10646 1 2 3 4 5 6 7 8 9 NATIONAL FEDERAL MILK MARKETING ORDER 10 PRICING FORMULA HEARING 11 12 DOCKET NO.: 23-J-0067; AMS-DA-23-0031 13 14 Before the Honorable Jill Clifton, Judge 15 16 ---o0o--- 17 18 Carmel, Indiana 19 January 17, 2024 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 10647 1 A P P E A R A N C E S: 2 FOR THE USDA ORDER FORMULATION AND ENFORCEMENT DIVISION, USDA-AMS DAIRY PROGRAM: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 Michelle McMurtray 6 FOR THE MILK INNOVATION GROUP: 7 Charles "Chip" English Ashley Vulin 8 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 9 Nicole Hancock 10 Brad Prowant 11 FOR SELECT MILK PRODUCERS, INC.: 12 Ryan Miltner 13 FOR INTERNATIONAL DAIRY FOODS ASSOCIATION: 14 Steve Rosenbaum 15 FOR THE AMERICAN FARM BUREAU FEDERATION: 16 Dr. Roger Cryan 17 FOR THE MAINE DAIRY INDUSTRY ASSOCIATION: 18 Dan Smith 19 20 ---o0o--- 21 22 (Please note: Appearances for all parties are subject to 23 change daily, and may not be reported or listed on 24 subsequent days' transcripts.) 25 26 ---o0o--- 27 28 10648 1 M A S T E R I N D E X 2 SESSIONS 3 WEDNESDAY, JANUARY 17, 2024 PAGE 4 MORNING SESSION 10,651 AFTERNOON SESSION 10,776 5 6 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10649 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Dr. Mark W. Stephenson: 5 (Continued) Cross-Examination by Dr. Cryan 10,651 6 Cross-Examination by Ms. Hancock 10,663 Cross-Examination by Ms. Taylor 10,702 7 Cross-Examination by Mr. Miltner 10,718 Redirect Examination by Mr. English 10,723 8 Warren Erickson: 9 Direct Examination by Mr. English 10,728 10 Cross-Examination by Ms. Hancock 10,744 Cross-Examination by Mr. Miltner 10,757 11 Cross-Examination by Dr. Cryan 10,761 Cross-Examination by Mr. Sleper 10,763 12 Cross-Examination by Mr. Rosenbaum 10,765 Cross-Examination by Ms. Hancock 10,767 13 Cross-Examination by Ms. Taylor 10,768 14 Mike Newell: 15 Direct Examination by Ms. Vulin 10,776 Cross-Examination by Ms. Hancock 10,801 16 Cross-Examination by Dr. Cryan 10,818 Cross-Examination by Ms. Hancock 10,821 17 Cross-Examination by Ms. Taylor 10,823 Redirect Examination by Ms. Vulin 10,830 18 Recross-Examination by Ms. Hancock 10,832 Redirect Examination by Ms. Vulin 10,836 19 Heath Miller: 20 Direct Examination by Mr. Smith 10,840 21 Cross-Examination by Mr. Rosenbaum 10,870 Cross-Examination by Ms. Hancock 10,874 22 Cross-Examination by Mr. Miltner 10,875 Cross-Examination by Ms. Taylor 10,877 23 Tim Kelly: 24 Direct Examination by Mr. English 10,886 25 26 ---o0o--- 27 28 10650 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 IN CHRONOLOGICAL ORDER: 4 NO. DESCRIPTION I.D. EVD. 5 454 MIG/AE-17 10,727 10,773 6 455 MIG/AE-17A 10,727 10,774 7 456 MIG/AE-17B 10,727 10,774 8 457 MIG/HOOD-21 10,776 10,837 9 458 MIG/HOOD-21A 10,777 10,837 10 459 MIG/HOOD-21B corrected 10,777 10,837 11 460 MDIA-1 10,839 10,879 12 461 MDIA-2 10,839 13 462 MIG-23 10,884 14 463 MIG-23A 10,885 15 464 MIG-23B 10,885 16 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 10651 1 WEDNESDAY, JANUARY 17, 2024 -- MORNING SESSION 2 THE COURT: Let's go back on record. 3 We're back on record. It's 2024, January 17, 4 approximately 8:09 in the morning. I apologize. Our 5 starting late is entirely my fault. This cold weather and 6 these dark mornings make it difficult for me to be here on 7 time. 8 All right. This is day 45 of this hearing, and we 9 have the witness back in the witness stand. 10 Would you, again, identify yourself, please. 11 THE WITNESS: Yes. My name is Mark W. 12 Stephenson. I'm retired from the University of Wisconsin. 13 THE COURT: Thank you. And you remain sworn, of 14 course, and we are ready for cross-examination. 15 Who would like to begin? 16 Dr. Cryan. 17 MARK STEPHENSON, 18 Having been previously sworn, was examined 19 and testified as follows: 20 CROSS-EXAMINATION 21 BY DR. CRYAN: 22 Q. Good morning, Mark. 23 A. Good morning, Roger. 24 Q. How are 'ya? 25 A. I'm well. Thanks. 26 Q. I'm Roger Cryan with the American Farm Bureau 27 Federation. Thank you for your testimony. I have a few 28 questions about it. Sorry, it happened all of a sudden. 10652 1 Okay. So your -- you talked about, as you 2 discussed the three -- these three elements of the $1.60 3 minimum Class I differential that the Department came up 4 with at the time of order reform. And you -- you -- you 5 have talked quite a few times about that in the context of 6 the value of the milk. 7 But those three elements are all about the cost? 8 Aren't they -- aren't they all cost elements? 9 A. Well, it costs to be able to provide value to a 10 product. I mean, we have to pay for the factors of input 11 that go into a bottle of milk. We have to pay for the 12 milk itself that's moving in there. So there are costs 13 involved, yes, of course. 14 Q. Okay. But a lot of your conversations have been 15 about, is the milk worth that as opposed -- 16 A. I don't think I have ever said that. 17 Q. Okay. But, well, would you -- you did -- you also 18 talked in your written testimony, you talked a good bit 19 about the history of the programs, the history of the 20 system. And is it -- is it -- it's my understanding that 21 in a lot of THE discussions in the 1930s when the Federal 22 Order programs were put into place, there was a sort of a 23 sense of developing the regulation of fluid milk as, like, 24 a public -- sort of like a public utility. 25 Is that -- is that your understanding, that this 26 pricing system was sort of developed to make sure that -- 27 that fluid milk was available as a first priority for the 28 benefit of the public? 10653 1 A. I mean, the basic tools of the Federal Orders that 2 were implemented at the time of their conception had been 3 in place and devised by cooperatives 40, 50 years earlier, 4 so they predated that. It was a system used by dairy 5 cooperatives, but enforcement was difficult. 6 And at the time of the Great Depression when we 7 had a lot of problems across the board, there was a 8 request, you know, for ideas about all kinds of things, 9 what could help. And one of the ideas that was brought 10 forward was these tools of classified pricing and pooling 11 that would help elevate some of the problems that dairy 12 farmers were facing at that time. 13 Q. But wasn't the prioritization of Class I sort of 14 centered around the idea that there's a public good in 15 making sure there's fluid milk available? 16 A. Well, Class I was the most valuable portion of 17 that, also the most perishable portion. It was the one 18 that was, in my reading of the problems, having the most 19 problems of the day. So it was the focus of the early 20 part of the Federal Orders. And those tools of classified 21 pricing and pooling worked, I think, reasonably well when 22 fluid milk was, indeed, the largest portion of the 23 classified pricing in the marketplace. 24 But as we have grown milk supply and it's become a 25 less of, you know, highly-utilized product in most of the 26 Federal Orders, then the tools have not worked as well as 27 they did originally. 28 Q. But have you read materials about those programs 10654 1 and how they are developed that indicate that there was an 2 understanding that there's a public good for making sure 3 fluid milk was available? 4 A. Well, there was a lot of sense that dairy products 5 were good for nutrition, good for people, and -- and, yes, 6 that they should be made available. But I'm not sure that 7 this was a nutrition program first and foremost. I think 8 it was about a marketplace that was just demonstrating 9 some market failures at the time. 10 Q. And do you think that the Federal Order system 11 has -- has succeeded essentially in integrating the fluid 12 manufacturing markets? 13 A. What do you mean by that? 14 Q. Maybe it was a little more of a separation between 15 fluid -- you know, fluid milk sales and fluid milk 16 delivery and manufacturing before the Federal Order system 17 sort of brought them together, one helping serve the 18 other. 19 A. Well, I'm not -- I'm not sure about that, Roger. 20 I mean, we have had separate uses of the input well before 21 we had Federal Milk Marketing Orders, and we have separate 22 uses of the input today. That one can give up a portion 23 of the input to another utilization within an order was 24 probably always the case. But it was perhaps hard to make 25 that happen and make sure that there was an adequate 26 supply of milk in an area that would be made available for 27 all Class I uses. 28 Q. Okay. So facilitated the dovetailing of those two 10655 1 parts of the market? 2 A. It -- certainly. I mean, it's been about 3 coordination from the very beginning. But I think it's 4 also been about access to those markets where there was 5 the potential for higher valued sales. 6 Q. You discussed the idea of $1.60 being shared 7 directly with the producers who supply the Class I milk. 8 That, yet -- right? Right? I mean, it's here in front of 9 me. 10 A. Yes. 11 Q. Okay. 12 THE COURT: And "producers" includes three 13 categories of providers of fluid milk? 14 THE WITNESS: Three categories of providers -- oh, 15 sure. I talked about the individual producers, 16 cooperatives, or manufacturing plants might give up the 17 load of milk that they already had. 18 BY DR. CRYAN: 19 Q. That -- that does move away from the uniform 20 pricing principle that the system has operated on for 21 quite some time? 22 A. It does move away from that a bit, and I recognize 23 or acknowledge that. But we have had Federal Orders that 24 did have individual handler pools utilized in them in the 25 past, so this is not an entirely new concept. I do 26 acknowledge that we have, under the provisions of pooling, 27 the idea of uniform treatment, you know, to dairy 28 producers in the area, but that was as much about trying 10656 1 to make sure that we didn't have fights for the 2 marketplace occurring. 3 Q. Okay. I have a reference here in my notes to 4 another document, but let me -- you -- you went -- you 5 laid out your analysis of the USD -- 6 A. USDSS. 7 Q. -- USDSS. And it's a very interesting analysis, I 8 thought, about the difference between the -- you know, the 9 incremental value, the -- the shadow value of Class I 10 versus Class III milk on a location-by-location basis. 11 And you have -- and you -- you have -- you have -- you 12 talked about how the average across the whole -- that 13 whole system, the shadow value, was higher for Class III 14 than for Class I. 15 But you also identified in your written testimony 16 that that kind of represents a give-up charge, represents 17 a sort of -- the notion of what a give-up charge for 18 cheese milk to deliver to a fluid plant would be? 19 A. That was part of my impetus in looking at that in 20 the first place was to see if I couldn't provide some 21 metrics around both that and also the cost of balancing 22 across the system. So it was those two things 23 simultaneously that I was trying to like take a look at 24 with analytical data. 25 Q. One of the elements of the $1.60, according to the 26 order reform, development of the minimum Class I 27 differential, was the incentive to -- essentially the 28 incentive to deliver to a fluid plant, essentially 10657 1 something akin to the give-up charge? 2 A. Yes. And, you know, I thought that the analysis 3 that I looked at there was interesting to understand that 4 in many regions or parts of the country that manufacturing 5 plants had reason to want to hang on to that milk. I 6 mean, it's not just that they are greedy, it's that the 7 economic system is rewarding them for making the product 8 and to getting it to customers across the country. So I 9 can understand why give up charges in some region of the 10 country are indeed high and difficult. 11 Q. And to -- to -- but one element of the $1.60 is 12 the give-up charge in the sense. It is the incentive to 13 deliver milk to a bottling plant instead of to a cheese 14 plant. And from my -- you know, you have given us the 15 county-by-county breakdown, and there's -- there's -- 16 there's numbers -- there's higher numbers, but for 17 example, in Meeker County, Minnesota, where First District 18 has its cheese plant, the give-up charge by this 19 calculation would be about -- would be $1.78 per 20 hundredweight. 21 And those highest give-up charges, those highest 22 sort of requirements for give-up charges on your -- on 23 your numbers, on your own numbers, are in those regions 24 where you would be most likely to have that minimum 25 Class I differential; isn't that correct? 26 A. It is correct. And I tried to speak to that a 27 little bit yesterday when I said the model results appear 28 to mimic what has happened in reality, that we tend to 10658 1 have manufacturing plants in area where we have a lot of 2 milk, more than is needed for fluid markets, let's say, 3 and fluid plants tend to be located more where we have 4 population centers and not necessarily all of the milk 5 that may be wanted there for the fluid operations. 6 Q. But in terms of the system, the efficiency of the 7 system, delivering dairy products to folks across the 8 country from where the milk is produced through these 9 plants, that that efficiency that is implicit 10 profitability of making the cheese in those places where 11 we have $1.60 -- where we tend to have now $1.60 or would 12 have proposed $1.60 minimum Class I differentials, I mean, 13 that indicates that there is some need to shake the milk 14 loose potentially for fluid use? 15 A. Well, I think that can be the case, for sure. I 16 mean, there's -- as you would well know, there aren't as 17 many fluid plants in that Upper Midwest area that you are 18 talking about. They are really small portion of the total 19 utilization of milk in that region. They can find it 20 difficult to get milk into a plant, or just like it can be 21 difficult to get milk into a plant in Atlanta. But there 22 are somewhat different reasons. In that local area in 23 Atlanta there's not as much trying to pull that away from 24 a nearby cheese plant as it is about balancing costs and 25 maybe moving milk in from long distances away. 26 Q. So there are balancing costs substantial -- there 27 are balancing costs even in those milk surplus -- 28 (Court Reporter clarification.) 10659 1 BY DR. CRYAN: 2 Q. There are balancing costs even in those milk 3 surplus regions? 4 A. Yes. But I think that they are probably minimal 5 relative to the total supply of milk. Balancing is much 6 easier when, you know, Class I utilization is 10%. There 7 it begins to be more about what does it -- opportunity 8 cost that a cheese plant has for that milk in their own 9 operation. 10 Q. And the Class I price surface as a whole, 11 you're -- so much of your work over the years has been 12 about demonstrating the relative geographic value across 13 the -- across the country. And I think to -- you know, to 14 good effect, you have helped -- 25 years ago and today, 15 you know, your work has helped come up with some 16 foundation for understanding -- understanding the 17 importance of setting these different -- having these 18 differentials from location to location. 19 If we establish a location -- if we establish a 20 Class I differential in the Upper Midwest, is it -- is 21 it -- does it not -- is not important to maintain a 22 geographic relationship of the sort that is reflected in 23 your modeling in order to sort of maintain orderly 24 geographic relationships in order to maintain orderly 25 pricing from location to location all the way down to 26 Miami? 27 A. I'm not sure that I understand what you mean by 28 maintain geographic relationships. You mean physical 10660 1 plants, where physical plants are located? 2 Q. No. I mean, the relationship in the Class I 3 differential. The Class I differentials that -- that 4 exist today or that would be built on the sort of modeling 5 you have done, is that -- is that not a reasonable thing 6 to maintain, to maintain those differences from Minnesota 7 to Miami? 8 A. Well, I think that they are hard to ignore. The 9 marketplace is trying to accomplish the movement of milk 10 to satisfy all the needs across this geography on a daily 11 basis. Regulation can either hinder that or it can help 12 make that possible to do. But one way or another I think 13 the markets are likely to express themselves in the ways 14 that they have before we had Federal Orders. We had price 15 surfaces back then. 16 Q. And if the minimum prices are going to mean 17 something, they should at least approach -- or tend to 18 approach that -- those geographic differences -- 19 A. They should. And, you know, you -- I -- maybe it 20 wasn't your meaning, but it's part of what I took out of 21 what you were saying there. In my opinion those should 22 not be static. In other words, set them today, don't 23 think about them for another 25 years. I think that you 24 should look at them from time to time, because population 25 centers do move. I mean, the -- where people are choosing 26 to live. Milk production regions shift around and 27 transportation costs change. It changes the price surface 28 and the competitive nature of the dairy market. So if 10661 1 we've hardwired something from 25 years ago into the 2 system, then it gets to be difficult for the system to 3 operate the way it's feeling like it needs to today. 4 Q. Sure. Sure. That makes sense. That's why we're 5 here. 6 A. Yes. Partly. 7 Q. Well, absolutely. Partly, yes. 8 Okay. Last my last question is about, in your -- 9 in your written testimony, you -- you said that -- trying 10 to make sure I get the word right -- the shackles, 11 shackles to the 1938 -- 1937 Act? I took it to mean we 12 were shackled to it. You didn't quite say it that way, 13 but essentially you said we're shackled to the 1937 Act. 14 Is there anything -- is there anything that the 15 1937 Act does not allow us to do in terms of developing a 16 marketing program, in terms of developing a Federal Order? 17 Is there -- I mean, from my read of the Act, and 18 it's my reading of the history of, I guess, John Black or 19 one of those books about how these programs developed, but 20 they had a huge range of possibilities, including Federal 21 Orders for products or -- you know, or -- what is it that 22 couldn't be done under the authority of the 1937 Act that 23 shackles us to -- 24 A. Well, I think that, at that point in time, they 25 had the luxury of asking themselves the big questions: 26 What are the problems we face in this industry today? And 27 how do we fix those problems? 28 We don't get that luxury today. If we could say, 10662 1 what are the problems we face in the industry, and start 2 with a clean slate, we might not be addressing these 3 little things that are kind of nudging us around the edges 4 of the issues. 5 For instance, I would say that we cannot ignore or 6 consider to be a trailing spouse or something of the dairy 7 industry; that would be manufacturing. Manufacturing is a 8 huge piece of our industry today, and it needs to be 9 thoughtfully incorporated into this. So I would ask, 10 first of all, have we identified the problems we're trying 11 to fix? And I would say that depooling, it's not a 12 problem. It's a symptom of the problems. 13 And I think it's difficult to do that when we have 14 the boundaries that were prescribed by the '37 Act that 15 don't let us think very far beyond those. We have to 16 navigate within those boundaries. 17 Q. And what -- what boundaries -- what -- what could 18 be done that the Act doesn't allow? 19 A. As I said, it's difficult for us to sit down here 20 and think about this as an entire industry and system, 21 recognizing manufacturing for what it is today and -- and 22 identifying these problems. We have to think about this 23 as: What are the fluid milk problems that we have? How 24 can we best address those within the bounds of what we can 25 do, you know, based on the early provisions of the Federal 26 Order? 27 I'm not suggesting it's wrong, but it would be 28 really nice -- this would have been a painfully long 10663 1 hearing if we started with what is the problem that we're 2 trying to fix, you know, with a clean slate, and how do we 3 do it. But I do think that, you know, that would be an 4 optimal way to go about it. 5 And then I think you need to ask yourself whether 6 or not these are problems that policy can best address 7 that we can't do without it. It may not need that. 8 Q. Okay. I'm impressed that you don't think this has 9 already been a painfully long hearing. 10 A. It's bordering on it. 11 Q. Well, thank you, Mark. 12 THE COURT: Dr. Stephenson, I had difficulty 13 distinguishing the word you used when you described the 14 manufacturing sector as a -- we no longer treat it as a 15 trailing... 16 THE WITNESS: Spouse, I said. Yeah, I mean, 17 it's -- it is certainly closely married to the fluid milk 18 industry, but, you know, we -- it used to be that that was 19 a -- we need to recognize this as part of the solution to 20 help the fluid milk industry. But today, I think that it 21 is such a powerful portion of our dairy industry that you 22 can't simply treat it as potentially helpful. I think 23 it's something that competes very strongly with milk for 24 fluid plants. 25 CROSS-EXAMINATION 26 BY MS. HANCOCK: 27 Q. Good morning. Nicole Hancock with National Milk. 28 Good morning, Dr. Stephenson. 10664 1 I thought it would be helpful to put in context 2 when you started working on the Class I differential piece 3 that has become your testimony in Exhibit 453, at least 4 that's the PowerPoint presentation? 5 A. When I began working on that? 6 Q. Yeah. When were you hired to work on the Class I 7 differentials. 8 A. It was reasonably early on. I'm trying to 9 remember exactly when that would have been, but, you know, 10 I want to say in the early part of the summer, something 11 around that time period. This was before MIG had their 12 proposal actually. They were talking about looking at 13 pieces of what would ultimately become their proposal. 14 But, in particular, they had asked me to think about this 15 $1.60, what are the elements of it, how do we use that. 16 And so I began to systematically try to answer some of 17 those questions. 18 Q. When you said "summer," did you mean summer of 19 2023? 20 A. Yes, not this summer. Yes. 21 Q. Okay. So about seven months ago or so? 22 A. Yes. 23 Q. And yesterday, Ms. Keefe testified that she had 24 some early working groups that started in the winter of 25 2022 and into 2023. 26 Were you involved in those meetings? 27 A. No, I wasn't. 28 Q. So you picked up after those meetings had 10665 1 occurred. 2 Did you attend the IDFA meeting where she 3 presented to the IDFA members? 4 A. No. I did not. 5 Q. And then I think that she said, also, that there 6 was an information session to the USDA. 7 Did you participate in that? 8 A. No. 9 Q. Did you -- so who hired you? 10 A. I was hired by Davis Wright & Tremaine to work on 11 on behalf of the MIG group. 12 Q. Okay. And were you -- you had done some other 13 work for MIG or IDFA related to this hearing; is that 14 right? 15 A. IDFA had retained me to do another update of the 16 cost of processing study and estimates. 17 Q. Were you already working on the Make Allowance 18 cost estimates and surveys when you were hired to do the 19 Class I differentials? 20 A. I don't recall exactly, but they would have been 21 close to contemporaneous, yes. 22 Q. Okay. Did you -- can you tell me what it is that 23 you were hired to do by MIG? What's the scope of what you 24 were retained to do? 25 A. Initially the scope of what I was retained to do 26 was to take a look at that $1.60, but I have been a 27 sounding board for them for a period of time to talk about 28 some of the questions and issues. As I did mention 10666 1 yesterday in my testimony, that what I have offered here 2 was not in support of the MIG proposal. It was some of my 3 own ideas, I guess, about how the industry might be able 4 to work to move milk in ways that address a modern -- a 5 current contemporary dairy industry. 6 Q. So I'm going to get to that in just a second, but 7 before I get there, I just want to make sure that I have a 8 good understanding about what you were hired by MIG to do, 9 and you said take a look at the $1.60. 10 Anything else that you were hired by MIG to do 11 related to the Class I price differentials? 12 A. No, not at that time. No. 13 Q. And you said "not at that time." 14 So then I have to ask the next question which is 15 at some point later in time were you asked to do anything 16 different with respect to Class I differentials? 17 A. No, I had -- as a part of looking at that $1.60 18 had begun to discover some of this from our analytical 19 work with the USDSS model and shared that with them. It 20 took me a while to begin to think about what does -- what 21 are the implications of this, what does it actually mean, 22 and that began to become my testimony. So it wasn't as 23 though MIG or indeed the Davis Wright & Tremaine asked me 24 to go ahead and do this. This is something that I had 25 done. 26 Q. Okay. So you were hired by MIG to look at the 27 $1.60 base differential that was included in the current 28 Class I differential calculation? 10667 1 A. Yes. 2 Q. And -- 3 A. And part of it was just history, do we know where 4 that came from, do we know what those pieces of that A 5 plus B plus C really represent, when did that first begin 6 to show up or occur, you know, that kind of thing. 7 Q. Okay. So -- and when you were hired to do that, 8 what work did you do? 9 A. Well, I began to look at some of the earlier work. 10 In fact, I managed to reboot some very old computers that 11 I had that had a bit of the original work from back in 12 1997 and '8 that I was doing at the time. We were in the 13 Cornell Program on Dairy Markets and Policy. 14 Q. Is that from 1998? 15 A. Yes. That would have been back in -- in that time 16 period. Right. So I was looking for documentation notes 17 that we would have had, you know, some of that kind of 18 material. And I didn't find much there, but I did find 19 some of the original documents that began to talk about 20 that, that were partly from the office and -- or from AMS. 21 Q. Anything else that you did? 22 A. At that time, no, that was the beginning of that. 23 And, you know, then to begin to understand those pieces 24 and where they came from and what the implications of them 25 were, I did begin to look at the data to see whether, you 26 know, it -- I have had quite a few years in the industry 27 and may have some ideas about, you know, what things are 28 and why they are. But I do think that anytime we can 10668 1 address some of these questions with a bit more rigor 2 rather than just say, "my opinion is," I think that's 3 worth doing. 4 Q. Okay. So you looked at the historical context 5 when order reform set the current price one [sic] 6 differentials. 7 Anything else that you did for your work on behalf 8 of MIG to get to where you are today? 9 A. No. I have answered questions as we go along, and 10 a lot of those questions have been about the work that I 11 had done, you know, where they wanted to understand 12 what -- what that meant or what the implications would be. 13 Q. So is it fair to say that you have kind of 14 operated a little bit like a historian for them to be able 15 to give them some of that historical knowledge and 16 resources that went back to when order reform set the 17 current Class I price differentials? 18 A. For sure. I mean that's been a part of what I had 19 done. 20 Q. Okay. Did you conduct any kind of study or 21 analysis on Class I price differentials or any of those 22 three elements that made up the $1.60? 23 A. Looking at that 2016 data, this was analysis that 24 had been done, yes, I did go back and look at the 25 differentials. I didn't rerun models. Those were models 26 that we had used a few times in the past and felt that the 27 data were good, and had been used in other studies. So, 28 in fact, published from that data, so... 10669 1 Q. So you -- you said you went back and looked at the 2 model. 3 You are referring to the 2016 version of the USDSS 4 model? 5 A. Yes. 6 Q. And that had already been run in 2016? 7 A. It had been run just shortly after that, yeah. I 8 mean, a year or more after when the data are available. 9 Q. Okay. It had been run with data results that took 10 it through the end of the calendar year 2016? 11 A. Two months of 2016, that's correct. 12 Q. Okay. And any -- any -- so you didn't do that 13 study on behalf -- or analysis on behalf of MIG, you just 14 looked at the 2016 USDSS model results? 15 A. That's correct. 16 Q. Did you do any independent study or analysis on 17 your own for the work that you were doing on behalf of MIG 18 related to the Class I price differentials? 19 A. Absolutely. I mean, there's a good deal of this 20 that's just a lifetime of curiosity and following threads 21 that, you know, become exposed as you are working with 22 some of the information. So much of that actually was 23 personal curiosity. 24 Q. Yeah. So what -- what studies or analysis did you 25 undertake in order to provide your testimony related to 26 the MIG's Class I price differential proposal? 27 A. Well, it would have been going back and looking at 28 the price relative values from those model runs. Those 10670 1 needed to be transformed back to the mapping values, which 2 give us values at all geographic points across the 3 contiguous 48 states, and then looking at the differences 4 between the Class III and Class I. 5 Q. Can that be summarized as you analyze the 2016 6 model results? 7 A. Yes. 8 Q. Okay. Anything that you did independently to 9 conduct your own analysis or studies related to current 10 costs of providing or servicing the Class I markets? 11 A. Not more current than 2016. 12 Q. So other than analyzing the 2016 model results, 13 you didn't do any other analysis or studies? 14 A. No. 15 Q. Okay. And then, I think, from that you had said 16 that you came up with what you described as a novel 17 approach to looking at Class I differentials, and it 18 wasn't something that was on behalf of MIG, but something 19 you had come up with. 20 Do you recall that yesterday, from your testimony 21 yesterday? 22 A. I'm not sure that I do. Perhaps you could provide 23 me a little more background or trigger that would help me 24 to recall? 25 Q. Yeah. I think it was related to what you just 26 talked about a few minutes ago, and I'll get back to that 27 in a second, but you are talking about kind of a change in 28 and a little bit of a deviation that wasn't on behalf of 10671 1 MIG in your testimony. 2 A. Well, I think that, you know, that was after MIG 3 had developed their proposal, you know, which was for a 4 zero value of the $1.60, my independent contribution to 5 this was that, you know, perhaps we still need that, but 6 that it could be more directed and would probably need to 7 be directed. Diluting that into pool values in many parts 8 of the country would simply not liberate the milk that 9 would be needed. 10 Q. And so are you -- are you proposing independent 11 producer pools? 12 A. No, not necessarily. I know it appears like it 13 could be the case, but, you know, I would throw this open 14 as a possibility, more for the concept and ideas that it 15 has. The $1.60 has been a value that has been recognized 16 by the industry on all sides for some period of time, and 17 you could use that full $1.60 as the motivation to move 18 milk to fluid plants, or in some regions it may be a 19 possibility where you simply decide, we don't need all of 20 that here, we can pool a portion of that $1.60, but let 21 some of that be available as a direct payment to 22 producers. 23 Q. And you understand that MIG had had at least a 24 related proposal that was not accepted with -- to fall 25 within the scope of this hearing, where they could use at 26 least a portion of that $1.60 that would be used to cover 27 at least balancing costs? 28 A. Honestly, I didn't recall that, and perhaps I 10672 1 should have. But I have been retired and relatively 2 disengaged from a lot of the hearing process. 3 Q. Except that where you have been hired by MIG to 4 actually provide that historical context -- 5 A. Sure. 6 Q. -- of Class I differentials? 7 A. No. These specific pieces where I have been down 8 here, I have been trying to be fully engaged. But that 9 didn't mean that I went looked at all of the proposals 10 that were offered. 11 Q. Okay. And -- and are you, in taking that position 12 that that $1.60 could be used independently outside of -- 13 if it's pulled out of the pricing formulas, that it could 14 be used independently, is that a position that you are 15 here to testify to on behalf of MIG? 16 A. I haven't asked them if I can do that, and I'm not 17 offering that at this point in time. All that I'm 18 suggesting is that it seems to me that it may take all of 19 the $1.60 in some regions of the country to move milk to 20 fluid plants, and that in other regions it may not take 21 all of that. 22 Q. Okay. So in -- in your kind of independent 23 observations and making that, not on behalf of MIG as a 24 scope creep here in this hearing, but just as your own 25 independent opinion, it at least inherently acknowledges 26 that those costs are still justified in order to move 27 milk; is that fair? 28 A. It is fair, that when you look at not only the 10673 1 value of the milk at location per use, that if you need 2 additional milk in that region, it's not going to readily 3 be given up by the value that is in the pool. 4 Q. Okay. And you would in your -- maybe your more 5 creative way of trying to find some -- some solutions, it 6 acknowledges that those dollars, that $1.60 used in a 7 different way, as you are proposing it, would still be 8 then used to incentivize the movement of milk when it was 9 needed in certain areas? 10 A. Yes. I mean, that is what I was proposing here. 11 Q. Okay. 12 MS. HANCOCK: Your Honor, I think just for 13 purposes of making sure that our record's clear, because 14 it wasn't clear to me if this is a proposal that's being 15 suggested to expand this scope of the hearing or alter in 16 any way what's being considered at the hearing. But 17 National Milk would like to make sure that our position is 18 clear that we would object to the -- to the modification 19 of any scope, especially to the extent that it is related 20 to something that's already been specifically excluded 21 from the hearing. 22 THE COURT: Yes, your objection is noted. And 23 I -- sitting here, hearing it all come in, I never heard 24 anyone suggest that we're having another proposal. 25 MS. HANCOCK: It might not be. I just wanted -- 26 in an abundance of caution, I just want to make sure that 27 the record is clear. 28 THE COURT: Yes. Thank you for that. 10674 1 MS. HANCOCK: Appreciate that. 2 BY MS. HANCOCK: 3 Q. Okay. So let me just dive in a little bit to the 4 substance of the report that you have offered. 5 In the work that you did as the historian and then 6 analyzing the 2016 model results, did you collaborate with 7 any other groups or individuals? 8 A. No. 9 Q. Did you go out and talk with producers about any 10 of the costs that they -- that they have in serving the 11 Class I fluid milk markets? 12 A. No. 13 Q. Did you talk with anybody about their actual 14 balancing costs? 15 A. No. 16 Q. Did you talk with anybody about what it actually 17 takes to move milk or make a decision as to deliver to one 18 plant or another? 19 A. Not at this point in time. But I would also 20 remind you that I have had 40-some years of having done 21 this, and my Ph.D. thesis was looking at the cost of 22 balancing in the Northeast. So these are not new ideas 23 for me. And it's -- it's not that I'm entirely naive, but 24 I would hesitate to say that anybody can understand all 25 corners of the elephant -- 26 Q. Okay. 27 A. -- that Sally was trying to eat. 28 Q. Yet again, there's another bite. 10675 1 When did you obtain your Ph.D.? 2 A. Eighty -- this I should know off the top of my 3 head. '87, '86. I -- I can't recall specifically without 4 looking. 5 Q. Okay. 6 A. It was a memorable day, but not a memorable date. 7 Q. It was a long time ago? 8 A. Yeah. 9 Q. 40-some years ago? 10 A. Yeah. 11 Q. Okay. And then you have -- you have worked in 12 academia throughout the course of your career and studied 13 the market and industry? 14 A. Yes. 15 Q. And, in fact, you did conduct a pretty 16 comprehensive cost survey a couple of different times in 17 order to support the Make Allowance proposal that's part 18 of this hearing? 19 A. Yes. 20 Q. And throughout the course of your career you have 21 done lots of kind of studies and analysis in order to 22 evaluate and analyze the industry; is that fair? 23 A. Yes. That's been exclusively what I have worked 24 on is the dairy industry. 25 Q. And gathering data collection points in order to 26 analyze the -- what's happening within the dairy industry? 27 A. Yes. 28 Q. Why didn't you conduct any survey or analysis 10676 1 related to your work on Class I price differentials? 2 A. Why do I, did you say? 3 Q. Why didn't you? 4 A. Oh, why didn't I? 5 Well, we have the secondary data that are 6 available and we think are fairly good that were used in 7 the USDSS model, or at least as good as we can get. There 8 are some proprietary data that we used to assure ourselves 9 that the secondary data are good, and transportation 10 costs, for example. And there simply wasn't time to be 11 able to do a great deal of collecting information for 12 this. I mean, historically I think that much of the work 13 that we have done, I think, has been well done, but not 14 necessarily quickly done. 15 Q. And you did have time though to conduct the cost 16 survey on behalf of IDFA in order to support your 17 Make Allowance testimony? 18 A. That was done. And part of the reason that could 19 be done as quickly as it was is because we have done that 20 in the past, and I had the mechanisms to be able to do it, 21 and participants got their data in fairly quickly. 22 Q. Did you -- did you try to collect any data for 23 purposes of the analysis that you were conducting 24 evaluating the $1.60 base differentials from order reform? 25 A. Secondary data, yes, but not primary data. 26 Q. And secondary data, you mean the analysis that you 27 did on the 2016 model results? 28 A. Well, and more. I mean, data from secondary 10677 1 sources, so in other words, looking at publications, that 2 were available from dairy programs or from AMS or from 3 NASS or just a variety of other sources. 4 Q. And I didn't see that in your written materials. 5 Did you cite any of those sources as a basis? 6 A. Yes, I think so. 7 Q. Can you show me where? Because I might have 8 missed it. 9 A. Well, they are footnotes. If you look at -- 10 Q. Footnotes in your written testimony? 11 A. Yes, in the written testimony. 12 Q. So that's Exhibit -- 13 A. That's -- 14 THE COURT: 451. 15 THE WITNESS: -- 451. 16 If you look on page 3, the bottom, there are some 17 of those sources there. On the bottom of page 4 there are 18 some others. 19 BY MS. HANCOCK: 20 Q. Okay. Those are the secondary sources that -- 21 that you -- that you referenced in conducting your 22 analysis? 23 A. Yes. 24 Q. So, for example, footnote number 3 has final 25 estimates for 1979 through 1982? 26 A. Yes. 27 Q. And then the Milk Production Disposition and 28 Income 2022 Summary, which I believe Ms. Keefe put in as 10678 1 part of her testimony exhibits? 2 A. Didn't look at that yesterday, but perhaps. 3 Q. And then Measures of Growth in Federal Orders, 4 that was the other source? 5 A. Yes. 6 Q. Anything else that you considered for your 7 analysis that you can think of? 8 A. Yeah. There were -- on page 4, there are also a 9 few footnotes down there. The questions and answers on 10 Federal Milk Marketing Orders and rules and regulations in 11 the industry. 12 Q. And these publications that I have looked at, I 13 don't see any kind of analysis over the elements that went 14 into that $1.60, as far as the cost of supplying the 15 market with fluid milk. 16 Are you aware of whether any of those had any 17 current costs analysis or summaries? 18 A. Not cost analysis. I did find AMS documentation, 19 you know, where they were noting the three elements of the 20 $1.60, and that was from back before 2000. It would have 21 been at the time of Federal Order Reform. 22 Q. Okay. Just that those three elements were what 23 were used in determining the base differentials in order 24 reform? 25 A. Yes. And I also recall personal conversation with 26 a former member of Dairy Programs. And this was many 27 years ago, but I was curious about the $1.60 or the $1.20 28 that existed before the Federal Order reform as to how 10679 1 they thought about that and what it was for. And I do 2 recall them saying that -- although I couldn't find any 3 documentation about it, but that this had to be justified 4 at the time of World Trade Organization negotiations. We 5 had green box, amber box, red box on a lot of programs 6 that were being looked at, and this was one of them that 7 they used to justify. 8 Q. And in your 40 years plus of experience, have you 9 ever been involved in marketing any milk? 10 A. No. I'm a consumer. I buy milk but in small 11 quantities. 12 Q. Have you ever been involved in selling raw milk? 13 A. No. 14 Q. Have you ever been involved in buying raw milk? 15 A. I have been an academic. 16 Q. Yeah. I just want to make sure I'm clear on 17 what -- what we're drawing on for experience. 18 So other than academia, the work that you have 19 done in academia, have you ever been involved in balancing 20 milk? 21 A. I have been involved in studies of balancing milk, 22 which involved a great deal of interaction with all 23 members of the industry. So do I actually balance? I 24 don't think any one person balances milk. 25 Q. You have never had a role on a team of people who 26 balanced milk either, have you? 27 A. I have interacted with teams that do that. 28 Q. Have you yourself ever had any responsibility in 10680 1 balancing milk? 2 A. I have never been paid to act on a team to balance 3 milk. 4 Q. Have you ever filled out a pool report? 5 A. No. But I have seen them. 6 Q. Okay. So the experience that you are drawing upon 7 is from your role in academia and reading studies about 8 what's happening in the industry and looking at the model 9 results? 10 A. Yes. 11 Q. Let's take a look -- so I am looking at 12 Exhibit 453, which is your PowerPoint presentation. And 13 on page 5 you have a footnote there that talks about -- 14 that there are testimony from experts at this hearing that 15 suggest that own-price elasticity for fluid milk may now 16 be elastic. 17 Do you see that? 18 A. Yes. 19 Q. Do you believe that fluid milk is elastic or 20 inelastic? 21 A. I have not studied that. And many things I don't 22 study, I would count on the research that has been done, 23 read that, and if I feel like it's a reputable source, 24 then, you know, you would either believe it or you might 25 try to conduct your own study to disprove that. 26 Q. Can you think of any reputable source that you 27 believe that has concluded that price of fluid milk is 28 elastic? 10681 1 A. Dr. Oral Capps is certainly an expert in his area, 2 and he has testified, I believe, that in our current time 3 period since COVID that milk has moved into that elastic 4 territory. 5 Q. And you're also familiar with other studies 6 throughout the course of your historical experiences over 7 40 years -- 8 A. Sure. Absolutely. 9 Q. Just let me finish so I have a complete sentence. 10 A. Sorry. 11 Q. Sorry. 12 But you are familiar with other studies that have 13 been done over the course of your experience in the 14 industry over the last 40 years that have repeatedly been 15 peer reviewed and concluded that fluid milk is an 16 inelastic product? 17 A. Yes. It's been long held that dairy products were 18 inelastic. 19 Q. And did you work with Dr. Kaiser? 20 A. I worked with Dr. Kaiser when I was at Cornell 21 University. And certainly Dr. Kaiser had been involved in 22 studies looking at the elasticity of milk. Dr. Olan 23 Forker before him. 24 Q. And you are familiar with the work that they do, 25 even through today, that they have done in the industry? 26 A. I'm not familiar with recent studies that 27 Dr. Kaiser may have done. I haven't been trying to keep 28 up on that, I guess. 10682 1 Q. Are you familiar with the work that Dr. Capps has 2 done on behalf of the USDA and its reports to Congress 3 related to the elasticity studies for fluid milk? 4 A. I'm familiar that Dr. Capps has been an expert in 5 that area. I have not scrutinized his -- his studies or 6 his testimony recently. I did watch the hearing process 7 here when he was on. 8 Q. And did you also observe Dr. Kaiser's testimony at 9 this hearing as well? 10 A. I didn't. I wasn't available that day. 11 Q. Okay. Any reason to believe that Dr. Kaiser's 12 conclusions are not accurate? 13 A. I didn't see or hear Dr. Kaiser's conclusions, so 14 I couldn't really speak to that. 15 Q. Yeah. So as you sit here today, do you have -- 16 based on your 40 years of experience in the dairy 17 industry, do you have an opinion about what you think is 18 the most credible source for determining price 19 elasticities of the fluid milk market? 20 A. Well, no, I don't at this point in time. Again, I 21 haven't looked at those studies in that level of scrutiny 22 for quite a period time. I wasn't aware that Dr. Kaiser 23 had done recent work, I guess. Dr. Capps has been doing 24 contemporary work, I know that. 25 Q. And you know that Dr. Capps has different 26 contemporary works that reach different conclusions? 27 A. Yes. I do realize that earlier. And I think even 28 in his testimony he was saying that this has become a 10683 1 fairly recent phenomenon, that it's been moving toward 2 being unitary elastic or even elastic. 3 Q. And as you sit here today, based on your 4 experience in the industry, you don't know which of 5 Dr. Capps' contemporary work is the correct one? 6 A. No. I would assume that his most recent work 7 reflects the most recent conditions of the industry. I 8 would have a hard time imagining that he was not trying to 9 be honest about his scrutiny of the data. 10 Q. On page 7 of your PowerPoint presentation in 11 Exhibit 453, you have Figure 2 which says "Discovering a 12 Market Clearing Price." 13 You're not suggesting that Class I is a market 14 clearing product, are you? 15 A. This is merely an illustration of what we're 16 talking about when we are saying a market-clearing price. 17 Q. Yeah. I just want to clarify, you are just 18 talking about the price at which Class I sales are made, 19 you are not trying to say that Class I fluid milk is a 20 market-clearing product, are you? 21 A. No, I'm not suggesting that. I mean, any product 22 that's made will have to have a market-clearing price. 23 And, you know, that's for non-dairy products as well. 24 Q. If you turn to page 9 of your PowerPoint 25 presentation, you are talking about the model in this -- 26 on this page. 27 And I think that you had testified that the reason 28 you used the 2016 model results is because you believed 10684 1 that the more recent model results that Dr. Nicholson used 2 for National Milk was data that was owned and proprietary 3 to National Milk; is that right? 4 A. I felt that it would be unethical for me to use 5 that. 6 Q. Did you ever ask National Milk if you could use 7 that data? 8 A. I didn't. No. 9 Q. Why not? 10 A. Didn't occur to me. This data was readily 11 available as well, and for illustrative purposes, I think 12 that, you know, it would have been just as good to use 13 this. I would suggest that if you really wanted to go in 14 this direction, that researchers like Dr. Nicholson could 15 be asked to take a look at the same outcome or analysis 16 with more contemporary data. 17 Q. And if -- if you look at the second bullet point 18 on page 9 there, it says, "The model's task is to find the 19 most efficient movements of milk assembly, product 20 processing, and distribution of final projects subject to 21 many constraints." 22 Do you see that? 23 A. Uh-huh. 24 Q. Is that a "yes"? 25 A. Pardon? 26 Q. You said "uh-huh." 27 A. Yes. Oh, I'm sorry, yes. 28 Q. I just want to make sure that we get your words on 10685 1 the transcript. 2 Can you tell me how the model works to determine 3 the product -- the most efficient product processing at 4 the plant? 5 A. It works to get the most -- sure. 6 The plant locations that we have identified in the 7 model are also identified as to the products they process 8 there, and we have some idea about the milk input of those 9 plants. So -- not of all plants but of the majority of 10 plants. It allows us to be able to constrain the model to 11 process only those products at those locations. So the 12 model's task is to assemble that milk to get to the plants 13 to make the products, and distribute them to the points of 14 demand that the model used. 15 Q. Okay. So when you say that the model task is to 16 find the most efficient movements of milk, product 17 processing, and distributions of final products, you are 18 not saying that the model is determining the most 19 efficient product processing at each plant, are you? 20 A. No. It's -- it's looking at the products they can 21 process and constraining them by the volumes that the 22 plant can handle. 23 Q. So it doesn't -- it doesn't do anything to 24 evaluate the efficiency within the plant's operations 25 itself? 26 A. It doesn't. We do have the capability of turning 27 on returns to scale on plants so that plants could operate 28 at slightly lower costs if they were larger. But we don't 10686 1 always use that in the model runs. 2 Q. And the three elements that you evaluated for the 3 $1.60 criteria, nothing in the model results tells us 4 whether that $1.60 is warranted or unwarranted; is that 5 correct? 6 A. No, it doesn't at all. The model results do not 7 include that. The $1.60 lives outside of the efficient 8 solution of that model. That's something that has been 9 imposed, you know, through regulation. 10 Q. And -- and so it's -- is it fair to say then that 11 the model results are just the -- related to the spatial 12 movement of the milk on a geographical map? 13 A. Yes, it is. 14 Q. Okay. And so there's no kind of subjective 15 evaluation of where milk should move, other than just that 16 spatial relationship within that modeling? 17 A. That's correct. I mean, the model is making the 18 most efficient choice that it can from all of those 19 constraints and all of the resources it has available. We 20 don't impose anything on the model that is subjective. 21 And that isn't one of the shortcomings. I believe 22 that Dr. Nicholson in his testimony mentioned that, you 23 know, for example, business relationships may not respect 24 the precise flows that the model has, that, you know, you 25 may find that I buy milk from this cooperative to move to 26 my plant here, and it may be somewhat different than the 27 model looks at. 28 Q. And those market factors that -- that you would 10687 1 like to have used for purposes of covering those balancing 2 costs or incentives to move milk, those are things that 3 are not factored into the model? 4 A. Those are -- the model solves the problem of 5 getting milk to plants and finished products to consumers. 6 It does that. So we don't need to do things outside of 7 that to look at the most efficient solution. 8 Q. And is that -- the model, when it's talking about 9 that spatial movement of milk, it's really focused on the 10 transportation of the milk; is that correct? 11 A. It's focused on the transportation of assembly and 12 distribution, recognizing all of the road system networks 13 that we have and costs associated with it. 14 Q. And Exhibit 452, this is MIG-16A. 15 Is 452 the 2016 model results? 16 A. Yes. 17 Q. With the $1.60 removed? 18 A. Yes. These are, you know, just the shadow prices. 19 Q. Okay. And so I -- it -- was there a version of 20 the 2016 model results that had the $1.60 base 21 differentials included? 22 A. There certainly would have been reported, but 23 that's a straightforward addition to those columns here 24 in -- or the column called "Class I Shadow Price." 25 Q. Okay. So then you took that, you just across the 26 board did a $1.60 reduction in all of the counties that 27 are in Exhibit 452? 28 A. No. 10688 1 Q. Okay. 2 A. These would have been the shadow price values as 3 reported out of the model. 4 Q. Okay. So this has the $1.60 included? 5 A. No. 6 Q. Well, that's what I'm trying to get at. 7 A. Okay. The model itself does not report those 8 values with $1.60. When we report them as Class I 9 differentials, we would add the $1.60 to these values. 10 Q. Okay. That's why I asked the earlier question of 11 was there a version of this model that had the $1.60 12 included, and you were saying not as the model ran it, but 13 later as it was added as the base differentials? 14 A. That's correct. 15 Q. Okay. And so this in Exhibit 452 looks as it came 16 out of the 2016 model results? 17 A. Yes. 18 Q. And did you do any other modifications or analysis 19 of the 2016 model results that would be reflected in 20 Exhibit 452? 21 A. No, these are about as pure as they get. They are 22 just the dumps from the model that we would use for 23 matching purposes or anything else. 24 Q. And -- and do you know what month it was run? 25 A. This was for May of 2016. 26 Q. Why use May of 2016? 27 A. May is what we would refer to as the flush month, 28 and these tend to be the smaller of the shadow price 10689 1 values. When we are only reporting one month, we usually 2 use the flush month. 3 Q. All right. So you didn't apply or adopt any other 4 methodology or analysis or study other than just report in 5 Exhibit 452 the 2016 model results? 6 A. That's correct. 7 Q. Were you ever asked within the scope of the work 8 that MIG hired you to do to look at the costs of balancing 9 that are actually incurred? 10 A. I was not asked to do that nor would I have had 11 time to do that. 12 Q. Were you ever asked within the scope of the work 13 that you were hired to do to evaluate or analyze the cost 14 of maintaining Grade A products? 15 A. No. 16 Q. Were you ever asked by MIG or -- to conduct an 17 analysis or study of what the costs are that are 18 associated with incentivizing the movement of milk to the 19 Class I fluid milk market? 20 A. No. I was asked to take a look at these things 21 and to see whether or not I had some information that 22 might be able to shed light on it, and that was why I had 23 gone to this model. Not quickly. It took a little while 24 for me to think about whether or not this had something to 25 say about it. 26 Q. And I think that in your testimony on page 7 of 27 your written testimony, so that's Exhibit 451, you talk 28 about Grade A elimination from the base differential. 10690 1 Do you see that? 2 A. Yes. 3 Q. And you say in here that there actually are costs 4 of maintaining Grade A, but because it's standard in the 5 industry, you don't think that it is right to be included 6 within the base differential? 7 A. My professional judgment is that it's a trivial 8 cost. Most of the costs -- I mean, Grade A describes the 9 conditions under which milk is produced, and most of those 10 conditions are things that would be considered to be a 11 sunk cost on dairy farms today, that they have made the 12 investment, and it's a capital cost. I located my well so 13 many feet from animal concentration or manure. I have a 14 screen door on my milk parlor. You know, just a variety 15 of things like that. And those are standards of the 16 industry that I think don't really bear looking at very 17 closely at this point in time. 18 Q. Are there other costs that are continuing and 19 ongoing that the farms have to incur in order to maintain 20 Grade A milk standards? 21 A. I think that there are few things. They have to 22 keep records, for example, of use of medications on the 23 animals, that type of thing. It's something that they 24 would probably be doing anyway. They need to control 25 rodents and flies and that type of thing. Most of them 26 would want to do that for their own working environment. 27 And, you know, I think those are relatively small costs. 28 Q. And deep cleaning as well; is that right? 10691 1 A. Cleaning, sure. 2 Q. Energy costs in order to maintain the 3 refrigeration requirements? 4 A. Grade B has to clean as well. I don't think -- 5 Q. With the same frequency? 6 A. I don't think that most of the Grade B farms would 7 be finding a market for a product if they weren't 8 cleaning. They are the standards under which -- I 9 understand the difference between Grade A and Grade B, and 10 there has been in the past some ungraded milk, which 11 doesn't even have standard but... 12 Q. And I just want to be specific to my question to 13 you, which is you understand that there are continuing and 14 ongoing costs that are incurred in maintaining Grade A 15 status? 16 A. Yes, I do understand that. And I do think that 17 most of those costs would probably be done Grade A or no 18 Grade A. I don't think that Grade A imposes those upon 19 farms. I think they do that because -- very much as I 20 mentioned in the course of the testimony here, or at least 21 the written documentation, that we have had such things as 22 premiums that have been paid for low somatic cell count 23 milk. That costs something for those farms to achieve 24 that initially. But it's become commoditized now, and 25 it's so available that premiums are not being paid at the 26 same degree or level that they did at one point in time. 27 Q. And whether the farms are used to paying those 28 costs or not or will pay them, they are still costs in 10692 1 order to maintain a Grade A standard of milk; is that 2 right? 3 A. They are. And I think that to use, again, the 4 example of low somatic cell count milk, farms have also 5 discovered that there are additional benefits to having 6 that, not just what the plant wants, but that my cows are 7 healthier and I get more production from them and so 8 forth. And I think the same thing is for many of the 9 Grade A standards. 10 Q. And understandably, there are lots of benefits to 11 having higher quality practices. 12 But with those higher quality maintenance costs, 13 those farms still have to incur those costs; is that a 14 yes? 15 A. Farms still have to incur the costs, sure. 16 Q. And based on your historical -- or the historian 17 role that you were performing on behalf of MIG, you -- and 18 the records that you reviewed, that was estimated at order 19 reform at around $0.40 a hundredweight? 20 A. That was quite a while ago, and I'm not sure 21 that -- I don't recall that that involved a great deal of 22 study at that point in time. I don't know what the source 23 of that $0.40 was. 24 Q. Did you find any information on that in your work? 25 A. I didn't find information on that. 26 Q. Okay. And are you aware of any costs in the last 27 20-plus years that have gone down in a way that would 28 suggest that that number would be less? 10693 1 A. The $0.40? 2 Q. Yeah. 3 A. To attain Grade A status? 4 Q. Yeah. 5 A. We have very few farms trying to attain Grade A 6 status. They are at Grade A status. So that would be 7 maintain Grade A status. Is that what you are asking? 8 Q. Yeah. Are you aware of any factors that would 9 suggest that the cost of maintaining Grade A quality milk 10 have decreased in the last 20-plus years? 11 A. No, I'm not sure. But, again, I think that the -- 12 I think that the documentation that AMS had offered was 13 that this was to support the conversion from Grade B to 14 Grade A. Correct? 15 Q. I'm not asking about that. I'm asking about the 16 maintenance costs. 17 Anything that you read in any of the work that you 18 did in order to provide your testimony that would suggest 19 the costs of maintaining Grade A milk have decreased? 20 A. I'm not sure that I know what would have become 21 less expensive in the way of inputs to the cleaning or 22 supplies, if that's your question. But, again, I don't 23 think that's what the AMS justification was about. 24 Q. Because you are focused on the conversion? 25 A. I think that that's what it was. 26 Q. What about the costs of balancing, anything in the 27 work that you did, either as the historian or the 28 documents that you reviewed, that would suggest the costs 10694 1 of balancing have decreased in the last 20-plus years? 2 A. No, I -- well, yes, I guess, some things have 3 changed or at least shifted. So, for example, the 4 intra-week balancing that was common in the fluid milk 5 industry, when plants didn't operate on a Saturday or 6 Sunday, plants were incented to put in capacity to store 7 milk on the weekend and to at least receive milk on the 8 weekends and have that to be able to process on Monday. 9 So those investments had been made. 10 Q. You ever have to update any of those investments 11 that are made more than 20 years ago? 12 A. You have to update those you say? 13 Q. Yeah. You have to update those from time to time? 14 A. Oh, sure. Absolutely. 15 Q. Or if you build a new plant, you have to incur -- 16 A. Capacity. 17 Q. -- new costs? 18 A. Sure. 19 Q. So nothing in your reading that would suggest 20 those costs have decreased in the last 20-plus years? 21 A. No. Who is incurring them perhaps has changed. 22 Q. And you understand based on your historical work 23 in the industry that the Federal Order was put in place to 24 help neutralize some of the disparate bargaining power 25 between the parties? 26 A. Yes. 27 Q. And in some ways, it is your testimony that some 28 of those protections are no longer needed. 10695 1 Is that because those -- those systems that were 2 put in place were successful? 3 A. They were successful, during their time, that's 4 correct. I still think that there is a role to play. 5 Milk is still a perishable product when it's produced in 6 its raw state. It is still bulky and expensive to 7 transport long distances. There's still a lot of the 8 factors of milk and milk production that I think can make 9 farms vulnerable to market positions. 10 Q. And that disparate bargaining power that was the 11 situation wasn't limited to just fluid milk, but it 12 pertained to all types of milk that was being delivered; 13 is that right? 14 A. It was focused on fluid milk at the time. 15 Q. And you understand that the system that was put in 16 place is designed to pay producers for their milk without 17 regard to its final end use? 18 A. I understand that. That's correct. 19 Q. And do you believe that that's necessary today? 20 A. I -- I'm not sure that it is. We have a lot of 21 milk that is opting out of Federal Order regulation. The 22 total amount accounted for by Federal Milk Marketing 23 Orders has been declining for several years. We find a 24 number of plants, particularly those that are at the outer 25 zones of a Federal Milk Marketing Orders that are simply 26 feeling as though there's not enough money in the order 27 for me to put up with the hassle of reporting. 28 Q. Okay. So you think there's enough change in the 10696 1 circumstances now that suggest that now producers could be 2 paid differently based on the final end use of their 3 products? 4 A. I think that we can reexamine whether or not the 5 Federal Order system is accomplishing what it was set out 6 to accomplish. 7 Q. And what analysis or study did you conduct in 8 order to evaluate whether it would create disorderly 9 market conditions if producers were paid based on the 10 final end use of the product? 11 A. Could you give me an example of disorderly 12 marketing conditions? 13 Q. I'm asking you. Did you do any kind of analysis 14 or study to evaluate what would happen if producers were 15 paid based on the end use of their product? 16 A. If producers were paid on the basis of the end use 17 of their products, I did not do that. What I did try to 18 take a look at is what it may take to incentivize milk 19 movements and to compensate for -- for balancing funds. 20 Q. And you did that on behalf of your client, which 21 are the ten fluid milk processors that make up MIG? 22 A. I did that for Davis Wright Tremaine. 23 Q. Which is the law firm that represents MIG -- 24 A. I agree -- 25 Q. -- that is made up of just -- 26 A. -- yes. 27 Q. -- fluid milk processors -- 28 A. Yes -- 10697 1 Q. -- is that right? 2 A. -- they are representing -- 3 THE COURT: Finish your question, and then please 4 answer. 5 MS. HANCOCK: Yeah. I'll restate it just to make 6 sure it is a complete sentence. 7 BY MS. HANCOCK: 8 Q. You did your work for Davis Wright Tremaine, which 9 is the law firm that represents MIG, that has the ten 10 fluid milk processor clients? 11 A. That's correct. 12 Q. And you did not do any of that work analyzing any 13 of the producers' actual experiences; is that right? 14 A. No, I did not. 15 Q. Did you conduct any kind of analysis or study 16 related to the economic conditions that affect supply and 17 demand of milk? 18 A. No. And, again, I will repeat, as I have stated 19 before, that the USDSS takes the supply of milk and the 20 demand for dairy products as a given. 21 Q. Did you look at the historical differentials prior 22 to order reform where differentials were set at $1.04 a 23 hundredweight? 24 A. No. I looked at differentials I believe that were 25 $1.20 a hundredweight prior to reform. 26 Q. And did you look at -- 27 A. It may have gone to $1.04. I don't recall. The 28 $1.20 -- I'm sorry for interrupting. The $1.20 was the 10698 1 differential at that point in Minneapolis. 2 Q. And did you do any kind of evaluation or analysis 3 to determine what it was that made up that $1.04 or $1.20? 4 A. No, I did not. 5 Q. Do you know what criteria was used to increase it 6 to the $1.60? 7 A. This was in the Federal Register at the time that 8 it was published, I guess, but I don't recall what that -- 9 at least I believe it was in the Federal Register, the 10 increase to $1.60. 11 Q. So your work would have been limited to what was 12 published in the Federal Register? 13 A. No, it was limited to the documents that I had 14 available. 15 Q. And have you provided any of those as part of the 16 evidentiary record that you are putting forth today and 17 yesterday? 18 A. I don't recall that I did. I can. 19 Q. In -- in Exhibit 452, the May of 2016 model 20 results, did you do any work to evaluate the impact at the 21 local county level for these price differentials? 22 A. I'm not sure I understand the question. These are 23 all at the county level. 24 Q. Did you evaluate any of the local county results? 25 A. I have looked at the county results, and I looked 26 at a few of the specific examples on here of what the 27 differences have been. Every county has been mapped, as 28 well as reported in this document. So I'm not sure I 10699 1 guess what your question is. I have touched every county. 2 Q. Yeah. So I understand that you have looked at the 3 model results, which includes all broken down by county. 4 Did you do anything at the local level to actually 5 evaluate the local conditions of the market to determine 6 if the model results are accurately being utilized in 7 those specific counties? 8 A. Well, I think the short answer would be no. But, 9 yes, we have looked at every county and looked at the 10 estimated milk supply on a county-by-county basis. We 11 have made estimates of the components that do add up to 12 the state values that are reported. We do look at the 13 population of all counties. We do look at the estimates 14 of per capita consumption of all counties. 15 And so I do think that when you are asking 16 questions about have we considered supply and demand 17 conditions or -- at the local level, yes, we have. 18 Q. And those elements that you were just describing, 19 those are the factors that are taken into account by the 20 model? 21 A. Those are the factors taken into account by the 22 model. 23 Q. So separate from the model results, have you done 24 any kind of subjective evaluation of the local market 25 conditions and the competitive circumstances to evaluate 26 the model results? 27 A. Could you give me an example of the competitive 28 conditions that you want me to respond to? 10700 1 Q. Anything that you can think of that would affect 2 the competitive circumstances based on your 40 years in 3 the industry. 4 A. The term competitive condition seems a little 5 loose to me. Can you make that more precise? 6 Q. Yeah. Did you do anything -- other than use the 7 model results, did you do anything to evaluate the local 8 conditions of the dairy industry to make sure that the 9 model results are accurately being applied in each market? 10 A. We do extensive work to make sure that the model 11 data and the results are correct, that when we get a final 12 report from the model, that they add up to all of our 13 known factors of production that are going into here, 14 including locations of plants. In other words, the model 15 cannot make product where there is not a plant to do so, 16 so -- 17 Q. Did you do any kind of evaluation or changes to 18 the May 2016 model results to update it for plants that 19 had closed? 20 A. No. These were 2016 results. 21 Q. Did you do any kind of local evaluations to make 22 sure that Exhibit 452 includes new plants that have come 23 online since 2016? 24 A. These are 2016 results. I would repeat that. If 25 we wanted 2023 results, it would require that we try to 26 pull all of those data together and rerun the model which, 27 you know, we -- we would do if this was something that 28 would help forward the industry. 10701 1 Q. I'm just trying to figure out as part of the work 2 that you did in putting Exhibit 452 into the record, did 3 you do anything at the local level to make sure that 4 Exhibit 452 is accurate today? 5 A. It wouldn't be accurate today. It would be 6 accurate as of 2016. 7 THE COURT: Remember where you are, Ms. Hancock. 8 Let's take 15 minutes. I would like you to be back at 9 9:50. Go back on record about 9:50. Go off record at 10 9:35. 11 (An off-the-record discussion took place.) 12 THE COURT: Let's go back on record. 13 Back on record at 9:52. 14 Ms. Hansen [sic]. 15 MS. HANCOCK: Dr. Stephenson, I don't have any 16 further questions. Thanks for your time this morning. 17 THE WITNESS: You're welcome. 18 THE COURT: Who next has cross-examination for 19 Dr. Stephenson? 20 If no one else has cross-examination, I'll turn to 21 the Agricultural Marketing Service for questions. I see 22 no one. 23 The Agricultural Marketing Service is invited to 24 ask questions of Dr. Stephenson. 25 MS. TAYLOR: Thank you. I'm surprised. You 26 caught me off guard. 27 // 28 // 10702 1 CROSS-EXAMINATION 2 BY MS. TAYLOR: 3 Q. Good morning. 4 A. Good morning. 5 Q. Thanks for coming back today. 6 A. You're welcome. 7 Q. Okay. A couple questions to help us understand 8 the numbers. 9 For the model that you -- the 2016 run that you 10 did -- 11 A. Yes. 12 Q. -- when you and Dr. Nicholson talked about what 13 you have done -- the updated things that you have done, 14 you talked about a small run and a large run. So, for 15 example, the graph you have on page 10 of Exhibit 451, the 16 written statement, and then the numbers on Exhibit 452 17 that go along with that, is that out of the small run or 18 the large run? 19 A. This is out of the small run. We didn't have the 20 large run completed at that time. 21 Q. Okay. We noticed -- I'll turn to page 10 with the 22 graph. 23 When we're looking at the reds and the greens, we 24 found it -- you could almost draw a line at the California 25 border, and then down through Nevada at that border, to 26 kind of where the red stops and the green starts again. 27 And just kind of found that interesting, and I'm just 28 wondering if you might have an idea of why that's 10703 1 happening, and -- and is the fact that you did a small 2 versus a large run impacting that? 3 A. No. I can, I think, fairly safely assure you that 4 that's not a small-versus-large model run, but it is a 5 curious set of outliers. And I think that what it's doing 6 is reflecting the fact even though there's a lot of milk 7 in California, there's also a lot of population there, and 8 it's requiring that that processing of fluid milk and its 9 needs -- and the same thing would be true in Nevada 10 that -- relative to the population -- or relative to the 11 milk production there's a lot of population there -- sways 12 this toward being more advantageous, I guess, for fluid 13 than it has been for manufacturing. And it probably has 14 something to do -- and I -- I meant to go in and take a 15 look at that in more detail because this is another one of 16 the things that stuck out to me was that those two states 17 appear to be an island of green in, you know, a sea of 18 red. 19 You see a little bit of the inverse of that, I 20 think, also a curiosity when you look at New York State on 21 a map like this, that that single state also has aspects 22 of green as you get toward Long Island area and aspects of 23 red as you look at the northern and western parts of the 24 state. But, once again, the model has real need for these 25 manufactured dairy products. There's large population 26 that wants those as well. And then it places where you 27 have got surplus milk, it -- those are truly advantageous 28 to the model to have them there. 10704 1 Q. And -- okay. And so I know you didn't look at the 2 2021 data for this purpose? 3 A. No. 4 Q. But do you have an idea if you think the greens 5 would be greener and the reds would be redder, for 6 example, over the seven years? 7 A. I can honestly tell you I didn't even peek at 8 that, and I would have had to do some additional data work 9 to be able to do that. But my intuition tells me that the 10 green would be greener and the red would be redder. 11 Q. Okay. We noticed -- and I want to talk a little 12 bit about the numbers in Exhibit 452. And as we 13 understood how the model works, just generally, not 14 specifically these numbers -- and you did clarify with 15 Ms. Hancock that there's no dollar -- there's no base 16 differential in these numbers. It's a complete shadow 17 price. 18 So my assumption is somewhere in here would be a 19 zero, but the lowest number we see in here for a Class I 20 shadow price is $1.03 in three different areas. Just 21 curious why that is. 22 A. Well, there would be a zero somewhere. And I'm 23 not sure -- I didn't look at these closely enough, I 24 guess, to determine what the lowest values were. 25 One of the things that does happen is that -- 26 important to recognize that a zero value happens at an 27 infinitesimally small point where there is manufacturing 28 going on, and there is interpolation to get the data 10705 1 values across all points. And that's one of the reasons 2 why I think in at least one of the month's model runs, if 3 I recall, for the 2021 data, that you don't see $1.60 4 showing up in the county maps because there is a point 5 within the county that isn't $1.60, but by the time it is 6 averaged and spread across the county, by the 7 interpolation of the other 12 points closest to it, those 8 values become big enough to make it something larger than 9 $1.60 average in the county. 10 Q. Yeah. And I think when we looked back at the 2021 11 survey, the lowest point was, I think, $0.10. Right? I 12 think it came out in the studies or in the evidence 13 entered in this record as $1.70, so I took off the buck 14 60, which was included, say $0.10. 15 A. Yes. 16 Q. But I don't see anything on here that's kind of 17 that low. Right? We went through the spreadsheet -- and 18 so it was a buck, and it just seems like that's rather 19 higher than we would think as an actual base zone. 20 A. Yeah. I -- I hadn't caught that, Erin -- 21 Q. Okay. 22 A. -- and I would want to look at that, I guess, to 23 see and make sure because it should be down in that range 24 of, you know, $0.05 or $0.10, not -- not a buck. 25 Q. Okay. Okay. Another question we had, so we 26 looked at a few anchor cities. Well, National Milk talked 27 about the anchor cities that they used to kind of look at 28 the model from 2021 and then come up with their proposal. 10706 1 And we just wanted to look at the shadow price for the 2 2016 run and then the shadow price for the 2021 run. 3 And so -- and I'll take Yuma, Arizona, as example, 4 and if you would just give me the pleasure to assume the 5 numbers I'm telling you are correct. 6 A. Okay. 7 Q. But I -- for everyone else's following along, the 8 numbers came out of MIG Exhibit 64C. And I don't have the 9 other exhibit number written down. 10 So in Yuma, the model number in that exhibit is 11 2.15. So if I take out $1.60, that leaves me with a 12 shadow price of $0.55. And then in your 2016 run, if I 13 look at the shadow price, it is 3.31, significantly more. 14 I'm just curious if you had an idea as to why that 15 is. And that's -- it is similar for other cities, that 16 the 2023 -- 2021 numbers are significantly higher than the 17 2016 numbers. 18 A. I don't have a good explanation for that, Erin. 19 You may have caught a major flaw in what I have done here, 20 and I would want to look at that. 21 Q. Okay. 22 A. I mean, that's seriously something that I 23 should -- I should have caught. 24 Q. Okay. I mean, for all I know it could be correct. 25 We're just kind of trying to process what this all means. 26 A. That would not make sense to me. 27 Q. Okay. So you talked in general about how there 28 was a difference between I and III you look at as a 10707 1 give-up charge basically. But the results coming out of 2 the model, as we understand them, and as I understand 3 them -- and you talked a little bit about this with 4 Ms. Hancock -- is that the model kind of puts out the 5 optimal result for efficiency sake. And you're -- you're 6 kind of taking that number and saying, okay, well, that's 7 a proxy for what a give-up charge would be. 8 Is that a correct characterization? 9 A. The model has solved for all the needs that we 10 have in the country. When you take a look at the 11 differences between one class and another out here, I 12 think it describes just exactly how much a particular 13 plant may want to hold on to their milk, it is of that 14 level of value to them, and they would have to be 15 compensated at at least that rate to feel like they are no 16 worse off by giving that up. 17 Q. And so I'm -- do you have an idea of what -- what 18 goes in the determination of a plant to want to hold on to 19 that milk, from like a cost perspective, what do they 20 weigh to determine, I'm willing to send it to a fluid 21 plant for X amount rather than keep it here and make 22 cheese, for example? 23 A. Uh-huh. This would be -- you know, the concept of 24 the shadow price that we're using in a model like this is 25 to be I'm indifferent between receiving a next 26 hundredweight of milk at this location, or how much would 27 I have to pay to get that next 100 of milk to move -- a 28 hundredweight of milk to move here. And that's what the 10708 1 shadow price really is. 2 In the more global model sense, it would be 3 saying, if I had another hundredweight of milk at this 4 location, could I reconfigure the model results by 5 something that would lower the total cost to the entire 6 dairy system? So that really is what we're talking about 7 when we are looking at the shadow price. 8 It is that economic current, if you will, that 9 people are feeling as, you know, they have opportunities 10 for their product and their sales opportunities and what 11 we -- what I would call, I guess, the opportunity cost of 12 giving up that milk. 13 So, I mean, a marginal value is how much would it 14 cost me to procure one more unit of that milk, and a very 15 close proximity to that would be how much would I have to 16 be compensated to give up one unit of milk. 17 Q. Okay. And so for the Class I -- so following that 18 logic, so for Class I handlers, it would be the cost of 19 getting the raw milk to my plant, how much do I have to 20 spend to get the raw milk to my plant? 21 A. Beyond what was required to process what I 22 processed here. 23 Q. Yeah. 24 A. Yeah. 25 Q. And then for the Class III side, that shadow price 26 is a lot of factors, one of them to be what is the lost 27 sales I would incur to give it up to the fluid plant 28 rather than to process it and distribute it out into the 10709 1 finished product market? 2 A. Yeah. You should probably think of it in exactly 3 the same way you thought of the fluid plant. 4 Q. As an assembly cost? 5 A. Or the give-up charge, correct. I mean, it's -- 6 it is that marginal value at having solved what the model 7 solved for at that point in time. 8 Q. Okay. And you -- so this is listed as a Class III 9 shadow price. 10 What -- is that all Class III or just cheese? 11 A. It's all Class III. 12 Q. That includes whey? 13 A. It includes all of the hard cheeses -- all of the 14 products that are in Class III manufacturing. 15 Q. Okay. I wondered if you could expand a little bit 16 about how exports are handled in the model. I guess I'll 17 just start there. 18 A. We identify all of the ports that dairy products 19 can be shipped out of. We know how much were shipped out 20 of each of those ports. So we make those port 21 destinations a new demand center. So it is almost as 22 though we have got people demanding these specific 23 products right there. So the model has to get the product 24 to that port. We -- beyond that we are not incurring 25 shipping costs or anything else. But we do have to get 26 the product to that port and committed for what actually 27 occurred at that month and year that we are making the 28 model run for. I believe that there are 16 ports that we 10710 1 have in the model. I'd have to double check that, but I 2 think that's about it. 3 Q. So, whey, you know, a lot of whey is exported -- 4 A. Yes. 5 Q. -- a bunch of it. And since that's in Class III, 6 I was wondering if you might opine in maybe how that might 7 be impacting the Class III shadow -- or if that might be 8 impacting these Class III shadow prices in some particular 9 way, W-A-Y? 10 A. You know, again, this is where you would want to 11 go back and take a look at some of the primal values, the 12 actual shipments, the processing that occurs in the model. 13 You would want to look at a port, just take a port as an 14 example, trace it back, and -- and discover where did that 15 whey come from. But that would be part of the demand that 16 the model has met to be able to meet the demands for 17 export as well as domestic consumption. So shadow prices 18 are really falling out of how did we meet the actual 19 physical product movements to meet the demand needs for 20 export. 21 Q. Okay. So in your discussions with Dr. Cryan and 22 Ms. Hancock, I think I generally -- and reading your 23 testimony, you know, the overall sentiment I get from your 24 testimony is not that you don't think these costs don't 25 exist in the base differential, so Grade A maintenance or 26 conversion, I think you said that was -- to your opinion 27 was more of a conversion cost, a balancing cost, and then 28 incentive to supply. So you are not saying they don't 10711 1 exist, you are just of the opinion that those should be 2 not in the regulated costs -- should not be covered in the 3 minimum regulated price, they should be outside of the 4 system. 5 Is that correct? 6 A. That's correct. As an example, we have been 7 talking a lot about the differentials and the values that 8 are composed in the differential costs here. But by far, 9 the larger value of milk the dairy farmers are receiving 10 are from the calculated monthly values that you're 11 announcing as Class III, Class IV, II, and I prices. 12 So Class I has the additional components here of 13 the differential in that announcement, but the base cost 14 is much bigger than the differential. 15 Q. Uh-huh. 16 A. And those additional costs of some of these things 17 would -- wouldn't be much different than the grease I use 18 on my tractor. You know, that has to be somehow paid by 19 the milk that's produced too, and we don't include that as 20 part of the differential. 21 Q. And I think what I heard you also say is that 22 those costs can differ regionally, so in one part of the 23 country, let's say, balancing costs were higher, and maybe 24 in another part of the country, for example, the 25 Southeast, the incentive to supply the fluid milk plants, 26 that cost would be higher. 27 Is that accurate? 28 A. Yes. I think that it was convenient to me as a 10712 1 way of thinking about this, the components that have been 2 written about what is in this $1.60, and both the give-up 3 charge or the opportunity cost is there as one of them, 4 and balancing is another one. I think that in some 5 regions of the country, balancing costs are much more 6 important than give-up costs, and in some regions of the 7 country give-up costs are probably bigger than the 8 balancing costs. 9 Q. Okay. So if we -- if the Department did set the 10 base differential at zero, I want to talk a hypothetical 11 example. 12 With the understanding, you know, the Act -- and 13 you talked about this, one of the objectives of the 14 program as outlined in the Act is to ensure efficient 15 supplies of milk are available for fluid needs. So that's 16 interpreted as the fluid order needs to make sure that the 17 milk gets to the fluid plant, and we use pricing and 18 pooling provisions to do that. 19 So an example of Los Angeles, the current 20 differential is $2.10. If we took the $1.60 out of that, 21 that would leave a differential of $0.50. 22 So my question is, you know, how -- would $0.50 23 move milk to those plants in L.A.? 24 A. $0.50 doesn't move milk very much, very far, 25 anywhere. But I gave as an example in my previous 26 testimony, that if you had a dairy producer who had two 27 plants equidistant from his farm, one of -- or they were 28 both, let's say, 100 or 200 miles away from the operation, 10713 1 the cost to transport is going to be the same. But if one 2 of those farms was in -- or plant was in a zone that was 3 say $0.10 different than the other plant, he would 4 probably always want his milk to move in the direction of 5 the $0.10 greater value. It doesn't compensate for his 6 full transportation costs, but it encourages the movement 7 of the milk in the direction it's needed. 8 And that's what I think, you know, you see with 9 any of these kind of values that don't cover full costs. 10 Q. Sure. But in -- in -- as you all -- you had 11 talked about, and other witnesses have, typically the 12 plants are where the people are, and the fluid plants are 13 where the people are, and the cheese plants are where the 14 cows are. So in that example, there's not a lot of farms 15 near the fluid plant, so there is no farm equidistant from 16 a cheese plant and a fluid plant to make that decision. 17 I mean, how does that help us serve the fluid 18 plants if the cheese plant is 30 miles from me and the 19 nearest fluid plant that needs to get milk is 150 miles 20 from me, for example? 21 A. Well, my thought process here would be that if I 22 had a dairy farm near -- or just outside of Bakersfield or 23 something, and I had a cheese plant to the north, and the 24 fluid plant is to the south, that were about the same 25 distance from my operation, would I have that milk flowing 26 north to the cheese plant or would I have it going south 27 to the fluid plant? I would probably want it to go south. 28 I would want to pick up that extra $0.50. 10714 1 Q. Okay. I was wondering if you had -- I don't 2 believe you did any analysis, but given your background, 3 put any thought into the impact to the pools should the 4 base differential be set at zero? 5 A. Yeah. It could be very difficult with some of the 6 pools, no question about it, because many of the pools 7 have those $1.60 values in a portion at least of that 8 market area, so the pools could be much smaller. 9 I also just -- and I'm not trying to pick winners 10 and losers in this kind of thing, nor would I think USDA 11 would be trying to do that. You would be trying to think 12 about what the best representation of an efficient market 13 could be and how can we help forward that. 14 So it's likely under those conditions that much 15 less milk would be pooled. I'm not sure that that would 16 be a bad thing in many cases. I don't want it to be zero. 17 I think that we need to have milk pooled in all those 18 orders, but if it moved utilization from -- Class I 19 utilization from 10% to, say, 50% of a pool, because you 20 lost milk in that pool, I'm not sure that's a bad thing. 21 I think you are still supplying the Class I needs. You 22 are meeting the requirements of what the orders are 23 supposed to do. 24 MS. TAYLOR: Okay. I wonder if I could ask Your 25 Honor for a quick five-minute break. 26 THE COURT: Of course. 27 MS. TAYLOR: And I have a few questions on 28 Make Allowances, since it's I think our last opportunity 10715 1 to probably ask you about that study, and I just need to 2 get another -- have a little discussion. So if we could 3 take a five-minute break. 4 THE COURT: Of course. Yes. We'll go off record. 5 Please be back ready to go at about 10:22. 6 (Whereupon, a break was taken.) 7 THE COURT: Let's go back on record. 8 We're back on record at 10:23. 9 And so I have an essential participant who is not 10 in the witness chair, and we'll go back off record. 11 (An off-the-record discussion took place.) 12 THE COURT: Let's go back on record. 13 We're back on record at 10:23. 14 Ms. Taylor, you may resume. 15 BY MS. TAYLOR: 16 Q. This will be short. I did put on your table there 17 two exhibits for everyone. It is Exhibit 158, which is 18 NMPF-18C, and Exhibit 178, which is IDFA-1, and they are 19 the 2021 and 2023 manufacturing cost studies. You 20 probably won't have to look at them, but just in case you 21 did, I wanted you to have them. 22 In the 2023 study, you put not only the new 23 numbers on there, but you also in it put in -- you had 24 gone back and done the 2021 study using the 25 non-transformation allocation. 26 A. Yes. 27 Q. Okay. The question we have is, in all the other 28 studies you put a high and a low breakout, but because -- 10716 1 you just put the average in that study, so we were 2 wondering if you had the high and low breakout for the 3 non-transformed 2021 numbers. 4 A. I don't have the table available that way or, at 5 least I didn't look at it, I guess. I simply reported it 6 as the average on there. Apparently I -- if you would 7 have asked me, I would have said they were probably high 8 and low. There was no reason not to do that. 9 Q. Would it be possible to get that? 10 A. I suppose. I'm feeling as though -- 11 Q. You don't want to come back here? 12 A. -- I may not be able to escape here as easily as I 13 thought. 14 THE COURT: What part of "retired" did you not 15 understand? 16 MS. TAYLOR: But he keeps coming back, so he must 17 enjoy this. 18 THE WITNESS: Erin, you have spoiled my entire 19 day. 20 BY MS. TAYLOR: 21 Q. I'm sorry. You are probably not the first person 22 that feels that way about me. 23 Just as we kind of go through, trying to analyze 24 the evidence, it might be helpful to just have that 25 additional piece of data since we do have it for the two 26 other studies that you put in there. 27 A. I will make sure that I get that to you. 28 Q. Thank you very much. 10717 1 And then one last question. With the 2023 survey, 2 in particular the whey piece of that, I was just wondering 3 if you could share any more information on the plants that 4 participated particularly in the whey study, the high cost 5 plants that participated. 6 A. And by share additional information, what do you 7 mean by that? I have -- I have always told plants who 8 participated. 9 Q. Sure. I'm not asking for anything confidential. 10 More along the lines, you kind of had said how, for 11 example, butter surveyed between the two, the sample was 12 very different of plants. 13 A. Yeah. 14 Q. But could you kind of speak to that on the whey 15 side. 16 A. Also true with whey, that we had different plants 17 who participated in the two different studies. Not 18 entirely different, there was some overlap between them, 19 but there were clearly different plants and different 20 sizes. So you may give some additional information with 21 the high-low breakout. I'm not sure about that. But I 22 would assume that that may give you some additional 23 information. 24 Q. Okay. And when you say, there's -- there was some 25 overlap, can you estimate what that is? Half of the 26 plants were the same? 27 A. I was going to say half of the plants were the 28 same. And specifically for the whey operations. 10718 1 Q. Yeah. Okay. 2 And so if the number is higher, I would assume 3 then that the other half were more high cost plants on the 4 2023 study. Could I assume that I guess is a better 5 question? 6 A. Well, that the average prices came up, I think you 7 certainly could assume that. 8 MS. TAYLOR: Okay. I told you it would be quick. 9 I think that's it from AMS. Thank you so much for your 10 time. 11 THE WITNESS: You're welcome. 12 THE COURT: And the time to be spent in the 13 future, Dr. Stephenson. 14 THE WITNESS: Thank you? 15 THE COURT: Mr. Miltner, you may come forward. 16 MR. MILTNER: Thank you, Your Honor. 17 CROSS-EXAMINATION 18 BY MR. MILTNER: 19 Q. Ryan Miltner, I represent Select Milk Producers. 20 And I apologize, I was a few minutes late back in the room 21 when USDA asked questions, which is helpful, because you 22 asked several of the questions that I was going to ask, 23 Ms. Taylor. 24 Dr. Stephenson, I -- I want to ask your help in 25 looking at one example here to help me get a better 26 understanding of your analysis, and it's similar to some 27 of the questions that USDA asked. 28 I'm looking at -- I want to look at a couple 10719 1 counties in particular. I wanted to look at Michigan. 2 And I pulled these numbers from Exhibit 452. So I was 3 looking at Clinton County, Michigan, and the difference 4 for that county is a negative $0.329. 5 A. I see that. 6 Q. And Clinton County is where St. Johns, Michigan, 7 is. There's a relatively new cheese plant there. 8 A. That's my hometown. 9 Q. That is your hometown. That I did not know. 10 So you are familiar with that cheese plant, at 11 least its existence? 12 A. I'm familiar with its existence, yes. 13 Q. So the difference -- what does -- what does the 14 difference of negative $0.329, what would that mean to the 15 buyers of milk at that cheese plant? 16 A. For the buyers of milk at that cheese plant, it 17 would mean that if they were being asked to give up milk 18 to a fluid plant in that area, that they would be 19 unwilling to give that up. It would be worth at least the 20 $0.33 to them, unless they were compensated that much 21 more. 22 Q. Now, if I look at Kent County, Michigan, which is 23 Grand Rapids, the difference is a negative $0.484. And I 24 don't know -- I'm not aware of any Class III plants in 25 Kent County, but there are bottling plants in Kent County. 26 So for a bottling plant in Kent County, what does 27 that $0.484 mean? 28 A. That $0.484 to that particular region would mean 10720 1 that they would be expected to have to pay at least an 2 additional $0.48 to be able to get milk into that 3 operation. 4 Q. And they are going to pay $0.484 above what? 5 A. Above their regulated cost. This depends on 6 should this be adopted, you know, so, for example, then 7 they would have money for sure in the $1.60 that would be 8 available to them to target that milk. They shouldn't 9 have trouble attracting that. So if they are looking at 10 the base value of their milk production, then that would 11 be the assumed cost that would be required to get that 12 milk there. 13 Q. Right now Kent County's differential is $1.80? 14 A. Uh-huh. 15 Q. So does this suggest that they would pay $0.484 16 above $1.80 or above $0.20? 17 A. Well, the differential would be different if -- if 18 this was adopted. I had assumed that the differentials 19 would be the shadow price values that are given here and 20 that the $1.60 would be on top of that. So that the fluid 21 plant would be required to pay the shadow price value plus 22 $1.60, but they could pay that directly to -- the $1.60 23 directly to the procurement of milk rather than into the 24 pool. 25 Q. Now, very early on in the hearing there was a 26 producer from Michigan who testified. I believe his farm 27 was located very close to the plant in St. Johns. I think 28 he also testified that the closest Class I plant to him 10721 1 would be in Grand Rapids. 2 If you are a producer, and you are receiving a 3 uniform price, do the numbers you provide as a difference 4 affect that producer's income in any manner? 5 A. The data that I have here is not indicative of a 6 blended price, but it would be suggestive that he would -- 7 he or she would receive the $1.60 on top of the uniform 8 price that would be calculated at that point in time. 9 Q. That $1.60 under your analysis would be paid 10 directly to the supplying producer, it would not be a 11 pooled figure? 12 A. If this member or person was a member of a 13 cooperative, then the cooperative would receive the $1.60 14 and can reblend within the cooperative. But, yes. 15 Q. Okay. And if the producer were independent? 16 A. If the producer were independent and shipper to 17 that, they would receive that directly. If the fluid 18 plant received the milk from the St. Johns cheese plant, 19 and the cheese plant had paid for -- in the blended price 20 from the pool, then they would receive that $1.60. 21 Q. Now, in testimony from Ms. Keefe, she included a 22 chart which estimated the uniform price impact if -- if 23 the $1.60 were reduced to zero, and for the Mideast order, 24 the uniform impact was presented as a $0.59 decrease. 25 So in your scenario that producer would be net 26 $1.01 under the adoption of this scenario; am I correct 27 then? 28 A. I believe that would be correct math, the plus 10722 1 $1.60 minus -- did you say $0.59? 2 Q. Yes. 3 Now, if I look at Merced County, California, in 4 Exhibit 452, the difference there is a positive $0.059. 5 There is a cheese plant and a bottling plant in Merced 6 County. 7 So just so, again, I'm clear, for the cheese 8 plant, what does the positive $0.059 mean to them? 9 A. You're telling me that the positive $0.59 is the 10 same in California as it was in Michigan pool? 11 Q. I'm sorry, I was unclear. So let's just take -- 12 let's -- we're done with Michigan. 13 A. Yep. 14 Q. Let's just look at California. 15 A. Okay. 16 Q. And if I look at Exhibit 452, where you have got 17 your shadow prices and the differences, and I'm looking at 18 Merced County, the difference there is $0.059, but it is 19 positive. Okay? 20 So if -- if you are a cheese plant operator in 21 Merced County, California, what does that $0.059 convey? 22 A. That $0.059 conveys the fact that the fluid plant 23 can attract milk from the cheese plant without the need 24 for the $1.60. That they would have the ability to pay 25 about the same as they would, but the $1.60 would still be 26 required to be paid under what I had conceptually 27 provided. 28 Q. Okay. I think just one more question I have, and 10723 1 this is a question about part of your written statement. 2 And I'm looking at the last lines of page 11. 3 A. Okay. 4 Q. And you stated that "handler actions such as 5 depooling are more a symptom of the underlying problems 6 than the problems themselves." 7 With respect to just that sentence, what 8 underlying problems were you thinking of when you wrote 9 that sentence? 10 A. I was thinking that when we see depooling 11 occurring, it's because there is not enough money in 12 Federal Order pools to be attractive to do the things that 13 were trying to be done in the Federal Order. So in other 14 words, you paid more out on the basis of components, 15 value, and Class III than you had collected. 16 MR. MILTNER: That's all I have. Thank you very 17 much. 18 MR. ENGLISH: Good morning, again, Your Honor. 19 REDIRECT EXAMINATION 20 BY MR. ENGLISH: 21 Q. Chip English for the Milk Innovation Group. 22 So I only have a few questions that I want to 23 preface with the following. Dr. Stephenson, as much as it 24 pains you, you are likely going to return in the last week 25 to address the issue addressed -- that USDA addressed 26 about 452 and the shadow prices, correct? 27 A. Correct. Apparently I have made an error in here, 28 and I willingly admit that this is something that, you 10724 1 know, should have been caught. I'm glad that AMS caught 2 that. 3 Q. So with that as a predicate, I'm going to limit my 4 questions to a few things, just because they were asked 5 today, and I think it makes more sense to tie them up 6 today. 7 In response to some questions from Dr. Cryan, I 8 think one summary statement you made is that the Act as 9 adopted was dealing with fluid milk issues, but today, 10 it's your view we have to look at those in the -- in the 11 lens of a manufacturing market, correct? 12 A. That's correct. 13 Q. And why is that significant? 14 A. Well, it's significant because they create a 15 different set of forces on the marketplace than was true 16 back in the late 1930s and early '40s. 17 Q. And then one set of questions, because I think 18 time got away from all of us. In answer to questions 19 from -- from National Milk's lawyer, you suggested that 20 you were retained in the summer of 2023. 21 Were you, in fact, retained in the summer of 2022, 22 the first conversations? 23 A. I believe that's true. 24 And I also believe that I received my Ph.D. either 25 in '89 or '90. 26 Q. And then the formal retainer letter of Davis 27 Wright Tremaine was in early November of 2022; is that 28 correct? 10725 1 A. I believe that's correct. 2 Q. And most of the work leading to this report today 3 was actually done in February or March of 2023, before MIG 4 submitted its proposal to USDA? 5 A. That's correct. Yes. 6 Q. And finally, you have been a participant in these 7 Federal Order hearings at least since 1993, correct? 8 A. Yes. 9 Q. That's the first time I encountered you, correct? 10 A. At least. Yes. I did testify in the -- yes, the 11 1993 hearings, that's correct. 12 Q. And you have appeared either on your own or, for 13 instance, as part of informal rulemaking with Dr. -- with 14 the Cornell model, which eventually became the USDSS 15 model. You have appeared -- in those cases you have 16 appeared for Make Allowance, and you have appeared here 17 for MIG. 18 In all of those cases, you have provided your own 19 independent views and not taken instructions from others, 20 correct? 21 A. That's correct. 22 MR. ENGLISH: That's all I have for now, 23 recognizing that Dr. Stephenson will indeed be back. 24 THE COURT: Are there any other questions for 25 Dr. Stephenson today now? 26 Apparently not. 27 Thank you so much, Dr. Stephenson. 28 THE WITNESS: Thank you. 10726 1 THE COURT: You may step down. 2 MR. ENGLISH: I actually moved admission -- we 3 already admitted them, right? 4 MR. HILL: Yes. 5 THE COURT: The record should reflect that we are 6 returning the record copies of the two exhibits that were 7 utilized in the Agricultural Marketing Service questions. 8 Before you begin, Mr. English, I just wanted to 9 make an announcement. I referred to our sound man with 10 the wrong name yesterday. I made the same mistake I had 11 made in December and been corrected. His name is Dakota, 12 and he has requested that anyone that has a PowerPoint 13 presentation, please be certain that during the break 14 before we start again, that you give him an opportunity to 15 test it out. So any time exhibits are being distributed, 16 including a PowerPoint, please invite Dakota to work on 17 the transmission to the screen that we have here. 18 Thank you, Mr. English. 19 MR. ENGLISH: Thank you, Your Honor. 20 We next call to the stand Warren Erickson of 21 Anderson Erickson Dairy. 22 We have earlier passed out Exhibits 17A and 17B, 23 which were pre-submitted. I think we had a pagination 24 error that we corrected with respect to 17A. But if we 25 could have 17A and 17B marked, Your Honor. And I confess, 26 I have lost track of exhibit numbers. 27 THE COURT: Which one do you want to be first? 28 MR. ENGLISH: 17A is the testimony, and 17B is his 10727 1 PowerPoint presentation. 2 THE COURT: All right. Let's utilize for 17A -- 3 MR. ENGLISH: Sorry, that's not what's on here. 4 THE COURT: Let's go off record for just a moment. 5 We'll also make sure that the PowerPoint will work. 6 We go off record at 10:45. 7 (An off-the-record discussion took place.) 8 THE COURT: We're back on record at 10:46. 9 MR. ENGLISH: I stand corrected. There are three 10 documents submitted: Exhibit 17, MIG-17, which was 11 pre-submitted; 17A, which was submitted last Friday; and 12 17B. 13 So 17 -- Exhibit MIG-17, could I have that marked 14 as the next exhibit number, Your Honor? 15 THE COURT: I would move 454 is 17; 455 is 17A, 16 and 456 is 17B. 17 (Thereafter, Exhibit Numbers 454, 455, and 18 456 were marked for identification.) 19 MR. ENGLISH: Thank you, Your Honor. 20 Was the presentation working, indeed? 21 THE COURT: You may presume that it is. So you 22 want to start with it? 23 MR. ENGLISH: Bingo. 24 THE COURT: All right. Excellent. 25 MR. ENGLISH: All right. Have we sworn the 26 witness? 27 THE COURT: No. Thank you, Mr. English. 28 Sometimes I forget my main job. All right. 10728 1 Would you identify yourself by stating and 2 spelling your name into the microphone, not to me. 3 THE WITNESS: Yes. My name is Warren Erickson. 4 That's W-A-R-R-E-N. Erickson is E-R-I-C-K-S-O-N. 5 THE COURT: Have you previously testified in this 6 proceeding? 7 THE WITNESS: No. 8 THE COURT: I'd like to swear you in. 9 WARREN ERICKSON, 10 Being first duly sworn, was examined and 11 testified as follows: 12 THE COURT: Thank you. 13 Mr. English. 14 MR. ENGLISH: Thank you. 15 DIRECT EXAMINATION 16 BY MR. ENGLISH: 17 Q. So, Mr. Erickson, what is your position with 18 Anderson Erickson? 19 A. My position is one of president and CFO of 20 Anderson Erickson Dairy. 21 Q. How long have you worked for AE? 22 A. I've worked for AE in a full-time basis about 23 27 years. It is a family business, so I worked there the 24 rest of my life also, but we won't count that. 25 Q. What's your educational and professional 26 background? 27 A. I have a bachelor of business administration 28 degree in accounting from the University of Iowa, as well 10729 1 as a master's degree in accounting from the University of 2 Iowa. 3 Those were in 1990 and 1991, if anybody cares. I 4 remember mine. Yes. 5 Q. So given your role as president and CFO, what does 6 that actually mean on a day-to-day basis at AE today? 7 A. On a day-to-day basis I do oversee plant 8 operations, office operation, financial operations, and 9 intimately involved in milk procurement. 10 Q. Let's go to your first slide beyond the title 11 slide. 12 So tell me a little about AE's history. 13 A. AE started in 1930. So this is a picture in the 14 late '30s. My grandfather is in the picture. And humble 15 beginnings in Des Moines, Iowa. Started as a family 16 business. Most of the people in the picture are his 17 brothers and sisters, and they all worked to distribute 18 milk around the Des Moines area. 19 Q. What about Mr. Anderson? 20 A. Mr. Anderson was a business partner with Iver 21 Erickson, my grandfather. He did leave the company in the 22 late '30s, but the name continues. 23 Q. Let's go to the next slide. 24 So what does this depict? 25 A. Currently we're still based in Des Moines. We're 26 still a family operation. This is our headquarters in the 27 east side of Des Moines. We're -- we're still a humble 28 dairy in the middle of Iowa. We serve most of Iowa and 10730 1 around the Kansas City Metro area. And we have about 400 2 employees. And we do a full variety of dairy products, 3 including milk, some sour cream, cottage cheese, dips. We 4 do some juices. And other non-dairy items also. 5 Q. The next slide, please. 6 What's this showing? 7 A. Yes. This picture inside of our plant and cooler 8 facility, I guess, proof that we actually make milk and 9 distribute it. 10 THE COURT: Inside your plant and what? 11 THE WITNESS: And -- and cooler facility. 12 THE COURT: Thank you. 13 BY MR. ENGLISH: 14 Q. Is AE a small business as defined by the Small 15 Business Administration? 16 A. Yes, we are. 17 Q. What role do employees play in your business? 18 A. Employees are a big part of the AE family. 19 Obviously we need them. We have got about 400, like I 20 said. 200 of those work in distribution and help get our 21 products to our customers. And another 200 are helping 22 make the products and sell and do all the other stuff 23 involved in that. We're all partners in making this 24 happen. We all have a vested interest in the well-being 25 of Anderson Erickson for sure. 26 Q. Please tell me a little bit about MIG and why it 27 is here today. 28 A. MIG is the Milk Innovation Group. Been referred 10731 1 to a lot in these hearings. But we are just interested 2 parties in Class I. We -- when there was indications that 3 there would be a Federal Milk Marketing Order hearing, we 4 wanted Class I to have a clear voice, and these -- there's 5 a lot of different -- there's a variety of members of MIG. 6 Some are very big; some are very small like myself. Some 7 do specialty milk; some are just a little bit more 8 conventional like AE. But we all have a vested interest 9 in, like I said, having Class I have a clear voice and 10 furthering the awareness of some of the issues that 11 Class I faces. 12 Q. So what kind of milk supply does AE have? 13 A. AE gets -- we get our milk from independent 14 suppliers. So we are completely direct ship, 100%. 15 Q. Has that always been the case? 16 A. No, it has not. This has been a long process. 17 That's been a lot of bumps along the road. But when I 18 started, it was my father's desire, who was my boss, of 19 course, and he and I had a desire to increase the 20 independent milk supply, which at that point was zero. 21 And we went about, and this is a long process to 22 get to -- to get it to an independent milk supply, but we 23 managed to do that. And along the way we were encouraged 24 to do that by some of the people that were shipping us 25 milk. They said we were hard to serve. They said there's 26 no milk in Central Order Iowa. They said a lot of 27 different things. 28 And we were encouraged to -- or at least we felt 10732 1 encouraged to develop our own independent milk supply 2 based on those factors in trying to procure milk. Milk 3 obviously is a very important part of everything that we 4 do. 5 Q. So not notwithstanding what you were told from 6 your milk suppliers back then, were you able to find a 7 milk supply within Iowa? 8 A. We were. It's not something -- like I said, you 9 don't snap your fingers and get this done. But we have an 10 all-Iowa milk supply, all of which comes from within a 11 hundred miles of our plant. 12 Q. Are your independent shippers your partners? And 13 if so, what do you mean by that term? 14 A. They are absolutely our partners. We all have a 15 vested interest, like I said, in the success of AE. They 16 are a big part of our finished product, and they are 17 absolutely in a partnership with us to not only dispose of 18 their milk but be proud of where it's going and how -- how 19 it gets used. I brought some product yesterday, and 20 hopefully some people got to enjoy that. We're all real 21 proud of AE products. 22 Q. So let's go to the next slide. 23 And can you tell me how does this milk supply 24 issue affect your position on Proposals 1 and 2? 25 A. Yeah. So Proposals 1 and 2, we are against. And 26 we did -- I did some -- there's no "we" -- I did some 27 quick numbers on a two-year average of our milk supply, 28 and our actual numbers are all below Proposal 1, what they 10733 1 would want to charge the Class I for the -- for that milk. 2 And I feel it's unfair that we would get charged more than 3 what we're actually receiving. And we don't have any 4 ability to -- milk has a standard of identity. We can't 5 add or subtract to that to, you know, make up for any 6 differences from Proposals 1 and/or 2. 7 We are in Order 32, and it's a -- the -- we -- the 8 producers get paid for components, and the only one we can 9 adjust is butterfat. We can't change the other 10 components, like I said. And honestly, customers 11 aren't -- they are not dictating, well, it has to have 12 this amount of nonfat milk solids or this amount of 13 protein. They are happy with AE milk in general. 14 Q. Has any customer ever requested higher protein or 15 higher nonfat -- higher solids, other solids? 16 A. On a conventional gallon of milk, no. 17 Q. And that's what you sell? 18 A. Yes. 19 Q. All right. Let's go to the next slide. And this 20 is your position on Proposals 13, 16, 17, and 18. 21 Does AE hedge today? 22 A. We don't have any open hedges at the current time. 23 We have hedged in the past. And we -- we would oppose 24 anything that would get in the way of our ability to 25 hedge. We do have customers that look for a fixed cost 26 over a period of time. And, you know, our only way to 27 accommodate that is either keep it open or actually hedge 28 that difference. So we appreciate the ability to hedge. 10734 1 Q. So that means you oppose Proposals 13, 17, and 18, 2 which would interfere with that ability? 3 THE COURT: Would you -- 4 MR. ENGLISH: That means you oppose, that means AE 5 oppose Proposals 13, 17, and 18, which would interfere 6 with that ability to hedge. 7 THE COURT: Okay. I'm looking at a slide that has 8 another number. 9 MR. ENGLISH: I'm deliberately choosing these 10 numbers, Your Honor. 11 THE COURT: All right. 12 MR. ENGLISH: If you give me a moment, I'll get to 13 the other one. 14 THE COURT: Okay. Thank you. 15 MR. ENGLISH: There's -- there's overlapping 16 issues, but different proposals. So my characterization 17 is correct. 18 THE COURT: Thank you. 19 MR. ENGLISH: But I will address the one that you 20 think I omitted in a moment. 21 THE COURT: Thank you, sir. 22 THE WITNESS: We would be opposed to any proposal, 23 including 13, 17, and 18, that would limit our ability to 24 hedge. 25 BY MR. ENGLISH: 26 Q. So, now, Proposals 16, 17, 18 address the issue of 27 advanced pricing. 28 And do you have a position on advanced pricing? 10735 1 A. I do have a position on advanced pricing. I'm a 2 proponent of advanced pricing. I have lived in an era of 3 non-advanced pricing, and it's -- it's very cumbersome. 4 Customers don't live in an era of non-advanced pricing, 5 I'll say that. They expect that we -- they are going to 6 know their price in advance. That's the expectation. And 7 when it's not available on the majority of the cost of our 8 product, it's very problematic. 9 Q. And so that is why, hedging and advanced pricing, 10 you opposed all four of these proposals, 13, 16, 17, and 11 18, correct? 12 A. Yes. And that's where the 16 came in. Yes. 13 Q. Thank you. 14 So let's go to the next slide. 15 And this is your position on Proposal 19. 16 What is AE's position on Proposal 19? 17 A. Our position is we oppose Proposal 19. 18 Proposal 19 tends to increase the Class I price in all 19 areas, and really fairly arbitrarily. And there were 20 winners and losers in the authorship of Proposal 19. We 21 resent that, and we're in opposition of that. 22 We take a look at Iowa, in particular, which is 23 near and dear to my heart, obviously. The slide on the -- 24 on the right there shows a close-up of Iowa. Des Moines, 25 Iowa, is in the middle of the state, so we're the blue dot 26 in the middle. To the west is Omaha, so there's a blue 27 dot there, which would be a competitor. To the northwest 28 is Le Mars, Iowa, which is another competitor. Both of 10736 1 which are co-ops and members of NMPF. And directly -- not 2 quite directly south but to the south is Kansas City, and 3 we compete in that market. And then to the northwest -- 4 northeast, excuse me, is Dubuque, which is another pretty 5 significant dairy plant. 6 That encapsulates our competition. You can see 7 the Twin Cities, Minneapolis area in the north of that 8 map. We don't really go up there much. But just for 9 clarity sake, we kept their dots on the map. 10 Q. So if you -- if -- that's where the maps are. 11 So if you now look at the next page, which is 12 Table 1. 13 A. Yeah. We look at Table 1. 14 Q. Why don't we look at a couple of items here. 15 Let's start with -- with the second line, which is 16 Le Mars. Tell me about Le Mars and why that concerns you. 17 A. Yes. So Le Mars in Northwest Iowa, probably our 18 closest competitor, and currently we have a 1.80 Class I 19 differential, and Le Mars has a 1.75 Class I differential. 20 Under NMPF Number 19, we would go to $3, and they 21 would go to 2.80, so that's increasing that difference 22 between Le Mars and us by $0.15. 23 Q. So you mention Kansas City. 24 You sell significant quantities of milk in Kansas 25 City? 26 A. Yeah, we do. It's a large population base. I was 27 blessed with a lot, but not a large population. So we 28 have more pigs than people. A just random fact there, 10737 1 Chip. But Kansas City, we do ship there. If you can 2 see -- if you look at the model, that's the third column 3 over with the dollar sign. 4 So in the model, AE is at a 2.80 differential, and 5 Kansas City is at a 3.35. So that difference is about 6 fifty -- or it isn't about, that difference is $0.55. If 7 you go to NMPF Number 19, we're $3, still, and Kansas City 8 is at 3.35. So that -- that has decreased that difference 9 by $0.20. All of which makes a big difference for AE. 10 When you are talking about $0.10 a hundred, that can make 11 a very big difference on the street and when you are 12 competing with customers. 13 Q. So given what you did with building your 14 independent milk supply within a hundred miles of your 15 plant in Iowa, having been told there was no milk, what 16 does that tell you about the business models that you are 17 addressing here? 18 A. Well, when I listened to testimony about 19 Proposal 19, there was a lot of talk about shipping of 20 milk and stair-stepping and this and that, which was 21 precisely the reasons we were given that we weren't a 22 viable market for milk supply of certain -- from certain 23 people. So, you know, we built our own, and we enjoy 24 strong partnerships with our partnership -- with our 25 farmer shippers. 26 And I resent being asked to pay for a business 27 model that wasn't effective for me and was -- when I had 28 to go around. So when I built up -- when AE built up an 10738 1 independent milk supply, we did that on our own volition, 2 and we made our own partners, and we don't think we should 3 be asked to pay for a cooperative business model that 4 wouldn't service us. 5 Q. So let's turn to Proposal 21 in the next slide. 6 What is your position on Proposal 21? 7 A. We are in opposition of Proposal 21. That would 8 increase the Class II differential by $0.86. So in the 9 slide that I showed with AE's products, we do make 10 Class II products. We make yogurt. We make cottage 11 cheese. We make sour cream. We make dips, as well as 12 whipping cream, half and half. And we do that under the 13 fully regulated Class I milk plant, but we cannot avoid -- 14 Q. Explain. 15 A. -- being -- we cannot avoid getting pooling. 16 A lot of our competition is very specialized. 17 Like I said, AE is just a small operation in Iowa, and a 18 lot of the competition is very specialized, and they have 19 specific plants that would make these specific products, 20 which those plants wouldn't have any Class I milk in them, 21 they wouldn't be fully regulated milk plants, and they 22 would have the ability to depool, which we never had that 23 ability to depool. So that $0.86 of additional cost is 24 just that to us. We have no ability to avoid it, and that 25 is why we're in opposition to Proposal 21. 26 Q. So -- so would you read your last bullet point on 27 that slide? 28 A. Yeah. Saddling those properties -- which many of 10739 1 which are very important products for Anderson Erickson. 2 They are some of our iconic products that we're known for. 3 Saddling those with additional costs to feed a broken 4 system that we can't avoid is not going to fix the 5 problem. 6 Q. Would that be orderly marketing, to have to 7 compete against milk that's not regulated by the Federal 8 Order? 9 A. I would consider it such, yes. 10 Q. Let's go to your next slide. 11 THE COURT: I want to make sure that's clear. Say 12 again. 13 THE WITNESS: Yes. We would consider that 14 disorderly marketing. 15 MR. ENGLISH: Thank you, Your Honor. 16 BY MR. ENGLISH: 17 Q. All right. If you could turn to the next slide. 18 What is -- what is AE's position on MIG's 19 Proposal 20? 20 A. We are in support of Proposal 20. And there's 21 been a lot of discussion about Proposal 20, but we are in 22 support. We -- we -- just the first -- the first item and 23 class -- and the $1.40 -- or $1.60 differential, $0.40 of 24 that is supposed to apply to being a Grade A milk plant. 25 I was curious, just intellectual curiosity, and I 26 queried the Department of Agriculture in the State of 27 Iowa, 741 dairy farms, seven of which are Grade B. So 28 hardly any. And they produce basically no milk, according 10740 1 to the USDA. There's no Grade B milk in the state of 2 Iowa. 3 So that tells me that those 734 remaining dairy 4 farms, they are all Grade A. I'm not getting -- or their 5 Class I isn't getting all the milk from those 734 dairy 6 farms, so they are going to manufacturing plants, many of 7 them are, and that cost is -- for Grade A is built into 8 the cheese and the butter price already. So that $0.40 9 should not be part of the differential. 10 Q. We have heard a lot of -- we have heard a lot 11 about super Grade A requirements during this hearing. 12 What comments do you have on that? 13 A. I think any prudent Class I manufacturer has their 14 own quality standards, and certainly we do. But we -- we 15 partner with our farmers, and usually those are in the way 16 of an incentive or some add-on to -- to the price to -- to 17 be able to achieve those quality standards. 18 Q. In your experience, do a lot of those apply to all 19 milk as well, not just Class I? 20 A. I -- I can only speak for what we buy, but I 21 believe that is the case, yes. 22 Q. Now let's turn to the next slide. 23 So let's talk about balancing. 24 A. Balancing is an issue for anybody that buys milk. 25 It's -- milk is perishable, and balancing is a big part of 26 what all dairy supply plants have to worry about. And we 27 have achieved an ability to balance with independent 28 suppliers. And, you know, if we need extra milk or if -- 10741 1 I know co-ops charge for a balancing fee if it's a -- not 2 an everyday delivery, and those charges can range from 3 $0.45 to $0.65 a hundred just to start. But it's not a 4 flat rate. There's no silver bullet to fix that balancing 5 problem. And certainly the Class I differential hasn't 6 assisted us in balancing. 7 Q. Have you also made investments in your plant to be 8 able to -- I think we heard yesterday from Ms. Keefe, sort 9 of shift the costs of balancing? 10 A. Absolutely. Yeah. You invest in raw silos to be 11 able to have an even-day delivery, invest in other areas 12 that -- that would help with balancing. 13 Q. And those costs are incurred by AE, correct? 14 A. Absolutely. Yes. 15 Q. We have heard over-order premiums are difficult 16 for co-ops to charge. 17 Is that your experience? 18 A. My experience is they have a monthly meeting. 19 They have what they call an agency that sets the 20 over-order premium. And they mail out a letter, an 21 e-mail, e-mail out a letter and says, here's what it is. 22 That doesn't really sound so difficult to me. 23 Q. And does AE pay its dairy farmers -- in addition 24 to the -- you know, the quality premiums, do you pay other 25 premiums over the Federal Order price? 26 A. We do. We pay over the minimum price, for sure. 27 Q. So now let's turn to the last piece. And that's 28 the incentive piece. 10742 1 What's your position about the incentive piece? 2 A. My position is we have heard pretty compelling 3 testimony from Dr. Stephenson that that might not be an 4 issue. I know from personal experience that if you build 5 a longstanding partnership, that attracting milk is -- 6 kind of goes hand in hand with long-term relationships, 7 and those costs of -- really are more appropriate on an 8 over-order premium that's going to go directly to the 9 farms that are servicing Class I plants. To build in a 10 nebulous attraction charge into a number that gets pooled 11 over a very, very large area, in our case, Order 32, it 12 spans a lot of geography and hits many, many farms, a 13 multitude of farms that never would consider shipping to 14 us. It's not effective. 15 Q. So it's more effective to use over-order premiums 16 for this purpose? 17 A. It is. 18 Q. Did MIG and Anderson Erickson have a proposal to 19 address this very issue? 20 A. We did. We -- we have an assembly credits 21 proposal that would incent people to -- or would actually 22 pay people that are shipping to Class I some of those 23 premiums. Unfortunately that wasn't accepted. 24 Q. Do you still support that concept? 25 A. I do. I think in this day and age people that are 26 shipping to Class I should enjoy the -- some of those 27 over-order benefits that are -- in days gone by were 28 pooled. 10743 1 Q. So let's wrap up on Proposals 19, 20, and 21. 2 What is your conclusion here? 3 A. Yeah. I think we're trying to fix a system that 4 is struggling to adapt to new market realities. And I 5 don't feel it's appropriate to saddle Class I, which has 6 not seen growth in the past decades, with extra costs, 7 to -- as a solution to some of these new market realities. 8 I think a healthy Class I is very important to the 9 industry as a whole. And it's certainly important to MIG, 10 and one of the reasons that we bonded together as a group. 11 But I think it's -- Class I -- a healthy Class I market 12 should be encouraged by all the players in the dairy 13 market because that would help everyone. 14 Q. So I'm going to turn to one other issue, which 15 is -- well, here, you are the president and CFO of a dairy 16 company located in Iowa. 17 What is your actual experience with respect to 18 the, you know, intellectual inquiry you've had, but as a 19 practical matter, what is your experience with respect to 20 the demand elasticity for fluid milk? 21 A. I'm not an economist. You are going to ask for my 22 studies. I don't have any. But I have real experience, 23 that when the price goes up, people shop differently. 24 When the Class I prices increase, you see less gallon 25 sales, more half gallon sales. You see people downsizing. 26 I can attest that -- and I would attribute that to 27 elasticity and the fact that the milk does struggle when 28 you saddle it with increased costs. 10744 1 Q. Do you have anything to add before I turn you over 2 for cross-examination? 3 A. No, sir. 4 MR. ENGLISH: Your Honor, I'll move, and we can 5 wait on Exhibits 454, 455, and 456. But I don't want to 6 forget to move their admission and make the witness 7 available for further examination. 8 THE COURT: Very good. And we'll deal with 9 admission of the exhibits following cross-examination. 10 Who would like to begin? 11 CROSS-EXAMINATION 12 BY MS. HANCOCK: 13 Q. Good morning, Mr. Erickson. I'm Nicole Hancock 14 with National Milk. 15 A. Good morning. 16 Q. I won't ask you if you have done any studies. 17 A. Thank you. 18 Q. But I appreciate you being proactive. All right. 19 So your distribution territory for Anderson 20 Erickson is in -- comes out of Iowa? You have one 21 location? 22 A. We do. 23 Q. And your distribution territory is Minnesota, 24 Nebraska, Kansas, Missouri, Illinois, and Iowa? 25 A. Yeah. I would characterize it mostly as Iowa and 26 around the metropolitan area of Kansas City. 27 Q. Okay. And so is it fair to say that the 28 experiences that you are drawing upon focus on those 10745 1 experiences within that territory? 2 A. It would be fair to say my direct experiences 3 focus on that territory. But we are involved in other 4 organizations and have discussions with other people in 5 the dairy industry. 6 Q. Okay. And you talked about the formation of MIG. 7 Were you part of the original founding members? 8 A. Yes. 9 Q. And so can you -- when it talks about -- when you 10 said that it's the Milk Innovation Group, is the goal of 11 MIG to be innovative? 12 A. I would say -- I would characterize MIG as very 13 innovative. 14 Q. And maybe you can help expand upon the innovation 15 part of Milk Innovation Group. 16 What's the mission? 17 A. The reason the group was formed, like I said, was 18 to give Class I a clear voice in -- in proceedings like 19 this. 20 Q. Is it to expand the demand for Class I fluid milk? 21 A. There's not a member of MIG that would not want 22 expansion of Class I. 23 Q. Okay. When you say that it was formed, though, to 24 be able to give Class I a voice, were you talking about 25 within the Federal Order system? 26 A. Certainly. 27 Q. How many independent producers does Anderson 28 Erickson have today? 10746 1 A. We have several. 2 Q. Are you comfortable sharing how many you have or 3 can you give me a range? 4 A. I'm -- I'm not comfortable sharing specific 5 numbers. 6 Q. Okay. Can you give me a range? Is it more than 7 ten? 8 A. No. 9 THE COURT: Is that, no, you cannot give her a 10 range? 11 THE WITNESS: I will say it is not more than ten. 12 BY MS. HANCOCK: 13 Q. All right. And are you -- can you give us a 14 utilization percentage for your Class I fluid milk? 15 A. In -- at the -- at our plant, it's around the 80%. 16 Q. So mostly Class I fluid? 17 A. Mostly Class I, yes. 18 Q. But you do a pretty diversified portfolio of 19 products? 20 A. We do. 21 Q. And it's just the 20% that goes into those other 22 products? 23 You have to answer audibly for the record. 24 A. Yes. Although Mr. Wilson could answer that more 25 completely than I could because he has all the records 26 but... 27 Q. And are you comfortable sharing what your plant 28 volume is that you process through your plant? 10747 1 A. How would you like that? 2 Q. However it is that you measure it. 3 A. On a per day, per month, per year? 4 Q. How about on a per month basis? 5 A. A per month basis, approximately 30 million 6 pounds. 7 THE COURT: Say it again? 8 THE WITNESS: 30 million. 9 BY MS. HANCOCK: 10 Q. And do you receive milk 365 days a year? 11 A. This year will be 366. 12 Q. Leap year? 13 A. Yes. 14 Q. Okay. And do you have any balancing that you 15 perform? 16 A. Well, certainly. Yeah. 17 Q. And how -- 18 A. Because we -- we receive milk seven days a week. 19 Q. And how do you balance your milk? Do you do it 20 all within your own plant -- 21 A. Yes. 22 Q. -- capacity? 23 A. Yes. 24 Q. Do you use cooperatives for balancing at all? 25 A. No. 26 Q. And do you know what your costs of balancing are? 27 A. No. 28 Q. Do you measure that or track that within your 10748 1 organization? 2 A. Do not track it. 3 Q. And do you have to balance on a monthly basis? 4 A. I'm not sure I understand your question. 5 Q. Yeah. Do you balance on a daily basis, monthly 6 basis, weekly basis, or is it more seasonal? 7 A. I guess I don't understand your definition of 8 balancing. 9 Q. Do you have to manage supply issues that -- 10 matching your supply issues with your distribution? 11 A. Yeah, we do that on a daily basis, hourly basis. 12 Q. And are there seasonal issues as well? 13 A. There's absolutely seasonal issues, yes. 14 Q. And, again, regardless of whether it's daily, 15 monthly, seasonal, you don't track those costs of what it 16 costs you to balance that milk supply with your demand? 17 A. No. 18 Q. Do you know what the degree of variability is on a 19 monthly basis that you have to balance? 20 A. It is several loads a day. 21 Q. Okay. And what would the volume be? What's the 22 range of the volume of variability that you have to 23 balance? 24 A. Well, several loads a day would be 180,000 pounds 25 a day. That would be three tankers. 26 Q. Meaning that's the variability, it can give or 27 take those 180,000 pounds a day? 28 A. Roughly. 10749 1 Q. So not an insignificant amount; is that fair? 2 A. That is very fair. 3 Q. In your -- 4 MS. HANCOCK: I'm sorry, I didn't get the exhibit 5 number on the PowerPoint. 6 THE COURT: That's 456. 7 BY MS. HANCOCK: 8 Q. In Exhibit 456, if we can turn to slide 6. 9 Your second bullet point there you say, in 10 Order 32 we already pay for components. 11 A. Producers are paid for components under Order 32, 12 yes. 13 Q. Okay. You don't do that for your Class I milk? 14 You are not paying for your components in your Class I 15 milk? 16 A. We are measuring components, and we sync up that 17 measurement with the MA, and the producers are paid based 18 on those components. 19 Q. Do you pay for components on your Class I milk? 20 A. We pay for butterfat and skim. 21 Q. Based on the volume? 22 A. Based on poundage. 23 Q. Which is the volume? 24 A. That's one way to look at it. 25 Q. And -- okay. Let's turn to page 10. 26 This is your Table 1. And you were selecting 27 these locations to highlight National Milk's Proposal 28 Number 19 and the effect on -- or I guess comparing where 10750 1 your plant is located with your competitors. 2 Is that what you were selecting here? 3 A. That's a factual chart of, yeah, plants close to 4 AE and -- and current differentials and other options. 5 Q. So do you -- do you compete with all of these 6 plants that you have listed here? 7 A. No. Like I said, the Twin Cities, not so much. 8 Q. Okay. 9 A. That would be the Minnesota plants. 10 Q. Okay. You were just selecting the Minnesota 11 plants here in Ramsey and Washington Counties just to show 12 the examples? 13 A. Just because they were on the previous map, for 14 clarity. 15 Q. Okay. You mean the map on page 9? 16 A. Yes. 17 Q. Okay. And you gave the example of Plymouth and 18 Polk County, Iowa, and the proposed changes, and the 19 impact with one of your competitors, and that you have 20 listed here as DFA Dean in Le Mars. 21 A. Yes. 22 Q. It's fair to say that based on this factual lens 23 that you have grabbed here on page 10, that there are some 24 instances where National Milk has proposed an increase 25 from the model and some instances where National Milk has 26 proposed a decrease from the model results; is that right? 27 A. Yeah, that is. 28 Q. And it's about half and half based on the ten that 10751 1 you have selected here? 2 A. I am particularly interested in the ones I 3 directly compete with. 4 Q. And other than the one that you pointed out in 5 Plymouth, are there others that you believe you directly 6 compete with? 7 A. Yes. 8 Q. Which ones? 9 A. We would directly compete with Prairie Farms in 10 Dubuque. We would directly compete with Hiland in Kansas 11 City. 12 Q. Any others? 13 A. Somewhat Hiland in Omaha. 14 Q. Any others that you can think of? 15 A. No. 16 Q. And of those that you believe -- that are your 17 direct competitors, I have four now, even just with those 18 four, some of those National Milk has proposed an increase 19 from the model average and some National Milk has proposed 20 a decrease; is that right? 21 A. I'll take your word for it. 22 Q. Well, you don't have to take my word for it. You 23 can use your own exhibit to see that, right? 24 A. Well, I would have to take some time to look at 25 the four. But, yes. 26 Q. Okay. Well, we can just look at Prairie Farms in 27 Dubuque, right? 28 A. Okay. 10752 1 Q. For example, is a decrease that National Milk 2 proposed from the model average; is that right? 3 A. $0.15, yes. 4 Q. $0.15 decrease? 5 A. Yes. 6 Q. And Hiland, Kansas City, there was no deviation 7 from the model; is that right? 8 A. That is right. 9 Q. And then Hiland, Omaha, it was an increase from 10 the model; is that right? 11 A. That is right. 12 Q. And fair to say that National Milk has -- in some 13 instances had some increases and some instances had some 14 decreases? 15 A. It is also fair to say that in Des Moines at my 16 plant they're a $0.20 increase, right? 17 Q. From the model average, right? 18 A. Yes. 19 Q. Okay. And can you tell me how that would put you 20 at a competitive disadvantage based on the net effect of 21 those changes? 22 A. $0.20 difference in a differential is a very 23 significant. 24 Q. And that's a $0.20 difference just from the model 25 average though; is that right? 26 A. That -- that's right. 27 Q. Okay. Not a $0.20 difference from your 28 competitor. 10753 1 A. Well, let's look at Le Mars. That's $0.10 2 different from where we started. That's a significant 3 difference for us. 4 Q. Okay. And does that mean that you would be able 5 to sell less milk? 6 A. That is -- that's the worry. I don't -- I 7 don't -- yes. 8 Q. It's a concern of yours because you believe that 9 it would cause you to pay more for your milk than what 10 Le Mars would have to pay? 11 A. Relatively, yes. 12 Q. What are you paying today for your over-order 13 premiums to your producers? 14 A. I consider that proprietary information. 15 Q. Okay. Do you know if it's more or less than what 16 your competitors are paying? 17 A. I wouldn't have any idea. 18 Q. Okay. Is it fair to say that you don't have 19 visibility into what your competitors are paying when 20 people are paying through over-order premiums? 21 A. It would be fair to say that the competitors that 22 we have are mostly cooperatives, who are not -- I have no 23 visibility into what they pay, nor are they required to 24 pay the same things that we are under the Federal Order. 25 Q. But you don't know if you would have a competitive 26 advantage or disadvantage over what's being paid under 27 today's prices; is that right? 28 A. I can assure you that if Proposal 19 was adopted, 10754 1 that the street prices would change accordingly. 2 Q. My question to you was, you don't know whether you 3 would have a change in the competitive pay price if 4 National Milk's proposal were adopted, compared to what's 5 being proposed -- what's being paid today through 6 over-order premiums; is that correct? 7 A. The original question was, am I worried about 8 selling less milk. My response to that is, I can assure 9 you, if Proposal 19 was adopted, that those changes 10 would -- would become evident in the price of milk, and we 11 would be put in a competitive disadvantage. 12 Q. And you don't know to what extent that 13 disadvantage would occur compared to what's currently 14 being paid under over-order premiums; is that right? 15 A. I would look at the changes in -- on the table as 16 indicative of what the selling prices would change. 17 Q. And if you turn to page 15. 18 We talked a little about with Mr. English that you 19 do have quality standards in excess of the Grade A 20 standards for your independent producers; is that right? 21 A. That is true. 22 Q. Are you comfortable sharing what those quality 23 requirements are? 24 A. Specifically, I wouldn't be the right one to ask, 25 but they involve somatic cell counts and PI counts and 26 standard plate counts. 27 Q. What about temperature controls? 28 A. Temperature is a pass fail. If it is over temp, 10755 1 it goes away. 2 Q. Is it -- is the threshold pass/fail amount set at 3 the Grade A standard or something lower than that? 4 A. Never had a trouble -- never had any trouble with 5 temperature, so I -- I can't answer that. 6 Q. Do you know what the pass/fail number is? 7 A. Well, we're looking at 40 but -- 8 Q. And do you pay any kind of incentives to your 9 producers who exceed those Grade A standards? 10 A. We do, yes. 11 Q. Is that negotiated through the over-order premium 12 as well or something separate from that? 13 A. That's part of the over-order premium. 14 Q. And do you buy any milk from any cooperative? 15 A. Ever or today or -- that's an ambiguous question. 16 Q. How about today? 17 A. No. 18 Q. Do you -- at what point in time did you move fully 19 to independent producer supply? 20 A. Approximately 18 months ago. 21 Q. Okay. So before that how did you supply your 22 milk? Was it through cooperatives or a blend? 23 A. We have been on a slope of becoming fully 24 independent. It's been a gradual process that's 25 culminated, like I said, a couple years ago to 100%. 26 Q. Okay. So that process started a couple years ago, 27 until about 18 months ago when you were -- 28 A. Oh, no. That process started decades ago and 10756 1 culminated a couple years ago. 2 Q. And it sounds like you have been able to -- to 3 establish some really good relationships with your 4 producers, I think you called them your relationship 5 partners? 6 A. Yeah. 7 Q. And in that, you are incentivized to maintain 8 those relationships and treat them fairly; is that 9 accurate? 10 A. That's accurate, yes. 11 Q. But you would agree with me that there are other 12 examples throughout the country where people are maybe not 13 quite as generous or as cooperative with their producers 14 as what you have described your relationships to be? 15 A. Generally I have found that your relationship with 16 your milk suppliers is a very important thing in the dairy 17 business. 18 Q. And you understand that historically there's been 19 some challenges with being able to maintain those 20 relationships, and some of which is why we have a Federal 21 Order system? 22 A. I'm not aware of any specific examples. 23 Q. Nothing that you have ever experienced in your 24 time in the industry? 25 A. No. Not -- no. 26 MS. HANCOCK: Okay. I have no further questions. 27 Thanks for your time. 28 THE WITNESS: Thank you. 10757 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Good morning, Mr. Erickson. My name is Ryan 4 Miltner, and I represent Select Milk Producers. 5 A. Good morning. 6 Q. First question I have is actually I want to 7 clarify something. I understand from your testimony and 8 from your questions from Ms. Hancock that you do not 9 purchase from cooperatives right now. 10 A. That's true. 11 Q. On page 15 of your slides, second bullet point 12 reads: "AE with independent supply balances with a co-op 13 and pays for that service through over-order premiums." 14 A. Historically that's been correct, but currently, 15 less and less. 16 Q. Okay. So am I correct then that you purchase all 17 of the milk produced by your independent supplying farms 18 at all times? 19 A. No. 20 Q. Okay. Would you care to share how you balance 21 those supplies if you are not taking all of that milk? 22 A. Some farms I take all their milk; some farms I 23 order on a weekly basis. 24 Q. Elsewhere, and this may be in your written 25 statement -- let me find it, so I don't misspeak. 26 I'm on page 4. It's about a third of the way 27 down. 28 A. Which -- which one? 10758 1 Q. I'm sorry. This is your written statement. 2 A. There's two. 3 Q. Oh, you are correct. This is MIG-17. 4 A. Okay. 5 THE COURT: Which is also Exhibit 454. 6 THE WITNESS: Yes. 7 MR. MILTNER: Okay. 8 BY MR. MILTNER: 9 Q. Okay. So about a quarter of the way, third of the 10 way down: "AE always pays more for milk that is used to 11 balance a Class I plant." 12 So are you paying more to those producers that you 13 are only buying their milk on an occasional basis? 14 A. Certainly. 15 Q. Okay. Now, a couple lines down from there: "In 16 order to balance our supply needs, we have to augment 17 those supplies with another supplier who has the ability 18 to balance for us." 19 Based on your answers to my other questions, the 20 other supplier you are refer to, that's also an 21 independent dairy farmer? 22 A. Yes. 23 Q. Okay. And then if you look a little further down, 24 that paragraph, you discuss and state: "This premium can 25 change but is currently more than the $0.60 built into the 26 Class I differential." 27 Is that based on your historical experience buying 28 from cooperatives? 10759 1 A. Yes. 2 Q. Okay. And so if you are not buying from 3 cooperatives, I'm curious on what basis you state that 4 it's currently more than $0.60? 5 A. They publish a weekly -- or a monthly price list. 6 Q. Okay. Does that come from an over-order pricing 7 agency? 8 A. There's an over-order pricing agency, yes. 9 Q. Okay. And I'm just trying to clarify the record. 10 I'm -- I'm not trying to ask -- 11 A. No. 12 Q. Okay. The record sometimes doesn't reflect 13 everything that's said. 14 You spoke a little bit about hedging in your 15 testimony, your direct testimony, and I did not quite hear 16 your answer to Mr. English's question. 17 Do you -- does Anderson Erickson currently hedge 18 its milk costs? 19 A. Do I have any open hedges at the present time? 20 No. 21 Have we historically hedged? Yes. 22 Q. Okay. 23 A. Do we value the ability to continue to hedge? 24 Yes. 25 Q. What are the business considerations or other 26 considerations that -- which would encourage you to hedge 27 at some point in time but not currently? 28 A. The business implications of a hedge would be if 10760 1 you had a customer or a group of customers that would -- 2 that want a fixed price over a longer-term, which does 3 happen. And we -- we desire to have the flexibility to 4 address those situations with a financial instrument if 5 necessary. 6 Q. So your decision to hedge raw milk costs is driven 7 by your customers' desires more than fixing a price for 8 your -- for your business? 9 A. I don't consider myself smart enough to know 10 market moves, so I wouldn't take an open hedge. 11 Q. Okay. With respect to Proposal 19, the increases 12 or updates to the Class I surface, do you have or does 13 Anderson Erickson have an opinion about whether the model 14 used to generate the base level of those changes is 15 accurate? 16 A. I do not have an opinion on that. 17 Q. Is your opposition to Proposal 19 based on your 18 opposition to any increases to the differentials or 19 something else? 20 A. My opposition to Proposal 19 is I had no input on 21 any of it, was not considered on any of it, and it 22 affects -- greatly affects our business. 23 Q. If you look at page 10 of your slides. This is 24 the table that you had prepared. 25 If I look at the column that is labeled "Current," 26 and I look at those plants that you previously stated were 27 direct competitors of yours, those differentials are 28 relatively in line with one another. If I look at the 10761 1 column "Model Average," some of those relationships 2 change, and I wondered if you have examined or thought 3 about what those changes and relative relationships to 4 your competitors might mean to your business. 5 A. I'm selfishly going to say, I oppose us paying any 6 more than any of those direct competitors on a beta basis 7 or just in general. It -- it is -- we're all drawing milk 8 from the same area. It should be pretty -- pretty equal. 9 MR. MILTNER: Okay. Thank you, Mr. Erickson. 10 That's all I have. 11 THE WITNESS: Thank you. 12 CROSS-EXAMINATION 13 BY DR. CRYAN: 14 Q. Good morning. I think it is still morning. 15 I'm Roger Cryan with the American Farm Bureau 16 Federation. It is nice to see you. Thanks for coming. 17 You say you balance your market. You balance by 18 buying -- you balance your supply by buying less than a 19 full supply from a farmer or farmers. 20 Is that -- is that what I understand from your 21 discussion? 22 A. That's correct. 23 Q. Okay. Do you know how that producer or producers 24 balance their supply? 25 A. Gladly it is not my problem. So, no, I don't. 26 Q. You don't. Okay. 27 So that's their problem? 28 A. Yes. 10762 1 Q. Okay. Sorry, I should have gone another 2 direction. 3 Okay. You oppose return to the higher-of because 4 of concerns about your ability to hedge your Class I milk? 5 A. Yes. 6 Q. If there was a Class I futures and options complex 7 on the CME, would that satisfy your need to hedge Class I 8 milk? 9 A. I think you are just making it more complicated. 10 There are other options that you don't need to invent a 11 new financial vehicle to accomplish what you are trying to 12 accomplish. 13 Q. But if the CME did introduce a Class I contract, 14 would that satisfy your need? 15 A. It would be helpful, other than just being -- 16 having no ability. 17 Q. Okay. And why -- why do you need advanced pricing 18 of Class I milk? 19 A. Those costs are approximately -- well, in excess 20 of 60% of our total costs. It's very difficult to run a 21 business not knowing what your costs are. 22 Q. Do you -- do you -- okay. 23 Your Class II products are perishable products? 24 A. They are. They are delicious though. 25 Q. And, you know, especially because they are 26 perishable products, you can't just produce and store them 27 for six months out, you need to -- 28 A. We don't have that ability, no. 10763 1 Q. You need a continuous supply of milk to produce 2 those -- 3 A. We do. 4 Q. -- products? 5 So those -- you have balancing costs associated 6 with the supply for those products as well; is that right? 7 A. I worry about balancing as a whole regardless of 8 the disposition of the milk. But it -- it -- balancing is 9 an issue for Anderson Erickson and everybody in the dairy 10 industry. 11 Q. For everything you make? 12 A. Yes. 13 DR. CRYAN: All right. Okay. That's it. Thank 14 you very much. Have a great day. 15 THE WITNESS: Thank you. 16 CROSS-EXAMINATION 17 BY MR. SLEPER: 18 Q. Jim Sleper, Sleper Consulting, LLC. 19 Good morning, Mr. Erickson. I just have a couple 20 real quick questions for you. 21 A. Good morning. 22 Q. Do you support the Federal Order program? 23 A. It's my understanding that the Federal Milk Order 24 program was developed by farmers for farmers, of which I'm 25 not really a party to, right? So it's not really my place 26 to say whether -- it's a system that's been in place for 27 very long time. It's a system that adds little or no 28 value to Anderson Erickson in particular. It wasn't 10764 1 necessarily designed to add value to Anderson Erickson. 2 Q. But dairy farmers are not regulated. Anderson 3 Erickson, as a Class I processor, is regulated. So I 4 would assume you would have an opinion whether or not you 5 support it or not. 6 A. Well, we are regulated, yes. And where it becomes 7 problematic is when your competitors aren't -- or they 8 have ways around the regulations, which is kind of the 9 world we live in. 10 Q. Okay. Have you heard of Great Plains Dairy 11 Cooperative? 12 A. Yes, sir. 13 Q. Okay. Do you buy milk from this entity? 14 A. We do. 15 Q. Okay. What is the agency -- you were talking 16 about the agency sends out a pricing letter and so forth. 17 What is the agency in Iowa? 18 A. Could you re-ask the question? I'm sorry. 19 Q. Well, you were talking about -- and I think 20 through Mr. English's questions, talking about how 21 agencies send out letters, and you thought it was pretty 22 easy for them to send out pricing throughout their 23 particular region and so forth. 24 What is the agency that co-ops use in Iowa? 25 A. There's an Iowa milk agency, which is a 26 conglomeration of co-ops that supply milk to dairy 27 facilities in the state. And they meet, and they decide 28 the price. 10765 1 Q. Okay. So that particular agency, is it in 2 operation today? 3 A. I believe it is. I don't buy milk in that agency, 4 so I can't speak directly. 5 Q. Sure. I understand. 6 That particular agency was called Iowa, the Iowa 7 Milk Marketing Agency, and it went defunct about ten years 8 ago. 9 MR. ENGLISH: I object to his testimony. It is 10 not -- 11 MR. SLEPER: I just -- I understand. 12 THE COURT: Okay. You may -- you may re-ask that. 13 You may ask him to assume that, and then you will need to 14 prove it if it's going to result in usable evidence. 15 MR. SLEPER: I'll just move on. 16 THE COURT: Okay. 17 MR. SLEPER: Thank you. 18 THE COURT: Are there other cross-examination 19 questions before I turn to the Agricultural Marketing 20 Service questions? 21 Mr. Rosenbaum. 22 CROSS-EXAMINATION 23 BY MR. ROSENBAUM: 24 Q. Steve Rosenbaum for the International Dairy Foods 25 Association. 26 So you have testified that currently you -- your 27 over-order premium is currently $0.05 higher than your 28 competitor located in Le Mars, correct? 10766 1 A. True. 2 Q. And that the Proposal 19 would mean that your 3 Class I differential would be $0.20 higher than your 4 competitor in Le Mars, correct? 5 A. Uh-huh. 6 Q. You should say yes or no. 7 A. Yes, sir. 8 Q. Okay. And so that would represent a $0.15 9 increase in your, if you will, competitive disadvantage in 10 term of a milk procurement price, correct? 11 A. Yes. Did I do the math wrong earlier? 12 Q. No, no. No, no. You did it right. 13 A. Okay. 14 Q. And I just want to -- so now I'm going to give 15 you -- just ask a math question, which is given that these 16 differentials are in terms of a hundredweight of milk, and 17 that a gallon of milk weighs roughly 8.6 pounds, that 18 appears to me -- 19 A. Roughly. 20 Q. -- to translate to $0.02 a gallon? 21 A. Yes. We're all -- everybody in this room does 22 that math in their head all day long. Yes. 23 Q. Of course. And -- but since we're creating a 24 record -- 25 A. Yes. 26 Q. -- I thought I would go ahead and ask that 27 question. 28 And now that all leads me to the following 10767 1 question, which is you obviously compete for particular 2 customers, grocery stores, I assume, for example, you want 3 them to carry your milk, as opposed to the milk coming 4 from your competitor in Le Mars, for example, correct? 5 A. Absolutely. Yes. 6 Q. And so this is all leading up to the question: Is 7 $0.02 a meaningful amount of money when it comes to trying 8 to get a customer like a grocery store in the real world? 9 A. Yes. I could give you evidence of bids that we 10 have lost, million-dollar bids, over hundreds of dollars. 11 So minisc- -- you know, .0001 cents per gallon, it is a 12 very, very significant difference, $0.02 a gallon. 13 Q. That's all I have. 14 MR. ROSENBAUM: Thank you. 15 THE COURT: Ms. Hancock. 16 CROSS-EXAMINATION 17 BY MS. HANCOCK: 18 Q. Mr. Erickson, do you support MIG's Proposal 20? 19 A. Yes. 20 Q. What is the difference between MIG's Proposal 20 21 for your price differential as compared to your 22 competitor; do you know? 23 A. It would be the same. We are taking the Class I 24 differential down $1.60 for everyone. 25 Q. You would still have a difference between what 26 your proposed payment would be and what their proposed 27 payment would be? 28 A. The difference would be the same. 10768 1 Q. Do you know what the model results are? 2 A. The model results for what? 3 Q. For Proposal 20, between yours and your 4 competitors? Do you know what the model results are that 5 are being proposed by MIG in Proposal 20? 6 A. MIG Proposal 20 decreases the Class I differential 7 by $1.60. 8 Q. From where they are set currently? 9 A. Yes. 10 MS. HANCOCK: Okay. Thank you. 11 THE COURT: Are there any other cross-examination 12 questions before I turn to the Agricultural Marketing 13 Service? 14 There are none. I invite the Agricultural 15 Marketing Service to ask questions. 16 CROSS-EXAMINATION 17 BY MS. TAYLOR: 18 Q. Good morning. Thank you for joining us today. 19 A. It's been a pleasure. 20 Q. To ask you -- 21 A. I don't know why you are laughing. 22 Q. I have to laugh. I have been here 45 days. 23 A. I get it. 24 Q. I'm going to try to be rather brief. 25 I'm going to start just on your Exhibit 17, which 26 is kind of your opposition to all the other proposals -- 27 or your stance on all the other proposals. And I just 28 want to turn to page 5 of 6. And in the middle of that 10769 1 paragraph -- and this is talking about the incentive for 2 the Class I market service there that's in that $1.60. 3 And you have a statement: "Adding this incentive 4 compensation to the current Class I differential magnifies 5 disorderly marketing in the supply chain." 6 Can you expand on what you are saying there about 7 disorderly marketing and what that means to you? 8 A. What it means to me is that $0.60 should -- if 9 we're trying to attract milk as a Class I plant, the $0.60 10 is better served giving directly to someone that's going 11 to -- going to supply your plant. If we're diluting it 12 among tens of thousands of farms, it's not -- it's not 13 helpful. 14 Q. And so is that dilution that you are talking 15 about, is that the disorder that you think that exists in 16 your opinion? 17 A. I don't think it helps in attracting milk. So it 18 would not help on orderly marketing. 19 Q. Okay. And you talk about how you pay premiums to 20 your suppliers. And in your opinion or can you expand 21 kind of what you think that premium is meant to represent? 22 What does that premium serve to do, or what service is 23 being provided to you for which then you are willing to 24 pay this premium? 25 A. We are getting a milk supply, continual milk 26 supply, with people that we know, trust, and partner with, 27 and it is in the -- it's the one constant in the milk 28 price, too. Right? You can look at it that way. The 10770 1 over-order premium is a set number that they can count on. 2 They can't necessarily count on what their month-to-month 3 price would be because there's a lot of market 4 fluctuations. 5 Q. Okay. And so what kind of factors go into 6 determining that number for you? You talked about 7 continuous supply. Is there other things? 8 A. Quality is definitely a part of it. 9 Q. Okay. 10 A. And I think those are the main -- 11 Q. The main things? 12 A. Yeah. 13 Q. Okay. If we -- or under MIG's proposal that $1.60 14 would come out of the regulated price. 15 Are you concerned at all if -- if the regulated 16 price is lower, somehow that will result in a lot of 17 differences between raw milk costs that arise between you 18 and your competition? 19 A. I guess it is possible. That does not concern me. 20 I feel we can compete in a free market system adequately. 21 Q. You wouldn't have trouble getting a supply? 22 A. No. 23 Q. Okay. I want to turn to your second statement on 24 Exhibit 455. 25 On your hedging, you said the reason you have done 26 it in the past is because you had a customer that wanted 27 some type of long-term fixed price? 28 A. I already have a group of customers or something 10771 1 like that, yes. 2 Q. Certainly. 3 What type of products -- well, let me back up. 4 For the Class I products you produce, are they 5 HTST product or are they ESL products? 6 A. All HTST. 7 Q. Okay. So you did do hedging utilized on your HTST 8 products for a customer? 9 A. Yes. 10 Q. Okay. And you don't do it now, but I'm just 11 trying to -- did you do it once? Did you do it regularly 12 and not -- and, you know, just kind of like -- 13 A. No. We did it over the course of several years. 14 Q. Okay. And the component levels you talk about on 15 page 3 for your plant? 16 A. Yes. 17 Q. Are those on a skim basis? 18 A. I believe so, yes. 19 Q. Okay. 20 A. I had to ask Sally. She affirmed yes. 21 Q. Okay. 22 A. For the record, I did the computation, but she's 23 the brains, so you know. 24 Q. Got it. 25 You mentioned -- well, it's on page 4, but you 26 also mentioned how you have operated in a world when there 27 wasn't advanced pricing -- 28 A. Yes. 10772 1 Q. -- is that correct? 2 A. That's true. 3 Q. And then on page 4 you talk a little bit about how 4 there's kind of -- the difficulty you came -- the 5 difficulty that presented to you. 6 Can you expand a little bit on your experience on 7 operating without advanced pricing and what products were 8 they for? 9 A. Well, obviously, we don't have advanced pricing 10 for Class II products currently, which is somewhat 11 problematic. But when the Class I did not have advanced 12 pricing was a significant issue for Anderson Erickson, 13 very volatile results, hard to predict month to month, 14 hard to price your product, hard to -- I mean just adds a 15 layer of complexity that doesn't seem necessary since we 16 have had advanced pricing for a long time. 17 Q. Okay. And your customers are used to the benefit 18 they get of knowing their price in advance? 19 A. They are. There's no customer that would not take 20 an advanced price. So if our cost is an advanced price, 21 then that's certainly problematic. 22 Q. On page 4, at the bottom when you are talking 23 about specifically why you don't want the differentials to 24 be increased as proposed by National Milk, you talk about 25 how you don't think differentials should be arbitrary or 26 in this case arbitrarily changed. 27 So is your issue that the model results that came 28 out, in your view, might be arbitrary or that the 10773 1 resulting changes that National Milk looked at and then 2 put forward are arbitrary or both? 3 A. Well, I listened to a lot of testimony on 19, and 4 it did seem arbitrary, changes that were made, up, down. 5 The model is the model, but -- so I don't have the 6 expertise to critique the model. I respect Mark and his 7 work. But we're tinkering with it. When competitors are 8 tinkering with it, that strikes a chord with Anderson 9 Erickson. 10 Q. The tinkering part is more of the problem? 11 A. I think increasing in general is a problem. 12 Tinkering and increasing is a twofold problem. 13 Q. Okay. 14 MS. TAYLOR: That's it from AMS. Thank you so 15 much. 16 THE WITNESS: Thank you. 17 THE COURT: Mr. English. 18 MR. ENGLISH: Your Honor, this is Chip English. I 19 have no further questions. I move that -- I actually 20 already moved, so now I ask you to rule on my motion to 21 admit 454, 455, and 456. 22 THE COURT: Thank you, Mr. English. 23 Is there any objection to the admission into 24 evidence of Exhibit 454, also marked MIG/AE-17? 25 There is none. Exhibit 454 is admitted into 26 evidence. 27 (Thereafter, Exhibit Number 454 was received 28 into evidence.) 10774 1 THE COURT: Is there any objection to the 2 admission into evidence of Exhibit 455, also marked MIG/AE 3 Exhibit 17A? 4 There is none. Exhibit 455 is admitted into 5 evidence. 6 (Thereafter, Exhibit Number 455 was received 7 into evidence.) 8 THE COURT: Is there any objection to the 9 admission into evidence of Exhibit 456, also marked MIG/AE 10 Exhibit 17B, like boy? 11 There is none. Exhibit 456 is admitted into 12 evidence. 13 (Thereafter, Exhibit Number 456 was received 14 into evidence.) 15 MR. ENGLISH: This concludes Mr. Erickson's 16 testimony. And I guess we're ready for lunch. I don't 17 know if Mr. Miller has arrived. My understanding is that 18 he would be first up after lunch. 19 THE COURT: Ms. Taylor. 20 MS. TAYLOR: That's fine with AMS. I think 21 Mr. Smith, his counsel, indicated to me 2:00 p.m. I don't 22 know if they are shooting for 2:00 p.m. 23 THE WITNESS: Mr. Smith hasn't arrived yet, so I 24 would appreciate if we wait for him. I think his goal is 25 to be here by 2:00. 26 MS. TAYLOR: Right. I got an e-mail of 2:00 p.m., 27 so -- 28 MR. ENGLISH: And that's fine. In that case, my 10775 1 understanding is that the next witness would be the 2 HP Hood witness Mr. Newell right after lunch. 3 THE COURT: All right. Very fine. 4 MR. ENGLISH: We're flexible. 5 THE COURT: Thank you, Mr. English. 6 MR. ENGLISH: And we will get those exhibits 7 distributed at lunch, during lunch, so when we come back, 8 we can start right away. At 1:05 I guess. I'll let Your 9 Honor set the time. 10 THE COURT: All right. 11 And, Mr. Erickson, I thank you so much. Thank you 12 for being here, and thank you for your preparation, and 13 thank you for your decades of work in the industry. 14 All right. Let's break for lunch. I would like 15 to you come back today at 1:10. 1:10. 16 We go off record. 17 (Whereupon, a luncheon break was taken.) 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 10776 1 WEDNESDAY, JANUARY 17, 2024 - - AFTERNOON SESSION 2 THE COURT: Let's go back on record. 3 We're back on record at approximately 1:12. 4 MS. VULIN: This is Ashley Vulin with the Milk 5 Innovation Group. We call next Michael Newell with 6 HP Hood to the stand. 7 THE COURT: You have testified here before. 8 THE WITNESS: I have testified here before, and 9 the mic's working, so I am ready. 10 THE COURT: Good. Good. 11 State and spell your name for us. 12 THE WITNESS: It's Michael Newell, N-E-W-E-L-L. 13 THE COURT: And you remain sworn. 14 THE WITNESS: I remain sworn. 15 MICHAEL NEWELL, 16 Having been previously sworn, was examined 17 and testified as follows: 18 MS. VULIN: And, Mr. Newell, in front of you and 19 handed out to the audience, we have three documents. The 20 first is Exhibit MIG/Hood 21. 21 And we ask, Your Honor, that that be marked as 22 Exhibit 457. 23 THE COURT: Yes. 24 (Thereafter, Exhibit Number 457 was marked 25 for identification.) 26 MS. VULIN: The second is MIG/Hood 21A, and we ask 27 that that be marked as Exhibit 458. 28 THE COURT: Yes. 10777 1 (Thereafter, Exhibit Number 458 was marked 2 for identification.) 3 THE COURT: Yes. 4 MS. VULIN: And these are your written testimony 5 on Proposal 20 and then your opposition testimony, 6 correct? 7 THE WITNESS: That's correct. 8 MS. VULIN: And then we also have MIG/HP Hood 9 Exhibit 21B Corrected. 10 And, Your Honor, we ask that that be marked as 11 Exhibit 459. 12 THE COURT: Yes. 13 (Thereafter, Exhibit Number 459 was marked 14 for identification.) 15 BY MS. VULIN: 16 Q. And that last Document 21B, Exhibit 459, is your 17 PowerPoint testimony, correct? 18 A. That is correct. 19 Q. Thank you. 20 So if we could bring up that PowerPoint, please. 21 A. We hope it's coming. 22 THE COURT: Dakota, is this PowerPoint going to 23 come up? 24 Thank you so much. 25 BY MS. VULIN: 26 Q. Thank you. 27 So, Mr. Newell, remind us what your position is 28 with HP Hood. 10778 1 A. Yes. So my official position is I'm a director of 2 sales with HP Hood, and my background is I was -- had a 3 family dairy -- or milk processing company in Sacramento 4 California. I served at -- in a number of positions in 5 sales marketing, operations. Eventually was president of 6 the company when Hood acquired our business in 2007. So 7 that was Crystal Cream & Butter Company, and our plant is 8 now Hood's Sacramento plant. 9 So for Hood, I am responsible for sales in 10 Northern California and the Pacific Northwest. And then I 11 have a dual role, which I'm their industry relations 12 person in California, and as such, I serve on the Dairy 13 Institute of California board, the Dairy Council of 14 California, and some other organizations representing 15 Hood. 16 Q. Some other organizations, sorry? 17 A. Representing Hood. 18 Q. Thank you, Mr. Newell. 19 And I will say, if you want to slow down just a 20 titch, I know our court reporter would be grateful. But 21 appreciate that background. 22 And so you have been with Hood since 2007 when 23 your prior company was acquired? 24 A. Correct. 25 Q. Thank you. 26 And I see now you have the Hood production plants 27 up. We won't retread too much ground, but I just want you 28 to reorient us as to where Hood's manufacturing facilities 10779 1 are located. 2 A. Yeah. So Hood has five manufacturing -- ESL 3 manufacturing facilities: In Sacramento, California; 4 Winchester, Virginia; Batavia, New York; Oneida, New York; 5 and then a plant in Philadelphia, which is actually under 6 contract to be sold. 7 We have four HTST facilities: In Massachusetts, 8 Maine, New Hampshire, and Vermont. 9 And then we have three culture plants and one ice 10 cream plant. 11 Q. Great. 12 And you said of the 14 facilities that Hood has, 13 three are -- or excuse me -- five of those are ESL? 14 A. Correct. 15 Q. And four of those are HTST? 16 A. Yes. 17 Q. Thank you. 18 And if you want to go to the next slide. 19 And can you refresh us just a little bit about 20 some of the products Hood makes. 21 A. Yes. So this is a picture of our -- our HTST -- 22 that Hood HTST fluid line. So we -- which is our -- our 23 biggest HTST brand. We also produce products under the 24 Crowley label. Booth Brothers is another label that we 25 have. And then we do assorted private labels, Class I 26 products. 27 And we -- similar business as far as culture 28 products goes. 10780 1 And then ESL-wise, Lactaid would be by far our 2 biggest brand, which is national footprint. We have some 3 plant-based beverages that we sell nationally. We also 4 have some ESL milk that we export to the Pacific Rim. 5 Q. Thank you. 6 THE COURT: To the Pacific Rim? 7 THE WITNESS: To the Pacific Rim, yes. 8 BY MS. VULIN: 9 Q. Can you describe for us a little bit the nature of 10 Hood's milk supply, cooperative versus independent, 11 distance. Give us a sense of that, please. 12 A. Yeah. So we purchase milk from four different 13 co-ops. We have independent shippers as well. We also 14 have a milk broker that we purchase milk through. So kind 15 of a diverse supply, if you will. Most of the farms that, 16 you know, end up shipping to us are located within 150 17 miles of our facilities, and all the milk is direct 18 shipped to our plants. 19 Q. And if we could go to the next slide, please. 20 THE COURT: Let me interrupt just to get a couple 21 of spellings. 22 You mentioned a couple of other labels, and you 23 mentioned Crowley. 24 THE WITNESS: Yes. 25 THE COURT: How is that spelled? 26 THE WITNESS: So C-R-O-W-L-E-Y. 27 THE COURT: All right. And Booth? 28 THE WITNESS: Booth, B-O-O-T-H. 10781 1 THE COURT: Thank you. 2 BY MS. VULIN: 3 Q. And so if you want to go to the next slide, 4 please. 5 So Proposal 20, tell us just generally why does 6 Hood support Proposal 20? 7 A. So the reason we support Proposal 20 is, you know, 8 given that we're looking at Class I differentials due to 9 Proposal 19, we felt it was really important to take a 10 look at the components behind proposal -- behind the base 11 differential. Class I has, you know, fallen quite a bit 12 in terms of pool utilization. It's about 30% now. So the 13 conditions have definitely changed over the past 20 years, 14 so... 15 Q. Thank you. 16 And let's talk first about the Grade A portion of 17 the $1.60, which I know is $0.40. 18 What is Hood's experience with Grade B milk? 19 A. You know, we don't -- we don't have any. We can't 20 utilize it, and it's not available 99 -- over 99% of the 21 milk on the market is Grade A. So it's the de facto 22 standard. 23 Q. And I know Hood manufactures cultured products. 24 But does Hood purchase any Grade B milk for those 25 products? 26 A. No. 27 Q. And so when considering whether or not Hood 28 believes that poolwide incentive is necessary to ensure 10782 1 milk is Grade A, do you think the marketplace requires 2 that any longer? 3 A. Can you repeat the question? 4 Q. Is being Grade A still a Class I feature or has 5 that become a marketwide feature? 6 A. I think it is a marketwide feature. I think it 7 is -- yeah. It's the de facto standard. 8 Q. And then going to the second element, balancing 9 costs, which I understand is $0.60 per hundredweight of 10 the base price, correct? 11 A. Correct. 12 Q. And so can you tell us what are the ways in which 13 Hood balances its milk supply? 14 A. Sure. As I have stated earlier, we -- all of our 15 milk is received directly from farms. We do pay our co-op 16 suppliers a handling charge to -- that includes the cost 17 of balancing. 18 Now, we -- we try to be as consistent as we can in 19 terms of our receiving schedules, and there has been some 20 discussion about what even "days" mean. So really that's, 21 you know, what we -- we attempt to do. A lot of our 22 plants run 24 hours, seven days a week, so we -- we can 23 accomplish that. 24 With some of our supplier contracts we actually 25 have what's called universal receiving credits in place, 26 which are the co-ops players coming back to us to incent 27 us to have that even-day schedule. So it's a nice kind of 28 free-market approach to balancing. 10783 1 Q. I want to ask a little bit about this direct 2 shipment. 3 What are the costs or efforts of receiving direct 4 ship milk that are different from purchasing milk in a 5 balancing plant? 6 A. Well, I mean your -- your -- whatever the farm 7 is -- is producing, you are getting, so it's not -- it's 8 not a tailored product. So then we need to separate it -- 9 store it, separate it. So we need to kind of deal with, 10 you know, balancing, with -- which -- what comes in from 11 the farm. 12 Q. Are there administrative costs to receiving direct 13 ship milk 24 hours a day, seven days a week? 14 A. I mean, there's obviously labor costs, too, to 15 maintaining that. 16 Q. And I believe you said that Hood pays its 17 cooperatives, suppliers, handling charges that include the 18 cost of balancing, correct? 19 A. Yes. 20 Q. And so even outside of the FMMO system, Hood is 21 compensating its suppliers for balancing activities? 22 A. Correct. 23 Q. And these even-day receiving credits and the 24 direct shipment of milk, is that handled exactly the same 25 for every single supplier or will those features be 26 tailored to each supplier relationship? 27 A. So, no, it really varies by supplier, so -- and I 28 can't go into specifics of supplier agreements, one, 10784 1 because I don't know them, and secondly, because that 2 would be proprietary information. 3 Q. But you can tell us that this is a 4 relationship-by-relationship or supplier-by-supplier 5 decision, such that there's not a blanket receiving -- or 6 blanket cost of balancing that is identical amongst all 7 suppliers? 8 A. No. 9 Q. And then you also discuss here ESL processing 10 facilities. 11 Can you tell us first, give us a little bit of 12 update on the Batavia facility, and then I want to talk 13 about how ESL processing aids in balancing. 14 A. Okay. So Batavia is our newest ESL facility, and 15 in the summer we announced a $120 million expansion to 16 that facility. And a couple primary elements of that 17 expansion are we're adding two receiving bays and adding 18 two large raw milk silos to enable us to better balance 19 that milk supply. 20 Q. And in comparing the expense of an ESL processing 21 line or facility compared to HTST, is ESL more expensive? 22 A. ESL is more expensive. The processing is very 23 expensive. But even -- even more so, product storage, 24 because you are doing much longer production runs, you 25 know, producing specific products less often, but longer 26 runs, so you need to store product two, three weeks. We 27 had a discussion about, you know, producing over the 28 summer to sell in the winter. We don't go quite that far. 10785 1 But with eggnog, you know, we will produce at the end of 2 August, and we'll be shipping that product well into 3 October. 4 Q. And even day to day, having ESL processing can 5 allow for storage in terms of days or weeks, correct? 6 A. Correct. 7 Q. And does Hood utilize its ESL products to manage 8 its supply chains day to day or week to week? 9 A. So with your production planning, you're 10 scheduling way out in the distance, so that allows you to 11 better, you know, manage your ingredient flows. 12 Q. And it's my understanding that the expense of an 13 ESL facility is not just slightly more expensive than HTST 14 but magnitudes more expensive; is that right? 15 A. That would be correct. 16 Q. And certainly there are other reasons other than 17 balancing why Hood utilizes ESL processing, correct? 18 A. Absolutely. Yes. 19 Q. But it also is an expense that aids in Hood's 20 ability to balance the marketplace for its milk supply? 21 A. That -- that is -- yes, that's the side benefit of 22 having the extended shelf life and the large facilities. 23 Q. And has Hood ever had any milk shortages that it 24 wasn't able to solve either through spot purchases or 25 negotiating new supply agreements? 26 A. No. I mean milk is amply available, so we have 27 not had any milk shortages. If we did have a temporary 28 spike, we would look to buy milk on the open market. If 10786 1 we had a -- we -- our contracts are mid/max contracts, so 2 if we were above the maximum, we would look to renegotiate 3 the contract. 4 Q. And do over-order premiums figure into any Hood's 5 supplier agreements? 6 A. We do have over-order premiums in place with our 7 suppliers. 8 Q. And those are negotiated with each supplier as 9 needed, correct? 10 A. Yes, and they are part of the contract. 11 Q. And has Hood ever charged -- excuse me. I'll 12 start that again. 13 Has Hood ever been charged fuel costs by its 14 suppliers? 15 A. Yes. So we -- we do have fuel surcharges that are 16 passed through from our co-op suppliers. 17 Q. And so compensating your suppliers for shipping 18 expenses outside of the FMMO system, but on a 19 supplier-to-processor relationship, allows you to tailor 20 those to specifically compensate that supplier for the 21 exact miles travelled? 22 A. I can't say that it goes down to that level, but I 23 mean, if we see, you know, the cost of fuel rise, then 24 they are compensated for that increase. 25 Q. Maybe a better way to put it is it is allowed to 26 adjust in real time when it's outside of the FMMO system? 27 A. That's correct. 28 Q. And then let's talk about the third piece, the 10787 1 incentive to serve the Class I market. 2 Do you have any views on whether or not the base 3 Class I differential is needed in order to incentivize 4 service of Hood's plants? 5 A. So we do not have any problem attracting milk to 6 our plants, so -- and with Class I at 30% of the pool, 7 we -- we don't see the need for -- and over-order premiums 8 in place to attract milk, we don't see the need for 9 Class I to bear the burden of the $0.60 incentive. 10 Q. Okay. And even if there's a short-term shortage, 11 I believe you said that Hood would solve that through 12 purchasing on the spot market; is that right? 13 A. Correct. 14 Q. Not through the FMMO system in some way? 15 A. That's correct. 16 Q. And now if we could go to the next slide, please. 17 So this chart I will identify is also found on 18 page 5 of your written testimony, which is Exhibit 457, 19 but we have it here in the PowerPoint so that we can 20 discuss it. 21 So can you tell us what does -- what data does 22 this chart reflect? 23 A. Yes. So this is -- well, let me explain my 24 purpose. 25 In looking at Proposal 19 and 20, I thought it 26 would be helpful to take a look at what we call bump 27 charts, which is -- 28 Q. What we call what kind of chart? 10788 1 A. A bump chart. So a bump chart looks at the impact 2 of price changes over time on volume. 3 Q. Bump? 4 A. Bump. 5 Q. Okay. 6 A. B-U-M-P. 7 Q. So this specific chart is the -- and our 8 categories development team put this together for me, and 9 it's data from Circana, which was formally IRI before 10 merger. And this is U.S. multi-outlet sales, which is 11 kind of the broadest measure we have of sales. It 12 captures grocery stores and mass merchandise and a little 13 bit of club, not all club. Costco is not included in this 14 data. But it's kind of the broader -- broadest measure we 15 have. 16 And so this looks at gallon sales of branded and 17 private label gallons for four-week periods over about a 18 five-year period. So it -- it kind of looks at the impact 19 of the inflation that we had in 2022 on gallon sales, 20 so... 21 I mean, so what we see is, you know, sales 22 approaching 200 million at the start of the period. We 23 see the price spike in early '22, and you see the gallon 24 sales drop from probably the -- a little over 150 million 25 to probably down to about 140 million over the last 26 15 months of the chart, which kind of shows the impact of 27 higher prices. 28 So it was my attempt to look at elasticity. Not 10789 1 as elegant as Dr. Capps did, but I think it kind of paints 2 the picture of what higher prices -- the impact they have, 3 so... 4 Q. Put simplistically, as price goes up, purchases go 5 down? 6 A. Yeah. 7 Q. If we could look at the next slide, please. 8 A. So the next slide looks at the 64-ounce size of 9 branded and private label products. And I thought it was 10 really interesting that Warren kind of referenced this 11 pattern when he talked about elasticity. 12 So this -- this looks at half gallon sales, and 13 the unit sales here for a four-week period are really kind 14 of remarkably flat throughout this five-year period and 15 through the inflationary period. So it kind of 16 demonstrates the pattern that when you see prices 17 increase, you see some consumers move from the gallon size 18 to the 64-ounce size because that's more affordable for 19 them, so which indicates, you know, lower overall volume 20 consumption. 21 Q. So as we see the price for both gallons and half 22 gallons going up, we're seeing less gallon consumption, 23 and in your estimation -- or in your conclusion from this 24 data, also, consumers trading down to a smaller volume of 25 milk? 26 A. That is correct. 27 Q. Thank you. 28 And then let's look at the final chart, please. 10790 1 A. So the final chart is I thought it would be 2 interesting to look at branded gallon sales, so not -- 3 removing private label from the equation, and what impact 4 does higher prices have on branded. And for independent 5 processors like Hood, brand is really what's most 6 important. 7 And this slide to me was pretty alarming. We see 8 sales dropped from 40 million in 2018. You have the COVID 9 spike in 2020, but as those prices start to ramp up, you 10 really see the unit sales of gallons drop to less than 11 20 million per four-week period at the end of that time 12 period. 13 Q. And so when you are considering elasticity, right, 14 or the consumer's reaction to price increases, that 15 appears to be more significant or severe in response to 16 price increases for branded products than for all 17 products? 18 A. And the assumption here is they are moving to 19 smaller sizes. They could be moving to plant-based. They 20 are moving to private label for sure. 21 So my implications here are, for higher Class I 22 prices, if we increase the differential, we're going to 23 see lower gallon sales overall. We're going to see 24 consumers switch to smaller sizes, consider other 25 substitutes, or they are going to consume less. I think 26 branded sales will decline faster than the market. 27 And with branded sales declining and private label 28 getting stronger, I think that really favors captive 10791 1 dairies for sure because they exist to serve their retail 2 owners, and then also co-ops I think are in a better 3 position to serve private label since they can reblend, so 4 their costs are -- they have a cost advantage. 5 And another implication is declining volume sales 6 will lead to further consolidation and plant closures in 7 the industry. 8 So I just -- I don't think it bodes well for the 9 Class I market. 10 Q. And in terms of Proposal 20 and reducing the pool 11 obligation by $1.60, we heard some questions yesterday to 12 Ms. Keefe about, well, what's about going to happen to 13 that $1.60 if it's not going into the pool. 14 And how would you expect that Hood could utilize 15 or would utilize capital freed up from having a lower pool 16 obligation? 17 A. Yeah. So for -- for HTST products, I mean, we 18 typically base our cost to the customer on the price. So 19 if we see the price fall, we will see our price to our 20 customers fall. 21 Q. And that really -- so you are talking about 22 bringing down this blue line here and hopefully bringing 23 up some of the volume back? 24 A. Yeah. We don't control the retailers, but, you 25 know, we -- we do move with the market on conventional 26 milk products, so hopefully that's what would happen. 27 Now, certainly, if we had to attract more milk to our 28 plants, then we would need to look at the over-order 10792 1 premiums that we pay, so... 2 Q. So utilizing that $1.60 to pay directly to your 3 suppliers to attract more milk? 4 A. And that's -- that's -- I mean, that's kind of our 5 preference with all three components -- well, maybe not 6 Grade A, but it -- it would be much better to have a 7 direct relationship with our suppliers and have those 8 incentives diluted by the pool. 9 Q. And that would be consistent with the approach 10 today, where part of the payment is a pool obligation and 11 part of the payment is an over-order premium, correct? 12 A. That is correct. I mean, I -- I -- I didn't get 13 involved in this process until June, so I didn't really 14 even have a good understanding of the base differential 15 prior to that. So when I saw these were the components 16 and what MIG's proposal was, I thought it was pretty 17 compelling. 18 Q. Thank you. 19 So if we could turn to the next slide, slide 8. I 20 would now like to move away from your support for our 21 Proposal 20 to talk about Proposal 19. 22 What is Hood's position on Proposal 19? 23 A. So our position is that regulated prices should be 24 minimum prices. The industry uses over-order premiums and 25 fuel surcharges to incent milk movement. The USDA should 26 not burden Class I minimum prices with variable 27 transportation costs as the proposal has -- has requested. 28 So... 10793 1 Q. And we talked just a minute ago about the fact 2 that Hood already addresses transportation costs in 3 realtime with its suppliers or at least some of its 4 suppliers, correct? 5 A. That's correct. 6 Q. Thank you. 7 A. So these first three bullets are really our -- 8 yeah, this is why you should reject Proposal 19. The next 9 two bullets really focus in on the proposal and the 10 working group proposals and some of the inequities we see 11 there. 12 So we -- you know, we object to the working groups 13 using different supporting logic for their differentials, 14 so -- and sometimes that logic was contrary or 15 contradictory, so -- and then when we took kind of a deep 16 dive into how our plants would be impacted, we found the 17 proposed location differentials often varied significantly 18 from the spatial model and in some cases seem to give a 19 competitive advantage to competitive plants owned by the 20 cooperatives that helped craft the location differential 21 proposal. 22 Q. Thank you. 23 And if we -- I could dig a little bit into that by 24 going to the next slide, please. 25 So I see you have five plants highlighted on this 26 slide. Can you just tell us the names of those plants and 27 why you chose to examine those five. 28 A. Yeah. So I -- I kind of chose the Massachusetts, 10794 1 New Hampshire, Maine area to focus in on three of our 2 fluid plants and two of our competitors and kind of the 3 way the proposal impacted our plant. 4 So -- and I'm really going to kind of focus in on 5 Hood Agawam, DFA Franklin, and Hood Portland, Maine, in 6 this discussion for the sake of time. 7 So when you look at the Hood Agawam plant, which 8 is located in kind of Central Massachusetts, about 9 80 miles from Boston, you see the current differential is 10 $3, the model average is 4.85, and the proposal 11 proposed -- the proposal in Proposal 19 is 4.85. So no 12 variance from the model average, which seems right if you 13 are going to use that as your base. 14 However, the DFA Franklin plant, which is south of 15 Boston, so it is much closer to that market, currently has 16 a differential of 3.25. The model average would dictate 17 it goes up to 5.25. However, the proposal put forth by 18 the working group was 5.10, so -- which is a $0.15 19 variance. So it favors their plant by $0.15, so that puts 20 our Agawam plant at a disadvantage. And those plants 21 compete. 22 So then looking to the northeast in Maine, our 23 Portland -- we ship a lot of milk from that Maine plant 24 into Boston and south of Boston. Currently the 25 differential is $3. The model average calls for 4.50. 26 There's lots of milk available in Maine. The proposed 27 increase is 4.85, so $0.35 above the model average, which, 28 you know, now puts our Maine plant at a $0.50 competitive 10795 1 disadvantage from current state to the DFA Franklin plant. 2 And we have a lot of milk shipping into the Boston market 3 from that Maine plant. 4 So part of the logic given for that $0.35 increase 5 was, well, we need to keep the milk in Maine, so let's 6 come back to that in a minute. 7 So I'm going to move on to the next slide, which 8 looks at our ESL plants. 9 Q. And so just to kind of summarize the prior slide, 10 the concern is, right, that vis-a-vis competitive plants, 11 right, DFA did not feel as though the adjustments were 12 done fairly or equitably between those plants, correct? 13 A. Hood did not feel those -- those -- 14 Q. Oh, yes. 15 A. That's correct. And I -- I didn't talk about our 16 Concord plant, but a similar situation there. We do ship 17 a lot of milk into Massachusetts from that plant, and that 18 plant is at a disadvantage to the Franklin plant as well. 19 Q. Thank you. So the next slide would be great. 20 A. Okay. So this plant thought it would be helpful 21 to look at our ESL facility. So Hood Batavia and Hood 22 Oneida are located about 150 miles from each other, and 23 when you look at -- so they kind of pull from the same 24 milk shed. When you look at the current situation, 25 Batavia's differential is 2.20, Oneida is 2.50. The model 26 average would call for them to narrow, so within $0.05. 27 However, what was proposed is that Oneida increases $0.20 28 above the model average, which doesn't seem quite right 10796 1 when the model would dictate that the cost would -- should 2 be -- the differential should be the same, so... 3 And then, separately, we took a look at our 4 Sacramento facility, and I know there will be a lot of 5 discussion coming about the California differential 6 increasing, so much more for the model as we get further 7 into the Proposal 20 testimony. But what we saw with our 8 plant is currently the differential is 1.70, the model 9 average would call for a $0.20 increase to 1.90, but the 10 proposal is for 2.50, so a $0.60 increase. 11 In California I just looked at the average 12 proposed increase, and it was $0.69 over the plants there, 13 and comparing that to the model deviation for the rest of 14 the U.S., that was $0.14, so a $0.55 difference. So the 15 justification there is hard to understand. 16 And then we look at the Appalachian region where a 17 milk deficit was cited earlier. So it seems like you 18 would want to increase above the model average there, or 19 at least hit the model average. And actually there it is 20 almost $0.15 short of the model average. So it doesn't 21 seem -- it doesn't seem rational when you compare it to 22 the increase that's proposed for California. 23 THE COURT: Repeat the tail end of your sentence. 24 THE WITNESS: It doesn't seem rational when you 25 compare it to the increase proposed for California. 26 BY MS. VULIN: 27 Q. And I think this is an interesting comparison 28 because, as I understand it, the critique here is not how 10797 1 Hood was treated vis-a-vis a competitor, but the lack of 2 consistency even amongst Hood's ESL plants? 3 A. That's correct. It's -- it's -- kind of goes back 4 to there being no set methodology. 5 Q. Thank you. 6 And if we could go to the next slide, please. 7 A. So this next slide, we're coming back to Maine. 8 So what was proposed was $0.35 above the model average to 9 keep milk in Maine. Maine has the Maine Milk Commission, 10 which was founded in 1935, and was created to arbitrate 11 differences, establish minimum prices in designated areas 12 after hearings, and exercise general supervision over the 13 milk industry in Maine. 14 So Maine kind of has a dual regulatory -- has two 15 regulatory bodies. So on-farm costs of production are 16 reviewed every three years by an independent party and 17 adjusted by -- accordingly. I believe the Maine Milk 18 Commission is a five-person board. 19 The producer margin is added to Class I prices 20 which help establish minimum wholesale and on-shelf prices 21 in the state of Maine. So Maine specifically is highly 22 regulated. 23 The producer margin is paid back to the Maine pool 24 on the milk produced, processed, and sold in Maine. So 25 there's an incentive already built into the regulatory 26 structure to keep milk in Maine. 27 And I -- in earlier testimony I think the 28 testimony was given that 30% of the milk produced in Maine 10798 1 stays in Maine. And that's NMPF-54, Appendix 1B is where 2 we pulled that data from. 3 So for us, this would indicate that additional 4 Class I differentials are not needed with the close 5 oversight of the Maine Milk Commission and a surplus of 6 milk to service Class I demand. 7 So I think it's important for the USDA to kind of 8 look at those regions that have separate bodies that -- 9 that are involved when they are considering this 10 differential proposal. 11 Q. Thank you. Appreciate that. 12 And then if we can go to the last slide on your 13 opposition testimony on Proposal 21, please. 14 Just in a high level, why does Hood oppose 15 Proposal 21? 16 A. Yeah. So we're opposed to Proposal 21. We think 17 it -- and Warren mentioned this -- unfairly impacts 18 Class I facilities that produce both Class I and Class II 19 products. They -- they -- they are locked into the pool 20 and -- 21 Q. When you say "they are locked into the pool," 22 facilities that also produce Class I and II products? 23 A. Yes, they can't -- they can't -- you know, they 24 can't depool. I guess in some cases Class II plants can 25 depool. 26 So our feeling is in lieu of another stagnant 27 differential, we would lean on our opposition to 28 Proposal 19 and reiterate the need to let a free market do 10799 1 its job and place the value of Class II milk in the hands 2 of over-order premiums based on supply and demand signals 3 in the marketplace. 4 We also feel that a permanent cost increase in 5 Proposal 21 might decrease demand for Class II stall -- 6 decrease the demand for Class II skim solids by 7 encouraging low cost raw material optimization from nonfat 8 milk powders, whey, or buttermilk in place of Class II. 9 So this -- this displaced Class II would move into 10 Class III and IV plants, incurring additional freight 11 costs and potentially lowering over-order premiums, and -- 12 and the amount of money that goes in the pool, which would 13 be completely at odds with the Farm Bureau's proposal and 14 reasoning. And then in a region like the Northeast where 15 you have limited manufacturing plants, it could result in 16 disorderly marketing conditions. 17 Q. And so really there are a number of collateral 18 consequences to Proposal 21 that you believe makes it 19 unfeasible? 20 A. Makes it -- it would not be to the benefit of the 21 industry to adopt it. 22 Q. Thank you. 23 And if we could go to the last slide, please. 24 If you want to tell us what this chart is here, 25 and namely how USDA should take into account this decline 26 in sales when deciding what -- where to set the current 27 Class I differential. 28 A. Yeah. So, I mean, obviously, the trend in fluid 10800 1 milk consumption, per capita consumption, is not 2 favorable. We have talked about the -- how utilization 3 has fallen. I think this really paints the picture. So 4 we appreciate the USDA for holding the hearing and 5 allowing a thoughtful conversation. 6 I think the Agricultural Act of 1937 requires we 7 bring forth an adequate supply of milk for fluid use. So 8 we have a differential structure in place that does it. 9 It doesn't mean that all transportation costs should be 10 covered. If other classes of milk are able to attract 11 milk without covering all the transportation costs or 12 without a locked-in defined system in place, why are we 13 doing -- burdening Class I with such a system at this 14 point when utilization is 30% of the pool and less than 15 20% of overall milk production? So Class I is steadily 16 declining. I think any regulatory change must account for 17 this regulatory reality -- or this market reality. That's 18 it. 19 Q. Thank you. Appreciate it. 20 A. Thank you, Ashley. 21 MS. VULIN: Nothing further, Your Honor. I would 22 move to admit Exhibits 458 -- excuse me -- 457, 458, and 23 459. 24 THE COURT: Thank you. And I'll wait until we 25 have had cross before responding to your motion. 26 MS. VULIN: Nothing further. And I present the 27 witness for cross-examination. 28 THE COURT: Mr. Newell, that was extremely well 10801 1 presented, very concise, and nicely laid out. 2 And I invite cross-examination. 3 CROSS-EXAMINATION 4 BY MS. HANCOCK: 5 Q. Good afternoon, Mr. Newell. 6 A. Hello, Ms. Hancock. 7 Q. I'm Nicole Hancock with National Milk. 8 Let's see. I'm looking at Exhibit 457 on your 9 written testimony, and I just want to get a little 10 background on your HP Hood's plants. 11 On the last paragraph on page 2 there in the 12 Company Background is where I'm at least kind of anchoring 13 these questions. But you have listed out the location of 14 your various plants there, and I'm wondering if you could 15 help us understand what you produce at those plants. 16 A. Okay. So -- 17 Q. While you are looking, I'll catch you before the 18 judge does, that your volume will drop off if you are 19 looking down. 20 A. Thank you. 21 Okay. I'm sorry, I was looking at page 3. 22 Okay, page 2. So our -- so our ESL plants, we 23 produce Lactaid. We produce ESL milk for export. 24 Q. I'm sorry. At which one? 25 A. Our ESL plants. So do you want me to walk through 26 plant by plant or -- 27 Q. Yeah. That would be great. 28 A. So Sacramento, we produce Lactaid, and we produce 10802 1 ESL milk for export. Additionally, we produce plant-based 2 beverages. 3 Q. Okay. 4 A. Winchester, Virginia, we produce Lactaid. We may 5 produce some private label dairy products in Winchester. 6 We also produce those in Sacramento. So I should have 7 stated that. And then we produce non-dairy creamer and 8 some plant-based beverages. 9 THE COURT: Some plant-based beverages? 10 THE WITNESS: Plant-based beverages. 11 Batavia, New York, would be -- and I -- I'm unsure 12 of whether we produce private label products -- or dairy 13 products in Batavia. I know we produce plant-based 14 beverages, and we produce Lactaid in Batavia. And we 15 would have the same product line up in Oneida, New York. 16 BY MS. HANCOCK: 17 Q. As Batavia? 18 A. Yes. Yes. 19 We also produce half and half and cream in some of 20 these facilities as well, some of these ESL facilities. 21 So in our -- I'm going to move on to our HTST 22 plants. And we have -- in those plants we produce the 23 HTST products, so gallons, half gallons, quarts, in the 24 Hood Crowley and Booth Brothers and private label. And I 25 really can't break that down by plants. We also produce 26 half and half and cream and ice cream mix in some of those 27 facilities. 28 HTST products, our Vernon plant is our yogurt 10803 1 plant, so we produce yogurt there. I believe we also 2 produce some sour cream there. 3 And then Agawam and LaFargeville are culture 4 plants as well, so cottage cheese and sour cream. And I 5 believe Heluva Good! Dip is produced in some of those 6 facilities. 7 THE COURT: What was -- 8 MS. HANCOCK: What was the last thing you said? 9 THE WITNESS: Heluva Good! Dip. 10 THE COURT: Would you spell that, please? 11 THE WITNESS: I knew you were going to ask me 12 that. Yes, it's H-E-L-U-V-A. 13 THE COURT: Oh. 14 THE WITNESS: It's good. Good stuff. 15 THE COURT: Thank you. 16 THE WITNESS: And then our Suffield plant we 17 produce ice cream and... 18 BY MS. HANCOCK: 19 Q. And so your ESL plants are Sacramento and 20 Winchester, and then Oneida and Batavia? 21 A. Yes. And I left Philadelphia out of the mix 22 because that plant is under a sale agreement. 23 Q. Okay. Why are you selling that plant? 24 A. It -- it doesn't really fit with the rest of our 25 plants, which are newer, modern facilities. That's an 26 older facility. We do -- it's a smaller facility, and we 27 do some creams there. But I -- it just doesn't -- I mean, 28 I'm -- I'm not at the level of the company to exactly say 10804 1 why, but just from my seat observing, it doesn't seem to 2 fit with the rest of our facilities, which are larger, 3 more modern facilities. 4 Q. Okay. Not an indication that it's a decline in 5 demand, it is just not the right -- the right plant for 6 the otherwise growth opportunities that you have? 7 A. Yes. 8 Q. Because you are growing in other areas, as you 9 noted that you have a new plant coming online? 10 A. Yeah -- well, we have a plant expansion coming 11 online. 12 Q. Okay. Fair enough. 13 A. Yep. 14 Q. And -- and so in all of the four locations in 15 which you produce ESL products, you also produce non-dairy 16 products as well? 17 A. That's correct. 18 Q. Okay. And do you use those unanimous dairy 19 products to balance the production of your ESL products or 20 your -- 21 A. So not really to balance. We -- we typically 22 have -- those plants are kind of an isolated system, so we 23 run them on separate fillers, not always set -- use 24 separate lines, batching systems to produce those 25 products. 26 Q. And you note in your testimony that your Class I 27 utilization rate, I think that it's for the totality of 28 all of your locations is 87% for Class I? 10805 1 A. Yes. Yes. So -- so 13% would be Class II. 2 Q. And you note the -- you source most of your milk 3 from cooperatives, but that you also utilize direct ship 4 and brokers as well? 5 A. I think one broker. So I don't think that's 6 really a major part of our business. So co-ops would be 7 the large majority, but independent suppliers are 8 important to us also. 9 Q. Which plants do you have that receive direct ship, 10 do you know? 11 A. So when you say "direct ship," do you mean -- so 12 all of our plants are direct ship from the farms. 13 Q. I'm sorry, I should have said from your 14 proprietary -- from your independent suppliers. 15 A. I don't know precisely. I know our Sacramento 16 plant has some independents. I believe our plants in 17 northern New England. But I could not take that down to 18 the plant level for you. 19 Q. Is it fair to say it's a very small percentage? 20 A. It's -- it's definitely -- the large majority 21 is -- comes from co-ops. 22 Q. And to the extent that you have talked about some 23 of the balancing that you have either done or that you are 24 expanding your plant to be able to do, that comes on top 25 of the balancing that's done by the cooperative as well? 26 A. So we -- we do the best that we can to have 27 even-day receiving, which makes it easy for the co-ops to 28 balance their milk production, and in some cases they 10806 1 incent us to do that, which is a nice partnership. 2 Q. Can you explain the even-day receiving? 3 A. So -- so basically, you know, farms tend to 4 produce the same amount of milk day in and day out. So if 5 we receive every day, throughout the week, then we can 6 handle that production, and it's -- it makes for an easy 7 relationship to take the milk right off the farms and not 8 have to redirect it somewhere else. 9 Q. And if you don't have the same volume of receipts 10 to achieve that, who is responsible for managing those 11 supply variations? 12 A. So that would be the -- then that would fall to 13 the co-op. 14 Q. And then the co-op would absorb the burdens and 15 costs of those balancing costs? 16 A. And we pay them a handling fee to do that. 17 Q. Okay. And you say that you pay over-order 18 premiums? 19 A. We do. 20 Q. And is that across the board with all of your 21 suppliers you pay an over-order premium? 22 A. I believe that's with all of our suppliers. 23 Q. And how does -- how does the even-day receiving 24 play into that over-order premium, if at all? 25 A. It doesn't. My understanding, the handling is 26 separate from -- from the over-order premium. 27 Q. And do you -- if you achieve those even-day 28 receiving, do you receive a credit? 10807 1 A. Yeah. I think we -- I talked about that in my 2 testimony. It's called a universal receiving credit. 3 Q. And that is -- that's a deduction off of the 4 over-order premium that you pay? 5 A. It's a -- it's money that comes back to us from 6 the handling charge. 7 Q. Okay. If you achieve that? 8 A. If we achieve that. 9 Q. Okay. And do you know what the percentage is that 10 you hit that mark? 11 A. I'm sorry, I have no idea. 12 Q. Okay. We fly a little blind in our questions, so 13 I have to ask just to find out. 14 And do you know what the credit amount is that you 15 receive -- or at least if it's not a dollar amount, the 16 percentage of the credit that you receive if you hit that 17 even-day receiving target? 18 A. I -- I do not. No, I don't know any of the 19 economic specifics. 20 Q. So in the plants where you receive -- or I'm 21 sorry -- in the plants where you process ESL products, do 22 you take in the same volume of milk seven days a week? 23 A. I can't answer that question. I -- I don't have 24 that knowledge. I know that we strive to, but I can't 25 affirmatively say that. 26 Q. Do you know if you alternate the days of 27 production that you are producing milk products versus 28 your plant-based products? 10808 1 A. So our plants are large, so we have various lines 2 going. So it's really not -- usually we're -- we're 3 producing both sets of products on separate 4 pasteurizers -- separate ultra pasteurizers, separate 5 lines. So it's -- they're not mutually exclusive. 6 Q. Is that the case with all four of the plants that 7 process ESL products? 8 A. I can't say that. I would think so, but I -- I 9 can't say that positively. 10 Q. And overall, your -- as a business, Hood is 11 increasing the volume of its ESL products year over year? 12 A. We have been fortunate to have good growth over 13 the -- yeah. 14 Q. That's a growing segment? 15 A. It's been a growing segment of our business, and 16 certainly the addition of the Batavia plant for us came at 17 a good time, which was I think 2018 that plant opened. 18 Q. And I think you talked a little bit about this, 19 but I want to make sure I understand -- or at least with 20 respect to eggnog you talked about it. But you talked 21 about how you build up a supply, and you can -- you can 22 store that, and then distribute it at a later time? 23 A. Yeah. I mean, eggnog's an extreme example, 24 producing, you know, in August to ship in late September 25 and October. And certainly we do other production runs 26 later in the year. But, yeah, that's an example of, you 27 know, freeing up some line time in maybe a slower season. 28 Q. Okay. You can use that as an internal method to 10809 1 balance some of your -- at least the incoming supply? 2 A. Yes. 3 Q. And can you do that with your ESL products as 4 well? 5 A. We -- we -- we don't do that with our regular ESL 6 products. Those are more on a regular production 7 schedule. 8 Q. And you talk about, in page 4 of your testimony, 9 the cost of balancing and -- and Hood's experiences in 10 balancing itself. 11 Have you done anything to quantify the costs that 12 Hood incurs in balancing milk? 13 A. I have not. 14 Q. And have you done any -- is it fair to say, then, 15 you haven't done anything to determine what your 16 cooperatives' costs are in balancing milk? 17 A. I don't know what -- what our cooperatives' costs 18 are in balancing milk. I know we have made significant 19 capital investments to, you know, better be able to 20 receive milk. But I -- yeah, I don't know what our 21 cooperative costs are. 22 Q. Is it fair to say you haven't engaged in any 23 conversations with the cooperatives that would let you 24 know that the extent to which Hood's investments in being 25 able to balance milk would offset some of the burdens that 26 the cooperative would have? 27 A. It would be safe to say that I have not done that 28 in my position, so I -- I -- I know that on the milk 10810 1 procurement side of the business, we work very closely 2 with our co-op partners, but I specifically can't answer 3 that question. 4 Q. You also talk about the current need for 5 incentives to service the Class I market. And -- and in 6 your experience, you have had good experiences with being 7 able to supply a sufficient quantity of milk for Hood's 8 needs; is that right? 9 A. Yes. 10 Q. And able to -- to sufficiently obtain that supply, 11 you have to pay an over-order premium? 12 A. We -- yes. 13 Q. And do you know what that over-order premium is 14 designed to compensate to your suppliers? 15 A. I -- I have -- I believe it's there to, you know, 16 incent them so we can have a min-max contract so we can be 17 assured that we're going to have the milk that we need in 18 our facilities. 19 Q. And when you talk about a min-max contract, can 20 you describe for our record what that means? 21 A. And so it means that we will take a minimum of 22 this amount of milk and be able to flex up to a maximum of 23 that amount of milk. And I -- I think that allows our 24 partners to better manage their milk supply. 25 Q. And what's the delta there? How big of a range is 26 it, do you know? 27 A. I don't know. 28 Q. A significant amount, or is it within a couple of 10811 1 truckloads in the range, or do you have any idea? 2 A. I don't have any idea. I'm sorry. 3 Q. That's okay. 4 A question on that, I was going to try and jump to 5 it, but it is not here. 6 So you are still, at least through your over-order 7 premiums, having to pay an incentive to entice that milk 8 or ensure that adequate supply. 9 So is it fair to say that it's your position that 10 it's just better paid through the over-order premiums as 11 opposed to the Class I differentials? 12 A. It's -- it's our -- it's definitely our position 13 to pay directly to the supplier than to pay into the pool 14 and have it diluted to other manufacturing classes. 15 Q. So when you say pay to -- paid directly to the 16 supplier, you mean you would like to pay to the 17 supplier -- the supplier of the raw milk, for the milk 18 that you are going to be using for Class I use? 19 A. Yeah, that would be our preference. 20 Q. And you understand that it's a fundamental 21 principle under the Federal Order system that suppliers or 22 producers would be paid without regard to the end use of 23 their final product? 24 A. I do understand that when the system was created. 25 But Class I was such a large part of the pool then, and we 26 needed to assure that milk was available. It's just 27 drastically changed now. So it seems that, you know, the 28 differentials need to reflect that. 10812 1 Q. Okay. And -- and if we just look at on 2 Exhibit 459, your PowerPoint, on page 4, those are the 3 three buckets that you are saying -- the three buckets of 4 costs that make up that $1.60 base differential that you 5 are saying are no longer needed to be included in base 6 differentials? 7 A. That's correct. 8 Q. But they could be instead privately negotiated 9 directly with those handlers? 10 A. Correct. 11 Q. So you are not saying that these costs don't exist 12 or that they haven't gone up -- 13 A. So, no. 14 Q. -- you are just saying that -- 15 A. I don't -- for -- for Grade A, I think -- Grade A 16 is the de facto standard, so it makes no sense to have 17 that as part of the Class I differential at this point. 18 So I think we need to carve that out separately. 19 Q. Okay. And just because I didn't get a complete 20 sentence in there -- 21 A. I apologize. 22 Q. That's okay. It's an awkward conversation under 23 any standard. 24 So under -- on page 4 of your PowerPoint 25 testimony, the three buckets of -- that make up the $1.60 26 base differential, you are not saying that those costs 27 don't exist in some form, you are just saying that those 28 should be privately negotiated between the Class I fluid 10813 1 milk handler and the supplier of that milk? 2 A. Correct. 3 Q. And I think the clarification you were making is 4 that you don't believe the Grade A, to the extent that 5 there is a portion of that base differential that includes 6 a Grade A standard, for either converting that milk from 7 Grade B to Grade A or to maintain that milk, you don't 8 believe that that's valid any longer? 9 A. I don't. No. 10 Q. Okay. But you would agree with me that in order 11 to maintain a Grade A quality standard, that those are 12 still costs that are incurred, your position is just that 13 it's standardized across the industry so you don't want to 14 pay for it? 15 A. Right. It's the cost of doing business if you 16 want to be a milk producer. 17 Q. But a producer still has costs associated with 18 that, but you are just saying that's just a sunk cost of 19 operating? 20 A. Yes. 21 Q. And you are not aware of any other place in the 22 Federal Order system where that Grade A requirement is 23 otherwise compensated to maintain that standard? 24 A. I'm not. 25 Q. You are just, again, relying on the private 26 contract negotiation between a fluid milk handler and the 27 producer or the supplier? 28 A. Well, for -- for Grade A, I think it's -- you 10814 1 know, it's assumed that the product is Grade A, so it's 2 part of the cost of doing business at this time. 3 Q. Okay. And then if we turn to the next page of 4 your PowerPoint on page 5. 5 You have put together some -- some chart 6 comparisons based on the Circana database. 7 A. Yes. 8 Q. And you understand that the Circana database 9 focuses on just the retail pricing or the retail outlets? 10 A. Yes. So Circana looks at most grocery stores. 11 There are some chains that don't participate, but most. 12 It includes mass merchants like Walmart. It includes some 13 club stores, but Costco is excluded. 14 Q. And it doesn't include things like the government 15 contracts, schools, military, things like that, right? 16 A. No. 17 Q. Okay. And those obviously have very -- they would 18 have a very differing effect if you would add those 19 contracts into this mix? 20 A. That would change the picture. I don't know if it 21 would make it look better or worse, but the -- yeah. This 22 is really looking at milk that is sold through retail. 23 Q. And does Hood have any government, military, or 24 school contracts? 25 A. We do. 26 Q. They are not as -- they are not as reactive to 27 short-term price changes; is that fair to say? 28 A. Well, I think they move with the market, so volume 10815 1 could be impacted. 2 Q. So volume can be impacted? 3 A. Can be impacted, yes. 4 Q. How long are the terms of your government 5 contracts? 6 A. I can't answer that -- that question. 7 Q. Multi-year? 8 A. I -- I don't know. 9 Q. Okay. And you have a time period that you have 10 charted here from February of 2018 through May of 2023. 11 Any reason it's that timeframe? 12 A. So I went back to 2018 because I didn't want to 13 start in 2020 because of the COVID spike. So I mean, 14 that's kind of typical when we look at data, we like to 15 try to get a picture of what it looked like before the 16 pandemic. 17 Q. Are your margins higher on a half gallon of milk 18 as opposed to a gallon size milk? 19 A. I don't know the answer to that -- to that 20 question. 21 Q. Is it fair to say that the retail price to 22 consumers is generally more than half the price for a half 23 gallon of milk than a gallon of milk? 24 A. Yes, if you -- if you look at -- compare the two 25 charts, the gallon chart to the half gallon chart, it 26 shows that the price of the gallon, average price, is 27 3.50, and the price of a half gallon looks to be about 28 3 -- about 2 -- 2.30. 10816 1 Q. And do you know who reaps the benefits of that 2 additional cost on a per unit basis? 3 A. Do I know who reaps the benefit of that additional 4 cost? I know it's more expensive for us to produce. I 5 think that retailers tend to, you know, probably price up 6 and need to be more competitive on gallons because that 7 seems to be the price item. 8 Q. And let me ask it more directly. Is margin 9 greater on a half gallon of milk than on a gallon of milk? 10 A. Well, you asked me that question before, and I 11 cannot say that affirmatively. 12 Q. Okay. And is it fair to say that -- well, what 13 are the -- what are the specialty products, the branded 14 products that fall under Hood's brand? 15 A. So it -- it would be -- Hood is our -- is, you 16 know, our brand, so that's kind of our premium brand. In 17 some markets, Crowley. 18 Q. So on page 7 of your PowerPoint you have charted 19 the multi-outlet for the branded gallon products from 20 Hood? 21 A. Yeah. This isn't from Hood. This is for the 22 market overall. So this is looking at branded label 23 overall. 24 Q. Okay. So these would be the premium products like 25 fa!rlife and Lactaid? 26 A. No, no, no, no. So this is gallons. So gallon 27 size, and it would be branded, so like Hood or Anderson 28 Erickson or Garelick, those would all be considered 10817 1 branded, versus private label was factored out of this 2 measure. 3 Q. These are the ones that would be premium priced 4 products? 5 A. It's what the retailers would -- if the retailer 6 has a private label product, so their private label would 7 be in competition with these branded products. 8 Q. And on general, these are the -- these are the 9 products that are the most price sensitive to changes in 10 prices at the retail level? 11 A. That's certainly what we see on this chart, 12 because they tend to be priced at a premium to private 13 label. So when prices go high, you have customers saying, 14 well, maybe -- you know, I like my local label, but maybe 15 I need to save some money and buy the private label. 16 Q. Buy more of a generic product? 17 A. Yes. 18 MS. HANCOCK: And that's all I have. Thank you so 19 much. 20 THE WITNESS: Thank you. 21 THE COURT: Mr. Newell, would you please look at 22 these charts on pages 5, 6, and 7, Exhibit 459, and the 23 words do seem to indicate that the time period measured 24 ended in May of 2023, but every one of the charts seems to 25 include through July of 2023. 26 Am I seeing that correctly on the charts? 27 THE WITNESS: You are correct. 28 THE COURT: So you got some more data before this 10818 1 was printed. 2 THE WITNESS: I actually think when I put the 3 caption in here, I mislabeled it. 4 THE COURT: Oh, okay. 5 THE WITNESS: Because the PowerPoint was produced, 6 and then recently the charts were added, so this was my 7 error. 8 THE COURT: Okay. So we have even more fresh 9 information here. 10 THE WITNESS: Yes. 11 THE COURT: All right. 12 Who else has questions for Mr. Newell? 13 CROSS-EXAMINATION 14 BY DR. CRYAN: 15 Q. Hi. 16 A. Hello. How are you, Roger? 17 Q. I'm good. How are you? 18 A. I'm good. 19 Q. I'm Roger Cryan with the American Farm Bureau 20 Federation. Thanks for being here. Thanks for 21 testifying. I've got just a couple of things. 22 What -- what -- what do you think the Class II 23 differential should be? 24 A. What do I think it should be? 25 Q. Yes. 26 A. That's not a question that I have considered. I 27 think what we're saying here is let's not change it, so 28 that's our position. 10819 1 Q. Does -- do you think -- does -- do your Class II 2 needs have similar balancing costs to your Class I needs? 3 A. So our -- 4 Q. For the fresh products, for the perishable 5 Class II products? 6 A. So our -- our -- certainly our HTST plants, they 7 are intertwined, so the balancing costs would be similar. 8 The cultured plants, you know, I'm not familiar enough 9 with those operations to speculate. 10 Q. But they are fresh products? 11 A. They are fresh products. 12 Q. Produced every day? 13 A. Yes. 14 Q. With limited shelf life? 15 A. Yes. 16 Q. You can't store it? 17 A. Can't store it for long. 18 Q. So presumably have similar -- 19 A. Yes. 20 Q. -- similar balancing needs? 21 A. Yes. 22 Q. And do you think for your products you have got a 23 lot of good high quality Class II fresh products that you 24 think -- how easily do you think you would switch over 25 using powder in place of fresh skim? 26 A. So I -- I think it's a risk of the proposal, is 27 that -- that people would look for substitutes. So I 28 mean, we have got great products, and we would want to be 10820 1 very careful about -- about doing that. But it certainly, 2 you know, creates an opportunity for a manufacturer to 3 look at. 4 Q. Right. Is the barrier, though, roughly what it 5 would cost to turn milk into a Class IV product and then 6 use it again? 7 A. I don't -- I don't -- I don't know the answer to 8 that question. 9 Q. That's fair. 10 Are you -- are you aware that at one time a lot of 11 these perishable Class II products, especially cream, were 12 in Class I, once upon a time? 13 A. So I come from the California order, so we -- 14 Q. Of course. Of course. 15 A. -- we actually had cream in Class I, and then we 16 had some in Class IV. 17 Q. Right. 18 A. But I -- I -- I was not aware that the Federal 19 Order used to have them in Class I. 20 Q. And one of the issues that's been raised, one of 21 the concerns about this higher Class II differential is 22 that standalone Class II plants are able to depool, which 23 has other costs, and the ability to draw, and so forth. 24 But would it be fair if -- if these perishable 25 Class II products were moved back into Class I? 26 A. We -- I mean, I think we have had a lot of 27 testimony here about the difficulty of Class I, so we 28 certainly would not want to see those products moved back 10821 1 into Class I given the issues those higher differentials 2 are causing. 3 Q. Okay. That's fair. 4 There was the -- there was testimony from 5 Dr. Stephenson earlier today about these implicit give-up 6 charges associated with bottling versus cheese production, 7 and he has a map that shows some red in Western New York, 8 indicating, for example, that -- that in Western New York 9 presumably the Class III give-up charge for bottling plant 10 would be would be significant. 11 Is that your experience? 12 A. So that is -- that's not our experience that I'm 13 aware of. We -- we -- yeah, we don't encounter milk 14 supply problems in Western New York. 15 Q. Okay. 16 DR. CRYAN: That's it. Thanks. 17 THE WITNESS: Thank you. 18 THE COURT: Ms. Hancock. 19 CROSS-EXAMINATION 20 BY MS. HANCOCK: 21 Q. I'm sorry, Mr. Newell, I forgot to ask one 22 question. 23 On page 9 of your PowerPoint, Exhibit 459, this is 24 the page where you have mapped some locations of your 25 plants in comparison with some of the competitors? 26 A. Yes. 27 Q. And I think one of the -- one of the biggest 28 deviations that you noted that you said put one of Hood's 10822 1 plants in Portland, Maine, at a disadvantage -- or put 2 Hood at a disadvantage, is located in Portland, Maine? 3 A. Correct. 4 Q. Does DFA also have a plant in Portland, Maine? 5 A. They do. Yeah, their Oakhurst plant. 6 Q. And are they competitor of yours? 7 A. They are a competitor of ours. And I did -- in my 8 written testimony, I did mention that. So the difference 9 is Oakhurst sells most of their milk in Maine. We sell -- 10 we use our Maine plant and sell down into the Boston area, 11 so... 12 Q. So that where you have Hood Portland located -- 13 noted there under "Plant," it should also say DFA has a 14 plant in that same location? 15 A. I just didn't list them on this chart, because I 16 didn't really want to focus on -- on them as far as this 17 discussion goes. 18 Q. Okay. But you did have DFA located in those other 19 jurisdictions that you were using as a comparison? 20 A. Yes. 21 Q. But at least with respect to what you have noted 22 here is where you feel like you were most disadvantaged 23 that in Portland, Maine, DFA has the same price under 24 National Milk's proposal as to what you would have? 25 A. They do. Yes. 26 Q. Okay. Thank you. 27 THE COURT: Who next would like to cross-examine 28 Mr. Newell before I invite questions from the Agricultural 10823 1 Marketing Service? 2 I see no one. Agricultural Marketing Service, you 3 may ask your questions of Mr. Newell. 4 MS. TAYLOR: Thank you, Your Honor. 5 CROSS-EXAMINATION 6 BY MS. TAYLOR: 7 Q. Good afternoon. 8 A. Good afternoon. 9 Q. Thank you for coming back. 10 A. This is the last time. 11 Q. Be careful what you say. 12 Dr. Stephenson thought that, too. 13 A. Be nice to me, please. 14 Q. Okay. I'm going to try to keep this pretty short. 15 I'm going to start on Exhibit 21 and questions relating to 16 that. And you talked -- well, this was in both, but you 17 talked about your ESL plants and your products. 18 Can you define kind of what makes it -- what 19 makes -- define ESL as in what makes it ESL? 20 A. Sure. So the products are ultra pasteurized, so 21 pasteurized at I believe above 280 degrees. Then they are 22 stored kind of under a vacuum, so highly sanitary. And 23 then they are packaged in a high-hygiene carton or bottle 24 on a sterile filler, and that allows you to get that ESL 25 extended shelf life code, which can range from 90 days to 26 over 120 days depending on the product. 27 Q. Okay. 28 A. Still requires refrigeration. 10824 1 Q. So for Hood's ESL products, they get anywhere from 2 90 do 120 days? 3 A. I should -- actually 70 to 120 days. 4 Q. Thank you. 5 On your charts that are on page 5 and 6 of the 6 Circana data -- 7 A. Yes. 8 Q. -- it seems it stops in July of 2023. 9 A. Yes. 10 Q. I'm just curious, if you had looked at the -- you 11 know, the later months of the year and if the fact that 12 inflation has come down has changed any of those patterns? 13 A. I -- I have not looked at the data since I put the 14 testimony together. 15 Q. Okay. So MIG's argument for having the base 16 differential set at zero and what you have discussed 17 was -- and I think Ms. Hancock summarized it, is, you 18 know, these costs might exist, but you'd rather it be left 19 to the negotiation between the two parties instead of 20 caught in the Federal Order system; is that correct? 21 A. That is correct. 22 Q. Okay. And you say you already pay some premiums 23 to your suppliers? 24 A. Yes. We pay over-order premiums in handling 25 charges. 26 Q. To cover some of those costs, balancing, for 27 example? 28 A. Yes. 10825 1 Q. How do you know that the premium that you pay 2 covers that cost for your supplier? 3 A. We -- we -- I don't know that specifically. 4 Q. So are the -- 5 A. But I will say we -- we try to do -- I mean, 6 receiving milk directly from the farm, and on a regular 7 basis, we certainly try to minimize the balancing costs 8 that are -- that burden the supplier. 9 Q. And your premiums, since you have plants on both 10 sides of the country, do they differ from what you pay in 11 the Northeast to California? 12 A. Unfortunately I don't -- I don't know the specific 13 premiums, so I can't answer that question. 14 Q. Okay. And you wouldn't be sure if they had any 15 seasonality to them or anything like that? 16 A. So my understanding is that the premiums are part 17 of the contract, so they don't vary, and if the contract 18 were renegotiated -- or when the contract's renegotiated, 19 then those premiums are up for discussion. So I don't 20 believe that they are seasonal. 21 Q. Okay. And how often does that stuff come up for 22 negotiation? 23 A. I -- I think that a lot of the contracts are kind 24 of evergreen contracts, so it's when either party wants to 25 discuss. 26 Q. Okay. And when you are going through that 27 negotiation, how do you assure your -- Hood isn't paying 28 excessive amounts of premiums to the market? 10826 1 A. So I haven't been through those negotiations, but 2 I would say I know that because we -- we have 3 relationships with several suppliers, we -- and we have a 4 good understanding of the market, we would -- we would 5 have a pretty good idea. 6 Q. Okay. Turning to your statement on the other 7 proposals that we have heard so far. The first one up is 8 the Proposal 1 and 2 on the milk components. And you 9 mentioned that your colleague, Ms. Landry, earlier in the 10 hearing gave testimony on the components that you all have 11 in your milk? 12 A. Yes. 13 Q. And that you don't get components as high as 14 what's been proposed? 15 A. Yes. 16 Q. We went back and looked at what she put in the 17 record, and she did give us a range. 18 I'm wondering if you know what the average is? 19 A. I do not. 20 Q. Okay. So there's no way of knowing if the average 21 is higher or lower than the proposed? 22 A. So she gave a range, she didn't give the average. 23 I believe her testimony is the -- you know, the milk that 24 we get is well below the proposed components. 25 Q. Okay. 26 A. I thought that was her testimony. 27 Q. It was a long time ago. 28 A. It was a long time ago. I -- 10827 1 Q. And I appreciate your detailed statement, and I 2 don't have that many questions. 3 But one I did have on Maine, you mention the state 4 of Maine has its own regulatory system? 5 A. Yes. 6 Q. And that would regulate plants that are not 7 associated with the Federal Order at all. 8 Do you know how many plants are in Maine that are 9 not federally regulated? 10 A. So I believe there's -- I believe there's two. 11 Q. Okay. 12 A. We looked that up last night because I had that 13 question also, and I think they are pretty small 14 facilities. 15 Q. Pretty small. 16 Do you know where they are located about in the 17 state? 18 You have dots -- 19 (Court Reporter clarification.) 20 MS. TAYLOR: No, I just spoke over him, and I 21 apologize. 22 BY MS. TAYLOR: 23 Q. But I will add, if I looked on your chart of your 24 PowerPoint presentation, page 9, and that's Exhibit 459, 25 there is a dot in the northeastern part of the state. 26 Is that where they are located? 27 A. Well, that's where one is located. 28 Q. Okay. 10828 1 A. And the second one, I don't know. 2 Q. Okay. 3 A. And maybe it is in the Portland area, and it's 4 just covered up by one of those bins. But, yeah. 5 Q. Okay. So in your testimony on Proposal 19 on the 6 proposed Class I differentials by National Milk, you go 7 into good detail on the kind of specific areas where your 8 plants are located and talk about what the model says the 9 proposed results with the differentials under an optimal 10 situation should be versus what you currently have. 11 And I'm curious if you could talk a little bit 12 about, is it important to -- is it important to you to 13 keep those same plant-to-plant competitive relationship or 14 is it of more importance to follow the optimal solution 15 that the model produced? 16 A. So those -- you know, I -- so I think we were 17 clear that we're -- you know, we're against changing the 18 differentials, so I mean, first and foremost. But if you 19 are going to consider it, I think keeping that -- those 20 competitive positions are extremely important. I don't 21 think the -- your decision should give one competitor an 22 advantage over the other. So I -- I mean, the Portland, 23 Maine, to Franklin comparison, and -- and to a lesser 24 extent our Agawam comparison, I think those are very 25 alarming to us. 26 Q. Uh-huh. Bear with me for a second. 27 A. Sure. 28 Q. On page 4 of Exhibit 21A, I believe, you had a 10829 1 line in there that says, "Declining volume will put 2 greater" -- and volume, we're talking about Class I 3 volume -- "will put greater financial pressures on Class I 4 processors and could lead to additional bankruptcies of 5 Class I processors. This situation would favor the 6 co-op-owned Class I plants and, to a lesser extent, 7 producer handlers." 8 I wonder if you could expand on why you think 9 that. 10 A. Could you ask the question one more time? 11 Q. Sure. So I mean, in general in that you are 12 saying if Class I prices go up, you would expect Class I 13 sales to go down? 14 A. Yes. 15 Q. And that would put greater financial pressure on 16 Class I processors. 17 But then you say how that financial pressure would 18 be different for, say, co-op and producer handler plants, 19 as opposed to independent plants like yourself? 20 A. Yeah. Because I think that those co-ops have the 21 ability to reblend those costs, so they have got a cost 22 advantage there, and for a producer handler it would be -- 23 it would be similar. I think it -- they have got an 24 advantage in the system over this -- under that situation. 25 Q. Okay. 26 A. The declining volume is very alarming for all of 27 us. 28 MS. TAYLOR: I think that's it from AMS. Thank 10830 1 you. 2 THE WITNESS: Thank you. 3 THE COURT: Ms. Taylor, I think you were actually 4 in MIG/Hood 21 on your page 4, which is Exhibit 457. 5 MS. TAYLOR: Thank you, Your Honor. 6 THE COURT: Thank you. 7 Ms. Vulin. 8 MS. VULIN: Just a couple of questions. 9 REDIRECT EXAMINATION 10 BY MS. VULIN: 11 Q. We've heard a lot of discussion about balancing, 12 right, the cost of balancing. 13 The suppliers, the cooperative suppliers to Hood, 14 do they, to the extent you know, sell to any other 15 processor? 16 A. Oh, yes. I think that they sell to a number of 17 processors. 18 Q. Any non-Class I processors? 19 A. I would assume, yes, they -- they do. I mean, 20 that's why they are there is to market their milk. 21 Q. And so to the extent Hood's suppliers have 22 balancing costs, those are not specific to Hood, but those 23 are balancing of their supplies to all of the purchasers 24 of that milk, correct? 25 A. Yeah, they are -- I mean that's really a service 26 that they provide, and they spread that out over, yeah, 27 all of their customers. 28 Q. And so in looking at the balancing cost in the 10831 1 Class I -- in the base Class I differential, is part of 2 the concern there also that Class I is carrying this 3 burden of balancing that's really experienced 4 industrywide? 5 A. Again, yes. Yes. So... 6 Q. And in terms of how Proposal 20, if at all, 7 changes what's currently done, or what's historically been 8 done, under the system the FMMO system today, producers 9 receive a uniform blend price, correct? 10 A. Correct. 11 Q. And under MIG's Proposal 20, producers will still 12 receive a uniform blend price, correct? 13 A. Correct. 14 Q. And today, suppliers receive, to some degree, 15 over-order premiums, correct? 16 A. Yes. 17 Q. And under MIG's Proposal 20, suppliers will still 18 receive some form of over-order premium, correct? 19 A. Correct. 20 Q. So MIG's Proposal 20 is not a policy change, it's 21 just a reexamination of how those particular lines are 22 drawn between those buckets, correct? 23 A. Correct. 24 MS. VULIN: Nothing further, Your Honor. And I 25 would move to admit Exhibits 457, 458, and 459. 26 THE COURT: Is there any objection to the 27 admission into evidence of Exhibit 457, also marked 28 MIG/Hood-21? 10832 1 MS. HANCOCK: Your Honor, I don't have an 2 objection. I just have a couple of extra questions. 3 THE COURT: Let's have you ask those. 4 MS. HANCOCK: I wasn't sure which order I should 5 be going in. Sorry. 6 RECROSS-EXAMINATION 7 BY MS. HANCOCK: 8 Q. Good afternoon, again, Mr. Newell. 9 When the USDA had asked, which -- you know, which 10 is better to follow if there is going to be a change, 11 honoring the current competitive relationships that exist 12 or following the model results, do you recall that? 13 A. Yes. 14 Q. And I think you responded, said that you -- it's 15 important, at least from your perspective, to honor those 16 same competitive relationships; is that right? 17 A. I think that when -- when they are looking at what 18 the model -- what the model dictates and what the working 19 group proposals are, and they see a big variance there, I 20 think that they need to take into account those current 21 competitive relationships. So I think they need to keep 22 those in -- in -- in balance. 23 Q. Okay. When you say take them "into account," 24 then, are you saying that some variation would be 25 acceptable, but just keeping those relationships somewhat 26 consistent? 27 A. So I -- we're against Proposal 19. 28 Q. Understood. 10833 1 A. Yes. So with that caveat, yes. 2 Q. Okay. But currently, with the use of over-order 3 premiums, you don't have visibility into what your 4 competitors are paying; is that fair? 5 A. That's fair. 6 Q. And if you were to go with Proposal 20, for 7 example, and take what is the base differential currently 8 out of the differentials and allow the parties to 9 negotiate it by contract, you would have even less 10 visibility into what your competitors are paying; is that 11 fair? 12 A. I would say that's true, but I don't even know if, 13 you know, that overall base differential, those 14 components, even equate to reality any -- anymore. I 15 mean, we know we all pay 1.60. If the 1.60 were to go 16 away, then we would all be paying less. And if part of 17 that had to go and do an over-order premium directly to 18 the supplier, that is correct, it would not be as 19 transparent, but I think that it would be a fair 20 trade-off. 21 Q. Okay. And your expectation is, is that if that 22 $1.60 were removed from the base differential to allow 23 free markets to be negotiated, that that full $1.60 24 wouldn't be negotiated into the over-order premiums, it 25 would be something less than that? 26 A. I -- I think that's true. I think a lot of it 27 would -- would go into the price of product, so you 28 would -- you would see Class I prices lower. 10834 1 Q. And you can understand that that's not what a 2 producer would want, to have a lesser -- to have that 3 $1.60 removed and to get something less than that $1.60 in 4 the contract negotiation? 5 A. Yes. And right now what they are getting is -- is 6 obviously diluted by the pool. 7 Q. Yeah. But I'm just saying -- 8 A. Yes, I understand. 9 Q. Well, just so my question is clear. You can see 10 from the producer's perspective that taking $1.60 out of 11 the Class I price differentials and not getting that full 12 $1.60 in a contract negotiation is less desirable? 13 A. Yes. 14 Q. And if your assumption is that in those contract 15 negotiations, you, as Hood, will be able to negotiate 16 something less than that $1.60, it suggests you have a 17 stronger bargaining position, doesn't it? 18 A. In certain cases we may, yes. 19 Q. Okay. And then on your chart that -- that you 20 were just talking with, the Circana charts? 21 A. Yes. 22 Q. Was there a -- between May of 2022 and May of 23 2023, was there a 20% drop in the Class I prices? 24 A. I don't -- I don't know that off the top of my 25 head. 26 Q. Okay. Do you want to look at the chart real 27 quick? 28 A. Which chart? 10835 1 Q. Well, the hard part is you can't really see it at 2 this granular level, so let's look at -- if we look at 3 between -- I'm on page 6 -- if we look at May of 2022. 4 And then we don't have a May of '23, but we can get to 5 April. 6 THE COURT: Or the next one for May. 7 MS. HANCOCK: I guess -- yeah, that's right, the 8 next bar without a title, you can see it. 9 BY MS. HANCOCK: 10 Q. Was there a drop in the prices, in that time 11 period, in the class prices? Do you know? 12 A. I don't know. 13 Q. Okay. 14 A. I mean, I'm looking at retail prices here, but I 15 don't have the class prices, so -- 16 Q. Okay. Do you know what the -- I mean, did you 17 chart and look at what the class prices were doing in 18 comparison to what was happening at the retail level? 19 A. I did not. 20 Q. Okay. Do you know if there's a correlation 21 between the drop in class prices and a corresponding 22 retail effect? 23 A. So I know that retail will follow. Obviously the 24 retailers price the products where they price them, but 25 typically they will move up and down with the market. 26 There might be a bit of a lag effect there but... 27 Q. Do you know if when -- when class prices drop, if 28 there is a corresponding increase in demand of Class I 10836 1 milk? 2 A. So maybe not immediately, but over time I would 3 expect there to be. 4 Q. You didn't chart that? 5 A. I did not, no. I did not chart that. 6 Q. Okay. 7 MS. HANCOCK: Thanks. That's all I have. 8 MS. VULIN: I just want to clarify one thing 9 because I think there's was some confusion in the 10 questions and answers on the $1.60. 11 REDIRECT EXAMINATION 12 BY MS. VULIN: 13 Q. So the $1.60 paid as part of the base Class I 14 price today, that doesn't mean that Hood suppliers receive 15 $1.60 from the pool, correct? 16 A. No. It's diluted. 17 Q. And so whatever Hood's specific suppliers receive 18 from the pool, particularly in orders with low 19 utilization, will be much less than the $1.60, correct? 20 A. Yes. Correct. 21 Q. And so even if Hood is only able to redirect a 22 portion of that $1.60 directly to its suppliers, its own 23 suppliers very well could be better off than if they had 24 received the very diluted portion from the pool? 25 A. That's true. 26 MS. VULIN: Nothing further, Your Honor. I'd move 27 to admit the exhibits, please. 28 THE COURT: Thank you. 10837 1 I'm now looking at Exhibit 457, also marked 2 MIG/Hood-21. Is there any objection to that document 3 being admitted into evidence? 4 There is none. Exhibit 457 is admitted into 5 evidence. 6 (Thereafter, Exhibit Number 457 was received 7 into evidence.) 8 THE COURT: Exhibit 458 is marked also as 9 MIG/Hood, Exhibit 21A. Is there any objection to that 10 document being admitted into evidence? 11 There is none. Exhibit 458 is admitted into 12 evidence. 13 (Thereafter, Exhibit Number 458 was received 14 into evidence.) 15 THE COURT: Exhibit 459 is marked also 16 MIG/HP Hood, Exhibit 21B, like boy, Corrected. Is there 17 any objection to that document being admitted into 18 evidence? 19 There is none. Exhibit 459 is admitted into 20 evidence. 21 (Thereafter, Exhibit Number 459 was received 22 into evidence.) 23 MS. VULIN: Nothing further, Your Honor. Thank 24 you. 25 THE COURT: Mr. Newell, I congratulate you. First 26 of all, I don't think they are going to make you come 27 back. 28 THE WITNESS: Thank you. It's been a pleasure. 10838 1 THE COURT: Thank you. 2 MS. TAYLOR: Your Honor, might I suggest a break, 3 and then we start with Mr. Miller, who's waited patiently, 4 as our next witness. 5 THE COURT: Very good. I would like 15 minutes, 6 if you don't mind. So please come back at -- what would 7 that be? That would be 3:05. 3:05. 8 (Whereupon, a break was taken.) 9 THE COURT: Let's go back on record. 10 We're back on record at 3:06 p.m., and I have a 11 witness in the witness stand that I would like to have 12 identify himself for the record. 13 We are now having some copies of his testimony 14 distributed, and we may want to go off record in just a 15 moment. In fact, I will. I'll go off record for now for 16 just a moment. 17 Off record at 3:06. 18 (An off-the-record discussion took place.) 19 THE COURT: Let's go back on record. 20 We're back on record at 3:08 p.m. 21 First I'd like counsel to identify himself at the 22 podium, and then I'll swear in the witness. 23 MR. SMITH: What is the current custom for moving 24 the microphone? 25 THE COURT: You know, that's an excellent question 26 because it falls off, and you are tall. I do believe 27 Dakota has got the sound system working very, very well, 28 so that you do have to be an inch or two from the 10839 1 microphone. 2 MR. SMITH: Dan Smith representing the Maine Dairy 3 Industry Association. We -- the MDIA is presenting Heath 4 Miller as a witness, Your Honor. And we have two exhibits 5 marked MDIA-1 and MDIA-2. And if I understand the 6 sequence, the first would be 460, and the second would be 7 461. 8 THE COURT: Correct. That's how the copies that I 9 have been given are marked as well. 10 (Thereafter, Exhibit Numbers 460 and 461 were 11 marked for identification.) 12 THE COURT: All right. Good. I'd like the 13 witness please now to state and spell his name. 14 THE WITNESS: Heath Miller, H-E-A-T-H, Miller, 15 M-I-L-L-E-R. 16 THE COURT: And, Mr. Miller, you spoke directly to 17 me, which means you did not speak to the microphone. 18 THE WITNESS: Okay. 19 THE COURT: Now, position yourself so that you can 20 see the document that you are going to be looking at, and 21 have that microphone fairly close to you. 22 That looks good. Let's just test that a minute. 23 Again state your name. 24 THE WITNESS: Heath Miller. 25 THE COURT: That's perfect. 26 All right. Have you previously testified in this 27 proceeding? 28 THE WITNESS: I have not. 10840 1 THE COURT: I'll swear you in. 2 HEATH MILLER, 3 Being first duly sworn, was examined and 4 testified as follows: 5 THE COURT: And, Mr. Smith, you may proceed. 6 MR. SMITH: Thank you, Your Honor. 7 DIRECT EXAMINATION 8 BY MR. SMITH: 9 Q. Good afternoon, Heath. You have already stated 10 your name for the record. 11 Could you state your business address for the 12 record? 13 A. Our farm is at 128 North Road in Newburgh, Maine, 14 04444. 15 THE COURT: Now, your zip code trailed off, so 16 that again may require a little moving of the base of the 17 microphone. 18 THE WITNESS: Do you want me to repeat that? 19 THE COURT: Yes, please. 20 THE WITNESS: 04444. 21 MR. SMITH: Very good. 22 BY MR. SMITH: 23 Q. You have been duly admonished to speak slowly. 24 A. Yes. 25 Q. And if you don't, you will be duly re-admonished. 26 And so -- 27 THE COURT: Look what they gave me. 28 THE WITNESS: I have one over here also. 10841 1 MR. SMITH: That's bringing back bad memories, 2 Your Honor, bad memories. 3 BY MR. SMITH: 4 Q. So, Heath, have you had prepared a statement to 5 present today? 6 A. Yes, I have. 7 Q. And will you read your statement -- 8 A. I will. 9 Q. -- for the record? 10 A. All right. Good afternoon. 11 As I stated, I am Heath Miller, and I'm here today 12 representing the Maine Dairy Industry Association, MDIA, 13 to provide the Association's position regarding the 14 proposal -- regarding the proposals being considered in 15 this hearing. 16 In summary, MDIA's position is that the Secretary 17 should make changes to the FMMO regulated pricing series 18 as a result of this hearing only if the Secretary's 19 conclusion concludes the change will not result in a 20 reduction in the orders of uniform minimum producer 21 prices. 22 MDIA's position is premised on the historic 23 function of the market order regulation to establish 24 regulated uniform minimum pricing -- producer pricing. It 25 would be inconsistent with this essential function for an 26 FMMO regulatory hearing to cause a reduction of regulatory 27 minimum producer pricing. 28 MDIA's position also stems from a concern about 10842 1 the consequences a reduction in regulated minimum producer 2 would have for the Northeast region. First, and 3 primarily, it would be particularly problematic to lower 4 the regulated minimum price amidst the widespread and 5 accelerated exit of Northeast dairy farmers over the past 6 25 years that is directly traceable to chronically 7 inadequate producer pay prices. 8 I am a member of Dairy Farmers of America 9 cooperative and serve on the cooperative's resolution 10 committee. I serve as the chair of Maine Dairy Promotion 11 Board as well as chair of my district school board 12 consisting of four towns and 2300 students. 13 THE COURT: Let me just stop you, because I have 14 front and back. 15 THE WITNESS: Oh, you do? 16 THE COURT: And you skipped a couple of 17 paragraphs. So I think if you are going to read the 18 statement, we need for you to back up a bit. 19 THE WITNESS: That -- that -- yeah. That -- yeah, 20 I'm fine. I don't know why I did that, but I did. 21 What, did I skip a whole page? 22 (An off-the-record discussion took place.) 23 THE COURT: Now, before -- before you resume, I 24 want you to go back to the paragraph that begins on the 25 top of page 2, and I think you left off out a word in that 26 second line. 27 THE WITNESS: Okay. I'll just start at the 28 beginning of that page and read that whole page over 10843 1 again. 2 THE COURT: Okay. And if there's a word missing, 3 just insert it where it would go. 4 THE WITNESS: Yeah. 5 MDIA's position also stems from a concern about 6 the consequences a reduction in regulated minimum producer 7 prices would have for the Northeast region. First, and 8 primarily, it would be particularly problematic to lower 9 the regulated minimum price amidst the widespread and 10 accelerated exit of Northeast dairy farmers over the past 11 25 years that is directly traceable to chronically 12 inadequate producer pay prices. 13 MDIA's position is further premised on our 14 collective -- on our members' collective experience with 15 the contractual and resulting upheaval in the Northeast 16 milk shed, which has been caused by this loss of farms. 17 We are most concerned that a decrease in the regulated 18 minimum price will likely cause more farm exit and 19 therefore even greater contractions in upheaval in the 20 milk shed. 21 Later in my testimony I will present a letter from 22 the Northeast Secretaries, Commissioners and Directors of 23 Agriculture. This letter described their collective 24 belief that the farm -- that the loss of farms has brought 25 our region's fluid milk supply to a tipping point. My 26 testimony echoes this alarming statement by our region's 27 foremost agricultural leaders. 28 My day job is to operate Green Valle Farm in 10844 1 Newburgh, Maine, a dairy that has been operated by family 2 since the 1860s. With three employees and four family 3 members, we manage a total of 500 animals and 650 acres of 4 hay and corn. Our milk goes to the DFA bottling plant 5 in -- mostly goes -- mainly goes to the DFA Oakhurst 6 bottling plant in Portland about 120 miles away. At 7 times, our milk is trucked to the DFA Garelick bottling 8 plant outside of Boston. 9 I am a member of the Dairy Farmers of America 10 cooperative and serve on the cooperative's resolution 11 committee. I serve as the chair of the Maine Dairy 12 Promotion Board, as well as the chair of my district's 13 school board consisting of four towns and 2300 students. 14 MDIA is a processor -- a producer -- sorry, that's 15 very critical -- MDIA is a producer association that 16 includes all Maine dairy producers, cooperative members, 17 and independent producers, conventional as well as organic 18 dairy farmers. 19 There are 145 MDIA member farms at last count. 20 About 80% of these have fewer than 130 cows and produce an 21 average of 2.25 million pounds of milk per year per farm. 22 I understand that a dairy farm is a small business for the 23 purpose of this hearing if it has an annual gross revenue 24 of 2.75 million or less. 25 THE COURT: Now, that's not what you have got 26 written in your statement. 27 What's the dollar amount? 28 THE WITNESS: 3.75 million or less, sorry. Thank 10845 1 you for keeping me straight, Your Honor. 2 According to this definition, all but 10 to 15 of 3 Maine's 145 member dairy farms, including mine, qualify 4 and are here represented as small businesses. 5 MDIA is a non-profit organization that does not 6 market milk or engage in any other commercial enterprise. 7 It is funded by producer contributions provided partly as 8 required by law and partly voluntarily. MDIA's purpose is 9 to represent the collective interest of its producer 10 members and also the public's interest in maintaining 11 sustainable Maine dairy farms and their continued ability 12 to provide the raw milk supplied for Maine's fluid milk 13 production and consumption. 14 MDIA's main focus is to advocate for sustainable 15 producer pay prices on behalf of its membership. We 16 appear regularly before the Maine Milk Commission with 17 which administers an over-order pricing program that has 18 been in continuous operation for almost 100 years. 19 We also engage in ongoing dialogue with the Maine 20 legislature to promote the effective administration of the 21 state's most recent and unique program of tiered producer 22 payments. This payment program supplements Federal Order 23 minimum and state over-order regulated producer pricing. 24 The legislature and we also recognize the 25 improvements to Federal Order dairy policy and regulatory 26 operations should reduce the need for state action and 27 expenditures. We have, therefore, been involved in 28 Congressional farm bills over the past 20 years and have 10846 1 also appeared in two major Federal Order hearings held 2 since 2000. Additionally, we played an active role in the 3 establishment of the Northeast Interstate Dairy Compact. 4 When developing our policies -- when developing 5 our policy positions at both state and federal level, we 6 take into account the interest and concerns of 7 cooperatives and bargaining agencies -- Agri-Mark, DFA, 8 CROPP, and NFO cooperatives -- which now operate in Maine. 9 We account for these interests as collective marketers of 10 producer milk and as operators of co-packers with milk 11 processing plants. We also account for the concerns of 12 the proprietary milk plants that purchase Maine raw milk 13 and for the concerns and interest of consumers. 14 THE COURT: I do want you to read that again. The 15 sentence that says "we account for their interest," if you 16 would start there. 17 THE WITNESS: We account for their interests as 18 collective marketers of producer milk and as operators of 19 co-packers with -- 20 THE COURT: So we have got "of" and we've got 21 "or." I need to know which way this should read, 22 "operators of or co-packers." Is that -- if you could 23 just explain to me what the difference is between an 24 operator and a co-packer. 25 THE WITNESS: Let's see the word "or" -- the word 26 "or" may be a mistake. Maybe if we removed the word "or," 27 that would make more sense. 28 THE COURT: All right. You may read it that way. 10847 1 THE WITNESS: Okay. We account for these 2 interests as collective marketers of producer milk and as 3 operators of co-packers with milk processing plants. We 4 also account for the concerns of the proprietary milk 5 plants that purchase Maine raw milk and for the concerns 6 and interests of their consumers. 7 Our approach is thus premised on the so-called 8 three-legged school of dairy policy that includes 9 producers, handlers, and consumers. But MDIA's primary 10 focus is to advocate for the collective producer interest 11 of MDIA's farmer membership as producers. 12 A few key background notes for my testimony. 13 First I would like to explain how MDIA has taken a 14 very different approach than we took in two prior hearings 15 in presenting only our summary position with regards to 16 the outcome of the hearing. 17 Some here today may remember that MDIA has 18 previously submitted and advocated for significant, if not 19 radical, change in the FMMO program. The prior national 20 Make Allowance hearing, including AMS' formal review and 21 consideration of MDIA's proposal to replace the Class III 22 end product price formula with a competitive pay price 23 calculation. For the hearing that established the 24 California Federal Order, we argued for inclusion of the 25 supply management program as an alternative to depooling 26 provisions. 27 For this hearing, we conclude that the focus must 28 be on National Milk's package of proposals to update FMMO 10848 1 pricing formula on the -- and on the related proposals 2 submitted by the direct marketing -- market participants. 3 MDIA recognizes there is a pressing need for this update, 4 and this should be the hearing's agenda alone. 5 At the same time, MDIA determined that its 6 collective voice advocating solely for producers as 7 producers can still lend value to this hearing, while 8 recognizing that MDIA's membership, mostly of small-scale 9 operations, is not completely representative. We still 10 believe that our producers share, to some measurable 11 degree, on -- an everyday reliance on their milk checks. 12 All producers, therefore, share some measurable concern 13 regarding this hearing's impact on regulated minimum 14 amount of their milk checks. 15 Finally, I would like to explain how my statement 16 was developed. 17 I have consulted with the MDIA board throughout, 18 as the National Milk and IDFA proposal progressed, and as 19 this hearing was noticed and has been conducted. The 20 board and I have also consulted with our counsel, Dan 21 Smith, during this time. At the board's and my direction, 22 he has helped me prepare this statement. 23 During my testimony, MDIA brings to this hearing 24 and the history -- and the history and experience of our 25 longstanding involvement in both the local Maine milk 26 market and the greater Boston regional milk marketplace. 27 These local and regional markets were critical to the 28 development of the nation's dairy industry, with Boston a 10849 1 key city and center of innovation. Being so involved with 2 the start and at the epicenter of the dairy industry we 3 have continuous experience with the development and all 4 the dramatic changes that have occurred over the past 100 5 plus years. 6 Most significantly for this hearing, our history 7 and experience include continual involvement with the 8 creation and development of the state and federal milk 9 market regulation programs which have occupied the 10 industry's evolution. 11 I will relate a bit of this market and regulatory 12 history to illustrate the two key points of MDIA's 13 position. 14 The history first illustrates the critical 15 interconnection between the FMMO regulated minimum 16 producer pricing and the producer milk checks that has 17 existed virtually from the industry's beginning. The 18 history also provides contents for our heightened concern 19 about the potential impact a reduction in the FMMO 20 regulated minimum pricing will likely have on our region's 21 producers and milk supply. 22 In putting my testimony together, I realized that 23 the history of the farm I grew up on tracks the history of 24 the Maine dairy industry that I will be describing, so you 25 will hear a bit of that as well. 26 As I said earlier, my family's farm was 27 established around the time of the mid 1800s. At its 28 start, the farm primarily provided for subsistence living. 10850 1 Our family kept a typical barnyard of animals: Chickens 2 for eggs, sheep for wool and meat, and cows for both meat 3 and dairy. As the farm and the family grew, it also began 4 selling excess farm products to generate income. My 5 family also recognized the value in diversification and 6 raised squash to ship 230 miles away to the Boston market. 7 My grandfather was born in 1900. This era was the 8 beginning and development of a specialized New England 9 dairy farming prompted by the flourishing by growth of the 10 region's New England fluid milk industry. Capitalizing on 11 the opportunity for additional farm income, my grandfather 12 and his brother saw shipping milk as another form of 13 diversification for their farm. As -- as best I can 14 determine, they sold their milk to a local creamery in our 15 town of Newburgh. The milk was collected and trucked in 16 milk cans to the plant 15 miles away. 17 Like our farm's local customer, small milk plants 18 and creameries were similarly being built all across Maine 19 and all over New England. As like with our farm's local 20 customer, these countless Maine and New England fluid milk 21 plants were served -- were served by literally thousands 22 of small-scale milk can dairy operations that came to be 23 established nearby these receiving plants. 24 The custom of twice monthly milk check was 25 developed as part of the early kitchen table contracts for 26 the sale and delivery of raw milk to local milk plants. 27 Dairy farmers were expected to continuously supply their 28 perishable raw product to the plants. In return, they 10851 1 were to receive twice monthly milk checks per the 2 hundredweight of milk shipped held in each can. The term 3 could also include -- the terms could also include 4 additional incentives such as to promote higher quality 5 and greater volume. 6 Also, in the early periods of the industry's 7 development, Maine's raw milk production began to be moved 8 to the emerging Boston market for fluid milk. Milk's 9 bulkiness and perishability, of course, were big limiting 10 factors. At the start, some Southern Maine milk 11 production being on the coast and close to Boston was 12 transported to the new market by ocean ship. 13 Coinciding with urban growth and the rollout of 14 the urban area railroad network around Boston changed 15 everything. Coupled with the innovation of the 16 refrigerated rail car, the rail network made available the 17 Northern New England and New York milk sheds. 18 Transportation has again transformed when the interstate 19 highway system displaced railroads in the 1950s and '60s. 20 All along, the milk assembly and transport method was 21 continuously refined. 22 As for all of the rural New England milk shed, 23 these changes and improvements engaged the -- engaged 24 Maine's supply to the Boston market to grow -- sorry, I'm 25 going to start that paragraph right over. 26 As for all the rural New England milk sheds, these 27 changes and improvements enabled Maine's supply to the 28 Boston market to grow and become more regularized. By the 10852 1 end of the 20th century, Maine's raw milk was supplying 2 close to 10% of the old New England Order's fluid milk 3 supply. 4 For much of the mid and later 20th century, 5 Maine's producers thus engaged in two-part local and 6 regional marketplace. For many years, this two-part 7 market provided vibrancy and competition for Maine milk 8 production for both independent and cooperative producers 9 alike. 10 Today, the two-part local and regional supply 11 pattern for Maine's raw milk essentially still exists. 12 Maine farmers and milk plants still combine to supply 13 practically all of the beverage milk demand for Maine 14 residents. And raw milk from Maine dairy farms also 15 continue to provide a not insignificant portion of the raw 16 product supplied for the Boston market. 17 But we have also participated in most of the 18 dramatic changes that has swept the industry since the 19 start of the century. Our local and regional conventional 20 fluid milk businesses have also gone through transforming 21 consolidation. The in-state Maine dairy industry now has 22 only two milk plants located in Portland. Hood still 23 operates one of these plants. The other, Oakhurst, is now 24 operated -- owned and operated by DFA. Similarly, the 25 urban Boston market now has one proprietary company, Hood, 26 and one cooperative, DFA, that operate very few plants 27 still located in Boston. 28 THE COURT: So at the bottom of page 9 I just want 10853 1 you to read again that last line, "Similarly." 2 THE WITNESS: Okay. Similarly, the urban Boston 3 market now has one proprietary company, Hood. 4 THE COURT: All right. And I'm just going to say 5 "proprietary." 6 THE WITNESS: Yeah. 7 THE COURT: Okay. No worries. 8 THE WITNESS: That's just a pronunciation issue. 9 THE COURT: It is. 10 THE WITNESS: Yes. 11 THE COURT: And "company," and then we're on the 12 next page now. 13 MS. McMURTRAY: Mr. Miller? 14 THE WITNESS: Yes. 15 MS. McMURTRAY: Before we keep going, could you 16 just watch your speed just a little bit? 17 THE WITNESS: Thank you. 18 MS. McMURTRAY: You are doing great. 19 THE COURT: See, it's more people than just -- 20 THE WITNESS: Everybody's joining in. 21 All right. I will start with the -- I'll start 22 back on that. Why don't I read that again. I'll start 23 back on that sentence. 24 Similarly, the urban Boston market now has one 25 proprietary company, Hood, and one cooperative, DFA, 26 operating the very few plants still located in Boston. 27 Also, paralleling the rest of the country, the 28 industry's dairy farm sector in Maine and across New 10854 1 England has gone through dramatic consolidation. Almost 2 all producers are now members of two conventional 3 cooperatives that operate New England, Agri-Mark and DFA. 4 Maine has some of the very few independent producers still 5 negotiating kitchen table contracts directly with local -- 6 with a local milk plant. They market their milk to 7 Oakhurst even though it's operated by DFA. 8 Also tracking national trends, the Boston fluid 9 market has been absorbed into a much larger Northeast 10 regional dairy marketplace. The previous New England 11 Order 1 utilized 2.6 billion pounds of milk for Class I 12 out of a total of 6 billion pounds. The new Northeast 13 order uses 8 billion pounds of milk out of a total of 14 27 billion pounds. 15 This greater regional market thus also includes 16 far more dairy products manufacturing than the old Boston 17 market. Many of the manufacturing plants are now owned by 18 cooperatives. This means that as member owners these 19 dairy farmers now also participate in marketplace much 20 greater than only a local or regional fluid milk market 21 place. 22 Maine dairy has also participated in the 23 diversification that has accompanied the conventional 24 market's consolidation. About one-third of MDIA's members 25 are now organic producers. On -- on-farm and smaller 26 scale processing and manufacturing are also operating in 27 Maine. 28 Our Maine's experience tracks this evolution of 10855 1 the conventional fluid -- sorry, I'm going to start that 2 over. 3 Our farm's experience tracks this evolution of the 4 conventional fluid industry. In the early 1800s, the Hood 5 cot- -- 1980s -- 6 THE COURT: Go ahead and start that sentence 7 again. 8 THE WITNESS: In the early 1980s, the Hood cottage 9 cheese plant in nearby Newport that we had shipped to 10 since 1950 shut down. We then joined the Boston Milk 11 Shippers and shipped to West Lynn plant near -- shipped to 12 the West Lynn plant near Boston. 13 THE COURT: And just so the record's correct, 14 would you spell that West Lynn plant? 15 THE WITNESS: W-E-S-T, L-Y-N-N. 16 THE COURT: Thank you. 17 THE WITNESS: Then in the 1990s we started 18 shipping through the DMS system that allowed our milk 19 again to be shipped to a local plant in Bangor, Maine, 20 known as Grant's Dairy. After a few years, though, 21 Grant's, which had been bought out by Dean's, was closed 22 down. Seeing the writing on the wall, we had joined DFA a 23 couple years before that happened anticipating the 24 closure. 25 I know that I'm telling a history that most in the 26 room are familiar with. The point is that from the 27 beginning of the industry's development and throughout all 28 these transforming changes, the constant for New England 10856 1 producers has been their twice monthly milk checks. 2 Twice monthly paychecks have provided the steady 3 income needed to cash flow the daily operations that kept 4 the milk flowing in service -- and to service mortgages 5 and loans. At least for some of the time in our history, 6 the payments also provided sufficient return for the 7 establishment of all the beautiful farmsteads still 8 standing across New England. 9 Dairy farms shipped by wagon, sea, rail, and 10 highway, all received payments in return of the -- in the 11 form of a milk check. Dairy farmers who ship close to the 12 farm or to Boston all received a milk check. This has 13 been the basic custom, whether a farmer was an independent 14 producer or a member of a bargaining agency or co-op; no 15 matter all received -- no matter all -- no matter, they 16 all received and continue to receive their twice monthly 17 milk checks. 18 Which brings us to the function of the regulatory 19 uniform minimum pricing as the uniquely controlling 20 feature of the dairy farmers' milk checks. Here is a bit 21 of additional history to fill out the picture of Maine and 22 New England's dairy farms' experience with regulated 23 producer pricing and their milk checks. 24 The dairy industry's early years in the '20s and 25 into the '30s coincided with the onset of the depth of the 26 Great Depression. The times included turmoil for the 27 Boston and Maine fluid markets. I grew up with stories of 28 milk bandits, milk wars, and milk strikes. 10857 1 While an oversimulization -- an oversimpli- -- 2 while an oversimp- -- I'm going to have a drink of water. 3 While an oversimplification, the turmoil was 4 mostly caused by unequal market power of the many milk 5 sellers as compared to the number of milk buyers. The 6 perishability of raw milk and its different values when 7 used for fluid and manufactured uses increased this market 8 power imbalance. 9 Cooperatives and other bargaining agencies 10 organized early on in response to enable the collective 11 and enhanced producer bargaining power. In Maine, these 12 included Hood Milk Shippers Association, and also at some 13 point, Boston Milk Shippers Association that supplied West 14 Lynn Creamery. 15 The cooperatives and other collective producer 16 groups innovated minimal classified pricing by handlers 17 and uniform blended pricing for producers in the 1920s. 18 But market-based efforts proved unsuccessful 19 against the depression. Individual state legislatures, 20 including across New England, responded with the enactment 21 of state market orders. And in the '30s, Congress acted 22 to establish the Federal Milk Marketing Order program. 23 The Maine Milk Control Board was created in 1935. 24 It set up a series of Marketing Orders that established 25 marketing areas for the cities and regulation of the 26 plants and producers that serve them. The orders adopted 27 minimum classified and uniform producer pricing to provide 28 marketing stability for these local markets and their 10858 1 producer plants and customers. 2 Federal Order 1 for the Boston market was 3 established right around the same time as the Maine order. 4 The Federal Order program also adapted minimum classified 5 and uniform producer pricing to provide similar marketwide 6 stability for the nation's cities and their marketing 7 area, also intended by the Congressional law. 8 Maine dairy farms have thus participated in 9 regulated pricing programs from their beginning. In the 10 beginning, most dairy farms were pooled under the state 11 orders, while Southern Maine dairy farmers who supplied 12 milk to Boston plants, also described above, were some of 13 the first pooled producers under the first FMMO 1. 14 For this hearing, the key point is that both order 15 programs link the regulated pricing with producer payments 16 and their milk checks. Most significantly, an order's 17 unified blend price became the regulated minimum price 18 that pool producers were to receive in their milk checks. 19 All milk handlers pooled under an order became subject to 20 an audit of their milk payments to producers to ensure 21 they paid their supplying producers the order's regulated 22 minimum blend price. 23 Procedurally, the market order programs also 24 eventually adopted the twice monthly payment custom as the 25 basic process for pooling payments. Class I handlers paid 26 twice monthly into the pool, and equalized disbursements 27 out of the pool were also paid out twice monthly to 28 provide all handlers unified -- uniform blend minimum 10859 1 price payments to producers. 2 This new regulatory commercial practice of 3 required minimum producer pricing completely altered 4 kitchen table contracts and negotiations between plant and 5 producer. For all contracts, again, the regulated uniform 6 minimum amount was just that, and that was a major change. 7 The regulated minimum was also most of the 8 contract amount, but producers could still bargain for 9 prices above the minimum. A new negotiation developed 10 with buyers about over-order pricing terms. Along with 11 over-order procurement premiums, incentive payments for 12 quality and higher volume production continued, now also 13 as over-order premiums. These over-order procurements and 14 other incentives premiums became a market fixture and also 15 became the basis of competition among handlers for 16 producers' milk. 17 As with industry change, Maine's experience with 18 milk marketing regulation has also gone through constant 19 evolution since the market order regulation was adopted in 20 the 1930s. The Maine state and Boston order operated side 21 by side for many years, but the regulatory pattern has 22 now -- is now long gone. Maine's state order has been 23 converted to a regulated over-order premium program. 24 The federal program itself was the course of a 25 dramatic consolidation in the 2000s to include only a few 26 regional orders, and the pricing series was also then 27 changed significantly. Uniform regulated minimum producer 28 pricing for Order 1 and many others now reflect the 10860 1 minimum regulated value of each producer's component 2 production plus the PPD, instead of the pooled uniform 3 premium blend producer price. The support price has come 4 and gone and the Dairy Margin Coverage Program payments 5 are now a new and key source of direct supplemental income 6 provided by the federal government, at least for smaller 7 scale farmers. 8 Yet, again, through all these regulatory twists 9 and turns over the past 90 years, the interconnection 10 between the producer milk check and the regulated producer 11 pricing has also endured and remain constant. The 12 fundamental milk market regulatory principle, establishing 13 a unified -- a regulated unified minimum payment amount to 14 be provided in milk checks received by pool producers that 15 serve an order's market area, remains. 16 If anything, the interconnection between the FMMO 17 regulated pricing and the producer milk check is even 18 tighter in today's market, at least in Order 1. In the 19 Northeast, over-order pricing has become at best marginal. 20 There are virtually no more procurement premiums, and 21 quality premiums are limited. This means the order -- the 22 order's regulated minimum price now more establishes the 23 actual producer pay price. In other words, with only 24 marginal over-order pricing, pay prices for FMMO 1 pooled 25 producers now virtually start and end with calculations of 26 the producer's regulated FMMO component value pricing plus 27 the PPD. 28 This recent development is most important for this 10861 1 hearing because it means that the decision by the 2 Secretary resulting in a reduction of the FMMO regulated 3 minimum producer price will do more than simply be 4 inconsistent with the historic function of the regulated 5 minimum pricing. Of greater concern, this recent 6 development means that a price reduction will likely 7 translate directly into a reduction in producer milk 8 checks. 9 This brings me to our concern about the 10 consequences of such a decision for the Northeast. The 11 first and basic concern is that there is a direct line 12 between the steep and accelerating exit of Northeast 13 producers and the inadequate pay price. A reduction in 14 producer milk checks resulting from this hearing will 15 therefore cause, if not further accelerate, the additional 16 exit of Northeast producers. 17 THE COURT: Ms. McMurtray? 18 MS. McMURTRAY: Just slow down just a little bit. 19 THE WITNESS: Got you. Good for me, too. 20 See, I would have failed. If I couldn't get you 21 to tell me to slow down a little bit, it would've been a 22 failure. 23 In the Northeast, the number of pooled producers 24 has declined by over half between 2000 and 2022. We have 25 gone from 17,280 producers pooled on Order 1 in 2000 to 26 8,319 pooled producers in 2022. The number of New England 27 pooled producers has declined even more during this 28 period, by two-thirds, from 2,588 to 851. 10862 1 Many factors have contributed to this decline, 2 including labor difficulties and milk transportation 3 challenges to name just a few. But we producers know that 4 the plain driving cost is inadequate pay pricing. Without 5 at least adequate pay, it is at bottom hard to rationalize 6 keeping the farm going. Plus, if we had sufficient 7 revenue, we could -- could hire, keep workers, and we 8 could improve the efficiency of milk pickup and transport. 9 Inadequate pay price has become a chronic problem 10 following the market consolidation. Constant confronting 11 inadequate revenue and income over this long period of 12 time has made it truly hard to rationalize keeping the 13 cows milking and the land producing. This is why so many 14 of our neighbors have gone out and will continue to go 15 out. 16 There is no tolerance for a further decline -- 17 further price decline. This is why we have our basic 18 concern for the outcome of this hearing. Again, a 19 decision by the Secretary that results in a reduction of 20 the order's regulated minimum producer prices will likely 21 translate directly into a reduction in producer milk 22 checks. Amidst the current pricing environment, this will 23 cause, if not further accelerate, the additional exit of 24 Northeast producers. 25 The potential for this exit of producers leads to 26 our second concern. This concern is the further 27 contraction of Northeast milk shed and the upheaval for 28 the milk shed's infrastructure which would accompany the 10863 1 loss of additional farming operations. 2 Like in so many other states, the Maine dairy 3 industry is the anchor of the agricultural and rural 4 economy and has an integral role in the state's overall 5 economy and culture. Dairying is a very close second to 6 the largest segment of the state's diversified 7 agricultural economy. 8 What distinguishes dairy farming is its dispersal 9 around the state rather than being concentrated in one 10 area like our potatoes. This means that dairy farms have 11 an unusual important impact across the Maine rural 12 economy, both direct and by operation of the agricultural, 13 economic multiplier effect. The historic statewide 14 significance of dairy farms can also be seen across New 15 England and New York, and particularly in Vermont and New 16 York. 17 The really unimaginable loss of dairy farms 18 identified above have already significantly degraded the 19 historic presence of dairy farms across New England and 20 New York. This contraction and upheaval in the region's 21 milk shed has caused tremendous social and economic costs 22 for the Northeast rural communities. I salute the Maine 23 legislature for their adoption of our Maine Tier [sic] 24 program which confronts these costs directly in our state. 25 THE COURT: And name again that program in the 26 next to the last line on page 18? 27 THE WITNESS: Maine Tier Program. 28 THE COURT: Is it the Maine Tier Payment Program? 10864 1 THE WITNESS: It is. Maine Tier Payment Program. 2 Thank you. 3 THE COURT: Okay. Thank you. 4 THE WITNESS: More particularly for dairy farmers, 5 this upheaval has first meant the loss of community's 6 varied from farm operation, size, type, and management 7 style, which is really the historic basis of our region's 8 diverse and flourishing dairy industry. 9 Of equal and more recent concern, the contraction 10 is eroding the infrastructural vital for -- infrastructure 11 vital for the support and long-term sustainability of all 12 farms, no matter the size. The infrastructure's upheaval, 13 unpredictability, and unreliability for dairy farms cannot 14 be overstated. 15 This upheaval and unreliability are the best -- 16 are best demonstrated by the diminishment of feed and 17 tractor dealers, milk haulers, seed and fertilizer 18 dealers, let alone the milk equipment repair folks. As I 19 can recall as a young man, there were many nearby small, 20 mom-and-pop feed dealers available to me. Today, there 21 are only two mills in our entire state owned by Upstate 22 companies, plus a few others that haul in grain from mills 23 in other New England states. 24 The same can be said for milk haulers. Many milk 25 haulers who used to be available to haul milk for their 26 neighbors to the plant, now drive hours just to get to 27 their first farm, and then, after getting loaded, drive 28 hundreds of miles to a receiving plant, many times also to 10865 1 wait in line to be unloaded at the plant. 2 I understand, of course, there has been 3 substantial expansion and consolidation of farming 4 operations over the past few years and that milk 5 production from bigger farms has offset the loss of volume 6 associated with the widespread exit of smaller farms. But 7 I don't think this really offers much assurance about milk 8 shed stability for the long-term. I don't see how the 9 infrastructure of the Northeast milk shed can support 10 itself without critical massive dairy farms, regardless of 11 size. 12 In sum, my point for the Secretary is this: The 13 industry cannot support more milk shed contraction and 14 loss of infrastructure. A diversity of Northeast dairy 15 producers is the infrastructure's anchor. The demise of a 16 diverse dairy industry will be the beginning of the end 17 for all small-scale agriculture that make up our rural 18 communities in New England. 19 I would like to now read a -- the letter from the 20 Northeast Dairy -- Northeast Secretaries, Commissioners, 21 and Directors of Agriculture referenced earlier. This 22 letter identifies their collective belief that we in the 23 Northeast are, in fact, at a tipping point for the 24 stability of our region's milk supply. 25 THE COURT: All right. And so now we're leaving 26 page 20 of Exhibit 460, and we're going to Exhibit 461. 27 THE WITNESS: All right. This letter was written 28 October 6, 2023, to Deputy Commissioner Dana Coale. 10866 1 It reads: Dear Deputy Commissioner Coale, we are 2 writing to provide our complimentary concerns and 3 positions as they relate to the Maine Dairy Industry 4 Association's testimony regarding the Federal -- National 5 Federal Milk Marking Order Pricing Formula Hearing. 6 As directors, commissioners, and secretaries of 7 the Departments of Agriculture in our respective Northeast 8 states, we understand the great need for this hearing and 9 for the USDA Dairy Programs to revise the update -- and 10 update the Federal Milk Marketing Order Program's 11 component valuations, product surveys, and formulas. The 12 hearing and the record being developed should enable a 13 decision by the Secretary making the FMMOP more responsive 14 to the industry supply and marketing requirements, 15 particularly for our world's leading manufacturing dairy 16 product industry. 17 Paramount to this effort is the FMMOP's primary 18 responsibility to ensure orderly marketing for fluid milk 19 markets. Rational, regulated producer pricing is an 20 essential -- essentially a market order program function 21 as is price discovery. 22 The COVID-19 pandemic starkly illustrated that we 23 ignore threats to our regional food supply at our peril. 24 The steady loss of our New England family-owned dairy 25 farms is of great -- grave concern. As the number of 26 farms decrease, milk plants in the Northeast must travel 27 ever increasing distances to transport their raw supplies, 28 a perishable product. 10867 1 We believe that the widespread exit of the 2 Northeast dairy operations has brought our region's fluid 3 milk supply to a tipping point. We assert that critical, 4 inadequate, and volatile producer pricing are the primary 5 causes of this almost unimaginable loss of Northeast 6 farms. While we recognize many pricing factors at work, 7 the Dairy Programs -- Program must be vigilant to ensure 8 that FMMOP's producer pricing is part of the solution and 9 not a cause of the problem. 10 Accordingly, when making the needed changes to 11 price formula inputs, the dairy programs and the Secretary 12 must include, as an equal fundamental consideration, that 13 this hearing does not result in a net reduction of 14 producer pricing. 15 Thank you for considering our position. 16 This letter is signed by commissioners in -- 17 commissioners, secretaries, in Maine, Rhode Island, 18 Pennsylvania, New Hampshire, Massachusetts, Connecticut, 19 Vermont, and New Jersey. 20 I would like to conclude with a few additional 21 thoughts about MDIA's position for this hearing. First, 22 it follows from MDIA's position that the outcome of this 23 hearing cannot be -- cannot be an increased adjustment 24 alone of Make Allowances. An increased adjustment of 25 Make Allowances alone would, by definition, reduce 26 regulated minimum producer pricing -- prices. 27 If Make Allowances are to be updated and 28 increased, there must be corresponding updating changes to 10868 1 other order provisions, such as an increase also to the 2 Class I differential, which ensures the outcome of the 3 process is, at worst, a net-neutral impact on producer 4 pricing. 5 I am not advocating for some sort of tit-for-tat 6 processor producer pricing numbers calculation, nor am I 7 suggesting that any changes should be adopted that are not 8 supported by the record in order to equal out the math. 9 What I am simply saying is that the Secretary should only 10 act if the system's collective update and modernization 11 has the net result of not increasing regulated minimum 12 producer prices. 13 I would also like to note that MDIA's position 14 reflects our awareness that risk management tools are 15 increasingly being used to relieve cash flow pressures 16 associated with reliance on milk-check-to-check payments. 17 Unfortunately, I can say with great confidence 18 that very few MDIA members rely on hedging strategies to 19 alter their basic reliance or their milk checks. At most, 20 I believe ten out of the 145 members employ these tools. 21 I do not use them, and I could explain why if folks are 22 interested. 23 I also believe that the MDIA's experience is this 24 reward it -- regard -- I also believe -- I'll start that 25 sentence over. 26 I also believe that MDIA's experience in this 27 regard is mostly representative of producers' experience 28 across the Northeast. As in Maine, a big majority of the 10869 1 Northeast producers are still mostly small scale. 2 Certainly, in absolute terms, there are a lot of 3 large-scale farms in regions that are more likely to 4 employ hedging and risk management, but for the vast 5 majority of still smaller scale Northeast producers, these 6 strategies do not yet provide a viable alternative to 7 their basic reliance or their milk checks. 8 More broadly, as I said at the beginning, I also 9 recognize that small-scale MDIA membership is less 10 representative of the national experience. Nationally, 11 and obviously in the West and Southwest regions, there are 12 surely many more large-scale producers that employ hedging 13 and risk management strategies. As I also said, however, 14 we believe that all producers still share, to some 15 measurable degree, a reliance on their milk checks. This 16 means that minimum producer pricing continues to serve its 17 historic function, at least to some degree, across all 18 orders. 19 In conclusion, we ask the Secretary to make 20 specific findings about the impact the decision will have 21 on the FMMO regulated minimum producer pricing in the 22 shorter- and longer-term. The Secretary's decision should 23 also be supported by stated conclusions that the decision 24 will not result in a reduction of an FMMO regulated 25 minimum producer pricing for either the shorter or longer 26 terms. 27 This concludes my testimony, and I thank you for 28 your consideration. 10870 1 BY MR. SMITH: 2 Q. Thank you, Heath. 3 Before you're made available for 4 cross-examination, do you have anything that you would 5 like to add to your written statement? 6 A. Nope. I think I have talked enough. 7 THE COURT: Do you need a little water for 8 cross-examination? Is there a bottle available? 9 (Off-the-record discussion occurred.) 10 MR. SMITH: So, Your Honor, at this point, I'd 11 move preliminarily for the admission of Exhibits 460 and 12 461. 13 THE COURT: Very good. And we'll wait until 14 cross-examination has ended before I act on your motion. 15 I'd like a five-minute stretch break. Don't go 16 very far. We'll go back on record at 4:07. 17 (Whereupon, a break was taken.) 18 THE COURT: Let's good back on record. 19 We're back on record at 4:07. 20 Mr. Rosenbaum, you may proceed. 21 CROSS-EXAMINATION 22 BY MR. ROSENBAUM: 23 Q. Mr. Miller, I'm Steve Rosenbaum. I represent the 24 International Dairy Foods Association. 25 So we only received your testimony right before 26 you testified, so under that condition, I'm going to have 27 to be looking at some things off of the computer, which I 28 did not have an opportunity to print out. 10871 1 But I will just tell you that the U.S. Department 2 of Agriculture Economic Research Service has a website 3 with a bunch of tables, one of which is Milk Cows and 4 Production by State. And the citation is www.ers- -- 5 THE COURT: We're not catching your voice. 6 BY MR. ROSENBAUM: 7 Q. -- www.ers.usda.gov/data-products/dairy-data. 8 So if you look at that table, which is -- that 9 specific table spreadsheet is called Milk -- as I say, 10 Milk Cows and Production by State and Region Annual. 11 So it shows that in Maine in 1970, 619 million 12 pounds of milk was produced; in 2023, 554 million pounds. 13 So it's a decline over that period of time. 14 By comparison, the state of New York, it's 15 obviously part of the Northeast, went from 10,341,000,000 16 pounds in 1970 to 15,660,000,000 pounds in 2023, so 17 basically a 50% increase over that timeframe. And, in 18 fact, New York milk production in 2023 was a record for 19 the state, the most ever. 20 Do you have a view as to why New York has 21 experienced that kind of growth whereas Maine has actually 22 declined? 23 A. I suppose that with some time I could think of a 24 theory. But I mean, no, I don't have a view why that 25 would be. 26 Q. Because I mean, you are aware that New York 27 represents roughly half the total production in the 28 Northeast, that one state? 10872 1 I'm sorry, you need to say -- 2 A. Yes. 3 Q. -- out loud. Okay. Thanks. All right. 4 I did notice, and just curiosity perhaps, New York 5 was not a signatory to the letter. 6 Is there a -- that you presented. 7 Is that a -- is there a reason for that? 8 A. They were concentrating mostly on New England. 9 Q. You got New Jersey, which is actually further 10 south I think or -- 11 A. Oh, I didn't understand your question. I -- I -- 12 you were talking about the letter. I was thinking my 13 testimony. 14 I -- I do not know. I do not know the answer to 15 that. 16 Q. Okay. Yeah. 17 And you have talked about the decline in farm 18 number -- farmer numbers. I mean, that's been -- that's 19 sort of been a national phenomenon, right, fewer farmers, 20 bigger farms? 21 A. Yes. 22 Q. And one of the figures provided is -- that same 23 dataset is milk per cow. And I note that in Maine, for 24 example, in 1970, the average cow produced -- I guess this 25 is 9,984 pounds, and today it is 21,308 pounds. 26 Does that sound seem reasonable to you? 27 A. That sounds correct. 28 Q. So if you are getting that much more milk out of a 10873 1 cow, you are going to need a lot fewer cows, and 2 presumably you are going to end up with fewer farmers, 3 too; is that fair? 4 A. Yeah. We're getting more milk per cow, so if 5 there's not more of a demand for milk, that would be 6 correct. 7 Q. And I -- I -- you talk about, you know, whether, 8 what USDA would do would result in a reduction in the 9 regulatory minimum producer price. 10 And I -- I -- I take it your aspiration is that 11 that doesn't happen, correct? But you are not arguing 12 that that's actually forbidden, are you? 13 A. No. That -- our stance is that -- that -- that 14 this -- this body will -- has been and will continue to 15 collect information, and as -- and, you know, it's not 16 something that I have the ability to analyze and tell -- 17 and come up with a solution. 18 So I'm in hopes that this body will pull all that 19 data together, and the Secretary will be able to make a 20 decision that won't reduce producer prices. 21 Q. But you're not suggesting that hasn't happened at 22 some times in the past? The 2008 hearings themselves 23 were -- which I think you have referenced, did nothing but 24 increase Make Allowances, which had the effect of reducing 25 minimum prices? 26 A. Well, I think our stance is that it can't happen 27 again. Or shouldn't happen again, I should say, 28 shouldn't. 10874 1 Q. Shouldn't. 2 A. That's very critical. 3 Q. It's the latter, I take it -- 4 A. Yes. 5 Q. Is that fair? 6 A. Yeah. 7 Q. That was a "yes," I'm sorry? 8 A. Yes. 9 Q. And I take it you have not yourself performed any 10 studies as to the extent to which the current 11 Make Allowances do or do not reflect -- 12 A. I have not. 13 Q. -- actual cost of production? 14 A. That's true. I have not. 15 MR. ROSENBAUM: That's all I have. Thank you. 16 CROSS-EXAMINATION 17 BY MS. HANCOCK: 18 Q. Good afternoon, Mr. Miller. I'm Nicole Hancock 19 with National Milk. 20 It's been proposed by MIG in Proposal 20 to 21 eliminate the base differential of $1.60 from the Class I 22 fluid milk prices and, instead, allow handlers and 23 producers to negotiate over-order premiums on their own to 24 cover the costs that the base differential is designed to 25 cover. 26 Are you aware of that? 27 A. Yes. 28 Q. In your experience, have you been able to 10875 1 negotiate over-order premiums? 2 A. I haven't had the opportunity to do that, no. 3 Q. And in your experience as a producer, do you hold 4 sufficient bargaining power in order to negotiate 5 over-order premiums that would compensate you for the 6 items that the base differentials are designed to cover? 7 A. I do not believe so. 8 MS. HANCOCK: That's all I have. Thank you so 9 much for your time today. 10 THE WITNESS: Thank you. 11 CROSS-EXAMINATION 12 BY MR. MILTNER: 13 Q. Good afternoon, Mr. Miller. My name is Ryan 14 Miltner. I represent Select Milk Producers. 15 I would like to take you up on your offer to hear 16 about your risk management or hedging activities, and why 17 you use what you use, or don't use what you don't use. 18 A. So we have dabbled a little bit in it. And it's 19 been our experience that, for one, I don't have time as a 20 small farmer to -- to read up on market trends and feel 21 like that I have -- was making a really informed decision. 22 We have done it a couple of times, and it hadn't worked 23 out. 24 And the other -- the other angle is many times the 25 premiums are of such that I don't feel like I can give up 26 that amount in order to participate. 27 Q. Do you use the Dairy Margin Coverage Program? 28 A. I do. 10876 1 Q. Have you ever used the Dairy Revenue Protection 2 Program? 3 A. I did one month -- or one quarter, I should say. 4 One quarter, yeah. 5 Q. Have you ever used the Livestock Gross Margin 6 Program for dairy? 7 A. No. 8 Q. An economist or a risk management person from DFA, 9 your cooperative, testified earlier in the hearing that 10 they offer different products or different services to 11 their members for risk management. 12 Have you ever used any of the programs offered by 13 Dairy Farmers of America? 14 A. It's been a few years since I have, but I would -- 15 I would -- I would believe that. There is many options 16 that are available to us as members, yes. 17 Q. There have been suggestions from some in the 18 hearing that certain proposals, if USDA were to choose to 19 adopt them, should be delayed in their implementation 20 because of producers' risk management decisions. 21 Do you have or does MDIA have any position as to 22 whether any result coming out of this hearing should be 23 delayed for purposes of risk management? 24 A. No. We haven't had that discussion at all. 25 MR. MILTNER: Thank you very much. 26 THE WITNESS: Thanks. 27 THE COURT: Is there other cross-examination of 28 Mr. Miller before I invite the Agricultural Marketing 10877 1 Service to question him? 2 I see none. I invite the Agricultural Marketing 3 Service to ask questions of Mr. Miller. 4 CROSS-EXAMINATION 5 BY MS. TAYLOR: 6 Q. Good afternoon. 7 A. Good afternoon. 8 Q. Thank you for coming here today. 9 A. Thanks for having me. 10 Q. I think we have all been around each other a long 11 time. Ms. Hancock asked my over-order premiums, and 12 Mr. Miltner asked my risk management questions, so they 13 stole my thunder. 14 Just one question, just so the record's clear. 15 MDI- -- does MDIA have any position on any 16 particular proposal before us? 17 A. No, we do not. 18 MS. TAYLOR: Okay. That's it. 19 THE WITNESS: All right. Thank you. 20 MS. TAYLOR: Thank you. 21 THE COURT: So now we'll see if Mr. Smith has any 22 follow-up questions brought on by the cross-examination. 23 THE WITNESS: He might be the scary one in the 24 room. 25 REDIRECT EXAMINATION 26 BY MR. SMITH: 27 Q. Dan Smith, MDIA. 28 My only question is, do you have anything to add 10878 1 based on the questions you have been asked or anything 2 else? 3 A. I do not. 4 MR. SMITH: Okay. Your Honor, I -- I have one 5 preliminary request, which is page 9 and page 10 of the 6 statement referred to two publications, one is the New 7 England Milk Market Order Statistics that the Market 8 Administrator published under the old order, and page 10 9 refers to the current Federal Milk Marketing Order 1 10 Statistical Report. And I would ask that -- that you take 11 judicial notice of those official reports. 12 THE COURT: I'll be happy to do so. I love it 13 when people give me copies of what I'm to take official 14 notice of. 15 You don't happen to have that with you? 16 MR. SMITH: I do -- I do not. I apologize. 17 THE COURT: All right. Well, I know how to find 18 it. So, yes. Let me make a note of this. 19 MR. SMITH: Okay. 20 THE COURT: I will -- we call it official notice, 21 since I'm not in the judicial branch, I'm in the 22 administrative branch, but it's the same thing. 23 So I will take official notice of the publications 24 that are cited at the bottom of page 9 and the bottom of 25 page 10 of Exhibit 460, also marked exhibit MDIA-1. 26 MR. SMITH: Thank you, Your Honor. 27 And with that, I would move the admission of 28 Exhibits 460 and 461. 10879 1 THE COURT: Is there any objection to the 2 admission into evidence of Exhibit 460, also marked 3 MDIA-1? 4 There is none. Exhibit 460 is admitted into 5 evidence. 6 (Thereafter, Exhibit Number 460 was received 7 into evidence.) 8 THE COURT: Is there any objection to the 9 admission into evidence of Exhibit 461, also marked 10 MDIA-2? 11 MR. HILL: Sadly, Your Honor, I think I'm going to 12 have to speak here. 13 THE COURT: All right. You want all these people 14 to come verify their signatures? 15 MR. HILL: Well, it appears that although this was 16 addressed to the Deputy Administrator, there is no record 17 of it being received by the deputy administrator. 18 Obviously, we don't have any of the signatories here. We 19 also don't have any of the agents of the signatories here. 20 So on that basis I'm going to object. 21 THE COURT: So, Mr. Smith, do you have any 22 explanation for why this document addressed to Dana Coale, 23 Deputy Administrator, USDA Dairy Program, never arrived 24 where she has it in her records? 25 MR. SMITH: Your Honor, I have to admit that that 26 is a bit of a curve ball. It was, to my knowledge, 27 e-mailed to the Deputy Secretary at the e-mail that has 28 always been used. And I have no -- have plenty of 10880 1 experience with that e-mail having gone through. If I 2 understand, that perhaps it should have been e-mailed to 3 the e-mail for this hearing. 4 But I'm not quite sure I follow what the objection 5 is since the document is in front of you as opposed to 6 having been admitted. It's being sought to be introduced 7 now as an exhibit in the hearing. 8 THE COURT: So there would be a couple of ways to 9 authenticate this document. One would be for all the 10 signatories to say, "Yep, that's my signature, that's 11 my" -- that's the slow way. 12 Another one might be if Dana Coale, Deputy 13 Administrator, the USDA Dairy Program, said, "I did 14 receive this document in the course of ordinary receipt of 15 business materials." 16 MR. SMITH: Okay. 17 THE COURT: That would be another way to 18 authenticate it. 19 Mr. Rosenbaum, do you have a suggestion? 20 MR. ROSENBAUM: Your Honor, I actually have a 21 different objection, not a suggestion. 22 I don't really view this as a -- as an appropriate 23 exhibit. It's -- 24 THE COURT: Please speak into the mic. 25 MR. ROSENBAUM: Your Honor, this is a statement of 26 support for a particular position, and this is, to my 27 view, the kind of document -- it's sort of like a 28 post-hearing brief almost, saying, this is what we think 10881 1 you should do. But it's not -- it's not evidence, and no 2 one is here sponsoring it. I don't doubt that the 3 signatures are valid, in the sense that they are signed by 4 people they claim to be -- this claims to be signed by. 5 But, you know, we -- if people -- I mean, evidence 6 is coming in through witnesses who are sworn and 7 cross-examined, and this is essentially, you know, if you 8 will, testimony without a witness. 9 And so, like I say, I -- certainly nothing wrong 10 with it being -- accompanying the record and being treated 11 as if it were, if you will, submitted, but not as 12 testimony. 13 THE COURT: Are there any other comments about 14 Exhibit 461 having been moved for admission and my 15 consideration of that? 16 There are none. 17 At this time, I reject Exhibit 461, also marked 18 MDIA-2, as an exhibit. Now, rejected exhibits are part of 19 the record, as are accepted exhibits. But the difference 20 is they are not considered evidence to be relied on in 21 making the decision. 22 And you can decide, Mr. Smith, what your next move 23 is. You don't have to decide this minute. 24 MR. SMITH: Well, I think if the basis of your 25 rejection is the authentication of the signatures, that's 26 easily cured. 27 THE COURT: All right. And if I am, instead, 28 agreeing with Mr. Rosenbaum's objection, that we don't 10882 1 have any opportunity to cross-examine proponents. 2 MR. SMITH: Understood. If I might respond. 3 THE COURT: You may. 4 MR. SMITH: It's -- you have already rejected it, 5 so I'm not sure -- 6 THE COURT: You may. You may make a record in any 7 way you would like now. 8 MR. SMITH: Okay. Briefly, the hearing has 9 admitted all sorts of evidence and leaving it, as I 10 understood, to the Secretary's discretion to -- to account 11 for the value of the evidence and certainly take into 12 account Mr. Rosenbaum's concern. That was, to be honest, 13 the kind of the fastball down the middle that I expected, 14 to be honest. 15 And in this case, the letter -- it was really 16 prompted by the Secretaries. The impetus is there. And I 17 think it's reasonable to reflect -- to -- to account for 18 their interest, acknowledging the concern that they did 19 not attend. The difficulty of attending this hearing is 20 quite significant for anybody trying to do so, both from a 21 cost and a scheduling, so for Secretaries, or even their 22 representatives. And I'm not trying to overstate the 23 case, but that is -- that is the thinking. You know, 24 number one, that the Secretaries put this in of their own 25 purpose to make a statement, and two, there is legitimate 26 reason for them not attending. And in that sense, it 27 speaks for itself. 28 THE COURT: I agree with you that in-person 10883 1 attendance has -- is required for everyone who is 2 presenting evidence at this hearing. The only exception 3 we have made for that is we had a certain time period in 4 which certain farmers who had requested the opportunity to 5 appear on the YouTube or streaming, or whatever, were 6 allowed to appear and be cross-examined by audio-visual 7 means. 8 MR. SMITH: Sure. 9 THE COURT: But that was a carveout just to serve 10 farmers. I'm not aware of any other carveout in all these 11 days of hearing for anyone else who was excused from being 12 here to be cross-examined. 13 And I have been at milk hearings where people with 14 these important positions appeared and were here to 15 testify, and I always felt very honored that they took the 16 time. 17 But normally, they had something more concrete to 18 help make the decision than this document, which is a 19 generalization, and doesn't really have much gravitas in 20 my opinion, unless the person being cross-examined could 21 support the position with some facts and figures or 22 something. 23 So I leave it to you to decide what you want to do 24 next, but at this stage, I do reject Exhibit 461. 25 MR. SMITH: Thank you for the explanation, Your 26 Honor. 27 THE COURT: All right. Thank you, both. Thank 28 you for your testimony. It was good for you to come. 10884 1 Mr. English. 2 MR. ENGLISH: Good afternoon, Your Honor. My name 3 is Chip English with the Milk Innovation Group. I know we 4 don't have a lot of time this afternoon, but I think we 5 really need to use as much time as we can productively. 6 THE COURT: I have one item before I let you call 7 your next witness, an administrative matter. 8 MR. ENGLISH: If that's the case, of course, Your 9 Honor. 10 MS. TAYLOR: We'll do it in the morning. 11 THE COURT: Okay. Well, see how they yield to 12 your persuasive -- 13 MR. ENGLISH: I try to be as productive as 14 possible. 15 THE COURT: Very good. 16 MR. ENGLISH: We have a witness, Mr. Tim Kelly for 17 Shamrock Foods Company. And as he's coming to the stand, 18 Your Honor, we have previously handed out, we have been 19 trying to be very efficient, three documents, which are 20 marked as MIG-23, MIG-23A, and MIG-23B. 21 THE COURT: All right. Now, my next number would 22 be 462. 23 (Thereafter, Exhibit Number 462 was marked 24 for identification.) 25 MR. ENGLISH: That would be MIG-23, Your Honor. 26 THE COURT: Yes. 27 MR. ENGLISH: 463 would be MIG-23A. 28 THE COURT: Yes. 10885 1 (Thereafter, Exhibit Number 463 was marked 2 for identification.) 3 MR. ENGLISH: And MIG-23B would be 464. 4 THE COURT: Correct. 5 (Thereafter, Exhibit Number 464 was marked 6 for identification.) 7 MR. ENGLISH: And for identification purposes, 462 8 was Part 1 of Shamrock Foods Company testimony submitted 9 way back in September; 463 was submitted last night, or 10 actually maybe even Friday night, I think Friday night 11 because we thought he would be on yesterday; and 12 Exhibit 464 is the PowerPoint presentation that hopefully 13 is hooked up that he is going to give as part of my Q&A. 14 THE COURT: Excellent. 15 Now, I would just add to your description of these 16 documents. MIG-23 is MIG/Shamrock-23; MIG-23A is 17 MIG/Shamrock-23A; and MIG-23B is MIG/Shamrock-23B, which I 18 think is very helpful. 19 And I would like the witness to identify himself 20 please and spell his name. 21 THE WITNESS: Tim Kelly, T-I-M, K-E-L-L-Y. 22 THE COURT: And have you previously testified in 23 this proceeding? 24 THE WITNESS: I have not. 25 TIM KELLY, 26 being first duly sworn, was examined and 27 testified as follows: 28 THE COURT: Now, position yourself so that you can 10886 1 see the document that you are looking at, or your 2 computer, and still be speaking where that mic can pick 3 you up the best. You may need to experiment. 4 THE WITNESS: You got it. 5 THE COURT: You can count back from ten or 6 something. 7 MR. ENGLISH: And someone should bring your 8 presentation up. 9 Thank you. 10 DIRECT EXAMINATION 11 BY MR. ENGLISH: 12 Q. So, Mr. Kelly, please provide your background. 13 A. Sure. I am Tim Kelly. I've been with Shamrock 14 for 31 years. I started when I was five. And I'm 15 currently senior vice president, general manager 16 overseeing the dairy operations for Shamrock Foods 17 Company. And I graduated from Arizona State University. 18 I have a BS degree and a master's degree in agribusiness. 19 Q. Can you tell me a little bit about Shamrock Foods 20 history. 21 A. Sure. Shamrock started in 1922 in Tucson, 22 Arizona. It's a family-run company, still is today. 23 We're in the fourth generation ownership. It was started 24 by McClellan family. They were Irish immigrants, came 25 over to the United States. W.T. fought in World War I, 26 got his citizenship, and started Shamrock at that time. 27 Q. So let's turn now to the next slide. 28 A. Sure. A little bit more about Shamrock. Not only 10887 1 are we a dairy company, we're also one of the largest 2 independent foodservice distributors in the United States. 3 So envision a Sysco or U.S. Foods Company. That's what we 4 are in the West, and we're in roughly 16 states in the 5 West. 6 Q. Thank you. 7 THE COURT: How many states? 8 THE WITNESS: Roughly 16. Might be a little more 9 now, but that's close enough. 10 BY MR. ENGLISH: 11 Q. But your job is with the dairy side? 12 A. That's correct. So I oversee the dairy division 13 for the McClellan family. 14 Q. And in addition to that, does the dairy also have 15 farms? 16 A. It does. We have -- we have a family farm. It is 17 not part of Shamrock Foods Company, but we have a 18 2,000-head farm that is owned by the McClellans, of which 19 I purchase 100% of their raw product. 20 Q. And is some of their -- 21 THE COURT: Of their what? 22 THE WITNESS: Raw pro- -- of the milk. I purchase 23 100%. 24 THE COURT: Oh, of their raw product. I get it. 25 Thank you. 26 BY MR. ENGLISH: 27 Q. And is part of their farm organic? 28 A. We have roughly 850 head of the 2,000 would be 10888 1 organic. 2 Q. So turning to the processing side. Let's look at 3 the next -- let's start with this slide -- 4 A. Sure. 5 Q. -- and then go through it, and the next couple 6 slides, and tell me a little about the products that 7 Shamrock produces. 8 A. Sure. So in Arizona, Shamrock is a Class I and 9 Class II producer. We are your local hometown dairy 10 within the state of Arizona, providing traditional gallons 11 and half gallons in HTST format. Also doing school milk, 12 as you can see here. We do some value-added organic 13 lactose-free milk in a 96-ounce package, and we do what we 14 call specialty milk with an HTST formula which is half 15 gallons and quarts of buttermilk. 16 If you go to the next slide. 17 These are more of our innovative products that we 18 have, all in extended shelf life. It's in Class I. These 19 are all Class I items. So milk-based protein drinks. Our 20 Rockin' Protein drink, which we sell nationally, our 21 ready-to-drink milk items that we sell nationally as well, 22 as well as some multi-serve and seasonal items that we 23 produce in ESL bottle as well as half gallon. 24 Q. And your next slide, please. 25 A. And then these are the Class II items that we 26 produce, both in our Phoenix facility and our Virginia 27 facility. They are half and half, heavy cream items, as 28 is in the sizes that you can see here, as well as half and 10889 1 half and heavy cream. The items in the middle are more 2 along the lines of our institutional foodservice items, 3 which would be made for putting into ingredients and like, 4 and then our culture items that we sell at retail within 5 the state of Arizona. 6 Q. So I think you have discussed some of your 7 customers. 8 You have some schools, correct? 9 A. Yes. So the channels of business that we service 10 would be what we call large format, which in layman's 11 terms would be retail. We do sell club. We sell -- 12 within foodservice, we sell institutional, so that would 13 be back-of-the-house type items and ingredients, as well 14 as quick-serve restaurants, so Jack in the Box, Subway, we 15 sell milk, as well as some Class II items, shake mix 16 items, to that. And then we do club, and then impulse, 17 would be vending, anything in C store. 18 THE COURT: What kind of store is C store? 19 THE WITNESS: Convenience stores. I'm sorry. 20 THE COURT: Thank you. 21 THE WITNESS: Yeah, no problem. 22 BY MR. ENGLISH: 23 Q. So let's turn to the next slide. 24 You have already briefly discussed the processing 25 plants. Let's talk about in the next few slides what you 26 are seeing here, first for Arizona dairy. 27 A. Sure. This is our Arizona farm. So we started in 28 Tucson. We moved to this location in 1955. It's -- 10890 1 currently does both HTST and extended shelf life at this 2 facility. It's in Federal Market Order 131. 3 And then our Virginia facility, as you can see 4 here, is newer. We built this in 2014. It is an extended 5 shelf life bottle plants, as well as we do do 6 bag-in-the-box products there as well in the extended 7 shelf life format. We do do Class I and Class II out of 8 this facility. 9 THE COURT: Now, what I'm looking at on page 5 and 10 page 6 is in what location currently? Oh, no, not 6, just 11 page 5. 12 THE WITNESS: Page 5 is our Arizona dairy. 13 THE COURT: And what is the nearest town? 14 THE WITNESS: That's located in Phoenix, Arizona, 15 I'm sorry. 16 THE COURT: Thank you. 17 THE WITNESS: Yep. Arizona and Phoenix. 18 And then our Virginia facility is located in a 19 town called Verona, Virginia, which is roughly 30 miles 20 west of Charlottesville. 21 MR. ENGLISH: Thank you, Your Honor. 22 BY MR. ENGLISH: 23 Q. So let's go to the next slide, and let's start now 24 talking about proposals. 25 So what is Shamrock's position on Proposals 1 and 26 2, the component proposals? 27 A. Yeah. So currently in both of our orders we're a 28 butterfat skim order, so the component pieces of that does 10891 1 not apply to me. Proposals 1 and 2 would increase our 2 cost between 60 and $0.75 per hundredweight. And from the 3 reviews that we have done internally as well as 4 externally, we don't receive the solids at the level that 5 have been proposed, so obviously we would be overpaying. 6 So the market wouldn't allow us to collect for 7 those, pay for those. And as a matter of fact, in my 8 31 years at Shamrock, we never had a customer ask me what 9 are your solids in milk. 10 Q. And since you are in a butterfat skim order, not 11 only do you pay on butterfat skim for Class I, but your 12 dairy farmers are paid on butterfat skim, correct? 13 A. That's correct. 14 Q. So they are not even paid on the components that 15 you would be being requested to pay? 16 A. That is correct. 17 Q. And what would be the impact on the consumer of 18 these? 19 A. It would be higher prices. 20 Q. Can you recover these costs? 21 A. No, I cannot. 22 THE COURT: Mr. English, there's a difference 23 between Mr. Kelly's volume, which is perfect, and yours, 24 which is softer. 25 THE WITNESS: I'm a much more dynamic speaker. 26 It's obvious. Chip's not. 27 MR. ENGLISH: I didn't get my one-hour late lunch 28 break today. 10892 1 I will do my best, or the mic can go up, or I will 2 move closer to the mic, or maybe Mr. Smith broke it again. 3 THE COURT: He's tall. 4 BY MR. ENGLISH: 5 Q. So let's now turn to the next slide. 6 A. Sure. 7 Q. And this is the issue of the base skim milk price. 8 And it's true that Shamrock opposes Proposals 13, 9 16, 17, and 18, correct? 10 A. We do. 11 Q. What is your position on price stability? 12 A. Well, we are very much for price stability. Our 13 customers are for price stability, particularly when you 14 look at some of the channels we service. Within 15 foodservice, they are requesting annual pricing, if 16 possible. To change menu boards, particularly in the 17 past -- I would say less now with certain of our customers 18 with digital boards, but changing -- changing pricing 19 within menu boards could cost millions of dollars, 20 particularly for Subway sandwich shop that has 28,000 21 locations. So they were looking for stability within 22 that, for sure. 23 Q. What is your position on hedging? 24 A. We are for hedging. We currently do hedge some 25 items. As a matter of fact, we recently hired a person 26 that will take that on for Shamrock going forward. We 27 don't have a lot of experience in that but -- and we've 28 utilized other outside agencies to perform that for us, 10893 1 but we are looking to internalize that. 2 Q. And so do you intend to hedge in the future? 3 A. Yes, sir, we do. 4 Q. And what is your position about USDA with respect 5 to any proposal that would limit your ability to hedge? 6 A. We are against anything that limits hedging. 7 Q. And what is your position on advanced pricing? 8 A. We are for advanced pricing. Obviously, anytime 9 you know what your cost is going to be before you are out 10 there selling it, it certainly helps. I can tell you that 11 we have lost millions of dollars by not knowing what our 12 costs are. Example would be just as early -- I'm sure a 13 lot of you in the room, last year when we were dealing 14 with some Class II issues throughout, and the culture 15 items, and I'll tell you, last February wasn't fun for the 16 industry, I can tell you that. 17 Q. Let's turn to Proposal 19 first. 18 We'll talk about 21 next, but let's -- what's your 19 position on Proposal 19? 20 A. Order-over premiums? 21 Q. No. 19 is the Class I differential. 22 A. Oh, thank you. 23 Q. I think you may have -- 24 A. Naw, we're good. Yeah. 25 So differentials is a tough one for me. 26 Currently, at least in my last 15 years -- 14 years at 27 Shamrock, I have been instrumental in the procurement of 28 our raw milk needs. I have been involved in all 10894 1 negotiations with the -- both co-ops that we purchase 2 from. In Arizona we purchase about half of our needs from 3 a co-op, and in Virginia 100% of our needs. The 4 differential in the conversations within all that, within 5 the over-order premium, was for different items within -- 6 that are covered within the location differential. I 7 personally believe I'm paying for it twice. 8 So, sorry, I'm rambling here. I'll answer your 9 question. 10 Q. So -- so the co-ops have claimed at various times 11 that it's difficult for them to collect over-order 12 premiums. 13 What is your experience in those two markets, 14 Arizona and Virginia? 15 A. It has not been hard for them to collect the 16 over-order premiums in our market. Arizona, we are -- 17 they are the lone co-op, United Dairymen of Arizona. They 18 are the only co-op. And I will tell you, in our last 19 agreement, we have -- we have seen increases as high as 20 fourfold and -- on the over-order premium. That's a lot 21 of money. 22 Q. And Virginia? 23 A. Virginia, we -- we have -- we have competition 24 there. We still have seen increases, but not at the level 25 as I have seen within Arizona. 26 Q. And there's been some conversation about whether 27 balancing is included in those over-order premiums? 28 A. It absolutely is. It's the conversation of the 10895 1 over-order premium. We need freight help. We need 2 balancing help. We need all of the above, which is my 3 argument in having to pay for it twice. They feel the 4 need is to have covering within the over-order premium. 5 As of which, within the balancing portion, there is a URC 6 credit that's put within it. So they flat out just put it 7 in there was well. 8 Q. So before Judge Clifton asks, what does URC stand 9 for? 10 A. Universal Receiving Credit. So it's the helping 11 of the co-op to streamline their needs -- which I 12 completely understand -- but their supply, to make sure 13 that they can handle it, and we -- we obviously do the 14 best we can to mitigate that and manage that. 15 Q. And when you talk about mitigating and managing, 16 so, for instance, when you built the plant in Virginia for 17 an ESL facility, did you make an investment that includes 18 your carrying inventory and -- and also timelines to be 19 able to meet demand so that you are effectively paying for 20 balancing on the front end? 21 A. Yeah, particularly in Virginia. So we'll -- we 22 put anywhere between 90 and 130 days on our product. So 23 significant capital investment is needed in order to carry 24 those inventory levels, particularly when we talk seasonal 25 items like eggnog, heavy creams, and those types of 26 things. So it's -- are very expensive. 27 Q. So what kind of increases would you see if 28 Proposal 19 were adopted? 10896 1 A. Well, you can see here 28%. I have a table that 2 I'll share with you, but 28%. It's 62% in Virginia. So 3 what -- combined it's well north of $2.50 a hundredweight, 4 $0.22 a gallon. 5 Q. So why don't we now turn to Table 1, which is on 6 slide 10. 7 A. Sure. 8 Q. And so tell me what we're seeing on this slide. 9 A. So on this slide, you can see on the top 10 there's -- these are the Arizona -- this would be within 11 Maricopa County, which is Phoenix. There are four 12 processing plants. We have a small value-added producer 13 handler that runs glass product, Danzeisen; we have 14 fa!rlife that we're all aware of; we have Kroger and 15 Safeway that have captive plants; and then we have 16 Shamrock, which is a branded and private label plant. 17 Our current is 2.35 a hundredweight, and then you 18 can see the model minimums that we have broken out. But 19 this increase would go from 2.35, and National Milk's 20 proposal would be $3. 21 Q. Given the model average would actually be 22 basically a $0.05 increase to 2.40, what is your view 23 about the model average versus National Milk's 19? 24 A. Well, the -- obviously it doesn't go up as much as 25 that. But I will tell you that any -- any increase that 26 we're seeing, and my argument being, for any increase 27 within Class I would be, what problem are we trying to 28 solve? And the problem being that I'm hearing from the 10897 1 milk side -- and I will preface it. We're -- currently I 2 sit on multiple boards. I'm currently the chairman of 3 MilkPEP. I'm on the board of fluid milk for IDFA, as well 4 as I sit on the board of DMI's Innovation Center. So I'm 5 with dairy farmers all the time. As a matter of fact, I 6 work for a dairy farmer. 7 So I understand the costs that are associated with 8 running dairy farms. I understand the increased costs 9 that are associated with it. 10 My argument is, the way that this current model is 11 being structured, I don't necessarily think is going to be 12 beneficial to the dairy farmer. And from what I'm seeing, 13 the -- I don't pay a dairy farmer, I pay a co-op. And the 14 monies that I'm seeing go up, and the prices that I'm 15 paying by going up, are substantial. 16 When you talk about 2 to $3 a hundredweight in 17 cost increases, that's what I'm paying. That's what the 18 consumer's paying. And when I see a $0.10 increase, when 19 I see a $0.20 increase, that's a 20 to 30 to $0.35 20 increase to the consumer, because that's how retail works. 21 So to answer your question, I'm not for any 22 increase. I'm for the parties involved to work together 23 to figure out a better costing mechanism that will take 24 care of the dairy farmers and not penalize Class I, which 25 will thus reduce Class I milk, which will then thus put 26 more milk into III and IV, which is going to drive down 27 the blend, which is going to pull money out of the dairy 28 farmer. Okay? I'm mean, I went to ASU, which is known as 10898 1 Harvard of the West, I get it, but with my math, telling 2 me you are pulling money out of the dairy farmer. 3 So let's -- let's try to identify -- and my 4 frustration that I have with this entire process is 5 everyone knows my number. Call me. I'll sit in any 6 meeting with dairy farmers, National Milk, sit with anyone 7 that's there, and try to come up with a proactive way to 8 fix the system. But the system is broken, and it needs to 9 be repaired. 10 Q. I'm going to digress for a moment. 11 A. Sorry for my rant. Chip, I know you're upset at 12 me. 13 Q. Well, I'm actually going to digress based upon 14 your commentary, which is that -- you were here yesterday 15 for the examination of Ms. Keefe, correct? 16 A. I was. 17 Q. As a member of MIG, and with all those boards you 18 sit on -- 19 A. Yes, sir. 20 Q. -- did you make efforts to reach out to 21 cooperatives about the MIG proposals? 22 A. I personally made phone calls. How this started 23 was with -- there was a vote being taken within IDFA about 24 this proposal. It wasn't looked favorably by the co-op 25 community. As a matter of fact, my good friend from AE, 26 Miriam Erickson Brown, was called many times in 27 frustration. And we supported taking a vote, and it did 28 not pass. And at that call I stated my frustration to my 10899 1 co-op friends, that doing this blindly, doing it in a -- 2 hidden behind all of our backs, which is it was, no one 3 reaching out, and then just asking for a flat line vote 4 was inappropriate. 5 Q. You mean a flat line vote on the National Milk 6 proposals? 7 A. That's correct. Without any of us even seeing 8 them. 9 Q. And did you also then also attempt to say, "Look, 10 we have got an alternative we want to talk about"? 11 A. At that time, Chip, the -- the MIG group was not 12 formed, if I recall. I do recall having conversations 13 with the CEO of Aurora, him calling me saying, "We need a 14 voice in this community. Will you help me?" And I helped 15 recruit people that are within the MIG group. 16 Q. And did there come a time later that you tried to 17 talk about this? 18 A. Yes, sir. I'm sorry. Yes. Then later was going 19 to them. But the co-ops were not going to -- obviously 20 it's going against their membership, so they were flatly 21 denied that they wanted to be -- to talk about it or 22 participate within it. 23 Q. But the effort was made. 24 A. I personally made the effort. 25 Q. Okay. So let's turn to slide 10 for a moment. 26 You talked about Arizona. We haven't yet 27 addressed Virginia. And I just want to point out, when 28 you look at Virginia, and the fact that -- as for 10900 1 Shamrock, National Milk proposes using the model average. 2 But for four other locations, they are -- I'm sorry -- for 3 three other locations they are going down, and then for 4 another member of MIG they are going up from the model, 5 correct? 6 A. Yes, sir. 7 Q. Let's turn to the slide -- I think you have 8 actually covered the next slide. I don't think we have 9 skipped anything, unless there's something here you want 10 to expand on. 11 A. No, I think I have hit this. 12 Q. Okay. So let's now turn to Proposal 21, which is 13 slide 12. 14 What is your position on Proposal 21, which would 15 increase the Class II differential? 16 A. Yeah, my argument, similar to Hood and AE's, which 17 is we are pooled plants, and we are competing with our 18 competitors. Particularly in Arizona, we do have a 19 competitor that would be a non-pooled operation in 20 culture. So I'm not for it at all. 21 Q. And so the issue about being a competitor with a 22 non-pool plant is they wouldn't be obligated to pay this 23 differential, correct? 24 A. That is correct. 25 Q. And as to any fluid creams, you wouldn't be able 26 to reformulate, correct? 27 A. No. I follow the standards of identity within 28 those categories, so I'm not able to reformulate. 10901 1 Q. And what is your view about whether higher prices 2 will drive down demand? 3 A. Well, I think the -- if we're looking at 4 elasticity and inelasticity, I have a lot of thoughts 5 within this. And I think if you look at it holistically 6 throughout the data, arguments can be made that milk would 7 be considered inelastic. 8 I can give you an example, one with even National 9 Milk's proposal of -- with that they deem being it's 10 inelastic, the milk still drops. 11 Q. You mean, Dr. Kaiser's data? 12 A. I'm sorry, yes. Dr. Kaiser's. 13 Q. But the demand still drops, correct? 14 A. Still drops. Still drops. It's not falling 15 within the standard error rate of saying that it's not, 16 but it's still dropping. 17 The other would be through, in my opinion with it, 18 when I started at Shamrock in 1991, roughly 70% of my milk 19 in what I would call the take-home package, so the gallon 20 and half gallon, was branded, and 30% was private label. 21 It's absolutely flip-flopped now. So now I'm at roughly 22 80% private label, 20% brand. That's all due to price. 23 So if you -- if you take a look at holistically 24 throughout and you say, well, it's not elastic. Go look 25 at the items of which I sell, they are driven by price. 26 When I promote my brand, it increases by 25%. That's 27 because of price. 28 So, you know, I think we -- any good statistician, 10902 1 anybody can make their data read the way they want. I'm 2 just looking at it through my business. Price increases 3 reduces Class I demand, and certainly reduces 4 profitability, and takes away from my ability to invest 5 more in the ESL value-added items, which I think every 6 dairy farmer wants me to continue to invest in. 7 Q. Let's turn to the next slide. 8 I have a preface before we talk about Proposal 20, 9 because we have already heard a number of questions of 10 earlier witnesses -- 11 A. Yep. 12 Q. -- and the commentary that -- that the producer is 13 going to lose somehow that $1.60, which I think assumes a 14 lot of information, correct? 15 But -- 16 A. Correct. 17 Q. -- given what's happening with Class I, what is 18 your view about whether the producer ought to be concerned 19 about the loss of Class I sales -- 20 A. Well -- 21 Q. -- compared to that $1.60? 22 A. Yeah. For instance, let's just -- I mean, we can 23 sit here and do the math, which I'm not going to do on the 24 stage, but with that, increasing that or losing that, you 25 just do the math within what's that going to do when 26 you -- Class I drops? Where does that milk go? It goes 27 into lower classes of milk. It's going to reduce the 28 blend check. 10903 1 So I -- like I said, I work for a dairy farmer. I 2 see through their eyes. I see through their lenses. And 3 I'm just saying, if we're trying to do everything we can 4 to help them get more money, is the current structure and 5 the way the proposal that's reading today, is that really 6 going to get it done? I say no. But I only got 31 years 7 experience. 8 Q. So let's now turn to slide 13, and we're going to 9 cover some of these very quickly so that we can finish 10 before 5 o'clock, if we can. 11 So what is your -- what is Shamrock's experience 12 with Grade A and Grade B in your marketplace? 13 A. Yeah. So Grade A, it's nonexistent within my 14 market. I'm not as aware of -- 15 (Court Reporter clarification.) 16 THE WITNESS: So within Grade A, within Arizona, 17 there is no Grade B dairy farmers. I even made a call to 18 verify that. Within Federal Order 5, I'm not aware of 19 any. There could be some, I'm not aware of any. As a 20 matter of fact, in my time in this business I have never 21 even heard of a demand or anything. But keep in mind, I'm 22 a Class I dairy plant, so that's probably not as common, 23 but I haven't heard any Grade B milk. 24 BY MR. ENGLISH: 25 Q. So let's turn to the next element, your next slide 26 which is balancing. 27 A. Yes. So within the balancing things, you can see 28 here the charges that we're getting. There is without a 10904 1 doubt, Shamrock, and when I get my -- when I get my bill, 2 I'm paying for that balancing. I'm paying for it within 3 the URC credit, which they clearly put out there. So to 4 sit there and say there isn't a balancing charge 5 throughout for what I get, it's -- it's in contracts. 6 Everyone knows. We talked about it earlier. So 7 there are -- there are balancing charge, or 8 balancing fees, or balancing penalties if you aren't able 9 to do it. So I am paying for it within the over-order 10 premium. 11 And then obviously, I provide rolling forecasts to 12 our co-ops. I provide 90-day rolling forecasts. If I am 13 above or below that, I'm penalized. I'm penalized for 14 holding fees for them at the dock. I'm penalized -- all 15 that within -- in my bill, they are passing all these 16 costs through to me. Is the dairy farmer getting those? 17 I don't know, but I'm paying it. 18 Q. Should USDA remove that charge from the Class I 19 differential? 20 A. Absolutely. 21 Q. Because you are already paying for it? 22 A. Already paying for it. 23 Q. Let's move to the next slide which is the 24 incentive piece. 25 A. Yeah. So for Shamrock, sourcing milk has never 26 been an issue. We will -- there are -- are times where it 27 could get tight, I will admit that. The spring flush 28 is -- we are all aware of what that is, and there is an 10905 1 abundance of milk. 2 And then, particularly in Arizona, when we have 3 the monsoon season, the cows don't like humidity in 4 Arizona. They are fine with the 120. We have mister 5 systems for them. But when the humidity increases, 6 they certainly drop. And there could be tight things, and 7 we do work with our co-op and our farm to -- to 8 manage that. But it's typically a two-week period of 9 time. The cows become used to it and are able to 10 adjust to it. It's not something that lasts forever. 11 Q. I want to go back to the elasticity for one 12 moment. 13 A. Sure. 14 Q. What about milk's competitive position with other 15 beverages? 16 A. Well, that's my -- that's my biggest argument here 17 is, particularly with you going to the retail space, we 18 can all remember the days when you had eight doors and 19 seven of them were for milk. And now when you go into any 20 dairy case, you are roughly seeing two doors of dairy, 21 maybe three, depending on the size of retailer, but an 22 abundance of plant-based products, which we manufacture as 23 well. So Shamrock is a manufacturer of plant-based 24 beverages, nut juices, as I like to call them. But we 25 manage -- we manufacture those as well. 26 And I understand the price stability that they 27 have, which I don't, which it is -- their first ingredient 28 is water, not -- not milk but -- so that's the -- that's 10906 1 the competitive nature that we see, is that I'm competing 2 against all those other brands, and we, as an industry, as 3 the dairy industry everyone, are completing against that. 4 So what we want to do is make sure that we can keep our 5 prices competitive enough within that scope so that we can 6 continue to compete against the plant-based and nut-based 7 juices. 8 Q. There's also been some questions today about, 9 well, you know, if you take that $1.60 out, you won't 10 know, then, what your competitor is paying. 11 Is that an issue? Is it so much an issue 12 about paying similar prices or about similar regulatory 13 burdens? 14 A. Yeah. I think I'm less of -- I'm more of a 15 regulatory side of the exposure of that, understanding 16 what it is. If it's an even playing field, I'm willing to 17 compete. I'm willing to do my best. I'm willing to make 18 substantial investments in our business, substantial 19 investments to drive down costs, increase efficiencies. 20 But when it's an unfair playing field, which I already 21 experience within depooling plants, it makes it very 22 difficult to go out and compete against like items. 23 Q. Let's very briefly go to the last slide. What's 24 the point you are trying to make here from somebody who 25 sits on IDFA, who sits on MilkPEP, who reaches out and 26 talks to -- 27 A. Yeah. I hit on it earlier, but as I said, I 28 really want us all to come together. And what I mean by 10907 1 that, I want the farmer community, the co-op community, 2 the independents, the big brands, to try to find a 3 solution to this and work together. The in-fighting, the 4 going back and forth, the he-said/she-said is not 5 productive. The only people making money seem to be the 6 attorneys in the room, Chip. 7 And I would certainly like to see that be utilized 8 and our efforts be utilized a more -- in a way that we can 9 all work together to make it a better industry, so that we 10 can compete against our true competition, which is the 11 plant-based beverages. 12 MR. ENGLISH: Your Honor, I have no further 13 questions of this witness. I will preemptively for 14 tomorrow move into evidence Exhibits 462, 463, 464, make 15 the witness available for cross-examination in the morning 16 after administrative matters. 17 THE COURT: You are amazing. You really are. My 18 hat's off to you. 19 THE WITNESS: He's not cheap, but he is amazing. 20 THE COURT: All right. I know it's time to go. 21 I'd just like to have an idea about tomorrow. So we begin 22 with an administrative item, then we go to Tim Kelly. 23 Then, Mr. English, do we go to Chuck Turner of 24 Turner Dairy? 25 MR. ENGLISH: Yes, we do, Your Honor. 26 THE COURT: Then do we go to Aurora Organic? 27 MR. ENGLISH: No, I think we're going to have to 28 switch some things around given some witness's schedules. 10908 1 And so our intention, hopefully we can get through all of 2 these: David Hardy who is an Organic Valley CROPP 3 producer; followed by Organic Valley CROPP, a panel, and I 4 will say ahead of time it's three people, so we'll need 5 three chairs and deal with the mics; and then Jay Luikart 6 from Danone; and if we get done with that, we then would 7 go to Aurora Organic Dairy, who also has a dairy farmer, 8 plus an Aurora Organic Dairy witness as well. And that's, 9 I think, ambitious, but that's the goal. 10 THE COURT: Excellent. 11 Ms. Hancock would like identification of the three 12 people. Are you going to send out an e-mail? 13 MR. ENGLISH: Yeah, we will get out an e-mail. I 14 think we already did. I think we sent an e-mail out. I 15 need to see what's going on. All right. I thought the 16 list had everybody. So we will check the e-mail. If we 17 need to modify, we will. But we sent out an e-mail I 18 thought of all the names. 19 THE COURT: But, you know, a timely -- a current 20 e-mail might help. I'm sure you have all got a lot of 21 e-mails. 22 MR. ENGLISH: We will endeavor to resend an 23 e-mail. 24 THE COURT: Thank you. All right. I thank you 25 all. It's been a marvelous day. And we now go off record 26 at 5:05. I'll see you in the morning at 8:00. 27 (Whereupon, the proceeding concluded.) 28 ---o0o--- 10909 1 STATE OF CALIFORNIA ) ) ss 2 COUNTY OF FRESNO ) 3 4 I, MYRA A. PISH, Certified Shorthand Reporter, do 5 hereby certify that the foregoing pages comprise a full, 6 true and correct transcript of my shorthand notes, and a 7 full, true and correct statement of the proceedings held 8 at the time and place heretofore stated. 9 10 DATED: February 12, 2024 11 FRESNO, CALIFORNIA 12 13 14 15 16 MYRA A. PISH, RPR CSR Certificate No. 11613 17 18 19 20 21 22 23 24 25 26 27 28