11385 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 29, 2024 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 11386 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 Ashley Vulin 8 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 9 Nicole Hancock Brad Prowant 10 FOR SELECT MILK PRODUCERS, INC.: 11 Ryan Miltner 12 FOR INTERNATIONAL DAIRY FOODS ASSOCIATION: 13 Steve Rosenbaum 14 FOR THE AMERICAN FARM BUREAU FEDERATION: 15 Danny Munch 16 17 ---o0o--- 18 19 20 (Please note: Appearances for all parties are subject to 21 change daily, and may not be reported or listed on 22 subsequent days' transcripts.) 23 24 ---o0o--- 25 26 27 28 11387 1 M A S T E R I N D E X 2 SESSIONS 3 MONDAY, JANUARY 29, 2024 PAGE 4 MORNING SESSION 11,390 AFTERNOON SESSION 11,512 5 6 ---o0o--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11388 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Dr. Mark Stephenson: 5 Direct Examination by Ms. Vulin 11,393 Cross-Examination by Ms. Hancock 11,407 6 Cross-Examination by Mr. Miltner 11,413 Cross-Examination by Ms. Taylor 11,417 7 Redirect Examination by Ms. Vulin 11,424 Recross-Examination by Ms. Taylor 11,426 8 9 Jeffrey Sims: 10 Direct Examination by Ms. Hancock 11,430 Cross-Examination by Mr. Rosenbaum 11,469 11 Cross-Examination by Ms. Vulin 11,476 Cross-Examination by Mr. Miltner 11,499 12 Cross-Examination by Ms. Vulin 11,504 Cross-Examination by Ms. Taylor 11,506 13 14 Carl Rasch: 15 Direct Examination by Ms. Hancock 11,515 Cross-Examination by Mr. Miltner 11,524 16 Cross-Examination by Ms. Taylor 11,527 17 Mike Giles: 18 Direct Examination by Mr. Rosenbaum 11,532 Cross-Examination by Mr. Miltner 11,541 19 Cross-Examination by Ms. Taylor 11,544 Redirect Examination by Mr. Rosenbaum 11,552 20 Steve Galbraith: 21 Direct Examination by Mr. Rosenbaum 11,554 22 Cross-Examination by Mr. Miltner 11,567 Cross-Examination by Ms. Hancock 11,572 23 Cross-Examination by Mr. Wilson 11,573 Cross-Examination by Ms. Taylor 11,576 24 Sally Keefe: 25 Direct Examination by Ms. Vulin 11,586 26 Cross-Examination by Mr. Miltner 11,599 Cross-Examination by Ms. Taylor 11,601 27 Redirect Examination by Ms. Vulin 11,603 28 ---o0o--- 11389 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. 5 490 MIG-16C 11,392 11,427 6 491 MIG-16D 11,393 11,427 7 492 MIG-16E 11,393 11,428 8 493 MIG-16F 11,393 11,428 9 494 NMPF-112 11,429 11,512 10 495 NMPF-112A 11,429 11,512 11 496 NMPF-112C 11,429 11,512 12 497 NMPF-112C 11,430 11,513 13 498 NMPF-112D 11,430 11,513 14 499 NMPF-113 11,514 11,530 15 500 IDFA-67 11,532 11,553 16 501 IDFA-65 11,554 11,583 17 502 IDFA-66 11,554 11,583 18 503 MIG-67 11,585 11,604 19 20 ---o0o--- 21 22 23 24 25 26 27 28 11390 1 MONDAY, JANUARY 29, 2024 -- MORNING SESSION 2 THE COURT: All right. We're back on record. It 3 is 2024, January 29. It's a Monday. It's approximately 4 8:01 a.m. Eastern, and this is Day 48 of this milk 5 hearing. 6 I know we have a number of preliminary matters. I 7 think I'd like to get into the testimony before we go into 8 most of those. 9 What preliminary matters should we address before 10 resuming testimony? 11 MS. TAYLOR: Good morning, Your Honor. I know I 12 have a list of witnesses that need to finish up the week, 13 and I was just wondering if parties might put that on the 14 record so we all have the same list. I don't know if my 15 list is correct. So we know what to expect. 16 MS. VULIN: Good morning. Ashley Vulin with the 17 Milk Innovation Group. 18 We'll be starting with Dr. Stephenson addressing 19 the questions that arose at the end of the prior testimony 20 on Proposal 20. And then we will also have Ms. Sally 21 Keefe in opposition to Proposal 21. I expect she will be 22 last or near last at the end of the hearing once we 23 conclude the remainder of Proposal 20 witnesses. 24 THE COURT: Now, Ms. Vulin, come back to the mic 25 for just a minute. 26 Did you notice how enormously sensitive it is to 27 whether you are two inches from it? 28 MS. VULIN: I did, Your Honor. So I will be 11391 1 better -- 2 THE COURT: We have a little bit of a different 3 system than we did last time, so we'll all have to be a 4 little more mindful. 5 MS. VULIN: Thank you for the reminder. 6 MS. HANCOCK: Good morning. Nicole Hancock, 7 National Milk. 8 We'll have Jeff Sims in opposition to Proposal 20, 9 and Carl Rasch in opposition to Proposal 21. Mr. Sims 10 will go following Dr. Stephenson, and Mr. Rasch will plan 11 on today or tomorrow. 12 MR. ROSENBAUM: Steve Rosenbaum for the 13 International Dairy Foods Association. 14 We have three witnesses. We have Mr. Mike Giles, 15 who we anticipate will testify today on Proposal 19. We 16 have Steve Galbraith, who will testify on Proposals 19 and 17 21, potentially today. And we have Kyle Powell who will 18 testify on Proposal 21 tomorrow. 19 MR. MILTNER: Thank you, Your Honor. I'm Ryan 20 Miltner representing Select Milk Producers. 21 We will not have a witness this week. We 22 indicated that to counsel last week, but we wanted to put 23 that on record. We were discussing having a producer who 24 was going to be here today, but he will not be testifying. 25 THE COURT: And I notice Carl Rasch's name is 26 spelled C-A-R-L, R-A-S-C-H. 27 I'm not sure Steve, that I know Steve Galbraith's 28 spelling. 11392 1 MR. ROSENBAUM: That's G-A-L-B-R-A-I-T-H. 2 THE COURT: That's what I wrote down. Amazing. 3 Okay. Great. 4 Is there anything else preliminary to the witness 5 testimony? 6 All right. I'd ask the witness again to state and 7 spell his name for the record. 8 THE WITNESS: My name is Mark W. Stephenson. 9 That's M-A-R-K, S-T-E-P-H-E-N-S-O-N. 10 THE COURT: Dr. Stephenson, you remain sworn. 11 MARK STEPHENSON, 12 Having been previously sworn, was examined 13 and testified as follows: 14 THE COURT: And we have some exhibits to mark, do 15 we not? 16 MS. VULIN: Yes, Your Honor. The first is 17 MIG-Exhibit 16C, as in cat, and we'd ask that that be 18 marked as Exhibit 490, please. 19 THE COURT: 490 yes. 20 (Thereafter, Exhibit Number 490, was marked 21 for identification.) 22 MS. VULIN: The second is MIG Exhibit-16D, as in 23 dog. We ask that be marked as Exhibit 491. 24 THE COURT: Now, does it have about 59 pages? 25 MS. VULIN: It does, Your Honor. It's an Excel 26 spreadsheet submitted to USDA in Excel format, but we have 27 printed it here. 28 THE COURT: Very good. And that is going to be 11393 1 491? Yes. 2 (Thereafter, Exhibit Number 491 was marked 3 for identification.) 4 MS. VULIN: Correct, Your Honor. 5 Next is Exhibit 16E, and that will be Exhibit 492. 6 THE COURT: Yes. 7 (Thereafter, Exhibit Number 492 was marked 8 for identification.) 9 MS. VULIN: And finally, Exhibit -- 10 MIG Exhibit 16F, and that will be 493. 11 (Thereafter, Exhibit Number 493 was marked 12 for identification.) 13 THE COURT: I'm caught up. Thank you. 14 You may proceed. 15 MS. VULIN: Thank you, Your Honor. 16 DIRECT EXAMINATION 17 BY MS. VULIN: 18 Q. Good morning, Dr. Stephenson. 19 A. Good morning. 20 Q. Thank you for joining us again. 21 A. Good to be here. 22 Q. So you had previously submitted some data to USDA 23 reflecting shadow prices for Class I and Class III, 24 correct? 25 A. Correct. 26 Q. And I understand that in response to some 27 questions -- 28 THE COURT: Let's make sure our mics are good. 11394 1 THE WITNESS: Are they on? Yes. 2 THE COURT: It's on, but your voice is softer than 3 Ms. Vulin's. I would like them to match. So either, 4 Ms. Vulin, you could step back a bit, or, 5 Dr. Stephenson -- 6 THE WITNESS: I'll try to make sure I'm tight. 7 THE COURT: All right. Thank you. 8 BY MS. VULIN: 9 Q. And I understand that in response to some 10 questions you went back and looked at that data again, 11 correct? 12 A. I did. Yes. 13 Q. And so you have some documents here to correct and 14 supplement that prior data; is that right? 15 A. I do. And also to explain just a little bit about 16 the derivation of those data. 17 Q. Okay. Thank you. 18 So just to identify the documents that we have 19 marked, first we have Exhibit 490, and that's your written 20 explanation of an additional testimony, correct? 21 A. Correct. 22 Q. Exhibit 491 is the corrected dataset? 23 A. Correct. 24 Q. Exhibit 492 is the corrected map? 25 A. Correct. 26 Q. And Exhibit 493 is a box-and-whisker chart that 27 reflects the corrected data? 28 A. That's correct. 11395 1 Q. Great. So we'll just start at the beginning. 2 Were you able to identify the issues with the 3 data? 4 A. Yes, I was. And I would thank Ms. Taylor for her 5 probative questions, and the AMS staff for having spotted 6 that. 7 The -- when we run models, we're typically looking 8 at asking ourselves what would happen if we had a change 9 in something. We would then typically go through our 10 baseline calculations, which are our best representation 11 of the way the dairy world actually looked and worked at a 12 particular point in time, as in March, or September, or 13 May, or whatever the month may have been, in this case, 14 year 2016, and that becomes our baseline. And then when 15 we run scenarios, we will do something like impose a new 16 plant in a new location, and then ask ourselves, "What 17 difference does that make?" And that's a comparison to 18 the baseline. 19 Apparently I had chosen one of the scenarios that 20 we had run as the data form and not the baseline data. 21 Q. And so you went back and pulled that original 22 baseline data, correct? 23 A. I pulled the original baseline data right from the 24 model dump that we get, the large amount of data that 25 comes out of there, and then did the calculations again to 26 do all of the county-level distributions. 27 Q. And Exhibit 491, which is also MIG Exhibit-16D, 28 reflects that corrected baseline data, correct? 11396 1 A. That's correct. And in this case, it was asked 2 last time why we had additional precision on the data 3 table, because the data that had been presented earlier 4 for National Milk's model runs by Dr. Nicholson were 5 rounded to the nearest dime, and so I rounded these to the 6 nearest dime. 7 Q. And did you confer with Dr. Nicholson at all in 8 your -- the research to identify the baseline data? 9 A. I did. We did go through this. I also had some 10 questions about the model coding and the way that we were 11 calculating the dual values in there. 12 Q. And so are you and Dr. Nicholson confident now you 13 have the original baseline data? 14 A. Yes. 15 Q. Great. 16 And so with the corrected data, you said you 17 re-ran your calculation of the difference between the 18 Class I shadow price and the Class III shadow price, 19 correct? 20 A. That's correct. 21 Q. So if we could pull up the PowerPoint, please. 22 Now, this first slide is from MIG Exhibit-16B. 23 That was the data that contained the error, 24 correct? 25 A. That's correct. 26 Q. And this is from Exhibit 451, I will note for the 27 record, at page 10. So this is the prior map. 28 Now, if you could go to the next map, please. 11397 1 A. There. Sorry. 2 Q. No problem. 3 So this is the corrected difference map found in 4 MIG Exhibit-16E? 5 A. This is the corrected map. And I would just 6 stress that the colors may look somewhat more intense on 7 here. That was just my choice of color selection. And 8 apparently I didn't precisely match what the previous map 9 was, but the connotation is the same. 10 Q. You say "the connotation is the same." 11 What -- what similarity or consistency is there 12 between what you had previously presented and this 13 corrected map? 14 A. Well, the similarity is that the red areas are 15 showing places where the marginal value, the shadow price, 16 if you will, of Class III is greater than the shadow price 17 of Class I. The green areas are where Class I shadow 18 prices are greater than Class III. And those gray areas 19 are zones where they're approximately equal. 20 Q. And the conclusions that you previously presented 21 based on the difference data that you calculated, did 22 those still stand with the corrected data? 23 A. Yes. They, in most cases, are within, you know, a 24 few cents of one another any place you are looking at. So 25 the differences, if they were close to $3, were close to 26 $3. If they were $1, they were close to $1. So they were 27 not much different. 28 Q. And your prior conclusion or the takeaway from 11398 1 your data regarding the impact of manufacturing and 2 Class I and the supply of milk, do those conclusions still 3 hold with the corrected data? 4 A. They do. 5 Q. And if I compare these maps, the area where I 6 really identify any difference seems to be kind of Nevada 7 and a little bit in California; is that right? 8 A. Yes. The previous map, and I can perhaps pull 9 that up again over here, you will notice in this area that 10 the California/Nevada maps almost stand out on a state 11 line basis as being particularly green in -- in an area 12 bordered by red-colored counties. 13 Over here in the new data, it's not as much. It's 14 more green in the populous areas of California and a 15 little bit in Nevada. But it looks a bit smoother and not 16 just bordered by states. 17 Now, when I go back and was trying to ask myself, 18 what could possibly have been different between these 19 runs? 20 In the 2016 model iterations, it was the first 21 time that we were trying to impose plant-level constraints 22 of volume of processing. Now, clearly we don't have 23 information on all plants in the country, but we do have a 24 good idea about the volume going through a lot of the 25 plants in the country. And my belief is it wasn't 26 documented or noted on that particular one, but it was 27 when we had plants that were probably excessively 28 constrained in California and Nevada. Doing that would 11399 1 have meant their shadow price values would have risen for 2 the fluid plants in that area. 3 Q. Thank you. 4 And I know we can parse out the county level data. 5 But do you have any -- is your takeaway intended to be a 6 localized county-level analysis, or is it more an industry 7 or nationwide conclusion that you are presenting? 8 A. Well, I think the story line that I would like to 9 try to leave and have people aware of is that our industry 10 has changed quite a lot over the decades, and it's now 11 come to the point where the manufacturing portion of the 12 industry is highly competitive, and in particular, in some 13 regions of the country, and I don't think really can be 14 ignored in a lot of the regulation that we do. We -- we 15 have to recognize that those plants are very competitive 16 and they are creating the products that consumers in this 17 country want. So it does make it difficult for some of 18 the plants, like fluid plants in those regions, I think to 19 compete with pooled values of -- of the Class I 20 differential. 21 Q. And you were also asked about whether or not there 22 would be a shadow price of zero in any county. 23 Can you just briefly explain to us how this zero 24 shadow price works within the USDSS? 25 A. Yes. There -- there will always be a zero shadow 26 price value. 27 Now, I should make sure that I clarify this by 28 letting you understand that when we are doing the model at 11400 1 this point in time, we don't have milk price values, we 2 have component values. But we get back to milk price 3 values by creating a standardized milk value from the 4 component. So that's 3.5 pounds of butterfat and 5 3.1 pounds of protein, 5.9 pounds of other solids. That 6 gives us a hundredweight equivalent of shadow price value 7 at locations. 8 When we have those values, there will always be a 9 zero value somewhere. And recognize that we have shadow 10 prices at all areas with constraints. So for example, 11 farm milk production, as given, is constrained. There's 12 no more milk at a point than -- than we say there is, and 13 there will be a shadow price value for those products. 14 There are shadow price values at plants, and we can look 15 at just Class I or just Class III or all plants where you 16 have shadow price values for demand for dairy products. 17 And those kind of fall on the spectrum. 18 Fluid milk plants, if they are at exactly the same 19 location as the adequate or surplus raw milk supply, may 20 have a zero-point value. But if the plant is not exactly 21 at the milk supply, if milk has to travel some distance to 22 get there, then the fluid plants will have a very low 23 shadow price near that area, but it's not going to be 24 quite zero. 25 So in this particular case, the low point was 26 actually at Boise, Idaho, and the value was $0.13 per 27 hundredweight at that plant. So close to zero, but not 28 zero. The actual zero value is going to occur at a raw 11401 1 milk supply. 2 Q. At a point within the county? 3 A. Maybe. 4 Q. Potentially? 5 A. Maybe not within the county, but nearby, yes. 6 Q. And there's also rounding of the data, correct? 7 A. Yes. And when we're rounding, there are two 8 effects of rounding. One of them is this kriging 9 methodology that we use. That $0.13 takes place at a 10 point in Boise County, and we have to calculate the 11 average values for Boise County. And that's influenced by 12 the other fluid milk plants that would be somewhere 13 nearby, and so the average of Boise County can come up. 14 If it comes up above $0.15, for example, by that average, 15 then the rounding to $0.10 increments is going to give you 16 a $0.20 value, which is what it has in this particular 17 case. 18 Q. And are you confident that the data that you are 19 presenting here, the corrected data, is accurate? 20 A. To the best of our capabilities, it's accurate. 21 And I mean, I obviously am not going to do this quickly to 22 get back here. I wanted to make sure that the data are 23 accurate. 24 Q. And if you were to run this same comparison with 25 2021 data, knowing what you know about the industry, do 26 you expect it to be qualitatively similar or substantially 27 different? 28 A. I think it would be qualitatively very similar. 11402 1 We have now got at least the example of two model runs 2 with 2016 data: The first one, the one that was a 3 scenario that we had run, and then this baseline data. 4 And I think that you can see that there are differences, 5 but qualitatively, the story line is the same. 6 Q. And I understand that you wanted to provide USDA 7 with another visualization of this data, correct? 8 A. I did. I thought it would be helpful. 9 Q. So if we could go to the next slide, please. And 10 this is MIG Exhibit-16F, which has been marked as 11 Exhibit 493. 12 So this is our friend, a box-and-whisker chart, 13 correct? 14 A. It is. And I would not have probably chosen to 15 toss that up here except that I understood that Ms. Keefe 16 has already explained what the box-and-whisker plots are 17 to the group. 18 Q. Thank you. 19 So can you walk us through what this 20 box-and-whisker chart shows us about the Class I shadow 21 price in comparison to the Class III shadow price. 22 A. Sure. I have two box-and-whisker plots for each 23 of the 11 Federal Orders, and one of them is showing the 24 Class I shadow prices, and the other one is showing the 25 Class III shadow prices. 26 I think the box-and-whiskers are nice because they 27 give you not only an idea about the range in values that 28 you can see in any given area, but also the distribution. 11403 1 You know, in other words, are the data relatively tight 2 around the observation or do they have long tails? 3 So just as an example, in this Appalachian value, 4 the long and tall box-and-whiskers plot are the Class I 5 values. So there is a distribution of values that goes 6 from, oh, roughly a value of 3 to a value of maybe $5.80, 7 something like that. 8 Q. And what does that tell us about the value of 9 Class I milk in that order? 10 A. Well, it tells you that there are some plants 11 obviously in different locations, and some of them have 12 easier access to milk supplies and ability to process in 13 that region. Those would be the lower shadow price value 14 plants. And those plants that are more constrained or 15 having a more difficult time getting milk to the plants 16 are going to be up here at the upper end of that range. 17 Q. Thank you. 18 And then next to it, what is the plot with the two 19 yellow carats I'm told they are called? 20 A. Yes. These smaller box-and-whiskers plots 21 represent the Class III distribution of observations in 22 the Appalachian order. So you can see that those are much 23 tighter, much closer together. 24 The reason that the distribution is not as large 25 is because these are plants that can take those same 26 components that are available in milk and condense them 27 into a much more nutrient-dense package that can be 28 shipped longer distances, if needed, so we don't see as 11404 1 big a distribution for Class III. That doesn't mean that 2 they aren't different. Even within the Appalachian order 3 they are different, but as you move over to Arizona, Las 4 Vegas order, you can see that they have diminished there, 5 California and so forth. So they do differ. Scale can be 6 quite different, though, for these plants. It is much 7 tighter than it is for the fluid plants. 8 Q. And if I'm comparing, because they are next to 9 each other, the Appalachian order where there's overlap in 10 the box-and-whisker plants between the Class I and III 11 shadow prices, whereas when I move to the Arizona order, 12 the Class III shadow prices are far above what the 13 distribution is for the Class I prices, what does that 14 tell us about milk supply and demand in those two areas? 15 A. Well, for plants that are represented in the upper 16 half or maybe two-thirds of the Appalachian order where 17 their shadow price is well above, you know, all of the 18 Class III plants, these would be counties that would be 19 shown in green on the map. And these are plants that 20 would have the ability to attract the milk that's 21 necessary because of the value of the product. This is 22 where cost of balancing probably becomes more important 23 than acquisition of the milk. Plants that are down here 24 in this area would -- 25 Q. When you say "this area," you mean the bottom 26 quarter of the Appalachian order distribution? 27 A. That's correct. Thank you. The bottom quarter of 28 that distribution in Appalachia is below all of the 11405 1 Class III plants. So there are a handful of plants in 2 Appalachia that would have difficulty procuring milk in 3 their plant away from a cheese operation. 4 When you take a look at the order that's next to 5 there, Arizona, Las Vegas, the manufacturing plants, 6 Class III plants, are all well above the fluid plants, 7 which just tells me that the value of milk going into 8 manufacturing is much higher than it is into the fluid 9 plants there. Fluid plants would have a difficult time 10 without a substantial premium, in my estimation, to get 11 milk into the plant. 12 Q. And that's because the system is saying that it's 13 the manufacturing use of that milk that's going to be the 14 highest and best use? 15 A. Yeah, this is the -- the economic realities that 16 the plants face. There is a market for the product coming 17 out of those -- sorry -- a market for the value of the 18 products coming out of those manufacturing plants that 19 will pay them for that milk in such a way that the fluid 20 plants would have a difficult time matching. 21 Q. And does all of this data reflect maybe a shift in 22 the role of manufacturing or the role of manufactured 23 dairy products in the dairy industry compared to what it 24 may have been in the 1930s or even in the 1990s? 25 A. I think so. When -- in the earlier part of the 26 orders we may have had 60 or 70% Class I utilization in 27 the order. That additional milk that was there and pooled 28 had access to pool dollars that would have been adequate 11406 1 to pull milk into those fluid plants. But that's not 2 necessarily the case any longer, at least in some of the 3 regions, that the pool value gets really fairly diminished 4 across a large volume of milk. 5 Q. Thank you. 6 Anything else on this data that you would like 7 USDA to takeaway? 8 A. No, I don't think so. 9 Q. And then lastly, just a small item, you were also 10 previously asked about providing Make Allowance data that 11 summarized the low cost, high cost, and average for 12 plants. 13 Do you recall that? 14 A. I do. 15 Q. And you identified that you had already provided 16 that data found in IDFA Exhibit 1, which is Hearing 17 Exhibit 178, starting at page 12, correct? 18 A. That's correct. There are four tables there for 19 each of the four products that do have the breakouts by 20 low cost and high cost plants, as well as the average. So 21 my verbal testimony at the time had a table that looked at 22 a comparison over years, but it was looking at the average 23 of all the plants and not the high and lows. 24 MS. VULIN: If I could have just one moment, Your 25 Honor. 26 THE COURT: Yes. Let's go off record. You can 27 move around a bit. Don't go away from your chair. We go 28 off record at 8:30. 11407 1 (An off-the-record discussion took place.) 2 THE COURT: We're back on record at 8:33. 3 Ms. Vulin. 4 MS. VULIN: Thank you, Your Honor. Nothing 5 further. 6 Thank you, Dr. Stephenson, for returning. 7 And the witness is available for 8 cross-examination. 9 CROSS-EXAMINATION 10 BY MS. HANCOCK: 11 Q. Good morning. Nicole Hancock, National Milk. 12 I just have a couple of questions. Maybe I should 13 have asked them before to better understand this, but 14 since you are back and I have a fresher mind today, I can 15 try and figure it out again. 16 If -- if I'm just looking at Exhibit 492, which is 17 the map, if I maybe oversimplify it, is it fair to say 18 that where we see the green areas or the lighter colored 19 areas that get into kind of a gray area or white shade, 20 that's an area where we want to pull Class I milk into 21 those areas? 22 A. Well, we need Class I milk in all areas. But if 23 you take a look at the very green areas, those are areas 24 where Class I milk is needed in the fluid plants, but they 25 can, with the value of the end product, very well compete, 26 I think, with cheese plants in that region. 27 Their costs here -- relatively high shadow price 28 values in a state like Florida have more to do with 11408 1 balancing costs than they do with procurement cost. 2 Q. Okay. So it means that if it's in the green 3 areas, there's more -- Class I is in a greater competitive 4 position against competing Class III manufacturing plants? 5 A. That -- that's correct. 6 Q. So do you have to -- you have a greater amount of 7 balancing cost in those areas? 8 A. The balancing cost would be the -- I mean, this is 9 indicating in many of these areas that we have deficit 10 milk production. And in the deficit regions of -- you 11 know, let's just use Florida as an example. Milk supplies 12 may have to come from some distance during some parts of 13 the year, and may be pushed away in other parts of the 14 year. That becomes the large cost for Class I in those 15 regions more than is the case in the heavily-surplus 16 areas. 17 Q. And this was based on a model run that was done in 18 the spring of 2016? 19 A. Yes. This is the flush season values that are 20 shown in this map. 21 Q. And did you ever run it again in comparison with, 22 say, October? 23 A. Well, we always run a flush season and short 24 season run. I didn't bring that or provide that here. 25 The colors would have looked somewhat different. I 26 believe that in the National Milk testimony by 27 Dr. Nicholson, that you had some idea about the 28 differences between the flush season and short season 11409 1 values for the 2021 data. 2 Q. Okay. So you didn't map that to see how it 3 changes? 4 A. I didn't map that here, no. 5 Q. Okay. Did you just map it -- did you map it at 6 all to know what the differences were? 7 A. Well, I have in the past, but I didn't look for 8 that -- and I have never mapped them this way. This 9 difference between the Class I and III is something that 10 was new to this particular testimony. 11 Q. And so you said that there would be a greater 12 amount of balancing that would be required in the areas 13 that are lighter or more green? 14 A. My intuition, professional, from having done this 15 for a long period of time is that we would have seen this 16 green area creep a little bit further up toward the Upper 17 Midwest than it shows on this particular map during the 18 flush season. 19 Q. Maybe you did answer that, I'm not sure, but I 20 thought when you were talking about the -- in Exhibit 493, 21 the box-and-whiskers plotting chart, I thought that you 22 described the Appalachian region as that -- that overlap 23 between Class III and Class I there as having additional 24 balancing costs than in the red areas? 25 A. Yeah. The additional balancing costs are going to 26 be more in the green regions. The red areas are probably 27 showing you where fluid plants would have more procurement 28 issues than they would balancing issues. 11410 1 Q. Okay. Then you would have, in those areas, more 2 need to incentivize movement on an on-demand basis? 3 A. Yes. 4 Q. Okay. Two of which are the elements that go into 5 the Class I differentials, balancing and incentivizing 6 movement of milk? 7 A. That's -- that's the narrative that we have been 8 working under. 9 Q. Okay. And so this doesn't do anything to suggest 10 that those balancing costs and incentive costs are no 11 longer needed, you are just saying it's needed differently 12 in different areas? 13 A. Yes. 14 Q. Okay. And -- 15 A. I think that balancing costs are real. Don't -- 16 don't let that be a takeaway message. 17 Q. And incentive to move milk costs are also real? 18 A. Certainly. 19 Q. And you specifically focus the comparison of these 20 shadow prices between Class I and Class III with the 21 model, so you don't -- you just treat all manufacturing as 22 modeled under Class III; is that right? 23 A. No. I -- we could have looked at this with 24 Class IV included. We could have looked at this with 25 Class II included. I didn't choose to do that. Class III 26 is a very large volume product and important product in 27 the country, and so I just looked at Class III as an 28 example. 11411 1 Q. Do you know how your model results would have 2 differed if you would have averaged Class III and 3 Class IV? 4 A. The Class IV shadow price values, if you think 5 about the box-and-whiskers plots, how the Class III 6 box-and-whiskers are relatively condensed, Class IV would 7 look like that, and they would be at a lower overall 8 average value than Class III is. And I haven't looked at 9 Class II, but I would suspect that they would be 10 intermediary between Class III and I. 11 Q. And I think we have established this previously, 12 but this is a novel approach that -- for which the model's 13 never been used previously; is that right? 14 A. Well, the data are always there, but we haven't 15 chosen to look at them. I mean, typically speaking, the 16 requests have always been to look at either the primals, 17 the flows of, you know, milk and product through the 18 industry, or the dual values for Class I, or in some 19 cases, we're looking at the dual values for raw milk at 20 the farm level. So, for example, a question may be coming 21 to us, how would this impact farmers in the area if we had 22 any plant or something like that. 23 Q. You are not aware of anytime that the USDA has 24 ever used the model results for -- in the same way that 25 you have proffered them in your testimony, are you? 26 A. I'm not aware that they have used them in any way 27 other than the Class I shadow price values. 28 Q. Are you aware of -- of the model ever being used 11412 1 in this way to support a peer-reviewed article or study? 2 A. In this way? 3 Q. Yeah. 4 A. No, this was the first time that this was done. 5 Q. Okay. And so -- and because the industry hasn't 6 used it and because it's never been published and peer 7 reviewed, we have never had an opportunity to really test 8 this methodology against real life, have we? 9 A. No. I offered this as an observation that I think 10 ought to ask additional questions of the way that we're 11 regulating. I'm not suggesting that this is the answer to 12 the way we should be regulating. I'm suggesting that this 13 should raise questions about what we're currently doing, 14 because I think it makes what we're currently doing 15 difficult. 16 Q. Okay. So fair enough. 17 It -- it's a way to raise some questions and look 18 at it through a new lens; is that fair? 19 A. I think so. 20 Q. Doesn't answer the question of what should be 21 done, though; is that right? 22 A. No, it doesn't answer the question of what should 23 be done. 24 MS. HANCOCK: That's all I have. Thanks so much 25 for your time. 26 THE COURT: It's 8:43. Let's go off record just a 27 moment. 28 (An off-the-record discussion took place.) 11413 1 THE COURT: We're back on record at 8:43. 2 Who will next cross-examine Dr. Stephenson? 3 CROSS-EXAMINATION 4 BY MR. MILTNER: 5 Q. Good morning, Dr. Stephenson. 6 A. Good morning. 7 Q. Ryan Miltner. I represent Select Milk Producers. 8 I wanted to ask a few questions about the 9 box-and-whisker chart. I think some of this was discussed 10 the last time we had a chart like this during the hearing. 11 I want to make sure that my understanding of what this 12 represents is the same as what I previously understood it 13 to be. 14 So if I look at the Appalachian order, for 15 instance -- and really this, I think, would apply to all 16 the boxes -- but the upper and lower bounds of the 17 whiskers represent the entire range of data for that 18 particular order; is that correct? 19 A. For that particular order and that particular 20 class of plant. 21 Q. Okay. Now, in between the two whiskers within the 22 box is a line in the middle. 23 That represents the median of the dataset? 24 A. The median, yes. 25 Q. Okay. And the upper and lower bounds of the box 26 itself are the bounds of the second and the third 27 quartiles of the data within that set, correct? 28 A. That's correct. 11414 1 Q. What about the shaded area in the box around the 2 median, what does that represent? 3 A. It's a shaded area around the median. And it's 4 around the median, I think, in all of these particular 5 cases, although the California one looks like maybe it's 6 close. But that shaded area represents a 95% confidence 7 interval that the true meaning of the data would lie 8 within that range. 9 Q. Now, if I'm looking at California for Class I, the 10 Northeast for Class I, and the Upper Midwest for 11 Class III, there's a circle outside of the whiskers. I 12 guess I also see some in the Mideast and Northeast. 13 Those are outlying data points for those 14 particular datasets; is that correct? 15 A. Those are statistically flagged outliers, that's 16 correct. They would just say that, statistically 17 speaking, they lay outside the distribution of the rest of 18 the observations. 19 Q. And then to the extent for any box-and-whisker, 20 the median is not in the middle of the box, or the 21 whiskers are of different lengths, that suggests that the 22 distribution of the data within that set is not normal, 23 right? 24 A. It can be suggestive of that, yes. I mean, so, 25 for example, if you had a -- well, look at the Southwest 26 as an example of this. You can see that the lower whisker 27 is quite a bit longer than the upper whisker. This 28 suggests that the distribution is skewed toward the upper 11415 1 end. 2 Q. Okay. Would you agree that one of the underlying 3 assumptions for having Federal Order regulation in 4 pooling, particularly, is that absent pooling, producers 5 would engage in ruinous competition to supply Class I 6 plants? 7 A. It's my understanding that as a student of dairy 8 history that we have had classified pricing and pooling. 9 The pooling portion of it is to have equitable 10 distribution of classified pricing to producers. It's not 11 equal distribution, as we have zones within the orders, 12 but it is a more equitable distribution. 13 Q. As I think about your testimony and I look at the 14 graphical evidence you have presented, it suggests to me 15 that maybe you are implying that that underlying 16 assumption may no longer be true? 17 A. We have had quite a bit of milk depooling from 18 orders, and I don't mean just in extraordinary 19 circumstances, I mean, as in choosing not to pool on a 20 regular basis. And I think that, you know, that's 21 symptomatic of the fact that we have got more milk trying 22 to pool or to -- acted on orders than we have seen 23 historically from the way that orders were first 24 constructed and built. 25 I do understand what you are talking about in 26 terms of the competitive nature, but if the value of the 27 pool is smaller than it would have otherwise been, I think 28 we would find that many farms would choose not -- or many 11416 1 suppliers of milk would choose not to pool their milk 2 because it wouldn't be of enough value to them for the 3 location of the milk or the headache of having to deal 4 with paperwork or supplying the pools. 5 Q. If I remember correctly, the last time we were 6 here with you on the stand, you were asked if there is 7 still a role for price regulation, and specifically, 8 classified pricing and pooling. My recollection is that 9 you said that there is. 10 Do you agree with my recollection? 11 A. Yeah. My recollection of the question was whether 12 I agreed there was still a role for Federal Orders. I'm 13 not sure it was as specific as that. 14 But, yes, I do think that there's still a role for 15 it. In my testimony that was offered, I suggested a 16 possibility where part of the value of what had been 17 pooled across the wide order could be targeted toward the 18 procurement of milk, and the rest of the value be pooled, 19 you know, across the order. Which in some orders would 20 not be very much value, I understand that. 21 But, again, I'm going back even a step further 22 than that to recognize what Federal Order's mission was, 23 why they were created in the first place, and what we were 24 trying to do with that, and that is to service, you know, 25 the Federal Milk Marketing -- or excuse me -- to service 26 the fluid markets and to assure an adequate supply of 27 milk. 28 Q. Do you have an opinion as to whether Federal 11417 1 Orders would be more effective if the geography of the 2 orders were more focused on those individual Class I 3 markets that you referenced? 4 A. Can you rephrase that question or -- 5 Q. Yeah. Would we -- would Federal Orders be more 6 effective in achieving their mission if we had more 7 smaller orders that focused or organized around Class I 8 geographic markets? 9 A. Historically, the boundary of Federal Orders 10 described an area where Class I handlers competed for the 11 sale of their product, and they're competing across wide 12 areas now. I don't know if that's still an adequate 13 description of what Federal Order boundaries should be, 14 but I think that's becoming very difficult to achieve. 15 MR. MILTNER: That was my last question. Thank 16 you very much. 17 THE COURT: Are there other cross-examination 18 questions for Dr. Stephenson before I call on the 19 Agricultural Marketing Service for questions? 20 I see no one. I invite the Agricultural Marketing 21 Service questions. 22 CROSS-EXAMINATION 23 BY MS. TAYLOR: 24 Q. Good morning. 25 A. Good morning, Ms. Taylor. 26 Q. Thank you for returning this week. 27 A. You're welcome. 28 Q. I wanted to start, I -- I had to race out and pull 11418 1 out -- I wanted to pull out your exhibits from the last 2 week, so I might have missed part of your explanation on 3 kind of what you found to be -- what's different than the 4 old versus the new generally. 5 And I think what I caught was, in the run you put 6 in two weeks ago, you weren't comparing it against the 7 baseline, it was against a different run. And you went 8 back, and this exhibit you are putting in this time around 9 is something against what the baseline numbers were; is 10 that correct? 11 A. Yes. These represent the baseline numbers. The 12 previous testimony happened to be a scenario that we ran. 13 So in other words, we were looking at a change from 14 baseline, something that didn't exist -- 15 Q. Got you. 16 A. -- but, you know, something that we were trying to 17 impose to answer a question. 18 Q. Okay. And then you mentioned that you thought one 19 of the reasons that kind of California and Nevada stood 20 out before was that the plants were -- the fluid plants in 21 those regions were constrained in the model? 22 A. Yeah. We do attempt to constrain all of the 23 plants within a boundary of what we think they process. 24 Now, I -- I don't have complete knowledge of this, 25 but we do have contacts with industry sources. We do try 26 to collect information that gives us an idea about plants, 27 and we don't constrain that to specifically the number 28 that we have. Rather, we look at a plus and minus 10% 11419 1 from what we think. So there is a range that plants can 2 process in. 3 Q. Okay. And so in those two states before, it was 4 pushing up against the constraint is what you said? 5 A. I think that that was the case. Now, I can't tell 6 you specifically, because when I went back to look at the 7 model run that I had reported on last time, there were not 8 notes as to what that scenario actually was. But in that 9 2016 data, it was the first time that we had tried to 10 utilize our plant capacity information. So there was 11 quite a lot of work that was done to collect information 12 about plant processing volume and that type of thing. 13 Q. So in this run, did you lift the constraints or 14 you just maybe made your range plus or minus a different 15 percentage? You mentioned before it was plus or minus 10. 16 A. If we had questions about it, then we would have 17 gone back and solicited additional information from other 18 people, if we could, to try to find what, you know, 19 volumes those plants may have been. So you can see that 20 if there's a real need for fluid milk in an area like 21 Nevada or California, and if plant capacity is not 22 adequate to supply that volume of fluid milk, then you can 23 have those shadow prices increase rather substantially. 24 It would be asking for more opportunity to process there. 25 Q. And that's when we would see more green? 26 A. Yes. Those shadow prices, the Class I values 27 would have been higher. 28 Q. Okay. 11420 1 A. I should perhaps at least comment, too, that we 2 have the volume estimates on quite a large number of the 3 plants in this country, and the total volume accounted for 4 by those plants -- they tend to be the larger operations 5 as well -- is close to 90% of the volume of total milk 6 produced in the country. So the additional 10% of volume 7 is dispersed over quite a lot of smaller plants. Those 8 plants are available for operation. They are just not 9 constrained because we don't know what they process. 10 Q. Okay. Okay. So I just want to make sure we're 11 all clear. So this is -- you didn't rerun anything. You 12 had your baseline numbers, and that's what we have in 13 these exhibits? 14 A. Can -- can you say that again, please? 15 Q. Sure. This is -- the baseline -- you didn't -- 16 the baseline numbers didn't change between this set and 17 the other set of numbers. It's just that this is actually 18 reporting now baseline numbers, and before it was 19 reporting out a change for the baseline? 20 A. Either the change from the baseline or runs that 21 we were making trying to get to the baseline. So our idea 22 of the baseline is the best that we can do to represent 23 the dairy industry as it existed at that point in time. 24 And I don't recall if that set that I had used before was 25 as we were trying to get to the baseline numbers or if it 26 was a scenario from the baseline numbers, but it was a 27 model run that was not what we considered to be the 28 baseline of 2016. 11421 1 Q. Okay. 2 A. I might just also mention, though, that even 3 though there are differences between the data presented 4 before and this, I think that qualitatively, the results 5 are quite robust. I mean, they look fairly similar. I 6 mean, the story that I was trying to show, demonstrate, 7 you know, is the story that is in both of these maps, I 8 think, even though the low point wasn't in Idaho. 9 Q. I do appreciate you going back to look at this, 10 though. I know it takes quite an effort, and so I do want 11 to thank you for doing that and coming back here. 12 A. You're very welcome. 13 Q. I did have one question on the Make Allowance 14 questions. 15 So I think if I caught correctly, you mentioned 16 you had put highs and lows, and I think it was 17 Exhibit IDFA-1. 18 A. Yes, there are -- Hearing Exhibit 178? 19 Q. Yeah. Yes. 20 And I was -- I went back and looked at the online 21 copy. And so you -- you did have highs and lows in there 22 for your 2023 survey. I think what we were looking for 23 were highs and lows of the non-transformed numbers in the 24 2021 survey. 25 A. Oh, okay. 26 Q. Yeah. 27 THE COURT: When would you like to come back? 28 MS. TAYLOR: Well, if we're done, maybe he can -- 11422 1 I won't speak for him. But we'll be here today and 2 tomorrow. 3 THE WITNESS: I won't. I didn't bring those 4 values, and apparently I didn't understand what you were 5 requesting. 6 BY MS. TAYLOR: 7 Q. Okay. 8 A. I -- I can pull those together if you really want 9 them, but I'm not sure how to submit them to you. 10 Q. Yeah. I don't think we'll be able to submit them 11 after we close the hearing, unfortunately, so -- okay. 12 That would be -- 13 THE COURT: Ms. Vulin? 14 MS. VULIN: Could I propose that either Mr. Brown 15 or Ms. Keefe could submit them tomorrow? Or at least 16 let's look into that. We'll see. 17 MS. TAYLOR: I would be great with that, but I 18 don't know if from my attorney's perspective he would be 19 good with that, so how about we circle back on that. One? 20 MS. VULIN: That's fair. 21 THE COURT: Would you articulate again what you 22 need? 23 MS. TAYLOR: Yes. 24 BY MS. TAYLOR: 25 Q. What we're looking for, we're just trying to get a 26 full comprehensive set of data over whatever years we can 27 get, and then we can make comparisons to kind of look at 28 changes. 11423 1 So in IDFA-1, you put in 2021 study numbers based 2 on your non-transformation allocation of unallocated 3 costs, and you put those in as averages in the text of 4 your document. What we're looking for is the high and low 5 breakouts of that non-transformed numbers for the 2021 6 survey. 7 A. I'd have to look here, but I'm pretty sure that 8 these are the non-transformed numbers in 178. What -- 9 what is not non-transformed are the earlier years. 10 Q. Right. That's what I'm looking for. You put 2023 11 in, and you used the -- I'll call it the old allocation 12 method. 13 A. Yes. 14 Q. And that's what 2023 numbers are. And I'm just 15 looking for the 2021 numbers, high and low, based on the 16 old allocation method. 17 A. I'd have to look to see if I had that. 18 Q. Okay. 19 A. I may have to actually rerun all of that. I did 20 rerun those for my testimony where that table shows the 21 total average, but I don't recall if I broke that out by 22 the high and low plants. 23 Q. Okay. I think we can talk and see what we may be 24 able to do tomorrow. 25 MS. VULIN: I may have spoken out of turn. I'm 26 not sure if Ms. Keefe or Mr. Brown worked on any of that 27 data. I had misunderstood that. I can see the issue now. 28 MS. TAYLOR: Yeah. 11424 1 THE COURT: Where there's a will, there's a way. 2 MS. TAYLOR: One could hope. 3 THE COURT: So we'll see. 4 MS. TAYLOR: I think that's it from AMS. Thank 5 you again. 6 MS. VULIN: Your Honor, just a short redirect. 7 REDIRECT EXAMINATION 8 BY MS. VULIN: 9 Q. You have used the terminology procurement costs, 10 balancing costs, and incentive. 11 And is procurement costs and incentive costs, are 12 those the same thing conceptually? 13 A. I'm meaning that to be that way, that's correct. 14 Q. And Ms. Hancock had asked you about the need for 15 balancing costs and incentive costs in some areas of the 16 country but not in others, correct? Identical needs. 17 A. Yes. The needs are different in different parts 18 of the country. But, yes. 19 Q. Uh-huh. 20 And so in looking at this map, if -- if we set 21 balancing and incentive values in red areas based on what 22 those values would be in the dark green areas, what does 23 that do to the system? What kind of impact would that 24 have? 25 A. Well, access to milk and balancing function is 26 much easier -- or excuse me -- access to the balancing 27 function is much easier in the red areas simply because 28 you have got capacity in manufacturing plants to handle a 11425 1 little extra milk, if it may be surplus in fluid plants, 2 or to give up a relatively small amount of the total 3 proportion for fluid needs. So balancing costs tend to be 4 much smaller in those regions. 5 Procurement, on the other hand, can be quite a bit 6 different, as you will see in some of the orders where 7 enticing that milk away from the cheese plant that has 8 sales for their final product is difficult and costly to 9 do. 10 Q. And so there's really no way to set a national 11 balancing and procurement cost that would apply uniformly 12 in all of these areas and still be accurate; is that fair? 13 A. I think it's really difficult to do. And if we 14 look at the records where we see $0.30 for one of the 15 values and $0.40 for another, or something like that, that 16 suggests awfully round values, which, to me, you know, 17 suggests that we didn't really actually know what those 18 were at the time either, that it seemed like a good number 19 to throw out there. 20 Q. And then, lastly, you were asked about the newness 21 of the methodology used to calculate these differences. 22 So developing the Class I shadow price has been 23 done before to set Federal Order policy, correct? 24 A. That's correct. I mean, all of these shadow price 25 values have been done before. So developing those values 26 is not new at all, it's just visualizing and using them in 27 this way is -- is new. 28 Q. And when you say "this way," running the 11426 1 difference between the Class I shadow price and the 2 Class III shadow price, correct? 3 A. Correct. 4 Q. And that's just simple subtraction math? 5 A. Sure. 6 MS. VULIN: Nothing further, Your Honor. 7 MS. TAYLOR: This is Erin Taylor from AMS. I 8 still have one more question, actually. 9 MS. VULIN: Yes. 10 RECROSS-EXAMINATION 11 BY MS. TAYLOR: 12 Q. You talk about why there's a near zero point for 13 the Class I shadow price. 14 Is there -- should there be or why isn't there a 15 near zero Class I dollar value for the Class III shadow 16 price? 17 A. Why is there not? 18 Q. Yeah. 19 A. You can think about those shadow prices in the 20 model solution as being on a complete spectrum from zero 21 to the highest value shadow price that we have, which is, 22 I'm guessing without looking on here, but probably for 23 consumer demand for fluid milk in Key West, okay? So 24 those shadow prices for all products in all constraints, 25 in all regions of the country, are going to be on that 26 spectrum somewhere. 27 And your question was why don't we see a zero 28 price? 11427 1 Q. A near zero price in the Class III shadow price? 2 A. The near zero price on Class III is because those 3 products are needed and are generally being shipped or 4 having to be shipped some distance to consumers from the 5 plant locations, so they are incurring transportation 6 costs to get from surplus regions to places where they are 7 needed. 8 Q. Okay. Thank you. 9 MS. VULIN: Thank you, Your Honor. We would move 10 to admit Exhibits 490, 491, 492, and 493. 11 THE COURT: Is there any objection to the 12 admission into evidence of MIG Exhibit 16D, which is 13 Exhibit 491? 14 There is none. Exhibit 491 is admitted into 15 evidence. 16 (Thereafter, Exhibit Number 491 was received 17 into evidence.) 18 THE COURT: Is there any ob- -- well, I started 19 with 491. Sorry, I'm out of order. 20 But is there any objection to admission into 21 evidence of MIG Exhibit 16C, like cat, which is 22 Exhibit 490? 23 There is none. Exhibit 490 is admitted into 24 evidence. 25 (Thereafter, Exhibit Number 490 was received 26 into evidence.) 27 THE COURT: Is there any objection to the 28 admission into evidence of MIG Exhibit 16E, also 11428 1 Exhibit 492? 2 There is none. Exhibit 492 is admitted into 3 evidence. 4 (Thereafter, Exhibit Number 492 was received 5 into evidence.) 6 THE COURT: Is there any objection of the 7 admission into evidence of Exhibit MIG-16F, which is 8 Exhibit 493? 9 There is none. Exhibit 493 is admitted into 10 evidence. 11 (Thereafter, Exhibit Number 493 was received 12 into evidence.) 13 MS. VULIN: Thank you, Your Honor. 14 THE COURT: Thank you so much, Dr. Stephenson. I 15 appreciate your working with Ms. Vulin to determine 16 whether the issue that the Agricultural Marketing Service 17 would like a little more information on could in some way 18 be provided. 19 THE WITNESS: Thank you. 20 THE COURT: Thank you. And you truly are a 21 gentleman and a scholar. Thank you for coming back. 22 Let's take a ten-minute break. Please be back and 23 ready to go at 9:22. 24 (Whereupon, a break was taken.) 25 THE COURT: Let's go back on record. 26 We're back on record at 9:26. 27 We have a new person in the witness chair. 28 Would you please state and spell your name for us. 11429 1 THE WITNESS: Jeffrey Sims, J-E-F-F-R-E-Y, 2 S-I-M-S. 3 THE COURT: You remain sworn. 4 JEFFREY SIMS, 5 Having been previously sworn, was examined 6 and testified as follows: 7 THE COURT: Ms. Hancock, if you'd identify 8 yourself and then walk me through these exhibits. 9 MS. HANCOCK: Nicole Hancock, National Milk. 10 And, Your Honor, I believe we're on Exhibit 494. 11 THE COURT: Correct. 12 MS. HANCOCK: So we have Exhibit NMPF-112, which 13 is Mr. Sims' written opposition statement. We'll mark 14 that as Exhibit 494. 15 THE COURT: Yes. 16 (Thereafter, Exhibit Number 494, was marked 17 for identification.) 18 MS. HANCOCK: And then we have NMPF-112A through 19 D, like David, and we'll mark those in order. 20 So National Milk-112A will be Exhibit 495. 21 THE COURT: Yes. 22 (Thereafter, Exhibit Number 495 was marked 23 for identification.) 24 MS. HANCOCK: National Milk-112B, as in boy, will 25 be 496. 26 THE COURT: Yes. 27 (Thereafter, Exhibit Number 496 was marked 28 for identification.) 11430 1 MS. HANCOCK: National Milk-112C, as in Charlie, 2 will be 497. 3 THE COURT: Yes. 4 (Thereafter, Exhibit Number 497 was marked 5 for identification.) 6 MS. HANCOCK: And last, National Milk 7 Exhibit-112D, as in David, will be 498. 8 THE COURT: Yes. 9 (Thereafter, Exhibit Number 498 was marked 10 for identification.) 11 MS. HANCOCK: Delta for the pilots in the room. 12 Did we get the -- 13 THE WITNESS: Yes. 14 MS. HANCOCK: We're good to go. 15 THE WITNESS: If we can turn on the display. 16 MS. HANCOCK: Okay. Your Honor, is it okay to 17 proceed? 18 THE COURT: It is. So we're looking at what's 19 been marked as Exhibit 495. 20 DIRECT EXAMINATION 21 BY MS. HANCOCK: 22 Q. Good morning, Mr. Sims, and welcome back to the 23 stand. Let's just identify the documents that we have 24 here first. 25 They won't all show on the screen right now, but 26 we'll start with Exhibit 494, that's your written 27 testimony that you are going to provide in just a moment; 28 is that right? 11431 1 A. Yes. 2 Q. Exhibit 495, which is 112A that's showing on the 3 screen, can you tell us what this exhibit is? 4 A. Yes. This calculates two or three things 5 simultaneously by Federal Milk Marketing Order by month 6 for calendar years 2021 and 2022. It simply takes -- and 7 these data are from the MA websites or the price 8 announcements or other data that's been presented at this 9 hearing in terms of the Class I producer milk pounds and 10 the producer milk pounds in each pool, the 11 pools, 11 for -- again, for the years 2021 and 2022. It calculates 12 the cost, the reduction in pool revenue by month, and then 13 summarized annually for each of the 11 orders, the 14 reduction in pool revenue from reducing across the board 15 Class I differentials by $1.60 per hundredweight. And it 16 simply takes those dollars and divides them by the 17 producer milk pounds in the month, which would create, 18 then, a change per hundredweight in the PPD, in the 19 component pricing orders, or the uniform price in the four 20 skim fat orders. 21 I then just put in the announced PPD at the base 22 zone for each order in the next to last column, and then 23 simply took the change in the PPD compared to the PPD as 24 announced. 25 And then the last column would be a revised PPD 26 based on reducing the pool revenues by $1.60 per 27 hundredweight. 28 I will note that Ms. Keefe's testimony earlier had 11432 1 some data in there on 2022, and my data in terms of the 2 change in the order blend price or PPD or uniform price, 3 whichever way you want to look at, and hers are within -- 4 I rounded mine out to three decimals, she rounded out to 5 two, and within that rounding they are identical. 6 So the process that she used to compute the change 7 in the weighted price or the blend prices for 2022 and 8 mine match, again, within the, you know, rounding out to 9 one-tenth of a cent. So the process is something that 10 matches exactly what Ms. Keefe did earlier. 11 Q. And if we turn to page 13 of Exhibit 495, you have 12 a summary page there? 13 A. I do. 14 Q. And do you want to explain that page? 15 A. Yes. This simply takes the individual results per 16 order and adds them up together to get, for the two years 17 number, the weighted average change across all orders in 18 terms of the change in blend prices for each of the two 19 years. Also sums the change in pool revenues for each of 20 the two years. Notably, for 2021, about 674 thous- -- 21 excuse me -- $674 million in pool revenue reduced as a 22 result of Proposal Number 20, and just under $656 million 23 for the year 2022. 24 And then over to the side we simply take a quick 25 look at how the Proposal Number 20 would impact the 26 occurrence of negative PPDs and how it would increase the 27 incidence of negative PPDs, current, or as was announced 28 by each Federal Order, the PPD. And then the impact of 11433 1 Proposal 20 on the occurrence or the number of times you 2 would -- we would see negative PPDs in the Federal Orders. 3 Q. Okay. And then Exhibit 496, can you tell us what 4 that exhibit is? 5 A. Yes. This exhibit takes the -- I guess you could 6 say the -- as -- as today, for 2021 and 2022, the top half 7 of each page -- and the pages are procedurally identical, 8 2021 being the first page, 2022 being the second page. It 9 simply takes the base zone uniform price or statistical 10 uniform price for the component pricing orders, subtracts 11 the location adjustment to -- from what I would call 12 representative reserve supply areas for the Southeast. 13 These reserve supply areas Deaf Smith County, Texas; 14 Hereford, the city; Manitowoc, Wisconsin, in Order 30; 15 Rensselaer, Indiana, in Order 33; St. Johns, Michigan, in 16 Order 33, also; and Lancaster, Pennsylvania, for Order 1. 17 It simply calculates the blend price gradient, if 18 you will, between these reserve supply areas and the order 19 blend price of -- that was announced in Orders 5, 6, and 20 7. And, again, these transactions represent what I would 21 call kind of typical reserve supply sources for each of 22 the three orders in the Southeast, largely the Southwest, 23 and the Upper Midwest, and the Middle Midwest for Order 7, 24 Michigan for Order 6, and the Order 1 area generally for 25 Order 5. 26 It simply calculates the blend price gain from 27 buying milk in a reserve supply area and the blend price 28 gain when you sell it in Orders 5, 6, and 7. If you 11434 1 reduce the $1.60 out of the Order 5, 6, and 7 pools, 2 because Orders 5, 6, and 7 have the highest Class I 3 utilization of all the orders in the country, that $1.60 4 impacts those orders most negatively. In other words, the 5 blend price goes down in Orders 5, 6, and 7, more than it 6 goes down anywhere else if you take a flat $1.60 off of 7 every pool. Now, every blend price and every pool goes 8 down, but Orders 5, 6, and 7 goes down more than typical 9 because of their very high Class I utilization. 10 And so then I used -- basically take the same 11 blend price changes that I computed in Exhibit 111 -- 12 National Milk 112A, and applied them to these five typical 13 milk movement scenarios on an annual basis, and it -- 14 maybe I can -- maybe I can get that one up while we're -- 15 let's see. We need B, don't we? There we go. 16 So as we can see, the blend price, because, again, 17 every order, the blend price goes down as a result of 18 Proposal Number 20, the announced Federal Order blend 19 price or uniform price or statistical uniform price, they 20 all fall. But they fall most and biggest, a biggest fall, 21 the biggest decrease, in Orders 5, 6, and 7. 22 So when you compare the blend price incentive to 23 move milk, bulk milk, farm milk, from these reserve supply 24 areas to the Southeast, Proposal 20 actually harms or 25 reduces the incentive to move supplemental milk from these 26 reserve supply areas to the Southeast more than any other 27 place, to the tune of, depending on the place, depending 28 on the origin point of the supplemental milk, the 11435 1 destination point, and the year, anywhere from 50-some-odd 2 cents per hundredweight decline in the incentive to move 3 milk to more than $1 per hundredweight to -- that would 4 reduce the incentive. 5 So basically Order 1 -- excuse me -- Proposal 20 6 damages the ability or the -- what I would call the blend 7 price gradient between reserve supply areas and the 8 Southeast pretty substantially. And I think it bears a 9 bit of a reminder that packaged milk tends to move on 10 Class I prices; bulk milk moves on blend prices. 11 So this is the calculation that, for example, I, 12 in my position, would go through to determine where to get 13 supplemental milk, or what supplemental milk should cost, 14 et cetera, for these areas, particularly for Lone Star 15 Order 7, this is exactly the kind of comparison I do when 16 I start thinking we might need supplemental milk or what 17 is milk worth. This is the kind of calculations I do. 18 And it -- and this Proposal Number 20 would severely 19 damage the Southeast's ability to attract supplemental 20 supplies in these reserve areas. 21 Q. Thank you. 22 And let's move to Exhibit 497. 23 Can you explain for us what is represented in 24 Exhibit 497. 25 A. Yes. And I'm going to go -- I have been accused 26 of going fast, but I'll try to go slow. 27 The question has arisen in this hearing about the 28 impact of Class I differentials on Class I demand. And if 11436 1 we -- if you think intuitively, you would think that if 2 you raise Class I differentials, that raises -- it should 3 raise retail prices, and consumers, if there is a response 4 or a relationship between what consumers do and how much 5 milk they buy, they are responding to retail prices. 6 So we investigated the question of, is there a 7 cause and effect relationship between Class I 8 differentials and retail prices? Because that's what -- 9 again, that's what consumers respond to. 10 For the year, for the ten months ending 11 October 2023, when we initially did this, I don't think 12 the last two months have been announced yet, we used the 13 30-city AMS Dairy Program Retail Price Survey as our data 14 source. So these are USDA announced retail prices from 15 their monthly survey, 30 cities across the U.S. 16 This first page here is a standard graph of the 17 relationship for each of those 30 cities of the retail 18 price, the ten-month retail price, again, ending 19 October 2023, as an -- you know, provided in that USDA 20 data, compared to the Class I differential at that city, 21 the current Class I differential. 22 Perhaps the easiest one to look at is the one to 23 the very, very far right. You will see a dot there, oh, a 24 little bit closer to $4 than it is $4.50 on the retail 25 price per gallon, and hovers greatly above $6. Most of us 26 who mess around with Class I differentials and prices know 27 that that's Miami. Miami is the current only place that I 28 think that has milk plants and has people and has a 11437 1 Class I differential of $6. So far out to the right, that 2 one is Miami, in the intersection of the retail price, 3 ten-month average retail price, and the Class I 4 differential. 5 If we look at the one at the top, the very -- the 6 kind of the second line, the -- or excuse me -- the second 7 column, the $2 per hundredweight differential group, the 8 number there is a number just above $6 per gallon. That 9 is Kansas City. 10 So we plotted in a scatter graph the relationship 11 as the retail price was reported by USDA against the 12 Class I differential at that city. For -- again, for 13 Kansas City, $2; Miami, $6, et cetera. And then just did 14 a quick statistical test, an ordinary least squares 15 regression, to get the trend line, the best fitting 16 regression line. 17 And out of that you can then ask, what is the 18 R-square which represents a statistical measure of how 19 much of the difference in all these data points is 20 represented by that best-fitting regression line? 21 Q. How well they correlate? 22 A. How well they correlate. 23 Q. Okay. 24 A. In this case, in an R-square, it's been a long 25 time since I did them, but I do remember that zero means, 26 in essence, completely random, absolutely no relationship 27 whatsoever. A factor of one means absolute relationship. 28 That the -- that the dependent variable moves in lockstep 11438 1 with the independent variable. 2 In this case, when we were -- and intuitively, 3 again, you would think that Class I differentials would 4 have a direct impact on the retail price in an area. The 5 higher the differential, you would think you would, you 6 know, intuitively believe that that should result in the 7 highest retail price. 8 That is absolutely not the way the world is. The 9 R-square here is .0032, meaning more than 95.5% of the 10 impact on retail prices is from factors other than the 11 Class I differential. It is almost as close to random as 12 you can get. There is virtually no cause and effect 13 relationship between the Class I differential and the 14 price per gallon for retail milk sold in a particular 15 area. They are completely disassociated actions or 16 activities. 17 Q. And so I hate to say the word again because I feel 18 like there will be a collective eye roll, but we have 19 heard a lot of debate at this hearing about price 20 elasticities and whether the retail price of milk causes 21 any kind of effect on consumer behavior. And I want to be 22 clear on what we're talking about in this Exhibit 497. 23 You are not talking about price elasticities here, 24 are you? 25 A. We are not. We're simply saying that if you make 26 the intuitive conclusion that higher Class I differentials 27 will raise retail prices or, conversely, lower Class I 28 differentials will necessarily reduce the likelihood or 11439 1 create a likely reduction in retail prices, that cause and 2 effect relationship simply does not exist. 3 Q. And because if you increase Class I differentials, 4 there's a lot of intervening events that can happen to 5 either absorb or reduce costs along the way before it gets 6 to a retail outlet; is that fair? 7 A. All we're saying with this data and what the data 8 says is that the relationship between the Class I 9 differential and a retail price has virtually nothing to 10 do with the Class I differential. It's gillions of other 11 things, retail pricing behavior, any number of things that 12 can drive that, but what is not driving it is the Class I 13 differential. 14 Q. Okay. Let's turn to page 2. 15 A. Yes. 16 Again, intuitively you would think that, again, 17 retail prices and Class I differentials should be at least 18 indicative of each other, right? So we prepared a couple 19 of maps here, one of which will not be any surprise to 20 anybody in the room. We'll start with the map on the 21 right, which simply just for the 30 cities announced in 22 that USDA AMS retail price service, the 30 series -- the 23 Class I differential at those 30 cities compared to the 24 median Class I differential for those 30 cities. 25 In this case, the median Class I differential is 26 $2.45. That's not too far off what we normally think of 27 as the average Class I differential across the country 28 completely, but for this subset of cities, the median 11440 1 Class I differential is $2.45 per hundredweight. And they 2 range from, of course, well less than that to up to $6 in 3 Miami. 4 The gradations in this map simply show the 5 relationship of the city Class I differential to the 6 median. The most red state, now, no political commentary, 7 is Florida. It has the highest Class I differential 8 compared to the median. And when you get to the Upper 9 Midwest and parts of California or the cities in 10 California that are surveyed, you have the largest 11 difference less than the median Class I differential. 12 So this map looks exactly like you would expect. 13 The highest Class I differentials compared to the median 14 in the Southwest and up the Eastern Seaboard, the lowest 15 in the Upper Midwest and on the West Coast. 16 The map on the left-hand side makes the same 17 comparison, but with retail prices. And you don't see 18 what you would expect there. If you -- if prices -- 19 retail prices followed Class I differentials in relative 20 consistency. 21 There is a good bit of difference. The places 22 where the retail prices are higher, substantially higher 23 than the -- than the Class I differential, or higher than 24 the mean -- excuse me. Strike that. 25 The places where they are higher than the median, 26 you know, deep red, largely across some of the central 27 states and Pennsylvania. Higher than the median in 28 California and the Upper Midwest. Tend to be lower than 11441 1 the median in the South, Georgia and Florida, and the 2 Southwest. 3 So this shows that the -- again, the lack of 4 connection between retail prices and -- and the Class I 5 differentials, or chose, at least on this one, the picture 6 of where the retail prices deviate from -- from the 7 median. 8 We also asked the question, well, yeah, the -- the 9 implication of the statistics is that there's no relation, 10 but could this be a regional thing? Could there be some 11 sort of regional implication that says, "Okay, here's why 12 it doesn't look why there's no relationship," and that's 13 some sort of regional pricing behavior on retail prices. 14 So I'm going to go, again, through this one fairly slowly. 15 And I struggled with the right nomenclature, but, 16 again, if you -- if you think intuitively or you consider 17 intuitively the Class I differential and the retail price, 18 normally we would think they ought to move together or be 19 consistent. But there's just as many places where they 20 are completely inconsistent. 21 A blue state in this case means that -- one of two 22 things: Either the median differential is higher than 23 the -- or the actual retail price is higher than the 24 median and the Class I differential is higher than the 25 median, or conversely, the retail price is lower than the 26 median and the Class I differential is lower than the 27 median. In other words, they kind of move like you would 28 expect. Right? 11442 1 But then all the red states show a place where 2 they move entirely differently, or the relationship is 3 exactly opposite. You have a high Class I differential 4 but a relatively low retail price, or vice versa, a low 5 Class I differential but a relatively high retail price. 6 There's obviously no geographic relationship in 7 terms of this disconnect. And in fact, if you look to the 8 three states that -- in kind of the Northeast, the Ohio 9 and the Northeast, Pennsylvania -- Ohio, Pennsylvania, and 10 New York, each of those states has two cities in the USDA 11 retail price surface -- or survey. In each of those 12 states, the two cities themselves aren't even consistent 13 in terms of how they relate to their retail price versus 14 the median. 15 So this is not a regional question. It's not 16 there's a regional impact, or it's -- this is just simply 17 their -- these data show that if you are looking for a 18 cause or effect relationship between Class I differentials 19 and retail prices, it simply doesn't exist. 20 Q. Okay. And then briefly Exhibit 498, tell us what 21 that exhibit is. 22 A. Yes. The type is kind of small, we tried to get 23 as many as we could on a page, but -- there's been some 24 discussion, implication at this hearing that the 25 Proposal 19 Class I differentials are somehow skewed such 26 that they tend to create a competitive advantage for 27 cooperative-owned Class I plants, that the implication is 28 that we went -- in developing Proposal 19 we somehow 11443 1 inherently or systematically or systemically inserted a 2 bias to competitive advantage for cooperative plants. 3 So this is a plant list that I think came off of, 4 I believe the footnote says Exhibits 299 and 301. 289, I 5 believe -- 289 distributing plants and supply plants. And 6 the Class I working group went in and simply, to the best 7 of our knowledge and belief, marked whether those plants 8 are owned by a cooperative or whether they are owned by a 9 proprietary company, including in what we have included in 10 proprietary companies vertically-integrated grocery store 11 chains. 12 Q. And what's the executive summary or the takeaway 13 from Exhibit 498? 14 A. If we can get to the bottom. 15 We made calculations, and that the -- across -- 16 compared to the current differentials -- there's a small 17 table at the bottom that simply summarizes the -- the -- 18 the statistics. 19 Cooperative-owned plants, the current differential 20 is approximately $2.55, simple average across those 21 co-op-owned plants. The order -- excuse me -- the 22 Proposal 19 proposed differential across that universe of 23 plants is $4 and roughly $0.02, a difference of $1.46, 24 $1.47, the delta per hundredweight. 25 The proprietary plants, again, including the 26 vertically-integrated grocery stores, the current average 27 differential is 4 -- roughly $4.03 a hundredweight. The 28 proposal -- excuse me -- the Proposal Number 19 is $4.03, 11444 1 compared to a current differential average across those of 2 $2.58 per hundredweight, a difference of $1.44 roughly per 3 hundredweight. 4 This shows that across the country compared to the 5 current Class I differentials -- which seem to be 6 important to a number of the witnesses in terms of 7 maintaining price alignment, the current price alignment 8 seemed to be an important consideration for them. 9 Compared to the current differentials, the 10 cooperative-owned plants, their increase is ever so 11 slightly more than the proprietary plants, but I would say 12 that these represent virtually identical numbers. 13 But if there is any difference or any notable 14 difference, it's that the co-op plants tend to go up more 15 than the proprietary plants, again, including the 16 vertically-integrated grocery store chains. 17 Q. Okay. Let's turn to your opposition testimony to 18 Proposal Number 20 in Exhibit 494. You have approximately 19 32 minutes left. 20 A. Oh, am I limited? I didn't think I was. 21 Q. Well -- 22 MS. TAYLOR: All witnesses get an hour. 23 MS. HANCOCK: I thought it was direct testimony. 24 MS. TAYLOR: Is this not direct testimony? 25 MS. HANCOCK: It's rebuttal testimony to 20. 26 (Discussion held, not reported.) 27 MS. HANCOCK: Okay. Well, I saw the clock 28 running, so I think we're going to be close. 11445 1 THE WITNESS: Okay. 2 BY MS. HANCOCK: 3 Q. Exhibit 494, if you could provide that testimony. 4 A. Yes. And I -- my name is Jeffrey Sims, as we said 5 earlier. I work for Lone Star Milk Producers, and I'm a 6 member of the National Milk Producers Class I working 7 group. 8 We present this testimony on behalf of National 9 Milk in opposition to Proposal Number 20. Proposal 10 Number 20, if adopted, would result in calamitous, 11 disorderly marketing conditions in the U.S. 12 I'll do my best to stay under my 30 minutes. 13 We enumerate a number of challenges and concerns 14 regarding Proposal Number 20. Number one, as we indicated 15 in that -- one of the previous exhibits, there's an 16 enormous amount of Class I revenue which leaves the 17 Federal Order pools, which would result on -- from 18 order -- excuse me -- Proposal Number 20, somewhere in the 19 $650 million to $670 million range per year. 20 Importantly, there is no guarantee, no guarantee, 21 that any of the $660 million would materialize in the form 22 of over-FMMO prices. A substantial portion of the country 23 would have a zero Class I differential per hundredweight 24 under Proposal Number 20. That would significantly 25 increase the incidences of Class I price inversions, and 26 would also significantly increase the incidences of 27 negative PPDs. 28 Negative PPDs are a major concern for dairy 11446 1 farmers, and they -- provisions which would tend to 2 increase the incidences of and magnitude of negative PPDs 3 are not embraced, and will not be embraced in the dairy 4 farming community. 5 I think I'll pause here and go off script, since 6 we're not going to follow the script. Mr. Schuelke last 7 week, two weeks ago, made a very interesting observation 8 about -- from Crystal Creamery, Mr. Schuelke -- about 9 negative PPDs. He said, "Negative PPDs tell dairy farmers 10 to deliver to Class III, not to Class I." I think that's 11 a very interesting observation. 12 Number three, Proposal Number 20 would reduce or 13 even eliminate the regulated price economic incentives to 14 supply Class I plants, and this would occur across the 15 country, not just in predominantly Class I markets. 16 Proposal Number 20 ignores or assumes away -- this 17 is a substantial cost of balancing Class I plants -- and 18 ignores or assumes away 25 years of increases in milk 19 hauling costs. 20 Proposal Number 20 ignores the difference between 21 the on-farm milk production costs of Grade A milk versus 22 Grade B. 23 Effective -- Proposal Number -- or item number 24 six, Proposal Number 20 would effectively return much of 25 the country to individual handler pools which can cause 26 market disorder rather than the market-wide pools which 27 have been determined by the Secretary to enhance orderly 28 marketing. 11447 1 Proposal Number 20 would create conflicts with 2 other Federal Milk Marketing Order provisions. 3 Proposal Number 20 makes no improvement in the 4 Class I price surface to encourage milk to move from 5 reserve supply areas to areas of milk need and, in fact, 6 would disincentivize the delivery of milk from reserve 7 supply areas to milk deficit areas. 8 Number nine, Proposal Number 20 improperly 9 concludes, as we have just described in our -- one of the 10 previous exhibits, the Class I will -- demand will be 11 reduced or eliminated -- excuse me -- if you reduce or 12 eliminate Class I differentials. 13 Proposal Number 20 relies on substantial immediate 14 and permanent increases in over-order prices to transmit 15 the dairy product values through raw milk. If -- if 16 the -- if such increases in over-order prices were to 17 occur, which is a highly speculative occurrence we 18 believe, there is no guarantee that such increases would 19 be immediate and permanent, and certainly no assurance 20 that the over-FMMO prices would sufficient -- would rise 21 sufficiently to offset the $660 million in pool revenues. 22 These problems build on each other and multiply 23 each other -- 24 THE COURT: Do you want to just re-read just after 25 "offset"? 26 THE WITNESS: Oh. Over-FMMO prices, there's no 27 assurance that over-FMMO prices would rise sufficiently to 28 offset the $660 million lost in FMMO pool revenues. 11448 1 THE COURT: Thank you. 2 THE WITNESS: These problems build on each other 3 and exacerbate each other. 4 Number one, Proposal Number 20 reduces pool 5 revenues in all Federal Milk Marketing Orders. As we 6 mentioned, computed in that previous exhibit, that number 7 is rounded $650 million to $670 million. 8 Proposal Number 20 increases the incidences of 9 Class I price inversions and increases the incidences of 10 magnitude of negative PPDs. It's pretty straightforward. 11 We reduce $1.60 off of every order Class I differential, 12 that then lowers the blend, that lowers the -- reduces the 13 Class I price, it increases the incidences of Class I 14 price diversions, and increases the occurrence of negative 15 PPDs. 16 This is particularly problematic with Class II, 17 with -- if the mover goes back to the higher-of, every 18 time the mover is set on Class IV, you can have a -- in 19 those areas where there's a zero Class I differential, you 20 will have a Class I to Class II price inversion. 21 Proposal Number 20 reduces or eliminates the 22 incentive to supply for Class I one. I'll try to 23 summarize here. The way to get Class I milk delivered to 24 Class I is to make Class I price the highest price class. 25 Okay? 26 In much of the country, under Proposal Number 20, 27 there would be no notable difference between the 28 manufacturing class prices, Class III and IV particularly, 11449 1 and the Class I price. You -- in essence, we may still 2 have classes of use, but in a place where there is a zero 3 Class I differential, you do not have classified pricing 4 because all the class prices are going to be pretty much 5 the same. So you -- when you take that money away, the 6 Class I price looks exactly like, or very nearly like, the 7 manufacturing class prices. 8 Why would anybody -- why would a dairy farmer 9 choose to serve Class I plants when the revenue at that 10 Class I plant that flows into the pool is virtually 11 identical to the revenue that flows in from Class III and 12 Class IV? We have a real problem there if we need a place 13 that has a zero or very nearly zero Class I differential. 14 If the -- if the Class I and Class III/IV prices 15 are equal or virtually equal, there is absolutely no 16 economic incentive within the orders to supply milk to 17 Class I. And the fact that we -- you know, so the orders 18 would not reflect the cost of balancing, the order prices 19 would not reflect the cost of acquiring milk for Class I, 20 there is no practical reason why a dairy farmer would 21 elect to take on the cost of balancing a Class I plant 22 when there is no more money in the pool which comes from 23 Class I than comes from Class III or Class IV. 24 Class I differentials need to have a slope which 25 encourages milk to move from reserve supply areas to 26 deficit regions, particularly. Dr. Stephenson, I believe, 27 admitted that in one of his pieces of testimony. 28 Order -- Proposal Number 20 does not address the 11450 1 need to increase the price gradient to track supplies from 2 reserve supply areas to deficit areas. 3 Proposal Number 20 dismisses the undeniable and 4 harmful effects of 25 years of escalating hauling costs as 5 inconsequential. As we demonstrated in the exhibit, 6 Proposal Number 20 actually reduces the incentive, the 7 blend price incentive, to move milk from reserve supply 8 areas to deficit areas in absolute conflict with the aims 9 and purposes of the orders and as directed in the 10 market -- in the Agricultural Marketing Agreement Act. 11 Proposal Number 20 would negate the impact of 12 pooling provisions or milk delivery performance standards. 13 THE COURT: I'm going to interrupt you just a 14 moment, Mr. Sims. You are at the bottom of page 6. 15 THE WITNESS: I am at the -- about two-thirds of 16 way down page 6. I -- again, I'm bouncing as quickly as 17 possible. 18 Proposal Number 20 would negate the impact of 19 pooling provisions or milk delivery performance standards. 20 There's been some talk at this hearing that if we want to 21 get milk to move to Class I, then, hey, just tighten 22 pooling provisions, and then milk will move to Class I. 23 Well, that's not true. The math doesn't prove that. 24 If the Class I price in those areas where the 25 differentials are zero or very nearly zero, if the Class I 26 price is virtually unrecognizable compared to the 27 manufacturing class prices, it doesn't matter what the 28 Class I utilization in the pool is. 11451 1 Mathematically, we can explain that. If you have 2 a pool that's 90% Class I, and the Class I price and the 3 Class III price, in this case, are the manufacturing 4 prices are $17, the Class I price and the manufacturing 5 class prices are identical or virtually identical. If you 6 are 90% Class I times $17, plus 10% in the manufacturing 7 class times $17 per hundredweight, you are going to get a 8 $17 blend. If all the class prices are the same, you 9 don't have any impact from higher Class I differentials. 10 If it were 10% Class I and 90% Class I, you get the same 11 answer. 12 If the Class I price is not higher than the 13 manufacturing prices, you can boot all the milk out of the 14 pool, the manufacturing milk you want to boot out, and it 15 doesn't impact the blend. That doesn't -- those 16 incentives to supply Class I become -- or that use of 17 pooling provisions reduces the incentive or the 18 effectiveness of pool previsions. 19 Proposal Number 20, again -- now I'm at the bottom 20 of page 7. Proposal Number 20 does not recognize a 21 substantial cost of balancing Class I markets and does not 22 recognize more than 25 years of increased hauling costs. 23 The discussion at this hearing has indicated that 24 balancing costs of Class I plants, while they exist, may 25 not be as important as they used to be. That is not true. 26 There is substantial daily, weekly, monthly, and annual 27 variation in the receiving at Class I plants. It's 28 expensive to balance Class I plants purely because of 11452 1 their variation day to day, week to week, et cetera. That 2 milk has to go somewhere, whether it's sitting in reserve 3 or for Class I. 4 We have provided clear and convincing evidence at 5 this hearing on the increases in milk hauling costs and 6 how those increases in milk delivery costs are today, not 7 tomorrow, threatening a continuous supply of milk to 8 Class I. 9 Proposal Number 20 dismisses away those increases 10 in hauling costs and how it has impacted the ability and 11 desirability of delivering milk to Class I plants. 12 Milk has regional value. Proposal Number 20 does 13 nothing to improve or recognize the hauling costs and its 14 impact on the relative value of milk as it moves across 15 the country. 16 I would note that, again, something we have said 17 before, Make Allowances are a reflection of product use 18 utility, the conversion of raw milk and the conversion, 19 the cost to change the form and product utility of 20 those -- of class -- of fluid milk to hard products. 21 Class I differentials are time and place utility. It 22 costs money to move milk from where it is to where it 23 needs to be and when dairy farmers need to be compensated 24 for that conversion in time and place utility. 25 Proposal Number 20 -- again, now top of page 9. 26 Proposal Number 20 does not recognize the substantial cost 27 of producing Grade A milk versus Grade B. We won't go too 28 very deep into this one. We have had this debate. Other 11453 1 than to point out an odd piece of information. 2 One of -- there was a proposal submitted by the 3 proponents of Proposal 20 to institute in the orders a 4 delivery credit, which would have come out of the pool, by 5 the way, $0.55 per hundredweight. So the proponents of 6 20 -- of Proposal 20 are, in fact, recognizing that there 7 are costs associated with balancing and supplying milk to 8 Class I, and they pegged that at $0.55 in that 9 unregula- -- unnoticed proposal. 10 But they are also saying that the Grade A/Grade B 11 piece of the current minimum differential is zero, or 12 should be zero. The cost of delivering -- or the 13 incentive to pool milk out of manufacturing or incentivize 14 deliveries to Class I is or should be zero. And the third 15 element, the balancing cost -- or the Grade A/Grade B is 16 $0.40 or that should be zero. 17 If you admit that there is a balancing cost of 18 $0.55 or a need to attract milk to Class I plants and that 19 cost is $0.55, then one of the other elements must be -- 20 or the other two elements must be a negative 55. In this 21 case, they say there's plenty of milk in the country, no 22 need to incent milk to move to Class I, so if you do the 23 math, the simple algebra, they are saying that actually 24 Grade A milk is cheaper to produce by $0.55 per 25 hundredweight than Grade B. We go through that math in 26 the testimony, generally on page 10. 27 Moving to page 11. Proposal Number 20 would 28 create conflicts with other provisions in the Federal 11454 1 Orders. There are a number of items that are classified 2 based on the lowest price class when they occur. Things 3 like shrinkage, overage, milk inventory, other uses. This 4 would be a real problem if the Class I price and the 5 manufacturing places are the same. It -- well, the -- 6 there would be a real conflict there. When you have 7 Class I price inversions, Class I becomes the lowest price 8 class, so you would start some of the allocations -- or 9 classify some of these products at Class I in one order 10 and perhaps another class in another neighboring order 11 where there is a positive differential. 12 Also, there is any number of orders -- or the 13 sections of -- in 44, section 44 of the orders, that start 14 with the allocation of Class IV and other source milk, 15 step-wise moving way up, and that would not work well if 16 Class I is the lowest price class. It would be, in fact, 17 disorderly. 18 Proposal Number 20 would effectively return much 19 of the country to individual handler pools. 20 And I think I just want to read this section 21 rather than hit the high points. 22 THE COURT: And you are at the top of page 12? 23 THE WITNESS: Yes, ma'am. Top of page 12. 24 Several of the witnesses supporting Proposal 25 Number 20 did not even try to cloak their disdain for the 26 Federal Milk Marketing Order program and market-wide 27 pooling, instead, in effect, espousing the self-serving 28 but disorderly return to individual handler pools. 11455 1 An important element, if the Secretary to adopt 2 Proposal 20, would be a reversal of the Secretary's 3 rejection long ago of individual handler pools as an 4 orderly method of handler and producer milk pricing. The 5 reliance on over-FMMO prices to encourage milk to be 6 delivered to Class I plants will actually defeat multiple 7 purposes of FMMOs: First, uniform classified pricing; and 8 second, the objective of the orders to eliminate ruinous 9 competition for milk sales. 10 Over-FMMO prices, except in some rare cases, are 11 not pooled, that is, the billing supplier of the milk 12 generally keeps the over-order premium for themselves. 13 Also, in many regions, over-order prices are class 14 specific, a fact basically acknowledged by the proponents 15 of Proposal Number 20 when they encouraged the Secretary 16 to allow them to set their own Class I price. 17 Having Class I differentials at or near $0 per 18 hundredweight that are supposed to be replaced with 19 over-order prices means any additional milk price value 20 associated with the delivery of milk for Class I would be 21 handler specific, a circumstance which would have the same 22 result as creating individual handler pools. 23 The Secretary's rejection of individual handler 24 pools as tools to encourage orderly marketing is reasoned 25 and proper. When dairy farmers are paid for the milk 26 based on the Class I utilization of the specific plant to 27 which they deliver rather than at the market-wide Class I 28 utilization, dairy farmers will seek to deliver to plants 11456 1 with the highest Class I utilization because those plants 2 will likely return the most money per hundredweight for 3 the milk. 4 This is exactly the marketing scheme envisioned by 5 the proposals of Proposal Number 20 when they say 6 virtually in unison and with a coordinated voice that the 7 Secretary should let them direct their individual plant 8 Class I values to the farmers delivering milk to their 9 plants. 10 The natural consequence of an individual handler 11 pool marketing structure is that dairy farmers will begin 12 fighting for the ability to supply the higher-paying 13 Class I plants. The only bargaining chip the farmers have 14 is price, and when the basic additional value of Class I 15 milk is not regulated, they will begin bidding down the 16 over-FMMO premiums, a milk marketing eventuality described 17 by Dr. Stephenson in page 3 of his Exhibit MIG-16. 18 This pernicious competition and the disorderly 19 markets that follow it is exactly what FMMO pooling is 20 designed to eliminate. The logical progression of price 21 deregulation to declining dairy farmer income and 22 declining of milk costs to processing plants is doubtless 23 not lost on the proponents of these thinly disguised 24 individual handler pools, in fact, they are counting on 25 it. 26 At the bottom of page 12. Proposal Number 20 27 improperly concludes that Class I demand will increase 28 when reduced, while eliminating Class I differentials. 11457 1 We have described the data we analyzed regarding 2 the relationship of Class I differentials and retail 3 prices and that there is no such relationship. 4 I will point out an interesting piece of 5 information. This is taken from a Hordes Dairyman article 6 just earlier this month. They took a look -- it looks 7 like exactly the same data as in the USDA AMS monthly 8 retail price survey, and they found that in 2023, the 9 average retail price for national Class I milk was $4.34 10 per gallon, which was $0.08 per gallon higher than the 11 average in 2022. 12 Hit the high points of the numbers. For 2022, the 13 average Class I mover in the United States was $23.66, 14 with a -- so that would be approximately -- with an 15 approximate national average Class I differential, the 16 annual national average Class I price in 2022 was $26.26 17 per hundredweight. We use the same method, you get an 18 average Class I price in 2023 of $21.80, a decline of 19 20.5% in the Federal Order average national Class I price 20 than 2023 versus 2022. 21 To be clear, the retail fluid milk prices rose 22 1.9% from 2022 to 2023, in a year when the national 23 average Class I price fell 20.5%. We're supposed to 24 believe, based on the Proposal Number 20 pricing, that 25 reduced Class I prices will spur fluid milk product demand 26 because retail prices will invariably follow Federal Order 27 prices, and that is not borne out by the evidence. 28 By the way, Dr. Balagtas basically uses the same 11458 1 data in his Exhibit Number 436, the PowerPoint at page 17, 2 where he shows that the retail price in 2023 was higher 3 than the retail price in 2022 by $0.08 per gallon. 4 THE COURT: And now you are on page 14. 5 THE WITNESS: Middle of page 14. Eight minutes. 6 Proposal Number 20 places the ultimate incentive 7 of supplying Class I markets on over-FMMO prices. The 8 reliance on premiums would require the Secretary to 9 abrogate his responsibility under the AMAA. We have -- 10 previous testimony has documented the challenge in 11 securing over-order prices and the challenge in retaining 12 them. Southeast is a perfect example of premiums are at 13 substantially less than they were few years ago. 14 Over-order prices are hard to get. The record of 15 this hearing is replete with the history of over-order 16 pricing and its limitations and its impertinence -- or 17 excuse me -- its impermanence. The Secretary should pay 18 particular note that the parties that benefit the most 19 from over-FMMO prices and benefit when they increase, that 20 is dairy farmers, are also warning of over-order prices 21 limitations, and they simply can't be relied -- or that 22 they simply can't be relied on over any appreciable said 23 length of time. 24 On the other hand, the supporters of lowering 25 regulated milk prices and then theoretically substituting 26 market-set prices for those regulated prices are those 27 parties who benefit from the reduction in regulated prices 28 and benefit again when Federal Milk Marketing Order 11459 1 over-order prices crumble, which they most certainly will 2 do eventually. 3 I'll jump now down to the middle of page 15, 4 implications for Proposal Number 20. 5 Proposal Number 20 fails to represent several 6 basic facts associated with milk marketing and the need to 7 address these facts and regulated pricing. 8 There's a difference in the cost of producing 9 Grade A and B milk. 10 There remains a need to incentivize delivery of 11 milk to Class I used in preference to other classes by 12 establishing a Class I price superior to the manufacturing 13 class prices. 14 Balancing Class I prices -- plants is expensive. 15 We need to continue to incentivize the milk movement from 16 reserve supply areas to milk deficit regions. 17 Milk is bulky and expensive to transport, and the 18 cost of moving milk and supplying Class I plants have seen 19 significant increases in costs over the last 25 years. 20 Milk is a perishable product and there continues 21 to exist an imbalance of market power of processors over 22 dairy farmers. 23 Proposal Number 20 assumes away or ignores these 24 important factors. The problems with Proposal 20 are 25 multiple and multiplicative in their failures. The 26 predictable result of these market failures would be 27 undeniably lead to producers questioning the need for 28 Federal Milk Orders. 11460 1 Let me back up and preface that. 2 If the class prices are all virtually equal, the 3 Class I price is virtually equal to the manufacturing 4 class prices, you may have classified pricing -- you may 5 have classification, excuse me, but you don't have 6 classified pricing. If the prices are all the same, you 7 don't have classified pricing. If you don't have 8 classified pricing, you don't need a market-wide pool. If 9 you don't need a market-wide pool, you don't need a 10 Federal Milk Marketing Order. That logical progression is 11 inherent in everything in this Proposal 20. The move 12 toward deregulation, the partial -- the initial request to 13 partially regulate will lead undoubtedly to the 14 destruction of a Federal Milk Marketing Order program. 15 Summary. And now I'm on page 17. Federal Milk 16 Marketing Orders cannot meet the mission of the 17 Agricultural Marketing Agreement Act without Class I 18 differentials. The AMAA requires incentives for milk to 19 be delivered to Class I plants. With no Class I 20 differentials, the USDA is dependent on unregulated 21 over-order premiums to create the economic incentive to 22 meet its mission under the AMAA. So a Federal Milk Order 23 with no economic incentives to move milk to Class I 24 violates the Act and, therefore, should be considered 25 illegal. 26 USDA must uphold the law, and thus, by regulation, 27 it cannot have a situation with a Federal Milk Marketing 28 Order and no Class I differentials. 11461 1 Whenever industry discusses with USDA potential 2 amendments to the orders, invariably a USDA staff member 3 will remind us that we must look at the enabling 4 legislation for FMMOs, the Agricultural Marketing 5 Agreement Act. They are right in these reminders. We 6 must follow the law. 7 So let's remind ourselves of what the Act says and 8 how Proposal Number 20 fails to follow the law, or at 9 least suborns the Secretary to fail to follow the law. 10 The plain language of the Act says, "he" -- 11 meaning the Secretary -- "shall fix such prices as he 12 finds reflects such factors, insure a sufficient quantity 13 of pure and wholesome milk, and be in the public 14 interest." The factors to be considered include "the 15 available supplies of feeds, and other economic conditions 16 which affect market supply and demand for milk." 17 Let's repeat: "Fix" -- "shall fix such prices." 18 "Fix." 19 The AMAA does not direct the Secretary of 20 agriculture to rely on the bargaining power of dairy 21 farmer producers to set sufficient milk prices. The AMAA 22 does not direct the Secretary to rely on the benevolence 23 of the buyers of milk to set sufficient milk prices. The 24 AMAA does not direct the Secretary to rely on the 25 invisible hand of supply and demand to set sufficient milk 26 prices. And the AMAA does not direct the Secretary to 27 rely on divine providence or sheer dumb luck to set 28 sufficient milk prices. 11462 1 It's the Secretary's job and duty to fix those 2 prices that ensure a sufficient quantity of milk, nobody 3 else. No other force, it's on the Secretary. 4 The plain and straightforward reason the AMAA 5 wisely and appropriately places this job square in the 6 Secretary's hands is that these other options or 7 alternative methods always fail. Always. We can rely on 8 the Secretary and the power bestowed by the AMAA to fix 9 the milk prices to bring forth a sufficient quantity of 10 milk. The dairy industry and the consuming public can't 11 depending on -- depend on anything else to get the job 12 done, it's just that simple. 13 Proposal Number 20 asks the Secretary to ignore 14 the Secretary's responsibility to "fix" prices. The 15 Secretary must follow the law and the USDA must deny 16 Proposal Number 20 in its entirety. 17 This concludes our prepared testimony. Thank you. 18 THE COURT: How many seconds does he have left? 19 MS. HANCOCK: I don't think we're really operating 20 under that, are we? 21 THE WITNESS: Apparently we are. 22 MS. HANCOCK: I mean, they -- they put on, like, 23 14 witnesses in opposition to our Proposal 19. I mean, 24 we're putting on one witness, and I thought only the 25 direct testimony was limited by an hour. 26 MR. HILL: Each witness. 27 MS. HANCOCK: Only for the direct testimony, not 28 for rebuttal testimony. We haven't done it for any of the 11463 1 other rebuttal witnesses. 2 MS. VULIN: If I may, Ms. Keefe was limited to one 3 hour for her Proposal 19 opposition. 4 MS. HANCOCK: You had, like, 14 witnesses opposing 5 Proposal 19. 6 MS. VULIN: Each of whom was limited to one hour. 7 MS. HANCOCK: Never did they run the clock. 8 THE COURT: You may continue your direct 9 examination. 10 MS. HANCOCK: Thank you, Your Honor. 11 BY MS. HANCOCK: 12 Q. Mr. Sims, are you aware of Walmart opening a 13 plant? 14 A. Yes. 15 Q. A new plant? 16 A. Yes. 17 Q. And where is it located? 18 A. I understand that one is planned for construction. 19 Q. And where is it located? 20 A. South Georgia. 21 Q. What is the effect of Walmart opening a Class I 22 fluid milk plant in Georgia? 23 A. What would be the effect? 24 Q. Yeah. 25 A. In what vein? 26 Q. Well, what do you think it will do, for example, 27 to over-order premiums in that area? 28 A. It will make them a bigger challenge. The -- the 11464 1 plant that was opened in Northern Indiana suppressed 2 over-order prices in that world almost immediately when 3 that plant opened, substantially. And those lessened 4 over-order premiums impacted a big swath of the country. 5 Marketing agency in common -- marketing agencies in common 6 pay attention to the over-order prices existing in 7 neighboring agencies, and so when one agency has a failure 8 in its over-order price, it can impact others. 9 I have no reason to believe that that would not be 10 a similar result as a result of the South Georgia new 11 plant. I suspect it will put substantial pressure on 12 over-order prices across the Southeast. 13 Q. Meaning that over -- it puts pressure on those 14 prices in a way that makes over-order premiums go down in 15 that region? 16 A. That's what I mean by pressure, yes. 17 Q. We have heard also repeatedly the MIG witnesses 18 have testified that they want to eliminate the price 19 differentials and for producers to just trust that they 20 will put that into the over-order premium pool. 21 Even if we assume that their intentions are as 22 genuine and authentic as what they have testified to, I'm 23 wondering if you can talk about what your experiences are 24 in that continuing long-term. 25 A. Over-order prices, in my career -- and it's a 26 fairly long one -- I have seen the gamut in over-order 27 prices. I have seen them pretty high, more than $3, 28 approaching $4, and I have seen them at zero. And no 11465 1 matter how high they are or how -- they always come down. 2 If they get high, they come down. And the more you rely 3 on over-order prices, and the more you rely on over-order 4 prices to be high, the more likelihood they are to 5 crumble. And they all crumble eventually. It's -- it 6 just kind of happens. And, in fact, the higher you make 7 them, the more incentive there is for them to be caused to 8 crumble. 9 So we -- my -- my experience is that over-order 10 prices are -- you almost have to consider them here today, 11 gone tomorrow. They do not generally last a long time, 12 they go through cycles. And those cycles are difficult. 13 The cycles, they -- let me say this, the peak periods of 14 over-order prices when they kind of get up to a fairly 15 high level last considerably longer than those periods of 16 time when they are suppressed and near zero. The valleys 17 are substantially longer in duration than the peaks. And 18 over-order prices simply cannot be counted on to exist 19 long-term. 20 Q. And do you -- in your experience, do you believe 21 that producers have sufficient bargaining power in order 22 to command the prices that they need to cover the elements 23 that we have been talking about that are currently 24 factored into Class I differentials? 25 A. All I can say in response to that question is that 26 it's the -- it's a very unusual circumstance for 27 over-order prices to cover all the costs of balancing 28 plants. They generally are insufficient in their -- in 11466 1 how much we are able to charge for -- for those services. 2 Q. And have you heard from plants how they use the 3 Federal Order announced minimum price in order to pass 4 that price along to their customers? 5 A. Yes, that's a common theme. We hear plants, 6 particularly traditional plants that have retail 7 customers, say that their -- the formulas that are used -- 8 that are used to set the wholesale price, the price that 9 the plant gets from the -- from the wholesaler, the 10 retailer, are driven purely by month-to-month changes in 11 the Federal Order prices. I think it's been described 12 something like a tolling circumstance, where there's a 13 fixed per gallon, per half gallon margin that in essence 14 is -- creates the transfer price, which is over and above 15 the regulated Class I price. 16 A very common statement when we talked with our 17 customers about changes in pricing is that if it is on the 18 Federal Order price announcement, we can pass it on; if 19 it's in the form of a premium, not so much. In fact, it's 20 very difficult for them to pass -- if not impossible -- to 21 pass on to their wholesale and retail customers. If it's 22 on the Federal Order price announcement, they can pass it 23 on to their packaged milk customers. If it's in a 24 premium, much, much, much more difficult for them to pass 25 it on. 26 Q. And we're going to hear from Mr. Giles later on 27 today or possibly tomorrow, and he's a customer of yours; 28 is that right? 11467 1 A. He's a customer of Lone Star Milk Producers, yes. 2 We supply them raw milk. 3 Q. And we have heard other MIG witnesses who have 4 talked about that with their cooperatives that they pay 5 balancing costs within some of the costs that are 6 enumerated in the -- by the co-ops. 7 Have you heard that testimony as well? 8 A. Yes. 9 Q. And they say that they are double paying for that 10 when they have to pay Class I differentials, and they also 11 pay balancing costs to the cooperatives. And in 12 anticipation of one of your Lone Star's customers coming 13 up to testify later and talk about the over-order premiums 14 that he pays to Lone Star, I'm wondering if you can talk 15 about whether you believe there is a double-dipping that 16 occurs. 17 A. I'm just -- I'm -- I will not reveal the nature of 18 our relationship between Lone Star and Plains, but I can 19 say this generally -- how's that -- that between what the 20 order may -- the Federal Order price may reflect in terms 21 of the value or cost of balancing, plus what generally can 22 be captured in an over-order premium, very, very rarely 23 the sum of those covers the real cost of balancing. 24 Q. Okay. So if it very rarely, if ever, covers the 25 real cost of balancing when you take the current Class I 26 differentials and your over-order premiums, is it fair to 27 say that you are not getting double paid for any of those 28 balancing costs? 11468 1 A. We're generally getting paid between the sum of 2 the two less than the real cost. 3 Q. And just to put a fine point on all of this. Is 4 it -- in your experience, have the costs of moving fluid 5 milk to the handlers gone up, at least in proportion to 6 the 109% increase in inflation that has occurred over the 7 last 20 years? 8 A. The cost of moving milk or the cost of balancing 9 or all of the above? 10 Q. The totality of all three of those. 11 A. Yes. Certainly, dairy farmers and the cost to 12 move milk, balance milk, get milk supplies to where it's 13 needed, are not immune from the general cost increases in 14 the economy. Our costs have gone up, and they go up every 15 year. And they were insufficient when -- you know, years 16 ago; they are insufficient today. 17 Q. Okay. Thank you so much for your time today. 18 MS. HANCOCK: Your Honor, Mr. Sims is available 19 for cross-examination. 20 THE COURT: Thank you. We'll need a break before 21 we start that. Let's take 15 minutes. And please come 22 back ready to go at -- let's come back at 1:53 -- excuse 23 me -- 10:53. 24 (Whereupon, a break was taken.) 25 THE COURT: Let's go back on record. 26 We're back on record at 10:53. 27 // 28 // 11469 1 CROSS-EXAMINATION 2 BY MR. ROSENBAUM: 3 Q. Good morning. Steve Rosenbaum on behalf of the 4 International Dairy Foods Association. 5 Good morning, Mr. Sims. 6 A. Good morning. 7 Q. I understand your testimony to be both rebuttal in 8 support of Proposal 19, as well as opposition to 9 Proposal 20; is that fair? 10 A. There is some support for 19, and then -- but 11 primarily opposition to Proposal Number 20. 12 Q. I'm going to focus on the rebuttal with respect to 13 Proposal 19 aspect of things. 14 A. Not rebuttal, support for 19. 15 Q. Well, however you want -- okay. Lawyers might 16 call it your testimony in this context to be rebuttal, but 17 that's technical and not really important. 18 So what I want to focus on is Hearing 19 Exhibit 497 -- 20 A. Yes. 21 Q. -- which is the chart that's called "Class I 22 differential and U.S. average retail packaged fluid milk 23 price correlation." 24 And just to orient ourselves, Proposal 19 would 25 increase Class I differentials, correct? 26 A. Yes. 27 Q. And Proposal 20 would decrease them, correct? 28 A. Yes. 11470 1 Q. Okay. And so is it fair to say this chart is, in 2 that sense, relevant to both proposals? 3 A. Yes. 4 Q. So and -- and from a Proposal 19 perspective, is 5 it fair to say that you're relying upon Hearing 6 Exhibit 497 to suggest that there may not be much of a 7 relationship between an increase in Class I differentials 8 and the retail price of milk? 9 A. This exhibit, I think, provides substantial 10 evidence that there is no cause and effect relationship 11 between Class I differentials and how high they are or how 12 low they are and the resultant retail price in a 13 particular city. 14 Q. And, in fact, you -- you compute an R-squared, 15 which is a statistical way of measuring the relationship 16 between two things; is -- is that fair? 17 A. Yes. 18 Q. And you compute an R-squared of 0.0032, correct? 19 A. Yes. 20 Q. Which is a low R-squared, correct? 21 A. Meaning that the relationship between the 22 dependent and independent variables is almost random. 23 It -- this trend line or the dispersion of the 24 independent -- or the dependent variable here has 25 virtually no relationship whatsoever with the dependent 26 variable, which is, of course, the retail price. 27 Q. Okay. So what puzzles me, Mr. Sims, is the fact 28 that National Milk put on an expert witness, Dr. Henry 11471 1 Kaiser, on this very issue, and he reached conclusions 2 that are the exact opposite of what you submitted here; 3 isn't that fair? 4 A. I don't recall Dr. Kaiser's -- I was not present 5 for Dr. Kaiser's testimony. All I can say is this data 6 showed that they are not, there's no relationship between 7 Federal Order Class I differentials and retail prices. If 8 he was discussing demand, that's a different story. 9 Q. And -- and we're going to hone in right on that. 10 And let me give you a copy of his written testimony, which 11 was National Milk Producer Federation Exhibit 48, marked 12 as Hearing Exhibit 115. 13 So if those people who have copies of Hearing 14 Exhibit 115 would pull it out, that would be -- if they 15 could read along to the major parts of it that I'm going 16 to focus on. 17 So you understand that Dr. -- maybe you don't 18 understand. 19 Are you aware that Dr. Kaiser did two things? 20 First of all, he calculated how much of an increase in the 21 Class I differential would be reflected in retail prices, 22 and then calculated how much such an increase in retail 23 prices would reduce demand. 24 Are you aware that that's what he did? 25 A. I -- again, I said I was not present for 26 Dr. Kaiser's testimony, and I don't -- I have not studied 27 his testimony. 28 Q. Well, if you could turn with me to page 3 of his 11472 1 written testimony, which is Hearing Exhibit 115. There's 2 a paragraph that begins with the words, "How would 3 increasing." 4 Do you see that? 5 A. I do. 6 Q. And I'll just read the key sentences. 7 "How would increasing the Class I price 8 differential impact retail fluid milk demand? NMPF's 9 proposal recommends a nationwide increase of the Class I 10 price differential by an average of $1.49 per 11 hundredweight. At current Class I prices, this is an 8.6% 12 increase. To translate the Class I price increase to the 13 retail level, we need an estimate of the price 14 transmission from the farm price to the retail price. 15 Based on monthly Class I and retail price data from 2013 16 through May 2023, I estimate that a 1% change in the 17 Class I price would cause a 0.55% change in the same 18 direction in the retail CPI for all milk products." He 19 says, "Calculations from this are available from the 20 author." 21 Do you see that? 22 A. I do. 23 Q. Do you interpret this language to mean that he had 24 concluded that if Class I differentials go up by 1%, 25 retail prices would go up by 0.55%? 26 A. That appears to be the implication. But what I 27 obviously do not know is whether he's comparing 28 differentials or the Class I price. You get a 11473 1 substantially different answer when you make that 2 comparison. 3 Q. Well, he's -- I mean, it's pretty plain that he's 4 saying that if the Class I differentials go up by $1.49, 5 then you would see a corresponding -- well, strike that. 6 He is discussing what impact a 1% change in the 7 Class I price would have, correct? 8 A. He makes that statement, yes. 9 Q. Okay. And you are proposing to increase the 10 Class I differentials, meaning increasing the Class I 11 price, right? 12 A. All things being equal, yes. 13 Q. Okay. So let's look at page 9, the last page of 14 his exhibit, where he provides the econometric output for 15 farm to retail price transmission. 16 Do you see that? 17 A. Page 9. 18 Q. It is the last page. 19 A. Yes, I see a table there. 20 Q. Okay. And you understand that in this context, 21 the farm price, that's the price that farmers are getting 22 for their milk, correct? 23 A. Well, if you could point out where that is on the 24 table. 25 Q. Well, okay. Let's just -- if you look at the -- 26 if you weren't here, you didn't hear him testify. 27 Do you see the "sum of lags" at the bottom of that 28 chart? 11474 1 A. Yes. 2 Q. And do you see that the -- he has four lags, and 3 then the sum of them are 0.54929. 4 Do you see that? 5 A. I do. 6 Q. And do you see -- do you -- do you understand -- 7 do you see that that is, in fact, the same number that he 8 uses to -- as the impact on retail prices from the 1% 9 increase in Class I prices? 10 A. Well, sir, I am not capable of answering whether 11 that fifty- -- that .54929 is the 55% that he cites in 12 that paragraph you quoted in page 3, but I will agree that 13 those numbers are quite similar. I can't say that that is 14 the number or how it came about, but they are -- 15 Q. Okay. 16 A. -- principally the same number. 17 Q. Have you had an opportunity to review his oral 18 testimony in this hearing on August 31, 2023? 19 A. I have not. 20 Q. And if I -- let me just read to you lines 10 21 through 16 of his testimony: "And so I basically looked 22 at this, and the bottom part of that graph is four months 23 of lag, and so the sum of the lags where it says .54929, 24 that basically means that over a four-month period a 1% 25 increase in the Class I price would result in a little 26 over a half a percent increase in the retail price, that's 27 the price transmission." 28 So with that explanation, do you agree that's what 11475 1 this chart is showing? 2 A. I don't know how to interpret that. 3 Q. Okay. Well -- okay. Let's -- let's -- I mean, do 4 you have some difficulty with the language I just read to 5 you as to what it means? 6 THE COURT: Ms. Hancock? 7 MS. HANCOCK: Your Honor, I would object. This 8 witness has already said he doesn't -- he didn't hear the 9 testimony and he can't speak to this, and at this point 10 he's just badgering the witness about if he has some 11 difficulty in understanding. 12 I mean, if there's something that this witness has 13 for direct knowledge, I think it's fair game. But just 14 reading another statement into the record and trying to 15 get him to adopt it or disagree with it I don't think is 16 appropriate. 17 THE COURT: I sustain your objection, Ms. Hancock. 18 But, Mr. Rosenbaum, you are making the point 19 beautifully. 20 MR. ROSENBAUM: All right. 21 BY MR. ROSENBAUM: 22 Q. Well, let me call your attention to one other 23 number in this chart, which is the R-squared. 24 Do you see an R-squared of 0.746673? 25 A. Yes. 26 Q. And that is, like, 20 times higher than the 27 R-squared you calculated, correct? 28 A. It's almost infinitely higher. 11476 1 Q. And just let me -- and by the way, these are -- 2 these -- this is a question -- this question was by 3 Mr. Miltner that -- that resulted in these answers. 4 "Question --" 5 THE COURT: Mr. Rosenbaum? 6 MR. ROSENBAUM: I'm just -- I'm just going to ask 7 whether -- 8 THE COURT: I want to you move on. 9 MR. ROSENBAUM: All right. That's all I have, 10 Your Honor. 11 THE COURT: And as I say, you made your point. 12 All right. Who next has cross-examination for 13 Mr. Sims? 14 And let us return these record copies of the 15 Exhibit 115 before we forget to do so. 16 CROSS-EXAMINATION 17 BY MS. VULIN: 18 Q. Good afternoon, Mr. Sims -- or morning, I guess, 19 wherever you would put 11:00 a.m. 20 A. I would call it morning. 21 THE COURT: Ms. Vulin, identify yourself for the 22 record, please. 23 MS. VULIN: Ashley Vulin with the Milk Innovation 24 Group. 25 BY MS. VULIN: 26 Q. So, Mr. Sims, I want to start kind of bigger 27 picture about the purpose of FMMOs. 28 FMMOs are not a price guarantee, correct? 11477 1 A. They guarantee that at whatever price the 2 commodity prices generate and that the uniform prices 3 generate, that regulated plants must pay that value to 4 their suppliers of producer milk. 5 Q. Thank you. That was an inartfully-worded 6 question, so your clarification is fair. 7 They are not a guarantee of prices that will cover 8 all costs, correct? 9 A. The prices that the Agricultural Marketing 10 Agreement Act instructs the Secretary is to fix such 11 prices as will create a sufficient quantity of pure and 12 wholesome milk, including certain economic factors and 13 prices of feed. Long-term, the Act directs the Secretary 14 to set prices -- fix prices is the word it uses -- which a 15 sufficient quantity of milk will be produced. 16 There is no month-to-month, day-to-day guarantee 17 of a particular price. No dairy farmer is guaranteed a 18 profit. No dairy farmer is guaranteed a market. But over 19 the long-term, the Secretary is responsible for 20 determining and setting prices which will make sure that 21 this country has enough milk. 22 Q. And so just to make sure I'm tracking your point 23 to summarize that, it's your interpretation of the Act 24 that the Secretary is obligated to set long-term prices to 25 ensure that over time, dairy farmers costs are covered by 26 the minimum FMMO price? 27 A. I didn't say -- you said dairy farmer costs are 28 covered. There is 20-some-odd thousand dairy farmers in 11478 1 this country, all of whom who have a different cost 2 structure. So any one of them cannot be guaranteed that 3 the Federal Order prices will generate revenues which 4 cover their costs. 5 Q. And I'm not trying to misstate your testimony, I 6 just want to make sure I'm tracking it. 7 So then if -- if the Secretary is not setting 8 long-term prices to cover all dairy farmers' costs, then 9 what is the benchmark for how much cost should be covered 10 in your interpretation of the Act? 11 A. The sufficient -- the prices are set such that it 12 would generate a sufficient supply. 13 Q. So prices should be set not to ensure that costs 14 are covered, but to ensure that enough costs are covered 15 that there is a steady stream of milk for fluid use; is 16 that fair? 17 A. That's reasonably fair, yes. 18 Q. Okay. So then if you could go, please, to page 12 19 of your testimony. I'm on the last paragraph. 20 And just to summarize your point before this 21 paragraph, you're arguing that a reduction of the Class I 22 differentials to zero essentially creates an individual 23 handler pool structure; is that right? 24 A. I'm saying that if you reduce, sufficiently, 25 reduce seriously, the regulated Class I price with the 26 intent or the promise by buyers that they will replace 27 those revenues with over-order prices, those over-order 28 prices and the farmer-to-plant relationship becomes, in 11479 1 essence, an individual handler pool. 2 Q. And do you believe Proposal 20 does such a thing? 3 A. I do. 4 Q. Okay. So this -- 5 A. I will say this, excuse me. It does it if there 6 are any over-order prices. Those become a -- an 7 individual handler pool. But as we have said, there 8 certainly is no guarantee. In fact, it brings into great 9 question whether there would be sufficient over-order 10 prices. 11 Q. And so under Proposal 20, if those over-order 12 prices are going to the -- to the suppliers for those 13 handlers, it's your conclusion that -- and this is a 14 quote, starting that paragraph, that last paragraph: "The 15 natural consequence of an individual handler pool 16 marketing structure is that dairy farmers will begin 17 fighting for the ability to supply the higher paying 18 Class I plants." 19 Is that right? 20 A. Yes. 21 Q. And another way to say this would be that the 22 natural consequence of Proposal 20 is that dairy farmers 23 will begin fighting for the ability to supply higher 24 Class I plants? 25 A. If those Class I plants are paying a premium. 26 Q. Thank you. 27 A. Not a given. 28 Q. Appreciate the clarification. 11480 1 So then if you could go to page 7, please. I'm in 2 the middle of the page here, the paragraph that starts "in 3 areas where." 4 A. Yes. 5 Q. And so after first reading page 12 and thinking, 6 okay, a problem of Proposal 20 is that all of the 7 suppliers will want to serve the Class I processors if 8 they are paying an over-order premium. Then I read here, 9 "In areas where the Class I prices and the manufacturing 10 class prices become virtually equal at a location, the 11 decision on whether to serve Class I will be largely one 12 of logistical costs uninfluenced by the milk price. The 13 foreseeable result is that some Class I plants may not get 14 served." 15 Did I read that correctly? 16 A. You did. 17 Q. And so as I read this, you are arguing in the 18 first instance that Proposal 20 will cause disruption 19 because everyone will want to serve Class I, but then in 20 the same breath, cause disruption because no one will want 21 to serve Class I? 22 A. No one will want to serve Class I if there are no 23 premiums. Everybody will want to serve Class I if there 24 are premiums or if they are substantial. The quote you 25 just read, basically, is the natural evolution of pricing 26 in an unregulated market, it will fall. The over-order 27 premiums will fall, and -- and then, thus, there is no 28 incentive to supply Class I. 11481 1 Q. So without Federal Order -- well, strike that. 2 We have over-order premiums today, correct? 3 A. Yes. In some places, yes. 4 Q. And so somehow Class I processors have figured out 5 how to ensure their plants are served using over-order 6 premiums in the current structure, correct? 7 A. Yes. But we have to remember that they are 8 operating in a structure where those over-order premiums 9 are a substantially small portion of the total value of 10 the milk. The Federal Milk Orders provide the regulated 11 value or the substantial portion of the regulated value, 12 and the over-order premiums are a small piece over and 13 above that. We're trying -- the Proposal 20 changes that 14 substantially, puts the emphasis on the premium and takes 15 away the influence of the orders. 16 Q. And is it your conclusion that Class I processors 17 will be -- somehow be inept at using over-order premiums 18 to attract milk if we don't have a base Class I price of 19 $1.60? 20 A. I would never call a Class I processor inept. But 21 I can say that what influences Class I differentials 22 are -- excuse me -- what influences over-order prices are 23 a myriad of things not necessarily associated with any 24 particular plant. The degradation of premiums 100, 200, 25 300 miles away can domino into an area. And at the end of 26 the day, Class I processors are seriously -- and mostly as 27 we have heard in testimony -- concerned about the price 28 that their neighboring competitor plant is paying. So 11482 1 when premiums start to degrade, erode, that's going to 2 naturally erode them everywhere. 3 Q. And if a Class I processor is not able to attract 4 sufficient milk, do you have any reason to believe that 5 they would be unable to offer over-order premiums to do 6 so? 7 A. They certainly can offer it. The question is 8 their permanence. 9 Q. The question for the supplier is their permanence 10 you mean? 11 A. The question for the buyer is they may very well 12 be willing in the very short-term to -- to increase -- pay 13 a premium to get milk, but the question is how long will 14 they pay them and how high will they be, and will they -- 15 being combined with the much less valuable blend from the 16 orders, will that be enough to attract a supply long-term. 17 Q. And, again, going back to your point of the 18 problem with over-order premiums serving that role. 19 Why are Class I plants unable to manage that type 20 of typical supply chain using over-order premiums without 21 the $1.60 Class I differential? 22 A. I'm sorry, I don't think I understood your 23 question. 24 Q. So your argument is that without the $1.60 in the 25 Class I differential, more of the payment has to come in 26 the form of an over-order premium, correct? 27 A. To attract the supply, yes. 28 Q. And that because it's in the over-order premium, 11483 1 and it's not necessarily permanent, that will result in 2 suppliers being less willing to serve that Class I plant? 3 A. Yes. 4 Q. So why can't we, then, rely upon Class I 5 processors and suppliers to negotiate like they do every 6 day, some kind of mutually-agreeable outcome of an 7 over-order premium that works for everyone? 8 A. The basic problem with those over-order premiums 9 are that they are not uniform, or don't have to be, or 10 typically may not be. They are -- they will be -- since 11 an over-order premium is based on an individual plant, and 12 often the Class I utilization at that plant, that may be 13 striated by class, you will create a competition. And 14 it's disorderly pernicious competition to serve those 15 Class I plants when an outsized portion of the value of 16 the milk is subject to individual relationship between a 17 plant and a supplier. Those are -- those will, in 18 essence, be an individual handler pool, and those -- and 19 those circumstances force prices down. 20 Q. Despite the fact that we still use over-order 21 premiums today? 22 A. But they are a very small portion of the total 23 value of milk, that's the difference. 24 Q. What portion? 25 A. Depends on the area. 26 Q. Have you done any study or analysis to give us 27 numbers to support that contention? 28 A. I could -- I could offer anecdotal evidence. The, 11484 1 you know, premiums are, say, $1 or so, maybe $1.15 2 depending on the price of fuel in the Southeast. They are 3 a little bit less than that in the Mideast. They may be a 4 little -- they may not be existent at all, or certainly 5 not coordinated, in the Northeast. They are -- but they 6 are all similar, but represented fairly small. 7 The portion of the value is inversely related to 8 the Federal Order price. So $1 premium in the Southeast, 9 percentage-wise, is a smaller representation of the total 10 value of milk than $1 in the Mideast where the blend price 11 is lower. 12 Q. And given that the issue here is service of 13 Class I plants, wouldn't you agree that USDA should give 14 fairly high credence to testimony from Class I processors 15 that they are confident they will be able to obtain 16 sufficient milk supplies without the base $1.60 in the 17 Class I differential? 18 A. That testimony was delivered. The history of 19 over-order prices across the last 40 years suggests that 20 that -- although intentions may be high, that other 21 factors will force them down when one of their 22 competitors -- when -- I as a processor, I might say, I'm 23 willing to pay an over-order price, but as long as the 24 plant down the road pays one, too, and the plant down the 25 other way pays one, too. And everybody -- and without a 26 Federal Order, there is no guarantee that those numbers 27 are equal. So they will, by natural competition, fall to 28 the least common denominator. 11485 1 So you may have high intentions of paying an 2 over-order premium, but you won't pay one if you think the 3 plant up the road is getting a better deal. 4 Q. Isn't that natural economic market competition? 5 A. It's disorderly markets, because then you have 6 fights for Class I, and you have -- and you have 7 degradations in prices, you have high variation in prices, 8 you do not have uniform prices to producers, and you do 9 not have uniform prices to plants. It is disorderly. It 10 may be natural, but everything we have learned about milk 11 over the last 80-some-odd years is that milk does, in 12 fact, function in a purely competitive market. That's why 13 we have price regulation, to prevent those disorderly 14 marketing conditions. 15 Q. Are there any market circumstances, in your 16 opinion, that would warrant a decrease in the Class I 17 differential price? 18 A. All the cost factors say the differentials need to 19 increase. The sheer fact that we are here to discuss both 20 the cost of transforming milk into manufactured products 21 leads us to the natural inquiry about the cost of moving 22 milk. I -- I -- based on the 25 years of increase in cost 23 of moving milk, I can't envision any circumstance that 24 would suggest differentials in the main should decrease. 25 Q. You can't imagine a circumstance that would 26 support decreasing the Class I differentials? 27 A. I can't -- I can understand that there could be. 28 I just don't see them today. 11486 1 Q. What could they be? What would be a circumstance 2 that would support reducing Class I differentials? 3 A. A serious -- serious oversupply of milk, perhaps. 4 Q. And a serious oversupply of milk, given natural 5 supply and demand forces, would support a reduction in the 6 Class I price? 7 A. Not necessarily. It might, if you could -- you 8 could retain the same Class I price, and when the blend 9 prices go down, that sends the signal to the producers, so 10 you don't have to lower the Class I price to send that 11 signal. Those signals actually will be transmitted 12 through the blend. 13 Q. Assuming sufficient Class I utilization. 14 A. If the manufacturing class prices decline, the 15 blend prices decline given the equal before and after 16 Class I differential. That's where the price signals 17 come. 18 Q. But my question was about Class I, right? So if 19 there's a surplus of milk on the marketplace, even in that 20 circumstance, you wouldn't believe that Class I should be 21 able to pay less for their milk? 22 A. Say that again, please. 23 Q. So my question was, is there -- is there a 24 situation in which you would ever agree that market 25 circumstances would support a decrease in the Class I 26 differential? 27 A. Yes. 28 Q. And you had said a surplus of milk. 11487 1 A. Maybe I'll amend my statement. Maybe not a 2 surplus. If the price of diesel fuel drops back to $0.75 3 a gallon, and the cost of a truck drops back to $25,000, 4 and the cost of labor to drive that truck drops back to 5 the minimum wage, maybe we can get milk moved for 6 substantially less than we get it moved now. But the 7 costs of moving milk today justify an increase. 8 Q. So you strike your prior answer; you don't agree 9 that a surplus of milk on the marketplace would warrant a 10 decrease in the Class I differential? 11 A. I'm saying it wouldn't necessarily warrant it, no. 12 Q. Sorry, say again? 13 A. Would not necessarily. Directly, that particular 14 circumstance is not an automatic trigger, or should not be 15 considered an automatic trigger, that Class I 16 differentials are somehow improperly aligned. We have to 17 also consider intra- -- you know, within market and -- 18 intra-market price alignment. 19 Q. And you agree with me that the Class I marketplace 20 is in decline both by volume and per capita, correct? 21 A. Certainly per capita. 22 Q. By overall volume you disagree? 23 A. The trend has been that Class I -- Class I 24 producer milk has declined in the orders, yes. 25 Q. Do you believe that USDA should consider that when 26 setting Class I differentials? 27 A. The Agricultural Marketing Agreement Act instructs 28 the Secretary to make sure there's a sufficient supply of 11488 1 milk for fluid use. That's the -- to the Secretary and 2 standard the Secretary should follow. 3 Q. And so to the extent there's less fluid use, 4 there's less need to attract milk to it, correct? 5 A. Not necessarily. We have a very different world 6 today. I think Dr. Stephenson made some comment about the 7 predominance of manufacturing and its importance. It's 8 harder to shake milk out of manufacturing today. It 9 may -- the milk may actually be converted into a Class III 10 or Class IV product, but that doesn't mean that that milk 11 is available for Class I use. 12 Today, milk plants are built to serve a demand 13 customer. You don't build a plant purely for balancing 14 anymore, it's too expensive. So all these plants have 15 customers that they are serving that are demand customers, 16 they want to run to serve their demand. So there is not 17 this large pool of reserve supply. Those -- the Class III 18 and IV demand, those plants are going to want to run, it's 19 harder to shake milk out of them for Class I. Just 20 because there's milk going to Class III and IV doesn't 21 mean it's available for Class I. 22 Q. For the milk to be available to Class I, a Class I 23 processor would have to attract that milk, correct? 24 A. You don't take milk to a plant just to take it, 25 they have a need for it. The same as Class I is as 26 Class III and IV. 27 Q. And would you agree with me the most direct way to 28 attract milk to a plant is through an over-order premium? 11489 1 A. I think over-order premiums have their limits. 2 They have -- I don't think, I know that over-order 3 premiums have their limits. They are a nice tool to 4 partially compensate the organizations that serve Class I 5 plants, but they should not be. They should not be the 6 predominant tool to attract milk to a Class I plant. 7 Q. And have you calculated the portion of the price 8 between the over-order premium under Proposal 20 and what 9 makes up the bulk of the Class I price, namely the base 10 Class I skim price? Have you run that comparison? 11 A. I'm sorry, I -- you are going to have to simplify 12 that question. 13 Q. There was -- your statement that you just made, 14 you have no numbers to support that for us today, correct? 15 A. I'm -- please repeat the question. You asked me 16 about numbers, and I need you to repeat the question. 17 Q. You said -- and I'm summarizing your testimony, so 18 let me know if I get it accurately. You had testified 19 that if the over-order premium plays too large or plays 20 the substantial role of moving milk, that that is going to 21 not serve to sufficiently attract milk? 22 A. I'm saying that over-order prices are not sure. 23 They are temporary at any one point in time. They can 24 disappear overnight for things that have absolutely 25 nothing to do with the cost of supplying a particular 26 place or a particular plant. And if they are, if they -- 27 I can tell you the percentage of the value of milk for 28 when a premium is at zero, it's 0% of the value of milk. 11490 1 Q. There's nothing to stop Class I processors and 2 suppliers for agreeing to any unlimited number of years, 3 for a set price for over-order premium, is there? 4 A. They -- the contracts might read that way, but at 5 the end of the day, the important part to any one 6 particular plant is how they fare against their 7 competitor. So if they can't have assurance, like a 8 Federal Milk Order provides of uniform and competitive 9 pricing with their neighbor plant, that will, in itself, 10 degrade premiums over time. 11 Q. And proprietary Class I processors compete with 12 cooperative-owned Class I plants, correct? 13 A. Yes. 14 Q. But cooperative Class I plants can reblend; isn't 15 that right? 16 A. They can reblend when it comes to payment to the 17 producers, but they are obligated -- a cooperative-owned 18 plant is obligated to the Federal Order pool at the class 19 prices, just like a proprietary plant. There is 20 absolutely no difference. 21 Q. So I want to break out a little bit your testimony 22 between the base Class I skim price and the county-level 23 differentials. Right? Because those are two separate 24 aspects of the Class I differential, correct? 25 A. Yes. 26 Q. We have the base Class I skim price $1.60, and 27 then there's the differentials that go on top of that that 28 are county-level specific, right? 11491 1 A. Yes. It also applies to butterfat. 2 Q. And let's start with the base Class I skim, the 3 Grade A piece. You testified that if there is no 4 financial incentive to produce Grade A milk, reversion to 5 Grade B could be a viable option at the farm level. 6 And my -- my question is, are you aware of any 7 farm that is really intending to become a Grade B farm if 8 the outcome of this hearing is to reduce the $1.60 by 9 $0.40? 10 A. If the outcome is to reduce the base minimum 11 differential by $0.40? I have no idea if there are anyone 12 who has -- any dairy farmer, any individual dairy farmer 13 who is contemplating that, but certainly within the realm 14 of possibility. 15 Q. It's physically possible, but is it likely in your 16 professional opinion? 17 A. Likely? If you -- if you make the value of 18 Class I milk equal to the value of manufacturing milk, 19 dairy farmers will respond economically. They will either 20 stop supplying Class I, or if there's money to be saved by 21 reverting to Grade B, they will do it. They will respond. 22 Q. So that kind of addresses the entire $1.60, and I 23 really want to keep us focused on the $0.40 for Grade A, 24 because that's the specific limits of my question. 25 So you agree that the Grade A factor, right, is 26 about what USDA determined was necessary to ensure a 27 sufficient supply of Grade A milk for fluid use, correct? 28 A. Yes. 11492 1 Q. And that was $0.40. 2 A. That -- that number has been quoted, yes. 3 Q. Do you have any reason to believe it is a 4 different amount than $0.40? 5 A. No. My reading of the final rule in 1999 suggests 6 that -- that the portion of the $1.60 minimum differential 7 associated with Grade A to Grade B is $0.40 per 8 hundredweight. 9 Q. And Grade A standard, that's essentially a food 10 safety standard, correct? 11 A. The Grade A standard, yes. 12 Q. And so my question is, if the Class I 13 differential, $0.40, dedicated to that Grade A 14 maintenance, if that is cut out and the $1.60 is reduced 15 to $1.20, is it your testimony that it is likely that 16 enough farms would convert from Grade A to Grade B that we 17 would not have enough Grade A milk to serve Class I 18 processors? 19 A. I would agree it's unlikely. But I think it is 20 important that the prices still reflect that there is a 21 possibility of the reversion from Grade A to Grade B, and 22 it could be that -- it could be a problem that is 23 localized. There may be an area where that becomes a real 24 potential. May not be a broad potential, but it certainly 25 could be a potential in some number of places, which 26 threatens the supply of Class I. 27 Q. Then I would like to move to the balancing factor 28 then that accounts for $0.60 of the $1.60. 11493 1 A. Yes. 2 Q. And you testified a bit about the costs of 3 balancing, I believe, are on page 8 of your testimony. 4 A. Yes. 5 Q. So my first question is, have you done any 6 calculations, any survey, any studies, to determine what 7 the average cost of balancing is to suppliers today? 8 A. No. 9 Q. So you are not sure if it's significantly less 10 than $0.60? 11 A. I can say from my experience that it is not 12 less -- significantly less than $0.60. 13 Q. Is the cost of balancing uniform between every 14 single supplier? 15 A. No. 16 Q. Would you agree with me that processors can bear 17 certain balancing costs? 18 A. Yes. 19 Q. And would you agree with me that processors and 20 suppliers, given the unique contributions each would make 21 to balancing in their individual relationship, can 22 negotiate how to approach that balancing cost? 23 A. They can negotiate, yes. 24 Q. So then I would like to move back briefly to the 25 incentive piece. We have spoken a little bit about that 26 already. 27 But you have a number of places in your testimony 28 where you criticize situations where the Class I price and 11494 1 the manufacturing price would be equal? 2 A. Yes. 3 Q. And those would be places where the current 4 Class I differential is $1.60, correct? 5 A. I would -- I would also include places where the 6 current differential is, you know, within a few dimes of 7 $1.60. You can -- you basically get to the same place 8 as -- at the places where the differential is $1.60 per 9 hundredweight, $1.70 per hundredweight, $1.80 per 10 hundredweight. The Class I price would look remarkably 11 like the manufacturing prices -- the manufacturing class 12 prices. 13 Q. And I believe it's on page 5, I'm looking at the 14 top of your testimony there. You say that "given that 15 Proposal 20 would lead to a significant portion of the 16 country experiencing scenarios in which the monthly 17 Class I price aligns closely or even equals at least one 18 of the manufacturing class prices, why would producers 19 show any interest at all in meeting Class I demand?" 20 Do you see that? 21 A. I do. 22 Q. Is it your testimony that a significant portion of 23 the country has Class I differentials at or near $1.60? 24 A. I would say the portion of the country that has 25 $1.60, $1.70, $1.80 is very significant. 26 Q. And that testimony would not apply equally to 27 areas of the country with higher Class I differentials 28 based on their county-level differential, correct? 11495 1 A. There would be a different result of that, but 2 we -- when -- then we still have to circle back to the 3 question of the impact on blend prices and the blend price 4 relationship, and the blend price surface, which 5 encourages bulk milk to move to supply, particularly 6 deficit areas. 7 Q. And if the Class I price is roughly equal to the 8 manufacturing class price, Class I processors can still 9 use over-order premiums if they need to attract milk, 10 correct? 11 A. They can. The obvious question is, will they? 12 And history shows they will not, that the over-order 13 premiums will come under pressure at some point, and the 14 prices generated between the Federal Order price and the 15 over-order price will be insufficient to encourage the 16 milk to supply Class I. 17 Q. And can you tell me an example of a situation 18 where Class I has not been able to ensure it was 19 sufficiently served using over-order premiums? 20 A. Say that -- ask that again, please. 21 Q. Have you heard any testimony at this hearing from 22 a Class I processor that they were unable to attract 23 sufficient supplies of milk using over-order premiums? 24 A. No. 25 But we also need to remember that we're operating 26 under a Federal Milk Marketing Order, and the class and 27 the over-order prices are a small portion of the total 28 value of milk. To say that I have never had a problem 11496 1 getting a supply to my plant, those people all are 2 regulated by Federal Milk Orders. The Federal Milk Orders 3 are doing their job in making the supply of milk to them 4 attractive. 5 Q. They also could be too high, correct, if every 6 processor has testified that they have a sufficient supply 7 of fluid milk? 8 A. No. That I -- I don't think that those two are -- 9 would -- those two statements are logically -- could -- 10 Q. Would you agree with me that a supplier can always 11 decline to sell their milk to a Class I processor if the 12 price is not sufficient in their estimation? 13 A. Always? I would not agree with that, always. 14 Q. Are -- are you aware of any situation where a 15 supplier is legally compelled to sell their milk to a 16 Class I processor? 17 A. They may have a contract which requires it, yes. 18 Q. And they voluntarily entered into that contract, 19 correct? 20 A. Yes. 21 Q. Just one moment so I can spin through my notes to 22 see if I covered everything. 23 You have a few statements in your testimony that 24 the purpose of Proposal 20 is to eliminate Federal Milk 25 Marketing Orders; is that fair? 26 A. That is -- it is a logical conclusion from 27 Proposal 20 that that would be a logical result of the 28 proposal. 11497 1 Q. But Class I processors can't eliminate any Federal 2 Order, correct? 3 A. If -- they can propose provisions which would make 4 Federal Orders so irrelevant that the industry would walk 5 away from them. I -- I see this as a very straightforward 6 logical progression. If you have Class I prices that are 7 equal to the manufacturing prices over a significant 8 portion -- and I repeat, it's a significant portion of the 9 country where the Class I price and the manufacturing 10 class prices are virtually equal. You may have classified 11 products, but you don't have classified pricing. If you 12 don't have classified pricing, you don't need a 13 market-wide pool. If you don't need a market-wide pool, 14 you don't need a Federal Milk Order. It seems to me those 15 two logical steps are very, very impossible to ignore. 16 Q. So it's your testimony, based on your experience, 17 that producers, that farmers will find no value in FMMOs 18 outside of the Class I contribution of $1.60 to the pool? 19 A. There are other values to Federal Orders. But if 20 you reduce the Class I price enough in those areas where 21 there -- where those prices are identical or nearly 22 identical to class -- to the manufacturing prices, 23 there -- the other values will tell them, we are telling 24 you that you need to go seek these values outside the 25 pool, and they will -- and the logical conclusion will be, 26 why have a Federal Order? 27 Q. And I believe a number of MIG witnesses testified 28 to the benefits of Federal Orders beyond just pricing. 11498 1 Do you recall that? 2 A. I recall them saying they like the information 3 that orders provide. I don't recall any of them saying 4 that they -- they appreciate the pricing under -- 5 provisions under Federal Orders. 6 Q. But it's your testimony that you believe farmers 7 will only care about the pricing provisions for those 8 counties with a zero-level Class I differential because -- 9 of course, right, we have many other counties that will 10 still have positive Class I differentials if Proposal 20 11 is adopted, correct? 12 A. The obvious concern is if a significant portion of 13 the country decides that they don't need Federal Milk 14 Marketing Orders, that the disorderly marketing conditions 15 that might exist in those areas can bleed over into the 16 next order, and the next order, and the next order. 17 Q. And you believe Class I processors and Class I 18 suppliers will be incapable of solving those issues the 19 way they do today, using the Federal Milk Marketing Orders 20 system with the combination of over-order premiums? 21 A. We are not -- you are not -- you are comparing 22 apples and washing machines. Today we have a Federal 23 Order price which establishes the vast majority of the 24 value. You are imposing the change where the Federal 25 Order price becomes, if not insignificant, nearly 26 insignificant, and the major portion of the value is 27 entrusted to over-order prices. You cannot say that 28 that's the same environment as we have today. 11499 1 MS. VULIN: Nothing further. 2 Thank you, Your Honor. 3 CROSS-EXAMINATION 4 BY MR. MILTNER: 5 Q. Ryan Miltner representing Select Milk Producers. 6 It is still morning? 7 Good morning, Mr. Sims. 8 A. Good morning to you. 9 Q. On Exhibit 497, it's NMPF-112C -- 10 A. Yes. 11 Q. -- this one, on the third page you have a note. 12 A. Yes. 13 Q. Can you explain what you mean by that note? 14 A. Yes. Yes. I may have had to truncate my 15 description earlier. 16 Each of those three states, and I think there are 17 two other states actually, two cities in those states 18 have -- are a part of the 30-city retail price survey. In 19 Ohio, I think it's Columbus and Cleveland. I can look it 20 up. I guess it's not material. 21 But this picture shows that one of the -- in each 22 of these three states, one of those cities has a 23 retail-to-differential relationship which I would call 24 intuitive, that the -- you know, the differential is lower 25 than the -- the median, and the retail price is lower than 26 the median. But the other city in that state has a 27 counterintuitive, or inconsistent, price relationship from 28 what you would expect regarding the relationship of 11500 1 differential to retail. So even within a state you don't 2 have -- you don't have consistency about the relationship 3 between a retail price and the differential. In those 4 three states, they are -- even in a state, you have 5 inconsistencies. 6 Q. If we could go back to USDA's data, we'd find, 7 whatever it is, that New York might be -- Buffalo and New 8 York City -- 9 A. I think it's New York City and Syracuse, if my 10 memory serves. 11 Q. Okay. Pennsylvania might be Philadelphia and 12 Pittsburgh -- 13 A. I believe that one is correct. 14 Q. Even if there are two cities in those states, and 15 they are not consistent? 16 A. Yes. 17 Q. I now want to ask a couple of questions about 18 Exhibit 498, which is your list of plants and their 19 ownership. 20 A. Yes. 21 Q. To be clear, the column labeled "Proposed 22 Differential" -- 23 A. Yes. 24 Q. -- those differentials are those that are from 25 Proposal 19 as offered by National Milk Producers? 26 A. Yes. 27 Q. Did you do this analysis using the results of the 28 economic model without further adjustment? 11501 1 A. No. This -- this comparison simply compares the 2 change -- delta, some people have been using that term -- 3 between the Proposal 19 proposed differential in each of 4 these plant locations and the current. 5 When looking at it, we -- we thought about the 6 testimony from a number of the Class I handlers whose -- 7 who said over and over that their concern in terms of 8 pricing, or a major concern, was there was the consistency 9 in -- in the relationship in pricing. And so we -- our 10 question was, compared to the current differential, which 11 is a given, we compared the proposal. 12 Q. And for -- again, so my understanding is clear, 13 when you are looking at this comparison between the 14 average differential of pool distributing plants that are 15 owned by cooperatives and that are proprietary, this is 16 the national average across the entire -- for the 289 17 plants that you have identified on this list? 18 A. Actually, the number of distributing plants in the 19 list is 219. So this averages across the 219 pool 20 distributing plants, yes. 21 Q. Then that leads into my next question, which is 22 you have some plants on here that are identified as supply 23 plants. 24 Is it correct those plants were not included when 25 you calculated the summary data at the bottom of the 26 exhibit? 27 A. That is correct. The summary data pertains solely 28 to the pool, the pool distributing plants, however that's 11502 1 defined in each order. 2 Q. But you did not look at and so we don't know what 3 the relationship between cooperative plants and 4 proprietary plants would be if you had just looked at the 5 results of the spatial model? 6 A. That is not included on this. 7 Q. Okay. I don't want to repeat questions, but these 8 are somewhat similar to some you have already been asked. 9 So I apologize, but I want to understand your opinion 10 about why something might not happen. 11 And I'm looking at the bottom of page 4 of your 12 testimony, Exhibit 494. And you are stating that if there 13 was a zero zone, there would be no incentive to supply 14 milk to a Class I plant, correct? 15 A. I probably would say that there is no regulated 16 price incentive to supply Class I. 17 Q. In that hypothetical scenario where there's a zero 18 county or a zero zone, it seems that both the 19 manufacturing plant and the Class I plant are simply going 20 to have to bid against one another to get milk to move to 21 their plant, correct? 22 A. Theoretically. 23 Q. Your conclusion seems to be that that -- that 24 there is no incentive for the producer. And I just want 25 to make sure that we understand your experience and -- and 26 opinion as to why that won't occur. Why would there be a 27 market failure there where the plants bidding for milk 28 won't get the milk to move to the plant? 11503 1 A. My concern, given my very long observation of this 2 industry, is that the -- that the -- number one, that the 3 market power in the negotiation process is tilted toward 4 the buyer. We have a very perishable product that we are 5 marketing, and if you don't get it to a plant in a hurry, 6 it becomes an unmarketable product. So the buyer knows 7 that. 8 The other concern is that factors having 9 absolutely nothing to do with the local supply and demand 10 for milk can influence over-order prices. 11 And I want to clarify something I may have said 12 earlier. In the natural historical cycle of over-order 13 prices, the peaks last considerably less than the valleys. 14 If I said it backwards earlier, I want to make sure that 15 that's understood. 16 High over-order prices don't last very long, they 17 never have. Low over-order prices drag on. And that 18 is -- those are the concerns that we don't have a -- you 19 know, all these questions of negotiation presume that the 20 buyer and seller are in the same position, that, you know, 21 I have an alternate place I can take my milk every day 22 instantly. 23 That's not necessarily true, and you must -- it's 24 a perishable product, and it has to be gotten rid of or 25 disposed of to a place that can make it into a product 26 less perishable very quickly. That creates an uneven 27 competitive circumstance. 28 MR. MILTNER: I think all my other questions were 11504 1 already asked, so I won't try to ask them again. Thank 2 you very much. 3 THE COURT: Ms. Vulin. 4 CROSS-EXAMINATION 5 BY MS. VULIN: 6 Q. Mr. Miltner's questions prompted a couple 7 additional ones from me. 8 So you said that suppliers have a perishable 9 product, and because of that, are at a disadvantage 10 vis-à-vis their buyers? 11 A. Generally, yes. Not generally, it's true, that 12 you -- that the perishability of their product makes 13 marketing decisions need to be instantaneous. 14 Q. And isn't the inverse also true, that if you are a 15 Class I processor, your need for supplies to make your 16 product is a need for a product that you need to be 17 delivered daily? 18 A. Generally, Class I processors can wait longer than 19 the dairy farmers can. 20 Q. A Class I processor -- 21 A. Can -- can -- can suspend their purchases for a 22 longer time than a dairy farmer can hold their milk off 23 the market. 24 Q. A dairy processor cannot stockpile three months' 25 worth of raw milk to use as needed, correct? 26 A. They cannot. 27 Q. They also have to have a steady stream of milk 28 coming at a rate that allows them to process it as 11505 1 required by the PMO and other food safety regulation, 2 correct? 3 A. They would desire a steady supply. 4 Q. They would need one in order to operate their 5 business, correct? 6 A. You can't make packaged fluid milk without raw 7 milk, yes. 8 Q. So this issue of perishability cuts both ways. It 9 creates a product that needs to be sold quickly, but also 10 a supplier that needs frequent -- excuse me -- a buyer 11 that needs frequent supplies of this perishable product? 12 A. Again, that knife does cut both ways, but it isn't 13 as sharp on both sides. The dairy farmer is in the 14 disadvantageous position. 15 Q. And that disadvantageous position, when you are 16 talking about the spot market, right? Where you need to 17 unload a load of milk day the next day very quickly is 18 very different than a long-term negotiated contract for 19 milk supply, correct? 20 A. The spot market and long-term negotiated contracts 21 are not the same. 22 Q. And Mr. Miltner had asked you about this issue of 23 manufacturing and Class I prices being equal, resulting in 24 those respective processors just merely competing for milk 25 on the marketplace, correct? 26 A. That was -- I think -- I believe that was the 27 nature of his question, yes. 28 Q. And were you here during Crystal Creamery's 11506 1 testimony where Mr. Schuelke testified about the 2 challenges that FMMOs can pose for getting Class I milk 3 supplies when competing with manufacturers under the 4 current system? 5 A. I -- I was here. I don't recall that testimony 6 specifically. But, yes. 7 Q. So to the extent the current system was 8 disadvantageous for Class I processors in competing for 9 fluid milk, something that brought them back to baseline 10 with manufacturers could be an improvement over the 11 current system? 12 A. I don't think so. 13 MS. VULIN: Nothing further. Thank you. 14 THE COURT: Are there any other cross-examination 15 questions before I turn to the Agricultural Marketing 16 Service for their questions? 17 I see none. I invite the Agricultural Marketing 18 Service. 19 CROSS-EXAMINATION 20 BY MS. TAYLOR: 21 Q. Good morning. 22 A. Good morning. 23 Q. I only have a few questions. Let's see. 24 If we can turn to Exhibit 497. 25 A. Yes. 26 Q. I just want to make sure we know where the data is 27 coming from. I know you have the link down there, but is 28 this -- in one instance you said it was January to 11507 1 October 2023 data, and then in another instance I -- what 2 I thought I heard it was October 2023 data. 3 A. It is January 2023 through October 2023. 4 Q. So you averaged all those numbers? 5 A. Yes. 6 Q. Okay. And on that retail price series, there's 7 quite a number of different data points in there, so I 8 wanted to know which one you looked at. 9 Was it conventional? Whole milk? 10 A. The conventional whole milk. 11 Q. And then on Exhibit 495, and I want to make sure 12 we're just straight on this, for Orders 5, 6, and 7 that 13 don't have PPDs, it is -- these are changes from -- in the 14 last three columns that would be the uniform price? 15 A. Hold on. I'm having a hard time finding that. 16 495. Found it. I'm sorry. 17 Q. Yep. I might have said columns -- I mean rows, 18 but I meant columns. 19 So the last three columns for information for 20 Federal Orders 5, 6, and 7, those are changes -- example 21 in the third column from the end, changes in the uniform 22 price, not changes in the PPD? 23 A. Yes. And for consistency, I put in a proxy 24 announced PPD which was simply the difference between the 25 uniform price, the -- you know, the 3.5% skim and 26 butterfat equivalent uniform price under Orders 5, 6, and 27 7, and 131, and the Class III price at 3.5. So it's 28 that -- that -- those changes are -- the changes in the -- 11508 1 oh, it does say PPD, doesn't it? That shouldn't. It is 2 uniform in that -- one, two, three, four, five -- should 3 be uniform price in that fifth column. 4 Q. Where it says "MIG Proposal 20 PPD change," it's a 5 uniform price? 6 A. Yes. For Orders 5, 6, 7, and 131, that is uniform 7 price, not PPD. 8 Q. And then in the last column as well? 9 A. Yes. Well, again, I -- for consistency's sake, to 10 calculate how often there would be a negative PPD, I 11 converted, in Orders 5, 6, and 7, and 131 using a proxy 12 PPD. And so the uniform price change, in essence, you 13 could maybe make the case of as the same thing as the 14 blend price going down, or the blend price change, so that 15 moves over and is compared in the final column, revised 16 PPD, or revised proxy, if you will. 17 Q. Okay. So you said in some questions bulk milk 18 moves on blend prices? 19 A. Generally, yes. 20 Q. And so if I take your statement big picture, what 21 you are saying, in your opinion, is a reduction in the 22 Class I differentials filters through to a reduction in 23 the blend price. 24 A. Yes. 25 Q. And that results in your opinion of milk less 26 willing to serve the Class I market? 27 A. My -- the Exhibit 496 -- well, National Milk-112B 28 shows that the -- because of the high -- higher than 11509 1 average Class I utilization percentages in Orders 5, 6, 2 and 7, when you take $1.60 away from that Class I price in 3 those orders, the blend price reduction will be greater -- 4 the reduction will be greater -- if that's not an 5 oxymoron -- the reduction in blend price will be greater 6 in those orders than the reserve supply orders that 7 surround Orders 5, 6, and 7. 8 So when you -- if you lower the blend price $0.40 9 in Order 33, and you lower it $1 in Order 7, the incentive 10 to move milk from Order 33 to Order 7 declines by $0.60 11 per hundredweight. They are all going down. All the 12 blends, all the uniform prices go down as a result of 13 Proposal Number 20. But they go down more in Orders 5, 6, 14 and 7 than anywhere else, so that changes the blend price 15 gradient, which is what bulk milk moves on. 16 Q. So in particular, in your opinion, those orders 17 would have trouble getting the supplemental supplies that 18 they need? 19 A. The problem getting supplemental supplies to those 20 orders will get worse. It's already a problem, but they 21 will get worse. 22 Q. And you had some discussion back and forth on 23 individual handler pools. And from what I hear from your 24 opinion is that more of the actual Class I price should be 25 reflected in the Federal Order prices and less left up to 26 over-order premium negotiation? 27 A. I believe that the -- that if we're going to 28 adjust the values in Federal Orders to reflect the value 11510 1 of Class I, that adjustment should be made in the Federal 2 Order prices and not left to increases in over-order 3 premiums which haven't materialized. And it's certainly 4 true on the converse, we certainly should not reduce the 5 Class I revenues in the pools and put more reliance on 6 over-order prices. 7 Q. Is your concern mitigated at all given that 8 Class I processing in the U.S. does have a significant -- 9 and I don't define significant -- but portion of it owned 10 by cooperatives? 11 A. No. They are treated in the -- under the order 12 identical to a proprietary that's -- I don't see any -- 13 any structural difference. 14 Maybe I misunderstood your question. 15 Q. Well, you were concerned about revenue sharing, 16 and that if there's an individual handler pool, you know, 17 what I heard was, they don't have to share all that 18 revenue with all the market participants who are pooled? 19 A. Yes. 20 Q. Would that be accurate? 21 A. It's unlikely that the over-order revenue will be 22 shared broadly across a pool. 23 Q. And I'm just -- was kind of piggybacking on that 24 to say, is that concern mitigated at all because of 25 cooperatives that own a significant portion of Class I 26 processing? 27 A. I don't think so. I think the value of the 28 uniform pricing to producers is of such substantial value 11511 1 that we should avoid the implications that come with 2 individual handler pools. 3 Q. Okay. And just to continue -- and that 4 implication to you is non-uniform prices to producers; is 5 that correct? 6 A. There's multiple implications, but simply the 7 question of market-wide pooling versus individual handler 8 pools, one of the implications is non-uniform producer 9 pricing, and the ruinous competition which would come for 10 the desire to supply those high Class I plants in an 11 individual handler pool environment. 12 MS. TAYLOR: That's it from AMS. Thank you. 13 THE COURT: Shall we break for lunch before 14 redirect? 15 I'm getting a yes. All right. Please come back 16 at 1:05. We go off record at 12:05. 17 (Whereupon, the luncheon recess was taken.) 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 11512 1 MONDAY, JANUARY 29, 2024 - - AFTERNOON SESSION 2 THE COURT: Let's go back on record. 3 We're back on record at 1:07. 4 You may proceed, thank you. 5 MS. HANCOCK: Nicole Hancock for National Milk. 6 Your Honor, we have no further questions. We 7 would just move for the admission of Exhibits 494 through 8 498. 9 THE COURT: Is there any objection to the 10 admission into evidence of Exhibit NMPF-112, marked 11 Exhibit 494? 12 There is none. Exhibit 494 is admitted into 13 evidence. 14 (Thereafter, Exhibit Number 494 was received 15 into evidence.) 16 THE COURT: Is there any objection to the 17 admission into evidence of Exhibit NMPF-112A, also marked 18 Exhibit 495? 19 There is none. Exhibit 495 is admitted into 20 evidence. 21 (Thereafter, Exhibit Number 495 was received 22 into evidence.) 23 THE COURT: Is there any objection to the 24 admission into evidence of Exhibit NMPF-112B, like boy, 25 also marked Exhibit 496? 26 There is none. Exhibit 496 is admitted into 27 evident. 28 (Thereafter, Exhibit Number 496 was received 11513 1 into evidence.) 2 THE COURT: Is there any objection of the 3 admission into evidence of Exhibit NMPF-112C, like cat, 4 also marked Exhibit 497? 5 There is none. Exhibit 497 is admitted into 6 evidence. 7 (Thereafter, Exhibit Number 497 was received 8 into evidence.) 9 THE COURT: Is there any objection to the 10 admission into evidence of Exhibit 112D, like David, also 11 marked 498? 12 There is none. Exhibit 498 is admitted into 13 evidence. 14 (Thereafter, Exhibit Number 498 was received 15 into evidence.) 16 MS. HANCOCK: That's all we have for this witness, 17 Your Honor. 18 THE COURT: All right. Thank you. 19 Did anyone else have any questions for Mr. Sims 20 before I invite him to step down? 21 No one. 22 Mr. Sims, thank you so much. 23 THE WITNESS: Thank you. 24 THE COURT: Let's go off record while we switch 25 out the laptop. Who will be the next witness, though? 26 MS. HANCOCK: Your Honor, we'll have Carl Rasch as 27 our next witness for National Milk. 28 THE COURT: Thank you. 11514 1 Mr. Rasch, while we're on break, you may make 2 yourself comfortable in the witness chair. 3 Let's go off record at 1:10. 4 (An off-the-record discussion took place.) 5 THE COURT: We're back on record at 1:11. 6 I have in front of me an exhibit, but before we 7 turn our attention to that, I'm going to ask the gentleman 8 in the witness chair to state and spell his name. 9 THE WITNESS: All right. My name is Carl Rasch. 10 First name C-A-R-L; last name, R-A-S-C-H. 11 THE COURT: Good. 12 And have you previously testified in this 13 proceeding? 14 THE WITNESS: No, I have not. 15 THE COURT: I'd like to swear you in. 16 CARL RASCH, 17 Being first duly sworn, was examined and 18 testified as follows: 19 THE COURT: Thank you. 20 And, Ms. Hancock, I'm looking at Exhibit NMPF-113. 21 I believe that will be marked 499. 22 (Thereafter, Exhibit Number 499 was marked 23 for identification.) 24 MS. HANCOCK: I wish we had one more exhibit so 25 that we could have the 500 mark. 26 THE COURT: Would you like me to tear off the last 27 page? 28 MS. HANCOCK: I think the honor will go to someone 11515 1 else. 2 DIRECT EXAMINATION 3 BY MS. HANCOCK: 4 Q. Good afternoon, Mr. Rasch. Thank you for being 5 here. 6 And I will note that you spent a considerable 7 amount of time at this hearing because you were slotted to 8 previously testify, but in our effort to expedite some of 9 the proceeding and witnesses, and when we trimmed some 10 witnesses, you were one of the witnesses that graciously 11 gave us back your time. So thank you for being here then, 12 and thank you for returning again for this topic as well. 13 You have prepared Exhibit NMPF-113, which is now 14 marked as Exhibit 499, in support of your rebuttal to 15 Proposal Number 21; is that right? 16 A. That's correct. 17 Q. Would you provide us with that testimony, please. 18 A. Okay. So the testimony that I'm going to present 19 today is a little background about myself. 20 As I indicated, my name is Carl Rasch, and I am 21 engaged as a consultant for the Michigan Milk Producers 22 Association. And prior to working as a consultant, I was 23 employed by them for 40 years as their director of bulk 24 milk marketing. 25 And my business address is 41310 Bridge, 26 B-R-I-D-G-E, Street, Novi, N-O-V-I, Michigan, 48375. 27 So my name is Carl Rasch. I'm here today to 28 present testimony in opposition to Proposal 21 on behalf 11516 1 of the National Milk Producers Federation, hereby referred 2 to as NMPF, with the support of the Michigan Milk 3 Producers Association, hereby referred to as MMPA. 4 MMPA is a member of NMPF. I am a private 5 consultant engaged by MMPA to represent their interests at 6 this proceeding. I was also designated to be MMPA's 7 representative on the National -- on the NMPF task force, 8 which developed the recommendations for Federal Order 9 modernization. Those recommendations were ultimately 10 approved by the NMPF Board of Directors and were included 11 in the notice of hearing issued by the USDA. 12 From 1977 to 2017 I was the director of bulk milk 13 marketing for MMPA. In that capacity, I was responsible 14 for negotiating and executing third-party raw milk sales 15 agreements. Additionally, I was responsible for producer 16 payrolls, Federal Order reporting and pooling, and 17 representing MMPA at various public hearings. 18 The NMPF Federal Order task force reviewed many of 19 the current Federal Order regulations during the process 20 of identifying critical issues to be addressed in this 21 modernization process. One of the issues considered by a 22 working group of the task force was the appropriate level 23 of the Class II differential. While there was 24 acknowledgement that the differential could be changed, 25 there was no consensus as to how much of a change should 26 be proposed. 27 Therefore, NMPF decided it would not submit a 28 proposal to change the current Class II differential of 11517 1 $0.70 per hundredweight, which is -- and I'm going to 2 strike the word "applicable" and replace it with 3 "uniform," so it should read -- which is uniform in all 4 Federal Milk Marketing Orders. It may be appropriate to 5 consider changing the Class II differential at a separate 6 Federal Order hearing. 7 THE COURT: Let me interrupt you there, and we'll 8 make this change on the record copy. So on page 1 of 9 Exhibit 499, the next to the last full paragraph, you're 10 changing the word "applicable" to the word "uniform." 11 It's done. Thank you. 12 THE WITNESS: Okay. So in regards to the issue of 13 substitution incentive. There were numerous -- numerous 14 concerns were expressed in arriving at this decision by 15 the task force work group. And I might add that many of 16 those same concerns have been expressed by various other 17 witnesses at this proceeding, witnesses for both the Milk 18 Innovation Group and the International Dairy Foods 19 Association. 20 Chief among our concerns was the possible creation 21 of an incentive to substitute Class IV powder for fresh 22 milk ingredients, which currently are classified as 23 Class II. This would reduce pool revenues which determine 24 the prices received by dairy farmers. Encouraging 25 substitution of lower cost ingredients for higher value 26 fresh milk ingredients is counterproductive to the basic 27 purpose of the Federal Order program. 28 NMPF is concerned that the Class II differential 11518 1 proposed by the American Farm Bureau Federation, hereby 2 referred to as AFBF, would create an incentive to 3 substitute milk powder for fresh milk. AFBF's method to 4 determine the proposed differential of $1.56 per 5 hundredweight is too simplistic. Because milk powder is 6 relatively nonperishable, it can be purchased today at an 7 attractive price, stored under proper conditions, and 8 utilized within 12 months, when it -- when it -- when 9 it -- it should say "when it is more financially 10 advantageous." In other words, the original cost of the 11 ingredient may be less than the current cost of that same 12 ingredient. Setting the Class II differential too high 13 may incentivize the practice of substituting cheaper 14 powdered milk for fresh milk. 15 The cost of transportation of ingredients is 16 another concern not addressed by the AFBF proposal. Milk 17 powder is a concentrated form of milk solids, far more so 18 than raw milk or concentrated skim milk. The buyer of 19 milk solids is typically located some distance from the 20 source of the product, and transportation costs are 21 incurred in delivering the product to its destination. 22 Because milk powder has nearly all the cow water removed, 23 it is much cheaper per pound of milk solids to transport 24 than fresh milk ingredients. 25 AFBF's rationale for establishing new and higher 26 differential value does not account for this added cost 27 for fresh milk ingredients. This difference in 28 transportation costs also contributes to the incentive to 11519 1 substitute milk powder for fresh milk ingredients. 2 Disorderly marketing. Federal Order regulations 3 do not require the pooling revenue generated by Class II 4 usage unless the handler is a fully-regulated distributing 5 plant. Consequently, if a class price misalignment 6 exists, there is the -- an opportunity to depool 7 significant volumes of Class II milk. In fact, the 8 current differential of $0.70 per hundredweight has 9 consistently provided an incentive to depool Class II 10 milk. Because I am most familiar with marketing 11 activities within the Mideast Milk Marketing Order, I will 12 use statistics for that market for illustration purposes. 13 Beginning in December of 2021, there have been 14 incentives to not pool Class II milk on the FMMO number 33 15 every month. Due to the strength the non-fat milk powder 16 and butter prices relative to cheese and whey prices, 17 there has been a significant price spread between Class IV 18 and Class III prices for the last 23 months. 19 So the 23-month period I'm talking about here is 20 December of 2021 through October of 2023. That was the 21 most recent information available at the time I prepared 22 this statement. 23 THE COURT: That would be October or November? 24 THE WITNESS: October of 2023. 25 THE COURT: Okay. 26 THE WITNESS: After adding the $0.70 per 27 hundredweight differential to the Class IV advanced price 28 factor, Class II price -- Class II skim prices averaged 11520 1 $14.32 per hundredweight versus $10.92 per hundredweight 2 Class III average for calendar year 2022. The Class II 3 skim value exceeded the Class III skim by $3.40 per 4 hundredweight. Additionally, the Class II butterfat value 5 exceeded the Class III butterfat price by .007 cents per 6 pound. The average PPD for -- 7 THE COURT: Let me stop you there just so we make 8 sure the record's right. 9 So you have got the dollar sign, and then a 10 decimal point, and then 007. 11 THE WITNESS: Cents. 12 THE COURT: Yes. 13 THE WITNESS: Per pound. 14 THE COURT: All right. Thank you. 15 THE WITNESS: The average PPD for Federal Order 16 Number 33 during 2022 was $1.50 per hundredweight. The 17 Class II price exceeded the sum of the Class III price 18 plus the PPD every month, which would have resulted in a 19 payment obligation to the producer settlement fund if the 20 Class II milk were to be pooled. 21 The same milk price misalignment continues to 22 exist in 2023. Through the month of October, the average 23 Class II price was $10.15 per hundredweight, and the 24 Class III price was $7.17 per hundredweight, which is a 25 difference of $2.98 per hundredweight. The average PPD 26 through October was $1.58 per hundredweight. Class II 27 milk pooled on Federal Order 33 also would have had a 28 payment obligation to the producer settlement fund for 11521 1 every month of 2023. Consequently, there's been a huge 2 decline in the volume of Class II milk participating in 3 the Federal Order Number 33 pool beginning in December of 4 2021. 5 And so I went to the statistical page for Federal 6 Order 33 and was able to determine the volume of milk 7 participating in the pool in each of the calendar years 8 2020 through October of 2023, and that's what I have 9 listed here as the sum of the total Class II utilization 10 pooled in Federal Order 33. 11 For the year 2020, the total Class II pounds were 12 4,065,109,000 pounds. 13 In 2021, the Class II pool pounds were 14 3,857,237,000 pounds. 15 THE COURT: Would you read that number again, 16 please. 17 THE WITNESS: 3,857,237,000 pounds. 18 By 2022, that number had declined to 19 1,517,464,000 pounds. 20 And through the month of October, the cumulative 21 volume of Class II pooled sales in 2023 was 22 1,200,786,000 pounds. 23 And if I look at the price relationship in volumes 24 for November and December of 2023, the same depooling 25 situation existed. Not only does this create inequity for 26 dairy farmers due to non-uniform prices paid in a common 27 market, it also results in unequal procurement costs for 28 suppliers. An entity that supplies milk to a fully 11522 1 regulated plant for Class II usage has paid the market's 2 uniform price, while another entity that supplies milk to 3 an unregulated plant for Class II usage is typically paid 4 the prevailing Class II price. 5 As demonstrated earlier in my testimony, the 6 difference between the Class II price and the market 7 uniform price has been huge during 2022 and 2023. For 8 twenty- -- for the year 2022, the difference on average 9 was $1.91 per hundredweight, and so far in the year 2023, 10 the difference on average has been $1.40 per 11 hundredweight. 12 Many pool distributing plants generate excess 13 cream which is not utilized in the production of packaged 14 Class I products. Traditionally, this excess cream has 15 been utilized to produce butterfat intensified products 16 such as half and half, whipping cream, sour cream, cottage 17 cheese, and ice cream mixes. All these products are 18 categorized as Class II, and any distributing plant that 19 is fully regulated has this Class II utilization included 20 in the calculation of the plant's total classified value 21 and its obligation to the producer settlement pool. 22 However, if the same byproducts were to be 23 produced at a partially-regulated or completely 24 unregulated plant, those plants would have no obligation 25 to the pool if they chose not to -- to not pool the milk. 26 This creates a huge cost disadvantage for a pool 27 distributing plant. As an operator of a pool distributing 28 plant at Canton, Ohio, this price disparity causes MMPA 11523 1 great concern. If the Class II differential was to be 2 increased to $1.56 per hundredweight as proposed by AFBF, 3 we envision almost all Class II production being shifted 4 to non-pool facilities and the elimination of a valuable 5 source of revenue from the Federal Order Number 33 pool. 6 So in conclusion, NMPF opposes the adoption of 7 Proposal 21 for all the reasons presented in my testimony. 8 Also, NMPF believes that AFBF's proposal to increase the 9 Class II differential is a subject better addressed at a 10 future Federal Order hearing. 11 NMPF has offered five proposals which are intended 12 to modernize Federal Order regulations. All of these will 13 affect the calculation of class prices. Not knowing what 14 the outcome of this public hearing might be, it is 15 impossible to evaluate the consequences of any change to 16 the Class II differential at this time. Additionally, 17 there are issues separate from the correct value for the 18 differential that need to be considered that are not 19 addressed in Proposal 21. Therefore, USDA should reject 20 Proposal 21 and maintain the Class II differential at 21 $0.70 per hundredweight. 22 Respectfully submitted by Carl Rasch on behalf of 23 NMPF. 24 MS. HANCOCK: Thank you, Mr. Rasch. 25 Your Honor, we would make him available for 26 cross-examination. 27 // 28 // 11524 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Ryan Miltner representing Select Milk Producers. 4 Mr. Rasch, do you have an opinion as to what the 5 Class II differential, the proper differential should be? 6 A. Well, as I indicated, it's tough to evaluate what 7 it should be not knowing, you know, how the formulas are 8 going to work in the future. I guess all I would say at 9 this point, increase -- proposing an increase of $0.70 to 10 $1.56 at minimum, you know, if -- if, you know, the $1.56 11 calculation is based on the current Make Allowance for 12 powder, and everyone has proposed that the Make Allowance 13 be increased, so given the proposal as presented by 14 American Farm Bureau, there's a potential for it to be 15 even more. 16 Historically, Class II differentials have been 17 pretty modest. I can remember the day when it was 18 Class III plus $0.10, and then we increased it from 19 Class III plus $0.30, and then with Federal Order Reform, 20 the basis for determining Class II was changed to Class IV 21 plus $0.70. And there was previous testimony earlier in 22 the proceeding indicating that, you know, substitution of 23 powder for fresh milk did occur with the increase to 24 $0.70. 25 So as we indicated, you know, this was the 26 consensus of the members of National Milk that were 27 represented on the task force, and we did not have an 28 opinion as to what the correct differential was. We 11525 1 indicated it should stay at $0.70 until more information 2 is available to make that determination. 3 Q. Based on the state of the regulations and price 4 formulas that we have today is $0.70 appropriate? 5 A. There is some substitution. I'm aware of a fairly 6 significant manufacturer of private label ice cream in 7 Michigan that uses powder exclusively in their operations, 8 so we really don't -- there's -- there's two concerns. We 9 don't want to be eliminating -- as you can see in my 10 numbers for Federal Order 33, you know, the volume of milk 11 pooled has decreased dramatically, and it's not because 12 some of it might have been done due to substitution, but 13 the majority that was due to price misalignments. 14 So, you know, one concern is substitution. But 15 probably the more overriding thing is what is it going to 16 do to exacerbate the concern that everybody has with 17 depooling. 18 Q. In the fourth paragraph of your testimony you -- 19 you stated that, "While there was acknowledgement that the 20 differential could be changed, there was no consensus as 21 to how much of a change should be proposed." 22 When I heard you say that, I took away the idea 23 that at least some members of the National Milk task force 24 felt there should be an adjustment to the Class II 25 differential. 26 Am I correct in that assumption? 27 A. Correct. Some were of the opinion that it could 28 be increased; some thought it should be decreased. 11526 1 Q. So I guess that makes sense then that National 2 Milk wouldn't -- wouldn't include that in their package if 3 you couldn't get consensus? 4 A. That's true. Because we had -- on all of the 5 proposals we submitted, there was consensus of opinion. 6 Q. But then I also read your statement, I heard you 7 present your statement, and it seems to suggest that 8 because National Milk hasn't come to a consensus, USDA 9 shouldn't consider making any adjustments at all. 10 Is that what you are suggesting? 11 A. I think our bigger -- the takeaway the Department 12 should get from this proceeding is we're trying to make a 13 decision as to what the appropriate level of the 14 differential is operating with -- with sort of in a 15 vacuum. 16 We don't know how the formulas are going to work, 17 so how can you determine what you should do for the 18 differential? 19 And -- and at this point, other than American Farm 20 Bureau Federation suggesting that it be $1.56, I have not 21 heard anybody else suggest what the appropriate level 22 should be, so I don't know how they would make a decision. 23 MR. MILTNER: Thanks. That's all I have. 24 THE COURT: Would anyone else like to 25 cross-examine Mr. Rasch? 26 I see no one. I invite the Agricultural Marketing 27 Service to ask questions they have; 28 // 11527 1 CROSS-EXAMINATION 2 BY MS. TAYLOR: 3 Q. Good afternoon. 4 A. Good afternoon. 5 Q. Thanks for coming to testify. We just needed to 6 make sure you were here -- 7 A. Waited a long time. 8 Q. Excuse me. Just a couple of questions. 9 Mr. Miltner asked you what you thought the 10 Class II differential should be set at -- or should be. 11 I want to ask you a slightly different question, 12 as what do you think it should represent? 13 A. Obviously, you know, representing producers, we 14 would like to keep as much of the Class II value in the 15 pay price for the producers. It should be a neutral 16 decision, you know. It may be more appropriate for a 17 processor to use powder, but cost should not be the 18 driving factor. If -- you know, if they use powder, now 19 we're substituting Class II value for the producer for 20 Class IV. And Class II is -- is tied directly to the 21 Class IV price, so you are always going to lose pool value 22 if there's substitution of fresh milk with powdered milk, 23 simply to -- simply for economic reasons. 24 Q. So then you talked a bit about the shift that you 25 noted in Class II pooled volumes -- it's very echoey. 26 THE COURT: We have quite a bit of echo on the AMS 27 mic. 28 MS. TAYLOR: Sorry. 11528 1 BY MS. TAYLOR: 2 Q. You list -- there's Class II volumes on page 3 in 3 Federal Order 33, so you talk about you think that shift 4 was due to price alignment. And so tying back to what you 5 just said, as your goal is to -- from the producer's 6 perspective, is to keep as much of that -- that revenue in 7 the pool, is that any price misalignment that would cause, 8 that Class II milk to be depooled is what you are trying 9 to avoid. Or not used, I guess, is the right word. 10 A. The depooling is -- is entirely a result of the 11 misalignment in pricing. 12 Q. At standalone plants? 13 A. At a standalone plant, yes. And -- and even at a 14 partially-regulated plant as well. They have -- they are 15 required to pool their Class I volume, but they can choose 16 to depool anything that's not Class I. 17 Q. At the end in your conclusion when you talk about 18 basically if there's -- does need to be a change in the 19 Class II differential, it should be at a future hearing 20 because there are issues separate from the correct value 21 for the differential that need to be considered. 22 I was wondering if you could expand on what those 23 issues are you see. 24 A. Performance standards, you know, in order to be 25 eligible to participate in the pool. If you depool milk, 26 there are consequences, there's restrictions as to how 27 much milk you can pool in the subsequent month after your 28 depooling action. So performance standards, pooling 11529 1 restrictions, you know, they vary. What do we have, 12 2 Federal Orders now, or 11? 3 Q. 11. 4 A. 11. All 11 have different standards based on 5 their own market conditions, you know. I indicated, you 6 know, that in the past the differential has been pretty 7 modest, if we were to go to something in the range of 8 $1.50 to $2. Should the differential be uniform across 9 all orders or should it be variable like the Class I 10 differential? So those are just a few things. And they 11 just haven't -- you know, I don't know that they have been 12 taken into consideration when Proposal 21 was prepared and 13 presented. 14 MS. TAYLOR: Thank you very much. That's it from 15 AMS. 16 MS. HANCOCK: Thank you, Mr. Rasch. Appreciate 17 your time. 18 Your Honor, we would move for admission of 19 Exhibit 499. 20 THE COURT: Is there any objection to the 21 admission into evidence of Exhibit NMPF-213, also 22 Exhibit 499? 23 MR. HILL: There's no objection, Your Honor, but I 24 do want to make a correction that Mr. Rasch made on 25 page 2, since he brought it up, which was in line 5 he 26 added the word "is" between "it" and "more." "It is more 27 financially advantageous." 28 And since I'm in here, let's go to page 3 as well. 11530 1 Very minor change. It is next to the 2020 line, that 2 4.065, obviously, that's supposed to be a comma. I wanted 3 to mention that. 4 THE COURT: Very good. Let's make those changes 5 on the exhibit copy. The -- I mean, the original exhibit. 6 So the top of page 2, five lines down, we're 7 adding the word "is," I-S, just after the word "it." 8 That's done. 9 And then on page 3, with regard to the four 10 different numbers, the top number needs a comma after "4," 11 it's 4 billion, comma. 12 That's done. You are very quick. 13 MS. HANCOCK: Thank you, Mr. Rasch. 14 MR. HILL: No objection. 15 THE COURT: All right. So as corrected, we're 16 ready now to admit Exhibit 499. Exhibit 499 is admitted 17 into evidence. 18 (Thereafter, Exhibit Number 499 was received 19 into evidence.) 20 THE COURT: All right. Good. You're free to go. 21 Thank you, Mr. Rasch. How many days were you here? 22 THE WITNESS: What's that? 23 THE COURT: How many days were you here in 24 attendance? 25 THE WITNESS: A dozen. 26 THE COURT: A dozen? 27 THE WITNESS: I'm fairly close. I have been able 28 to drive in and drive away. 11531 1 THE COURT: Excellent. Well, we appreciate you 2 filling in today. Thank you. 3 MS. HANCOCK: Your Honor, we note Mr. Rasch, I 4 believe, is the final National Milk witness. 5 MR. ROSENBAUM: Steve Rosenbaum for the 6 International Dairy Foods Association. 7 Our next witness is Mr. Mike Giles, G-I-L-E-S, and 8 I'm distributing copies of his presentation. 9 THE COURT: Let's go off record while those are 10 distributed. 11 We're off record at 1:45. 12 (An off-the-record discussion took place.) 13 THE COURT: Let's go back on record. 14 We're back on record at 1:52. 15 Mr. Rosenbaum, why don't you start by introducing 16 yourself, and then I'll have the witness identify himself, 17 and then we will number the exhibit. 18 MR. ROSENBAUM: Steve Rosenbaum, International 19 Dairy Foods Association. 20 THE COURT: All right. And I'd like the gentleman 21 in the witness chair to state and spell his name. 22 THE WITNESS: I'm Mike Giles, M-I-K-E, G-I-L-E-S. 23 THE COURT: Have you previously testified in this 24 proceeding? 25 THE WITNESS: No, Your Honor. 26 THE COURT: All right. I'd like to swear you in. 27 // 28 // 11532 1 MIKE GILES, 2 Being first duly sworn, was examined and 3 testified as follows: 4 DIRECT EXAMINATION 5 BY MR. ROSENBAUM: 6 Q. Good afternoon, Mr. Giles. You have on your 7 computer a PowerPoint presentation. We have distributed 8 hard copies of that presentation which are marked as 9 IDFA-Exhibit 67, and I would ask that be marked with the 10 next Hearing Exhibit number, which I believe is 500. 11 THE COURT: Correct. 12 (Thereafter, Exhibit Number 500 was marked 13 for identification.) 14 THE COURT: A milestone. 15 MR. ROSENBAUM: We arranged the order so you would 16 be the one. 17 THE WITNESS: I guess I should say thank you at 18 this point. 19 MR. ROSENBAUM: I had to fight for that. 20 BY MR. ROSENBAUM: 21 Q. Before we start your presentation, tell us what 22 your current position is. 23 A. I am president and general manager of Plains Dairy 24 in Amarillo, Texas. 25 Q. We'll talk about Plains in a little bit in a 26 minute. 27 Is this -- how long have you held that position? 28 A. I have been there five years this January. 11533 1 Q. And do you have experience in the dairy industry 2 that goes back earlier than that? 3 A. I do. Previously I worked for a short term at 4 H-E-B, another captive dairy. And then before that I was 5 vice president of manufacturing for Brookshire's Grocery 6 Company for a long time. 7 Q. And did they have dairy facilities of their own? 8 A. Yes. We had a dairy, ice cream plant; a water, 9 tea, bottling operation; a sweet goods bakery; and an ice 10 plant. 11 Q. All right. 12 THE COURT: Would you spell the name of that 13 establishment for me. 14 THE WITNESS: B-R-O-O-K-S-H-I-R-E-S. The 15 headquarters and plant was located in Tyler, Texas. It's 16 now a Hiland plant. 17 BY MR. ROSENBAUM: 18 Q. All right. Appreciate you providing that 19 background to us. 20 I think if we could go ahead and pull up the 21 PowerPoint presentation at this point, and go to page 3, 22 and tell us about Plains. 23 A. Okay. Plains has been in Amarillo since 1934. 24 Its present location -- 25 THE COURT: Let me interrupt just a minute. So 26 my -- my Exhibit 500 starts with a number 2. 27 MR. ROSENBAUM: It was printed off with two pages 28 per page, Your Honor. If you look back on page 1, you 11534 1 will see there's a 1 and a 2 both. 2 THE COURT: Exactly. 3 MR. ROSENBAUM: So that's -- that's the cause of 4 that confusion. 5 THE COURT: Thank you so much. So I have pages 1 6 and 2, and then I have3 and 4 on the next page. 7 MR. ROSENBAUM: Exactly, Your Honor. 8 THE COURT: Now I understand. I'm sorry to have 9 interrupted. 10 You may proceed. 11 THE WITNESS: No problem, Your Honor. 12 So we are a fluid milk plant. We run the typical 13 fluid, creams, milk, chocolate milk, buttermilk -- we do 14 have cultured there, buttermilk, eggnog, half and half, 15 and heavy cream. Also run a lot of non-dairy as well. 16 Our parent company is Affiliated Foods of 17 Amarillo, and they are the largest of the nine remaining 18 independent grocery wholesalers in the United States. 19 They are about a $1.7 billion distribution company. They 20 are a co-op. And about 88% of our milk ships through a 21 warehouse channel. Affiliated Foods acquired the dairy in 22 1996, and the members of the co-op are independent grocery 23 store owners, mainly in small towns or rural settings. 24 Q. If we could go to the next page to see a map. 25 A. So we -- we -- the parent company distributes 26 groceries in a total of nine states, and all the way up 27 from Amarillo in the middle of the Panhandle there of 28 Texas. All the way up to Torringon, Wyoming, you see one 11535 1 little red dot up there in the corner of Wyoming. All the 2 way down to Zapata, Texas, which is actually further to 3 Zapata than it is to Torrington, Wyoming. And all the way 4 to Dallas -- Arizona on the border, a little bit into 5 Arkansas, all the way up to South Dakota. 6 Q. And when you say that 88% of your milk is shipped 7 through a warehouse channel, I take it that means the milk 8 goes to a warehouse owned by Affiliated Foods? 9 A. Affiliated Foods, yes. 10 Q. And then distributed? 11 A. Yeah. We send truckloads of milk to the 12 warehouse, and then they distribute it through their 13 channels. 14 Q. Okay. If we could go to the next slide, slide 5. 15 A. So we are, again, owned by Affiliated. We're an 16 independent dairy. We buy our milk from the Lone Star 17 co-op for at least the last 15, 20 years. We pay an 18 over-order premium to the co-op. We receive seven days a 19 week and have the opportunity to earn receiving credits. 20 Our milk supply is all Texas milk and comes within 21 30 minutes to an hour of the plant. All single-load 22 producers. We have a small DSD operation that operates 23 throughout the Panhandle, approximately about a hundred 24 miles around the plant and into the Lubbock market. 25 Q. And so these would be shipments that you yourself 26 are making as opposed to going through the warehouse? 27 A. Right. Right. And we have a few other customers 28 as well. 11536 1 Q. All right. 2 A. So we believe that Plains has a unique position in 3 the industry that, from my perspective, the hearing may 4 not have heard from yet. 5 We're -- because we're owned by a grocery 6 distributor that sells groceries to its members, and those 7 are mainly small town grocery stores, sometimes these 8 stores are the only store in the town where they are 9 located. And our -- Affiliated Foods, our parent, also 10 owns other manufacturing, a water bottling facility, which 11 I run as well, a meat plant, a bread bakery, and all those 12 kind of go together to make the model or the mousetrap for 13 the distributor. 14 Q. What's your position on Proposal 19? 15 A. We do not support it, Mr. Rosenbaum. 16 Q. And if we go to the next page, tell us why. 17 A. Okay. We have several reasons. We feel like 18 Proposal 19 is inconsistent with the USDSS study and the 19 remarkable growth in milk supply in the Texas Panhandle in 20 the last 20 years, being very close to the milk supply or 21 the majority of it coming to us less than a hundred miles. 22 Q. I take it that tends to reduce the transportation 23 cost? 24 A. I would think so. So in the 2021 University of 25 Wisconsin modeling study, our differential came in at 2.20 26 a hundredweight and -- for the May study, and 2.30 for the 27 October '21 study. Our current differential -- 28 THE COURT: Let me stop you, Mr. Giles. I want to 11537 1 make sure that this is captured in the transcript as 2 dollars and cents. So would you read that bullet point 3 again and make it clear what you have written. 4 THE WITNESS: For the 2021 University of Wisconsin 5 modeling study, our differential came in at $2.20 a 6 hundredweight for the May '21 study, and $2.30 a 7 hundredweight for the October 2021 study. 8 Our current differential is $2.40 a hundredweight. 9 And the Proposal 19, National Milk's proposal 10 is -- has our differential at $3 a hundredweight. 11 BY MR. ROSENBAUM: 12 Q. And just to pause there. The University of 13 Wisconsin model, based upon what you just told us, 14 actually recommends a decrease in your current Class I 15 differential, correct? 16 A. That is correct. 17 Q. And does that reflect a tremendous growth in milk 18 production up in the Texas Panhandle? 19 A. That is correct. There's tremendous growth, both 20 on the producer side and the manufacturing side. 21 Q. Okay. Continue on, please. 22 A. So between the two, the May '21 model study of 23 estimate of $2.20 a hundredweight and the National Milk's 24 proposal, it's about $0.80 a hundredweight difference. 25 That's about $0.07 a gallon to a fluid milk operator. And 26 $0.07 does matter if you are doing a bid to a warehouse, 27 entity, or a large company. We are -- we are very 28 condensed, and increasing the differential could further 11538 1 affect our volume and the business and the competitiveness 2 of our members' stores as well. 3 Q. Okay. And -- and so basically, the USDSS model 4 would give you a raw milk cost $0.07 less than what is 5 being proposed in Proposal 19; is that correct? 6 A. Well, hang on a second. Could you repeat the 7 question? 8 Q. Yes. The fundamental issue is that the University 9 of Wisconsin model, if followed, would result in a Class I 10 differential for your company, $0.08 less than 11 Proposal 19 -- 12 A. Eight -- 13 (Continuous crosstalk. Court Reporter 14 clarification.) 15 BY MR. ROSENBAUM: 16 Q. Let me start it again just -- 17 A. Okay. 18 Q. -- so she can get my question down and then your 19 answer. 20 The University of Wisconsin model provides a 21 Class I differential to your plant in Amarillo at a cost 22 $0.07 a gallon less than Proposal 19? 23 A. That's correct. 24 Q. If we go on to page 9, I think you got a chart 25 that shows all of this. 26 A. Right. Here's just a chart shown in green, our 27 current differential; in yellow, the first is the 28 May 21st [sic] study at 2.20; then the 2.30 for the 11539 1 October study, and then the National Milk proposal of $3. 2 Q. All right. Please continue. 3 A. So it's my opinion that when -- it seems, to a 4 Class I producer, sometimes when the changes to the FMMO 5 are needed by -- by the farmers, by the producers, the 6 first thought is to raise the price of Class I milk. And 7 Class I milk is declining per capita for many, many years, 8 to the point that fluid milk utilization, I think when the 9 market order first started in the '30s, it was over 10 85% utilization of the total milk supply, and right now 11 it's down to about 17 or 18%, which is approximately equal 12 to the U.S. dairy exports. 13 We know that cheese is driving the bus in dairy 14 utilization, and Plains Dairy is opposed to the concept of 15 raising Class I as the first best answer. 16 We believe the industry needs a financially-sound 17 solution that is best for the long-term sustainability of 18 all parts of the industry. And, again, we're not against 19 reform, we're just against maybe not data-driven reform. 20 I talked about milk consumption declining. And 21 the latest data shows milk volume down around 1.9% 22 nationally. Just attended the Milk -- MilkPEP there, 23 before the dairy forum, and that was the information 24 presented. I think it was two or three months old. 25 Mass merchandisers like Walmart Supercenters, 26 Costco, Sam's, are up 1%, while drug stores, C stores, and 27 traditional grocery are all down. 28 Our membership, that is the membership that is 11540 1 part of the Affiliated co-op, is almost totally made up of 2 traditional grocery. And traditional grocery that's not 3 urban but mainly rural, with some C stores, mostly, again, 4 in that small town setting. 5 These stores, traditional stores, according to 6 MilkPEP, are down 4 to 5%, with C stores down over 10%. 7 So -- and the thought there is that consumers are starting 8 to run out of money and switching to more valued formats 9 and driving further from home to access them. 10 Dr. Capps' study at Texas A&M University testified 11 in December on his most recent elasticity study, he found 12 that the milk price elasticity is more elastic than 13 earlier studies, with every 1% increase in price resulting 14 in a more than 1% decrease in sales volume. This is a 15 dramatic change from pre-COVID. 16 And for an example sake here, I used $0.20 per 17 gallon wholesale cost, the increase to these stores could 18 raise retail as much as $0.35 in our stores. 19 Q. And does that reflect the fact that the stores are 20 taking a markup over and above the wholesale price? 21 A. Yeah. In a perfect world, they do that. And a 22 traditional grocery markup is around 35%. 23 In other formats, it is not. You know, the 24 Walmart model, it is a pretty well known common fact that 25 their markup is less, about 22 to 24%. Sam's, Costco 26 markups are 19%. But if one of our grocery retailers, our 27 members have a store and there's a -- say it's in a town 28 where there's a Walmart, and the Walmart has a lower 11541 1 price, they are going to match that price and not be able 2 to go up and just take a loss. 3 MR. ROSENBAUM: That completes Mr. Giles' 4 testimony. He is available for cross-examination. 5 THE COURT: Who will begin cross-examination? 6 CROSS-EXAMINATION 7 BY MR. MILTNER: 8 Q. Good afternoon, Mr. Giles. 9 A. Good afternoon. 10 Q. I'm Ryan Miltner, and I represent Select Milk 11 Producers. 12 Earlier in the hearing we had some testimony from 13 folks on the cost to move raw milk in a tanker from farm 14 to plant. 15 And I wondered in your experience, do you happen 16 to have a rule of thumb for what it costs to move packaged 17 milk from your plant to the warehouse or from warehouse to 18 store? 19 A. All that is -- that's totally dependent probably 20 on the, you know, current diesel and -- price and that 21 sort of thing. I think somebody testified earlier that if 22 the cost of a semi and tractor-trailer rig was less, and 23 diesel was down, and, you know, it would be inexpensive, 24 but it's not. 25 Pre-COVID, the cost of a tractor-trailer rig was a 26 lot less than it is currently, almost double what it was 27 before COVID. 28 Q. I guess -- I think when they were -- when people 11542 1 were testifying about raw milk, it was more just the 2 incremental cost of actually moving it, not so much taking 3 into account the equipment. I thought it was about $1 per 4 hundredweight per hundred miles. 5 Now, if I just took that and I backed it into a 6 gallon, it would be about $0.085, I think, if my math is 7 right, to move a gallon of milk a hundred miles. 8 And I don't -- I was just curious if that -- if 9 there was any type of equivalent like that, or if that's 10 something you guys just don't track the same way that 11 farmers do? 12 A. Well, you know, talking to co-op representatives 13 in the past, I have heard that the cost that they are 14 getting for the transportation of milk, say, from the 15 Panhandle to Dallas is not what -- you know, what they are 16 able to charge or get for that. So other than that, you 17 know, locally, a hundred miles would be $1 hundredweight, 18 that wouldn't be a lot more than $2.40 I guess, right? 19 Q. Sure. The distance from Amarillo to some of the 20 more distant stores within your cooperative, what -- some 21 of the cities you mentioned, but looks like, when I was 22 looking at the map, maybe Torrington, Wyoming, to the 23 north; Bentonville, Arkansas, to the east; Laredo to the 24 south; and Safford, Arizona, to the west, they are all in 25 that 500- to 600-mile distance. 26 A. I think -- I think right now a good rule of thumb 27 is about $3 a running mile for grocery delivery, not bulk. 28 I don't know what bulk is, but that's what I have heard 11543 1 from our transportation department. I'm no expert on 2 that. 3 Q. Okay. How many gallons of milk would be in a 4 truck? 5 A. It depends on the store. They are going to 6 order -- they may get two or three shipments a week with 7 their groceries. So they are getting all the groceries 8 for that store, along in that truck with the milk, and the 9 milk may only be a pallet scattered through the load, or 10 it may be half a truckload. It just depends on the store 11 and their order. 12 Q. And from your testimony and the questions with 13 Mr. Rosenbaum, I understand that you do all your 14 processing there at the plant in Amarillo, and then -- and 15 then you ship to one or more than one warehouse for 16 distribution? 17 A. Just one. It's about five miles across town. 18 Q. Okay. 19 A. And the grocery company has to add on additional 20 transportation costs to get it to the store. 21 Q. Thank you. 22 On slide 8 of your presentation, you stated that 23 Proposal 19 is inconsistent with the USDSS study. 24 And I'd like to ask, other than the specific 25 differentials applicable to your county, what you found 26 inconsistent between Proposal 19 and the study, if 27 anything? 28 A. Well, from our perspective, and being right there 11544 1 at the milk supply, and our differential going up $0.60 a 2 hundredweight instead of going down $0.20 like the May '21 3 study, University of Wisconsin, to me that's inconsistent. 4 Q. So are you -- you believe the output from the 5 study itself is correct and should be considered as well? 6 A. I think it's some of the better data that we have. 7 Q. Thanks. 8 MR. MILTNER: I don't have any further questions. 9 THE WITNESS: Thank you. 10 THE COURT: Is there other cross-examination 11 before I invite the Agricultural Marketing Service 12 questions? 13 I see no one. I invite the Agricultural Marketing 14 Service to ask questions. 15 CROSS-EXAMINATION 16 BY MS. TAYLOR: 17 Q. Good afternoon. 18 A. Good afternoon. 19 Q. Thank you so much for coming to testify today. 20 A. My pleasure. 21 Q. I'm glad you feel that way still. 22 I wondered if you could just explain a little bit 23 the co-op grocery model for the record, since we talked a 24 lot about the co-op side and the dairy farmer side, but 25 could you just kind of explain just a little bit how that 26 works. 27 A. Well, so the -- the co-op is basically a grocery 28 distributor made up of independent grocery store owners. 11545 1 And our board is grocery store owners as well. We do have 2 a couple of larger members, but the bulk of our membership 3 is -- one, two, five, six, seven -- eight store type 4 owners, a lot of ones and twos. And they may have a store 5 30 miles outside of Salina, Kansas, in a little town with 6 1500 people, that may have to drive 35 miles to go to a 7 bigger city to access, say, like a, you know, Walmart or 8 another chain store grocery store to get their groceries. 9 So they operate in and they perform a great service for 10 these independent members. 11 By having a dairy be vertically integrated with 12 some manufacturing, having a dairy, having a meat plant 13 that makes -- takes boxed beef and puts it into retail 14 cuts, because butchers are very hard to find in small 15 towns, usually they will go to a larger town if there's a 16 butcher available and make more money, so that's a service 17 they offer. 18 A bread plant, it's all part of their, you know, 19 what I call a mousetrap for their model. And it attracts, 20 you know, those grocery store owners rather than a 21 competitive independent wholesaler like AWG or somebody 22 like that. 23 To give you an example of how serious our board is 24 about it, during COVID, you know, people went -- went 25 and -- everything got shut down, people went to the 26 grocery store and bought everything, and you couldn't get 27 toilet paper, and paper towels, and bottled water. We 28 have store brands in our company -- and we control 11546 1 about -- we were buying about a hundred loads of bottled 2 water at the time a week, truckloads. 65 of those were in 3 private label. 4 Well, our supplier, Niagara, the manufacturer, 5 couldn't keep up because the demand went up probably to a 6 hundred loads. But it went up everywhere, all our 7 customers went up. So it was kind of a force majeure 8 situation, and we only got like eight loads of water a 9 week when we needed a hundred. And some of our 10 competitors, maybe in a big box store, got pretty much 11 what they needed. 12 And our board got upset about that, so they built 13 a water plant. And, you know, we were able to do that 14 because it was the beginning of COVID, and the supply 15 chain was still pretty much intact at the very beginning. 16 We were -- jumped on it the next month and started. 17 14 months later, we had first saleable product in our 18 water plant because of that. Some of these little towns 19 had water where they wouldn't have had water when they had 20 to drive a long way. So, you know, that's part of the 21 value of our co-op membership. 22 The other thing is, our profits go back to the 23 members at the end of the year. You know, we hold money 24 out for cash flow and capital expenditures, but then 25 profits go back to the members in the form of a rebate, so 26 it kind of helps keep their costs down. 27 Q. Okay. Thank you so much for that. 28 A. Uh-huh. 11547 1 Q. And then did I hear you correctly, maybe this is 2 just from the dairy side, so you have one -- you -- Plains 3 Dairy manufactures the milk and then ships it to a 4 warehouse, and then that's where the distribution happens? 5 A. That's correct. 6 Q. And is that in regards only to the dairy or that 7 is for all the different meat packing? 8 A. So picture a big grocery warehouse. That's what 9 Affiliated is like. And we ship our product five miles 10 across town to them, and then they distribute our milk 11 with all the groceries as the stores order them. 12 Q. Got you. 13 And you mentioned that you buy your milk from a 14 dairy former cooperative? 15 A. Correct. 16 Q. And that's the -- they are your sole supplier? 17 A. They are. 18 Q. So we have had other testimony at the hearing on 19 kind of how those relationships are, how those 20 negotiations go when it comes to over-order premiums, 21 et cetera. 22 So I was wondering if you could add a little 23 information to the record that you are comfortable with 24 adding kind of in how that works. 25 A. Well, when we first started out, we had a 26 relationship with Lone Star. I think they were in an 27 agency. I'm not sure they are anymore. They are? 28 We get a competitive price, even though, you know, 11548 1 whether they are or they are not. But we have a contract, 2 you know, so it kind of outlines our relationship. They 3 have been good vendors to us. 4 Q. And when it comes to fulfilling the supply that 5 you need, do they provide balancing services to you, or 6 are you pretty steady seven days a week? 7 A. No. No. We don't bottle on the weekends. So, 8 you know, we'll -- we'll receive seven days a week, but we 9 don't bottle every day. So, yes, they provide balancing 10 services for us. 11 Q. Okay. And then your over-order premiums, there's 12 discussion about, on one side those can be negotiated; 13 from the other side says those are really difficult to get 14 anywhere and they could be short lived. 15 Can you talk a little bit about if you pay 16 over-order premiums, how often they might be negotiated 17 and maybe what you think -- 18 A. There's not much negotiation on our side, I don't 19 think. So, you know, they are what they are. And I have 20 seen them -- as Mr. Sims said, I have seen them in my 35, 21 40 years of dairying zero, and I have seen them over $3. 22 So -- but you usually just get a notice of what they are 23 going to be from my side. 24 Q. Okay. I want to turn to slide 8, and the bottom 25 bullet there you are talking about the increase in 26 differentials could affect -- further affect your volume 27 and business and the competitiveness of our member stores. 28 I wanted to see if you could expand on that, 11549 1 particularly when you mention that a lot of your members 2 might be a single -- you know, might be the only grocery 3 store in town. 4 A. Right. If that's the case, they -- if we go up, 5 and there's no competition there, they are probably going 6 to go up. But, you know, there's a point there where if 7 they can drive 30 miles and save $1 a gallon, they might 8 decide to do that, right? 9 The other side of it is if there isn't competing 10 store in a little town like that, and the competitor has, 11 say, milk at $2.99, then they are going to match the $2.99 12 no matter what their cost is, just to, you know, be 13 competitive. 14 Q. Uh-huh. 15 A. And it affects their profit. 16 Q. And you mentioned consumers might drive a longer 17 distance. 18 Is that what you mean on your last slide when you 19 talk about switching to value formats? Could you expand 20 on what that means. 21 A. Yeah. Value format, like a mass merchandiser. 22 You know, you go to a Costco or Sam's, it's -- their 23 prices are going to be a little less expensive than if you 24 are in small-town America from an independent. 25 Q. Okay. And slide 10 at the bottom you say you 26 "believe the industry needs a financially-sound solution 27 that's best for the long-term sustainability for all parts 28 of the industry." 11550 1 What, in your mind, would be a sound solution or 2 what factors would go into that? 3 A. I don't know. And I don't envy y'all's position 4 either, listening to months of testimony and probably 5 going to have to relive it for the next few months to come 6 up with your proposals to submit. 7 We don't really get to be -- have a vote as a 8 processor, so I wish you luck with that, you know. 9 I just think it -- I am not against reform. I 10 just need -- I think it needs to be data driven, and the 11 data says our particular plant should go down in 12 differential, not up. 13 Q. Okay. And then my last question at the back, on 14 slide 11, you give an example, a $0.20 per gallon 15 wholesale increase to the stores could raise retail as 16 much as $0.35 per gallon. 17 I'm just trying to understand the math, how you 18 got to $0.35, and I don't need an equation but generally. 19 A. Well, if a retailer pays $3 for a gallon of milk 20 at wholesale, he's not going to sell it for $3 if he 21 doesn't have to, unless he has a competitor across the 22 street that's selling it for $3. He's going to sell it 23 for $4.50 because that's -- that's his markup. That 24 $1.50, you think, well, that's a 50% markup, right? $3, 25 $1.50. 26 That's not how they figure it. They figure $1.50 27 divided by $4.50, that's a 34% markup. And traditional 28 grocery stores are about a 35% markup, where, you know, 11551 1 your value super center type is more along the 20% level, 2 like a Sam's or Costco. 3 Q. So if what I am -- I don't need to follow the 4 math, but I think -- I just want to make sure I understand 5 your general point, is that if the differentials go up, 6 some retailers will use that price increase, and also in 7 addition to whatever it is at the wholesale level, add an 8 additional markup to the consumer? 9 A. They will raise the price, and they will try to 10 get their traditional markup on top of it, if they can. 11 But it all depends on their -- you know, their format, 12 what type of store it is. And competition. A lot of 13 times they won't be able to get that because of 14 competition. 15 Q. Does that happen in the reverse, when prices go 16 down? 17 A. I think you will find in retailers world, that 18 prices -- prices go up very fast. And they come down 19 pretty slow, but they will come down, but usually it's 20 competition that drives it. 21 Q. Uh-huh. 22 MS. TAYLOR: I think that's it from AMS. Thank 23 you so much. 24 THE WITNESS: Thank you. 25 THE COURT: Mr. Rosenbaum. 26 // 27 // 28 // 11552 1 REDIRECT EXAMINATION 2 BY MR. ROSENBAUM: 3 Q. Just a follow-up on the questions about over-order 4 premiums. 5 I mean, do you -- how do you find out literally 6 what your over-order premium is going to be? 7 THE COURT: I think that was heard, but it was 8 pretty faint. 9 (Court Reporter clarification.) 10 BY MR. ROSENBAUM: 11 Q. You answered a couple of questions about 12 over-order premiums. 13 How do you find out what the amount of your 14 over-order premium is going to be? 15 A. Well, first off, Mr. Rosenbaum, they don't change 16 very often. And when they do, I usually get a phone call 17 if it's been a long time and they are going to change a 18 lot, followed by a notice in the -- in an e-mail. 19 Q. Okay. And that's when it comes from the 20 cooperative; is that correct? 21 A. That's correct. 22 Q. Okay. Is there any real negotiation that's going 23 on? 24 A. No, sir. 25 MR. ROSENBAUM: That's all I have. 26 Your Honor, I would move Hearing Exhibit 500 into 27 evidence. 28 THE COURT: Is there any objection to the 11553 1 admission into evidence of IDFA Exhibit 67, also marked 2 Exhibit 500? 3 There is none. Exhibit 500 is admitted into 4 evidence. 5 (Thereafter, Exhibit Number 500 was received 6 into evidence.) 7 THE COURT: Mr. Giles, is there anything further 8 you would like to add before you step down? 9 THE WITNESS: No, Your Honor. 10 THE COURT: Thank you so much for being here. 11 I would like to take a break, but let me find out 12 who will be the next witness before we take the break. 13 MR. ROSENBAUM: Steve Rosenbaum. 14 Your Honor, Steve Galbraith will be the next 15 witness. 16 THE COURT: Very good. 17 MR. ROSENBAUM: And I'll just mention, he has two 18 separate statements, and I will distribute them during the 19 break. 20 THE COURT: Very good. 21 Let's take 15 minutes. It's now 2:30. Please be 22 back and ready to go at 2:45. 23 (Whereupon, a break was taken.) 24 THE COURT: Let's go back on record. 25 We're back on record at 2:45. 26 I have a new witness in the witness chair. 27 Would you please state and spell your name. 28 THE WITNESS: Steve, S-T-E-V-E, Galbraith, 11554 1 G-A-L-B-R-A-I-T-H. 2 THE COURT: Have you previously testified in this 3 proceeding? 4 THE WITNESS: Yes, Your Honor, I have, on 5 August 30th of last year. 6 THE COURT: Oh, my. You remain sworn. Well, I'm 7 glad you get to see both climates. 8 THE WITNESS: I have seen both experiences. 9 STEVE GALBRAITH, 10 Having been previously sworn, was examined 11 and testified as follows: 12 THE COURT: Mr. Rosenbaum, I have two documents. 13 MR. ROSENBAUM: Yes, Your Honor. We have two 14 testimonies, written testimonies, by this witness. The 15 first one is labeled IDFA-Exhibit 65, which we would ask 16 be marked as Hearing Exhibit 501. 17 THE COURT: Yes. 18 (Thereafter, Exhibit Number 501 was marked 19 for identification.) 20 MR. ROSENBAUM: And the other is marked as 21 IDFA-Exhibit 66, which we would ask be marked as Hearing 22 Exhibit 502. 23 THE COURT: Yes. 24 (Thereafter, Exhibit Number 502 was marked 25 for identification.) 26 DIRECT EXAMINATION 27 BY MR. ROSENBAUM: 28 Q. Mr. Galbraith, your written testimony starts with 11555 1 some introductory background, most of which -- I guess all 2 of which probably we covered back in August. But since 3 it's been a few months, let me just start by asking you a 4 few questions. 5 Remind us the name of the company for which you 6 work and what your position is. 7 A. I'm employed at Saputo Dairy USA, in Dallas, 8 Texas, where I am -- 9 (Court Reporter clarification.) 10 THE WITNESS: I'm employed by Saputo Dairy USA, in 11 Dallas, Texas, where I am vice president of procurement 12 and commodity risk management. 13 BY MR. ROSENBAUM: 14 Q. All right. And remind us how many plants Saputo 15 has and basically what you make. 16 A. So we have 29 plants across the United States. We 17 manufacture some Class I, Class II, Class III dairy 18 products across multiple plants. 19 Q. All right. And Hearing Exhibit 501 addresses 20 Proposal 19, correct? 21 A. Correct. 22 Q. So if you could go to the first page, and to the 23 second heading, opposition of Proposal 19, and go ahead -- 24 and read your testimony for us. 25 A. Okay. First I would like to comment on 26 Proposal 19, the potential impact of increasing Class I 27 differentials in a category that's seen annual average 28 decline of 2%, or over 20% cumulatively, since 2010. 11556 1 In a previous testimony by Mike Brown, it was 2 noted that the current supply of milk greatly exceeds by 3 any measure the amount necessary to satisfy fluid needs. 4 There is no justification to increase Class I 5 differentials and stimulating a larger milk supply given 6 the presence of an already far more than adequate milk 7 supply. I would agree with that proposal as well. 8 In the choosing to raise prices for any product 9 category that is experiencing steadily declining volume 10 has not proven to be a recipe for growth due to some of 11 the potential following outcomes. 12 Mandating higher Class I differentials would 13 reduce the price difference between Class I milk and 14 plant-based beverages. This narrow price difference may 15 incent some consumers to try and ultimately switch to 16 plant-based beverages, resulting in further Class I volume 17 decline. Although the volume does remain wide today, that 18 potential outcome certainly exists. 19 Continued lower milk volume will drive a change in 20 the fluid distribution model from primarily direct store 21 delivery to the delivery through distribution centers. 22 Delivery through distribution centers with longer supply 23 chains will require ESL, or extended shelf life, milk 24 processing, which comes at a higher cost. The move to 25 more ESL processing will result in less HTST processing. 26 And over the past decade, some of the HTST 27 manufacturing plants who shuttered their doors had 28 cultured production -- cottage cheese and sour cream as an 11557 1 example -- associated with them, and they were forced to 2 consolidate that cultured production into centralized 3 facilities further away from customers. These categories 4 remain popular, and if more HTST plants close, any 5 associated cultured production capacity will need to be 6 replaced. As that transition is likely to continue, 7 additional costs to consumers will be required. 8 The loss of Class I consumption reduces milk 9 demand overall. If farmers continue to increase 10 production, that excess milk may ultimately find its way 11 into Class III and Class IV product. Continued supply due 12 to the declining Class I demand will depress prices of 13 Class III and Class IV categories, and reducing the value 14 of Class III and Class IV is not in the best interest of 15 producers or processors. 16 To summarize what I am saying, we have added cost 17 to Class I category over the past several decades with 18 consolidation and increased miles on our product. Adding 19 additional cost will not continue to grow the category. I 20 spent the last 40 years working to build brands and create 21 consumer value. I have never seen structural increases in 22 costs and/or prices be a path to achieving either 23 objective. 24 That's a general overview of, you know, kind of 25 where we're coming from. There are, however, some 26 specific issues that will impact Saputo specifically. 27 We do operate some Class I manufacturing plants 28 across the U.S. We do have a kind of gappy area in the 11558 1 Rocky Mountains and in the Pacific Northwest. At times, 2 we struggle to get milk to certain Saputo facilities that 3 are not located in traditional milk sheds. The 4 marketplace has a mechanism that helps us get milk to 5 where we need it, when we need it, by paying larger 6 over-order premiums. 7 The over-order premium is not promulgated nor 8 implemented through regulatory means. Higher proposed 9 regulatory costs, such as higher Class I differentials, 10 will not change the relationship between the hard-to-get 11 milk locations and the milk-surplus areas. It has a 12 potential to increase inefficiencies between those 13 locations and make processing milk in those hard-to-get 14 locations even more expensive. 15 So, specifically, when you do the math, 16 Proposal 19 pushes the Class I differential in Saputo's 17 Federal Marketing Order Number 7 facility up from the 18 current $2.70 per hundredweight to $4.60 per 19 hundredweight, an increase of $1.90 per hundredweight. 20 Saputo's Class I differentials in Federal Milk 21 Marketing Order 51 would move up from $1.70 per 22 hundredweight to $2.50 per hundredweight, an increase in 23 $0.80 per hundredweight. 24 Saputo manufactures Class I value-added ESL milk 25 and distributes across several states. Proposal 19 puts 26 the facilities in Federal Order 7 at a greater cost 27 disadvantage compared to the West. 28 The same logic applies to facilities in Federal 11559 1 Order 1 and Federal Order 30 when you compare those to the 2 other Federal Milk Marketing Orders. And I -- there's a 3 chart attached with proposed differential changes. 4 The free market and the use of over-order premiums 5 will help bring milk production closer to the demand. 6 Proposal 19 has a potential to move production to 7 alternative locations or, worse yet, drive the cost high 8 enough to reduce overall demand. 9 Creating value in the minds of the consumers is 10 the most effective way to increase revenue in the dairy 11 industry -- 12 (Court Reporter clarification.) 13 THE WITNESS: Creating value in the minds of 14 consumers is the most effective way to increase revenue in 15 the dairy industry. A great example of this is a cream 16 market and the continued increase in cream multiples over 17 the past several years. Not only have butter prices 18 maintained a historic high price, but cream multiples have 19 also continued to increase over the years as manufacturers 20 strive to secure supply to make product for a growing 21 dairy category. 22 Due to this increased consumer demand, co-op 23 agencies can increase cream multiples in the marketplace. 24 The same story needs to be repeated in the minds of the 25 consumer relative to skim solids in the various formats in 26 which they can be delivered to the consumer. Increased 27 regulation and regulation mandating higher prices will not 28 resurrect the category that has been declining for over 11560 1 50 years. The best solution is to build value in the mind 2 of the American and global consumer. 3 BY MR. ROSENBAUM: 4 Q. Thank you very much, Mr. Galbraith. 5 Let's move, then, to your other testimony, which 6 has been marked as IDFA Exhibit 66 and Hearing 7 Exhibit 502, which addresses Proposal 21. 8 And if you could start in the middle of the first 9 page after the heading, "Position - Proposal 21." 10 A. I testify today in opposition of Proposal 21 that 11 seeks to increase the Class II differential from $0.70 12 hundredweight to $1.56 over the Class IV price. 13 Saputo manufactures products in several different 14 states that utilize Class II milk, both skim solids and 15 butterfat components, and opposes Proposal 21 for the 16 following reasons. 17 When I testified on August 30th in opposition to 18 of Proposals 1 and 2, I presented data demonstrating the 19 Saputo plants in Federal Milk Marketing Orders 6 and 7 20 were not receiving milk to contain skim solids below the 21 9% level. 22 Q. I think you put in a "not." Can you re-read that 23 part? 24 A. That contains -- oh, were receiving milk that 25 contains skim solids below -- oh, you are right. Sorry. 26 Q. Why don't you read the whole sentence over again. 27 A. All right. When I testified on August 30th in 28 opposition to Proposals 1 and 2, I presented data 11561 1 demonstrating Saputo plants in Federal Orders 6 and 7 were 2 receiving milk that contained skim solids below the 9% 3 level. Raising the calculation of costs above 9%, as 4 proposed in 1 and 2, would only cause Saputo to pay for 5 solids not being received today. 6 Increasing the premium from $0.70 to $1.56 is 7 simply asking to pay higher levels for solids that are not 8 being received today, placing manufacturing facilities in 9 Federal Orders 6 and 7 at a further competitive 10 differential -- further competitive disadvantage. 11 The differential increase of $0.86 is intended to 12 increase revenue to dairy producers, but will likely not 13 have the intended effect. Class II skim solids demand is 14 likely to decrease, as alternative milk solids have 15 greater substitution values. 16 The last reason -- or the fourth reason would be 17 cream multiples will increase, further increase in cost to 18 consumers. 19 So I'll stop there for a second. 20 For the table below in the testimony, so -- is the 21 following values of skim solids based on published price 22 of various indexes over the past five years. I just 23 pulled these different data points. They are not landed 24 delivered costs to our plants, but they are data points, 25 and they are intended to show the deltas between the 26 different classes. 27 So the Western non-states -- non-fat dry milk, the 28 Western states non-fat dry milk powder has averaged just a 11562 1 little bit over $1.25 and a half over the last five years, 2 Class II skim solids have averaged $1.1495, just under 3 $1.15, and the proposal for Class II skim solids would 4 move that up to $1.2445, just under $1.24 and a half. 5 Q. And those are all in per pound numbers, correct? 6 A. Those are all per pound solids basis, that is 7 correct, skim solids, because we buy in solids and 8 obviously we formulate in solids. 9 Based on the last five years' market values 10 spread, the following conclusions can be derived. 11 Substitution of non-fat dry milk values for 12 Class II skim solids in raw milk does not seem to make 13 economic sense given that non-fat dry milk carries a 14 premium. 15 When you add premiums for condensing skim, the 16 Class II condensed skim gets closer to non-fat values; 17 however, the rehydration time and expense has prevented 18 substitution to date for financial reasons. 19 Consequently, if there is any substitution going 20 on today, or has gone on in the recent past, it is not due 21 to market values. 22 Should the American Farm Bureau proposal to 23 increase the Class II skim solids by over $0.095 a pound, 24 it is possible we could see substitution of non-fat dry 25 milk in a formula replacing Class II skim solids in 26 certain months. 27 This is likely to be done at various levels in the 28 supply chain from the condensing skim manufacturing 11563 1 process to the milk plant itself where the finished 2 product is made. 3 The net result would be the same amount of milk 4 solids used. However, there would be limited or no 5 additional revenue anywhere in the supply chain for 6 producers when this substitution occurs. 7 Q. Would those solids now be priced at Class IV 8 rather than Class II? 9 A. It would be priced at Class IV if you were buying 10 powder, correct. 11 Q. Please continue. 12 A. When making ice cream mix, processors can create 13 ice cream mix formulas that incorporate milk solids other 14 than Class II solids. 15 These substitutions include whey, sweet whey. 16 That substitution for skim solids is a one-for-one. Sweet 17 whey substitution for the past five years would have 18 benefitted an average of just over $0.69 a pound. Sweet 19 whey substitution under Proposal 21 would benefit nearly 20 $0.79 per pound, so an additional dime advantage. 21 Buttermilk. The substitution for skim solids 22 includes removing some of the butterfat as well as skim 23 solids. The table below shows the substitution or cost 24 benefits, so that's cost increase, over the past five 25 years, when compared to actual market and -- and a market 26 where Proposal 21 is enacted. 27 There are a couple of takeaways from this data. 28 Buttermilk substitution would have been beneficial two of 11564 1 the last five years under the current market dynamics. 2 Buttermilk substitution under Proposal 21 would have been 3 beneficial four of the last five years. 4 The larger these substitution savings 5 opportunities become, the more likely owners of the 6 formulas, customers, will look closer to opportunities and 7 ultimately make the switch. The net result of 8 implementing Proposal 21 would likely result in a decrease 9 in Class II skim solids in current formulas. 10 Then I talked about Class III skim solids and why 11 I refer to Class III skim solids in the table below. 12 Because there are companies similar to Saputo that do 13 acquire non-fat dry milk for a variety of reasons. Some 14 of those may be intentional. They market play -- take 15 advantage of a market price or some distressed inventory. 16 Some of those reasons maybe unintentional when 17 milk must be diverted to a balancing plant for numerous 18 reasons. 19 When a -- when you assess the disposition of that 20 non-fat dry milk, there's really two options, outright 21 sale into the marketplace or substitution of powder into 22 Class III or Class II products. 23 The option is often done when the non-fat dry milk 24 inventory is valued at less than Class III or Class II 25 solids. 26 So we look at our inventory that we have for 27 powdered milk, we'll say, what is the value of that 28 inventory and does that inventory value work into Class II 11565 1 or Class III formula. And the best option always is going 2 to be to replace the highest priced skim solids that you 3 have in your network, and that is more likely to be 4 Class II if the differential is increased. 5 Q. So we're not going to have you read the chart that 6 follows into the record, but as an example, you show here 7 that under the actual market there were a couple of years 8 where net per pound buttermilk was at a price advantage -- 9 A. Right. 10 Q. -- over Class II. 11 That would turn into having an advantage four out 12 of five years if Proposal 21 had been in place; is that 13 correct? 14 A. That is correct. 15 Q. And what, just as a businessperson, if you see 16 that substituting buttermilk will make you money four 17 years out of five, what does that give you an impetus to 18 do? 19 A. Yeah. So what it does is we look at the markets 20 every week. We'll get -- look at the ingredients every 21 week, and we try to do a least cost formulation. And what 22 this tells us is that four out of five years, had 23 Proposal 21 been enacted, we would have been substituting 24 buttermilk in our formulas for ice cream mix versus the 25 current where we really only had financial advantage to 26 substitute two out of the five years. 27 So it just provides some of those -- some of that 28 we pass on to our customers; some of it, you know, we 11566 1 keep. A lot of it we do pass on to our customers. 2 Q. Please continue. 3 A. Another impact of increasing Class II 4 differentials would be the impact of cream prices. Cream 5 premiums will increase by an average of half a multiple 6 point based on Class II solids increase. In a tanker load 7 of cream, there's probably 2,550 pounds of skim solids. 8 Cream sellers will realize the increased value of skim 9 solids by increasing the multiple charge for the fat. By 10 increasing the cost $0.09 per pound, that would increase 11 multiple by .0045, or a half a point, when butter is 12 valued at $2.50. 13 I can go through the math if you want to, but it 14 gets boring. So increasing butterfat pricing in an 15 already high value market may not always prompt additional 16 usage and could have a negative impact on consumption. 17 And the last point really has to do with the 18 calculation itself and when the math is applied to the 19 current increase in Class II versus Class IV solids. 20 Butterfat in the current increases .007 per pound. 21 The skim solids increase $0.0778 per pound, by a factor of 22 11. Because the skim milk goes up $0.70 a hundredweight, 23 there's only nine pounds of solids in that skim, you put 24 all $0.70 on that nine pounds, but the fat only goes up 25 seven-tenths of a cent per pound. 26 So if you increase to $1.56, you are still going 27 to have that same 11 factor increase in Class II skim 28 solids versus the butterfat. To me, that just -- why 11567 1 would you want to increase the skim solids 2 disproportionately to the fat level? Particularly given 3 the fact that the marketplace does not value the skim 4 solids at the same level they do the fat. It just seems 5 illogical to me. And, you know, given the struggles that 6 we've seen with demand in the marketplace, it seems like a 7 weird calculation. But I'm kind of a numbers guy. 8 Q. Thank you very much. 9 MR. ROSENBAUM: Your Honor, the witness is 10 available for cross-examination. 11 CROSS-EXAMINATION 12 BY MR. MILTNER: 13 Q. Good afternoon, Mr. Galbraith. 14 A. Good afternoon. 15 Q. My name is Ryan Miltner. I represent Select Milk. 16 I'm the guy that wants to understand your cream 17 multiple math. 18 A. Okay. So if there's 2550 pounds of skim solids in 19 a tanker load of cream, a 48,000-pound tanker load of 20 cream, 2550 pounds of skim solids, they go up by a value 21 of $0.095 per pound, because you went from $0.70 to $1.56. 22 There's 20,360 pounds of butterfat in a tanker load of 23 cream, and we buy thousands of them every month, so we 24 kind of have our average that we use, 20,360 pounds of 25 butterfat in a tanker load of cream. Do the simple math, 26 and then that's how much per pound of fat. And then you 27 got to pick a butter price. And you use 2.50 on average, 28 probably a decent number -- was a decent number for this 11568 1 year, probably be decent number for next year. That's how 2 you get there. 3 Q. When you refer to a cream multiple, what are you 4 referring to? 5 A. When you buy cream, the value of the cream is 6 based on the butter price times a multiple. So most cream 7 is traded on the previous week's average spot butter price 8 times a multiple, and that multiple varies for a variety 9 of reasons. So that's the multiple. 10 Q. But the multiple itself is just set by the market, 11 is it not? 12 A. The multiple is set by the market, yes. But it's 13 also set as a baseline cost. So there's two things 14 involved there: There's the cost and then there's a 15 market. 16 Q. So what is your baseline cost? 17 A. The baseline cost would be Class II butterfat plus 18 the skim solids. That's the cost that the processor paid 19 for the milk. 20 Q. So when you are saying your cream multiple is 21 going to increase, you are not discussing whether the 22 multiple for any given month is 1.25 or 1.20 or 1.40, 23 because that is still market driven, correct? 24 A. That is market driven. 25 Q. Okay. So the change -- I'm having trouble linking 26 up a change to the Class II differential resulting in a 27 change in a market-driven -- 28 A. Okay. 11569 1 Q. -- multiplier. 2 A. So when you buy cream on an annual contract, that 3 becomes a negotiation of market value that starts as a 4 baseline of cost. That baseline cost automatically moves 5 higher by a half a point. That becomes a built-in 6 foundation of where the starting point is. So it -- as 7 another example would be, if the Class II butterfat 8 formula was not 1.211, but 1.10, that would change the 9 baseline cost structure of the contracts going forward 10 because your base started, not at 1.211, but at 1.10. 11 It's the same concept. 12 Q. But in that case where you are talking about 13 butter yield, you are changing the price of Grade AA 14 butter, which I understand is the multiplier times the 15 multiple? 16 A. I'm not changing the butter price, I'm changing 17 the multiple. 1.211 is the yield factor -- 18 Q. Correct. 19 A. -- in the Class II formula. So I use -- just use 20 that as an example. If that formula changed, that 21 would -- that would change the base price as well. 22 Q. I misspoke. You are not changing the Grade AA 23 butter price, you are changing the price of butterfat? 24 A. Yes. 25 Q. Okay. But by changing the price of butterfat, 26 again, when you are negotiating to buy cream, you are 27 still going to go to your seller or buyer, depending on 28 which side of the transaction you are on, look at the 11570 1 available cream in the market and the available churning 2 capacity, and a thousand other factors, and say, our 3 multiplier is 1.24 for the term of this contract, 4 hypothetically, correct? 5 A. And one of those thousands of other factors you 6 refer to is a cost of the skim solids. So what we see, 7 if -- if milk -- if non-fat dry milk is $2 versus $1, 8 that's one of the factors used in calculating a tank load 9 of cream. 10 Q. So is it correct for me then to say, when you say 11 the cream multiple will increase, what's really happening 12 is that the change in the price formula is the equivalent 13 of changing the multiple; the market will still set a 14 multiple based on an entire litany of factors? 15 A. That's correct, it will. The market will settle 16 on that, but that will be a factor. 17 Q. Okay. I realized I brought up just one of your 18 two statements. I need to grab the other one to see if I 19 have any other questions. Give me just a moment. 20 A. Sure. Okay. 21 Q. This ties back to the cream multiples a little 22 bit. This is Exhibit 501, which was your first statement. 23 A. Okay. 24 Q. And it's the end of page 2, continuing to page 3. 25 And you write, "Due to this increased consumer demand, 26 co-op agencies can increase cream multiples in the market 27 place." 28 Can you give me a little context around what you 11571 1 mean there. 2 A. So we purchase cream from agencies. I don't think 3 I need to name them, but we do purchase cream from 4 agencies, which is more than one co-op. And because 5 demand is high, they are able -- and because they control 6 a large amount of the cream, they are able to elevate 7 prices. 8 Q. So it's really just a statement about market power 9 in that context for cream sales? 10 A. Yes. 11 Q. Okay. Saputo itself, the parent company, is a 12 Canadian entity, correct? 13 A. Yes. 14 Q. Now, fluid milk consumption in Canada has not 15 fallen to the extent it has in the U.S. 16 Would you agree with that? 17 A. I haven't seen the data, but I'll take your word 18 for it. 19 Q. I was wondering if within Saputo, if they have had 20 any observations about why -- why fluid milk sales have 21 not declined in Canada as much as -- 22 A. I have not been privy to these conversations, so I 23 wouldn't be able to comment. 24 Q. Now, if a gallon of milk -- or four liters of milk 25 is selling for $7, that might suggest that fluid milk 26 declines in the U.S. aren't entirely tied to price. 27 Would you agree with that? 28 A. I think there's a lot of factors involved in the 11572 1 decline of Class I milk, a lot. 2 MR. MILTNER: I don't think I have anything else. 3 I appreciate you answering my questions. 4 THE WITNESS: Thank you. 5 CROSS-EXAMINATION 6 BY MS. HANCOCK: 7 Q. Good afternoon. I'm Nicole Hancock with National 8 Milk. 9 I'm on Exhibit 501 on page 2 of your testimony. 10 A. Okay. 11 Q. On the halfway point on the page you have three 12 bullet points there. I'm just below the third one. You 13 have a new paragraph there that says, "The free market and 14 the use of over-order premiums will help bring milk 15 production closer to the demand." 16 Do you see that? 17 A. Yes. 18 Q. I'm wondering if you could explain that to me. 19 A. So we process milk in Federal Orders 6 and 7, not 20 the most dynamic milk shed in the world, as you know. 21 There's not a lot of cows in that part of the country. 22 And in order for us to get milk, we have to pay a higher 23 over-order premium in there, and that market dynamic in 24 itself works. 25 So the point is, why would we need to structurally 26 increase it more when that dynamic works? 27 Q. So when you say that that market dynamic works, 28 you mean from the handler's perspective? 11573 1 A. Yes, from our perspective. 2 MS. HANCOCK: That's all I have. Thank you so 3 much. 4 THE COURT: Is there other cross-examination 5 before I call on the Agricultural Marketing Service for 6 questions? 7 There is none. I invite the Agricultural 8 Marketing Service questions. 9 CROSS-EXAMINATION 10 BY MR. WILSON: 11 Q. Todd Wilson, AMS. 12 Good afternoon, Mr. Galbraith. 13 A. Good afternoon. 14 Q. I'm going to start on Exhibit 502, sorry, and on 15 page 3, I want to kind of go through this chart that you 16 have and just make sure that we understand clearly what 17 some of the annotations are. 18 The first column -- well, the second column, first 19 column of data, has a Class III skim solids. 20 A. Yes. 21 Q. Can you tell me how that was -- how are you 22 calculating that? 23 A. Class III skim milk divided it by nine. 24 Q. The announced Class III Federal Order skim 25 price -- 26 A. Divided by nine. 27 Q. -- divided by nine? Perfect. 28 Same with Class II, it's not the announced 11574 1 Class II non-fat solids price? 2 A. You say -- yeah, it was the announced, not the 3 advanced. Class II is -- the skim is advanced. 4 Q. Correct. 5 A. Should say announced. 6 Q. Okay. Then we move across to about the middle of 7 the chart, "SS pounds," what does that -- 8 A. Skim solids. 9 Q. Skim solids. 10 "BMS," next column over? Butter -- 11 A. Wait. I'm looking for the next column. 12 Buttermilk. 13 Q. Then the next column over is "SS pounds," and you 14 have there 1, the number 1 in that column. 15 What is that in reference to? Is that a price? I 16 mean a -- or 1 pound or -- 17 A. Where are you at? 18 Q. So the first -- the top chart, do you see where it 19 says "Actual Market" as a header? It's on page 3. 20 A. Okay. Got it. Okay. Buttermilk. 21 Q. Yes. 22 A. Skim solids pounds, so that's the substitution. 23 Q. Just the 1 is -- 24 A. So you would take out -- you would put in 1 pound 25 of skim solids, 1.0256 pounds of buttermilk solids, and 26 take out .0256 pounds of butterfat. That's the 27 substitution. Sorry I was looking at the wrong sheet. 28 Q. That's okay. 11575 1 A. So when you -- you -- when you -- because 2 buttermilk is about 2.5% butterfat, you have to take 3 that -- you would take out some butterfat when you put in 4 buttermilk, but you've got to replace the skim solids one 5 for one. So you put in 1 pound of skim solids, 1.0256 6 butterfat, and then you just take out .0256 pounds of -- 7 you take out .0256 pounds of butterfat, so 1.0256 pounds 8 of buttermilk solids -- 9 (Court Reporter clarification.) 10 MS. TAYLOR: Just say the numbers. 11 THE WITNESS: You start with your formula, and you 12 take out 1 pound -- 13 BY MR. WILSON: 14 Q. I'm going to interrupt you. 15 You start with what? 16 A. An ice cream mix formula. 17 Q. A formula? 18 A. Formula of ice cream mix. 19 Q. Not a price on this chart? 20 You are not taking 1 out of something on this -- 21 in another part of the piece of the data? 22 A. I am taking out 1 pound of skim solids at Class II 23 price. 24 Q. The .9157? 25 A. Yep. 26 Q. Okay. 27 A. I'm taking buttermilk solids. I'm adding 1.0256 28 pounds of buttermilk. 11576 1 Q. It is the replacement? 2 A. As a replacement. 3 Q. Got you. 4 A. But because I put 2.56 more pounds of buttermilk 5 than I took out skim solids, I have to take out butterfat. 6 And that -- 7 Q. That equates out to the next column? 8 A. Yes. 9 Q. Net per pound buttermilk -- 10 A. Yeah. It was an $0.08 premium in 2019 on average. 11 It saved you $0.03 a pound in 2020. It cost you $0.05 in 12 2021. It cost you $0.14 a pound in 2022. And in '23, you 13 saved $0.12 under the current price -- the current 14 formula. 15 Q. I think we're understanding it now. 16 A. Okay. Sorry. 17 MR. WILSON: Thank you. 18 THE WITNESS: I'm a math guy. 19 CROSS-EXAMINATION 20 BY MS. TAYLOR: 21 Q. Okay. I'm going to turn to Exhibit 501. 22 A. Okay. 23 Q. Hopefully I'm not going to be too repetitive of 24 questions I may have asked you back in August, but to be 25 honest, I've forgotten what I asked you back then, so 26 that's why I have a transcript to read later. 27 So Saputo has ESL products. 28 Do you do any HTST? 11577 1 A. No. 2 Q. And on your ESL products, do you -- do you do any 3 risk management with those? 4 A. Yes. 5 Q. Can you elaborate a little bit on that if you are 6 willing? 7 A. We have customers that request fixed price. Most 8 of those customers are menu board customers. So for 9 obvious reasons, you know, they have -- they would like to 10 have a fixed price, because they don't like to change 11 their menus that often. And so we provide them that 12 ability to do that. 13 So, yes, we do on Class II. 14 THE COURT: Say that again? So, "yes, we"? 15 THE WITNESS: We -- we have customers that request 16 fixed pricing for periods of anywhere from three to nine 17 to 12 months out for butterfat and skim solids. And they 18 do that for obvious reasons. 19 BY MS. TAYLOR: 20 Q. So that's what you provide your customer. 21 Do you then go out to the market to hedge that 22 risk? 23 A. Yes. 24 Q. Okay. For the same three to six months out each 25 time period? 26 A. Yes. 27 Q. And then on your ESL products, what's the shelf 28 life on average of those products, do you know? 11578 1 A. 90 days. 2 Q. Thank you. 3 On the -- towards the bottom of page 1 you have a 4 bullet in there talking about how continued lower milk 5 volume -- and I think what you are talking about is 6 Class I sales, Class I utilization -- will drive a change 7 in the fluid milk distribution model from primarily DSD 8 through -- to delivery through distribution centers, and 9 those distribution centers will require a longer supply 10 chains and require ESL, extended shelf life, products. 11 A. Uh-huh. 12 Q. And then ultimately resulting in less HTST 13 processor, if I move through the logic of your statement. 14 I guess I was wondering, first, if you could talk 15 a little bit on what you think the incentives are for a 16 Class I processor to move from HTST to ESL production, 17 like what drives you to make that decision? 18 A. It's distribution of the product. So today, a 19 HTST processor has direct store delivery. Does not take 20 extra time to go through a distribution network. And 21 the -- in the old days, that's almost -- exclusively it 22 was all direct store delivery. 23 As you go through distribution systems, and you 24 consolidate that with other shipments, because you don't 25 have enough volume in milk to justify taking directly to 26 the store and having somebody take it in there, the volume 27 is not there, you run that through your distribution 28 system. 11579 1 When you run that through your distribution 2 system, that takes time. And so if you don't have the 3 date code on there, where the consumer sees it on the 4 shelf and it is -- it is not about to expire, you need to 5 extend that shelf life. So -- so we see that in 6 foodservice, and it only makes logical sense that it would 7 go to retail as you get less and less direct store 8 delivery. 9 Q. And is it that distribution system also that 10 allows shipments to move longer distances than -- not 11 really -- it takes longer to go through the chain from 12 point A to whatever the ultimate destination was, but does 13 it allow for longer distances to be travelled generally to 14 service other markets? 15 A. Yes. It does that as well. 16 Q. Okay. And are those decisions made at all in 17 regards to -- in the Class I processor side, the cost of 18 the raw milk supplied? 19 A. No, not necessarily. Not -- that really hasn't 20 had the impact. 21 Q. Okay. 22 A. It's not been a discussion point. 23 Q. And so when I read this statement -- 24 A. Let me rephrase that. One of the key drivers to 25 making the decision whether you need that extended shelf 26 life is scrap. How much product are you day coding out? 27 If you are one or two or three or five, whatever the 28 percentage is, the higher the value of that product, the 11580 1 lower percentage tolerance you have to scrap it out. 2 Q. When you say "scrap," just so the record's clear, 3 it expires and you can't sell it. 4 A. Expires. Codes out, yes. 5 Q. Yeah. 6 A. And you can't sell it anymore. 7 Q. Uh-huh. 8 A. The value of that -- the higher the value, the 9 less tolerance you have for -- for coded out product. 10 That's why we see a lot of high value heavy cream products 11 with more and more ESL because of that. Indirectly it has 12 an impact, the cost has an impact, the -- you know, but 13 obviously fluid milk doesn't have the same cost as a heavy 14 whipping cream on a per unit basis. 15 Q. Uh-huh. Okay. 16 And so when I read your statement about how 17 eventually we could result in more ESL processing, do you 18 think that's a good or a bad thing? 19 A. I think it's a more expensive thing, and that was 20 the point. And, you know, do we really want to add 21 additional costs? Whether it's good or bad, it's more 22 expensive, and any time you add expense to any category, 23 it's never good. 24 Q. Okay. So I'm just trying to tease out kind of the 25 Federal Order part role in all of that, right? Because 26 you talk about -- 27 A. So the Federal Order part becomes just another 28 incremental cost. That's all. It's simply, we're going 11581 1 to take this -- we're going to move Federal Order 7 up, 2 whatever I said it was in here, up $1, whatever, a 3 hundredweight. It's another incremental cost, that's all. 4 That's where the Federal Order becomes -- adding 5 structural costs that are not market driven just adds 6 further cost to a category. 7 Q. And in a declining category as you say? 8 A. In a declining category. 9 Q. Okay. I do want to talk a second about the 10 example you put in the middle of page 2 about your plant 11 in Order 7, under Proposal 19 would see an increase of 12 $1.90 in your plant, and in the California order, under 13 the proposed differentials, would see an increase of 14 $0.80. 15 A. Yes. 16 Q. And you say that puts your Order 7 facility at a 17 greater cost disadvantage compared to the West Coast? 18 A. That's correct. So I preface that statement with 19 we operate in multiple locations. We process lactose-free 20 milk for a lot of customers. ESL travels a long distance. 21 We do it in certain regions of the country. 22 If you've got one in -- one in Kentucky and one in 23 California, and you are servicing the intermountain West, 24 where do you ship that from? 25 Q. Uh-huh. 26 A. So you look at it and say, okay, what's my landed 27 cost delivered to the customer in Denver, Colorado? Let's 28 pick that as a point. What goes into that? A lot of 11582 1 things go into that. Cost of milk goes into that, number 2 one. Number two would be processing. Number three would 3 be transportation. 4 And given the fact that West Coast transportation 5 for reefer units coming out of California going back east, 6 particularly into the high plains and the high meat 7 regions, is cheaper than bringing finished product from 8 Kentucky out West, you know, you start to put Kentucky at 9 a disadvantage to California. 10 Q. In your experience, those two plants compete for 11 the same sales? 12 A. They will ultimately. We look at the supply chain 13 for the lowest landed cost. We look -- we get the same 14 sale. The question becomes is, what -- what plant gives 15 you the lowest landing cost. 16 Q. Sure. 17 A. And milk is a factor of that, probably the largest 18 piece of that. 19 Q. And you can say that now. Right? I mean, with 20 the -- based on the differentials, one is going to give 21 you an advantage over the other? One place will have the 22 advantage over the other place? 23 A. Well, of the total cost of goods, milk would be 24 largest percentage of the cost of goods. 25 Q. Uh-huh. 26 A. Then there's other factors involved that I talked 27 about. 28 Q. Okay. On that chart on page 2 where you list the 11583 1 different plants, Saputo plants, could you mind just 2 reading what states they are in, if it is not -- are 3 obvious; some are not. 4 A. Okay. So Gustine is in California; Wilmington's 5 in Connecticut; Plant City is in Florida; Murray is in 6 Kentucky; White Bear Lake's in Minnesota; Friendship and 7 Delhi are both in New York; Sulphur Springs is in Texas. 8 Q. Thank you. 9 MS. TAYLOR: I think that's it from AMS. Thank 10 you very much for your time. 11 MR. ROSENBAUM: Steve Rosenbaum, International 12 Dairy Foods Association. 13 I would simply ask that Hearing Exhibits 501 and 14 502 be entered into evidence. 15 THE COURT: Is there any objection to the 16 admission into evidence of IDFA-Exhibit 65, also marked as 17 Exhibit 501? 18 There are none. Exhibit 501 is admitted into 19 evidence. 20 (Thereafter, Exhibit Number 501 was received 21 into evidence.) 22 THE COURT: Is there any objection to the 23 admission into evidence of IDFA-Exhibit 66, also marked 24 Exhibit 502? 25 There are none. Exhibit 502 is admitted into 26 evidence. 27 (Thereafter, Exhibit Number 502 was received 28 into evidence.) 11584 1 MR. ROSENBAUM: Thank you, Your Honor. 2 THE COURT: Thank you, Mr. Rosenbaum. 3 Is there anything else that you would like to add, 4 Mr. Galbraith? 5 THE WITNESS: No, it's been a good experience. I 6 really enjoyed talking to people. 7 THE COURT: Well, we're glad to have a math guy. 8 THE WITNESS: I usually bring my calculator with 9 me, but I didn't bring it today, I'm sorry. 10 THE COURT: Most of our witnesses have stated, "I 11 don't do math on the witness stand. I don't add, I don't 12 subtract." 13 THE WITNESS: We do it every day. 14 THE COURT: Well, we're glad you came. 15 THE WITNESS: Thank you. 16 THE COURT: Thank you. You may step down. 17 So what would be the best witness to call next? 18 Would it be Ms. Keefe or is there -- 19 MS. TAYLOR: Your Honor, if we could have maybe a 20 five-minute break so we can all confer. I think there's 21 one witness who will not be here until tomorrow, and I'm 22 not sure if the other two have their statements printed 23 yet. So maybe a five-, ten-minute break and we can get a 24 plan. 25 THE COURT: Let's do ten. Please be back -- and 26 it's now about 3:36. Please be back and ready to go at 27 3:46. 28 (Whereupon, a break was taken.) 11585 1 THE COURT: Let's go back on record. 2 We're back on record at 3:47. 3 MS. VULIN: Good afternoon, Your Honor. Ashley 4 Vulin with the Milk Innovation Group. We call Sally Keefe 5 to the stand. 6 THE COURT: Ms. Keefe, would you state and spell 7 your name, please. 8 THE WITNESS: My name is Sally Keefe, S-A-L-L-Y, 9 K-E-E-F-E. 10 MS. VULIN: And I'm sorry, Your Honor -- 11 THE COURT: No, I -- I was going to say, I know 12 you have testified before. You may proceed with the 13 exhibit. 14 MS. VULIN: Thank you. I almost said she is still 15 sworn, but you've got us all very well conditioned on that 16 front. 17 THE COURT: You do remain sworn, as you know. 18 SALLY KEEFE, 19 Having been previously sworn, was examined 20 and testified as follows: 21 MS. VULIN: So, Ms. Keefe, you have in front of 22 you MIG-Exhibit 67, correct? 23 THE WITNESS: Yes, I do. 24 MS. VULIN: Your Honor, I ask that that be marked 25 as Exhibit 503. 26 THE COURT: Yes. 27 (Thereafter, Exhibit Number 503 was marked 28 for identification.) 11586 1 DIRECT EXAMINATION 2 BY MS. VULIN: 3 Q. And, Ms. Keefe, this is your testimony in 4 opposition to Proposal 21, correct? 5 A. Yes, that's correct. 6 Q. And then there were a couple outstanding questions 7 that had arisen in the hearing that you also wanted to 8 address on advanced pricing and organic pricing, correct? 9 A. Yes, that's correct. 10 Q. And before we get started, I know there's one 11 correction we have to make. 12 If you could please turn to page 5, footnote 1. 13 The third line down identifies Mr. Galbraith's testimony 14 as Exhibit 501. 15 But in fact, that should be 502, correct? 16 A. Yes. That's right. We just heard that. 17 Q. Our guess there was wrong. 18 MS. VULIN: So, Your Honor, we would ask that the 19 record copy be marked such. 20 THE COURT: It has been done. 21 BY MS. VULIN: 22 Q. Ms. Keefe, I know given the timing we don't have a 23 fancy PowerPoint. We'll ask that you please read your 24 testimony into the record. And if you want to skip your 25 background, you are welcome to do so given the amount of 26 times you have testified. 27 A. Thank you. I'll get started on page 2, just 28 before section 2. 11587 1 I'm an expert consultant for MIG in support of its 2 proposals at this hearing. I am testifying in opposition 3 to AFBF's Proposal 21 here today. 4 MIG's position is that USDA should not adopt 5 Proposal 21 as it is not an equitable nor justifiable 6 approach to determining the Class II differential. 7 Class II utilization is important to fluid processors, 8 namely because Class I products will inherently have 9 excess cream that must either be sold, typically to a 10 Class II or Class IV manufacturer, or made use of. 11 Class I processors use the excess cream that fluid 12 milk generates in a variety of ways. It's common for a 13 fluid plant to bottle both Class I fluid milks and 14 Class II fluid creams, as well as other beverages that are 15 also part of Class II. Additionally, many fluid plants 16 have Class II lines for production of cottage cheese, sour 17 cream, yogurt, ice cream mix, et cetera. Conversely, it 18 is also relatively common today for Class II plants not to 19 bottle fluid milk, i.e., standalone Class II manufacturers 20 are more prevalent than they were historically. 21 Class II includes milk used for a diverse array of 22 dairy products. As detailed at 7 CFR 1000.40(b), Class II 23 includes skim milk and butterfat used for: Fluid cream 24 products such as half and half and whipping cream; soft, 25 semi-solid, and frozen products such as cottage cheese, 26 ice cream, sour cream, and yogurt, including beverage 27 forms of these; products used for infant feeding or 28 dietary use including meal replacements; and products for 11588 1 commercial food processing, such as large format fluid 2 milk and sweetened condensed milk. 3 Importantly, 7 CFR 1000.40(b)(2)(ix) states that 4 Class II includes skim milk and butterfat used for "(a)ny 5 product not otherwise specified in this section." Thus, 6 Class II milk includes any use which is not explicitly I, 7 III, or IV. 8 This link between Class I and Class II is largely 9 out of a fluid processor's control because of the 10 relatively low butterfat utilization of Class I fluid milk 11 as determined by consumer preferences for skim, 1% low 12 fat, 2% reduced fat, and whole milk. As shown in Table 1 13 below, Class I is the only class with butterfat 14 percentages consistently and significantly below that of 15 FMMO milk in total, i.e., producer milk. 16 Table 1 contains the butterfat percentage of FMMO 17 milk by class for 2013 to 2022. It's found on page 4 of 18 my written statement. I'm not going to read the table 19 into the record. 20 These facts all make clear that any Class II 21 specific proposal will significantly impact fluid 22 processors if adopted. If adopted, American Farm Bureau 23 Federation's Proposal 21 would create winners and losers: 24 In short, Class I would again be the loser. Under 25 Proposal 21, standalone Class II processors would be able 26 to depool when economically rational, while Class I 27 processors with Class II manufacturing would always be 28 subject to pooling. While the pool plant provisions vary 11589 1 modestly across the orders, generally distributing plants 2 with 25% or more Class I utilization of milk receipts and 3 at least 25% of Class I sales within the applicable 4 marketing area are fully regulated pool plants. 5 Fully regulated distributing plants are mandatory 6 FMMO participants. As such, pooling includes all milk 7 used by the distributing plant, even the non-Class I 8 utilization. In contrast, participation for a standalone 9 Class II plant is voluntary. Like other non-fluid 10 participants, they pool when it is economically rational 11 to do so. 12 The unfairness here is that a fluid plant making 13 Class II products that meets the typical 25% threshold 14 would be subject to pooling at all times for all of its 15 milk. Adoption of Proposal 21 would not change the 16 mandatory participation of fully regulated distributing 17 plants and the voluntary participation of others, 18 including standalone Class II operations. 19 This disparity would leave competitors inequitably 20 and unfairly positioned in the marketplace. Standalone 21 Class II processors would have an economic advantage over 22 Class I processors making Class II products. FMMOs cannot 23 and should not regulate identical products differently. 24 Certainly, this disparity already exists today, 25 and it is worthwhile to consider long-term the place of 26 the Class II differential with FMMO pricing. But without 27 doubt there's no reason to impact the Class II 28 differential given the unfair impact doing so would have 11590 1 on fluid processors. 2 Proposal 21 is going to make it more difficult for 3 distributing plants with Class II products to continue to 4 compete in the marketplace against standalone Class II 5 operations and all because of an unequally applied 6 regulatory burden. USDA must reject Proposal 21. 7 Not only would AFBF's proposed increase in the 8 Class II differential unfairly impact Class I, but the 9 increase would also create disorderly marketing within the 10 marketplace as a whole. AFBF seeks to increase the 11 Class II differential from $0.70 per c-weight to $1.56 per 12 c-weight, more than doubling the Class II differential. 13 This large increase would encourage substitution of 14 Class IV ingredients for Class II milk in Class II 15 products with particular ingredient formulations and 16 standards of identity. It would also change the 17 pool/depool decision for Class II. 18 Even AFBF recognizes that adoption of Proposal 21 19 "could increase the likelihood of depooling Class II milk 20 when the Class II price is above the uniform price." 21 However, they claim that since "much Class II use is at 22 distributing plants, Class II milk is less subject to 23 depooling based on price relationships than other 24 classes." 25 This statement proves the point above that 26 distributing plants are captive to the FMMO system for all 27 utilization, Class II included. However, monthly FMMO 28 Class II milk volumes show that AFBF's claim is wrong and 11591 1 that Class II milk is indeed routinely depooled. As 2 illustrated by Chart 1 below, conservatively, Class II 3 milk was depooled in 22 to 28% of the months during the 4 60-month period January 2018 to December 2022, so 13 to 16 5 of the 60 months. 6 Q. So I want to talk a little bit about Chart 1. 7 Can you tell us the billions of pounds represented 8 by the Y axis, what is that reflecting. 9 A. Yes. So the Y axis here is Class -- is FMMO 10 Class II milk volume. So this is the -- across all 11 of 11 the FMMO s, all of the Class II milk. 12 Q. And this is all of the pooled Class II milk, 13 correct? 14 A. Yes. Because this is FMMO milk, this is not all 15 milk that would have been used to make Class II products. 16 This is only the FMMO volume. 17 And so to -- I shaded the area down between 18 0.9 billion pounds and 1.2 billion pounds to indicate 19 months where there were significantly lower volumes of 20 Class II milk within the FMMO system, and that is one of 21 the ways that you can see depooling happening in the data. 22 Q. And so if we look at 2022, that was a year where 23 there was significant depooling of Class II milk? 24 A. Yes. As was testified by a previous witness, he 25 walked through an example for Order 33 in 2022 and 26 explained sort of the price dynamics behind that. This is 27 looking at the volume nationally in 2022 and what you see 28 on Class II volume within the orders, all of them, during 11592 1 that same time period. 2 Q. And it appears there's not clear consistency of 3 kind of seasonality, where milk is routinely pooled in the 4 spring or not in the fall vice versa, it kind of moves 5 sporadically? 6 A. Yeah. So because Class II is such a diverse 7 class, there's a lot of different products in there. 8 There are a number of different seasonal trends that 9 impact the volume of milk that you are going to see here, 10 so things like when ice cream mix is being made before ice 11 cream season starts, and then when -- you know, when some 12 of the products within Class II are very sensitive to 13 seasonal promotions like a whipping cream at the holidays, 14 things like that, so -- and not everything is perfectly 15 countercyclical leading to like very stable Class II. 16 Like, there's a lot happening here because Class II, when 17 you think about it, is a lot of very different products. 18 Q. And just to be clear, this chart reflects 19 depooling -- actual depooling under the actual current 20 prices, correct? 21 A. Yes. 22 Q. Thank you. 23 A. And it's not a projection forward. It's just 24 indicating, like if you look at the volumes, you can see 25 that there was substantially less milk pooled in those 26 months. 27 Q. Thank you. Please continue. 28 A. Yep. 11593 1 Depooling decisions are made based on the 2 particular circumstances of the handler and the FMMO they 3 are regulated by. Depooling is determined not only by 4 price, but also FMMO utilization and its corresponding 5 effect on the uniform price as well as pool quality 6 qualification requirements, et cetera. 7 Monthly average FMMO milk volumes by class and 8 order are shown in Table 2 below. Class utilization and 9 total pool volume vary across the 11 FMMOs. On the 10 average, Class II utilization ranges from 5 to 24%. Like 11 pool volume and utilization, pooling rules and 12 qualification requirements, also vary across the orders. 13 If Proposal 21 were adopted, for those handlers 14 able to do so, depooling of Class II milk would most 15 likely decrease. As -- 16 THE COURT: Would you read that again? 17 THE WITNESS: If Proposal 21 were adopted, for 18 those handlers able to do so, depooling of Class II milk 19 would most likely increase. As noted by AFBF increasing 20 the Class II differential to $1.56 per c-weight would 21 increase the months when the Class II price would be 22 expected to exceed the uniform price for many orders. 23 BY MS. VULIN: 24 Q. So then just to transition slightly. I know there 25 were some prior questions about advanced pricing prior to 26 order reform, and that you have a little bit of history 27 there to share with us. 28 A. Indeed. 11594 1 So two weeks ago there were some questions and 2 discussion regarding both advanced pricing and organic 3 pricing that I wanted to just offer a few quick remarks 4 on. 5 Today, both Class I skim milk and butterfat prices 6 are advanced, meaning the price for each month is 7 announced before the start of that month. Each month the 8 Class I prices are announced on or before the 23rd day of 9 the prior month and are computed using the most current 10 two weeks of commodity survey price data available. This 11 has not always been the case. In 1972, the FMMOs were 12 amended to establish advanced pricing of the skim milk 13 portion of Class I. 14 The decision stated: "The rapidly changing 15 structure of the milk distribution industry throughout the 16 United States makes it desirable that handlers be notified 17 at reasonable period in advance of changes in the price 18 they must pay for Class I milk." 19 While some advocated for also advancing the 20 Class I butterfat differential, that change was not made 21 then. 22 Specifically, the decision noted: "The Class I 23 butterfat differential changes infrequently. This is 24 because the Chicago butter price quotations, which are 25 strongly influenced by the prices paid for butter by the 26 Government under the price support program, do not vary 27 significantly from month to month. Consequently, there is 28 no compelling need to advance the Class I butterfat 11595 1 differential announcement in connection with the adoption 2 of Advanced Class I pricing." 3 At the time of order reform, the butterfat 4 differential for the preceding month was still announced 5 on or before the 5th day of the current month. As 6 testified to by other witnesses, this lack of advanced 7 pricing for the butterfat differential was burdensome for 8 the industry. To address that issue, during Federal Order 9 Reform, USDA aligned the timing for Class I butterfat and 10 skim prices. 11 With respect to Class I, the order reform final 12 decision stated: "Announcement of Class I butterfat and 13 skim prices in advance eliminates current problems caused 14 by calculating the butterfat differential after the month 15 for which it is effective. Handlers will have true 16 advance Class I pricing." 17 Witnesses, including me, have noted throughout 18 this proceeding that advanced pricing remains important 19 for Class I handlers today. Advanced pricing underpins 20 the standard terms of trade for the traditional HTST 21 segment of Class I fluid milk. 22 And now on to organic milk pricing. 23 USDA raised some questions regarding the 24 methodology for organic prices. Given my long history in 25 that marketplace, I wanted to provide some background and 26 context for how pricing works for organic milk. 27 Fundamentally organic milk prices are not pegged 28 to conventional milk prices because the two markets are 11596 1 distinct. It would be akin to agreeing to tie the 2 conventional milk price to the price of pork. There may 3 be similar inputs, like labor, energy, fuel, et cetera, 4 but at heart, they are just two different market places. 5 The organic and conventional dairy markets are 6 distinct due to organic milk's unique production 7 requirements. After emerging in the 1980s, the organic 8 market expanded rapidly following the passage of the 9 Organic Foods Production Act in 1990 and the issuance of 10 the final rule establishing the USDA National Organic 11 Program in 2000. From the beginning, organic dairy 12 farmers have sought stable prices to: One, cover the high 13 cost of organic milk production; two, provide funds to 14 maintain and grow their operations; and three, better 15 facilitate business planning. While the FMMOs predate 16 organic's emergence, organic farm milk prices are 17 unrelated to unconventional FMMO prices. 18 The organic milk prices not simply structured as a 19 premium over conventional because the cost of production 20 for organic dairy farmers is determined by the inputs and 21 practices required of certified organic dairy farmers, 22 namely, organic feed and the cost of replacing organic 23 animals. 24 Dr. Juan Velez's testimony described the organic 25 producer cost of production in detail, including feed, 26 labor, operations and replacement. Organic production 27 costs are not only higher than conventional, but they also 28 do not necessarily track with it. 11597 1 I also have an example to share of a failed 2 attempt to tie the organic milk price to the FMMO minimum 3 price. In the mid to late 1990s there was an organic milk 4 supply in the Northeast primarily located in New York that 5 was priced using the New York-New Jersey Order 2 6 uniform -- also known as the blend -- price plus an 7 organic premium. This organic milk was affiliated with 8 Elmhurst's Worcester Creamery and was the primary supply 9 for their Juniper Valley brand. 10 In 1998, Horizon Organic Dairy acquired Juniper 11 Valley from Elmhurst. At that time, I was responsible for 12 milk procurement, fluid co-packing, and balancing for 13 Horizon. 14 This price structure with an organic premium over 15 conventional was not aligned with either the organic 16 handlers' or organic producers' needs. For organic 17 producers, the FMMO conventional blend plus organic 18 premium pricing was too volatile. Worse, while not 19 perfectly countercyclical, too often the structure 20 provided low organic milk prices when organic feed costs 21 were high. 22 Ultimately, Elmhurst found itself unable to 23 attract the organic milk supply necessary to meet Juniper 24 Valley's needs using the conventional plus organic premium 25 structure. Organic Valley/CROPP Cooperative, The Organic 26 Cow of Vermont, and Horizon offered stable fixed prices 27 for organic milk and were out-competing Elmhurst's program 28 in the countryside. Fundamentally, the problem was that 11598 1 Elmhurst's organic milk pricing structure was reflecting 2 the conventional market and not responding to the organic 3 market. 4 And so in conclusion, Proposal 21 must be rejected 5 as it would promote, rather than relieve, disorderly 6 marketing. It would create perverse incentive to 7 substitute dried dairy ingredients for farm milk in 8 Class II manufacturing and increase Class II differential 9 disadvantages processors that make Class II products in 10 pool distributing plants. 11 Dairy has seen remarkable innovation with Class II 12 products as testified to by MIG member Tim Doelman. The 13 regulatory structure should support, not hinder, this 14 innovation, particularly for the struggling Class I 15 sector. Encouraging growth and diversity in offerings 16 will benefit the industry as a whole, and rejecting 17 Proposal 21 is consistent with the type of regulatory 18 approach USDA should take to further support the dairy 19 industry. 20 Q. Thank you, Ms. Keefe. 21 Anything else you would like to add to your 22 testimony? 23 A. I'm good. I'm happy to answer questions. 24 MS. VULIN: Ms. Keefe is available for 25 cross-examination. Thank you, Your Honor. 26 THE COURT: Who will begin? 27 Mr. Miltner, you always have excellent questions. 28 Please come forward. 11599 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. I'm Ryan Miltner, I represent Select Milk 4 Producers. 5 And this is going to -- this is not going to be 6 important, and then people are going to say, "We extended 7 this thing ten minutes for nothing." 8 Ms. Keefe, I had a question for you about your 9 comparison in the organic market and the conventional milk 10 market, and you testified that they are distinct markets. 11 But then you likened it to tying conventional milk to the 12 price of pork. 13 And you have been recognized as an expert in this 14 hearing, correct? 15 A. Yes. 16 Q. Yes. I mean, when you -- when you -- a consumer 17 of organic milk, if it's not available on the shelf, what 18 do they purchase? 19 A. It varies. Today I would say that many of them 20 will purchase a plant-based beverage. They -- most often 21 people switch in to organic milk from conventional milk. 22 But they don't necessarily go back to conventional when 23 organic is not available. 24 Q. But many do, correct? 25 A. I'm sure some do. Like, my area of expertise with 26 respect to organic and what I have -- what I have been 27 testifying about at the hearing is not on the -- is not on 28 the consumer behavior of anyone. 11600 1 Q. But if I'm going to go buy organic milk, and I'm 2 not going to use it to drink, I'm going to use it to make 3 pudding, and it's not available. 4 I could buy conventional milk and end up with a 5 very similar, if not almost identical, output of the 6 evidence, could I not? 7 A. You could buy conventional milk and make pudding 8 and -- with a conventional ingredient instead of the 9 organic. 10 Q. Now, if I need to go buy a pork tenderloin and 11 they are out, I can't -- I can't grill milk? 12 A. Sadly, no. 13 Q. Organic or otherwise, correct? 14 A. I would agree. 15 Q. Okay. So, I mean, while there may be differences 16 in the markets for those, they are in -- at least up to 17 the point of consumer preference, perfect substitutes for 18 each other? 19 A. They are not perfect substitutes for each other 20 because you can't -- for me, a perfect substitute would be 21 that you can go in either direction. 22 And so with respect to the processing of organic 23 milk, they are most assuredly not perfect substitutes. 24 You cannot substitute conventional milk for organic and 25 label it as organic. 26 Q. But for purposes of consumer use, aren't they 27 perfect substitutes? 28 A. For consumers, like, the way that they use them, 11601 1 they would -- you could substitute. Consumer preferences, 2 that's a different situation. 3 Q. Okay. 4 MR. MILTNER: That's the ten minutes I wanted to 5 waste. Thank you. 6 THE COURT: Is there other cross-examination 7 before I turn to the Agricultural Marketing Service 8 questions? 9 There is none. I invite the Agricultural 10 Marketing Service to question Ms. Keefe. 11 MS. TAYLOR: Thank you, Your Honor. 12 CROSS-EXAMINATION 13 BY MS. TAYLOR: 14 Q. And thank you for preparing your statement quickly 15 so we could get it on today. 16 A. No problem. Happy to help. 17 Q. I just want to turn to page 7. There's the chart 18 Table 2. 19 First I want to note -- and I know this was done 20 quickly, so I just want to note what's probably a typo so 21 we can get it correct on the record. 22 In the Roman numeral row, I believe the third one 23 should be "III" and not "II." So it would go "I," then 24 "II," then "III," then "IV." 25 A. Yes, I completely agree. 26 Q. Okay. 27 MS. TAYLOR: If we could have that changed on the 28 record copy. 11602 1 THE COURT: It is already done. 2 MS. TAYLOR: Thank you. 3 BY MS. TAYLOR: 4 Q. And then just my own question on this chart 5 because I just wanted to make sure that I'm walking away 6 with the point you are trying to make with this when I 7 read your narrative, is that you're highlighting the 8 different uses by class, and as you work through your 9 narrative, the Class II differential, if it was increased, 10 that would cause a lot of that Class II milk to not be 11 pooled. 12 And that's what this column 2 -- excuse me -- 13 Class II, both in billions of pounds and percentages, is 14 trying to show, the amount of milk on each of these orders 15 that could be not pooled? 16 A. It's the amount of milk that could be not pooled. 17 Now, some of it will, frankly, be forced to be pooled 18 because some of it is going to be inside of Class I 19 distributing plants. But the point I was trying to make 20 is that you would start seeing more orders looking like, 21 you know, the Upper Midwest, which is relatively low, 22 versus the Northeast, which is the high one. 23 Q. Okay. Thank you. 24 MS. TAYLOR: That was it from AMS. Thank you. 25 THE WITNESS: You're welcome. 26 THE COURT: Ms. Keefe -- oh, Ms. Vulin will be 27 there in just a minute. 28 MS. VULIN: Thank you, Your Honor. 11603 1 REDIRECT EXAMINATION 2 BY MS. VULIN: 3 Q. So Mr. Miltner's questions on substituting organic 4 milk for conventional. 5 The statement you made about the problems with 6 pegging the organic price to conventional are about the 7 inputs for producing organic milk, correct? 8 A. Yes. 9 Q. And so you can never substitute conventional feed 10 for organic feed, can you? 11 A. No, you cannot. 12 Q. And you can never substitute a conventional cow 13 for an organic cow, correct? 14 A. You cannot. 15 Q. And so your statement about tying those prices is 16 not about what a consumer could do with those products, 17 it's about what are the farmers' options in substituting 18 inputs or comparing inputs for producing that organic 19 milk, correct? 20 A. Yes. It's from the perspective of dairy producers 21 and dairy processors, not organic dairy consumers. 22 Q. Thank you. 23 MS. VULIN: With that, I move to admit 24 Exhibit 503. 25 THE COURT: Is there any objection to the 26 admission into evidence of MIG Exhibit 67, also marked 27 Exhibit 503? 28 There is none. Exhibit 503 is admitted into 11604 1 evidence. 2 (Thereafter, Exhibit Number 503 was received 3 into evidence.) 4 MS. VULIN: Thank you, Your Honor. 5 THE COURT: Thank you, Ms. Keefe, for providing 6 this excellent information. 7 THE WITNESS: You're welcome. 8 THE COURT: All right. Is it true that there are 9 no other witnesses available to testify today? It appears 10 to be true. 11 We did have some preliminary matters that I put 12 off that we could have started with today, but I'm glad we 13 started with the testimony instead. 14 How would the Agricultural Marketing Service like 15 to use some more of today's time? 16 MS. TAYLOR: I think it might be helpful, we could 17 probably go off record and come back on when we have made 18 a decision, but go off record and kind of discuss possible 19 briefing schedules, et cetera, and what the regulations 20 provide for, so everyone can think about that this evening 21 before we put it on the record tomorrow. 22 THE COURT: Great. Let's do that. 23 Does anybody want a break before we do this off 24 record or are you good to go? 25 Everybody's good to go. All right. Let's go off 26 record then at 4:22, and we will go back on before we 27 finish today. 28 (An off-the-record discussion took place.) 11605 1 THE COURT: Let's go back on record. 2 All right. We're back on record. It's 4:48. 3 While off record we were discussing parts of the 4 federal regulations. I started with Title 7 of the Code 5 of Federal Regulations Section 900.10, certification of 6 the transcript. And we have also dwelt on 7 CFR Section 7 900.27, deadline for filing post hearing briefs and 8 corrections to transcript. 9 I did indicate while we were off the record that I 10 will not shorten the 30 days that people have to file with 11 the hearing clerk by 4:30 p.m. Eastern on the deadline 12 their proposed transcript corrections. 13 And when does the 30 days begin? Well, it will 14 begin when the transcript has been posted on the AMS 15 website in its entirety. So AMS will use its website to 16 notify people that the 30 days has begun to run and when 17 it ends what the deadline is. 18 And then with regard to the briefs, what we have 19 asked all of you here to do is talk about whether you will 20 be happy with just a brief submitted by the 60-day 21 deadline. The 60-day deadline will begin when this 22 hearing has ended, which may be as early as tomorrow. 23 So those 60 days, if you want to have them all for 24 your initial brief, then there will just be one brief. If 25 you'd prefer to have an opportunity to file responses to 26 other people's briefs, then you will need to come to some 27 consensus as to what you might like to do about that. If 28 you can't agree, then each of you should speak, and I'll 11606 1 choose something. But puts extra pressure on you if you 2 have to go early with your initial brief, but if it gives 3 you an opportunity to respond to other people's briefs. 4 It may be worth it to you, I don't know. 5 And then we talked about the lists -- I'll call 6 them the official notice lists that you all have been 7 compiling, and we talked about how it would be wonderful 8 if you would bring that in writing tomorrow so that it can 9 be dealt with as an exhibit and accepted or not, and no 10 one would have to read into the record the contents of 11 that document. 12 What else would anybody like to make a record of 13 our informal discussion? 14 MR. MUNCH: Just one quick comment for tomorrow. 15 We at the last minute are adding something for tomorrow 16 morning from Farm Bureau. We just had some policy 17 reaffirmed next week, and we want to write a letter that 18 will be submitted. But we will need about -- I will need 19 about ten minutes at 8 a.m. when FedEx opens to print it 20 out. So if we can wait until -- for me to go up until 21 then, I would really appreciate that. Thank you all. 22 THE COURT: Tell me your name again. 23 MR. MUNCH: Danny Munch. I'm an economist with 24 the American Farm Bureau Federation. 25 THE COURT: Good. Thank you. 26 Mr. Rosenbaum. 27 MR. ROSENBAUM: I'm now perhaps becoming 28 repetitive, but since we're now on the record, I just did 11607 1 want to refer once again to the language in 900.27, that 2 what's due in 60 days is the parties to file, obviously, 3 but that we can file proposed findings and conclusions and 4 written arguments or briefs, all of that's included. 5 THE COURT: Yes. And most valuable are, in my 6 opinion, are the proposed findings and conclusions. 7 All right. Would anyone like to do anything else 8 before we call it a day? No one? 9 We go off record at 4:53. Thank you. See you 10 tomorrow morning at 8:00. 11 (Whereupon, the proceedings concluded.) 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11608 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 19, 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