[Federal Register: April 28, 1997 (Volume 62, Number 81)]
[Proposed Rules]
[Page 23031-23063]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ap97-31]
[[Page 23031]]
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Part IV
Northeast Dairy Compact Commission
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7 CFR Chapter XIII
Compact Over-Order Price Regulation; Proposed Rule
[[Page 23032]]
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NORTHEAST DAIRY COMPACT COMMISSION
7 CFR Chapter XIII
Compact Over-Order Price Regulation
AGENCY: Northeast Dairy Compact Commission.
ACTION: Proposed rule.
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SUMMARY: This rule proposes a compact cover-order price regulation for
the territorial region of the six New England states, in the amount of
$16.94 (Zone 1), for six months duration. The Northeast Dairy Compact
Commission (Compact Commission) establishes this price regulation based
on its determination that it is necessary to assure the viability of
dairy farming in New England and to assure the region's consumers of a
continued adequate, local supply of fresh and wholesome milk,
reasonably priced.
DATES: Comments must be received by May 12, 1997.
ADDRESS: Comments should be submitted to the Northeast Dairy Compact
Commission, 43 State Street, P.O. Box 1058, Montpelier, VT 05601. The
complete file for this proposed rule is available for public inspection
during normal business hours at the offices of the Commission.
FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director,
Northeast Dairy Compact Commission at the above address or by telephone
at (802) 229-1941 phone or by facsimile at (802) 229 -2028.
SUPPLEMENTARY INFORMATION:
Background
The Compact Commission was established under authority of the
Northeast Interstate Dairy Compact (Compact). The Compact was enacted
into law by each of the six participating New England states as
follows: Connecticut--Pub. L. 93-370; Maine--Pub. L. 89-437, as
amended, Pub. L. 93-320; Massachusetts--Pub. L. 93-370; New Hampshire--
Pub. L. 93-184-A; Rhode Island--Pub. L. 93-336; Vermont--Pub. L. 89-95,
as amended, 93-97. Consistent with Article I, Section 10 of the United
States Constitution, Congress consented to the Compact in Pub. L. 104-
127 (FAIR ACT), Section 147, codified at 7 U.S.C. Sec. 7256.
Subsequently the United States Secretary of Agriculture, pursuant to
the FAIR ACT, authorized implementation of the Compact.
Section 8 of the Compact empowers the Compact Commission to engage
in a broad range of activities that are designed to ``promote
regulatory uniformity, simplicity and interstate cooperation.'' For
example, the Compact authorizes the Compact Commission to engage in a
range of investigations of the existing milk programs of both the
participating states and the federal milk marketing system, to make
recommendations to participating states, and to improve industry
relations as a whole. See Compact, Art. IV, Sec. 8.
In addition to the powers conferred by Section 8, the Compact also
authorizes the Compact Commission to consider adopting a compact over-
order price regulation. See Compact, Art., IV, Sec. 9. A ``compact
over-order price'' is defined as:
A minimum price required to be paid to producers for Class I
milk established by the Commission in regulations adopted pursuant
to sections nine and ten of this compact, which is above the price
established in federal marketing orders or by state farm price
regulation in the regulated area. Such price may apply throughout
the region or in any part or parts thereof as defined in the
regulations of the commission.
See Compact, Art. II, Sec. 2(8); see also Compact, Art. IV, Sec. 9
(``The Commission is hereby empowered to establish the minimum price
for milk to be paid by pool plants, partially regulated plants and all
other handlers receiving milk from producers located in a regulated
area.'')
Such price regulation establishes the minimum procurement price to
be paid by fluid milk processors to farmers used for New England fluid
milk consumption. The regulated price established by the Compact
Commission is actually an incremental amount above, or ``over-order''
(Federal Order #1) the minimum price for the same milk established by
Federal Milk Market Order.
Section 11 of the Compact specifically delineates the procedures
that the Commission must employ in the event it wishes to promulgate an
over-order price regulation.
Before promulgation of any regulations establishing a compact
over-order price or commission marketing order, including any
provision with respect to milk supply under subsection 9(f), or
amendment thereof, as provided in Article IV, the commission shall
conduct an informal rulemaking proceeding to provide interested
persons with an opportunity to present data and views. Such
rulemaking proceeding shall be governed by section four of the
Federal Administrative Procedures Act, as amended (5 U.S.C.
Sec. 553). In addition, the commission shall, to the extend
practicable, publish notice of rulemaking proceedings in the
official register of each participating state. Before the initial
adoption of regulations establishing a compact over-order price or a
commission marketing order and thereafter before any amendment with
regard to prices or assessments, the commission shall hold a public
meeting. The commission may commence a rulemaking proceeding on its
own initiative or may in its sole discretion act upon the petition
of any person including individual milk producers, any organization
of milk producers or handlers, general farm organizations, consumer
or public interest groups, and local, state or federal officials.
Pursuant to Sec. 11 of the Compact, the Compact Commission issued a
Notice of Hearing on December 13, 1996, and held public hearings on
December 17 and 19, 1996. The Notice also invited the public to submit
written comments through January 2, 1997. Following the close of this
comment period, the Commission met on January 16, 1997 and established
three working groups to consider the testimony and data submitted. The
Commission issued a Notice of Additional Comment Period on March 14,
1997. This comment period closed on March 31, 1997; the reply comment
period closed April 9, 1997.
Statement of Required Findings of Fact
Sec. 12(a) of the Compact directs the Commission to make four
findings of fact as the basis for promulgating a compact over-order
price regulation.
(a) In addition to the concise general statement of basis and
purpose required by section 4(b) of the Federal Administrative
Procedure Act, as amended (5 U.S.C. Sec. 553(c)), the commission shall
make findings of fact with respect to:
(1) Whether the public interest will be served by the
establishment of minimum milk prices to dairy farmers under Article
IV.
(2) What level of prices will assure that procedures receive a
price sufficient to cover their costs of production and will elicit
an adequate supply of milk for the inhabitants of the regulated area
and for manufacturing purposes.
(3) Whether the major provisions of the order, other than those
fixing minimum milk prices, are in the public interest and are
reasonably designed to achieve the purposes of the order.
(4) Whether the terms of the proposed regional order or
amendment are approved by producers as provided in section thirteen.
Compact Art. V. Sec. 12.
For purposes of clarity, the analysis of the testimony and comment
first addresses the substance of findings (2) above, or the level of
price needed by producers to cover their costs of production and which
will elicit an adequate supply of milk for inhabitants. The conclusion
of that analysis is that the current pay price is not sufficient to
cover cost of production or to elicit an adequate supply of milk for
inhabitants. Based on that determination the
[[Page 23033]]
resulting analysis addresses the substance of finding (1) above, or
whether the establishment of minimum milk prices to dairy farmers would
serve the public interest.
Summary of Comment
I. Finding
What level of prices will assure that producers receive a price
sufficient to cover their costs of production and will elicit an
adequate supply of milk for the inhabitants of the regulated area and
for manufacturing purposes.\1\
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\1\ The Compact Commission has determined that the findings here
required need not contain any determination with respect to the
provision of milk supplies utilized for manufactured purposes. Under
current circumstances, the Compact Commission is authorized to
regulate only the price of milk used for fluid consumption. See 7
U.S.C. Sec. 7256(2) (``The Northeast Interstate Dairy Compact
Commission shall not regulate Class II, Class III, or Class III-A
milk used for manufacturing purposes or any other milk, other than
Class I fluid milk, as defined by a Federal milk marketing order
issued under 7 U.S.C. Sec. 608c of this title, reenacted with
amendments by the Agricultural Marketing Agreement Act of 1937.'')
The Commission has concluded that the finding provision with regard
to milk used for manufactured purposes stems from the Compact's
alternative authority to regulate that additional milk supply with a
Commission marketing order. See Compact, Article IV, Sec. 9(c).
Under the Compact, however, this authority could be utilized only in
the event the federal Market Order System is eliminated. See Compact
Article IV, Secs. 9(a) and (c). This is not presently the case.
Morever, this residual authority was struck by the Congress when it
approved the Compact. Pub. L. 104-127(2). Accordingly, because the
Commission has authority only to regulate the price of milk used for
fluid milk purposes, its findings only deal with fluid milk supply
and consumption issues.
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This finding requires consideration of the core issues regarding
the financial health of the region's dairy farmers and the Compact's
associated purpose of assuring the region's adequate supply of milk.
More specifically, this finding requires the Commission to make a
determination of the price level necessary both to ensure the
continuing financial viability of New England dairy farms and to elicit
an adequate supply for the region's fluid, or milk beverage,
consumption.
Section 9(e) of the Compact provides guidance to the Commission
with regard to the factors to be considered in analyzing the cost of
production issue. That section directs the Commission.
to consider the * * * costs of production including, but not limited
to the price of feed, the cost of labor including the reasonable
value of the producer's own labor and management, machinery expense,
and interest expense. Section 9(e) also guides this inquiry by
requiring the Commission to consider ``the price necessary to yield
a reasonable return to the producer and distributor.
Based upon this statutory guidance, the Commission sought testimony
and comment on the following subjects and issues:
(1) Farmer costs of production, including the components
identified by Compact Section 9(e), and the pay price needed to
yield a reasonable rate of return to producers; and
(2) Prevailing pay prices received by dairy farmers in the New
England region; and
(3) The balance between production and consumption of fluid milk
products.\2\
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\2\ 61 CFR 65604.
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A. Issue: Farmer Cost of Production and the Pay Price Needed To Yield a
Reasonable Rate of Return to Producers
The comment received makes clear that, despite the approach of
Section 9(e), there is very little agreement on what ``costs'' should
be included in the cost of production, and even how they should be
calculated. Beyond actual cash costs, there is considerable
disagreement over whether to include or exclude, and how best to
consider, depreciation, family living costs, return or equity, a
reasonable value for the farmer's own labor, and debt service. There
was no common definition throughout the testimony among farmers or
economists. Farmers, themselves, quite frequently, excluded the value
of their own labor and or depreciation in calculating their own costs
of production.
The diversity of comment makes clear the difficulties of cost of
production analysis. Cost of production can and do vary widely from
farm to farm and year to year.\3\ Even one commenter who opposed the
adoption of a price regulation agreed that there is a lack of consensus
on the amounts that should be considered in calculating costs of
production.\4\ University of Vermont dairy economist Rick Wackernagel
suggests the difficulty of isolating the cost of producing a
hundredweight of milk from what is typically a diversified farming
operation, and that any such attempt is at best ``an approximation.\5\
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\3\ See December 19, 1996 hearing transcript (12/19/96 HT):
Putnam at 141, 148-49; Stevens at 158-60; Carlson, at 232-34;
Buelow, at 248; Beach at 288-90; Platt, at 292.
\4\ Vetne, 12/19/96 HT at 264-66.
\5\ Wackernagel, Compilation of January 2, 1997 Written Comment
(1/2/97 WC) at 482-83.
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As will be discussed, despite the diversity of their analytical
approach, the comments do reflect near unanimous agreement on at least
three important aspects of the cost of production equation:
(1) For an extended period of time prices have not covered the
full costs of production, however defined,
(2) price instability has caused financial stress and made it
impossible for farmers to plan financially; and
(3) over time, net, ``mail box'' price levels received by
farmers have not kept up with inflation.
In addition, the Compact Commission will review the comments
relating to the structure and health of the New England dairy industry.
The Compact Commission's review of comment under this section
includes a comprehensive survey of the testimony and comment received
from dairy farmers, and a response to opposing comments received. The
Commission notes that very few conflicting comments were submitted for
consideration.
(1) Price Insufficiency
Commenters indicated again and again that, in general, farmers in
New England had done a good job of holding down costs of production in
response to flat milk prices by increasing productivity and
efficiency.\6\ According to one survey of New England farmers, however,
this efficiency and productivity has not equated to profitability.
According to the survey conducted by the Farm Credit Services, forty-
two percent of the farms had a negative cash margin in 1995.\7\
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\6\ See DeGues, 1/2/97 WC at 74; Sciabarrasi, 1/2/97 WC at 309;
and Smith, 12/17/96 HT at 36.
\7\ See Smith, 12/17/96 HT at 36.
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This survey included seventy-three New England farmers who
participate in Agrifax, a financial accounting service provided to
farmers by local Farm Credit Associations. Despite the relatively small
size of the survey sample, the results are useful to the Commission
because, according to the authors, survey participants are generally
larger and perhaps better managed than the average dairy farm in New
England. The survey indicates that the average adjusted cost of
producing milk by New England farms in this survey in 1995 was $15.37
per hundredweight, when including a 4% rate of return on equity. Before
the 4% rate of return on equity the net cost of production was
14.25.\8\
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\8\ See Smith, 12/17/96 HT at 36.
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Smith concluded
When you consider the average price received by farmers in our
survey for New England was $13.70 per hundredweight in 1995, it is
not surprising that many dairy farms are having financial
difficulty.\9\
\9\ Smith, 12/17/96 HT at 36.
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There was also abundant evidence in the record that costs of
production for 1996 will likely be as high or even higher than in 1995
and again not be covered by the price received. Jim Putnam, a Senior
Vice President with First Pioneer Farm Credit Bank, for
[[Page 23034]]
example, testified that he ``would estimate probably a dime or more
higher in 96'' primarily as a result of a 29% increase in purchased
feed prices which can account for up to 50% of the cost of production
in New England.\10\ The average 1996 mailbox price in New England was
measured as $14.25, leaving a shortfall of over $1.00, against this
commenter's estimated cost of production.
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\10\ Putnam, 12/19/96 HT at 148-149; see also Smith, 12/17/96 HT
at 38; Andrew, 1/2/97 WC at 5.
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Farmers consistently referred to the fact that low farm prices made
it difficult for them to reach their ``break-even'' point, let alone
generate any meaningful return.\11\ As one witness testified:
\11\ See Mason, 12/17/96 HT at 87; d'Boer, 12/17/96 at 192;
Putnam, 12/19/96 HT at 144-45, 146.
I have two young children and she'll say gee, Dad, we've had a
break-even for less price this year for a lower milk price and let's
go out and eat and I've got to explain to her that when you break
even, you don't eat, that's just paying the operating expenses and
says nothing about investing in your business and making it a long
range commitment.\12\
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\12\ Holmes, 12/17/96 at 93.
Other farmer-witness testified that they, themselves, were living
below the poverty line and were eligible to participate in the WIC
program.\13\
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\13\ See Mason, 12/17/96 HT at 85-86.
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The result of these depressed prices and the inability to make ends
meet will, according to one commenter, cause farmers to ``tighten their
belt'' or ``hunker down'' and ``wait out the point in time when they'll
go back to breakdown.'' \14\ Farmers, thus, are struggling to make ends
meet.
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\14\ Putnam, 12/19/96 at 147-48.
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The testimony and comments also made clear that this failure of
milk prices to cover, or even meet, the costs of production is not a
short-lived phenomenon, but rather, is part of a long-term trend that
extends back into the mid-1980s. Numerous studies, which were
corroborated by substantial anecdotal evidence from farmers, documented
the chronic price insufficiency over the last decade.
The USDA Economic Research Service estimates that during the 1985
to 1990 period, cash receipts of Northeastern dairy farmers rose from
$13.96 to $16.00 per hundredweight while the cost of production jumped
from $12.06 to $16.46. In 1990, dairy farmers in the Northeast average
a net loss of .46 cents per hundredweight of milk sold.\15\
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\15\ Pelsue, 1/2/97 W/C at 274.
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Several other studies reached similar conclusions. For example, in
a study commissioned by the Maine Milk Commission submitted by Mike
Wiers, the Commission's Chair, economists Robert Milligan and Wayne
Knoblauch analyzed total costs of production (cash costs, depreciation,
a 5% return on equity, and a return on the farmer's labor) in Maine and
the five Southern New England states of Vermont, New Hampshire,
Massachusetts, Connecticut and Rhode Island--the six Compact states.
They found that for Maine the total costs of production per
hundredweight to be $17.24 in 1982 and $17.17 in 1987. For the Southern
New England States, the costs were $16.65 and $16.62 respectively.\16\
For these years, the Market Administrator's Report indicates that the
blend prices for Order 1, Zone 21 were $13.61 and $12.56, reflecting
pay prices below the costs of production.
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\16\ In reply comment, Bill Gillmeister indicated that the
higher cost of production in southern New England was a significant
issue that must be addressed. See Gillmeister, Reply Comment, (RC)
April 9, 1997. The Commission agrees that the loss of milk supply
nearest to the population centers is an issue of utmost concern, and
the reasons for this particular decline should be most carefully
scrutinized. As described at footnote 3, the Commission has
concluded that it should initiate a regional cost of production
study by the close of the regulation adopted under this rule. The
comparative costs of production within the region will be a key part
of this analysis.
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University of Vermont Extension economist Rick Wackernagel
submitted a study which relief upon an analysis of farm income and
expense data from Agrifax and ELFAC farms to estimate costs of
production for 1988 through 1990. The costs considered included cash
operating expenses, capital costs (other than land) and the labor
provided by the farm family; they did not provide for any return on the
owner's equity in land. According to this study, net costs of
production on these Vermont farms in 1988 were about $13 per
hundredweight. In 1990, they had risen to $15 per hundredweight.\17\ By
comparison, the Market Administrator's Report indicates blend prices
for 1988 and 1990, Order 1, Zone 21 were $12.22 and $13.95,
respectively. This study again confirms the fact that prices were
inadequate to enable farmers to meet the break-even point.
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\17\ Wackernagel, 1/2/97 W/C at 515.
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Economist Neil Pelsue submitted another study of the costs of
production in Vermont, conducted by the Community Development and
Applied Economics Department at the University of Vermont.\18\ This
study analyzed cost of production by considering all cash expenses,
capital replacement costs, and unpaid farm labor, using a hired wage
rate. For 1990, the study found the average cost of production to be
$14.33 per hundredweight, or about $0.67 less than the Wackernagel
study determination. When the economic or ``full ownership'' costs of
production was analyzed, however, which included a residual return to
management and risk, the measurement of cost of production ballooned to
an average of $16.41 per hundredweight. This determination is
substantially higher than the Wackernagel analysis and well above the
reported blend price of $13.95 for the year.
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\18\ Pelsue 1/2/97 W/C at 282.
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The Pelsue study also determined that nearly two-thirds of the
surveyed farms had negative residual returns. The study concluded, that
``[m]ore than half of the survey farms had economic costs of production
that exceeded their receipts. This implies that if current market
conditions do not improve, those farms may find it hard to continue
operating in the long run.'' \19\
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\19\ Pelsue, 1/2/97 W/C at 282.
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Vermont Department of Agriculture economist Reenie De Geus provided
testimony indicating that:
In 1995, the most recent year, costs of production averaged
$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower
[sic] than the actual milk prices received of $13.23. In fact, in
each of the last 5 years, milk price received was lower than the
cost of production by an average of $1.08.\20\
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\20\ De Geus, 1/2/97 WC at 74.
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Finally, as mentioned above, there was near unanimous testimony
from farmers that price levels were inadequate to enable them to cover
their costs of production. As one commenter summarized, the result of
these chronically depressed prices will be ``attrition.'' \21\
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\21\ Putnam, 12/19/96 HT at 148.
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The evidence submitted to the Commission regarding the inadequacy
of prices paid to farmers currently and over an extended period of time
is persuasive. Although the degree of the price inadequacy varies from
commenter to commenter, the evidence supports the conclusion that costs
of production exceed prices paid to farmers. \22\
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\22\ The Commission again notes the disparities in study
methodologies. While repeating its belief in the broad breadth and
strength of these studies for the conclusion that current prices are
not covering costs of production, the Commission also has identified
the need for a uniform, regional, cost of production study, to be
initiated before the close of the regulation imposed by this rule.
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(2) Price Instability
Abundant testimony in the record indicates that price instability,
and wide fluctuations in the price of milk, were significant sources of
financial stress for the dairy industry. These wide
[[Page 23035]]
variations in price made it difficult for farmers to make good business
decisions and to plan financially. Robert Wellington, Vice President of
Agri-Mark, testified that:
* * * data from the New England Market Administrator's office show*-
*-*the price volatility exhibited in the past 12 months is triple
that experienced in 1981 and much larger than most of the 1980's and
nearly all of the 1990's. This combination of lower prices with
unpredictable volatility has made business planning nearly
impossible and has put severe financial strain on most farms. \23\
\23\ Wellington, 3/31/97 AC.
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Robert Smith of the Farm Credit System testified with respect to
price instability that:
The volatility in milk prices makes it very difficult for
farmers to effectively plan and make the type of investment
necessary to position themselves for the future. The Commission can
play a major role in helping to reduce this volatility through
establishing a higher minimum Class I price. This will help keep
farmers and land in business and maintain a stronger agriculture
industry in New England for future generations. It will enable dairy
farmers to make necessary investments to enhance efficiencies and
will benefit communities with enhanced economic activity. \24\
\24\ Smith, 12/17/96 at 39.
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Comments from farmers expressing frustration over the wide swings
in milk prices were abundant and adamant. Tom Magnant, a dairy farmer
from Franklin Vermont testified: ``We find it very difficult to make
ends meet with the milk prices that fluctuate between $11.00 and $15.00
a hundredweight.'' \25\
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\25\ Magnant, 12/17/96 at 227.
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Jeffrey Holmes, a farmer from Langdon, New Hampshire testified
that:
I think one of the key things that's going to be gained from
this potential floor price and Mr. Smith alluded to that is the
stability of the price to the producer. We have no say in what we
get and that's been true for years and years, but in this day and
age of tight margins we really need to plan on a certain price.
We're making borrowing decisions on variations of ten, twenty and
thirty cents a hundred and the last two months we dropped 2 dollars
and I don't know what the figure is--$2.50 with a little over a
month warning that was coming and it's really a farce that we have
to make long range plans based on that type of marketplace. \26\
\26\ Holmes 12/17/96 at 92-93.
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Jim Jenks, a farmer from Danville, Vermont, testified:
I regret that I'm not a more prudent businessman but one thing I
know is if we're going to make a good decision with respect to
putting my family's equity on the line, we need to know something
about the stability of our markets and our future. So with regard to
the Compact Commission and the price that they could set, one thing
that we're really looking for is stability. We need price. And
there's a lot of other factors. But stability and a price that goes
with it is really critical.\27\
\27\ Jenks, 12/17/96 HT at 153.
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Ralph McNall, a dairy farmer and a Director of the Vermont St.
Albans Cooperative Creamery testified that:
Price stability is the greatest potential benefit of the
Compact. Within our own business costs have increased dramatically
in the last five years. The improvements or expansions have been
difficult to justify or prepare for with the fluctuations of the
price paid for milk. I fully support the Compact and its potential
to stabilize the milk price to allow my business to plan its
future.\28\
\28\ McNall, 12/17/96 HT at 221.
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Charles Telly, a dairy farmer from Dunstable Mass testifying on
behalf of the National Grange: ``I am increasingly concerned about the
fluctuating prices * * * It is difficult for me to plan out--to
financially plan out my future three, five or ten years in advance
because of the uncertainty I face each month with the ever changing
milk price''.\29\
\29\ Telly, 12/19/96 HT at 123.
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These comments are persuasive, and they demonstrate the need for
price stability in the region in order to avoid the harmful effects of
price volatility.
(3) Failure of Milk Prices to Account for Inflation
Both economists and farmers identified the failure of milk prices
to keep up with inflation as a factor contributing to farm financial
stress. A recent study conducted and submitted by University of Vermont
dairy economist, Rick Wackernagel presented a comprehensive analysis of
the impact of these two variables--price insufficiency and inflation--
upon farm profitability.\30\ Because of its comprehensive approach, the
Commission finds this study persuasive and relies on it extensively.
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\30\ Wackernagel, 1/2/97 W/C at 467 et seq.
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The Wackernagel study analyzes the economic effects of three
different price trajectories for two different farm sizes--an 80 cow
herd and a 350 cow herd. Wackernagel's first trajectory used a macro-
economic model developed by the Food and Agriculture Policy Research
Institute (FAPRI) for 1997 modified to reflect local price levels and
yields as a base. The base scenario is premised upon a Class I price of
$16.17 per hundredweight at Zone 21 and a blend price of $14.70 per
hundredweight. Under this scenario, both farms operate at low to modest
levels of profitability. They are stressed financially during several
periods of price instability and by a general downward trend in price,
however. The financial results for these two farm sizes are ``marginal
to somewhat unattractive'' at these price levels, providing ``an
extremely modest return on investment of 0.4 to 3.0%''.\31\
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\31\ Wackernagel, 1/2/97 W/C at 473.
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The second trajectory attempts to moderate price instability by
holding the Class I price constant. Wackernagel estimates that the
Class I price accounts for about forty percent of the variation in the
blend price and that stabilizing the Class I price could potentially
reduce the variability of the blend price by about half. The economic
impact of this approach upon farm income and survival, however, was
similar to the base (first) trajectory, suggesting that price
instability is not the only factor placing financial stress on these
farming operations. Inflation, was a factor as well, as Wackernagel
explains: ``The Consumer Price Index (CPI) shows a third source of
financial stress for these farms, inflation. In contract to its steady
upward progression, the first two trajectories have downward
trends.\32\
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\32\ Wackernagel, 1/2/97 W/C at 473.
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Wackernagel's third price trajectory raises the Class I price to
$17 per hundredweight (Zone 21), yielding a project blend price of
$15.45, and increases the Class I price by one-half the rate of
inflation in subsequent years. This price trajectory has the greatest
positive impact on retention of equity, net farm income and
survivability, even though its upward slope is less than that of the
CPI.
Farmers also identified inflation as a significant source of
financial stress. Ellen Paradee, a dairy farmer from Grand Isle,
Vermont testified that:
Since 1985, our property taxes have increased two hundred
percent. Our grain costs have increased one hundred percent. And our
utility costs have increased one hundred and twenty five percent. In
1985, the average blend price for Zone 25 was $12.57 per
hundredweight. In 1995, the average blend price was $12.56 per
hundredweight. Essentially, there has been no increase in the blend
price. If the price of milk had kept pace with inflation, it would
be approximately $26 per hundredweight.\33\
\33\ Paradee, 12/17/96 HT at 232.
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Ralph McNall commenting on his own farm finances and inflation
said:
* * * utility cost, electricity, for example, has gone from, in the
year 1991 it's gone from $3,600 to $5,800 for an increase of fifty
two percent.
Purchased feed is another example--$37,000 to $76,000 for an
increase of one hundred and five percent. Fertilizer--$4,900 to
$8,100 for an increase of sixty six percent . . . It is important
to note that steps have been taken to reduce electricity costs, for
[[Page 23036]]
instance through plate coolers and heat reclaimers within the milk
house and yet as I said before the cost went up fifty percent.
Reliance on purchased fertilizer has been reduced, supposedly,
through the installation and utilization of liquid manure.\34\
\34\ McNall, 12/17/96 HT at 222 and 223.
---------------------------------------------------------------------------
John Mordasky, dairy farmer and Legislator from Stafford,
Connecticut, said:
I lost from eight to ten thousand dollars a year in the last
four years and I feel that this has come about because the relative
price of milk has stayed the same. Fuel has gone up, grain has
jumped out of sight and it just--all the other costs that are
involved--equipment, parts--have gone very, very, high and they're
not relative anymore.\35\
---------------------------------------------------------------------------
\35\ Mordasky, 12/19/06 HT at 12.
---------------------------------------------------------------------------
(4) Structure and Health of the New England Dairy Industry
The comment received also makes clear the devastating impact that
chronic price insufficiency, price instability, and the failure of milk
prices to keep up with inflation over the last decade has had, and will
continue to have, on the structure and health of the New England dairy
industry absent intervention through regulation by the Compact
Commission.\36\
---------------------------------------------------------------------------
\36\ One commenter felt that the Commission should not take
action because he believed that other regions of the country were
losing dairy farmers at a faster rate than New England. See Tipton,
WC 1/2/97 at 462. A finding that New England is losing farmers
faster than any other part of the country is unnecessary to
establishing an over-order price regulation.
---------------------------------------------------------------------------
According to the extensive testimony by University of New Hampshire
Extension Specialist Michael Sciabarrasi, the character of the New
England dairy industry is still predominantly family owned and
operated, made up of mostly small to medium sized producers, and is
heavily dependent on family labor.\37\ Maintenance of this market
structure premised on family farms is precisely the express purpose of
the Compact. See Compact Article I, Sec. 1.\38\
---------------------------------------------------------------------------
\37\ Sciabarrasi, 1/2/97 WC at 309.
\38\ Three commenters expressed the opinion that the market
should be left to work without regulation, even if this meant
continued farm loss. (Baker, 12/17/96 HT at 185, Schnittker, 1/2/97
WC at 313 and Vetne, 12/19/96 HT at 269.) As one Commenter
recognized, this is essentially a question of public policy. In
response, the Commission refers to the Compact's Statement of
Purpose, that ``dairy farmers are essential to the region's rural
communities and character'' and are ``an integral component of the
region's economy.'' Compact Article I, Sec. 1.
---------------------------------------------------------------------------
Mr. Sciabarrasi's conclusions were corroborated by much of the
evidence adduced at the hearings. There is abundant evidence that many
of the region's farms are small to medium-sized. Likewise, there is
substantial anecdotal evidence of heavy dependency on family labor,
much of which often goes unpaid.\39\
---------------------------------------------------------------------------
\39\ See 12/17/96 HT: Mason at 87; Olson at 146; d'Boer at 192.
---------------------------------------------------------------------------
The testimony of Robert Smith, with the Yankee Farm Credit Bank and
Farm Credit of Maine, described the effect of the industry's chronic
distress upon this basic market structure. According to Smith, ``The
number of dairy farms in New England declined by 41% over the past 10
years. (1985-1995) During this period the number of cows has declined
24%, total production has declined 4% and land used in farms fell by
nearly 600,000 acres.'' \40\ According to another commenter, New
England has lost dairy farmers at a rate of about 40% faster than the
national average, between 1987 and 1992.\41\
---------------------------------------------------------------------------
\40\ Smith, 12/17/96 at 34.
\41\ Ed Barron, 12/17/96 HT at 60.
---------------------------------------------------------------------------
Statistics cited by another commenter indicate these problems are
particularly severe in the southern portion of the Compact region.
Massachusetts, the most populous state, has seen the greatest effect,
showing a 35% decline in cow numbers and a 20% decline in milk
production during the period of 1986 through 1995. Each of the two
other southern New England states, Connecticut and Rhode Island, have
also shown substantial declines in farms, cow numbers and production
See New England Agricultural Statistics, 1995-96, USDA, Page 68.\42\
---------------------------------------------------------------------------
\42\ William Zweigbaum, U-NH Extension 3/31/97 AC.
---------------------------------------------------------------------------
The economic literature submitted into the record addressing this
issue likewise concludes that inadequate milk prices threaten the long-
run survival of small and medium-sized farms. Quiroga & Bravo-Ureta,
``Short- and Long-Run Adjustments in Dairy Production: A Profit
Function Analysis,'' 24 Journal of Applied Economics 607-16 (1992).\43\
In this study, the authors extracted data from Vermont farms between
1966 and 1988 and applied that data to econometric models to test the
effects of milk price reductions on several factors, including farm
size. The results of their analysis were consistent with the view that
low milk prices threaten the economic viability of small- and medium-
sized dairy farms in the short run, and continue the trend towards
fewer, and larger, dairy farms over the long run. Yet, it is precisely
this fear of continuing attrition among the region's small rural dairy
farmers that led to the enactment of the Compact, and prompted the
Commission to undertake this proceeding. See, e.g., Compact, Art. I,
Sec. 1.
---------------------------------------------------------------------------
\43\ Bravo-Ureta, 1/2/97 WC.
---------------------------------------------------------------------------
(5) Comments and Testimony From Farmers
In the language of economists, the Commission was told that a farm
can continue to operate in the short term only if market prices cover
variable costs. In the long term, it must cover the total cost of
production and marketing or the farm will cease operating.
(WC 282 Pelsue) Farmers were more likely to describe this situation
as living off their depreciation or living off their equity, in terms
evidencing both frustration and humor.
Connecticut dairy farmer, Mavis Collins, testified that:
People in fact used to ask us ``what will you do with all the
money from selling your development rights'' and we jokingly would
reply, ``We'll farm until the money is all gone.'' And
unfortunately, that's almost what's happened. This year alone we had
to use $24,000 of our savings plus $11,000 from creditors in order
to keep up with current bills. * * * \44\
\44\ Collins, 12/19/96 HT at 56.
---------------------------------------------------------------------------
Wendy Kennedy a farm wife and owner of a farm accounting and tax
service told the Commission:
I pulled out the full time dairy farmers from my files. (25
files) The average income from their Schedule F which is where you
report farm income was a negative $5,263 for last year. (1995) * * *
With a negative bottom line of $5,263 these families are living off
their depreciation or selling off their assets to live * * * You
can't run a business like that and be in business next year.\45\
\4\ Kennedy, 12/19/96 HT at 239-240.
---------------------------------------------------------------------------
Nowhere was the gap between cash receipts and costs of production
more apparent than when farmers talked about family living expenses or
any return for their family's labor: A Massachusetts dairy farmer
testified: ``My brother Edward and I milk about one hundred cows in
Westhampton, Mass. Ed and I take a draw of $300 per week and each of us
work about one hundred hours per week (6 a.m.-8 p.m. 7 days).\46\
---------------------------------------------------------------------------
\46\ Parsons, 1/2/97 WC at 236.
---------------------------------------------------------------------------
Jan d'Boer who milks 95 cows with his family told the Commission:
``We looked it over and we came up with about 35 hours of family labor
a day * * * And the wages per hour we came up with after we figured it
all out is $2.55 an hour.'' \47\
---------------------------------------------------------------------------
\47\ d'Boer, 12/17/96 at 192.
---------------------------------------------------------------------------
John Potter, a Washington, Connecticut dairy farmer: ``My costs
show $7.17 to produce milk, January through November. That's not
including anything for family living. That doesn't include anything for
depreciation or paying back debt.'' \48\
---------------------------------------------------------------------------
\48\ Porter, 12/19/96 HT at 226.
---------------------------------------------------------------------------
[[Page 23037]]
Joanne Reynolds, nurse and farm wife: ``In 1996, our milk price
averaged $14.88, but our expenses averaged $12.73. These expenses do
not reflect depreciation, debt principal or family living expense. What
other segment of society works 4000 hours a year, has a $500,000
investment and is basically living off of depreciation.'' \49\
---------------------------------------------------------------------------
\49\ Reynolds, 1/2/97 W/C at 293.
---------------------------------------------------------------------------
John Mordasky testified that: ``In the last four years, in order to
support my wife and myself we lived on our depreciation and my
legislative pay.'' \50\
---------------------------------------------------------------------------
\50\ Mordasky, 12/19/96 HT at 10.
---------------------------------------------------------------------------
John Devine of Devine farms of Massachusetts testified, `` * * * we
had the accountant pull off the facts from April to November and we had
a net loss of $12,877.23.'' \51\
---------------------------------------------------------------------------
\51\ Devine, 12/19/96 HT at 220.
---------------------------------------------------------------------------
Wayne Bissonette a dairy farmer from Hinesburg, Vermont told the
Commission that:
* * * long term decisions * * * [are] becoming increasingly
difficult as milk prices swing more dramatically with no apparent
link to other costs and market forces * * * ``I consider myself to
be a fairly efficient farmer,'' he said, ``and I believe that I
could make money with a blend price of $14.50. This does not allow
for much return on my equity but at this level I would be paying
income tax.''
Alice Allen a dairy farmer from Wells River, Vermont said:
In 1973, when my husband and I first began shipping milk, we
were receiving $7.50/cwt (federal Order 1) for milk. We were paying
$60 a ton for excellent quality 2nd cut hay and $80 a ton for 20%
protein. In 1996, we are receiving $15.37/cwt and paying $145 a ton
for second cut hay and $250 a ton for 20% protein concentrate.\52\
\52\ Allen, 1/2/97 W/C at 3.
---------------------------------------------------------------------------
Scott Mason, a registered jersey farmer from Coos County testified
that:
I'm looking at a break-even cost for my farm of $14.31. This
price does not include any figure for return to equity or family
labor. So 14.31 is I work 70 hours a week for nothing, my wife works
approximately 30 hours a week on the farm for nothing, and we risked
every last penny that we have for no return.\53\
\53\ Mason, 12/7/96 HT at 87.
---------------------------------------------------------------------------
Leon Berthiaume the general manager of the St. Albans Cooperative
in St. Albans Vermont testified in summary with respect to the members
of his cooperative that:
* * the average size farm for the St. Albans Coop Creamery produces
1.6 million pounds of milk per year and through these statistics
[UVM and USDA] we know the net cost of production, not including
return on investment would be in the range of $13.50 to $14.25 per
hundredweight.\54\
\54\ Berthiaume, 12/17 HT at 93 et seq.
---------------------------------------------------------------------------
The strength and consistency of the evidence in the record with
respect to the impact on farmers of their inability to cover their
costs of production provides stark evidence to the Commission of the
severity of the problems facing the region's dairy farmers, as well as
the consequences of inaction.
B. Issue: Prevailing Pay Prices Received by Dairy Farmers in the New
England Region
The issue of the pay prices received by New England dairy farmers
is important because it bears directly on determining the necessary
level of any Compact Over-order Price Regulation that might be imposed.
According to a review of the statistical data and the comment
received, prevailing farm prices are a function of two computations:
federally regulated uniform (or ``blend'') prices and net or
``mailbox'' price.
Statistics published by the Market Order # 1 Administrator provide
comprehensive and complete data to address the first part of this
issue--the market structure of federal, minimum, price regulation.
These statistics are compiled by the Market Administrator as part of
the regulation of the federal order, by law, and are published monthly,
annually, and in ten-year compilation form. See 7 C.F.R.
Sec. 100.3(c)(4), (9). They serve as the common basis for all New
England regional dairy marketing analysis and, together with similar
statistics supplied for other regions, form the basis for national
analysis.\55\
---------------------------------------------------------------------------
\55\ submitted for reference by De Geus and Gilmeister, 3/3/97
AC.
---------------------------------------------------------------------------
These statistics report the precise minimum uniform or ``blend''
prices paid to dairy farmers under federal regulation. According to the
statistics, these prices are announced and paid monthly, using one
hundred pounds (cwt) of milk as the unit of measure.
General managers and economists employed by cooperatives of dairy
farmers which operate in the region described in comprehensive detail
the integration of market forces at work in the regulated marketplace.
According to these commenters, farmers receive from the marketplace a
``mailbox'' or net pay price, which accounts for a variety of market
payments received and costs incurred for the sale of the milk they
produce. \56\
---------------------------------------------------------------------------
\56\ According to Wellington et al, (AC 3/31/97) and pursuant to
federal Market Order # 1, the cost of transporting the bulk fluid
milk from the farm to the processing plant is a key cost to farmers
which reduces the prevailing farm price. This issue is discussed in
more detail in the next finding section.
---------------------------------------------------------------------------
The following chart illustrates these two price computations of
prevailing pay prices of the region's dairy farmers.
[[Page 23038]]
Class I, Blend and Mailbox Prices 1995-1996
[Per CWT]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1995
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Class I.................................................. 15.10 14.62 14.59 15.03 15.13 14.4 14.36 14.66 14.47 14.79 15.32 15.85
Blend.................................................... 13.12 13.13 13.25 13.19 13.27 12.84 12.83 13.24 13.32 13.7 14.24 14.43
Mail box................................................. 11.83 11.86 11.98 11.93 11.92 11.39 11.35 11.71 11.88 12.42 13.14 13.20
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1996
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Class I.................................................. 16.11 16.15 15.97 15.83 15.94 16.33 17.01 17.16 17.73 18.18 18.61 17.37
Blend.................................................... 13.79 13.63 13.55 13.53 13.84 14.53 15.25 15.48 15.96 16.04 15.65 14.37
Mail box................................................. 13.38 13.23 13.14 13.08 13.49 14.08 14.77 15 15.55 15.83 15.37 14.12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 23039]]
C. Issue: The Balance Between Production and Consumption of Fluid Milk
Products
As noted, the finding analysis regarding the price calculation
simultaneously accounts for the level required to ensure the region's
local supply of fluid milk products and the amount needed to cover cost
of production. Section 9(e) of the Compact specifically requires the
Compact Commission to consider the balance between production and
consumption of milk and fluid milk products in the regulated area.
Inquiry under this issue assisted the Commission in determining
whether the region presently is being supplied locally or has become
dependent upon supply from distant sources, notwithstanding any present
price disparity between cost of production and the pay price. This
understanding allowed the Commission to determine the degree to which
price regulation is needed to sustain current, sufficient, local
supply, and the degree to which it is also needed to encourage and
ensure new and added local supply.
According to data, the six state, New England, region draws
approximately seventy percent of the raw product supply needed for the
consumption of all milk products, fluid and manufactured, from New
England farmers. The total volume of milk supplied for the region is
approximately five billion pounds. The predominant remainder is
supplied by New York farmers, who have traditionally made up a
substantial portion of the New England milkshed. Less than three
percent of the raw milk supply for the New England market is produced
outside of the six state/New York milkshed.
According to the Market Order statistics, approximately fifty
percent of this raw product milk supply is processed for consumption as
fluid, or drinking milk, in the New England region. The raw product
supply for this in-region fluid production and consumption draws from
both the New England and New York farmers comprising the New England
milkshed. At present, approximately 98 percent of the fluid milk
products consumed in the region are produced by fluid processing plants
located in New England. The remaining two percent of fluid milk
consumption is supplied by packaged milk products imported by plants
nearby to New England. A small percentage of the in-region fluid
production is similarly exported for consumption in the immediate areas
adjacent to New England.
The Market Order statistics also describe with particularity that
the remainder of the raw product milk supply is processed within New
England into manufactured dairy products. In contrast to fluid milk
products, these manufactured dairy products are consumed both within
and outside the New England region.
It is universally understood that the same raw product supply can
be used for both fluid, processing and manufacturing purposes. Given
this substitutability, and assuming reliance upon farmers in New York
State as part of the milkshed, the Commission concludes that New
England is, overall, presently in stable balance of regional production
and consumption of fluid milk products.
At the same time, the Market Order statistics describe a marked
decline in production over time in every individual New England state
except Vermont.\57\
---------------------------------------------------------------------------
\57\ See also New England Agriculture statistics, submitted by
William Zweigbaum, A/C 3/31/97.
Receipts of Milk From Producers, By States
[Thousand Pounds]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year CT Me MA NH NY RI VT All States
--------------------------------------------------------------------------------------------------------------------------------------------------------
1985............................................ 594,785 345,956 540,143 338,028 1,284,015 39,722 2,256,595 5,399,244
1986............................................ 574,279 333,124 506,773 343,806 1,280,331 36,912 2,266,222 5,341,447
1987............................................ 541,118 293,373 450,524 301,738 1,313,635 36,198 2,236,238 5,172,824
1988............................................ 515,512 262,059 418,055 281,403 1,391,994 34,490 2,214,116 5,117,629
1989............................................ 502,716 217,437 400,105 268,453 1,388,680 29,651 2,167,758 4,974,803
1990............................................ 494,619 216,586 407,704 280,201 1,455,463 29,805 2,229,961 5,114,341
1991............................................ 504,516 253,383 412,990 294,185 1,545,890 30,056 2,268,174 5,309,194
1992............................................ 525,702 260,759 427,407 307,159 1,560,245 28,853 2,367,566 5,477,691
1993............................................ 504,282 288,776 424,836 310,463 1,443,447 28,266 2,345,423 5,345,493
1994............................................ 491,495 296,500 398,271 299,911 1,283,684 27,161 2,301,044 5,098,521
1995............................................ 487,493 346,443 400,501 314,610 1,417,034 28,536 2,375,518 5,370,135
1996............................................ 457,230 388,684 388,227 312,293 1,459,469 26,850 2,350,348 5,383,101
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: New England Market Order Administrator's Statistical Summaries.
Milk Marketed by Producers: Sold to Plants and Dealers: by State
[Million Pounds]
--------------------------------------------------------------------------------------------------------------------------------------------------------
YR CT ME MA NH RI VT Total NE
--------------------------------------------------------------------------------------------------------------------------------------------------------
1986......................................................... 575 670 535 362 36.0 2405 4583.0
1987......................................................... 540 654 480 314 36.0 2370 4385.0
1988......................................................... 515 620 437 296 35.0 2350 4253.0
1989......................................................... 500 585 422 286 30.0 2295 4118.0
1990......................................................... 495 590 436 297 30.2 2330 4178.2
1991......................................................... 505 600 440 313 33.4 2370 4261.4
1992......................................................... 526 623 454 328 32.3 2474 4437.3
1993......................................................... 527 645 452 320 31.9 2470 4445.9
1994......................................................... 514 621 431 308 31.2 2422 4327.2
1995......................................................... 508 625 426 322 32.1 2507 4420.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: MILK: Annual Quantities Used and Marketed by Producers, 1986-1995 New England Agricultural Statistics, 1995-1996.
[[Page 23040]]
This statistical picture of decline is further corroborated by the
previously cited testimony of Smith and Baron. According to Smith,
``The number of dairy farms in New England declined by 41% over the
past 10 years. (1985-1995) During this period the number of cows has
declined by 24%, total production has declined 4% and land used in
farms fell by nearly 600,000 acres.'' \58\ According to another
commenter, New England has lost dairy farmers at a rate of about 40%
faster than the national average, between 1987 and 1992.\59\
---------------------------------------------------------------------------
\58\ Smith, 12/17/96 HT at 34.
\59\ Barron, 12/17/96 HT at 60.
---------------------------------------------------------------------------
According to statistics cited by another commenter, problems are
especially severe in the southern portion of the Compact region.
Massachusetts, the most populous state, has seen the greatest effect,
showing a 35% decline in cow numbers and a 20% decline in milk
production during the period of 1986 through 1995. Each of the two
other southern New England states, Connecticut and Rhode Island, have
also shown substantial declines in farms, cow numbers and
production.\60\
---------------------------------------------------------------------------
\60\ See New England Agricultural Statistics, 1995-96, USDA,
Page 68.
---------------------------------------------------------------------------
Another commenter indicates that milk production in New York state,
the supplemental portion of the New England milkshed has also declined.
Citing USDA statistics, this commenter states that ``New York milk
production was down 4 percent in February 1997 compared to one year
ago.'' \61\
---------------------------------------------------------------------------
\61\ Wellington et al, 3/31/97 AC at 6.
---------------------------------------------------------------------------
This commenter also indicates that the milkshed has expanded in
area as production closer to the production centers has declined:
The milk supply area for the New England market has steadily
increased over time as dairy farmers in the region have gone out of
business. When the New England Order was promulgated more than
twenty years ago, the supply area, or milkshed, covered all the six
New England states and a dozen or so eastern New York counties.
Recent information provided by the Market Administrator's Office
shows that the New England market now receives milk from thirty four
New York counties as far west as Ontario County. Ontario County is
about 360 miles distance from Boston. This distant milk is primarily
needed to satisfy the daily Class I needs of New England bottlers
during the peak demand period in late summer and fall when schools
go back into session and milk supplies are seasonably at their
lowest level. The New England milkshed has increased in size by
approximately 10 miles.\62\
\62\ Wellington et al, 3/31/97 AC at 6.
---------------------------------------------------------------------------
From the comment and statistics, therefore, the Compact Commission
concludes that production and consumption in New England, though
presently in balance, are operating in a balance that is under
tremendous stress. The supply most local to the population centers, or
that provided by southern New England farms, has been greatly
diminished and is in fact disappearing. Production at the outer reaches
of the milkshed has been able to replace this loss of the most local
supply. Yet this more distance supply is itself under stress and is in
fact in decline, causing the outer boundaries of the milkshed to be
expanded.
The Compact Commission consequently concludes that the present
stress on the balance between the region's production and consumption
must be relieved if the region is to continue to be provided an
adequate, local supply of fluid milk. The Commission concludes that the
present balance likely will not be maintained and could soon begin to
significantly erode, which would threaten the region's supply, if the
stress is not relieved. To ensure a continuing balance, the present,
local supply must at least be stabilized, if not increased.
Furthermore, the present, distant supply itself must be stabilized as
well, to ensure that the milkshed does not reach further west.
D. Summary Analysis of Costs of Production and Sufficient Price
Based on this summary of comment and analysis under issues (1), (2)
and (3) above, the Commission concludes the chronic loss of dairy
operations in the region, and thereby the stress on the region's local
supply of milk, is a direct result of the volatility of farmer milk
prices and their chronic insufficiency, including the failure of prices
to adjust for inflation.
The Commission further concludes, accordingly, that price
regulation is necessary to address the chronic pricing problems and to
continue the assurance of an adequate, local supply of milk for the
region.
Price Volatility, Cost of Production and Chronic Insufficiency of
Price, and the Failure of Price To Adjust for Inflation
1. Price Volatility
The concern with price volatility is described in detail above. The
Commission concludes that this price volatility can and should be
addressed directly by Compact Over-order price regulation. Compact
Over-order price regulation can minimize and even eliminate price
volatility by establishing a level, Class I, floor price that combines
the Federal Order minimum price with a ``floating'' Over-order price.
Such a combined floor price will serve to eliminate the volatile swings
in federal Class I pricing.
More specifically, the precise amount of the ``floating'' component
of the Compact Over-order Price Regulation will be the difference in
amount between the federal, regulated, price that is announced monthly
and the amount of Compact Over-order Price Regulation itself. As
explained below, the Commission is adopting a combined, federal Order
and Compact Over-order, Class I price of $16.94 (Zone 1). The
``floating'' or ``Over-order'' component of the Compact price
regulation will be the difference between the announced Federal Order,
Class I, Zone 1 price for each month and $16.94.
2. Cost of Production and Chronic Insufficiency of Price
The evidence in the record suggests that the costs of production in
the New England states, within the meaning of the required finding, is
best defined as a range. The Compact Commission draws this conclusion
for two reasons. First, both the farm testimony and that of the
region's dairy economists indicates that costs of production vary from
farm to farm. Second, the testimony of the dairy economists themselves
define a wide range of values.
The range presented in their study data varied widely, between
approximately $13.50 and $17.24 per cwt. Leon Berthiaume testified that
costs of production among members of a substantial Vermont cooperative
ranged from $13.50-$14.25; on behalf of the Vermont Department of
Agriculture, Reenie De Gues testified that Vermont production costs
were $14.06; University of Vermont economist Rick Wackernagel testified
that costs were at $15.00; Neil Pelsue testified of costs equaling
$16.41; Bob Smith described costs of $15.37; The Economic Research
Service provided an estimate of at $16.46; Milligan and Knoblauch
concluded that production costs were as high as $17.24.
These variances can be explained by several factors, including the
different time frames surveyed, the different data relied upon, and the
different costs included in the survey evaluations. Despite the
recognized, inherent, limitations resulting from this variability, this
data base is still most comprehensive, and allows the Commission to
settle upon a range of cost of production that is most reliable.
To establish its range, the Compact Commission has referred to the
above series of summary numbers and eliminated the high and low values.
The
[[Page 23041]]
Compact Commission then matched this range against the variety of
anecdotal statements presented by dairy farmers in testimony and
comment. Accordingly, the Compact Commission determines that, for
purposes of analysis under this rule, the range of New England cost of
production is reliably understood to be somewhere between $14.06 and
$16.46 per cwt.
As described earlier in detail, the data, comment and testimony
received demonstrated overwhelmingly that New England farmer pay prices
are and have been chronically below this defined range of cost of
production. The Compact Commission further concludes that the amount of
this insufficiency is also best described as a range.
As described earlier, the USDA Economic Research Service estimate
that during the 1985 to 1990 period, cash receipts of Northeastern
dairy farmers rose from $13.96 to $16.00 per hundredweight while the
cost of production increased from $12.06 to $16.46. This describes a
deficiency in price range of $1.90-$0.46. Vermont Department of
Agriculture economist Reenie De Geus provided testimony indicating
that:
In 1995, the most recent year, costs of production averaged
$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower
than the actual milk prices received of $13.23. In fact, in each of
the last 5 years, milk price received was lower [sic] than the cost
of production by an average of $1.08.\63\
\63\ De Geus, 1/2/97 WC at 74.
---------------------------------------------------------------------------
Using the figures here identified, the Commission accepts this
comment and concludes that cost of production exceeds farmer pay price
by an amount in the range of $0.46-$1.90.
As cited earlier, Ms. De Gues provides some context for this
apparent range in deficiency:
In good years, we find that the cost of production tends to rise
with the price of milk. With the extra cash farmers replace worn out
equipment and make repairs that may have been delayed for years.
When the price of milk drops below cost, they consume some of the
equity in their farms to meet family living expenses and cash flow
demands.\64\
---------------------------------------------------------------------------
\64\ De Geus, 1/2/97 WC at 75.
---------------------------------------------------------------------------
3. Adjustment for Inflation--Determination of Specific Price Amount and
Formula
As described earlier, the chronic insufficiency in price can be
traced to a number of sources. The Compact Commission has determined
that the single most readily identifiable basis of price insufficiency
is the failure of farm prices to adjust to inflation over time.\65\
Given this readily apparent concern from the hearing record, in the
subsequent Notice of Comment, the Compact Commission specifically
sought comment as follows:
---------------------------------------------------------------------------
\65\ The Commission here specifically notes the determination of
Professor Wackerngel's analysis regarding the significance of
inflation. Wackernagel, 1/2/97 WC at 473.
The Commission is considering a possible Compact over-order
price regulation that will be based, at least in part, on an
adjustment for inflation to the Class I, fluid milk price, over
time. The Commission seeks comment on the advisability of such an
approach, as well as possible methodologies for determining the
impact that such an adjustment would have on the Class I, fluid milk
price, over time.\66\
---------------------------------------------------------------------------
\66\ 62 FR 12252.
---------------------------------------------------------------------------
In response, the Commission received a combined comment from Reenie
DeGeus and Bill Gillmeister, dairy economists for the Vermont and
Massachusetts Departments of Agriculture, respectively, providing a
detailed analysis on this point. They proposed a one-time adjustment of
the Class I price, (Zone 1) using 1991 as the base year for the
adjustment. They proposed using the 1990 CPI as the base index, given
that the Compact expressly uses this base year for adjusting the cap on
its regulatory authority. See Compact Section 9(b). They suggest
further using the CPI-U Boston as the appropriate, more local indicator
of the inflation factor.
This equation yields a Class I, Zone 1 price of $16.94 per cwt. for
1997.
The Commission accepts the recommendation of these two state
agriculture department economists. 1991 is a reasonable year to use for
the historic period; 1991 prices were markedly low, following an
historic year of high prices. This erratic fluctuation in prices was of
similar type to the recent swing of November, 1996-January, 1997, and
thus provides a recent and analogous, relevant time period for the
inflation adjustment. In addition, as the commenters note, using the
low point, 1991, of this last pricing cycle ensures that the inflation
adjustment will be appropriately limited.
Wellington, et al. also submitted comment in response, indicating
concern with the use of an automatic inflation adjustment. They
indicated that inflation must be accounted for as a dynamic factor of
retail prices as well as farmer cost of production. They indicated that
the price regulation, including all relevant factors, should be
assessed every six to twelve months, rather than made to adjust to a
single static indicator.\67\
---------------------------------------------------------------------------
\67\ Wellington et al at 11. Another commenter expressed similar
concern. See Vetne, 12/19/96 HT at 269.
---------------------------------------------------------------------------
The Compact Commission accepts this comment, as well. The
Commission agrees that the inflation adjustment should not serve as the
single, permanent, function of price adjustment. Rather, it serves as
the initial, limited, regulatory response to the defined chronic market
problems of price insufficiency and volatility.
The Compact Commission further agrees that the overall price
regulation adopted by this rule must be revisited after the passage of
some time rather than imposed permanently. As discussed throughout this
summary of comment, the Commission has determined that the duration of
the rule will be six months. This will allow the Commission to assess
again the broader market circumstances in the manner contemplated by
the commenters.
Accordingly, the Compact Commission has adopted the price/inflation
adjustment presented by DeGues and Gillmeister, which accounts for this
six month duration of the rule. Given that this six month period will
be from July-December, 1997, the Commission adopts their calculation of
price, adjusted for inflation for 1997, of $16.94 (Zone 1).
The Compact Commission recognizes that this price level, in itself,
will not be sufficient to cover the defined range of deficiency between
current farmer pay prices and cost of production. The Commission
expects instead the combined benefits of price enhancement and
stability to result in the positive impact on the region's milk supply,
as contemplated by the finding analysis under this section.
The Commission here expressly refers to and relies upon the
analysis of Professor Wackernagel, which assessed the impact on
profitability of a Class I price of $16.89 (Zone 1) ($16.17 Zone 21).
The price analyzed is thus directly in line with that adopted by the
Commission. According to this analysis, farms operating in such a
stabilized pricing environment would remain under stress financially,
but would show some improved financial performance, able to operate at
low to modest levels of profitability.\68\
---------------------------------------------------------------------------
\68\ Wackernagel, 1/2/97 WC at 473.
---------------------------------------------------------------------------
The Commission, again, concludes that this price level is the
appropriate, initial increment to establish, for the defined period of
six months. This initial, limited duration of the regulation will allow
the Commission
[[Page 23042]]
soon to revisit again the issues raised by this finding analysis. For
that next time, The Commission's inquiry will have the benefit of the
performance of the existing price regulation. Such a record will aid
the Commission's analysis.
II. Finding
Whether the public interest will be served by the establishment of
minimum milk prices to dairy farmers under Article IV.
The Commission referred to the Compact's express Statement of
Purpose in determining the intended meaning of ``public interest'', as
used in this finding. The Statement of Purpose declares at the outset
that:
The mission of the commission is to take such steps as are
necessary to assure the continued viability of dairy farming in the
northeast, and to assure consumers of an adequate, local supply of
pure and wholesome milk.
The participating states find and declare that the dairy
industry is the paramount agricultural activity of the northeast.
Dairy farms, and associated suppliers, marketers, processors and
retailers, are an integral component of the region's economy. Their
ability to provide a stable, local supply of pure, wholesome milk is
a matter of great importance to the health and welfare of the
region.
Compact Art. I, Sec. 1.
Section 9(e) of the Compact provides further guidance with regard
to the intended meaning of ``public interest''. This section provides a
concise but non-exhaustive list of criteria for the Commission to
consider ``in determining the price''. Compact Art. IV Sec. 9(e).
Pursuant to that section:
[T]he commission shall consider the balance between production
and consumption of milk and milk products in the regulated area, the
costs of production including, but not limited to the price of feed,
the cost of labor including the reasonable value of the producer's
own labor and management, machinery expense, and interest expense,
the prevailing price of milk outside the regulated area, the
purchasing power of the public and the price necessary to yield a
reasonable return to the producer and distributor.
Based on the inclusion of this broad list of criteria, the Compact
Commission determined that it must balance the interest of all market
participants described by the Statement of Purpose--processors,
retailers and consumers, along with farmers.\69\ This necessarily
requires a broad inquiry, one that takes into account the common
interest of all market participants in the maintenance of dairy farming
in the region.
---------------------------------------------------------------------------
\69\ Neil Marcus, President of Marcus Dairy, Inc. emphasized the
importance of considering the impact of the Compact on all market
participants in his testimony. See HT 82-83; 12/19 Marcus.
---------------------------------------------------------------------------
The Compact Commission thereby identified four main components of
the ``public interest'' contemplated by this Finding: (i) Assuring the
continued viability of dairy farming in the region, (ii) assuring
simultaneously the continued viability of associated suppliers,
marketers, processors and retailers, (iii) benefiting consumers through
the maintenance of an adequate supply of milk, reasonably priced, and
(iv) maintaining a local supply of milk.
Based on this definition of ``public interest'', the Commission
sought comment on the following subjects and issues:
(1) The balance between production and consumption in the region--
the pay price needed to yield a reasonable rate of return to producers
and to ensure an adequate supply of milk for the region.
(2) The prevailing farm prices for Class I, fluid milk, inside and
outside the New England region,
(3) The prevailing processing and wholesale costs for Class I,
fluid milk, inside and outside the New England region,
(4) The costs of transporting bulk fluid milk products to plants
located within the New England region,
(5) The costs of delivering fluid milk products processed outside
the New England region to outlets within the region,
(6) The purchasing power of the general public,
(7) The elasticity of demand for fluid milk products,
(8) The cost of retailing fluid milk products,
(9) The prevailing retail prices for Class I, fluid milk, inside
and outside the New England region,
(10) The potential impact of a flat, combined, regulated, Federal
Order and Compact Over-Order price on the wholesale market for fluid
milk products,
(11) The potential impact of a flat, combined, regulated, Federal
Order and Compact Over-Order price on the retail market for fluid milk
products,
(12) The potential impact of a flat, combined, regulated, Federal
Order and Compact Over-Order price on school lunch programs.
(13) The potential impact of a flat, combined, regulated, Federal
Order and Compact Over-Order price on the Women, Infants and Children
Special Supplemental Nutrition Program of the United States Child
Nutrition Act of 1966.\70\
---------------------------------------------------------------------------
\70\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------
A. Issue: The Balance Between Production and Consumption in the
Region--The Pay Price Needed To Yield a Reasonable Rate of Return to
Producers and to Ensure an Adequate Supply of Milk for the Region
This issue is the premise for the remaining discussion of the
public interest in regulated milk pricing.\71\ The remaining discussion
is triggered by the Compact Commission's determination that such farm
price regulation is necessary, both to yield a reasonable rate of
return to producers and to ensure an adequate, local, supply of milk
for the region.
---------------------------------------------------------------------------
\71\ As noted previously, this issue is raised specifically by
Compact Section (e).
---------------------------------------------------------------------------
This issue was previously addressed in detail in the previous
finding section. In summary, the Compact Commission concluded that
farmer pay prices must be enhanced, stabilized and adjusted for
inflation. The Commission thereby determined that a flat, combined,
federal Class I and Compact Over-Order Price Regulation in the amount
of $16.94 (Zone 1) per cwt was necessary to accomplish these
objectives.
B. Issue: Prevailing Farm Prices Inside and Outside the New England
Region
Compact Section 9(e) provides specifically for consideration of
this issue. Mailbox price statistics allow for a determination of
present comparison of milk prices in adjacent markets. The following
chart submitted as part of a written comment describes these
comparative prices.\72\
---------------------------------------------------------------------------
\72\ Wellington et al, 3/31/97 AC appendix.
[[Page 23043]]
Mailbox Milk Prices for Selected Federal Milk Orders
[Dollars per hundredweight]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1995
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
New England................................................. $11.83 $11.86 $11.98 $11.93 $11.92 $11.39 $11.35 $11.71 $11.88 $12.42 $13.14 $13
NY/NJ....................................................... 12.00 12.02 12.14 11.88 11.82 11.45 11.39 11.74 12.01 12.61 13.17 13
Middle Atlantic............................................. 12.15 12.07 12.06 11.83 11.86 11.50 11.60 12.14 12.26 12.82 13.50 13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1996
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
New England................................................. 13.38 13.23 13.14 13.08 13.49 14.08 14.77 15.00 15.55 15.83 15.37 14
NY/NJ....................................................... 13.44 13.29 13.18 13.16 13.70 14.10 14.82 15.05 15.68 15.68 14.82 13
Middle Atlantic............................................. 13.57 13.27 12.86 12.76 13.41 14.40 15.07 15.49 16.05 15.84 15.55 14
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Exhibit Co-op #1C & #1D, Additional Comment as submitted by Robert Wellington, on behalf of Agri-Mark Dairy Co-op, St. Albans Co-op Creamery, & Independent Dairymen's Co-op.
[[Page 23044]]
From this chart, it can be seen that 1995 mailbox prices for the
New England market were consistently less than those for the New York-
New Jersey and Middle Atlantic markets, but by relatively small
amounts. This data further indicates that prices throughout the three-
market area are presently in relative alignment.
C. Issue: Costs of Transporting Bulk Fluid Milk Products to Plants
Located Within the New England Region
As made clear by comment received, and based on common knowledge,
the cost of transporting bulk fluid milk products is most significant
to the calculation of the cost of the delivered raw product to the
processing plant, because of the significant expense involved. It is
thus a critical input of the wholesale and, hence, the retail
price.\73\
---------------------------------------------------------------------------
\73\ The broader issues of impact on the wholesale and retail
markets are analyzed at the end of this finding section.
---------------------------------------------------------------------------
According to Wellington et al, ``[d]ue to its bulkiness, milk is
expensive to transport. Back haul opportunities to lower transportation
costs are also more limited with milk due to its sanitary standards and
large volume which moves on a daily basis.'' \74\
---------------------------------------------------------------------------
\74\ Wellington et al, 3/31/97 AC at 4.
---------------------------------------------------------------------------
According to the reported statistics, the regulated price itself
accounts for the transportation costs of raw fluid milk supplies.
Market Order #1 establishes a zone differential to account for this
transportation cost. This differential is established per cwt. in an
amount equal to 3.6 cents per ten miles transported. According to
Wellington et al, this rate has not changed since 1982.
Market Order #1 uses zone 21 as the representative zone for farm
pricing. 7 CFR 1001.50(a). This zone is 210 miles from the Boston, or
city, zone. 7 CFR 1001.52(d). The cost of transportation from this
representative zone 21 to the city, zone 1, is 72 cents per cwt. 7 CFR
1001.52(g).
Further, according to Wellington et al, a 1994 consolidation of
federal orders in the southern market established a rate of 3.9 cents/
cwt per ten miles transported. There is no explanation as to whether
the higher rate for the new southern order better reflects costs in the
Northeast, although that is the inference, or whether the higher cost
is attributable to market conditions in the south. The comment does
identify with specificity a higher cost of transportation for the Agri-
Mark cooperative, which represents approximately half of all New
England farmers. This cost is represented as 4 cents/cwt for each ten
miles transported.
D. Issue: Prevailing Processing and Wholesale Costs for Class I, Fluid
Milk, Inside and Outside the New England Region
This issue is significant because processing and delivery are the
only intermediate stops in the commercial channel for milk between farm
and retail outlet other than transport of the raw supply. The delivered
cost to the retail outlet can thus be determined as a function of a
relatively few variables.
Although the Compact Commission requested comment on this issue, it
did not receive data regarding processing and wholesale costs specific
to the New England market. While two of the fluid milk processors doing
business in the New England market did submit comment,\75\ along with a
trade organization from New York state,\76\ none of these comments
presented data with regard to costs of operation.
---------------------------------------------------------------------------
\75\ Neil Marcus on behalf of Marcus Dairy, 12/19/96 HT at 81
and 1/2/96 AC; Donald Turner, Turner's Dairy, 12/19/96 HT at 176.
\76\ Bruce Krupke on behalf of New York State Dairy Foods, Inc.
3/31/97 AC; John H. Vetne, on behalf of New England Dairies, Inc. 3/
31/97 AC.
---------------------------------------------------------------------------
A very recent and comprehensive national study of 35 plant
operations submitted by a group of dairy economists from Cornell
University provides useful guidance to the Commission on this issue. R.
Aplin, E. Erba, M. Stephenson, ``An Analysis of Processing and
Distribution Productivity and Costs in 35 Fluid Milk Plants'', February
1997, R.B. 97-03, Cornell University. The study is particularly useful
because fourteen of plants studied, though unnamed, are identified as
being located in the Northeast.
The study indicates that the processing and wholesale costs for
Class I milk are a function of three variables: (1) the procurement
cost for the raw product supply, in significant part, combined with (2)
processing, delivery and sales costs for servicing the retail outlet,
and (3) return on capital.
An extract entitled ``Presentation at IDFA Annual Meeting in
Dallas, Texas (October 1996) was also submitted. This extract provides
``estimated costs of marketing 2% lowfat milk through supermarkets, New
York Metro Area, $ per gallon, 1995.'' In this extract, the raw product
cost is identified as $1.31 per gallon. (This is in line with the net
combined regulated and ``over-order'' Class I price for the New England
market.) According to the study, there is an additional plant cost of
$0.24 per gallon and a package cost of $0.10 per gallon. There are
additional delivery, selling and general and administrative costs,
totaling $0.22. Finally, the extract identifies a return for cost of
capital in the amount of $0.06.
The study thus identifies a total, delivered, processing and
wholesale cost of $1.93 per gallon.
The Economic Research Service of the United States Department of
Agriculture also provides a breakdown of wholesale costs, nationally,
per half gallon.\77\ According to this study, for 1992, the farm value
was $0.597; assembly and procurement totaled $0.058; the processing
cost was $0.191; and wholesaling costs were $0.196. Total costs per
half-gallon equal $1.042 according to this ERS study. For comparison
purposes, assuming equal costs per gallon as the costs per half gallon
in the study, this would mean a total delivered cost of $2.08 per
gallon, or $0.15 more than shown in the Aplin study.
---------------------------------------------------------------------------
\77\ Food Cost Review, 1995/AER-729. (Submitted as reference
source by DeGuess and Gilmeister, 3/31/97 AC.)
---------------------------------------------------------------------------
The ERS study further notes that ``processing costs have remained
stable since 1986 (through 1992), after rising 16 percent from 1982
through 1986.\78\
---------------------------------------------------------------------------
\78\ AER 726 at 26.
---------------------------------------------------------------------------
Both the Aplin study and extract, and the ERS study, indicate that
processing plants are covering their margins. The Aplin extract also
provides a precise indicator of the ``return for cost of capital.''
This amount is identified by the extract as $0.06, or only a three
percent return.
E. Issue: Costs of Delivering Fluid Milk Products Processed Outside the
New England Region to Outlets Within the Region
This issue is significant for two reasons. First, these identified
costs complete the description of delivered cost to the retail outlet.
Second, the issue inquires into whether finished, Packaged milk
products transported from plants located away from the region's
population centers can serve as a substitute supply for the finished
product provided by more local plants.
The Compact Commission requested but did not receive data regarding
packaged product delivery costs specific to the New England market. The
Cornell University study cited above \79\ sheds light on this issue.
According to the study, costs of delivery for packaged fluid milk
products range from $0.216 to $0.541 per case, with an average cost of
38.8 cents per case, or about $0.097 cents per gallon. (There are 4
gallons/case.) \80\
---------------------------------------------------------------------------
\79\ Aplin et al, R.B. 97-03, Cornell University, February,
1997.
\80\ Aplin et al at 21.
---------------------------------------------------------------------------
[[Page 23045]]
With regard to the possibility of substitution of packaged milk
supply, as discussed in the first finding analysis, the Market Order
statistics makes clear that the major processing facilities servicing
the New England region are currently located nearby the population
centers of the region they serve. These plants currently provide for
almost all of the market's supply of finished product. At present,
then, there is almost no substitution for this local supply of finished
packaged product with finished product imported from distant plants.
The detailed analysis of the Aplin study provides insight into this
settled market pattern. Cost of operating a delivery vehicle
contributed an average of 43 percent of the delivery cost per case. The
remainder of the cost is attributable to driver labor cost. (Vehicle
operating cost ranged from 21 percent to 53 percent. \81\ The study
further indicated that these costs were for routes serving large
customers, and that route costs for serving smaller customers ``is
expected to be much higher.''
---------------------------------------------------------------------------
\81\ Aplin et al at 48.
---------------------------------------------------------------------------
Most significantly, route labor productivity was shown by the study
to decrease substantially with greater distance traveled and on routes
with numerous customer stops. A 1.0 percent increase in miles traveled
per month increased direct delivery cost by 2.9 percent per case. A 1.0
percent increase in customer stops made per month increased the cost by
1.1 percent per case. Not surprisingly, the study concludes that plants
located in more densely populated areas had lower direct delivery
costs.\82\
---------------------------------------------------------------------------
\82\ Aplin et al at 54
---------------------------------------------------------------------------
This delivery cost analysis of the Cornell study thus explains the
present market pattern: Plants located near population centers are the
most cost effective. According to this pattern, the market should
continue to consist of plants located nearby the population centers,
plants which are supplied with raw product from the milkshed and which
in turn provide finished product to the region's retail outlets.
F. Issue: The Price Needed to Yield a Reasonable Rate of Return to
Processors of Fluid Milk Products
This inquiry is derived directly from Section 9(e) of the Compact
and is significant in view of the Compact's emphasis on the financial
health of the entire dairy industry. The focus of the inquiry is the
determination of a price that ensures a reasonable rate of return. It
is of present significance for the baseline determination of whether
processing plants are currently covering costs of production.
The Compact Commission did not receive information with regard to
the price required to yield a reasonable rate of return specifically to
New England fluid processors. According to the extract of the Aplin et
al, Cornell study cited above, return for cost of capital for the
nearby New York metro area plant equaled $0.06 per gallon.
The Compact Commission concludes that this data may be relied upon
to determine that the region's fluid processors are presently covering
their costs with a return on capital, however slight. As noted, the
Aplin study was a number of nationally representative fluid plants, of
which fourteen were from the Northeast. It is reasonable to assume that
a representative number of these region-wide plants in turn were from
the New England area, and that the extract chosen by the authors may be
understood as representing this group as a whole, including New England
plants.
G. Issue: The Purchasing Power of the General Public
This inquiry is also drawn directly from Section 9(e) of the
Compact. The Compact Commission concludes that the Compact focuses
primary concern on the consumer interest because milk is a staple
product. The impact of price regulation upon the consumer's ability to
pay is thus a critical part of the Compact Commission's assessment of
the public interest under this finding section.
To sharpen inquiry under this broader issue, the Compact Commission
sought comment on a number of issues relating to the potential impact
of price regulation on consumers. These issues include: The elasticity
of demand for fluid milk products, the costs of retailing Class I,
fluid milk in the New England region, the prevailing retail prices for
Class I, fluid milk, inside and outside the New England region, the
cost of retailing fluid milk products, and the potential impact of a
flat, combined regulated, Federal Order and Compact Over-Order price on
the retail market for fluid milk products.\83\
---------------------------------------------------------------------------
\83\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------
The Compact Commission also focused specific attention on the
potential impact of price regulation on lower income consumers.
Specifically, the Commission sought comment on the potential impact of
a flat, combined, regulated, Federal Order and Compact Over-Order price
on the Women, Infants and Children Special Supplemental Nutrition
Program of the United States Child Nutrition Act of 1966, and the
impact of such a price on the school lunch program.\84\
---------------------------------------------------------------------------
\84\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------
Each of these issues is addressed in turn.
H. Issue: The Elasticity of Demand for Fluid Milk Products
Citing recent studies, Wellington et al identify the demand
coefficient for fluid milk as 3.1. This means that a ten percent
increase in price will result in a 3.1 decrease in demand.\85\
---------------------------------------------------------------------------
\85\ Wellington et al, 3/31/97 AC.
---------------------------------------------------------------------------
In response to this comment, Thomas Conway, Esq., former Counsel
and former Executive Director of the New York State Legislative
Commission Dairy Industry Development, submitted a study of ``Consumer
Response to the Unprecedented Rise in the Retail Price of Fluid Milk in
1989-1990'' (Consumer Response).\86\ This study focused on the actual
impact on consumption of a relatively large increase in retail milk
prices during late 1989 and early 1990.
---------------------------------------------------------------------------
\86\ New York State Legislative Commission of Dairy Industry
Development, August, 1990.
---------------------------------------------------------------------------
The study group was of four regions, including the Northeast.
During this time, the price of milk rose to $2.67 a gallon, a $0.34
increase. Directly contrary to the traditional analysis of the
elasticity of demand for milk, consumption actually increased rather
than decreased in two of the regions studied. In the Northeast, the
15.04 percent price increase in the Northeast was matched by lower
sales of only 0.98, or well below that expected based on any of the
demand coefficients identified above.
The study concludes ``that other factors were more important than
price to the determination of consumer demand for fluid milk''.\87\
Other factors included growth in personal income, demographic factors,
advertising and increased concerns over health and nutrition.
---------------------------------------------------------------------------
\87\ Consumer Response at 11.
---------------------------------------------------------------------------
While this study is now dated, the Compact Commission accepts its
basic premise that analysis of the impact must account for the market
function as a whole, rather than focus upon a strict elasticity of
demand equation. Nonetheless, the Commission remains aware of the
importance of accounting for the direct impact on consumption that an
increase in retail prices may have.
I. Issue: Costs of Retailing Class I, Fluid Milk in the New England
Region
The Commission did not receive comment with specific regard to New
England costs of retailing. As noted, the
[[Page 23046]]
Aplin et al, extract of the Cornell study identified a total delivery
cost of $1.93. Adding an identified supermarket cost and return of
$0.19 establishes for this extract a retail cost of $2.12.
The ERS study identified a total delivered cost of $1.04 and a
retailing cost of $0.35, for a total retail cost $1.39 per half gallon.
The retail cost component for the ERS study is substantially higher
than that for the Aplin study. The ERS study indicates part of this
cost may represent wholesaling formerly performed by processors, which
would explain at least part of the difference.
The Commission concludes that the more recent Cornell extract
provides a useful benchmark for assessing New England costs of
retailing.
J. Issue: Prevailing Retail Prices for Class I, Fluid Milk, Inside and
Outside the New England Region
There are two significant concerns raised by this issue. First, the
inquiry addresses the benchmark question of whether retail margins are
covering costs, much as the earlier inquiry addressed whether processor
margins were sufficient to cover costs. Second, the inquiry must
consider the relative retail costs beyond the area subject to Compact
Over-order Price Regulation, as part of the ongoing process of
assessment of the potential impact of price regulation on the region's
retail prices.
James G. Hines, Director of Dairy Services, submitted for the
record copies of the tracking studies of retail prices conducted by The
International Association of Milk Control Agencies. The Association
tracks and publishes monthly price surveys from a number of markets
nationwide. The following is an extract from three markets:
[[Page 23047]]
Retail Prices--Different Markets
[1995-1996]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1995
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MA (Boston)................................................. $2.49 $2.09 $2.49 $1.99 $2.29 $2.39 $2.39 $2.49 $2.49 $2.49 $2.09 $2.49
NY (Albany)................................................. 2.18 2.18 2.18 2.16 2.16 2.15 2.17 2.17 2.17 2.17 2.19 2.23
NJ (North).................................................. 2.55 2.56 2.53 2.53 2.53 2.53 2.54 2.53 2.52 2.55 2.56 2.57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1996
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MA (Boston)................................................. 2.19 2.29 1.99 2.49 2.59 2.29 2.59 2.59 2.29 2.59 ......... .........
NY (Albany)................................................. 2.23 2.23 2.25 2.26 2.25 2.32 2.4 2.42 2.42 2.46 ......... .........
NJ (North).................................................. 2.56 2.57 2.59 2.59 2.58 2.58 2.65 ......... 2.67 2.67 ......... .........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: International Association of Milk Control Agencies.
[[Page 23048]]
The Aplin et al extract identified a total, delivered cost of
$1.93, and a total retail cost of $2.12, including combined retail cost
and return on capital. The Compact Commission concludes from this
survey of prices that, as measured against their identified delivered
cost, New England retailers are currently covering their costs of
production with an adequate return on capital.
The Commission further concludes that this on-going Agencies' study
of markets both within and outside the New England region provides the
basis for the Commission to monitor the impact of regulation on New
England retail prices. The Commission will be able to utilize this
study data and compare the current, relative alignment in prices
between the New England and New York regions against the relative
alignment once price regulation is in place.\88\
---------------------------------------------------------------------------
\88\ Retail prices are also being monitored currently in
Connecticut, Vermont and Maine. The Commission will have to
establish a tracking program in Rhode Island.
---------------------------------------------------------------------------
K. Issue: The Potential Impact of a Flat, Combined, Regulated Order and
Compact Over-Order Price on the Wholesale Market for Fluid Milk in the
Region
The purpose of this most critical inquiry is to address the
potential impact on the wholesale market of price regulation.
Commenters described a number of potential concerns and potential
benefits. The benefits described were premised on the value of price
stabilization. The concerns raised related to the potential for market
distortion and competitive harm to current market participants.
In reply comment, Berthiaume \89\ described the benefit of a
stabilized pricing as imposed by this rule. He indicated that Compact
Over-order price regulation would bring stability to the regulated
Class I price, and not merely as a floor price. ``The value of a flat
regulated minimum Class I price is that the wholesale cost of milk
would and could be anticipated.''
---------------------------------------------------------------------------
\89\ Berthiaume, Reply comment; April 8, 1997 (RC).
---------------------------------------------------------------------------
The Commission agrees with this statement and adopts it as a
finding with respect to this issue. As discussed above, farm prices
have been marked by persistent, erratic fluctuations which translate
directly into the wholesale price. The Commission concludes that, while
processors are currently covering their margins, minimization of such
persistent fluctuations in price can only serve as a benefit to
stability of firm participants in the wholesale market.
Other commenters expressed concern about the potential for market
distortion which price regulation could bring. Wellington et al
expressed a concern that price regulation could distort the
traditional, market driven, pattern of raw product supply provided by
New England and New York farmers. The concern raised is that the
Compact Over-order price regulation could create an incentive for
increased milk supply from more distant portions of the milkshed in New
York. This would represent a market distortion directly contrary to the
intended purpose of the Compact.
These commenters qualified their concern by noting that processors
``will be reluctant to disrupt their current supply sources in reaction
to a Compact program which is officially of limited duration.'' \90\ In
his testimony at the hearing, Wellington also stated his opinion that
such market change was not likely to occur as long as the Commission
did not increase the regulated Class I price above $17.00.\91\
---------------------------------------------------------------------------
\90\ Wellington et al, AC 3/3197 at 6.
\91\ Wellington, 12/19/97 HT, pages 50-51.
---------------------------------------------------------------------------
Neil Marcus, President of Marcus Dairy, Inc., described other
potential market distortions that could result from price regulation.
His concerns also centered on the alignment of a market subject to
combined, Compact, and Federal Order regulation with adjoining markets
regulated only under Federal Order.\92\ The particular circumstances of
the Marcus Dairy operation heightened his concern. According to the
commenter, Marcus Dairy is located in Connecticut, on the border of New
York. The commenter described the supply of packaged dairy products
subject to price regulation under Federal Order 2 which is sold in New
England and expressed concern that this milk must not escape
regulations under the Compact. According to Marcus, such uniform
regulation is necessary to ensure that the current, market, pattern of
the supply of packaged product in the marketplace is maintained.
---------------------------------------------------------------------------
\92\ Marcus, 12/19/96 HT at 84-98.
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The Commission concludes that market alignment of prices and
uniformity of regulation must be considered in establishing over-order
price regulation. Present market patterns within the region and between
the region and adjacent areas are derived from the integrated formula
of Class I pricing in the federal Market Order System, which includes
pricing under more than one federal Order. There is no doubt the
Compact will introduce a new feature of market structure by adjusting
the Class I price, in effect, for only one Order.
At the same time, even given that the Compact will introduce a
novel feature of market structure, the Commission does not determine
that market distortion will necessarily occur. The technical provisions
of the Compact Over-order price regulation are precisely patterned upon
the underlying federal Order System in significant part. This provides
a structural basis for concluding that such distortion should not
occur.
Nonetheless, the concerns raised by the commenters with regard to
the potential for market distortion were a central consideration in the
Commission's deliberations over price regulation. These concerns were
also a controlling factor in the Commission's fashioning of the six
months', limited duration, for the initial price regulation. The
Commission here specifically notes Wellington et al's assertion that a
``limited duration'' of price regulation will minimize the potential
for distortion of the market caused by the Compact Commission's initial
price regulation.
L. Issue: The Potential Impact of a Flat, Combined, Regulated Federal
Order and Compact Over-Order Price on Retail Prices for Fluid Milk
Products
The Compact Commission sought comment on the critical issue of the
potential impact, if any, of a flat, combined, regulated Federal Order
and Compact Over-order price on retail prices for fluid milk products.
After reviewing all of the comments and testimony submitted, the
Compact Commission concludes that the price regulation will have a
positive impact on retail prices. The Commission determines that
preventing further erosion of the milkshed through price regulation
will itself have a positive impact on retail prices, in large part
because of the avoidance of increased transportation costs. The
Commission concludes that the further benefits of price stability will
trace through the farm and wholesale markets to the end-point, retail
market, and have a further, positive impact on retail prices.
The Commission bases its conclusion on the following analysis:
1. Change in the Epicenter of Milk Production and the Impact on Retail
Prices
The Compact Commission previously determined that there has been a
distinct movement away over time of the epicenter of the region's milk
supply. The loss of dairy farms in the New England region, and in
particular,
[[Page 23049]]
in the Southern New England region, has forced the epicenter of the
region's production further and further from the region's population
centers. This movement has involved both the loss of supply by farms
closest to the population centers and the replacement of that supply by
more distant farms, primarily in New York and Vermont. The location of
these more distant farms themselves, in turn, has moved ever father
away from the region's population centers.\93\
---------------------------------------------------------------------------
\93\ The 1989 Massachusetts Extension Order, at page 14, cites
testimony that the transportation costs for this most distant supply
``would currently run $2.00 to $2.50/cwt (17-22 cents/gal) and would
require capital investments that few truckers would be willing to
undertake.'' Extension Order at 14.
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This feature of the stressed circumstance of the region's milk
supply described in the first finding analysis has had a direct,
adverse impact on retail milk prices. The Commission bases this
conclusion in part on the determination that transportation costs are a
significant input of the retail price for milk. As noted, the federal
Market Order System allows 72 cents per cwt to cover transportation
costs from the representative ``country'' zone to the Boston, ``city''
zone.\94\ This single cost input, alone, accounts for over three
percent of the total delivered cost to the retail outlet, when measured
against the Aplin et al extract identification of $1.93 for delivered
cost/gallon. (11.6 gallons per cwt). It follows, by definition, that an
increase in transportation costs attributable to greater hauling
distance will result in an increase in retail prices.
---------------------------------------------------------------------------
\94\ The discussion, supra, of transportation costs indicates
that this regulated calculation of cost does not fully account for
the true cost.
---------------------------------------------------------------------------
The Commission's conclusion is also premised on a similar finding
contained in the December 29, 1989 extension of the Massachusetts Milk
Stabilization Order. This Order found that a 50 mile shift in milk
prices causes a three cent increase in milk prices.
The evidence in the record thus demonstrates that the epicenter of
the region's milkshed has moved away from the population center to a
significant degree, and that this shift has had a measurable impact on
retail prices. The Compact Commission concludes that this adverse
impact on retail prices will continue as long as the milkshed is not
stabilized.
2. Risk Avoidance in Commodity Purchasing--The Benefits of Price
Stabilization
Senator Patrick Leahy submitted extended comment referencing
studies in the economic literature of the adverse effects of commodity
price uncertainty and, conversely, the utility of price stability.\95\
One article described so-called ``risk avoidance'' pricing strategy in
the wheat industry. The analysis indicated that increased price
uncertainty and variability in the wheat industry led to significant
increases in retail wheat marketing margins.\96\ The article determined
both theoretically and empirically that increased price variability
results in higher margins. The authors theorized and then demonstrated
empirically that the uncertainty created by wholesale price volatility,
in essence, drives the retailer to retain a larger margin. The retailer
acts to retain such a larger margin to avoid the risk created by the
uncertainty in wholesale costs.\97\
---------------------------------------------------------------------------
\95\ Senator Patrick J. Leahy, WC 1/297.
\96\ Brorsen, Chavas, Grant and Schnake, ``Marketing Margins and
Price Uncertainty: The Case of the U.S. Wheat Market,'' Amer. J.
Agr. Econ., (August, 1985) 521-527.
\97\ The analysis is confirmed with regard to market conduct and
performance in the beef industry. Holt, ``Risk Response in the Beef
Marketing Channel: A Multivariate Generalized ARCH-M Approach'',
Amer.
---------------------------------------------------------------------------
The logical implication of this theory is that price stabilization
reduces or eliminates the retailers' need to act in such a risk-
avoiding manner, because the volatility and uncertainty that drove that
behavior is reduced or eliminated.
The analysis of Hahn et al \98\ demonstrates convincingly that
price volatility within the meaning of the authors above cited defines
market conduct and performance of the fluid milk industry. The pattern
of pricing conduct described by these authors is consistent with the
risk-avoidance strategy described by Brosen et al and Holt.
---------------------------------------------------------------------------
\98\ See Hansen, Hahn, and Weimar, ``Determinants of the Farm-
to-Retail Milk Price Spread'', Agriculture Information Bulletin
Number 693 (March 1994). See also Kinnucan and Forker, ``Asymetry in
Farm-Retail Price Transmission for Major Dairy Products'', Amer. J.
Ag. Econ., 285-292 (May, 1987).
---------------------------------------------------------------------------
Based on this analysis, the Commission concludes that New England
retail prices likely will respond positively to the stabilization of
the wholesale price input which will result from imposition of Compact
Over-order Price Regulation. The price established by this rule will be
a certain one; Berthiaume suggests that the combined, federal Order and
Compact Over-order price will not vary for the six month term of its
duration. At least for the short-term duration of this price
regulation, the uncertainty of price variability in the region's Class
I market will have been significantly reduced if not eliminated.
According to the analysis described above, the Compact Commission
concludes that retail margins and, hence, prices, should positively
adjust, accordingly.\99\
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\99\ The Commission recognizes that at least one comment
suggested that the ``impact'' of any price regulation would be a
straight dollar-for-dollar ``pass through'' from processors to
consumers, resulting higher retail prices. Alan Rosenfeld, December
19, 1996 at pages 183 et seq. The Commission is not persuaded by
Rosenfeld's predictions for several reasons. It is, in the
Commission's view, contrary to the weight of the comments submitted
and the prevailing economic literature and anecdotal evidence. More
fundamentally, however, it is not descriptive and provides no
reasoned explanation for the conclusion expressed therein. Nor does
it respond in any way to the comprehensive literature suggesting
precisely the opposite conclusion.
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3. The Experience of the Southeast Region of the United States
Received comment and statistics indicate that the adverse
experience of the southeast states could well serve as a model for the
future of New England's supply pattern and retail prices, if the
present stress on the milkshed is not abated. Many of those states have
lost a significant measure of their local milk supply. For the
southeast as a whole, between 1980 and 1995, the number of dairy farms
declined from 33,900 to 7,250.\100\ In Georgia, the percentage of milk
supplied by Georgia farmers declined from 84% in 1973 to 50% in
1988.\101\
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\100\ National Agricultural Statistics Service, ``Milk
Production'', 1970-1995.
\101\ Gilmeister, 3/31/97 at 10.
---------------------------------------------------------------------------
Two commenters, Ronald Harrell, Ph.D., of the Louisiana Farm Bureau
Federation, Inc., and G.A. Benson, Ph.D., and Associate Professor and
Extension Economist in the Department of Agriculture at North Carolina
State University, voiced graphic concerns over the dwindling local milk
supply patterns in the Southern states. According to Dr. Benson:
Because milk production is decreasing, and because of seasonal
imbalances between production and sales, more milk must be imported
from out-of-region sources in the fall. The seasonal ``surplus'' in
the spring months has virtually disappeared. Supplementary or other
source milk is more expensive than locally produced milk because of
give-up charges, transportation costs, and differences in
classification in the originating and receiving orders. These
statistics are not collected on a regular basis or published, but a
reliable source in one of the regional cooperatives informed me that
last year they imported an average of 8.5% of the total milk they
needed to meet customer needs as supplementary milk at an average
cost of $1.92 per 100 lb. above the cost of producer milk in the
federal order. * * * On Average, this supplementary milk [reported
by another cooperative] cost $2.58 per 100 lb. more than
[[Page 23050]]
local milk. It came from a variety of sources and the added costs
ranged from a low of $1.52 per 100 lb. to a high of $4.15 per 100
lb.\102\
\102\ Dr. G.A. Benson, 327/97 AC at 2.
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The comment indicated that dairy cooperatives were currently
absorbing the cost as a loss rather than passing it on to customers,
but that this is an unsustainable market pattern.\103\
---------------------------------------------------------------------------
\103\ Gillmeister's analysis at 6-7 (sic) also indicates that
southern retail costs are not reflecting these market conditions.
---------------------------------------------------------------------------
The Commission is concerned that if the continued stress on the
milkshed for the New England region continues unabated, without
Commission intervention, then the New England states will begin to
approach the increased market uncertainty currently facing the Southern
states. Accordingly, the Commission bases its determination of the
present need for Compact Over-order Price Regulation on the current
experience on the southern states. The Commission concludes the Compact
was designed precisely to avoid such a market pattern as currently
experience by the southeast, and to permit the New England region to
test the efficacy of the over-order price mechanism as a device for
curtailing these very problems.
4. Summary Analysis
The Commission has analyzed the data and the comments submitted on
the question of the impact of Compact Over-order Price regulation on
retail prices and concluded the consumer component of the ``public
interest'' will be served in the manner contemplated by the finding
under this section. The Commission concludes that alleviating the
stress on the milkshed will itself have a stabilizing impact on retail
prices, if not result in outright reduction.
The Commission further determines that stabilization of the
wholesale price will likely result in stabilized, and reduced, consumer
prices. The Commission here notes, in summary, that an established
price of $16.94 for July-December of 1997, in combination with the
federal, Market Order #1 announced prices for January through May,
1997, would yield an average Class I (Zone 1) price for these 11 months
of 1997 in the amount of $16.15.\104\ This compares with the 1996
average price of $16.86.\105\
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\104\ Prices announced for Market Order 1, Zone 1 prices:
January--$14.85; February--$14.58; March--$15.18; April--$15.70;
May--$15.73.
\105\ Wellington, Appendix to 12/19/96 HT Testimony, Table 1.
---------------------------------------------------------------------------
By contrast, as expressed by Gillmeister, there would be ``a
considerable cost to consumers if nothing is done to assist farmers in
New England.'' \106\
---------------------------------------------------------------------------
\106\ Gillmeister comment, 3/31/97 at 8.
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M. Issue: The Potential Impact of a Flat Combined Regulated Federal
Order and Compact Over-Order Price on the School Lunch Program
Consistent with the need to protect the interests of consumers, the
Commission sought comment on the impact, if any, of a flat, combined,
federal Market Order price and Compact Over-order Price Regulation on
the fluid milk procurement process in the context of the school lunch
(and breakfast) programs. The comment received, while limited, does
provide the Commission with an adequate basis to make an informed
decision on this question.
Senator Jeffords submitted an analysis by the United States
Department of Agriculture indicating total annual consumption of fluid
milk by school districts amounted to 12,798,000 gallons.\107\ This
amounts to 148,456,800 pounds of milk, or approximately 5.9 percent of
all fluid milk consumed in the region.
---------------------------------------------------------------------------
\107\ RC 4/9/97.
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The comment also contained a discussion of a study by the General
Accounting Office that described a comprehensive, 1980s Justice
Department investigation into bid rigging associated with this market.
The study describes how the school lunch program is designed to operate
through a competitive bidding process, by which individual districts
solicit bids for the supply of their milk program demands.
This description is, in effect, one of a competitive marketplace,
despite the involvement of the government subsidization. The contracts
between the districts and the suppliers result from a competitive
bidding process, with price levels a function of market forces of
supply and demand. The Compact Commission thereby concludes that the
impact of Compact Over-order Price Regulation on the school lunch and
breakfast programs can be understood as consistent with the impact of
regulation on the larger, overall, retail market.
As discussed below, such analysis is distinctly different from the
analysis of the potential impact of regulation on the Women, Infants
and Children Special Supplemental Nutrition Program of the United
States Child Nutrition Act of 1966, which is a capped reimbursement
program.
N. Issue: The Potential Impact of a Flat, Combined, Regulated Federal
Order and Compact Over-Order Price on the Women, Infants and Children
Special Supplemental Nutrition Program of the United States Child
Nutrition Act of 1966
Section 10 of the Compact sets forth a nonexhaustive list of issues
that the Commission may, in its discretion, address in a Compact over-
order price regulation. Subsection 10 therein provides that a price
regulation may contain ``[p]rovisions for reimbursement to participants
of the Women, Infants and Children Special Supplemental Food Program of
the United States Child Nutrition Act of 1966.'' (WIC Program).
The Commission has been most concerned from the outset of its
regulatory process with ensuring that this program is not adversely
affected. Accordingly, the Commission sought, and received, testimony
and both individual and joint written comments from each of the state
WIC directors addressing the potential consequences of an over-order
price regulation on the administration of the WIC Program.
The Commission is particularly impressed with the expertise and
knowledge of these witnesses regarding the administration of the
program. In light of the absence of any comments opposing the proposals
set forth in the joint WIC directors' comments, the Commission hereby
adopts that written statement, set forth in its entirety below.
About the WIC Program
The Special Supplemental Nutrition Program for Women, Infants and
Children (WIC) is a unique health and nutrition program serving women
and children with--or at risk of developing--nutrition-related health
problems. WIC provides access to healthcare, free nutritious food, and
nutrition information to help keep low to moderate income pregnant
women, infants and children under five healthy and strong.
WIC provides a monthly `prescription' for nutritious foods tailored
to supplement the individual dietary needs of each participant. Foods
include milk, cheese, eggs, cereal, fruit juice and peanut butter.
Included foods are specifically chosen to provide high levels of
protein, iron, calcium, and Vitamins A and C--nutrients that have been
scientifically shown to be lacking or needed in extra amounts in the
diets of the WIC-eligible population. These five nutrients--plus
calories and other essential nutrients provided by the WIC food
prescription--are critical for good health, during periods of growth
and
[[Page 23051]]
development. Milk and other dairy products play a large and important
role in every participant's food package. WIC also distributes coupons
for fresh produce--redeemable at local farmers' markets--in conjunction
with State Departments of Agriculture.
WIC is a prevention program designed to influence lifetime
nutrition and health behaviors. Ongoing nutrition education--the
centerpeice of WIC--is designed to ensure that program participants
continue to make healthy choices at the grocery store even when they
are no longer eligible.
WIC Works
WIC is widely acknowledged to be effective in the prevention of
immediate health problems and in the improvement of long-term health
outcomes. More than 70 evaluation studies have demonstrated the
effectiveness of WIC and documented medical, health and nutrition
successes for women, infants, and children:
<bullet> Women participating in the WIC Program have improved
diets, received prenatal care earlier and have improved pregnancy
outcomes
<bullet> Infants born to WIC mothers have better birth weights,
larger head size, and are less likely to be premature
<bullet> WIC infants and children consume more iron, vitamin C and
other nutrients, resulting in improved growth and nutritional status
<bullet> Children enrolled in WIC are more likely to have regular
medical care and immunizations, and demonstrate better cognitive
performance
<bullet> WIC families buy more nutritious foods than non-WIC
families.
And WIC saves money! Studies have also shown that WIC is cost
effective. Every WIC dollar spent on pregnant women produces $1.92 to
$4.21 in Medicaid savings for newborns and their mothers.
How WIC Works
The WIC Program is a Federally funded program carried out according
to provisions of the Federal Child Nutrition Act. The Program is funded
through the Food and Consumer Service of the United States Department
of Agriculture (USDA).
The Program is administered on the local level by State WIC
Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island, the Vermont State Departments of Public Health (the States).
State funds are also provided in Massachusetts. Participants are issued
WIC checks or vouchers at local agencies for WIC authorized foods. The
checks or vouchers--which do not have a predetermined value--are
redeemed at authorized retail stores at current store prices in
accordance with posted prices. The checks are processed through the
banking system for reimbursement, except in New Hampshire where
vouchers are paid through a state accounting system. Prepayment edits
are performed on each check to ensure that specific food purchasing,
pricing and payment requirements are met.
The average number of women and children provided WIC benefits and
services in August, 1996 in the New England States was 212,760--
individual State WIC participation was: Connecticut 47,673,
Massachusetts 99,643; Maine 20,243; New Hampshire 14,700; Rhode Island
17,360; and Vermont 13,141 (Final August, 1997 FSC 298 Reports). These
numbers do not include infants also served by the WIC Program.
WIC is not an entitlement program. As such, the number of
participants that WIC is able to serve at any time is dependent upon
availability of funds from Federal and State sources, and the costs of
WIC food items. The national appropriation for WIC is capped by
Congress. The amount of USDA funding each State received is determined
through complex formulae taking into account such factors as the number
of people served and the funding level of the previous year. The grant
determines the number of people who can be serviced--not the number of
people in need.
Since the amount of funds is fixed, any increase in the price of
WIC foods has the effect of reducing the number of women and children
the available grant dollars can serve. USDA estimated that there are
9.4 million women, infants, and children in the US who meet WIC's
income eligibility guidelines (185% of the Federal poverty level.) The
national WIC fiscal year 1997 Federal appropriation is approximately $4
billion. This sum would serve only about 5.5 million at full retail
prices, about 60% of the eligible persons.
All the States have instituted measures to stretch food funds to
the maximum, including restrictions on container size, brands and
product price, requiring least expensive brands, competitive store
selection procedures, and manufacturers' rebates on infant formula and
infant cereal. Nationally, these measures have brought over $1 billion
in savings, which are then used to provide services to an additional
1.9 million needy mothers and children. In New England, over 75,000
women and children receive WIC services as a direct result of these
cost savings measures, the most significant of which are the result of
cooperative projects of State WIC directors working together on an
interstate basis.
Still, more than 20% of eligible women and children remain
unserved. WIC's current funding is estimated to be $100 million short
for this year, with several States reducing caseloads. Funding
prospects for next year are not any better, and State WIC programs in
New England are not eligible to receive funding to offset the impact of
an Over-Order Price Regulation.
As such, it is imperative that WIC's funds be held harmless from
adverse impact due to a Regulation.
The WIC Program and the Milk Over-Order Price Regulation
The WIC Program recognizes the important role that farms and
farmers play in New England, including ensuring an ongoing supply of
fresh milk at competitive prices, keeping important industry--and
jobs--in our area, and providing open space that increases quality of
life for all New England residents. The WIC Program also understands
the need for dairy farmers' relief.
WIC is a major purchaser of locally produced dairy products in the
New England region. Because, however, WIC recognizes the importance of
dairy products at critical times of child development, and therefore,
must continue its milk purchases, the Program must be concerned with
the fact that food cost increases have a direct, inverse effect on the
number of participants WIC is able to serve. An increase in milk prices
is of particular concern because of the large quantity of milk WIC
purchases each month.
Milk purchases are some 35% of WIC food dollars spent by
participants. The number of quarts of Class 1 fluid milk purchased by
WIC participants in New England in August 1996 was 3,779,015, which
represents approximately 3.7% of the total amount sold by New England
producers in the Region. WIC Class 1 fluid milk purchases in quarts by
State were: Connecticut 1,100,000; Massachusetts, 1,481,163; Maine
457,852; New Hampshire 230,000; Rhode Island 300,000; and Vermont
210,000.
Given current WIC participation levels, a 1 cents per quart
wholesale price increase in Class 1 Fluid milk reflected at the retail
level would translate into an increase in monthly WIC program
expenditures of $37,790 for New England as a whole. This increase would
necessitate a decrease in monthly program funded participation of
1,260. A 5 cents per quart milk retail price increase would result in
an increase in monthly
[[Page 23052]]
WIC expenditures of $189,950 and a participation decrease of 6,302.
In order to maintain services to eligible persons, without
compromising the nutritional health effectiveness of its food benefits
if food costs rise, WIC managers must achieve offsets to increased food
benefit expenditures and use those offsets to serve a significant
portion of the eligible women and children in need. Further, if the
States in New England must reduce or limit participation levels due to
higher Class 1 fluid milk costs, there will be negative impact on
Federal WIC funding to the New England Region--and on the amount of
milk purchased.
As important, low income women and children who WIC is not able to
serve because of increased food costs will not receive the essential
medical, health and nutritional benefits of WIC participation. It is
critical, then, that the intended benefits to the regional economy and
the continuation of dairy farming in New England not accrue at the cost
of a significant risk to maternal and child health stemming from
Regulation-related costs to WIC.
Retail Price Impact of An Over-Order
The Northeast Interstate Dairy Compact enables participating States
collectively to regulate the New England farm price for Class 1 fluid
milk, thereby enhancing and stabilizing dairy farmer income. This
Regulation may have the effect of increasing the price paid for Class 1
fluid milk by WIC participants at retail stores, if the regulated farm
price increase translates directly into an increase at the retail
level. Other goals are to stabilize processor and retailer costs and
consumer prices.
Concomitantly, the findings of Hansen et al \108\ with regard to
the variability of milk farm prices and asymmetric price transmission
are the basis for the theory that an Over-Order Price Regulation of
Class 1 fluid milk which brings about stable farm prices for Class 1
fluid milk will result in price stability--and potential price
decreased--in Class 1 milk at the retail level for consumers over a
period of time. Testing this concept, presented by US Senator Patrick
Leahy of Vermont in public comment before the Northeast Dairy Compact
Commission, would appear viable with regard to the impact of a
Regulation on consumer milk prices.
---------------------------------------------------------------------------
\108\ Hahn et al, ``Determinants of the Farm-to Retail Milk
Price Spread'', Agriculture Information Bulletin #693, March 1994.
---------------------------------------------------------------------------
Demonstration Period and Continuing Assessment of Impact
The New England State WIC Programs understand that the Compact is
considering an Over-Order Price Regulation on Class 1 fluid milk for a
specific period of time. The State directors believe it appropriate
that any initial Regulation be in effect for a limited period, such as
six months. A potential outcome of such a demonstration could provide
evidence which supports that milk farm price stability due to a
Regulation will result in price stability, and perhaps decreases and
related savings, on Class 1 fluid milk purchases by consumers--
including WIC participants--over time.
To measure and document the impact of a Regulation, the Commission
will need to develop systems and methodologies to gather, track and
analyze Class 1 fluid milk retail price data in order to accurately
assess and evaluate any Regulation-related adverse or beneficial impact
on costs to consumers and WIC, and to make related adjustments to
assure that the public interest is served and consumers and the WIC
Program and its participants are protected. Such an analytical
framework should include information which is appropriate to milk
purchasing and pricing at both the New England Regional and individual
State levels--including each State's WIC programs--comprising
representative samples of market areas and retail store types,
proportion of sales by package size (quarts, half falls and gallons),
and the degrees to which retail price fluctuations differ for package
sizes in relation to each other, since data reflect WIC operations and
purchasing patterns in each State. WIC participants often purchase 2
half gallon containers, and the majority do not have ready access to
supermarkets, especially for frequent purchase of a perishable product
such as milk.
As important, analysis should include development of a baseline by
which changes over time will be measured, as well as evaluation of the
relationship between changes in the Regulation and Class 1 fluid milk
prices at retail levels over time and the cost impact to WIC. WIC does
not specify the fat content of milk purchased. Tracking and measuring
product differentials based on fat content; therefore, it is not
necessary to any WIC cost impact methodology.
Post Demonstration Reimbursement System
Given such analysis and evaluation and sufficient evidence,
Commission reimbursement to WIC could be then based upon the Over-Order
Price Regulation and--specifically, on the amount of any portion of the
retail cost for Class 1 fluid milk to WIC attributable to the
Regulation which would encompass and respond to individual state WIC
programs.
Demonstration Period Reimbursement System
WIC recognized, however, that the theory and data which may justify
the adoption of a demonstration period Regulation does not provide
demonstrated, proven assurance that there would be no cost increase to
WIC on its Class 1 fluid milk purchases. Notwithstanding any public
interest or other justification for a Regulation, in the absence of
such current evidence that a Regulation would be either cost neutral or
beneficial to WIC's present year funding, the Commission should provide
a way to protect and hold harmless the WIC Program--and its
participants--in the New England States from potential increases in the
Class 1 fluid milk retail price during a period of a demonstration
Over-Order Price Regulation, for at least the period of any
demonstration Regulation. It is clearly a part of the public interest
under any Regulation to protect WIC's limited funds and the full number
of women and children WIC would otherwise serve. WIC cannot support a
Regulation which would leave women's and children's health and
nutritional status at risk because appropriated WIC funds were diverted
to pay higher milk prices, rather than remaining with the WIC Program
to provide benefits to participants.
As such, the State WIC Programs in New England propose a method by
which the WIC Program will be held harmless from any impact related to
a demonstration of a Compact Over-Order Price Regulation for Class 1
fluid milk. The Commission would reimburse each respective State WIC
Program. The amount of reimbursement would be based on (1) the
quantities of milk purchased with WIC checks and (2) the amount of any
Compact Over-Order Price Regulation.
This would allow the Commission to implement a Compact
demonstration Regulation, providing essential relief to dairy farmers,
and WIC could continue to serve the maximum number of participants in
each State allowed by the grants during an Over-Order demonstration.
This would also allow the Commission a period of time to develop a more
finely attuned analysis of the impact of the Regulation, and the
develop methods to most accurately
[[Page 23053]]
ascertain any cost to WIC and the most appropriate reimbursement
levels.
The principles of the interim mechanism proposed by the State
directors are:
1. The Commission should establish a Reserve Account, to assure
that funds are on hand for timely reimbursement by the Commission to
the States. This account will be funded from the Compact over-order
price regulation based on the recent percentage of total milk sold in
New England purchased by WIC participants.
2. Any Commission Over-Order Price Regulation in a given month will
result in a cent for cent reimbursement for Class 1 fluid milk paid for
by each State WIC Program in that month. The amount of reimbursement
will be based on the quantities of milk actually paid for by each WIC
state. Funds in the Reserve Account will only be drawn by individual
States in proportion to the Over-Order Regulation. Unused funds would
return to the Commission.
3. Each State WIC Program will invoice the Commission on a monthly
basis for reimbursement due. When the refund amounts are small,
individual States may elect to bill up to 3 months in one invoice to
avoid unnecessary administrative costs for both parties.
Formal Agreement
Implementation will take place under the terms and conditions of a
formal agreement between the Commission and the States, entered into by
the State WIC Programs acting as a single entity. Such an agreement
must contain the above provisions for interim reimbursement
determination and procedures, continuing assessment of impact, how the
parties will change to any post demonstration reimbursement system,
conditions for mutual agreement for modifications to the agreement,
term of the agreement and conditions for mutual or either party
termination prior to expiration of the agreement.
The above proposal by the State WIC Programs in New England and any
subsequent agreement are subject to approval by the Food and Consumer
Service of the USDA. The State WIC Programs will collaborate with the
Compact Commission and USDA Food and Consumer Service to develop and
implement agreement provisions and operating procedures for any
reimbursement system which meet the requirements of Compact legislation
and Federal WIC guidance, rules and regulations.
Public Interest Finding--Summary Analysis
In view of this comprehensive marketwide analysis, the Compact
Commission concludes that Compact Over-order Price Regulation in the
amount of $16.94, for six months' duration, will ensure the ``public
interest'' is served in the manner contemplated by the finding analysis
under this section. The stated amount represents a limited market
adjustment that accounts for its potential impact on all levels of the
market, from farm to retail.
As noted throughout the analysis under this and the previous
finding section, the Compact Commission has accounted for a number of
potential market impacts in fashioning this initial, limited
regulation. Most particularly, the Commission is concerned about the
potential for market dysfunction in the wholesale market, and with
regard to unanticipated impacts on consumer prices.
The Commission has concluded that the regulation should not
adversely affect the wholesale market and should, indeed, have a
positive impact on retail prices. Yet the Commission has purposefully
limited the duration of the initial regulation to ensure against
unanticipated consequences. As a final safeguard against unanticipated,
adverse consequences, the Commission has acted to ``hold harmless'' the
WIC program, despite its conclusion of the remoteness of such
unanticipated consequences occurring.
The Compact Commission concludes further that the limited duration
of this initial regulation ensures that its impact across markets can
be carefully monitored and evaluated from the outset and then
reconsidered as soon as a record has been established. Accordingly, the
Commission will attempt specifically to monitor and assess the pattern
of raw product supplies from New York and New England farms and the
movement of packaged milk into the market from plants outside the
region, as well as the impact of price regulation on retail prices,
including the school lunch program, and the WIC program.\109\
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\109\ In reply comment, John Ghiorzi, Regional Director,
supplemental Food Programs, Northeast Region, USDA, suggested that
the demonstrational nature of the initial regulation would be better
served if the initial period were eight or twelve months instead of
six months. The Commission acknowledges this point. The Commission
has determined still that a useful empirical record can be developed
in six months', and that the relative efficacy of this record must
be considered along with the other factors at issue in determining
the proper duration of the initial regulation. The Commission has
accordingly settled upon six months as the proper length of time.
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III. Finding
Whether the major provisions of the order, other than those fixing
minimum milk prices, are in the public interest and are reasonably
designed to achieve the purposes of the order.
The Compact Commission's responsibility to consider the public
interest with respect to the non-price aspects of regulation are
evident in two areas: First, as required by Compact Article IV, Section
9(f), the Commission has acted to insure that its regulation does not
create an incentive for dairy farmers to produce additional, surplus
supplies of milk, and second, the Commission's regulation is uniform
and equitable and does not unduly distort traditional markets and
marketing channels.
1. Surplus Production
Compact Requirement
Compact Section 9(f) provides that ``when establishing a Compact
over-order price, the Commission shall take such action as necessary
and feasible to ensure that the over-order price does not create an
incentive for producers to generate additional supplies of milk.''
Compact, Article IV, Sec. 9(f).
Accordingly, the Compact Commission sought comment on:
The appropriate, necessary and feasible, action to take, as
required by the Compact, to ensure that Compact Over-order Price
Regulation does not result in additional supplies of milk.\110\
\110\ 62 CFR 12252.
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The Commission concludes that specific action is not necessary at
the present time in light of the limited duration of the price
regulation established by this rule. The Commission draws this
conclusion from actual and projected data of regional and national
production levels,\111\ which indicate it is most unlikely that
additional supplies of milk will be produced by New England as a
region. The Commission also concludes from the testimony of farmers
about their production planning decisions that it is unlikely
individual farmers will make decisions to increase production based
upon imposition of this price regulation.
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\111\ See discussion, infra, of CCC purchase requirement.
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The record contains abundant evidence demonstrating that farmers
plan their activities based on the anticipated long-run rather than
short-range changes in market structure. As cited previously, one dairy
economist
[[Page 23054]]
testified that price fluctuations and market instability ``makes it
very difficult for farmers to effectively plan and make the type of
investment necessary to position themselves for the future.'' \112\ Jim
Jenks, a dairy farmer from Vermont, echoed these sentiments. He
testified, in essence, that the instabilities in the prices and in the
market structure made such an investment too risky of a proposition to
pursue. ``[I]f we're going to make a good decision with respect to
putting my family's equity on the line, we need to know something about
the stability of our markets and our future.'' \113\
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\112\ Smith, 12/17/96 HT at 38.
\113\ Jenks, 12/17/96 HT at 153.
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Similar sentiments were expressed by Charlie Telly, a dairy farmer
from Massachusetts. ``It is difficult for me to plan out--to
financially plan out my future three, five or ten years in advance
because of the uncertainty I face each month with the ever changing
milk price.'' \114\
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\114\ Telly, 12/19/96 HT at 123.
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Combined with the statistical data of the lack of probability of
region-wide production increases, this individual testimony leads the
Commission to conclude that a price regulation of limited duration
likely would not affect production behavior within the meaning of
Section 9(f).\115\
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\115\ The rule's intended benefit regarding the maintenance and
stabilization of the milkshed relates to promoting the viability of
farming units rather than the promotion of increased production. It
is expected that the rule will promote this benefit, despite its
limited duration, by serving as a basis for existing producers to
remain in production.
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Requirement of Enabling Legislation
Pub. L. 104-127(5) states that:
[b]fore the end of each fiscal year that a Compact price
regulation is in effect, the Northeast Interstate Dairy Compact
Commission shall compensate the Commodity Credit Corporation for the
cost of any purchases of milk and milk products by the Corporation
that result from the projected rate of increase in milk production
for the fiscal year within the Compact region in excess of the
projected national average rate of the increase in milk production,
as determined by the Secretary [of Agriculture].
7 U.S.C. sec. 7256(5). Accordingly, the Compact Commission
requested comment on:
The most appropriate means to account for the Compact
Commission's responsibility to reimburse the Commodity Credit
Corporation (CCC) for CCC purchases attributable to an increase in
milk production in the New England region above the national average
rate of increase.\116\
\116\ 62 CFR 12252.
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Although the comments received were few in number, they were
sufficient to permit the Commission to address this issue.
For example, Wellington et al indicated the view that the
appropriate response for the Commission was simply to monitor
production levels and take action only if current circumstances changed
markedly.\117\ The comment is based on the assertion that the rate of
increase in regional production is unlikely to exceed the rate of
increase in national production. In the event of an unexpected change
in circumstances, these commenters suggested a plan for the Commission
to retain funds sufficient to cover any CCC purchases.
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\117\ 3/31/97 WC at 10-11.
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Statistical data and projections support the position set forth by
these commenters. According to statistical data submitted, the national
production average increased at a rate of 0.8768 percent between 1991
and 1996.\118\ Production in the region increased 0.7121 percent over
the same five-year time period.\119\ According to projections, national
production in1997 is expected to increase at a rate of between 1 and
2.07 percent. Regional production, however, for 1997 is projected to
increase at a rate of only 0.6 percent, a rate that is significantly
lower than the proposed projected national rate of increased
production.\120\
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\118\ National Agricultural Statistics Service, Milk Production
Summary.
\119\ New England Agricultural Statistics, 1995-1996, ``Milk
Production'', page 68.
\120\ Northeast Regional Dairy Outlook Conference, November 6,
1996; Milk Production Worksheet and Food and Agricultural Policy
Research Institute Staff Report #1-96, page 86.
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The Commission notes that the CCC made no purchases of surplus milk
in fiscal year 1996 or 1997. Therefore, in light of the comments
submitted, the Commission agrees that action that is appropriate and
necessary under these circumstances is presently limited to monitoring.
The Commission concludes further, however, that it must be prepared in
case production increases in an unexpected manner, and CCC purchases
occur.
Accordingly, for each month price regulation is in place, in
consultation with the United States Secretary of Agriculture, the
Compact Commission will monitor the regional and national rates of
production to determine whether the regional rate of increased
production is within 0.25 percent of the national rate of increased
production. If production does increase within this range, then for
each such month, the Commission will estimate the potential cost of CCC
surplus purchases of surplus which might occur should the rate of
regional rate of increased production exceed the national rate. The
Commission will retain a portion of the proceeds of the price
regulation sufficient to cover such estimated cost, as necessary.
After the date of termination of the Compact Over-Order Price
Regulation, if the Commission has retained any proceeds of the price
regulation and no compensation has been made to the CCC for surplus
purchases, the Commission will provide pro rata refunds to all pooled
producers. The amount of each producer's refund will account for the
marketing's of milk by each producer and the regulated price for such
milk in effect for each month in which proceeds were retained.
If, after the date of termination, compensation has been made to
the CCC and proceeds of the price regulation still remain, the
Commission will provide refunds as follow: (1) A pooled producer shall
become eligible to receive a refund by submitting to the Commission
documentation that the producer did not increase marketing's of milk
during the time that the price regulation was in effect as compared to
the same period during the previous calendar year. Such documentation
shall be filed with the Commission not later than 45 days after the
date of termination of the over-order price regulation. (2) The
Commission shall calculate the amount of refund to be provided to each
eligible producer by taking into account the total amount of retained
proceeds, the total marketing's of milk by all producers eligible for
refunds, and the total amount of marketing's by each eligible producer.
Finally, the Commission notes, in accordance with 7 U.S.C.
7256(b)(5), that it is not required to take any action with respect to
the CCC prior to its promulgation of a price regulation.
2. Technical Regulation
As described in the discussion on the potential impact of price
regulation on the wholesale market, the Commission is most concerned
that the price regulation established under this rule not cause market
distortion. The Commission concludes that the technical regulation will
avoid any such distortions.
The Commission's regulation is uniform and equitable, and will have
a neutral impact on existing markets and marketing channels, other than
operation of the regulated price. Assurance of this neutral impact
promotes the public interest by preventing adverse consequences
attributable to market distortions. The Commission has taken the
following steps to insure the protection of the
[[Page 23055]]
public interest in this manner by carefully considering the following
issues:
1. Proper construct of the definition of pool plants and partially
regulated plants subject to regulation of the Compact. A pool plant is
defined under Section 2(6) as any milk plant located in a regulated
area. A partially regulated plant is defined in Section 2(7) as a milk
plant not located in a regulated area but having Class I distribution
within such area, or receipts from producers located in such area.
Section 2(5) defines a regulated area as any area within the region
governed by and defined in regulations establishing a compact over-
order price or commission market order. Section 9(d) of the Compact
establishes the Commission's authority to establish the minimum price
for milk to be paid by pool plants, partially regulated pool plants and
all other handlers receiving milk from producers located in a regulated
area.\121\
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\121\ One commenter, in effect, challenged the Commission's
authority to rely upon the provision in Sec. 9(d) of the Compact
which permits the Commission to regulate such ``partially regulated
pool plants.'' Vetne, 3/31/97 AC. The Commission disagrees with this
legal conclusion of the commenter.
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2. Assuring that that Class I sales outside the New England region
made by new England based plants or pool plants, are not subject to the
regulation, through the use of the so-called ``competitive credits''
authorized by Section 10(4) of the Compact.
3. Providing for equitable distributions to producers shipping to
pool plants and partially regulated plants. See Compact Section
9(d).\122\
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\122\ One commenter indicated the Commission should include all
producers supplying partially regulated plants, without regard to
the relative volume of milk sales by such plants in the Compact
region. Marcus, 12/19/96 HT at 92. The Commission concludes that
this approach would cause undue distortion of the outside markets,
and declines to adopt it.
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4. Assuring the regulation does not disrupt the traditional pattern
of raw product supply from New England and New York, and the existing
market supply of packaged milk products. These issues are addressed
comprehensively throughout the technical regulation.
5. Assuring complimentary operation of the Compact with the Federal
Milk Market Order Program. The Compact's Statement of Purpose expressly
declares this purpose. The technical regulation is expressly based on
this principle. The Commission will also be utilizing the assistance of
the Milk Market Administrator on an ongoing basis, as authorized by 7
U.S.C. Sec. 7256(6), to ensure such efficient operation.\123\
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\123\ One commenter described the need for a butterfat
adjustment in the regulation. Vetne, 3/31/97 AC. This necessary
adjustment is already provided for and established in the structure
of the underlying federal Order.
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Finally, the Compact Commission notes that one commenter argued
that the Commission should regulate all classes of milk and not just
Class I fluid milk (HT 177 12/19 Turner). The Commission's authority,
however, is expressly limited by statute and by the Compact to the
regulation of Class I fluid milk. See 7 U.S.C. Sec. 7256(2); Compact,
Art. IV, Sec. 9(b).
IV. Administrative Assessment
Article VII, Sec. 18(a) of the Compact provides that:
if regulations establishing an over-order price * * * are
adopted, they may include an assessment for the specific purpose of
their administration. These regulations shall provide for
establishment of a reserve for the Commission's ongoing operating
expenses.
In accordance with this section, the Commission determined that
this regulation will cost $400,000 to administer for its six month
duration. Based on a projected total utilization of 1.25 billion pounds
of Class I milk in the Compact region during this period, an assessment
in the amount of $0.032 per cwt will be imposed. The funds will be held
in an operating expense reserve account.
V. Required Findings of Fact
Pursuant to Compact Art. V. Sec. 12, the Compact Commission hereby
finds:
(1) That the public interest will be served by the establishment of
minimum milk prices to dairy farmers under Article IV.
(2) That, for purposes of this initial regulation, a level of price
in the amount of $16.94 will assure that producers receive a price
sufficient to cover their costs of production and will elicit an
adequate supply of milk for the inhabitants of the regulated area and
for manufacturing purposes.
(3) That the major provisions of the order, other than those fixing
minimum milk prices, are in the public interest and are reasonably
designed to achieve the purposes of the order.\124\
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\124\ Whether the terms of the proposed regional order are
approved by producers as provided in section thirteen, as required
by finding 4 of this section, is contingent on final action by the
Commission and the consequent conduct of a referendum.
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List of Subjects in 7 CFR Parts 1300, 1301, 1303, 1304, 1305, 1306
and 1307
Milk.
For the reasons set forth in the preamble, the Commission
establishes in title 7 of the Code of Federal Regulations a new chapter
XIII to read as follows:
CHAPTER XIII--NORTHEAST DAIRY COMPACT COMMISSION
Part
1300 Over-order price.
1301 Definitions.
1303 Handlers reports.
1304 Classification of milk.
1305 Class price.
1306 Compact over-order producer price.
1307 Payments for milk.
1308 Commission assessment.
PART 1300--OVER-ORDER PRICE REGULATIONS
Sec.
1300.1 Compact Commission.
1300.2 Continuity and separability of provisions.
1300.3 Handler responsibility for records and facilities.
1300.4 Termination of obligation.
Authority: 7 U.S.C. 7256.
Sec. 1300.1 Compact Commission.
(a) Designation. The agency for the administration of the Pricing
Regulation shall be the compact commission.
(b) Powers. The compact commission shall have the following powers:
(1) Administer the pricing regulation in accordance with its terms
and provisions;
(2) Make rules and regulations to effectuate the terms and
provisions of the pricing regulation;
(3) Receive and investigate complaints of violations;
(4) Recommend amendments.
(c) Duties: The compact commission shall perform all the duties
necessary to administer the terms and provisions of the pricing
regulation, including, but not limited to the following:
(1) Employ and fix the compensation of persons necessary to enable
them to exercise their powers and perform their duties:
(2) Pay out of funds provided by the administrative assessment all
expenses necessarily incurred in the maintenance and functioning of
their office and in the performance of their duties;
(3) Keep records which will clearly reflect the transactions
provided for in the pricing regulation;
(4) Announce publicly at their discretion, by such means as they
deem appropriate, the name of any handler who, after the date upon
which he is required to perform such act, has not:
(i) Made reports required by the pricing regulation;
(ii) Made payments required by the pricing regulation; or
[[Page 23056]]
(iii) Made available records and facilities as required pursuant to
Sec. 1300.3;
(5) Prescribe reports required of each handler under the pricing
regulation. Verify such reports and the payments required by the
pricing regulation by examining records (including such papers as
copies of income tax reports, fiscal and product accounts,
correspondence, contracts, documents or memoranda, of the handler, and
the records of any other person that are relevant to the handler's
obligation under the pricing regulation, by examining such handler's
milk handling facilities; and by such other investigation as the
compact commission deems necessary for the purpose of ascertaining the
correctness of any report or any obligation under the pricing
regulation. Reclassify fluid milk product received by any handler if
such examination and investigation discloses that the original
classification was incorrect;
(6) Furnish each regulated handler a written statement of such
handler's accounts with the compact commission promptly each month.
Furnish a corrected statement to such handler if verification discloses
that the original statement was incorrect; and
(7) Prepare and disseminate publicly for the benefit of producers,
handlers, and consumers such statistics and other information covering
operation of the pricing regulation and facts relevant to the
provisions thereof (or proposed provisions) as do not reveal
confidential information.
Sec. 1300.2 Continuity and separability of provisions.
(a) Effective time. The provisions of this pricing regulation or
any amendment to the pricing regulation shall become effective at such
time as the compact commission may declare and shall continue in force
until suspended or terminated.
(b) Suspension or termination. The compact commission shall suspend
or terminate any or all of the provisions of the pricing regulation
whenever they find that such provision(s) obstructs or does not tend to
effectuate the declared policy of the compact. The pricing regulation
shall terminate whenever the provisions of the compact authorizing it
cease to be in effect.
(c) Continuing obligations. If upon the suspension or termination
of any or all of the provisions of the pricing regulation there are any
obligations arising under the pricing regulation, the final accrual or
ascertainment of which requires acts by any handler, by the compact
commission, or by any other person, the power and duty to perform such
further acts shall continue notwithstanding such suspensions or
termination.
Sec. 1300.3 Handler responsibility for records and facilities.
Each handler shall maintain and retain records of his operations
and make such records and his facilities available to the compact
commission. If adequate records of a handler, or of any other person,
that are relevant to the obligation of such handler are not maintained
and made available, any fluid milk product required to be reported by
such handler for which adequate records are not available shall not be
considered accounted for or established as used in a class other than
the highest price class.
(a) Records to be maintained. (1) Each handler shall maintain
records of his operations (including, but not limited to, records of
purchases, sales, processing, packaging and disposition) as are
necessary to verify whether such handler has any obligation under the
pricing regulation and if so, the amount of such obligation. Such
records shall be such as to establish for each plant or other receiving
point for each month:
(i) The quantities of fluid milk product contained in, or
represented by, products received in any form, including inventories on
hand at the beginning of the month, according to form, time and source
of each receipt;
(ii) The utilization of all fluid milk product showing the
respective quantities of such fluid milk product in each form disposed
of or on hand at the end of the month; and
(iii) Payments to producers, dairy farmers and cooperative
associations, including the amount and nature of any deductions and the
disbursement of money so deducted.
(2) Each handler shall keep such other specific records as the
compact commission deems necessary to verify or establish such
handler's obligation under the pricing regulation.
(b) Availability of records and facilities. Each handler shall make
available all records pertaining to such handler's operation and all
facilities the compact commission finds are necessary to verify the
information required to be reported by the pricing regulation and/or to
ascertain such handler's reporting, monetary or other obligation under
the pricing regulation. Each handler shall permit the compact
commission to observe plant operations and equipment and make available
to the compact commission such facilities as are necessary to carry out
their duties.
(c) Retention of records. All records required under the pricing
regulation to be made available to the compact commission shall be
retained by the handler for a period of three years to begin at the end
of the month to which such records pertain. If, within such a three
year period, the compact commission notifies the handler in writing
that the retention of such records, or of specified records, is
necessary in connection with a proceeding or court action specified in
such notice, the handler shall retain such records, or specified
records, until further written notification from the compact
commission. The compact commission shall give further written
notification to the handler promptly upon the termination of the
litigation or when the records are no longer necessary in connection
therewith.
Sec. 1300.4 Termination of Obligation.
The provision of this section shall apply to any obligation under
the pricing regulation for the payment of money:
(a) Except as provided in paragraphs (b) and (c) of this section,
the obligation of any handler to pay money required to be paid under
the terms of the pricing regulation shall terminate two years after the
last day of the month during which the compact commission receives the
handler's report of receipts and utilization on which such obligation
is based, unless within such a two year period, the compact commission
notifies the handler in writing that such money is due and payable.
Service of such written notice shall be complete upon mailing to the
handler's last known address and it shall 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
cooperative association, the name of such producer(s) or such
cooperative association, or if the obligation is payable to the compact
commission, the account for which it is to be paid;
(b) If a handler fails or refuses, with respect to any obligation
under the pricing regulation, to make available to the compact
commission all records required by the pricing regulation to be made
available, the compact commission may notify the handler in writing,
within the two year period provided for in paragraph (a) of this
section, of such failure or refusal. If the compact commission so
notifies a handler, the said two year period with respect to such
obligation shall not
[[Page 23057]]
begin to run until the first day of the month following the month
during which all such records pertaining to such obligation are made
available to the compact commission;
(c) Notwithstanding the provisions of paragraphs (a) and (b) of
this section, a handler's obligation under the pricing regulation to
pay money shall not be terminated with respect to any transaction
involving fraud or willful concealment of a fact, material to the
obligation, on the part of the handler against whom the obligation is
sought to be imposed; and
(d) Unless the handler files a petition to the compact commission
to commence litigation within the applicable two year period indicated
below, the obligation of the compact commission:
(1) To pay a handler any money which such handler claims to be due
him under the terms of the pricing regulation shall terminate two years
after the end of the month during which the fluid milk product involved
in the claim were received; or
(2) To refund any payment made by a handler (including a deduction
or offset by the compact commission) shall terminate two years after
the end of the month during which payment was made by the handler.
PART 1301--DEFINITIONS
Sec.
1301.1 Compact.
1301.2 Commission.
1301.3 Northeast Dairy Compact Regulated Area.
1301.4 Plant.
1301.5 Pool plant.
1301.6 Partially regulated plant.
1301.7 Non pool plant.
1301.8 Milk.
1301.9 Handler.
1301.10 Producer-handler.
1301.11 Producer.
1301.12 Producer milk.
1301.13 Exempt milk.
1301.14 Fluid milk product.
1301.15 Fluid cream product.
1301.16 Filled milk.
1301.17 Cooperative association.
1301.18 Person.
1301.19 Route disposition.
1301.20 Distributing plant.
1301.21 Supply plant.
1301.22 State dairy regulation.
1301.23 Diverted milk.
Authority: 7 U.S.C. 7256.
Sec. 1301.1 Compact.
Compact means the Northeast Dairy Compact as approved by section
147 of the Federal Agriculture Improvement and Reform Act (Fair Act),
Pub. L. 104-127.
Sec. 1301.2 Commission.
Commission means the commission established by the Northeast Dairy
Compact.
Sec. 1301.3 Northeast Dairy Compact Regulated Area.
Northeast Dairy Compact Regulated Area hereinafter called the
Regulated Area means all territory within the boundaries of the states
of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and
Vermont. All waterfront facilities connected therewith and craft moored
thereat, and all territory therein occupied by any governmental
installation, institution, or other similar establishment.
Sec. 1301.4 Plant.
Plant means the land and buildings, together with their
surroundings, facilities and equipment, whether owned or operated by
one or more persons, constituting a single operating unit or
establishment for the receiving, processing or packaging of milk or
milk products. The term plant shall not include:
(a) Distribution points (separate premises used primarily for the
transfer to vehicles of packaged fluid milk products moved there from
processing and packaging plants); or
(b) Bulk reload points (separate premises used for the purpose of
transferring bulk milk from one tank truck to another tank truck while
en route from dairy farmers' farms to a plant). If stationary storage
tanks are used for transferring milk at the premises, the operator of
the facility shall make an advance written request to the compact
commission that the facility be treated as a reload point; otherwise it
shall be a plant. The cooling of milk, collection or testing of
samples, and washing and sanitizing of tank trucks at the premises
shall not disqualify it as a bulk reload point.
Sec. 1301.5 Pool Plant.
Pool Plant means any milk plant located in the regulated area.
Sec. 1301.6 Partially Regulated Plant.
Partially Regulated Plant means a milk plant not located in the
regulated area but having Class I distribution in the regulated area,
or receipts from producers located in the regulated area.
Sec. 1301.7 Non Pool Plant.
Non Pool Plant means any milk plant that is not a pool plant
pursuant to section 1301.5 and not a partially regulated plant pursuant
to section 1301.6.
Sec. 1301.8 Milk.
Milk means the lacteal secretion of cows and includes all skim,
butterfat, or other constituents obtained from separation of any other
process and as defined pursuant to prevailing standards of identity.
Sec. 1301.9 Handler.
Handler means:
(a) Any person, except a producer-handler, who operates a pool
plant;
(b) Any person who operates a partially regulated plant;
(c) Any person who operates any other plant, or a pool bulk tank
unit as defined under the Federal order, from which fluid milk products
are disposed of, directly or indirectly, in the regulated area;
(d) Any cooperative association with respect to the milk that is
moved from farms in tank trucks operated by, or under contract to, the
association to pool plants or as diverted milk to non pool plants for
the account of, and at the direction of, the association. The
association shall be considered as the handler who received the milk
from the dairy farmers. However, the cooperative association shall not
be the handler with respect to the milk moved from any farm if the
association and the operator of the pool plant to which milk from such
farm is moved both submit a request in writing, on or before the due
date for filing the monthly reports of receipts and utilization, that
the operator of the pool plant be considered as the handler who
received the milk from the dairy farmer, and the pool plant operator's
request states that the pool plant operator is purchasing the milk from
such farm on the basis of the farm bulk tank measurement readings and
the butterfat tests of samples of the milk taken from the farm bulk
tank; or
(e) Any person who does not operate a plant but who engages in the
business of receiving fluid milk products for resale and distributes to
retail or wholesale outlets packaged fluid milk products received from
any plant described in paragraph (a), (b) or (c) of this section.
Sec. 1301.10 Producer-handler.
Producer-handler means any person who, during the month is both a
dairy farmer and a handler and who meets all of the following
conditions:
(a) Provides as the person's own enterprise and at the person's own
risk the maintenance, care, and management of the dairy herd and other
resources and facilities that are used to produce milk, to process and
package such milk at the producer-handler's own plant, and to
distribute it as route disposition.
[[Page 23058]]
(b) The person's own route disposition constitutes the majority of
the route disposition from the plant.
(c) The producer-handler receives no fluid milk products except
from such handler's own production and from pool handlers, either by
transfer of diversion.
Sec. 1301.11 Producer.
Producer means:
(a) A dairy farmer who produces milk in the regulated area that is
moved to a pool plant or a partially regulated plant, having Class I
distribution in the regulated area,
(b) A dairy farmer who produces milk outside of the regulated area
that is moved to a pool plant provided that dairy farmer milk was moved
to a plant located in the regulated area during December 1996. Provided
further: to be considered a qualified producer, milk from the dairy
farmer's farm must move to a pool plant during the current month and
must have been moved to a pool plant for five (5) months subsequent to
July of the preceding calendar year;
(c) A dairy farmer who produces milk outside of the regulated area
that is moved to a partially regulated plant and allocated to Class I
pursuant to Sec. 1304.5. However, the term shall not include:
(1) A producer handler;
(2) A dairy farmer who is a local or state government that has non-
producer status for the month under Sec. 1301.13(c);
(3) A dairy farmer who is a governmental agency that is operating a
plant from which there is route disposition in the regulated area;
(4) Dairy farmer milk received at a pool plant or a partially
regulated plant which is rejected and segregated in the handler's
normal operations for receiving milk and which receipts are accepted
and disposed of by the handler as salvaged product rather than milk.
Sec. 1301.12 Producer milk.
Producer milk means milk that the handler has received from
producers. The quantity of milk received by a handler from producers
shall include any milk of a producer that was not received at any plant
but which the handler or an agent of the handler has accepted,
measured, sampled, and transferred from the producer's farm tank into a
tank truck during the month. Such milk shall be considered as having
been received at the pool plant at which other milk from the same farm
of that producer is received by the handler during the month, except
that in the case of a cooperative association in its capacity as a
handler under Sec. 1301.9(d), the milk shall be considered as having
been received at a plant in the zone location of the pool plant, or
pool plants within the same zone, to which the greatest aggregate
quantity of the milk of the cooperative association in such capacity
was moved during the current month or the most recent month.
Sec. 1301.13 Exempt milk.
Exempt milk means:
(a) Fluid milk products received at a pool plant in bulk from a non
pool plant to be processed and packaged, for which an equivalent
quantity of package fluid milk products is returned to the operator of
the non pool plant during the same month, if the receipt of bulk fluid
milk products and return of packaged fluid milk products occur during
an interval in which the facilities of the non pool plant at which the
fluid milk products are usually processed and packaged are temporarily
unusable because of fire, flood, storm or similar extraordinary
circumstances completely beyond the non pool plant operator's control;
(b) Packaged fluid milk products received at a pool plant from a
non pool plant in return for an equivalent quantity of bulk fluid milk
products moved from a pool plant for processing and packaging during
the same month, if the movement of bulk fluid milk products and receipt
of package fluid milk products occur during an interval in which the
facilities of the pool plant at which the fluid milk products are
usually processed and packaged are temporarily unusable because of
fire, flood, storm, or similar extraordinary circumstances completely
beyond the pool plant operator's control;
(c) Milk received at a pool plant in bulk from the dairy farmer who
produced it, to the extent of the quantity of any packaged fluid milk
products returned to the dairy farmer, if:
(1) The dairy farmer is a State or local government that is not
engaged in the route disposition of any of the returned products, and
(2) The dairy farmer has by written notice to the compact
commission and the receiving handler, elected non-producer status for a
period of not less than 12 months beginning with the month in which the
election was made and continuing for each subsequent month until
canceled in writing, and the election is in effect for the current
month.
(d) All fluid milk product disposed outside of the regulated area.
Sec. 1301.14 Fluid milk product.
(a) Except as provided in paragraph (b) of this section fluid milk
product means any milk products in fluid or frozen form containing less
than nine percent butterfat, that are in bulk or are packaged,
distributed and intended to be used as beverages. Such products
include, but are not limited to: Milk, skim milk, low fat milk, milk
drinks, buttermilk, and filled milk, including any such beverage
products that are flavored, culture, modified with added nonfat milk
solids, sterilized, concentrated (to not more than 50 percent total
milk solids), or reconstituted.
(b) The term fluid milk product shall not include:
(1) Plain or sweetened evaporated milk, plain or sweetened
evaporated skim milk, sweetened condensed milk or skim milk, formulas
especially prepared for infant feeding or dietary use that are packaged
in hermetically sealed containers, any product that contains by weight
less than 6.5 percent nonfat milk solids, and whey; and
(2) The quantity of skim milk in any modified product specified in
paragraph (a) of this section that is in excess of the quantity of skim
milk in an equal volume of an unmodified product of the same nature and
butterfat content.
Sec. 1301.15 Fluid cream product.
Fluid cream product means cream (other than plastic cream or frozen
cream), including sterilized cream, or a mixture of cream and milk or
skim milk containing nine percent or more butterfat, with or without
the addition of other ingredients.
Sec. 1301.16 Filled milk.
Filled milk means any combination of nonmilk fat (or oil) with
skimmed milk (whether fresh, cultured, reconstituted, or modified by
the addition of nonfat milk solids), with or without milk fat, so that
the product (including stabilizers, emulsifiers, or flavoring)
resembles milk or any other fluid milk product, and contains less than
six percent nonmilk fat (or oil).
Sec. 1301.17 Cooperative association.
Cooperative association means any cooperative marketing association
of producers which the Secretary of Agriculture of the United States
determines:
(a) To be qualified under the provisions of the Act of Congress of
February 18, 1922, known as the ``Capper-Volstead Act'';
(b) To have full authority in the sale of milk of its members; and
(c) To be engaged in making collective sales of, or marketing milk
or its products for its members.
[[Page 23059]]
Sec. 1301.18 Person.
Person means individual, partnership, corporation, association, or
other business unit.
Sec. 1301.19 Route disposition.
Route disposition means distribution of Class I milk by a handler
to retail or wholesale outlets, which include vending machines but do
not include plants or distribution points. The route disposition of a
handler shall be attributed to the processing and packaging plant from
which the Class I milk is moved to retail or wholesale outlets without
intermediate movement to another processing and packaging plant.
Sec. 1301.20 Distributing plant.
Distributing plant means a processing and packaging plant.
Sec. 1301.21 Supply plant.
Supply plant means a plant at which facilities are maintained and
used for washing and sanitizing cans and to which milk is moved from
dairy farmers' farms in cans and is there accepted, weighed or
measured, sampled, and cooled, or it is a plant to which milk is moved
from dairy farmers' farms in tank trucks.
Sec. 1301.22 State dairy regulation.
State dairy regulation means any state regulation of dairy prices,
and associated assessments, whether by statute, marketing order or
otherwise.
Sec. 1301.23 Diverted milk.
Diverted milk means milk, other than that excluded under
Sec. 1301.11 from being considered as received from a producer, that
meets the conditions set forth in paragraph (a) or (b) of this section
and is not excluded from diverted milk under paragraph (c) of this
section.
(a) Milk that a handler in its capacity as the operator of a pool
plant reports as having been moved from a dairy farmer's farm to the
pool plant, but which the handler caused to be moved from the farm to
another plant, if the handler specifically reports such movement to the
other plant as a movement of diverted milk, and the conditions of
paragraph (a) (1) or (2) of this section have been met. Milk that is
diverted milk under this paragraph shall be considered to have been
received at the pool plant from which it was diverted.
(1) During any two (2) months subsequent to July of the preceding
calendar year, or during the current month, on more than half of the
days on which the handler caused milk to be moved from the dairy
farmer's farm during the month, all of the milk that the handler caused
to be moved from that farm was physically received as producer milk at
the handler's pool plant or at another of the handler's pool plants
that is not longer operated as a plant.
(2) During the current month and not more than five (5) other
months subsequent to July of the preceding calendar year, milk from the
dairy farmer's farm was received at or diverted from the handler's pool
plant as producer milk, and during the current month all of the milk
from that farm that the handler reported as diverted milk was moved
from the farm in a tank truck in which it was intermingled with milk
from other farms, the milk from a majority of which farms was diverted
from the same pool plant in accordance with the preceding provisions of
this paragraph.
(b) Milk that a cooperative association in its capacity as a
handler under Sec. 1301.9(d) caused to be moved from a dairy farmer's
farm to a partially regulated plant if the association specifically
reports the movement to such plant as a movement of diverted milk, and
the conditions of paragraph (b) (1) and (2) of this section have been
met. Milk that is diverted under this paragraph shall be considered to
have been received by the cooperative association in its capacity as a
handler under Sec. 1301.9(d).
(1) During any two (2) months subsequent to July of the preceding
calendar year, or during the current month, on more than half of the
days on which the cooperative association in its capacity as a handler
under Sec. 1301.9(d) caused milk to be moved from the farm as producer
milk during the month, all of the milk that the association cause to be
move from the farm was physically received at a pool plant.
(2) During the current month and not more than five (5) other
months subsequent to July of the preceding calendar year, the
cooperative association in its capacity as a handler under
Sec. 1301.9(d) caused milk to be moved from the dairy farmer's farm as
producer milk, and during the current month all of the milk from that
farm that the cooperative association in its capacity as a handler
under Sec. 1301.9(d) reported as diverted milk was moved from the farm
in a tank truck in which it was intermingled with milk from other
farms, the milk from a majority of which farms was diverted by the
association in accordance with the preceding provisions of this
paragraph.
(c) Milk moved, as described in paragraphs (a) and (b) of this
section, from dairy farmer's farms to partially regulated plants in
excess of 35 percent in the months of September through November and 45
percent in other months, of the total quantity of producer milk
received (including diversions) by the handler during the month shall
not be diverted milk. Such milk, and any other milk reported as
diverted milk that fails to meet the requirements set forth in this
section, shall be considered as having been moved directly from the
diary farmers' farms to the plant of physical receipt, and if that
plant is a nonpool plant the milk shall be excluded from producer milk.
PART 1303--HANDLERS REPORTS
Sec.
1303.1 Reports of receipts and utilization.
1303.2 Other reports of receipts and utilization.
1303.3 Reports regarding individual producers and dairy farmers.
1303.4 Notices to producers.
Authority: 7 U.S.C. 7256.
Sec. 1303.1 Reports of receipts and utilization.
On or before the eighth day after the end of each month, each
handler shall report for such month to the compact commission, in the
detail and on the forms prescribed by the compact commission as
follows:
(a) Each handler, with respect to each of the handler's pool plants
shall report the quantities of fluid milk products contained in or
represented by:
(1) Receipts of producer milk (including the specific quantities of
diverted milk and receipts from the handler's own production);
(2) Receipts of milk from cooperative association in their capacity
as handlers under Sec. 1301.9(d);
(3) Receipts of fluid milk products from other pool plants;
(4) Receipts of fluid milk products from partially regulated
plants;
(5) Inventories at the beginning and end of the month of fluid milk
products;
(6) All Class I utilization or disposition of milk, filled milk,
and milk products required to be reported pursuant to this paragraph.
(b) Each handler operating a partially regulated plant shall report
with respect to such plant in the same manner as prescribed for reports
required by paragraph (a) of this section. Receipts of milk that would
have been producer milk if the plant had been fully regulated shall be
reported in lieu of producer milk.
(c) Each handler described in Sec. 1301.9(d) shall report:
(1) The quantities of all fluid milk product contained in receipts
of milk from producers; and
[[Page 23060]]
(2) The utilization or disposition of all such receipts.
(d) Each handler shall report bulk milk received at a handler's
pool plant from a cooperative association in its capacity as the
operator of a pool plant or as a handler under Sec. 1301.9(d), if such
milk was rejected by the handler subsequent to such handler's receipt
of the milk on the basis that it was not of marketable quality at the
time the milk was delivered to the handler's plant, and such milk was
removed from the plant in bulk form by the cooperative association and
was replaced in the other milk from the association. Except for
purposes of this paragraph and Sec. 1303.2(a), such milk that was so
removed from the handler's plant shall be treated for all other
purposes of the pricing regulation as though it had not been delivered
to and received at the handler's plant.
(e) Each handler not specified in paragraphs (a) through (c) of
this section shall report with respect to the handler's receipts and
utilization of milk, filled milk, and milk products in such manner as
the compact commission may prescribe.
(f) Any handler who operates a pool plant which has no Class I
disposition and receives no milk from producers is exempted from
reporting to the compact commission under this section.
Sec. 1303.2 Other reports of receipts and utilization.
(a) Each handler who intends to have a receipt of unmarketable milk
replaced with the other milk in the manner described under Sec. 1303.1
shall give the compact commission, at the request and in accordance
with instructions of the compact commission, advance notice of the
handler's intention to have such milk replaced.
(b) In addition to the reports required pursuant to paragraph (a)
of this section and Sec. 1303.1 and Sec. 1303.3 each handler shall
report such other information as the compact commission deems necessary
to verify or establish such handler's oblitation under the order.
Sec. 1303.3 Reports regarding individual producers and dairy farmers.
(a) Each handler shall report on or before the 15th day after the
end of each month the information required by the compact commission
with respect to producer additions, producer withdrawals, changes in
farm locations, and changes in the name of farm operators.
(b) Each handler that is not a cooperative association, upon
request from any such association, shall furnish it with information
with respect to each of its producer members from whose farm the
handler begins, resumes, or stops receiving milk at his pool plant.
Such information shall include the applicable date, the producer-
member's post office address and farm location, and, if known, the
plant at which his milk was previously received, or the reason for the
handler's failure to continue receiving milk from his farm. In lieu of
providing the information directly to the association, the handler may
authorize the compact commission to furnish the association with such
information, derived from the handler's reports and records.
(c) Each handler shall submit to the compact commission within ten
(10) days after their request made not earlier than twenty (20) days
after the end of the month, his producer payroll for the month, which
shall show for each producer:
(1) The daily and total pounds of milk delivered and its average
butterfat test; and
(2) The net amount of the handler's payments to the producer, with
the prices, deductions, and charges involved.
Sec. 1303.4 Notices to producers.
Each handler shall furnish each producer from whom he receives milk
the following information regarding the weight and butterfat test of
the milk:
(a) Whenever he receives milk from the producer on the basis of
farm bulk tank measurements, the handler shall give the producer at the
time the milk is picked up at the farm a receipt indicating the
measurement and the equivalent pounds of milk received;
(b) Whenever he receives milk from the producer on a basis other
than farm bulk tank measurements, the handler shall give the producer
within three (3) days after receipt of the milk a written notice of the
quantity so received;
(c) If butterfat tests of the producer's milk are determined from
fresh milk samples, the handler shall give the producer within ten (10)
days after the end of each month a written notice of the producer's
average butterfat test for the month. Such notice shall not be required
if the handler has given the producer a written notice of the butterfat
test for each of the sampling periods within the month; and
(d) If butterfat tests of the producer's milk are determined from
composite milk samples, the handler shall give the producer within
seven (7) days after the end of each sampling period a written notice
of the producer's average butterfat test for the period.
PART 1304--CLASSIFICAITON OF MILK
Sec.
1304.1 Classification of milk.
1304.2 Classification of transfers and diversions.
1304.3 General classification rules.
1304.4 Classification of producer milk at a pool plant.
1304.5 Classification of milk at a partially regulated plant.
Authority: 7 U.S.C. 7256.
Sec. 1304.1 Classification of milk
All fluid milk products required to be reported by a handler
pursuant to this section shall be classified as follows:
(a) Class I milk shall be all fluid milk products disposed of in
the regulated area, and in packaged inventory of fluid milk products at
the end of the month, except as otherwise provided in paragraphs (b),
(c), and (d) of this section;
(b) Fluid Milk Products:
(1) Disposed of in the form of a fluid cream product or any product
containing artificial fat, fat substitutes, or six percent or more
nonmilk fat (or oil) that resembles a fluid cream product, except as
otherwise provided in paragraph (c) of this section;
(2) In packaged inventory at the end of the month of the products
specified in paragraph (b)(1) of this section and in bulk concentrated
fluid milk products in inventory at the end of the month;
(3) In bulk fluid milk products and bulk fluid cream products
disposed of or diverted to a commercial food processor if the compact
commission is permitted to audit the records of the commercial food
processing establishment for the purpose of verification. Otherwise,
such uses shall be Class I;
(4) Used to produce:
(i) Cottage cheese, lowfat cottage cheese, dry curd cottage cheese,
ricotta cheese, pot cheese, Creole cheese, and any similar soft, high
moisture cheese resembling cottage cheese in form or use;
(ii) Milkshake and ice milk mixes (or bases), frozen desserts, and
frozen dessert mixes distributed in one-quart containers or larger and
intended to be used in soft or semi-solid form:
(iii) Aerated cream, frozen cream, sour cream and sour half-and-
half, sour cream mixtures containing nonmilk items, yogurt and any
other semi-solid product;
(iv) Eggnog, custards, puddings, pancake mixes, buttermilk biscuit
mixes, coatings, batter and similar products;
(v) Formulas especially prepared for infant feeding or dietary use
(meal
[[Page 23061]]
replacement) that are packaged in hermetically sealed containers;
(vi) Candy, soup, bakery products and other prepared foods which
are processed for general distribution to the public, and intermediate
products, including sweetened condensed milk, to be used in processing
such prepared food products; and
(vii) Any product not otherwise specified in this section.
(c) All fluid milk products:
(1) Used to produce:
(i) Cream cheese and other spreadable cheeses, and hard cheeses of
types that may be shredded, grated, or crumbled, and are not included
in paragraph (b)(4)(i) of this section;
(ii) Butter, plastic cream, anhydrous milkfat and butteroil;
(iii) Any milk product in dry form, except nonfat dry milk;
(iv) Evaporated or sweetened condensed milk in a consumer-type
package and evaporated or sweetened condensed skim milk in a consumer-
type package; and
(2) In inventory at the end of the month of unconcentrated fluid
milk products in bulk form and products in bulk form and products
specified in paragraph (b)(1) of this section in bulk form;
(3) In fluid milk products, products specified in paragraph (b)(1)
of this section, and products processed by the disposing handler that
are specified in paragraphs (b)(4) (i)-(iv) of this section, that are
disposed of by a handler for animal feed;
(4) In fluid milk products, products specified in paragraph (b)(1)
of this section, and products processed by the disposing handler that
are specified in paragraphs (v)(4) (i)-(iv) of this section, that are
dumped by a handler. The compact commission may require notification by
the handler of such dumping in advance for the purpose of having the
opportunity to verify such disposition. In any case, classification
under this paragraph requires a handler to maintain adequate records of
such use, if advance notification of such dumping is not possible, or
if the compact commission so requires, the handler must notify the
compact commission on the next business day following such use;
(5) In fluid milk products and products specified in paragraph
(b)(1) of this section that are destroyed or lost by a handler in a
vehicular accident, flood, fire, or in a similar occurrence beyond the
handler's control, to the extent that the quantities destroyed or lost
can be verified from records satisfactory to the compact commission.
(6) In skim milk in any modified fluid milk product or in any
product specified in paragraph (b)(1) of this section that is in excess
of the quantity of skim milk in such product that was included within
the fluid milk product definition pursuant to Sec. 1301.14 and the
fluid cream product definition pursuant to Sec. 1301.15.
(d) All fluid milk products used to produce nonfat dry milk.
Sec. 1304.2 Classification of transfers and diversions
(a) Transfers and diversions to pool plants. Fluid milk products
transferred or diverted from a pool plant to another pool plant or
partially regulated plant shall be classified as Class I milk unless
the operators of both plants request not to classify it Class I. In
either case, the classification of such transfer or diversion shall be
subject to the following conditions: The fluid milk products classified
in Class I shall be limited to the amount of fluid milk products,
respectively, remaining in Class I at the transferee-plant or diverted-
plant.
(b) Transfers and diversions to producers-handlers. Fluid milk
products transferred or diverted from a pool plant to a producer-
handler shall be classified as Class I.
Sec. 1304.3 General classification rules.
In determining the classification of producer milk pursuant to
Sec. 1304.4, the following rules shall apply:
(a) Each month the compact commission shall correct for
mathematical and other obvious errors all reports filed pursuant to
Sec. 1303.1 and shall compute separately for each pool plant and for
each cooperative association with respect to milk for which it is the
handler pursuant to Sec. 1301.9(d) the pounds of skim milk and
butterfat, respectively, in Class I in accordance with Sec. 1304.1 and
Sec. 1304.2;
(b) The classification of producer milk for which a cooperative
association is the handler pursuant to Sec. 1301.9(d) shall be
determined separately from the operations of any pool plant operated by
such cooperative; and
(c) If receipts from more than one pool plant are to be assigned,
the receipts shall be assigned in sequence according to the zone
locations of the plants, beginning with the plant in the lowest-
numbered zone for assignments to Class I milk.
Sec. 1304.4 Classification of producer milk at a pool plant.
For each month the compact commission shall determine the
classification of producer milk of each handler described in
Sec. 1301.9(a) for each of the handler's pool plants separately and of
each handler described in Sec. 1301.9(d) by allocating the handler's
receipts of fluid milk products to the handler's utilization pursuant
to paragraphs (a) and (b) of this section.
(a) Fluid milk products shall be allocated in the following manner:
(1) Subtract from the total pounds of fluid milk products in Class
I the pounds of fluid milk products in:
(i) Beginning inventory packaged fluid milk products;
(ii) Receipts of Class I fluid milk products from other pool plants
and partially regulated plants;
(iii) Disposition of Class I fluid milk products outside of the
regulated area;
(iv) Receipts of exempt fluid milk products pursuant to
Sec. 1301.13 (a), (b), and (c).
(b) The quantity of producer milk in Class I shall be the combined
pounds of fluid milk product remaining in Class I.
Sec. 1304.5 Classification of producer milk at a partially regulated
plant.
For each month the compact commission shall determine the
classification of producer milk of each handler described in
Sec. 1301.9(b) for each of the handler's partially regulated plants
separately by allocating the handler's receipts of fluid milk products
to the handler's utilization pursuant to paragraphs (a) through (c) of
this section.
(a) Fluid milk products shall be allocated in the following manner.
Subtract from the total pounds of fluid milk product in Class I the
pounds of fluid milk products in:
(1) Beginning inventory packaged fluid milk products;
(2) Receipts of Class I fluid milk products from other pool plants
and partially regulated plants;
(3) Disposition of Class I fluid milk products outside of the
regulated area;
(4) Receipts of exempt fluid milk product pursuant to Sec. 1301.13
(a), (b), and (c).
(b) The quantity of producer milk in Class I shall be the combined
pounds of fluid milk product remaining in Class I, not to exceed the
total pounds of fluid milk products disposed of in the regulated area.
(c) Producer milk will be allocated pursuant to paragraph (b) of
this section in the following manner:
(1) Receipts from producers located in the regulated area;
(2) Receipts of diverted pool milk;
(3) Receipts from producers not located in the regulated area shall
then be assigned to any remaining Class I in the regulated area.
[[Page 23062]]
PART 1305--CLASS PRICE
Sec.
1305.1 Compact over-order class I price and compact over-order
obligation.
1305.2 Announcement of compact over-order class I price and compact
over-order obligation.
1305.3 Equivalent price.
Authority: 7 U.S.C. 7256.
Sec. 1305.1 Compact over-order class I price and compact over-order
obligation.
The compact over-order Class I price per hundredweight of milk
shall be as follows:
(a) The Class I price shall be announced pursuant to Sec. 1305.2.
(b) The compact over-order obligation shall be computed as follows:
(1) The compact Class I price;
(2) Deduct Federal Order #1, Zone 1 price;
(3) The remainder shall be the compact over-order obligation.
Sec. 1305.2 Announcement of compact over-order class I price and
compact over-order obligation.
The compact commission shall announce publicly on or before the 5th
day of each month the Class I over-order price and the compact over-
order obligation for the following month.
Sec. 1305.3 Equivalent price.
If, for any reason, a price specified in this part for use in
computing class prices or for other purposes is not reported or
published in the manner described in this part, the compact commission
shall use one determined by the commission to be equivalent to the
price that is specified.
PART 1306--COMPACT OVER-ORDER PRODUCER PRICE
Sec.
1306.1 Handler's value of milk for computing basic over-order
producer price.
1306.2 Partially regulated plant operator's value of milk for
computing basic over-order producer price.
1306.3 Computation of basic over-order producer price.
1306.4 Announcement of basic over-order producer price.
Authority: 7 U.S.C. 7256.
Sec. 1306.1 Handler's value of milk for computing basic over-order
producer price.
For the purpose of computing the basic over-order producer price,
the compact commission shall determine for each month the value of milk
of each handler with respect to each of the handler's pool plants and
of each handler described in Sec. 1301.9(d) with respect to milk that
was not received at a pool plant, as directed in this section: Multiply
the pounds of Class I fluid milk products as determined pursuant to
Sec. 1304.1(a) by the compact over-order obligation.
Sec. 1306.2 Partially regulated plant operator's value of milk for
computing basis over-order producer price.
For the purpose of computing the basic over-order producer price,
the compact commission shall determine for each month the value of milk
disposition in the regulated area by the operator of a partially
regulated plant, as follows: Multiply the pounds of Class I fluid milk
products as determined pursuant to Sec. 1304.1(a) by the compact over-
order obligation.
Sec. 1306.3 Computation of basic over-order producer price.
The compact commission shall compute the basic over-order producer
price per hundredweight applicable to milk received at plants as
follows:
(a) Combine into one total the values computed pursuant to
Sec. 1306.1 and Sec. 1306.2 for all handlers from whom the compact
commission has received at the compact commission's office prior to the
9th day after the end of the month the reports for the month prescribed
in Sec. 1303.1 and the payments for the preceding month required under
Sec. 1307.3(a).
(b) Add an amount equal to not less than one-half of the
unobligated balance of the producer-settlement fund at the close of
business on the 8th day after the end of the month;
(c) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk;
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1306.2 (a); and (d) Subtract not less than four (4) cents nor
more than five (5) cents for the purpose of retaining a cash balance in
the producer-settlement fund. The result shall be the basic over-order
producer price for the month.
Sec. 1306.4 Announcement of basic over-order producer price.
The compact commission shall announce publicly on or before: The
13th day after the end of each month the over-order producer price
resulting from the adjustment of the basic over-order producer price
for such month, as computed under Sec. 1306.3.
PART 1307--PAYMENTS FOR MILK
Sec.
1307.1 Producer-settlement fund.
1307.2 Handler's producer-settlement fund debits and credits.
1307.3 Payments to and from the producer-settlement fund.
1307.4 Payments to producers.
1307.5 [Reserved]
1307.6 Statements to producers.
1307.7 Adjustment of accounts.
1307.8 charges on overdue accounts.
Authority: 7 U.S.C. 7256.
Sec. 1307.1 Producer-settlement fund.
(a) The compact commission shall establish and maintain a separate
fund known as the producer-settlement fund. They shall deposit into the
fund all amounts received from handlers under Sec. 1307.3, Sec. 1307.7,
and Sec. 1307.8 and the amount subtracted under Sec. 1306.3(d). They
shall pay from the fund all amounts due handlers under Sec. 1307.3,
Sec. 1307.7, and Sec. 1307.8 and the amount added under Sec. 1306.3(b)
subject to their right to offset any amounts due from the handler under
these sections and under Sec. 1308.1
(b) All amounts subtracted under Sec. 1306.3(d), including interest
earned thereon, shall remain in the producer-settlement fund as an
obligated balance until it is withdrawn for the purpose of effectuating
Sec. 1306.3(b).
(c) The compact commission shall place all monies subtracted under
Sec. 1306.3(d) in an interest-bearing bank account or accounts in a
bank or banks duly approved as a Federal depository for such monies, or
invest them in short-term U.S. Government securities.
Sec. 1307.2 Handlers' producer-settlement fund debits and credits.
On or before the 15th day after the end of the month, the compact
commission shall render a statement to each handler showing the amount
of the handler's producer-settlement fund debit or credit, as
calculated in this section.
(a) The producer-settlement fund debit for each plant and each
cooperative association in its capacity as a handler under
Sec. 1301.9(d) shall be the value computed pursuant to Sec. 1306.1 and
Sec. 1306.2.
(b) The producer-settlement fund credit for each plant and each
cooperative association in its capacity as a handler under
Sec. 1310.9(d) shall be computed as specified in this paragraph.
(1) Multiply the quantities of producer milk that were allocated to
Class I pursuant to Sec. 1304.4 and the quantities of route disposition
in the marketing area by partially regulated plants for which a value
was determined pursuant to Sec. 1306.2(a) by the basic over-order
producer price computed under Sec. 1306.3.
(2) For any cooperative association in its capacity as a handler
under Sec. 1301.9(d), multiply the quantities of
[[Page 23063]]
milk moved to each pool plant by the basic over-order blended price
computed under Sec. 1306.3; and to the result add the value determined
under Sec. 1306.1.
(c) The producer-settlement fund debit or credit of any handler
shall be the net of the producer-settlement fund debits and credits as
computed for all of its operations under paragraph (a) and (b) of this
section.
Sec. 1307.3 Payments to and from the producer-settlement fund.
(a) On or before the 18th day after the end of the month, each
handler shall pay to the compact commission the handler's producer-
settlement fund debit for the month as determined under Sec. 1307.2(a).
(b) On or before the 20th day after the end of the month, the
compact commission shall pay to each handler the handler's producer-
settlement fund credit for the month as determined under
Sec. 1307.2(b). If the unobligated balance in the producer-settlement
fund is insufficient to make such payments, the compact commission
shall reduce uniformly such payments and shall complete them as soon as
the funds are available.
Sec. 1307.4 Payments to producers.
(a) On or before the 20th day after the end of the month, each
handler shall make payment to each producer for the milk received from
him during the month at not less than the basic over-order producer
price per hundredweight computer under Sec. 1306.3. If the handler has
not received full payment for the compact commission under
Sec. 1307.3(b) by the date payments are due under this paragraph, he
may reduce pro rata his payments to producers by an amount not to
exceed such underpayment. Such payments shall be completed after
receipt of the balance due from the compact commission by the next
following date for making payments under this paragraph.
(b) If the handler's net payment to a producer is for an amount
less than the total amount due the producer under this section, the
burden shall rest upon the handler to prove to the compact commission
that each deduction from the total amount due is properly authorized
and properly chargeable to the producer.
(c) In making payment to producers under paragraph (b) of this
section for milk diverted from a pool plant the handler may elect to
pay such producers at the price of the plant from which the milk was
diverted, if the resulting net payment to each producer is not less
than the otherwise required under this section and the rate of payment
and the deduction shown on the statement required to be furnished under
Sec. 1307.6 are those used in computing the payment.
(d) If a handler claims that the required payment cannot be made
because the producer is deceased or cannot be located, such payment
shall be made to the producer-settlement fund, and in the event that
the handler subsequently locates and pays the producer or a lawful
claimant, or in the event that the handler no longer exists and a
lawful claim is later established, the compact commission shall make
such payment from the producer-settlement fund to the handler or to the
lawful claimant, as the case may be.
(e) If not later than the date when such payment is required to be
made, legal proceedings have been instituted by the handler for the
purpose of administrative or judicial review of the compact commission
findings upon verification as provided above such payment shall be made
to the producer-settlement fund and shall be held in reserve until such
time as the above-mentioned proceedings have been completed or until
the handler submits proof to the compact commission that the required
payment has been made to the producer in which latter event the payment
shall be refunded to the handler.
(f) At a partially regulated plant each handler shall make
payments, on a pro rata basis, to all producers and dairy farmers for
milk received from them during the month, the payment received pursuant
to Sec. 1307.3(b).
Sec. 1307.5 [Reserved]
Sec. 1307.6 Statements to producers.
In making the payments to producers required under Sec. 1307.4,
each handler and each cooperative shall furnish each producer, in
addition to the information required under Federal and State
regulations, a supporting statement, in such form acceptable to the
commission, which shall show: The rate and amount of the compact over-
order producer price.
Sec. 1307.7 Adjustment of accounts.
(a) Whenever the compact commission verification of a handler's
reports or payments discloses an error in payments to or from the
compact commission under Sec. 1307.3 or Sec. 1308.1, the compact
commission shall promptly issue to the handler a charge bill or a
credit, as the case may be, for the amount of the error. Adjustment
charge bills issued during the period beginning with the 10th day of
the prior month and ending with the 9th day of the current month shall
be payable by the handler to the market administrator on or before the
18th day of the current month. Adjustment credits issued during that
period shall be payable by the compact commission to the handler on or
before the 20th day of the current month.
(b) whenever the compact commission's verification of a handler's
payments discloses payment to a producer or a cooperative association
of an amount less than is required by Sec. 1307.4, the handler shall
make payment of the balance due the producer not later than the 20th
day after the end of the month in which the handler is notified of the
deficiency.
Sec. 1307.8 Charges on overdue accounts.
Any producer-settlement fund account balance due from or to a
handler under Sec. 1307.3, Sec. 1307.7 or Sec. 1307.8 for which
remittance has not been received in or paid from the compact commission
office by close of business on the 18th day of any month, shall be
increased one percent effective the following day.
PART 1308--ADMINISTRATIVE ASSESSMENT
Authority: 7 U.S.C. 7256
Sec. 1308.1 Assessment for pricing regulations administration.
On or before the 18th day after the end of the month, each handler
shall pay to the compact commission his pro rata share of the expense
of administration of this pricing regulation. The payment shall be at
the rate of .032 cents per hundredweight. The payment shall apply to:
(a) The quantity of fluid milk products disposed in the regulated
area from a pool plant for which a value is determined under
Sec. 1306.1;
(b) All receipts and beginning inventory of a cooperative
association in its capacity as handler under Sec. 1301.9(d) for the
month less its ending inventory for the month; and
(c) The quantity distributed as route disposition in the regulated
area from a partially regulated plant for which a value is determined
under Sec. 1306.2.
Daniel Smith,
Executive Director.
[FR Doc. 97-10831 Filed 4-25-97; 8:45 am]
BILLING CODE 1650-01-M