which plants are to bedeleted from the system. If the handlerdoes not notify the marketadministrator, the market administratorwill exclude plants from the systembeginning with the plant at the bottomof the list of plants submitted by thehandler responsible for qualifying thesystem, and continuing up the list untilthe system qualifies.

The provisions for supply plantsystems are very similar to theprovisions currently contained in boththe Chicago Regional and UpperMidwest orders. Unlike the ChicagoRegional and the Upper Midwest orders,however, this order does not contain aspecific shipping requirement forindividual plants within a supply plantsystem. In the current Chicago Regionalorder, pool supply plant systems havetwice the percentage shipping standardof individual supply plants, withindividual plants within the systemsrequired to ship 47,000 pounds or threepercent of their producer receipts,



whichever is less, in five of the sixmonths of August through January. Thecurrent Upper Midwest order requireshandlers with supply plants in a supplyplant system to ship five percent of eachhandler’s Grade A receipts, includingmilk diverted by the handler to nonpoolplants, during one of the months ofAugust through December.

This decision does not provide for thecategory of supply plants referred to asreserve supply plants. Reserve supplyplants ceased to be included in theChicago Regional order in 1987, whilethe Upper Midwest continues to providefor them. With year-round shippingrequirements, the unlimited ability ofthe market administrator to changeshipping percentages both in level andin area, and the ability of supply plantsto form systems, there is no compellingreason to have two categories of supplyplants.

A provision to allow plants to remainqualified for up to two consecutivemonths due to unavoidablecircumstances, such as a naturaldisaster, fire, breakdown of equipment,or work stoppage is included in thisdecision. The provision is contained inthe Chicago Regional order and hasworked quite well in giving handlerssome administrative relief in the face ofcertain unavoidable circumstances.

Comments filed by a cooperativeassociation and a fluid milk handlerurged that the unit reporting, accountingand allocation provisions of the ChicagoRegional order be retained in theconsolidated order. This issue isconsidered and addressed in theClassification section of this decision.

Producer MilkThe definition of producer milk

determines which milk will be eligibleto participate in the Federal order pool.This decision provides that milkreceived at a pool plant directly fromproducers or from a cooperativeassociation acting as a handler shouldbe eligible to be producer milk. Milk forwhich the operator of a pool plant is thehandler that is delivered directly fromthe farm to another pool plant shouldalso be considered producer milk.Under certain circumstances, milkdelivered to a nonpool plant may alsobe considered producer milk. Milkdelivered directly from a farm to anonpool plant may be consideredproducer milk if at least one day’sproduction is received at a pool plantduring the dairy farmer’s first month asa producer.

In order to qualify as producer milkthe milk pooled by a cooperativeassociation acting as a handlerdescribed in § 1030.9(c), the cooperative

must deliver at least 10 percent of themilk for which it is the handlerpursuant to § 1030.9(c) to pooldistributing plants, units of pooldistributing plants, plants of producer-handlers, or partially regulateddistributing plants. The shipments topartially regulated distributing plantsare limited to the quantity classified asClass I. These are the same performancerequirements that apply to supplyplants, with the exception of thetreatment of milk shipped direct fromfarms to distributing plants regulatedunder other orders. If such milk isallocated to Class I under the otherorder, it will become producer milkunder that order. The same performancerequirements that apply to supplyplants apply to cooperative associationsacting as handlers if the marketadministrator adjusts the shippingpercentages.

No significant differences in thetreatment of milk received at pool plantsare provided under this decision thanunder the current Chicago Regional orUpper Midwest orders. There are,however, several differences relating todiverted milk. This decision allows theoperator of a pool plant to divert, orship milk directly from the farm toanother pool plant, the milk ofproducers for which it is the handler,and account for the milk as producermilk at the shipping plant. Allowingeither a proprietary pool plant or acooperative pool plant to divert milk toanother pool plant is consistent with theChicago Regional order. In the UpperMidwest order, milk that is received ata pool plant and for which a cooperativeassociation is the handler is consideredproducer milk at the receiving plant.The Upper Midwest order specifies thata proprietary handler may divert milk toanother pool plant and that such milkwill be considered producer milk of thediverting proprietary handler. Thelanguage adopted under this decisionleaves to the discretion of thecooperative association the option ofdiverting milk to another pool plantfrom its own pool plant or deliveringthe milk to the pool plant in its capacityas a handler of producer milk pursuantto § 1030.9(c).

The consolidated Upper Midwestorder requires that a new producer or aproducer who has broken associationwith the market have at least one day’sproduction received at a pool plantduring the first month in which theproducer’s milk is reported as producermilk. Currently the Chicago Regionalorder requires a new producer on themarket or a producer who has brokenassociation with the market to have atleast one day’s production received at

the pool plant at which the milk isreported during the first month inwhich the producer’s milk is consideredto be producer milk eligible fordiversion to a nonpool plant. Inaddition, at least one day’s productionof a producer’s milk must be received ata pool plant in each of the months ofAugust through January to be eligible fordiversion to a nonpool plant. Thecurrent Upper Midwest order requiresthat a new producer or a producer whohas broken association with the marketbe received at a pool plant prior to themilk being diverted to a nonpool plant.

There is little or no justification forforcing producer milk to be received ata pool plant to maintain or proveassociation with the market. Supplyplants and cooperatives will be requiredto ship a fixed percentage of their totalmilk supply, not just that portionreceived at their plants, to the fluidmarket. Since both cooperatives andproprietary handlers can move milkdirectly from the farm to the fluidmarket there is little reason to force milkinto a pool plant solely for regulatorypurposes. Certainly the extra cost to thehandler of moving milk for regulatorypurposes does not enhance economicefficiency or milk quality and in factdecreases economic efficiency and milkquality to the detriment of the entiremarket.

This decision provides that producermilk be priced in the month in whichit is delivered to the plant of firstreceipt, although the proposed rulewould have priced milk in the month inwhich it is picked up at the farm. Someorders have allowed milk picked up onthe last day of a month but delivered toa plant in the next month to be pricedin the month in which it was picked up.A comment filed by WisconsinCheesemakers favored continuation ofthis regulatory treatment. For purposesof uniformity between the consolidatedorders (which apply to many handlers,cooperative and proprietary, whooperate in more than one order area)and clarity of plant accounting for milkreceived and used during each monthall orders now will provide thatproducer milk is not received until itactually enters a plant.

Under the consolidated order, as inthe proposed rule, producer milk will bepriced at the location of the plant atwhich the milk is physically unloadedinto processing facilities or a storagetank. In the current Chicago Regionalorder milk is priced where milk ispumped within the confines of a plant.The adopted order language willeliminate the pricing of milk where it ispumped from truck to truck and pricethe milk where it is eventually unloaded



into processing facilities or a storagetank.

Location Adjustments andTransportation Credits

To help move milk to the fluid marketa transportation credit and an assembly/procurement credit for Class I milk arecontained in the Upper Midwest order.The transportation credit will becomputed by multiplying thehundredweight of milk contained intransfers of bulk fluid milk from poolplants to pool distributing plants andused in Class I by the value obtained bymultiplying .0028 times the number ofmiles between the transferor plant andtransferee plants with an offset for apositive difference between the Class Iprices at the transferee and transferorplants. The transportation credit shouldbe paid to the receiving handler, as themilk will be pooled at the location fromwhich it is shipped and the credit will,to some extent, duplicate the function ofthe location adjustment in helping tocover the cost of moving it from supplyplants to fluid milk handlers.

The transportation credit is similar tothe transportation credit currentlycontained in the Chicago Regionalorder. Both the transportation creditadopted in this decision and the currentcredit, which uses the same .0028 rate,are applied to Class I milk only.However, in the current ChicagoRegional order the credit is based on110 percent of the Class I milk receivedat the pool distributing plant. Theproposed rule would have provided thatthe transportation credit be paid to theshipping handler on the basis of ClassI milk transferred to fluid milk plants.

Several interested personscommented on the use of transportationcredits and assembly credits in thisconsolidated order, with most favoringsuch provisions but disagreeing to someextent with their proposed application.There was disagreement between thecomments on whether the credit shouldapply to the shipping or the receivinghandler and whether it should apply toall Class I milk, both direct-shipped andfrom plants, or just to milk transferredfrom plants and used in Class I. Onecommenter also stated that the proposedrate did not cover enough of the actualcost of moving milk.

In the case of milk received at adistributing plant from a supply plantoperated by a cooperative association,the order provides that a distributingplant pay the supply plant from whichit receives milk at not less than the priceapplicable at the distributing plant. Theshipping plant must account to themarketwide pool at the price applicableat the shipping plant, where the milk

was first received. Payment of thedistributing plant’s Class I price for milkin Class I uses will assure thatcooperative associations are being paidthe order minimum price for such milk.The distributing plant, then, isresponsible for the cost of getting themilk from the supply plant location toits own, with some assistance from thetransportation credit to the extent thatthe calculated cost exceeds thedifference in the Class I prices betweenthe shipping and receiving plants.

There must be some contribution fromconsumers to the cost of moving milk todeficit locations. However,incorporating the entire cost of haulingmilk in the transportation credit couldhave the effect of encouraging handlersto procure milk from greater distancesthan necessary. If milk is moved from ahigher-priced zone to a lower-pricedzone (which may be necessary to obtainneeded supplies of milk at outlyingdistributing plants), there will be nooffset for differences in Class I pricesbetween the shipping and receivingplants.

Unlike the transportation credit,which is based on mileage and paidonly on transfers of bulk milk to pooldistributing plants, the assembly/procurement credit is paid at the rate of8 cents per hundredweight of Class Imilk transferred or diverted by a poolplant to a pool distributing plant. Anassembly/ procurement credit also willbe applied to milk received fromproducers and from cooperativeassociations acting as handlers pursuantto § 1030.9(c) based on the pro ratashare of producer milk delivered to apool distributing plant and allocated toClass I.

A comment filed by a cooperativeassociation stated that assembly creditsshould not apply to distributing plants’own milk supplies, but only to milkobtained from supply plants orcooperatives. If such a change weremade, distributing plant operators whohave arranged for their own milksupplies would have an 8-centdisadvantage in procuring milk incomparison with their competitors whoobtain milk only from supply plants andcooperatives.

A transportation credit andprocurement credit are incorporated inthe order to assist handlers in supplyingthe Class I market. These transportationand procurement credits, to be paid onClass I milk only in combination withthe Class I price surface discussedelsewhere in this final decision, willhelp handlers move milk to the fluidmarket by distributing the cost ofsupplying the fluid market to all marketparticipants who share in the

marketwide pool. Handlers andproducers who supply the Class Imarket on a regular basis should not beexpected to bear the entire cost ofsupplying the Class I market whilehandlers and producers who meet onlythe minimum requirements derive thebenefits of marketwide pooling.Incorporation of a transportation creditand procurement credit on Class I milkin the marketwide pool will assure thatat least some of the cost of supplying theClass I market is shared among allmarket participants.

Reporting and Payment DatesComments filed by two handlers

opposed changing the reporting datesfor the consolidated order from the 10thto the 9th of the month following receiptand use of the milk. It should beapparent, especially to the cooperativeassociation that filed this comment, thatpayment to producers cannot bedetermined until the marketwidepooling process is completed andminimum producer pay pricescalculated. The earlier the poolingprocess can begin, the sooner producerscan be paid. The reporting date of the9th, adopted in this decision, is thelatest date for filing handler reports inany of the consolidated orders. Twoother orders specify the 9th, with oneorder requiring reporting on the 8th andthe other seven orders specifying thathandler reports be filed on or before the7th of the following month. Becausereporting should be somewhat moreuniform among the Upper Midwesthandlers after consolidation of theorders, their reporting burdens shouldbe reduced accordingly. Further,technology certainly has improved theability of all businesses to keep recordsand organize data for reporting purposessince the current reporting dates wereestablished (over 35 years ago).

Wisconsin Cheesemakers’ commentopposed reducing the time lag betweenwhen producers deliver milk tohandlers and when they are paid forthat milk. The current dates for payingproducers for the milk delivered in thefirst half of each month (the 3rd and 4thof the following month) under these twoorders are among the latest, if not thelatest, in the entire Federal milk ordersystem. The date adopted in thisdecision, the 26th of the same month, isthe same as in three other consolidatedorders, later than in five of the otherorders, and earlier than in two of theorders (none of which is later than thelast day of the month). The datespecified for final payment to producersranks similarly. Producers need to bepaid for the milk they’ve deliveredseveral weeks before on as timely a basis



as possible. The adopted provisions willaccomplish that goal.

Central OrderMany of the provisions of the

consolidated Central order areexplained in the ‘‘Identical Provisions’’portion of this decision, and need not beaddressed here. The provisions thatdeviate somewhat from those adoptedfor other order areas are the provisionsdealing with standards for determiningthe pool status of producers andhandlers. An effort is made to explainsignificant differences between thepooling provisions of the 9 individualorders included in this consolidationand those of the consolidated order.

Pool PlantThe Central pool distributing plant

definition follows closely the provisionscontained in most of the otherconsolidated orders. The provisionsadopted would make no difference inthe pool status of distributing plantscurrently pooled under the individualorders.

Specifically, the percentage of ahandler’s total route dispositiondistributed within the marketing areathat will result in the handler beingfully regulated under the Central orderis the same 25-percent standard adoptedfor all of the other 10 orders. Theminimum percentage of a pooldistributing plant’s actual physicalreceipts of fluid milk products thatwould have to be distributed on routesis 25. Currently most of the ordersincluded in the consolidated Centralorder include milk diverted from thedistributing plant in the total bulkreceipts used to compute the routedisposition percentages.

The consolidated Central orderprovides that a single handler beallowed to form a unit of distributingplants and Class II manufacturingplants, all of which must be locatedwithin the marketing area. The unitmust meet the requirements for a pooldistributing plant, and at least one of theplants in the unit is required to meet thepool distributing plant requirements asa separate plant. Plants in the unit thatdo not meet the pool distributing plantdefinition are required to havedisposition of packaged fluid milkproducts, packaged fluid creamproducts, or cottage cheese and otherClass II products of at least half of theirreceipts of Grade A bulk fluid milkproducts, including milk diverted by theplant operator.

Class II manufacturing plants areincluded in units with distributingplants because the manufacturing plantsproduce products such as packaged

fluid cream, sour cream, and cottagecheese that are marketed in conjunctionwith bottled fluid milk products. Inaddition, some of these plants producea limited quantity of fluid milkproducts. Handlers have argued that theoperator of a free-standingmanufacturing plant that manufacturesthese complementary products shouldbe able to pool its milk supply for both(or for several) plants as if all of theproducts were made in the bottlingplant.

The pool supply plant definition ofthe consolidated Central order containsprovisions that assure continued poolqualification for any handlers or milkcurrently associated with the marketsincluded in the consolidated Centralmarket. The Iowa order contains nolimit on the amount of direct-shippedmilk that can be used to qualify asupply plant, and several of the otherorders allow such deliveries to make upa portion of qualifying shipments. Theconsolidated order allows direct-shipped milk to be counted as poolqualifying shipments without limit.

The Greater Kansas City, Nebraska-Western Iowa, Southern Illinois-EasternMissouri, and Southwest Plains orderscontain cooperative balancing plantprovisions, allowing cooperative-operated plants to be pooled if thecooperative delivers a given percentageof the milk for which it is the handlerto pool distributing plants. Theconsolidated Central order also containssuch a provision, including in the poolplant definition a plant operated by acooperative association that supplies atleast 35 percent of the milk for whichit is the handler to pool distributingplants, either during the current monthor for the immediately preceding 12-month period. The deliveries to pooldistributing plants may includedeliveries directly from the farms ofproducers for whom the co-op is thehandler, as well as transfers from thecooperative’s plant.

Cooperative association ‘‘balancingplants’’ serve the market as the outlet oflast resort. When surplus milk has noother place to go on weekends, holidays,or during months of surplus production,it moves to cooperative association‘‘balancing plants’’ where it ismanufactured into storable products.When production decreases, theseplants operate at minimal capacity ormay be shut down completely.Cooperative members assume theburden and cost of processing surplusmilk through such plants.

Most of the Central orders allow aperiod during which supply plants donot have to meet shipping percentagesif they have done so for the months

during which milk production levels arelow and demand for fluid milk is high.The Iowa order has reduced shippingstandards for such months. The orderprovisions adopted with this decisioninclude a period during which supplyplants that have served the needs of themarket when milk supplies are tight arenot required to meet shipping standards,but it is reduced from the 5–7 monthperiod existing in the current orders toa 3-month period from May throughJuly.

The percentage of receipts asqualifying shipments to distributingplants currently ranges from 30 to 50percent for these orders, with the Iowapercentage reduced to 20 for the monthsof December through August. Theadopted shipping standards for poolsupply plants under the consolidatedCentral order are 35 percent for themonths of September through Novemberand January and 25 percent for all othermonths, with plants meeting thepercentage standard for the months ofAugust through April being allowed toretain their pool status for theimmediately following months of Maythrough July.

Groups of two or more supply plantsare allowed to form systems of supplyplants for the purpose of meeting theshipping requirements by shipping thesame percentage as that required forindividual pool supply plants that arenot part of such a system. These poolsupply plant systems may consist ofplants of the same handler or more thanone handler, and may contain bothproprietary and cooperative handlers.The only requirement affecting eachplant within the system is that the plantmust be physically located within themarketing area. This restriction isnecessary to prevent distant plants fromreceiving the benefits of participating inthe marketwide pool without having anactual association with the market.

As in the other consolidated orders,the market administrator will have theauthority to increase or reduce therequired shipping percentage asmarketing conditions change for thepurpose of assuring that an adequatesupply of milk will be available for fluiduse, or to assure that the order does notrequire handlers to undertakeuneconomic movements of milk tomaintain the pool status of their plants.

In addition, as in the consolidatedUpper Midwest order, the provisionsadopted in this decision will allow themarket administrator to increase ordecrease the required shippingpercentage on a selected area basis, aswell as a marketwide basis, if deemednecessary to reflect needed milkmovements within this geographically



extensive marketing area. This provisionhas existed in the current UpperMidwest order for some time withoutresulting in any controversy, and isexpected to be useful in view of theconsiderable enlargement of themarketing area through consolidation.Care in using the provision must beexercised to avoid placing handlers inareas in which shipping percentages aretemporarily increased or decreased at acompetitive disadvantage or advantageto handlers in areas that have not beenso affected. However, it would be moreinequitable to require increasedshipments from plants in, for instance,Eastern Colorado, to ship milk to plantsin eastern Illinois to supply deficits inthat portion of the marketing area.

Producer MilkThe producer and producer milk

provisions of the orders consolidated inthe Central order are quite similar toeach other and differ little from those tobe incorporated in the otherconsolidated orders. The principaldifference between some of theindividual orders and the consolidatedorder is the limit on the percentage ofa handler’s pooled producer milk thatmay be diverted to nonpool plants. Thepercentage of a handler’s milk that maybe diverted to nonpool plants variesunder the individual orders from 20percent of milk received at pool plantsduring some months under the EasternColorado order to 70 percent for somemonths under the Nebraska-WesternIowa and Iowa orders. Most of theorders require each producer’s milk tobe received at a pool plant at least onceeach month. The consolidated Centralorder requires that a new producer or aproducer who has broken associationwith the market have at least one day’sproduction physically received asproducer milk at a pool plant before theproducer’s milk is eligible to be divertedto nonpool plants.

In order to assure that all of the milkthat has been pooled under these orderscontinues to qualify for pooling, thediversion limit adopted for the Centralorder is 65 percent for the months ofSeptember through November andJanuary, and 75 percent for the monthsof February through April andDecember. Allowable diversions for themonths of May through July areunlimited. There is no requirement thateach producer’s milk be received at poolplants for a minimum number of daysper month. At the same time, the marketadministrator is authorized to increaseor reduce the diversion limit as neededto maintain orderly marketing andefficient handling of milk in themarketing area.

Multiple Component Pricing

The reporting and payment provisionsof the consolidated Central orderinclude those common to other orderswith multiple component pricing. Thesemarkets have a significant amount ofmilk used in manufactured products,and component pricing will enableproducers to be paid according to thevaluable components of their milk.

Mideast Order

Many of the provisions of the orderfor the consolidated Mideast marketingarea are explained in the ‘‘IdenticalProvisions’’ portion of this finaldecision, and need not be addressedhere. The provisions that deviatesomewhat from those provided for otherorder areas are the provisions dealingwith standards for determining the poolstatus of producers and handlers. Asignificant change from the proposedrule is that the uniform multiplecomponent pricing plan provided forthe six other orders that use multiplecomponent pricing is also incorporatedinto the Mideast order, in place of theproposed pricing plan that differedslightly from the one common to theother orders with multiple componentpricing provisions. This change isdiscussed more fully later in this sectionof this decision.

For the most part, pooling provisionshave less effect on the current MichiganUpper Peninsula market than on the 4other markets included in thisconsolidated order because MichiganUpper Peninsula is the only remainingindividual handler pool in the currentFederal order system. Therefore, poolingprovisions are discussed in relation tothe 4 principal markets included in theconsolidated Mideast order.

Pool Plant

The Mideast pool distributing plantdefinition, in which the in-area routedisposition qualification was proposedto exceed that contained in most of theother proposed orders (30 percentinstead of 15 percent) to make lesslikely the full Federal regulation of threeState-regulated plants, will instead usethe same 25-percent standard of in-arearoute dispositions of receipts that isbeing provided in all of the other orders.

Several comments opposed use of anin-area standard higher than 15 percent,arguing that the standard in the Mideastarea should not be higher than in otherareas, and that handlers outside themarket should be held to the ‘‘current’’15-percent standard. The adoption of auniform 25-percent standard of in-areasales as a percentage of total routedispositions for all orders is discussed

in the section of this decision dealingwith Provisions Common to all Orders.

As in the other consolidated orders,the total route disposition percentagewill be calculated on the basis of thetotal receipts of fluid milk productsphysically received at the distributingplant. Currently all four of the largerorders to be included in theconsolidated Mideast order includemilk diverted from the distributingplant in the total receipts used tocompute the total route dispositionpercentage.

One comment urged that a pass-through provision similar to that in thecurrent New York-New Jersey order(Order 2) be incorporated in theconsolidated order to deal with the in-area route dispositions of handlers whodo not meet the order’s poolingrequirements. Continuation of such aprovision in Order 2 was consideredand rejected in this decision, in theregional discussion of the Northeastorder. There would be no valid basis foradopting such a provision in theMideast order when it has been foundnot appropriate for use in the Northeast.

To assure continued poolqualification for all of the handlers whocurrently are associated with theMideast markets, the pool supply plantdefinition of the consolidated Mideastorder provides for all of the types ofsupply plants that currently qualify forpooling under the 4 principal orders.The Eastern Ohio-Western Pennsylvaniapool plant provision includes a plantoperated by a cooperative if thecooperative association delivers todistributing plants at least 35 percent ofthe milk for which it is the handlerduring the current month or over thepreceding 12 months. The SouthernMichigan order (Order 40) includes aspool supply plants: (a) A plant that hasbeen a pool plant for 12 consecutivemonths and has a marketing agreementwith a cooperative association, and (b)a system of supply plants operated byone or more handlers. Order 40 alsoincludes some shipments to otherFederal order plants and partiallyregulated distributing plants, inaddition to pool distributing plants, asqualifying shipments by supply plants.

The percentage of receipts asqualifying shipments to distributingplants currently ranges from 30 to 40percent for these orders, with directdeliveries from farms rather than planttransfers limited to half of the requireddeliveries under three of the orders. Allfour of the orders require performanceof pooling standards by supply plantsfor the months of September throughFebruary, followed by a ‘‘free ride’’period during which shipping



percentages need not be met by supplyplants that met the shipping standardsduring the required period. The Indianaorder contains a provision allowing thecontinued pooling of a plant that fails tomeet pooling standards because ofcircumstances beyond the handler’scontrol.

The shipping standards adoptedunder this decision for pool supplyplants are 30 percent for all months,with plants meeting the standard for themonths of September through Februarybeing allowed to retain their pool statusfor the immediately following months ofMarch through August. For the purposeof making the 30 percent level ofshipping standard less burdensome, upto 90 percent of required shipments areallowed to be made directly from farmsto distributing plants. The cooperativeassociation plant defined as a pool plantin the Eastern Ohio-WesternPennsylvania order is retained, as arethe supply plant provisions peculiar tothe Southern Michigan order. Theseprovisions reflect marketing conditionsspecific to these current areas, and willassure that plants currently qualified forpooling will retain such status.

Producer Milk

The producer and producer milkprovisions of the orders consolidated inthe Mideast order are quite similar toand differ little from those incorporatedin the other consolidated orders. Theprincipal difference between some ofthe individual orders and theconsolidated order would be the limiton the percentage of a handler’s pooledproducer milk that may be diverted tononpool plants. The Ohio Valley,Indiana and Eastern Ohio-WesternPennsylvania orders all contain 50percent diversion limits for the monthsof September through November,January and February and a 60 percentlimit for the month of December, withno diversion limit for the months ofMarch through August. The SouthernMichigan order contains a 60-percentdiversion limit for the months ofSeptember through February, with nolimit for the months of March throughAugust. In order to assure that all of themilk that has been pooled under theseorders continues to qualify for pooling,the diversion limit adopted for theMideast order is 60 percent for themonths of September through February,with no limit for the March throughAugust period. At the same time, themarket administrator is authorized toincrease or reduce the diversion limit asneeded to maintain orderly marketingand efficient handling of milk in themarketing area.


In a change from the proposed rule,the reporting and payment provisions ofthe consolidated Mideast order adoptedin this decision now conform to thoseof the other consolidated orders thatprovide for multiple component pricing(MCP). The proposed rule would haveincorporated a pricing plan similar tothe current Southern Michigan MCPplan in the consolidated order instead ofthe MCP plan proposed for the otherconsolidated orders. The SouthernMichigan MCP plan differs from thatincluded in the other current MCPorders only by pricing ‘‘fluid carrier’’instead of ‘‘other solids.’’

The Farm Bill authorizes adoption ofa ‘‘uniform’’ multiple componentpricing plan. As a result, the componentpricing plan has been modified to be thesame as the plan contained in otherMCP orders. The differences betweenthe adopted MCP plan and thatoriginally proposed for the consolidatedMideast order are not significant. Thesame prices would be used to computecomponent values, the same protein andbutterfat prices would be used, and theproposed ‘‘fluid carrier’’ price wasderived directly from the ‘‘other solids’’price. The Mideast order language ischanged accordingly, and will result invery little difference in total payments,either by handlers or to producerswhose milk is pooled under thediffering provisions.

Somatic Cell Adjustment

Michigan Milk Producers Association(MMPA), a large cooperative associationin Michigan, opposed changing thepresent Southern Michigan (Order 40)somatic cell count (SCC) adjustmentschedule to the adjustment scheduleproposed uniformly for all of the MCPorders with SCC adjustments. Changingthe current Michigan SCC adjustmentschedule to the uniform scheduleincluded in the proposed rule wouldhave the effect of reducing (from thecurrent Order 40 level) the positivevalue adjustments on milk containingless than 200,000 SCCs and reducing thenegative value adjustments on milkcontaining more than 700,000 SCCs.Incorporating the proposed adjustmentin all of the consolidated orders thathave somatic cell adjustments will makefor a more uniform system of pricingand may better reflect measurabledifferences in value.

Reporting and Payment Dates

MMPA proposed that handler reportsbe submitted one day earlier (on the 6thinstead of the 7th day after the end ofeach month) so that producers can be

paid a day earlier. The cooperative alsoadvocated that producers be paid withtwo partial payments instead of one (onthe 21st day of the month for the first15 days’ production and the 6th of thenext month for the second half of themonth’s production instead of onepartial payment on the 26th day of themonth for the first 15 days’ production,as proposed). Final payment for eachmonth’s milk would then be made nolater than the 16th of the followingmonth, instead of the 17th. Thecooperative stated that reducing thetime lag between delivering milk andbeing paid for it would betteraccommodate the cash flowrequirements of modern larger dairyfarms.

The Southern Michigan ordercurrently requires that handler reportsbe filed no later than the 5th of the nextmonth, and that nonmember producersbe paid on the 15th. These dates arevery early compared to most otherFederal orders. Two of the ordersincluded in the consolidated Mideastorder currently have a reporting date ofthe 8th and payment dates of the 18th.

The dates included in the proposedrule and adopted in this decisionrepresent an effort to find a middleground between significant differencesin the orders to be consolidated. Thedesire to accelerate payment toproducers, both by increasing thenumber of partial payments andadvancing the final payment date, isunderstandable. However, otherinterested parties in the consolidatedarea had no opportunity to indicateagreement with or opposition to suchchanges. These proposals would moreproperly be addressed in a formalrulemaking proceeding after thisproceeding is completed.

6d. Western Region

This final decision adopts fourFederal milk orders (i.e., Southwest,Arizona-Las Vegas, Western, and PacificNorthwest orders) for the westernregion. A number of comments werereceived in response to the proposedrule. These comments are addressedbelow under the applicable orderdiscussion.

A number of changes have been madeto the consolidated orders since theproposed rule. The significant changesthat have been made to all or most of theconsolidated orders are explained at theend of this regional discussion, whereas,those modifications that are unique toan individual order are discussed underthe applicable order.



Southwest Order

The consolidated Southwestmarketing area is comprised principallyof the current Texas and New Mexico-West Texas marketing areas. Withregard to milk production andpopulation (consumption), these areasare both in the process of change, but indifferent ways. Texas has one of thefastest-growing populations in the U.S.,and until recently has been able tomaintain milk production on a percapita basis. After a significant increasein milk production during the 1988–1994 period, Texas milk production hasbeen declining somewhat, accompaniedby the exit of approximately 29 percentof the State’s Grade A dairy farmers. Ifthe current trend continues, the Texasmarket could come to resemble moreclosely those of the Southeast portion ofthe U.S., relying significantly on moredistant milk supplies to meet themarket’s Class I and II needs. Thissituation currently exists for thesouthern parts of Texas.

The State of New Mexico hasexperienced relatively slow populationgrowth, but dramatic increases in milkproduction—from 1.099 billion poundsin 1988 to an estimated 4.020 billionpounds in 1997. With the decliningproduction in Texas, the New Mexicomilk-shed will be drawn upon moreoften to supply Class I and II needs inthe Texas demand centers, 500–600miles distant. Procurement costs wouldbe expected to increase dramatically. Inlight of these circumstances, provisionsin the Southwest order must provideflexibility to cooperatives and handlerssupplying the market to preventinefficient movements of milk andunnecessary costs of operation incurredfor the purpose of participating in themarket-wide pool.

Prior to enactment of the 1996 FarmBill, cooperatives operating in thesouthwestern markets had determinedthat the two milk orders in the regionwere being operated as one and shouldbe merged. Much discussion took place,and proposed order provisions weredeveloped by the principal cooperativesinvolved. These comments, withnumerous others, were considered inthe development of this final decisionfor the Southwest marketing area.

Pooling standards

Most of the pooling standards in theTexas and New Mexico-West Texasorders have been suspended for sometime. The rapid expansion of milkproduction in the region during the late1980’s created a situation in whichcooperatives and handlers operating inthe region could not meet the provisions

of the orders while pooling all of theirmilk supplies. For this reason, thepooling standards for the Southwestorder have been relaxed.

As adopted in this final decision, thepooling standards for a distributingplant require the plant to have routedisposition equal to at least 25 percentof its fluid milk receipts at the plantduring the month. In addition, at least25 percent of the plant’s routedisposition must be in the marketingarea.

One partially regulated plant locatedin the Texas marketing area will becomefully regulated under this provision.The plant has been partially regulatedunder the Texas order and, periodically,fully regulated under the ChicagoRegional order. The lowering from 50percent to 25 percent of total routedisposition for a pool distributing plantby the Southwest order will cause thisplant to become fully regulated underthe Southwest order and, thereby,alleviate the disorderly conditionscaused by its shifts in regulation. Thereshould be no change in the plant’s costs,since their supply of milk comes fromSouthwest pool sources.

The pool plant provisions of theSouthwest order have been revised inthis final decision. The modificationprovides for the pooling of plants thatspecialize in ultra-pasteurized oraseptically-processed fluid milkproducts. A detailed explanation of thechanges is located at the end of thewestern regional discussion.

There are no pool supply plantsregulated under the present Texas andNew Mexico-West Texas orders.Nevertheless, as recommended in theproposed rule and adopted in this finaldecision, provision is made for such anoperation under the Southwest order.As proposed, to qualify as a pool plant,a supply plant must ship 50 percent ormore of the total quantity of milk thatis physically received during the monthfrom dairy farmers and handlersdescribed in § 1000.9(c) to pooldistributing plants. The supply plantprovisions have been modified in thisfinal decision to include milk that isdiverted to other plants as well as milkphysically received at the plant to allowfor more efficient movement of milk todistributing plants when needed.

A provision for the pooling ofcooperative association balancing plantsis also included in the consolidatedorder. A plant located within themarketing area that is operated by acooperative association would qualify asa pool plant if pool plant status isrequested for such plant by thecooperative association and during themonth at least 30 percent of the

producer milk of members of suchcooperative association is delivereddirectly from farms to pool distributingplants or is transferred to such plants asa fluid milk product from thecooperative’s plant. The requirementthat the plant be located in themarketing area ensures that milk pooledthrough the balancing plant iseconomically available to processors offluid milk if needed.

One comment was received regardingthe proposed pooling standards forsupply plants. Kraft Foods, Inc. (Kraft),stated that the Southwest order shouldadopt all the options and poolingefficiencies contained in Section 7 ofthe proposed Central marketing order.Kraft asserts that the two markets havevirtually identical populations (21million) and Class I utilization (48percent–49 percent). In addition, thehandler contends that the pool supplyplant provisions of the Southwest orderprovide intra-market inequity amonghandlers in the Southwest market. Kraftindicated that a proprietary supplyplant could qualify for pooling only bytransferring 50 percent of milkphysically received at the plant andnoted that no farm to plant shipmentsare permitted to count towardsqualifying. However, the handler stated,a plant in the marketing area operatedby a cooperative association may makequalifying shipments directly fromfarms. The performance level, Kraftindicates, is 30 percent of all milkpooled by the cooperative.

A primary mission of mostcooperatives supplying the Southwestmarket is to provide milk to handlers forfluid use and to dispose of milkefficiently when not needed for fluiduse. The order provisions shouldaccommodate and encourage efficientmilk handling practices. Thecooperative balancing plant provision isintended to allow cooperatives tosupply the fluid market in the mostefficient manner possible and also toprocess milk efficiently when such milkis not needed for fluid use. Almost allof the dairy product manufacturingplants in the current Texas and NewMexico-West Texas marketing orders areoperated by cooperatives.

As stated in the proposed rule, thepooling provisions for the Southwestorder are similar to the provisions in thepresent Texas and New Mexico-WestTexas orders. The pool supply plantstandards are consistent with and reflectthe current marketing conditions of theconsolidated Southwest order. Thestandards should ensure that milk ofproducers servicing the Class I needs ofthe market will be pooled. Theprovisions for a supply plant in this



final decision does not recognizeshipments directly from producers’farms as qualifying shipments for asupply plant. However, there currentlyare no supply plants regulated under theTexas or New Mexico-West Texasorders. Accordingly, the provisionsshould not place proprietary handlers ata competitive disadvantage and areappropriate to meet the needs of themarket.

It is not necessary to seasonally adjustthe supply plant and balancing plantshipping requirements for theSouthwest order because the standardsproposed are flexible enough toaccommodate the disposal of surplusmilk during the flush productionseason. Also, this order, like the othernew consolidated orders, contains aprovision to allow the marketadministrator to increase or decreasethese shipping requirements.

In addition to the provisionsdescribed above, the Southwest ordercontains a provision to allow unitpooling of distributing plants operatedby the same handler.

Producer-HandlerThe producer-handler provisions that

were proposed have been revised in thisfinal decision to be very similar to theprovisions in the current Texas andNew Mexico-West Texas orders. Therevisions should assure that the status ofcurrent producer-handlers will beunchanged.

Producer MilkThe current Texas and New Mexico-

West Texas orders have provisions thatrequire a producer’s milk to be receivedat a pool plant, or touch base, beforemilk of the producer is eligible to bediverted. The proposed rule indicatedthat milk produced by producerslocated in the marketing area should beeligible for pooling without a particularpercentage or number of days’production being required to bereceived at a pool plant. For producerslocated outside the marketing area thetouch base provision of the proposedrule required that at least 15 percent ofthe production of producers bedelivered to pool plants during themonth in order to be eligible forpooling. Based on comments and areview of the different touch baserequirements for producers both in andout of the area, the provision in the finaldecision has been changed. Theprovision in the final decision willallow diversion of producer milk of anew producer, provided there is adelivery of at least 40,000 pounds or oneday’s milk production, which ever isless, to a pool plant during the month

(rather than before diversions areallowed). This dual ‘‘touch base’’standard has been developed toaccommodate a market that ischaracterized by substantial differencesin size among dairy farmers. Therequirement that one day’s productionbe delivered to a pool plant, isappropriate for many producers but isunreasonable for those who produce asmuch as seven tanker loads a day.

The current Texas order allows anamount equal to one-third of the milkdelivered to pool plants to be diverted(this provision is currently suspended),while the (currently suspended) NewMexico-West Texas provision allows 50percent of a handler’s total milk supplyto be diverted. In addition, the currentTexas order provisions base allowablediversions on deliveries to individualpool plants, greatly exacerbating thetime and effort required to keep track ofmilk movements. In the proposed rulethe provision set the limit on diversionsof producer milk on the basis of at least50 percent of the milk pooled by ahandler being received at pool plants forthe handler’s entire milk supply to bepooled. The diversion limit in this finaldecision is continued at 50 percent of ahandler’s total milk supply. The totalperformance standard will allowhandlers to meet diversion limits moreeasily with more efficient movements ofmilk. In addition, the increasedpercentage of allowable diversions willassure that all of the producers whosemilk would qualify for pooling undereither of the two orders beingconsolidated will continue to meetpooling qualifications. A provision toallow the market administrator to makeadjustments is included in the producermilk section of the order with respect tothe percentage of milk that may bediverted.

Multiple Component PricingThe reporting and payment provisions

of the consolidated Southwest order inthe final decision include thosecommon to other orders with multiplecomponent pricing. The multiplecomponent pricing plan does include asomatic cell adjustment for milk used inClasses II, III, and IV. The current Texasand New Mexico-West Texas orders donot provide multiple componentpricing. However, the proposedprovisions that were developed by thecooperatives involved in discussions tomerge the current orders did include amultiple component pricing plan. Asstated above, those comments wereconsidered in the development of thisfinal decision.

A comment was received fromLeprino Foods Company (Leprino)

regarding the inclusion of multiplecomponent pricing in the consolidatedSouthwest order. Leprino stronglysupports multiple component pricingfor both handlers and producers andstates that it has a direct interest in theconsolidated Southwest order. Thus,there is support on both the producer,as represented by cooperativeassociations, and handler side of theSouthwest dairy industry.

Transportation Credits for Surplus MilkThe Texas order currently has a

market-wide service payment provisionthat gives credits for hauling surplusmilk located in certain zones in Texasto nonpool plants outside the State foruse in manufactured products. Theprovision has not been included in theconsolidated Southwest order languagebecause of declining production andincreasing balancing plant capacity inthe affected areas of Texas.

Payment ProvisionThe Texas order is one of only a few

marketing orders that requires handlersto remit the full classified value duringthe month to the Market Administrator.In turn, the Market Administrator actsas a clearing house and forwards theseproceeds on to the respectiveorganizations. Interested persons haveexpressed an interest in retaining theseprovisions, not only for the proposedSouthwest order, but for all otherorders.

The current Texas payment provisionwas found necessary because ofproblems encountered in assuringtimely payments by pooled handlers.The provision has been in the Texasorder since 1979, and the earlierpayment problems have been remedied.Such a provision involves a rather largedegree of regulatory interventionbetween milk processors and theirsuppliers that should be shown to benecessary to correct existing problems.There is no indication that suchproblems currently exist, or would existin the absence of the provision. Nearlyall of the milk that will be pooled underthe consolidated Southwest order isproduced by cooperative members andpooled by the cooperatives. These large,business-oriented organizations shouldbe able to assure that they receive fullpayment for their members’ milk in atimely manner. In addition, there areprovisions in the General provisions(Part 1000) that provide for enforcementof late or under-payment charges at onepercent per month of the amount due.

Arizona-Las Vegas OrderMany of the provisions of the

consolidated Arizona-Las Vegas order



are explained in the ‘‘IdenticalProvisions’’ portion of this finaldecision and need not be addressedhere. Those provisions that deviate tosome extent from the ‘‘IdenticalProvisions’’ are addressed in thisdiscussion.

Pool PlantThe pool distributing plant definition

is similar to that contained in most ofthe other consolidated orders. Theminimum percentage of a pooldistributing plant’s physical receipts ofbulk fluid milk products that aredisposed of as route disposition is 25percent. The percentage of a handler’stotal route disposition into themarketing area that would result in adistributing plant becoming fullyregulated under the Arizona-Las Vegasorder is also 25 percent. While thisdefinition differs slightly from thecurrent order language, it providesuniformity with other consolidatedorders and should result in noadditional distributing plants beingpooled under the Arizona-Las Vegasorder or any change in the pool statusof distributing plants currently pooled.

The pool plant provisions of theArizona-Las Vegas order have beenrevised in this final decision. Themodification provides for the pooling ofplants that specialize in ultra-pasteurized or aseptically-processedfluid milk products. A detailedexplanation of the changes is located atthe end of the western regionaldiscussion.

The proposed pool supply plantdefinition would have required a supplyplant to ship at least 50 percent of itsphysical receipts of milk from dairyfarmers to pool distributing plantsduring the month in order to be a poolsupply plant. In the proposed rule itwas indicated that this definition wouldprovide for easy, effective orderadministration and would result in noadditional handlers being regulatedunder the order. The supply plantdefinition has been modified in thisfinal decision to include milk that isdiverted from the plant as well as milkphysically received at the plant. Thereare currently no pool supply plants inthe proposed marketing area.

The current Central Arizona orderpermits a manufacturing plant locatedin the marketing area that is operated bya cooperative association to be a poolplant, provided that the cooperativeships at least 50 percent of its membermilk to pool plants of other handlersduring the current month or theprevious 12-month period ending withthe current month. This percentagerequirement is currently suspended.

The proposed order suggested reducingthis percentage to 35 percent andauthorizing the market administrator toincrease or reduce the percentage inresponse to market conditions. The 35percent and the authorization to makeadjustments in the level is contained inthis final decision. The reducedperformance standard should enable thecontinued pooling of producer milk thatcurrently is pooled without resulting inuneconomic handling or disorderlymarketing. The Arizona-Las Vegas orderprovides that a single handler beallowed to form a unit of distributingplants and Class II manufacturing plantsprovided each plant is located withinthe marketing area. The unit in totalwould be required to meet therequirements for a pool distributingplant and at least one of the plants inthe unit would be required to meet thepool distributing plant definitionindividually. This provision wouldprovide uniformity with other federalorders and would not change the statusof any plants currently pooled. Class IImanufacturing plants are included forunit pooling with distributing plantsoperated by the same handler becausesuch plants produce products that aremarketed in conjunction with fluid milkproducts.

A provision permitting the marketadministrator to adjust the percentagesspecified in the pool plant definitionwill provide the flexibility to respond ina timely manner to changing marketingconditions without the need for a formalhearing process.


were proposed have been revised in thisfinal decision to be very similar to theprovisions in the current Arizona order.The revisions should assure that thestatus of current producers-handlerswill be unchanged.

ProducerThe consolidated order contains a

dairy farmer for other marketsdefinition. A producer could not bepooled under the Arizona-Las Vegasorder unless all of the milk from thesame farm was pooled under this orsome other federal order or unless suchnon-pooled milk went to a plant withonly Class III or Class IV utilization.This differs slightly from the currentdefinition in the Central Arizona order.Such a provision is needed in theconsolidated order to prevent dairyfarms whose milk is regularly used forfluid disposition in other markets frompooling the surplus portion of theirproduction under the Arizona-Las Vegasorder.

Producer Milk

The percentage of a handler’s pooledmilk that may be diverted to nonpoolplants is 50 percent in any month. Theproposed rule recommended a diversionlimit of 20 percent in any month.Currently, diversions under the CentralArizona order are limited to eight days’production of a producer during fourmonths of the year, with unlimiteddiversions the remainder of the year.The recommended 20 percent diversionlimit was suggested because it wasthought that this would have resulted inthe amount of milk eligible for diversionbeing approximately equivalent to eightdays’ production and would have beeneasier to administer than the currentorder provisions. In addition, theproposed rule stated that the 20 percentlimit year round would have assuredthat pooled milk will have a closeassociation with the market’s fluidprocessing plants.

Security Milk Producers Association(SMPA) expressed concern regardingthe recommended 20 percent limit onthe volume of a handler’s pooled milkthat may be diverted during any month.SMPA states that diversionrequirements set at anything less than50 percent would be financiallydetrimental to its producers. Thecooperative requests that a limit beimplemented that will not detract fromthe orderly flow of milk.

Based on the comments received bySMPA and an reevaluation of themarketing conditions in theconsolidated Arizona-Las Vegas order,and noting that eight days production isabout 40 percent, this final decisionadopts for the Arizona-Las Vegas ordera diversion limit of 50 percent for eachmonth of the year. The 50 percentdiversion limit year round is moreflexible than the current order and the20 percent limit recommended in theproposed rule and it would be easy toadminister. In addition, the 50 percentdiversion limit is consistent with thediversion limit included in theSouthwest order, which is adjacent tothe Arizona-Las Vegas Order. Thus, the50 percent diversion limit each monthshould allow the Class I needs of themarket to be met while ensuring theorderly disposition of milk. In addition,the market administrator will have theauthority to adjust the diversionpercentage.


The Arizona-Las Vegas order does notprovide for multiple component pricing(MCP). There are six plants that areexpected to be regulated under theconsolidated order: five proprietary



distributing plants, and onemanufacturing plant operated by acooperative association. The Class Iutilization for the order is expected tobe less than 50 percent, a level thatwould, in some other orders, be anindication that component pricingwould be appropriate. However, theClass I utilization at the five distributingplants is more than 80 percent. With theexception of the one cooperativebalancing plant, the handlers to beregulated constitute predominantly aClass I market.

Prior to the issuance of the proposedrule, there were no comments receivedin support of MCP for the Arizona-LasVegas order. However, Schreiber Foods,Inc. (Schreiber), Leprino, and SMPAhave indicated support for MCP in theconsolidated order. Schreiber agreeswith National Milk ProducersFederation that MCP is important insome but not all orders, and the rule toadopt such a plan and qualityadjustments to minimum prices shouldbe based on the dairy industry’spreference in each area. The handlerasserts that its Class III utilization ofover 50 percent of the milk from theArizona-Las Vegas market is a strongindication for the need of MCP in theorder.

Leprino indicates that less than half ofthe milk in the proposed Arizona-LasVegas order is used for Class I purposes.The handler argues that competitiveinequities due to differences betweenfat-skim and MCP across manufacturersoperating in different orders willbecome more significant as themanufacturing sector grows. It claimsthat the lack of MCP in the order willstimulate some disorderly marketingconditions as low component milk fromNew Mexico seeks higher revenue thatwill be available through the fat-skimpricing to the west. Additionally, SMPAstrongly suggests that a system thatprices the butterfat and proteincomponents be incorporated in theorder because it is in the best interest ofproducers.

This final decision does not adoptMCP for the consolidated Arizona-LasVegas order. The current CentralArizona order does not contain amultiple component pricing plan. Thehandlers proposed to be regulated underthe consolidated order are currently all,with one exception, regulated under thecurrent Central Arizona order. Themanufacturing of milk in theconsolidated order is anticipated to bedone primarily by Schreiber, at a non-pool plant. Schreiber is almost totallysupplied by United Dairymen ofArizona (UDA). Due to these marketingsituations (i.e., one buyer and one

seller), the implementation of MCP inthe consolidated Arizona-Las Vegasorder would only benefit some of theproducers of the order. All of theproducers in the marketing area wouldnot share equitably. As stated in theproposed rule and explained above, thefluid nature of much of the market andthe current marketing situations do notwarrant MCP at this time.

Payment Obligation of a PartiallyRegulated Distributing Plant

SMPA recommended a proposaldesigned to equalize Class I costsbetween California distributing plantsand handlers fully regulated under theproposed Arizona-Las Vegas order.SMPA explained that the proposal isessentially a modification of the‘‘Wichita Option,’’ which represents areasonable method for computing apartially regulated distributing plant’sobligation to the producer-settlementfund.

The ‘‘Wichita Option’’ compares theamounts paid to producers for milkreceived by a nonpool distributing plantwith the full class-use value of milk thatwould have applied if the plant werefully regulated under the order. Toequalize the competitive positions ofboth fully regulated plants and thoseplants not regulated under an order, anyamount by which the class-use valueexceeds the value paid to producers isdue to the producer-settlement fund orcan be paid to the producers whosupplied the handler. However, thisoption does not function appropriatelyto handle milk from plants regulatedunder a State order that provides formarket-wide pooling. Thus, themodified ‘‘Wichita Option’’ includespayment provisions for any plantregulated under such a State-operatedprogram.

The current Great Basin orderprovides payment provisions for anyhandler operating a State-regulateddistributing plant having routedisposition in the Great Basin order.This provision has been incorporated inSection 76 of the General provisions inthis final decision and is applicable toall orders.

Western Order

Many of the provisions of theconsolidated Western order areexplained in the ‘‘Identical Provisions’’portion of this final decision and neednot be addressed here. Those provisionsthat differ from those explained in the‘‘Identical Provisions,’’ or thosecurrently contained in the orders to beconsolidated, are discussed below.

Pool plant

The pool distributing plant definitionis similar to that contained in most ofthe other orders. The minimumpercentage of a pool distributing plant’sphysical receipts of bulk fluid milkproducts that are disposed of as routedisposition is 25 percent. Thepercentage of a handler’s total routedisposition distributed into themarketing area that would result in adistributing plant becoming fullyregulated under the Western order isalso 25 percent. While this definitiondiffers slightly from the currentlanguage of the orders included in thisconsolidated Western order, it providesuniformity with other consolidatedorders and should result in noadditional distributing plants beingpooled under the order or any change inthe pool status of distributing plantscurrently pooled.

The pool plant provisions of theWestern order have been revised in thisfinal decision. The modification to thepool plant definition provides for thepooling of plants that specialize in ultra-pasteurized or aseptically-processedfluid milk products. A detailedexplanation of the changes is located atthe end of the western regionaldiscussion.

The proposed pool supply plantdefinition would have required a supplyplant operator to ship at least 35 percentof the milk pooled at the supply plant,either by transfer or diversion, to pooldistributing plants during the month inorder to qualify for pooling. The 35percent level is included in the finaldecision. The percentage is slightlyhigher than that contained in thecurrent Southwest Idaho-Eastern Oregonorder and slightly lower than thatcontained in the current Great Basinorder. This change should result in nomilk that is currently associated witheither of the two orders losing suchassociation.

The pool supply plant definition inthe final decision includes provision fora March through August period duringwhich a supply plant that has met theorder’s shipping percentages for thepreceding months of September throughFebruary to be able to continue to be apool plant without meeting the shippingstandards. As with other consolidatedorders, the market administrator willhave the authority to increase ordecrease the order’s supply plantpooling standards as marketingconditions change.

The Western order final decisioncontains a provision that would permita manufacturing plant operated by acooperative association and located in



the marketing area to be a pool plant if35 percent of the milk for which thecooperative is the handler is received atpool distributing plants during themonth or during the immediatelypreceding 12-month period. Thisprovision is similar to one currentlycontained in the Great Basin order andin some of the other consolidatedorders.

Although the two current orders thathave been consolidated do not containsuch a provision, the Western orderwould provide that a single handler beallowed to form a unit of distributingplants and Class II manufacturing plantsprovided each plant is located withinthe marketing area, as suggested by theIdentical Provisions committee. Theunit in total would be required to meetthe requirements for a pool distributingplant and at least one of the plants inthe unit would be required to meet thepool distributing plant definitionindividually. This provision wouldprovide uniformity with other federalorders and would not change the statusof any plants currently pooled. Class IImanufacturing plants are proposed to beincluded for unit pooling withdistributing plants operated by the samehandler because such plants produceproducts that are marketed inconjunction with fluid milk products.

Proprietary Bulk Tank HandlerThe consolidated Western order final

decision retains the bulk tank handlerprovision that is currently in theSouthwestern Idaho-Eastern Oregonorder, permitting a handler other than acooperative association to divert milk tononpool plants for the handler’s accountbased on shipments of milk to poolplants of other handlers.


were proposed have been revised in thisfinal decision to be very similar to theprovisions in the current Great Basinand Southwestern Idaho-Eastern Oregonorders. The revisions should assure thatthe status of current producers-handlerswill be unchanged.

ProducerThe Western order contains a dairy

farmer for other markets definition. Aproducer would not qualify for poolingunder the Western order unless all ofthe milk from the same farm was pooledunder this or some other federal orderor unless such non-pooled milk went toa plant with only Class III or Class IVutilization. This differs slightly from thecurrent definition in the Great Basinorder. Such a provision is contained inthe Western order to prevent dairy

farmers whose milk is regularly used forfluid disposition in other markets frompooling the surplus portion of theirproduction on the consolidated order.Security Milk Producers Associationsupports this provision and states that itis needed to prevent the pooling ofsurplus milk from farms whose milk isregularly associated with other markets.

Producer MilkThe percentage of a handler’s pooled

milk for the Western order finaldecision that may be diverted to non-pool plants is 90 percent in any month.The proposed rule recommended a limitof 80 percent, which is identical to thepercentage currently included in theSouthwestern Idaho-Eastern Oregonorder and is only slightly higher thanthat for the present Great Basin order(i.e., 75 percent for cooperatives and 70percent for proprietary handlers).

Avonmore West Inc. (Avonmore), ahandler in the Southwestern Idaho-Eastern Oregon order in Twin Falls,Idaho, favors the more liberalqualification rules proposed for theWestern Order whereby only one day’sproduction of producer milk has to bereceived at a pool plant. However, thehandler opposed the 80 percentstandard of a handler’s pooled milk thatmay be diverted to non-pool plants asrecommended in the proposed rule.Avonmore indicated that the 80 percentdiversion limitation is identical to theone currently in the SouthwesternIdaho-Eastern Oregon Federal order andstated that this standard was suspendedindefinitely in December 1989. Thehandler contends that the argument thatthe 80 percent diversion limitationcaused uneconomic movements of milkis still valid today.

In 1997, Avonmore notes, an averageof 217 million pounds of producer milkwas diverted to nonpool plants eachmonth. Accordingly, Avonmore arguesthat the reintroduction of the 80 percentdiversion limitation would allow only80 million pounds of producer milk tobe diverted to nonpool plants. Thehandler contends this would precludemany dairy producers in Idaho fromhaving their milk associated with theWestern order, which could causesignificant price disparities betweenproducers and create disorderlymarketing conditions that Federalorders are intended to prevent.

Utah Farm Bureau Federation filed acomment regarding the consolidation ofthe Great Basin and SouthwesternIdaho-Eastern Oregon orders into theWestern order. In their comments thefederation states that the poolingprovisions of the current Great Basinorder must be maintained to prohibit

opportunistic entry of outside milk intothe Utah Class I pool.

As adopted in this final decision, the90 percent diversion limitation is thesame as that adopted in theconsolidated Upper Midwest order. The90 percent limitation on movements ofpooled milk to nonpool plants shouldpermit all milk associated with themarket that is not needed at pool plantsduring the month to be pooled andpriced under the order. The 90 percentstandard provides handlers moreflexibility to efficiently move milk.Although unlimited diversions are notincorporated in the consolidated order,the 90 percent standard should notpreclude most producers associatedwith the current individual orders fromhaving their milk pooled under theconsolidated Western order. The 90percent standard is an appropriate levelfor the consolidated order given theprovisions contained in the currentindividual orders and should not createany disorderly marketing conditions.The recommended standard also shouldensure that additional amounts ofunneeded milk would not be pooled. Inaddition, as contained in otherconsolidated orders the marketadministrator will have the authority toadjust the diversion percentage.

The order language allowing two ormore cooperative associations to jointlymet the diversion limits wasinadvertently excluded from theproposed rule. Order language to allowthis to occur has been included in thisfinal decision.

Darigold Farms opposes the touch-base requirement that wasrecommended in the proposed rule. Thecooperative contends that the exclusionof this provision may present anopportunity to obtain unified supportfor a provision that would prevent orreduce opportunistic pooling.

The current Southwestern Idaho-Eastern Oregon and Great Basin orderscontain such a touch-base provision.The provision ensure that a producerwhose milk is pooled on the order isindeed servicing the Class I needs of themarket. Accordingly, the touch-baseprovision recommended in theproposed rule is adopted in this finaldecision. The provision provides thatduring the month at least one day’s milkproduction of a dairy farmer new to theorder must be physically received at apool plant so that milk of such produceris eligible for diversion.

Reports of Receipts and Utilization andPayroll Reports

The Western order requires poolhandlers to file a ‘‘report of receipts andutilization’’ on or before the seventh day



after the end of the month. This isidentical to the current reporting date inthe Great Basin order but two daysearlier than the same provision in theSouthwestern Idaho-Eastern Oregonorder. Almost all handlers currently filereports by FAX or some other form ofelectronic data transfer, whicheliminates delays due to mail handling.A seven-day reporting period shouldallow adequate time for handlers toprepare reports and will allow thecomputation and release of producerprice information to occur on or beforethe 12th day after the end of the month.

The date on which the report ofpayments to producers is due to themarket administrator under the Westernorder is on or before the 21st day afterthe end of the month. This is the samedate as that under the Great Basin order,but one day earlier than under theSouthwestern Idaho-Eastern Oregonorder. The earlier reporting date andannouncement of producer pricesshould assure that an earlier payrollreporting date would not beburdensome.

Multiple Component PricingBoth the Great Basin order and the

Southwestern Idaho-Eastern Oregonorder currently have multiplecomponent pricing based on proteinwithout a somatic cell adjustment. Themultiple component pricing provisionsof the consolidated Western ordershould be the same as those for otherproposed orders that provide formultiple component pricing based onprotein but without a somatic celladjustment. The Western order has asignificant amount of milk used inmanufactured products, especiallycheese, and component pricing willenable producers to be paid according tothe value of the components of theirmilk. However, the somatic celladjustment included in some of theconsolidated orders for whichcomponent pricing is proposed is notwarranted by marketing conditionsunder the Western order, and such anadjustment is not included in the finaldecision.

Avonmore expressed support for theuse of multiple component pricing inthe Western Order and stronglyrecommended the inclusion of a somaticcell count price adjuster. Avonmorestates the SCC adjuster is necessarybecause the manufacture of cheese is thepredominant use of milk in the WesternOrder. Avonmore notes that it has beendocumented that elevated levels of SCCimpact cheese yield. In addition, thehandler contends that dairy products(i.e., cheese, NFDM, butter, wheyproducts) exported to the European

Union must be made with milkcontaining less than 400,000 SCC.

Darigold Farms, a cooperative thatwill have milk on the order hasexpressed the opinion that anadjustment for somatic cells is a qualityissue that may be better dealt withbetween the buyer and seller. Inaddition, the nearby Pacific Northwestorder will not have a somatic celladjustment. The somatic cell count ofmilk produced in the western U.S. is atan average level of 250,000. This levelis significantly lower than the 350,000level, which provides no adjustment inthe consolidated orders that adjust forsomatic cell count. For the reasonsstated above and due to the high qualityof milk produced in the consolidatedWestern marketing area, a qualityadjustment is unnecessary and need notbe included in the order.

Payments To and From the ProducerSettlement Fund

Payments to the producer settlementfund under the consolidated order aredue on or before the 14th day after theend of the month. This is two days afterthe announcement of uniform producerprices, which is an identical time periodto that which exists in the two currentorders that are being consolidated.

Payments from the producersettlement fund under the consolidatedorder would be due on or before the15th day after the end of the month.This is the same date as under thecurrent Great Basin order and three daysearlier than under the SouthwesternIdaho-Eastern Oregon order. Thispayment date should be practicable,given the use of current banking andtransmission techniques.


Under the Western order, partialpayments would be due from handlersto producers who are not members ofcooperative associations on or before the25th day of the month in an amount notless than 1.2 times the lowest class pricefor the preceding month multiplied bythe hundredweight of milk receivedfrom such producers during the first 15days of the month. Final paymentswould be due on or before the 17th dayafter the end of the month.

Partial payments to cooperativeassociations would be due on or beforethe 24th day of the month at the samerate as above, with final payments dueon or before the 16th day after the endof the month. These final payment datesrepresent very little or no change fromthe orders’ present payment dates. Thepartial payment dates are earlier thanthose required under the current orders,

but are very close to those suggested bythe Identical Provisions committee, andcompliance should present no hardshipto handlers who would already havehad the use of the producers’ milk for9 to 23 days.

Pacific Northwest OrderMany of the provisions of the Pacific

Northwest order are explained in the‘‘Identical Provisions’’ portion of thisfinal decision, and need not beaddressed here. The provisions thatdeviate somewhat from thoseincorporated in other order areas are theprovisions dealing with standards fordetermining the pool status of producersand handlers, the definition ofproducer-handlers, the factors uponwhich payments to producers arecalculated, and reporting and paymentdates. Because this order is notproposed to be consolidated with anyother orders, there is little reason forchanging the substance of many of theprovisions that are not included in theGeneral Provisions.

Pool Distributing PlantThe pool distributing plant provisions

of the proposed Pacific Northwest Orderare changed from the current definitionto one that more closely resembles thedefinition suggested in the identicalprovisions report. Rather than basingthe identification of a pool distributingplant on only 10 percent of the plant’sreceipts as in-area route dispositions,the order should specify that such aplant have at least 25 percent of itsphysical receipts distributed as routedisposition, and at least 25 percent of itsroute disposition distributed within themarketing area.

It is expected that the modifiedpooling standard will not affect the poolstatus of any plant that currently doesor does not meet the pooling standardof the Pacific Northwest order. Inaddition, it would remedy a provisionthat could result in fully regulating aplant that has minimal association withthe marketing area.

The pool plant provisions of thePacific Northwest order have beenrevised in this final decision. Onemodification provides for the pooling ofplants that specialize in ultra-pasteurized or aseptically-processedfluid milk products. A detailedexplanation of the changes is located atthe end of the western regionaldiscussion.

Pool Supply PlantFor the most part, the current pool

supply plant definition of the PacificNorthwest order and the performancestandard of shipping 20 percent of the



milk is appropriate to the marketingconditions in the area. However, theprovision that currently requires ahandler to include producer milkmoved directly to pool distributingplants in the shipments on which poolplant performance is calculated ischanged to allow the handler to includesuch movements if the handler wants toqualify its plant for pooling. A plantoperator who receives milk at a plantonly for manufacturing use also will beable to supply producer milk directly todistributing plants without arequirement that the manufacturingplant be a supply plant.

In the Pacific Northwest order thecurrent March through August periodduring which supply plants do not haveto ship the minimum percentage todistributing plants if they have done soduring the previous September throughFebruary period is included in the poolsupply plant definition.

As in the other consolidated orders,the market administrator will have theauthority to increase or decrease theorder’s pooling provisions as marketingconditions change for the purpose ofassuring that an adequate supply of milkwill be available for fluid use, or toassure that the order does not requirehandlers to undertake uneconomicmovements of milk to maintain: (1) Thepool status of their plants, or (2) thepooling of producers who havehistorically been associated with themarket and who help serve Class Ineeds.

Nonpool PlantThe current definition and exemption

for milk produced and processed bystate institutions, as contained in thepresent order’s producer-handlerdefinition, is expanded and moved to beincluded in the ‘‘Nonpool plant’’definition contained in the GeneralProvisions. Such entities, along withcolleges and universities and charitableorganizations, will not be subject to theorders’ pricing and pooling provisionsas long as they have no sales incommercial channels.

The present Pacific Northwest orderprovisions allow a state institution toavoid any regulation on the portion ofits milk that is used only within theinstitution, and apply some pricingregulation to that portion that isdistributed in commercial channels. Insome respects, this arrangement issimilar to the situation of partiallyregulated distributing plants. However,partially regulated distributing plantoperators, to avoid obligations underFederal orders, must show that they paythe dairy farmers who ship milk to themat a rate at least commensurate with that

paid to producers whose milk is pooledunder the order. In any case, they mustprocure a milk supply in thecompetitive market. State institutionsmay have any number of costadvantages over regulated handlers inthe production and processing of milk,such as not having to pay a minimumwage and not having to pay propertytaxes. It would be unjust to allow suchinstitutions to compete with fullyregulated handlers in regularcommercial channels as if the playingfield were level. Therefore, state andother institutions that compete withregulated handlers in regularcommercial channels, such as bids forschool milk programs, would beregulated on those sales.

Producer-HandlerThe current Pacific Northwest

producer-handler provisions remainessentially untouched. Some of the‘‘Identical Provisions’’ features of theproducer-handler definition, such as the150,000-pound thresholds for routedispositions, own farm production, andreceipts from pool plants are adopted inthis final decision. The rest of thecurrent producer-handler provisionsremain in effect for administrativepurposes.

Producer-handlers represent a muchlarger portion of the Class I dispositionsin the Pacific Northwest marketing areathan in most other Federal order areas.In many marketing areas, producer-handlers supply one percent or less ofthe Class I sales. In the PacificNorthwest area, however, they furnishalmost 10 percent of the market’s ClassI dispositions. The larger average size ofthe dairy farms in the western UnitedStates makes more likely the existenceof a producer-handler that is asignificant factor in the market.

The current order’s producer–handlerprovisions are based on the history ofproducer–handler operations in themarketing area, reflecting difficultiesencountered in order administration,attempts to circumvent orderprovisions, and court challenges.

In addition to the current orderprovisions, the producer–handlerdefinition contains language clarifyingthat milk received by the producer–handler at a location other than theproducer–handler’s processing plant fordistribution on routes will be includedas a receipt from another handler.

Reserve Supply UnitThe Pacific Northwest order will

continue to provide for a cooperativereserve supply unit. The existingprovision has many similarities to areserve supply plant, which is not

provided in this order but which isincluded in several of the consolidatedorders.

Under the terms of the presentprovision, the cooperative members ofthe reserve supply unit must be locatednear a pool distributing plant, as areserve supply plant must be located inthe marketing area. Both the reservesupply unit and the reserve supplyplant provisions require that the plantor unit operator request prior approvalof the market administrator to initiateand cancel their status, both requirelong-term association with the market,and both provide substantial penaltiesfor failing to meet all requiredconditions. Although the cooperativeunit does not have monthlyqualification requirements, it is subjectto a call by the market administratorafter the market administrator’sinvestigation of the need forsupplemental supplies of milk. Becauseof the current existence of thisprovision, based on the need shown ata public hearing, and its similarities toa pooling mechanism suggested forother orders, provision for thecooperative reserve supply unit willcontinue to be included in the PacificNorthwest order.

The order language regarding theexemption from diversion limits for acooperative reserve supply unit wasinadvertently excluded from theproposed rule. The order language forthis exemption has been included inthis final decision.

The order language allowing two ormore cooperative associations to jointlymet the diversion limits was alsoinadvertently excluded from theproposed rule. Order language to allowthis to occur has been included in thisfinal decision.

Producer and Producer MilkThe consolidated Pacific Northwest

order would contain a ‘‘dairy farmer forother markets’’ provision for eachmonth of the year. The large volume ofmilk production in California andCalifornia’s quota system give dairyfarmers an incentive to pool productionin a volume equal to their quota poundson the California order, and thenattempt to share in the PacificNorthwest Class I market with theirover-quota production, for whichreturns under the California order aremuch less. At the same time, none of theCalifornia Class I returns would beshared with Pacific Northwestproducers. Similarly, producers subjectto other state programs should not beallowed to pool the reserve suppliesfrom the State-regulated markets andshare in returns from the Pacific



Northwest pool while enjoying thebenefits of the State orders’ Class Ireturns.

The current provisions of the PacificNorthwest order do not require that aproducer’s milk be received at poolplants for the producer’s first pooleddelivery on the market or for anyspecified period. If a handler meets itsoverall performance requirements forsupplying milk to the market, it shouldmake no difference which individualproducer’s milk is actually delivered topool plants as long as the milk of eachproducer participating in the pool isGrade A and available to the market ifand when needed. It is expensive,inefficient, and unnecessary to movemilk from areas close to nonpoolmanufacturing plants to bottling plantsin the city markets when that milk is notneeded for bottling. For the abovereasons and furthermore because thereare often great distances andmountainous terrain between plants andfarms in the more sparsely populatedWest, no ‘‘touch base’’ requirementsshould be included. As statedpreviously, Darigold Farms supports theexclusion of ‘‘touch base’’ requirements.The cooperative states that theexclusion may present an opportunity toobtain unified support for a provisionthat would prevent or reduceopportunistic pooling.

This order and other western ordershave allowed producers to pool milk onmore than one order during the samemonth. Because of the locations of anumber of dairy farmers, their milk maybe used by pool plants regulated undermore than one order in a single month.These producers also represent a reservesupply for more than one market. Large,multi-market handlers should be giventhe flexibility to market and transporttheir milk to fulfill the needs of theircustomers in the most efficient waypossible.

The small changes in the finaldecision from the current poolingprovisions of the Pacific Northwestorder result in very little change in theorder’s diversion limits. The limit of 80percent of the handler’s supply ofproducer milk remains unchanged, withthe months during which the percentageis effective changed from Septemberthrough April to September throughFebruary. These months will correspondto the months during which supplyplants must ship 20 percent of theirreceipts to pool distributing plants.

In the current order there is no limiton diversions during May throughAugust. In this final decision there willbe a limit of 99 percent on diversions ofproducer milk for the months of Marchthrough August. The current delivery

standards have not been overlyrestrictive nor associated unneededsupplies with the market and should beallowed to continue basicallyunchanged. However, the change fromwithout limit to a percentage amountwill allow the market administrator, asprovided for in other orders theauthority to adjust the percentage ofmilk that may be diverted.


Although the current PacificNorthwest order contains a multiplecomponent pricing plan very like thatproposed to be standard for theconsolidated orders, it does not nowand would not under this reformprocess contain a somatic celladjustment provision. The level ofsomatic cells in the western U.S. isgenerally lower than in the east, with anoverall average of approximately250,000 instead of 350,000. This lowersomatic cell count would seem toreduce the need for such a provision.Historically, the principal argument fora somatic cell adjuster has been thenegative effect of somatic cells on thecheese yields. Although cheesemanufacturing in the Northwest isincreasing, most cheese manufacturingis done by cooperative associations whohave expressed the opinion that anadjustment for somatic cells is a qualityissue best dealt with internally. Thesomatic cell adjustments in theconsolidated orders of the final decisionare not incorporated in the PacificNorthwest order.

Announcement of Producer PricesThe dates on which handler reports,

market administrator’s announcement ofproducer prices, and payment toproducers would remain unchangedfrom those of the current order.

General Comment Related to OrdersDarigold Farms suggests that the new

orders provide some performancerequirements attached to eachindividual market, but recommends thata producer, once qualified, should belocked into the pool for a minimum offour months. This recommendation hasnot been incorporated in the finaldecision for any of the western orders.The provisions adopted in each ordershould ensure that the Class I needs ofthe markets are met.

Major Changes to Orders From theProposed Rule

The pool plant provisions of theorders in the western region have beenrevised. Paragraph (b) of section 7 willaccommodate the pooling of plants that

specialize in ultra-pasteurized oraseptically-processed fluid milkproducts (i.e., fluid milk products witha shelf life of at least 60–90 dayswithout refrigeration.) At the presenttime, there are no plants processing thistype of product in the Southwest,Arizona-Las Vegas, or Pacific Northwestmarketing areas. However, there is oneplant in the Western order market area.

Unlike a typical distributing plant, aplant specializing in extended shelf-lifeproducts may have a more erraticprocessing schedule, reflecting thelonger shelf life of the productspackaged at the plant. Consequently, aplant’s Class I utilization may varyconsiderably from month to month. Incertain areas of the country, suchvariability has resulted in shifting poolstatus for this type of plant from oneorder to another. Such regulatoryinstability is not conducive to orderlymarketing. To provide greater regulatorystability for these plants, they should befully regulated pool plants if they arelocated in the marketing area andprocess at least 25 percent of their fluidmilk product receipts during the monthinto ultra-pasteurized or aseptically-processed fluid milk products. Thisprovision will not guarantee that a plantqualifies as a fully-regulated pool plantevery month; some months a plant mayfail to process 25 percent of its milkreceipts into ultra-pasteurized oraseptically-processed fluid milkproducts. Nevertheless, the provisionwill guarantee that if a plant meets the25 percent standard described above, itwill be qualified under the same orderall the time.

7. Miscellaneous and Administrative

(a) Consolidation of the marketingservice, administrative expense, andproducer-settlement funds. To completethe consolidation of the present 31Federal orders effectively and equitably,the reserve balances in the marketingservice, administrative expense, andproducer-settlement funds that haveresulted under the individual orderswould be combined.

The balances in these three fundsshould be combined on the same basisthat the marketing areas areconsolidated into regional orders herein.For instance, the Texas and NewMexico-West Texas marketing areas aremerged into a new regional Southwestorder. Accordingly, the reserve balancesin the marketing service, administrativeexpense and producer-settlement fundsof the two individual orders likewiseshould be combined into three separatefunds established under theconsolidated Southwest order.



The marketing areas of the 11consolidated orders essentiallyrepresent the territory covered by the 31individual orders plus the territoryincluded in the former Tennessee Valleymarketing area. Because of this, thehandlers and producers servicing themilk needs of the individual marketswill continue to furnish the milk needsof the applicable regional market for themost part.

In that regard, the reserve balances inthe funds that have resulted under the31 individual orders should becombined on a marketing area basis intothe appropriate separate fundestablished for each of the 11 regionalorders. Any liabilities of such fundsunder the individual orders would bepaid from the appropriate newlyestablished fund of the applicableregional order. Similarly, obligationsthat are due the separate funds underthe individual orders would be paid tothe appropriate combined fund of theapplicable consolidated order.

In most cases, the entire marketingarea of an order or orders is included inthe consolidated marketing area of oneof the 11 regional orders. Four presentmarketing areas would be split betweentwo consolidated orders. One county ofthe present Louisville-Lexington-Evansville (Order 46) marketing areawould be included in the Southeastorder, and the rest of the territory in theOrder 46 marketing area would beincluded under the Appalachian order.Even though one Order 46 county isincluded in the consolidated Southeastorder, all of the present Order 46producers and handlers are expected tobe covered under the consolidatedAppalachian order. Accordingly, thebalances in the Order 46 marketingservice, administrative expense, andproducer settlement funds should beconsolidated into the three separatefunds established for the consolidatedAppalachian market.

Different regulatory situations,however, will occur in the other threeinstances where a current marketingarea is divided between twoconsolidated orders. The southwestMissouri and northwest Arkansasportions of the current Southwest Plainsorder area are included in theconsolidated Southeast marketing area,while the remainder of the SouthwestPlains area is combined with themarketing areas of eight other orders inthe consolidated Central marketing area.Similarly, one county of the currentGreat Basin (Order 139) marketing areais included in the consolidated Arizona-Las Vegas order and the rest of theOrder 139 marketing area is included inthe consolidated marketing area for the

West. In the third instance, two zones ofthe Michigan Upper Peninsula (Order44) marketing area are included in theconsolidated Upper Midwest marketingarea and the other zone of the Order 44marketing area is included in themarketing area for the Mideast regionalorder.

In each of these 3 cases, some of theproducers and handlers of each of thecurrent order areas that are beingdivided will become pooled under oneconsolidated order, while the otherproducers and handlers of each of theseareas will become pooled under anotherregional order. Accordingly, any reservebalances in the marketing service,administrative expense and producer-settlement funds of these threeindividual orders should be dividedequitably among the applicableconsolidated orders.

The money accumulated in themarketing service funds of theindividual orders is that which has beenpaid by producers for whom the marketadministrators are performing suchservices. Since the marketing areas ofthe 11 regional orders encompass theterritory covered by the individualorders, for the most part, the producerswho have contributed to the marketingservice funds of the individual ordersare expected to continue supplying milkfor the consolidated orders. Sincemarketing service programs will becontinued for these producers under theregional orders, it would be appropriateto combine the reserve balances in themarketing service funds of the order ororders that are represented in theconsolidation of each of the 11 regionalorders.

When the consolidated marketing areaincludes the marketing area of one ormore individual orders, any remainingbalance in the marketing service fund ofthe individual order or orders should becombined in the marketing service fundestablished for the applicableconsolidated order. If a currentmarketing area is split between twoconsolidated markets and the regulatorystatus of producers and handlers isdivided between the two regionalorders, as is the case with the MichiganUpper Peninsula, Southwest Plains, andGreat Basin orders, any balance in themarketing service fund of the individualorder should be prorated between thetwo consolidated orders on the basis ofthe amount of milk subject to themarketing service deduction that will becovered by each respective regionalorder (using producer deliveries in thelast month the individual orders are ineffect but assuming that the marketingareas had been consolidated).

The money paid to the administrativeexpense fund is each handler’sproportionate share of the cost ofadministering the order. For the mostpart, handlers currently regulated underthe individual orders will continue to beregulated under the consolidated orders.In view of this, it would be anunnecessary administrative andfinancial burden to allocate the reservefunds of the individual orders back tohandlers and then accumulate anadequate reserve for each of theconsolidated orders. It would be asequitable and more efficient to combinethe remaining administrative moniesaccumulated under the individualorders in the same manner as themarketing areas are combined.

For the orders where the consolidatedmarketing area includes the regulatedterritory of one or more of theindividual orders, any remainingbalance in the administrative expensefund of the individual order or orderswould be combined into theadministrative expense fund establishedfor the applicable consolidated order. Inthe situations where the currentindividual marketing area is split andthe regulatory status of producers andhandlers is divided (as in the case of theMichigan Upper Peninsula, SouthwestPlains, and Great Basin orders) betweentwo consolidated marketing areas, theremaining balance in the administrativeexpense fund should be proratedbetween the two regional orders on thebasis of the amount of milk that wouldbe pooled and priced under eachrespective consolidated order (usingproducer milk deliveries during the lastmonth the individual orders are in effectbut assuming that the orders had beenconsolidated).

Likewise, the producer-settlementfund balances of the individual ordersshould be combined. They should becombined on the same basis as themarketing areas are consolidated herein.This will enable the producer-settlement funds of the consolidatedorders to continue without interruption.

The producers currently supplyingthe individual markets are expected tosupply milk for the consolidatedmarkets. Thus, monetary balances in theproducer-settlement funds of theindividual orders now would bereflected in the pay prices of theproducers who will benefit from theapplicable consolidated orders. Thecombined fund for each consolidatedorder also would serve as a contingencyfund from which money would beavailable to meet obligations (resultingfrom audit adjustments and otherwise)occurring under the individual orders.



The same procedure used incombining the remaining balances inthe marketing service andadministrative expense funds of theindividual orders should be followed incombining the producer-settlement fundbalances when the individual orders areconsolidated. For orders where theconsolidated marketing area includesthe marketing area of one or moreorders, any remaining balance in theproducer-settlement fund of theindividual order or orders would becombined into the producer-settlementfund established for the applicableconsolidated order. In the threesituations (Michigan Upper Peninsula,Southwest Plains, and Great Basin)where the marketing area of a currentorder is split between two consolidatedorders and some of the individualmarket’s producers and handlers wouldbe regulated under one consolidatedorder and others would be regulatedunder another consolidated order, thebalance in the producer-settlement fundshould be divided equitably betweenthe two consolidated orders. Since theMichigan Upper Peninsula order is anindividual-handler pool market, noproducer-settlement fund is provided.In the 2 remaining instances in whichcurrent marketing areas are dividedbetween 2 consolidated orders, theremaining balance in the producer-settlement funds of the SouthwestPlains and Great Basin orders should beprorated between the consolidatedorders on the basis of the amount ofmilk that will be pooled and pricedunder each respective consolidatedorder (using producer milk deliveriesduring the last month the individualorders are in effect but assuming thatthe orders had been consolidated).

(b) Consolidation of the transportationcredit balancing funds. To complete theconsolidation process, the reservebalances in the transportation creditbalancing funds that are in effect nowunder three Southeast orders (Carolina,Order 5; Southeast, Order 7; andLouisville-Lexington-Evansville, Order46) also should be consolidated. Thesefunds should be combined on amarketing area basis. In that regard, thereserve balances in the transportationcredit balancing funds of the Carolinaand Louisville-Lexington-Evansvilleorders should be consolidated into anewly established transportation creditbalancing fund for the consolidatedAppalachian order, which also includesthe current marketing areas of these twoorders with the exception of one county.Similarly, the reserve balance in thetransportation credit balancing fund ofthe present Southeast order should be

transferred to the consolidatedSoutheast order, which includes all ofthe marketing area of the presentSoutheast order. These procedures willenable the transportation credits tocontinue without interruption underthese two consolidated orders.

(c) General findings.The findings and determinations

hereinafter set forth supplement thosethat were made when the aforesaidorders were first issued and when theywere amended. The previous findingsand determinations are hereby ratifiedand confirmed, except where they mayconflict with those set forth herein.

(1) The tentative marketingagreements and the orders, as herebyproposed to be amended, and all of theterms and conditions thereof, will tendto effectuate the declared policy of theAct;

(2) The parity prices of milk asdetermined pursuant to section 2 of theAct are not reasonable in view of theprice of feeds, available supplies offeeds, and other economic conditionswhich affect market supply and demandfor milk in each of the aforesaidmarketing areas, and the minimumprices specified in the tentativemarketing agreements and the orders, ashereby proposed to be amended, aresuch prices as will reflect the aforesaidfactors, insure a sufficient quantity ofpure and wholesome milk, and be in thepublic interest;

(3) The tentative marketingagreements and the orders, as herebyproposed to be amended, will regulatethe handling of milk in the samemanner as, and will be applicable onlyto persons in the respective classes ofindustrial and commercial activityspecified in the marketing agreements;

(4) All milk and milk productshandled by handlers, as defined in thetentative marketing agreements and theorders as hereby proposed to beamended, are in the current of interstatecommerce or directly burden, obstruct,or affect interstate commerce in milk orits products; and

(5) It is hereby found that thenecessary expense of the marketadministrator for the maintenance andfunctioning of such agency will requirethe payment by each handler, as his prorata share of such expense, 5 cents perhundredweight or such lesser amount asthe Secretary may prescribe, withrespect to milk specified in § 1000.85 ofthe General Provisions.

CommentsIn arriving at the findings and

conclusions, and the regulatoryprovisions of this decision, each of thecomments received was carefully and

fully considered in conjunction with therulemaking record.

Marketing Agreements and OrderAmending the Orders

The marketing agreements regulatingthe handling of milk in each of theconsolidated orders are not included inthis final decision because theregulatory provisions thereof would bethe same as those contained in theorders, as hereby amended. Thefollowing order amending the ordersregulating the handling of milk in therespective marketing areas of theseorders is proposed as the detailed andappropriate means by which theforegoing conclusions may be carriedout.

Referendum Order to DetermineProducer Approval

This decision does not provide forconducting referendums of producers todetermine if they approve of theissuance of the consolidated orders. Anotice to conduct a referendum on eachof the consolidated orders will be issuedat a future date.

List of Subjects in 7 CFR Parts 1000,1001, 1002, 1004, 1005, 1006, 1007,1012, 1013, 1030, 1032, 1033, 1036,1040, 1044, 1046, 1049, 1050, 1064,1065, 1068, 1076, 1079, 1106, 1124,1126, 1131, 1134, 1135, 1137, 1138 and1139

Milk marketing orders.Dated: March 12, 1999.

Michael V. Dunn,Under Secretary, Marketing and RegulatoryPrograms.

Order Amending the Orders Regulatingthe Handling of Milk in the Northeastand Other Marketing Areas

This order shall not become effectiveunless and until the requirements of§ 900.14 of the rules of practice andprocedure governing proceedings toformulate marketing agreements andmarketing orders have been met.

Findings and DeterminationsThe findings and determinations

hereinafter set forth supplement thosethat were made when the orders werefirst issued and when they wereamended. The previous findings anddeterminations are hereby ratified andconfirmed, except where they mayconflict with those set forth herein.

(a) The said orders as herebyamended, and all of the terms andconditions thereof, will tend toeffectuate the declared policy of the Act;

(b) The parity prices of milk, asdetermined pursuant to section 2 of theAct, are not reasonable in view of the



price of feeds, available supplies offeeds, and other economic conditionswhich affect market supply and demandfor milk in the aforesaid marketingareas. The minimum prices specified inthe orders as hereby amended are suchprices as will reflect the aforesaidfactors, insure a sufficient quantity ofpure and wholesome milk, and be in thepublic interest; and

(c) The said orders as hereby amendedregulate the handling of milk in thesame manner as, and are applicable onlyto persons in the respective classes ofindustrial or commercial activityspecified in, the marketing agreements;

(d) All milk and milk productshandled by handlers, as defined in theorders as hereby amended, are in thecurrent of interstate commerce ordirectly burden, obstruct, or affectinterstate commerce in milk or itsproducts; and

(e) It is hereby found that thenecessary expense of the marketadministrators for the maintenance andfunctioning of such agency will requirethe payment by each handler, as his prorata share of such expense, 5 cents perhundredweight or such lesser amount asthe Secretary may prescribe, withrespect to milk specified in § 1000.85 ofthe General Provisions.

Order Relative to Handling

It is therefore ordered, that on andafter the effective date hereof, thehandling of milk in the Northeast andother marketing areas shall be inconformity to and in compliance withthe terms and conditions of the orders,as amended, and as hereby amended, asfollows:

The provisions of the proposedmarketing agreements and orderamending the orders contained in theproposed rule issued by theAdministrator, Agricultural MarketingService, on January 21, 1998, andpublished in the Federal Register onJanuary 31, 1998 (63 FR 4802), asmodified herein, shall be and are theterms and provisions of this order,amending the orders, and are set forthin full herein.

For the reasons set forth in thepreamble and under the authority ofTitle 7, chapter X, parts 1000, 1001,1005, 1006, 1007, 1030, 1032, 1033,1124, 1126, 1131, and 1135 are revisedand parts 1002, 1004, 1012, 1013, 1036,1040, 1044, 1046, 1049, 1050, 1064,1065, 1068, 1076, 1079, 1106, 1134,1137, 1138 and 1139 are removed andreserved as follows:

PART 1000—GENERAL PROVISIONSOF FEDERAL MILK MARKETINGORDERS

Subpart A—Scope and PurposeSec.1000.1 Scope and purpose of this Part 1000.

Subpart B—Definitions1000.2 General definitions.1000.3 Route disposition.1000.4 Plant.1000.5 Distributing plant.1000.6 Supply plant.1000.8 Nonpool plant.1000.9 Handler.1000.14 Other source milk.1000.15 Fluid milk product.1000.16 Fluid cream product.1000.17 [Reserved]1000.18 Cooperative association.1000.19 Commercial food processing

establishment.

Subpart C—Rules of Practice andProcedure Governing MarketAdministrators1000.25 Market administrator.

Subpart D—Rules Governing OrderProvisions1000.26 Continuity and separability of

provisions.

Subpart E—Rules of Practice andProcedure Governing Handlers1000.27 Handler responsibility for records

and facilities.1000.28 Termination of obligations.

Subpart F—Classification of Milk1000.40 Classes of utilization.1000.41 [Reserved]1000.42 Classification of transfers and

diversions.1000.43 General classification rules.1000.44 Classification of producer milk.1000.45 Market administrator’s reports and

announcements concerningclassification.

Subpart G—Class Prices1000.50 Class prices, component prices,

and advanced pricing factors.1000.51 [Reserved]1000.52 Adjusted Class I differentials.1000.53 Announcement of class prices,

component prices, and advanced pricingfactors.

1000.54 Equivalent price.

Subpart H—Payments for Milk

1000.70 Producer-settlement fund.1000.76 Payments by a handler operating a

partially regulated distributing plant.1000.77 Adjustment of accounts.1000.78 Charges on overdue accounts.

Subpart I—Administrative Assessment andMarketing Service Deduction1000.85 Assessment for order

administration.1000.86 Deduction for marketing services.

Subpart J—Miscellaneous Provisions

1000.90 Dates.1000.91 [Reserved]

1000.92 [Reserved]1000.93 OMB control number assigned

pursuant to the Paperwork ReductionAct.

Authority: 7 U.S.C. 601—674.

Subpart A—Scope and Purpose

§ 1000.1 Scope and purpose of this Part1000.

This part sets forth certain terms,definitions, and provisions which shallbe common to and part of each Federalmilk marketing order in 7 CFR, chapterX, except as specifically definedotherwise, or modified, or otherwiseprovided, in an individual order in 7CFR, chapter X.

Subpart B—Definitions

§ 1000.2 General definitions.(a) Act means Public Act No. 10, 73d

Congress, as amended and as reenactedand amended by the AgriculturalMarketing Agreement Act of 1937, asamended (7 U.S.C. 601 et seq.).

(b) Order or Federal milk order meansthe applicable part of 7 CFR, chapter X,issued pursuant to section 8c of the Actas a Federal milk marketing order (asamended).

(c) Department means the U.S.Department of Agriculture.

(d) Secretary means the Secretary ofAgriculture of the United States or anyofficer or employee of the Department towhom authority has heretofore beendelegated, or to whom authority mayhereafter be delegated, to act in hisstead.

(e) Person means any individual,partnership, corporation, association, orother business unit.

§ 1000.3 Route disposition.Route disposition means a delivery to

a retail or wholesale outlet (except aplant), either directly or through anydistribution facility (includingdisposition from a plant store, vendor,or vending machine) of a fluid milkproduct in consumer-type packages ordispenser units classified as Class Imilk.

§ 1000.4 Plant.(a) Except as provided in paragraph

(b) of this section, plant means the land,buildings, facilities, and equipmentconstituting a single operating unit orestablishment at which milk or milkproducts are received, processed, orpackaged, including a facility describedin paragraph (b)(2) of this section if thefacility receives the milk of more thanone dairy farmer.

(b) Plant shall not include:(1) A separate building without

stationary storage tanks that is used onlyas a reload point for transferring bulk



milk from one tank truck to another ora separate building used only as adistribution point for storing packagedfluid milk products in transit for routedisposition; or

(2) An on-farm facility operated aspart of a single dairy farm entity for theseparation of cream and skim or theremoval of water from milk.

§ 1000.5 Distributing plant.Distributing plant means a plant that

is approved by a duly constitutedregulatory agency for the handling ofGrade A milk at which fluid milkproducts are processed or packaged andfrom which there is route disposition ortransfers of packaged fluid milkproducts to other plants.

§ 1000.6 Supply plant.Supply plant means a plant approved

by a duly constituted regulatory agencyfor the handling of Grade A milk thatreceives milk directly from dairyfarmers and transfers or diverts fluidmilk products to other plants ormanufactures dairy products on itspremises.

§ 1000.8 Nonpool plant.Nonpool plant means any milk

receiving, manufacturing, or processingplant other than a pool plant. Thefollowing categories of nonpool plantsare further defined as follows:

(a) A plant fully regulated underanother Federal order means a plantthat is fully subject to the pricing andpooling provisions of another Federalorder.

(b) Producer-handler plant means aplant operated by a producer-handler asdefined under any Federal order.

(c) Partially regulated distributingplant means a nonpool plant that is nota plant fully regulated under anotherFederal order, a producer-handler plant,or an exempt plant, from which there isroute disposition in the marketing areaduring the month.

(d) Unregulated supply plant means asupply plant that does not qualify as apool supply plant and is not a plantfully regulated under another Federalorder, a producer-handler plant, or anexempt plant.

(e) An exempt plant means a plantdescribed in this paragraph that isexempt from the pricing and poolingprovisions of any order provided thatthe operator of the plant files reports asprescribed by the market administratorof any marketing area in which the plantdistributes packaged fluid milk productsto enable determination of the handler’sexempt status:

(1) A plant that is operated by agovernmental agency that has no routedisposition in commercial channels;

(2) A plant that is operated by a dulyaccredited college or universitydisposing of fluid milk products onlythrough the operation of its ownfacilities with no route disposition incommercial channels;

(3) A plant from which the total routedisposition is for individuals orinstitutions for charitable purposeswithout remuneration; or

(4) A plant that has route dispositionand packaged sales of fluid milkproducts to other plants of 150,000pounds or less during the month.

§ 1000.9 Handler.

Handler means:(a) Any person who operates a pool

plant or a nonpool plant.(b) Any person who receives packaged

fluid milk products from a plant forresale and distribution to retail orwholesale outlets, any person who as abroker negotiates a purchase or sale offluid milk products or fluid creamproducts from or to any pool or nonpoolplant, and any person who by purchaseor direction causes milk of producers tobe picked up at the farm and/or movedto a plant. Persons who qualify ashandlers only under this paragraphunder any Federal milk order are notsubject to the payment provisions of§§ ll.70, ll.71, ll.72, ll .73,ll.76, and ll.85 of that order.

(c) Any cooperative association withrespect to milk that it receives for itsaccount from the farm of a producer anddelivers to pool plants or diverts tononpool plants pursuant to § ll.13 ofthe order. The operator of a pool plantreceiving milk from a cooperativeassociation may be the handler for suchmilk if both parties notify the marketadministrator of this agreement prior tothe time that the milk is delivered to thepool plant and the plant operatorpurchases the milk on the basis of farmbulk tank weights and samples.

§ 1000.14 Other source milk.

Other source milk means all skimmilk and butterfat contained in orrepresented by:

(a) Receipts of fluid milk productsand bulk fluid cream products from anysource other than producers, handlersdescribed in § 1000.9(c) and § 1135.11,or pool plants;

(b) Products (other than fluid milkproducts, fluid cream products, andproducts produced at the plant duringthe same month) from any source whichare reprocessed, converted into, orcombined with another product in theplant during the month; and

(c) Receipts of any milk product(other than a fluid milk product or a

fluid cream product) for which thehandler fails to establish a disposition.

§ 1000.15 Fluid milk product.

(a) Except as provided in paragraph(b) of this section, fluid milk productmeans any milk products in fluid orfrozen form containing less than 9percent butterfat that are intended to beused as beverages. Such productsinclude, but are not limited to: Milk, fat-free milk, lowfat milk, light milk,reduced fat milk, milk drinks, eggnogand cultured buttermilk, including anysuch beverage products that areflavored, cultured, modified with addednonfat milk solids, sterilized,concentrated, or reconstituted. As usedin this part, the term concentrated milkmeans milk that contains not less than25.5 percent, and not more than 50percent, total milk solids.

(b) The term fluid milk product shallnot include:

(1) Plain or sweetened evaporatedmilk/skim milk, sweetened condensedmilk/skim milk, formulas especiallyprepared for infant feeding or dietaryuse (meal replacement) that arepackaged in hermetically-sealedcontainers, any product that contains byweight less than 6.5 percent nonfat milksolids, and whey; and

(2) The quantity of skim milkequivalent in any modified productspecified in paragraph (a) of this sectionthat is greater than an equal volume ofan unmodified product of the samenature and butterfat content.

§ 1000.16 Fluid cream product.

Fluid cream product means cream(other than plastic cream or frozencream), including sterilized cream, or amixture of cream and milk or skim milkcontaining 9 percent or more butterfat,with or without the addition of otheringredients.

§ 1000.17 [Reserved]

§ 1000.18 Cooperative association.

Cooperative association means anycooperative marketing association ofproducers which the Secretarydetermines is qualified under theprovisions of the Capper-Volstead Act,has full authority in the sale of milk ofits members, and is engaged inmarketing milk or milk products for itsmembers. A federation of 2 or morecooperatives incorporated under thelaws of any state will be considered acooperative association under anyFederal milk order if all membercooperatives meet the requirements ofthis section.



§ 1000.19 Commercial food processingestablishment.

Commercial food processingestablishment means any facility, otherthan a milk plant, to which fluid milkproducts and fluid cream products aredisposed of, or producer milk isdiverted, that uses such receipts asingredients in food products and has noother disposition of fluid milk productsother than those received in consumer-type packages (1 gallon or less).Producer milk diverted to commercialfood processing establishments shall besubject to the same provisions relatingto diversions to plants, including, butnot limited to, §§ ll.13 and ll.52 ofeach Federal milk order.

Subpart C—Rules of Practice andProcedure Governing MarketAdministrators

§ 1000.25 Market administrator.(a) Designation. The agency for the

administration of the order shall be amarket administrator selected by theSecretary and subject to removal at theSecretary’s discretion. The marketadministrator shall be entitled tocompensation determined by theSecretary.

(b) Powers. The market administratorshall have the following powers withrespect to each order under his/heradministration:

(1) Administer the order inaccordance with its terms andprovisions;

(2) Maintain and invest funds outsideof the United States Department of theTreasury for the purpose ofadministering the order;

(3) Make rules and regulations toeffectuate the terms and provisions ofthe order;

(4) Receive, investigate, and reportcomplaints of violations to theSecretary; and

(5) Recommend amendments to theSecretary.

(c) Duties. The market administratorshall perform all the duties necessary toadminister the terms and provisions ofeach order under his/heradministration, including, but notlimited to, the following:

(1) Employ and fix the compensationof persons necessary to enable him/herto exercise the powers and perform theduties of the office;

(2) Pay out of funds provided by theadministrative assessment, exceptexpenses associated with functions forwhich the order provides a separatecharge, all expenses necessarilyincurred in the maintenance andfunctioning of the office and in theperformance of the duties of the office,

including the market administrator’scompensation;

(3) Keep records which will clearlyreflect the transactions provided for inthe order and upon request by theSecretary, surrender the records to asuccessor or such other person as theSecretary may designate;

(4) Furnish information and reportsrequested by the Secretary and submitoffice records for examination by theSecretary;

(5) Announce publicly at his/herdiscretion, unless otherwise directed bythe Secretary, by such means as he/shedeems appropriate, the name of anyhandler who, after the date upon whichthe handler is required to perform suchact, has not:

(i) Made reports required by the order;(ii) Made payments required by the

order; or(iii) Made available records and

facilities as required pursuant to§ 1000.27;

(6) Prescribe reports required of eachhandler under the order. Verify suchreports and the payments required bythe order by examining records(including such papers as copies ofincome tax reports, fiscal and productaccounts, correspondence, contracts,documents or memoranda of thehandler, and the records of any otherpersons that are relevant to thehandler’s obligation under the order), byexamining such handler’s milk handlingfacilities, and by such otherinvestigation as the marketadministrator deems necessary for thepurpose of ascertaining the correctnessof any report or any obligation under theorder. Reclassify skim milk and butterfatreceived by any handler if suchexamination and investigation disclosesthat the original classification wasincorrect;

(7) Furnish each regulated handler awritten statement of such handler’saccounts with the market administratorpromptly each month. Furnish acorrected statement to such handler ifverification discloses that the originalstatement was incorrect; and

(8) Prepare and disseminate publiclyfor the benefit of producers, handlers,and consumers such statistics and otherinformation concerning operation of theorder and facts relevant to theprovisions thereof (or proposedprovisions) as do not reveal confidentialinformation.

Subpart D—Rules Governing OrderProvisions

§ 1000.26 Continuity and separability ofprovisions.

(a) Effective time. The provisions ofthe order or any amendment to the order

shall become effective at such time asthe Secretary may declare and shallcontinue in force until suspended orterminated.

(b) Suspension or termination. TheSecretary shall suspend or terminateany or all of the provisions of the orderwhenever he/she finds that suchprovision(s) obstructs or does not tendto effectuate the declared policy of theAct. The order shall terminate wheneverthe provisions of the Act authorizing itcease to be in effect.

(c) Continuing obligations. If upon thesuspension or termination of any or allof the provisions of the order there areany obligations arising under the order,the final accrual or ascertainment ofwhich requires acts by any handler, bythe market administrator or by any otherperson, the power and duty to performsuch further acts shall continuenotwithstanding such suspension ortermination.

(d) Liquidation. (1) Upon thesuspension or termination of any or allprovisions of the order the marketadministrator, or such other liquidatingagent designated by the Secretary, shall,if so directed by the Secretary, liquidatethe business of the marketadministrator’s office, dispose of allproperty in his/her possession orcontrol, including accounts receivable,and execute and deliver all assignmentsor other instruments necessary orappropriate to effectuate any suchdisposition; and

(2) If a liquidating agent is sodesignated, all assets and records of themarket administrator shall betransferred promptly to such liquidatingagent. If, upon such liquidation, thefunds on hand exceed the amountsrequired to pay outstanding obligationsof the office of the market administratorand to pay necessary expenses ofliquidation and distribution, suchexcess shall be distributed tocontributing handlers and producers inan equitable manner.

(e) Separability of provisions. If anyprovision of the order or its applicationto any person or circumstances is heldinvalid, the application of suchprovision and of the remainingprovisions of the order to other personsor circumstances shall not be affectedthereby.

Subpart E—Rules of Practice andProcedure Governing Handlers

§ 1000.27 Handler responsibility forrecords and facilities.

Each handler shall maintain andretain records of its operations andmake such records and its facilitiesavailable to the market administrator. If



adequate records of a handler, or of anyother persons, that are relevant to theobligation of such handler are notmaintained and made available, anyskim milk and butterfat required to bereported by such handler for whichadequate records are not available shallbe considered as used in the highest-priced class.

(a) Records to be maintained. (1) Eachhandler shall maintain records of itsoperations (including, but not limitedto, records of purchases, sales,processing, packaging, and disposition)as are necessary to verify whether suchhandler has any obligation under theorder and if so, the amount of suchobligation. Such records shall be such asto establish for each plant or otherreceiving point for each month:

(i) The quantities of skim milk andbutterfat contained in, or representedby, products received in any form,including inventories on hand at thebeginning of the month, according toform, time, and source of each receipt;

(ii) The utilization of all skim milkand butterfat showing the respectivequantities of such skim milk andbutterfat in each form disposed of or onhand at the end of the month; and

(iii) Payments to producers, dairyfarmers, and cooperative associations,including the amount and nature of anydeductions and the disbursement ofmoney so deducted.

(2) Each handler shall keep such otherspecific records as the marketadministrator deems necessary to verifyor establish such handler’s obligationunder the order.

(b) Availability of records andfacilities. Each handler shall makeavailable all records pertaining to suchhandler’s operations and all facilitiesthe market administrator finds arenecessary to verify the informationrequired to be reported by the orderand/or to ascertain such handler’sreporting, monetary, or other obligationunder the order. Each handler shallpermit the market administrator toweigh, sample, and test milk and milkproducts and observe plant operationsand equipment and make available tothe market administrator such facilitiesas are necessary to carry out his/herduties.

(c) Retention of records. All recordsrequired under the order to be madeavailable to the market administratorshall be retained by the handler for aperiod of 3 years to begin at the end ofthe month to which such recordspertain. If, within such 3-year period,the market administrator notifies thehandler in writing that the retention ofsuch records, or of specified records, isnecessary in connection with a

proceeding under section 8c(15)(A) ofthe Act or a court action specified insuch notice, the handler shall retainsuch records, or specified records, untilfurther written notification from themarket administrator. The marketadministrator shall give further writtennotification to the handler promptlyupon the termination of the litigation orwhen the records are no longernecessary in connection therewith.

§ 1000.28 Termination of obligations.(a) Except as provided in paragraphs

(b) and (c) of this section, the obligationof any handler to pay money required tobe paid under the terms of the ordershall terminate 2 years after the last dayof the month during which the marketadministrator receives the handler’sreport of receipts and utilization onwhich such obligation is based, unlesswithin such 2-year period, the marketadministrator notifies the handler inwriting that such money is due andpayable. Service of such written noticeshall be complete upon mailing to thehandler’s last known address and itshall contain, but need not be limited to,the following information:

(1) The amount of the obligation;(2) The month(s) on which such

obligation is based; and(3) If the obligation is payable to one

or more producers or to a cooperativeassociation, the name of suchproducer(s) or such cooperativeassociation, or if the obligation ispayable to the market administrator, theaccount for which it is to be paid.

(b) If a handler fails or refuses, withrespect to any obligation under theorder, to make available to the marketadministrator all records required by theorder to be made available, the marketadministrator may notify the handler inwriting, within the 2-year periodprovided for in paragraph (a) of thissection, of such failure or refusal. If themarket administrator so notifies ahandler, the said 2-year period withrespect to such obligation shall notbegin to run until the first day of themonth following the month duringwhich all such records pertaining tosuch obligation are made available tothe market administrator.

(c) Notwithstanding the provisions ofparagraphs (a) and (b) of this section, ahandler’s obligation under the order topay money shall not be terminated withrespect to any transaction involvingfraud or willful concealment of a fact,material to the obligation, on the part ofthe handler against whom the obligationis sought to be imposed.

(d) Unless the handler files a petitionpursuant to section 8c(15)(A) of the Actand the applicable rules and regulations

(7 CFR 900.50 et seq.) within theapplicable 2-year period indicatedbelow, the obligation of the marketadministrator:

(1) To pay a handler any moneywhich such handler claims is due underthe terms of the order shall terminate 2years after the end of the month duringwhich the skim milk and butterfatinvolved in the claim were received; or

(2) To refund any payment made bya handler (including a deduction oroffset by the market administrator) shallterminate 2 years after the end of themonth during which payment was madeby the handler.

Subpart F—Classification of Milk

§ 1000.40 Classes of Utilization.Except as provided in § 1000.42, all

skim milk and butterfat required to bereported pursuant to § lll.30 of eachFederal milk order shall be classified asfollows:

(a) Class I milk shall be all skim milkand butterfat:

(1) Disposed of in the form of fluidmilk products, except as otherwiseprovided in this section;

(2) In packaged fluid milk products ininventory at the end of the month; and

(3) In shrinkage assigned pursuant to§ 1000.43(b).

(b) Class II milk shall be all skim milkand butterfat:

(1) In fluid milk products incontainers larger than 1 gallon and fluidcream products disposed of or divertedto a commercial food processingestablishment if the marketadministrator is permitted to audit therecords of the commercial foodprocessing establishment for thepurpose of verification. Otherwise, suchuses shall be Class I;

(2) Used to produce:(i) Cottage cheese, lowfat cottage

cheese, dry curd cottage cheese, ricottacheese, pot cheese, Creole cheese, andany similar soft, high-moisture cheeseresembling cottage cheese in form oruse;

(ii) Milkshake and ice milk mixes (orbases), frozen desserts, and frozendessert mixes distributed in half-galloncontainers or larger and intended to beused in soft or semi-solid form;

(iii) Aerated cream, frozen cream, sourcream, sour half-and-half, sour creammixtures containing nonmilk items,yogurt, and any other semi-solidproduct resembling a Class II product;

(iv) Custards, puddings, pancakemixes, coatings, batter, and similarproducts;

(v) Buttermilk biscuit mixes and otherbuttermilk for baking that contain foodstarch in excess of 2% of the total



solids, provided that the product islabeled to indicate the food starchcontent;

(vi) Formulas especially prepared forinfant feeding or dietary use (mealreplacement) that are packaged inhermetically-sealed containers;

(vii) Candy, soup, bakery productsand other prepared foods which areprocessed for general distribution to thepublic, and intermediate products,including sweetened condensed milk, tobe used in processing such preparedfood products;

(viii) A fluid cream product or anyproduct containing artificial fat or fatsubstitutes that resembles a fluid creamproduct, except as otherwise providedin paragraph (c) of this section; and

(ix) Any product not otherwisespecified in this section; and


(c) Class III milk shall be all skim milkand butterfat:

(1) Used to produce:(i) Cream cheese and other spreadable

cheeses, and hard cheese of types thatmay be shredded, grated, or crumbled;

(ii) Plastic cream, anhydrous milkfat,and butteroil; and

(iii) Evaporated or sweetenedcondensed milk in a consumer-typepackage; and


(d) Class IV milk shall be all skimmilk and butterfat:

(1) Used to produce:(i) Butter; and(ii) Any milk product in dried form;(2) In inventory at the end of the

month of fluid milk products and fluidcream products in bulk form;

(3) In the skim milk equivalent ofnonfat milk solids used to modify afluid milk product that has not beenaccounted for in Class I; and


(e) Other uses. Other uses includeskim milk and butterfat used in anyproduct described in this section that isdumped, used for animal feed,destroyed, or lost by a handler in avehicular accident, flood, fire, or similaroccurrence beyond the handler’scontrol. Such uses of skim milk andbutterfat shall be assigned to the lowestpriced class for the month to the extentthat the quantities destroyed or lost canbe verified from records satisfactory tothe market administrator.

§ 1000.41 [Reserved]

§ 1000.42 Classification of transfers anddiversions.

(a) Transfers and diversions to poolplants. Skim milk or butterfat

transferred or diverted in the form of afluid milk product or transferred in theform of a bulk fluid cream product froma pool plant or a handler described in§ 1135.11 to another pool plant shall beclassified as Class I milk unless thehandlers both request the sameclassification in another class. In eithercase, the classification shall be subjectto the following conditions:

(1) The skim milk and butterfatclassified in each class shall be limitedto the amount of skim milk andbutterfat, respectively, remaining insuch class at the receiving plant afterthe computations pursuant to§ 1000.44(a)(9) and the correspondingstep of § 1000.44(b);

(2) If the transferring plant receivedduring the month other source milk tobe allocated pursuant to § 1000.44(a)(3)or the corresponding step of§ 1000.44(b), the skim milk or butterfatso transferred shall be classified so as toallocate the least possible Class Iutilization to such other source milk;and

(3) If the transferring handler receivedduring the month other source milk tobe allocated pursuant to § 1000.44(a)(8)or (9) or the corresponding steps of§ 1000.44(b), the skim milk or butterfatso transferred, up to the total of the skimmilk and butterfat, respectively, in suchreceipts of other source milk, shall notbe classified as Class I milk to a greaterextent than would be the case if theother source milk had been received atthe receiving plant.

(b) Transfers and diversions to a plantregulated under another Federal order.Skim milk or butterfat transferred ordiverted in the form of a fluid milkproduct or transferred in the form of abulk fluid cream product from a poolplant to a plant regulated under anotherFederal order shall be classified in thefollowing manner. Such classificationshall apply only to the skim milk orbutterfat that is in excess of any receiptsat the pool plant from a plant regulatedunder another Federal order of skimmilk and butterfat, respectively, in fluidmilk products and bulk fluid creamproducts, respectively, that are in thesame category as described in paragraph(b)(1) or (2) of this section:

(1) As Class I milk, if transferred aspackaged fluid milk products;

(2) If transferred or diverted in bulkform, classification shall be in theclasses to which allocated under theother order:

(i) If the operators of both plants sorequest in their reports of receipts andutilization filed with their respectivemarket administrators, transfers in bulkform shall be classified as other thanClass I to the extent that such utilization

is available for such classificationpursuant to the allocation provisions ofthe other order;

(ii) If diverted, the diverting handlermust request a classification other thanClass I. If the plant receiving thediverted milk does not have sufficientutilization available for the requestedclassification and some of the divertedmilk is consequently assigned to ClassI use, the diverting handler shall begiven the option of designating theentire load of diverted milk as producermilk at the plant physically receivingthe milk. Alternatively, if the divertinghandler so chooses, it may designatewhich dairy farmers whose milk wasdiverted during the month will bedesignated as producers under the orderphysically receiving the milk. If thediverting handler declines to accepteither of these options, the marketadministrator will prorate the portion ofdiverted milk in excess of Class II, III,and IV use among all the dairy farmerswhose milk was received from thediverting handler on the last day of themonth, then the second-to-last day, andcontinuing in that fashion until theexcess diverted milk has been assignedas producer milk under the receivingorder; and

(iii) If information concerning theclasses to which such transfers ordiversions were allocated under theother order is not available to the marketadministrator for the purpose ofestablishing classification under thisparagraph, classification shall be Class I,subject to adjustment when suchinformation is available.

(c) Transfers and diversions toproducer-handlers and to exemptplants. Skim milk or butterfat that istransferred or diverted from a pool plantto a producer-handler under any Federalorder or to an exempt plant shall beclassified:

(1) As Class I milk if transferred ordiverted to a producer-handler;

(2) As Class I milk if transferred to anexempt plant in the form of a packagedfluid milk product; and

(3) In accordance with the utilizationassigned to it by the marketadministrator if transferred or divertedin the form of a bulk fluid milk productor transferred in the form of a bulk fluidcream product to an exempt plant. Forthis purpose, the receiving handler’sutilization of skim milk and butterfat ineach class, in series beginning withClass IV, shall be assigned to the extentpossible to its receipts of skim milk andbutterfat, in bulk fluid cream products,and bulk fluid milk products,respectively, pro rata to each source.

(d) Transfers and diversions to othernonpool plants. Skim milk or butterfat


Federal Register /Vol. 64, No. 63/Friday, April 2, …...16126 Federal Register/Vol. 64, No. 63/Friday, April 2, 1999/Proposed Rules percent of the total quantity of milk physically

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