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[Federal Register: January 30, 1998 (Volume 63, Number 20)]
[Proposed Rules]
[Page 4801-4850]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja98-29]

[[Page 4801]]

_______________________________________________________________________

Part II

Department of Agriculture

_______________________________________________________________________

Agricultural Marketing Service

_______________________________________________________________________

7 CFR Part 1000 et al.

Milk in the New England and Other Marketing Areas; Opportunity To File
Comments, Including Written Exceptions, on Proposed Amendments to
Marketing Agreements and Orders; Proposed Rule

[[Page 4802]]

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1002, 1004, 1005, 1006, 1007, 1012, 1013,
1030, 1032, 1033, 1036, 1040, 1044, 1046, 1049, 1050, 1064, 1065,
1068, 1076, 1079, 1106, 1124, 1126, 1131, 1134, 1135, 1137, 1138
and 1139

[DA-97-12]

Milk in the New England and Other Marketing Areas; Proposed Rule
and Opportunity To File Comments, Including Written Exceptions, on
Proposed Amendments to Marketing Agreements and Orders

------------------------------------------------------------------------
7 CFR part Marketing area
------------------------------------------------------------------------
1000.............................. General Provisions of Federal Milk
Marketing Orders.
1001.............................. New England.
1002.............................. New York-New Jersey.
1004.............................. Middle Atlantic.
1005.............................. Carolina.
1006.............................. Upper Florida.
1007.............................. Southeast.
1012.............................. Tampa Bay.
1013.............................. Southeastern Florida.
1030.............................. Chicago Regional.
1032.............................. Southern Illinois-Eastern Missouri.
1033.............................. Ohio Valley.
1036.............................. Eastern Ohio-Western Pennsylvania.
1040.............................. Southern Michigan.
1044.............................. Michigan Upper Peninsula.
1046.............................. Louisville-Lexington-Evansville.
1049.............................. Indiana.
1050.............................. Central Illinois.
1064.............................. Greater Kansas City.
1065.............................. Nebraska-Western Iowa.
1068.............................. Upper Midwest.
1076.............................. Eastern South Dakota.
1079.............................. Iowa.
1106.............................. Southwest Plains.
1124.............................. Pacific Northwest.
1126.............................. Texas.
1131.............................. Central Arizona.
1134.............................. Western Colorado.
1135.............................. Southwestern Idaho-Eastern Oregon.
1137.............................. Eastern Colorado.
1138.............................. New Mexico-West Texas.
1139.............................. Great Basin.
------------------------------------------------------------------------

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This proposed rule consolidates the current 31 Federal milk
marketing orders into 11 orders. This consolidation is proposed to
comply with the 1996 Farm Bill which mandates that the current Federal
milk orders be consolidated into between 10 to 14 orders by April 4,
1999. This proposed rule also sets forth two options for consideration
as a replacement for the Class I price structure and proposes replacing
the basic formula price with a multiple component pricing system. This
proposed rule also establishes a new Class IV which would include milk
used to produce nonfat dry milk, butter, and other dry milk powders;
reclassifies eggnog and cream cheese; and addresses other minor
classification changes. Part 1000 is proposed to be expanded to include
sections that are identical to all of the consolidated orders to assist
in simplifying and streamlining the orders.

DATES: Comments must be submitted on or before March 31, 1998.

ADDRESSES: Comments (two copies) should be submitted to Richard M.
McKee, Deputy Administrator, Dairy Programs, USDA/AMS, Room 2968, South
Building, P.O. Box 96456, Washington, DC 20090-6456. Comments also may
be sent by fax to (202) 690-3410. Additionally, comments may be
submitted via E-mail to: Milk__Order__Reform@usda.gov.
All comments should be identified with the docket number found in
brackets in the heading of this document. To facilitate the review
process, please state the particular topic(s) addressed, from the
following list, at the beginning of the comment: consolidation, basic
formula price, Class I price structure, other class prices,
classification, provisions applicable to all orders, regional issues
(please specify: Northeast, Southeast, Midwest, Western), and
miscellaneous and administrative. If comments submitted pertain to a
specific order, please identify such order.
Comments are also being requested on the Executive Order 12866
analysis, the Regulatory Flexibility Act analysis, and the Paperwork
Reduction Act analysis.
Additionally, comments may be sent via E-mail to:
Milk__Order__Reform@usda.gov.
All comments submitted in response to this proposal will be
available for public inspection at the USDA/AMS/Dairy Programs, Order
Formulation Branch, Room 2968, South Building, 14th and Independence
Ave., S.W., Washington, D.C., during normal business hours (7 CFR
1.27(b)). All persons wanting to view the comments are requested to
make an appointment in advance by calling Richard M. McKee at (202)
720-4392.

FOR FURTHER INFORMATION CONTACT: John F. Borovies, Branch Chief, USDA/
AMS/Dairy Programs, Order Formulation Branch, Room 2971, South
Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 720-6274.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Legislative and Background Requirements
Legislative Requirements
Background
Actions Completed
Public Interaction
Public Input
Executive Order 12988
Executive Order 12866
The Regulatory Flexibility Act and the Effects on Small
Businesses
Paperwork Reduction Act of 1995
Preliminary Statement
II. Discussion of Material Issues and Proposed Amendments to the
Orders
Consolidation of marketing areas
Basic formula price replacement and other class price issues
Class I price structure
Classification of milk and related issues
Provisions applicable to all orders
Regional Issues:
Northeast Region
Southeast Region
Midwest Region
Western Region
Miscellaneous and Administrative:
Consolidation of the marketing service, administrative expense,
and producer-settlement funds
Consolidation of the transportation credit balancing funds
Proposed general findings
III. Order Language
General provisions
Northeast order provisions
Appalachian order provisions
Florida order provisions
Southeast order provisions
Mideast order provisions
Upper Midwest order provisions
Central order provisions
Southwest order provisions
Arizona-Las Vegas order provisions
Western order provisions
Pacific Northwest order provisions
IV. Appendix
A: Summary of Preliminary Suggested Order Consolidation Report
B: Summary of Pricing Options
C: Summary of Classification Report
D: Summary of Identical Provisions Report
E: Summary of Basic Formula Price Report
F: Summary of Revised Preliminary Suggested Order Consolidation
Report

I. Legislative and Background Requirements

Legislative Requirements

Section 143 of the Federal Agriculture Improvement and Reform Act
of 1996. (Farm Bill), 7 U.S.C. 7253, requires that by April 4, 1999,\1\
the current Federal

[[Page 4803]]

milk marketing orders be consolidated into between 10 to 14 orders. The
Secretary of Agriculture (Secretary) is also directed to designate the
State of California as a Federal milk order if California dairy
producers petition for and approve such an order. In addition, the Farm
Bill provided that the Secretary may address related issues such as the
use of utilization rates and multiple basing points for the pricing of
fluid milk and the use of uniform multiple component pricing when
developing one or more basic prices for manufacturing milk. Besides
designating a date for completion of the required consolidation, the
Farm Bill further requires that no later than April 1, 1997, the
Secretary shall submit a report to Congress on the progress of the
Federal order reform process. The report must cover three areas: a
description of the progress made towards implementation, a review of
the Federal order system in light of the reforms required, and any
recommendations considered appropriate for further improvements and
reforms. This report was submitted to Congress on April 1, 1997.
Finally, the 1996 Farm Bill specifies that USDA use informal rulemaking
to implement these reforms.\2\
---------------------------------------------------------------------------

\1\ Section 143(b)(2) requires that a proposed rule be published
by April 4, 1998 and Section 143(b)(3) provides that ``in the event
that the Secretary is enjoined or otherwise restrained by a court
order from publishing or implementing the consolidation and related
reforms under subsection (a), the length of time for which that
injunction or other restraining order is effective shall be added to
the time limitations specified in paragraph (2) thereby extending
those time limitations by a period of time equal to the period of
time for which the injunction or other restraining order is
effective.''
\2\ Since this proceeding was initiated on May 2, 1996, the
Black Hills, South Dakota and the Tennessee Valley orders have been
terminated. Effective October 1, 1996, the operating provisions of
the Black Hills were terminated (61 FR 47038), and the remaining
administrative provisions were terminated effective December 31,
1996 (61 FR 67927). Effective October 1, 1997, the operating
provisions of the Tennessee Valley order were terminated (62 FR
47923). The remaining administrative provisions of the Tennessee
Valley order will be terminated before this consolidation process is
completed.
---------------------------------------------------------------------------

Background

The authorization of informal rulemaking to achieve the mandated
reforms of the Farm Bill has resulted in a rulemaking process that is
substantially different from the formal rulemaking process required to
promulgate or amend Federal orders. The formal rulemaking process
requires that decisions by USDA be based solely on the evidentiary
record of a public hearing held before an Administrative Law Judge.
Formal rulemaking involves the presentation of sworn testimony, the
cross-examination of witnesses, the filing of briefs, the issuance of a
recommended decision, the filing of exceptions, the issuance of a final
decision that is voted on by affected producers, and upon approval by
producers, the issuance of a final order.
The informal rulemaking process does not require these procedures.
Instead, informal rulemaking provides for the issuance of a proposed
rule by the Agricultural Marketing Service, a period of time for the
filing of comments by interested parties, and the issuance of a final
rule by the Secretary, which would become effective if approved by the
requisite number of producers in a referendum.
Full participation by interested parties is essential in the reform
of Federal milk orders. The issues are too important and complex for
this proposed rule to be developed without significant input from all
facets of the dairy industry. The experience, knowledge, and expertise
of the industry and public are integral to the development of the
proposed rule. To ensure maximum public input into the process while
still meeting the legislated deadline of April 4, 1999, USDA developed
a plan of action and projected time line. The plan of action developed
consists of three phases: developmental, rulemaking, and
implementation.
The first phase of the plan was the developmental phase. The use of
a developmental phase allowed USDA to interact freely with the public
to develop viable proposals that accomplish the Farm Bill mandates, as
well as related reforms. The USDA met with interested parties to
discuss the reform progress, assisted in developing ideas or provided
data and analysis on various possibilities, issued program
announcements, and requested public input on all aspects of the Federal
order program. The developmental phase began on April 4, 1996, and
concludes with the issuance of this proposed rule.
The second phase of the plan is the rulemaking phase. The
rulemaking phase begins with the issuance and publication of this
proposed rule. This proposed rule provides the public 60 days to submit
written comments on the proposal to USDA. These comments will be
reviewed and considered prior to the issuance of a final rule.
The third and final phase of the plan is the implementation phase.
The implementation phase will begin after the final rule is published
in the Federal Register. This phase will consist of informational
meetings conducted by Market Administrator personnel. The objective of
the informational meetings is to inform producers and handlers about
the newly consolidated orders and explain the projected effects on
producers and handlers in the new marketing order areas. After
informational meetings have been held, referendums will be conducted.
Upon approval of the consolidated orders and related reforms by the
required number of producers in each marketing area, a final order
implementing the new orders will be issued and published in the Federal
Register.
Although all of the issues regarding Federal milk order reform are
interrelated, USDA has established several committees to address
specific issues. The use of committees has allowed the reform process
to be divided into more manageable tasks. The committees will work
throughout the developmental and rulemaking phases. The committees that
have been established are: Price Structure, Basic Formula Price,
Identical Provisions, Classification, and Regional. The Regional
committee is divided into four sub-committees: Midwest, Northeast,
Southeast, and West. Committee membership consists of both field and
headquarters Dairy Programs personnel. The committees have been given
specific assignments related to their designated issue and have been
meeting since May 1996.
In addition to utilizing USDA personnel, partnerships have been
established with two university consortia to provide expert analyses on
the issues relating to price structure and basic formula price options.
Dr. Andrew Novakovic of Cornell University led the analysis on price
structure and published a staff paper entitled ``U.S. Dairy Sector
Simulator: A Spatially Disaggregated Model of the U.S. Dairy Industry''
and a research bulletin entitled ``An Economic and Mathematical
Description of the U.S. Dairy Sector Simulator''\3\ Dr. Ronald Knutson
of Texas A&M University led the analysis on basic formula price options
and published two working papers entitled ``An Economic Evaluation of
Basic Formula Price (BFP) Alternatives'' and ``The Modified Product
Value and Fresh Milk Base Price Formulas as BFP Alternatives.''\4\
---------------------------------------------------------------------------

\3\ Copies of this report may be obtained by contacting Ms.
Wendy Barrett, Cornell University, ARME, 348 Warren Hall, Ithaca, NY
14853-7801, (607) 255-1581.
\4\ Copies of these reports may be obtained by contacting Dr.
Ronald Knutson, Agricultural and Food Policy Center, Dept. of Ag.
Economics, Texas A&M University, College Station, TX 77843-2124,
(409) 845-5913.
---------------------------------------------------------------------------

Actions Completed

USDA has maintained continual contact with the industry regarding
the reform process. To begin, on May 2, 1996, the Agricultural
Marketing Service (AMS) Dairy Division issued a memorandum to
interested parties announcing the planned procedures for

[[Page 4804]]

implementing the Farm Bill.\5\ In this memorandum, all interested
parties were requested to submit ideas on reforming Federal milk
orders, specifically as to the consolidation and pricing structure of
orders. Input was requested by July 1, 1996.
---------------------------------------------------------------------------

\5\ Copies of this announcement and all subsequent announcements
and reports can be obtained from Dairy Programs at (202) 720-4392,
any Market Administrator office, or via the Internet at http://
www.ams.usda.gov/dairy/.
---------------------------------------------------------------------------

On June 24, 1996, USDA issued a press release announcing that a
public forum would be held in Madison, Wisconsin, on July 29, 1996. The
forum would address price discovery techniques for the value of milk
used in manufactured dairy products. Thirty-one Senators, Congressmen,
university professors, representatives of processor and producer
organizations, and dairy farmers made presentations at the forum.
On October 24, 1996, AMS Dairy Division issued a memorandum to
interested parties requesting input regarding all aspects of Federal
milk order reform and specifically as to its impact on small
businesses. USDA anticipates that the consolidation of Federal orders
will have an economic impact on handlers and producers affected by the
program, and USDA wants to ensure that, while accomplishing their
intended purpose, the newly consolidated Federal orders will not unduly
inhibit the ability of small businesses to compete.
On December 3, 1996, AMS Dairy Division issued a memorandum to
interested parties announcing the release of the preliminary report on
Federal milk order consolidation. The report recommends the
consolidation of the current 32 Federal milk orders into ten orders.
(See Appendix A for report summary.) The memorandum requested input
from all interested parties on the recommended consolidated orders and
on any other aspect of the milk marketing order program by February 10,
1997.
On March 7, 1997, AMS Dairy Division issued a memorandum to
interested parties announcing the release of three reports that
addressed the Class I price structure, the classification of milk, and
the identical provisions contained in a Federal milk order. The price
structure report consisted of a summary report and a technical report
and discussed several options for modifying the Class I price
structure. (See Appendix B for report summary.) The classification
report recommended the reclassification of certain dairy products,
including the removal of Class III-A pricing for nonfat dry milk. (See
Appendix C for report summary.) The identical provisions report
recommended simplifying, modifying, and eliminating unnecessary
differences in Federal order provisions. (See Appendix D for report
summary.) Comments on the contents of these reports, as well as on any
other aspect of the program, was requested from interested parties by
June 1, 1997.
On April 18, 1997, AMS Dairy Division issued a memorandum to
interested parties announcing the release of the preliminary report on
Alternatives to the Basic Formula Price (BFP). The report contained
suggestions, ideas, and initial findings for BFP alternatives. Over
eight categories of options were identified with four options
recommended for further review and discussion. (See Appendix E for
report summary.) The memorandum requested input from all interested
parties on a BFP alternative and on any other aspect of the milk
marketing order program by June 1, 1997.
On May 20, 1997, AMS Dairy Division issued a memorandum to
interested parties announcing the release of a revised preliminary
report on Federal milk order consolidation. The revisions were based on
the input received from interested parties in response to the initial
preliminary report on order consolidation. (See Appendix F for report
summary.) Instead of recommending 10 consolidated orders as in the
first report, the revised report recommended 11 consolidated orders and
suggested the inclusion of some currently unregulated territory. The
memorandum requested comments from all interested parties on the
recommended consolidated orders and on any other aspect of the milk
marketing order program by June 15, 1997.
To elicit further input on the role of the National Cheese Exchange
price in calculating the basic formula price, on January 29, 1997, the
Secretary sissued a press release announcing steps being taken by USDA
to address concerns raised by dairy producers about how milk prices are
calculated. In the press release, the Secretary requested further
comments from interested parties about the use of the National Cheese
Exchange in the determination of the basic formula price, which is the
minimum price that handlers must pay dairy farmers for milk used to
manufacture Class III products (butter and cheese) and the price used
to establish the Class I and Class II prices. These comments were
requested by March 31, 1997, and have been useful in analyzing
alternatives to the basic formula price in context of the order reform
process.

Public Interaction

As a result of these announcements and the forum, more than 1,600
individual comments have been received by USDA. In addition to the
individual comments, more than 3000 form letters have been received.
All comments were reviewed by USDA personnel and are available for
public inspection at USDA. To assist the public in accessing the
comments, USDA contracted to have the comments scanned and published on
a CD. The use of this technology has allowed interested parties
throughout the United States access to the information received by
USDA.
USDA also made all publications and requests for information
available on the Internet. A separate page under the Dairy Division
section of the AMS Homepage was established to provide information
about the reform process. To assist in transmitting correspondence to
USDA, a special electronic mail account--Milk__Order__Reform@usda.gov--
was opened to receive input on Federal milk order reforms.
USDA personnel met continually with interested parties from May
1996 through the issuance of this proposed rule to gather information
and ideas on the consolidation of Federal milk orders. During this time
period, USDA personnel addressed over 250 groups comprised of more than
22,000 individuals on various issues related to Federal order reform.
USDA personnel also conducted in-person briefings for both the
Senate and House Agricultural Committees on the progress of Federal
milk order reforms. Since May 1996, seven briefings were conducted for
the committees. The briefings advised the committees of the plan of
action for implementing the Farm Bill mandates; explained the
preliminary report on the consolidation of Federal milk orders;
explained the contents of the reports addressing Class I price
structure, classification of milk, identical provisions and basic
formula price; and discussed the congressional report.

Public Input

To ensure the involvement of all interested parties, particularly
small businesses as defined in the following Initial Regulatory
Flexibility Analysis, in the process of Federal order reform, three
primary methods of contact have been used: direct written notification,
publication of notices through various media forms, and speaking and
meeting with organizations and individuals regarding the issue of
Federal order

[[Page 4805]]

reforms. In addition, information has been made available to the public
via the Internet. USDA also made one written program announcement
specifically requesting information from small businesses.
All announcements made by USDA have been mailed to over 20,000
interested parties, State Governors, State Department of Agriculture
Secretaries or Commissioners, and the national and ten regional Small
Business Administration offices. In addition, most dairy producers
under the orders were notified through regular market service bulletins
published by Market Administrators on a monthly basis. Press releases
were issued by USDA for the May 2, 1996, December 3, 1996, January 29,
1997, March 7, 1997, and May 20, 1997, announcements, and for the July
31, 1996, public forum.\6\ These press releases were distributed to
approximately 33 wire services and trade publications and to each State
Department of Agriculture Communications Officer. These methods of
notification helped to ensure that virtually all identified small
businesses were contacted.
---------------------------------------------------------------------------

\6\ Copies of these press releases may be obtained from Dairy
Programs at (202) 720-4392, or via the Internet at http://
www.ams.usda.gov/news/newsrel.htm.
---------------------------------------------------------------------------

Departmental personnel, both in the field and from Washington,
actively met with interested parties to gather input and to clarify and
refine ideas already submitted. Formal presentations, round table
discussions, and individually scheduled meetings between industry
representatives and Departmental personnel were held. Over 250
organizations and more than 22,000 individuals were reached through
this method. Of these individuals, approximately 13,400 were identified
as small businesses.
As a result of the requests for information, publication of
informational reports, meetings with interested parties, and the
comments, AMS has prepared this proposed rule which contains proposals
addressing the following issues: the consolidation of marketing areas;
basic formula price replacement and other class price issues; Class I
price structure; classification of milk; provisions applicable to all
orders; regional issues relating to the Northeast, Southeast, Midwest,
and Western areas; and various other miscellaneous and administrative
issues. Each proposal is discussed in detail following this preliminary
statement that includes Executive Order 12988 and 12866 discussions,
the Regulatory Flexibility Analysis, and the Paperwork Reduction
Analysis.

Executive Order 12988

This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform. This rule is not intended to have a retroactive
effect. If adopted, this proposed rule will not preempt any state or
local laws, regulations, or policies, unless they present an
irreconcilable conflict with the rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the Secretary
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with law. A handler is afforded the opportunity for a hearing on the
petition. After a hearing, the Secretary would rule on the petition.
The Act provides that the district court of the United States in any
district in which the handler is an inhabitant, or has its principal
place of business, has jurisdiction in equity to review the Secretary's
ruling on the petition, provided a bill in equity is filed not later
than 20 days after the date of the entry of the ruling.

Executive Order 12866

The Department is issuing this proposed rule in conformance with
Executive Order 12866. This proposed rule has been determined to be
economically significant for the purposes of Executive Order 12866.
When proposing a regulation which is determined to be economically
significant, agencies are required, among other things, to: assess the
costs and benefits of available regulatory alternatives; base
regulatory decisions on the best reasonably-obtainable technical,
economic, and other information; avoid duplicative regulations; and
tailor regulations to impose the least burden on society consistent
with obtaining regulatory objectives. Therefore, to assist in
fulfilling the objectives of Executive Order 12866, the USDA prepared
an initial Regulatory Impact Analysis (RIA). Information contained in
the RIA pertaining to the costs and benefits of the revised regulatory
structure are summarized in the following analysis. Copies of the RIA
can be obtained from Dairy Programs at (202) 720-4392, any Market
Administrator office, or via the Internet at http://www.ams.usda.gov/
dairy.
This rule proposes the consolidation of the current 31 Federal milk
marketing order areas into 11 marketing order areas. The proposed
marketing areas are: Northeast, Mideast, Upper Midwest, Central,
Appalachian, Southeast, Florida, Southwest, Arizona-Las Vegas, Western,
and Pacific Northwest. The consolidated marketing areas consist
primarily of territory that is in the current Federal order markets. In
addition, they would include some previously unregulated territory. At
this time, California is not proposed as a Federal order. This
consolidation is proposed to comply with the 1996 Farm Bill that
mandates the current Federal milk order marketing areas be consolidated
into between 10 to 14 marketing areas by April 4, 1999. This proposed
rule also sets forth two options for consideration as a replacement for
the Class I price structure and proposes replacing the basic formula
price with a multiple component pricing system. These changes are
proposed to address concerns that the current system of pricing Class I
milk may not adequately reflect the value of Class I milk at various
locations or the value of milk used in manufacturing products. The 1996
Farm Bill identified these as related issues that may be addressed in
the consolidation of milk marketing orders. The proposed rule further
proposes changes to classification of milk by establishing a new Class
IV which would include milk used to produce nonfat dry milk, butter,
and other dry milk powders; the reclassification of eggnog and cream
cheese; and other minor changes. These proposed changes should improve
handler reporting and accounting procedures thereby providing for
greater market efficiencies. Finally, this proposed rule expands Part
1000 to include provisions that are identical within each consolidated
order to assist in simplifying the orders. These provisions include the
definitions of route disposition, plant, distributing plant, supply
plant, nonpool plant, handler, other source milk, fluid milk product,
fluid cream product, cooperative association, and commercial food
processing establishment. In addition, the milk classification section,
pricing provisions, and most of the provisions relating to payments
have been included in the General Provisions. These proposed changes
adhere with the efforts of the National Performance Review--Regulatory
Reform Initiative to simplify, modify,

[[Page 4806]]

and eliminate unnecessary repetition of regulations. Unique regional
issues or marketing conditions have been considered and included in
each market's order provisions. Not all of these changes would be
considered economically significant; however, changes dealing with
marketing area consolidation, the basic formula price, and the Class I
pricing structure may be significant and are described further in the
following sections.
Economic Impacts of Consolidation
It is impossible to determine the economic effects of the proposed
marketing area consolidation on handlers, producers and consumers
without using assumptions about the specific order provisions contained
in the consolidated order areas. The only effect consolidation, as a
single factor, can have on the various market participants is its
effect on the percentage of milk used in different classes within the
proposed consolidated orders. Without assumptions that include the
specific class prices and milk uses in different products, there are no
means of quantifying the economic effects of consolidation.
Handlers would be affected by class prices, which would be
determined by the Class I price surface option that is selected, and by
the minimum prices contained in all of the orders for milk used in
Classes II, III and IV. Handlers similarly located would be subject to
the same minimum Class I, Class II, Class III and Class IV prices for
milk. Such handlers would also be subject to the same minimum prices to
be paid to producers.
Dairy farmers would be affected by the proposed consolidation of
marketing areas because changes in utilization percentages would result
in changes in blend prices. As in the case of effects on handlers,
however, it is impossible to accurately determine a separate
consolidation effect on producers, defined in monetary terms. The
closest approximation to such an estimate would be the ``weighted
average utilization value'' (WAUV). These ``prices'' reflect only the
change in value that can be attributed to changes in utilization rates,
with no assumptions about changes in the levels of the various class
prices. Such estimates, of necessity, would reflect only anticipated
changes in blend prices, using class prices that would no longer be in
effect under the consolidated orders. To the extent that the WAUV
computations reflect some of the effect of the effect of consolidation
on producer prices, they are included in this analysis. It should be
noted, however, that all producers in any given current area would be
affected to an equal extent by the consolidation factor.
The following table shows the potential impact of three order
consolidation options on producers who supply each of the current
Federal milk marketing order areas via WAUV ``prices''. The three
consolidated options are (1) the consolidated marketing areas suggested
in the December 1996 initial Preliminary Report on Order Consolidation;
(2) the consolidated marketing areas suggested in the May 1997 Revised
Preliminary Report on Order Consolidation; and (3) the consolidated
marketing areas suggested in this proposed rule.

Weighted Average Utilization Values (WAUV)
[Based on October 1995 information]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Consolidated Market Marketing areas in Initial Marketing Areas in Revised Marketing Areas in Proposed
--------------------------------------------------------- Consol. Report (Dec. 96) Consol. Report (May 97) Rule (Option 3)
(Option 1) (Option 2) -------------------------------
---------------------------------------------------------------- Consol. Mkt. WAUV ($/cwt)
Consol. Mkt. WAUV ($/cwt) Consol. Mkt. WAUV ($/cwt) -------------------------------
----------------------------------------------------------------
Current Markets WAUV using WAUV using WAUV using WAUV using WAUV using WAUV using
Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt.
Utilization Utilization Utilization Utilization Utilization Utilization
($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Northeast............................................... .............. $13.46 .............. $13.48 .............. $13.47
New England (F.O. 1)................................ $13.50 13.48 $13.52 13.51 $13.52 13.49
NY-NJ (F.O. 2)...................................... 13.44 13.48 13.48 13.50 13.45 13.48
Middle Atlantic (F.O. 4)............................ 13.45 13.39 13.45 13.41 13.44 13.40
Appalachian............................................. .............. 14.13 .............. 13.96 .............. 13.97
Carolina (F.O. 5)................................... 14.23 14.21 14.23 14.19 14.23 14.20
Tenn. Valley (F.O. 11).............................. 13.92 13.95 13.92 13.93 13.92 13.94
Lville-Lex-Evan (F.O. 46)........................... n/a n/a 13.35 13.39 13.35 13.40
Florida................................................. .............. 15.05 .............. 15.05 .............. 15.05
Upper Florida (F.O. 6).............................. 14.67 14.78 14.67 14.78 14.67 14.78
Tampa Bay (F.O. 12)................................. 15.09 15.04 15.09 15.04 15.09 1504
SE Florida (F.O. 13)................................ 15.42 15.31 15.42 15.31 15.42 15.31
Southeast............................................... .............. 14.26 .............. 14.25 .............. 14.24
Southeast (F.O. 7).................................. 14.26 14.26 14.25 14.25 14.24 14.27
Mideast................................................. .............. 12.96 .............. 12.94 .............. 12.92
Ohio Valley (F.O. 33)............................... 12.99 13.02 12.99 13.01 12.99 13.00
E. Ohio-W. PA (F.O. 36)............................. 13.07 13.00 13.10 12.99 13.07 12.97
S. Michigan (F.O. 40)............................... 12.75 12.86 12.75 12.84 12.75 12.83
MI Upper Penin. (F.O. 44)........................... 12.81 12.62 12.81 12.62 12.81 12.61
Lville-Lex-Evan (F.O. 46)........................... 13.35 13.06 n/a n/a n/a n/a
Indiana (F.O. 49)................................... 12.97 12.94 12.97 12.93 12.97 12.92
Upper Midwest........................................... .............. 12.60 .............. 12.62 .............. 12.60
Chicago Reg. (F.O. 30).............................. 12.62 12.62 12.62 12.61 12.62 12.62
MI Upper Penin. (F.O. 44)........................... R R R R R R
Neb.-W. Iowa (F.O. 65).............................. n/a n/a 12.63 12.74 n/a n/a
Upper Midwest (F.O. 68)............................. 12.55 12.56 12.55 12.54 12.55 12.56
E. South Dakota (F.O. 76)........................... n/a n/a 12.81 12.65 n/a n/a
Iowa (F.O. 79)...................................... n/a n/a 12.69 12.67 n/a n/a

[[Page 4807]]

Central................................................. .............. 13.16 .............. 13.21 .............. 12.95
S. IL-E. MO (F.O. 32)............................... 12.93 12.90 13.00 12.95 13.00 12.88
Central IL (F.O. 50)................................ 13.03 12.74 13.03 12.78 13.03 12.72
Greater K. City (F.O. 64)........................... 13.22 12.90 13.22 12.95 13.22 12.88
Neb.-W. Iowa (F.O. 65).............................. 12.63 12.81 n/a n/a 12.63 12.79
E. South Dakota (F.O. 76)........................... 12.81 12.68 n/a n/a 12.81 12.67
Iowa (F.O. 79)...................................... 12.71 12.71 n/a n/a 12.71 12.70
SW Plains (F.O. 106)................................ 13.31 13.33 13.31 13.41 13.08 13.29
E. Colorado (F.O. 137).............................. 13.27 13.31 13.27 13.38 13.27 13.27
Southwest............................................... .............. 13.36 .............. 13.39 .............. 13.39
Texas (F.O. 126).................................... 13.49 13.48 13.49 13.46 13.49 13.46
Central AZ (F.O. 131)............................... 13.26 13.17 n/a n/a n/a n/a
NM-W. Texas (F.O. 138).............................. 13.00 13.09 13.00 13.07 13.00 13.07
Arizona-Las Vegas....................................... .............. n/a .............. 13.26 .............. 13.26
Central AZ (F.O. 131)............................... n/a n/a 13.26 13.29 13.26 13.29
Western................................................. .............. 12.79 .............. 12.78 .............. 12.78
W. Colorado (F.O. 134).............................. 13.41 12.84 13.41 12.82 13.41 12.82
SW ID-E. OR (F.O. 135).............................. 12.63 12.68 12.63 12.68 12.63 12.68
Great Basin (F.O. 139).............................. 12.83 12.81 12.81 12.79 12.81 12.79
Pacific Northwest....................................... .............. 12.45 .............. 12.44 .............. 12.44
Pacific NW (F.O. 124)............................... 12.45 12.45 12.44 12.44 12.44 12.44
--------------------------------------------------------------------------------------------------------------------------------------------------------
n/a: Not applicable
R: Restricted

\7\ The Basic Formula Price Committee was established in May
1996 to consider replacements for the basic formula price during the
Federal order reform process. This committee and others established
are described further in the ``Background'' portion of this proposed
rule.
---------------------------------------------------------------------------

Descriptions of the two Committees' analyses, and results of their
work are included in ``A Preliminary Report on Alternatives to the
Basic Formula Price,'' published in April 1997 by the Basic Formula
Price Committee, Dairy Division, AMS; \8\ and the following reports
from the Agricultural and Food Policy Center, Texas A&M University
System:
---------------------------------------------------------------------------

\8\ Copies of this report can be obtained from Dairy Programs at
(202) 720-4392, any Market Administrator office, or via the Internet
at http://www.ams.usda.gov/dairy/.
---------------------------------------------------------------------------

``An Economic Evaluation of Basic Formula Price (BFP)
Alternatives,'' AFPC Working Paper 97-2, June 1997.
``Evaluation of Final Four Basic Formula Price Options,'' AFPC
Working Paper 97-9, August 1997.\9\
---------------------------------------------------------------------------

\9\ Copies of these reports may be obtained by contacting Dr.
Ronald Knutson, Agricultural and Food Policy Center, Dept. of Ag.
Economics, Texas A&M University, College Station, TX 77843-2124, or
(409) 845-5913.
---------------------------------------------------------------------------

The primary criterion used by the BFP Committee was that any
replacement BFP option reflect the supply of and demand for milk used
in manufactured dairy products. At the same time, one of the USC's
critical criteria for a replacement BFP was that it reliably reflect
market conditions for all manufactured products.
In trying to determine the most appropriate replacement for the
current BFP, which uses a survey of prices paid by manufacturing plants
for non-Grade A milk updated by a product price

[[Page 4808]]

formula, the goal of both groups was a market-based alternative. The
BFP Committee measured the extent to which each pricing option met its
primary goal by tracking the options against the current BFP for a
period of prior months.\10\ The USC Committee used an econometric
procedure to test the ability of the alternatives they considered to
reflect supply and demand.
---------------------------------------------------------------------------

\10\ It was assumed that the current BFP successfully reflects
the supply and demand for milk used in manufactured products.
---------------------------------------------------------------------------

To the extent the goal of identifying a BFP that reflects the value
of milk used in manufactured products is capable of attainment, all
market participants--handlers, producers, and consumers--would be
affected by the BFP replacement in the same manner as if they were
operating in a free market, with no external impacts caused by
regulation. Consumers can be assured that the prices generally charged
for dairy products are prices that reflect, as closely as possible, the
forces of supply and demand in the market.
Of the options considered and analyzed, both groups studying the
issue determined that the option of pricing components of milk
according to their value in manufactured products, as reflected by the
sales prices of those products, best approximates the intersection of
supply and demand for milk used in manufactured dairy products.
Economic Impact of Multiple Component Pricing Provisions
Seven of the 11 proposed orders provide for milk to be paid for on
the basis of its components (multiple component pricing, or MCP). Five
of the 7 MCP orders also provide for milk values to be adjusted
according to the somatic cell count of producer milk. The equipment
needed for testing milk for its component content can be very expensive
to purchase, and requires highly-skilled personnel to maintain and
operate. The cost of infra-red analyzers ranges from just under
$100,000 to $200,000. The infra-red machines that are used by most
laboratories will test for total solids and somatic cells at the same
time the butterfat and protein tests are done.
Some additional information is necessary from handlers on their
monthly reports of receipts and utilization to assure that producers
are paid correctly. In particular, handlers would be required to report
pounds of protein, pounds of other solids, and, in 5 of the orders,
somatic cell information. This data would be required from each handler
for all producer receipts, including milk diverted by the handler,
receipts from cooperatives as handlers pursuant to Sec. 1000.9(c), and,
in some cases, receipts of bulk milk received by transfer or diversion.
Since producers would be receiving payments based on the component
levels of their milk, the payroll reports that handlers supply to
producers must reflect the basis for such payment. Therefore, the
handler would be required to supply the producer not only with the
information currently supplied, but also: (a) the pounds of butterfat,
the pounds of protein, and the pounds of other solids contained in the
producer's milk, as well as the producer's average somatic cell count;
and (b) the minimum rates that are required for payment for each
pricing factor and, if a different rate is paid, the effective rate
also. It should be noted that handlers already are required to report
information relative to pounds of production, butterfat, and rates of
payment for butterfat and hundredweight of milk.
Of over 74,000 producers whose milk was pooled in December 1996
under 23 orders that would be part of consolidated orders providing for
multiple component pricing, the milk of 52,500 of these producers was
pooled under 13 orders that currently have MCP. Handlers in these
markets already have incurred the initial costs of testing milk for its
component content and have already made the needed transition to
reporting the additional information required for component pricing of
milk.
Of the remaining 21,750 producers who would be affected by MCP
provisions under a Federal order, the milk of approximately 13,000 of
these producers currently is received by handlers who test or have the
capability of testing for multiple components and, in many cases,
somatic cells. Many of these handlers also report component results to
the producers with their payments. Almost all of the producers whose
milk currently is not being tested or paid for on the basis of
components are located in the New England and New York-New Jersey
marketing areas, which would be consolidated with the Middle Atlantic
area into the proposed Northeast order.
Accommodation has been made to ameliorate handlers' expenses of
testing producer milk for component content. As component pricing plans
have been adopted under a number of the present Federal milk orders
since 1988, the component testing needed to implement these pricing
plans has been performed by the market administrators responsible for
the administration of the orders involved for handlers who are not
equipped to make all of the determinations required under the amended
orders. This policy would continue under this proposed rule. Thus,
handlers who are unable to obtain the equipment and personnel needed to
accomplish the required testing for component pricing would be able to
rely on the market administrators to verify or establish the tests
under which producers are paid.
Economic Impacts of Class I Price Changes
Several different options were considered for pricing fluid or
Class I milk. These pricing options included using a market-driven
basic formula price plus differentials based on location, differentials
based on the ratio of milk used for fluid purposes compared to all
other uses, flat differentials, flat differentials modified in high
Class I use areas, and differentials based on the demand for fluid milk
within a designated marketing area and the associated transportation
costs. Other options considered would have decoupled Class I pricing
from the basic formula price or pooled Class I differentials only
(i.e., eliminated the basic formula price entirely). Finally,
suggestions were considered to base Class I pricing on the cost of
production and to base differentials on only regional supply and demand
conditions. After analyzing these options and more than 1400 letters
that were submitted from interested persons, the Department narrowed
the pricing options to four and conducted extensive quantitative and
qualitative analysis on them. The four options selected include
location-specific differentials, relative value-specific differentials,
and decoupled Class I prices with adjustors. Although four Class I
price structure options are analyzed in the RIA, only two options are
considered as viable replacements for the current Class I price
structure in the proposed rule. However, comments are requested on all
options prior to determining which option should be adopted.
Three of the four pricing options in the RIA assume that milk would
be classified in the four classes of use detailed in the proposed rule.
One option in the RIA has only two classes of milk and thus is not
detailed in the proposed rule. For purposes of the RIA analysis, Class
IV milk is priced using the proposed butter-nonfat dry milk product
formula, but since the product prices proposed for use in the formula
are not presently available, the Chicago Mercantile Exchange spot price
for

[[Page 4809]]

butter and the average nonfat dry milk wholesale price reported by
USDA's Dairy Market News for the Western States are substituted. Also,
Class III milk is priced using the proposed cheese product formula, and
the Class II milk price for the month is equal to the Class IV price
for the month plus 70 cents per hundredweight (cwt).
The initial RIA assesses costs and benefits for dairy farmers,
fluid milk processors, dairy product manufacturers, and consumers. The
impact of each of the four Class I pricing options is measured as a
change from a baseline. The model baseline was adapted from the USDA
dairy baseline estimate published as part of the President's Budget for
Fiscal Year 1998.\11\ That baseline, which is a national annual
projection of the supply-demand-price situation for milk and dairy
products, was the basis for the market-by-market baseline of the model.
Both the President's Budget Baseline and the model baseline assume the
same program assumptions: namely, that the price support program will
be phased out by December 31, 1999, that the Dairy Export Incentive
Program will continued to be utilized, and that the Federal Milk Order
Program will be continued at the same level of class prices currently
in existence. Assumptions also are made concerning the cost of
production--especially feed, the commercial utilization of milk and
dairy products, commercial inventories, and imports. All parameters,
except those associated with the changes in the Federal Milk Order
Program, are assumed to remain unchanged.
---------------------------------------------------------------------------

\11\ See Agricultural Baseline Projections to 2005, Reflecting
the 1996 Farm Act, Interagency Agricultural Projections Committee,
U.S. Department of Agriculture, Office of the Chief Economist, World
Agricultural Outlook Board, Staff Report, WAOB-97-1 and ``Budget of
the United States Government, Fiscal Year 1998.''
---------------------------------------------------------------------------

To evaluate the impacts on dairy farmers, fluid milk processors,
and dairy product manufacturers of the four selected Class I pricing
options, a baseline estimate was constructed assuming that the current
32 orders \12\ would continue through the study period, 1999-2004. To
make comparisons, proposed pricing points for the proposed 11
consolidated orders were identified to correspond with the base pricing
zones of the 32 current marketing orders. For example, for the
consolidated Appalachian Region order, which would have the city of
Charlotte as its base pricing point, prices also were identified for
Knoxville and Louisville. These 3 pricing points correspond with the
base pricing points of the 3 markets that are to be combined into the
Appalachian regional order.
---------------------------------------------------------------------------

\12\ The following analyses were completed prior to the
termination of the Tennessee Valley marketing order and thus the
results identify it as a pricing point. Most of the plants and milk
of the former Tennessee Valley market have become regulated under
either the Southeast order or the Carolina order.
---------------------------------------------------------------------------

Location-Specific Differentials (Option 1A) Analysis
This option would establish a nationally coordinated system of
location-specific Class I price differentials reflecting the relative
economic value of milk by location. An important feature of the option
is that it would also include location adjustments that geographically
align minimum Class I milk prices paid by fluid milk processors
nationwide regardless of defined milk marketing area boundaries or
order pooling provisions. It is based on the economic efficiency
rationale presented in Cornell University research on the U.S. dairy
sector.\13\ A basic premise of this option is that the value of milk
varies according to location across the United States. The concepts of
spatial price value and relative price relationships together with
marketing data and expert knowledge of local conditions and marketing
practices and a review of supply and demand conditions are used to
develop a national Class I price structure.
---------------------------------------------------------------------------

\13\ Bishop, Phillip, James Pratt, Eric Erba, Andrew Novakovic,
and Mark Stephenson, An Economic and Mathematical Description of the
U.S. Dairy Sector Simulator, Research Bulletin 97-09, A Publication
of the Cornell Program on Dairy Markets and Policy, Department of
Agricultural, Resource, and Managerial Economics, Cornell
University, July 1997.
---------------------------------------------------------------------------

Overall, the magnitude of changes in price and income under this
option compared to the baseline are small. The all-milk price for all
Federal order markets combined during the 1999-2004 period is estimated
to average 5 cents per cwt higher. For all of the U.S. the all-milk
price is estimated to average 3 cents higher. The average all-milk
price at the basing point of 18 current markets could experience
increases of 1 to 29 cents per cwt. At the basing point of the 13
markets, the average all-milk price could decrease from 3 to 83 cents
per cwt.
The 5 markets with the greatest increases in all-milk prices were
Eastern Colorado ($0.29), New York-New Jersey ($0.28), Tampa Bay
($0.26), Southwest Plains ($0.25), and Upper Florida ($0.24). The
market with the greatest reduction in price was Western Colorado
(-$0.83), Central Illinois (-$0.66), Greater Kansas City (-$0.53),
Eastern South Dakota (-$0.51), and Southern Illinois-Eastern Missouri
(-$0.34). The annual average all-milk price in the previously-
unregulated areas of New York and New England declined $0.87 per cwt.
Changes in gross cash receipts, as expected, moved in the same
direction as the change in the all-milk price in a given market. Over
the period 1999-2004, location-specific differentials raised gross
receipts in 18 markets. It appears that the estimated average annual
receipts for producers in the current New York-New Jersey market
increased by $37.2 million. However, most of this increase was the
result of adding to the all-milk price the current $0.15 reduction on
all milk marketings for transportation. It is expected that this
apparent increase in the all-milk price and dairy farmer income would
be offset by a like amount by increased transportation costs paid by
the producer. The markets with the greatest estimated increase in gross
receipts for milk marketing were Southwest Plains ($11.8 million),
Chicago Regional ($10.9 million), Southern Michigan ($10.7 million),
New England ($7.4 million), and Eastern Colorado ($7.2 million). Gross
receipts in the current Chicago Regional and Upper Midwest markets may
have been expected to increase more since this option increased the
Class I differentials at those points substantially. However, this
option also envisions the expansion of transportation credits within
the merged order to move milk which is expected to use 20 percent of
the dollars generated by the higher Class I differentials. Over-order
charges which currently fund transportation credits are expected to be
reduced by a like amount.
The largest estimated decreases in cash receipts occur in the
Southern Illinois-Eastern Missouri (-$8.5 million), Great Basin (-$4.1
million), Middle Atlantic (-$2.9 million), Texas (-$2.5 million), and
Greater Kansas City (-$2.5 million) markets. Nine other current markets
would lose average annual gross cash receipts during the period 1999-
2004 of less than $2.0 million each. The previously unregulated areas
of New York and New England would lose an estimated average of $16.9
million in annual gross receipts from milk marketings. Under location-
specific differentials the estimated average annual gross receipts for
all Federal order markets combined increased by $68.1 million and the
entire US increased $53.1 million compared to the baseline for the
1999-2004 period.
Fluid processors in 21 of the 32 Federal order market areas face
increased Class I differentials if this

[[Page 4810]]

option were adopted compared with Class I differentials under the
baseline. Fluid processors in four of the Federal order markets and in
the previously-unregulated areas of New York and New England would see
no changes in Class I differentials. Fluid processors in the remaining
seven Federal order markets would see decreases in Class I
differentials compared with the baseline. The increases in
differentials ranged from $0.01 per cwt in the New England and New
York-New Jersey markets to $0.50 per cwt in the Upper Midwest.
Decreases in Class I differentials would range from $0.03 per cwt in
the Middle Atlantic to $0.25 per cwt in New Mexico-West Texas. Those
fluid processors facing higher Class I differentials would see their
monthly obligations to the markets' producer-settlement funds increase
while those facing lower Class I differentials would see their
obligations decrease.
With virtually no change in the amount of milk available for
manufacturing, manufacturers of dairy products would face nearly the
same supply and demand conditions that they now face when buying milk
or selling dairy products. Manufacturers in the Southwest, where milk
marketings are expected to decline, may have less milk to process while
manufacturers in the Upper Midwest may find that they have slightly
more milk for manufacturing.
Relative Value-Specific Differentials (Option 1B) Analysis
Like a location-specific differential structure, a relative value-
specific differential structure would also establish a nationally
coordinated system of Class I price differentials and adjustments that
recognizes several low pricing areas. Option 1B relies on a least cost
optimal solution from the USDSS model to develop a Class I price
structure that is based on the most efficient assembly and shipment of
milk and dairy products to meet all market demands for milk and its
products. Option 1B relies more on the market and the negotiating
ability of processors and producers to generate higher prices when
needed to provide the necessary incentive to move milk in order to
satisfy demand.
Three methods of phasing into the Class I differentials under
Option 1B were evaluated. First, a 20-percent gradual phase-in was
analyzed; then, a transitional phase-in that would offset any lost
revenue was analyzed; and finally, a revenue-enhancement phase-in that
would add additional revenue into the Class I price structure was
analyzed.
Phase-in Method 1
With the gradual phase-in, the estimated all-milk price for all
Federal order markets combined during the 1999-2004 period could
average 8 cents per cwt lower than the baseline. The estimated average
all-milk price at the basing point of 11 Federal order markets could
increase from 1 to 32 cents per cwt. At the basing point of the other
21 Federal order markets, the all-milk price is estimated to decrease
from 1 to 58 cents per cwt.
The 5 markets with the greatest estimated increases in average all-
milk prices, for the 1999-2004 period are: New Mexico-West Texas
($0.32), Chicago Regional ($0.19), Tampa Bay ($0.19), Nebraska-Western
Iowa ($0.17), and Southwest Idaho-Eastern Oregon ($0.15). The 5 Federal
order markets with the greatest estimated reductions in price are:
Eastern South Dakota (-$0.58), Michigan Upper Peninsula (-$0.55),
Western Colorado (-$0.55), Greater Kansas City (-$0.53), and Carolina
(-$0.46). The annual average all-milk price in the previously
unregulated areas of New York and the New England states is estimated
to decline by $0.96 per cwt compared to the baseline.
Over the period 1999-2004, 1B differentials could lower producer
gross cash receipts from minimum order prices in 21 of the Federal
order markets. The five current markets that would have the greatest
decreases were: Texas (-$36.8 million), Middle Atlantic (-$26.2
million), Upper Midwest (-$15.9 million), Carolina (-$15.2 million),
and Southeast (-$12.5 million). The annual average reduction in
estimated gross receipts in the previously unregulated areas of New
York and the New England states is estimated at $18.5 million from the
baseline. Estimated gross receipts increased in 11 markets. The five
markets that would have the greatest increases in gross receipts were:
Chicago Regional ($31.5 million), New Mexico-West Texas ($9.1 million),
Southern Michigan ($6.6 million), Southwestern Idaho-Eastern Oregon
($5.8 million), and New York-New Jersey ($5.3 million).
Phase-in Method 2
A possible modification to the relative value-specific
differentials would be to initially raise Class I differentials by 55
cents per cwt above the level called for in the first year of
transition. During the second year, Class I differentials would be set
at 35 cents above the transition level; the third year, 20 cents above;
and the fourth year, 10 cents above the called-for transition
differentials. At the beginning of the fifth year, Class I
differentials would be fully phased in and no assistance provided.
Under this phase-in method, the estimated all-milk price for all
Federal order markets combined during the 1999-2004 period could
average 4 cents per cwt lower than the baseline. The estimated average
all-milk price at the basing point of 12 Federal order markets could
increase from 3 to 36 cents per cwt. At the basing point of 20 Federal
order markets, the all-milk price is estimated to decrease from 2 to 53
cents per cwt from the baseline.
The five markets with the greatest estimated increases in average
all-milk prices, per cwt, for the 1999-2004 period are: New Mexico-West
Texas ($0.36), Tampa Bay ($0.32), Nebraska-Western Iowa ($0.22), Upper
Florida ($0.20), and Chicago Regional ($0.23). The five markets with
the greatest estimated reductions in price are: Eastern South Dakota
(-$0.53), Western Colorado (-$0.52), Michigan Upper Peninsula (-$0.49),
Greater Kansas City (-$0.48), and Texas (-$0.34). The annual average
all-milk price in the previously unregulated areas of New York and the
New England states is estimated to decline by $0.93 per cwt compared to
the baseline.
Over the period 1999-2004, this phase-in option would lower
estimated producer gross cash receipts attributable to minimum order
prices in 19 of the Federal order markets. The 5 markets with the
greatest estimated decreases were Texas (-$32.6 million), Middle
Atlantic (-$22.8 million), Upper Midwest (-$13.9 million), Carolina
(-$10.7 million), and Arizona-Las Vegas (-$7.6 million). The annual
average reduction in estimated gross receipts in the previously
unregulated areas of New York and the New England states is $17.8
million lower than the baseline. Gross receipts from milk marketings
could increase in the following markets: Chicago Regional ($34.4
million), New York-New Jersey ($11.7 million), Southern Michigan ($10.4
million), New Mexico-West Texas ($10.4 million), and Tampa Bay ($7.0
million). Total estimated cash receipts for the combined current
Federal orders would average $40 million less for the 6-year period.
Phase-in Method 3
Another phase-in option would enhance prices during the transition
period by $1.10 for first year phase-in differentials, $0.70 in the
second year, $.40 in the third year, and $.20 in the fourth year. The
additional price enhancement provided to dairy farmers

[[Page 4811]]

under this method is intended to help producers make the necessary
investments and other changes to compete in a more market-oriented
economy. At the beginning of the fifth year, Class I differentials
would be fully phased in at the Option 1B levels.
With the use of additional revenue under this phase-in option, the
estimated all-milk price for all Federal order markets combined during
the 1999-2004 period could be expected to be unchanged from the
baseline. The estimated average all-milk price at the basing point of
15 Federal order markets would increase from 1 to 43 cents per cwt. At
the basing point of the other 17 Federal order markets, the all-milk
price is estimated to decrease from 3 to 52 cents per cwt.
The five markets with the greatest estimated increases in average
all-milk prices, per cwt, for the 1999-2004 period were: Tampa Bay
($0.43) New Mexico-West Texas ($0.41), Upper Florida ($0.32), Nebraska-
Western Iowa ($0.26), and South Eastern Florida ($0.26). The five
markets with the greatest estimated reductions in price were: Western
Colorado (-$0.52), Eastern South Dakota (-$0.49), Greater Kansas City
(-$0.44), Michigan Upper Peninsula (-$0.43), and Texas (-$0.33). The
annual average all-milk price in the previously unregulated areas of
New York and the New England states is estimated to decline by $0.88
per cwt compared to the baseline. Total estimated cash receipts for the
combined current Federal order markets would average $34.9 million
higher for the 6-year period.
Over the period 1999-2004, this phase-in option could lower
estimated producer gross cash receipts from milk marketings in 16 of
the current markets. The five current markets with the greatest
decreases were: Texas (-$28.2 million), Middle Atlantic (-$19.0
million), Upper Midwest (-$14.6 million), Carolina (-$6.5 million) and
Arizona-Las Vegas (-$6.0 million). The annual average reduction in
estimated gross receipts in the previously unregulated areas of New
York and the New England states is estimated at $16.9 million from the
baseline. Gross receipts from milk marketings increased in 16 markets.
The five markets that would have the greatest increases were: Chicago
Regional ($33.5 million), New York-New Jersey ($19.0 million), Southern
Michigan ($14.4 million), New Mexico-West Texas ($11.7 million), and
Tampa Bay ($9.8 million).
Decoupled Baseline Class I Price with Adjustors (Option 5) Analysis
A third option analyzed in the RIA would retain the current Class I
differentials, but floor Class I prices in all markets at their 1996
average levels. Adjustments to this price would be made based on
changes in fluid use rates and short term costs of production (i.e.,
feed costs). Under this option, the all-milk price for all Federal
order markets combined would increase $0.07 per cwt and the U.S. is
projected to increase $0.03 per cwt over the 6-year period. In 19 of
the Federal order markets, the average all-milk price would be higher
by $0.01 to $0.50 per cwt. In 12 Federal order markets, the average
all-milk price would decrease from $0.03 to $0.82 per cwt.
Flooring the Class I prices at the average 1996 levels would result
in higher Class I prices in all markets in 1999 and 2000 and higher
all-milk prices in most markets when compared to the baseline. These
increased incentives for milk production would result in greater
volumes of milk for manufacturing and lower manufacturing prices.
Location-Specific Differentials (Option 6) Analysis
This option would establish minimum prices for milk used in Class I
by adding market-specific Class I differentials to the proposed Class
II price. Class II would contain all manufactured products and would be
priced by a cheese product price formula using the National
Agricultural Statistical Service surveyed 40-pound cheddar cheese price
times 9.87 plus the Chicago Mercantile Exchange Grade A butter price
times 0.238 less $1.80. The Class I differentials in this option would
be phased in over a five-year period.
In general, the Class I differentials in the central section of the
country would be reduced while those in the Northwest, New England and
Florida are increased. After the proposed price surface is fully phased
in, 20 markets would have Class I differentials that are reduced and 10
markets would have increases.
Under this option, the all-milk price for all Federal order markets
combined would decline $0.10 per cwt over the six year period. In 23 of
the Federal order markets, the average all-milk price would decline by
less than $0.01 to $0.95 per cwt. In 9 orders, the all-milk price would
increase $0.02 to $0.19 per cwt.
Gross cash receipts from milk marketings in the combined Federal
orders would average $148.8 million less than the baseline for the 6-
year period. Cash receipts would be lower in 23 markets and higher in 9
markets. Because of this decline in cash receipts and since it is
inconsistent with the four-class system contained in the proposed rule,
this Class I price option is not detailed in the Class I price
structure section of the proposed rule. This two-class pricing system
was found to be insufficient to recognize the different use-values of
milk for reasons set forth in the Basic Formula Replacement and
Classification portions of this proposed rule.
Other Impacts of Pricing Options
The potential impacts of the options analyzed in the initial RIA on
retail prices, and thus consumers, is less certain than the impacts on
other sectors of the dairy industry. In general, changes in farm milk
prices and wholesale prices are passed onto consumers. However, the
timing and the degree of these pass-throughs is uncertain. It is
assumed that all changes in farm milk prices (fluid processor costs)
and the wholesale costs of manufactured products would be passed on to
the retail level without any changes in the farm-processor-retail or
farm-wholesale-retail margins.
Because of the bulky and perishable nature of packaged fluid milk,
all international trading of dairy products, with the exception of
limited exports of fluid milk to Mexico, is in manufactured products.
An appendix table in the initial RIA details USDA's baseline estimates
of international and domestic prices for butter and nonfat dry milk.
Neither location-specific differentials nor relative value-specific
differentials are expected to have a significant impact on domestic,
wholesale dairy product prices and therefore little effect on
international trade of manufactured dairy products.
Economic Impacts of Classification Changes
The classification of milk recommendations should not have a
significant economic impact on any dairy industry participants. This
proposed rule provides uniform milk classification provisions for the
newly consolidated milk orders. The recommendations should improve
reporting and accounting procedures for handlers and provide for
greater market efficiencies.
Most of the changes regarding milk classification provisions
proposed for the newly consolidated orders would simplify order
language and remove obsolete language.

[[Page 4812]]

This proposed rule contains a modified fluid milk product
definition and recommends that certain products be reclassified. The
revised fluid milk product definition proposed for the new orders
should provide more consistency in determining the classification of
products. The inclusion of eggnog to the list of fluid milk products
and the reclassification of cream cheese from Class III to Class II
will cause a nominal increase in the cost of the finished product.
However, these changes, which will be applicable to all handlers
regulated under the new orders, should not have a significant impact on
the retail price of these products. Although producers will benefit
from these products being reclassified into higher utilization classes,
the impact of the product classification changes on the blend price to
producers will be marginal.
Another modification includes the reclassification of butter and
whole milk powder from Class III to Class IV. This change merely places
these market-clearing products in the new Class IV with nonfat dry
milk. The change promotes market efficiency and should have a minimal
impact on producers' blend prices.
One recommendation with possible economic implications concerns the
treatment of milk used to produce bulk sweetened condensed milk/skim
milk. Some commenters argued that the wide price difference that
sometimes exists between the Class II price and the Class III-A price
has put manufacturers of sweetened condensed milk at a competitive
disadvantage with manufacturers of nonfat dry milk, which can be
substituted for bulk sweetened condensed milk and skim milk in some
higher-valued products.
Although this proposed rule does not recommend a reclassification
for milk used in bulk sweetened condensed milk, it does propose a
change in the relationship between the Class II and IV prices which
should eliminate the price disparity that now, at times, exists. As
discussed in the ``Class III and Class III-A (i.e., Class IV) Milk''
section of this proposed rule, the proposed new Class II price will be
equal to the Class IV price plus a 70-cent differential. The coupling
of the Class II and Class IV prices will largely remove the incentive
to substitute nonfat dry milk for bulk sweetened condensed milk.
The recommendations regarding shrinkage provisions should provide
equity among handlers, improve market efficiencies, and facilitate
accounting procedures. This proposed rule provides that shrinkage be
assigned pro rata based on a handler's utilization. As discussed in the
``Shrinkage and Overage'' section of this proposed rule, this
modification should result in a slight increase (i.e., one cent per
cwt.) in the blend price paid to producers.
For the reasons stated above, the milk classification provisions
proposed herein should have little economic impact on dairy industry
participants.

The Regulatory Flexibility Act and the Effects on Small Businesses

Pursuant to the requirements set forth in the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601 et seq.), the Agricultural
Marketing Service (AMS) has considered the economic impact of the
proposed rule on small entities and has prepared this initial
regulatory flexibility analysis. The RFA provides that when preparing
such analysis an agency shall address: the reasons, objectives, and
legal basis for the proposed rule; the kind and number of small
entities which would be affected; the projected recordkeeping,
reporting, and other requirements; and federal rules which may
duplicate, overlap, or conflict with the proposed rule. Finally, any
significant alternatives to the proposal should be addressed. This
initial regulatory flexibility analysis considers these points and the
impact of this proposed regulation on small entities, and evaluates
alternatives that would accomplish the objectives of the rule without
unduly burdening small entities or erecting barriers that would
restrict their ability to compete in the dairy industry.
This regulatory action is being considered in accordance with
Section 143 of the Federal Agriculture Improvement and Reform Act of
1996, 7 U.S.C. 7253, (the Farm Bill) which requires the Secretary of
Agriculture (Secretary) to consolidate the existing 31 Federal milk
marketing orders, as authorized by the Agricultural Marketing Agreement
Act of 1937, into between 10 and 14 orders. The Secretary is also
directed to designate the State of California as a Federal milk order
if California dairy producers petition for and approve such an order.
Finally, the Farm Bill specifies that the Department of Agriculture use
informal rulemaking to implement these reforms. The Farm Bill requires
that a proposed rule be published by April 4, 998, and all reforms of
the Federal milk order program be completed by April 4, 1999.
In addition to these required mandates, the Farm Bill provides that
the Secretary may address related issues such as the use of utilization
rates and multiple basing points for the pricing of fluid milk and the
use of uniform multiple component pricing when developing one or more
basic formula prices for manufacturing milk. This proposed rule also
sets forth two options for consideration as a replacement for the Class
I price structure and proposes replacing the basic formula price with a
multiple component pricing system. These changes are proposed to
address concerns that the current system of pricing Class I milk may
not adequately reflect the value of Class I milk at various locations
or the value of milk used in manufacturing products. The 1996 Farm Bill
identified these as related issues that may be addressed in the
consolidation of milk marketing orders. The proposed rule further
proposes changes to classification of milk by establishing a new Class
IV which would include milk used to produce nonfat dry milk, butter,
and other dry milk powders; the reclassification of eggnog and cream
cheese; and other minor changes. These proposed changes should improve
handler reporting and accounting procedures thereby providing for
greater market efficiencies. Finally, this proposed rule expands Part
1000 to include provisions that are identical within each consolidated
order to assist in simplifying the orders. These provisions include the
definitions of route disposition, plant, distributing plant, supply
plant, nonpool plant, handler, other source milk, fluid milk product,
fluid cream product, cooperative association, and commercial food
processing establishment. In addition, the milk classification section,
pricing provisions, and most of the provisions relating to payments
have been included in the General Provisions. These proposed changes
adhere with the efforts of the National Performance Review--Regulatory
Reform Initiative to simplify, modify, and eliminate unnecessary
repetition of regulations. Unique regional issues or marketing
conditions have been considered and included in each market's order
provisions.
The purpose of the RFA is to fit regulatory actions to the scale of
business subject to the actions in order that small businesses would
not be unduly or disproportionately burdened. To accomplish this
purpose, it first is necessary to define a small business. According to
the Small Business Administration's definition of a ``small business,''
a dairy farm is a ``small business'' if it has an annual gross revenue
of less than $500,00 and a handler is a ``small business'' if it has
fewer than 500 employees. For the purposes of determining which dairy

[[Page 4813]]

farms are ``small businesses,'' the $500,000 per year criterion was
used to establish a production guideline of 326,000 pounds per month.
Although this guideline does not factor in additional monies that may
be received by dairy producers, it should be an inclusive standard for
most ``small'' dairy farmers. For purposes of determining a handler's
size, if the plant is part of a larger company operating multiple
plants that collectively exceed the 500-employee limit, the plant will
be considered a large business even if the local plant has fewer than
500 employees. During the process of developing this proposed rule,
USDA identified approximately 80,000 of the 83,000 dairy producers
(farmers) that have their milk pooled under a Federal order as small
businesses. Thus, small businesses represent approximately 96 percent
of the producers in the United States. On the processing side, there
are over 1,200 plants associated with Federal orders, and of these
plants, approximately 700 qualify as ``small businesses'' representing
about 55 percent of the total.
During August 1997, there were 524 fully regulated handlers (343
distributing and 181 supply plants), 134 partially regulated handlers
and 111 producer-handlers submitting reports under the Federal milk
marketing order program. During 1996, 83,012 dairy farmers delivered
over 104.5 billion pounds of milk to handlers regulated under the milk
orders. This volume represents 69 percent of all milk marketed in the
U.S. and 72 percent of the milk of bottling quality (Grade A) sold in
the country. The value of the milk delivered to Federal milk order
handlers at minimum order blend prices was nearly $14.6 billion.
Producer deliveries of milk used in Class I products (mainly fluid milk
products) totaled 45.5 billion pounds--43.5 percent of total Federal
order producer deliveries. More than 200 million Americans reside in
Federal order marketing areas--77 percent of the total U.S. population.
The Federal milk order program is designed to set forth the terms
of trade between buyers and sellers of fluid milk. A Federal order
enforces the minimum price that processors (handlers) in a given
marketing area must pay producers or farmers for milk according to how
it is utilized. A Federal order further requires that the payments for
milk be pooled and paid to individual dairy farmers or cooperative
associations on the basis of a uniform or average price. It is
important to note that a Federal milk order, including the pricing and
all other provisions, only becomes effective after approval, through a
referendum, by dairy farmers associated with the order.
Development of the proposed rule began with the premise that no
additional burdens should be placed on the industry as a result of
Federal order consolidation and reform. As a step in accomplishing the
goal of imposing no additional regulatory burdens, a review of the
current reporting requirements was completed pursuant to the Paperwork
Reduction Act of 1995 (44 U.S.C. Chapter 35). In light of this review,
it was determined that this proposed rule would have little impact on
reporting, recordkeeping, or other compliance requirements because
these would remain almost identical to the current Federal order
program. No new forms have been proposed; however, some additional
reporting would be necessary in the proposed orders that would be
adopting multiple component pricing if the current orders do not
already have these provisions.
There are two principal reporting forms for handlers to complete
each month that are needed to administer the Federal milk marketing
orders. The forms are used to establish the quantity of milk used and
received by handlers, the pooling status of the handler, the class-use
of the milk used by the handler, and the butterfat content and amounts
of other components of the milk. This information is used to compute
the monthly uniform price paid to producers in each of the markets.
Handlers in the marketing areas adopting multiple component pricing
would be required to complete additional information regarding the
components of the milk. This information would be necessary to enable
their values of milk to be determined on the basis of these components
and to assure that producers are paid correctly. Many handlers already
collect and report this information.
This proposed rule does not require additional information
collection that requires clearance by the OMB beyond the currently
approved information collection. The primary source of data used to
complete the forms are routinely used in most business transactions.
Forms require only a minimal amount of information which can be
supplied without data processing equipment or a trained statistical
staff. Thus, the information collection and reporting burden is
relatively small. Requiring the same reports for all handlers does not
significantly disadvantage any handler that is smaller than industry
average.
New territory, or pockets of unregulated territory within and
between current order areas has been included in the proposed
consolidated marketing areas where such expansion would not have the
effect of fully regulating plants that are not now regulated. The
addition can benefit regulated handlers by eliminating the necessity of
reporting sales outside the Federal order marketing area for the
purpose of determining pool qualification. Where such areas can be
added to a consolidated area without having the effect of causing the
regulation of any currently-unregulated handler, they are proposed to
be added.
Handlers not currently fully regulated under Federal orders may
become regulated for two main reasons: first, in the process of
consolidating marketing areas, some handlers who currently are
partially regulated may become fully regulated because their sales in
the combined marketing areas would meet the pooling standards of a
suggested consolidated order area. Second, previously unregulated area
in New York, Vermont, New Hampshire and Massachusetts was added on the
basis of requests and supporting information. As a result, previously
unregulated handlers would become fully regulated. Because of these two
reasons, 24 additional plants are expected to become fully regulated
under the program. Of these 24 plants, it is estimated that 15 are
small businesses that would need to comply with the reporting,
recordkeeping, and compliance requirements. The completion of these
reports would require a person knowledgeable about the receipt and
utilization of milk and milk products handled at the plant. This most
likely would be a person already on the payroll of the business such as
a bookkeeper, controller or plant manager. The completion of the
necessary reporting, recordkeeping, and compliance requirements would
not require any highly specialized skills and should not require the
addition of personnel to complete. In fact, much of the information
that handlers report to the market administrator is readily available
from normally maintained business records, and as such, the burden on
handlers to complete these recordkeeping and reporting requirements is
expected to be minimal. In addition, assistance in completing forms is
readily available from market administrator offices. A description of
the forms and a complete Paperwork Reduction Act analysis follows this
section.
No other burdens are expected to fall upon the dairy industry as a
result of overlapping Federal rules. This proposed regulation does not
duplicate,

[[Page 4814]]

overlap or conflict with any existing Federal rules.
To ensure that small businesses are not unduly or
disproportionately burdened based on this proposed regulation,
consideration was given to several options with the intention of
mitigating negative impacts. Three options, including two suggested in
the preliminary reports issued by AMS in December 1996 and May 1997,
were considered with regard to the consolidation of Federal orders,
five options were considered as replacements for the basic formula
price, and seven options were considered with regard to the development
of a new Class I price structure. The following options were considered
by AMS prior to and during the development of the proposed regulation.
Consolidation Options
It is impossible to determine the economic effects of marketing
area consolidation on handlers, producers and consumers without using
assumptions about the specific order provisions contained in the
consolidated order areas. The only effect consolidation, as a single
factor, can have on the various market participants is through changes
in the percentage of milk used in different classes within the proposed
consolidated orders. Without assumptions that include the specific
class prices and milk uses in different products, there are no means of
quantifying the economic effects of consolidation.
Handlers would be affected by class prices, which would be
determined by the Class I price surface option that is selected, and by
the minimum prices contained in all of the orders for milk used in
Classes II, III and IV. The Class I price surface options considered
could have impacts on small handler entities, however, handlers
similarly located would be subject to the same minimum Class I prices,
regardless of the size of their operations, and all handlers would be
subject to the same minimum prices for Class II, Class III and Class IV
milk. Such handlers would also be subject to the same minimum prices to
be paid to producers.
Producers may be somewhat more affected by consolidation of
marketing areas because changes in utilization percentages would result
in changes in blend prices. As in the case of effects on handlers,
however, it is impossible to determine a separate consolidation effect
on producers, defined in monetary terms. The closest approximation to
such an estimate would be the ``weighted average utilization value''
(WAUV). These ``prices'' reflect only the change in value that can be
attributed to changes in utilization rates, with no assumptions about
changes in the levels of the various class prices. Such estimates, of
necessity, reflect only anticipated changes in blend prices, using
class prices that would no longer be in effect under the consolidated
orders. To the extent that the WAUV computations reflect some of the
effect of consolidation on producer prices, they are included in this
analysis under each option discussion. It should be noted, however,
that all producers in any given current area would be affected to an
equal extent by the consolidation factor, with no disproportionate
effect on small dairy farmer entities.
The following table shows the potential impact of three order
consolidation options on producers who supply each of the current
Federal milk marketing order areas via WAUV ``prices''. The three
consolidated options are (1) the consolidated marketing areas suggested
in the December 1996 initial Preliminary Report on Order Consolidation;
(2) the consolidated marketing areas suggested in the May 1997 Revised
Preliminary Report on Order Consolidation; and (3) the consolidated
marketing areas suggested in this proposed rule.

Weighted Average Utilization Values (WAUV)
[Based on October 1995 information ($/cwt)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Consolidated Market Marketing Areas in Initial Marketing Areas in Revised Marketing Areas in Proposed
--------------------------------------------------------- Consol. Report (Dec. 96) Consol. Report (May 97) Rule (Option 3)
(Option 1) (Option 2) -------------------------------
---------------------------------------------------------------- Consol. Mkt. WAUV ($/cwt)
Consol. Mkt. WAUV ($/cwt) Consol. Mkt. WAUV ($/cwt) -------------------------------
----------------------------------------------------------------
Current Markets WAUV using WAUV using WAUV using WAUV using WAUV using WAUV using
Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt. Current Mkt. Consol. Mkt.
Utilization Utilization Utilization Utilization Utilization Utilization
($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Northeast............................................... $13.46 $13.48 $13.47
New England (F.O. 1)................................ 13.50 13.48 13.52 13.51 13.52 13.49
NY-NJ (F.O. 2)...................................... 13.44 13.48 13.48 13.50 13.45 13.48
Middle Atlantic (F.O.4)............................. 13.45 13.39 13.45 13.41 13.44 13.40
Appalachian............................................. 14.13 13.96 13.97
Carolina (F.O. 5)................................... 14.23 14.21 14.23 14.19 14.23 14.20
Tenn. Valley (F.O. 11).............................. 13.92 13.95 13.92 13.93 13.92 13.94
Lville-Lex-Evan (F.O. 46)........................... n/a n/a 13.35 13.39 13.35 13.40
Florida................................................. 15.05 15.05 15.05
Upper Florida (F.O. 6).............................. 14.67 14.78 14.67 14.78 14.67 14.78
Tampa Bay (F.O. 12)................................. 15.09 15.04 15.09 15.04 15.09 15.04
SE Florida (F.O. 13)................................ 15.42 15.31 15.42 15.31 15.42 15.31
Southeast............................................... 14.26 14.25 14.24
Southeast (F.O. 7).................................. 14.26 14.26 14.25 14.25 14.24 14.27
Mideast................................................. 12.96 12.94 12.92
Ohio Valley (F.O. 33)............................... 12.99 13.02 12.99 13.01 12.99 13.00
E. Ohio-W. PA (F.O. 36)............................. 13.07 13.00 13.10 12.99 13.07 12.97
S. Michigan (F.O. 40)............................... 12.75 12.86 12.75 12.84 12.75 12.83
MI Upper Penin. (F.O. 44)........................... 12.81 12.62 12.81 13.262 12.81 12.61
Lville-Lex-Evan (F.O. 46)........................... 13.35 13.06 n/a n/a n/a n/a
Indiana (F.O. 49)................................... 12.97 12.94 12.97 12.93 12.97 12.92
Upper Midwest........................................... 12.60 12.62 12.60

[[Page 4815]]

Chicago Reg. (F.O. 30).............................. 12.62 12.62 12.62 12.61 12.62 12.62
MI Upper Penin. (F.O. 44)........................... R R R R R R
Neb.-W. Iowa (F.O. 65).............................. n/a n/a 12.63 12.74 n/a n/a
Upper Midwest (F.O. 68)............................. 12.55 12.56 12.55 12.54 2.55 12.56
E. South Dakota (F.O. 76)........................... n/a n/a 12.81 12.65 n/a n/a
Iowa (F.O. 79)...................................... n/a n/a 12.69 12.67 n/a n/a
Central................................................. 13.16 13.21 12.95
S. IL-E MO (F.O. 32)................................ 12.93 12.90 13.00 12.95 13.00 12.88
Central IL (F.O. 50)................................ 13.03 12.74 13.03 12.78 13.03 12.72
Greater K. City (F.O. 64)........................... 13.22 12.90 13.22 12.95 13.22 12.88
Neb.-W. Iowa (F.O. 65).............................. 12.63 12.81 n/a n/a 12.63 12.79
E. South Dakota (F.O. 76)........................... 12.81 12.68 n/a n/a 12.81 12.67
Iowa (F.O. 79)...................................... 12.71 12.71 n/a n/a 12.71 12.70
SW Plains (F.O. 106)................................ 13.31 13.33 13.31 13.41 13.08 13.29
E. Colorado (F.O. 137).............................. 13.27 13.31 13.27 13.38 13.27 13.27
Southwest............................................... 13.36 13.39 13.39
Texas (F.O. 126).................................... 13.49 13.48 13.49 13.46 13.49 13.46
Central AZ (F.O. 131)............................... 13.26 13.17 n/a n/a n/a n/a
NW-W Texas (F.O. 138)............................... 13.00 13.09 13.00 13.07 13.00 13.07
Arizona-Las Vegas....................................... n/a 13.26 13.26
Central AZ (F.O. 131)............................... n/a n/a 13.26 13.29 13.26 13.29
Western................................................. 12.79 12.78 12.78
W. Colorado (F.O. 134).............................. 13.41 12.84 13.41 12.82 13.41 12.82
SW ID-E. OR (F.O. 135).............................. 12.63 12.68 12.63 12.68 12.63 12.68
Great Basin (F.O. 139).............................. 12.83 12.81 12.81 12.79 12.81 12.79
Pacific Northwest....................................... 12.45 12.44 12.44
Pacific NW (F.O. 124)............................... 12.45 12.45 12.44 12.44 12.44 12.44
--------------------------------------------------------------------------------------------------------------------------------------------------------
n/a: not applicable.
R: Restricted.

For each option, a weighted average use value (WAUV) is computed
for (a) the consolidated order; (b) the current order with current use
of milk; and (c) the current order with projected use of milk in the
consolidated order. The difference between the weighted average use
values in (b) and (c) represents the potential impact on producers.
For example, in this proposed rule, the New England (F.O. 1)
market's WAUV using its current utilization is $13.52 per cwt. When the
three markets are consolidated and the new consolidated utilization is
used to calculate the WAUV, New England's WAUV would be $13.49 per cwt.
In this comparison, the potential impact on producers supplying the New
England market area would be a decrease of three cents per cwt.
Each of the three options assumes the pool distributing plant
standards suggested for each of the consolidated orders in this
proposed rule; thus the calculated values in the preceding table are
not directly comparable to the WAUV values published with either the
initial or the revised reports on order consolidation.
During the process of developing this proposed rule, AMS issued two
reports suggesting 10 and 11 marketing area boundaries, respectively,
to meet the requirements of the 1996 Farm Bill. The marketing areas
defined in these reports were based primarily on an analysis of receipt
and distributing data from fluid distributing plants in October 1995.
Over 900 comments regarding consolidation issues received thus far in
the development process also have been considered: almost 50 comments
prior to the December 1996 release of the Preliminary Report on Order
Consolidation (Option 1); an additional 60 comments prior to the May
1997 release of the Revised Preliminary Report on Order Consolidation
(Option 2); and another 800 comments since release of the revised
report. These comments were filed primarily by producers and handlers.
Incorporated in the marketing area boundaries suggested in the revised
report and in the proposed consolidation in this rule (Option 3) are
both information contained in the comments as well as data gathered to
update the information on which the earlier report(s) were based where
questions were raised about the boundaries of suggested marketing areas
and where marketing changes had occurred.
Option 1 (Preliminary Report on Order Consolidation, December 1996)
Based on seven criteria: ((1) Overlapping route disposition; (2)
overlapping areas of milk supply; (3) number of handlers within a
market; (4) natural boundaries; (5) cooperative association service
areas; (6) features common to existing orders, such as similar multiple
component pricing plans; and (7) milk utilization in common dairy
products), 10 marketing areas (Northeast, Appalachian, Florida,
Southeast, Mideast, Upper Midwest, Central, Southwest, Western and
Pacific Northwest) were suggested in this

[[Page 4816]]

report. Data were gathered relating to the receipts and distribution of
fluid milk products for all known distributing plants located in the 47
contiguous States, not including the State of California, for the month
of October 1995.
The current Federal orders that comprise the initially-suggested
consolidated areas are as follows: NORTHEAST--current marketing areas
of the New England, New York-New Jersey, and Middle Atlantic Federal
milk orders; APPALACHIAN--current marketing areas of the Carolina and
Tennessee Valley Federal milk orders, and a portion of the Louisville-
Lexington-Evansville Federal milk order; FLORIDA--current marketing
areas of the Upper Florida, Tampa Bay, and Southeastern Florida Federal
milk orders; SOUTHEAST--current marketing areas of the Southeast
Federal milk order, plus 1 county from the Louisville-Lexington-
Evansville Federal milk order marketing area, 15 currently unregulated
Kentucky counties, and 2 currently unregulated northeast Texas
counties; MIDEAST--current marketing areas of the Ohio Valley, Eastern
Ohio-Western Pennsylvania, Southern Michigan, and Indiana Federal milk
orders, plus most of the current marketing area of the Louisville-
Lexington-Evansville Federal milk order, Zone 2 of the Michigan Upper
Peninsula Federal milk order, and 12 counties of the Southern Illinois-
Eastern Missouri Federal milk order; UPPER MIDWEST--current marketing
areas of the Chicago Regional and Upper Midwest Federal milk orders,
plus Zones I and I(a) of the Michigan Upper Peninsula Federal milk
order and seven unregulated or partly regulated Wisconsin counties;
CENTRAL--current marketing areas of the Southern Illinois-Eastern
Missouri (less 12 counties included in the suggested Mideast marketing
area), Central Illinois, Greater Kansas City, Nebraska-Western Iowa
(less 11 currently-regulated counties suggested to be unregulated),
Eastern South Dakota, Iowa, Southwest Plains, and Eastern Colorado
Federal milk orders, plus 63 currently-unregulated counties in seven of
the states; SOUTHWEST--current marketing areas of the Texas, New
Mexico-West Texas, and Central Arizona Federal milk orders; WESTERN--
current marketing areas of the Western Colorado, Southwestern Idaho-
Eastern Oregon, and Great Basin Federal milk orders; and PACIFIC
NORTHWEST--current marketing area of the Pacific Northwest Federal milk
order plus 1 currently-unregulated county in Oregon.
Based on the WAUV calculations shown in the previous table,
utilization rate changes due to consolidation could affect producer
prices. The column labeled ``Option 1'' shows the WAUV for the
consolidated order and each of the current orders suggested in the
December 1996 report.
In the Northeast market, producers currently affiliated with the
New England and Middle Atlantic would have negative impacts on their
WAUV, respectively, while New York-New Jersey producers would be
positively impacted. In the Appalachian market, Carolina producers
should expect some negative impacts due to consolidation, while
Tennessee Valley producers would experience positive effects from this
consolidation. In the Florida market, Upper Florida producers would
gain while Tampa Bay and Southeastern Florida producers would have a
negative impact resulting from this consolidation. The Southeast market
remains virtually the same as it does currently and thus, no or little
impact on producer prices would be expected. In the Mideast market,
producers affiliated with the Ohio Valley and Southern Michigan Federal
orders would probably see increases in blend prices due to this
consolidation, while producers affiliated with the Eastern Ohio-Western
Pennsylvania, Michigan Upper Peninsula, Louisville-Lexington-Evansville
and Indiana Federal orders would see decreases. In the Upper Midwest
market, the Upper Midwest producers should see slight increases while
Chicago Regional producers would probably have no impact due to this
consolidation. Of all the consolidated markets, producers in the
current Orders that compose the Central market probably would see the
largest changes due to this consolidation: producers with the Nebraska-
Western Iowa, Southwest Plains and Eastern Colorado markets may see
increases, while producers affiliated with the Southern Illinois-
Eastern Missouri, Central Illinois, Greater Kansas City, and Eastern
South Dakota markets may see decreases. Producers with the Iowa market
would probably have no impact due to this suggested Central market
consolidation. In the Southwest market, producers affiliated with the
New Mexico-West Texas would see increases due to this consolidation
while Texas and Central Arizona producers would see decreases. In the
Western market, Southwestern Idaho-Eastern Oregon producers would see
increases but Western Colorado and Great Basin producers would see
decreases. The Pacific Northwest market remains virtually the same as
it does currently and thus, no or little impact on producer prices
would be expected.
Of approximately 83,000 dairy producers delivering milk to handlers
regulated under the milk orders, about 80,000 are considered to be
small businesses under the production guideline of less than 326,000
pounds per month.
As stated above, handlers are impacted more significantly by class
prices and minimum prices than by expected utilization changes
resulting from consolidation. Of the 371 distributing plants expected
to be fully regulated under this 10-market suggested configuration
under the assumptions used in the December 1996 report, an estimated
193 plants are small businesses under the criteria provided by the SBA
(under 500 employees).
Option 2 (Revised Preliminary Report on Order Consolidation, May 1997)
Eleven marketing areas were suggested in this second report.
Because numerous comments indicated that the boundaries of some
marketing areas should be re-evaluated, and also because regulatory
shifts and distributing plant distribution areas had occurred, more
detailed and updated data was obtained. The same seven criteria used in
Option 1 were applied in this option as well. Modifications were made
to the Northeast, Appalachian, Southeast, Mideast, Upper Midwest,
Central, Southwest and Western regions, as follows (only the changes to
these orders are noted): NORTHEAST--Addition of contiguous unregulated
areas of New Hampshire, Vermont and New York; the western non-Federally
regulated portion of Massachusetts, the Western New York State order
area, and Pennsylvania Milk Marketing Board Areas 2 and 3 in
northeastern Pennsylvania; APPALACHIAN--Addition of all of the
Louisville-Lexington-Evansville Federal order (with the exception of
one county included in the suggested Southeast market) and 26
currently-unregulated counties in Indiana and Kentucky; SOUTHEAST--
Minus 2 currently-unregulated counties in northeast Texas (in the
suggested Southwest market); MIDEAST--Addition of Pennsylvania Milk
Marketing Board Area 6 (in western/central Pennsylvania) and 2
currently-unregulated counties in New York, and minus the Louisville-
Lexington-Evansville Federal order area, 12 counties in Illinois, and
unregulated counties in Indiana and Kentucky (in the suggested
Appalachian market); UPPER MIDWEST--Addition of the Iowa, Eastern South
Dakota, and most of

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the Nebraska-Western Iowa Federal order areas, plus currently-
unregulated counties in Iowa and Nebraska; CENTRAL--Addition of 12
counties in the current Southern Illinois-Eastern Missouri Federal
order that initially were suggested as part of the consolidated Mideast
area, and minus the Eastern South Dakota, Iowa, and most of the
Nebraska-Western Iowa Federal order marketing area; SOUTHWEST--Addition
of 2 currently-unregulated northeast Texas counties that initially were
suggested as part of the consolidated Southeast market and 47
currently-unregulated counties in southwest Texas, and minus the
Central Arizona marketing area; ARIZONA-LAS VEGAS--this new eleventh
marketing area composed of the current marketing area of the Central
Arizona Federal order and the Clark County, Nevada, portion of the
current Great Basin marketing area, plus eight currently-unregulated
Arizona counties; and WESTERN--Minus Clark County, Nevada. The FLORIDA
and PACIFIC NORTHWEST marketing areas did not change from the
preliminary report.
Based on the WAUV calculations shown in the previous table,
utilization rate changes due to consolidation could affect producer
prices. The column labeled ``Option 2'' shows the WAUV for the
consolidated order and each of the current orders suggested in the May
1997 report.
In the Northeast market, producers currently affiliated with the
New England and Middle Atlantic orders would have negative impacts on
their WAUV, respectively, while New York-New Jersey producers would
remain unchanged. In the Appalachian market, Carolina producers should
expect some negative impacts due to consolidation, while Tennessee
Valley and Louisville-Lexington-Evansville producers would experience
positive effects from this consolidation. In the Florida market, Upper
Florida producers would gain while Tampa Bay and Southeastern Florida
producers would have a negative impact resulting from this
consolidation. The Southeast market remains virtually the same as it
does currently and thus, little impact on producer prices would be
expected. In the Mideast market, producers affiliated with the Ohio
Valley and Southern Michigan Federal orders would probably see
increases in blend prices due to this consolidation, while producers
affiliated with the Eastern Ohio-Western Pennsylvania, Michigan Upper
Peninsula, and Indiana Federal orders would see decreases. In the Upper
Midwest market, the Nebraska-Western Iowa producers should see
increases, while Chicago Regional, Upper Midwest, Eastern South Dakota,
and Iowa producers would have a decrease in producer prices due to this
consolidation. In the Central market, producers with the Southwest
Plains and Eastern Colorado markets would see increases, while
producers affiliated with Southern Illinois-Eastern Missouri, Central
Illinois, and Greater Kansas City markets may see decreases. In the
Southwest market, producers affiliated with New Mexico-West Texas would
see increases due to this consolidation while Texas producers would see
decreases. The added Arizona-Las Vegas market is virtually the same as
the Central Arizona market but a positive impact on producer prices may
result from an additional handler. In the Western market, Southwestern
Idaho-Eastern Oregon producers would see increases but Western Colorado
and Great Basin producers would see decreases. The Pacific Northwest
market remains virtually the same as it does currently and thus, no or
little impact on producer prices would be expected.
Of approximately 83,000 dairy producers delivering milk to handlers
regulated under the milk orders, about 80,000 are considered to be
small businesses under the production guideline of less than 326,000
pounds per month. In addition, it is estimated that about 13 percent of
the total milk production in Pennsylvania is represented only by the
Pennsylvania Milk Marketing Board. Under this option, this production
would be added to the Federal order pool and affect an undetermined
number of businesses which would include both small and large
producers.
As stated above, handlers are impacted more significantly by class
prices and minimum prices than by expected utilization changes
resulting from consolidation. Of the 379 plants expected to be fully
regulated under this 11-market suggested configuration under the
assumptions used in the May 1997 report, 175 plants are estimated to be
small businesses on the basis of fewer than 500 employees.
The preliminary consolidation report (Option 1) stated that the
Farm Bill requirement to consolidate existing marketing areas did not
specify expansion of regulation to previously non-Federally regulated
areas where such expansion would have the effect of regulating handlers
not currently regulated. However, on the basis of data, views and
arguments filed by interested persons in response to the initial
Preliminary Report (Option 1) requesting that currently non-Federally
regulated areas be added to some consolidated marketing areas, the
revised Preliminary Report (Option 2) suggests that such areas be added
to several consolidated areas, the Northeast and Mideast market areas
in particular. Approximately 20 handlers who would have been affected
by the expansion of Federal order areas into currently non-Federally
regulated areas were notified of the possible change in their status
and encouraged to comment.
Handlers located in Pennsylvania Milk Marketing Board Areas 2, 3
and 6 are regulated under the State of Pennsylvania if they do not have
enough sales in any Federal order area to meet an order's pooling
standards. If such plants do meet Federal order pooling standards, the
State continues to enforce some of its regulations in addition to
Federal order regulations. As state-regulated handlers, they must pay a
Class I price for milk used in fluid products which is often higher
than the Federal order price would be. Inclusion of the Pennsylvania-
regulated handlers in the consolidated marketing area would have little
effect on handlers' costs of Class I milk (or might reduce them), while
reducing producer returns.
Option 3: The Proposed Consolidation
The proposed consolidation is a result of extensive analysis of
data as previously indicated and consideration of public comments
submitted in response to Options 1 and 2. Extensive outreach, which is
explained in the ``Public Input'' section, was completed. After
compiling this information, the proposed order consolidation was
developed to ensure industry integrity.
Eleven marketing areas are proposed in this rule, including
modifications to some of the 11 marketing orders suggested in Option 2.
Marketing data was further examined for some of the suggested
consolidated