Federal Milk Marketing Order Reform Proposed Rule

Transcription

1 r( ~ l1". -J.. I \\ ~ Federal Milk Marketing Order Reform Proposed Rule GLOSSARY OF FEDERAL MILK ORDER TERMS Allocation provisions--a handler operating a milk processing and packaging plant usually receives milk from several sources other than producers. Since producer milk is commingled with milk from other sources, an allocation procedure is used to distinguish the uses made of producer milk. Balancing - Balancing is a marketing function necessitated by the reality that daily and seasonal milk supplies are different than daily and seasonal fluid milk product demands. Since fluid milk processors require adequate supplies to meet their peak demand periods, there are times when milk supplies are excessive of daily and seasonal needs. At these times, these excessive supplies must either be shipped outside the market to manufacturing regions or processed into manufactured products in loc,::al facilities. At other times of the year, in some marketing areas, milk supplies are short offluid milk product demands and milk must be imported from surplus production areas. While in the past, the fluid milk processors performed this marketing function, today cooperatives provide this service. Balancing costs - Generally, balancing costs are borne by market participants and are not subject to Federal milk order regulations. However, three Federal orders in the Southeast do provide for partial recovery of costs from importing milk during deficit periods. Cooperatives attempt to recover balancing costs through the collection of over-order charges on milk sold to processors. In some markets, some market participants realize the benefits of this marketwide service without realizing any of the cost of providing this service. Basic formula price (BFP)- The BFP is used to establish class prices under Federal milk orders. The current BFP updates the base (previous) month Minnesota-Wisconsin (M-W) price with a product price formula. The base month M-W price, published by the "National Agricultural Statistical Service," is the average price for all milk of manufacturing grade delivered f.o.b. plant or receiving station in Minnesota and Wisconsin. Basing Point- A location, generally in an area of surplus milk production, from which milk is priced based on distance from that location. Butterfat differential--most Federal order prices are quoted on a 3.5-percent butterfat basis. To adjust prices for a higher or lower butterfat content, a butterfat differential is used. The butterfat differential is the amount by which the applicable price is increased or decreased for each one-tenth of 1 percent that the butterfat content of the milk is above or below 3.5 percent. The Agricultural Marketing Service--U.S. Department of Agriculture

2 Class I prices--in all markets, the class I price is based on the Basic Formula Price. To this price is added a fixed differential stated in the order. Classes of milk--classes of milk utilization are defined in each Federal order. All orders provide for three classes. In general, milk disposed of by a handler as whole milk, lowfat milk, or skim milk is classified as class I. If milk is disposed of as fluid cream or used in soft manufactured products such as cottage cheese and frozen desserts, it is class II; and if it is disposed of in hard manufactured products such as cheese, butter, and milk products in dry form, this milk is class III. Some orders provide for a fourth class of milk utilization--c1ass III-A. Class III-A includes producer milk used to produce nonfat dry milk. Classified pricing--a pricing system under which the price of milk depends on the use made of the milk. Higher prices are charged for milk used for fluid purposes. Component pricing--in 13 orders, producer prices are based on the value of the components in the milk that they market. These components include butterfat, as well as solids not fat, or protein and other solids. In these orders, the price received by producers is dependent on the weighted average differential or producer price differential, the price per pound for butterfat, and either the price per pound for protein, or protein and other solids. Some orders also adjust for the somatic cell count in the milk. Cooperative association plant - A milk processing facility operated by a dairy farmer cooperative. Cooperatives can be pool handlers without operating a plant. Distributing plant - A milk processing facility primarily engaged in producing fluid milk products. Federal milk marketing order--a Federal milk marketing order is a regulation issued by the Secretary of Agriculture. Its purpose is to stabilize markets by placing certain requirements on the handling of milk in the area it covers. It is established under the authority of the Agricultural Marketing Agreement Act of 1937, as amended. It requires milk handlers in a marketing area to pay not less than certain minimum class prices established according to how the milk is utilized. These prices are established under the order after a public hearing at which evidence is received on the supply and demand conditions for milk in the market. A milk order, including the pricing provisions and all other provisions, becomes effective only after approval by dairy farmers. It requires that payments for milk be pooled and paid to individual farmers or cooperative associations of farmers on the basis of a uniform or average price. Handler--A handler is a person or business entity, either a milk processor or a milk distributor, who is subject to the provisions of the order. Under most orders, a handler is any milk dealer whose plant is approved by a duly constituted health authority and who disposes of grade A fluid milk products in the marketing area. Handlers include persons who sell milk to other milk dealers as well as persons who sell milk to consumers and retailers. The Agricultural Marketing Service--U.S. Department of Agriculture

3 Individual handler pooling--blend price is computed for each pool handler, based only on that handler's utilization and order class prices. With this system, each handler pays his dairy farmers the full amount of the obligation computed for that handler. Consequently, producers shipping to different handlers receive different blend prices. Location adjustments --The class I price announced for a market is subject to adjustment, depending on the location of the plant regulated under the order.. Manufacturing class prices--currently prices for producer milk used in classes other than class I for the most part are related to the Basic Formula Price. Class II prices are determined by adding a $.30 differential to the Basic Formula Price. For most orders, the class III price is the Basic Formula Price. In those orders that provide for class III-A, a product price formula is used to set the price. Marketing area--a marketing area is a designated trading area within which the handling of milk is regulated by the Federal order. Generally, the size of the marketing area is determined by the sales territory of competing handlers. Marketing service deduction--marketing services, such as verification of producer milk weights and tests, and market information, are usually provided by qualified cooperatives for their producer members. Federal orders permit a handler to make deductions for these services from his payments to producers and pay the deducted amounts to the cooperative. The rate of deduction is the amount authorized by the producer in his contract with the cooperative. Marketing services for nonmember producers are provided by the market administrator. The expense of providing these services is deducted from payments to nonmember producers and is paid to the market administrator. The amount deducted cannot exceed a maximum specified in each order. Marketwide pooling--the market administrator computes the total obligation of each handler who operates a pool plant by multiplying the quantity of producer milk used in each class by the class price. The blend price to be paid producers is then computed by adding together the total obligations of all handlers and dividing by the quantity of producer milk delivered to all pool plants. Handlers must pay dairy farmers at least the blend price for milk received from them. The market administrator deducts the total payment each handler must make to dairy farmers from the total obligation of that handler. If the handler's obligation is larger than his payments to dairy farmers, that handler must pay the rest of his obligation into the producer-settlement fund or "pool". Other pool handlers who must paj' dairy farmers more than their total obligation receive payments from the pool to make up the difference. Marketwide service payment--payments to qualified handlers from "pool" funds to reimburse them for services they provide that benefit all dairy farmers and(or processors. Nonpool plants--nonpool plants are those from which fluid milk products are disposed of in the marketing area or distributed to pool plants but which do not meet requirements for The A9ricultural Marketin9 Service--U.S. Department of A9riculture

4 pooling. There are four types of nonpool plants--other order plants, producer-handler plants, partially regulated distributing plants, and unregulated supply plants. Operators of pool plants (pool handler)--operators of pool plants must meet minimum performance standards included in each order and are subject in full to the provisions of an order. There are three types of pool plants--distributing plants, supply plants, and cooperative association plants. Other order plant--this is any plant fully subject to the pricing and pooling provisions of another Federal order. A plant is usually regulated in the marketing area where it disposes of the most fluid milk products, but this rule does not hold true in all cases. Over-order prices - Class prices above Federal order minimum levels. Prices charged by cooperatives, for the most part, to recover costs of services provided to regulated handlers. These services include, but are not limited to: providing milk at a specified butterfat content and time; preparing and mailing producer checks; weekend and seasonal balancing of milk supplies; and conducting informational and educational activities. Partially regulated distributing plant--a plant for which the volume of fluid milk products distributed on routes in the marketing area is below the minimum performance standards of the order. Producer--A producer is usually any dairy farmer who sells milk to a pool handler. Producers must not be producer-handlers; they must produce milk in compliance with grade A or similar inspection requirements, and their milk must be either received at a pool plant or diverted to a non pool plant for the account of a pool handler. Producer-handler plant--this is any plant operated by a producer-handler as defined in an order. Producer-handlers are dairy farmers who process and sell milk from their own production and do not receive any milk from other dairy farmers, although they may receive some milk from other sources. They usually are exempt from the pricing and pooling provisions. Reconstituted milk--a fluid milk product made from a combination of concentrated milk solids and water. Supply plant - A milk processing facility primarily engaged in producing manufactured dairy products. Transportation pool- A mechanism for spreading the cost of shipping milk into the market from other markets over all milk procured. This equalizes the cost of milk to all handlers in the market. Uniform (blend) prices--in Federal order markets, minimum prices required to be paid to producers are termed uniform or "blend" prices. In markets where marketwide pools are used, the blend price is the weighted average of all class values of milk used by all handlers, The Agricultural Marketing Service--U.S. Department of Agriculture

5 and all producers must be paid at least this average price per hundredweight, subject to butterfat and location adjustments. For orders that provide for individual handler pools, the blend price reported in statistics for each market is a weighted average. of all such individual handler's blend prices. In markets where producer prices are established in terms of a base price and an excess price, the blend price reported represents the weighted average of base and excess payments. Unregulated supply plant--a plant for which the volume of Grade A milk products shipped to pool plants is below the minimum performance standards of the order. The Agricultural Marketing Service-U.S. Department of Agriculture

6 Access the FMMO Rule Electronically! The Federal Milk Marketing Order Proposed Rule is available electron ica lly... Internet: free CD: $65.00 Input Solutions Tina Batcheller SCAN or When the rule is published by the Federal Register, copies may be purchased from: Government Printing Office call (202) A limited number of printed copies will also be available from AMS Dairy Division... call (202) for information.

7 CONSOLIDATION AND REFORM OF FEDERAL MILK MARKETING ORDERS I (7 U.S.c. 7253) SEC CONSOLIDATION AND REFORM OF FEDERAL MILK MARKETING ORDERS. (a) AMENDMENT OF ORDERS.- (1) REQUIRED CONSOLIDATION.-The Secretary shall amend Federal milk marketing orders issued under section 8c of the Agricultural Adjustment Act (7 U.S.c. 608c), reenacted with amendments by the Agricultural Marketing Agreement Act of 1937, to limit the number of Federal milk marketing orders to not less than 10 and not more than 14 orders. (2) INCLUSION OF CALIFORNIA AS SEPARATE ORDER.-Upon the petition and approval of California dairy producers in the manner provided in section 8c of the Agricultural Adjustment Act (7 U.S.C. 608c), reenacted with amendments by the Agriculrural Marketing Agreement Act of 1937, the Secretary shall designate the State of California as a separate Federal milk marketing order. The order covering California shall have the right to reb lend and distribute order receipts to recognize quota value. (3) RELATED ISSUES ADDRESSED IN CONSOLIDATION.- Among the issues the Secretary is authorized to implement as part of the consolidation of Federal milk marketing orders are the following: (A) The use of utilization rates and multiple basing points for the pricing of fluid milk. (B) The use of uniform multiple component pricing when developing 1 or more basic formula prices for manufacturing milk. (4) EFFECT OF EXISTING LAW.-In implementing the consolidation of Federal milk marketing orders and related reforms under this subsection, the Secretary may not consider, or base any decision on, the table contained in section 8c(5)(A) of the Agricultural Adjustment Act (7 U.S.c. 608c(5)(A)), reenacted with amendments by the Agricultural Marketing Agreement Act of 1937, as added by section 131 of the Food Security Act of (b) EXPEDITED PROCESS.- (1) USE OF INFORMAL RULEMAKING.-To implement the consolidation of Federal milk marketing orders and related reforms under subsection (a), the Secretary shall use the notice and corrunent procedures provided in section 553 of title 5, United States Code. (2) TIME LIMIT A TIONS.- (A) PROPOSED AMENDMENTS.-The Secretary shall announce the proposed amendments to be made under subsection (a) not later than 2 years after the date of enactment of this title. (B) FINAL AMENDMENTS.-The Secretary shall implement the amendments not later than 3 years after the date of enactment of this title. (3) EFFECT OF COURT ORDER.-The actions authorized by this subsection are intended to ensure the timely publication and implementation of new and amended Federal milk marketing orders. 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. (c) FAILURE TO TrMEL Y CONSOLIDATE ORDERS.-If the Secretary fails to implement the consolidation required under subsection (a)(l) within the time period required under subsection (b)(2)(b) (plus any additional period provided under subsection (b)(3)), the Secretary may not assess or collect assessments from milk producers or handlers under such section 8c for marketing order administration and services provided under such section after the end of that period until the consolidation is completed. The Secretary may not reduce the level of services provided under the section on account of the prohibition against assessments, but shall rather cover the cost of marketing order administration and services through funds available for the Agricultural Marketing Service of the Department. (d) REpORT REGARDING FURTHER REFORMS.- (1) REpORT REQUIRED.-Not later than April 1, 1997, the Secretary shall submit to Congress a report (A) reviewing the Federal milk marketing order system established pursuant to section 8c of the Agricultural Adjustment Act (7 U.S.c. 608c), reenacted with amendments by the Agricultural Marketing Agreement Act of 1937, in light of the reforms required by subsection (a); (B) describing the efforts underway and the progress made in implementing the reforms required by subsection (a); and (C) containing such recorrunendations as the Secretary considers appropriate for further improvements and reforms to the Federal milk marketing order system. (2) EFFECT OF OTIlER LA WS.-Any limitation imposed by Act of Congress on the conduct or completion of reports to Congress shall not apply to the report required under this section, unless the limitation specifically refers to this section. (7 U.S.c ) I Title I, Subtitle D, of the Federal Agriculture Improvement and Reform Act of 1996, Pub. L , 110 Stat. 915, Apr. 4, 1996.

8 ERRATA GENERAL OVERVIEW sheet: On the reverse side, in the last sentence, the words "by a majority of the producers" should read "by at least two-thirds of the producers". CONSOLIDATION OF MARKETING ORDERS sheet: In the description of the proposed Southeast consolidated order area: 1) the words "northwest Arkansas, 23 counties" should read "northwest Arkansas and 23 counties"; and 2) the words "presently part of the Southern Illinois-Eastern Missouri order," should read "presently part of the Southwest Plains order, and 6 counties in Missouri that are presently part of the Southern Illinois-Eastern Missouri order,". In the description of the proposed Central consolidated order area, the words "(but not 11 currently unregulated counties in that order that would remain unregulated)" should read "(but not 11 currently regulated counties in that order that would become unregulated)". CLASS I PRICING SURFACE sheet: In the first paragraph of What Are Class I Prices?: The words "used in Class I, II, and III." should read "used in Class I, II, III, and III-A.". AMS-DAIRY January 23, 1997

9 rr- 1 rr "~ L!,;..d ~ bj Federal Milk Marketing Order Reform Proposed Rule GENERAL OVERVIEW The 1996 farm law mandated USDA to reform the Federal milk marketing order (FMMO) program. Although the farm bill only specified that there be fewer orders, the farm bill also authorized the Secretary to make other reforms to the FMMO program. The farm bill authorized a Federal order be created for California, if producers in California wanted to establish an order within the FMMO program. The farm bill mandated that reforms be implemented by April 4, 1999, and that USDA use an "informal" rulemaking process to proceed with the reforms. The Context for Reform of the FMMO Program......;.' ;~~~l:~~~~:;~=fll be :~ 2L~!ii~!f:iEE:' pf,~ ees w1il be more ma~ket = orl~hted; mil1or :revisionsare..made" to produ ct;s H ncludedi~ '~ ch class of ':,'h milk;.';, 0mW:i~n.. pr0visi-qri{tq :.:'streamnn-e th~, :bfde:~s. :~<;.".:... u.s. agriculture is transitioning to a more marketoriented sector, free from traditional government involvement typified by price and income support programs. This transition was continued by the 1996 farm bill, which mandated the gradual phase-out of traditional price and income support programs, including the dairy price support program that has existed for 60 years, in which the Federal government supported milk prices by offering to purchase butter, cheese, and nonfat dry milk at certain specified prices. The FMMO program is being restructured to be consistent with this trend toward a marketoriented dairy sector in which dairy farmers respond to market signals. However, the FMMO program retains its basic purpose--to provide for orderly market conditions in which milk is marketed so that producers have an assurance of stable markets, and adequate supplies of milk are available for consumers. Federal milk marketing orders will continue to establish minimum prices that regulated handlers must pay to producers for milk based on its end use. The FMMO program also will continue to recognize the higher costs of supplying milk for fluid use, including the costs of transporting milk and the costs associated with balancing supplies and use within each market. What's in the Proposed Rule? The proposed rule covers all aspects of the FMMO program, and contains provisions dealing with the following components of the FMMO program: ~ Consolidation--in accordance with the farm bill, the proposed rule suggests 11 milk marketing order areas, consolidating the present 31 milk marketing order areas. The Agricultural Marketing Service--U.S. Department of Agriculture

10 Classified Pricing--the proposed rule suggests changes to the level and manner in which milk is priced according to its use. For milk in the highest-valued, fluid use (Class I) two pricing options are presented for consideration. Both options recognize a location-value of milk - that is, milk is costly to transport and therefore its value will differ by location. Option la is a set of Class I prices that vary by location (called a "price surface"), and closely reflects the current price surface, but makes adjustments for recent changes in economic conditions. Option IB is more market-oriented, still providing minimum prices for higher valued fluid use, while relying more on the market to generate higher prices when needed to attract'sufficient milk to markets. Three methods oftransitioning to option IB are offered: a gradual phase-in to lower Class I differentials with no transition assistance; transition assistance that "bumps up" Class I differentials initially to offset any loss in cash receipts due to the decline in Class I differentials; and transition assistance that initially "bumps up" the Class I differentials even more, while still phasing toward a more marketoriented price surface over a 5-year period. Basic Formula Price CBFp)--the BFP has gradually become less representative of competitive conditions for milk for manufacturing over time. The current BFP is.based on the Minnesota-Wisconsin price for unregulated Grade B (manufacturing-grade) milk, which is dwindling as a share of all milk produced in those states and nationally, and a product formula updater to reflect current competitive conditions for manufactured products. The proposed rule suggests replacing the BFP with a Class III price based on multiple component pricing, which continues, but partially decouples, the tie between the price of milk used in fluid products and the price of milk used in manufactured products. The proposed Class I price mover, which is a 6-month moving average of manufacturing milk prices, will provide additional stability to the Class I market. Classification Er Identical Provisions--many orders have similar provisions. Over time, each milk order has been amended to contain provisions that may be unique, but may also be very similar to other orders. The identical provisions section of the proposed rule recommends streamlining provisions, terms and definitions applicable to all orders. The classification section recommends uniform provisions and makes minor changes from the current system of classification by end use. Informal Rulemaking Process for Reform Congress authorized the use of informal rulemaking to reform the FMMO program. Since passage of the 1996 farm bill, public input has been sought to assist in developing the proposals for reform that are contained in the proposed rule. With publication of the proposed rule, the public will have 60 days to provide written comment. Following the comment period, a final rule will be published, taking into account all submitted materials from interested parties. Then, a referendum will be held to determine approval for each new milk marketing order by a majority of producers in each new order. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) (TDD). USDA is an equal opportunity employer.

11 rr-- I r( ~ \L d n bj! Federal Milk Marketing Order Reform Proposed Ru Ie WHAT IS A FEDERAL MILK MARKETING ORDER? The Agricultural Marketing Agreement Act of 1937 authorized the Federal Milk Marketing Order (FMMO) program that exists today which is being reformed in accordance with the 1996 farm bill. The 1996 law mandates USDA to consolidate the present 31 Federal order areas to not less than 10 orders and no more than 14 Federal order areas. Although the law only mandated fewer orders, the farm bill also authorized the Secretary to make other reforms to the FMMO program, such as the method of deriving Class I prices for fluid milk. The farm bill mandated that reforms be implemented by April 4, 1999, and that USDA use an "informal" rulemaking process to proceed with the reforms. What Does a Milk Order Do? Milk marketing orders are a legal instrument, voluntarily initiated and approved by twothirds of the producers in an area. Handlers, or first buyers, are regulated under an order - not producers. Milk marketing orders address two kinds of equity issues. First, milk orders prevent handlers from "playing off" producers against each other in an attempt to drive down the price that handlers have to pay for a highly perishable product. Second, milk orders address intermarket equity issues that can arise between producers in surplus-producing milk regions versus producers in regions that do not produce enough milk, by establishing a system of prices that provide the necessary incentives to draw milk from surplus regions to deficit regions when local supplies are not adequate to satisfy fluid demand. Although most of the focus is on prices, milk orders also provide other safeguards to protect producers against unfair and abusive trade practices, including: failure to pay producers the minimum order price for milk delivered; inaccurate reporting by handlers of the volume and butterfat test of farmers' milk and how the milk was used; and the general lack of fairness from unequal bargaining power between buyers (many fewer buyers) and sellers (many more sellers), such as in price negotiations, or that arise with lack of access to accurate market information. How Do Milk Orders Work? First, orders classify milk by end use: Class I is milk for fluid consumption; Class II is milk used to produce the soft products of ice cream, cottage cheese, etc; and Class III is milk used to manufacture hard products such as butter, nonfat dry milk and cheese. In recent years in many Federal order areas, a Class III-A category has been defined for nonfat dry milk only. The Agricultural Marketing Service.. U.S. Department -of Agriculture

12 Second, milk orders specify minimum prices that buyers (handlers) must pay for milk used in each class. The highest price is for milk used in Class I, and the lowest price is for milk used in Class III (or Class III-A, for those markets which have four classes of milk). Third, milk marketing orders specify rules (called pooling) for distributing milk proceeds to all producers who supply the marketing order area. In a milk marketing order, producers do not receive the Class prices directly. Instead, all producers who supply milk to an order receive the same uniform or "blend" price for their milk. The blend price is a weighted average price derived from pooling all milk proceeds received from all milk used in the various classes in a market area. The blend price assures that all producers share equally in the higher valued fluid market. The blend price also ensures that all producers share equally in the lower prices that are received for milk diverted to manufacturing uses. Thus, no producer captures only the higher, fluid-use price, but no producer has to bear only the lower, manufacturing price for milk. This sharing of all milk proceeds equally assures an orderly flow of milk to the market for consumers. It is important to note that Federal order prices are minimums only. Market conditions can and often do lead to prices above Federal order minimums. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) (TDD). USDA is an equal opportunity employer.

13 (( rr ~ u... "\ n ~ u Federal Milk Marketing Order Reform Proposed Rule CONSOLIDATION OF MARKETING ORDERS The 1996 farm bill requires that the current 31 Federal milk marketing order areas be consolidated into no fewer than 10, and no more than 14 orders by April 4, The farm bill requires USDA to establish a separate marketing order area for the State of California, if that State's dairy farmers request and approve a marketing order under the FMMO program. Currently, California has a state marketing program for milk. The Federal milk order proposed rule recommends 11 marketing areas: Northeast, Appalachian, Florida, Southeast, Mid East, Upper Midwest, Central, Southwest, Arizona-Las Vegas, Western, and Pacific Northwest. See the attached maps for the current and proposed new marketing order areas recommended in the proposed rule. Some areas of the country will remain unregulated areas under the Federal milk order system, but may have State programs (shown in white on the map). What's in the Proposed Consolidated Order Areas? NORTHEAST APPALACHIAN FLORIDA SOUTHEAST Includes current marketing areas of the New England, New York-New Jersey, and Middle Atlantic Federal milk orders. In addition, the new Northeast order includes the contiguous unregulated areas of New Hampshire, northern New York and Vermont, as well as the non-federally regulated portions of Massachusetts and the Western New York State order area. Includes the current marketing areas of the Carolina and Louisville Lexington-Evansville milk orders (but not Logan County, Kentucky). Also, the new Appalachian order will include the recently terminated Tennessee Valley area and the currently unregulated counties in Indiana and Kentucky. Includes the current Upper Florida, Tampa Bay, and Southeastern Florida Federal milk marketing order areas. Includes the current Southeast Federal milk order area, plus Logan county, Kentucky. The new Southeast order will also include 11 counties in The Agricultural Marketing Service -U.S. Department of Agriculture

14 northwest Arkansas, 23 counties in Missouri that are presently part of the Southern Illinois-Eastern Missouri order, and currently unregulated counties in southeast Missouri and Kentucky. MID EAST UPPER MIDWEST CENTRAL SOUTHWEST Includes the current Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern Michigan, Indiana, and zone 2 of the Michigan Upper Peninsula Federal milk order areas. The new Mideast order would also include currently unregulated counties in Michigan, Indiana, and Ohio. Includes the current Chicago Regional and Upper Midwest Federal milk order areas. The new Upper Midwest order would also include zones 1 and l(a) of the Michigan Upper Peninsula Federal milk order, as well as unregulated counties in Wisconsin. Includes the current Southern Illinois-Eastern Missouri, Central Illinois, Greater Kansas City, Southwest Plains, Eastern Colorado, Nebraska-Western Iowa (but not 11 currently unregulated counties in that order that would remain unregulated), Eastern South Dakota, and Iowa Federal milk order areas. The new Central order would not include 11 northwest Arkansas and 23 Missouri counties that are currently included in the Southwest Plains Federal order (they would be part of the new Southeast order). The new Central order would also exclude 6 Missouri counties that are currently part of the Southern Illinois-Eastern Missouri Federal order (they would also be part of the new Southeast order). However, the new Central order would add currently unregulated counties in Kansas, Missouri, Illinois, Iowa, Nebraska, and Colorado. Inludes current Texas and New Mexico-West Texas Federal milk marketing orders, plus currently unregulated counties in Texas. ARIZONA-LAS VEGAS Includes the current Central Arizona Federal milk marketing order, that portion of Clark County, Nevada which is part of the current Great Basin Federal order, as well as currently unregulated counties in Arizona. WESTERN PACIFIC NORTHWEST Includes current Western Colorado, Southwestern Idaho-Eastern Oregon, and Great Basin Federal milk marketing orders (but not Clark County, Nevada). Includes the current Pacific Northwest Federal milk marketing order, plus a currently unregulated county in Oregon. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) (TDD). USDA is an equal opportunity employer.

15 Federal Milk Marketing Order Reform Proposed Rule Marketing Areas Under Federal Milk Orders as of October 1, 1997 DIffERENCES IN SHADING MEREL.Y SERVE TO DIFfERENTIATE BETWEEN ~TING AAEAS Proposed Federal Milk Marketing Order Areas DIFFERENCES rn SHADING MEREL.Y SERVE TO DIFFE~TIATE BEnon:E.N MARKETING AREAS

16 rr L rr "\ :-\ J b? Federal Milk Marketing Order Reform Proposed Rule REPLACING THE BASIC FORMULA PRICE The 1996 farm bill mandated USDA to reform the Federal milk marketing order (FMMO) program. Although the farm bill only specified that there be fewer orders, the farm bill also authorized the Secretary to make other reforms to the FMMO program, including how milk is priced. The farm bill also mandated that reforms be implemented by April 4, 1999, and that USDA use an "informal" rulemaking process to proceed with the reforms. What is the Basic Formula Price?.'.~~ at's.~~.~~~\~~:j~;:; ~r~ ers ;. i'~;~"iii~iji;~~:~;:~ "WHr' be.j1tbre.market;,orient eo; :. JI.} mi)tb,r ' r-evis i bn$ :. a.re -made :2~9,.. :. pr:6dusts' included in each ciassof. mhk~ : ~ommbn iprovisi<?ns to streamline.the orders.. The basic formula price, or BFP, is used to determine Federal order minimum Class III prices. The BFP reflects the value of milk used in manufactured dairy products--butter, nonfat dry milk (powder), and cheese. Price differentials are added to the BFP to establish minimum prices for milk used in higher-valued fluid milk--called Class I products--and milk used in "soft" dairy products, called Class II products. The current BFP is based on a monthly survey of prices paid for unregulated, manufacturing grade milk (called Grade B milk) in Minnesota and Wisconsin. This monthly price is updated by the most recent month-to-month changes in dairy product prices, especially cheese prices. Why Replace the BFP? There is widespread agreement in the industry that the BFP needs to be replaced. At one time, there was a significant amount of Grade B milk produced, and most of that was produced in Minnesota and Wisconsin. Since Grade B milk is unregulated by Federal orders because it is not eligible for fluid use, it was considered representative of competitive market conditions that would prevail in the absence of the FMMO program. Today, less than 5 percent of all milk produced is Grade B milk. As the supply of Grade B milk has dwindled in Minnesota and Wisconsin, as well as nationally, the BFP is becoming out of date as a statistically valid indicator of a competitive market for milk. The Agricultural Marketing Service--U.S. Department of Agriculture

17 What Does the Proposed Rule Recommend for Replacing the BFP? The proposed rule recommends that a Class III price based on multiple component pricing replace the BFP, which continues, but partially decouples, the tie between the price of milk used in fluid products and the price of milk used in manufactured products. Multiple component pricing involves determining a value for milk based on the values of protein, butterfat, an.d other nonfat solids used in manufacturing products. The method of establishing minimum Class I prices will be very similar to the current method--in which a Class I differential is added to the BFP. Under a reformed milk marketing order system, the Class I differential will be added to a "base price." That "base price" will be a 6-month moving average of the Class III or Class IV (the current Class III-A) price for milk used in manufacturing, whichever is higher. Class I differentials will be added to this base price. Use of a moving average of prices based on components of milk will also lend more stability to the Class I market. How will Component Prices Be Determined? USDA's National Agricultural Statistics Service (NASS), which currently surveys and reports block cheese prices used in calculating the current BFP, would add surveys and reports of transaction prices for butter, dry whey, and nonfat dry milk. These product prices will be used to derive the price of milk used in manufacturing in order to calculate the Class I price mover. Manufacturing or "make" allowances--estimated costs of producing dairy products--would be deducted from the commodity prices surveyed by NASS to derive a representative price based solely on the value of the components in milk used to manufacture cheese, butter, nonfat dry milk, and dry whey. The proposed rule contains estimates of make allowances that were based on several university studies of the dairy manufacturing sector. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) 720-ll27 (TDD). USDA is an equal opportunity employer.

18 r{ L r- """1 n ll".d- W Federal Milk Marketing Order Reform Proposed Rule CLASS I PRICING SURFACE The 1996 farm bill mandated USDA to reform the Federal milk marketing order (FMMO) program. Although the farm bill only specified that there be fewer orders, the farm bill also authorized the Secretary to make other reforms to the FMMO program, such as the method of deriving Class I prices for fluid milk. The farm bill mandated that reforms be implemented by April 4, 1999, and that USDA use an "informal" rulemaking process to proceed with the reforms. What Are Class I Prices? l-wb.ae,s -Be.. rig lq<~~~g~d~ +<- "..,,.,"" " " ~ there,\.\ijuib.e fewer '0rdet:"s; :. the 'ba~ ihfbrmgl~ p,hce whl be I,'", 1\,,i, 1J~:placedtop.etter reflect the value of,tnilkcomponents; n1ihimurn,'flui 4'~iI~ (da ~s 1) prices. wo~ld be mor.e : h'larket : ti:;::!~ i i1-qns are _ ~ade ' to.. "products i!1duded ih-each' class of,. <,:. millq,::::.. '" 'i,., 0mt1')qn ljt oyisions wi11~e.' streamlined ~acro'ss orders. In each Federal milk marketing order area, the Class I price is the minimum price that regulated handlers must pay for milk used in fluid products--called Class I milk. Like Class II and Class III prices, producers do not receive the Class I price directly; rather, they receive a weighted average, called the blend price, which represents the volume and price of all milk in the marketing order area used in Class I, II, and III. Class I prices are announced each month, as the sum of the Basic Formula Price (BFP) plus a stated Class I price differential. Since the BFP is the same for every milk order, most discussions of Class I prices focus on the Class I differential, which varies across milk marketing orders. Class I differentials vary across Federal milk order areas for two reasons. First, there needs to be a price incentive (called the Class I differential) to move Grade A milk from points of production to fluid milk processing plants, which are typically located closer to population centers than to production areas. However, Federal orders also recognize that local milk prices should not exceed the cost of available "distant" milk plus transportation costs to the "local" market. The price incentive also persuades manufacturing plants to "give up" milk and make it available for the fluid market. What's in the Proposed Rule? The proposed rule reviews 7 Class I pricing methods that were submitted through public comment and suggested within the USDA. Two of these options are presented in significant The Agricultural Marketing Service--U.s. Department of Agriculture

19 detail for the reform of the FMMO program. Both options reflect the location value of milk that has prevailed in the FMMO program since its inception. One option, called "option la," would provide a set of Class I prices across the consolidated 11 orders that more closely reflects the current Class I price surface, but makes adjustments for recent changes in economic conditions. A second option, called "option IB," is more market-oriented, and like the current price surface, still provides minimum prices for higher valued fluid use, but relies more on the market to generate higher prices when needed to attract sufficient milk to markets. Option IB sets the stage for the dairy industry to move toward a market environment with less government intervention, and is consistent with the direction set by Congress in the 1996 farm bill. Option IB is therefore preferred by the Department. Because option IB is more market-oriented and reduces the government presence in establishing minimum Class I prices, the proposed rule offers three methods of transitioning to option lb. One method is to gradually phase in the new Class I differentials. This method would implement the change in Class I differentials in market order areas by 20 percent each year until the final Class I differentials under option IB are reached in A second method provides transition assistance that "bumps up" Class I differentials initially to offset the loss in cash receipts due to the decline in Class I differentials in most markets. In this method, the new Class I differentials under option IB would be "bumped up" by $0.55 per hundredweight (cwt) in the first year of phase-in, $0.35 per cwt in the second year, $0.20 in the third year, and $0.10 in the fourth year in all marketing areas. This level of assistance is intended to restore any lower receipts that might occur in some markets during transition. Market conditions could, of course, lead to higher prices, above the minimums established by option lb. A third method suggests transition assistance that initially "bumps up" the new Class I differentials even more, while still phasing toward a more market-oriented price surface by Under this variation, all Class I differentials in all marketing order areas would be "bumped up" by $1.10 per cwt in the first year of phase-in, $0.70 in the second year, $0.4 0 in the third year, and $0.20 per cwt in the fourth year before reaching the final Class I differentials described by option IB in The additional assistance provided by this method would enable dairy producers to make the investments and other changes in their operations that would be necessary to help them succeed in a more market-oriented environment. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) (TDD). USDA is an equal opportunity employer.

20 rr ~ -- r- 1 ~ ~ n W, Federal Milk Marketing Order Reform Proposed Rule CLASSIFICATION Er IDENTICAL PROVISIONS The 1996 farm bill mandated USDA to r~form the Federal milk marketing order I..FMMO) program. Although the farm bill only specified that there be fewer orders, the farm bill also authorized the Secretary to make other reforms to the FMMO program, including how milk is priced. The farm bill also mandated that reforms be implemented by April 4, 1999, and that USDA use an "informal" rulemaking process to proceed with the reforms. What Are Classification & Identical Provisions? ~t~~re:l~~i!t:;j~~:l\pe. r(ep h,u::ed ~ to J)epter; 'f.ef1e q::the value.. of m flk, compone~ts;, fuirihnum nuj(l:~11k%~ lass,ty >.prices > :t!:, [~f;~~:i~t:: ; '; products.includ ef ih e~ ~h,class,. of... milk, '",., ;- ':':"'-..',,'",:.,:., p~mmon provisi o/n.? ;~vih be.. sttean1nneda2ross '; orde ~s.,.. The Agricultural Marketing Agreement Act of the authorizing legislation for Federal milk marketing orders--provides that au milk should be classified "in accordance with the form in which, or the purpose for which it is used." This has resulted in a system of uniform provisions that places milk used for fluid purposes in the highest use class--class I--and other manufactured products in lower classes--classes II, III, and III-A. Currently, products packaged for fluid consumption such as whole milk, skim milk, buttermilk, and flavored milk drinks, are classified as Class I products. Class II products include ice cream, yogurt, cottage cheese, and cream. Most cheeses and butter are now classified in Class III, and Class III-A is limited to nonfat dry milk. What Would Change in the Proposed Rule? Among the changes in classification recommended in the proposed rule are the following: ~ Eggnog would be reclassified from Class II to Class I; ~ Cream cheese would be reclassified from Class III to Class II; ~ Class III-A would be renamed Class IV, and would include butter and any milk product in dried form. Federal milk marketing orders also contain numerous provisions that establish the regulations for the operation of the orders. Over the years, the orders have been individualized to account for specific situations associated with a given marketing area. The Agricultural Marketing Service--U.S. Department of Agriculture

21 However, there are several provisions within the orders that are similar, or that could be similar, and still provide for orderly and efficient marketing of milk. Therefore, the proposed rule also recommends streamlining of various provisions, definitions, and terms across orders. Specifically, the proposed rule recommends: ~ Standardizing and consolidating as many order provisions as possible into the General Provisions (Part 1000 of Title 7, CFR), and reducing the provisions contained in individual orders to those provisions that must be unique to each order. Standardized provisions would: define various terms used in the orders; establish regulatory standards for plants and handlers; provide for uniform reporting of milk receipts and utilization; provide for uniform classification of milk; and provide for computation of a uniform price. Eliminating archaic terminology and obsolete provisions, restructuring order provisions in a more logical format, simplifying the way in which "shrinkage" (milk lost in transit and processing) is classified, and modifying the way in which milk components (butterfat, protein, and skim milk) are priced. January 1998 The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or call (202) (voice) or (202) (TDD). USDA is an equal opportunity employer.