Rhode Island: Ron Newman, John Smith and Aaron Briggs

New Hampshire: Doug Morris, Powell Cabot, and Debora Erb

Connecticut: Bob Jacquier, Shirley Ferris and Mae Schmidle

Maine: Mike Wiers, Fred Hardy and Tom Doak

Massachusetts: Sam Shields, Gordon Cook and Jay Healy

Vermont: Harold Howrigan, Jacques Couture, Andy Dykstra, Millicent Rooney and Bobby Starr

Ken Becker, Executive Director; Carmen Ross, Regulations Administrator; Dixie Henry, Staff Counsel; Becky Holden, Office Manager; Kelly Plastridge, Bookkeeper; and Tina Wisell, Public Information Director

The meeting was called to order by Chair Michael Wiers at 1:22 p.m. Mr. Wiers said the agenda would be moved around slightly in order to allow Dr. Daniel Lass of the University of Massachusetts to give a presentation to the Commission at the beginning of the meeting concerning his preliminary analysis of the Cost of Production Surveys.

Ad Hoc Committee -- University Studies, Dr. Daniel Lass:

Dr. Lass stressed that all of the figures he would be discussing were preliminary and not final. He said the surveys were done this spring and contained data from the 1996 year. The Commission had received 273 returns.

Dr. Lass explained that the cost of production study is being done to try to get an estimate of what it costs to produce a hundredweight of milk for the New England market. He said the surveys included certain explicit costs of production that were easy to interpret. These included cash, everyday and operating expenses -- things that were readily observed. However, a difficult part in analyzing costs of production, which takes additional time to calculate, is getting a handle on implicit costs of production such as the number of hours farmers work but don't pay themselves for. After these costs are determined analysts would then be working to determine different costs between states. They would also be looking at different factors that might contribute to differences in farm costs such as farm size.

Dr. Lass said data was provided to him by the University of New Hampshire Survey Center which had received and coded the survey results. He was now in the process of determining whether there were any coding problems, oddities or missing values in the data. Another task, some of which has been completed, is developing aggregates of variables needed for analysis. This includes computing such things as costs per hundredweight by dividing total milk production by operating costs. Once these steps are finished, the analysts will be able to move on to statistical analysis.

Some of the preliminary statistics included:

*The final two columns represent information from farms that have complete data for costs.

Dr. Lass said that of the farms responding, over 65% were sole proprietorships, 25% were partnerships, and 5% were corporations. Over 50% of the farms had manual record-keeping systems. Comparing all farms that responded to those with complete cost information Dr. Lass also determined the following statistics:

Using explicit costs alone, Dr. Lass determined the average explicit cost of producing a hundredweight of milk. However, he cautioned the Commission that this figure is not a representative figure of the total cost of producing milk in this region because implicit costs were not yet factored in. He said the explicit cost is actually a lot lower than the actual costs of production because such things as capital assets and operator labor were not yet factored into the costs. He added that it was astounding just how much operator labor costs are not paid on farms. The only labor costs that were factored into the explicit cost figure so far were hired labor costs. Other costs that were included in the explicit cost of production figure were such costs as purchased feed, veterinary, breeding and medical, crop expenses, fuel, etc. Dr. Lass said he is currently trying to calculate the actual operator costs that go into producing a hundredweight of milk in the northeast. He is expecting another data set from the University of NH concerning capital costs which he will also factor in to the total cost of production.

Commission Executive Director Ken Becker asked if the survey results would be able to show if there were differences in costs between states. Dr. Lass said that since the confidence interval for states with few respondents, such as Rhode Island, will be huge, he may need to combine the data from two states, such as Connecticut and Rhode Island, together as a group to compare with other regions of the northeast.

New York dairy farmer Ken Dibbell said the Commission needs to educate consumers in the northeast in order to be able to compete with states like California where consumers are willing to pay $3.00 per gallon for milk. He also stressed that the Compact needs to be enlarged to the whole northeast region.

Regulations Administrator Carmen Ross introduced Dr. Patel, the Director of the Dairy Division/Commodity Regulations for the state of New Jersey. Ken Becker introduced the Commission's new bookkeeper Kelly Plastridge who began working for the Commission in mid-July. Other members of the public introduced themselves at the request of the Chair.

Andy Dykstra made a motion to approve the minutes of the August 5, 1998 regular session. Fred Hardy requested that the minutes be amended in order to add the words Class I to the second line of the last paragraph on page 9. The motion to accept the minutes as amended was seconded by Bobby Starr, passed by unanimous vote of the six State delegations.

Ken Becker said he would address the communications during the Executive Director's report.

Powell Cabot, referring to the Monthly Expenditures to Budget Report for July 1998 and for January through July 1998, and the Balance Sheet as of July 31, 1998 (Attachment I), noted that the Commission had a net income for the month of $107,572. Mr. Cabot stressed that the Commission is in sound financial shape. This is due in part because litigation costs are down. He said that if the Commission could continue in this direction, he expected that the Commission would be able to begin reducing its debt to banks.

Mike Wiers stated that he sent a memo to the Committee on Nominations advising the committee that it would have to meet at least once before the December meeting to make recommendations for nominations for the officers of the Commission. He added that the bylaws require that the state delegations must also meet to submit a name or names for nominations. The elections would be made at the December meeting.

Executive Director:

Ken Becker said the Commission's new bookkeeper Kelly Plastridge has made some changes to the expense forms to make them more understandable and usable.

Mr. Becker said he sent a letter to each member of the New England Congressional delegation, as well as to U.S. Senators from New York -- Moynihan and D'Amato, and to each of the New England governors updating them on the Commission's recent activities. Enclosed with each letter was a list of Commission members so that people could contact Commission members from their particular states if interested.

Mr. Becker recently took part in one afternoon of a two-day agricultural tour of Vermont and New York that CoBank sponsored. It was designed to give Congressional staffers insight into New England agriculture, the dairy industry and the Northeast Dairy Compact. Mr. Becker had the opportunity during the tour to discuss with the staffers some of the issues facing the Compact, including its possible reauthorization in 1999.

Concerning Compact activity in Washington, DC, Mr. Becker said the U.S. House and Senate will be appointing a conference committee to deliberate the differences in the Agriculture Appropriations Bill. The House passed language that would extend for six months the time period for USDA to do federal milk market order reform. The extension would also allow the Compact's sunset date to be extended for six months. The Senate did not have any dairy language at all, so the committee will have to work out the differences shortly after Labor Day. Mr. Becker said sources he had talked to in Washington believe it will be a contentious fight, but that the extension language will be able to be retained.

Concerning litigation, Mr. Becker said the Commission could receive word any day from the federal court in Boston concerning the New York milk dealers' case. The judge still has not made a decision in that case. The Organic Cow case will go to court on September 14, 1998 in Burlington, VT.

The recent pool of July milk paid in August was the largest pool for calendar year 1998. The over-order obligation was $2.82. Total producer milk was 568 million pounds. The total pool was approximately $6.7 million, but of that, $838,000 was held out as escrow for the Commission's obligation to the CCC, which brought the total CCC escrow to $2.1 million.

Since the announcement came out that the Class I price for September milk would be above $18, and well above the Compact price, some handlers have called asking whether they would still have to pay the administrative assessment for that month. As a result, Mr. Becker sent a letter to all handlers indicating that the administrative assessment is still owed even when there is no over-order obligation because 1) the administrative assessment is required by the Compact, and 2) the Commission office and staff still need to operate even when there is no over-order obligation because there are regular duties that still need to be performed.

Ron Newman questioned how much money the Compact has returned to dairy farmers. Mr. Becker said that during the first 12 months of operation, approximately $38 million has been returned.

Committee on Administration:

Mike Wiers said the committee met to discuss personnel matters and review financials. The committee also discussed revisions to the budget, but will address the revisions at an upcoming Commission meeting.

Referendum Agent - Results of School Milk Reserve Referendum:

Referring to the Producer Referendum Certification of Results (Attachment II), Mae Schmidle said that the price regulation establishing a reserve for school lunch program reimbursement was approved by producers. 97.1% of the producers cast votes in favor of the regulation.

Audit Committee:

Tom Doak said a contract has been signed with an auditing firm for the 1997 and 1998 audits. The Northfield, VT firm of Sullivan, Powers and Company will begin the first audit in October and must submit the audit report form back to the Audit Committee by December 1. The first audit will cost $4,800 and the 1998 audit was cost $5,000.

Bylaws Committee:

Mae Schmidle said the committee had received several requests from Commission members to address the issue of Commission members who submit testimony during a rulemaking. Therefore, the committee was recommending that the Commission adopt a proposed amendment to the Bylaws that clarified this issue. Referring to an August 26, 1998 memo to commission members (Attachment III), Mrs. Schmidle said the amendment would not allow Commission members who submit formal testimony during a rulemaking to cast a vote on that specific rulemaking. Mrs. Schmidle said the committee is required to give the Commission four weeks advance notice of proposed amendments to the Bylaws, and therefore, the amendment would be voted on at the October 7, 1998 Commission meeting.

Gordie Cook expressed concern that some members of the Commission serve in other positions and may feel compelled to submit testimony in their other capacity. Therefore, he was not in favor of the Bylaws change.

Jay Healy questioned whether the Commission has an existing policy. Mike Wiers responded that the amendment was an attempt to codify the policy that the Commission was already following. Mr. Healy said he shared some of the concerns expressed by Mr. Cook. Mr. Cook questioned who instituted this policy because it was one he did not recall the Commission voting on. Mr. Wiers responded that it was a policy that the Commission has followed in the past, and that, in fact, other Commission members who had wanted to testify during past rulemakings had not because doing so would have prevented them from voting on those past rulemakings. Debora Erb made a motion that the Commission enter into Executive Session to hear the opinion of legal counsel concerning the proposed amendment to the Bylaws. The motion was seconded by Ron Newman, passed by unanimous vote of the six State delegations. The Commission entered into Executive Session at 2:24 p.m. and returned to Regular Session at 2:38 p.m.

Committee on Regulations and Rulemaking:

Bobby Starr said the Regulations Committee had met the night before and discussed several issues that it would be making recommendations on to the Commission. These included: 1) the Commission's obligation and payment to the Commodities Credit corporation, 2) supply management, 3) the school milk program reserve, 4) a future rulemaking, 5) the effective date of the regulation concerning the school lunch reserve, and 6) a report concerning the organic milk dealers petition.

Ad Hoc Committee -- Cost of Production/Market Impact:

Ken Becker said he continues to meet with researchers at the University of Vermont who are conducting market impact studies for the Commission. He noted that one of the researchers attended the hearing held earlier that morning concerning a proposed rulemaking on diversions and transfers of milk out of the Compact region. This was because one of the aspects of the market impact research is to analyze the affect of New York milk coming into the region. Mr. Becker was optimistic that the UVM researchers could submit part of their research into the official record concerning the rulemaking prior to the close of the public comment period on September 16, 1998. He said researchers would also present preliminary information on other portions of the market impact study, the Compact's impact on retail prices and WIC programs, at the October Commission meeting.

Gabe Moquin, Deputy Director of the Connecticut Department of Agriculture, summarized a report he prepared for the Commission entitled, Organic Milk in the Northeast (Attachment IV).

Mr. Moquin concluded that the information he had gathered in his report was not enough for the Commission to make a decision on the issue of organic milk. He suggested that the Commission undertake a fact-finding process and hold a formal public hearing in order to gather additional testimony and information on the record which could be used to initiate a rulemaking on the issue. Mr. Moquin felt this would be an appropriate action considering the fact that since organic milk is not differentiated from non-organic milk under the federal order regulatory scheme, there is a lot of information that is not a part of an official record before the Commission. He said the Commission could also propose a rule concerning an exemption from the regulation for organic milk production and distribution but based on his research he personally did not feel that an exemption was warranted. A final option would be for the Commission to do nothing on the issue. He felt it was unwise for the Commission to take a "do-nothing" approach, especially with a court case on the issue of organic milk coming up in the near future.

Regulations Committee Chair Bobby Starr said the Committee had reviewed Mr. Moquin's report and would be recommending later in the meeting that the Commission add the organic milk issue to the next rulemaking it undertakes. This would also be a cost-saving for the Commission because it would allow the Commission to address more than one issue in one rulemaking instead of paying for the costs of addressing the issues in separate rulemakings.

Gordie Cook asked if those farmers who ship to The Organic Cow and Horizon had received any Compact payments due to the organic processors' legal challenge to the Compact. Mr. Becker said that the processors who have challenged the Compact regulation in court have had to pay into an escrow account, therefore, none of their producers have received Compact payments while the case is pending. Gordie Cook commended Mr. Moquin on a well-done report.

Turner's Dairy Petition:

Mike Wiers said a petition for exemption from the compact over-order regulation was filed by Turner's Dairy in New Hampshire. Therefore, Mr. Wiers who is serving as the hearing panel for the petition, held a hearing that morning at which Mr. Turner testified. The petitioner will have until September 14 to provide additional information. A proposed decision must be mailed by October 18 and Mr. Turner must file a response to that by November 7. The final hearing panel recommendation would likely be considered at the December Commission meeting. Mr. Wiers said that specifically, Mr. Turner was seeking to be reimbursed for $23,000 in payments he had made during the 1997-1998 calendar year.

Mike Wiers noted that there were three additional items that needed to be addressed that were not included on the agenda and asked for a motion to add the items to the agenda. Ron Newman made a motion to add the following under Section VIII. New Business:

D. Consideration of Supply Management and Hiring of Economist

E. Ratification of Effective Date of School Lunch Rule

F. Authorization of School Lunch Withholding for August Milk

The motion was seconded by Jacques Couture, passed by unanimous vote of the six State delegations.

Bobby Starr said the Commission had received a letter in August from the Commodities Credit Corporation suggesting that the Commission be prepared to pay $2.8 million for its obligation to the CCC. At that time, the Commission decided to withhold 15¢ from the pool payment for the CCC and that if any additional funds needed to be escrowed, the Commission would decide that amount at the September Commission meeting. Since that meeting there have been several discussions between the Commission office and the CCC. The CCC noted that figures that it had used to determine the amount of production in the region had been revised and this resulted in a reduced, final estimate of $1,762,000 as the Commission's obligation to the CCC. Mr. Starr said if the Commission agreed to the payment, it would mean no more money would have to be escrowed for the CCC obligation. Additionally, it would leave more than $350,000 that the Commission would be able to refund to farmers of the $2.1 million that had been escrowed for the CCC. Mr. Starr then made a motion to approve payment of $1,762,000 to the Commodities Credit Corporation for the Commission's final obligation to the CCC for the 1998 Fiscal Year. Ken Becker explained that it would be wise for the Commission to agree to the figure because the estimates for national milk production would be revised on September 11 and that revision could mean national milk production would go down substantially, causing the Commission's obligation to go up. He, therefore, did not feel it was worth the risk to contest the amount. Mr. Becker also received word that the U.S. Agriculture Secretary was planning to make an announcement that same day that the USDA was going to charge the Commission $1,762,000. Mr. Starr noted that the new estimate was $1.1 million less than the estimate received a month ago. He said the CCC obligation impacts on New England at less than 11-12 cents per capita for the year. Ron Newman said it was important to note that the Compact has returned over $38 million to farmers so far and that the $1,762,000 will go back to the federal government for surplus purchases that will be used for such programs as school lunch programs and other good causes. Gordie Cook said it was also important to note the weather's impact on the Commission's obligation to the CCC. He stressed that it wasn't just good weather in the Northeast that made it appear as though production was up significantly in this region, it was also bad weather that other large milk producing states were receiving that made their production figures go down significantly. Mr. Becker said he intended to send the CCC a letter with the Commission's final payment expressing these and other concerns with the calculations used by the CCC. He would also make it clear in the letter that the Commission considered this payment to be a final payment that would not be revised at a later date.

Tom Doak asked if there was a mechanism for refunding the balance of the CCC escrow to producers. Regulations Administrator Carmen Ross said that producers who did not increase production, within 45 days after the end of the fiscal year, would need to submit documentation of their production figures for two years to prove that they did not increase production. Once all of these figures are in and verified, the balance of the CCC reserve would be divided by the number of pounds produced by those farms that did not increase production and that is the amount of money that would be returned to each of those farms. Farmers who do not file, and farmers who increased production would not be eligible for a refund.

Mr. Becker credited Reenie De Geus of the Vermont Agriculture Department with finding the error in the production figures the CCC used in its original calculation of the Commission's obligation, which resulted in the new, significantly-reduced estimate.

Consideration of Initiating Rulemaking:

Mike Wiers said that the Commission indicated in its November 25, 1997 regulation that it would begin a rulemaking by July 1, 1998 to consider whether any further adjustment to the Compact over-order regulation price is necessary and appropriate. Because the Commission still had several studies outstanding that would be beneficial to such a rulemaking, the Commission in June of this year decided to delay the rulemaking until September. Mr. Wiers said the Committee on Regulations discussed the issue at some length the previous evening. While the committee felt that there was still information that the Commission needed to gather for a possible rulemaking, the Committee also felt that the Commission really needed to get the rulemaking process started. The Committee was therefore recommending that the Commission hold a Subjects and Issues Hearing at which the Commission could gather information on the record to be used for a rulemaking. It also recommended that members of the staff draft a notice of such a hearing that would be reviewed at the next Commission meeting in October. Commission members could contact the staff during the next few weeks if they had issues they wanted included in that notice. Mr. Wiers said this timeframe would allow the Commission to hold a regulatory hearing before mid-November, and have final consideration in either January or February. Mae Schmidle moved to direct the staff to develop a Subjects and Issues Notice of Regulatory Hearing that would be presented at the Commission's October meeting and that Commission members contact staff with issues they want included in the Subjects and Issues Process. Bobby Starr seconded the motion. Motion passed by unanimous vote of the six State delegations.

Organic Milk Dealers Petition - Hearing Panel Recommendation:

Bobby Starr said the Committee on Regulations had spent a considerable amount of time discussing Mr. Moquin's report and recommendations concerning the organic milk dealers petition. The committee felt that it would be unwise for the Commission to either exempt organic milk dealers from the regulation at this time or for the Commission to take no action at all on the issue. Instead, the committee felt it would be in the best interest of all parties for the Commission to address the organic milk issue during an upcoming rulemaking. Since the Commission had voted earlier in the meeting to proceed with a subjects and issues process which would include specific issues that Commission members wanted addressed, Mr. Starr suggested that the organic milk issue be included in that subjects and issues process. He made a motion that the Commission initiate a subjects and issues rulemaking proceeding regarding whether organic milk should be exempted from the Compact over-order price regulation, to be noticed and public hearing and comment period to coincide with the next Commission rulemaking proceeding. Shirley Ferris seconded the motion. The motion was passed by unanimous vote of the six State delegations.

Federal Milk Market Invoice -- $9166.30 for June 1998 pool and audits/expenses for July 1998:

Jacques Couture made a motion to approve payment of the Market Administrator's invoice (Attachment V) of $9,166.30 for the June pool and an audit (and related expenses) that was completed in July. Fred Hardy seconded the motion. Ron Newman asked if the invoice amount was higher than past months. Ken Becker said the increase was due to the fact that the Market Administrator's Office had audited Dairylea Cooperative and since it is a large cooperative with a lot of producers and a lot of milk, the audit takes longer to conduct and therefore costs more than some other audits. Motion passed by unanimous vote of the six State delegations.

Mike Wiers noted that both the Referendum Results and Organic Milk Dealers Petition agenda items had been addressed previously.

Consideration of Supply Management and Hiring of an Economist:

Bobby Starr said the Committee on Regulations felt there may be a downside to the Commission's payment to the CCC in that organizations who oppose the Compact may try to say it is evidence that the Compact is causing farmers to overproduce, and consumers are paying the burden of it. The committee felt this might also be an issue of concern to Congress if it is not addressed before the Compact comes up for reauthorization. Therefore, the committee felt that the Commission should address the issue by reviewing whether or not a supply management system needed to be put in place. The committee was, therefore, recommending that the Executive Director take the necessary steps to employ or contract with an economist to study and make specific recommendations for rulemaking on supply management, and that the Committee on Administration make the necessary adjustments to the budget. Mr. Starr moved the recommendation as a motion. He explained that the budget already contains funding for an economist's position. A lengthy discussion ensued regarding supply management studies that have previously been published.

Mr. Becker said the Commission could do the literature search for the supply management proposals that had been mentioned and use the proposals in making its recommendation on this issue. He believed the issue was broader than one that just affected the Northeast Compact. A larger study was needed to provide the credibility needed for Congress's review of the issue. Mr. Becker felt the Commission needed to have information back for the Commission to review by late January or early February. Bobby Starr added that the issue of supply management had to be dealt with properly and thoroughly because it has always been a contentious issue. He said supply management was included in the original wording of the Compact but had been taken out because it appeared that it could not be passed with the supply control language in the Compact. However, he felt it was something that now needed to be addressed, and addressed in a proper fashion.

Harold Howrigan made a motion to call the previous question. Deb Erb seconded the motion. Voting yes for the motion were the State delegations of CT, ME, NH and VT. MA and RI voted no. The motion passed.

Mr. Becker told the Commission he would take the suggestions the Commission had made into consideration when going forward on this issue. He believed that some information could be gathered within 60 days to allow the Commission to get started on the issue, however, more significant information would take a longer period of time. A vote was then held on the original motion to employ or contract an economist to study and make recommendations concerning supply management. Voting yes for the motion were the state delegations of CT, ME, NH and VT. Voting no were MA and RI. The motion passed. Ron Newman asked that the dissenting States' reservations concerning the timeline of the study results be clearly noted.

Ratification of Effective Date of School Lunch Rule:

Staff Counsel Dixie Henry said that usually when the Commission publishes a final rule in the Federal Register, the effective date is 30 days after the publication date. However, the rule establishing the school milk reserve account needs to be effective within ten days, so the Commission office had the rule published in the Federal Register on Tuesday, September 2, 1998 with an effective date of September 10, 1998. The Commission now needs to ratify that date. Ms. Henry explained that the effective date had to be moved up so that Regulations Administrator Carmen Ross could designate funds for the school milk account when he runs the August pool, before the announcement of the Compact price on September 11. Ms. Henry said it was especially urgent that the Commission be able to withhold funds for the reserve from the August pool since there would likely not be a Compact pool on September milk. Per this recommendation, Harold Howrigan made a motion that full 30-day publication prior to the effective date is impracticable, unnecessary and contrary to the public interest and therefore, good cause is found to ratify September 10, 1998 as the effective date for the final rule establishing a reserve fund for reimbursement for school food service program reimbursement. Ron Newman seconded the motion. Carmen Ross said the next agenda item would deal with how much money is actually withheld from the pool for the reserve. Ms. Henry noted that since the Commission's regulation exempted milk for the 1998-1999 school year, which began on July 1 for some schools, the Commission has already incurred liability for two months. Therefore, it is important for the Commission to be able to put money in the reserve fund now since it will not have a September pool to draw from. She said the goal is to reserve in increments over the course of the school year so the Commission would not have to withhold a large portion for the reserve during any particular month. Vendors are submitting documentation to the Commission concerning the portion of their contract price that is attributable to the Compact and schools are documenting their sales of eight-ounce containers of milk. Under the memorandum of understanding, the schools would be reimbursed for the lesser of the amount documented by the vendor or the actual Compact price. The liability for the school reimbursements would have to be paid in June of 1999. The motion passed by unanimous vote of the six State delegations.

Regulations Administrator Carmen Ross said that school milk sales were approximately three percent of the total volume of the pool. Although the Commission does not yet know the total amount of money it would be liable for in order to reimburse schools, Mr. Ross said the Regulations Committee was recommending that the Commission withhold 3 percent of the upcoming pool to begin the reserve fund. He estimated that this would generate approximately $45,000 to $50,000. Once all of the documentation from vendors and schools is returned to the Commission by the end of September, the Commission would have a better idea of just how many total dollars it would need to accumulate in the fund to reimburse the schools. Mr. Ross said the Commission could then reserve additional amounts on a month to month basis. Harold Howrigan made a motion to withhold 3 percent of the value of the August pool to be reserved for the reimbursement of the school food service programs. Ron Newman seconded the motion. Motion passed by unanimous vote of the six State delegations.

The meeting adjourned at 4:34 p.m.

Respectfully submitted,

Tina Wisell

Public Information Director