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DEPARTMENT OF AGRICULTURE

Western Area Power Administration

CFR Citation: 7 CFR Part 1000

Docket ID: [Docket No. AMS-DA-07-0026; AO-14-A77, et al.; DA-07-02-A]

NOTICE: Part IV

DOCUMENT ACTION: Proposed rule; tentative partial final decision.

SUBJECT CATEGORY: Milk in the Northeast and Other Marketing Areas; Tentative Partial Final Decision on Proposed Amendments and Opportunity To File Written Exceptions to Tentative Marketing Agreements and Orders

DATES: Comments should be submitted on or before August 19, 2008.

DOCUMENT SUMMARY: This tentative partial final decision proposes to adopt changes to the manufacturing cost allowances and the butterfat yield factor used in Class III and Class IV productprice formulas applicable to all Federal milk marketing orders on an interim basis. A separate decision regarding the collection of manufacturing cost information, the use of an energy cost adjustor and providing for a cost addon feature to Class III and Class IV productpricing formulas will be addressed in a separate decision. This tentative partial decision requires determining if producers approve the issuance of the amended orders on an interim basis.

SUMMARY: Agriculture Department, Agricultural Marketing Service,

SUPPLEMENTAL INFORMATION

This tentative partial final decision proposes to adopt on an interim final and emergency basis, amendments to the manufacturing (make) allowances for cheese, butter, nonfat dry milk (NFDM) and dry whey powder contained in the Class III and Class IV product price formulas. Specifically, this decision proposes to adopt the following make allowances: Cheese$0.2003 per pound; butter $0.1715 per pound; NFDM$0.1678 per pound; and dry whey$0.1991 per pound. This decision also proposes increasing the butterfat yield factor in the butterfat price formula from 1.20 to 1.211.

This decision also addresses proposals published in the hearing notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 18 that seek to change various features of the Class III and Class IV productprice formulas. Proposals seeking to establish a manufacturing cost survey (Proposal 2), establish an energy cost adjustor (Proposal 17) and establish a cost addon (Proposal 20), will be addressed in a separate recommended decision.

This administrative action is governed by the provisions of Sections 556 and 557 of Title 5 of the United States Code and, therefore, is excluded from the requirements of Executive Order 12866.

The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed amendments would not preempt any state or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Agricultural Marketing Agreement Act of 1937 (Act), as amended (7 U.S.C. 604674), 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 U.S. Department of Agriculture (USDA) 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 the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, USDA 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 habitant, or has its principal place of business, has jurisdiction in equity to review the USDA'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. Regulatory Flexibility Act and Paperwork Reduction Act

In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 612), the Agricultural Marketing Service has considered the economic impact of this action on small entities and has certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. For the purpose of the Regulatory Flexibility Act, a dairy farm is considered a small business if it has an annual gross revenue of less than $750,000, and a dairy products manufacturer is a small business if it has fewer than 500 employees.

For the purposes of determining which dairy farms are small businesses, the $750,000 per year criterion was used to establish a production guideline of 500,000 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 500employee limit, the plant will be considered a large business even if the local plant has fewer than 500 employees.

For the month of February 2007, the month the initial public hearing was held, the milk of 49,712 dairy farmers was pooled on the Federal order system. Of the total, 46,729 dairy farmers, or 94 percent, were considered small businesses. During the same month, 352 plants were regulated by or reported their milk receipts to be pooled and priced on a Federal order. Of the total, 186 plants, or 53 percent, were considered small businesses.

This decision proposes that all orders be amended by changing the make allowances contained in the formulas used to compute component prices and the minimum class prices in all Federal milk orders. Specifically, the make allowance for butter increases from $0.1202 to $0.1715 per pound; the make allowance for cheese increases from $0.1682 to $0.2003 per pound; the make allowance for NFDM increases from $0.1570 to $0.1678 per pound; and the make allowance for dry whey increases from $0.1956 to $0.1991 per pound. The butterfat yield factor in the butterfat price formulas is increased from 1.20 to 1.211.

The proposed adoption of these new make allowances serves to approximate the average cost of producing cheese, butter, NFDM and dry whey for manufacturing plants located in Federal milk marketing areas. The established criteria for the make allowance changes are applied in an identical fashion to both large and small businesses and will not have any different impact on those businesses producing manufactured milk products.

An economic analysis has been performed that discusses impacts of the proposed amendments on industry
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participants including producers and manufacturers. It can be found on the AMS Dairy Web site at http://www.ams.usda.gov/dairy. Based on the economic analysis we have concluded that the proposed amendments will not have a significant economic impact on a substantial number of small entities.

The Agricultural Marketing Service (AMS) is committed to complying with the EGovernment Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

This tentative partial final decision does not require additional information collection that needs clearance by the Office of Management and Budget (OMB) beyond currently approved information collection. The primary sources of data used to complete the forms are routinely used in most business transactions. The forms require only a minimal amount of information that 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 the industry average.

Interested parties were invited to submit comments on the probable regulatory and informational impact of this proposed rule on small entities.

Economic Analysis

In order to assess the impact of the proposed changes in Federal order producer price formulas, the Department conducted an economic analysis. The complete analysis is available at on the Dairy Programs Web site which can be accessed through http://www.ams.usda.gov.

The impacts of the proposed changes to the Class III and Class IV pricing formulas contained in the tentative final decision are summarized as changes from the USDA baseline on an annual basis and as a nineyear average change from 20082016. Impacts on the Federal order system are considered to be in the context of the broader U.S. market for milk and dairy products.

Producers: The U.S. allmilk price falls an average $0.06 per cwt (0.39 percent) from a baseline level of $16.22 per cwt over the nine year projection period. The average Federal order minimum blend price at test averages $0.11 per cwt (0.68 percent) below the baseline level of $16.43 per cwt. The lower milk prices result in a tightening of production. In turn, Federal order marketings fall an average 145 million pounds (0.11 percent) below the baseline average of 126.5 billion pounds. Federal order cash receipts decrease an average $165 million (0.79 percent) from the $20.8 billion baseline receipts. U.S. marketings come in an average 240 million pounds (0.13 percent) per year below the baseline average of 187.8 billion pounds. The lower marketings coupled with lower prices across the board result in an average decline of $156 million (0.51 percent) in producer revenue from the baseline average of $30.4 billion.

Milk Manufacturers and Processors: Increases to the make allowances in Federal order minimum price formulas are advantageous for dairy product manufacturers. Average wholesale prices over the projection period exceed baseline by the following: Cheddar cheese by $0.0176 per pound (1.14 percent), butter by $0.0346 per pound (1.89 percent), nonfat dry milk by $0.0090 per pound (0.88 percent), and dry whey by $0.0034 per pound (0.94 percent).

In spite of the higher product prices, the make allowance changes are substantial enough that the nineyear average component prices fall from baseline levels. The changes are as follows: Butterfat by $0.0014 per pound (0.07 percent), protein by $0.0451 per pound (1.96 percent), nonfat solids by $0.0018 per pound (0.22 percent) and the other solids price by $0.001 per pound (0.05 percent). Lower component prices are carried through to lower skim milk pricing factors. The Class III skim price falls an average $0.14 per cwt (1.72 percent) from a baseline average level of $8.16 per cwt and remains the Class I price mover.

Consumers: The retail price of fluid milk is expected to decrease an average of $0.0094 per gallon (0.27 percent) from the baseline average price of $3.4135 over the nineyear projection period due to the lower Class I price. Consumers respond, albeit modestly, to the decreased prices as evidenced by the average 32 million pound (0.07 percent) increase in Class I marketings from a baseline average of 45 billion pounds over the projection period. Class II marketings increase overall, indicating an increase in consumption of soft products consistent with the slight decline in Class II prices. At the same time, consumers face higher prices for hard manufactured dairy products such as cheese, butter and nonfat dry milk and as a result, Class III and Class IV marketings fall from baseline levels. Consumer demand for hard manufactured dairy products is more elastic than for fluid milk and soft products; consumers are more responsive to changes in price.

Government Outlays: With the expiration of the Milk Income Loss Contract (MILC) program, and no activity under Dairy Export Incentive Program (DEIP), any change to government outlays occurs through Milk Price Support Program (MPSP) purchases. Baseline level prices are high enough that few government purchases are expected. Under the proposed changes, removals change only slightly at the beginning of the projection period; remaining unchanged in from baseline in the long run projection.

The proposed changes to Class III and Class IV pricing formulas result in lower Federal order prices as well as higher manufactured product prices. Thus, the gap between the price of milk and the wholesale prices received by processors widens. At the same time, milk producers face lower prices and respond by cutting back on production, leading to lower marketings and producer revenue losses.

The decrease in the Federal minimum price for Class I milk is passed on to consumers in the form of a slightly lower retail price for fluid milk which increases consumption. However, tighter milk supply bolsters manufactured product prices and in turn lowers consumption of cheese, butter, and NDFM. Class I and Class II marketings increase, but not enough to counteract the lower prices, allowing average receipts to fall across all classes. Though prices for Class III and Class IV milk decrease under the proposed changes, the decreased consumption of the associated dairy products and the increase in Class I and Class II product consumption causes a shift in dairy product allocation, increasing the amount of milk allocated to Class II production. Prior Documents in This Proceeding

Notice of Hearing: Issued February 5, 2007; published February 9, 2007 (72 FR 6179).

Supplemental Notice of Hearing: Issued February 14, 2007; published February 20, 2007 (72 FR 7753).

Notice To Reconvene Hearing: Issued March 15, 2007; published March 21, 2007 (72 FR 13219).

Notice To Reconvene Hearing: Issued May 2, 2007; published May 8, 2007 (72 FR 25986).

Preliminary Statement

Notice is hereby given of the filing with the Hearing Clerk of this tentative partial final decision with respect to the proposed amendments to the tentative marketing agreements and the orders [[Page 35308]]
regulating the handling of milk in the Northeast and other marketing areas. This notice is issued pursuant to the provisions of the Agricultural Marketing Agreement Act (AMAA) and applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR part 900).

Interested parties may file written exceptions to this decision with the Hearing Clerk, United States Department of Agriculture, Room 1031Stop 9200, 1400 Independence Avenue, SW., Washington, DC 20250 9200, by the August 19, 2008, deadline. Six (6) copies of the exceptions should be filed. Comments may also be submitted at the Federal eRulemaking portal: http://www.regulations.gov.

A public hearing was held upon proposed amendments to the marketing agreements and the orders regulating the handling of milk in the Northeast and other marketing areas. The hearing was held, pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937 (AMAA), as amended (7 U.S.C. 601674), and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR Part 900).

The proposed amendments set forth below are based on the record of the first session of a public hearing held in Strongsville, Ohio, on February 26March 2, 2007, pursuant to a notice of hearing issued February 5, 2007, published March 21, 2007 (72 FR 13219); a second session of a public hearing held in Indianapolis, Indiana, on April 9 13, 2007, pursuant to a reconvened hearing notice issued March 15, 2007, published March 21, 2007 (72 FR 13219); and a third session of a public hearing held in Pittsburgh, Pennsylvania, on July 911, 2007, pursuant to a reconvened hearing notice issued May 2, 2007, published May 8, 2007 (72 FR 25986).

The material issues on the record of the hearing relate to:

1. Amending the productprice formulas used to compute Class III and Class IV prices.

2. Determination of Emergency Marketing Conditions. Findings and Conclusions
1. Amending the productprice formulas used to compute Class III and Class IV prices

This tentative final decision adopts on an interim basis, a proposal published in the hearing notice as Proposal 1 which seeks to amend the manufacturing allowances for butter, cheese, nonfat dry milk (NFDM) and dry whey using the most currently available data, and a portion of Proposal 6 that increases the butterfat yield in the butterfat price formula. Specifically, this decision adopts the following manufacturing allowances: Cheese$0.2003 per pound, butter $0.1715 per pound, NFDM$0.1678 per pound and dry whey$0.1991 per pound. This decision also increases the butterfat yield factor in the butterfat price formula from 1.20 to 1.211.

The Federal Milk Marketing Order (FMMO) program currently uses productprice formulas to compute prices handlers must account for in the marketwide pooling of milk used in the four classes of products. These formulas rely on the price of finished products to determine the minimum classified prices handlers pay for raw milk. In addition, the Class III and Class IV prices form the base from which Class I and Class II prices are determined. This endproduct pricing system was implemented on January 1, 2000 (published February 12, 1999; 64 FR 70868).

The productprice formulas are computed by using component values from National Agricultural Statistic Service (NASS) surveyed prices of manufactured dairy products. The pricing system determines butterfat prices for milk used in products in each of the four classes from a surveyed butter price; protein and other solids prices for milk used in Class III products from surveyed cheese and dry whey prices; and a nonfat solids price for milk used in Class II and Class IV products from surveyed nonfat dry milk product prices. The skim milk portion of the Class I price may be derived from either the protein and other solids price, or from the nonfat dry milk price depending on the price relationships. The butterfat, protein, other solids and nonfat solids prices are all derived in a similar manner: Average NASS survey price minus a manufacturing (make) allowance times a yield factor. The yield factor is an approximation of the quantity of a specific product that can be made from a hundredweight (cwt) of milk. The yield factors were last amended on April 1, 2003 (published February 12, 2003; 68 FR 7063).

The make allowance factor represents the cost manufacturers incur in making raw milk into one pound of product. Federal milk order pricing formulas currently contain the following make allowances: Cheese$0.1682 per pound, butter$0.1202 per pound, NFDM$0.1570 per pound and dry whey$0.1956 per pound. These make allowances were adopted in 2006 (71 FR 78333) and became effective on March 1, 2007, and were determined on the basis of a California Department of Food and Agriculture (CDFA) and a Cornell Program on Dairy Markets and Policy (CPDMP) survey of manufacturing costs. The current make allowances, except dry whey, were computed by taking a weighted average of the CDFA and CPDMP surveys using National commodity production as the weights, and adjusting for marketing costs. The dry whey make allowance was computed by relying solely on the CPDMP 2005 survey and adjusting for marketing costs.

Nineteen proposals were published in the hearing notice for this proceeding. Proposals 4, 5 and 11 were withdrawn at the hearing by proponents in support of other noticed proposals. No further reference to these proposals will be made.

A proposal published in the hearing notice as Proposal 1, offered by AgriMark Cooperative (AgriMark), seeks to amend the Class III and Class IV make allowances by using the most current plant cost survey data available. AgriMark is a CapperVolstead cooperative with approximately 1,400 memberowners throughout New England and New York, and operates four manufacturing plants.

AgriMark is also the proponent of Proposal 2 that seeks to amend the Class III and Class IV product price formulas to annually update the manufacturing allowances using an annual manufacturing cost survey of cheese, whey powder, butter, and nonfat dry milk plants (located outside of California.) The proposed amendments would grant authority to the Market Administrator to administer the survey, select the sample plants, and collect, audit, and assemble cost information. This proposal will also be addressed in a separate decision.

A proposal published in the hearing notice as Proposal 3, offered by Dairy Producers of New Mexico (DPNM), seeks to amend the manufacturing allowances contained in the Class III and Class IV product price formulas. Specifically, this proposal seeks to set the make allowances at the following levels: $0.1108 per pound for butter; $0.1638 per pound for cheese; $0.1410 per pound for NFDM; and $0.1500 per pound for dry whey. DPNM is an association of dairy producers located in New Mexico and West Texas.

DPNM is the proponent of Proposals 6, 7 and 8 that seek to amend the yield factors and the butterfat recovery rate of the Class III and Class IV product price formulas. Proposal 6 seeks to amend the butter price formula by increasing the butterfat yield factor from 1.20 to 1.211
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and to amend the protein price formula by increasing the butterfat recovery rate from 90 percent to 94 percent. Proposal 7 seeks to eliminate the farmtoplant shrink and butterfat shrink adjustments of all yield factors. Proposal 8 seeks to increase the nonfat solids yield factor from 0.99 to 1.02, and increase the protein price yield factor for cheese from 1.383 to 1.405 and for butter from 1.572 to 1.653.

Proposal 9 was offered by the International Dairy Foods Association (IDFA). Proposal 9 seeks to amend the Class III and Class IV product price formulas by adjusting the protein price formula to reflect the lower value and reduced volume of butterfat recoverable as whey cream. IDFA is a trade association with 530 members representing
manufacturers, marketers, distributors, and suppliers of fluid milk and related products.

Proposal 10 was submitted on behalf of AgriMark. Proposal 10 seeks to amend the Class III and Class IV productprice formulas by reducing the protein price to reflect the lower selling price of whey butter.

Proposal 12 was offered by IDFA. Proposal 12 seeks to amend the Class III and Class IV product price formulas by eliminating the 3cent cost adjustment for cheese manufacturing of 500pound barrels contained in the protein price formula.

Proposal 13 was offered by Dairy Farmers of America, Inc. (DFA) and the Northwest Dairy Association (NDA). Proposal 13 seeks to amend the Class III and Class IV productprice formulas by removing the barrel cheese price as a cost component of the protein price formula. DFA is a CapperVolstead cooperative with 13,500 memberowners producing milk in 40 states. NDA is a CapperVolstead cooperative with approximately 610 memberowners, and operates 6 manufacturing plants and 4 distributing plants in the western United States.

Proposal 14 was advanced by AgriMark. Proposal 14 seeks to amend the Class III and Class IV product price formulas by using a combination of the weekly NASS and CME cheese price series to determine the cheese price contained in the Class III and Class IV productprice formulas.

Proposal 15 also was offered by DPNM. This proposal seeks to replace the NASS commodity price surveys with CME commodity prices in each of the price formulas except for the other solids formula. The dry whey price in the other solids formulas would continue to be derived from the NASS dry whey price survey.

Proposal 16 was offered by National AllJersey, Inc. (NAJ). Proposal 16 seeks to amend the Class III and Class IV productprice formulas by eliminating the other solids price and adding the equivalent value of dry whey to the protein price formula. NAJ is a breed organization with more than 1,000 members.

Proposal 17 was offered by the National Milk Producers Federation (NMPF). The proposal seeks to amend the Class III and Class IV product price formulas to incorporate a monthly energy cost adjustment based on monthly changes in the manufacturing price indices for industrial natural gas and industrial electricity as published by the Bureau of Labor Statistics. NMPF is an association consisting of 33 dairyfarmer cooperative members representing nearly threequarters of U.S. dairy farmers. This proposal will be addressed in a separate decision.

Proposal 18 was offered by the Maine Dairy Industry Association (MDIA). Proposal 18 seeks to amend the Class III and Class IV product price formulas by incorporating a factor to account for any monthly spread between component price calculations for milk and a competitive pay price for equivalent Grade A milk. MDIA is an association that represents all of Maine's 350 dairy farmers.

A proposal published in a supplemental hearing notice as Proposal 20 was submitted on behalf of Dairylea Cooperative, Inc. (Dairylea). Proposal 20 seeks to amend the Class III and Class IV price formulas by establishing costofproduction addons that manufacturers could include in the selling price of their products but would not be included in the determination of the NASS survey prices. Dairylea is a CapperVolstead cooperative with 2,400 memberowners located in seven states. This proposal also will be addressed in a separate decision.

To provide order to the volume of hearing testimony and post hearing briefs, the summary of testimony is organized as follows:

1. Make Allowances: Proposals 1, 2 and 3

2. Product Yields and Butterfat Recovery Percentage: Proposals 6, 7 and 8

3. Value of Butterfat in Whey: Proposals 9 and 10

4. Barrel Cheese Price: Proposals 12 and 13

5. Product Price Series: Proposals 14, 15 and 18

6. Other Solids Price: Proposal 16

1. Make Allowances

A witness from Cornell University (Cornell witness) testified regarding the 2006 manufacturing cost survey (2006 survey) conducted by the Cornell Program on Dairy Markets and Policy (CPDMP), to assess the manufacturing costs of plants producing cheddar cheese, dry whey, butter and NFDM. The witness did not testify in support or opposition to any proposal presented at the hearing. The witness explained that an earlier study, the CPDMP 2005 manufacturing cost survey (2005 survey), was contracted in part by USDA and was presented at a 2006 rulemaking hearing (71 FR 52502), and were factors considered by USDA in developing the make allowances that became effective March 1, 2007 (71 FR 78333). The witness said that some manufacturing plants that participated in the 2005 survey requested a new survey to reflect more current cost information.

The Cornell witness said that each of the plants that participated in the 2005 survey were asked to participate in the 2006 survey. The witness stated that 21 plants agreed to participate and of those plants 19 were deemed to have acceptable data to be included in the 2006 survey. Plants submitted data corresponding to their most recent fiscal year; most of the data observations occurred in calendar year 2006, the witness said. The data was not audited by the witness. The witness explained that if a plant produced multiple products they were asked to allocate manufacturing costs for each product. However, if they failed to do so the witness allocated costs on a per pound of solids basis in the finished product. The average manufacturing costs detailed in the study were on a per pound of finished product basis and were not adjusted for moisture content, the witness said.

The Cornell witness said that 11 cheese plants participated in the 2006 survey compared with 16 cheese plants in the 2005 survey. Eight of those plants (one classified as a large plant and the other seven as small plants) also participated in the 2005 survey; the three remaining plants that participated in the 2006 survey were asked to participate in 2005 but submitted data too late for its inclusion. The witness testified that five small cheese plants that were included in the 2005 survey opted not to participate in the 2006 survey. Of the eleven plants, the witness classified seven as small plants and the remaining four as large volume plants. The witness testified that the weighted average manufacturing cost of the 2006
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cheese plant sample was $0.1584 per pound, a decrease of $0.0054 per pound from 2005. The witness said that comparing the costs for the eight plants that participated in both surveys revealed a weighted average cost increase of $0.017 per pound between the 2005 and 2006 surveys. The total pounds covered by the 2006 survey increased from approximately 60 million pounds in 2005 to nearly 119 million pounds in 2006. The Cornell witness asserted that the 2005 survey oversampled small plants while the 2006 survey oversampled large plants. The witness noted that the average packaging cost for cheese in the 2006 survey was only for 40pound block production. If a plant produced barrel cheese the witness assigned it an average 40pound block packaging cost before computing the average manufacturing costs for the entire sample.

The Cornell witness said that seven whey plants participated in the 2006 survey and their weighted average cost was $0.1976 per poundan increase of $0.0035 per pound from the 2005 survey. According to the witness, the seven participating whey plants were associated with a cheese plant that was also included in the 2006 survey. The witness noted that 12 whey plants participated in the 2005 survey.

The Cornell witness said that four butter plants participated in the 2006 survey; three of the plants also participated in the 2005 survey. The weighted average cost of the four plants was $0.1846 per pound, an increase of $0.0738 per pound over the 2005 survey. The survey accounted for 57.6 million pounds of butter. The witness testified that significant cost allocation problems and data quality problems with the 2005 butter data were major reasons for the large increase in the weighted average cost from 2005 to 2006. The witness testified that the 2005 survey butter data was not accurate, but asserted that the allocation problems were corrected in the 2006 survey. While maintaining that the 2006 survey data was reliable, the witness said that a larger sample size would have been preferred. The witness also noted that the manufacturing costs submitted by one of the butter plants in the 2006 survey did include the cost of transporting cream from its drying plant to its butter plant.

The Cornell witness said that the 2006 survey for NFDM consisted of seven of the eight NFDM plants that participated in the 2005 survey. According to the witness, the weighted average cost of the seven plants was $0.1662 per pound, an increase of $0.0239 per pound from 2005. The witness explained that the weighted average cost increase is partially explained by increases in real costs (labor, packaging, etc.), but also partly because of a change in the methodology of indirectly allocating costs between butter and NFDM. According to the witness, there were flaws in the method used to indirectly allocate costs for NFDM in the 2005 study that resulted in understating the cost of processing NFDM. The witness claimed that an attempt was made in the 2006 survey to correct this understated processing cost. The witness did not explain the reported flawed methodology or the methodological changes for 2006. According to the witness, the 2006 survey accounted for 70.1 million pounds of NFDM, an increase of 15 million pounds.

A witness appearing on behalf of AgriMark testified in support of Proposals 1 and 2. The witness explained that Proposal 1 seeks to update the make allowances adopted on an interim final basis (71 FR 78333), effective March 1, 2007, using 2005 CDFA data. The witness asserted that this update would increase the butter, NFDM and cheese make allowances by $0.0014, $0.0092 and $0.0029 per pound, respectively. The witness was of the opinion that the dry whey make allowance should incorporate the 2005 CDFA data which reflects an average cost of $0.2851 per pound.

The witness reiterated AgriMark's position expressed in comments to the tentative final decision (71 FR 67467) that proposed adoption of the current make allowances. The witness concluded that using this weighting methodology (including a $0.0015 per pound marketing cost factor) the resulting make allowances should be: $0.1780 per pound for cheese, $0.1351 per pound for butter, $0.1510 for NFDM and $0.2090 per pound for dry whey.

The AgriMark witness conceded that increasing the make allowances would assist highcost plants in covering their costs while creating a financial windfall for lowcost plants. In turn, the witness said, the lowcost plants could use the additional revenue to sell products at a lower cost, pay producers a higher price, or increase their financial returns. The witness said that any financial gains lowcost plants in the Southwest earn from a high make allowance would not harm highcost plants in the Northeast because it is too costly to transport milk from the Southwest to the Northeast. The witness believed that competitive issues resulting from high make allowances would only arise if a low cost plant was located next door to a highcost plant that competes for the same milk supply.

The AgriMark witness advanced Proposal 2 seeking to establish an annual manufacturing cost survey, administered by USDA that would automatically update make allowances without requiring a rulemaking proceeding. On brief, AgriMark withdrew the automatic updating portion of this proposal. The witness explained that manufacturing input prices fluctuate in the shortrun and an annual survey would ensure the timelier recognition of these fluctuations in make allowances. The witness said that the CPDMP survey should provide the basic methodology needed to conduct the survey and that any changes to the methodology should be done through the formal rulemaking process. The witness asserted that the survey should be administered by market administrator audit personnel and the plant sample, preferably larger than the CPDMP sample, should be selected by random sampling. The witness also supported auditing surveyed plants and asserted that this function should be funded by payments from the Market Administrator's administrative assessment fund. The witness said that if the survey was audited, the use of CDFA cost data would no longer be necessary in determining make allowances. The witness also supported addressing the proposed manufacturing cost survey in a recommended decision to allow for public comments.

The AgriMark witness was of the opinion that based on the new CPDMP survey the make allowances should be set at the higher of: (1) A level that would allow a minimum of 80 percent of the producer milk used by Class III and Class IV plants to cover their costs; or (2) a level that would allow a minimum of 25 percent of the producer milk volume used by Class III and Class IV plants in any specific Federal order annually pooling at least 4 billion pounds of milk to cover their costs. The AgriMark witness opposed Proposal 3.

A witness appearing on behalf of Land O'Lakes (LOL) testified in support of Proposals 1 and 2. According to the witness, LOL is a CapperVolstead cooperative with over 3,000 members that own 4 manufacturing plants in the United States. The witness supported updating the current make allowances with 2005 CDFA manufacturing cost data as advanced in Proposal 1. The witness advocated that the audited CDFA whey manufacturing cost data be included in the whey make allowance computation. The witness asserted that the make allowances should be recalculated by weighting the CDFA and
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CPDMP data by the survey sample volumes, not national product volumes which the witness argued was not statistically valid. The witness concluded that the new make allowances (using LOL's proposed weighting) should be as follows: $0.1780 for cheese; $0.2090 for dry whey; $0.1560 for NFDM; and $0.1351 for butter.

The LOL witness supported the annual cost survey offered in Proposal 2, with technical modifications. The witness stated that the authority for collecting plant cost data should be granted to the AMS Administrator, that the plant sample be limited to plants located outside of California that receive pooled (producer) milk, and that the survey results are combined with the CDFA data to determine appropriate Federal order make allowance levels. The witness opposed the portion of Proposal 2 that would set make allowances at a level that would cover the cost of manufacturing for the highest cost Federal order marketing area. The witness said that classified prices are determined on a national, not a regional basis, and therefore relying on regional costs is inappropriate. The witness was of the opinion that USDA should clearly identify the target product volume and percentage of plants that should be covered by new make allowances that result from this proceeding.

The LOL witness opposed Proposal 3 seeking to exclude CDFA manufacturing cost data when computing new make allowances. The witness argued that since 2000 the Department has continuously considered CDFA manufacturing cost data when determining new make allowance levels and asserted that there is no justification to modify that policy. The witness elaborated that classified prices are determined using a national survey that includes California plants and therefore including California plant costs when determining make allowance levels is appropriate.

A witness testifying on behalf of Michigan Milk Producers Association (MMPA) testified in support of Proposals 1 and 2, and in opposition to Proposal 3. According to the witness, MMPA is a Capper Volstead cooperative with approximately 2,400 members that markets 3.5 billion pounds of milk annually and operates 2 manufacturing plants. The witness offered support for Proposal 1 to update the make allowances based on the most currently available data, specifically the 2005 CDFA manufacturing cost data. The MMPA witness stressed support for Proposal 2's annual survey of manufacturing costs that would be administered by AMS through its market administrators.

A witness appearing on behalf of NDA testified regarding the CPDMP 2005 survey that was used to determine current make allowance levels. The witness said that NDA participated in the study and that costs for its NFDM plants were incorrectly allocated. The witness estimated that NDA's NFDM production represented approximately 54 percent of the total volume contained in the CPDMP 2005 survey for NFDM. In the survey, cream costs were allocated on a butterfat solids basis rather than as a percent of total solids, the witness said. However, according to the witness NDA's NFDM plants separate the cream that is stored in silos to be sold or transported to its butter manufacturing plant resulting in an overallocation of costs to cream in the CPDMP 2005 survey. According to the witness, this misallocation inaccurately lowered NDA's NFDM manufacturing costs by $0.036 per pound. The witness asserted that after correcting for this error, the CPDMP 2005 survey for NFDM weighted average cost should been $0.019 per pound higher. The witness urged USDA to issue an emergency decision addressing make allowances because of the errors contained in the CPDMP 2005 survey.

A posthearing brief was filed on behalf of AgriMark, Foremost Farms USA, LOL, MMPA, NDA and Associated Milk Producers, Inc., hereinafter referred to as AgriMark, et al. The members of AgriMark, et al., are all CapperVolstead cooperatives who market their members' milk in the Federal order system and operate manufacturing plants.

The AgriMark, et al., brief emphasized its support for product price formulas because, in their opinion, no truly independent competitive price series exists to determine milk prices. The brief summarized the evolution of the Federal order pricing system and asserted that USDA's past policy has been to set make allowances at levels that cover the processing costs for most Federal order plants. The brief expressed the opinion that USDA deviated from this policy when determining current make allowance levels.

The AgriMark, et al., brief supported adoption of Proposal 1 and argued that make allowances should be updated using the 2005 CDFA and the CPDMP 2006 surveys. AgriMark, et al., was of the opinion that USDA should continue to use the same national product volume weighting methodology that determined the current make allowances, incorporate CDFA whey cost data, use the CPDMP 2005 survey cheese plant population average cost instead of the sample average cost and continue to include a marketing cost factor of $0.0015 per pound in each make allowance.

In their posthearing brief, AgriMark, et al., proposed that the cheese make allowance be set at $0.2154 per pound. AgriMark, et al., wrote that the CPDMP 2005 survey cheese plant population average of $0.2028 per pound was the most representative of average size plants and therefore it is the best available information to determine an appropriate cheese make allowance. AgriMark, et al., endorsed the methodology explained in the IDFA brief that derived a cheese make allowance of $0.2154 per pound.

The AgriMark, et al., brief proposed a dry whey make allowance of $0.2080 per pound by combining the 2005 CDFA and the CPDMP survey of 2006 weighted average costs. Using this same methodology, the brief proposed a butter make allowance of $0.1725 per pound and the NFDM make allowance of $0.1782 per pound (though stipulating that the CDFA mediumsized plant cost should be used for NFDM.) The brief summarized the Cornell witness' testimony regarding the errors with the 2005 butter and NFDM survey methodology and concluded that the current make allowances that were determined with this data are unrepresentative of actual costs. AgriMark, et al., requested that Proposal 1 be adopted on an emergency basis to rectify the current unrepresentative make allowances.

In their brief, AgriMark, et al., expressed support for the portion of Proposal 2 that would authorize USDA to develop and conduct periodic manufacturing cost surveys of plants located outside of California. The brief explained that this data could then be relied upon in future rulemaking proceedings to amend the product price formulas.

A witness testified on behalf of DPNM, Select Milk Producers, Inc. (Select), and Continental Dairy Producers, Inc. (Continental). Hereinafter, these entities will be referred to as DPNM, et al. The witness said that Select and Continental are CapperVolstead cooperatives whose members are located in New Mexico, Texas, Kansas, Ohio, Michigan and Indiana. According to the witness, the DPNM, et al., testimony was endorsed by Lone Star Milk Producers and Zia Milk Producers, Inc., who are also CapperVolstead cooperatives.

The DPNM, et al., witness testified in support of Proposal 3. The witness was
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of the opinion that CDFA cost data should not be used to determine new make allowance levels because the data are only representative of California manufacturing plants which the witness asserted have higher manufacturing costs than the rest of the country. The witness testified that CDFA data had been utilized in the past when make allowances were determined using Rural Business Cooperative Service (RBCS) cost data because the audited CDFA data broadened the available data and was used to verify the information contained in the RBCS study. However, the witness insisted that the CPDMP cost surveys are far more
representative of the population of manufacturing plants and should now be relied upon as the sole determinant of make allowances.

The DPNM, et al., witness testified that make allowances should be set at the following levels: $0.1108 per pound for butter; $0.1638 per pound for cheese; $0.1410 per pound for NFDM; and $0.1500 per pound for dry whey. The witness stated that except for dry whey, the proposed make allowances are identical to the weighted average costs contained in the CPDMP 2005 survey. The witness proposed that the dry whey make allowance be determined by adding $0.0090 per pound to the NFDM make allowance to account for the additional energy needed to produce dry whey. The witness estimated that if the DPNM, et al's., proposed make allowances are adopted, blend prices would increase by $0.22 per cwt.

A second witness, a dairy accountant and dairy farmer appearing on behalf of DPNM, et al., testified regarding dairy farm operating costs, accounting, and business analysis of large modern dairy farm operations. According to the witness, the firm provides accounting and other business services to dairy producer operations in 27 states whose production volume represents about 10 percent of the milk produced in the United States. The witness testified that based on data collected during the 1990's, large dairy farms in six Western states had an average annual net profit per cwt of $1.31. The witness testified that based on 10 years' worth of client data, dairy farms in the west and eastern states must earn a net income of $1.50 and $2.00 per cwt, respectively, for a dairy farmer to collect a salary and retire debt. The witness predicted that for 2007 producer client average gross income of $15.51 per cwt and an average cost of production of $15.17 per cwt, would yield an average net profit of $0.34 per cwt. The witness said that this was far from the $1.50 per cwt net profit needed for their clients to reduce debt or cover living expenses.

The second DPNM, et al., witness stated that low milk prices in 2005 reduced dairy farm client income to an average of $206 per cow. The witness noted that during the 1990s, average production cost per cwt in western states was $11.87 but this has risen to $13.50 for 2004 2005. The witness testified that rising input costs combined with lower milk prices in 20042005 made largescale, highly efficient dairy farming unprofitable, even in lowcost operating areas such as west Texas and New Mexico. The witness provided additional testimony to show that increasing make allowances depressed dairy farmer income during a period of increasing costs and reduced opportunities for profitability. The witness supported this testimony with 2006 client data showing that a farm milking 1,800 cows would have lost $284,000. The witness provided detailed client data showing that the major highercost milk production factors during 2005 and 2006 were increased energy and feed costs.

A third witness, a dairy farmer, appearing on behalf of DPNM, et al., testified in support of Proposal 3. The witness operates a farm in New Mexico that milks approximately 3,800 cows and testified that they have been receiving $1.50 cwt below the Southwest order's blend price because of hauling costs. The witness said that over the last few years any increase in producer milk prices has been consumed by rapidly increasing production costs. The witness supported all proposals submitted by DPNM and articulated opposition to adoption of Proposals 1 and 2.

The DPNM, et al., posthearing brief explained its opposition to all other proposals included in the hearing to adjust the make allowances was based on three principles: (1) The data used to determine the appropriate level of manufacturing allowances for establishing Federal order prices should be drawn from plants operating within the Federal order system; (2) adjustments to Federal order pricing regulations should always be subject to formal rulemaking; and (3) make allowances should be set at a level deemed appropriate by USDA, after taking into consideration all statutorily required factors and current milk marketing conditions, rather than prescribed geographic or volumetric factors. The brief explained why the CPDMP 2005 survey is the best data available and met their criteria for use in establishing Federal order make allowances and why the 2006 survey is flawed and should not be relied upon in determining make allowances.

A witness appearing on behalf of IDFA testified in support of Proposal 1 and the annual manufacturing cost survey advanced in Proposal 2. However, the witness did not support adoption of the portion of Proposal 2 that would result in the automatic update of make allowances. The witness requested emergency adoption of Proposal 1 and this request was reiterated in IDFA's posthearing brief.

The IDFA witness testified that the productprice formulas determine the minimum prices manufacturers must pay for their raw milk and that those whose costs exceed the fixed make allowances in the price formulas are unable to recoup their higher costs. The witness asserted that any increase in the manufacturer's end product prices would only result in an increase in the minimum raw milk price they must pay. According to the witness, manufacturers also face financial problems if any of the productprice formula factors are incorrect. The witness illustrated by example the impacts of both inaccurate product prices and inaccurate make allowances on manufacturers.

The IDFA witness testified that before January 1, 2000, the Federal order system utilized a marketbased pricing system which automatically reflected current market conditions. However, under the end product pricing system, market factors (e.g. yields, butterfat retention) are set at a point in time and can only be changed through the formal rulemaking process, the witness said.

The IDFA witness espoused that setting make allowances too high or yield factors too low may result in low milk prices but that should not be of concern to USDA. In this regard, the witness was of the opinion that the Federal order system should only determine minimum prices and allow market responses through overorder premiums to remedy any regulated prices that are too low. However, the witness conceded that if a plant can manufacture products at costs lower than those reflected by the price formula make allowance levels then the difference could be used to make plant investments, secure a larger milk supply to the detriment of highercost plants or return higher margins to plant owners.

The IDFA witness testified in support of updating the current make allowances with the most current cost data available (Proposal 1). The witness was of the opinion that the CDFA dry whey cost data should be a factor in determining a new dry whey make allowance for Federal orders. The
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witness asserted that the CDFA average dry whey plant size more closely resembled the NASS average dry whey plant size than did the CPDMP survey. Furthermore, the witness asserted that the CDFA dry whey data was skewed toward low cost plants, not high cost plants as asserted by USDA. The witness maintained that using the CDFA data in determining the dry whey make allowance would not cause the make allowance to be set too high. The witness concluded that both the CDFA and CPDMP dry whey weighted average costs should be used to determine the dry whey make allowance and reiterated this position in its posthearing brief.

Also in its posthearing brief, IDFA stated that any decision made by USDA on the Class III and Class IV pricing formulas should not directly consider hearing testimony regarding dairy farmer costof production. The brief asserted that it is already captured indirectly through the supply and demand for manufactured products and therefore should not be given additional consideration in this proceeding.

The IDFA witness testified that USDA needs to correct for CPDMP's stratified cheese plant sampling which in IDFA's opinion over represents lowcost cheese plants. The witness highlighted testimony of the Cornell witness which compared the eight cheese plants that participated in both surveys revealing an average manufacturing cost increase of 1.7 cents per pound. IDFA was of the opinion that since the same cheese plant sample was not used in the two CPDMP surveys, the most appropriate method for determining a new cheese make allowance would be to use the weighted average cost from the 2005 survey ($0.2028) plus 1.7 cents for a total of $0.2198 per pound. In its brief, IDFA concluded that the new make allowances should be set no lower than the following: $0.2154 per pound for cheese; $0.1725 per pound for butter; $0.1782 for NFDM; and $0.2080 for dry whey.

The IDFA witness supported adopting an annual manufacturing cost survey as contained in Proposal 2 but opposed any automatic updating of make allowances. The witness said that an annual survey would provide industry participants information regarding trends in plant costs and such information could be used in future hearings to adjust make allowances. However, the witness did not support automatically updating make allowances outside of the hearing process because it would prohibit industry input regarding how the data should be utilized. IDFA reiterated these views in its posthearing brief.

The IDFA witness testified in opposition to Proposal 3. The witness argued that audited CDFA data should continue to be included when determining new make allowance levels. The witness asserted that the elimination of the CDFA data would result in lower make allowances that in their opinion are already too low. In its posthearing brief, IDFA asserted that the proponents of Proposal 3 had presented no evidence that manufacturing costs have decreased to levels similar to the manufacturing costs reflected in make allowances that were effective prior to February 1, 2007.

A witness appearing on behalf of Lactalis American Group, Inc. (Lactalis) testified in support of Proposal 1 and in opposition to Proposal 3. According to the witness, Lactalis operates six cheese plants in the United States. The witness expressed support for IDFA's positions. The witness said that the Class III and Class IV product price formulas should be amended to give more flexibility to market participants in establishing market prices. The witness was of the opinion that increasing make allowances by adopting Proposal 1 would give processors the flexibility to make shortterm adjustments in response to changing market conditions. The witness argued that the increasing milk supply, not make allowances which are too high, is the cause of low milk prices received by dairy farmers. Therefore, the witness opposed any proposals that would result in lower make allowances.

A witness appearing on behalf of Leprino testified in opposition to Proposal 3 stating that there is no basis to set make allowances below current levels. According to the witness, Leprino operates nine manufacturing plants throughout the United States that produce Italian style cheeses. The posthearing brief filed by Leprino expressed support for the make allowances proposed in IDFA's posthearing brief. Leprino was of the opinion that make allowances should be set no lower than the following: $0.2154 for cheese; $0.2080 for dry whey; $0.1725 for butter; and $0.1782 for NFDM.

A witness appearing on behalf of Saputo Cheese USA (Saputo), a dairy manufacturer, testified in support of IDFA's positions. The witness testified that Saputo opposed any proposal which would add complexity to the Federal milk order system. The witness supported updating the current make allowances to reflect the most current available data as sought in Proposal 1 and that updated make allowances for dry whey should use CDFA data.

A posthearing brief filed on behalf of Twin County Dairy (Twin County), an Iowabased cheese manufacturer, expressed support for the proposals offered by IDFA and AgriMark that seek to increase make allowances. However, the brief asserted that the proposals do not go far enough to ensure that mediumsized plants such as those operated by Twin County remain profitable. The brief argued that the proposed make allowances are heavily weighted toward large, lowcost plants and their adoption, especially the dry whey make allowance, would cause financial hardship on many cheese manufacturing plants that are similar in size to Twin County. Twin County insisted that even though productprice formulas are applied identically to large and small plants, USDA should conduct a regulatory impact analysis because in Twin County's opinion, productprice formulas have a disproportionate impact on small businesses compared with larger entities that may benefit from advantages of economies of scale.

A witness appearing on behalf of HP Hood LLC (HP Hood) testified in opposition to Proposals 1, 2 and 3. According to the witness, HP Hood is a manufacturer of Class I and Class II dairy products that are distributed nationally. The witness opposed Proposals 1, 2 and 3 because their adoption would change the Class III and Class IV milk pricing formulas that in turn are used to determine the Class I and Class II prices that HP Hood pays for its raw milk supply. The witness opposed adoption of any proposal that would result in the automatic or periodic updating of the Class III and Class IV pricing formulas arguing that such updates should be made through the formal rulemaking process.

A witness appearing on behalf of NAJ offered an amendment to Proposal 2. The witness said the amendment would expand the manufacturing cost survey to include gathering manufacturing cost data for whey protein concentrates (WPC's) and lactose. This inclusion was reiterated in NAJ's posthearing brief.

A Michigan dairy farmer testified regarding the profitability of dairy farmers and in opposition to adopting any proposals that would increase make allowances. The witness was opposed to increasing make allowances until the price formulas are amended to recognize a farmer's cost of production. The witness stated that onfarm fuel costs were $35,000 in 2004 and had risen to $70,000 in 2006. The witness asserted that there are many Michigan dairy farmers considering leaving the dairy industry because of increased costs and low milk prices. The witness also
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expressed the opinion that NASS NFDM prices were misreported or under reported during the prior 12 months.

A posthearing brief submitted on behalf of OATKA Milk Products Cooperative, Inc., (OATKA) expressed support for Proposals 1 and 2, and opposition to Proposal 3. According to the brief, OATKA is a CapperVolstead cooperative located in New York and its plant manufactures 600 million pounds of milk annually into butter and NFDM. The brief stressed that changes to the make allowances and other factors of the product price formulas need to accurately represent the current manufacturing market. OATKA expressed support for Proposal 1 and was of the opinion that the CPDMP 2006 survey should be considered a minimum when setting make allowances. According to the brief, OAT KA's plant manufacturing costs are higher than the CPDMP 2006 survey weighted average NFDM cost. OATKA also wrote that they compete directly with California plants and requested that USDA should keep the Class IV and California Class 4a prices aligned if it recommends any changes to the product price formulas. OATKA noted support for Proposal 2, but not the portion that calls for automatically updating make allowances. The OATKA brief opposed adoption of Proposal 3 because it would inhibit their ability to provide balancing services to the market and a fair return to its memberowners.

A joint posthearing brief filed on behalf of Dairylea and DFA, hereinafter referred to as Dairylea, et al., opposed adoption of Proposals 1 and 2. The brief opined that the current make allowances should be used with the addition of the energy adjustor advanced in Proposal 17 and cost addons described in Proposal 20. The Dairylea, et al., brief supported the NAJ modification of Proposal 2 to expand the NASS product price survey to include information on whey protein concentrates.

2. Product Yields and Butterfat Recovery Percentage

A witness appearing on behalf of DPNM, et al., testified in support of Proposals 6, 7 and 8. The witness testified that before January 1, 2000, the Federal milk order price discovery mechanism took into account dairy farmers' cost of production when determining minimum regulated prices. If farmers' costs of production increased, the witness said that manufacturers were able to pay farmers higher prices because onfarm production costs could be passed on to their customers. However, under the current pricing system, the witness argued, minimum prices to dairy farmers are based on the average prices of dairy products sold nationally during the month. As a result, the witness asserted, dairy farmers have experienced financial hardship because they are unable to pass on their higher costs to the marketplace.

The DPNM, et al., witness was of the opinion that Proposals 6, 7 and 8 should be considered jointly as coordinated adjustments to the various yield factors to ensure that dairy farmers receive a fair minimum price. In its posthearing brief, DPNM, et al., added that Proposals 3 and 15 also should be considered in conjunction with Proposals 6, 7 and 8 because together they address all parts of the current product price formulas.

The DPNM, et al., witness testified in support of Proposal 6 seeking to increase the butterfat yield factor from 1.20 to 1.211. The witness said that this change would correct for a mathematical error in calculating farmtoplant shrinkage. The witness explained that in the 2002 final decision that established the current farmtoplant shrinkage factor, shrinkage allocated to butterfat loss should have been calculated on a per cwt of milk basis, not on a per pound of butterfat basis. DPNM, et al., noted on brief that no witnesses at the hearing disagreed with this assertion.

The DPNM, et al., witness also offered a modification to Proposal 6 seeking to amend the butterfat credit in the protein price. The witness explained that when USDA adjusted the butterfat yield factor in the protein price formula to 1.572 in 2002 to account for farmtoplant shrinkage, the butterfat credit portion of the protein formula was not adjusted to an equivalent of 89.4 percent. The witness estimated that increasing the butterfat yield factor from 1.20 to 1.211 and decreasing the butterfat credit portion of the protein formula from 90 to 89.4 percent would, on average, have increased blend prices by $0.07 per cwt.

The DPNM, et al., witness testified in support of Proposal 7 seeking to eliminate the farmtoplant shrinkage factor. The witness was of the opinion that accounting for farmtoplant shrinkage allows producers and processors to mask inefficiencies. According to the witness, DPNM, et al., farmtoplant shrinkage is well below the 0.25 percent assumed in the pricing formulas. The witness attributed lower farmtoplant shrinkage to large producers who ship tanker loads of milk. The witness insisted that shrinkage is not a result of milk solids being unrecoverable from the milk tanker and hoses but rather the result of imprecise measuring at the farm.

The DPNM, et al., witness testified that the yield factors in the product pricing formulas should be amended to reflect current technology. The witness proposed that the protein price formula be changed to reflect a 94 percent butterfat recovery in cheese manufacturing, that the casein percentage in milk be increased to 83.25 percent, and that the butterfattoprotein ratio in cheese be changed to 1.214 to reflect average producer tests. According to the witness, the adoption of a 94 percent butterfat recovery rate also implies that the butterfat yield factor in the protein price should be increased from 1.587 to 1.653 as proposed in Proposal 8.

The DPNM, et al., witness estimated that increasing the butterfat recovery rate from 90 to 94 percent would result in a 10.5cent increase in producer blend prices. The witness said that the currently assumed 90 percent butterfat recovery rate is based on technology that is more than 20 years old while new technology enables manufacturers to achieve a much higher recovery rate. Using CDFA plant cost survey data for 2002 through 2005, the witness used a mass balance analysis to estimate the flow of milk components through a cheddar cheese plant and the allocation of milk components to products and byproducts. Through this analysis the witness derived a 94 percent butterfat recovery rate for plants participating in the CDFA cost survey. The witness estimated the butterfat recovery rate for cheese plants that participated in the 2004 RBCS cost study to be 95.25 percent for all cheeses.

The DPNM, et al., witness testified in support of Proposal 8. The witness argued that the percentage recovery factor for casein in milk should be increased from 82.2 to 83.2, to reflect average producer tests, which would result in a 2.3cent per cwt increase in producer blend prices. However, in their posthearing brief, DPNM, et al., stipulated that a casein recovery factor of 83.10 percent was appropriate. DPNM, et al., explained in brief that changing the casein recovery factor would raise the protein yield factor from 1.383 to 1.405; and increasing the butterfat reco

FOR FURTHER INFORMATION CONTACT Jack Rower, Marketing Specialist, USDA/AMS/Dairy Programs, Order Formulation and Enforcement, Stop 0231 Room 2971S, 1400 Independence Avenue, SW., Washington, DC 202500231, (202) 7202357, email address: jack.rower@usda.gov.