488 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 Channing D. Strother, Judge 15 16 ---o0o--- 17 18 Carmel, Indiana 19 August 25, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, C.S.R. Certificate No. 11613 28 489 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 Lorie Cashman 5 Brian Hill Michelle McMurtray 6 Bradley Vierra Lauren Decker 7 Phoebe Bierman Brian Riordan 8 FOR The American Farm Bureau Federation: 9 Roger Cryan 10 FOR The International Dairy Foods Association: 11 Steve Rosenbaum 12 FOR The Milk Innovation Group: 13 Charles "Chip" English 14 Sally Keefe Sarah Dorland 15 Ashley Vulin (Remote) 16 FOR The National All-Jersey, Inc.: 17 Erick Metzger John Vetne 18 FOR The National Milk Producers Federation: 19 Nicole Hancock 20 Brad Prowant Peter Vitaliano 21 Jim Sleper Chris Hoeger 22 FOR Select Milk Producers, Inc.: 23 Ryan Miltner 24 FOR National Farmers Organization: 25 Dick Bylsma 26 27 28 490 1 A P P E A R A N C E S: 2 FOR The Edge Dairy Farmer Cooperative: 3 Lucas Sjostrom Dr. Marin Bozic 4 Travis Senn Tim Trotter 5 FOR The Maine Dairy Industry: 6 Daniel Smith 7 8 ---o0o--- 9 10 11 (Please note: Appearances for all parties are subject to 12 change daily, and may not be reported or listed on 13 subsequent days' transcripts.) 14 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 491 1 M A S T E R I N D E X 2 SESSIONS 3 FRIDAY, AUGUST 25, 2023 PAGE 4 MORNING SESSION 494 AFTERNOON SESSION 625 5 6 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 492 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Calvin Covington: 5 (Continued) 6 Cross-Examination by Mr. Wilson 496 Cross-Examination by Ms. Taylor 498 7 Redirect Examination by Ms. Hancock 503 8 Erick Metzger: 9 Direct Examination by Mr. Vetne 511 Cross-Examination by Mr. English 556 10 Cross-Examination by Mr. Rosenbaum 563 Recross-Examination by Mr. English 572 11 Cross-Examination by Mr. Bylsma 573 Cross-Examination by Mr. Covington 577 12 Cross-Examination by Dr. Bozic 580 Cross-Examination by Dr. Cryan 582 13 Cross-Examination by Mr. Miltner 585 Cross-Examination by Ms. Taylor 595 14 Cross-Examination by Mr. Wilson 597 Redirect Examination by Mr. Vetne 602 15 Somula Schwoeppe: 16 Direct Examination by Ms. Hancock 608 17 Cross-Examination by Dr. Cryan 616 Cross-Examination by Ms. Taylor 619 18 Cross-Examination by Mr. Miltner 622 19 Dr. Marin Bozic: 20 Direct Examination by Mr. Sjostrom 627 Cross-Examination by Mr. English 637 21 Cross-Examination by Mr. Vetne 646 Cross-Examination by Mr. Miltner 650 22 Cross-Examination by Mr. Rosenbaum 670 Cross-Examination by Dr. Vitaliano 678 23 Cross-Examination by Ms. Taylor 682 Cross-Examination by Mr. Wilson 693 24 Chris Hoeger: 25 Direct Examination by Ms. Hancock 700 26 Cross-Examination by Mr. English 711 Cross-Examination by Mr. Wilson 716 27 Cross-Examination by Ms. Taylor 717 28 ---o0o--- 493 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 NO. DESCRIPTION I.D. EVD. 4 64 Statement of Calvin Covington 510 5 65 Article Authored by 510 6 Calvin Covington in 2015 7 66 NAJ-1 518 608 8 67 NAJ-2 518 608 9 68 NAJ-3 518 608 10 69 NAJ-4 518 608 11 70 NAJ-5 518 608 12 71 NAJ-6 518 608 13 72 NAJ-7 518 608 14 73 NAJ-9 519 608 15 74 NMPF-65 609 623 16 75 EDGE-1 627 17 76 EDGE-2 645 18 77 NMPF-5 701 719 19 ---o0o--- 20 21 22 23 24 25 26 27 28 494 1 THURSDAY, AUGUST 24, 2023 - - MORNING SESSION 2 THE COURT: Good morning. Day three of this 3 hearing. It is August 25th, which will probably appear on 4 the cover of the transcript. 5 I understand we have at least one piece of 6 preliminary business. 7 You have the floor. 8 MR. VETNE: Thank you. John Vetne, consultant for 9 National All-Jersey. As I progress in this, I find I have 10 more frequent mea culpas. 11 So on Wednesday morning Mr. English and I both 12 filed some objections on the scope of this hearing, and we 13 submitted -- and I refer to a document that was submitted 14 online that morning, which was signed by Wendy Yoviene and 15 me. 16 But what was copied was not the correct objection 17 version. It was a draft. I would like to submit to 18 replace, to substitute for the Exhibit 61 that was marked 19 and make this corrected final version that was submitted 20 earlier that day, Exhibit 1. So substitute one for the 21 other. It would be NAJ-8. 22 THE COURT: Any objection? AMS, I think would 23 be -- or anyone else. 24 MR. HILL: No, I don't have any objection to that, 25 your Honor. 26 THE COURT: Okay. I would propose, I think, 27 since -- inasmuch as the correct version is on the 28 website, I don't -- we could label this Exhibit 61A or 495 1 something like that. I think we'll just keep 61 and make 2 sure we keep track of -- 3 MR. VETNE: So what -- what was submitted online 4 early Wednesday morning is what I hold in my hand and to 5 which I referred in the argument. What was printed and 6 marked as Exhibit 1 was not that version. That was the 7 draft, an incorrect version. So I would like to rather 8 than have A and B, just substitute this, make it 61. 9 THE COURT: Yes. That's fine. Fine with me. We 10 have a new version of Exhibit 61. 11 While that's being handed out, I think we can move 12 forward. 13 Is there any other preliminary business? 14 MR. VETNE: I would like to say also that the 15 version I hold in my hand, that is now the substitute 16 version of the correct one, is also one that I exchanged 17 by e-mail with people, and if you didn't get one, I'll be 18 glad to do that for anybody that asks. 19 THE COURT: Very well, sir. I think I need a 20 copy. 21 Okay. With that, any other preliminary business? 22 Okay. With that, Witness Covington has again 23 taken the stand, and I have reminded him that he remains 24 under oath. I think we had interrupted at the end of the 25 day, cross by AMS. 26 Ms. Taylor, was this yours? 27 Oh, I'm sorry, of course. Introduce yourself 28 again. I'm getting to be bad with names. 496 1 MR. WILSON: Todd Wilson, USDA. 2 THE COURT: Mr. Wilson, the witness is yours. 3 CROSS-EXAMINATION 4 BY MR. WILSON: 5 Q. Good morning, Mr. Covington. 6 A. Good morning, sir. 7 Q. I'd like to clarify some items from your 8 testimony. 9 On page 2 in the middle of the page, you make a 10 statement that there is a tradition of publishing prices 11 at certain percentage standards. 12 Upon the -- upon this proposal being modified, the 13 Federal Milk Order, do you expect that those standards to 14 change based on the proposal -- new proposal language? 15 A. I can't say -- I can't say for certain. That 16 final decision would have to be left up to the people 17 who -- who publish these numbers. But I would anticipate 18 that when it comes to the components in the skim, if this 19 proposal is accepted, they would be updated to the skim 20 factors that we are proposing. 21 Q. Thank you. 22 Also, there's been a few times in the testimony, 23 yours and Dr. Vitaliano's, that the Class II pricing is 24 not being modified. I'd refer you to Appendix -- I've got 25 too many pages. They are stuck together. 26 On Appendix 1, the top subparagraph F has language 27 that appears to be modifying Class II solids nonfat 28 pricing. Is that correct? 497 1 A. Yes, sir. That is correct. 2 Q. So Class II pricing from a solids nonfat 3 perspective will be changing based on the new proposed? 4 A. Yes, sir. That is correct. 5 Q. Thank you. 6 The next page of that appendix is the order 7 language. There's a subparagraph 2 and 3. 8 Is there -- in one paragraph you used the word 9 "after" in describing how many months after, and in the 10 next paragraph you describe the years as following year, 11 third year. 12 A. Yes, sir. 13 Q. Are there different implications of using those 14 two descriptors in your mind? 15 A. No, sir. I will point out that we -- we have 16 flexibility here. Our -- our main objective is to have a 17 12-month lag from implementation. And also, if -- through 18 our update procedure, if the numbers need to change to 19 give the Dairy Division appropriate time to do those 20 calculations, appropriate time to announce it to the 21 industry. So we have flexibility if this proposal is 22 implemented and the Dairy Division sees better dates to 23 use in that time period. 24 Q. In referring to the 12-month lag, you expect there 25 to be 12 full months before the next -- before the 26 implementation of a new change? 27 A. Yes, sir. 28 Q. Thank you. 498 1 Also, I think you just referred to it, if -- if 2 the calculations are not available upon February the 28th, 3 let's say, and they are not available until, say, March or 4 April, do you expect that then to be flexible enough to 5 account for that? 6 A. Yes, sir. We -- we know it takes time to do 7 calculations. So, yes, we are flexible. 8 MR. WILSON: Thank you. 9 CROSS-EXAMINATION 10 BY MS. TAYLOR: 11 Q. Good morning. 12 A. Good morning. 13 Q. I wanted to -- well, I'll first start on the first 14 page of your testimony. 15 You list that SMI currently has 114 dairy farmer 16 members? 17 A. Yes, ma'am. 18 Q. Could you give us a little idea of how many of 19 those would be considered small businesses as the 20 definition is less than $3.75 million a year in revenue? 21 A. Southeast Milk is very similar to most 22 cooperatives. You know, it goes by the 80 -- you know, 23 pretty much 80/20 rule, 20% of the producers producing 80% 24 of the milk. Those would be small businesses, and I'm 25 going on memory because I have calculated. It would 26 probably be about two-thirds to three-fourths of those 114 27 would meet the small business definition. 28 Q. Thank you. 499 1 On page 4 of your testimony, towards the middle 2 under the Challenges header, you talk a little bit about 3 "failing to adjust" -- the paragraph starts "failing to 4 adjust the skim milk component factors." And towards the 5 bottom you talk about the marketing challenges that will 6 continue if your proposal is not adopted. 7 So I wondered if you could just describe a little 8 or expand a little for the record on what marketing 9 challenges would be remedied if your proposal is adopted. 10 A. Again, this proposal, if -- you know, if it's 11 adopted, and the skim milk component factors are updated, 12 it would increase the Class I mover skim milk price. It 13 would increase that. So that would give the spread or the 14 difference between the Class I skim and the Class III and 15 IV prices in the multiple component -- multiple component 16 pricing orders back to a difference it was when Federal 17 Order Reform went in. 18 And again, trying to serve the Class I market, 19 especially in the area that's Southeast Milk markets, we 20 have to go to some of those -- those areas for 21 supplemental milk. So it would make us more competitive 22 for supplemental milk as far as bringing that milk in, and 23 plus the additional value will give us encouragement, 24 also, to try to help maintain a local milk supply to serve 25 the consumers in the area that we serve if we can increase 26 the price of Class I milk. 27 Also, in the multiple component pricing areas, if 28 we could increase the skim milk value -- or the skim milk 500 1 revenue that goes into the order pool, that will provide 2 more money to increase the producer price differential and 3 which should, at least, lessen the chances of milk being 4 depooled, provide some more stability in the marketplace. 5 Q. Okay. Thank you. 6 And then another question, because I know we took 7 a long and windy road yesterday, but I wanted to try to 8 summarize. And I think you got there, but it is this 9 difference that -- between the III, IV prices and the 10 Class I skim, that kind of difference that existed in 2000 11 is different now. 12 And that's the misalignment of prices that you are 13 talking about in your testimony? 14 A. Yes, ma'am. That's -- thank you. That's -- 15 you're absolutely correct. 16 Q. Okay. Can you -- I know you covered in your 17 testimony -- but I always like to get things reiterated a 18 little bit -- the .07 percentage points. You talked about 19 how you looked at -- and I can't -- I circled the word 20 somewhere -- "it was determined" -- on page 10, in your 21 testimony -- "it was determined by looking at the 22 historical change in the nonfat solids level." 23 Can you talk about the time period you did a 24 lookback? 25 A. Yes, ma'am, I can. The data that I had on 26 components, as it is in my testimony, was from 2000 to 27 2022. Again, that's one of my charts. So that's the time 28 period that I used. 501 1 And so what we did, we started at 2000, and if we 2 assume we started with those factors that was put in in 3 2000, and if our proposal was accepted, just did that 4 calculation from 2000 down to 2022. And we looked at 5 those numbers, and it was a group of us, a part of the 6 National Milk producers Federal Order task force. And, 7 again, trying to keep in mind that we wanted to promote 8 orderly marketing. We wanted to make a change if a change 9 needed to be made, but we didn't want it to be a nuisance 10 change. 11 And so pulling all that data together was both -- 12 I would classify it as being both a science and an art. 13 That's how we arrived at the 0.07 factor. 14 Q. So that would allow changes to happen but not all 15 the time? 16 A. That -- that is correct. It would have to be, 17 again -- and we want to do it just based upon nonfat 18 solids, which is the sum of the two. So if it increases 19 above that or above, you would make the change; if it 20 didn't, you would not make the change. 21 Q. Okay. And in your proposal you talk about the 22 initial change would happen to look at -- implement 23 basically 2022 factors, and then after that the lookback 24 would be over three years of data. 25 A. Yes. 26 Q. And so a question has arisen amongst us at USDA, 27 is how come you didn't choose to do three -- a lookback of 28 three years to get you the initial change as well? 502 1 A. We want to make the system as accurate as 2 possible, and so we wanted to go ahead and start with what 3 what's in place. Start with the exact -- exact number. 4 Let's just go ahead and do it while we're here now and try 5 to get it right the best we can, because we'd still been 6 behind a little bit if we had gone back three years. 7 Q. Okay. And is there anything particular where you 8 chose three-year, just -- 9 A. Again, it was collectively, we talked about it. 10 We know we need to make a change, but yet, we didn't want 11 to make a change no more than necessary. 12 And also, you think about, we don't know what the 13 future holds. There is volatility in the dairy industry. 14 There could be some ups and downs in components. We just 15 don't know. Again, on my experience, feed quality has a 16 major impact on component level. And thank goodness we 17 haven't had any major, major feed challenges in this 18 country, but we could. And if we had a major feed 19 challenge, we could see maybe a dip in components one 20 year. 21 And then with all the technology that we have 22 going on today, I mean, who knows through genomics and 23 biotechnology and improved nutrition what might happen. 24 You know, some feed additive might come out, could really 25 jump up components. And by using the three years we just 26 felt that was a reasonable number to average out any 27 ups -- unexpected ups and downs. 28 Q. Okay. Thank you. 503 1 MS. TAYLOR: That's it from USDA. Thank you so 2 much. 3 THE WITNESS: Thank you. I appreciate it. 4 THE COURT: Okay. There shouldn't be any further 5 cross unless something came up in AMS's cross. 6 I guess we're ready for redirect, Ms. Hancock. 7 MS. HANCOCK: Thank you, your Honor. 8 REDIRECT EXAMINATION 9 BY MS. HANCOCK: 10 Q. Mr. Covington, yesterday we went through your 11 credentials to qualify you as an expert in this 12 proceeding. And Marvin Beshore was listening in and sent 13 me a note that said, hey, we forgot a really important 14 credential. 15 I'm wondering if you left off any credentials you 16 could share with us today? 17 A. You might be referring to the one, also part of my 18 education, I did receive completion of coursework in the 19 ministry at Moody Bible Institute. And I -- I do some -- 20 I'm an ordained elder in the church. I do some preaching. 21 Also, I conduct some weddings and also funerals. 22 Q. And how long have you done that? 23 A. Oh, we're going to go back, I think I preached my 24 first sermon in -- after being ordained back in the early 25 1980s. 26 Q. Okay. Long time then? 27 A. Yes, ma'am. 28 Q. Okay. Do you have your testimony in front of you? 504 1 A. Yes, ma'am, I do. 2 Q. And this is, just for the record, Exhibit 64. 3 A. Yes, ma'am. 4 Q. If you could turn to page 6 and page 7 of your 5 report, I want to talk about your Tables 3 and 4 in your 6 report. 7 A. Yes, ma'am. I have Table 3 in front of me. 8 Q. Okay. Yesterday you received some questions from 9 Mr. English that suggested that -- in particular, I think 10 he was referring to Table 4, but for both of your tables, 11 that -- that somehow you might have been hiding the actual 12 prices paid there or that you had somehow misrepresented 13 the numbers and in a manipulative way. 14 I'm wondering if you could provide some clarity 15 about that today. 16 A. Yes, ma'am, I can. 17 In Table 3, my title says Misalignment in Skim 18 Milk Prices, Class III Skim Versus Class I Mover Skim. So 19 the title, you know, tells me -- you know, states the 20 prices I am comparing. And the purpose of this table was 21 to show the misalignment. It goes back to answer a 22 question I gave to Dairy Division. 23 And I used the current skim milk components, 3.1, 24 5.9, and compared it to the average in 2022, 3.39 and 25 6.02. And, again, I used 2022 prices. 26 And so the Class III price, skim price, based upon 27 the current component levels, 10.92, which would be the 28 announced price, and where actual price with increased 505 1 components of the average should be 11.75. And I compared 2 that to the Class I mover and showed that that remains the 3 same. 4 If -- for example, I could have taken the Class I 5 mover skim price, and I could have added a Class I 6 differential to it. For example, if I took the current 7 Class I differential, for example, in Atlanta -- or excuse 8 me -- Orlando, Florida, which is 5.40 hundredweight, I 9 added 5.40 hundredweight to 13.03 under 2000 and 13.03 10 under 2010, again, the difference would still remain zero. 11 But, again, the purpose of this -- this table was 12 to show the impact of increase in producer components on 13 the average Class III price whereas the Class I mover skim 14 was not changed because the increased components was not 15 reflected. 16 And, again, I did the identical same thing in 17 Table 4. Misalignment in Skim Milk Prices, Class IV Skim 18 Versus Class I Mover. Again, Class I mover is going to be 19 the same. And I could have done the same thing, added a 20 Class I differential, but it would not have changed the 21 results or the point I was trying to make from these 22 tables. 23 Q. Is Proposal 1 looking at changing the skim milk 24 components? 25 A. Proposal 1 entirely deals with updating the skim 26 milk component factors. 27 Q. Is it looking at all the changes of Class I price? 28 A. It would -- it would increase the Class I mover 506 1 skim price. 2 Q. And is that why you didn't include that Class I? 3 A. Yes, because it did not add anything to -- to the 4 testimony I was trying to provide to support the reason 5 for a change. 6 Q. And yesterday, there was a discussion on the 7 relationship between butterfat and protein. I'm wondering 8 if you could provide some comments on that as well. 9 A. Yes. There is both a genetic and a phenotypic 10 correlation between butterfat pounds and protein pounds, 11 and also between butterfat percent and protein percent. 12 That correlation, in terms of genetic improvement, 13 is considered to be a relatively high correlation. I 14 don't have those numbers from memory, but in -- but 15 testimony that's already been presented from Van Amburgh 16 -- Amburgh from -- professor at Cornell University, he has 17 that table in his testimony. It's already on the website, 18 that has a table that shows those genetic corr- -- both 19 genetic and phenotypic correlations. 20 Q. Okay. Thank you. 21 THE COURT: Pardon me. When you say correlation, 22 you mean a positive correlation: One goes up, the other 23 tends to go down? 24 THE WITNESS: That is correct. For example, if -- 25 if you have a herd of cows and your butterfat percent goes 26 up, high correlation that your protein percent is going 27 up. It is not a complete 1 to 1. I think it's about .6 28 to .7, but -- 507 1 THE COURT: Thank you. I just wanted to make sure 2 it wasn't a negative correlation. 3 THE WITNESS: Yes, sir. Thank you. 4 BY MS. HANCOCK: 5 Q. And yesterday you also received some questions on 6 a cooperative's ability to reblend and whether it gives it 7 some competitive advantages over proprietary plants. 8 Would you mind explaining why a cooperative can 9 reblend and why it's important that a cooperative has the 10 authority to reblend? 11 A. Yes, ma'am, I -- I can. 12 First of all, let me give you my definition of 13 reblending. You know, reblending would be when the price 14 that the cooperative pays a dairy farmer is below the 15 announced Federal Order uniform blend price. And there 16 are times, many times at Southeast Milk, where the price 17 we paid our producers would be below that uniform blend 18 price. 19 The reason -- the reason for that is that the 20 cooperative is serving the market. In our case, we are 21 balancing a lot of Class I fluid handlers. Their milk 22 needs are not the same every day, and they don't always 23 match up with the production coming from the farms. 24 So at times we're going to have more milk than is 25 needed, because we have to ensure we have supply -- max 26 supply to meet when they need milk. 27 So there will be times that we don't have enough, 28 so we would have to go out and purchase supplemental milk, 508 1 and that is an additional cost. And once we pay that cost 2 and we pool our proceeds together to pay dairy farmers, it 3 could bring that price down below. 4 Likewise, there's going to be times we're going to 5 have too much milk. Okay. But we have to have that 6 reserve supply. And generally, when we have too much 7 milk, everybody's got too much milk, so we have to find a 8 home for that milk. And generally the home for that 9 surplus milk is going to be well below the Federal Order 10 minimum class price, so we take a loss on it, plus the 11 transportation. So, we have that cost. We pool all that 12 in. So, again, the balancing cost is a big factor why 13 sometimes we have to pay below the minimum. 14 Likewise, we have dairy farmer members that are in 15 different locations -- different price locations within 16 the area that we serve, and we're not always able to get 17 their milk -- they might be lo- -- physically located in a 18 higher location adjustment. We might not always be able 19 to get their milk to a plant that has that same location 20 adjustment. We have to do what's most efficient and to 21 best serve our members. 22 So if we continue to pay that producer where he is 23 located, but we can't get the money for his milk, that's 24 something that we -- that lowers the total -- the total 25 pool there. 26 So cooperatives serve a very important function in 27 that they balance the market, and there's a cost in doing 28 that. And that's -- to me, if I go back in history, 509 1 that's one of the reasons why we have that provision in 2 the Agricultural Marketing Agreement Act of 1937, to allow 3 cooperatives to do that to provide that service. 4 And also, we got to remember that the Act in the 5 Federal Milk Marketing Order program looks at a 6 cooperative as a producer. Yes, it might be made up of 7 several producers, but it is treated as a -- as a producer 8 as well. And then that producer, just like he's going to 9 have expenses to produce that milk, that cooperative has 10 expenses, which could end up lowering -- lowering that 11 blend price it pays to farmers. 12 Q. So in your opinion, do you believe that 13 reblending -- or the ability for a cooperative to reblend 14 gives it a disproportional advantage over the proprietary 15 plant? 16 A. No, sir, it doesn't -- excuse me -- no, ma'am, it 17 doesn't give a disadvantage. It's a tool that's needed if 18 cooperatives are to continue to provide their function of 19 helping to balance the market. 20 Q. Okay. 21 MR. HILL: Thank you, Mr. Covington. I really 22 appreciate your time and testimony. 23 THE WITNESS: Thank you, ma'am. Uh-huh. 24 THE COURT: Anyone think they are entitled to 25 re-cross? 26 Very well. 27 Okay. Move to admit exhibits? 28 MS. HANCOCK: Thank you again for the reminder, 510 1 your Honor. 2 THE COURT: Not at all. 3 MS. HANCOCK: We'll move to admit Exhibit 64. 4 THE COURT: Any objection? 5 Exhibit 64 is received in evidence. 6 (Thereafter, Exhibit Number 64 was received 7 into evidence.) 8 THE COURT: Yes? 9 Exhibit 65? 10 MS. HANCOCK: No objection, your Honor. 11 THE COURT: No objection from anyone else. 12 Exhibit 65 is received into evidence. Just making 13 a note. 14 (Thereafter, Exhibit Number 65 was received 15 into evidence.) 16 THE COURT: I think that's it for this witness, 17 right? We didn't have any -- didn't leave anything open? 18 Okay. Mr. Covington, thank you for your 19 testimony. You may step down from the stand. You are 20 excused. I appreciate it. 21 Next witness? 22 Please raise your right hand. 23 ERICK METZGER 24 being first duly sworn, was examined 25 and testified as follows: 26 THE COURT: Your witness, Counsel. 27 MR. VETNE: Thank you. 28 John Vetne, consultant representing National 511 1 All-Jersey. The witness is Erick Metzger. 2 DIRECT EXAMINATION 3 BY MR. VETNE: 4 Q. Mr. Metzger, can you state your name, full name, 5 and business address for the record? 6 A. Erick Metzger, E-R-I-C-K, M-E-T-Z-G-E-R. Business 7 address is 6486 East Main Street, Reynoldsburg, Ohio, 8 43068. 9 Q. And you have prepared some testimony and exhibits 10 which we will refer to during the course of your 11 testimony; is that correct? 12 A. That's correct. 13 Q. And you are here appearing as a witness for 14 National All-Jersey in a milk hearing proceeding. 15 Can you describe, briefly summarize your 16 experience in the dairy industry? 17 A. I was raised on a dairy farm in Northern Indiana, 18 actually about an hour and a half north of where we are 19 today. We had -- we had a herd of Guernsey cattle. 20 Milk marketing experience very early in that there 21 were 40 to 50 Guernsey producers who farmed a cooperative 22 and marketed our milk under a trademark of Golden 23 Guernsey. 24 Back in those days, we had -- you know, the 25 Federal Order system implemented -- had implemented 26 individual handler pools, so our cooperative as an 27 individual handler at that time was experiencing 85% 28 Class I use and about 15% Class II use from the excess 512 1 cream off of our milk that was sold as a branded ice 2 cream. 3 And as time went on the Federal Order system 4 decided to eliminate individual handler pools and go to 5 market-wide pooling. When that came in, our Class I 6 utilization dropped from 85% to somewhere in the 60 to 7 65%, which had an impact obviously on producer pay prices. 8 About that time was when National All-Jersey, at 9 that time I believe led by Calvin Covington, was exploring 10 the opportunities of marketing high protein milk to cheese 11 plants, demonstrating to cheese plants how the higher 12 protein milk would make them more money and that the 13 proceeds could be shared with producers. So it wasn't 14 long until we started marketing our milk instead of for a 15 fluid use to a cheese plant with a protein premium for 16 higher protein. 17 I have got a -- received a -- earned a Bachelor's 18 degree in animal science from Purdue University in 1982. 19 I went to work with the Guernsey Association, who had 20 relocated to Columbus, Ohio, in various capacities. I was 21 there for ten years, the last five as its CEO. 22 Then I was presented an opportunity with the 23 American Jersey Cattle Association, so I moved employment 24 to AJCA, worked on the herd services side of the business 25 for a while. And then when the general manager's position 26 for National All-Jersey became available, I became general 27 manager of National All-Jersey, a position I have held 28 since, I think, 2005. 513 1 Q. Okay. You mentioned two Jersey organizations, 2 American Jersey Cattle and National All-Jersey. 3 Can you describe the relationship between those 4 two? 5 A. The relationship is they are two separate 6 entities, both of them with their own Board of Directors. 7 There is some crossover from board members that will serve 8 on both boards. We have staff that will work, split their 9 time, some on the AJCA side, some on the NAJ side. 10 The AJCA, the Cattle Association, provides 11 traditional herd book services, recording ancestry, 12 recording ownership, performance evaluation on cattle, 13 working with genetic evaluations on cattle, promoting the 14 breed, etcetera. 15 National All-Jersey focuses on marketing milk and 16 marketing cattle. 17 Q. Your responsibilities with National All-Jersey, 18 have you consulted with and advised producers on the 19 marketing of their milk in one market or one use versus 20 another based on component content? 21 A. We have. 22 Q. Can you describe that? 23 A. As has been described in this hearing, there are, 24 you know, three orders in the Southeast that are priced on 25 fat/skim where the protein content of the milk isn't -- 26 isn't recognized in and of itself. We have done analysis 27 for producers who had the opportunity to either have their 28 milk pooled in a fat/skim order or in one of the 514 1 component -- multiple component pricing orders that 2 borders the fat/skim orders. 3 We have done analysis as to what -- which pricing 4 would be more advantageous for their milk and have either 5 worked with their -- if their current handler had the 6 opportunity to pool their milk, either in a fat/skim order 7 or a component pricing order, worked with their handler to 8 recognize which pooling arrangement would be more 9 advantageous for the producer, or if they were currently 10 with a handler who didn't have the option to pool in one 11 market or the other, help them find a handler. If it was 12 advantageous for their milk to be pooled in a component 13 pricing order, find a handler who could do that for them. 14 Q. Okay. And as a result of those consultations, 15 have you had members who have shifted from fat/skim order 16 to component pricing order? 17 A. We have. 18 Q. Have you also done analysis, consulting, and 19 advised handlers on their use of high component milk for 20 certain purposes? 21 A. Yes, we have. One of our -- one of our classic 22 examples involves cottage cheese, which is a Class II 23 product. The cottage cheese yield is entirely protein 24 dependent. And so we have shown, because it is a Class II 25 product, the handler would pay for the components, the 26 protein in that milk, at the solids nonfat price, but 27 because the yield of cottage cheese is protein dependent, 28 they would realize value based off of the protein price. 515 1 So we have done analysis with handlers saying, 2 look, if you have the opportunity to direct high protein 3 milk into your cottage cheese operation, this is 4 profitability gain that you could expect to realize, and 5 then encourage them to share some of that profit back with 6 the producer. 7 Q. And you have been involved in the Federal Milk 8 Order regulatory system during the course of your 9 employment with National All-Jersey; is that correct? 10 A. That is correct. 11 Q. Can you describe, briefly, what your functions 12 have been with respect to the Federal Order program? 13 A. Many conversations, with either the Dairy Program 14 staff in DC or Market Administrator offices. We have -- I 15 have participated in at least four Federal Order hearings 16 as a witness. 17 Q. And in those appearances, has the issue that you 18 have discussed primarily been component and component 19 value in milk? 20 A. Yes, it has been. 21 MR. VETNE: Your Honor, I offer Mr. Metzger as an 22 expert in milk and milk component marketing. 23 THE COURT: Any objections? 24 I find this witness to be competent to testify to 25 the matters set out in the statement that you have 26 discussed on voir dire. 27 MR. VETNE: Okay. 28 We have a number of exhibits, your Honor. The 516 1 exhibits have been previous- -- except for one, have 2 previously been submitted to Dairy Program, and they begin 3 with NAJ-1 and go through NAJ-6 for exhibits. The 4 testimony is labeled NAJ-7. 5 And then there are -- Mr. Metzger will not read 6 his prepared testimony, but simply ask that it be marked 7 and received as if read. But he will go over it with 8 bullet points, which is a new exhibit, which is now NAJ -- 9 been marked for this purpose as NAJ-9 and was submitted to 10 Dairy Programs through their website -- 11 This morning? 12 THE WITNESS: Last evening. 13 MR. VETNE: -- last evening. 14 So everything has been submitted electronically. 15 I propose to keep the exhibit numbers in the same order as 16 the NAJ number. We're going to start with the exhibits, 17 go on to the testimony and the bullet points in that 18 order, before he presents his summary. 19 Is that all right? 20 THE COURT: Yes. 21 MR. HILL: It appears that we don't have the 22 actual physical exhibits. I know that they are on the 23 website. But do you have copies for -- 24 MR. VETNE: I do. That's my next step. 25 MR. HILL: Okay. Thank you. 26 THE COURT: Oh, I see. You are going to hand out 27 hard copies of these things. 28 Yes, I -- a number of things to unpack there. 517 1 Instead of reading the statement, I like that, that 2 we'll -- as far as I'm concerned, we can accept that as if 3 it's read unless someone else has an objection to that. 4 We will have the hard copy. 5 MR. VETNE: You will have the hard copy. It's 6 already been submitted -- 7 THE COURT: And we're going to read the bullets -- 8 oh, I had one question. I missed -- is there an NAJ-8? 9 MR. VETNE: NAJ-8 would be the objection that -- 10 THE COURT: Oh, okay. 11 MR. VETNE: -- the substitute was -- 12 THE COURT: All right. That we have already -- 13 MR. VETNE: So we have got NAJ-1 through -9. 14 THE COURT: Yes. And 8's already come -- has come 15 in. Not -- 16 MR. VETNE: Yes. 17 THE COURT: -- into evidence, but it is admitted 18 for purposes of this proceeding. 19 Yes, I'm okay with that procedure. If anyone else 20 has an objection, so state it. 21 MR. VETNE: Let's get this done as quickly as 22 possible. Start with number 1. Somebody give me 23 instructions here. I give one to the judge, one to the 24 reporter, four over there, and I'll give Erin the rest, 25 and Randale is distributing to the audience. 26 THE COURT: Yes. Let's go off the record while 27 we're handling this administrative task. 28 (Off-the-record.) 518 1 THE COURT: Is the next exhibit 66? 2 All right. I guess I shouldn't go off the record. 3 We'll label -- back on the record. 4 Document labeled Exhibit NAJ-1 will be marked as 5 exhibit -- hearing Exhibit 66. 6 (Thereafter, Exhibit Number 66 was marked for 7 identification.) 8 THE COURT: Document marked Exhibit NAJ-2 will be 9 marked for identification as Exhibit 67. 10 (Thereafter, Exhibit Number 67 was marked for 11 identification.) 12 THE COURT: Document marked Exhibit NAJ-3 will be 13 marked Exhibit 68 for identification. 14 (Thereafter, Exhibit Number 68 was marked for 15 identification.) 16 THE COURT: Document marked Exhibit NAJ-4 will be 17 marked Exhibit 69 for identification. 18 (Thereafter, Exhibit Number 69 was marked for 19 identification.) 20 THE COURT: Document Exhibit NAJ-5 will be marked 21 hearing Exhibit 70 for identification. 22 (Thereafter, Exhibit Number 70 was marked for 23 identification.) 24 THE COURT: Document marked Exhibit NAJ-6 will be 25 marked as hearing Exhibit 71 for identification. 26 (Thereafter, Exhibit Number 71 was marked for 27 identification.) 28 THE COURT: Identified as NAJ-7 will be marked 519 1 Exhibit 72 for identification. 2 (Thereafter, Exhibit Number 72 was marked for 3 identification.) 4 THE COURT: Document top right-hand corner NAJ-9 5 will be marked as Exhibit 73. 6 (Thereafter, Exhibit Number 73 was marked for 7 identification.) 8 MR. VETNE: All right. Your Honor, all of the NAJ 9 exhibits and testimony have been marked. 10 I have a request that NAJ-7, which is Exhibit 72, 11 I think, the testimony, that that be not only marked and 12 received, but it be incorporated -- the instructions to 13 the reporter -- to put it in the transcript as if read, so 14 that the context of the testimony will be in one place 15 that it has been for all of the testimony. 16 Is that okay? 17 THE COURT: Seeing no objections, yes. 18 MR. VETNE: Thank you. 19 THE COURT: Ms. Reporter, if you will -- it shall 20 be done. 21 (Testimony of Erick Metzger as per Exhibit 72, 22 NAJ-7:) 23 THE WITNESS: My name is Erick Metzger, and I 24 serve as the General Manager of National All-Jersey Inc. 25 (NAJ), a position I have held for 16 years. NAJ’s 26 business address is 6486 E. Main St., Reynoldsburg, Ohio, 27 43068. 28 I was raised on a dairy farm in Indiana, earned a 520 1 Bachelor of Science degree in Animal Science from Purdue 2 University in 1982 and an MBA from Franklin University in 3 1999. I was employed by the American Guernsey Association 4 for 10 years, including five years as its CEO. I have 5 been with the Jersey organizations for the past 31 years. 6 During my tenure with NAJ, I have written numerous 7 newsletters and articles for industry publications, 8 provided economic analysis for producers and processors, 9 and participated in industry discussion panels. I have 10 testified as an expert witness and filed comments in 11 conjunction with previous Federal Order hearings. 12 NAJ is a national membership organization of over 13 900 milk producers and other people interested in 14 supporting milk pricing that recognizes the value of milk 15 components. Approximately 20% of NAJ members own dairy 16 cattle other than Jerseys. It is this policy that compels 17 NAJ to propose and testify in support of Proposal 2 to 18 annually update the skim component factors used in the 19 skim milk price formulas for Class III and Class IV milk. 20 Purpose of Updating Skim Component Factors. The 21 current Class III and Class IV skim milk price formulas 22 are: 23 Class III skim milk price = (protein price * 3.1) 24 + (other solids price * 5.9); 25 Class IV skim milk price = nonfat solids price * 26 9.0. 27 The current skim component factors of 3.1% 28 protein, 5.9% other solids, and 9.0% nonfat solids 521 1 substantially understate the skim components in average 2 producer milk. Updating the skim component factors will 3 make the Class III and IV skim milk price formulas more 4 accurate in relation to actual components in producer milk 5 and will impact Class I prices across all FMMOs and 6 Class II, III, and IV prices in the fat/skim FMMOs, 5, 6, 7 7 and 131. 8 NAJ contends that updating the skim component 9 factors generally and more regularly will help to reduce 10 incentives for manufacturing to disassociate from FMMOs 11 and will reduce disorderly marketing associated with the 12 uneconomic movement of milk that occurs when manufacturing 13 prices in non-MCP orders and Class I prices in all orders 14 are not in alignment with the pricing of manufacturing 15 milk in MCP orders where the actual value of those 16 components play a role and have been on the rise. 17 Updating skim factors more regularly will reduce 18 the burden on the pool when Class I contributes less 19 component value to the pool than it draws out in component 20 value, thus contributing to incentives for manufacturing 21 milk to depool. Updating skim factors more regularly will 22 improve the alignment between manufacturing prices in 23 skim-fat orders and manufacturing prices in MCP orders as 24 well as Class I prices in all orders and manufacturing 25 prices in MCP orders. 26 In addition, updated skim component factors will 27 reduce the incentive for uneconomic milk movements by 28 suppliers to move higher component milk away from outdated 522 1 fat/skim priced outlets in fluid deficit regions to 2 locations with higher value MCP pricing. 3 Furthermore, updating skim component factors will 4 reduce the current disincentive to move milk from reserve 5 supply areas that are priced on MCP to deficit fluid milk 6 markets that are priced on fat/skim. 7 FMMO data shows the current skim factors are much 8 lower than the skim components in average producer milk. 9 The current skim component factors of 3.1% 10 protein, 5.9% other solids, and 9.0% nonfat solids 11 substantially understate the skim components in average 12 producer milk. NAJ Exhibit 1 shows that skim milk pooled 13 in the seven MCP orders during 2022 averaged 3.39% 14 protein, 6.03% other solids, and 9.41% nonfat solids. 15 Skim solids data from MCP orders includes 100% of the 16 pooled milk and is audited and verified by Market 17 Administrators. 18 Furthermore, NAJ Exhibit 1 shows that the rate of 19 increase for skim protein has accelerated in recent years, 20 indicating that the factors should be updated regularly to 21 keep the price formulas accurate. Just two years earlier 22 in 2020 skim components averaged 3.30% protein, 6.01% 23 other solids, and 9.31% nonfat solids in the same orders. 24 Increases in both protein and butterfat account 25 for the accelerating trend. In 2020 milk pooled in the 26 MCP orders averaged 3.17% protein and 3.94% butterfat 27 which equates to 3.30% protein in skim milk (3.17/(100 – 28 3.94)). By 2022 protein increased to 3.25% and butterfat 523 1 jumped to 4.08% making skim protein 3.39% 2 (3.25/(100-4.08)). 3 Increasing protein and butterfat tests can be 4 expected to continue due to several dynamics. The first 5 factors are the combined impact of improving genomic 6 evaluations for both males and females along with 7 increased use of gender-selected semen. Gender-selected 8 semen allows dairies to produce their herd replacements 9 from the best cows in their herds. 10 Secondly, numerous milk buyers have implemented 11 production quotas or base/excess programs. Virtually all 12 these programs are volume based. When producers are 13 limited on the volume of milk they can market, they 14 logically increase the component content of their 15 allowable production. 16 Third, the use of automated or robotic milking 17 systems is increasing. Each automated unit collects 18 approximately the same volume of milk per day. Therefore, 19 producers can maximize revenue by increasing the component 20 content of the milk gathered by each automated unit. 21 The case for annual updates. The NMPF proposal 22 calls for the skim solids factors to be updated every 23 three years using the preceding three-year average. NAJ 24 Exhibit 1 calculated annual and three-year averages 25 beginning with milk pooled in 2014. Based on that 26 scenario, the first three-year average calculated 27 following 2016 would have been 3.24% protein, 5.97% other 28 solids, and 9.21% nonfat solids. These factors would be 524 1 used for milk marketed in 2018, 2019, and 2020. 2 The next three-year average would be calculated 3 following 2019. Milk pooled in 2019 averaged 3.29% 4 protein, 6.00% other solids, and 9.29% nonfat solids, 5 which were 0.05% protein, 0.03% other solids, and 0.08% 6 nonfat solids greater than the skim factors in effect at 7 the time. 8 Furthermore, the updated three-year average 9 calculated following 2019 was 3.27% protein, 5.99% other 10 solids, and 9.27% nonfat solids, an increase of only 0.06% 11 nonfat solids, which did not meet NMPF’s proposed 12 threshold of a 0.07% increase in nonfat solids needed for 13 the factors used in the skim milk price formulas to be 14 updated. Therefore, the three-year skim factors 15 calculated from 2014-2016 (3.24%, 5.97%, and 9.21%) would 16 still apply to milk marketed in 2021 (3.35%, 6.01%, 17 9.36%). 18 NMPF’s proposal states that when the updated 19 three-year average does not meet the 0.07% NFS minimum 20 threshold, the three-year average will be recalculated the 21 following year. The three-year average following 2020 was 22 3.29% protein, 6.00% other solids, and 9.29% nonfat 23 solids, an 0.08% increase over the skim factors in use at 24 the time, so the skim component factors in the price 25 formulas would be updated and used for milk pooled during 26 2022, 2023, and 2024. However, actual skim had increased 27 to 3.39% protein, 6.03% other solids, and 9.41% nonfat 28 solids in 2022, and is projected to be higher for 2023 and 525 1 2024. 2 Updating the skim component factors annually will 3 keep the price formulas more accurate, and in better 4 alignment with pricing available in MCP orders, than using 5 three-year averages that are updated every three years. 6 This is particularly true considering the recently 7 accelerated pace of component increases which are expected 8 to continue. 9 Updating skim factors more regularly will reduce 10 the circumstances that contribute to manufacturing milk 11 disassociating from FMMOs. 12 Producers in MCP orders are paid for all pooled 13 pounds of protein, butterfat, and other solids. However, 14 Class I skim value is based on the average of Class III 15 and IV skim values, plus $0.74/cwt., using the standard 16 skim component factors of 3.10% protein, 5.90% other 17 solids, and 9.00% nonfat solids. When Class I skim 18 contains higher protein and other solids than the standard 19 factors, Class I skim can draw more skim value from pooled 20 revenue than it contributes. 21 Furthermore, Class III and IV handler obligations 22 to FMMOs are based on the actual components pooled: 23 Protein and other solids for Class III, and nonfat solids 24 for Class IV. Class III and IV actual component levels 25 typically exceed the standard skim component levels used 26 to value Class I. Depending on the price relationship 27 between protein and nonfat solids, Class III skim value 28 can exceed the skim values of both Classes I and IV, or 526 1 Class IV skim value can exceed the skim values of both 2 Classes I and III. 3 In those instances, handlers of Class III or 4 Class IV would be obligated to contribute to pooled 5 revenues instead of drawing from pooled revenues. When 6 those value relationships occur, Class III or Class IV 7 handlers often opt to disassociate their milk from the 8 FMMO, a practice commonly referred to as depooling. Two 9 results of depooled milk are that it increases 10 non-uniformity of pricing among handlers as well as 11 non-uniformity of pricing among producers. 12 NAJ Exhibit 2, “Comparison of Classes I, III, and 13 IV Skim Values (at test)," illustrates skim component 14 values and price relationships for 2021 and 2022 along 15 with Class III and IV pooled volumes. In 2021 Class III 16 skim value exceeded both Class I and IV skim value. As a 17 result, only 37.5 billion pounds of Class III was pooled. 18 In 2022, Class III skim value was less than both Class I 19 and IV skim value, and 81.7 billion pounds of Class III 20 was pooled. 21 However, Class IV shows the exact opposite 22 scenario. In 2021 Class IV skim value was less than both 23 Class III and Class I, resulting in 37.2 billion pounds of 24 Class IV pooled. However, in 2022 Class IV skim value 25 exceeded both Classes I and III, and the volume of 26 Class IV pooled dropped to 14.6 billion pounds. 27 NAJ Exhibit 2 also shows Class I skim value in 28 2021 would have been $11.26/cwt. based on NAJ’s proposed 527 1 updated skim component factors of 3.29% protein, 6.00% 2 other solids, and 9.29% nonfat solids. The Class I skim 3 value would have exceeded both Class III and IV skim value 4 and discouraged Class III depooling. In 2022 NAJ’s 5 proposed updated skim component factors of 3.30% protein, 6 6.01% other solids, and 9.31% nonfat solids would have 7 generated a Class I skim value of $13.55/cwt., higher than 8 both Classes III and IV, and would have discouraged 9 Class IV from depooling. 10 In April 2021 Dr. Marin Bozic and Dr. Christopher 11 A. Wolf published Working Paper 21-01 in conjunction with 12 the Program on Dairy Markets and Policy 13 (https://dairymarkets.org). Included as NAJ Exhibit 4, 14 that article entitled “Negative Producer Price 15 Differentials in Federal Milk Marketing Orders: 16 Explanations, Implications and Policy Options," analyzed 17 six factors that contributed to negative PPDs including 18 increasing component tests. 19 In brief, PPDs represent the difference in an 20 order’s total pooled milk value and the value of the 21 order’s protein, other solids, and butterfat. Beginning 22 on Page 16, the authors describe the impact of increasing 23 component tests on PPDs: 24 “Increases in protein test reduce total producer 25 price differential. The reduction is higher in orders 26 where more milk is utilized in Class I. Since the value of 27 Class I skim milk depends only on pounds of skim milk 28 used, not protein test, increase in the protein test does 528 1 not increase handler obligation to the pool for Class I 2 skim milk. The negative impact on PPD will also be more 3 pronounced the wider the spread between protein price and 4 nonfat solids price.” 5 The research found that the outdated skim 6 component factors contributed an average of -$0.14/cwt. to 7 PPDs during 2020 (Table 6, page 37). Furthermore, the 8 research analyzed the impact of adjusting the skim protein 9 standard to 3.4% from the current 3.1% and found that the 10 change would have added an average of $0.38/cwt. to PPDs 11 from 2015 through 2020 (Table 8, page 39). 12 Adjusting the standard component factors in the 13 skim price formulas will keep Class I skim value more 14 nearly aligned with manufacturing skim value, thereby 15 reducing the current negative impact on PPDs and reducing 16 the incentives for handlers of Class III and IV to depool. 17 Given that handler pool obligations are based on 18 actual components, and given recent rapid increases in 19 skim components, updating the skim component factors 20 annually will align Class I skim value more closely with 21 manufacturing skim value in MCP orders than implementing a 22 three-year average updated every three years. 23 Impact of updated skim component factors on 24 Class I in all orders and Classes II, III, and IV in 25 fat/skim orders. NAJ Exhibit 6, Impact on Class I Skim 26 Values 2019 – 2022, compares Class I skim values using 27 current skim component factors, NMPF’s proposed three-year 28 averages that are updated every three years, and NAJ’s 529 1 proposed annual updates. 2 Using a starting date of 2014 as shown in NAJ 3 Exhibit 1, the three-year skim component average in effect 4 for 2019 would have been based on years 2014-2016 (3.24% 5 P, 5.97% OS, and 9.21% NFS). NAJ’s proposal to update 6 skim component factors annually would have used 2017 7 averages of 3.27% P, 5.98% OS, and 9.25% NFS. NMPF’s 8 proposal would impact Class I skim value by $0.24/cwt., 9 and NAJ’s proposal would impact Class I skim value by 10 $0.29/cwt., a $0.05/cwt. difference. 11 Going forward, NMPF’s three-year average from 12 2014-2017 would continue to be used for 2020 and 2021 13 because the next scheduled re-calculation of the 14 three-year average following 2019 resulted in an increase 15 of 0.06% NFS, less than NMPF’s proposed minimum threshold 16 of a 0.07% increase. By 2021, the spread in Class I skim 17 value between the NMPF proposal and the NAJ proposal 18 widened to $0.11/cwt. 19 NAJ Exhibit 3, Impact of Updated Skim Factors on 20 fat/skim Orders, utilized data provided by USDA’s data 21 “Milk Components by Class and Order – 2008-2023." NAJ 22 focused its analysis on Orders 5, 6, and 7 only because 23 USDA’s footnotes to the dataset stated that Order 131 24 components were simply based on Order 124, whereas 25 component data for Orders 5, 6, and 7 represented over 70% 26 of milk pooled in those three orders. 27 NAJ’s Exhibit 3 compares Class II, III, and IV 28 values for Orders 5, 6, and 7 from 2019 through 2022 based 530 1 on: Current fat/skim pricing; fat/skim pricing using NAJ 2 proposed updated skim component factors; MCP pricing 3 (including NAJ proposed updated skim component factors 4 impacting Class II). 5 In broad terms, the weighted average skim 6 component content for Classes II, III, and IV for orders 7 5, 6, and 7 mirror national skim component factors. In 8 all four years (2019-2022) the skim components in 9 manufacturing milk exceeded the current skim component 10 factors of 3.10% protein, 5.90% other solids, and 9.00% 11 nonfat solids. 12 Proposal 2 will ensure that manufacturers in 13 Orders 5, 6, and 7 will pay prices for their milk needs 14 that more accurately reflect the value of that milk. 15 Furthermore, Proposal 2 will more nearly equalize 16 manufacturers' skim costs between the fat/skim orders and 17 the MCP orders. The current skim component standards 18 afford manufacturers in the fat/skim orders a cost 19 advantage over manufacturers in MCP orders. NAJ firmly 20 believes that the analysis would hold true with Order 131 21 if the data were available. I am aware of no reason why 22 it would not. 23 Updating skim factors to stay in alignment with 24 current component. Levels nationally will reduce the 25 incentive for uneconomic milk movements that make it 26 difficult for fluid milk plants to attract nearby milk. 27 NMPF’s proposal to update skim component factors 28 included the following justification: "Three of the 531 1 non-MCP orders, Appalachian, Florida and Southeast, do not 2 have an adequate supply of producer milk within their 3 marketing areas to meet consumer fluid milk demand. 4 Supplemental milk must be transported into these markets 5 to meet this demand. The supplemental milk is typically 6 supplied from Federal Orders using MCP. The higher 7 relative value of skim milk in MCP versus non-MCP markets 8 increases the cost of supplemental milk for the non-MCP, 9 deficit fluid milk markets. In addition, it decreases the 10 incentive to move milk from reserve supply areas to 11 deficit fluid milk markets. Both make it more costly and 12 difficult to ensure consumers have access to an adequate 13 supply of fluid milk. 14 NAJ agrees with this statement. Updating the skim 15 component factors will impact the skim milk price of all 16 four classes in the three fat/skim orders in the Southeast 17 thereby raising the statistical uniform price by the full 18 amount of the update. Updating the skim component factors 19 will only affect the Class I price in the surrounding MCP 20 orders supplying supplemental milk, and the resulting 21 impact on their statistical uniform price will be limited 22 to the extent of each orders’ Class I utilization. The 23 result will be to minimize the differences in skim value 24 between the MCP and skim-fat orders, thereby increasing 25 the incentive for milk to move from the MCP orders to the 26 Southeast orders. 27 Impact on Risk Management Programs. Risk 28 management programs have become increasingly important to 532 1 dairy producers. Various risk management tools allow 2 producers to limit their exposure to future milk price 3 fluctuations and milk price-feed costs margins. 4 Consideration of risk management tools is 5 important when considering changes to FMMO price formulas 6 so that a regulatory change does not create disorder in 7 the marketplace. Sufficient time is needed between the 8 announcement of a price formula change and when the change 9 is implemented. Participants utilizing risk management 10 tools need to know if and when price formulas underlying 11 the risk management contracts are going to change and the 12 magnitude of the change. 13 The annual updates to the skim component factors 14 can be known by mid-January each year following the 15 calculation of December Statistical Uniform Prices for the 16 MCP orders. Each month’s Statistical Uniform Price 17 calculation includes the component content of pooled milk. 18 NAJ proposes the updated factors become effective with 19 milk marketed January the following year. This provides 20 an 11-month time lag between announcement of the updated 21 factors and when the updated factors become effective. 22 However, if that time lag is deemed not to be in 23 the best interest of the industry, NAJ is open to a longer 24 time delay between the announcement and implementation. 25 However, NAJ also asserts that instituting a longer delay 26 increases the imperative that the updates be done annually 27 instead of every three years to keep the skim component 28 factors in stronger alignment with actual components. 533 1 CME Group lists monthly dairy futures contracts 2 for 24 consecutive months. The number of outstanding 3 contracts is called the open interest. The Class III Milk 4 Futures contract is the most utilized dairy risk 5 management tool. Open interest in Class III Milk Futures 6 contracts on August 11, 2023, was 21,029, with open 7 interest as far in the future as March 2025. However, the 8 heaviest open interest existed for contracts expiring in 9 the next five months (16,923, 80%), and 93% of the open 10 interest was for contracts expiring in the next ten months 11 (20,023). 12 However, NAJ also observes that potential updates 13 to skim component factors can be tracked monthly as FMMO 14 data is reported through MPR Data Mart (usda.gov). NAJ 15 Exhibit 5, Monthly Skim Components January 2019 – December 16 2022, shows that the average skim components reported in 17 the MCP orders for January through June each year are very 18 predictive of that year’s final skim components. 19 From 2019 through 2022 average skim components 20 reported from January through June were within 0.01% of 21 each year’s annual skim components. Therefore, it follows 22 that concerns for the use of risk management tools in 23 conjunction with annual updates of skim factors are 24 greatly exaggerated. 25 In closing, NAJ thanks the Department for the 26 opportunity to participate in this national public hearing 27 to consider proposals to amend the pricing formulas in the 28 11 FMMOs. NAJ urges the adoption of its proposal in its 534 1 entirety because it will contribute to greater order 2 within and among FMMOs and among milk uses. 3 For the reasons outlined in this testimony and 4 supporting documentation, NAJ believes that annual updates 5 to the skim component factors in the Class III and 6 Class IV skim milk price formulas best achieve the 7 objective of increasing their accuracy, thereby better 8 aligning skim values more closely to manufacturing skim 9 values in all orders for Class I and for Classes II, III, 10 and IV in the fat/skim orders. 11 BY MR. VETNE: 12 Q. Mr. Metzger, in your prepared testimony, which has 13 been marked but which you will not read, you refer to the 14 various exhibits, NAJ-1, 2, 3, 4, 5, and 6, and you have 15 prepared a bullet point summary, which is NAJ-9, of your 16 testimony and the importance of the exhibits. 17 Is that correct? 18 A. That's correct. 19 Q. And you are going to present your oral testimony 20 by referring to the bullet points, which we've marked as 21 the last exhibit, and hope that the participants will 22 follow along. 23 Is that correct? 24 A. That's correct. 25 Q. Okay. Are you prepared to proceed with that? 26 A. I am. Thank you. 27 Q. Thank you. 28 A. Thank you, Mr. Vetne. 535 1 We appreciate the Department's modified procedures 2 with the advanced submission of testimony and exhibits, 3 and then rather than reading -- you know, having the 4 option of rather than reading prepared testimony to 5 present an opening statement, and so that's what I have 6 opted to do. 7 I find it difficult to write text that -- that 8 describes data that is in spreadsheets, and so I have 9 decided to take a different approach than is normally done 10 at these hearings and present the spreadsheets, where the 11 data came from, our analysis of the data, and why we think 12 it is pertinent to these proceedings. 13 Shortly after the Dairy Programs announced which 14 additional proposals were going to be noticed for the 15 hearing, I was having a conversation with Ryan Miltner 16 about the proposals. And I thought Ryan made a very 17 astute observation, and that was the objective of the 18 proposals at this hearing should be to improve the 19 accuracy of the pricing formulas used to derive minimum 20 pricing. 21 And that struck me as that is essentially the crux 22 of National Milk Proposal 1 and our Proposal 2. We need 23 to -- we want to increase the -- or improve the accuracy 24 of the skim pricing -- skim component pricing formulas for 25 Class III and Class IV. 26 Mr. Covington did an outstanding job of outlining 27 how those skim components have changed over time. I was 28 gratified to see the data that we had pulled together 536 1 matched with Mr. Covington. NAJ Exhibit 1 gets to the 2 crux of the matter as to why NAJ is proposing these 3 updates be made annually instead of on a three-year basis. 4 If we were having this hearing three years ago, 5 NAJ Proposal 1 probably -- or Proposal 2 probably would 6 not have been submitted because, as Mr. Covington's 7 testimony demonstrated, as well as NAJ Exhibit 1, if you 8 follow with my cursor, from 2014 down through about 9 2020 -- 2018, the skim protein content of producer milk 10 had not -- had not changed much. 11 If we started at 2014, for example, National 12 Milk's proposal, their first three-year average would have 13 been calculated following 2016. That calculation would 14 have been one in 2017 and applied to milk marketed in 15 2018. 16 That three-year average if we look at nonfat 17 solids of 9.21 compared to milk marketed in 2018, which 18 would have been the first year it would have been used, 19 there's a bit of a difference there, but perhaps not -- 20 not substantial. But that three-year average then would 21 have been used, not only for 2018 milk, but also 2019 milk 22 and 2020 milk, which by that time we were up to 9.31 on 23 nonfat solids. 24 The next calculation on using National Milk's 25 proposal would have been done after 2019. We can see what 26 those three-year averages would have been. And in the far 27 right-hand column, it says -- shows that the three-year 28 average for nonfat solids would have changed by zero -- or 537 1 .06%, which would have not met National Milk's threshold 2 of 0.7. 3 So we would have recalculated after 2020, and at 4 that point, we would have come up with .08% change, which 5 would have triggered a change in the formulas. That 2020 6 three-year average would have been calculated in 2021 and 7 applied -- first applied to milk marketed in 2022. 8 By that time, producer milk would have been 9 averaging 9.41% nonfat solids as compared to the formula 10 using 9.29. Furthermore, that three-year average would 11 have not only been used for 2022 milk, but also milk 12 marketed in 2023 and next year in 2024. 13 As we can see here recently, the producers have 14 increased their component content substantially. We 15 believe there are three reasons for that. 16 One is genetic. I have reviewed Dr. Van Amburgh's 17 written testimony that's posted on the website. He does a 18 superb job of outlining the reasons for genetic change, 19 and the only thing I can add to his testimony is a big old 20 advance amen. 21 We believe there is general knowledge in the dairy 22 industry, there are two other factors that are 23 contributing to the increase of skim components. One is 24 numerous handlers have implemented production quotas or 25 base/excess plans for their producers whereby producers 26 are allowed to market a certain volume of milk, and any 27 milk they market over their allowable volume is discounted 28 substantially. Any producer who is limited on the volume 538 1 of milk they can market in order to increase their revenue 2 is going to increase the component content of that milk 3 that's -- that they are allowed to market for full value. 4 Another reason we believe skim component factors 5 are changing -- changing rapidly is the increased use of 6 automated milking systems, commonly referred to as robotic 7 systems. A robotic -- once you put in that robotic unit, 8 it is set up, more or less, to harvest a certain volume of 9 milk in a 24-hour period. 10 If each unit is limited on how much milk they can 11 harvest from the cows, producers logically are going to 12 increase the component content of that milk to maximize 13 their returns. 14 So for those reasons, we believe that annual 15 updates are more appropriate, because as we can see, if we 16 move in 2020, from 3.3%; in 2021, 3.35; in 2022, we're up 17 to 3.39; on the nonfat solids side we have moved .1 -- 18 from 2019 to 2022, we have moved .12%. 19 Which if the objective is to increase the accuracy 20 of these pricing formulas, then we believe updating 21 annually will be more appropriate. 22 The question can come up, all right, how far can 23 these skim component values go? What's the limit? 24 Dr. Van Amburgh in his testimony refers to 25 Holstein production that is routinely now approaching 5% 26 butterfat, 3.4% protein, which increases that skim protein 27 content to somewhere I think in about 3.5 or 3.6% range. 28 Speaking for Jerseys, our national average, 539 1 according to the Dairy Herd Improvement Association, which 2 Calvin described yesterday, our national average for 3 Jersey skim protein would be about 3.9%, and our top herds 4 are approaching a skim protein content of 4.3 to 4.4%. 5 So we have not maximized the skim protein 6 capability of the national dairy herd yet. There's more 7 room to go. 8 Why -- now I'm going to move to Exhibit 2. 9 Why is it important to keep -- to adjust those 10 skim protein factors in the price formulas? 11 Well, here's a case study. Looking at 2021, the 12 skim price through the Federal Order system was 10.83. If 13 we -- I'm going to skip the next line for now, but if we 14 look at Class III milk marketed or pooled that year, it 15 averaged 3.22% protein, other solids was 5.78. If you 16 combine those percentages with the prices for 2021, we 17 come up with a Class III skim value of 11.13. Nonfat 18 solids test was 9.01, nonfat solids price of about $1.09, 19 the Class IV skim value was $9.83. And in 2021, 37 and a 20 half billion pounds of Class III were pooled, and a little 21 over 37 billion pounds of Class IV were pooled. 22 Now, let's fast forward to 2022, the reverse 23 situation happened. Class I skim price was 13.03 -- and I 24 apologize, these two numbers, these two decimal numbers, 25 for protein and other solids percent, did not get 26 converted to a percent basis. We will submit a correction 27 of this exhibit to change that. 28 But it shows that in 2022 Class III protein 540 1 percent was 3.28 and other solids is 5.79. If you combine 2 that with the protein and other solids prices for 2022, 3 you come up with a Class III skim value of 11.36. 4 Now if we look at Class IV, we have a nonfat 5 solids value of 8.19, a price of $1.50, and a Class IV 6 skim value of 13.40. The Class IV skim value exceeds the 7 Class I skim value, the Class III skim value, and this 8 year is less than the Class I skim value. 9 And so what happened? 10 Now we have over 81 billion pounds of Class III 11 pooled, and we drop Class IV pooled down to 14.6 billion 12 pounds. So it's obvious, it is very apparent that given 13 one of the -- that a lot of Class III milk was depooled in 14 2021, a lot of Class IV milk was depooled in 2022. 15 It is our contention that a contributing -- 16 significant contributing factor to the depooling of 17 Class III in one year and the depooling of Class IV in the 18 other year is the price relationship between the Class III 19 skim values and Class IV skim values and the Class I skim 20 values. 21 MR. HILL: Mr. Metzger, can I interrupt for just 22 one moment here? 23 THE WITNESS: Yes, you may. 24 MR. HILL: The witness has identified this as 25 Exhibit 2. It is actually Exhibit 67 at this point. 26 THE WITNESS: I'm sorry, NAJ Exhibit 2. Thank 27 you. I apologize for that. 28 THE COURT: No worries. We can -- I -- I was 541 1 going to say something to you, but it's probably clear in 2 the record since we -- but thank you -- 3 THE WITNESS: Thank you. 4 THE COURT: -- Witness Metzger. 5 THE WITNESS: Under NAJ's proposal, in 2021, the 6 Class I skim price would have been 11.26, which is higher 7 than either the Class III skim value or the Class IV skim 8 value. 9 In 2022, under NAJ's proposal, the Class I skim 10 price would have been 13.55, which, again, is higher than 11 either the Class III skim value or the Class IV skim 12 value. We believe that would provide a disincentive for 13 manufacturing milk to depool. 14 Why is depooled milk of concern to these 15 proceedings? 16 Depooled -- there are three reasons: Depooled 17 milk increases the non-uniformity of prices paid by 18 handlers; depooled milk increases non-uniformity of prices 19 paid to producers; and depooled milk is never available to 20 serve the Class I market. And that's why we should be -- 21 these proceedings should be concerned with depooled milk. 22 NAJ Exhibit 3 examines -- changing the skim 23 component factors will impact the Class I price in all 24 orders, it will impact the Class II, III, and IV prices in 25 the skim/fat orders. We did an analysis of what will be 26 the actual impact on the skim value and in the fat/skim 27 orders for Classes II, III, and IV. 28 I'm going to take some time to walk through some 542 1 detail on this first example, and then after that, I 2 think, we can walk through the other examples rather 3 quickly. 4 But what we did, from NAJ -- from USDA data in 5 Table 1 on the website is, in 2019, we calculated the 6 total pounds of skim that were pooled as Class II for the 7 Appalachian, Florida, Southeast, and Arizona orders. We 8 also totaled the nine nonfat solids that were pooled as 9 Class II in the Appalachian, Florida, Southeast, and 10 Arizona orders. 11 Then we calculated a weighted average of nonfat 12 solids from Orders 5, 6, and 7. We excluded 131 from 13 our -- from this analysis because the footnote on USDA 14 Table 1 stated that the component levels in Order 131 were 15 restricted, and so they simply applied component levels 16 from 124. 17 We just made a decision that was a little less 18 imprecise than -- or a little more imprecise than we cared 19 to use in this analysis, so we limited it to the Orders 5, 20 6, and 7 because the footnote said that in 5 and 7 it 21 represented over 70% of milk pooled, in Order 6 it was 22 over 80%. 23 So in this column we believe there are several 24 important points. 25 First of all, the pooled nonfat solids average 26 9.2%, which is well above the current standard of 9.0. 27 The current pricing using the 9.0 standard would have 28 valued Class II milk at 8 -- the skim of Class II milk at 543 1 8.24. NAJ's proposed updated factors would have valued 2 that skim Class II milk at 8.46. 3 If this -- if multiple component pricing were 4 implemented in Orders 5, 6, and 7, the value of that 9.20 5 nonfat solids based on a component pricing basis would 6 have been $8.42. 7 So here is the analysis. 8 The actual value based on component is 8.42. We 9 compare that to the current fat/skim price, which values 10 that milk at 8.24, well under its true value based on 11 components. 12 The NAJ proposal, using 9.24, is slightly higher 13 than the actual 9.20, so NAJ's proposal would overvalue 14 that compared to component pricing by $0.04 a 15 hundredweight. 16 As everyone's aware, NAJ had submitted a proposal 17 to convert all Federal Orders to multiple component 18 pricing. That proposal was declined. 19 And so now the decision that the Department has to 20 make is which will lead to more uniform price -- pricing 21 paid by handlers and more uniform pricing paid to 22 producers. Do we maintain the current fat/skim pricing 23 scenario, which would undervalue this milk by $0.18 a 24 hundredweight, or do we update the standards and 25 potentially overvalue that milk by $0.04 a hundredweight? 26 That's the decision we have to make, which is better. 27 Now, I'll try to walk through, cognizant of my 28 time, so I'll try to walk through the rest of these a 544 1 little more quickly. 2 In 2019, the weighted average protein for 3 Class III milk pooled in 5, 6, and 7 averaged 3.22, above 4 the current standard of 3.1. Other solids was 5.98, above 5 the current standard of 5.9. When we combine that with 6 the prices, the current fat/skim pricing would value that 7 Class III skim at 8.48, which is about $0.29 below its 8 actual component pricing value. 9 The NAJ proposal would overvalue -- would value 10 that Class III skim at 8.87, which is $0.10 above the 11 component value. 12 Again, which is the better option, to underprice 13 it by $0.29 or to overprice it by a dime? 14 Class IV of that year, nonfat solids averaged 15 9.20, again, well above the current component standard of 16 9.00. We look at the fat/skim pricing comparison. We 17 either undervalue that milk by $0.18 a hundredweight or we 18 overvalue it by $0.07. 19 I'll move a little more quickly. The next page is 20 2020. Again, Class II at 9.22 is above the current 21 standard of 9.0. Class III protein, Class III other 22 solids, well above the current component standards that 23 are being used. In Class IV, 9.25, nonfat solids again 24 above the current standard of 9.0. The same pricing 25 scenarios apply for 2020 that applied in 2019. We either 26 undervalue it by a lot or we overvalue it by a little. 27 2021, same scenario. Nonfat solids in Class II 28 averaged 9.22, above the current standard. Protein and 545 1 other solids in Class III, above the current standard. 2 Nonfat solids in Class IV, above the current standard. 3 Multiple component pricing would have valued -- done the 4 best job of valuing that milk. Since that's not an option 5 for consideration, we either undervalue it by a lot or we 6 overvalue it by a little. 7 2021, same scenarios. There is more nonfat 8 solids, there is more protein other solids, and nonfat 9 solids in Class IV than the current standard. 10 And 2022, again, same scenario, we have got more 11 nonfat solids in pooled milk than the current standard. 12 Same with protein. Same with other solids. And the same 13 scenario with -- with using either current fat/skim 14 pricing or updated fat/skim pricing. 15 So that -- that's our analysis of what the impact 16 of updating the standards would mean to Class II, III, and 17 IV in the four fat/skim orders. 18 NAJ Exhibit 4 is a paper written by Dr. Marin 19 Bozic, who is with us today, and also Dr. Christopher Wolf 20 from Cornell, which examined the causes of negative PPDs 21 in the year 2020. 22 THE COURT: If I may, Exhibit NAJ-4 has been 23 marked for identification, hearing Exhibit 69. 24 THE WITNESS: Thank you. 25 THE COURT: Please continue. 26 THE WITNESS: Thank you. 27 I'm not going to -- you know, this, as noted, is a 28 46-page research paper. I'm not going to delve into all 546 1 the details of it, particularly because I might misstate 2 something. And the -- one of the co-authors is with us 3 today. 4 But they examine, you know, in 2020, producer 5 price differentials went to record negative levels, and so 6 they decompressed the causes of that and they identified 7 of reasons. One being the drop in Class I utilization, 8 but one of those reasons was the component test, the fact 9 that we are still valuing class -- pricing Class I on 10 component test levels that are not reality with components 11 that are actually being pooled, particularly in Class III 12 and IV where those components are valued fully. 13 Quick summary. Because the component test 14 standards are out of alignment with actual producer 15 components, Table 6 shows that that misalignment 16 contributed an average of negative $0.14 to PPDs for that 17 year. 18 And then they also, as we go to Table 8, they 19 had -- they ran a scenario where they adjusted the skim 20 protein level from its current 3.1 up to a more realistic 21 standard of 3.4, more in line with actual producer 22 components. And they said, if that updated protein factor 23 of 3.4 had been used from 2015 through 2020, it would have 24 increased PPDs by an average of $0.38. This is important 25 because increasing PPDs would lessen the incentive to 26 depool milk and the negative consequences that markets 27 realize when manufacturing milk is depooled. 28 Exhibit Number 5, NAJ Exhibit 5. This strikes 547 1 directly to the issue of risk management and what should 2 be the lead time between announcing updated component 3 standards that will be used in the pricing formulas, the 4 lag time between that announcement and when those updated 5 factors are actually implemented. 6 THE COURT: NAJ-5 is hearing Exhibit 70 for 7 identification. 8 THE WITNESS: National Milk has an expert in risk 9 management that will be testifying. Our purpose -- our 10 proposal is that from the up- -- an annual updated skim 11 components can be announced -- quite frankly, it can be 12 calculated in January each year after the Market 13 Administrators publish their statistical uniform price for 14 December milk. 15 The National Milk proposal says, well, we figured, 16 you know, a little more lag time, it could be calculated 17 by the end of February each year and then implemented the 18 following March instead of implemented the following 19 January. 20 Folks, we are not picking this hill to die on. 21 Okay? Whether it is implemented in January or implemented 22 in March is not the critical factor in -- in our 23 estimation. 24 However, no one who has an interest in what the 25 updated skim component factors should be surprised by the 26 announcement of the annual update, and that is because the 27 skim component content of milk can be tracked on a monthly 28 basis. 548 1 And in fact, in our case study here, looking at 2 2019 to -- through 2022, at the end of June each year we 3 basically knew what the -- that year's annual skim 4 component factors would be. In 2019, at the end of June, 5 skim component -- skim protein averaged 3.31. At the end 6 of the year, it was 3.30. In 2020, at the end of June, we 7 were at 3.29 skim protein. At the end of the year, we 8 were at 3.30. 9 And then here's where it gets interesting. In 10 2021, and 2022, when we took substantial advances or 11 increases in skim components, it was predicted or 12 forecasted by the end of June, because at the end of June 13 we knew we had moved to 3.34 skim protein. And, yes, at 14 the end of 2020 -- at the end of the year, we were at 15 3.35. The next year, the end of June, we were at 3.39; at 16 the end of the year we were at 3.39. 17 So simply tracking the monthly skim component 18 content of milk, essentially adds a six-month additional 19 advance on what that announced annual skim component 20 content will be. 21 And then, finally, NAJ Exhibit 6, which was marked 22 as -- your Honor, help me out. 23 THE COURT: Hearing Exhibit 71. 24 THE WITNESS: Thank you. 25 There has been concern and comment in this hearing 26 so far that will Class I handlers be paying -- essentially 27 the argument is, will Class I handlers be paying for more 28 protein than exists in the actual Class I milk that they 549 1 receive? 2 And so based on USDA Table 1, we did analysis 3 looking at just the Class I that was pooled each year for 4 each order, from 2019 through 2022. 5 Now, I'll take some time to walk through the 6 detail on one order, which then is applicable to the 7 analysis of the other orders in the other years. 8 In 2019, the Northeast Order pooled just over 9 8 billion pounds of Class I skim. That Class I skim 10 contained 260 million pounds of protein, which computes to 11 a skim protein content of 3.21. It contained 448 -- 12 484 million pounds of other solids, which computes to an 13 other solids content of 5.98. And then you combine those, 14 you have nonfat -- Class I nonfat solids total of 15 744 million pounds of milk and a nonfat solids skim 16 content of 9.19. 17 So, now, let's look at four pricing scenarios for 18 Class I. 19 The current Class I skim price results in a 20 Class I skim price of $8.40. Using the National Milk 21 proposal of a three-year annual update, it would have 22 priced that Class I skim at $8.64 across all orders. 23 NAJ's proposal to update those skim component factors 24 annually would result in a skim -- Class I skim price of 25 8.69 across all orders. 26 Now, if we calculate the value of the Class -- of 27 the skim components that were pooled as Class I for the 28 Northeast Order, the actual component value would have 550 1 been 8.61. That is well above the current standard. It 2 is a little bit below National Milk's proposal. It is a 3 little further below NAJ's proposal. That -- you know, 4 that's the scenario in the Northeast Order for 2019. 5 If we look at the Appalachian order, again, it 6 would -- either proposal, National Milk or NAJ -- would 7 somewhat overprice Class I skim value compared to 8 component value. The same is -- is true for the Florida 9 order. 10 But once we get past those three orders and get 11 into the remaining eight orders, the actual component 12 value is either equal to or greater than NAJ's more 13 aggressive approach of annual updates to the skim 14 component factors. 15 And so in summary, in 2019, yes, there would have 16 been three orders that would have paid for more skim 17 components than they received, but that would be 18 counterbalanced by eight orders that received more skim 19 component value than was -- would be priced in the NAJ 20 proposal. 21 If we go forward to 2020, the same scenario holds 22 true. We have three orders that would have skim price 23 above the component value in Class I skim. We would have 24 eight orders where the skim components value is actually 25 higher than the Class I skim price, even using NAJ's more 26 aggressive annual updates. 27 The same holds true for 2021. The three orders 28 separate themselves; the other eight orders would receive 551 1 more -- would not be -- the Class I price would not exceed 2 Class I skim component value. And also, the same holds 3 true in 2022. 4 NAJ, when we saw that there would be a proposal to 5 update skim component factors, we recognized there could 6 be an inequity between Class I components received and 7 Class I components how they were priced. So we submitted 8 a proposal to be -- for this hearing, to price Class I on 9 the actual components received. That proposal was 10 declined as an additional proposal for this hearing. 11 But -- but that would have been an option had our proposal 12 been received. 13 And I think with that, I have covered what I care 14 to cover in regards to why skim component factors -- first 15 of all, why they need to be updated, and second of all, 16 why we believe that annual updates would provide more 17 accuracy to this -- to the skim pricing formulas and, 18 therefore, provide more orderly marketing through the 19 Federal Order system. Thank you. 20 BY MR. VETNE: 21 Q. Thank you, Mr. Metzger. 22 For context and reference, when you say annual 23 updates, you are referring to an update at the current 24 time based on component content of milk two years or more 25 previously, correct? 26 A. That will be the practical application. For 27 example, we are in 2023. The skim components of -- the 28 skim components of pooled milk in 2021 would have been 552 1 calculated in early 2022 and applied to milk marketed in 2 2023. So, yes, there is a two-year lag between the 3 calculation of those components and their application. 4 Q. Okay. And the two-year lag is what you are 5 referring to when you refer to your proposal as more 6 aggressive, it's already two years outdated when it is put 7 into effect? 8 A. Correct. 9 Q. Okay. And -- and the National Milk proposal, 10 would on occasion result in lags of five years or more? 11 A. Up to five years, yes. 12 Q. Okay. You were present for the testimony by 13 Mr. Covington. 14 A. I was. 15 Q. Okay. And you reviewed his -- his statement and 16 listened to his testimony. 17 A. I did. 18 Q. He has a couple of comments on SMI's qualified 19 preference for the NA -- National Milk versus NAJ 20 proposal. One of the comments he makes is an annual 21 update might be a small change, not worth the effort. 22 Are you aware of any extra effort involved in an 23 annual update versus an update when it reaches .07? 24 A. I'm not. 25 Q. Okay. During the 15 years or so that was -- that 26 was analyzed -- well, actually, 22 years -- Mr. Covington 27 referred to ups and downs. 28 There was -- are you aware of any down in the ups 553 1 and downs during that period? 2 A. Do I, relying on memory? I believe 3 Mr. Covington's -- had a -- Mr. Covington's table showed 4 that on nonfat solids, in that 22-year time period, there 5 was one year where there was a decline in nonfat solids 6 from the preceding year. And all the other years either 7 -- nonfat solids either remained the same as the previous 8 year or increased. 9 Q. Okay. And I'll show you -- I'll show you a copy 10 of the -- Cal Covington's testimony on page 5 of 13 to see 11 if that's what you are referring to. 12 A. Yes, I'm referring to Table 2 in -- in Mr. 13 Covington's testimony. 14 THE COURT: That's Exhibit 64, page -- 15 THE WITNESS: Page 5. 16 THE COURT: Page 5. 17 BY MR. VETNE: 18 Q. And that was a .01 drop from year to year, 19 correct? 20 A. That is correct. 21 Q. And that's the only down -- 22 A. In that timeframe, yes. 23 Q. In that timeframe. And the rest have been all 24 ups, correct? 25 A. Either ups or even. 26 Q. Mr. Covington used the term "orderly marketing" in 27 contrasting the NAJ proposal to the National Milk 28 proposal. 554 1 Are you aware of any orderly marketing or 2 disorderly marketing that could occur with respect to 3 annual updates versus updates every three to five years? 4 A. No, I am not. 5 Q. Okay. Other than using the term, did you hear 6 Mr. Covington refer to any marketing disorder that could 7 result by adoption of the NAJ proposal versus the National 8 Milk proposal? 9 A. I don't believe so. 10 Q. Okay. And finally, Mr. Covington referred to the 11 National Milk proposal as involving a more orderly process 12 than the NAJ proposal. 13 Is there any substantive difference in the process 14 as you understand it? 15 A. No. 16 Q. Okay. 17 THE COURT: Between this witness's proposal and 18 Mr. Covington's proposal? 19 MR. VETNE: Yes. 20 THE COURT: You asked if there's a difference. A 21 difference between what? 22 MR. VETNE: Is there -- is there a difference in 23 the process of updating annually and updating every three 24 to five years other than the frequency of updates. 25 THE COURT: Thank you. 26 THE WITNESS: No. 27 MR. VETNE: That's all I have. The witness is 28 available. Thank you. 555 1 THE COURT: Okay. Who's got cross? We'll wait 2 for AMS to the end. 3 I was thinking at 10:00 because it's about four 4 hours, but if now is a good time -- okay, let's take a 5 break. Let's take ten minutes. We'll come back at 9:50. 6 Off the record. 7 (Whereupon, a break was taken.) 8 THE COURT: Okay. We're back in session. On the 9 record. 10 THE WITNESS: Your Honor, if I -- 11 THE COURT: Yes, Witness Metzger. 12 THE WITNESS: Before -- before we go to cross, I 13 would like to interject one comment. And I have been very 14 remiss in not recognizing my colleague, Randale Lowe, 15 R-A-N-D-A-L-E, last name L-O-W-E, who has done yeoman's 16 work over the last several months constructing these -- 17 these spreadsheets that I used, and certainly needed on 18 the record, and publicly, to thank him for all his work on 19 behalf of National All-Jersey. Thank you. 20 THE COURT: And -- but they were prepared under 21 your supervision? 22 THE WITNESS: Yes, they were. 23 THE COURT: Very good, sir. 24 All right. Cross-examination? 25 Mr. English, your witness. 26 MR. ENGLISH: Good morning, your Honor. 27 CROSS-EXAMINATION 28 BY MR. ENGLISH: 556 1 Q. Good morning, Mr. Metzger. 2 A. Good morning. 3 Q. My name is Chip English, attorney for the Milk 4 Innovation Group. 5 To try to be efficient, if we could have a copy of 6 Exhibit 43 and Exhibit 44 that I may -- once the judge 7 gives me permission to approach the witness, hand to the 8 witness. 9 THE COURT: Of course. 10 MR. ENGLISH: I'm not going to start with those, 11 but I thought it would be more efficient rather than 12 interrupting. 13 THE COURT: Good plan. Thank you. 14 BY MR. ENGLISH: 15 Q. So I'm trying to keep these to a minimum, 16 Mr. Metzger, on your Exhibit 73, which is your summary of 17 your testimony, which I greatly appreciate, page 9, 18 paragraph 5, H. I'm sorry, it's page 4. It's page 4 19 of -- yeah, I got the 9 off of the top. Sorry. So page 4 20 of Exhibit 73, paragraph 5, H. 21 Do you see that paragraph? 22 A. Yes, if the statement begins "Class I skim 23 only" -- 24 Q. Yes. "Only contributes." 25 A. Yes. 26 Q. So you have a statement there in the third line, 27 "Class I skim can draw greater value from pooled revenue 28 than it contributes." 557 1 Your statement presumes that there is value to 2 Class I plants from those higher components, correct? 3 A. This refers to how the pool is constructed. And 4 when the pool value is assembled, the Class I skim value 5 is based on those current factors of 3.1, 5.9, and 9.0. 6 And when -- so that handler would pool obligation based on 7 Class I skim values; however, when that handler gets the 8 pool draw, it is based on all the components provided in 9 Class I milk. 10 Q. So does that mean your statement there is 11 referring to pool value, not actual value to a Class I 12 plant? 13 A. Correct. 14 Q. Thank you. 15 So now, Exhibit 71, which is also Exhibit NAJ -- 16 or it was table I think -- or Exhibit NAJ-6. This is your 17 comparison of Class I skim values. 18 And you have based this off of Table 1, correct? 19 A. Correct. 20 Q. I'm sorry, Exhibit 44? 21 A. Correct. 22 Q. Now, you understand because there is -- you were 23 here yesterday, correct? 24 A. I was. 25 Q. Okay. You understand that there are a fair number 26 of materials in Exhibit 44 where the numbers are 27 estimated, correct? 28 A. Correct. 558 1 Q. Do you understand that for other solids and 2 protein that the methodology for estimating the Class I 3 pound protein is literally taking -- you subtract for III, 4 the protein, and then you apply the protein across the 5 other three classes, per order. 6 Do you understand that to be the case? 7 A. I believe that's what the witness testified to. 8 Q. Yes. And so similarly for class -- I get it 9 backwards, what did I just say, other solids or protein -- 10 for protein, you subtract the Class III and then just 11 allocate across the other three classes, correct? 12 A. Correct. 13 Q. And for other solids you take it for Class IV and 14 then allocate across the other three classes, correct? 15 A. Other solids? Or nonfat solids? 16 Q. Nonfat solids. Thank you. 17 A. Well, you would have nonfat solids for II and 18 actual values for nonfat solids for II and IV. And 19 actually, Class III, because nonfat solids in III would be 20 the addition of other solids and protein. 21 Q. All right. Let me just try to keep it brief. 22 So the footnote, Class III and total other solids 23 are reported in MCP orders. To estimate the pounds of 24 other solids -- so maybe I got -- I didn't -- I shouldn't 25 have talked about nonfat solids -- to estimate the pounds 26 of other solids in Classes I, II, and IV, the 27 non-Class III other solid pounds were multiplied by the 28 percent of nonfat solids in each of the respective 559 1 classes. There is just -- it is just an estimate, 2 correct? 3 A. Correct. 4 Q. Okay. And similarly, for protein, correct? It is 5 an estimate for Class I, correct? Using the order values, 6 correct? 7 A. Correct. 8 Q. Okay. So given National All-Jersey's long history 9 in presenting and supporting and doing its best for 10 multiple component pricing, rational actors in multiple 11 component prices -- pricing orders, have an incentive to 12 provide higher protein or solids milk to Class III and IV 13 plants, correct? There is a financial incentive to do so, 14 right? 15 A. Correct. 16 Q. Okay. And doesn't that suggest that if rational 17 actors are doing that, that as opposed to being -- doing a 18 calculation of an estimate as USDA has done based upon the 19 best data they have, that it is likely to be the case, at 20 least in MPC orders, that Class I plants are not receiving 21 the order average? 22 A. That is possible. But it is also my understanding 23 that in the MCP orders, the Market Administrators have the 24 option to require pool plants to file two pool reports. 25 One pool report would be for milk processed at the pool 26 plant, and the other pool report would be for diverted 27 milk. And so if a pool plant is diverting higher 28 component milk to manufacturing use, those separate pool 560 1 reports would capture that. 2 Q. But it wouldn't be captured in this estimate, 3 would it? It would be summarized in the estimate. And it 4 would actually all be merged together because these 5 estimates are across the order, correct? 6 A. I believe those separate pool reports would 7 provide a more accurate accounting of the protein and 8 other solids going to a Class III plant and the nonfat 9 solids going to a Class IV plant. And so with a more 10 accurate accounting of those actual components in those 11 classes, when the subtraction is done and it is applied to 12 the other classes, there would be fewer pounds allocated 13 to Class I skim than if it were simply one pool report 14 applied across all four classes. 15 Q. And you said the Market Administrators have the 16 option to do that. So not all Market Administrators do 17 that, correct? 18 A. I -- that was my understanding, and I confirmed 19 that with -- in conversations with two Market 20 Administrators. 21 Q. But nonetheless, if you read footnotes 2 and 3, 22 that's not what they did. They actually estimated rather 23 than trying -- if there's a separate pool report, that 24 doesn't appear to be what was used for footnotes 2 or 3, 25 correct, because it was an estimate? 26 A. The separate pool report would account for the 27 actual pounds of components that were in diverted milk 28 from that plant. 561 1 Q. I understand that. But -- but what footnote 2 and 2 3 says is, we took the others solids and then we estimated 3 across the others. So you wouldn't know, actually, based 4 upon that, what Class I plants actually got. 5 I mean, if you actually knew, they wouldn't be 6 estimated, correct? 7 A. That is correct. But I think the separate pool 8 reports would result in a more accurate estimate. 9 Q. Let me look at Exhibit 71, which is NAJ-6. 10 And I apologize, I was trying to prepare as I was 11 going along. You mentioned I think that there were three 12 orders that don't reach your proposal level. Is that 13 correct? 14 A. That's correct. 15 Q. Which three orders were those? 16 A. Those would be Northeast, Appalachian, and 17 Florida. 18 Q. Okay. Now, these are annual averages, correct? 19 A. Correct. 20 Q. And annual averages, by definition, there's some 21 months that were higher and some months that were lower, 22 correct? 23 A. That would be correct. 24 Q. So when you look at what was provided, which is 25 the Exhibit 43 -- which thank you for asking for the 26 data -- it certainly reflects, one, that within order 27 there is seasonal variation, correct? 28 A. Yes. 562 1 Q. And two, the variation varies from order to order, 2 correct? 3 A. Yes. 4 Q. Given that, you agree that Federal Orders provide 5 for a minimum pricing system, correct? 6 A. Yes. 7 Q. Well, given the fact that Federal Orders provide 8 for a minimum pricing system, why shouldn't USDA look at 9 the lowest month for the lowest order for Class I so that 10 no one is overpaying as opposed to a minimum price? 11 A. Because it would underprice milk substantially for 12 many other orders, many other months. 13 Q. But this is a national system, correct? 14 A. Yes. 15 Q. And it is a minimum pricing system, correct? 16 A. Yes. 17 Q. So isn't the program designed with minimum pricing 18 to allow then premiums and other market forces to price 19 above that, correct? 20 A. Yes. Premiums should be available to -- for 21 providing balancing services, for meeting quality 22 standards that are perhaps more stringent because a 23 particular handler wants that, to cover transportation 24 costs. The Federal Orders also provide for any producer 25 who meets the requirements of an order's requirements to 26 serve the Class I market of that order, should share in 27 the Class I revenue of that order. And if a substantial 28 portion of that Class I revenue is paid out in premiums, 563 1 it is not available to all producers who are eligible to 2 receive and share in Class I revenue. 3 Q. But that's necessarily true about any time you 4 have a premium, isn't it? Nobody -- not -- everybody is 5 not sharing in a premium. If it is a minimum pricing 6 program, then shouldn't it be a minimum price based upon 7 the lowest month for the lowest order for these 8 components, otherwise you are overcharging somebody for 9 that milk? 10 A. That is -- I do -- I do not agree with -- with 11 that assertion. 12 Q. Okay. 13 MR. ENGLISH: I have no further questions. Let me 14 get the -- unless another witness wants to look at those, 15 I want to return those to USDA. 16 THE COURT: Yes. 17 Mr. Rosenbaum? 18 CROSS-EXAMINATION 19 BY MR. ROSENBAUM: 20 Q. Steve Rosenbaum for the International Dairy Foods 21 Association. Good morning, Mr. Metzger. 22 A. Good morning. 23 Q. If the four fat/skim orders were to adopt multiple 24 component pricing, then that would solve any alleged 25 underpayment for milk used for Class II, III, and IV 26 purposes to the extent that the nonfat component levels 27 there are higher than those assumed in the current 28 formula; is that correct? 564 1 A. Yes. 2 Q. And in fact, you submit a proposal to implement 3 that very solution, correct? 4 A. Correct. 5 Q. And without wanting to suggest that I necessarily 6 agree with the figures you provide, you do indicate the 7 fact that component levels in those four orders do, in 8 many cases, fall below the levels that are proposed by 9 Proposal 1 and 2, correct? 10 A. They fall below Proposal 2. I have not done an 11 extensive analysis as to whether they would fall below the 12 National Milk proposal. 13 Q. Okay. Now, you testified that you have gone in 14 your role at National All-Jersey to Class III handlers to 15 explain why it was advantageous for them to use milk with 16 high nonfat solids components levels, correct? 17 A. Yes. 18 Q. And that's because, as an example, if the protein 19 level is higher, then you can -- in the milk, then you can 20 produce more cheese, correct? 21 A. That is correct. 22 Q. Okay. Have you ever gone to a Class I handler and 23 tried to convince a Class I handler that they should seek 24 out milk with higher nonfat solids component levels? 25 A. I haven't exactly gone to a Class I handler and 26 encouraged them to recruit higher protein milk. However, 27 we do have a number of producers who are marketing Class I 28 milk as -- as producer handlers. And one of the features 565 1 that is part of their marketing program is based on the 2 fact that their milk does have higher protein value -- or 3 protein levels. 4 And they -- they will do nutritional testing on 5 their milk and compare it to what's on, you know, the 6 standard nutritional label. They will go to retail 7 outlets where their milk is sold and buy gallons and jugs 8 of their competitors' milk and do nutritional testing on 9 their milk compared to their competitors. 10 And part of their marketing program and marketing 11 that Jersey milk for a premium as a fluid product is based 12 on the fact that that milk has higher protein and higher 13 calcium levels than competitor milk. 14 Q. And do you know what percentage of milk sold in 15 fluid format in the United States is sold as having more 16 than the standard 8 grams protein? 17 A. I do not. 18 Q. Surprise you if it is in the single digit? 19 A. It would not. 20 Q. If you could look at here in Exhibit 71. 21 A. Which is NAJ exhibit? 22 Q. 6. 23 A. 6, okay. Thank you. 24 Q. You -- do you have that? 25 A. I do. It is in front of me. I have it on my 26 computer. 27 Q. Okay. So there is -- there are series of -- this 28 is the document entitled Comparison of Class I Skim 566 1 Values. 2 A. Correct. 3 Q. And in the last section you have under the heading 4 Skim Price, several columns, current, National Milk 5 Producer Federation three-year average, annual and actual 6 component, correct? 7 A. Correct. 8 Q. And your reference to current is that's the 9 current price, correct? 10 A. Yes. Based on the 3.1, 5.9, 9.0. 11 Q. That's the price under the current regulation, 12 correct? 13 A. Yes. 14 Q. The National Milk Producer Federation three-year, 15 that's a reference in that column to Proposal 1 -- 16 A. Correct. 17 Q. -- what is resulting from Proposal 1? 18 And then the annual, that column reflects what the 19 price would be under Proposal 2, your proposal, correct? 20 A. Correct. 21 Q. Okay. And then Actual Comp, I think you sometimes 22 refer to that in your testimony as actual component value. 23 Is that -- I think that's the term of art you used? 24 A. Yes. 25 Q. Okay. So, now, that that value, what you call the 26 actual component value, to the extent that there's a 27 difference between actual component value and a -- and the 28 current value, you're simply reflecting that the protein 567 1 level, for example, 3.21 in the Northeast in the first 2 example, first row, is higher than the 3.1% assumed in the 3 current formula, correct? 4 A. That is correct. 5 Q. Okay. And -- and that's how you get the actual 6 component value number, correct? 7 A. Yes, by using the 3.21 -- 8 Q. Okay. 9 A. -- times our calculated advance protein component 10 price. 11 Q. But I take it you have done no analysis as to 12 whether that -- well -- and -- so -- you have done no 13 analysis as to whether that actually -- that extra protein 14 has any value whatsoever to a Class I handler, correct? 15 A. I think that would depend on your -- on the 16 definition of the word value. 17 Q. Okay. Well -- okay. Well, whether a Class I 18 handler can charge more for its product based upon that 19 extra protein, let's start with that one. 20 A. Depending on their marketing strategy, they may be 21 able to. On a small scale, we have producers that are 22 marketing that -- the extra -- the value of that -- of 23 that extra component. 24 Q. You used the term "small scale." What does that 25 mean? 26 A. Producer handler. 27 Q. I see. Okay. 28 What -- okay. And what percentage of production 568 1 in this country is producer handler at this point in time? 2 A. I do not know. 3 Q. And obviously, the calculation of protein value is 4 based upon the way the formulas work, the price of cheese, 5 right, not the price of fluid milk, correct? 6 A. Correct. 7 Q. And similarly, just to complete the others, the 8 value of other solids in the formula is based upon the 9 value of dry whey -- 10 A. Correct. 11 Q. -- the finished product? 12 And the value of nonfat solids is based upon the 13 market value of nonfat dry milk, not fluid milk, correct? 14 A. Correct. 15 Q. Now, you have talked about concern about 16 depooling. One way to address depooling is to have 17 tougher requirements like in Order 1, correct? 18 A. Yes. There are various ways to address depooling. 19 I like to characterize them as, you know, carrots and 20 sticks. Carrots are through price relationships and 21 sticks are through regulation. 22 Q. And by -- and by -- 23 A. And we should use all the tools available to us. 24 Q. And by "sticks," I'm going to simplify, but 25 basically in Order 1, if you want to participate in the 26 pool, you sort of have to stay in the pool; is that more 27 or less a fair way to put it? 28 A. My understanding of Federal Order 1 is that a 569 1 producer must be pooled, I believe it is in the month of 2 July, in order to be eligible to be pooled in the 3 subsequent months. And if a producer disassociates from 4 the pool during any of those months, they can't 5 reassociate with the pool until the following July. 6 That's -- that's my understanding. If it's not correct, I 7 hope someone will correct me. 8 Q. Okay. Well, I'm not going to take that at this 9 point. 10 But that's -- that's one way to address the 11 concern over pooling, that's one real world way to address 12 pooling, correct? 13 A. Yes. 14 Q. And another way I suppose to address depooling is, 15 I mean, obviously, if you raise the Class I price high 16 enough, you are going to make it advantageous for 17 everybody to be in the pool to participate in that higher 18 Class I price, correct? 19 A. If you can eliminate or reduce inverse price 20 relationships, that will encourage manufacturing milk to 21 be pooled. 22 Q. Okay. To -- I'm sorry, to -- 23 A. To be pooled. 24 Q. To be pooled. Okay. 25 And -- but ultimately, I mean, doesn't the Class I 26 price have to have some relationship to the actual value 27 of the milk as opposed to simply its ability to keep 28 people in the pool? 570 1 A. The Class I price needs to account for the 2 opportunity cost of milk serving manufacturing markets. 3 Q. But that's -- 4 A. What -- I mean, later in this hearing there will 5 be numerous proposals to address the Class I price 6 formula. Whether we return to the higher-of III or IV, 7 whether we retain the average of but modify the adjuster, 8 whether we eliminate advanced pricing and only use 9 announced pricing, do we price it only off of Class III. 10 All of the proposals that were noticed to deal with the 11 Class I price have two underlying tenets, and those two 12 tenets are the Class I price should be priced off of 13 manufacturing prices and that the Class I price should be 14 set higher than the manufacturing prices. 15 Q. Aren't Proposals 1 and 2 really Class I pricing 16 proposals, in the sense that MCP orders govern 90% of the 17 milk pooled in the Federal Order system, 89%? 18 A. 89%. 19 Q. And in an MCP order, the assumed formula of -- 20 (Court Reporter clarification.) 21 BY MR. ROSENBAUM: 22 Q. -- the assumed formula levels really aren't 23 relevant because farmers are paid based upon the actual 24 component levels. 25 A. The assumed formula levels are not reflective of 26 producer milk -- 27 Q. Right. 28 A. -- which causes -- I can't think of the term -- 571 1 but -- boy, I -- it causes a -- the price relationship 2 between Class I and the manufacturing classes -- golly, I 3 don't know what the term is. Calvin knows. 4 Q. I think I -- I'm not sure I know what word you are 5 searching for. I'm not going to be able to help. It 6 probably wouldn't be proper for me to do so anyway. 7 A. Misalignment, that's the word I'm looking for. 8 Misalignment. And if it's not -- if it's -- there's a 9 misalignment now, and looking at what producers are doing 10 on the farm level, if we don't modify the skim component 11 factors, that misalignment is only going to get larger. 12 Q. Well, but I'm -- I'm not talking necessarily so 13 much about the rationale behind the proposals but what 14 their practical effect is. 15 I mean, as a practical matter, Proposals 1 and 2 16 really, as a practical matter, have nothing to do with the 17 price received by farmers for a Class II, III, and IV 18 milk, at least with respect to the 89% of milk that's in 19 the MCP orders; is that -- 20 A. That would be correct. 21 Q. Okay. And so -- and -- and then you would agree 22 that it will have an effect on the price received by 23 farmers in the four fat/skim orders, and there is a bit of 24 a tussle over whether given the component levels in their 25 milk, they deserve that higher price, right? But that's a 26 pretty limited issue, right? 27 A. Yes. 28 Q. Okay. So in the end, Proposals 1 and 2, what they 572 1 really do is increase the Class I price. That's really 2 the point. 3 And I'm not asking you -- I know you think that's 4 a good idea for a good reason. I'm really not, in this 5 question at least, trying to explore that. I'm just 6 trying to explore in the real world what the impact of 7 Proposals 1 and 2 are. And their impact really is to 8 increase the Class I price? 9 A. That will be the effect of making the formula more 10 accurate. 11 MR. ROSENBAUM: That's all I have. Thank you. 12 THE COURT: Mr. English rises again. 13 MR. ENGLISH: Your Honor, I promise this is 14 directly related to one question and answer from 15 Mr. Rosenbaum I think should be clarified in the record. 16 THE COURT: That's the nature of recross. 17 RECROSS-EXAMINATION 18 BY MR. ENGLISH: 19 Q. Last name -- I'm sorry, the name is Chip English 20 again. 21 So in answer to a question from Mr. Rosenbaum 22 about small entities that are selling, you know, basically 23 Jersey milk, as I understood it, and you used the phrase 24 "producer handler?" 25 A. Yes. 26 Q. Yes? 27 So a producer handler, under the regulations, is 28 an entity that, in its simplest terms, is both a farm and 573 1 a handler, and with very limited exceptions, has to have 2 all its own milk and has to be less than 3 million pounds 3 a month, correct? 4 A. That is correct. 5 MR. ENGLISH: That's all I had, your Honor. 6 THE COURT: Thank you, Counsel. 7 CROSS-EXAMINATION 8 BY MR. BYLSMA: 9 Q. Good morning. My name is Dick Bylsma, D-I-C-K, 10 last name is B-Y-L-S-M-A. I am the national director of 11 dairy sales for the National Farmers Organization. 12 Mr. Metzger, good morning. 13 A. Good morning. 14 Q. Thank you for your testimony. 15 My questions this morning are going to focus on a 16 very narrow part of your testimony this morning. I'd like 17 to refer to your exhibit, NAJ-2, which I believe is court 18 document 67. 19 My understanding of what you are presenting here, 20 you are indicating that a significant volume of milk was 21 depooled in the country; is that correct? 22 A. There was significant Class III depooled in 2021 23 and significant Class IV depooled in 2022. 24 Q. Okay. It was also your testimony, if I heard you 25 correctly, that depooling causes disruption in the 26 marketplace. Is that correct? 27 A. That's correct. 28 Q. You are aware that one of the functions of the 574 1 Federal Order system is to produce orderly marketing; is 2 that correct? 3 A. Yes. Everyone seems to have perhaps a little 4 slight different definition of what comprises orderly 5 marketing. 6 Q. Okay. On the issue of depooling it is my 7 understanding, and correct me if I'm wrong, that both USDA 8 and other groups have indicated that depooling should be a 9 regional issue, not a national issue and, therefore, will 10 not be addressed at this Federal Order hearing. Is that 11 correct? 12 A. That is correct. 13 Q. I believe this witness is qualified to answer a 14 theoretical question for me. 15 Theoretically, if I have a cheese factory 16 operating in the Northeast, which you have already 17 testified in the previous line of questioning that it's 18 extremely difficult for somebody to depool milk in the 19 Northeast Federal Order because, if you do, you may be 20 subject to not having that milk pooled for the remainder 21 of the pooling season. 22 So theoretically, if I have a cheese factory in 23 the Northeast making the exact same product as a cheese 24 factory in, let's say, the Midwest who can easily depool, 25 isn't it true that during times of rapid increases in 26 cheese prices where the option to depool is very 27 advantageous for a Class III manufacturer, that by virtue 28 of where the factory is located in the Northeast, he has a 575 1 disadvantage over a cheese factory in, let's say, the 2 Midwest who can easily depool his milk. Is that true? 3 A. That -- that -- that could be true. I don't know 4 that it would be true in every situation. 5 Q. But theoretically, it could be true? 6 A. It could be true. 7 Q. So is it correct for me to state that by virtue of 8 where the factory is located, Federal Milk Order system 9 has created a disadvantage for one manufacturer over 10 another? 11 A. I'm not sure I would exactly agree with that, 12 because when the cheese plant manufacturer in the 13 Northeast is making a decision whether to pool or depool, 14 they are looking -- they are balancing the potential costs 15 of remaining pooled in the short run versus the potential 16 gain of remaining pooled in the long run in the 17 anticipation that Class I prices will -- you know, that 18 the current price inversion will no longer exist, will get 19 back to a quote/unquote normal pricing relationship and, 20 therefore, the pool -- that cheese manufacturer would have 21 a pool draw from remaining pool instead of a pool 22 obligation. 23 And so that cheese manufacturer, if they say, 24 okay, I'm going to take the short-term loss now because I 25 have an obligation to pay the pool, my expectation is that 26 my pool draw in the future months will more than offset my 27 short-term loss. And if their projections are that for 28 the rest of -- for the reminder of that pooling season, it 576 1 does not project that my pool draw will be more -- greater 2 than my current pool obligation, then they would 3 rationally depool and be on the -- on the same footing as 4 the cheese manufacturer in the Midwest. 5 Q. I appreciate your understanding of the way this 6 works. But as you said, with the volatility of pricing, 7 there is the possibility that a certain month, one 8 manufacturer will have a disadvantage over another because 9 of the sheer fact of their ability to easily -- 10 A. In a particular month, yes. 11 Q. Okay. Is it your opinion that there should be 12 uniformity in the ability to depool across the Federal 13 Orders? 14 A. It is my opinion that that issue deserves a 15 thorough examination. 16 Q. Would there be a methodology that you can think of 17 that could create uniformity on depooling regulations in 18 the Federal Order system? 19 Let me rephrase that. Would it be -- would the 20 Federal Order system be able to establish rules that would 21 either make uniformity or discourage depooling? 22 A. I believe it would be possible to establish, on a 23 basic level, a more uniform pooling policy across all 24 Federal Orders, while still leaving room for some 25 individual pooling standards for individual orders. I 26 think perhaps I believe it would be, you know, Part 900 27 could -- pooling standards for all Federal -- some basic 28 pooling standards for all Federal Orders could be 577 1 addressed at that level of federal regulation while still 2 leaving -- for example, on component pricing, some 3 component pricing have a somatic cell adjustment, and 4 others don't. 5 And so we -- I believe -- I don't think a rigid, 6 one-size-fits-all would be appropriate, although I would 7 be willing to examine those options. But I think perhaps 8 some more basic rules that would apply to all orders 9 deserves an examination. 10 Q. One final comment or question. You're the third 11 witness, the third expert witness, who has already 12 mentioned that depooling causes disruption in the 13 marketplace. I believe Dr. Vitaliano mentioned it, 14 Reverend Covington mentioned it, and now you are. 15 So, again, your comment is this should be 16 addressed; is that correct? 17 A. Yes. 18 MR. BYLSMA: Thank you. 19 THE COURT: Yes. 20 CROSS-EXAMINATION 21 BY MR. COVINGTON: 22 Q. Calvin Covington representing Southeast Milk. 23 Mr. Metzger, we sure appreciate your testimony 24 this morning. And I have a couple questions just to 25 clarify some things to make sure we're all on the same 26 page with the same numbers? 27 A. Very good. 28 Q. But my first question is, is it correct if I said 578 1 that the National Milk Producers Federation Proposal 1, 2 and National All-Jersey's Proposal 2 are identical except 3 for the National All-Jersey proposal calls for updates 4 every year and updates based upon any change in -- in any 5 of the skim milk components? Is that a correct statement? 6 A. That's a correct statement. 7 Q. Thank you. 8 And earlier in your opening statement, you 9 emphasized accuracy. Again, we appreciate that. And I 10 want to refer back to some of your exhibits on checking 11 some numbers to make sure we're all on the same page of 12 some numbers and make sure we have the proper numbers in 13 the record. 14 A. Very well. 15 Q. Okay. I'd like to go to your -- it would be the 16 hearing's Exhibit Number 70. 17 A. Which is NAJ exhibit? 18 Q. Number 5. 19 A. Thank you. 20 Q. Okay. And down at the bottom you have month by 21 month by 2022. And we come over on the right-hand side, 22 down under '22, you have got 2023 average. 23 Is that a '23 -- are you thinking ahead for 2023, 24 or should that be 2022? 25 A. That is a mistake on our part. That should be 26 2022. 27 Q. Okay. And then also, you have in 2022 average 28 there, you have got other solids 6.02, protein 3.39, and 579 1 9.41 nonfat solids. I mean -- 2 A. Yes. 3 Q. -- am I reading that correct? 4 A. That is correct. 5 Q. And if you remember from the testimony I presented 6 earlier, those were identical component levels to what I 7 had based upon the Dairy Division data presented? 8 A. That is correct. 9 Q. Okay. In your written -- I know this is just 10 small, but again, I want to make sure we're all on the 11 same page with the same numbers. 12 In your written comment submitted as Exhibit 72, 13 and it would be the NAJ Exhibit Number 7, your written 14 comments. 15 A. Yes, sir. 16 Q. In that you state that the 2022 averages are 3.3, 17 3.9 protein, but 6.03 other solids and -- but, again, 18 9.41, nonfat solids. 19 And then likewise over in your Exhibit 1, which is 20 the hearing's record 66, you also use a different other 21 solids. I don't know if that's just a -- a typographical 22 error or a rounding error, but I wanted to see if the one 23 on Exhibit 70 is the -- is the correct number in your 24 record. 25 A. Yes. We -- while we were waiting on data from the 26 Dairy Division, we also went out to another USDA source of 27 data known as data mart, that has -- which is -- which are 28 referenced in the footnote on page 1 of NAJ Exhibit 1. So 580 1 we were able to pull Federal Order bat data from data 2 mart. I believe that 6.03 is a rounding based on a 3 slightly different data source. We're more than happy to 4 correct that -- to update that to 6.02 for nonfat solids 5 in 2022 across all our exhibits. 6 Q. Well, again, I know it is just a small number. I 7 just want to make sure we're all on the same page. 8 A. I appreciate that. 9 Q. Okay. And then my last question is in your 10 Exhibit 1, but the hearing's Exhibit 66, and down toward 11 the bottom there you have 2023 projected. 12 Could you tell us how you went about projecting 13 the skim milk components for 2023? 14 A. Basically that is just looking at what happened 15 from 2020 to 2021 and then from 2021 to 2022. It is 16 strictly an assumption that the same rate of increase will 17 continue. 18 Q. Okay. Did you use any of the actual data for 2023 19 that has been entered as an exhibit from the Dairy 20 Division as a part of those projections? 21 A. We did not. 22 Q. Okay. 23 MR. COVINGTON: Thank you very much, Mr. Metzger. 24 CROSS-EXAMINATION 25 BY DR. BOZIC: 26 Q. Good morning. Marin Bozic on behalf of Edge Dairy 27 Farmer. Good morning, everyone. 28 If USDA were to decide to implement your proposal, 581 1 but use the same methodology that you are proposing to -- 2 for updating protein and other solids, if they were to 3 apply that to butterfat as well, so update annually with a 4 one-year lag, how would you -- what would you estimate to 5 be the impact on dairy farmers? 6 A. The -- the impact on pooled -- there would be no 7 impact on pooled revenue because butterfat is accounted 8 for in all four classes of milk. There would be no -- I 9 don't -- I don't believe there would be any impact on 10 prices -- there would be no impact on prices paid by 11 handlers or prices paid to producers. 12 Q. Will there be any other consequences for dairy 13 farmers, positive or negative? 14 A. If -- from -- from a transparency standpoint, it 15 would make the announced prices more in line with what 16 producers see in their -- in their -- in -- in their 17 actual pay, because right now, the announced prices are 18 based on 3.5% butterfat. If that were to be updated to 19 4.1, it'd more closely resemble what they are actually 20 paid. 21 I know that a number, several of the MCP orders, 22 on their monthly statistical uniform price, they publish 23 two prices: One is the statistical uniform price, and 24 then there's a second price of what the value of pooled 25 milk in that order would be at test, which takes into 26 account the actual pooled butterfat level, protein level, 27 other solids level. 28 Q. What would be the impact of increasing butterfat 582 1 test, standard butterfat test, on ability of producers to 2 hedge their price risk, if any? 3 A. Off the cuff, I believe it would narrow the basis 4 that they deal with in their hedging program because 5 currently -- and I'm defining basis as the imprecision 6 between two prices for the same commodity. 7 Q. So basis risk? Would it be fair to say basis 8 risk? 9 A. Basis risk, yes. Because currently, if they 10 have -- if they're marketing milk that's 4.1, 4.2% 11 butterfat and their risk management program is based off 12 of a Class III contract that's on 3.5% butterfat, the 13 difference between their actual butterfat and the 14 butterfat used in the hedge contract, that difference is 15 not Hedged or is not to say -- you know, in the vernacular 16 is not protected. 17 Q. Would you think -- does anything come to mind as a 18 negative impact of increasing butterfat test, either in 19 terms of initiating or engaging or creating disorderly 20 marketing or -- or other adverse consequences on dairy 21 markets? 22 A. Right now, I cannot think of any. 23 DR. BOZIC: That's all I have. Thank you. 24 CROSS-EXAMINATION 25 BY DR. CRYAN: 26 Q. My name is Roger Cryan with the American Farm 27 Bureau Federation. 28 Hello, Erick. 583 1 A. Good morning. 2 Q. We support what you are doing. We support 3 Proposal 1 and Proposal 2. 4 But -- but I want -- and I appreciate some of 5 the -- some of the testimony by Calvin and you and some of 6 the clarifying questions about just the general issue of 7 alignment between the -- between the Class I price and the 8 manufacturing prices in actuality. 9 There's another issue I think that is related to 10 that that is important to -- to bring up. And because you 11 talked about your expertise in dealing with -- talking to 12 clients and producers about how prices line up depending 13 on skim and butterfat pricing and -- and -- I want to ask 14 about a hypothetical. 15 If -- if there is, for example, a -- and I want 16 to -- this is hypothetical. I'm not talking about anybody 17 in particular. If there is a cheese plant pooled in 18 Missouri -- if there's a cheese plant in Missouri and they 19 have a choice to -- to receive Class III milk pooled in 20 Order 32, which is a multiple component market, or 21 Order 5, which is a skim/butterfat market, and they are 22 receiving that milk at an average test, national average 23 test, where -- what would their -- would -- what would be 24 the differences in their obligation on those two choices? 25 Right now. Right now. 26 A. In the component pricing order, their obligation 27 would be for all of the pounds of protein that they 28 received. 584 1 Q. Right. 2 A. And in the fat/skim order, their obligation would 3 be on the standard component in the Class III skim milk 4 price formula, which currently is 3.1. 5 Q. So they -- they would have a lower obligation? 6 A. In the fat/skim order, if they are receiving milk 7 that is above 3.1 skim protein. 8 Q. So does that create an incentive to -- to pool 9 more milk on a skim/butterfat market? 10 A. If it's above the component standard, yes. 11 Q. Okay. Does that -- would that -- is that an 12 economic decision, or does that -- is that an -- is that a 13 regulation driven, uneconomic decision? 14 A. Well, that's a decision -- well, it actually is 15 both, because the regulation creates an economic decision. 16 Q. Okay. By the plant, right -- 17 A. Yes. 18 Q. -- I mean -- yeah. So would that tend to lead to 19 more milk to be pooled on a skim/butterfat market without 20 any particular economic value being accrued to anybody? 21 A. Well, in -- in reality that -- that cheese plant 22 in a fat/skim order would have to attract the milk supply. 23 Q. Right. 24 A. And they would be competing with Class I plants in 25 the fat/skim order who are pricing milk, not just off of 26 the Class I base price, but they also have the Class I 27 differential, so that that cheese plant in a fat/skim 28 order would have to be competing not only with the Class I 585 1 base price but the high Class I differentials that exist 2 for the Class I plants -- 3 Q. Sure. 4 A. -- in that order. 5 Q. But does that difference in Class III price 6 contribute to their incentive to pool milk on -- on a skim 7 or -- 8 A. It would, yes. 9 Q. Beg your pardon? 10 A. It would, yes. 11 Q. Okay. 12 DR. CRYAN: Thank you. That's it. 13 CROSS-EXAMINATION 14 BY MR. MILTNER: 15 Q. Ryan Miltner representing Select Milk Producers. 16 You frightened me a little bit there when you 17 started out. 18 A. I'm sorry. 19 Q. No, that's great. I quickly realized where you 20 were going with it, and I appreciate you sharing that. 21 You talked early on in your testimony about 22 base/excess programs, and I wanted to kinda connect dots 23 there if I could. 24 A. Very well. 25 Q. So you referenced base/excess programs and how 26 they would be implemented -- or they are administered in 27 many cases based on the volume of milk produced. 28 How -- how does that tie into Proposal 2 and -- 586 1 and what was your -- and not -- just tie that together for 2 me if you would. 3 A. It actually ties in to both Proposal 1 and 4 Proposal 2. If you have a producer who is marketing to a 5 handler, and the handler based on whether it's their 6 own -- they have their own processing plants, whether they 7 are marketing to proprie- -- milk to proprietary plants, 8 this handler has determined they have a market for 9 X million pounds of producer milk per month. 10 And if their membership or if their producers 11 produce more milk and expect the handler to take more milk 12 than they have a market for, then they have to do 13 something with that extra milk, which is usually market it 14 at a substantial discount. 15 And so in order to align the handler's needs with 16 their clients' or their customers' desires, they will 17 assign producers, okay, you can -- we will accept X amount 18 of milk from you at our full price, and if you go over 19 that, our expectation is we will have to market that as a 20 severely discounted price. Therefore, instead of sharing 21 that discounted -- you know, that discount among all our 22 producers, we're going to assign that discount to you for 23 exceeding your allowable volume. 24 However, in response, producers say, okay, if I 25 can market 50,000 pounds of milk a month or 500,000 pounds 26 of milk, if that's all my handler is going to take, and 27 I'm on a component pricing order, I'm going to increase 28 the components in that order to increase the value of each 587 1 hundredweight that I market. 2 Q. And in fact, in some orders the base/excess 3 programs have been adopted in that manner, correct? 4 A. Correct. 5 Q. All right. I want to move on to Exhibit 70, which 6 is your Exhibit 5. 7 And you were referencing this in terms Of -- of 8 risk management, correct? 9 A. Correct. 10 Q. Am I correct that kind of the takeaway from your 11 testimony on Exhibit 70 was that the market is aware of 12 the particular component values and those fluctuations, 13 generally increases, with sufficient time to make rational 14 hedging decisions? 15 A. Based on our case study, yes. 16 Q. And I think it was in response to Mr. Covington 17 you said that your Proposal 2 is the same as Proposal 1 18 but for the frequency of the updates. 19 Did I get that -- get that correct? 20 A. Yes. 21 Q. Does Proposal Number 2 contemplate a delay in 22 implementation of one year if it were to be adopted? 23 A. The way we submitted our Proposal 2 is that it 24 would be -- it would become effective with milk marketed 25 the following January, as opposed to Proposal 1 where they 26 would have it become effective with milk marketed the 27 following March. And we are -- National Milk indicated 28 flexibility in the implementation timeframe. We have 588 1 flexibility as well. As I said, we're not picking this 2 hill to die on. 3 Q. In your work with National All-Jersey, do you talk 4 with producers at all about risk management? 5 A. Yes. 6 Q. Does your membership -- in developing Proposal 2, 7 did your membership offer you any guidance on what type of 8 risk management decisions they make that would be 9 effective if Proposal 2 were to be adopted? 10 A. No. 11 Q. Mr. English -- shifting gears again -- asked you 12 about -- he was referring to Exhibit 44. I don't think we 13 need to look at that for my questions. But he was asking 14 you about what rational actors will do in terms of where 15 they direct their milk. 16 Do you remember those questions? 17 A. Yes. 18 Q. Okay. Part of those questions suggested that the 19 financial incentive to producers is to provide their high 20 solids milk to manufacturing plants, correct? 21 A. Correct. 22 Q. In your experience with NAJ and talking with 23 handlers and producers, is it common that a producer will 24 have the ability to select their market to the extent that 25 Mr. English alluded to? 26 A. In -- in -- I would say in some markets, yes, and 27 in some markets, no. It depends on competition for milk 28 and available -- quite frankly, available processing 589 1 plants. 2 Q. So when we talk about what a rational actor would 3 do if, in fact, they had a choice between two plants, one 4 which would price their milk based on their high 5 components and one which would not, that rational decision 6 would be to sell their milk to those that pay on 7 components, correct? 8 A. Correct. 9 Q. But aren't there a bunch of other factors that go 10 into that decision for a producer or to a handler? 11 A. Well, sure. I mean, one would be, like, 12 transportation costs, what is the location of the two 13 plants. You know that one strikes me initially. If 14 there's others you would like to volunteer, I could try to 15 agree or disagree. 16 Q. Well, you mentioned transportation costs, but you 17 also mentioned the availability of the market itself. 18 In many markets, plants simply aren't available 19 for a producer or a cooperative to go offer milk to, 20 correct? 21 A. Yes. 22 Q. In fact, some -- some plants, many plants, have 23 a -- what would be called a full supply agreement with a 24 cooperative, correct? 25 A. Correct. 26 Q. And if that were the case, would another 27 cooperative or another producer have the ability to go and 28 sell their milk to that plant? 590 1 A. No. 2 Q. In some markets, the types of plants that would be 3 available are limited, too, correct? 4 A. Yes. 5 Q. In some -- some parts of the world there might be 6 a plethora of Class II facilities and not a lot of Class I 7 facilities, correct? 8 A. Hypothetically, yes. 9 Q. And in other areas, the Class I plants might be 10 more geographically advantageous to supply to rather than 11 a Class IV plant, correct? 12 A. Yes. 13 Q. And so a rational actor isn't simply going to be 14 able to move their milk to the plant that might pay them 15 based on their components, correct? 16 A. Correct. There are other factors that come into 17 play. 18 Q. The rational actor is not going to simply base it 19 on one of those factors, correct? 20 A. Correct. 21 Q. So my client, Select Milk Producers, they operate 22 primarily in Order 33 and Order 126, and I wanted to ask 23 about Order 126, and perhaps your experience with Jersey 24 herds and processors in that part of the country. 25 Are you familiar with a bottler, Promised Land 26 Dairy? 27 A. I know they exist. 28 Q. Okay. Maybe we'll move on, then. 591 1 Are you -- are you generally aware of, or do you 2 have familiarity with some of the large cheese plants that 3 have been built in Texas and New Mexico in the past 4 20 years or so? 5 A. Yes. 6 Q. Are all of those plants affiliated with the order, 7 do you know? 8 A. I don't believe all of them are. 9 Q. So if there -- if those plants -- any of those 10 plants were not affiliated with the order -- well, let me 11 back up one step. 12 For those large cheese plants in that area, do you 13 know if -- if many of them source, or seek to source, 14 Jersey or other high-component milk? 15 A. Yes. Some of them do. 16 Q. If those plants were sourcing high-component milk 17 and they were not affiliated with the order, would the 18 components of those producers be included in the data that 19 USDA provided to us in this hearing? 20 A. If the milk is not associated with the order, it 21 would not be included in the data. 22 Q. And would you expect, based on your experience and 23 knowledge of those plants, that those components would be 24 higher than the averages reported by USDA? 25 A. Yes, they would be. 26 Q. And so if we want to talk about average components 27 and we're -- we would exclude, then, a substantial volume 28 of milk that has a higher component than what's already 592 1 reported, it could mean that what the Class I handlers in 2 that area receive is actually higher than might otherwise 3 be anticipated. 4 A. I'm sorry. I don't follow the question. 5 Q. Well, a series of questions that have been asked 6 of you and Mr. Covington is trying to figure out if the 7 average components in USDA's data is an appropriate 8 measure for what Class I handlers are receiving, correct? 9 A. True. Yes. 10 Q. Okay. So if we know that there's a bunch of milk 11 in the order that has higher components than what's 12 already reported, would we -- would that not necessarily 13 skew lower the components in USDA's data? And we know 14 that milk goes to Class I handlers, correct? 15 THE COURT: Is that an objection, Mr. English? 16 Sounded like it. 17 MR. ENGLISH: Objection. I thought there were two 18 separate questions, and I think the answers may not be -- 19 MR. MILTNER: I'll try to do that again. 20 Actually, let's go about this a different way. 21 THE COURT: Question's withdrawn. 22 MR. MILTNER: Thank you. 23 BY MR. MILTNER: 24 Q. Based on the availability of the data that we do 25 have, is there any real way to know specifically what any 26 Class III plant or Class I plant received in terms of its 27 components? 28 A. Exactly? 593 1 Q. Yes. 2 A. No. 3 Q. And so when you prepared your exhibits, I assume 4 you were basing your estimates on what you believed to be 5 the best data that was available? 6 A. Correct. 7 Q. Having been questioned by me and by others, do you 8 have a different belief as to what is the most accurate 9 data you might have used to develop your testimony? 10 A. I -- I do not have a different opinion, no. 11 Q. Mr. -- I forget if this was Mr. Rosenbaum or 12 Mr. English that asked -- actually I, do recall, it was 13 Mr. English. He was asking you questions about, in 14 setting minimum prices, where do you draw the line, so to 15 speak. 16 Do you remember that line of questioning? 17 A. I do. 18 Q. Would you agree that that's a policy decision that 19 USDA has to decide where that line is drawn? 20 A. Yes. 21 Q. In that policy decision, what rule do you think 22 efficiency of operations should play in figuring out where 23 we set a minimum? 24 A. Efficiency of operations, I don't -- I'm not 25 understanding. 26 Q. That's all right. 27 A. I'm sorry. 28 Q. Let me draw an analogy to make allowances, because 594 1 you acknowledge we're going to have some make allowance 2 discussion later in this hearing. 3 A. Yes, we will. 4 Q. If we have to figure out, and USDA has to 5 determine what is the cost to manufacture cheddar cheese, 6 do you believe it would be prudent to take the 7 manufacturing costs of the least efficient or most 8 expensive plant to set that make allowance? 9 A. That would not be appropriate. 10 Q. Would you agree that if you did so, that would 11 make it so every plant purchasing milk to manufacture 12 cheese would -- would be in -- the price would not be set 13 too high for those plants? 14 A. That is correct. 15 Q. And so similarly, should we take a -- would you 16 advise taking a similar approach as we look at Proposals 1 17 and 2 to set -- should we be setting the level that 18 necessarily guarantees a price for everybody? 19 A. No. 20 MR. MILTNER: I don't think I have anything else. 21 Thank you very much. 22 THE COURT: Anything else? Any cross-examiners 23 other than AMS? 24 Seeing none, AMS, you're up. 25 MS. TAYLOR: Judge, I know yesterday we discussed 26 in the efforts of keeping our court reporter with us, two 27 breaks in the morning and two in the afternoon. 28 Is now the appropriate time perhaps before lunch, 595 1 or is she okay? 2 Okay. I'm just checking. It's our utmost 3 importance that you stay with us for six weeks. 4 THE COURT: Off the record briefly. 5 (Off-the-record.) 6 THE COURT: Back on the record. 7 MS. TAYLOR: Thank you, Judge. 8 CROSS-EXAMINATION 9 BY MS. TAYLOR: 10 Q. Good morning, Mr. Metzger. 11 A. Good morning. 12 Q. I'm going to ask you a few questions, and then I'm 13 going to turn it over to my colleague to really get in the 14 weeds with you. 15 I think there's been a few questions asked just to 16 make sure we have the overall idea of the proposal that 17 National All-Jersey is bringing forth, and I just want to 18 make sure we're clear. It is to update the components 19 every year regardless of the -- if it's a positive or a 20 negative change; is that correct? 21 A. That is correct. 22 Q. And as your proposal stands, USDA would announce 23 the average components sometime soon after the first of 24 the year, and then those would be effective starting 25 January 1 of the following year, but you are not wed to 26 that kind of implementation schedule necessarily? 27 A. That is correct. 28 Q. Okay. I'm going to focus first on your 596 1 Exhibit 70 -- hearing Exhibit 72, which is your written 2 testimony that was submitted earlier. 3 A. Okay. 4 Q. On page 2, the second full paragraph talks about 5 "updating skim milk factors more regularly will reduce the 6 burden on the pool when Class I contributes less," and 7 then "draws out." 8 Is that -- are you alluding to negative PPDs? 9 A. I'm alluding to the depression on PPDs in the MCP 10 orders that occurs due to the misalignment between the 11 standard component levels that are assigned to Class I 12 milk and the actual component levels that producers are 13 paid for through the statistically uniform price. 14 Q. Okay. I like the word depression rather than just 15 negative PPDs. That's more accurate. Thank you. 16 On the next page when you are talking about kind 17 of the causes for increased factors, and you talk about 18 genetics and quota programs and then robotic milkers. And 19 I know you answered some questions I think from 20 Mr. Miltner on base/excess programs. 21 Can you inform the record on how much of the -- an 22 estimate of how much of U.S. Milk production kind of falls 23 under a base/excess plan? 24 A. I don't -- 25 Q. Like are they frequently used, etcetera? 26 A. I don't believe I could give an accurate estimate. 27 Q. Okay. And then I had the same question on your 28 statement on robotic milkers, just trying to see how 597 1 common that is in the industry. 2 A. I don't have an estimate on the percent of milk 3 that is currently harvested by robotic milkers. I do have 4 an estimate that it is continuing to grow and at a steady 5 pace. 6 MS. TAYLOR: I'm going to turn it over to 7 Mr. Wilson for a moment. 8 CROSS-EXAMINATION 9 BY MR. WILSON: 10 Q. Good morning, Mr. Metzger. 11 A. Good morning, Mr. Wilson. 12 Q. I have a couple of questions on Exhibit 71. It's 13 NAJ-6. 14 The -- kind of in the middle of the document, it 15 has advanced component values in a row. 16 A. Correct. 17 Q. Those are a yearly average; is that correct? 18 A. That is correct. 19 Q. Okay. The columns of Class I percentage, protein 20 other solids and nonfat solids? 21 A. Yes. 22 Q. Those are yearly averages as well? 23 A. Yes. 24 Q. Okay. So the source of this document is indicated 25 USDA Milk Components by Class and Order, January 2008 26 through April 2023. I believe that's Exhibit 44. 27 A. I believe that's correct. 28 Q. Okay. However -- and there's also additional to 598 1 that footnote is announcement of class -- announcement of 2 advanced price and pricing factors is also a document 3 source. 4 Some of the data on here seems to come from 44, 5 Exhibit 44, while others seem to be maybe calculated 6 values. And I would like for you if you can go through 7 that calculation. For example, the last column, actual 8 components. 9 A. Yes. 10 Q. Can you go through that calculation so that we 11 have that on the record, please? 12 A. Yes. That calculation uses the current Class I 13 price formula, which is the average of the Advanced 14 Class III and Class IV advanced prices, plus the $0.74 15 differential. 16 However, instead of using the standard component 17 factors of 3.1, 5.9, and 9.0, we substituted the actual 18 skim protein content for each order. For example, in -- 19 well, let's just go to the -- go to the first row, in 20 2019, in the Northeast Order, that actual component value 21 was calculated by using 3.21 skim protein and 5.98 skim 22 other solids in the Class -- Advanced Class III skim price 23 calculation instead of the current factors of 3.1 and 5.9, 24 and then the nonfat solids factor of 9.19 was used in the 25 Class IV skim milk pricing formula instead of the current 26 standard of 9.0. 27 Q. That is what I assumed. Thank you very much for 28 that clarification. 599 1 There's also possibly the data that's in the 2 pounds columns, skim pounds, protein pounds, OS pounds, 3 NFS pounds. That is coming from Exhibit 44? 4 A. Yes. 5 Q. If Exhibit 44 has different numbers, maybe there 6 was some advance information to you -- 7 A. Yes, we had -- when we first understood that as 8 part of National Milk's modernization proposal 1 of the 9 factors was going to be updating the skim component 10 factors, we wanted to start analyzing just how much that 11 change might be. And so we put in a data request to Dairy 12 Programs early this year for essentially is what the -- 13 what is the data in -- in Exhibit 44, we requested for 14 year -- just years 2019 through 2020. 15 We received the dataset. We did analysis. We 16 shared it with -- within the -- you know, throughout the 17 industry, including Dairy Programs. There were some what 18 we would term anomalies in that -- in that initial 19 dataset. With discussion with Dairy Programs, they then 20 made an update to our original dataset and provided an 21 updated dataset a couple of months later. And we made the 22 assumption that the dataset -- that the second dataset we 23 received would be included in what was 44. So our -- we 24 didn't look for differences between the second dataset 25 that we received and Exhibit 44. 26 Q. So 44 was a bit different? 27 A. If it was a bit -- well, we did not rerun our 28 analysis. We -- we made the -- we made the assumption 600 1 that the two data sets would be equivalent for those four 2 years. 3 MR. WILSON: Thank you, Mr. Metzger. 4 MS. TAYLOR: I think that's it from AMS. Thank 5 you. 6 THE COURT: Are you done. 7 MS. TAYLOR: Yes. 8 THE COURT: Oh, I'm sorry. I thought you were 9 getting ready to ask something else. 10 Anyone else? We're ready for redirect. 11 MS. TAYLOR: Sorry, I missed a sticky note. We 12 did have one more question. I apologize. 13 CROSS-EXAMINATION 14 BY MS. TAYLOR: 15 Q. I want to turn to hearing Exhibit 66, which is NAJ 16 Exhibit 1. 17 A. Yes. 18 Q. Okay. So on the first page you have got average 19 protein, other solids, annual averages, for percent 20 protein, other solids, and nonfat solids, and you have the 21 source as data mart, a USDA source. But I don't believe 22 we publish annual numbers on -- on skim components. 23 So I -- we wanted to get on the record if you used 24 monthly averages and then computed the annuals from that? 25 A. Actually what we pulled from data mart is for -- 26 for the current year -- if -- if -- my experience in using 27 data mart is, that for the current year it would provide 28 monthly data. But when I would use previous years, and I 601 1 would say, all months equal to 2022, it provides the 2 totals for the year, not each month -- provides the yearly 3 totals for each order. And that's what -- you know, 4 essentially on -- on NAJ Exhibit 1, the pages 2, 3, and 4 5 are where we show your work. 6 MS. TAYLOR: Okay. 7 CROSS-EXAMINATION 8 BY MR. WILSON: 9 Q. So clarification, Mr. Metzger. So AMS publishes 10 percentage or -- percentage of components on a volume 11 basis -- 12 A. Correct. 13 Q. -- whereas Exhibit 66 is on a skim basis? 14 A. The page 1 is a skim basis. How we obtained 15 the -- well, how we calculated the skim basis is shown on 16 pages 2, 3, and 4. 17 For -- for example, on page -- page 2, if we look 18 at year 2014, those totals, you know, the butterfat is of 19 3.8%. Yes, it is on total volume of milk. From that, we 20 calculated butterfat pounds. Protein percent was provided 21 by data mart. We calculated protein pounds, etcetera. 22 Then down below, what's highlighted in yellow, 23 that's -- we -- we decided to base our analysis on just 24 the MCP orders. And so the first line that's highlighted 25 in yellow is the totals from the MCP orders, and then the 26 second line that's highlighted in yellow is the MPC 27 order's weighted average on a skim solids basis. So the 28 protein percent in producer milk was 3.12, but when you 602 1 convert that to a skim basis, it becomes 3.24. 2 Q. Thank you. 3 MR. WILSON: Thank you. 4 MS. TAYLOR: Okay. Thank you. 5 THE COURT: Okay. Redirect? 6 REDIRECT EXAMINATION 7 BY MR. VETNE: 8 Q. This is John Vetne, consultant representing NAJ. 9 Mr. Metzger, let's go back just to a couple of the 10 cross-examiners and make sure the record is clear on what 11 your understanding of the question is in the context of 12 your answer. 13 Mr. Miltner asked you some questions concerning 14 manufacturing plants, cheese plants, in the Southwest, 15 Texas, and New Mexico, and terms used about those plants 16 being affiliated or not affiliated with a marketing order. 17 Do you recall that series of questions? 18 A. I do. 19 Q. Okay. Was it your understanding in the question 20 that -- and in providing the answer, that affiliated as 21 you used it in the answer and as you understood was used 22 in the question meant whether they were regulated under 23 the order? 24 A. Correct. 25 Q. Okay. So if a plant is not regulated, it would 26 not be included in the list of plants and the dots on the 27 map in the -- in the Dairy Programs exhibit? 28 A. Correct. 603 1 Q. Okay. Do you understand that plants that are not 2 regulated, non-pool plants, do in fact receive milk that 3 is pooled from pooled marketers? 4 A. They can, yes. 5 Q. Okay. So you -- and that milk would be sent to a 6 non-pool unaffiliated plant, by diversion -- 7 A. Yes. 8 Q. -- by either a handler or a cooperative, correct? 9 A. Yes. 10 Q. Okay. And that milk then would be included in the 11 reported totals of Exhibit 44, USDA Table 1? 12 A. Yes. 13 Q. Okay. So you did not intend to suggest in your 14 answers that milk -- that all milk received by 15 unaffiliated non-pool plants is non-pooled milk? 16 A. Correct. 17 Q. Okay. And is it -- is it your understanding that 18 there are a number of manufacturing plants, not only in 19 the Southwest, but elsewhere in the country, that are not 20 on the list of regulated plants that receive large 21 volumes, if not exclusive volumes, of pooled milk by 22 diversion? 23 A. That would be correct. 24 Q. Mr. Covington asked you a couple of questions for 25 correction on the difference between testimony and 26 exhibit, which is 72, NAJ-7, and Exhibit 70, and reference 27 was made in particular to 6.02. 28 And can you look at that, at the bottom of the 604 1 page of Exhibit 70? 2 A. Which is NAJ exhibit is it. 3 Q. NAJ-5? 4 A. Yes. 5 Q. My note of your response to Mr. Covington's 6 question was you referred to 6.02 as a correction of 7 nonfat solids; would it be correct? 8 A. For the year 2022, yes. 9 Q. Yes. And -- and what I believe to be an error, 10 maybe reinforced at this point, 6.02 actually is not 11 nonfat solids, it is other solids? 12 A. Oh, yes. 13 Q. Okay. So any -- any prior reference to that and 14 reference now to the correction of that number should be 15 understood to mean other solids, rather than nonfat 16 solids? 17 A. That's correct. 18 Q. Okay. Mr. English had a series of questions which 19 were premised on the concept of minimum price regulation. 20 Do you recall that? 21 A. Yes. 22 Q. Okay. You have referred in your testimony to 23 uniform price regulation. That is uniform prices received 24 by producers, uniform prices paid by handlers. 25 Is improvement of uniformity of prices paid by one 26 handler versus another handler an important feature and 27 objective of your proposal? 28 A. Yes. 605 1 Q. Okay. And if prices were based on the lowest 2 common denominator, non-uniformity in handler prices and 3 handler costs would increase, not decrease; is that 4 correct? 5 A. That's correct. 6 Q. And the same thing with producers, uniformity is 7 an important -- prices paid to one producer versus another 8 is an important feature of your proposal? 9 A. That's correct. 10 Q. And if prices were based on the lowest common 11 denominator, non-uniformity of one producer price versus 12 another would be aggravated, not improved? 13 A. That is right. 14 Q. And then, finally, if you could turn to your 15 Exhibit 68, NAJ-3? 16 A. Yes. 17 Q. Okay. Do you have that? 18 A. I do. 19 Q. In the third to the last column on the right in 20 bold, there are three entries that say 5, comma, 6, comma, 21 7 on MCP. 22 Do you see that? 23 A. Yes. 24 Q. MCP being abbreviation for multiple component 25 price? 26 A. Yes. 27 Q. Okay. You are referring here, not to the way 28 money is distributed among producers in multiple component 606 1 pricing, but rather to the way money is charged to 2 handlers? 3 A. Yes. 4 Q. Okay. And in fact, under the current skim 5 component factors, handlers receiving Class II, III, and 6 IV milk in the fat/skim market for those component are 7 paying considerably less than their competitors in the MCP 8 orders, correct? 9 A. Yes. 10 Q. And your Proposal Number 2 would bring those 11 competitive values -- competitive minimum prices closer 12 together? 13 A. That's right. 14 Q. Okay. But if you were to make them uniform so 15 that all handlers are paying the same, you would have to 16 at least price -- make the handler price a multiple 17 component price, one that is derived from price formula? 18 A. Yes. 19 Q. And apply it to protein, nonfat solids, and other 20 solids? 21 A. Right. 22 Q. And then the handler part of this where there 23 would be non-uniformity would go away without -- without 24 even addressing how the money is distributed among 25 producers, correct? 26 A. Yes. 27 Q. Thank you. 28 Do you have any other comments that you wish you 607 1 had made but didn't have a chance to? 2 A. I don't think so. I think we have been through 3 this pretty thoroughly. 4 Q. Okay. 5 MR. VETNE: Your Honor, I think we have marked 6 Exhibits, what, 66 through 73? 7 THE COURT: First, let me ask, any -- anyone think 8 they are entitled to further cross, that any door's got 9 open on that redirect? 10 Seeing none. 11 Okay, Counsel, yes, let's admit some -- 12 MR. VETNE: I would offer for admission 13 Exhibits 66 to 73. I think you have all of them. 14 THE COURT: That includes the request to admit to, 15 bring up certain evidence too, right? 16 MR. VETNE: Yes. 17 THE COURT: Are we putting that in now? I mean, I 18 don't think it matters. It's not really --that document 19 itself was not really evidence, correct? It is -- in the 20 nature of a motion. 21 MR. VETNE: Well, the substitute exhibit. 22 THE COURT: Okay. Yes. 23 MR. VETNE: That was taken care of this morning. 24 THE COURT: Okay. So that one's -- 25 MR. VETNE: So that -- 26 THE COURT: That one's in already. 27 MR. VETNE: The testimony in Exhibits 66 to 73 I 28 move for admission. 608 1 THE COURT: Any objection? 2 Exhibits 66 to 73 are admitted into the record. 3 (Thereafter, Exhibit Numbers 66 through 73 4 were received into evidence.) 5 MR. VETNE: I thank you, and everybody for their 6 indulgence, and for the accommodations for the process. 7 THE COURT: Mr. Metzger, thank you. You are 8 dismissed. 9 MS. HANCOCK: We're going to call producer Sam 10 Schwoepee. We think that we can get this probably knocked 11 out before lunchtime. 12 THE COURT: Very well. 13 MS. HANCOCK: Thank you. 14 SOMULA SCHWOEPPE, 15 Being first duly sworn, was examined and 16 testified as follows: 17 THE COURT: Your witness, Ms. Hancock. 18 DIRECT EXAMINATION 19 BY MS. HANCOCK: 20 Q. Good morning, Ms. Schwoeppe. Would you mind 21 stating your name and spelling it for the record? 22 A. Good morning. My name is Somula Schwoeppe, 23 S-O-M-U-L-A, S-C-H-W-O-E-P-P-E. 24 Q. What is your mailing address? 25 A. P.O. Box 462, Huntingburg, Indiana, 47542. 26 Q. Did you prepare a written statement in support of 27 a proposal? 28 A. I did. 609 1 Q. Great. 2 MS. HANCOCK: Your Honor, if we could mark what 3 has been identified as Exhibit NMPF-65, with a hearing 4 exhibit number. 5 THE COURT: Was that distributed earlier or -- 6 MS. HANCOCK: It has been. Did you receive a 7 copy? 8 THE COURT: I probably did. Carry on without me. 9 MS. HANCOCK: We have one coming. 10 THE COURT: Okay. I'm -- yes, I've got it now. 11 Thank you, Counsel. 12 Okay. Now I have it, and we're marking this -- 13 what was -- this is marked for identification as? 14 MS. HANCOCK: Exhibit NMPF-65, we're looking for a 15 hearing exhibit number. 16 THE COURT: Okay. I think we're at 74. 17 MS. HANCOCK: Thank you. 18 THE COURT: NMPF-65 is marked as a hearing exhibit 19 for identification as Exhibit 74. 20 (Thereafter, Exhibit Number 74 was marked 21 for identification.) 22 MS. HANCOCK: Thank you. 23 BY MS. HANCOCK: 24 Q. Ms. Schwoeppe, would you mind reading your 25 statement into the record. 26 A. Good morning, everyone. My name is Somula 27 Schwoeppe, and my family operates Schwoeppe Dairy, LLC, 28 which is -- 610 1 (Court Reporter clarification.) 2 THE WITNESS: Good morning. My name is Somula 3 Schwoeppe, and my family operates Schwoeppe Dairy, LLC, 4 which is located in Dubois County, Indiana. Our farm is 5 just outside of Huntingburg. And we milk approximately 6 110 registered Holstein cows. 7 Our cows are housed in a free-stall barn, and 8 during favorable weather they have access to pasture at 9 nighttime. We raise hay and corn for silage on 160 acres 10 that we own, and we rent an additional 250 acres. We 11 supplement our farm-raised feeds with purchased dry corn, 12 and we raise all of our replacement animals. 13 Schwoeppe Dairy sells breeding stock to other 14 dairy farmers, and we also sell hay. We do custom hay 15 baling for other farmers as well, and these activities 16 help us utilize our equipment and generate extra income 17 for our farm. 18 Dairy farming is our family's heritage as well as 19 its future. I am a fourth generation dairy farmer, and my 20 sons who are employed full time on our farm are fifth 21 generation farmers. We now have a sixth generation who 22 was just born this spring on the farm, and hopefully he 23 will continue our family's legacy. 24 The Schwoeppe family homesteaded our farm, and the 25 family has been milking cows continuously since 1874 on 26 this location. The first Grade A parlor on our farm was 27 built in the early 1920s, and we are currently in the 28 farm's third milking parlor, and we have plans for its 611 1 replacement, for our fourth milking facility, which are 2 now in place. 3 However, those plans are on hold until the 4 financial outlook for improved component pricing and just 5 better milk pricing overall points to a more secure future 6 for our family's business. Our milk goes to the Prairie 7 Farms plant in Holland, Indiana, and our pay price is 8 based on the Order 5 skim milk and butterfat pricing. 9 I have worked off the farm for additional income. 10 Currently I'm the senior manager of Agri-Engagement at 11 Feeding America. Earlier in my outside farm life and work 12 career, the Indiana State Dairy Association, our state 13 DHIA, employed me for nine years as a dairy herd 14 improvement or milk testing supervisor. 15 In this role, I provided support to 62 dairy farms 16 in 12 counties in Indiana, and this involved weighing and 17 sampling individual cow's milk production, helping farmers 18 maintain their production records, which include milk 19 weights, components, health and reproductive information, 20 income over feed costs for individual cows, etcetera. 21 This experience provided insight to the changing 22 component levels among various dairy cows. Currently, I 23 serve on the Board of Directors and as treasurer for 24 Prairie Farms Dairy, Incorporated. I am also on the Board 25 of Directors of the Professional Dairy Producers 26 Foundation, the American Dairy Association Indiana, and I 27 serve the Indiana Farm Bureau Women's Leadership Committee 28 as the District 9 education and outreach coordinator. I'm 612 1 also a member of the Holstein Association USA and 2 president of the Southwest Indiana Holstein Breeders Club. 3 Through my involvement with these organizations, I 4 interact with many dairy farmers, and a common topic of 5 discussion is how improved genetics and better feeding of 6 the dairy cow has increased milk production and improved 7 component levels in the milk. 8 On our farm, we focus on increasing the components 9 in the milk, just as other farmers across the United 10 States have done. Proceed high quality forage for our 11 cows is key to high component milk production. And forage 12 quality can vary from year to year, and it's influenced to 13 a great degree and dependent upon the weather. 14 For example, changes in hay and pasture growth and 15 nutrient quality levels are driven by the weather, and 16 these changes in forage and pasture quality affect milk 17 components. No matter how hard we try to overcome times 18 of poor forage quality, we cannot control the weather. 19 This is certainly true in our area and on our farm, and 20 the increasing components is not a straight upward trend 21 line, but it is an uneven upward trend line filled with 22 peaks and valleys. 23 Breeding cattle for higher components does not 24 show up in the bulk tank immediately. It takes patience 25 and about three years for the results of a mating decision 26 to show up in the bulk tank. From a genetic standpoint, a 27 dairy farmer is looking at multiple generations to see 28 sustained progress and component increases. 613 1 The chart that's included -- that is included in 2 my written testimony shows Schwoeppe Dairy's annual 3 average butterfat and protein tests for the year ending in 4 September 2022 and September 2006. 5 So the annual average year ending in September of 6 2022, our butterfat percent was 3.9, and our protein 7 percent was 3.2. When you compare that to the average 8 year ending September 2006, our butterfat was 3.6, and our 9 protein was 3.0 percent. So our average test increase was 10 .3 percent of butterfat and .2% of protein. 11 So in recent years we have really been placing a 12 greater emphasis on increasing our butterfat in the 13 Federal Order, such as Order 5, that prices milk on 14 butterfat and skim. A farm receives additional money for 15 producing additional butterfat pounds. Butterfat 16 generally accounts for over 50% of the Order 5 milk value 17 on our farm. 18 As an example, in June 2023, butterfat accounted 19 for 51.7% of the Federal Order 5 value on our milk check. 20 The announced Federal Order 5 butterfat price accounted 21 for 47.7% of the Federal Order uniform price. 22 In November of 2022, our butterfat accounted for 23 53.6% of the Federal Order 5 value on our milk check, and 24 the announced Federal Order 5 butterfat price accounted 25 for 47% of the Federal Order uniform price. 26 In November of 2018, our butterfat production was 27 57.6% of the Federal Order value, while the Federal Order 28 butterfat was 49.5% of the Federal Order uniform price. 614 1 There may be times that butterfat is less than 50% of our 2 milk value, but they are not numerous. 3 And no matter how much you increase the protein 4 and other solids, there is no additional money received on 5 the skim milk portion. The Federal Order skim milk price 6 formulas have neither changed to reflect the increased 7 protein in skim milk nor do the formulas attach any more 8 value to that added protein. There is a need to update 9 the skim formulas for the additional protein produced. 10 The northern two-thirds of Indiana is in the 11 Order 33 marketing area which is a multiple component 12 pricing order. The southern one-third of Indiana is in 13 the Order 5 area, and that is where my farm is located. 14 Order 5 is a skim and fat pricing order, and my 15 farm is approximately 125 miles from Indianapolis. If the 16 farm was located further north, our market would be in 17 Federal Order 33, and we would be paid for the increase in 18 our milk components through Order 33's multiple component 19 pricing. As it is, we're paid for the increased butterfat 20 in the Order 5 butterfat pricing but not for the increased 21 protein and other solids in the skim milk. 22 I am not proposing milk component pricing for 23 Order 5, but merely pointing out the inequitable treatment 24 producers in Indiana and elsewhere receive supplying a 25 fluid market when the skim pricing is not updated for the 26 added protein in the skim milk. 27 And furthermore, since the skim milk price formula 28 does not reflect the protein increase in the skim milk, it 615 1 is also unfair to producers in milk component pricing 2 orders. Since these producers have a protein price 3 component in the order milk pricing, the protein shortfall 4 in the skim pricing is not as noticeable in their milk 5 check. 6 In conclusion, I want to thank USDA for the 7 opportunity to present my views today. And I am 8 supporting Proposal Number 1, increasing the protein and 9 other solids in the skim milk pricing formulas. This will 10 increase values used in determining skim milk prices and 11 benefit all dairy farmers. And thank you for allowing me 12 to share my thoughts with you today. Your consideration 13 time, and help are appreciated. 14 BY MS. HANCOCK: 15 Q. Thank you, Ms. Schwoeppe. 16 I want to just briefly chat about your role as 17 Board of Directors and as the treasurer for Prairie Farms 18 Dairy. 19 How long have you served in those roles? 20 A. I have been on the Board of Directors for 21 11 years, and I have been the treasurer for nine. 22 Q. As a Board of Director member, what is -- what is 23 within the scope of your responsibility? 24 A. At Prairie Farms we lean on our management for 25 recommendations. It is our job to review and support 26 decisions or bring new ideas to the table for management 27 to maybe think and include, like the voice of the members. 28 Because it is -- it is our goal and like our duty as board 616 1 members of Prairie Farms to represent our membership, 2 which is the owner of the company. 3 Q. And what is Prairie Farms? Can you describe that 4 organization? 5 A. Prairie Farms is a cooperative. 6 Q. And how many members? 7 A. We have 640 members. I would have to defer that 8 exact number to Chris Hoeger, who is in charge of our milk 9 procurement. 10 Q. Okay. And we'll hear from him hopefully today. 11 As a board member, do you have any policies on 12 whether the cooperative can reblend? 13 A. Yes, we do. Our board in -- our board believes 14 that it is our job to return the highest value on our 15 member owners' equity, and we have policy, we do not 16 reblend milk. 17 Q. And why is that? 18 A. In order to return the highest value to our member 19 owners. 20 Q. Are you aware of whether Prairie Farms has ever 21 reblended? 22 A. Our policy has always been to not reblend milk. 23 Q. Okay. 24 MS. HANCOCK: Thank you for your time. I 25 appreciate it. 26 THE COURT: Cross-examination for this witness, 27 other than AMS? 28 CROSS-EXAMINATION 617 1 BY DR. CRYAN: 2 Q. My name is Roger Cryan with the American Farm 3 Bureau Federation. 4 Hello, Mrs. Schwoeppe, it is nice to see you 5 again. 6 A. Hello. 7 Q. You were at our Federal Milk Marketing Order 8 reform last October. 9 A. I was. 10 Q. I understood you had an active role in helping us 11 develop our consensus, so I appreciate that. And I 12 appreciate your service through the Farm Bureau. That 13 wasn't in your written testimony, but I appreciate you 14 mentioning it up here. 15 Prairie Farms is -- has a close connection with 16 Farm Bureau as well; is that right? 17 A. That is correct. 18 Q. It's a very well run co-op that serves its members 19 well, and I appreciate all that. 20 Could you just let me just boil down what I 21 understood from your testimony, that the difference 22 between the Class III value in Federal Order 5 and Federal 23 Order 33 matters, that -- is that right? 24 A. Absolutely. 25 Q. Yeah. Can you summarize that? 26 A. Can I summarize that? Everything that we produce 27 on our farms is of value, and we are at the bottom of the 28 food supply chain. And we talk about added value products 618 1 that our processors do for us, and when we talk about the 2 base price, we as farmers need to focus on our retained 3 value. 4 So when we have an inequity like this, it 5 allows -- it allows there to be advantages. We have heard 6 different testimony where one region may have an advantage 7 over another. And what is so powerful about the Federal 8 Order system is that they level that across the country 9 for all of us. 10 Q. That's great. That's well put, very well put. I 11 wouldn't have thought of that. Thank you. 12 Could you, if you -- if you care to, share some 13 thoughts about the impacts that depooling and negative PPD 14 has on your operation and your -- and your co-op. 15 A. So depooling and negative PPDs is a very unique 16 situation for a fluid milk cooperative like Prairie Farms 17 because there are different sets of rules. 18 So Prairie Farms is primarily a fluid milk 19 cooperative. So with the rules on depooling, they are 20 very different for a fluid milk processing entity than 21 they are for a cheese production facility. 22 So let's just say, we're all playing the game of 23 baseball, and some of us have the rules of softball, and 24 some of us have the rules of baseball, but we're all 25 playing the same game. And there's no equity in that. 26 DR. CRYAN: Wonderful. Thank you. Thank you very 27 much. That's all I have. Thank you. Thanks for 28 testifying. I appreciate it. 619 1 THE COURT: Anyone else have any cross other than 2 AMS for this witness? 3 Seeing no one, does AMS have any cross of this 4 witness? 5 MS. TAYLOR: We do, your Honor. 6 CROSS-EXAMINATION 7 BY MS. TAYLOR: 8 Q. Good morning. 9 A. Good morning. 10 Q. Lovely to see you today. Thank you for coming to 11 the hearing to testify. 12 Ms. Schwoeppe, you indicated your farm, you have 13 110 registered Holsteins. It is our job at AMS to make 14 sure the record gathers information on small businesses 15 that are impacted by our regulations. For dairy farmers 16 that's a gross revenue of $3.7 million or less annually. 17 Would your farm be considered a small business 18 under that definition? 19 A. Yes. 20 Q. In your testimony, you talked about the impact 21 that forage and genetics have on components in your herd. 22 And I wanted to take this opportunity, you know, there's a 23 lot of people that testified at the hearing that work in 24 the industry, but it's important to get this information 25 from dairy farmers who experience it personally. 26 So on your farm would you say that one of those 27 has more influence on component levels than the other? 28 A. That is a very layered question. You can breed, 620 1 you can make genetic decisions based upon fat and protein 2 levels, and those things take time. And when you -- when 3 you make a mating decision and you breed a cow, the 4 gestation is nine months, then you have the maturity of 5 the cow two years. And then like her full production, 6 though, is you are not going to learn that until she's at 7 least in her second lactation. So that's a decision four 8 years down the road. 9 Now, there are different hybrids of corn you can 10 plant. There are different hybrids of alfalfa you can 11 grow. You can manage your cutting time to create your 12 highest value of hay. And -- and the nutrition that a cow 13 eats, you know, like you are what you eat, correct. And 14 that makes a difference on the component level in the 15 milk. 16 But -- so you can feed to increase component 17 levels, but without breeding to increase the component 18 levels, you are not going to maximize those opportunities. 19 So really it takes both. 20 Q. So would it be safe to say then, if we see -- if 21 you see like a long-term trend in increasing components, 22 that's probably based on genetic -- breeding decisions, 23 and the fluctuations you see year to year is more based on 24 forage impact? 25 A. Absolutely. 26 Q. Okay. 27 A. Genetically speaking -- like, furthermore on that, 28 genetically speaking, like, we should see a 2 to 3% 621 1 increase every year just because the research is out there 2 to support -- and, like, everything we do has to get 3 better every day. 4 Q. You put in the testimony, and I appreciate this, 5 your butterfat and protein percentages in your milk volume 6 for 2022 and then for 2026 (sic) for comparison. I know 7 that you are paid in Order 5, which is the fat/skim order. 8 But I'm curious to know if you saw other similar 9 increases, you know, in your other solids components or 10 your nonfat solids totals? 11 A. So we aren't tested for other solids in Order 5. 12 Q. Okay. 13 A. I would love to know that, though, because I know 14 the other orders get a little bit of bonus money on that. 15 Q. And, lastly, we all know there's -- you know, 16 everyone talks. Farmers talk to each other, generally. 17 So would you say, you know, your increases in 18 component levels are reflective of other farms that might 19 see similar increases? 20 A. Absolutely. Just to reiterate, like, we have to 21 get better every single day to be able to stay 22 competitive. 23 Q. Okay. 24 MS. TAYLOR: That's it for AMS. Thank you for 25 coming to testify today. 26 THE WITNESS: Thank you. 27 THE COURT: Redirect? Or -- you have some cross 28 to come after AMS. Okay. If it's okay with AMS, I guess, 622 1 I don't -- something came up in AMS's testimony that; is 2 that correct? 3 MR. MILTNER: It had nothing to do with AMS, it 4 was just me being slow to realize I had some questions. 5 THE COURT: I don't think anyone here objects. If 6 they do, they better tell me right now. 7 Go ahead, Counsel. 8 CROSS-EXAMINATION 9 BY MR. MILTNER: 10 Q. Ryan Miltner with Select Milk Producers. 11 Mrs. Schwoeppe, thank you again for coming today. 12 I was curious about what type of hedging or risk 13 management activities you and your -- what you do at your 14 dairy farm. 15 Do -- do you participate in the Dairy Revenue 16 Protection program? Do you use that? 17 A. We do. 18 Q. How about Dairy Margin Coverage? 19 A. No. 20 Q. Livestock Gross Management for Dairy? 21 A. No. 22 Q. Do you forward-contract anything either with your 23 grains or your feeds? 24 A. We forward-contract soybean meal. We 25 forward-contract our protein base mix. And we 26 forward-contract fuel. We prepurchase seed, fertilizers. 27 Q. Do you forward-contract your milk through any 28 other programs -- 623 1 A. No. 2 Q. -- that I didn't talk about? 3 A. No, we do not. 4 Q. Do -- one of the elements of Proposal 1 would be 5 to delay its implementation for a period of time to -- to 6 accommodate risk management decisions that may have been 7 made. 8 Is that important for you and other farmers like 9 you? 10 A. Are you asking my opinion? 11 Q. Yes. 12 A. My personal opinion would be that I would love us 13 to go back to the higher-of milk pricing immediately 14 because that is what our risk management tools were 15 designed to support. 16 Q. Okay. 17 MR. MILTNER: All right. Thank you. I don't have 18 anything else. I appreciate your answers. 19 THE COURT: Ms. -- I'm not seeing anyone wanting 20 any further examination, re-cross. 21 Redirect, Ms. Hancock? 22 MS. HANCOCK: Your Honor, I have no further 23 questions. I just move to admit Exhibit 64 -- or 74. 24 THE COURT: 74. 25 Seeing no objection, Exhibit 74 is admitted into 26 the record. 27 (Thereafter, Exhibit Number 74 was received 28 into evidence.) 624 1 THE COURT: Off the record. 2 (Off-the-record.) 3 THE COURT: Back on the record. 4 We'll take lunch. Be back at 1:05 p.m. 5 Off the record. 6 (Whereupon, a luncheon break was taken.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 625 1 FRIDAY, AUGUST 25, 2023 - - AFTERNOON SESSION 2 THE COURT: Let's reconvene. We're on the record. 3 I understand we have at least one piece of 4 housekeeping before we get started with the witness. 5 MS. TAYLOR: Thank you. I just wanted to alert 6 everyone in the room and those listening, we have uploaded 7 all of the USDA exhibits -- data exhibits with the proper 8 official exhibit number on the exhibit hearing page. So 9 there's no longer a data request page. That's been 10 removed. They have moved over to the exhibit page where 11 they are numbered problem properly, if anyone's looking 12 for them. And they do contain ones that where maybe a 13 footnote was -- two footnotes were marked as 2 instead of 14 1 and 2. We did make those changes. We did it in the 15 hearing, but the Excel files show those changes. 16 THE COURT: Very well. Ms. Taylor, thank you. 17 Are we ready for our witness? 18 Raise your right hand. 19 DR. MARIN BOZIC, 20 being first duly sworn, was examined 21 and testified as follows: 22 THE COURT: Your witness, Counsel. 23 MR. SJOSTROM: Thank you, your Honor. 24 And for the record, again, I'm Lucas Sjostrom, 25 managing director of Edge Dairy Farmer Cooperative. If 26 it's all right, I'll give a brief background on that and 27 then have the witness introduce himself. 28 THE COURT: Very well. 626 1 MR. SJOSTROM: Edge is a verification cooperative 2 with over 800 member farms located in Illinois, Indiana, 3 Iowa, Kansas, Minnesota, Nebraska, Ohio, South Dakota, and 4 Wisconsin. 5 (Court Reporter clarification.) 6 MR. SJOSTROM: About two-thirds of those would be 7 considered small businesses under the regulations defined 8 for this hearing. Edge Dairy Farmer Cooperative, based in 9 Green Bay, Wisconsin, is the third-largest dairy 10 cooperative in the county based on milk volume. 11 In addition to milk verification services, Edge 12 provides dairy farmers throughout the Midwest with a voice 13 in Congress, with customers, and within our communities. 14 We'd like to -- and we can wait until the end, 15 your Honor -- move Edge 1 as an exhibit. We can do it now 16 also. It has been uploaded to the site. We do also have 17 Edge 2 uploaded. We're not ready to put that into the 18 record just due to printing, and we'll do that at a later 19 time, unless someone wants it recognized now. 20 Would you like to do that later? 21 THE COURT: Well, let's mark it for identification 22 now, and then we'll move it into the record after the 23 examination. 24 I mean, the idea being is if anyone brought 25 anything on cross-examination, whatever that would 26 challenge the admissibility of the exhibit, they could 27 cite that as they object to something like that. 28 So I have that this would be Exhibit 75 for 627 1 identification. 2 MR. SJOSTROM: Thank you, your Honor. 3 THE COURT: It's labeled Edge-1 in the top 4 right-hand corner. 5 (Thereafter, Exhibit Number 75 was marked 6 for identification.) 7 DIRECT EXAMINATION 8 BY MR. SJOSTROM: 9 Q. Dr. Bozic, thank you for being here today. You 10 haven't had an opportunity to introduce yourself at this 11 point. Could you please state and spell your name? 12 A. My name is Marin Bozic, M-A-R-I-N, B-O-Z-I-C. 13 Q. What's your address and employer for the record? 14 A. I represent -- I'm here representing Edge Dairy 15 Farmer Cooperative. The headquarters for Edge is 16 2763 Manitowoc Road, Suite B, or letter B, Green Bay, 17 Wisconsin, 54311. 18 Q. Thank you. 19 And did you provide this written testimony today? 20 A. We have included written testimony. I will be 21 reading parts from it in the interest of time, will 22 summarize the rest. 23 Q. Thank you. 24 And before you provide your testimony, could you 25 start with your background and education? 26 A. I'm a president of Bozic, LLC, advisor to the 27 Board of Directors of Edge Dairy Farmer Cooperative. I 28 hold a doctorate in agricultural economics from University 628 1 of Wisconsin. I have worked as a faculty at University of 2 the Minnesota Twin Cities since 2011. 3 In my academic career, I have extensively 4 researched dairy markets and policy and dairy risk 5 management. 6 Since 2018, I have participated with American Farm 7 Bureau Federation and other partners in creation of Dairy 8 Revenue Protection, and today my company manages both DRP 9 and Livestock Gross Margin for Dairy Cattle. 10 Q. Thank you very much. 11 And have you had works published in peer-reviewed 12 journals or been invited to speak at professional 13 organizations? And a reminder to go slow for our 14 reporter. 15 A. Yes. My work has been published in a variety of 16 journals, some I think 13, 15 articles altogether. I have 17 participated in numerous scholarly conferences, and over 18 years, given probably 150, 160 public speaking events. 19 Q. And finally, how -- do you work with processors 20 and producers outside of Edge Dairy Farmer Cooperative 21 today? 22 A. Yes, I do. My company has several product lines. 23 One of them is a data aggregation service. We have close 24 to 100 clients on four continents. A lot of them are here 25 in the room -- many of the people here in the room are 26 clients, I mean to say. And as part of that business 27 line, we -- we aggregate and summarize Federal Milk 28 Marketing Order data, as well as many other sources 629 1 published by USDA and other around the country. 2 My interaction with producers also comes through 3 several channels. I'm proud to be an advisor to Edge and 4 participate in your Board of Director meetings, but I also 5 field a lot of calls directly from producers on risk 6 management policy matters and other topics. 7 Q. Thank you. 8 MR. SJOSTROM: Your Honor, I'd like to present 9 Dr. Bozic as an expert witness on dairy economics and 10 agricultural commodity hedging today. 11 THE COURT: Yes. I find Dr. Bozic qualified to 12 testify on those matters as an expert witness. 13 MR. SJOSTROM: Thank you. 14 BY MR. SJOSTROM: 15 Q. That's all I have, except for Dr. Bozic, would you 16 please share a summary of your testimony? 17 A. Thank you, Lucas. 18 The central organizing theme of what Edge will 19 present, both today and later in this hearing, is a focus 20 on effective data risk management for dairy producers. 21 Today, our testimony will be constrained to just 22 the Proposals 1 and 2, so the first topic on milk 23 composition. In a few weeks we'll be here again on topic, 24 I believe, 4 on Class I, and we might opine on other 25 issues. But our central topic is dairy risk management. 26 Fundamental pricing principles in Federal Orders 27 is to establish Class I price to be high enough to reflect 28 the opportunity cost of using that milk in manufacturing 630 1 products. As component tests have increased over the 2 years, so has the opportunity cost of using that milk in 3 Class III or Class IV products instead of Class I. In MCP 4 orders, Class I handlers' obligations to the pool are 5 based on standard milk component tests. 6 When I refer to standard tests -- they told me to 7 slow down -- when I refer to standard tests, I'm referring 8 to standards 3.5, 3.1, 5.9, that we can find in the 9 Federal Order formula. So whenever I speak of standard 10 tests, that's what I'm speaking of. 11 So Class I handler contributions pay to the pool 12 based on standard tests, yet draw from the pool based on 13 actual component tests in producer milk. And producer 14 receipts in MCP orders in 2022 were some 88% of total pool 15 pounds across all 11 Federal Orders. So that justifies, 16 in my opinion, including this in a national hearing. This 17 is truly the vast majority of the orders. 18 I published a paper last year with my colleague, 19 Chris Wolf from Cornell, where we looked at the impact -- 20 or, rather, causes of negative producer price 21 differentials. As part of the paper, we looked at the 22 particular impact of contribution of this growing 23 discrepancy between standard component tests and actual 24 milk component tests. 25 And what we have found is that this rising 26 discrepancy has led to lowering of statistical uniform 27 prices between 2010, which a year we took as baseline, and 28 2020, the last year that we analyzed. 631 1 The impact on PPDs, or statistical uniform price, 2 differs by order. In Order 1, Northeast, it was $0.08 3 negative; in the Upper Midwest, $0.05 negative; in the 4 Central Order, $0.16 negative; in the Mideast Order, $0.14 5 negative; in the Pacific Northwest, $0.12 negative; in the 6 Southwest, $0.29 negative. 7 And unless a regulation is promulgated that 8 considers this rising opportunity cost of milk used in 9 Class I due to rising protein and other solids tests, this 10 spread will continue, the spread between actual and 11 standard component tests, will continue to contribute to 12 negative trend in producer price differentials. 13 This lower baseline PPD, or producer price 14 differential, will then make it easier for other price 15 shocks to induce depooling, which is, in my opinion, a 16 symptom of disorderly marketing. 17 For these reasons, Edge supports and here is 18 testifying in support of Proposals 1 and 2 by National 19 Milk and National Jersey. 20 That said, we do believe that National Milk's 21 proposal -- and in the rest of my testimony, just for 22 simplicity, I will refer to National's proposal when I'm 23 referring really to both of them. 24 We believe that National's proposal can be 25 improved by two design changes. First, we believe the 26 methodology used to update a standard protein and standard 27 other solids test should also be used to set the standard 28 butterfat test, so the same one-year delay lookback of 632 1 12 months. Whatever AMS decides to use as a protocol for 2 updating protein and other solids for purpose of pricing, 3 we believe the same methodology should be used to update 4 butterfat test. 5 If the standard is 0.07 as proposed in National 6 Milk before the changes are implemented, we don't -- we 7 believe that no changes in butterfat tests, standard 8 butterfat tests, should be done unless at the same time 9 protein and other solids are changing. If there are no 10 changes needed to protein and other solids, don't change 11 the butterfat at the same time. 12 While updating standard butterfat tests would not 13 affect pool obligations, which, I assume, is why 14 Proposals 1 and 2 do not consider it, it would ensure that 15 producers can effectively use Class III and Class IV milk 16 futures, as well as other risk management tools, based on 17 class prices to manage their price risk. 18 Second, we believe that implementation delay is 19 needed, it's critical -- not just needed, it's critical. 20 However, we would propose that it be 15 and a half months, 21 rather than about 11 or 12 months in Proposal 1 and 2. 22 This, as I will elaborate in a little bit, is 23 needed to make sure that we can legally continue to offer 24 data revenue protection for the fifth quarter out, and 25 I'll elaborate what that means. 26 In my written testimony, I have provided two 27 thought experiments, two exercises, two examples of a 28 producer or representative producer trying to use 633 1 Class III milk futures in the first example or -- well, in 2 both examples -- to manage their price risk. 3 And in both of those examples, we find that not 4 updating butterfat test leads to basis risk. Basis risk 5 meaning that a decline in the producers' gross pay price 6 has not been fully offset, or not as fully as possible 7 offset, by the hedging gains on their Class III futures 8 positions. I will not go into details unless I'm 9 cross-examined, just with the interest of time. 10 This perhaps considered is a good summary. The 11 National proposal, as well as All-Jersey proposal, leaves 12 the standard butterfat test at 3.50 pounds of butterfat 13 per hundredweight of milk, and their -- National's 14 proposal initial standard protein is 3.36 per 15 hundredweight of skim milk. This would result in a 16 butterfat-to-protein ratio of 1.08, and that's a decline 17 from the current butterfat to protein ratio of 1.17. 18 When we look at what happened in the MCP orders in 19 terms of butterfat-to-protein ratio in actual tests 20 between years 2000 and 2022, it actually went up. It used 21 to be 1.23 in year 2000, and now it's 1.27. So while 22 National Milk proposal will have this ratio reduced, the 23 industry has this ratio increased. They are moving in two 24 opposite directions, and that's not good for risk 25 management. 26 So without belaboring the point, if we want to 27 have effective risk management, we should increase the 28 standard butterfat test using the same protocol as is 634 1 adopted for increasing standard protein and other solids 2 test. That's my first big point. 3 The second design change that we are offering as 4 beneficial to dairy producers is to increase the advance 5 notice to the industry, or the delay, I'll call it really 6 speaking delay, in implementation. 7 We are proposing that 12-month period be used in 8 determining what the new standard component test should 9 be. However, that 12-month doesn't have to be calendar 10 year. We would offer that it -- perhaps it's September 11 through August, so that in early September we know what 12 the 12-month average is, and then before September 15th, 13 for example, before September 15th, 2024, USDA announces 14 the revised standard butterfat protein and other solids 15 test for January 1, 2026, so the year after the next year. 16 That timing is not arbitrary. It's not 17 capricious. On September 16th of each year, Dairy Revenue 18 Protection starts offering sales for the first quarter of 19 the year after next. So on September 16th, 2023, DRP will 20 start offering sales for the first quarter of 2025. On 21 September 16th of 2024, we will start offering sales for 22 the first quarter of 2026. 23 And this may not be a fact that's widely known 24 among the dairy industry participants, but DRP has to 25 follow the regulations under the Federal Crop Insurance 26 Act. 27 And I'm going to quote from the Act: "To qualify 28 for coverage under a plan of insurance, the losses of the 635 1 insured commodity must be due to drought, flood, or other 2 natural disaster, as determined by the Secretary. Over 3 years, this has been interpreted to include natural supply 4 and demand shocks, but this does not include regulatory 5 shocks." 6 In the basic provisions for Dairy Revenue 7 Protection, it is stated in the Section 4: "This policy 8 provides insurance only for the difference between final 9 revenue guarantee and actual milk revenue times the actual 10 share protection factor caused by natural occurrences in 11 market prices and yields in your pool production region." 12 Pool production region means something different 13 in their context than the pool as used in this hearing. 14 "This policy" -- the quote continues -- "this 15 policy does not insure against the death or other loss or 16 destruction of dairy cattle, or against any other loss or 17 damage of any kind whatsoever." 18 This is pretty serious. If we do not have 19 regulatory certainty, then we may have to delay the start 20 of the sales for that first quarter of 2026. In other 21 words, if we know that we will only find out standard 22 component tests in February of 2025, we may not be able to 23 start offering that last -- that first quote of 2026 under 24 DRP until those components are known. 25 So for these reasons, the Edge will propose 26 that -- is proposing that the delay be 15 and a half 27 months, and -- and to underline, our request is that any 28 changes follow the same delay. Some changes benefit 636 1 producers; some benefit processors more than producers, at 2 least in short-term. And our request is that any changes 3 be delayed in such way to allow us to continue offering 4 DRP for the fifth quarter out. 5 What's so special about the fifth quarter out? 6 My academic research that preceded the design of 7 Dairy Revenue Protection suggested that effective risk 8 management means that you place hedges before the crisis 9 starts, so far out that you can cover the entire potential 10 client crisis. 11 Think about COVID-19 prices for Class IV products. 12 They started falling in February, March of 2020. They 13 didn't really recover until May 2021 to their pre-pandemic 14 levels. It took about 15 months for prices to come up. 15 If you are only hedging three or six or nine 16 months out, you will be covered for the inception of the 17 crisis, but not for the entire crisis. And over the years 18 we have seen that utilization of Dairy Revenue Protection 19 has been slowly growing in those deferred months, and we 20 are actually right now in talks with industry stakeholders 21 as well as our partners at Risk Management Agency about 22 offering higher subsidies for deferred poolers to truly 23 encourage producers to hedge further out. 24 However, if we are -- if my company as a 25 responsible what's called submitter, like, colloquially 26 owner of intellectual property rights on DRP, if we become 27 aware there is a known regulatory risk that is being 28 covered by DRP, then I have legal responsibility to advise 637 1 Risk Management Agency that the sales are postponed. So 2 we could really mess up risk management if we are not 3 careful with the delay. 4 So with that, in conclusion, these are good 5 proposals. They make sense. We believe that they should 6 be implemented, either National Jersey or National Milk. 7 However, there are these two design changes that we 8 believe should be strongly considered. 9 And with that, Edge thanks the Secretary and the 10 Department for your hard work, opportunity to testify, and 11 I look forward to any questions. 12 THE COURT: Any direct besides that? 13 Any cross? Anyone other than AMS, I guess? 14 Yes, Mr. English, your witness. 15 MR. ENGLISH: Thank you, your Honor. 16 CROSS-EXAMINATION 17 BY MR. ENGLISH: 18 Q. Dr. Bozic, my name is Chip English, attorney for 19 the Milk Innovation Group. Good afternoon. 20 A. Good afternoon. 21 Q. So I want to focus on your written testimony. I 22 think one statement that you read into the record, and 23 then also it's appropriate, your study, at least a couple 24 comments that I think are related? 25 And so I want to start on Exhibit 75, page 1, with 26 your statement, "A fundamental pricing principle within 27 Federal Milk Marketing Orders is to establish Class I 28 price high enough to reflect the opportunity cost of using 638 1 that milk in manufactured products." 2 Now, a statutory standard is to bring forth an 3 adequate supply of milk and to avoid disorderly marketing, 4 correct? 5 A. I believe when you say that. 6 Q. And in fact, there is an adequate supply of milk 7 correct, fluid use? 8 A. At present time, I'm not aware of any empty 9 shelves. 10 Q. And in fact, fluid milk plants are not having 11 trouble getting milk, are they? 12 A. I cannot speak on their behalf. 13 Q. How familiar are you with the actual provisions of 14 the Federal Milk Marketing Orders? 15 A. Enough to be dangerous. 16 Q. Well, let's -- let's test that. So you agree that 17 Class I processors are the only entities that are required 18 to pool their milk, correct? 19 A. That is correct. 20 Q. And if there's a quid pro quo within the system, 21 that is that if -- in return for that obligation to pay a 22 higher Class I price, in order for milk to be producer 23 milk, as that term is used in the Federal Orders, those 24 producers must meet minimum performance standards, 25 correct? 26 A. Correct. 27 Q. And those performance standards are largely set 28 out in the definitions for handler in each of the 639 1 individual orders, correct? 2 A. That's right. 3 Q. And the point is, you're paying the higher Class I 4 price. We're not going to guarantee you a supply, but 5 we're going to help you get a supply, because we're going 6 to make people who share in the pool at least provide the 7 milk, correct? 8 A. That's right. 9 Q. That is to say, a dairy farmer doesn't get to 10 stand up and say, "I want to pool my milk." He has to do 11 something, correct? Or she has to do something, correct? 12 A. Or their cooperative. 13 (Court Reporter clarification.) 14 THE WITNESS: Or their cooperative. 15 BY MR. ENGLISH: 16 Q. And that's fine, cooperatives are deemed to be 17 producers for this purpose, correct? 18 A. Sure. Sure. Yes. When you said he or she, that 19 involved a physical person. 20 Q. I understand that. I wasn't trying to -- I mostly 21 wanted to get out of the fact I said he. 22 So -- and the -- so through the series of 23 hearings, first the Federal Order Reform, and the series 24 of hearings between 2000 and 2008, USDA set and then reset 25 the performance standards in order to address pooling and 26 depooling issues, correct? 27 A. That is my understanding. 28 Q. And in addition to having those standards, 640 1 industry asked or USDA thought it would be a good idea for 2 each individual Market Administrator to, within the 3 regulations, have the power, if requested, and if the 4 evidence established it, the power to increase those 5 performance standards, correct? 6 A. That is my understanding. 7 Q. And at the same time, the Market Administrator has 8 the power to decrease those performance standards, 9 correct? 10 A. And they have exercised that right. 11 Q. I'm sorry? 12 A. And they have exercised that right. 13 Q. Yes. They have, at least since January 1 of 2010, 14 not exercised the right to increase performance standards, 15 correct? 16 A. I -- I don't have the full document in front of 17 me, but I do not contest what you said. 18 Q. But in fact, since January 1 of 2010, for at least 19 five Federal Orders, they have repeatedly or repeatedly 20 and then to further notice, or just further notice, 21 reduced shipping percentages in five orders, correct? 22 A. I don't have the document in front of me, but I do 23 not contest what you are claiming. 24 Q. So if Class I plants needed to pull milk away from 25 manufacturing products, would we not have seen an increase 26 in the performance standards or at least not a decrease in 27 the performance standards? 28 A. I think that's speculative. 641 1 Q. Well, given the fact the Class I plants are paying 2 the highest price, if they were having trouble getting 3 milk, wouldn't you think as rational actors they'd hold up 4 their hand and ask the Market Administrator, "Help me"? 5 A. My understanding is they could also call for milk 6 from any pooled handler. 7 Q. Yeah, I think that provision is gone. I don't 8 think calls exist anymore. If they are there -- Order 1 9 definitely had a call at one time. I am not aware if 10 they -- if I'm wrong, I'm wrong. But assuming for a 11 moment they do have that right somewhere, they haven't 12 exercised that either, right? 13 A. Not that I'm aware of. I was just trying to say 14 that increasing performance standards is not the only way 15 to secure that milk. 16 Q. Well, whatever methods handlers have had, Class I 17 handlers, from Exhibit 39, they apparently either didn't 18 ask or the Market Administrator, after investigation, 19 thought they didn't need it, correct? 20 A. I do not contest that. 21 Q. So where in the statute does it say "a fundamental 22 pricing principle within Federal Milk Marketing Orders is 23 to establish a Class I price high enough to reflect the 24 opportunity cost of using that milk in manufactured 25 products"? 26 A. I did not claim that it says in the statute. 27 Q. So what is the basis for your saying it? 28 A. Well, for example, if you look at the record from 642 1 the 2000 hearing, and the setting of the higher-of of III 2 and IV, the idea was, behind it, that their price needs to 3 be high enough so that it reflects where else that milk 4 may go to incentivize others who do not have to 5 participate in the pool, to participate in the pool. 6 Q. Were you here yesterday when Mr. Rosenbaum asked 7 the question, it wasn't the overall policy of USDA in 8 Federal Order Reform to reflect existing regulated prices 9 as best they could? 10 A. I do not recall specifics. 11 It would be fair to interpret this paragraph that 12 you cite from federal pricing principles is my 13 interpretation of the statute, which may or may not be 14 correct, and anybody can contest it. 15 Q. So you have discussed hedging to some significant 16 extent, and so you believe that a series of proposals, and 17 certainly at this moment Proposal 1, in your view, would 18 improve the efficiency of hedging efforts, especially if 19 your modification was adopted, correct? 20 A. My testimony does not speak to that. My testimony 21 refers that if the -- if the Proposal 1 is adopted, that 22 increasing butterfat standard at the same time would 23 enhance hedging effectiveness versus only implementing 24 Proposal 1. 25 Q. Thank you for the correction. I appreciate that. 26 So hedging is important to dairy farmers, correct? 27 A. As evidenced by their actions, yes. 28 Q. And it is important to processors, correct? 643 1 A. As a -- I would assume, yes. 2 Q. You don't know -- you don't -- I don't want names, 3 but you don't have clients who are on the processor side 4 of the hedge? 5 A. Fair point. It is important for them as well. 6 Q. Including Class I processors? 7 A. Yes. 8 Q. That was a pretty emphatic yes. Yes, Class I is 9 important for -- to be able to hedge. 10 A. Emphatic because in what's going to come in a few 11 weeks, Edge's proposal on Class I more specifically looks 12 to address the concerns of your clients as well, 13 Mr. English. 14 Q. So I now want to discuss -- 15 MR. ENGLISH: And I -- I apologize, I -- did we 16 not mark for now, or are we treating, because it's a 17 footnote, the study as an exhibit? There were two 18 documents that were uploaded, Edge 1 and Edge 2, and I was 19 trying to pay close attention. 20 I don't know, was Edge 2 not marked for now? 21 THE COURT: Edge 2 has not been marked for 22 identification. We were waiting for printing, I think, 23 and counsel can correct me. 24 I don't know whether you are really a lawyer, but 25 for this purpose, you are counsel to me. 26 MR. ENGLISH: Your Honor, I don't think the rules 27 require people to be lawyers to be -- 28 THE COURT: Could be representative -- 644 1 MR. SJOSTROM: No, I'm not counsel. Yeah, it's 2 only a printing issue, so we would plan to have it next 3 week. If you want to identify it as such with future 4 physical inclusion, I don't know the rules of waiting or 5 not. You are welcome to include it as far as we're 6 concerned. It's only a printing logistics issue. 7 THE COURT: We have a cross-examiner that wants to 8 ask questions about it, and we don't have the -- well, I 9 guess I would ask you this, Mr. English, do you have a 10 copy of this document? 11 MR. ENGLISH: I was able to down- -- I mean, we -- 12 we have been very closely monitoring USDA's very 13 uploading, and Dr. Bozic, you know, followed the rules and 14 uploaded it this morning, and it came shortly after 15 8:00 a.m. So I do have a copy. 16 But on the other hand, if not everybody does, my 17 understanding, and if the representation is that Dr. Bozic 18 will be here at a later date, I am prepared to examine on 19 that statement, so everybody has it at the same time, 20 because otherwise, you know, I would have an advantage, 21 and I think that's -- I don't need that. 22 But if the representation is he's going to appear 23 again, and I have the opportunity to ask about the 24 document, which is referred to in footnote 1 on page 2, 25 I'm perfectly happy to reserve the questions on that 26 document. 27 THE COURT: Yes, Mr. Hill? 28 MR. HILL: Yes, your Honor, I think it would be 645 1 preferable if we waited for everyone to have the document, 2 it would be easier to follow. 3 THE COURT: Yes. Absolutely. I think that I want 4 to reward diligence. It's good to be checking on the 5 website and all that, but I do think that it would be more 6 orderly -- that's important. 7 THE WITNESS: Mr. English, I'll be back. 8 THE COURT: So you will reserve on the questions 9 you have for -- 10 MR. ENGLISH: What is not marked, what is right 11 now known on the website as Edge 2, but that's on the 12 website only as a submitted document. 13 THE COURT: I'm wondering if we -- let's reserve 14 Exhibit 76 for -- for identification for that document 15 when we get it, if that makes sense. That will at least 16 keep the Edge exhibits together in one of the virtual or 17 physical folders. 18 (Thereafter, Exhibit Number 76 was 19 reserved for identification.) 20 MR. ENGLISH: I'm perfectly fine with that, your 21 Honor. 22 THE COURT: And when we get it, we'll identify it 23 as that, and then we will have further cross by you, and 24 other people don't have to get up and reserve for anybody 25 on that document. 26 I guess the question I have -- I mean, I guess 27 we'll go ahead with other cross now, but should -- well, 28 we can decide then. I assume we can have redirect come 646 1 after we do all the cross. 2 MR. ENGLISH: In that case, your Honor, I am done 3 with this witness until he appears with copies of reserve 4 76. 5 THE COURT: Very well, Mr. English. 6 Further cross-examination? 7 CROSS-EXAMINATION 8 BY MR. VETNE: 9 Q. John Vetne, V-E-T-N-E, appearing for National 10 All-Jersey. 11 Dr. Bozic, I just have a couple of questions. 12 Starting on page 2 of your prepared testimony, Exhibit 75, 13 Edge 1. The heading at the bottom of the page is 14 Adjusting Standard Butterfat Test. 15 A. Yes, sir. 16 Q. You don't intend by that to mean anything of the 17 testing procedure needs to be changed, do you? 18 A. No, sir. As I qualified before, I'm referring to 19 the -- what is currently listed as just 3.5 pounds of 20 butterfat per hundredweight of milk in announcing the 21 Class III or Class IV price. 22 Q. Okay. You are referring to a fairly long history 23 of announcing USDA announced prices be based on 3.5% 24 butterfat and the value of 3.5% five pounds of butterfat 25 in a hundred pounds of milk? 26 A. That's correct. 27 Q. Okay. And the portion that is not butterfat is 28 skim, protein, other solids, or total solids nonfat, and 647 1 water. 2 A. That's correct. 3 Q. Okay. So when there is -- when USDA announces on 4 the basis of 3.5% butterfat, would it be correct to say 5 that the announcement reflects the true value of a hundred 6 pounds -- in a hundred pounds of skim, of 96.5 pounds of 7 skim milk and 3.5% pounds of butterfat? 8 A. Mr. Vetne, I have a Ph.D. That means I cannot do 9 math on the fly. 10 Q. Okay. I think you used the term in here 11 someplace -- 12 A. I -- I get scared every time we hear a phrase 13 "true value," so -- so that's why I -- 14 Q. Okay. Got it. I think you used the term 15 statistical uniform price? 16 A. Statistical uniform price would also include the 17 producer price differentials in addition to the standard 18 Class III milk. 19 Q. Statistical uniform prices is price -- is a term 20 that is used to announce USDA announced prices both in 21 fat/skim orders and in multiple component orders? 22 A. No, I don't believe that's technically correct. 23 In the skim/fat order, there was actually uniform price, 24 and the MCP statistical uniform price, just to be 25 pedantic. 26 Q. The statistical uniform price, how does that 27 compare to what you just referred to as the uniform price? 28 Is it supposed to be so you can compare apples and -- 648 1 apples and apples? 2 A. We're definitely in the same fruit bowl there. 3 But it -- that's the attempt, but like -- 4 Q. That's the attempt. Okay. 5 So a -- the purpose of your proposal for 6 modification is to have the announcement be based on 7 measured butterfat content as well as protein and other 8 solids in producer milk? 9 A. That is correct. It is very difficult to envision 10 a future in which protein continues to rise, protein 11 tests, actual protein tests continue to rise, without 12 corresponding increase in the actual butterfat test. 13 Which means that if we keep on adjusting protein over time 14 and not the butterfat, we will be increasing the basis 15 risk that would be present in hedging with the standard 16 Class III or Class IV milk futures, which are settled, 17 cash settled against the announced Class III and IV prices 18 announced by AMS. 19 Q. Okay. Proposals 1 and 2 addressed to the nonfat 20 solids portion of producer milk would change handler 21 obligations on various classes of milk -- 22 A. That's correct. 23 Q. -- in different ways, in different market areas, 24 but it would change handler obligations. 25 A. It would change handler obligations, yes. 26 Q. Okay. Adding butterfat to the components that are 27 updated, would that change any handler obligation? 28 A. There would be no impact on either money due to 649 1 the producer settlement fund or any draws from producer 2 settlement fund. The handler obligations would not be 3 affected by that. 4 Q. It would be simply a different way to announce 5 data that has been observed and statistics drawn from that 6 data? 7 A. To the chagrin of many dairy economists, including 8 Peter and myself, we will have to do some more work to 9 iron out our time series. But, yes, producers come first. 10 Their risk management is more important than our Excel 11 sheets. 12 Q. And further down the road in this hearing there 13 will be -- butterfat will be addressed on a different 14 technical issue as what's the yield that should be applied 15 to get an ultimate price for per pound of butterfat, and 16 your proposal to update would not be affected by that part 17 of this hearing either? 18 A. Our -- our current testimony is silent on those 19 issues. 20 Q. Okay. 21 A. Does not comment on any of that. 22 Q. So you see your proposal to include an adjustment 23 in the announced price as one applying to all components, 24 correct? 25 A. To -- specifically to butter -- the Proposals 1 26 and 2 already envision updating the protein and other 27 solids and nonfat solids. We are just saying, let's not 28 forget about butterfat. 650 1 Q. Okay. It would not increase an obligation. Do 2 you see it as a logical outgrowth of Proposals 1 and 2? 3 A. I do believe it's a logical outgrowth. It 4 prevents proposals that are fundamentally good and 5 beneficial for the dairy industry from having adverse 6 unintended consequences on basis risk. 7 Q. Thank you. 8 A. Thank you. 9 THE COURT: Further cross for this witness? 10 CROSS-EXAMINATION 11 BY MR. MILTNER: 12 Q. Ryan Miltner representing Select Milk Producers. 13 Dr. Bozic, how are you? 14 A. Good afternoon. How are you? 15 Q. Great. Thank you. 16 MR. MILTNER: Your Honor, if I could approach the 17 witness, I wanted to hand him this pamphlet that I would 18 like to refer to as I question him. 19 And for the record, it's a USDA publication. 20 There's a stack of them on the back table there. It's 21 titled Federal Milk Marketing Order Program: 22 Understanding the Milk Order Amendment Process. It's also 23 available on USDA's website. I don't think we need to 24 make this an exhibit. We could just take official notice 25 of its existence. 26 THE COURT: I'm sorry, Mr. Hill, what did you say? 27 MR. HILL: We don't have a problem with that being 28 taken official notice of. 651 1 I want to say, in the California hearing, a lot of 2 the documents that we had, we took official notice at the 3 end of the hearing in -- well, actually in briefing, but 4 it's fine to do that now for such a small -- 5 THE COURT: Not worth a whole lot of discussion on 6 the record, but official notice is an interesting concept. 7 It doesn't mean what it used to. But this is a document, 8 Federal Marketing Order Program: Understanding Milk Order 9 Amendment Process. It's a shiny pamphlet. It's available 10 on the website. So if anyone wants to take a look at it, 11 it's -- it's there. 12 We're not -- well, we'll see what the -- what the 13 cross is. We're really using this as a way of avoiding 14 getting an exhibit into the record that everyone can reach 15 anyway. It's nothing quite to say what use is made of it. 16 But go ahead, Counsel, official notice is hereby 17 taken. 18 MR. MILTNER: It is glossy and shiny, you have 19 that correct. 20 BY MR. MILTNER: 21 Q. Dr. Bozic, have you seen this document before on 22 the web or otherwise? 23 A. Yes, I'm familiar with it. 24 Q. Okay. The reason I wanted to have it in front of 25 us is to talk about the timeline that it sets out for 26 amending a Federal Milk Marketing Order. So I think you 27 have folded it out the way I have here where you are 28 looking at the map in the right corner. 652 1 A. Yes, I have. 2 Q. Okay. So if you look at number 5 there, it says, 3 "USDA holds a public hearing." 4 That's what we're doing right now, right? 5 A. The fun has just started. 6 Q. Yes. We have a ways to go. 7 So I want to go through the timeline from 5 to 12 8 and see if -- if we can put into the record kind of an 9 anticipated date when this proceeding will be completed 10 theoretically. 11 So AMS has said they would like to conclude the 12 hearing here by September 30th. So let's use that as the 13 end of the hearing. 14 A. Uh-huh. 15 Q. And the chuckles behind me should be noted for the 16 record. 17 So number 6: "The hearing record is available two 18 weeks after the completion of the hearing." 19 And I did my best to figure in 31-day months and 20 30-day months, but that one should be pretty easy, 21 October 14th, right? 22 A. 14th. 23 Q. Then the parties file corrections to the 24 transcript 30 days after the record is available. That 25 would get us to November 13th, I think. 26 A. No contest. 27 Q. Okay. Post-hearing briefs are next 60 days 28 following that. I believe that would be January 12th or 653 1 pretty close to that. 2 A. Happy New Year. 3 Q. A recommended decision 90 days following. So I 4 think April 12th, depending on what we count February for, 5 I think that's a leap year next year, but we're close any 6 way, right? 7 A. Yes. 8 Q. Comments and exceptions to the recommended 9 decisions 60 days after that. That would be June 11th, I 10 think. 11 A. Yes, sir. 12 Q. A final decision 60 days following takes us to 13 August 10th, I think. 14 A. I'm tracking. 15 Q. Okay. You are tracking that. 16 And then a referendum to implement the 17 amendments -- and this is where I -- you know, there's 18 no -- it gets a little squishy, but if we have a final 19 decision August 10th, and I'm going to assume 30 days to 20 get ballots in, so September 10th would be that. And then 21 it usually would be effective the first day of the month 22 following the referendum. 23 So maybe October 1st we could have operative 24 regulations from this hearing, at least for this 25 hypothetical. Can we go with that? 26 A. Yes. 27 Q. Okay. This hearing -- the petition from National 28 Milk was submitted on May 2nd. And so from May 2nd of 654 1 2023 to October 1 of 2024, that's how long we're going to 2 go from proposal to a potential change in regulations. 3 A. Yes, sir. 4 Q. Okay. Given that timeframe, when are you 5 advocating the effective date for any changes that would 6 be in that final decision? 7 A. Can you give me a little latitude in answering? 8 Q. Absolutely. 9 A. So we -- we should recognize that we are not 10 addressing only one-off changes here. Some of the changes 11 that -- that the organization will be proposing soon will 12 presumably be one-off changes, yields, shrink, losses, 13 etcetera. 14 But standard component tests, make allowances, 15 standard component tests -- even these proposals 16 contemplate periodic updating, and make allowances, while 17 they are here proposed as a one step up in some proposals, 18 other proposals several steps up over a number of years, 19 there is -- there are already actions afoot to create a 20 system where they would be regularly updated. 21 So what we -- how we handle make allowances in any 22 potential implementation timeline here sets the precedent 23 for how they will be handled once we have mandatory 24 surveys, regular hearings, etcetera. 25 I am, frankly, less concerned about 2025 than I am 26 about setting precedence for managing the Federal Order 27 system for years, potentially decades to come. And my 28 company has already worked with Risk Management Agency to 655 1 address availability of the risk management programs that 2 I'm responsible for in 2025, and I'm pleased to say that 3 we anticipate to promulgate some rules before 4 September 15th of this year to ensure uninterrupted 5 delivery in 2025. 6 So I'm less concerned about 2025 than precedence 7 for something -- for things that will be regularly updated 8 going forward. With that said, my preference would be 9 that all changes take effect January 1, 2026. 10 Q. So 15 months after what the effective -- well, 11 15 months after the referendum on the order, essentially. 12 A. Yes. And there also has to be some elegance in 13 regulation. It would be kind of awkward to implement 14 December 1 or February 1 where people budget for calendar 15 years. Every year is considered to be its own book, if 16 you speak -- if you will. So -- so that's why January 1 17 seems like a natural starting date rather than some other 18 time in the year. 19 Q. That you said that would be your preference. 20 Would that be your preference for any of the proposals in 21 this hearing that would be adopted? 22 A. Anything that could create hurdles for either 23 hedgers or market makers on Chicago Mercantile Exchange 24 Markets. If there are changes that are reasonable -- a 25 reasonable observer with no credentials would consider as 26 not material for effective operation of risk markets, I 27 see no reason to delay those. 28 Anything that can create hedging gains for one 656 1 side of the transaction and hedging losses on another, 2 that is not -- for a transaction that has taken place 3 before regulations have been promulgated, if we don't 4 start this hearing from the outset thinking about that, 5 what we are doing is already reducing liquidity in 2025 on 6 CME. 7 And 2025 is going to be a difficult year for dairy 8 producers who will have a cheese volume probably increase 9 by 7% year over year. The last thing we need right now is 10 to hamper risk management markets. 11 Q. That difficulty on the CME, that's completely 12 independent of anything that happens with this hearing, 13 right? 14 A. Not necessarily. If we, for example, promulgate 15 changes to make allowances in a way that the industry 16 cannot properly anticipate, if I was a market maker -- and 17 I'm not -- but if I was a market maker of CME, I would 18 probably try to stay clear from dairy futures for the 19 foreseeable future. That means that there is not 20 liquidity to help either producers or processors execute 21 their orders, market orders on CME, which increases cost 22 of transaction, transactioning. 23 I understand that CME will also be testifying 24 soon, so there will be more opportunity for cross-examine 25 on that. 26 Q. DRP, the -- if -- as I understand the program, the 27 underpinnings of DRP are the actual contracts on the CME; 28 is that correct? 657 1 A. Dairy Revenue Protection uses the end of day 2 prices on Class III, Class IV, butter, cheese, dry whey, 3 and nonfat dry milk futures, to inform expected prices, 4 and we use end-of-day option premiums, both puts and 5 calls, at the money puts and calls, to inform or calculate 6 volatility -- measures of risk so that we can properly set 7 the premiums that are generated each afternoon. 8 So, yes, DRP heavily depends on CME. 9 Q. DRP would be -- I realize this is an 10 oversimplification, but would it be correct to state that 11 DRP provides dairy farmers a crop insurance program that 12 mimics what they could accomplish trading on the CME? 13 A. We believe that it provides them some benefits 14 that they could not accomplish on CME. Particularly, 15 Dairy Revenue Protection also provides coverage against 16 unanticipated shocks to cow productivity, milk per cow 17 yield. 18 In addition, due to federal regulation, DRP is 19 designed to be affordable. It is designed to be easily 20 scalable. There are no fixed contract sizes. You can -- 21 whether you have 50 cows or 5,000 cows, you can design a 22 contract to your size. You cannot always easily do that 23 through CME. So we believe that DRP is a tool that is not 24 redundant given that CME exists. 25 Q. Make allowances were last updated in 2008, 26 correct? 27 A. That is my understanding. 28 Q. The issues that you described related specifically 658 1 to the CME. 2 Would those issues about liquidity and pricing of 3 contracts have existed in 2008? 4 A. Yes. However, we should look at the magnitude of 5 impact. And that depends -- and the magnitude of impact 6 on the dairy industry is going to be much bigger now than 7 it was before, for two reasons. 8 First, direct utilization of CME products has gone 9 up tremendously. I don't have the numbers, so I'm going 10 to wave my hands -- tremendously -- since 2008. And also, 11 we did not have Dairy Revenue Protection in 2008. Loss of 12 gross margin was just getting off the ground, it was 13 barely used in 2008. 14 So we are truly in a different territory now than 15 we had been in 2008 when it comes to the attention that we 16 need to pay to the proper operation of dairy risk markets. 17 Q. I forget the exact word you just used, but the 18 importance of the CME, the scale of use of the CME today 19 is much greater than it was in 2008? 20 A. That is correct. 21 Q. Wouldn't that mean that their liquidity is 22 actually increased now rather than what we had in 2008? 23 A. But that is not an irreversible process. If we 24 work hard here in this room, we can really screw that up 25 if we don't pay proper attention. Just because it has 26 gone up over years doesn't mean that we can believe that 27 this is going to continue to rise irrespective of how the 28 regulations are set here. 659 1 Put differently, the liquidity in CME over the 2 last, what would that be, 15 years, has risen because 3 there was regulatory stability. Prices are volatile. 4 Regulations are stable. We should not induce regulatory 5 uncertainty going forward. It's okay to regularly update 6 make allowances, yields, etcetera, but they should be done 7 in a way that it doesn't induce regulatory uncertainty for 8 holders of either long or short positions on CME or users 9 of products derived from CME prices. 10 Q. I'm glad you mentioned LGM Dairy. That product 11 was offered for sale when the make allowances were last 12 updated, correct? 13 A. I believe that's the case, yes. 14 Q. Did LGM Dairy have to suspend any of its contracts 15 or any of its offerings when make allowances were offered 16 in 2008? 17 A. LGM was not regularly offered for other reasons. 18 There was a limit to subsidies, so there were many months 19 where LGM just would be offered at all. LGM was offered 20 once per month; DRP is offered about 20 days per month. 21 And also, I don't want to -- as a submitter, it 22 is -- as a quote/unquote "owner" of DRP, and LGM now, it 23 is my responsibility to follow the letter and spirit of 24 the law, whether my predecessors have done so or not. In 25 other words, the precedent of LGM, either being suspended 26 or not, is not sufficient to guide actions going forward 27 in a way that stare decisis would be sometimes in Supreme 28 Court. 660 1 Q. Do you know if they suspended it in 2008? 2 A. I do not believe they have suspended it for the 3 reason of changes in make allowances. 4 Q. And the same restrictions or guidance that you 5 cite in your statement, that was in place in 2008? 6 A. That is correct. The Federal Protection Act 7 provision were still in place back then. 8 Q. I'd like to go back to the timeframe we talked 9 about at the beginning. And so let's -- let's talk about 10 an effective date, potential effective date of October 1. 11 If a producer has purchased DRP coverage for, say, 12 the first quarter of 2005 -- 13 A. Could we use a later year, for example, something 14 that is in the future rather than in the past, if it 15 doesn't -- 16 Q. I'm sorry, 2025. Thank you. That's great. I was 17 like, that is in the future. 18 They purchased it for the first quarter of 2025. 19 A. Yes. 20 Q. And the regulations change on October 1. They 21 will still be paid any -- any indemnity on the contract 22 that's already been purchased, correct? 23 A. That is correct. 24 Q. On October 1, assuming that there is no delay in 25 implementation, on October 1 of 2024, which quarters of 26 DRP would you expect to be made available, according to 27 your outlook? 28 A. Assuming no delays. 661 1 Q. Yes. 2 A. Probably all four quarters of 2025. I -- I 3 would -- I don't know with certainty about the first 4 quarter of 2026. 5 Q. So -- so let's just say on October 2nd, rules are 6 in effect. I'm a producer. I want to cover my milk for 7 the first quarter of 2025. I could purchase that 8 contract? 9 A. For the first quarter of 2025, you probably will 10 be able to, yes. 11 Q. The market -- wouldn't the market impact of the 12 new regulations affect the first quarter of 2025 in the 13 same manner it affects the first quarter of 2026? 14 A. That is the case, but here is me now taking your 15 side. The market has known about National Milk's make 16 allowance proposal for a year and a half, so presumably 17 has been priced in already in those quarters. 18 We have just -- two weeks ago, I petitioned the 19 Federal Crop Insurance Corporation Board of Directors to 20 approve changes in the dairy regulation that would allow 21 to us continue offering the DRP in 2025 under this 22 assumption that the regulatory changes that have been 23 discussed for, look at how many months we have listed 24 here, would have been properly priced in. 25 Again, my bigger concern is the precedent that we 26 set for future years for changes that will be recurringly 27 made, make allowances, and the standard component tests. 28 Also, if USDA does come out with the proposed rule 662 1 or the final rule that is wildly at odds with the -- what 2 has been proposed, then there -- there could be some 3 indemnities driven by the regulatory change. And we are 4 in a rather challenging territory at this point, you know. 5 To put it differently and more plastic, I could 6 get sued, you know, for -- for recommending to RMA to not 7 suspend DRP for 2025. So I'm kind of taking the risk here 8 in -- because I -- I do want DRP to stay open in 2025. 9 Q. And I think we can -- in the room, there's a 10 general consensus that we would like you not to get sued. 11 A. Sometimes I'm my own biggest enemy when it comes 12 to that. 13 Q. You talked about the markets having priced in for 14 this coming year, the possibility of these changes, right? 15 I mean, the people on the CME that are transacting there, 16 they are quite sophisticated in their market knowledge, 17 are they not? 18 A. Yes. To go into more weeds, if you will allow me. 19 So what we will do every day, we will monitor the spread 20 between the actual Class III futures and the Class III 21 futures implied by the butter, cheese, dry whey futures, 22 and if the implied Class III futures resemble the 23 regulatory changes that have been proposed and we can 24 assess indirectly that the market is indeed pricing in 25 that regulatory changes will occur. But you can only 26 carry those kind of exercises so far. 27 Q. But the markets do price in a certain amount of 28 volatility in the markets, weather risk, political risk, 663 1 regulatory risk, and -- and that knowledge is available to 2 the market, correct? 3 A. Yes, sir. The other side of the coin of what you 4 just stated is that unless we design regulatory process in 5 such way that there are proper delays in implementation, 6 we are going to force dairy producers to pay more for risk 7 management because they will be paying for regulatory 8 uncertainty. 9 Q. Do you, or have you, done any analysis to -- to 10 estimate the additional cost to producers of that 11 additional risk? 12 A. It's -- that -- that's something that we will know 13 probably by middle of first quarter of 2024. It's still 14 too early. The volume for the -- nobody anticipates that 15 anything will be affected before the first quarter of 16 2025. The first quarter of 2025 is very thinly traded 17 right now. It's just too early to say. 18 Q. If you had to suspend the sales for first quarter 19 of 2026, when would you expect that you would be able to 20 offer those contracts for sale? 21 A. If the -- as soon as we know the -- what make 22 allowances and standard components will be in effect for 23 the first quarter of 2026, or any other changes that may 24 or may not happen. 25 Q. Okay. So let me make sure I understand that. 26 If on October 1st of 2024, the regulations are in 27 effect -- 28 A. Right. 664 1 Q. -- we know what the make allowances are going to 2 be at that point, correct? 3 A. If -- if -- yes. Like, if we -- if we know with 4 certainty what's going to be enforced for the first 5 quarter of 2026, then, yes, we can offer the sales for the 6 first quarter 2026. It is the regulatory uncertainty that 7 may cause suspension of the program. If there is no 8 regulatory uncertainty, then there is no reason to 9 suspend. 10 Q. How long of a period of suspension do you think 11 there would be? 12 A. Well, I wish there was a manual on these things. 13 The way it works in practice is that we monitor the 14 situation on a daily basis, and if we notice any 15 abnormalities that jeopardize the credibility of prices or 16 volatilities or the program integrity, then we have to 17 alert Risk Management Agency, and then they have to make a 18 decision. They can make decisions sometimes within hours, 19 and sometimes within months, depending on what kind of 20 authority they require to make a change. But, you know, 21 there is no blueprint that I can offer to you today. 22 I can only commit and promise that we will do 23 everything in our power to ensure uninterrupted delivery 24 of all risk management programs for which we are 25 responsible for. 26 Q. In your experience, of those farmers that 27 participate in DRP, what percentage of them are buying 28 five quarters out? 665 1 A. Currently, about 10% of sales typically are the 2 fourth and the fifth quarter out combined. That may 3 increase in future years. We are in the process of 4 gathering stakeholder feedback right now about potentially 5 increasing subsidies for the fourth and the fifth quarter 6 out. So if that change transpires, we would anticipate 7 higher share of the sales to be in those quarters. 8 Q. The 10% you said was fourth and fifth quarters 9 combined? 10 A. Yes. I don't recall off the top of my head just 11 the fifth quarter. 12 Q. Okay. Thank you. So I'm thinking about 13 precedence as well. And from the time a petition was 14 submitted here to what we think could be regulations is 15 17 months. 16 If we were to then delay implementation for 17 another 15 months, it's two and a half years from somebody 18 saying, USDA, I think we need to look at making a change 19 to it being effective. 20 A. So you are referring to Proposals 1 and 2? 21 Q. I'm referring to -- sure. Proposal 1 and 2 fit 22 that bill. 23 A. Because both proponents are already asking for 24 about 12 months delay. 25 Q. Okay. Well, let's talk about another proposal 26 then. 27 Any other proposal, if -- if -- if -- if it's 28 proper to delay implementation of a Federal Order change, 666 1 say Proposal 11, which is one of my client's proposals to 2 change yield factors, and you say -- I think you said a 3 yield factor change, you would advise the same delay. 4 A. If it has a material impact on price, yes. 5 Q. Okay. And materiality would be how many cents per 6 hundredweight? 7 A. Well, let's put it differently. If they are going 8 through the efforts of making a change, then it's probably 9 material. 10 Q. Okay. So there are material proposals here, and 11 it's going to be 17 months from, let's take a look at 12 things, to we have made a decision, and then another 13 15 months until it becomes effective, that's two and a 14 half years for producers or handlers to get a fix to an 15 economic problem. 16 Is that -- would that be a typical expectation, 17 then, if USDA agrees with your position? 18 A. I believe in future hearings there will be -- if 19 the hearings are held regularly, they can probably go 20 faster than what we are doing it now. There will be less 21 to discuss, and the hearing probably won't take 40 days. 22 Q. Mrs. Coale is not looking over here. 23 A. And also, like, let's recognize that it's been 24 15 years since the last change. If something is so 25 urgent, wouldn't you anticipate that it would have been 26 submitted earlier? 27 Q. I think you could ask the people in this room, and 28 there would be lots of people that would agree with you 667 1 and lots of reasons why it was not. But let's take this 2 to -- let's ask another hypothetical. 3 Let's assume my clients came to me and said, we 4 have a new problem, and we need to make it a change to the 5 Federal Orders, draft a petition. And we expedited that 6 process. And this 18 months, 17 months gets compressed to 7 maybe ten, okay? So now it's ten months, plus 15 months, 8 that's two years for what would be considered, in industry 9 parlance, an emergency. 10 Is that -- would that be -- 11 A. None of the emergency hearings held in the past, 12 that have actually been held, not that have been 13 requested, had an effect on pricing formulas; is that 14 correct? They are, you know, in the aftermath of 15 hurricanes or other national disasters, maybe you change 16 the performance standards, make other tweaks. Any change 17 that does not affect the performance of risk markets 18 has -- there are no reasons that I'm aware of to delay 19 that. 20 Q. Would a change to a Class I differential fall into 21 a category of substantial? 22 A. It would be a substantial change, but it won't 23 affect the performance of futures or options market, so 24 there would be no reason to delay a change to Class I 25 differential, a change to performance standard, a change 26 to repooling. Let me tell you, there's a number of things 27 that you can change without waiting, you know, 15 months 28 to implement. 668 1 Q. But really -- so -- so if we exclude all of those, 2 any change to the price formulas of the Federal Orders, 3 you would advise a 15-month delay in implementation? 4 A. That would be my recommendation, correct. 5 Q. Which under regular procedures puts us out two and 6 a half years from petition to implementation? 7 A. Again, let's recognize that market has other ways 8 to address delay changes to pricing. Most everybody would 9 agree that make allowances are out of whack, technical 10 term, that they are lower than they need to be. The 11 market has not waited to provide a correction for that. 12 There are -- you know, some processors have depooled; some 13 processors have had the ability to reblend; cooperatives 14 have reblended; and -- and other private processors are 15 paying negative premiums -- quote/unquote "premiums," so 16 paying below the -- what would have been their regulated 17 price had they been pooled. 18 Markets will find a way to correct most things, 19 even in the short-term, even if the regulation is not 20 rushed forward. It's -- if you look at how our republic 21 is designed, we have designed the system of government, 22 bicameral, with the signature of the President to slow 23 things down, not to expedite them. Not that we should 24 necessarily see that there's a mandatory guidance here. 25 Q. Did you -- you have been in the room most of the 26 hearing so far, correct? 27 A. Most of the time. 28 Q. Did you hear the testimony from several witnesses 669 1 that called depooling a disorderly marketing condition? 2 A. I did hear that, yes. 3 Q. Do you agree with that connotation? 4 A. I think we all want to go on the weekend on time, 5 so I will probably pass on that question. 6 In certain -- in certain circumstances it can be, 7 but it not always is. 8 Q. Are negative premiums disorderly? 9 A. Not necessarily. I mean, they are undesirable. 10 But, you know, it -- it is -- it's a symptom that the 11 system should be fixed. But are they driving milk to be 12 used in an inefficient way? No. They merge because 13 market is trying to direct milk where its highest value is 14 and pay properly for it. It's an attempt to make the 15 market be efficient, you know, given the regulatory 16 constraints. 17 Q. Do the producers that should receive the income 18 from the sales of the milk, receive it in the right way? 19 A. For -- could you please specify what's the right 20 way? What do you mean by right way? 21 Q. Are the objectives of the Agricultural Marketing 22 Agreement Act achieved when we -- when we have excessive 23 depooling or negative market premiums? 24 A. I mean, I think that's open for debate. If you 25 look at the coverage of milk production 60, 70 years ago, 26 which would be a few decades after the Act was enacted, it 27 only covered, you know, less than half of milk produced in 28 the country. So -- so if we go that far back, we could 670 1 conclude that covering all of the milk produced may not 2 have been considered an important parameter by which to 3 judge whether the law was effectively implemented or not. 4 Q. I appreciate you answering my questions. 5 A. Thank you. This was interesting. 6 MR. MILTNER: I don't have anything else. Thank 7 you. 8 THE COURT: Nothing further? 9 Mr. Rosenbaum -- off the record. 10 (Off-the-record.) 11 THE COURT: All right. Let's take a break. Ten 12 minutes. Let's be back at 25 of 3:00. 13 (Whereupon, a break was taken.) 14 THE COURT: We are back on the record. 15 And Mr. Rosenbaum has the floor, and it's your 16 witness, sir. 17 CROSS-EXAMINATION 18 BY MR. ROSENBAUM: 19 Q. Dr. Bozic, I'm Steve Rosenbaum, appearing for the 20 International Dairy Foods Association. 21 You obviously are familiar with the general method 22 in which the Federal Order system sets skim milk prices, I 23 take it? 24 A. That is correct. 25 Q. And you are aware that for Class III products and 26 Class IV products -- I may be oversimplifying slightly -- 27 but fundamentally, you take the price at which the 28 finished product is sold, you subtract the cost of making 671 1 that product, and the rest you, the processor, are 2 required to turn over to the farmer. 3 Is that a reasonable way to summarize the system? 4 A. At a high level, that only applies to bulk, 5 unbranded, undifferentiated commodities. Many of the 6 members that you represent make value-added products. 7 They do not have to share any of that value with the dairy 8 producers. 9 Q. And of course, they have to bear whatever cost 10 they incur in -- 11 A. Take the risk. 12 Q. -- in making that a value-added product to begin 13 with, correct? 14 A. Yes. That's correct. 15 Q. They being -- 16 (Court Reporter clarification.) 17 BY MR. ROSENBAUM: 18 Q. I think we're talking over each other, so we'll 19 try again. 20 If there is a value-added product at issue, the 21 processor has to, on its own, bear whatever the cost is of 22 making that value-added product, above and beyond the 23 value of the bulk commodity product, correct? 24 A. That is correct. And they also bear any risk of 25 not finding the market for that. 26 Q. And so at least with -- and -- and there are -- 27 there's a substantial amount of production of the bulk 28 commodity products themselves; is that correct? 672 1 A. That is correct. 2 Q. Okay. So the system is geared to make the 3 processor turn over -- I'm talking about here, a 4 producer -- start the question again. 5 A processor of bulk commodity products, the ones 6 that are used to set the class prices, is required to pay 7 over to the farmer everything he receives for selling the 8 product minus the cost to manufacture as set by 9 regulation, correct? 10 A. That would be for privately-held processors. 11 Q. Yes. That's correct. For privately-owned 12 processors, correct? 13 A. Which are pooled, yes. 14 Q. Okay. And as an example, right now, when we talk 15 about cheese, the make allowance is 20.03 cents per pound, 16 correct? 17 A. Yes. 18 Q. Okay. And are you aware that -- I'm not asking 19 you to tell me whether you think it's right or not -- but 20 are you aware that my client's proposal to increase that 21 make allowance is based on the proposition that the actual 22 average cost is 28.4 cents? 23 A. Don't have the exact numbers in front of me, but 24 I'm in general familiar with the process that you have 25 followed to propose those numbers. 26 Q. Okay. And so I just -- and essentially under your 27 approach to timing, you are asking my client to absorb 28 that loss for an extra year, correct? That's the effect? 673 1 A. No, I'm not asking them to do that. 2 Q. Well, you are refusing to allow -- let me just 3 take a step back. 4 Let's just assume hypothetically that at the end 5 of these hearings, and after all the briefing, that USDA 6 agrees that the actual average cost to manufacture for 7 cheese, commodity cheese, is 28.4 cents, which is what we 8 assert. Okay? 9 A. Okay. 10 Q. So let's assume they agree with that. 11 Let's assume that they -- and you recognize that's 12 a figure that we're providing them based on existing cost 13 data surveys, correct? 14 A. Not audited. 15 Q. Yes. Well, we can get into that when the time 16 comes. I'm just assuming that -- I'm just asking for the 17 time period for which these costs have been gathered. 18 A. Sure. 19 Q. You are aware that these are the costs that have 20 been gathered for the period up through 2022, at the most 21 recent, right? 22 A. Yes, sir. 23 Q. Okay. So under your approach, the revised minimum 24 price requirements, based upon an assumed recognition by 25 USDA that my clients are correct that the right number is 26 28.4 cents, that would not go into effect until January 1, 27 2026, correct? 28 A. That is correct. 674 1 Q. I mean, you recognize that a delay of that nature 2 of a year for my clients, collectively, you are talking 3 about hundreds of millions of dollars, if you multiply 4 that $0.08 times how many pounds of cheese, commodity 5 cheese, are made in the United States. 6 A. Mr. Rosenbaum, your clients are perfectly free not 7 to participate, not to pool their milk during the time if 8 they believe that pooling would cause them damage rather 9 than benefit. 10 Q. Well, but there are other aspects of the program 11 that are designed to make participation beneficial, 12 correct? 13 A. And again, if they choose to participate and they 14 are rational actors, we can infer that despite the delay 15 in make allowances, benefits outweigh costs. 16 Q. Well, if you are saying they might lose even more 17 money if they didn't participate; is that what you are 18 saying? 19 A. No, I'm not saying that. If they do not 20 participate, they are perfectly free and legal and have 21 fiduciary responsibility to their shareholders to set the 22 milk price so they don't lose the money. 23 Q. They can't set the milk price. How can they set 24 the milk price? They have to compete for milk with 25 other -- with -- against other buyers, correct? 26 A. The same way that dairy producers who can say -- 27 don't set the price, and sometimes they lose money. The 28 market will find a way. The market will find the price 675 1 that's appropriate for commodity. 2 Q. But -- but the market price for cheese is being 3 set by the market dynamics for supply and demand for 4 cheese, correct? 5 A. That's correct, but -- 6 Q. But -- but right now -- but it's impossible -- 7 it's impossible for my clients to drive down the price of 8 milk. It's a regulated price. 9 A. Your clients are free to pay whatever the market 10 will bear if they choose not to be pooled in Federal Milk 11 Marketing Orders. 12 Q. And not to be pooled in Federal Milk Marketing 13 Orders is to give up all the benefits that exist of being 14 in the order. 15 A. If your clients choose not to pool. 16 If your clients choose to pool, by their decision, 17 they are revealing that the benefits outweigh the costs, 18 which means that they garner net benefit despite the 19 regulated make allowance not being yet modified before 20 it's -- because it's not yet January 2026. 21 Q. Okay. And so they would, what, have to be giving 22 up the incremental value of having their suppliers share 23 in -- 24 A. I'm not sure what -- 25 Q. -- the difference between the class -- between the 26 Class III price and the blend price? 27 A. Sir, I'm not sure why you deny your clients their 28 agency. They have the opportunity to choose whether to be 676 1 pooled or not. They do not have to stay pooled, unlike 2 Mr. English's clients, they have to stay pooled. 3 Q. They are my clients, too. 4 A. Well, yes, but like, we are specifically talking 5 about your cheese-making clients right now, in this 6 context. 7 Q. You are not, through your proposal, attempting to 8 encourage depooling, are you? 9 A. The purpose of the proposal is to ensure effective 10 risk management which would benefit your clients as well. 11 If the standard component tests are implemented without 12 proper delay, you know, then, you know, your clients could 13 also be hurt by that, could they not? 14 Q. I believe we support immediate implementation of 15 the changes, period, whatever they may be. 16 A. Well, I should talk with your clients then. 17 Q. You have made no proposed -- have you seen any 18 proposal by my clients to delay implementation? 19 A. I believe that your clients are not -- have not 20 put any proposal on the -- there are no proposals noticed 21 by IDFA on the milk composition; is that correct? 22 Q. Well, we have proposed that the make allowances be 23 implemented as soon thereafter as a final decision is 24 made. 25 A. My comment was specifically on the standard 26 components. 27 Q. Have we ever suggested the implementation would 28 not be uniform for all revisions? Have we said anything 677 1 like that? 2 A. I have not seen any proposal from your clients 3 that would ask for immediate implementation of higher 4 standard component test. 5 Q. But you have -- we don't have a proposal for 6 higher standards, of course, we don't think they are 7 warranted, so why would we? 8 But in terms of the proposals we have submitted, 9 they are all based upon the assumption of immediate 10 implementation. Isn't that true? 11 A. Again, to go back to questions you asked, whether 12 we would -- whether we are proposing what we are proposing 13 would intend to encourage depooling, that is not what we 14 are proposing. Our primary focus is on effective risk 15 management progress. 16 Q. And just to answer my question, you have seen 17 nothing to suggest that my client, A, is not proposing 18 implementation as soon as possible after final decision, 19 and is not proposing make allowances be implemented sooner 20 than anything else. You have seen nothing? 21 A. On the first question I can answer in the 22 affirmative. To the extent that you are silent on 23 standard component test, I cannot assess what you would 24 have said on that. 25 Q. Have there been any examples you can point to 26 where the -- where the insurance obligation was not 27 fulfilled on the ground that a change in price was 28 actually a result of regulatory action? 678 1 A. In land, LRP, land has been suspended after the 2 USDA has ceased publishing certain prices that were 3 necessary to settle that program. So land producers are 4 still now petitioning the government to create something 5 new. They have lost what they had. There were other 6 instances where we had to change rules for beef and cattle 7 to make sure that there is program integrity. Some of 8 that -- most recent changes were not related to regulatory 9 changes. But the best example of -- related to regulatory 10 changes in effect in at least, would have been elastic 11 risk protection for land. 12 Q. Did people actually end up paying premiums and 13 then not get paid the insurance that related to those 14 premiums? 15 A. Mr. Rosenbaum, the problem is that people at some 16 point lost the ability to pay the premium because the 17 program was no longer offered. 18 Q. You are pointing to a different issue. I'm asking 19 a very straightforward question as to whether or not you 20 can point to any example where premiums were actually 21 paid, and when time was ripe to pay, the insurer said, oh, 22 we're not paying for that loss, that loss was the result 23 of regulatory action? 24 A. I cannot point to a specific case at this point. 25 MR. ROSENBAUM: That's all I have. 26 THE COURT: Thank you, Counsel. 27 CROSS-EXAMINATION 28 BY MR. VITALIANO: 679 1 Q. Peter Vitaliano, National Milk Producers 2 Federation. 3 Dr. Bozic, I just have a few questions to seek 4 some additional clarification given the previous lines of 5 questioning, your assertion that a regulatory 6 implementation lag should -- should accompany any change 7 in regulations, that that might be affected by the degree 8 of regulatory uncertainty, and some comments you made 9 about the markets have already maybe priced in some 10 proposals. 11 And very specifically, could you comment on what 12 sort of regulatory implementation lag you would recommend 13 for, for example, Proposal 3 on eliminating barrel cheese 14 from the protein component price calculation? 15 A. Dr. Vitaliano, thank you for your question. 16 Eliminating barrel cheese could affect the pricing 17 for cheese futures, and therefore, indirectly affect the 18 pricing for Class III futures. And, therefore, we believe 19 the same principle should be applied to that one as what 20 we have requested for standard components and what we are 21 suggesting be done for make allowances as well. So 22 January 1, 2026. 23 Q. And how would you answer the same question with 24 respect to, say, Proposal 13, or by extension, other 25 proposals for making changes in the Class I price mover? 26 A. Class I price mover does not affect, directly or 27 in any immediate way indirectly, Class III or IV futures, 28 or the commodity futures. So from the risk management 680 1 perspective, for producers at least, that would not have 2 to be delayed. I'm thinking on the fly here. 3 However, to the extent that the processors may 4 have already budgeted based on the current regulatory 5 regime, maybe there's some further thinking that we should 6 put into that. But at least for dairy regulatory 7 protection, loss to gross margin, or the utilization of 8 CME by producers, there would be no need to delay those 9 changes. 10 Q. So in that sense, that would -- changes to the 11 mover would then fall into the same category as changes to 12 the Class I differentials that you have already spoken to? 13 A. That's correct. 14 Q. How would you answer that same question with 15 respect to any changes in the make allowance? There's 16 been some discussion on that, but you made a comment that 17 the markets may have already priced in make allowance 18 proposals. 19 A. Would you allow me two minutes to offer a thought 20 experiment on this to elaborate my point? 21 So, yes, markets may have already priced in, or 22 will be pricing in over the months to come, the 23 anticipation that, for example, your organization's 24 proposal would be adopted by AMS. 25 However, it is possible that, you know, once the 26 recommended decision comes out, that we will find out that 27 AMS has indeed found the evidence provided by the National 28 Dairy Foods Association is more compelling and has -- 681 1 or -- or the Milk Innovation Group, and that they would 2 set different numbers. If that happens, there could 3 potentially be losses incurred by the insurance companies 4 warehousing the risk in dairy reputation in 2025. 5 Now, to Mr. Rosenbaum's point, the losses will 6 still be paid, the producers will still be indemnified, 7 but the question is, what happens next? 8 When we have mandatory survey, 2026, 2027, 9 whenever that happens, when the survey results comes out, 10 I would be fully expecting that those insurance houses 11 that have lost money on the regulatory change in 2025 12 would petition very passionately to Risk Management Agency 13 that DRP has to be suspended until that kind of regulatory 14 uncertainty is resolved. 15 So what we do for 2025 will impact what will 16 happen in 2028, 2030, and later. We are setting a 17 precedent now. We can get away -- fool me once, shame on 18 you; fool me twice, shame on me, is the American adage. 19 We could potentially even get away, in 2025, 20 without delay in make allowances. I don't want to engage 21 in false pretense that that's not the case. In fact, the 22 changes that we just promulgated two weeks ago through 23 Dairy Revenue Protection would enable that. 24 However, if we are not responsible with that, the 25 time will come that we will regret that because those same 26 insurance companies that may have incurred losses in 2025 27 will make sure that they don't incur those losses again in 28 2028 or whenever the next time comes to update make 682 1 allowances. 2 I hope that helps. Thank you for your patience 3 with a little bit longer answer. 4 Q. And then finally, would you support National 5 Milk's recommendation for a 12-month implementation delay 6 for Proposal 1, or for that matter, by Proposal 2, on 7 updating the skim milk component composition factors? 8 A. It's -- it's not terrible. I think 15 and a half 9 months is better. 10 MR. VITALIANO: Okay. Thank you. No more 11 questions. 12 THE WITNESS: Thank you, sir. 13 THE COURT: Further cross for this witness? 14 Seeing none, redirect? 15 I'm sorry, AMS, I keep -- 16 MS. TAYLOR: That's okay. Thank you. 17 THE COURT: Ms. Taylor. 18 CROSS-EXAMINATION 19 BY MS. TAYLOR: 20 Q. Thank you, Dr. Bozic, for being here today. 21 I have to say, I have managed to make it through 22 my career so far not having to learn about risk 23 management, so bear with me as we kind of go through some 24 questions. 25 I think some other lines of questioning has helped 26 clarify this, but just to make sure it is clear to us at 27 USDA. What you indicate is Edge supports updating 28 components, since you support Proposals 1 and 2. 683 1 A. That is correct. 2 Q. You have no position, as I read, on whether it 3 should be a three-year average update or an annual update. 4 Would that be correct? 5 A. Edge has no official policy on that. 6 Q. Okay. You'd like two modifications: One, you 7 would also like the butterfat standard to be updated, 8 if -- 9 A. Yes. 10 Q. -- there's also, at the same time, a corresponding 11 change in protein or other solids? 12 A. That is correct. 13 Q. And then you would want the implementation change 14 as has been discussed in other lines of cross? 15 A. That is correct. Slightly longer delay that has 16 been proposed. 17 Q. Okay. And that implementation change is not for 18 just a first-year implementation, that would be any change 19 into the future would be that 15 and a half months? 20 A. Particularly any change later, yes. 21 Q. Okay. Did you have a proposal for what the 22 initial change to butterfat should be? 23 A. Whichever methodology AMS ends up adopting for 24 calculating the -- the -- or whichever methodology has 25 been used by proponents to calculate the protein and other 26 solids for -- I believe, for National Milk, it is 2022, 27 all markets combined; is that correct? Yeah. 28 So it's -- I think it's 406, that's all market 684 1 combined, 2022 average. 2 Q. Okay. 3 A. So that would be, you know, consistent with what 4 the rest of the proposal. 5 Q. Okay. And you talk about 15-and-a-half-month lag, 6 but Federal Order prices are monthly, so there's not a 7 price that applies in a half of a month. 8 But the half -- I would -- if you indulge me for a 9 second -- the half a month should be taken in that you 10 think, you know, once September or once August ends, we 11 would run September pools, that new calculation for that 12 previous year could be announced by, like, the middle of 13 September, and that's why your 15 and a half months 14 start -- 15 A. That is correct. 16 Q. Okay. And you have used implementation of 17 January 2026 as an example for how this would work, and 18 you have also explained how DRP insures based on quarters. 19 A. That is correct. 20 Q. So let's say that January 2026 wasn't feasible for 21 who knows why. You would advocate a change not happening 22 in the middle of a quarter, but on a quarter because of 23 the way DRP is structured. 24 Would that be accurate? 25 A. That would be a logical consequence of what I have 26 presented before, yes. 27 Q. Okay. So in your testimony, I think on page 3, 28 you list that DRP, in 2022, had covered milk -- oh, be 685 1 specific -- total declared covered milk of 56 billion 2 pounds? 3 What does total declared covered milk mean? 4 A. When a producer wants to protect 10 million 5 pounds -- if a producer -- let me say differently. 6 If a producer wants to protect 15 million pounds, 7 they have two ways to do that. They can declare on an 8 endorsement, I am covering 15 million pounds. And when we 9 sum up all such endorsements across all of the producers, 10 the number we arrive at for the calendar year 2022 is 56.7 11 and change billion pounds. 12 However, that number is conservative insomuch that 13 a producer can cover -- can protect 15 million pounds by 14 declaring only 10 million pounds, and choosing sometimes 15 that's called a protection factor of 1.15, and then they 16 effectively cover 15 million pounds. 17 So this number here is 56.7 to be conservative. 18 In reality, it's probably another 15 billion pounds more. 19 Didn't want it to go there because it's an informal way to 20 calculate. 21 But to be conservative, we can say that producers 22 have protected 56.7 billion pounds of milk through their 23 revenue protection for calendar year 2022. 24 Q. Okay. And if I wanted to figure out how much of 25 U.S. milk production that would be, do I just take what 26 U.S. milk production was in 2022 and -- 27 A. That is correct. 28 Q. Okay. 686 1 A. So about a quarter. 2 Q. That's what was my calculation, so thank you. 3 Let's see. 4 Okay. I want to get into a little bit -- and, 5 again, this might be a little elementary -- but how your 6 current contracts operate. 7 And as I looked at a fact sheet on DRP that's on 8 the RMA website to help me. So as I gather, they choose a 9 contract -- they pick a contract option, and they use 10 CME's future prices to help -- as the price they use, I 11 think that's expected revenue. Is that how that works? 12 A. Expected price. That's correct. Yes. 13 Q. Okay. Can you just kind of walk us through the 14 process of how that works? Because I think at the end 15 there's some AMS prices involved, and I kinda want to make 16 clear for the record how that all works. 17 A. Sure. So the way it works currently, today, this 18 Friday, is today's futures prices that will be -- that 19 were available anywhere between 1:30 and sometimes 4:00 in 20 the afternoon, so end-of-day futures prices, for let's 21 take the first quarter of 2025, for example, for January, 22 February, and March 202- -- in the four -- let's use the 23 October, December '24. Futures prices for October, 24 November, and December 2024, we would calculate a simple 25 average of Class III futures for those three months. That 26 becomes an expected Class III price for the fourth quarter 27 of 2024. 28 We would also collect the end-of-day settlements 687 1 for options, option premiums for both puts and calls. 2 From those options we would calculate something that's 3 called implied volatility, and then we would publish that 4 in the RMA -- we publish to RMA, then RMA picks it up from 5 our servers and publishes it to the industry. 6 We publish actuarial records. There is a 7 cookbook, if you will, a special document that actuarial 8 houses and insurance companies use to calculate the 9 premium based on the actuarial documents that we publish. 10 So the premium is always actuarially fair, plus a loading 11 factor. So now we have set the price for the fourth 12 quarter of 2024. 13 And now assume that we have too much cheese, 14 Class III price goes down, and it's January 20th or so, 15 2025. The milk production and milk per cow productivity 16 for the fourth quarter of 2024 is now known, revealed, 17 there's an actual number out there. Now comes the time to 18 publish the actual DRP prices and actual milk per cow 19 yields. 20 The current procedure in effect today is to use 21 the make allowances in effect today to calculate the 22 actual butterfat price, actual protein price, actual other 23 solids price, actual nonfat solids price, and then combine 24 the actual butterfat, protein, and other solids, times 25 standard component tests to determine the actual Class III 26 price for the monthly and then average to quarter for the 27 fourth quarter of 2024. 28 Does that answer your question so far? 688 1 Q. Yes. 2 A. So the problem with that methodology that we have 3 just got approved to change literally two weeks ago by the 4 Federal Crop Insurance Corporation, is that notice that I 5 have said that the method to convert the butter price that 6 you publish into butterfat uses the make allowances on 7 today, August -- what is today, 27th or something like 8 that, you know -- whatever was in effect today. 9 In other words, if you promulgate make allowances 10 changes in -- I know it's unrealistic -- but let's say 11 that you promulgate them November 1, we would not use the 12 make allowances for November and December 2024 for 13 calculating what butterfat and protein prices have to be 14 in that fourth quarter. 15 And that actually works fairly well for what's 16 called a component pricing option, because other than some 17 survey changes on barrel cheese or maybe salted, unsalted 18 butter, 30 to 45 days, there won't be a -- the regulatory 19 changes that we do here in this hearing and what your team 20 decides to implement will not affect the commodity prices, 21 published commodity prices, which means that we can use 22 the make allowances on the date when the endorsement was 23 purchased to calculate actual butterfat protein and other 24 solids price. 25 Class prices are a much bigger problem because 26 class prices -- we anticipate that the industry will start 27 anticipating, not for the fourth quarter 2024, but once 28 you get into 2025, that the market will start anticipating 689 1 regulatory changes. So using the outdated, at that point, 2 outdated make allowance, could result in program that is 3 no longer actuarially fair -- I know that I have lost 4 probably everybody but one person at this point, but 5 there's a court reporter, so you can read it later. 6 And so what the change that we just promulgated is 7 that we will publish as actual Class III and IV, simple 8 quarterly average of whatever AMS publishes with new make 9 allowances. 10 What we are betting on, and this is the quicksand 11 in which -- quicksand in which I stand currently -- is 12 that we are betting on that all regulatory changes will be 13 fully predictable so that no insurance company will be 14 able to claim that they have paid losses induced by 15 regulatory change. 16 Because if they can demonstrate that losses they 17 have paid were due to regulatory change, we would be in 18 technical violation of -- or at least it will be contested 19 in court -- of the Federal Crop Insurance Act that says 20 that the crop -- elastic insurance can only cover against 21 natural disasters, natural causes, not regulatory changes. 22 So, you know, to be on the safe side of the law, 23 it would really be good if we make sure that no 24 indemnities under these programs are paid due to 25 regulatory changes, hence the delay in make allowances. 26 Q. Okay. So you have made changes for 2025 by 27 essentially locking in the makes that we have now. Is 28 that what I heard? 690 1 A. I have unlocked the makes for class. They were 2 locked before. Now we are saying whatever you publish, 3 that's going to be the actual. 4 Q. And so if you were able to do that for 2025, why 5 couldn't you do that for 2026? You are talking about the 6 possible loss based on regulatory change. That's -- 7 that's the problem. 8 A. This decision that the board has approved can be 9 contested by the authorized insurance providers. My 10 counterargument for them, is for 2025, the industry has 11 strong expectations of what will happen. However, we have 12 no expectation -- meaning that, like, if I was a betting 13 man, I would probably guess that you will adopt National 14 Milk's proposal. And I'm not saying that you should, I'm 15 not saying that I support it. I'm just saying, like, in 16 terms of probabilistic outcome. 17 Q. I do not advise anyone to take a bet. 18 A. No. But the insurance companies can challenge 19 this. And the first time they provide the challenge, the 20 first time there is a loss, the first time they challenge 21 this, DRP can be severely suspended going forward. 22 So I'm doing everything I can as a submitter to -- 23 to travel these troubled waters that we are now in, but 24 the voyage would be much safer if there was proper 25 advanced notice on any substantive -- of any regulatory 26 changes that affect make allowances. 27 So it's not 2026 versus 2025. It's, like, the 28 uncontested period versus the first time there is a 691 1 serious complaint by one of the major insurance companies 2 that carry the risk for DRP. 3 Q. Okay. Kind of along that lines, then, and 4 obviously we're here to talk about Federal Orders, but I 5 mean, are there other types of policy changes that could 6 happen that would make DRP illegal, as you have described 7 it? 8 We only talked about one set of regulations, but 9 there's a lot of government regulations, so -- 10 A. If there were some major substantive change to how 11 NASS conducts the surveys, that could potentially be seen 12 as a regulatory change. However, that's merely a 13 theoretical possibility, not something that is imminent, 14 unlike Federal Order changes that are imminent. 15 Q. And Mr. Miltner went over our wonderful amendment 16 brochure with all our timelines. And, you know, from when 17 we issue a recommended decision, which is the Secretary's 18 recommendation on changes, there's a 60-day comment 19 period. And while I love the thought of a 30-day vote and 20 issuing an order within another 30 days, it doesn't move 21 quite that quick. 22 But let's just say, you know, if you issue a 23 recommended decision, it would give the industry a good 24 idea of what the Secretary thought would be the final set 25 of regulations he would recommend, right? 26 We get comments in, and he can make changes to 27 those based on what he receives. But let's just say they 28 are generally the same. You know, that six-month 692 1 notification period is not kind of a medium -- a middle 2 place for giving the industry the ability to kind of price 3 in the risk of those regulatory changes? 4 A. Is it true that you're not bound by recommended 5 decision, that you can actually modify what you've put in 6 the final decision? 7 Q. Yes. So a recommended decision is issued. The 8 public can comment on that. And then a final decision is 9 issued. And we have to address all of the public comments 10 received, and the Secretary can make modifications to the 11 initial recommendation based on those public comments. I 12 don't know if that happens very often, but it certainly is 13 allowable. 14 A. In other words, there is no regulatory certainty 15 until there is a final decision. 16 Q. If you need 100% regulatory certainty, sure. 17 A. Well, I have made everything I can to actually 18 leverage what you just described to get the changes 19 promulgated that we just did. 20 I -- I, again, implore your team to consider what 21 you do for 2025, not just -- not to see it as a one-off 22 decision, but setting a precedent for how these things 23 will be handled going forward. We'll probably have 24 mandatory surveys. We'll probably have more frequent make 25 allowances updates. We will have more frequent, if you 26 adopt Data Proposals 1 or 2, we'll have more frequent 27 standard component tests. But the eyes of the insurance 28 world is upon us now, and how are we going to behave for 693 1 2025, that will set their expectations for the next ten 2 years and longer. 3 Q. Let's see. 4 A. And also, it's not just about DRP. It's also 5 about CME and open interest on CME. 6 MS. TAYLOR: I think I have a few to end, but I'll 7 let Mr. Wilson go. 8 CROSS-EXAMINATION 9 BY MR. WILSON: 10 Q. The contracts that are offered at the class price, 11 the 3.5 butterfat price -- 12 A. Yes, sir. 13 Q. -- are those contracts, are they cash settled? 14 A. Are you referring to CME contracts? 15 Q. Yes. 16 A. They are cash settled. 17 Q. Are there -- you mentioned in your -- 18 A. Mr. Wilson, can I correct you for a second -- or 19 to correct my answer? The contracts are not offered at 20 3.5. The contracts are offered at whatever USDA 21 announces. So if you announce something that has a 22 different protein test, that's what the final CME price 23 for that contract will be. 24 Q. Okay. The monthly Class III price we announce -- 25 A. As announced, yes. 26 Q. -- at -- at a test or at a -- 27 A. Exactly as you announce it. So if you announce it 28 at 3.5 and 3.1 and 5.9, that's the Class III price, and 694 1 that's what the Class III futures will settle against. 2 Q. Okay. Thank you. 3 Does a producer enter into a hedge, you mentioned 4 this in your testimony, the exhibit, that would protect 5 100% of their expected marketings? 6 A. Is your question do they do that or -- 7 Q. You had a scenario that -- that that was the 8 scenario. Yes. My question is, do they do that? 9 A. The scenario in the testimony was deliberately 10 simplified to drive point a specific point -- to 11 illustrate a specific point. There are producers that 12 protect 100% of their marketings in -- I'm familiar with 13 Dairy Revenue Protection. There are no public data 14 available, to my knowledge, that would allow us to examine 15 whether producers -- how many producers have protected 16 100% of their marketings through Chicago Mercantile 17 Exchange. 18 In general, by just observing the open interest on 19 CME, you could say that a distinct minority of milk is 20 directly hedged on CME. 21 Q. So going over to the risk management company, the 22 insurance side of things, not the CME side of things, you 23 mentioned that the 56 billion pounds of milk. Is there a 24 way we can know how much that was their marketings? 25 A. I believe that's a protected information. What we 26 can know is that their marketings were -- it's -- in other 27 words, like, what do those -- what was total milk 28 marketings of those producers that have hedged that. I 695 1 don't believe that -- you know, I might be able to get 2 that information. 3 Q. Maybe I can ask a different type of question or 4 different wording. 5 Does a producer have to -- can a producer enter 6 into an insurance side with more than 100% of their 7 marketings? 8 A. There are penalties involved. If they cannot 9 demonstrate that they have produced at least 85% of what 10 they have protected, then the indemnities will be 11 prorated. So you can go 117%, but not too much. 12 Q. All right. That helps. 13 MR. WILSON: Thank you very much. 14 THE WITNESS: Thank you, sir. 15 CROSS-EXAMINATION 16 BY MS. TAYLOR: 17 Q. I have a couple of follow-up questions. I forgot 18 to ask one of them. 19 I know we talked about how DRP covers about 25% or 20 so of U.S. milk production in 2022. Can you talk about -- 21 I mean, that's on a production number, but what about on a 22 farm number? 23 A. Probably 4,000 farms. 24 Q. And would you say those are larger farms or 25 smaller herd-size farms? 26 A. I would say that the size varies, but the smaller 27 farms -- is this in the context of small versus -- small 28 business? Is that what you are trying to track? 696 1 Q. Well, that's $3.7 million in revenue, if you want 2 to be specific, but you could also just talk about 3 generally herd size, you know. 4 A. In general, a farm that has less than some 250 5 cows, if their actual production history is commensurate 6 with what they are actually producing, can get a really 7 effective coverage through Dairy Margin Coverage, the 8 Title 1 program. DRP becomes particularly relevant when 9 farms cannot cover majority of their milk through Title 1 10 through DMC. 11 So from that, it would be logically -- it would be 12 logical to infer that larger farms would be more 13 interested in dairy protection, but we have no data that I 14 can offer as definitive proof of that claim. 15 Q. Okay. So along that line, then, I can infer that 16 the smaller farmers would not necessarily benefit from 17 your delayed implementation plan because they don't 18 necessarily use your program? 19 A. I believe the smaller farms would likely benefit 20 from delaying implementation of make allowances. 21 Q. Okay. That's fair on the negative side. But any 22 positive change? 23 A. Again, like, we are making a speculative assertion 24 that they are not really using Dairy Revenue Protection. 25 That may be logically internally consistent, but it's not 26 corroborated by indisputable facts. 27 We don't have -- we go through great pains to 28 enumerate exhibits and do data requests, etcetera, and we 697 1 have not gone through such discovery to arrive at the 2 conclusion that you are offering as a fact. 3 Q. Okay. And then at the bottom of page 6 you 4 mention LGM Dairy may also need to be suspended. But 5 that's not your product, so you are not speaking on behalf 6 of that program, right? 7 A. That is actually, as of February of last year, 8 also my product. 9 Q. Okay. 10 A. I'm a co-owner there, I'm buying into equity. And 11 LGM is not as nearly as heavily used today, but give me a 12 few years, I think that we can make LGM really popular 13 going forward. 14 Q. Okay. And then my last question, because I want 15 to make sure the hearing record's clear, because your 16 testimony was written on behalf of Edge, but obviously you 17 are the owner of these products that you do have a 18 personal interest in their viability going forward, so -- 19 but Edge is the one who supports your position on what we 20 talked at the beginning of my cross-examination on the 21 changes you are seeking? 22 A. That is correct. 23 MS. TAYLOR: That's it. Thank you. Thank you so 24 much. 25 THE COURT: Okay. Thank you, Ms. Taylor. 26 I take it no re-cross before we get to redirect? 27 REDIRECT EXAMINATION 28 /// 698 1 BY MR. SJOSTROM: 2 Q. Lucas Sjostrom, Edge Dairy Farmer Cooperative. 3 Thank you, Dr. Bozic. 4 Just two follow-up questions. Mr. English, and 5 I'm sure -- or I'm guessing he knows this, but mentioned 6 at one point, dairy farmers stand up and raise their hand 7 to pool or depool their milk. 8 To your knowledge, can dairy farmers individually 9 pool or choose not to pool their milk? 10 A. To my knowledge, most dairy farmers don't even 11 know whether they have been pooled or not on behalf of 12 their handler. 13 Q. Are you familiar with situations where half of a 14 dairy farm's milk would be pooled and half would be not 15 pooled, or a portion, not exactly half? 16 A. Not -- not to the level that I would feel 17 comfortable entering on the record. 18 Q. Thank you. 19 And then, finally, now, to the previous questions 20 from USDA and in terms of small business being 21 3.75 million, depending on land and other entities, I 22 would estimate that that could be anywhere from 300 to 600 23 cows, doing some math. I'm -- we didn't talk about 24 whether you are an expert on balance sheets, but could you 25 take that as a reasonable range for the top level of a 26 $3.75 million farm, somewhere in that 350 to 700 cow 27 range? 28 A. I would have to do further calculations, but just 699 1 hearing it now on the fly, I don't find it implausible. 2 Q. And if that's the case, and with what you've said 3 about the 250 cow farms in DMC, would you say that that 4 250 to whatever that top range is, depending on other 5 business entities of what a small business farm is, would 6 they -- if DRP, Dairy Revenue Protection, was suspended, 7 would they have a harder time hedging than larger sizes of 8 farms? 9 A. Particularly. They would -- those farms would be 10 particularly challenged, because for a really large farm, 11 their production is many multiples of the size of the 12 futures contract. But if you -- if you are not a very 13 large farm, but you are large enough to exceed Dairy 14 Margin Coverage levels, then you might have problems with 15 the bulkiness or the limit on contract size in CME, and 16 that's where LGM and DRP really help. 17 Q. Thank you. 18 MR. SJOSTROM: No further questions, your Honor. 19 THE COURT: Okay. As I understand, we're going to 20 call this witness back for Edge-2, which we're going to 21 identify when we get it as 76; is that right? 22 MR. SJOSTROM: Yes, your Honor. 23 THE COURT: Well, I ask. I mean, is there any -- 24 no further re-cross based on the direct, I take it? 25 Seeing none. 26 So do we have -- I'm trying to figure out whether 27 it might be further cross that would involve Exhibit 75. 28 Why don't we just hold 75, I guess. We'll -- you can move 700 1 that into evidence when we wrap up this witness's 2 testimony, if that works for everyone. A little 3 unorthodox. 4 But with that, you are dismissed for now, subject 5 to recall, as discussed. 6 Off the record. 7 (Off-the-record.) 8 THE COURT: Back on the record. 9 Call your witness. 10 Raise your right hand. 11 CHRIS HOEGER 12 being first duly sworn, was examined 13 and testified as follows: 14 DIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. Good afternoon, Mr. Hoeger. Would you mind 17 stating and spelling your name for the record? 18 A. Chris Hoeger, C-H-R-I-S, H-O-E-G-E-R. 19 Q. And would you provide your mailing address? 20 A. 3744 Staunton, S-T-A-U-N-T-O-N, Road, R-O-A-D, 21 Edwardsville, E-D-W-A-R-D-S-V-I-L-L-E, Illinois, 62025. 22 Q. All right. And have you prepared a statement on 23 behalf of National Milk Producers Federation? 24 A. Yes. 25 Q. And is that in support of the milk components 26 Proposal Number 1 that's being offered by National Milk? 27 A. Yes. 28 MS. HANCOCK: Your Honor, we have previously 701 1 marked this as Exhibit NMPF-5, and if you would so 2 indulge, we would take an exhibit number for the hearing. 3 THE COURT: Yes. That would be Exhibit 77 for 4 identification. 5 (Thereafter, Exhibit Number 77 was marked for 6 identification.) 7 BY MS. HANCOCK: 8 Q. And, Mr. Hoeger, is Exhibit 77 the testimony that 9 you prepared? 10 A. Yes. 11 Q. Would you mind reading that into the record? 12 A. Sure. 13 My name is Chris Hoeger. This testimony is 14 presented in support of Proposal 1: Update the milk 15 component factors in the skim milk price formulas as 16 proposed by National Milk Producers Federation (NMPF). 17 This testimony is presented on behalf of Prairie Farms 18 Dairy, Inc. (Prairie Farms), a Capper-Volstead 19 cooperative. My career in the dairy industry covers over 20 22 years working in various roles, from sales 21 representative to several executive level roles. I 22 currently serve in the role as Vice President of 23 Procurement and Member Services. I have served on various 24 committees within many different dairy industry 25 organizations. I have been on the National Milk Federal 26 Order Task Force the last two years, and have been an 27 active member of the National Milk Economic Policy 28 Committee for the last decade. 702 1 As of June 30th, 2023, Prairie Farms' membership 2 is 668 conventional dairy farms located in Illinois, 3 Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, 4 Ohio, and Wisconsin. Prairie Farms has 680 members that 5 make up our milk supply. Prairie Farms is the second 6 largest fluid bottler, milk bottler, in the U.S., with 7 bottling plants located throughout the Midwest. 8 Through wholly-owned subsidiaries or joint 9 ventures, we operate 30 pool distributing plants that are 10 located throughout the Midwest, from the Canadian border 11 to the Mexican border and the Gulf of Mexico. We also 12 operate over 20 other manufacturing facilities that 13 produce cheese, ice cream, and cultured products. Prairie 14 Farms purchases about 20 to 30% of its raw milk from other 15 entities and under various arrangements. Prairie Farms 16 has pooled distributing plants in six Federal Milk 17 Marketing Orders (FMMOs), but the majority of our plants 18 and milk supply are located in FMMO 32. 19 The nonfat solids, i.e., protein and other solids, 20 components along with the butterfat component in milk have 21 steadily increased over the last 20-plus years. Other 22 witnesses have previously testified in detail about these 23 increases. In the multiple component (MCP), FMMOs, the 24 increased components have meant some increased revenue for 25 producers because a portion of the producer milk payment 26 is based on the pounds of various dairy components 27 contained in the producer's milk. 28 Formulas used to calculate skim milk prices have 703 1 not been updated despite the obvious and well-documented 2 increases in the dairy components contained in producer 3 milk. Because the nonfat solids and components have not 4 been updated in over 20 years, the Class I skim milk price 5 has lost comparative value and producers have lost 6 much-needed income. Producers in the four FMMOs using 7 skim/butterfat pricing have lost even more value than the 8 producers in the MCP orders because the skim price is 9 calculated for each of the four classes of milk, not just 10 Class I as is done in the FMMOs with MCP. 11 FMMO 32 is a reasonable proxy for the FMMO system 12 because its milk utilization is similar to the national 13 average. Updating the nonfat solids components would 14 impact the Class I skim milk price the same for all 11 15 FMMOs. However, the impact on each associated PPD would 16 vary because of the relationship with the Class I skim 17 value and the total pooled milk volume by FMMO. 18 In April of 2023, the announced FMMO 32 Class I 19 skim price was $11.66 per hundredweight. This price was 20 calculated by averaging the class -- Advanced Class III 21 and Class IV skim milk prices, then adding the fixed 22 differential of $0.74 per hundredweight: 23 Advanced Class III skim: (5.9 x $.2297) + (3.1 x 24 $2.2925) = $8.46; 25 Advanced Class IV skim: 9 x $1.0414 = $9.37; 26 Class I skim milk price mover: (($8.46 + 27 $9.37)/2) + $0.74 = $9.66; 28 Order 32 Class I skim price: $9.66 + $2 = $11.66. 704 1 By substituting into the calculation the proposed 2 updated nonfat solids component values, the April 2023 3 Order 32 skim price increases appropriately: 4 Advanced Class III skim is (6.02 x $.2297) + (3.39 5 x $2.2925) = $9.15; 6 Advanced Class IV skim is 9.41 x $1.0414 = $9.80; 7 Class I skim milk price mover would then be 8 (($9.15 + $9.80)/2) + $0.74 = $10.21; 9 The Order 32 Class I skim price would then be 10 $10.21 + $2= $12.21. 11 From this example, the updated component formula 12 would add $0.55 per hundredweight to the April 2023 13 Class I skim price. In April 2023, there were 14 340,868,325 pounds of Class I skim milk pooled in Federal 15 Market Order 32. By properly valuing the Class I skim 16 milk, $1,874,755 in additional producer revenue would -- 17 was added to the pool. The updated nonfat solids 18 component values also would have added $0.12 per 19 hundredweight to the PPD. 20 Without going into the stepwise details, the 21 results from May would have been similar. The updated 22 nonfat solids component values would have added $0.63 per 23 hundredweight to the May 2023 Federal Market Order 32 24 Class I skim price. The pool value would have increased 25 the pool -- would have increased the pool value by 26 $2,190,925, and added approximately $0.16 per 27 hundredweight to the PPD. 28 The updated nonfat solids components would also be 705 1 beneficial to producers whose milk is pooled on Federal 2 Market Orders utilizing skim milk and butterfat pricing. 3 As an example, using the $0.55 per hundredweight Class I 4 skim price increase for April, the Federal Market Order 7 5 pool value would have increased by $1,100,031. This would 6 result in a $0.35 per hundredweight increase in the 7 uniform skim price, increasing it from $12.44 per 8 hundredweight to $12.79 per hundredweight. 9 Similarly, the May 2023 Class I skim price 10 increase of $0.63 per hundredweight would have added 11 $1,314,952 in pool revenues. This would result in a $0.44 12 per hundredweight increase in uniform skim milk price, 13 increasing it from $13 per hundredweight to $13.44 per 14 hundredweight. 15 Fairness and Equity in Accounting for Components. 16 By using the proposed updates for nonfat solids 17 components, the pounds of calculated components in Class I 18 skim are closer to the actual components in the Class I 19 skim milk. This is especially important in MCP FMMOs 20 where the value of the total component pounds is 21 subtracted from the total pool dollars in Class I, II, 22 III, and IV. 23 As an example, in May of 2023, FMMO 32 reported 24 11,633,532 pounds of protein and 20,969,034 pounds of 25 other solids, for a total of 32,602,566 pounds of nonfat 26 solids in Class I. 27 Using the current nonfat solids component values, 28 generates 10,780,744 pounds of protein and 706 1 20,518,189 pounds of other solids, for a total of 2 31,298,933 pounds of nonfat solids. 3 Using the proposed nonfat solids component 4 updates, there would be 11,789,264 pounds of protein and 5 20,935,508 of other solids, for total of 32,724,772 pounds 6 of nonfat solids. 7 These results are shown in the table below, which 8 clearly shows updating the component values in the class 9 formula yields results that are much closer to reality 10 than the current nonfat solids component factors. 11 Again, I can read the chart: 12 Fat was 7,695,710 for May of 2023, protein 13 11,633,532, other solids was 20,969,034, for a total 14 nonfat solids of 32,602,566. 15 The current formula calculated, nonfat solids of 16 31,298,933, protein of 10,780,744, other solids 17 20,518,189, for total nonfat of 31,298,933. 18 The proposed, again, would be 32,724,772, protein 19 would be 11,789,264, other solids would be 20,935,508, 20 again, for a total nonfat of 32,724,772. 21 Reduce Negative PPD in the MCP Orders. Using the 22 proposed updated nonfat solids component factors in the 23 formula to calculate the Class I skim value will, as shown 24 above, result in a higher price. This price increase will 25 help alleviate the impact caused by negative PPDs. 26 The PPD for Federal Market Order 32 for the 27 24-month period from June 2021 through May 2023 averaged 28 $0.81 per hundredweight. This period was chosen since the 707 1 disruptions created by COVID-19 had started to ease. 2 During this same period, there were two months with a 3 negative PPD and five months that the PPD was positive and 4 below $0.30 per hundredweight. So for the seven months, 5 or about 30% of the time, the monthly PPD was well below 6 the average. 7 Other MCP FMMOs show results similar to Federal 8 Market Order 32. The PPD for Federal Market Order 30 of 9 the Upper Midwest averaged $0.24 per hundredweight for the 10 24-month period from June 2021 through May 2023. During 11 this period, there was one month when the PPD was negative 12 and three months when the PPD was positive and under $0.15 13 per hundredweight. 14 In Federal Market Order 51 (California) the PPD 15 averaged $0.91 per hundredweight for the same 24-month 16 period. During this period there was one month when the 17 PPD was negative and five months when the PPD was positive 18 and under $0.50 per hundredweight. 19 For five months of the 24, example, June 2021, 20 September 2021, October 2021, May 2022, and April of 2023, 21 all three FMMOs had low or negative PPDs. Updating the 22 component values used in the Class I skim milk price 23 formulas would help address the low or negative PPDs that 24 lead to milk sales revenues to be depooled. While 25 depooling is permissible in FMMOs, this activity adds to 26 disorderly marketing when it becomes pervasive. The more 27 milk participating in the pool, the fewer incidences of 28 disorderly marketing will occur. 708 1 Attracting Milk from Other Uses to Serve the 2 Class I Market. Updating the component formula used to 3 the calculate the Class I skim milk price will result in 4 an increased Class I skim milk price. This increased 5 price would be reflected as an increase in the FMMO PPD or 6 uniform skim milk price. 7 The Class I price and the PPD are adjusted based 8 on the plant location. As an example, in the Federal Milk 9 Marketing Order 32, the base zone is Kansas City with a $2 10 per hundredweight Class I differential. The FMMO 32 11 Class I differentials range from $1.70 per hundredweight 12 in Sioux Falls, South Dakota (the low) to $2.60 per 13 hundredweight in central Oklahoma (the high). 14 Fluid plants in Colorado have either a $2.45 per 15 hundredweight or a $2.55 per hundredweight Class I 16 differential. The Class I differential in Iowa/Nebraska 17 area ranges from $1.75 per hundredweight in Dubuque to 18 $1.85 per hundredweight in the Omaha, Nebraska area. 19 The Class I differential in St. Louis, Missouri 20 area is $2.00 per hundredweight. This gives Sioux Falls a 21 price that is $0.30 per hundredweight lower than Kansas 22 City. Based on the 24 months from June 2021 through May 23 2023, the Sioux Falls price, in and of itself, would not 24 be sufficient to attract additional milk for fluid use, 25 about 30% of the time. 26 The same is true for the distributing plant in 27 Dubuque, Iowa. The price there is $0.25 per hundredweight 28 lower than Kansas City, so it is a nickle hundredweight 709 1 better position than Sioux Falls. Dubuque plant is 2 located in a milk shed that has numerous manufacturing 3 plants and that are very price competitive. Milk from 4 Northeast Iowa and surrounding areas have become a reserve 5 supply for the St. Louis market (which has the same 6 Class I differential as Kansas City). 7 The Class I value in St. Louis is $0.25 higher 8 than Dubuque, but that price advantage is quickly absorbed 9 by the extra freight required to get the milk to St. 10 Louis. This leaves distributing plants in the St. Louis 11 area with a lower Class I price than the price necessary 12 to attract reserve supplies if the additional freight 13 costs are considered. 14 The Class I skim milk price formula does not 15 create difficulties in only in Federal Market 32, but 16 similar markets -- similar examples can be found in other 17 Federal Market orders. 18 And the problem is not only found in the MCP FMMO. 19 In fact, it's even worse in FMMOs using the skim/butterfat 20 pricing. Non-MPC -- non-MCP FMMOs end up trying to 21 attract milk from surrounding areas with MCP. FMMO 7 22 pulls reserve supplies from FMMO 126 and FMMO 5, depends 23 on the milk being shipped from Federal Market 1 and 33. 24 The skim and butterfat pricing used in Federal 25 Market Orders 5 and 7 compete poorly with the component 26 values available in the MCP orders. The Class I price 27 with the current formula results in FMMO prices that, 28 adjusted for distributing plant location, do not 710 1 adequately compensate the reserve supply for pulling milk 2 out of the manufacturing plants and delivering that milk 3 for fluid use instead. This price misalignment can be 4 partially solved by updating the nonfat solids component 5 values used in calculating the skim milk -- Class I skim 6 milk price. 7 The current skim milk component factors contribute 8 to the difficulty of attracting milk for fluid use. 9 Class I price is simply not adequate to pull the milk from 10 reserve supply manufacturing uses. 11 Prairie Farms expresses its appreciation to the 12 Secretary of Agriculture and the Dairy Division for 13 holding this hearing. We strongly recommend the Secretary 14 to adopt Proposal 1 from National Milk, update the milk 15 component factors and the skim milk price formulas. This 16 will promote orderly marketing of milk, along with 17 ensuring an adequate supply of milk for the Class I 18 operators to serve their markets. 19 Respectfully submitted, Chris Hoeger on behalf of 20 Prairie Farms. 21 Q. Thank you, Mr. Hoeger. 22 Just a couple of questions. I want to follow up 23 on some information that has evolved as we have heard some 24 examinations this week. 25 You understand that Federal Orders allow 26 cooperatives to reblend? 27 A. Correct. 28 Q. And does Prairie Farms reblend? 711 1 A. No. We are not -- as part of management, I'm not 2 allowed, when I set the pay price for the producers, to 3 reblend. 4 Q. What is your understanding of why you have that 5 policy? 6 A. The board expects the management to operate the 7 co-op to provide them the strongest price available as 8 announced, and we're to pay that announced price. If I 9 don't, I probably wouldn't be sitting here. 10 Q. And as far as you have been a part of Prairie 11 Farms, are you aware of whether it's ever reblended? 12 A. Not in the -- not to my knowledge in the history 13 of Prairie Farms. 14 Q. Okay. 15 MS. HANCOCK: Your Honor, I think consistent with 16 the others, we'll wait to offer Exhibit 77 into evidence 17 until cross-examinations are completed. 18 THE COURT: Yes. Cross-examination? 19 The hearing reporter requests another ten-minute 20 break. Let's come back right at 4:00. 21 (Whereupon, a break was taken.) 22 THE COURT: Mr. English, do you have all the 23 documents you need? 24 MR. ENGLISH: I do. I have notified Ms. Hancock 25 about Exhibit 39 and 40. Thank you. 26 CROSS-EXAMINATION 27 BY MR. ENGLISH: 28 Q. So Exhibit 39 is what I was referring to when I 712 1 was having my conversation with Dr. Bozic. It is labeled 2 Adjustments to Federal Order Performance Standards Shift 3 Requirements and Diversion Limits 2010 to Current. And 4 Exhibit 40 is labeled Request to Change Performance 5 Requirements by Order 2010 to Current. 6 So as I discussed with Dr. Bozic, in order for 7 milk to be producer milk under Federal Orders, it must 8 meet minimum performance standards, correct? 9 A. Uh-huh. Correct. 10 Q. And that is, in order for dairy farmers to share 11 in Class I revenues, it is important that milk be 12 available under those performance standards, correct? 13 A. Correct. 14 Q. And that is one, if not the most significant way, 15 that Federal Orders can assure that milk is actually 16 available to Class I, correct? 17 A. Correct. 18 Q. So when we looked at Exhibit 39 -- I know you are 19 under Order 32, so let's start with that. 20 According to Exhibit 39, there have been no 21 adjustments made to the performance standards in Order 32, 22 either upwards or downwards, correct? 23 A. That is correct. 24 Q. Okay. Now, are you aware there's -- whether 25 there's been any requests made? 26 A. Not that I'm aware of at this point. One thing I 27 will preface is that as being the VP of Prairie Farms, I 28 have been in this role for three years, as I have served 713 1 other executive roles. 2 Q. So -- but if we look at Exhibit 40, Exhibit 40 is 3 the Request to Change Performance Requirements by Order 4 2010 to Current. 5 A. Okay. 6 Q. And the cover sheet says, if you get down to 7 Order 32, received two requests, both denied. 8 If you could turn to page 5 -- I'll represent to 9 you the 5 is very hard to see, but it's the page between 4 10 and 6. It's easy to see 4 and -- the 5 is at the very 11 cutoff at the bottom of the page, so -- but it's the only 12 page labeled Central Order Number 32. 13 A. Correct. 14 Q. And I thank USDA for being maybe overly inclusive 15 here, because it was 2010 to current, both of these are 16 from '01 and '03 -- 2001 to 2003. So assuming that USDA's 17 data request is complete, and I do, there have been no 18 requests in Order 32 since 2003, correct? 19 A. Correct. 20 Q. So going back to Exhibit 39. I'm just going to 21 briefly summarize. The Order 1, the shipping standard is 22 20%, correct? 23 A. Uh-huh. 24 Q. But it has been revised down periodically to 25 various levels, but to 10% effective September through 26 November of 2023, correct? 27 A. Correct. 28 Q. And in some timeframe like 2015 it was actually 714 1 5%, correct? 2 A. Correct, in June to August, yeah. 3 Q. So, yeah, for September, November 2023 it's been 4 lowered from 20% to 10%. 5 Similarly, in Order 30 it was lowered from 10% to 6 8% in 2017 to 2019, correct? 7 A. Yes. 8 Q. And from May 2019 through July 2022 it was lowered 9 to the 8% to 6%, correct? 10 A. Correct. 11 Q. And then from August 2022 to the current, so the 12 most current timeframe, it was lowered from 6% to 4.5%, 13 correct? 14 A. Correct. 15 Q. Okay. So similarly, Order 33 -- and, yes, there's 16 different months -- but basically, all of those have been 17 lowered as well, correct? 18 A. Correct. 19 Q. And similarly, so in Order 33 also, diversion 20 limits have been increased, at least in the fall months, 21 correct? 22 A. Correct. 23 Q. And then we have Order 124, which is Pacific 24 Northwest, and effectively since July of 2019 through a 25 request that was granted July of 2023, it -- it's been 26 lowered from 20% to 15%, correct? 27 A. Correct. 28 Q. And finally, Arizona was lowered in February of 715 1 2015 until requested change from 20% to 15%, correct? 2 A. Correct. 3 Q. So since those are mechanisms for Federal Orders 4 to assure milk gets to fluid plants, I must say I am quite 5 confused by your comment, the Class I price is simply not 6 adequate to pull the milk from reserve supply 7 manufacturing uses. 8 A. The transportation -- the milk continues to get 9 farther and farther away from the St. Louis market, as I 10 have referenced. Northeast Iowa has been a strong supply, 11 that is now continuing to shift. We have now started to 12 pull some milk from other areas that are farther and 13 farther away. Hence, the transportation costs are driving 14 some of that. 15 In fact, I didn't -- I have -- people have noticed 16 today that I have had to step out maybe a couple times 17 this afternoon. I'm short five loads of milk that needs 18 to be in St. Louis tomorrow night by 6:00, so -- 19 Q. Will you, tomorrow, be making a request to the 20 Order 32 Market Administrator to -- 21 A. Todd, can I make that request right now? 22 No, I have not made that yet. We are -- we 23 have -- we have got good supply partners who we're making 24 arrangements to take care of that. We have not gone to 25 that step. 26 I'll be perfectly honest, as many years that I 27 have been working in 32, I wasn't aware that I could make 28 the request there. I have always known 30 I could. But I 716 1 guess I'll have to -- 2 Q. I'll help you out. It's under Section 1032.7(g), 3 paragraph (g). Okay? I'm happy to provide that. Please 4 submit. 5 MR. ENGLISH: Thank you. I have no further 6 questions. Oh, let me have the tables back. 7 THE WITNESS: Sure. 8 THE COURT: Any further cross by anyone other than 9 AMS? 10 MR. ENGLISH: I'm sorry, I'm done. I thought I 11 made that clear. 12 THE COURT: No cross from anyone. 13 AMS, I take it you have some. 14 CROSS-EXAMINATION 15 BY MR. WILSON: 16 Q. Good afternoon, Mr. Hoeger. 17 A. Good afternoon, Mr. Wilson. 18 Q. Just for clarification, you reference many times 19 in your testimony nonfat solids components -- nonfat solid 20 components. 21 Are you -- is your description of that more than 22 just what the Federal Order prices of Classes II and IV of 23 nonfat solids? 24 A. No, just what the Federal Order. 25 Q. Let me rephrase. 26 A. Okay. 27 Q. Does that include protein and other solids? 28 A. Yes. 717 1 MR. WILSON: Thank you. 2 CROSS-EXAMINATION 3 BY MS. TAYLOR: 4 Q. Good afternoon. 5 A. Good afternoon, Ms. Taylor. 6 Q. I just have one question. If you could expand for 7 the record about Prairie Farms' members. You have 668 8 dairy farms. Can you talk about the percentage of those 9 that would be small businesses under the small business 10 definition? 11 A. Well, our average dairy farm is about 175 cows, 12 175 to 200 cows. Average monthly production is about 13 325,000 pounds per month. So the majority, more than 14 half, the majority do fall under the small business 15 classification of $3.75 million in revenue. 16 Q. Thank you. 17 And we had some conversations this afternoon on 18 risk management, and I know we'll have some more next 19 week. And while you are an employee Prairie Farms, can 20 you talk about the use of risk management that your 21 members do or do not use? 22 A. Many of our members use a wide variety of risk 23 management tools out in the marketplace. Many use DMC. 24 Some use DRP. Some also use futures contracts. Prairie 25 Farms does offer a forward-contracting program. 26 In fact, one of the unique things that we offer as 27 far as the forward-contracting program for dairy producers 28 is, is we have what we call a small producer 718 1 forward-contracting program, so they are able to hedge or 2 use -- go call in and lock in a futures price based on 3 less than 200,000 pounds, because the standard futures 4 contract is 200,000 pounds, so if they only want to lock 5 in 50,000 pounds, they are able to do that. And the co-op 6 then takes on some of that risk until we get an 7 accumulation of 200,000 pounds and we actually lock in the 8 price ourselves as part of our forward-contracting 9 program. 10 Q. Okay. And when it comes to implementation of any 11 changes, your members are supportive of whatever those 12 implementations are that National Milk has? 13 A. Yes, they are -- they are in support of National 14 Milk's 12-month delay, because of the future risk 15 management issues that have been discussed earlier today. 16 Q. Okay. 17 A. Or yesterday. 18 Q. Is it all running together? We're only on day 19 three. 20 A. Yeah. 21 MS. TAYLOR: Okay. I think that's it. Thank you. 22 THE COURT: Is that it? 23 Re-cross? Redirect? 24 MS. HANCOCK: Your Honor, I have nothing further. 25 I would just offer Exhibit 77 into the -- as an exhibit. 26 THE COURT: Yes. 27 Any objections? 28 Exhibit 77 for identification is received into the 719 1 record. 2 (Thereafter, Exhibit Number 77 was 3 received into evidence.) 4 MS. HANCOCK: Thank you for your time, Mr. Hoeger. 5 THE WITNESS: Thank you. 6 THE COURT: So what's next? I think NMPF said 7 that, if I understand Ms. Hancock, she said that was the 8 last witness they had ready to go today. 9 MR. HILL: I believe that's the case, so I don't 10 believe there is anyone left to go today. 11 THE COURT: Okay. 12 MS. TAYLOR: No. I do have one housekeeping item 13 when we wrap up. 14 THE COURT: You have an item that we can discuss? 15 Okay. 16 MS. TAYLOR: Well, I just wanted to let everyone 17 know in -- Sean, can you put the webcast back on, 18 actually? For the people listening, I wouldn't like them 19 to think that that chair is talking to them. 20 I just wanted to let everyone know and those 21 watching that this afternoon we did post on the hearing 22 website producer testimony guidelines to give more 23 information on how producers can register to testify 24 virtually. The first time for them to do that is next 25 Friday, and registration will open on Monday at 26 12:00 a.m. -- 12:00 p.m. Eastern, 9:00 a.m. Pacific. And 27 there's information on the website that people can look at 28 over the weekend to make sure they understand how that's 720 1 going to happen. So I just wanted to make everyone aware. 2 THE COURT: Thank you, Ms. Taylor. 3 Anything else in the nature of housekeeping or 4 anything else that we left that's pending we need to talk 5 about? Anything anyone needs to update me on? 6 Very well. With that, we will see everyone at 7 8:00 a.m. on Monday. Thank you. Have a lovely weekend. 8 (Whereupon, the proceedings concluded.) 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 721 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: September 6, 2023 11 FRESNO, CALIFORNIA 12 13 14 15 16 17 MYRA A. PISH, RPR CSR Certificate No. 11613 18 19 20 21 22 23 24 25 26 27 28