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USDA Recommended Decision:
Large Producer-Handlers Should Become Subject to Federal Order Pricing and Pooling Provisions

By Kathie Arnold

Added December 2, 2009. On October 21st, 2009, USDA issued a recommended decision that, if it becomes rule, would require producer-handlers marketing more than 3 million pounds of fluid milk products each month to be subject to the same pooling and pricing provisions as fully regulated handlers in all Federal Milk Marketing Orders. Only producer-handlers marketing 3 million pounds of fluid milk or less each month would continue to be exempt. Currently, all producer-handlers are exempt.

The decision also recommends leaving the exempt plant volume at the current level of less than 150,000 pounds of production per month. An exempt plant is different from a producer-handler in that they don’t necessarily produce their own milk, as does a producer-handler.

This recommended decision came after petitions were submitted to the USDA by the National Milk Producers Federation and the International Dairy Foods Association earlier this year, proposing changes to the current producer-handler and small plant exemptions. A public hearing was held in Cincinnati, Ohio, from May 4th to the 19th where sworn testimony was given by numerous organizations, individuals, and businesses.

If this USDA recommended decision comes to fruition as rule, it has potential to have an impact on the organic dairy marketplace. One of the businesses testifying in Ohio against the proposals was Aurora Organic Dairy, the largest producer-handler in the country. According to their witness’s testimony, Aurora has 345 employees and about 12,000 cows on 5 farms in Colorado and Texas. They are a national supplier of private-label and store-brand organic milk and butter. As summarized in the 10/21/09 Federal Register Proposed Rule document “The witness asserted that if the proposal to eliminate producer-handlers is adopted, Aurora would have to restructure and essentially completely revise its business model. The Aurora witness was of the opinion that it is not possible to determine the presence or absence of orderly marketing conditions without considering the actual prices being paid to producers and the actual cost of milk incurred by handlers. The witness testified that based on the actual prices and costs, Aurora has not observed any unfair competition or the creation of any disruption in the market as a result of producer-handlers, nor has Aurora observed any producer-handlers with a price advantage that resulted in a competitive advantage”.

A different view was presented by a panel of three organic dairy producers representing FOOD Farmers (Rick Segalla from CT, Tony Schilter from WA, Kathie Arnold from NY) and by Mark Kastel from The Cornucopia Institute. As summarized in the Federal Register “the Cornucopia witness illustrated the ways that Aurora Organic Dairy’s (Aurora) exempt status as a producer-handler is disruptive. The Cornucopia witness was of the opinion that Aurora used the regulatory loophole to establish one of the largest market shares in the organic dairy industry....The FOOD [Farmer] panel also testified that Aurora has been able to use the scale of its operation in combination with its exemption from full regulation to capture a great deal of the organic market in the Northeast. According to the FOOD [Farmer] panel, Aurora’s significant presence in the Northeast marketing area has negatively impacted the price local organic producers receive for their milk and threatened the viability of the handlers that purchase local milk supplies.

USDA is accepting comments on the recommended decision through December 21, 2009. After the comment period closes, the USDA will have 60 more days to consider those comments and issue a final decision. That decision will be followed by a producer referendum, to be held within 30 days, with producers either accepting or rejecting the USDA recommendation. The results of the referendum will then be published along with an implementation date, which historically has been the first of the following month. With the process timetable laid out in the last Farm Bill, the earliest the decision is likely to be implemented would be April 1st of 2010. Of course, the decision could be met with a lawsuit and the implementation could be delayed if a judge orders a stay.

The recommended decision, however, is not without precedent. The Northwest and Arizona-LasVegas Federal Orders have had a 3 million pound per month cutoff of exemption for producer-handlers in place since April of 2006.

In the 10/21/09 Federal Register document, the USDA acknowledges that “While this may cause an economic impact on those entities with more than three million pounds of route sales that are currently considered producer-handlers under the Federal order system, the impact is offset by the benefit to other small businesses....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.”

Those producer-handlers who will become subject to Order provisions, if this decision prevails, will gain some potential benefits as they will no longer be limited to using only their own milk (or a very small amount from off-farm) but will be able to purchase any amount of milk from other farmers or handlers. This change could potentially mean that Aurora may choose to decrease the number of cows on their operations so that their own production just meets their base needs and then buy any additional organic milk if their supply is too short to meet their market demands.

Producer-handlers over 3 million pounds per month would also no longer have to deal with all their own balancing as their milk will then be entitled to minimum order pricing. Although this will be the minimum conventional price, it will provide a market for the surplus of any regulated producer- handler; currently, they have to take care of their own surplus.

Producer-handlers will continue to be required to report to Market Administrators to ensure compliance.

Comments to USDA on this recommended decision can be made through December 21, 2009 via Federal eRulemaking portal at http://www.regulations.gov. Transcripts of the Ohio hearing can be accessed on the USDA AMS website. u

Kathie Arnold owns and operates Twin Oaks Dairy LLC in Truxton NY, with her husband and brother-in-law; they’ve been shipping organic milk since 1998. Kathie serves on the Policy Committee of NODPA / FOOD Farmers and can be reached at randkarnold1@juno.com or 607/842-6631.