722 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 28, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, C.S.R. Certificate No. 11613 28 723 1 A P P E A R A N C E S: 2 FOR The USDA Order Formulation and Enforcement Division, USDA-AMS Dairy Program: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 Michelle McMurtray 6 FOR The American Farm Bureau Federation: 7 Roger Cryan 8 FOR The International Dairy Foods Association: 9 Steve Rosenbaum 10 FOR The Milk Innovation Group: 11 Charles "Chip" English Sally Keefe 12 FOR The National All-Jersey, Inc.: 13 John Vetne 14 FOR The National Milk Producers Federation: 15 Nicole Hancock 16 Brad Prowant 17 FOR Select Milk Producers, Inc.: 18 Ryan Miltner 19 FOR The California Dairy Campaign: 20 Lynne McBride 21 FOR The Chicago Mercantile Exchange: 22 Anne Krema ---o0o--- 23 24 (Please note: Appearances for all parties are subject to 25 change daily, and may not be reported or listed on 26 subsequent days' transcripts.) 27 28 724 1 M A S T E R I N D E X 2 SESSIONS 3 MONDAY, AUGUST 28, 2023 PAGE 4 MORNING SESSION 728 AFTERNOON SESSION 862 5 6 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 725 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Anne Krema: 5 Direct Examination by Ms. Taylor 728 Cross-Examination by Ms. Hancock 743 6 Cross-Examination by Mr. English 761 Cross-Examination by Mr. Rosenbaum 772 7 Cross-Examination by Mr. English 778 Cross-Examination by Mr. Vetne 779 8 Cross-Examination by Mr. Miltner 788 Cross-Examination by Ms. Taylor 795 9 Cross-Examination by Dr. Cryan 803 10 Leland Kootstra: 11 Direct Examination by Ms. Hancock 804 Cross-Examination by Mr. English 821 12 Cross-Examination by Mr. Rosenbaum 823 Cross-Examination by Ms. Taylor 825 13 Recross Examination by Mr. Cryan 827 Redirect Examination by Ms. Hancock 828 14 Roger Cryan: 15 Direct Testimony Read Into the Record 831 16 Cross-Examination by Mr. English 839 Cross-Examination by Mr. Covington 846 17 Cross-Examination by Mr. Vetne 848 Cross-Examination by Ms. Taylor 858 18 Lynne McBride: 19 Cross-Examination by Mr. Rosenbaum 884 20 Cross-Examination by Mr. Miltner 895 Cross-Examination by Ms. Hancock 904 21 Cross-Examination by Dr. Cryan 905 Recross-Examination by Mr. Rosenbaum 907 22 Cross-Examination by Ms. Taylor 910 23 Mike Van Amburgh: 24 Direct Examination by Ms. Hancock 918 Cross-Examination by Mr. English 935 25 Cross-Examination by Ms. Taylor 939 26 Mike Brown: 27 Direct Examination by Mr. Rosenbaum 942 Cross-Examination by Mr. Vetne 979 28 ---o0o--- 726 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 NO. DESCRIPTION I.D. EVD. 4 78 Testimony of Anne Krema 730 804 5 79 NMPF-25 805 829 6 80 NMPF-25A 805 829 7 81 NMPF-25B 806 829 8 82 NMPF-25C 806 829 9 83 NMPF-25D 806 829 10 84 NMPF-25E 807 829 11 85 Testimony of Dr. Roger Cryan 831 860 12 86 Testimony of Lynne McBride 863 13 87 Table 30, US Mozzarella 866 Production in Wisconsin 14 Wholesale Prices, 2000 to 2023 15 88 Requested Mozzarella 866 Information for California 16 Dairy Campaign Provided April 2023 17 89 June 2007 Spot Cheese Market 866 18 90 Consolidation and 866 Concentration in the U.S. 19 Dairy Industry, Dated April 27th, 2010 20 91 The United States 866 21 Department of Agriculture, In the Matter of: Milk 22 In the Northeast and Other Marketing Areas 23 92 Family Farming and Dairy 867 24 Policy Reform, 2023 Special Order of Business 25 93 Prediction of Mozzarella 867 26 Cheese Yield from Milk Consumption, From Hamzah M. Abu-Tarboush, 27 From Utah State University 28 727 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 NO. DESCRIPTION I.D. EVD. 4 94 USDA Specifications for 867 Mozzarella Cheese, 5 Effective September 24th, 2012, Reprinted in December of 2018 6 95 Purchase Award Description 867 7 For Mozzarella PCA 8 96 Testimony of 919 941 Michael Van Amburgh 9 97 Exhibit NMPF-3A 920 941 10 98 IDFA-4 947 11 99 IDFA-5 947 12 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 728 1 MONDAY, AUGUST 28, 2023 - - MORNING SESSION 2 THE COURT: On the record. Good morning. It is 3 Monday, August 28th, 2023. We're in Carmel, Indiana. 4 This is fourth day of the hearing. 5 Any preliminary business on the record? 6 Seeing none. 7 I hope everyone had a lovely weekend, a refreshing 8 one. 9 I understand we have a witness for the CME group, 10 Anne Krema, if I'm pronouncing it correctly, up first. 11 Good morning. 12 Raise your right hand. 13 ANNE KREMA 14 being first duly sworn, was examined and 15 testified as follows: 16 THE COURT: You may take the stand. 17 DIRECT EXAMINATION 18 BY MS. TAYLOR: 19 Q. Good morning. 20 A. Good morning, Erin. 21 Q. Can you state your name and spell your name for 22 the record? 23 A. Yes. My name is Anne Krema, A-N-N-E, K-R-E-M-A. 24 Q. And can you, for the record, give your business 25 address? 26 A. 20 South Wacker Drive, in Chicago, Illinois, 27 60606. 28 Q. Thank you. 729 1 Are you -- did USDA invite you here to speak 2 today? 3 A. Yes. 4 Q. On what topic? 5 A. On risk management. 6 Q. Did you prepare your testimony of your own 7 volition? 8 A. I did. 9 Q. And did USDA review any of your testimony in 10 advance? 11 A. No. 12 Q. For the record, we -- USDA knew risk management 13 would be a topic of conversation for the hearing, so we 14 asked the CME if they wanted to put some information on 15 the record in regards to their risk management tools they 16 have offered. So I will let Anne speak for them. 17 Thank you. 18 THE COURT: I take it this has been canvassed to 19 other parties? 20 MS. TAYLOR: Yes. They each have a copy, and it 21 will be online, shortly. 22 THE COURT: Very well. 23 MS. TAYLOR: But we would like to mark -- 24 THE COURT: Yes, I have the next exhibit number as 25 77, although that doesn't sound right to me. 26 77 is the next number? 78. 27 Okay. Exhibit CME Group-1 is marked for 28 identification Hearing Exhibit Number 78. 730 1 (Thereafter, Exhibit Number 78 was marked 2 for identification.) 3 THE COURT: I guess we don't have direct 4 examination. You are going to simply make your statement. 5 Ms. Krema, thanks for being here. 6 THE WITNESS: Thank you very much. 7 THE COURT: You may proceed. 8 THE WITNESS: Thank you. Thank you for having me. 9 Hello, my name is Anne Krema. I serve as Director 10 of Agricultural Research & Product Development for CME 11 Group. 12 As the world's leading derivatives marketplace, 13 CME Group offers the widest range of global benchmark 14 products across all major asset classes and provides 15 clearing services to our customers around the world. 16 Thank you for inviting me to testify today regarding CME 17 dairy markets. 18 From the founding of the Chicago Board of Trade in 19 1848 as a venue for grain producers to manage their price 20 exposure, to the establishment of the Chicago Butter and 21 Egg Board in 1898, the origins of CME Group are deeply 22 rooted in agriculture. CME Group Agricultural Futures and 23 Options Markets serve as a key means for physical market 24 participants to minimize risk and protect themselves 25 against adverse price movements. 26 At CME Group, our primary product offering 27 includes futures and options contracts. A futures 28 contract is a legally binding agreement to buy or sell a 731 1 standardized asset on a specific date or during a specific 2 month. An option on a futures contract is the right, but 3 not the obligation, to buy or sell the underlying futures 4 contract at a predetermined price on or before a given 5 date in the future. 6 Commodities futures and options markets are 7 essential to producers, processors, retailers, and 8 consumers to help manage price risk throughout the supply 9 chain. CME dairy futures and options serve as hedge tools 10 for physical market participants, allowing them to lock in 11 either sale or purchase prices for milk or dairy products. 12 The Chicago Mercantile Exchange, a part of CME 13 Group, has worked continuously toward the development of 14 dairy futures and options markets since 1996 with the 15 launch of milk futures and options. Risk management 16 applications for CME dairy markets can extend from 17 producers to processors, traders, and end users of dairy 18 products. 19 With the support and collaboration of the 20 industry, CME Group has been able to expand our dairy risk 21 management complex from one commodity in 1996 to now 22 offering products on seven different dairy commodities. 23 Average open interest, or the average amount of open 24 positions held on a daily basis, equated to over 37 25 billion pounds of product across futures and options in 26 2022 compared to just over 2 billion pounds of product in 27 2000. 28 In addition to acting as tools to manage price 732 1 risk, futures markets also serve as a mechanism for price 2 discovery. Futures exchanges offer a venue for buyers and 3 sellers to lock in prices at a future date. This act of 4 buyers and sellers coming together and submitting bids and 5 offers or indications of what they are willing to buy or 6 sell for at a specific point in the future translates to 7 price discovery. When this happens on a forward-looking 8 basis, the industry is supplied with transparent signals 9 of where market participants expect prices to go, which 10 can help inform future business decisions. 11 Commercial hedgers rely on CME dairy markets to be 12 able to reduce their physical price exposure. While these 13 commercial hedgers look to minimize their price risk, 14 there are other market participants that are willing to 15 assume risk and take the other side of a trade. These 16 market participants are often referred to as liquidity 17 providers and deliver a critical function to efficient 18 futures and options markets. Liquidity providers will 19 often show both buy orders and sell orders in the market. 20 In doing so, these market participants expand liquidity 21 and offer the ability for hedgers to either establish or 22 close out of hedges more efficiently. 23 Liquidity providers frequently improve upon the 24 best buy and sell orders in the market and, thus, reduce 25 costs for both physical buyers and sellers. These market 26 participants offer a service to the marketplace and 27 physical industry, and without liquidity providers, the 28 overall ability to effectively manage risk would be 733 1 significantly reduced for participants throughout the 2 supply chain. 3 CME Group recognizes that the purpose of this 4 hearing is to discuss the need to evolve policy to reflect 5 current dynamics within the U.S. dairy industry. We do 6 not have a stance on the proposals submitted to the USDA. 7 We do, however, wish to ensure stakeholders are aware 8 that, depending on the timeframe for implementation, some 9 of the changes proposed could have an impact on risk 10 management solutions for the dairy industry. 11 When market participants enter into futures and 12 options positions, they do so based on underlying 13 assumptions informed by established contract terms. 14 Futures markets are either physically or financially 15 settled. In physically settled markets, final settlement 16 of the contracts occurs through physical delivery of the 17 underlying commodity. There will be a standardized 18 physical specification of the product eligible for 19 delivery as well as established delivery terms. 20 Alternatively, in financially settled futures 21 contracts, there is an index or price reference that is 22 utilized for final settlement of the contract. Market 23 participants are then credited or debited against the 24 pricing reference at expiration. Financially settled 25 contracts also have established terms on their respective 26 pricing references. Dairy futures products at CME Group 27 are all financially settled using underlying USDA 28 published pricing references. 734 1 CME dairy markets include futures and options on 2 Class III Milk, Class IV Milk, Cash-Settled Cheese, Block 3 Cheese, Cash-Settled Butter, Nonfat Dry Milk, and Dry 4 Whey. 5 Final settlement for Class III Milk futures is 6 based upon the USDA Class III price for milk for a 7 particular month, as first released. Likewise, final 8 settlement for Class IV Milk futures is based upon the 9 USDA Class IV Price for milk for a particular month, as 10 first released. 11 The prices for USDA Class III and IV milk, upon 12 which our futures contract settle, are derived from 13 Federal Milk Marketing Order (FMMO) formulas. Final 14 settlement for Cash-Settled Cheese, Block Cheese, 15 Cash-Settled Butter, Nonfat Dry Milk, and Dry Whey futures 16 are based upon the USDA monthly weighted average prices 17 for the respective product. 18 As the USDA publishes prices for both Class III 19 and IV milk, as well as the USDA monthly weighted average 20 prices for the aforementioned dairy products, are 21 dependent on the established, current FMMO formulas and 22 collection criteria for the National Dairy Product Sales 23 Report (NDPSR) surveys. Participants within CME dairy 24 markets enter into futures and options positions based on 25 the current FMMO formulas and NDPSR survey methodology. 26 Any changes to the Federal Order formulas or underlying 27 NDPSR survey methods could result in a material change to 28 the valuation of the contracts. 735 1 Due to the current methodology for deriving USDA 2 Class III and IV Milk prices incorporating Cheese, Butter, 3 Dry Whey, and Nonfat Dry Milk prices, there is a 4 relationship that exists between Class III and IV Milk 5 futures and the corresponding dairy product futures by 6 class. This relationship can act as a mechanism for 7 hedgers to manage both input and output costs. This 8 relationship also presents the trading community an 9 opportunity to provide liquidity to the market while 10 managing the risk they take on. 11 While some market participants may only have 12 exposure to either milk or processed dairy products, 13 liquidity providers can utilize the relationship between 14 milk and dairy products to offer additional liquidity to 15 either side of the market through spread trading or the 16 simultaneous buying and selling of different commodity 17 futures. At times, there are natural sellers of milk 18 looking to lay off risk, without an equal number of 19 natural buyers in the market. Additionally, there may be 20 times when buyers of dairy products are looking to lay off 21 risk when there is not the same amount of natural 22 sell-side participation in the market. 23 Liquidity providers help bridge this gap through 24 the spread relationship. This trading behavior, often 25 referred to as crush trading, accounts for a significant 26 portion of dairy futures and options participation. The 27 spread relationship and corresponding positions put on 28 across products are dependent on the FMMO formulas. If 736 1 the FMMO formulas are not known, the spread relationship 2 is jeopardized, and market participants may be reluctant 3 to put on hedges or take on risk in months where there is 4 uncertainty in this relationship. 5 CME dairy futures and options contracts are listed 6 for 24 consecutive months. On average, total daily open 7 interest, or the number of open positions held on a daily 8 basis, was 269,354 contracts across futures and options in 9 2022. When multiplied by contract size and converted to 10 pounds, this equates to 37.3 billion pounds of product. 11 CME dairy markets have grown substantially since 12 the introduction of milk futures and options in 1996. In 13 2000, average daily open interest was about 11,600 14 contracts. Average daily open interest in 2008 was about 15 85,800 contracts. From 2008 to 2022, CME dairy market 16 size increased over threefold. 17 We would like to present, looking from the years 18 2018 to 2022, the average distribution of open interest 19 throughout the forward curve. So this is -- this is 20 calculated based on days to expiration of open positions 21 held. You can see within three months of an equivalent -- 22 estimated month equivalent by days to expiration that 23 47.49% of open interest is covered; over six months, about 24 75.14% of open interest is covered; over nine months, 25 90.38% of open interest is covered; over 12 months, 97.34% 26 of open interest is covered; over 15 months, 99.60% of 27 open interest is covered; throughout 18 months, 99.97% of 28 open interest is covered; and up to 21 months and on, 100% 737 1 of open interest is covered. 2 While the majority or open interest resides within 3 the first 12 months on average, the utilization of 4 contract months beyond 12 months can vary throughout the 5 year. Anecdotally, commercial hedgers often look to lock 6 in hedges for the following calendar year beginning in the 7 mid to late summer months. This behavior can be observed 8 in this chart, as the average open interest for contracts 9 with over 360 days to expiration increases during the 10 second half of the year. The greatest utilization of 11 contracts up to 18 months out occurs in August. 12 And this is also looking at 2018 to 2022 on 13 average. 14 While there are numerous proposals being discussed 15 in this hearing that could result in material changes to 16 CME dairy markets, we are providing an isolated, 17 hypothetical example in order to demonstrate possible 18 impacts to open interest for a range of proposed changes 19 to Make Allowance. 20 We provided two examples here of what we know are 21 proposed changes to Make Allowance, and one being an 22 initial proposed change to Make Allowance. In Example 1, 23 with the cheese Make Allowance being $0.24, butter 24 Make Allowance $0.21, dry whey $0.23, and nonfat dry milk 25 $0.21, the overall impact to contract value from an 26 absolute value standpoint is $88,351,560 looking at 2022 27 average open interest and futures equivalent positions. 28 In Example 2, with the cheese Make Allowance at 738 1 24-point -- 24.22 cents, butter Make Allowance at .2251, 2 dry whey Make Allowance at .2582, and nonfat dry milk 3 Make Allowance at .2198, the overall impact to average 4 2022 open interest would have been $115,819,440 to the 5 open positions on average. 6 CME Group routinely files changes to contract 7 specifications that are subject to Commodity Futures 8 Trading Commission, or CFTC review, which may be due to 9 changes in the underlying commodity or to maintain 10 compliance with the core principles set by the Commodity 11 Exchange Act and CFTC Regulations. These changes can 12 include adjustments to product quality and grading 13 standards as informed by continuous industry engagement. 14 Generally, when material changes are made to 15 contract specifications, the changes are either applied on 16 contracts without open interest or are communicated to 17 market participants with sufficient notice in such a way 18 that the changes will not disrupt settlement or other key 19 market features. 20 CME Group has made various changes over the years 21 to the Live Cattle futures contract to ensure that it 22 continues to suit the needs of the evolving commercial 23 industry. In 2019, for example, we filed a rule change 24 submission to the CFTC to change both the quality grade 25 and deliverable weight requirements for the contract. 26 Both of these changes were considered material changes as 27 they were changes to the underlying contract terms, and it 28 was expected that there could be an impact to contract 739 1 value. As such, these changes were announced in August of 2 2019 to be implemented in February of 2021, out beyond 3 open interest. 4 To provide another example, in December of 2008, 5 CME Group announced several changes to the Wheat futures 6 contract. Two of the changes, adding new delivery points 7 and introducing seasonal storage rates on the contract, 8 were determined not to be material changes that would 9 impact the value of the contract and thus were implemented 10 in July 2009, which applied to some contracts with open 11 interest. 12 There was also a change announced to the 13 underlying delivery grade in December 2008. Because the 14 change to the underlying delivery grade in the physical 15 contract specification was determined to have a material 16 impact on price, this change was not implemented until 17 September of 2011, beyond open interest. 18 There are certain mechanisms utilized for other 19 futures markets at CME Group that require transparent, 20 readily available data to update contract terms on an 21 ongoing basis. One such example of a dynamic adjustment 22 mechanism is Variable Storage Rates, or VSR, in wheat 23 futures. 24 VSR is a market-based determinant of maximum 25 allowable storage charges for outstanding wheat shipping 26 certificates. The respective storage rate for a defined 27 duration of the contract’s lifespan is determined by the 28 price relationships between contract months in the wheat 740 1 futures markets. 2 In the case of VSR, this adjustment mechanism was 3 introduced to the market with advanced notice and is now 4 an established contract term in the respective CBOT rule 5 books. Additionally, the data required to determine the 6 storage rate is available to the public on a daily basis. 7 As previously mentioned, market participants have 8 entered into Class III and IV positions, as well as spread 9 positions across dairy products, based on the current FMMO 10 formulas for Class III and IV milk and the current 11 collection methods for the NDPSR product surveys. Making 12 a change that would have an impact on settlement values on 13 contracts with significant open interest could result in 14 both physical hedgers and liquidity providers losing 15 confidence in CME Group dairy markets and reducing or 16 eliminating participation, which would put strain on the 17 industry’s ability to manage risk overall. 18 In addition to CME Group cleared dairy markets, 19 there are other risk management tools utilized in the 20 industry that could be impacted if liquidity in CME dairy 21 futures and options markets suffers. The over-the-counter 22 market, or OTC market, is utilized by commercial hedgers 23 when CME markets may not suit a market participant’s risk 24 profile or hedging needs. These bilateral trades are not 25 cleared and thus carry counterparty credit risk, but can 26 serve as an additional risk management solution for 27 hedgers, particularly in months further out on the forward 28 curve. 741 1 OTC market participants carry open positions off 2 exchange that are not represented in the CME dairy market 3 open interest presented earlier. The firms that offer 4 these OTC bilateral transactions take on risk from hedgers 5 and often in turn will lay off that risk using CME dairy 6 markets. If there is not sufficient liquidity available 7 for these firms to lay off the risk associated with 8 offering these hedge opportunities, the overall capacity 9 for those firms to offer OTC risk management tools could 10 be reduced as well. 11 Producer insurance programs such as Dairy Revenue 12 Protection (DRP) are also related to CME dairy markets as 13 they rely on CME Group markets to inform the expected 14 prices quoted to producers when they purchase policies. 15 DRP has been adopted by many producers such that roughly 16 32% of U.S. milk production was covered on an effective 17 basis for calendar year 2022 by DRP. This equates to the 18 equivalent of over 364,000 milk futures contracts, or an 19 additional 72.8 billion pounds of milk covered by 20 additional risk management tools that could be impacted by 21 changes to CME dairy markets. 22 We recognize that this hearing process has been 23 publicly communicated, and it could be suggested that 24 there is enough warning for futures market participants to 25 be aware that a change is likely coming. Until a final 26 decision from these hearings is issued, however, the 27 ultimate valuation of these products, Class III and IV in 28 particular, remains uncertain. 742 1 The spread relationship that provides the hedging 2 community further opportunities to transfer risk is also 3 uncertain. This uncertainty could potentially deter 4 participation in CME dairy futures and options markets. 5 In the meantime, as concerns around this uncertainty grow, 6 liquidity in dairy markets may suffer. 7 CME Group supports the industry’s initiative to 8 evaluate changes to modernize the pricing policy for dairy 9 in the U.S. While we do not take a stance on the various 10 proposals submitted, we would advocate that the USDA 11 consider futures and options markets and the long-term 12 viability of risk management tools for the industry when 13 establishing implementation plans. Considering an 14 implementation date that would not impact contract months 15 with significant open interest once a final decision is 16 issued could alleviate many concerns around the future 17 viability of risk management tools for the U.S. dairy 18 industry. 19 Thank you. 20 THE COURT: Very well. Any cross-examination 21 with -- or direct by AMS, I suppose, since it is -- you 22 have called the witness, so -- you go first or last on 23 this one? 24 MS. TAYLOR: Last. 25 THE COURT: Last. All right. I assume by 26 agreement, AMS, even though they are the ones who 27 requested the witness, will go last with this witness. 28 Any cross-examination by any other party? 743 1 Mr. English, are you preparing to -- 2 MR. ENGLISH: I don't want to go first. 3 THE COURT: I know the feeling but -- is 4 Mr. English the only person desiring -- the only party -- 5 okay. 6 Ms. Hancock? 7 MS. HANCOCK: Your Honor, this is a little 8 unconventional because we have only been going for a few 9 minutes, but given that we just got the testimony this 10 morning, would it be okay if we took a ten-minute break so 11 we could digest a little bit and gather our thoughts? 12 THE COURT: Is ten minutes enough. 13 MS. HANCOCK: Probably not, but, you know, I'll 14 take what I can get. 15 THE COURT: Well -- any objections? Let's -- I 16 mean, I think we should take 15 and do this in an orderly 17 manner, as is the word of the day -- or the word of the 18 Friday of last week. 19 Sure. Take 15 and let's reconvene at 20 of 9:00, 20 8:40. 21 MS. HANCOCK: Thank you. 22 (Whereupon, a break was taken.) 23 THE COURT: Okay. We're in session. Back on the 24 record. 25 Your witness, Ms. Hancock. 26 MS. HANCOCK: Thank you, your Honor. 27 CROSS-EXAMINATION 28 BY MS. HANCOCK: 744 1 Q. Good morning, Ms. Krema. I'm wondering if you 2 could start off by telling us a little bit about your 3 educational and professional background. 4 A. Sure. So I have a Master's and -- I'm sorry, I 5 studied at the University of Michigan in economics and 6 statistics. I majored in economics and minored in 7 statistics. And I have worked in with CME and with the 8 dairy markets for almost a decade now. So I currently 9 serve as director of research and product development over 10 livestock, dairy, and weather products at CME. So my 11 function right now is making sure that our -- in addition 12 to looking at new product opportunities, that our current 13 products are working for the market. 14 And prior to this role, I worked as a sales and 15 relationship manager for the dairy industry, so I -- I 16 worked in conjunction with the dairy industry and making 17 sure that the current products that we offered worked for 18 them, going back to when we electronified the spot dairy 19 markets, when we launched block cheese, when we launched 20 spot whey. So worked with the dairy markets for over -- 21 over -- about ten years on a number of initiatives, cross 22 products. 23 Q. Okay. And did you say you have your Master's 24 degree? 25 A. I'm sorry, I misspoke. I have an undergraduate 26 degree from Michigan. 27 Q. Okay. But I can -- I can tell from your 28 experience that it's the life experience as well that's 745 1 even more meaningful here too. 2 And did you say you worked in the private sector 3 as well as for CME? 4 A. Just with the CME my career. 5 Q. Okay. 6 MS. HANCOCK: Your Honor, I would offer Ms. Krema 7 to be recognized in this proceeding as an expert on risk 8 management and trading of futures market in the dairy 9 industry. 10 THE COURT: Yes, I find Ms. Krema is qual- -- 11 well, any objections? 12 I find Ms. Krema's qualified to testify on that 13 subject matter as an expert. 14 MS. HANCOCK: Thank you, your Honor. 15 BY MS. HANCOCK: 16 Q. So with that in mind, I'm going to ask you a few 17 questions. You will just have to bear with me because 18 this is not my area of expertise. 19 I want to just chronologically go back to a couple 20 of things in your testimony. Obviously the CME has been 21 around for more than a century, but it wasn't until 1996, 22 that you said that milk futures and options were launched 23 with it for trading purposes? 24 A. Uh-huh. 25 Q. Is that a "yes"? 26 A. Yes. 27 Q. If you say "uh-huh," the court reporter -- well, 28 she'll probably know but -- 746 1 A. Yes. 2 Q. -- we would like our record to be clear. 3 And can you tell us how that happened, how that 4 evolved, do you know? 5 A. Sure. So as -- I guess as some of the dairy 6 industry -- some of the regulation was removed and some of 7 those -- the pricing regulation in the '90s, I think the 8 need for risk management tools within the dairy industry 9 increased. I know there were a number of other exchanges 10 that tried to launch dairy futures prior to our launch in 11 1996 with the original milk futures and options contract. 12 We then in the year 2000 evolved those contracts 13 to a Class III milk contract and later launched a Class IV 14 milk contract as well. So as -- as the need for price 15 risk management tools had increased in the late '90s and 16 in the early 2000s, that -- that brought about the initial 17 launch of the milk products. We did also have butter and 18 whey contracts, and we later launched cheese -- we later 19 launched the current cheese contract, cash-settled cheese, 20 in 2011, and block cheese more recently, as well as nonfat 21 dry milk. 22 Q. Okay. So you said there was a need that 23 developed. 24 What do you mean there was a need that developed? 25 A. The need for the physical market to be able to 26 imagine their price risk exposure. So as -- you know, as 27 with the origin of any of our markets, market participants 28 are either on the buy side or the sell side exposed to 747 1 that market moving against them, and our tools of futures 2 and options offer them the ability to lock in that price 3 at a future date -- 4 (Court Reporter clarification.) 5 THE WITNESS: So, you know, whether you are a 6 buyer or seller in the physical market, where you are 7 throughout the supply chain, if you have that price risk, 8 if the market either moves against you, it moves up 9 against you or down against you, our markets have served 10 as tools to be able to lock in, you know, a price at a 11 future date and time, either a purchase or a sale price, 12 to minimize your price risk exposure. 13 BY MS. HANCOCK: 14 Q. Okay. And you said it wasn't until 2000 that you 15 had Class III contracts that were available? 16 A. Yes. As it currently stands. 17 Q. And then you said Class IV arose at some time 18 later. 19 Do you know when that was, approximately? 20 A. I -- I don't want to say the specific date on the 21 record, but I believe it was 2000 as well. 22 Q. Okay. 23 A. Later that year, 2000. 24 Q. Okay. So it's a -- it's a -- it's a market that 25 when it started in 1996, continued to evolve, it seems 26 pretty significantly over the years to follow. Is that 27 fair? 28 A. Yes. 748 1 Q. Okay. And you said in 2011 something else 2 occurred, and I didn't get it written down. What was 3 that? 4 A. That was when we launched our cash-settled cheese 5 contract, which after Class III milk is our most active 6 contract. It's evolved and grown quite a bit in terms of 7 utilization for hedge tools for the industry, but that 8 didn't launch until 2011. 9 Q. Okay. And then were there continued evolution -- 10 evolutionary steps in -- in the milk futures and options 11 risk management tools that evolved after that as well, 12 after 2011? 13 A. Yes. So we -- we have since also launched a block 14 cheese contract. We launched that a number of years back. 15 And that specifically settles the block cheese price, 16 whereas our cash-settle cheese contract takes into account 17 both block and barrel cheese. 18 Q. What did you say was the one that took into 19 account the block and barrel? 20 A. Cash-settled cheese. 21 Q. Cash-settled cheese. 22 And do you know when the block cheese was 23 implemented? 24 A. It was -- I believe it was 2020, but I don't want 25 to -- I don't want to state the specific date on record 26 without it in front of me. 27 Q. Okay. It is fair to say some -- on or around 28 2020? 749 1 A. Yes. 2 Q. Okay. And then what about the cash-settled block 3 and barrel? 4 A. The cash-settled cheese contract was in 2011. 5 Again, I -- I don't have that specific launch date in 6 front of me right now. 7 Q. Okay. I'm just curious to kind of get a little 8 rough estimate on this -- the chronology of it. 9 Because then you did a comparison. You say 10 37 billion pounds of product across futures and options in 11 2022 compared to just over 2 billion pounds of product in 12 2000. That seems like that's a significant growth in a 13 22-year period. Is that fair? 14 A. Yes. Yeah. Absolutely. 15 Q. And do you think that that is in part attributed 16 to just the evolutionary changes that occurred in the 17 contracts that were available? 18 A. Yes. I -- I think it's a combination of it also 19 takes time for markets to evolve and to develop. CME 20 dairy markets are still in a development phase if you 21 compare it to our grain contracts that have been around 22 since the mid 1800s. So, you know, 1996 really isn't that 23 long ago. So part of it is it takes time for contracts to 24 develop. It takes time for risk management to be adopted 25 within an industry. But then also adding additional tools 26 throughout that time. 27 And then, you know, more recently we have seen 28 spikes with other tools. Like I mentioned DRP and the OTC 750 1 market that are tied back to our markets also contribute 2 to that liquidity as well. 3 Q. Okay. Is it also fair to say that when there is 4 economic pressures put on a market, like for the dairy 5 producers and what they have experienced over the last 6 decade or so, that that also can be a driver in 7 participation in the program? 8 A. Yes. Yes. I think that's fair when -- when, you 9 know, the market expects additional price risk, it -- it 10 sparks more participation in the market. 11 Q. And have you seen a growth in the number of dairy 12 producers who participate in using those risk management 13 tools as well? 14 A. I -- I don't have that information in front of me. 15 Overall we have increased significantly in terms of the 16 number of individual market participants in our market 17 since -- certainly since 2000, the number of individual 18 firms. And there's also limitation of what, you know, 19 we're able to see on a client basis. But I think it's 20 fair to say that there's been a -- a vast increase in 21 individual use in the market, yes. 22 Q. Does the CME provide kind of -- or through any of 23 the roles that you have held, do you provide any kind of 24 training to the marketplace or educational opportunities 25 such that you're interacting with dairy producers who 26 would be trading in the futures market? 27 A. We do -- we provide a -- with -- partnering with 28 ADPI, we have a risk management seminar every year. So 751 1 that's an in-person seminar that we offer. We also offer 2 risk management educational tools on our website. So 3 there's modules and tools that we -- we offer to the 4 public for, you know, introduction to futures and options 5 as well as more specific information on -- on the dairy 6 markets. We also partner and support a lot of the brokers 7 in the industry that do a lot of that direct education 8 with producers and end users and processors as well. 9 Q. So just through your role anecdotally, you hear 10 about what's happening in the industry and how dairy 11 producers are using the futures market as well? 12 A. Yes. 13 Q. Okay. If we move a little bit forward into your 14 testimony, I'm on page 2, you talk about how some of the 15 proposed changes could have an impact on risk management 16 solutions for the dairy industry. 17 Did -- have you read through the proposals that 18 are being heard at this hearing? 19 A. Yes. 20 Q. And have you done any kind of analysis on -- on 21 those proposals? 22 A. So the example we provided in terms of a possible 23 range of outcomes to Make Allowance, we wanted -- you 24 know, we understand there's obviously many proposals being 25 discussed here and didn't want to speculate on, you know, 26 every outcome of -- of each proposal and the impact on our 27 markets. But we did want to provide an example of how, 28 you know, one of the Make Allowance proposals -- or two of 752 1 the Make Allowance proposals could impact open interest. 2 Q. And when you say the "examples," are you referring 3 to the work that you did in Figure 5 that's an page 6? 4 A. Yes. Yes. 5 Q. And Example 1 that you have noted there, that's 6 National Milk's Make Allowance Proposal Number 1? 7 A. Yes. 8 Q. And Example Number 2, is that what you understand 9 to be IDFA's year one Make Allowance proposal? 10 A. Yes. 11 Q. Okay. While we're there, I'm wondering if you 12 could help me understand how these numbers work a little 13 bit better. And you did explain it, so I apologize if I 14 am making you repeat it, but I feel like I just need to 15 understand it a little bit more. 16 If you look at -- well, let's look at -- go down 17 to change in value to the average 2022 futures equivalent 18 open interest. 19 Is that for Class III contracts? 20 A. That is for Class III contracts, yes. That's -- 21 that sixty -- negative 65 million, that's for Class III. 22 Q. Okay. So where you have that negative $65 million 23 and some change, what does that -- what does that number 24 mean? Who is losing -- it says a negative, so it means 25 somewhere that somebody's losing $65 million. Can you 26 tell me what that means? 27 A. I wouldn't speculate on winners and losers in that 28 situation, but we were -- what we were looking to show is 753 1 just the impact to the contract settlement on -- you know, 2 on average to the amount of open interest throughout 2022. 3 So that, you know, the $0.58 decrease from the 4 Make Allowance changes would have -- based on the average 5 open interest in 2022, would have that impact on the 6 Class III open positions on average. 7 Q. And so if I simplify this and I say that there are 8 buyers and sellers of a Class III contract, does this 9 amount reflect a $65 million reduction in the value for 10 those contracts? 11 A. Yes. 12 Q. Okay. And then if we drop down three lines from 13 there, or three rows from there, you have change in value 14 to the average 2022 futures equivalent open interest. 15 Do you see that one? 16 A. Yes, that -- that should be for Class IV. 17 Q. Okay. 18 A. Apologies for that not being included. 19 Q. And if we look at the two columns above that, 20 that's just the calculation of those two numbers resulting 21 in that negative 23 million? 22 A. That -- so the negative 53 is that -- that change 23 to the Class III -- Class IV price in that situation. And 24 then the 1,060 would be the change in -- on an individual 25 contract. And then the 23 million is taking into account 26 the average open interest for 2022. 27 Q. Okay. And same that I asked you for the 28 Class III, this negative $23 million, if there were a 754 1 buyer and seller on either side, this would represent the 2 difference in the valuation of those contracts? 3 A. Yes. 4 Q. Okay. 5 Okay. Let's turn to page 4 of your report. This 6 is -- I say of your report, Exhibit 78. 7 And I want to look at those percentages that you 8 have under Figure 3, the average open interest 9 distribution. 10 So the third column in where you have percentage 11 of the open interest covered on average, those are just 12 specific to each one of the time frames individually; is 13 that right? 14 A. That's right. 15 Q. And then the cumulative, you are just adding those 16 up so that you know the total amount of the open interests 17 that are covered? 18 A. That's right. 19 Q. So by -- by 12 months, 97.34% of the open 20 interests are -- on those contracts are covered; is that 21 right? 22 A. Looking at 2018 to 2022, on average, yes. 23 Q. Okay. And have those percentages changed over 24 time? 25 A. Not significantly. We -- we did look at a broader 26 timeframe, and it is -- they are in the same range. Going 27 back, you know, we also looked at 2015 to 2022 as well as 28 2013 to 2022. 755 1 Q. Do you recall how that -- did it -- did it 2 continue -- did the numbers continue to increase so that 3 with -- as time moved on, more of those open interests 4 were being covered? 5 A. I -- I don't want to speculate because I don't 6 have that in front of me right now. But it was -- it was 7 within the range. 8 Q. Okay. Nothing materially different? 9 A. Yes, nothing materially different. 10 Q. Okay. So is it fair to say that by the time 11 97.34% of the open interests are covered, that it's for 12 almost everything at that point; is that fair? 13 A. I wouldn't say "almost everything" -- you know, 14 it's not fair to say everything, but we just wanted to 15 show there is still additional open interest out beyond 16 the 97%. And we also did want to make the point, you 17 know, that we get demand from hedgers to lock in up to -- 18 at least up to 18 months out. So we wanted to make those 19 points as well. 20 Q. Okay. And, well, you actually -- so by 18 months, 21 you are at 99.97% though? 22 A. Yes. 23 Q. And the delta between the 97 and the 99, is 24 that -- is that nominal in your opinion? 25 A. I -- I would not -- you know, I wouldn't take a 26 position on that. I think we want to just point to the 27 data, and I wouldn't individually take a position on that. 28 Q. Okay. Okay. 756 1 And so thinking about how far out those open 2 interests are covered, I know that you made some 3 concluding remarks that says that -- that you support the 4 industry's modernization of pricing policies for dairy in 5 the U.S., and you are not -- I understand you are not 6 taking a position to support or reject anyone's -- or 7 oppose anyone's proposal. 8 But you do support building in some features that 9 would create stability for risk management tools; is that 10 right? 11 A. I think we would advocate for consideration of 12 risk management tools in implementation. 13 Q. Do you have a timeframe in mind for how much time 14 you believe would be reasonable to build in to 15 implementation of any of the proposals? 16 A. We -- we don't have a position to suggest on a 17 specific timeframe, but we do want to continue to point 18 back to this -- to this open interest data distribution. 19 Q. And that's Figure 3? 20 A. That's Figure 3, correct. 21 Q. Okay. So the greater amount of open interests 22 that are covered, the greater amount of stability that 23 would be offered for implementation purposes? 24 A. Yes, I think that's fair. 25 Q. And so have you -- have you reviewed National 26 Milk's proposal for milk composition? 27 A. Yes. 28 Q. And you understand that National Milk has a 757 1 12-month implementation phase-in? 2 A. Yes, I do. 3 Q. And do you believe that that would be sufficient 4 to account for the risk management tools that are used 5 that would be affected by the milk composition? 6 A. I -- I can't take a position on that one way or 7 the other. I would -- I would -- I would point out that 8 there's still open interest beyond 12 months, but I also 9 acknowledge that 97.34% is covered by 12 months. I would 10 also -- I know that that proposal is specific to one -- 11 you know, that lag is specific to one proposal, and, you 12 know, we do want to acknowledge that there are other 13 proposals that would impact contract evaluation and be 14 material impacts as well. 15 Q. Okay. And so when you say you want to acknowledge 16 that there's additional open interest, that's that two -- 17 at least based on the 2018 to 2022 timeframe in Figure 3, 18 that's that 2.66%? 19 A. Yes. But I also would be remiss if we didn't, you 20 know, point out that we do get demand, and we know that by 21 the -- by the chart I presented earlier, this chart, that 22 hedgers do look to lock in, especially around the summer 23 months throughout that entire next year. So we do get 24 commercial demand for those contract months. 25 Q. Okay. And when you -- when you -- you mentioned 26 there's other proposals that don't have the same 27 implementation lag as the milk composition proposed by 28 National Milk. 758 1 The next one, at least in our chronology here for 2 this hearing, is barrel elimination. Do you have any 3 perspectives on a delayed implementation for the barrel 4 elimination proposal? 5 A. I think it -- it could be considered a material 6 impact to price. So we -- we would, you know, make the 7 same point that potentially anything with a material -- 8 possible material impact to price, we would advocate for 9 consideration of the futures markets. 10 Q. Do you believe that the National Milk's barrel 11 elimination proposal would have a material impact on 12 price? 13 A. I -- I wouldn't speculate on that myself. But 14 I -- I think, you know, if it could be considered, that we 15 would advocate for a consideration of futures markets with 16 implementation. 17 Q. And have you done any kind of analysis to 18 determine if there is any -- any forecasted or anticipated 19 materiality impact to price? 20 A. That is out of scope of my direct testimony right 21 now. 22 Q. Okay. When you say "out of scope," does that mean 23 you didn't do that analysis or you are just not here -- 24 A. That's -- 25 Q. -- to talk about that -- 26 A. For my direct testimony, yes, we don't have that 27 analysis in front of us. 28 Q. Okay. And then what about for higher-of, did 759 1 you do -- have you -- do you have any perspectives on the 2 materiality impact of the higher-of proposal? 3 A. We -- we do not for this testimony. 4 Q. And Make Allowance, we have at least your analysis 5 in Figure 5. Does that mean that you believe that there 6 would be a materiality impact for Make Allowance? 7 A. Yes, based on what we have -- what we have 8 understood from the expected changes to price. 9 Q. And -- and that's based on what you have outlined 10 there in Figure 5? 11 A. Yes. 12 Q. All right. And so if we were weighing and 13 balancing the impact to producers in -- in increasing or 14 maybe tempering the increases in Make Allowance, we would 15 use your Figure 5 as a -- as a counterbalance to that? 16 A. We -- it's a hypothetical example, so I -- I -- we 17 just -- we know that these are proposals out there, and 18 analysis was done based on open interest in 2022. But 19 that's a hypothetical example. I don't think we're saying 20 that this would be the outcome with certainty on the III 21 and IV prices. 22 Q. And what about Class I differentials, did you do 23 any kind of -- do you have a perspective on whether the 24 Class I differential proposal by National Milk would 25 materially impact any pricing mechanisms? 26 A. We don't have that analysis as part of this 27 testimony. 28 Q. And for the milk composition proposal that 760 1 National Milk has put forth, you understand that National 2 Milk's proposal is that it would occur every three years 3 if there was a change made? 4 A. I -- I don't have that in front of me, but I -- I 5 believe you if that is, yeah, the proposal, yeah. 6 Q. I'm just wondering if -- if given the option of 7 having a change annually versus every three years, if you 8 believe that the three years would create less in -- less 9 of a disruption to futures risk than having it changed or 10 updated annually? 11 A. I would -- I would point back to our example with 12 variable storage rates. In that example, the data, it 13 comes from our futures markets where, you know, that data 14 is available on an everyday basis from market participants 15 to see. And so I -- I guess it -- I can't necessarily 16 answer one way or the other. I think it depends on the 17 availability of the data and making sure the marketplace, 18 you know, has advance notice and is able to view that 19 data. 20 There are -- there are mechanisms like VSR that 21 are written into the contract rules that update regularly, 22 but there -- you know, that was well known in advance 23 before those changes went in, and the marketplace knows 24 when those changes are coming. So I can't necessarily say 25 whether one year is better than three. I think it depends 26 on the availability of the data and the notice that the 27 market has. 28 Q. Is it fair to say that fewer number of changes 761 1 means that there would be fewer opportunities for -- for 2 any kind of market disruption to the futures risk 3 management practices? 4 A. I wouldn't necessarily take a position on that 5 because I think it can depend. 6 Q. Okay. On the -- on the visibility and being able 7 to expect when it's coming? 8 A. Yes. 9 Q. Okay. 10 MS. HANCOCK: Okay. Thanks so much. Appreciate 11 your time. 12 THE COURT: Further cross? 13 Mr. English. 14 CROSS-EXAMINATION 15 BY MR. ENGLISH: 16 Q. Good morning. My name is Chip English with Davis 17 Wright Tremaine. We represent the Milk Innovation Group. 18 Thank you very much for coming. 19 So I want to revisit some of the areas covered 20 just now, but it in a slightly different way. 21 Were you involved with the CME back in 2007, 2008 22 timeframe when USDA made the last changes to 23 Make Allowances? 24 A. I was not directly involved, no, but -- but I have 25 familiarity with our market since that time. 26 Q. Did you have familiarity with the market at the 27 time, though; is that -- or not? 28 A. I was not involved with that market at the time, 762 1 no. 2 Q. Okay. Would you know that USDA did not delay that 3 decision in 2007, 2008? 4 A. Yes. 5 Q. Okay. And so given the fact that these markets 6 were comparatively to now, newer, do you know whether the 7 change by USDA impacted open interest back at that 8 timeframe? 9 A. We -- we did see -- I would point back to 10 Figure 2. We did see a slight drop off in open interest 11 after 2008, so we did see some impacts. But I would -- 12 you know, in comparing back to 2008, I would point to the, 13 you know, three times the market size growth that we have 14 seen since then. You know, we're in a different scenario 15 since then. We also have additional -- several additional 16 futures tools that we didn't have in 2008, like the cheese 17 futures that are most active dairy product contracts, as 18 well as other products being tied back to the CME dairy 19 markets, in addition to the three times market growth that 20 we have seen. 21 Q. But nonetheless, the market survived. The hedging 22 didn't go away because of the impacts of 2008, correct? 23 A. There was still hedging, yes. 24 Q. Now, I'm going to struggle, too, with -- with your 25 roles, and so bear with me. But when it comes to Federal 26 Order, I want to test -- or at least understand what your 27 understanding is. 28 So do you understand that given the rules of 763 1 practice that we operate under, none of us outside of 2 USDA, but certainly none of us in the industry, any 3 hedging entities, dairy farmers, processors, will know 4 whether USDA is agreeing to delay implementation, at least 5 until the proposed rule and then -- is issued? 6 A. Yes. 7 Q. Okay. And even that, as you point out, we may not 8 know what the final rules are until the final rule comes 9 out, probably, maybe, you know, around October 1st of 10 2024, correct? 11 A. Yes. 12 Q. Okay. Doesn't that mean that the risk to open 13 interest would already exist, given the fact that no one 14 can know, not only what the change is going to be, but 15 whether the change is going to be implemented immediately 16 or not? 17 A. There -- there is uncertainty from a regulatory 18 standpoint. I do think there is an unprecedented amount 19 of regulatory uncertainty in -- in this current scenario 20 with all of the proposals, you know, being discussed, as 21 well as just our market size now. So there's additional 22 regulatory uncertainty. 23 But I would point out as well, that you -- you 24 mentioned, I think, the industry doesn't expect -- you 25 know, they don't expect a decision on this in the early 26 part of 2024, but we have already started to hear 27 anecdotally that farms that would have already been 28 putting on positions for the second half of 2024 or 764 1 putting on spread positions are holding back on that, or 2 doing less of that because of that regulatory uncertainty. 3 And we have -- we have seen that as well in -- in 4 looking at the amount of contracts on average in August 5 that are beyond 360 days to expiration. We are -- we were 6 at about 4800 on average for August of contracts beyond 7 that 360 days, and compared to the 2020 -- 2018 to 2022 8 average, that is a 54% drop. So we are seeing a pullback 9 in people willing to put positions on in that second half 10 of 2024 and beyond. 11 Q. I don't have the document, yet, I'm trying to get 12 it as an exhibit. But I think -- I think that reflects, 13 if you compare 2022 to 2023 open interest, it pretty well 14 consistently is lower as you go down? 15 A. We don't have 2023 open interest here. This is 16 through the end of 2022. 17 Q. I understand. I'm sorry. I'm looking at, if you 18 compare August 22nd, 20- -- I'm sorry -- August 24th, 19 2022, going down 18 months, compared to the open interest 20 August 24th, '23, if you compared those two, it would 21 appear that open interest is down across the lines. 22 Would you agree? 23 A. I -- I don't have that in front of me, so I don't 24 want to speculate right now but -- 25 Q. Okay. It wouldn't surprise you? 26 A. It wouldn't -- we are -- it's a slight on average 27 reduction in open interest on average this year, but 28 still -- still a record. I think second highest on 765 1 average open interest this year. 2 Q. But nonetheless, if -- if industry cannot know 3 whether they are dairy farmers, dairy processors, or 4 people who are middlemen, if they cannot know, not only 5 what the change is going to be, but when it's going to be 6 implemented, won't that all have the same impact on the 7 interest -- on open interest? 8 A. I don't know about the same impact and what you 9 mean by that. But there will -- if there's an 10 uncertain -- if there's uncertainty in where the Federal 11 Order formulas will land or that price relationship, that 12 will have an impact, a possible impact on people's 13 willingness to put on positions, either on the hedge side 14 or the liquidity provider side. 15 Q. And in fact, some of the volume trading 16 differences may be through over-the-counter contracts and 17 futures, correct? 18 A. That's possible, yes. 19 Q. Okay. So I also want to, if I can, explore the 20 impacts of some of these proposals. And given the fact 21 that this is not what I would call a traditional 22 cross-examination because you are here as a neutral 23 witness -- and believe me, everybody in this room wants 24 hedging to succeed. All right? That's not the point. 25 A. Uh-huh. 26 Q. So I want to explore maybe that two proposals may 27 have different impacts on open interest, if I may. And 28 those are the MIG allowance change, which you have done an 766 1 example of, and the component change that Ms. Hancock 2 discussed with you. 3 So I want to go first to your Figure 5 and ask one 4 question, and I'm going to try to run some more simple 5 examples, if I may. 6 So to the extent that many of these contracts 7 would be people -- would be dairy farmers or dairy 8 processors -- you agree that a lot of these contracts are 9 entered into by dairy farmers on the side, correct? 10 A. Yes. 11 Q. And dairy processors on the other side? 12 A. Yes. 13 Q. Okay. Let's assume that's 100%. I know it's not 14 100%, but assume for a moment that's 100% of the change in 15 value to the average 2022 futures equivalent open interest 16 that you have as a negative 65 million and change. 17 Do you see that? 18 A. Yes. 19 Q. Okay. Would the physical position on the other 20 side of the futures market be equal in a positive 21 direction? 22 A. It's not our place to address physical impacts. 23 We want to focus on the future side. 24 Q. I understand that. But I just want to be clear 25 that -- that may be the impact on the futures, but the 26 impact on people in the market, assuming my scenario of 27 100% dairy farmers and 100% processors, would be zero, 28 correct? 767 1 A. I'm sorry. Can you repeat the question? 2 Q. All right. Let me -- let me be simpler if I can. 3 Let's say -- 4 THE COURT: Let me ask, how are we doing on speed? 5 (Off-the-record.) 6 BY MR. ENGLISH: 7 Q. So let's assume for a moment that there's a dairy 8 farmer who wants to hedge, and he enters into a futures 9 contract to sell milk at $20 today. 10 (Court Reporter clarification.) 11 BY MR. ENGLISH: 12 Q. And the Federal Milk Order doesn't change, such 13 that at the time he sells his milk, he gets $22 on the 14 milk, but he contracted to sell at $20. He lost $2 on the 15 hedge, but he got $22 for the milk, so he gets $20, 16 correct? 17 A. Correct. 18 Q. So now let's say that the same dairy farmer sells 19 at $20 on a futures. But because of the Federal Order 20 change, he ends up settling to $19. 21 He still ends up with the same $20, correct? 22 A. Correct, in that scenario. 23 Q. So as long as you have to buy back at the physical 24 place, which happens automatically when the futures 25 contract expires, then the hedge will give you the same 26 outcome that you anticipated, correct? 27 A. That's -- that's the goal of hedging, yes, that 28 you are -- 768 1 (Court Reporter clarification.) 2 THE WITNESS: Yeah. The goal when you are hedging 3 is to take the equal and opposite position so that you 4 offset any loss in your physical position. 5 BY MR. ENGLISH: 6 Q. So under that scenario -- and I want to -- this is 7 now focusing on the Make Allowances because I think the 8 components may be different. 9 Under that scenario, the dairy farmer has the same 10 level of interest today regardless of what Federal Order 11 change would be, correct? 12 A. I -- I don't know that I want to speak to that. 13 Q. All right. If I went through the calculations, 14 though, on the opposite side of the transaction for a 15 processor, it would be the same, it would end up with the 16 $20, my example, correct? 17 A. On the other side of that -- 18 Q. Yes, other side of the producer -- so if the dairy 19 farmer and the producer enter the contract, under my 20 scenarios, they both got the benefit of the bargain, one 21 wanted to sell milk at $20 and one wanted to buy milk at 22 $20, and in the end that's what happens, correct? 23 A. Yes. 24 Q. Okay. All right. So that's a futures contract. 25 So let's talk about an options contract. So I'm a 26 dairy farmer -- and I'm not -- but a dairy farmer wants to 27 know that the price she is going to receive is no lower 28 than $20, but can still get the upside. And so that dairy 769 1 farmer buys a put option and gets the right to sell her 2 milk at $20, no matter where the price will end up. 3 Again, no matter where the price ends up under the Federal 4 Order, that dairy farmer will get the benefit of that 5 minimum $20, correct? 6 A. If they locked in that hedge, yes. 7 Q. And, again, the same thing on the opposite side of 8 the transaction if a processor wanted to buy milk at -- 9 A. Yes. 10 Q. Yes. Okay. 11 Now, let me briefly turn and suggest that while 12 that would be true with the change in the Make Allowances, 13 that the result may be different when we talk to changes 14 in the components. And that is to say under multiple 15 pricing orders -- you understand that some of the Federal 16 Orders have multiple component pricing, and some do not, 17 correct? 18 A. Yes. 19 Q. Okay. So a dairy farmer under a multiple pricing 20 order may very well be expecting to get a premium to the 21 Class III because of their higher components, correct? 22 A. That may be true, yes. 23 Q. Okay. But in that example, the hedging for 24 components, if the components have changed, will not work 25 out the same as my prior example with Make Allowances, 26 correct? 27 A. Possibly correct. 28 Q. Okay. So I understand that maybe we're going to 770 1 have a limited conversation about Class I based upon your 2 answers to Ms. Hancock, but I nonetheless, you know, want 3 to ask. 4 She -- she -- she asked the question about what is 5 euphemistically is called higher-of, and let me rephrase 6 it and say what we're talking about is the base Class I 7 skim milk price. 8 Does that phrase make sense to you? 9 A. Yes. 10 Q. Okay. Do you have any experience post 2019 seeing 11 whether Class I hedging increased -- let me strike that. 12 Do you know -- and I don't want confidential 13 information like names or anything -- but do you know who 14 was hedging? 15 A. I don't have the same visibility that, say, market 16 regulation would, not at the individual client. 17 Q. You wouldn't know whether a market participant is 18 a Class I processor versus a cheese manufacturer? 19 A. Not with full visibility, no. 20 Q. Okay. So you wouldn't know and be able to tell us 21 whether since 2019, when the Congress changed the statute 22 for the base Class I skim milk price, whether there was 23 more or the same or less Class I sales market? 24 A. I wouldn't want to speculate, because it's also 25 difficult for us to tie that activity back specifically to 26 fluid milk hedging. 27 Q. So let me just briefly go back. Given the fact 28 that you are already seeing some change in open interest, 771 1 and given the fact that we won't know, not only what the 2 rule is but the implementation date from USDA until 3 October of next year, shouldn't risk takers be taking all 4 that into consideration when they make hedges? 5 A. Yes. I think, you know, there's an obligation 6 that you should be aware of risk you are taking on when 7 entering into a contract. But I do also think, you know, 8 if we're talking about changes to the underlying 9 assumptions that -- that, you know, are out of the normal 10 scope of what people would be taking on in terms of risk 11 from an uncertainty of regulation standpoint. 12 Q. But at least it is uncertainty where we have some 13 experience, correct? 14 A. Again, I wasn't directly involved in 2008, so I 15 know there's a lot being discussed here. 16 Q. Well, it's not exactly like a war in Ukraine 17 breaks out and impacts the whole world, right? 18 A. What do you mean by that? It does. 19 Q. Or it's not like we have COVID, and as a result, 20 because industry asked for it, USDA issues a Food Box 21 Program that alters all the pricing, is it? 22 A. I'm not really sure what you are trying to ask. 23 Q. Okay. Have you in preparing for this testimony 24 had discussions with market participants? 25 A. Yes. 26 Q. Okay. Can you tell us which ones? 27 A. No. 28 Q. Sorry? 772 1 A. I can't say which market participants I have 2 discussed with. We also discuss our markets as regular 3 course of business on an ongoing basis. You know, having 4 those discussions is part of our daily job at CME as well. 5 Q. All right. 6 MR. ENGLISH: I have no further questions. I 7 thank you very much for your time. 8 THE COURT: Yes, Mr. Rosenbaum. 9 CROSS-EXAMINATION 10 BY MR. ROSENBAUM: 11 Q. Steve Rosenbaum for the International Dairy Foods 12 Association. 13 If I could ask you to turn to page 6 of your 14 testimony where you have your table. 15 You -- you list there in three columns, first of 16 all, the current Make Allowances, correct? 17 A. Correct. 18 Q. And in the second column, the -- what's called 19 Example 1, the National Milk Producers Federation proposed 20 changes in the Make Allowances, correct? 21 A. Correct. That's where we pulled those numbers 22 from, yes. 23 Q. And what you have as Exhibit 2 is year one of the 24 International Dairy Foods Association proposed revision to 25 the Make Allowance; is that correct? 26 A. That is where we pulled that example from, yes. 27 Q. And are you aware that the International Dairy 28 Foods Association year one proposed Make Allowances 773 1 represents 50% of what International Dairy Foods 2 Association says should be the change in the 3 Make Allowances? 4 A. Yes, I am aware of that. We wanted to show what, 5 you know, that initial impact of the change would be. 6 Q. Okay. And so if you were to be comparing the 7 National Milk Producer Federation proposal to the 8 ultimate, if you will, International Dairy Foods 9 Association proposal, the number for the cheese 10 Make Allowance would be something in excess of $0.28 for 11 IDFA, correct? 12 A. I believe I do have those numbers. 13 The cheese Make Allowance, .2840. 14 Q. Yes. And -- and simply -- one can simply subtract 15 from the number in Example 2, the number listed as 16 current, and double that difference, and that will tell 17 you what the IDFA ultimate proposal is; is that correct? 18 A. I'm sorry. You are saying subtract from 19 Make Allowance or from -- 20 Q. Well, I mean, for -- like an example -- just in 21 Example 1, the way it would work is you -- you take the 22 .2422, you subtract the .2003, and whatever that -- 23 whatever that number is, you double that and add it to 24 .2003, and that will tell you what the IDFA proposal is; 25 is that correct? 26 A. I don't want to speculate. 27 Q. Well, I'm just -- I'm just -- if Example 2 is 28 halfway to what IDFA is proposing in terms of an increase 774 1 in the Make Allowance, then you simply double whatever 2 that increase is -- 3 A. Yes. 4 Q. -- to get to the ultimate number, correct? 5 A. I -- I -- I understand that the ultimate number is 6 .2840 for IDFA Make Allowance. 7 Q. All right. And you can -- and one could do the 8 same calculation for all the other Make Allowances, 9 correct? 10 A. I understand that the butter Make Allowance is 11 .2785, .3172 for dry whey, and .2716 for nonfat dry milk. 12 Q. Okay. And that's IDFA's proposal, correct? 13 A. That's full Make Allowance change. As far as I 14 understand, yes. 15 Q. Okay. And I take it you are familiar with what 16 role Make Allowances play in the pricing of -- in the 17 setting of Class III and IV prices; is that correct? 18 A. Yes, familiar. 19 Q. Okay. And -- and are you aware that 20 fundamentally, one -- take cheese as an example -- 21 determine what the Class III price is, one does a survey 22 of what people are actually selling cheese for, one 23 deducts the Make Allowance, and what's left is the amount 24 that gets paid to the dairy farmer? 25 A. That may be an oversimplification, and I would 26 defer to the experts in the room on that. But I -- I 27 understand the role that Make Allowances has in the 28 formulas. 775 1 Q. I couldn't quite hear what you said. 2 A. I -- I don't want to oversimplify as I would defer 3 to the experts in the room on the formulas themselves. 4 But I understand that Make Allowance is a part of those 5 formulas that derive Class III and IV milk, yes. 6 Q. And by so doing, it drives the amount that has to 7 be paid to the dairy farmer, correct? 8 A. Yes. 9 Q. Okay. So -- and are you aware that as a general 10 matter, at least if you are selling the commodity product 11 that is being subject to CME trading, and that is used to 12 set class prices, that as a processor, you are, in 13 essence, limited to the Make Allowance in terms of the 14 money you get to hang on to? 15 A. I don't want to speak to the -- on the physical 16 side of the money that the processors get to keep. 17 Q. Okay. But -- but you -- you do understand that 18 the whole concept behind raising the Make Allowances is 19 that you would be increasing the amount of money that the 20 formulas are assuming it costs a manufacturer to make the 21 product, correct? 22 A. I -- I don't want to speak directly. I think 23 that's outside of my -- what I'm intending to testify on. 24 Q. Well, I'm just trying to understand whether you -- 25 you know, you have done some calculations here. 26 A. Yes. 27 Q. You must have some general understanding of the 28 purpose served by Make Allowances. 776 1 A. I -- I do, but I want to focus -- we wanted to 2 focus on the impact to futures markets and not on the 3 physical market participants. 4 Q. Well, let -- so have you -- have you done any 5 calculation to determine -- strike that. 6 In Example 1, that's National Milk Producers 7 Federation, correct? 8 A. We -- we pulled that example from -- 9 Q. Okay. And under their own proposal, the 10 Make Allowance would go up to $0.24 from 20.03 cents, 11 correct? 12 A. Yes. 13 Q. And so have you -- have you done any calculation 14 as to what that implies is the dollar amount by which the 15 Make Allowances currently in effect are failing to reflect 16 actual cost of manufacturer? 17 A. That's outside of our scope of what we -- 18 (Court Reporter clarification.) 19 THE WITNESS: Of what we intend to testify on. 20 BY MR. ROSENBAUM: 21 Q. I mean, if I were to tell you that simply using 22 National Milk's proposal and looking at how much milk is 23 pooled in the Federal Order system for Class III products, 24 it would suggest that the Make Allowances are understating 25 cost of manufacture by $600 million a year? 26 MR. HILL: Your Honor -- 27 THE COURT: Yes. 28 MR. HILL: -- I'm going to object here. I think 777 1 this witness has said over and over again at this point 2 that she's not intending to testify on those matters. She 3 came in for a specific testimony, and I think this is 4 outside of it. She's asked and answered this question. 5 THE COURT: Sustained. 6 Go on, Mr. Rosenbaum, you want to say something on 7 that before -- I'll withdraw that ruling. I'll hear what 8 you have to say, Mr. Rosenbaum. 9 MR. ROSENBAUM: Sorry -- I'm sorry, I didn't hear 10 that last part? 11 THE COURT: I'll let you respond to Mr. Hill's 12 objection that this is beyond the witness's testimony. 13 BY MR. ROSENBAUM: 14 Q. Let me ask -- let me ask it a different way. 15 You -- am I correct you -- you have not made any effort to 16 determine whether or to what extent delaying 17 implementation of the new milk order regulations by a 18 year, what impact that would have on -- on dairy 19 processors? 20 A. That's -- I would decide not to answer that. I 21 think we -- we don't intend to testify on those matters. 22 MR. ROSENBAUM: That's all I have. 23 THE COURT: Thank you, Counsel. 24 And the objection was sustained. 25 Mr. English has follow-up. Should we take you now 26 or did someone else stand to -- all right, let's take you, 27 Mr. English. 28 CROSS-EXAMINATION 778 1 BY MR. ENGLISH: 2 Q. So just a couple more questions. I appreciate it. 3 It's just something that I didn't quite get to. 4 So I talked about the hedgers, correct? 5 A. Yes. 6 Q. So let's talk about -- a minute about the market 7 makers. 8 This is, for want of a better phrase, a known 9 unknown, correct? 10 A. It -- it's -- there's regulatory risk associated 11 with this. 12 Q. And everybody knows that there's an unknown risk 13 of what's going to happen, correct? 14 A. You could say that about any market. There's 15 unknown -- 16 Q. Exactly. You can say that about any market. 17 Isn't that exactly what market makers want, they 18 want those kinds of things in order to be able to assess 19 risk? 20 A. I think I would point back to the example of, you 21 know, we have used some of the changes discussed as 22 material changes to the contract. And while, yes, there 23 is risk market makers take on when they are, you know, 24 entering and taking the other side of that trade, there's 25 still stability in the underlying assumptions that they 26 are making when making those trades and when taking on 27 that risk. 28 And I think there's an unprecedented amount of 779 1 uncertainty in, you know, whether -- without knowing the 2 formulas, without knowing that price relationship that 3 they are taking on. And we -- we have been hearing 4 anecdotally that they are -- they are maybe less willing 5 to do that moving forward if it's going to be -- continue 6 to be an additional unprecedented level of regulatory 7 risk. 8 Q. And part of that uncertainty is not knowing when 9 it will be implemented, correct? 10 A. Correct. 11 MR. ENGLISH: Thank you. 12 CROSS-EXAMINATION 13 BY MR. VETNE: 14 Q. Good morning. My name is John Vetne, V-E-T-N-E, 15 representing National All-Jersey. 16 The risk management programs that you provide 17 allow traders to project, as they desire, about changes in 18 value based on market data such as your cheese options 19 that's based on market information, correct? 20 A. What is based on market -- can you repeat the 21 question in a different way? 22 Q. The cheese options that you provide, for example, 23 cheese futures, are based on anticipated future prices of 24 cheddar cheese in 40-pound blocks and 500-pound barrels, 25 correct? 26 A. The forward curve can be seen as anticipation of 27 where the market's going to go, but the final settlement 28 is based on the USDA published prices for those -- for 780 1 those products. 2 Q. The USDA published prices are based on the survey 3 of market information? 4 A. Yes. 5 Q. Okay. Do you expect to see any -- any change 6 in -- in that product if 500-pound barrels are eliminated 7 from the regulatory formula? 8 A. I wouldn't speculate on -- on the actual impact to 9 price, but I think we do view it could be a material 10 change to the contract. 11 Q. I'm sorry. Could you keep your voice up? 12 A. We -- 13 Q. You're fading out. 14 A. I wouldn't -- I wouldn't speculate on the specific 15 impact to price, but I do think we believe that could be a 16 material change to the cheese contract, yes. 17 Q. Okay. You could only continue to offer that 18 product, for example, if 500-pound barrel prices continue 19 to be announced, even though they might not be part of the 20 formula? 21 A. Our -- our current rule book language states that 22 it settles to the USDA non-monthly weighted average price 23 for cheddar cheese, so it -- it does settle to the USDA 24 announced price for cheese, which if -- if they made a 25 change, that potentially would be reflected in the 26 contract as well. 27 Q. If they made a change in the products reported; is 28 that correct? 781 1 A. So if -- if USDA whatever -- you know, if they 2 change the survey methodology that feeds into that monthly 3 weighted price, our contracts will continue to settle to 4 the monthly weighted price. 5 Q. Okay. The survey methodology for reporting market 6 prices for cheese; is that what you are referring to? 7 A. Yes. For -- for the -- if there's a change to how 8 USDA calculates those weekly prices that feed into the 9 monthly price, that would -- that would all factor into 10 the cheese contract, yes. 11 Q. Okay. As long as that continues to be reported, 12 assuming the same survey price process, would it matter to 13 that contract if 500-pound blocks were removed from the 14 Federal Milk Marketing Order price calculation? 15 A. I wouldn't take a position on whether it would 16 matter or not. I just want to make sure you are aware 17 that we would consider it a material change, but I 18 wouldn't take a position one way or the other. 19 Q. Does not take a position mean you don't know? 20 A. I -- I defer -- I -- it's not our place to take a 21 position on that change. 22 Q. Okay. The Class III and Class IV futures are 23 based on reports of regulatory data as distinguished from 24 market price. Do you understand I use market price in 25 prior questions, reported cheese prices in the market as 26 reported by USDA? 27 A. Uh-huh. 28 Q. Class III and IV prices are not market prices, 782 1 they are regulatory data, correct? 2 A. I -- I wouldn't specify how -- how those are 3 determined. 4 Q. Okay. Let's go -- people love your Figure 5. 5 I'll go there, too. 6 When you use -- in this middle of the figure, you 7 use the term change in value to average 2022 futures 8 equivalent open interest. 9 So is that all of the open interest contracts for 10 calendar year 2022? 11 A. No. That's -- that's on average throughout the 12 year on a daily basis. 13 Q. It's the average for the entire calendar year? 14 A. The average for calendar year 2022 of futures 15 equivalent to futures and delta weighted options open 16 interest. 17 Q. So, by average -- 18 A. On a daily basis. 19 Q. On a daily basis, so -- okay, at any time. 20 And when you go down further to change in value to 21 average, is that a representation of what would happen to 22 the value of those future contracts if there were an 23 immediate change -- 24 A. No. 25 Q. -- of the Make Allowance? 26 A. It actually -- it doesn't necessarily take into 27 account when the change is made. It is just when that 28 change was made that next day, yes, this would -- this 783 1 would be the impact on the average settlement. 2 Q. Okay. So you have an existing settlement price, 3 and if the next day it changed, here's how all of those 4 contracts would be affected? 5 A. Yes. 6 Q. And therefore, if all of the data going down -- 7 except for change in value. If there were a 12-month or 8 15-month or a 24-month lag, you would anticipate the 9 change in value would be zero; am I correct? 10 A. I don't know if it's fair to say that. I wouldn't 11 want to speculate on undeferred. But market participants 12 would then be not entering in -- if they had advanced 13 notice of when those changes were going to happen -- 14 Q. Yes. 15 A. -- they would then be pricing that information and 16 taking that into account when they are entering into 17 positions. 18 Q. And at some point, if there was enough lag between 19 the announcement or knowledge of a change, if it's beyond 20 all open interest, the impact is zero? 21 A. Yes. 22 Q. Ms. Hancock asked you some questions about market 23 disruption and the frequency of change of prices, and she 24 used the word market disruption. 25 Did you understand her use of that word, and in 26 your answer did you intend to mean market disruption in 27 the risk management market, the futures market? 28 A. I'm thinking back. I believe that's how I 784 1 interpreted it, yes. 2 Q. Okay. And you did not intend to suggest a market 3 disruption in the milk market, for example? 4 A. I was focused on the futures market, yes. 5 Q. On the futures market. Okay. 6 And am I correct that if there is enough notice, 7 enough lag between a regulatory change and its 8 implementation, that the market disruption is reduced -- 9 could be zero, if it was enough lag, whether it's changed 10 every year or every three years or every five years? With 11 enough lag, the disruption would be the same, it's how 12 much the lag is? 13 A. I think it depends on the type of change you are 14 talking about and the market information available and the 15 notice given. So I -- I don't know that I'd generalize. 16 I think it depends but -- 17 Q. It depends on the lag between the notice and its 18 implementation in all cases, correct? 19 A. Yes. That would be a factor, yeah. 20 Q. Did I understand you to say that going beyond your 21 written testimony that the open interest beyond 12 months 22 currently in the month of August 2023 has reduced by 50% 23 or more? 24 A. Versus 20- -- versus 2022, yes. So average open 25 interest over 360 days for August of 2023 was around 4800 26 contracts, and for 2022 it was about 10,400 contracts. So 27 a roughly 54% drop versus the five-year average it is 28 roughly a 36% drop. 785 1 Q. So you are inferring that participants in risk 2 management are already factoring in the uncertainty of 3 this proceeding? 4 A. It's -- it's a possibility. I can't say with 100% 5 certainty that's what it is. But we wanted to point out 6 that there is a reduction in -- we're hearing anecdotally 7 that there is some reluctance to put on those deferred 8 positions. 9 Q. Okay. Concerning market knowledge, market 10 information, and lag time, Mr. English asked you some 11 questions. Apparently there has been some possible market 12 response by virtue of the proposal and this hearing. The 13 next step procedurally by USDA would be a recommended 14 decision. 15 Would that be another opportunity for the market 16 to respond in its risk management on the CME? 17 A. In terms of pricing and what -- what that new 18 decision would be, or what do you mean by that? 19 Q. In terms of you have indicated there has been a 20 response in open interest beyond 12 months. 21 Would you anticipate that market participants in 22 risk management would factor in a recommended decision in 23 their risk management planning, whenever that occurs? 24 A. I think they will take into account the 25 information that's available when trading in the market. 26 Q. And that would be additional information, correct? 27 A. Once a decision is issued, yes. 28 Q. Yes. 786 1 And then there will be some briefing and 2 exceptions, and then there will be a final decision, 3 another time at which market participants could factor in 4 new information? 5 A. There's new information, yes. But if -- but if 6 that uncertainty remains until the final decision, we can 7 likely still see a pullback in the willingness to put on 8 positions. 9 Q. Okay. And then following that, there would be a 10 final decision, another opportunity to factor in 11 information, reducing uncertainty, correct? 12 A. There would be additional information, yes. 13 Q. Okay. And following that, are you aware that 14 there would be a referendum with producers? 15 A. As I understand, yes. 16 Q. And then final implementation -- final 17 effectiveness of a rule, another time period in which 18 there would be additional information, correct? First day 19 of an effective rule? 20 A. I -- I'm not -- I don't have that process in front 21 of me, but I believe you, yeah. 22 Q. Okay. And then depending on what that rule says, 23 if there is a lag time built-in or not. 24 So the first indication the market would get on 25 whether there is a built-in lag would be in a recommended 26 decision? 27 A. It may be an indication, but there's still 28 uncertainty and, you know, decisions could land either 787 1 way, so there's -- 2 Q. The uncertainty would, in part, reflect whether 3 USDA has a pattern of following its recommended decision 4 into the final decision or making significant changes. 5 A. I wouldn't speak to that. 6 Q. You don't know. Okay. 7 Could you give me a really simplified fourth grade 8 explanation of the difference between a future and an 9 option? 10 A. Sure. Yeah. A futures contract is -- is -- I 11 refer back to my definition, but you are actually entering 12 into a contract to buy or sell an asset or an underlying 13 reference at a future point in time. And the options 14 contract is just the right but not the obligation to do 15 that. 16 Q. How is that different? 17 A. Options -- so futures are -- you know, they are -- 18 if you are carrying that position all the way to 19 expiration, you are automatically getting settled against. 20 An option, you have the right, but people don't always 21 exercise those positions. 22 Q. Under the option, you can if you want to, but you 23 don't have to? 24 A. Yes. 25 Q. Got it. 26 MR. VETNE: Thank you, 27 /// 28 /// 788 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Good morning. My name is Ryan Miltner. I 4 represent Select Milk Producers. 5 A. Okay. 6 Q. Many of the topics I was going to ask about have 7 been covered. So if I pause, it's because I'm skipping 8 over things that I don't want to duplicate or make you 9 duplicate. Okay? 10 A. Yes. 11 Q. There was some talk about the -- this Federal 12 Order process and the time it takes to get from a hearing 13 to a final decision. We went through this in some detail 14 on Friday with Dr. Bozic. But we kind of landed on a 15 recommended decision, if one were to come, sometime around 16 April 15th of 2024, and a final decision August -- I'm 17 sorry -- October 1 of 2024. 18 So let's just assume that that's going to be the 19 case. Is that all right? 20 A. I -- I am not going to say that we're -- I'm not 21 taking a position on that as a proposed. 22 Q. No, I'm not asking you to take a position. I'm 23 saying can we assume that for these questions? 24 A. Sure. 25 Q. Okay. So between April and October, we have got 26 six months or so. And if I'm -- as I look at your 27 testimony, and Figure 3 in particular, I think that means 28 that between the recommended decision and a final 789 1 decision, that 75% of the open interest would have closed 2 out during that window; is that right? 3 A. We still view that uncertainty as remaining until 4 that final decision. 5 Q. Okay. Wouldn't, however, the market participants, 6 once the recommended decision comes out, begin to price 7 that risk in? 8 A. Market participants will take into account the 9 information they have, but from our standpoint and how we 10 normally would approach a material change, that 11 uncertainty still remains until the final decision is 12 issued. 13 Q. I want to ask about the material changes that you 14 referenced in your testimony with respect to cattle 15 futures and wheat futures. 16 Those particular changes -- and, again, I'm not an 17 expert on the CME -- but those were triggered by changes 18 in the contract definition for those commodities, correct? 19 A. They were triggered by a need from the physical 20 industry to update the contracts to reflect -- to reflect 21 the dynamics in the industry. But when you say triggered, 22 you mean the contract changes that actually happened? 23 Q. Yes. 24 A. There would have been a change to rule book 25 language, yeah, to the underlying contract specifications. 26 Q. And the industry -- those -- the industries 27 affected by those commodities approached the CME and asked 28 for changes to the underlying contract structure or 790 1 definitions? 2 A. Whether they approached us or it was ongoing 3 engagement from us with them as a regular course of 4 business. 5 Q. It wasn't triggered by governmental action or 6 regulatory change, was it? 7 A. Not to my knowledge. I wasn't directly involved 8 with both of those changes but -- 9 Q. The CME trades interest rate futures and options, 10 correct? 11 A. Yes. 12 Q. There's no delay or change to those contracts if 13 the Fed changes the interest rates, is there? 14 A. I -- I don't cover those products, and I wouldn't 15 want to speak to those products in this hearing. 16 Q. I think it's either in your statement or in your 17 testimony that most of the dairy futures and options go 18 out 24 months; is that right? 19 A. We list contracts for 24 months out, yes. 20 Q. So right now, I could look at a Class III 21 July 2025 contract, at least it's listed? 22 A. It's available to trade, yes. I -- I don't 23 believe we have open interest out there yet, but it's 24 available. 25 Q. There is open interest in, say, the December 2024 26 Class III contract, though, right? 27 A. Yes. 28 Q. And if our -- if our guesstimate on the end of 791 1 this hearing or a final decision of October of 2024 is 2 right, that means those market participants are purchasing 3 those contracts or selling those contracts, whichever 4 case, understanding there's this regulatory risk out 5 there, correct? 6 A. I -- I can't speculate whether those individual 7 market participants understand the risk. You know, they 8 have entered into positions, but I can't speculate whether 9 they know. 10 Q. I want to ask a question about Figure 5. Where 11 you state the change to an individual Class III contract 12 under both examples, you are listing that as a negative 13 because it's a -- it's a drop in the value of the 14 underlying contract, right? That was the answer -- 15 A. Yes. And I -- I think I acknowledged this 16 earlier, but I would like to acknowledge that there should 17 be a correction to that. It should be Class IV that 18 change -- the 1060 and 1340, that should be for Class IV. 19 Q. Okay. I'll note that. I was actually looking at 20 the one a few rows above, so I was looking at the 21 Class III one. 22 So it's a negative number because the value of the 23 contract drops. But isn't there somebody on the other 24 side of the contract that's going to get the benefit of 25 that price change? 26 A. I don't -- I don't want to speak to the winners 27 and losers in the scenario, just the overall impact to 28 price, and it is a drop in price. 792 1 Q. Okay. I also want to try to get a little more 2 context around what you describe as a material -- material 3 impact on price. I think you -- in response to a 4 question, you said that the Make Allowance proposals would 5 have a material impact on price. 6 Am I stating that correctly? 7 A. Yes. I -- I think I meant to say would have a 8 material impact on the contract, and we would view an 9 impact on price as a material impact -- 10 Q. Okay. 11 A. -- in the contract. 12 Q. So that's great, material impact on the contract. 13 Have you evaluated the three proposals that Select 14 Milk Producers has introduced and determined whether you 15 believe they would have a material impact on the contract? 16 A. We don't have those in front of us, no. 17 Q. They were in the hearing notice. Did you -- and I 18 think you said you looked at the hearing notice. I'm just 19 wondering if you have done the evaluation, that's all. 20 A. I -- I haven't done that specific evaluation, no. 21 Q. Okay. Is there a threshold at some point at which 22 you would decide that any proposal would be material 23 impact on the contract? 24 A. We can't specify a threshold. I think we view it 25 as -- having an impact on price as being a material change 26 to a contract, but I -- I wouldn't get into the specifics 27 of threshold. 28 Q. So of the -- there are 21 different proposals at 793 1 the hearing, and although they will all be, I guess, 2 evaluated independently by USDA, it's a I would say 3 probability that more than one could be implemented, and 4 so that collection of proposals that would be adopted 5 would have some aggregate impact on prices. 6 Does the -- does the collective impact of 7 proposals have any change on your opinion as to whether 8 there would be a material impact on the contracts? 9 A. If -- if they have a change to the Federal Order 10 formulas themselves and there's a change to those 11 formulas, and thus a change to the underlying assumptions 12 when people are entering into these contracts, I think, 13 yes, we -- we believe that would be a material impact. 14 Q. Okay. My next questions are just to help me 15 understand some of the data here in your statement a bit 16 more. 17 I'm looking at Figure 2. And I appreciate that 18 this is in color because it does help. I'm trying to -- I 19 just want to make sure. There are two different blues in 20 there, maybe three. 21 The blue that's at the bottom of your bar chart, 22 is that Class III milk? 23 A. Yes. 24 Q. The blue that appears -- I'm looking at the 2022 25 column. It appears near the top underneath the gray bar. 26 Is that block cheese? 27 A. No, I believe that's dry whey. 28 Q. Okay. Does block cheese appear in the 2022 chart 794 1 then, at least to an extent that it's visible? 2 A. It is very difficult to see, so I apologize for 3 that color scheme. It should be, at least in the last 4 three. But it -- it appears to be blending in with the 5 Class III milk. 6 Q. Looking at, say, 2022 of that blue bar, do you 7 have an estimate as to what -- what percentage of that bar 8 might be block cheese versus Class III milk? 9 A. I -- I don't have that estimate. I -- I wouldn't 10 want to speculate on the record. It's -- it is a small 11 proportion of -- 12 Q. It's small? Okay. 13 So if the -- if the bottom part of the bar chart 14 is Class III milk, although that -- that volume of 15 contracts has certainly increased over time, from 2008 to 16 2022, it's, I don't know, maybe up 40, 50%. 17 Does that seem about right? 18 A. That looks about right, but I -- I don't want to 19 say that on the record without knowing the number. 20 Q. Mr. English asked you some questions, and he went 21 through kind of both sides of a futures and an options 22 trade. And if I followed the Q&A correctly, the benefit 23 to either party would be the same pre and post any 24 decision out of this hearing. 25 Am I correct there? 26 A. No, I don't think that's fair to say. And I -- I 27 wouldn't want to, again, speculate on -- on the physical 28 side of the market and outcomes to the hearing, no. 795 1 Q. Okay. Let me ask this. If a decision were to be 2 implemented right away rather than delayed, is the risk 3 really to the people that are trying to manage their -- 4 their exposure or is it to the liquidity makers that you 5 reference at the beginning of your statement? 6 A. There's risk to anyone that's entering into a 7 position. If the underlying assumptions within that 8 contract are changing, then there's still risk to -- 9 whether you are a hedger or a liquidity provider. 10 Q. Thank you. 11 MR. MILTNER: I don't have any other questions, 12 your Honor. 13 THE COURT: Thank you, Counsel. 14 Any further cross, other than AMS? 15 AMS, I think you are up. 16 MS. TAYLOR: Thank you, your Honor. 17 CROSS-EXAMINATION 18 BY MS. TAYLOR: 19 Q. Good morning, Ms. Krema. 20 A. Good morning. 21 Q. I do -- I do appreciate you coming to testify 22 today. I want to go through your testimony. Get my pages 23 in order again. 24 If we could look at Figure 1 on page 3, there was 25 some talk about one of the proposals is dropping barrels. 26 And, you know, I don't see barrels in this list of 27 products offered. 28 So for the record, could you state which of these 796 1 products would be impacted if barrels were no longer 2 surveyed in prices released? 3 A. The cash-settled cheese futures and options, I 4 believe could be impacted. Again, I -- I'm not going to 5 speculate on -- on impacts to price but -- and the 6 Class III milk futures and options as well. 7 Q. Okay. And what does cash-settled cheese settle on 8 then? 9 A. It settles to the USDA monthly weighted average 10 price for cheddar cheese. 11 Q. Okay. Thank you. 12 And to follow up to Mr. Miltner's question, if we 13 look at Figure 1 and then at Figure 2 on the following 14 page, it looks like in Figure 1, that second column -- and 15 this data is for 2022, total open interest, for a total of 16 269,000 contracts. 17 Is that the same data that was used on Figure 2 18 for that 2022 line? 19 A. Yes. 20 Q. So in the data -- on Figure 1 it says blocks 21 are -- had 2,071 contracts. So while the blue is kind of 22 hidden in Class III, you could figure out the proportion? 23 A. Yes. 24 Q. Okay. Let's see. 25 On Figure 2, I know you stated there was a -- a 26 slight decrease after we implemented our Make Allowance 27 change back in 2008. I also noted particular jumps -- 28 changes between 2010 and 2011, 2013 and 2014, and then 797 1 2021 and 2022. 2 I was just wondering if you could -- if you had 3 any information as to why there were these sudden jumps. 4 I'm guessing it's some new product that was offered 5 perhaps, which the colors show, but in some cases that 6 isn't the case. 7 A. Well, in 2011, yeah, the cheese contract we did 8 launch. So cash-settled cheese, you can see that green 9 bar. It's tiny, but it's there in 2011. And you do see 10 that picking up as well. The nonfat dry milk also, it's a 11 little bit harder to see, but that launched in 2007. So 12 you see that pick up over the years as well. 13 Q. And then the other one was from 2013 to 2014. 14 A. Yes. For that jump, I -- I wouldn't speculate on 15 record what exactly led to that jump. 16 Q. Okay. 17 A. I don't have that context. 18 Q. Okay. Okay. 19 In Figure 3, this average open interest 20 distribution, in this -- does this reflect all seven 21 products that the CME offers? 22 A. It does. 23 Q. Okay. And -- and am I correct -- and this might 24 be kind of an elementary school question for risk 25 management, at least, I'm not sure my kids learned about 26 this in elementary school -- but open interest covered, 27 does that mean that there is a contract, and there's a 28 buyer and seller at both ends, but the contract hasn't 798 1 matured yet, so it is still kind of open waiting for the 2 end date? 3 A. This is looking at a percentage of our open 4 interest that existed on average and the percent of that 5 open interest that resided within three months or six 6 months or nine months. And, again, that's -- that's an 7 estimated month equivalent, because they are bucketed 8 based on days to expiration. 9 Q. Okay. So if I read through -- and I think you did 10 go through this earlier, but sometimes I need to go 11 through it in my own head. 12 At the six-month line, does that mean that 75% of 13 the contracts at that point, on any given day, close 14 within six months? 15 A. Yes. On average, between 2018 and 2022, as much 16 as 75% of that open interest were contracts that would 17 expire within six months. 18 Q. Okay. On page 6, on the third full paragraph, you 19 talk about when a -- well, first, a question. 20 We talked -- there's been a lot of questions on 21 material changes. Does CME make that determination? 22 There's some discussion in that page too about the role 23 CFTC plays. Do -- so I'm just trying to understand who 24 makes the determination that it's a material change, and 25 does CFTC have to approve that or they just kind of 26 oversee? 27 A. For -- for typical changes it's a conversation 28 with our regulator where there's, you know, dialogue 799 1 around what would be considered a material change. 2 Q. Okay. So that's not necessarily just CME making 3 that determination independently? 4 A. Not for changes like we have discussed, you know, 5 these examples. 6 Q. Okay. And how long does it take to do that kind 7 of review and make that determination? 8 A. It -- it really depends on the contract change, 9 and there, you know, can be industry engagement around 10 that, both from us and from the commission. So I think 11 it -- it depends. 12 Q. Okay. And you talk about your material changes 13 are either applied on contracts without any open interest 14 or communicated to market participants with sufficient 15 notice. 16 So I was wondering if you could talk about how are 17 things communicated and what you mean by -- would define a 18 sufficient notice. 19 A. So in terms of how we would communicate a change, 20 you know, once a decision is made to make a change, we put 21 out generally -- we file with the commission, we put out a 22 submission, and then we also put out special executive 23 reports where it's basically a notice to the trade that a 24 change is coming and -- and the implementation windows 25 that -- you know, whatever contract month that change will 26 be effective on. 27 So that -- that's typically -- and there's other, 28 you know, direct communication, but certainly filing with 800 1 a regulator and then putting out broad notices to the 2 trade are how we communicate. 3 And can you repeat the other part of your 4 question? 5 Q. So you say it's done with sufficient notice, and I 6 was just wondering if you could define what that means. 7 A. I can't necessarily define -- I think it's 8 situational depending on whatever contract you are talking 9 about and what the change is. You know, sometimes, like 10 in the examples I mentioned, it's changes that are going 11 out past open interest, if they are deemed to be material 12 changes. Other times it's something that might not, you 13 know, be a material impact on price, and those -- those -- 14 you know, that -- that window can vary depending on what 15 the change is. 16 Q. Okay. Hold on one second. 17 So on your Figure 5, when you talk about overall 18 impact, and I just want to make sure it's clear. When -- 19 for me, for everyone, the record. So when people enter 20 into a contract and the assumptions are known at that 21 point, and then halfway through the assumptions change, 22 that contract cannot change. 23 So is it correct, that contract can't change? 24 A. You mean if it's a contract that's already listed? 25 Q. Yeah. 26 A. Generally, yeah, the contract wouldn't change. 27 Q. So whoever has that contract is kind of -- if 28 there is -- say the Federal Orders make a change to the 801 1 price formulas and the implementation is, you know, 2 shorter than what has been discussed here. The person 3 that has that -- the people that have that contract are 4 kind of stuck with it, right, and so they have to settle 5 it, whatever those terms are at the end, even though the 6 prices might not reflect that? 7 A. They would be subject to that risk, yes. 8 Q. Yeah. 9 There was some discussion on Friday, someone was 10 here to discuss some other risk management tools. And I 11 wanted to follow up on some of that and ask, is the -- 12 does the CME -- you know, do you all as an entity assume 13 any financial or legal risk? You know, if there's a new 14 policy, Federal Order changes that -- or is it just all -- 15 all that risk is assumed by market participants? 16 A. I -- I wouldn't want to speak specifically to our 17 legal risk in this scenario. 18 Q. Okay. 19 MS. TAYLOR: I think that's all we have. Thank 20 you so much. 21 THE COURT: Mr. Rosenbaum, do you have some 22 re-cross? 23 MR. ROSENBAUM: I do, your Honor. 24 RECROSS-EXAMINATION 25 BY MR. ROSENBAUM: 26 Q. I just want to follow up on a line of questioning 27 from USDA, if you would turn back to page 6 of -- here in 28 Exhibit 78, your testimony. 802 1 And you had a paragraph there about how "CME Group 2 routinely files changes to contract specifications that 3 are subject to Commodity Futures Trading Commission 4 review, which may be due to changes in the underlying 5 commodities or to maintain compliance with the core 6 principles set by the Commodity Exchange Act and CFTC 7 regulations." 8 So my question is this: Which of the proposals, 9 if at all, would trigger such a review? 10 A. I -- I don't know that I want to say in this 11 moment what would trigger that review. I think this -- 12 this hearing in general is -- is I think we view it as 13 part of the discussion of ongoing review of the contract 14 and engagement with the industry. But I -- I don't know 15 that I would speak specifically to each individual 16 proposal and whether it triggers that. 17 Q. Or -- or -- I'm focusing specifically on which 18 proposals would trigger the obligation for the CFTC to 19 make a review. 20 Do you have any opinion as to whether any of them 21 actually would trigger that? 22 A. I -- I don't have an opinion to state on that at 23 this point. 24 MR. ROSENBAUM: Thank you. 25 THE COURT: Yes? Re-cross? 26 Is it something having to do with something that 27 came up in the previous -- 28 DR. CRYAN: I apologize. I did not -- this is -- 803 1 this is something -- maybe is tangentially related. Is it 2 okay if I ask a question? 3 THE COURT: Any objection? 4 Seeing none. 5 DR. CRYAN: Thank you. Thank you. 6 (Court Reporter clarification.) 7 DR. CRYAN: Oh, I'm sorry, my name is Roger Cryan, 8 C-R-Y-A-N. I'm with the American Farm Bureau Federation. 9 CROSS-EXAMINATION 10 BY DR. CRYAN: 11 Q. When USDA made a change -- when Congress made a 12 change to the Class I price formula, it was in order to 13 accommodate risk management by fluid processors so they 14 could use the Class III and the Class IV contracts that 15 exist to manage their risk on the Class I price in ways 16 that they -- that were difficult to do with the higher-of. 17 You have added contracts in the past. You have 18 added the block contract. Is it not a possibility to add 19 a Class I futures contract? 20 A. We're always open to engagement with the industry 21 on -- on additional tools to suit the industry's needs. 22 You know, I'm not going to speculate anything out of this 23 hearing, but in general, we're always open to feedback if 24 there are additional tools needed to manage risk. 25 DR. CRYAN: Very good. Thank you very much. 26 THE COURT: Anything further? 27 So on my on motion, offer exhibit marked for 28 identification 78 into the record. 804 1 MS. TAYLOR: Yes, your Honor. Thank you. 2 THE COURT: Seeing no objections, Exhibit 78 is 3 now made a part of the record. 4 (Thereafter, Exhibit Number 78 was 5 received into evidence.) 6 THE COURT: Thank you, Ms. Krema. You may step 7 down. 8 We'll take a break. Ten minutes, be back at 9 10:30. 10 (Whereupon, a break was taken.) 11 THE COURT: Back on the record. 12 Your witness, Ms. Hancock. 13 MS. HANCOCK: Thank you, your Honor. 14 DIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. Good morning, Mr. Kootstra. Would you mind 17 stating and spelling your name for the court reporter? 18 A. Sure. My name is Leland Kootstra. First name is 19 spelled L-E-L-A-N-D. Last name is spelled 20 K-O-O-T-S-T-R-A. 21 Q. And where are you employed? 22 A. I work at Frazer, LLP, in Visalia, California. 23 Q. Would you mind providing your mailing address? 24 A. 2250 West Main Street, Visalia, California, 93291. 25 Q. And did you prepare a written statement in 26 preparation for your testimony today? 27 A. I did. 28 Q. And is that what we have identified as Exhibit 805 1 NMPF-25? 2 A. Yes. 3 Q. And did you also prepare some exhibits to support 4 and provide the backup information for your testimony? 5 A. Yes, I did. 6 Q. And -- 7 MS. HANCOCK: Well, maybe we do this first. If we 8 can have an exhibit number assigned for NMPF-25? 9 THE COURT: Yes, I have 79. 10 MR. HILL: Correct. 11 THE COURT: Exhibit NMPF-25 is marked for 12 identification as Hearing Exhibit Number 79. 13 (Thereafter, Exhibit Number 79 was marked for 14 identification.) 15 BY MS. HANCOCK: 16 Q. Okay. And then what we have previously identified 17 as Exhibit NMPF-25A is titled Dairy Farm Operating Trends, 18 December 31st of 2009. 19 Is that one of the exhibits that you prepared in 20 support of your testimony? 21 A. That's correct, yes. 22 Q. Okay. 23 MS. HANCOCK: And can we mark NMPF-25A as a -- for 24 identification as Exhibit 80, your Honor. 25 THE COURT: So marked. 26 (Thereafter, Exhibit Number 80 was marked 27 for identification.) 28 BY MS. HANCOCK: 806 1 Q. And if -- you also prepared NMPF-25B titled Dairy 2 Farm Operating Trends, December 31st of 2014? 3 A. Yes. 4 MS. HANCOCK: Your Honor, if we could mark that 5 for identification purposes as Exhibit 81. 6 THE COURT: So identified. 7 (Thereafter, Exhibit Number 81 was marked 8 for identification.) 9 BY MS. HANCOCK: 10 Q. You prepared what we have identified as Exhibit 11 NMPF-25C titled Dairy Farm Operating Trends, December 31st 12 of 2015? 13 A. Correct. 14 MS. HANCOCK: Your Honor, if we could mark that 15 for identification purposes as Exhibit 82. 16 THE COURT: So marked for identification. 17 (Thereafter, Exhibit Number 82 was marked 18 for identification.) 19 BY MS. HANCOCK: 20 Q. We have what we have identified as Exhibit 21 NMPF-25D, as in David, titled Dairy Farm Operating Trends, 22 December 31st, 2020. Did you prepare that as well? 23 A. Yes. 24 MS. HANCOCK: Your Honor, if we could have that 25 marked for identification purposes as Exhibit 83. 26 THE COURT: So marked for identification. 27 (Thereafter, Exhibit Number 83 was marked 28 for identification.) 807 1 BY MS. HANCOCK: 2 Q. And finally, your exhibit identified as Exhibit 3 NMPF-25E titled Dairy Farm Operating Trends, December 31st 4 of 2022. Did you prepare that as well? 5 A. Yes. 6 MS. HANCOCK: And, your Honor, if we could have 7 that marked for identification purposes as Exhibit 84. 8 THE COURT: So marked. 9 (Thereafter, Exhibit Number 84 was marked 10 for identification.) 11 BY MS. HANCOCK: 12 Q. Mr. Kootstra, before we have you read your 13 testimony into the record, would you mind providing us 14 with an overview of your background and education? 15 A. Sure. I graduated from Point Loma Nazarene 16 University with a Bachelor of Science in accounting. I'm 17 a partner at Frazer, LLP. We are an accounting and 18 consulting firm, headquartered in California, and we work 19 with several hundred dairy clients throughout the United 20 States. 21 Q. And what falls within the scope of the work that 22 you do at Frazer, LLP? 23 A. So in addition to the traditional tax and 24 assurance type work, we also do a significant amount of 25 estate planning, transactional support, lender 26 negotiation, bankruptcy support, and preparation of 27 feasibility studies, and other consulting type projects. 28 Q. When you say "feasibility studies," what kind of 808 1 feasibility studies have you been involved in? 2 A. A number of them, probably the largest of which 3 was a feasibility study for the University of Idaho and 4 their research dairy facility. 5 Q. What was the subject or scope of the feasibility 6 study that you did for the University of Idaho? 7 A. That was a Greenfield Dairy Facility and Research 8 Center. That was contemplated, and over several 9 iterations, we were able to help them kind of put together 10 a sustainable model, and that has now broken ground. 11 Q. Okay. And what was the -- how long had you been 12 working on that project for the University of Idaho? 13 A. So our firm was originally engaged on that back 14 in, I want to say 2015 or thereabouts, and then I started 15 working on that after I joined the firm in 2011. 16 Q. You said they were originally engaged in 2015? 17 A. 2005, sorry. 18 Q. Oh, okay. I thought my timing was a little off 19 there. 20 So your firm had been engaged in 2005 with the 21 University of Idaho to provide that feasibility study, and 22 then you started working on the project when you joined 23 your firm in 2011? 24 A. Correct. 25 Q. Okay. What year did you obtain your Bachelor's 26 degree? 27 A. 2011. 28 Q. Okay. And the customer base or the client base 809 1 with whom you work, is that mostly from the producers' 2 side? 3 A. I do work with both producers and processors, but 4 the vast majority of my clients are producers. 5 Q. Could you provide a percentage estimate of how 6 many are producers versus processors? 7 A. I would say upwards of 75% are producers. 8 MS. HANCOCK: Your Honor, I would offer 9 Mr. Kootstra as an expert in providing accounting and 10 financial advice services to the dairy industry. 11 THE COURT: Any objections? 12 Based on voir dire, I find this witness qualified 13 to testify as an expert on those subject matters. 14 BY MS. HANCOCK: 15 Q. Mr. Kootstra, would you mind reading your 16 statement into the record, please? 17 A. Yes. 18 Good morning. My name is Leland Kootstra, and I'm 19 a partner at Frazer, LLP, a full service accounting and 20 consulting firm. We work closely with hundreds of dairy 21 producers across the United States with a heavy focus on 22 providing consulting services to these producers. 23 Founded in Chicago in 1917, Frazer, LLP, expanded 24 throughout the Midwest and eastern United States. During 25 the 1950s, we began working closely with dairy producers, 26 finding our niche in this industry. Following the 27 westward movement of many producers, we opened offices in 28 California, where we are headquartered today. 810 1 We serve over 200 dairy producers across more than 2 20 states, and I am proud to say that my office is in 3 Tulare County, the nation's leading milk-producing county. 4 We continually strive to be our client's most trusted 5 advisor, offering services ranging from traditional tax 6 and assurance work to lender negotiation, estate planning, 7 and transactional support services. 8 I joined Frazer in late 2011 after graduating from 9 Point Loma Nazarene University with a Bachelor of Science 10 degree in accounting. Immersed in the dairy industry, I 11 quickly developed an appreciation for the incredible work 12 that goes into producing and supplying high quality milk 13 products to the world. My experience includes working 14 closely with many producers and processing companies in 15 navigating challenging business cycles, exploring new 16 opportunities, evaluating risk, and developing business 17 models. 18 Today, I have been asked by the National Milk 19 Producers Federation to provide an overview of our Dairy 20 Farm Operating Trends Report, including the information 21 contained therein, and to answer any questions you may 22 have. 23 The Dairy Farm Operating Trends Report is a 24 resource provided by Frazer to our clients, lending 25 institutions, and the larger dairy industry. Available 26 for free on our website, this report is organized by 27 geographic regions in the United States and presents 28 financial performance for the year presented. 811 1 The most recent report with the balance sheet date 2 of December 31, 2022, presents operations across eight 3 regions, including Southern California, the San Joaquin 4 Valley, Kern County, Arizona, Idaho, New Mexico, the 5 Panhandle, and the Pacific Northwest. 6 The contents of the report are prepared using 7 client data from compiled, reviewed, and audited financial 8 statements, prepared and in accordance with generally 9 accepted accounting principles, or GAAP. 10 To protect clients and ensure the report's 11 reliability, all personal and identifying data is 12 anonymized. We carefully select representative clients or 13 dairies for inclusion, excluding those undergoing 14 significant changes or transitions that could materially 15 impact the report's usefulness. 16 For more than two decades, Frazer, LLP, has 17 prepared the Dairy Farms Operating Trends Report, 18 assisting dairy producers and lenders in evaluating 19 specific herd performance. However, it is essential to 20 recognize that the data presented may not be exhaustive or 21 inclusive of all dairy business models. 22 For instance, the report mainly represents larger 23 scale dairies in the western United States. A dairy 24 producer located in Florida, for example, would be better 25 served to compare their operations to a benchmark study 26 more heavily focused on the Southeast. 27 The report presents financial results and metrics 28 in multiple ways, explaining trends within the report. 812 1 When examining several iterations, readers can identify 2 significant trends and the impacts of changing economic 3 environments on financial performance. 4 I have included a snapshot of the financial 5 performance for a dairy operation in the Panhandle during 6 four significant years in the dairy industry: 2009, 2014, 7 2020, and 2022. 8 In 2009, the net income per head was a negative 9 $799. Feed cost per head was $1,920. Milk production per 10 cow per day was 61.8 pounds. Herd turnover rate was 11 29.3%. Cost of replacements, $1,448. Milk sales per 12 hundredweight, $13.63. Feed cost per hundredweight, 13 $9.09. Labor cost per hundredweight, $1.65. Herd 14 replacement cost per hundredweight, $1.90. Interest 15 expense per hundredweight, $0.65. Current ratio, .59 to 16 1. Debt per cow was not measured in that year. Total 17 debt per cow, $1,831. Debt to equity ratio, 4.01 to 1. 18 Return on total assets was a negative 15.2%. Income -- or 19 loss per hundredweight in the year was $3.73. And the 20 loss per milking cow per month was $61.10. 21 In 2014, the net income per head was $1,250. Feed 22 cost per head, $2,313. 23 Q. Mr. Kootstra, I'll just save you the trouble -- 24 A. Okay. 25 Q. -- of reading the table because it's in the 26 record. 27 A. Thank you. 28 Q. So you are welcome to move on from that. 813 1 A. These years stand out for various reasons: 2 In 2009, most dairies in the United States 3 incurred losses due to depressed milk crisis; 4 In 2014, producers enjoyed profitability due to 5 high milk prices and comparatively low feed prices; 6 2020, mixed results were seen with the Panhandle 7 experiencing a profitable year while other regions faced 8 losses. Class III and Class IV milk prices, historically 9 close to parity, saw a spread of more than $10 per 10 hundredweight at points during the year; 11 2020 (sic), the industry enjoyed historically high 12 milk prices, but also endured historically high feed 13 prices as well. 14 I highlight these years to underline key aspects 15 related to the profitability and feasibility of dairy 16 operations, especially in the context of the proposed 17 price changes. While the milk price is undeniably the 18 most significant contributor to top line revenue for 19 dairies, it's far from the only influential factor. 20 For instance, feed cost, comprising over 60% of a 21 dairy's cost structure, have seen remarkable fluctuations 22 in recent years. These variations stem not only from 23 supply chain challenges but also from political conflicts, 24 weather patterns, and other external conditions. 25 Dairies have often absorbed the impact of 26 inflation, interest rate increases, and the rising costs 27 associated with labor and environmental regulations. 28 Concurrently, consumer demand for more sustainable, safe, 814 1 and quality products has put additional pressure on the 2 industry. While this has led to enhanced efficiency and 3 improvements in dairy operations, it has also incurred 4 substantial costs and required significant investments. 5 As reflected in the table above, this complex 6 scenario extends beyond mere annual income statement 7 performance. It reveals an increase in the average debt 8 held by a producer per cow, encompassing both operating 9 and other debt, often related to facilities and real 10 estate. 11 Specifically, from 2009 to 2022, the average debt 12 per cow more than doubled, a trend consistent across 13 regions, not just in the Panhandle. This increase in debt 14 illustrates that while dairy producers have invested 15 immense time, energy, and resources to elevate operations 16 and herd performance, this growth has predominantly been 17 debt driven. With the recent surge in interest rates over 18 the past 18 months, this debt accumulation adds a 19 substantial additional burden to the cost of dairy 20 production. 21 Dairy producers are predominantly price takers, 22 meaning that although they -- they have access to some 23 risk management tools, they typically cannot set their 24 milk price based on their production costs. This leaves 25 them vulnerable to the volatility of the commodity market. 26 The dairy industry has seen periods of both 27 healthy and negative margins, even as operations have 28 remained relatively consistent. As outlined in the Dairy 815 1 Operating Trends Reports, the average financial statement 2 margin per hundredweight produced over the past decade is 3 less than $1, or approximately 4 to 7% of the average milk 4 price during the time. With the ongoing rise in costs, 5 the milk price necessary to maintain a positive and 6 financially sustainable margin must support these 7 additional costs. If it fails to do so, we can expect 8 continued and significant consolidation within the 9 industry. 10 As we contemplate changes to Make Allowances and 11 the Class I mover pricing mechanisms, it is essential to 12 understand the delicate balance of costs, revenues, and 13 market forces that shape dairy operations. Any overly 14 aggressive reduction in milk price could have long-term, 15 irreparable effect on many dairy producers' financial 16 performance or financial positions, expediting 17 consolidation of the industry. 18 I implore you to evaluate the impact on dairy 19 producers carefully, recognizing the critical role that 20 dairy producers play in our economy, their communities, 21 and our daily lives. Thank you. 22 Q. Thank you, Mr. Kootstra. 23 First off, when you refer to Panhandle, what are 24 you referring to? 25 A. It's the region of Northern Texas, Oklahoma. 26 Q. Why did you use that region as your -- as your 27 sample here? 28 A. Within the reports, that -- that was the region 816 1 that had most consistency as far as the number of 2 producers in the group. California, for example, makes up 3 a large part of the reports, but those farms were not 4 within the Federal Milk Marketing Order for the majority 5 of those years. 6 Q. Okay. And when we look at the chart that you have 7 on page 2, it's fair to say that it looks like there's 8 some volatility there with respect to the net income; is 9 that fair? 10 A. Yes. 11 Q. Is 2009, that point -- so you said that it was a 12 negative net income of 799 per head. 13 Is that an outlier for anything that can be 14 explained? 15 A. So 2009 was a very difficult year for the dairy 16 industry. Milk price dropped substantially during the 17 year, and the margin between feed cost and milk price was 18 greatly decreased. So the vast majority of dairy 19 producers in the country lost money during 2009. 20 Q. Okay. And then -- and then there was a rebound in 21 2014 due in large part to the higher milk prices? 22 A. Correct. 23 Q. Anything else that contributed to 2014 that you 24 believe is noteworthy? 25 A. So in 2014, we had really high milk price. We 26 also had relatively stable feed prices. So the -- the 27 largest factor that we see in dairy profitability is the 28 delta between milk income and feed costs. And so when we 817 1 see those -- the delta grow, that's when we're going to 2 see higher profitability. 3 Q. Okay. So reasonably priced feed, higher milk 4 prices, bigger margin? 5 A. Yes. 6 Q. Okay. And then carried through into 2020, the 7 same factors, and then the inversion between Class III and 8 IV? 9 A. So 2020, the Panhandle was interesting in that 10 year. With -- with the COVID-19 pandemic and the Food Box 11 Program from USDA, we saw large discrepancies in 12 profitability throughout different regions of the country. 13 The Panhandle had a relatively strong 2020 on average 14 within our report, whereas during the same timeframe, a 15 farm in Arizona, for example, on average, recognized a 16 loss. 17 Q. And then take us into a little bit more depth as 18 to what happened as we move into 2022. 19 A. So in 2022, we saw historically high milk prices, 20 but with multiple factors in the market and some political 21 conflict in Ukraine, for example. We also saw 22 historically high feed prices. So although the main 23 driver of profitability being milk income was at an all 24 time high, many farms did not capture all the promise of 25 that high milk price because they were -- they were also 26 exposed to high feed prices. 27 Q. So given kind of these anchor points that you have 28 described and the data that you have compiled in 818 1 Exhibits 80 through 85 -- no, 80 through 84, excuse me -- 2 is it fair -- well, tell me -- tell me what you believe to 3 be the state of the financial condition for dairy 4 producers? 5 A. So dairy producers have historically operated with 6 volatility in their -- in their cost structure and in 7 their revenue streams. It has largely been outside of 8 their control as price takers. 9 Over the last -- you know, over the last decade -- 10 I know CME trading has started beyond that -- but over the 11 last decade we have seen more producers start to utilize 12 risk management tools as a way and in an effort to better 13 protect themselves from some of those -- that volatility 14 and exposure. 15 However, there's a lot of outside forces that 16 still affect dairy profitability, in particular, 17 environmental regulation increases, labor costs 18 increasing, the current inflationary environment, interest 19 rate increases. A lot of those costs are being incurred 20 by dairies, and they don't have a way to necessarily pass 21 on that cost to their purchaser, to their buyers. 22 So over the last couple years, while we have had 23 some years of very good milk price, historically speaking, 24 the margins have not consistently grown. Over the last -- 25 I think I -- in my testimony I say over the last ten 26 years, the margin has been on average under a dollar per 27 hundredweight. And so the margins that most dairy 28 producers are operating within do not represent a strong 819 1 return on investment versus, you know, other industries 2 and other investment opportunities. 3 Q. Okay. And when you said over the last -- I think 4 you said ten years? 5 A. Yes. 6 Q. The margins have been under a dollar a 7 hundredweight on average; is that right? 8 A. That's correct. 9 Q. And so what is your belief about whether dairy 10 producers could absorb a cost -- or a price decrease on 11 their milk for a dollar a hundredweight? 12 A. There are -- there are sections of the dairy 13 industry in the dairy producer pool that would be able to 14 incur that. However, there's a -- there's a significant 15 group, the lower tier groups, that would not be able to 16 incur that, probably the bottom half of the dairy industry 17 group. 18 And so I would expect if they saw a sustained time 19 period of a dollar less margin than what they have had 20 historically, they would be looking to exit the industry. 21 Q. And you talked about your experience working with 22 dairy producers who utilize risk management tools. 23 Could you estimate how many -- or a percentage of 24 the dairy producers with whom you work that are utilizing 25 risk management tools such as hedging or futures -- future 26 contracting? 27 A. So that -- that bounces around over time. I would 28 say, on average, I have probably upwards of 50 to 65% of 820 1 my clients are utilizing risk management in some capacity. 2 Q. And has that number increased over the last ten 3 years in your experience? 4 A. Yes. So on the heels of 2014, we had many 5 producers that shied away from risk management. But over 6 the last decade, we have seen a higher rate of adoption of 7 risk management strategies. But, obviously, that ebbs and 8 flows with what the markets offer. 9 Q. And you heard -- you were here present this 10 morning when the CME had a witness testify with respect to 11 the dairy market and risk management tools? 12 A. Yes. 13 Q. And do you have any -- any perspective or position 14 on the implementation lag for -- in this -- under National 15 Milk's proposal for milk components? 16 A. I feel there's -- there's always uncertainty when 17 entering into risk management decisions. But I think a 18 sophisticated participant in the market would weigh 19 those -- those uncertainties, and I think they would still 20 operate within the market even if there are lags or 21 uncertainties. 22 Q. Okay. 23 MS. HANCOCK: Thank you very much for your time, 24 and I'll be back up to offer your exhibits into evidence 25 in a bit. 26 THE WITNESS: Thank you. 27 THE COURT: Cross? 28 Mr. English. 821 1 CROSS-EXAMINATION 2 BY MR. ENGLISH: 3 Q. Good morning, sir. My name is Chip English. I'm 4 an attorney for the Milk Innovation Group -- 5 A. Good morning. 6 Q. -- it's a group of fluid milk processors. 7 So I want to start with your cost chart and -- 8 well, I guess it is income and chart cost, on the middle 9 of your page 2, and I want to know what's included or 10 what's not included, so -- because it's not clear to me. 11 Are hedging gains and losses embedded in the milk 12 income or somewhere else in this analysis? 13 A. Yes. So hedging income related to milk price 14 would be included in the milk sales. 15 Q. And what about government payments? 16 A. So government payments would be included in other 17 income within the operating trends report. So those would 18 not -- those would not show up in the milk sales per 19 hundredweight, but it would be reflected within the net 20 income or net loss number. 21 Q. Okay. So when you discuss representative dairies 22 for inclusion, when you talk about the Panhandle, do you 23 include organic dairies in your representative dairies? 24 A. So, no. No. We -- we would -- we would exclude 25 an organic dairy because their business operations would 26 not be reflective of the traditional dairy market. 27 Q. So even though there's been significant organic 28 growth, you just do not include them? 822 1 A. Correct. 2 Q. Okay. Would the answer be the same for A2 milk? 3 A. Correct. 4 Q. Pasture-fed milk? 5 A. Correct. 6 Q. Just a highly technical question, for this record, 7 because -- just to avoid any confusion. In the discussion 8 on page 2, under 2020, you have a reference: "Class III 9 and Class IV milk prices, historically close to parity, 10 saw a spread." 11 My understanding of your use of the word parity is 12 the comparison between the Class III and the Class IV 13 price, correct? 14 A. That is correct. 15 Q. You were not referring to parity prices as that 16 term appears in the Agricultural Marketing Agreement Act? 17 A. Correct. 18 Q. Have you ever testified at a Federal Order hearing 19 before? 20 A. I have not. 21 Q. Do you understand that the purpose of Federal Milk 22 Marketing Orders is to set minimum regulated prices? 23 A. Yes. 24 Q. And that, therefore, market prices often are 25 higher than the regular minimum prices? 26 A. Correct. 27 Q. Okay. Do you understand that when USDA sets 28 Class III and IV prices, the intent is to set them at 823 1 market clearing levels? 2 A. That's how I understand it, yes. 3 Q. And one reason to set it at market clearing levels 4 is to make sure that the manufacturing facilities that 5 process dairy farmers' milk are actually still in business 6 to take the milk, correct? 7 A. Understood. Yes. 8 Q. And so overvaluing milk through Make Allowances 9 that are too low could also threaten, or would threaten, 10 the dairy industry if we lost manufacturing capacity, 11 correct? 12 A. Yes. 13 MR. ENGLISH: I have no further questions. 14 THE COURT: Mr. Rosenbaum. 15 CROSS-EXAMINATION 16 BY MR. ROSENBAUM: 17 Q. Steve Rosenbaum for the International Dairy Foods 18 Association. 19 Mr. Kootstra, are you -- are you aware that USDA 20 historically has rejected suggestions that they take 21 farmer cost of production into account in setting 22 Make Allowances? 23 A. I'm -- I'm not familiar with their history on 24 that, no. 25 Q. Okay. Let me just read you sentences from the 26 last time Make Allowances were changed in 2008. This is 27 from the USDA decision -- tentative partial final 28 decision, 73 Federal Register 35305 at 35324, June 20, 824 1 2008. And I'll quote: "Opponents of increasing 2 Make Allowances argue a number of points, that they are 3 already set too high a level" -- sorry -- "set at too high 4 a level, that dairy farmer production costs also have 5 increased significantly due to higher energy and feed 6 costs, that processors should look beyond asking dairy 7 farmers to receive less for their milk by charging more 8 for manufactured products, and that Make Allowances should 9 be made only when all dairy farmer production costs are 10 captured in their milk pay price. These are not valid 11 arguments for opposing how Make Allowances should be 12 determined or what level Make Allowances need to be in the 13 Class III and Class IV product pricing formulas," end 14 quote. 15 So are you suggesting that, in fact, USDA should 16 change its approach and start taking farmer cost of 17 production into account and studying Make Allowances? 18 A. Respectfully, my testimony was in regards to the 19 operating trends report. That was what I was asked to 20 speak about. 21 Q. Well, I -- I'm -- I -- I took your last paragraph 22 to suggest that dairy farmer costs should in your view be 23 taken into account in setting Make Allowances. Is that 24 not what you are -- are you -- are you, in fact, not 25 opining on that subject? 26 A. I don't have an opinion about what USDA's process 27 should be. I think, ultimately, milk pricing is going to 28 affect the dairy industry as a whole, and so I think each 825 1 aspect of it should be considered. 2 MR. ROSENBAUM: That's all I have. Thank you. 3 THE COURT: Further cross? 4 AMS? 5 I'm never going to get AMS in there consistently, 6 but AMS goes last. So when I say "further cross," I mean 7 from the participants other than AMS. 8 Ms. Taylor, your witness. 9 MS. TAYLOR: Thank you, your Honor. 10 CROSS-EXAMINATION 11 BY MS. TAYLOR: 12 Q. Thank you for coming here to testify today. I 13 just have a few questions. 14 I know you say that all your operations are 15 generally west. Can you talk about the size of the 16 operations that are your clients? 17 A. The vast majority of our clients are going to be 18 between 1500 and 20,000 milking cows. We -- we typically 19 do not work with many farms under that 500-, 20 800-milking-cow threshold. 21 Q. Okay. Do you know for their feed, do they 22 purchase their feed or do they grow their own feed, 23 generally? 24 A. All over the board. So we -- we enjoy a client 25 base that has many different business models. 26 Q. On your table on page 2, your first line is net 27 income. Can you define -- let us clarify for the record, 28 what went into getting the net income, like deducts or -- 826 1 like, what's reflected in that number or not reflected? 2 A. Sure. So that would be a GAAP basis, financial 3 statement net income number. So that would be reflective 4 on a financial statement. That would include everything 5 from deducts, hauling, state and association, labor, herd 6 replacement costs. It would be an all-inclusive number. 7 Q. Okay. And later in your testimony, you talk about 8 how the average financial statement margin over the past 9 decade has been less than a dollar. 10 And, again, can you just clarify what went into 11 determining that margin that you are talking about? 12 A. So that would be a -- that would be after 13 reviewing the last number of years, that -- that number 14 specifically was over the last decade, of the net income 15 or loss generated by dairies within the report. 16 Q. So that would be on your table at the end -- 17 excuse me -- your table on page 2, that would be income 18 loss per hundredweight -- 19 A. Correct. 20 Q. -- to compare that? 21 A. Correct. 22 Q. And you indicated that many of your clients use 23 risk management tools? 24 A. Yes. 25 Q. Do you have any idea what risk management tools 26 they do utilize? 27 A. Sure. So they do use puts and calls. They do use 28 futures. Over the last number of years, we have seen a 827 1 significant move over to utilizing DRP, and some of the 2 other margin programs as well. 3 Q. Do you know about what percentage of their milk 4 production they might cover or the range? 5 A. I -- you know, I have clients that -- that will 6 cover 100% of their production, plus the yield factor 7 on -- on using the DRP program. Every -- every client 8 has a different -- a different method or a different 9 strategy that they like to employ. 10 MS. TAYLOR: All right. I think that's it from 11 AMS. Thank you. 12 THE WITNESS: Thank you. 13 DR. CRYAN: Roger Cryan -- 14 THE COURT: You violate the AMS last rule again. 15 DR. CRYAN: No, this is -- this is -- this is a 16 response to one of the questions that Ms. Taylor asked. 17 THE COURT: All right. We have -- 18 DR. CRYAN: I'm Roger Cryan with the American Farm 19 Bureau Federation. 20 THE COURT: This is re-cross in follow-up to AMS's 21 cross. 22 RECROSS-EXAMINATION 23 BY DR. CRYAN: 24 Q. You described a variety of risk management tools 25 that your clients are using to -- to manage their price 26 risks in the context of a Federal Milk Marketing Order 27 system. 28 Can you -- can you talk about how those -- those 828 1 tools are -- the use of those tools is affected by 2 depooling and negative PPDs? 3 A. Sure. So as we -- 2020 was the prime example of 4 that as far as negative PPDs. In California, for example, 5 we had an $11 spread between Class III and Class IV during 6 periods of that year. We saw Class III exit the pool. 7 And so we -- we saw a number of clients that had some 8 protection in place, and they -- they were exposed to that 9 negative PPD. 10 Since then, we have seen a lot more clients using 11 DRP separate their Class III, Class IV contracts into 12 separate policies to better insulate themselves from a 13 situation like that. Yeah. 14 Q. And it was the depooling that made the basis -- 15 created the basis problem for the producers in the pool 16 when Class III exited the market; is that right? 17 A. No. No. So the PPD was largely, in part, because 18 of the pricing mechanism for Class I. 19 DR. CRYAN: Okay. Very good. Thank you. 20 THE WITNESS: Yeah. 21 THE COURT: Further re-cross? 22 Ms. Hancock. 23 REDIRECT EXAMINATION 24 BY MS. HANCOCK: 25 Q. Thank you, Mr. Kootstra. 26 Is it fair to say that there are milk cycles? 27 A. Yes. 28 Q. And -- and that's what we're seeing in the trends 829 1 report that you have provided? 2 A. Yes. We see cycles. 3 Q. And in your experience looking back over the data 4 that you provided, do you think that it's getting less 5 predictable? 6 A. No. I think -- I think the markets have been 7 volatile. I think there are lots of factors that play 8 into the different cycles that we see. And, you know, we 9 have ease of access to information that we -- we 10 historically have not had. So I think maybe we see some 11 more knee-jerk reactions because we see a headline, but I 12 think the market's always been volatile. 13 Q. Do you -- do you think that you're seeing more 14 volatility with -- with our access to media and 15 information and knowledge of events and the communication 16 methods that are out there now? 17 A. I -- I think that's plausible, yeah. 18 Q. Okay. 19 MS. HANCOCK: Your Honor, at this time I would 20 move for admission of Exhibits 79 through 84. 21 THE COURT: Any objections? 22 MR. HILL: No objections. 23 THE COURT: Exhibits 79 through 84 marked as 24 identification as such are admitted into the record. 25 (Thereafter, Exhibit Numbers 79 through 84 26 were received into evidence.) 27 MS. HANCOCK: Thank you, your Honor. 28 THE COURT: Thank you. You are dismissed. You 830 1 may step down. 2 Who is next? 3 MS. TAYLOR: Your Honor, we have Ms. Lynne McBride 4 here from CDC to testify on their proposal, number -- and 5 their survey products. And I think it might be helpful to 6 finish up a little more on Proposal 1. So if it's 7 possible -- and her testimony then would be uninterrupted 8 after lunch. 9 So for now I think if maybe Dr. Cryan would like 10 to testify from Farm Bureau, I think his testimony is in 11 support of Proposal 1. 12 THE COURT: Any objections? Did you work this out 13 with the other parties? 14 MS. TAYLOR: Uh-huh. 15 THE COURT: Very well. 16 Mr. Cryan, you are off to the stand. Put on your 17 witness hat. 18 Raise your right hand. 19 ROGER CRYAN, 20 Being first duly sworn, was examined and 21 testified as follows: 22 THE COURT: All right. You are your own witness 23 here. I won't make you walk back and forth to the 24 lectern. 25 DR. CRYAN: Okay. Thank you. 26 MR. HILL: Your Honor, one moment. Could we 27 please have his testimony marked as Exhibit Number 85 for 28 identification? Is that correct? 831 1 THE COURT: Yes, that's what I -- we can do -- 2 well, I can do that then. 3 Let's mark Exhibit AFBF-1 for identification as 4 Exhibit 85. This is the statement -- or Direct Testimony 5 for Federal Milk Marketing Order Pricing Hearing, American 6 Farm Bureau Federation, by Mr. Cryan, who is on the stand. 7 (Thereafter, Exhibit Number 85 was marked for 8 identification.) 9 THE WITNESS: Thank you, your Honor. 10 THE COURT: You may give your statement. 11 THE WITNESS: Let me start by saying my name is 12 Roger Cryan, C-R-Y-A-N. I'm the chief economist of the 13 American Farm Bureau Federation. The address is 14 600 Maryland Avenue Southwest, Suite 1000W, Washington DC, 15 20024. 16 And I will first attempt to establish my 17 credentials as an expert. It may be redundant because 18 Mr. English has done this in the past. 19 But I'll say that I have worked for dairy farmers 20 for 40 years. My first job was working on the dairy farm 21 tossing bales. I studied agriculture in high school. I 22 got a Bachelor's degree in international studies at Johns 23 Hopkins, including a semester at Cornell studying 24 agriculture. 25 I interned at the Economic Research Service at 26 USDA one fall. I got my Master's and Ph.D. at the 27 University of Florida -- from the University of Florida in 28 agri- -- in food and agricultural -- fluid and resource -- 832 1 I'm sorry, I'm going to slow down -- food and resource 2 economics. 3 I interned with Gus Schumacher at the 4 Massachusetts Department of Food and Agriculture in 1988. 5 I did dairy work -- some dairy work in the assistantship 6 at Florida working on best management practices for waste 7 management. I did my -- one of my field papers at Florida 8 in agricultural policy, including an analysis of the early 9 New Deal programs, of which the Agricultural Marketing 10 Agreement Act is essentially the last remnant. 11 Four years I spent at the Atlanta Milk Market 12 Administrators office on -- during the time of Federal 13 Order Reform, from 1996 to 2000, which was probably the 14 best possible school for learning how Federal Orders work 15 and considering how to open the hood and change things 16 around. 17 I spent 12 years then at the National Milk 18 Producers Federation, which was also a good place to learn 19 about issues beyond Federal Milk Marketing Orders. I 20 worked on a wide range of issues, including labeling and 21 EPA issues and CFTC issues. I served on the CFTC 22 Agricultural Advisory Committee, as well as NASS Ag 23 Advisory Committee. And I led National Milk's efforts in 24 at least -- at least four hearings while I was there. 25 I spent -- I have spent two years -- oh, I 26 spent -- I'm missing -- so I have spent -- I spent ten 27 years at USDA working with these good folks, another good 28 place to learn about how things work. 833 1 And at USDA I was the director of the economics 2 division in AMS's Dairy Programs where I oversaw Dairy 3 Market News, as well as the market information group that 4 collected the survey that Federal Order prices are based 5 on and the economists who will do the analysis on this. 6 It was another rewarding opportunity. And I worked on a 7 number of things beyond dairy within USDA. 8 And then I came over almost two years ago to the 9 American Farm Bureau, which is an outstanding 10 organization, which I will touch on in my testimony, and 11 have learned on even -- an even broader context in 12 agriculture. 13 And after 42 years, I'm still working for dairy 14 farmers, and that's why I'm here today. 15 And let me see. Yeah, so -- 16 THE COURT: Tossing bales will encourage one to 17 move to a different part of the industry, hey? 18 THE WITNESS: Yes, sir. Yes, sir. 19 So I would ask that I -- I -- in all -- in all 20 modesty, I would ask that I be recognized as an expert on 21 Federal Milk Marketing Orders and milk marketing. 22 THE COURT: Yes, I -- unless there's objection, I 23 find that you are qualified to testify on those matters as 24 an expert witness. 25 THE WITNESS: Thank you. 26 I will also -- okay. I will now read my -- my 27 statement, which is not very long. 28 The American Farm Bureau Federation has nearly 834 1 6 million member families in all 50 states and Puerto 2 Rico, including many thousands of cooperative and 3 independent dairy farmers. All of these dairy farmers are 4 indirectly or mostly directly -- mostly directly affected 5 by the pricing provisions of the Federal Milk Marketing 6 Orders (FMMOs). 7 These dairy farmers play a crucial role in the 8 development of AFBF dairy policy. Every Farm Bureau 9 position and proposal is based explicitly on that policy, 10 developed through a grassroots process in which farmers 11 make the decisions at every step of the way. 12 AFBF submitted nine proposals for consideration in 13 this hearing, and appreciates the opportunity to address 14 the four that were accepted by USDA for consideration in 15 this hearing, as well as the clear direction on what may 16 be needed to advance the rest. 17 And we do respect the decisions that USDA made 18 about what to include and what not to include for the 19 record. 20 The fundamental focus of AFBF's proposals is the 21 reduction or elimination of negative producer price 22 differentials, which are called PPDs, and the depooling 23 that they cause. We believe that an orderly pool is the 24 key to orderly marketing and the continued benefits of the 25 Federal Milk Marketing Order system to farmers, 26 cooperatives, processors, and consumers. The key to an 27 orderly pool, in turn, is above all the proper alignment 28 of the four class prices. 835 1 In addition to our own proposals, AFBF largely 2 supports four of the five proposals submitted by NMPF 3 (Proposals 1, 3, 13, and 19). And for these I will 4 outline any substantive differences in our position with 5 an explanation for that difference. 6 I'll skip the next sentence. 7 This statement covers Category 1, Milk 8 Composition, and includes AFBF's response to Proposal 1 9 made by NMPF. 10 Regarding Proposal 1, National -- the National 11 Milk -- which is the National Milk Producers Federation's 12 proposal to incorporate updated component values into 13 Class III and Class IV price formulas. 14 AFBF supports the updating of those component 15 values in the Class III and Class IV skim milk price 16 formulas based on the same logic presented by NMPF. 17 Adjusting these values will more accurately define the 18 market value of skim milk used in the skim/butterfat 19 markets and in Class I in all markets. 20 In component markets, it will ensure that Class I 21 milk prices reflect at least the national average 22 component value rather than a low, outdated value which 23 undermines the premium for Class I milk intended by FMMO 24 pricing formulas, per years of FMMO hearing proceedings. 25 This higher value for Class I will, like the 26 adjustments to the Class I differentials, increase the 27 Class I price by an average of about $0.70 per 28 hundredweight based on the simple average of 2022 data. 836 1 It will reduce the incidence of price misalignments with 2 Class III and IV prices, reduce the size of frequency of 3 negative PPDs, and so reduce incentives for depooling, 4 which undermines orderly marketing and the principle of 5 uniform pricing in the market. 6 In addition, raising the value of skim milk in the 7 manufacturing classes, which are II, III, and IV, in the 8 skim/butterfat markets will reduce the current 9 misalignment of FMMO minimum prices for those classes 10 between those markets, that is the skim and butterfat 11 markets, and the bordering component markets. 12 Today, proprietary and cooperative manufacturing 13 plants located in Federal Order 32 or 126, for example, 14 have undue incentive to pool the Class II, Class III or 15 Class IV milk that they receive on Federal Order -- that 16 they receive on Federal Order 5 or 7, for example, because 17 the FMMO minimum price at an average test for that milk in 18 a skim/butterfat order is substantially lower than the 19 minimum price for the same milk in a component order based 20 on the current outdated component tests embedded in the 21 current formulas. 22 By USDA's calculations, the simple average of this 23 gap is $0.52 for Class II, $0.77 for Class III, and $0.50 24 for Class IV, in 2022. That's based on Exhibit 45. 25 Incentive produced by this gap creates undue 26 "pool-riding" in the deficit markets of the Southeast, 27 beyond the incentive of higher uniform prices in those 28 markets. This undermines the uniform price in those 837 1 market, which makes supplying those deficit markets more 2 difficult. 3 This unnecessary and distortionary incentive to 4 pool on the "wrong" market -- in quotes -- would be 5 substantially reduced by adoption of updated component 6 tests in the skim milk price formulas. Adjusting those 7 component values in the Class III, Class II -- sorry -- 8 Class II, Class III, and Class IV price formulas, 9 therefore, will improve the orderly marketing of milk in 10 multiple ways. 11 And on my written testimony I intended to ask for 12 the source to be recognized, but it has already been 13 recognized as Exhibit 45, for which I thank the USDA 14 for -- for providing that data. 15 That -- I have a couple other comments, just to 16 re- -- to reemphasize a couple things. 17 Our focus really is about adjusting -- addressing 18 the price misalignments. We think it's better to address 19 the price misalignments to improve the pull towards the 20 pool, towards pooling milk, rather than trying to build 21 fences and rope-pushing provisions that will force milk to 22 pool. 23 I'd also point out that fluid -- a number of folks 24 who have talked about how fluid sales have declined as a 25 percentage of milk in the market, there has been 26 absolutely decline. But the larger part of the percentage 27 decline has been based on growth and other use, excluding 28 exports. And it is appropriate to consider price 838 1 adjustments, changes in the way we consider the prices, in 2 order to make better use of the system in connection with 3 the current allocation of milk within the market. 4 It's been well established that depooling is 5 disruptive to producers and to the markets generally, but 6 particularly to producers. And we -- we are aiming to 7 demonstrate that throughout the hearing. 8 And finally, it's really critical to understand, 9 this is not -- this particular provision is -- that 10 National Milk has proposed, Proposal 1, is not just about 11 raising the Class I price. It is about updating the 12 alignment of class prices around the country, but 13 particularly in that small pocket that is a third -- a 14 quarter of the country in the Southeast that relies on 15 skim and butterfat pricing. 16 That will conclude my direct testimony, your 17 Honor. 18 THE COURT: Yes. 19 THE WITNESS: And I am available for 20 cross-examination. 21 THE COURT: I'd ask a question. Did I hear you 22 refer to rope-pushing provisions? Would you elaborate on 23 that, if I heard that correctly? 24 THE WITNESS: Yes, sir. 25 When there's discussion about depooling of milk in 26 the -- in the Federal Orders, very often folks talk about 27 provisions like we have in a number of orders that either 28 sort of punish handlers for depooling, making it -- 839 1 typically by make it harder to come back in afterwards, or 2 provisions that really sort of, as memory serves, force -- 3 force handlers to make a decision for the court for a 4 whole year, whether or not to pool or not to pool. 5 And those are essentially designed to overcome the 6 incentives that the -- that the current price 7 misalignments place on handlers to choose whether or not 8 to pool. Depooling by manufacturers is a long-established 9 part of the system. It is designed to make sure that 10 manufacturers only pool when -- when it is appropriate to 11 serve -- help to -- contribute to serving the fluid 12 markets or to generally contribute to serving orderly 13 marketing. 14 And we believe that price alignment -- getting the 15 prices in better alignment is -- Is a better first step 16 than simply trying to force milk to stay in the pool. 17 THE COURT: So the reference to rope-pushing is 18 that it's difficult to get certain players to do what the 19 marketing orders want them to do. 20 THE WITNESS: Right. 21 THE COURT: It's like pushing a rope. 22 THE WITNESS: Right. 23 THE COURT: Very well. 24 THE WITNESS: Yes, sir. 25 THE COURT: Cross-examination? 26 Yes. Mr. English. 27 CROSS-EXAMINATION 28 BY MR. ENGLISH: 840 1 Q. Dr. Cryan, my name is Chip English on behalf of 2 the Milk Innovation Group. 3 So I want to start on the back of page 2 where you 4 are discussing the deficit markets in the Southeast. And 5 you say there's an incentive produced by the gap, that's 6 referenced in the sentence above, that "creates undue 7 'pool-riding' in the deficit markets of the Southeast." 8 What evidence do you have that pool-riding is 9 going on in the Southeast? 10 A. It's a conceptual argument, and I don't -- I don't 11 have data. 12 Q. If you -- if you look at the data, for instance -- 13 you have been here for the hearing for most of the entire 14 time, right? 15 A. Yes. 16 Q. Okay. So, for instance, my examination of 17 witnesses -- Mr. Covington, for instance -- on what's 18 going on in the Southeast, given the significant drop in 19 volume that is associated with those orders, wouldn't that 20 suggest that there isn't any pool-riding going on? 21 There's barely any milk there at all. 22 A. I haven't examined that. 23 MR. ENGLISH: Your Honor, I move to strike that 24 statement. As this witness has just -- since it's 25 theoretical, he has no evidence of it, hasn't examined it. 26 There's no basis for that statement. 27 THE WITNESS: Your Honor, it's an -- it's an 28 economic theoretical statement that has merit on its own, 841 1 on its own basis. 2 THE COURT: I'm going to deny the motion to 3 strike, but it obviously goes to the weight. The witness 4 is saying that it's a theoretical construct that he's 5 opining on without particular evidence to support it, so 6 I'll allow it in. 7 MR. ENGLISH: Thank you, your Honor. 8 BY MR. ENGLISH: 9 Q. So, Dr. Cryan, given your experience, for 10 instance, at USDA, your testimony is about alignment of 11 prices and purported disorderly marketing. It is not that 12 there is an inadequate supply of milk for fluid use, is 13 it? 14 A. Well, I think we have heard testimony of this -- 15 of this in this hearing, that it's very difficult at times 16 to supply the fluid market in the Southeast markets. And 17 in those markets, particularly, the orders still -- 18 they -- they serve the purpose for which this was 19 designed, which is to help ensure an adequate supply of 20 fluid milk. 21 Q. On a national basis, sir, correct? You were at 22 USDA. It is a national basis. It is not a specific order 23 basis, is it? 24 A. There are 11 -- ten -- there are ten Federal 25 Orders, and each one of them is designed to serve a 26 different market. It is not -- fluid milk marketing is 27 not a national business, it is a regional business. 28 Q. But for purposes of minimum pricing and the prices 842 1 that are national prices, those are based upon a national 2 market; isn't it true, sir? 3 A. The national -- the use of national pricing to set 4 the prices for all of these -- all of these classes is 5 intended to maintain alignment among them at their edges. 6 If they -- if they all operated separately, it would -- it 7 would create disorderly marketing. 8 Q. That's not adequate supply. That's a different 9 standard, isn't it, sir? 10 A. No, it's about maintaining adequate supply, 11 certainly in four markets, in -- in the -- 12 Q. Four markets, you mean three markets -- 13 A. In the three -- 14 THE COURT: One at a time. One at a time. 15 THE WITNESS: Certainly in the three Southeastern 16 markets it is about maintaining an adequate supply of 17 fluid milk. 18 BY MR. ENGLISH: 19 Q. With a national Class I average of around 27% 20 Class I, how can you say there isn't an adequate supply of 21 milk for fluid use? 22 A. In those markets it is -- it is difficult to 23 maintain that supply. 24 Q. You are going to refuse to answer the question on 25 a national basis, sir? 26 /// 27 /// 28 /// 843 1 A. It's -- it is not -- it's a program -- it's a 2 national program that addresses regional markets. It is 3 inappropriate to consider it only a national basis. 4 Q. On the bottom of page 1, I'm not going to belabor 5 it, but the question you say -- you talk about the higher 6 value for Class I. 7 You don't have any research studies to show that 8 Class I plants place higher value on more protein, do you? 9 A. I -- I know by experience that many Class I plants 10 do put some value on that. I would certainly not argue 11 that it is the full component value in the -- in the 12 Class III price. But that's not really the point. The 13 point is to get these prices, these class prices into an 14 alignment that better serves for orderly pooling and 15 orderly marketing in each market. 16 Q. You have no research on that subject, do you, sir? 17 A. On which subject? 18 Q. On the subject of the higher value allegedly in 19 Class I milk for fluid plants. You don't have research. 20 You claim you had experience, but you don't have research, 21 do you, sir? 22 A. I have -- I have the experience of knowing that 23 there are -- there are fluid processors who fortify milk 24 in order to maintain a better milk -- mouth taste and a 25 higher -- and a better nutritional composition. There 26 are -- there are companies who clearly by their actions 27 demonstrate that they put a value on additional solids and 28 protein in milk. 844 1 Q. Okay. Leave aside my question about research for 2 a moment, which I'll come back to. That's a very small 3 fraction of the fluid milk, isn't it, sir? 4 A. I don't know. 5 Q. You don't have any research, do you? You just 6 said you don't know? 7 A. I think -- I mean, the Department has data on 8 fortification. I would be interested to see that data. 9 Q. Okay. I'm going to come back one more time. 10 A. Should we request fortification data from the 11 Department? 12 Q. I'm asking the questions, sir. I'm not going to 13 answer them. 14 I want to go back to my question again. Please 15 answer the question I'm asking: Do you have research on 16 alleged greater value in Class I milk because of higher 17 protein? 18 A. I -- I have experience. How you define research, 19 I don't have the formal -- 20 Q. You -- you are -- yes, you are an economist. You 21 just qualified yourself -- 22 MS. HANCOCK: Your Honor, if he could be permitted 23 to finish his answer. He's not even my witness, but I 24 think our record deserves it. 25 THE COURT: Yes. One at a time. The record's 26 going to get -- 27 MR. ENGLISH: I'll do that, but I prefer to get an 28 answer. 845 1 THE COURT: The witness -- well, hold on. Hold 2 on. The witness just said he's not sure what research 3 means in this context. I guess I'm not sure either. 4 MR. ENGLISH: Well -- 5 THE COURT: But I don't want to interrupt 6 your cross. 7 BY MR. ENGLISH: 8 Q. You are a professionally-trained economist, 9 correct? 10 A. I am. 11 Q. When a professionally-trained economist does 12 research, what does that mean, sir? 13 A. A practical economist takes their knowledge and 14 information from whatever source it comes from, and 15 experience is as valid as a formal research paper. 16 Q. What is a formal research paper? 17 A. A formal academic research paper is something 18 where folks go out and do a formal evaluation or a formal 19 study and then share it with other academics to consider 20 that. But there's an awful lot of knowledge about the 21 industry that is shared -- will be shared by some of your 22 witness and by -- by witnesses from across this hearing 23 that is not based on formal research. The fact that I 24 have a Ph.D. doesn't mean the only place I can find 25 information or knowledge is from formal research. 26 Q. All right. So let me ask the question: Do you 27 have formal research studies to support your thesis? 28 A. I do not. 846 1 Q. Thank you. 2 MR. ENGLISH: I have no further questions. 3 THE COURT: Thank you, Counsel. 4 CROSS-EXAMINATION 5 BY MR. COVINGTON: 6 Q. Calvin Covington representing Southeast Milk. 7 Good morning, Dr. Cryan. 8 A. Good morning, Calvin. It is nice to see you. 9 Q. I would like to -- I would like to follow up on 10 the questions that you had concerning Federal Milk 11 Marketing Orders. 12 Is it correct that the Federal Milk Marketing 13 Order system, all 11 orders, would have some provisions 14 that are uniform to all orders? 15 A. Yes. 16 Q. Okay. But because there are regional differences 17 throughout the United States, each of the 11 separate 18 Federal Milk Marketing Orders would have a number of 19 provisions that are different? 20 A. Absolutely. 21 Q. And it would be safe to say that the reason it has 22 those different provisions is to meet the milk marketing 23 needs in each particular order? 24 A. Absolutely. Yes, sir. 25 Q. And would some of those different provisions 26 relate to there being different pooling standards, how 27 much milk has to participate or what days you have to 28 touch base in order to participate in the pool? 847 1 A. That's right. There are markets where it's harder 2 to supply and the requirements are -- are greater. 3 Q. And would it be, likewise, some -- some orders, 4 especially orders that have a high fluid utilization, that 5 the amount of milk that they could divert is going to be 6 more stringent than compared to orders that have high 7 manufacturing volume of milk? 8 A. Yes, sir. In a lot of those markets the pooling 9 reaches close to the mathematical maximum allowed by those 10 standards. 11 Q. Okay. And also, each Federal Milk Marketing 12 Order, even within the particular orders, would have 13 different Class I differentials? 14 A. Absolutely. 15 Q. Okay. And again, the purpose -- or the reason to 16 having different Class I differentials is to meet the 17 various milk marketing needs of those different orders? 18 A. Yes. Yes, sir. 19 Q. Okay. Thank you. 20 One more question. You -- in your testimony, you 21 state that you support the National Milk Producers 22 Federation Proposal Number 1; is that correct? 23 A. Yes, we do. 24 Q. Okay. Do you support all provisions of the 25 National Milk Producers' proposal, including the 12-month 26 delay and the updating factors every three years? 27 A. We -- I don't know that we -- we understand -- we 28 understand the logic behind it. I don't know that we have 848 1 a position on that one way or the other. We think the 2 most important thing, though, is that these adjustments be 3 made to bring prices in better alignment. 4 Q. So -- 5 A. Which, as in many details, we will trust USDA to 6 make a wise decision about how -- how that's implemented. 7 Q. But as I understand, you're -- overall you're 8 supporting Proposal Number 1? 9 A. Yes, sir, we are. 10 Q. Okay. 11 A. In its most fundamental elements, we absolutely 12 are supporting Proposal Number 1. 13 Q. Thank you. 14 A. You're welcome. 15 THE COURT: Further cross before we get to AMS? 16 Yes, sir. 17 CROSS-EXAMINATION 18 BY MR. VETNE: 19 Q. John Vetne, representing National All-Jersey. 20 Good morning, Dr. Cryan. 21 A. Good morning. 22 Q. I'm turning to page 2 of your prepared testimony, 23 Hearing Exhibit 85. At the top of the page, you refer to 24 negative PPDs and depooling and conclude that it 25 undermines the principle of uniform pricing in the market. 26 Do you see that? 27 A. Yes, I do. 28 Q. Okay. Are you aware that the Act under which milk 849 1 orders are implemented provides for uniform pricing 2 between handlers in class prices as well as uniform 3 pricing to producers? Has two elements? 4 A. I understand that the one of the principles of 5 Federal Order -- the authorizing legislation for Federal 6 Orders is that producers within the pool will be paid a 7 uniform price in order to maintain more orderly marketing 8 and to avoid incentives for uneconomic competition. 9 Q. Okay. Are you also aware that the Act requires 10 that class prices charged -- required of handlers also be 11 uniform so that one handler is paying the same Class I 12 price or Class II as another handler? 13 A. Roughly. I mean, of course, there are differences 14 in different minimum -- uniform minimum prices and 15 adjusted by location, of course. 16 Q. That would apply only to the Class I? 17 A. Class I. Well, uniform prices are also adjusted 18 by location. 19 Q. Pardon? 20 A. Uniform price is also adjusted by location. 21 Q. Uniform producer prices? 22 A. That's right. 23 Q. But as between handlers, Class III prices are not 24 adjusted by location? 25 A. No. 26 Q. Class II prices are not adjusted by location? 27 A. No. 28 Q. Class IV prices are not adjusted by location? 850 1 A. Nope. 2 Q. So it's only in the producer's uniform price and 3 in the handler Class I price that the uniform price has 4 location adjustments? 5 A. Right. 6 Q. Okay. When you used the term undermine principle 7 of uniform pricing, were you referring to undermining the 8 uniform producer price, the uniform class price, or both? 9 A. The uniform producer price, because if producer's 10 milk is depooled, even if the -- even if -- if a 11 producer's -- if -- if a producer is supplying milk to a 12 Class III plant and the Class III price is high -- is 13 depooled, that producer receives one price, and the 14 producers that remain in the pool, a pool that is maybe -- 15 maybe depleted by the withdrawal of Class III milk, those 16 producers receive a different price. 17 And so the uniform -- the uniformity of prices 18 within a location, within a region, or even a small region 19 where normally the prices received are uniform, that -- 20 that blows up. It also has, of course, impacts, as 21 Mr. English just said, on risk management and a whole lot 22 of other things, which will be explored at length at this 23 hearing, the problems created by depooling and negative 24 PPDs. 25 Q. Okay. Would you agree with me that when there is 26 depooling, that uniform pricing between handlers is also 27 affected? A handler who no longer receives milk priced 28 under the order has a different price than a handler who 851 1 receives milk priced under the order, just like producers. 2 A. I mean, a producer who -- a handler that's not -- 3 a handler that's receiving unpooled milk doesn't have a 4 minimum payment obligation, of course. 5 Q. No, it doesn't. And I'm trying to get the point 6 here. 7 So a producer whose milk is depooled, when you are 8 referring to non-uniform prices between producers, the 9 producer who is no longer for that month, under the order, 10 there's no minimum payment obligation, correct? 11 A. Right. 12 Q. Okay. But you do have a situation where one dairy 13 farmer whose milk is depooled gets the benefit of a higher 14 Class III price, for example, than a neighbor whose milk 15 remains pooled? That's what you are referring to as 16 non-uniform? 17 A. At times, yeah. In some -- in some cases, 18 Class III plants have depooled and they have paid the 19 producers substantially the Class III price, but that's 20 a -- that's a different price from the uniform price of 21 the milk that remains. 22 Q. Okay. 23 A. Yeah. 24 Q. And that same difference between pooled and 25 unpooled milk and prices would apply to handlers, whether 26 their milk is pooled or not. It would be a departure from 27 uniform pricing as between handlers. 28 A. Handlers that don't -- manufacturers that don't 852 1 pool don't have a minimum payment obligation under any -- 2 you know, normally. And so I'm not sure how -- I'm not 3 sure how to answer that. 4 Q. But you answered it with respect to producers 5 whose milk has no payment obligation. But you -- but can 6 you not answer it with respect to handlers who have no 7 minimum obligation? 8 A. Handlers -- handlers can -- I guess I'm not -- I 9 guess I'm not finding the right words to -- to -- to 10 harmonize with what you are -- you are asking. 11 Q. Okay. Let me -- I see there's a difficulty. I 12 accept it. 13 A. I mean, there are situations -- and maybe -- maybe 14 this -- this answers the question. 15 There are -- certainly there are situations where 16 these prices get out of line, and some handlers end up 17 with opportunities to depool and capture windfall, and 18 they end up -- where they are normally paying a minimum 19 price under the order, they end up not having to pay, and 20 then they -- they -- they benefit from -- from the 21 depooling opportunity. 22 Q. That's -- 23 A. Does that answer the question? 24 Q. It -- it does. 25 A. Okay. 26 Q. So the handlers that get the benefit of windfall 27 have a non-uniform price, non-uniform benefit compared to 28 handlers who remain in the pool, correct? 853 1 A. Right. And considering that those handlers are 2 often taking full advantage of the pool, not -- not in a 3 pejorative sense, but just the fact that they normally 4 participate in the pool in order to receive the benefits 5 of that, it -- it -- one of the reasons for so many of 6 these programs that push the rope is to -- is to kind of 7 find fairness, to make sure that folks pool consistently. 8 And we believe that -- that price -- improving the price 9 alignments is a better first step for making that happen 10 than -- than rope-pushing exercises. 11 Q. Exactly. Thank you. 12 In the next paragraph you use the term 13 pool-riding, but you didn't define it. Can you do that, 14 please? 15 A. I guess that's probably a -- probably shouldn't 16 have been in my testimony but -- well, I think most folks 17 know what -- know what the concept means. 18 The idea is that there's -- there's milk that 19 isn't really serving -- in the Southeastern markets, for 20 example -- milk that isn't really serving the fluid market 21 in any sense, that is -- that is being pooled in order to 22 take advantage of the higher uniform value in -- in the 23 South -- in the Southeastern markets. 24 And I would say that the system is set up the way 25 the system is set up. So it's not necessarily -- there's 26 nothing to blame when folks ride -- you know, ride the 27 pool. When they -- when they pool because there's an 28 advantage, there's an incentive created by the rules of 854 1 the order, that that's -- they are following the rules of 2 the order. 3 But when the rules of the order create a gap 4 between the value of Class III or IV milk under the -- 5 under the orders -- under the Southeastern orders and 6 under the component orders, that -- that creates an 7 incentive for -- for undue additional milk being pooled on 8 those markets, and pooled on those markets in a way that 9 depletes the Class I value that's intended to incentivize 10 milk to be delivered for Class I use. 11 THE COURT: I'm sorry to interrupt, but you just 12 said you probably shouldn't have testified to that -- 13 THE WITNESS: I probably should not have used the 14 phrase "pool-riding," but I -- I believe that my comments 15 have clarified my intent and that I did not -- I did not 16 really mean it in any pejorative sense. It is often used 17 in a sense that somebody is doing something underhanded 18 and getting away with things -- 19 THE COURT: Yeah, very well. You are not 20 disavowing the rest of your sentence? 21 THE WITNESS: I am not disavowing, in fact, any of 22 the stuff. I am simply saying I might have chosen a 23 better phrase than "pool-riding," and I'm clarifying my 24 intent in using that phrase. 25 THE COURT: Okay. 26 BY MR. VETNE: 27 Q. And following that line in your testimony, you, 28 again, refer to uniform prices: "This undermines the 855 1 uniform prices in those markets." 2 And with respect to that reference to uniform 3 prices, were you referring to uniform prices between 4 producers, dairy farmers, between handlers, or both? 5 A. I was referring to the uniform producer price on 6 the market, which is -- in a high Class I utilization 7 market is intended to attract milk to where it's needed. 8 Q. Oh, okay. So you weren't referring to a situation 9 of non-uniformity between producers? 10 A. No. No. 11 Q. You were referring -- 12 A. That -- 13 Q. -- or making a point that the price wasn't high 14 enough? 15 A. In that -- in that paragraph, undermining the 16 uniform price means undermining the blend price in that 17 market in a way that undercuts the ability of the order to 18 support the delivery of fluid milk to those deficit 19 markets. 20 Q. And your objective is to point out that the 21 uniform price is lower than it should have been or lower 22 than it should be; is that correct? 23 A. Yes, sir. 24 Q. Okay. 25 A. It is -- I wanted to emphasize that because I had 26 not seen that point raised in any -- anyone else 's 27 testimony, that that -- that that border issue is pretty 28 significant and needs to be addressed, and the best way to 856 1 address it is -- is by -- by updating those component 2 levels. 3 Q. Okay. So let me maybe illustrate the border 4 issue. 5 If -- if near the border there is producer milk 6 that is on a component basis lower than average, that milk 7 could receive a better return going to a fat/skim order 8 than to a multiple component order, correct? 9 A. The -- the component standards in the formulas 10 right now are well below the average. 11 Q. Yes. 12 A. So a producer whose milk's -- whose milk 13 composition is below the average could very easily still 14 get a higher price in the component market than in the 15 skim/butterfat market. 16 Q. Okay. And if you -- if you raise the standard, it 17 would reduce the incentive to remain in the component 18 market and encourage it to flow -- 19 A. It would -- 20 Q. -- to the Southeast? 21 A. No, no. No, no. It would reduce the incentive of 22 the plants to -- to pool milk that they receive on the 23 skim/butterfat markets where they are able to pay a lower 24 price or their obligation is lower than when they have to 25 pay on the components, if they pool in Order 32 or 126, 26 for example, versus pooling on Order 5 or 7. 27 The handlers' obligation is increased when they 28 have to pay the component value for the average -- for the 857 1 average milk producer. And for the producers that they 2 would prefer to have, which are higher component 3 producers, it's even -- it is a bigger gap. But the 4 averages are a reasonable conclusion and a reasonable 5 approach to fixing -- to fixing the gap with -- the gap in 6 the current formulas, as has been proposed by National 7 Milk and by your client. 8 Q. Milk would be more likely to flow from a component 9 milk shed to the Southeast? 10 A. Milk would -- okay. So the -- 11 Q. Would the milk -- I'm sorry. Maybe the question 12 was wrong. I'm talking about milk flowing -- 13 A. I'm going to answer the question -- 14 Q. -- and money flowing -- 15 A. If you let me answer the question, I'll answer the 16 question. 17 Q. Go ahead. 18 A. The -- fixing this would discourage milk that's 19 being delivered in places like Texas and Missouri and that 20 is not even -- that's not moving towards serving the 21 Southeastern markets. That -- that milk -- instead of 22 that milk being pooled -- if that milk was not encouraged 23 to pool on Orders 5 and 7, then, arguably, the uniform 24 price in Orders 5 and 7 would be higher, and that would 25 better attract milk to the -- to the -- to the fluid 26 plants, to the distributing plants that need to be 27 supplied, that whose purpose -- whose purpose the Federal 28 Order is to supply. 858 1 Q. Got it. Thank you. 2 A. Sure. Thank you. 3 THE COURT: Okay. AMS? 4 MS. TAYLOR: Thank you, your Honor. 5 CROSS-EXAMINATION 6 BY MS. TAYLOR: 7 Q. Good afternoon, Dr. Cryan. Check my time. 8 A. Good afternoon. Is it afternoon already? 9 Q. Barely. 10 A. Okay. Thank you, Ms. Taylor. 11 Q. Can you give us an idea, if your Farm Bureau 12 membership has 6 million members, about how many are dairy 13 farm members? 14 A. That's a good question. We don't -- we don't have 15 a count on that. But I have found -- I -- I -- I would 16 guess that we probably represent about as many dairy 17 farmers as National Milk. It is probably in the same 18 ballpark. I would not claim we represent more, but I 19 think it is in the same ballpark. 20 Q. Okay. And the Small Business Administration 21 defines a small producer as one making $3.75 million or 22 less in farm income a year. 23 Do you know about what percentage of your dairy 24 farm members would meet that definition? 25 A. I -- if I -- if I had to guess, and I would be 26 guessing, I would think that our -- our members are 27 probably small businesses under that definition in a 28 slightly higher proportion than the national average, 859 1 because I -- you know, the Farm Bureau is a -- in -- 2 serves many roles. When it began, it was kind of a 3 movement, kind of a social movement. It's -- it's -- in 4 many ways, it serves social roles. It's about bringing 5 farmers together to solve problems. And -- and in some 6 cases, the very large farmers tend to see themselves as 7 solving their own problems. 8 So I would -- I would guess that we skew a little 9 bit -- a little small, but not entirely because there are 10 an awful lot of large farmers in the Farm Bureau as well. 11 Q. Okay. And then I wanted to turn to the second 12 page in that paragraph where you talk about "by USDA's 13 calculations," and you calculated a gap. 14 And you said that was from Exhibit 45; is that 15 correct? 16 A. Yes. I think so. Let me double-check. Did I get 17 the number wrong? 18 Yes, Exhibit 45. 19 Q. Okay. So those specific numbers aren't on that 20 exhibit, so I was -- 21 A. Oh. 22 Q. -- hoping you could explain how those calculations 23 were made. 24 A. Did I grab the wrong one? Did you -- do you have 25 an exhibit that has the annual averages, or did I simply 26 do -- 27 Q. I don't know what you used. All I know is 45 28 doesn't have averages on it. 860 1 A. Okay. As I recall from my spreadsheet, this is -- 2 must -- it would be a simple -- a simple average of the 3 differences. 4 Q. Which differences? 5 A. Between differences in the columns on the right. 6 Q. So that difference is in prices between current 7 and proposed component levels? 8 A. I think so. Yeah. Yeah, I think that's right. 9 Yes. I believe -- I believe so. 10 Q. Okay. 11 A. I have this spreadsheet in my head. I remember 12 the spreadsheet, and I believe that's what I did, yeah. 13 Q. Okay. 14 MS. TAYLOR: That's all the questions I have. 15 Thank you. 16 THE COURT: Re-cross? 17 Okay. We didn't really have direct. Anything you 18 would like to say in the nature of redirect testimony, 19 Mr. Cryan? 20 THE WITNESS: Yeah, that's a good question. I -- 21 I think -- I think I have -- I think I covered everything 22 I wanted to cover in the initial direct testimony. So I'm 23 done if you are done. 24 THE COURT: Well, with that, I propose to enter 25 Exhibit 85 for identification into the record. 26 Any objections? 27 Seeing none, Exhibit 85 is admitted into the 28 record. 861 1 Mr. Cryan, you are dismissed. Thank you. 2 (Thereafter, Exhibit Number 85 was received 3 into evidence.) 4 THE WITNESS: Thank you very much. 5 THE COURT: It is 12:09. I think we can take 6 lunch now. Let's come back at 1:10 p.m. 7 (Whereupon, a luncheon break was taken.) 8 ---o0o--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 862 1 MONDAY, AUGUST 28, 2023 - - AFTERNOON SESSION 2 THE COURT: Let's come to order. On the record. 3 I'll swear in the witness on the stand. 4 Please raise your right hand. 5 LYNNE McBRIDE, 6 Being first duly sworn, was examined and 7 testified as follows: 8 THE COURT: Okay. Who's got direct? Do we have 9 direct of this witness? 10 MS. TAYLOR: Your Honor, Ms. McBride is here much 11 like Mr. Cryan. She's a -- with California Dairy 12 Campaign. They are a proponent of one of the proposals, 13 but she's not represented here by counsel. 14 THE COURT: Very well. 15 MS. TAYLOR: So you and I can maybe help her out. 16 THE COURT: Why don't you do -- you probably have 17 it better -- better memorized by now. 18 MS. TAYLOR: I don't know about that. 19 THE COURT: Ms. Taylor will ask you just a few 20 preliminary questions, such as identifying yourself, 21 address, and that type of thing. 22 BY MS. TAYLOR: 23 Q. All right. Good afternoon. 24 A. Good afternoon. 25 Q. Can you please state and spell your name for the 26 record? 27 A. Lynne, L-Y-N-N-E, McBride, M-C-B-R-I-D-E. 28 Q. And can you state your business address? 863 1 A. 325 Mitchell Avenue in Turlock, California, 95380. 2 Q. You can read your statement in now for the record. 3 I will just ask you to be cognizant that the court 4 reporter is transcribing what you say, so we try to keep 5 it not quick. 6 A. Great. 7 THE COURT: Let's go ahead and mark Ms. McBride's 8 statement, which is updated, California Dairy Campaign-1, 9 let's mark that with the next exhibit in order, which I 10 have as 86. 11 (Thereafter, Exhibit Number 86 was marked 12 for identification.) 13 THE COURT: Very well. Exhibit -- the so 14 designated exhibit is marked for identification as 86. 15 Ms. McBride, you may give your statement. 16 MS. TAYLOR: For those listening, we don't have 17 extra paper copies. It is up on the website as CDC-1. It 18 is seven pages. 19 MR. ENGLISH: I request a copy. It's a lot harder 20 to do online. 21 THE COURT: Let's go off the record. 22 (Off-the-record.) 23 THE COURT: Back on the record. 24 Do I understand that there are additional exhibits 25 that this witness will be sponsoring, other than her 26 statement, which is Exhibit 86? 27 MS. TAYLOR: Yes, your Honor. CDC submitted to 28 the Department, according to the advance admissions 864 1 schedule, exhibit schedule, ten exhibits in total. All of 2 them are online. We only have the paper copy of one 3 today, but Ms. McBride indicated she would bring paper 4 copies of the other nine tomorrow morning so they could be 5 put officially in the paper record. We would like to 6 reserve Exhibit Numbers 87 through 95 so we can mark those 7 accordingly in the morning. 8 THE COURT: 87 through 95? 9 MS. TAYLOR: Yes. 10 THE COURT: Hearing exhibits are reserved. 11 All right. Let's just -- yes, Mr. Rosenbaum. 12 MR. ROSENBAUM: Well, your Honor, if this -- if 13 this is the opportunity to cross-examine this witness, 14 then I'm going to want to be able to do that. I mean, I 15 printed off copies from the web page. But I think we 16 should go ahead and assign Hearing exhibit numbers to 17 the -- to each of the exhibits so that we can go ahead and 18 do that cross-examination. 19 THE COURT: That's -- that's fair. And I -- I 20 guess I had really proposed to see how this goes, and if 21 someone feels disadvantaged by not having a hard copy 22 until tomorrow, we'll recall this witness, I suppose. 23 Either that or we could take up this witness later. 24 But what do the parties propose? 25 Mr. English seems to be concerned about not having 26 hard copies. 27 MR. ENGLISH: I -- I just wanted to make sure -- 28 since I understood there was an updated one, the website 865 1 wouldn't help. I'm prepared to use my computer with 2 respect to the exhibits. We'll just have to make sure at 3 that time we have numbered them so we're referring to them 4 correctly, that's all. But I'm prepared to move forward. 5 I'm not saying that we should postpone this witness. I 6 can't speak for others, but that's how -- 7 THE COURT: Yes. Thank you, Mr. English. 8 Any -- 9 MS. TAYLOR: CDC-1 on the website is updated. 10 Ms. McBride sent it this morning, and we have replaced 11 online what was submitted earlier. So it is the correct 12 version, just so everyone knows. Yeah. 13 THE COURT: Okay. 14 MS. TAYLOR: I'm happy to go through the names of 15 the exhibits if you would like. 16 THE COURT: Yeah, I think you should. It would 17 save me getting -- all right. And that -- and since we 18 will identify -- well, essentially mark -- well, virtually 19 mark, identify exhibits without introducing them into the 20 record right now. The remainder of the exhibits which 21 will hit tomorrow for this witness, and they won't put 22 anybody at any disadvantage if they have got a problem 23 with this tomorrow. 24 The floor is yours, Ms. Taylor. 25 MS. TAYLOR: Okay. It looks like CDC Exhibit 2 is 26 labeled Table 30, US Mozzarella Production in Wisconsin 27 Wholesale Prices, 2000 to 2023. And that should be 28 marked -- ask to be marked Exhibit 87. 866 1 (Thereafter, Exhibit Number 87 was marked for 2 identification.) 3 MS. TAYLOR: CDC Exhibit Number 3 titled Requested 4 Mozzarella Information for California Dairy Campaign 5 Provided April 2023 should ask to be marked 88. 6 (Thereafter, Exhibit Number 88 was marked for 7 identification.) 8 MS. TAYLOR: CDC Exhibit Number 4 entitled 9 June 2007 Spot Cheese Market. It's a one-pager from the 10 Government Accountability Office, ask to be marked 11 Exhibit 89. 12 (Thereafter, Exhibit Number 89 was marked for 13 identification.) 14 MS. TAYLOR: CDC Exhibit 5 is an exhibit from the 15 Congressional Research Service entitled Consolidation and 16 Concentration in the U.S. Dairy Industry, dated 17 April 27th, 2010. Ask that to be marked as Exhibit 90. 18 (Thereafter, Exhibit Number 90 was marked for 19 identification.) 20 MS. TAYLOR: CDC Exhibit Number 6 is a three-page 21 document entitled The United States Department of 22 Agriculture, In the Matter of: Milk in the Northeast and 23 Other Marketing Areas, docket number AO-14-A69, pages 641, 24 and then it skips to 668. Ask that to be marked as 25 Exhibit 91. 26 (Thereafter, Exhibit Number 91 was marked for 27 identification.) 28 MS. TAYLOR: CDC Exhibit Number 7 is on the header 867 1 for National Farmers Union entitled Family Farming and 2 Dairy Policy Reform, 2023 Special Order of Business. It 3 is a two-page document. Ask that to be marked Exhibit 92. 4 (Thereafter, Exhibit Number 92 was marked for 5 identification.) 6 MS. TAYLOR: CDC Exhibit Number 8 -- it is 7 loading, sorry. Okay. It is a 62-page document entitled 8 Prediction of Mozzarella Cheese Yield from Milk 9 Consumption, from Hamzah M. Abu-Tarboush, from Utah State 10 University. Ask that to be marked Exhibit 93. 11 (Thereafter, Exhibit Number 93 was marked for 12 identification.) 13 MS. TAYLOR: CDC Exhibit Number 9 is the USDA 14 Specifications for Mozzarella Cheese, effective 15 September 24th, 2012, reprinted in December of 2018. Ask 16 that to be marked Exhibit Number 94. 17 (Thereafter, Exhibit Number 94 was marked for 18 identification.) 19 MS. TAYLOR: And lastly, CDC Exhibit 10 is a 20 four-page document dated March 1st, 2023, titled Purchase 21 Award Description, for mozzarella PCA. It's a four-page 22 document. And we ask that to be marked Exhibit 95. 23 (Thereafter, Exhibit Number 95 was marked for 24 identification.) 25 MS. TAYLOR: And that looks to be all of their 26 exhibits. 27 THE COURT: The identified exhibits are so marked. 28 I think we can proceed with this witness's 868 1 statement. 2 Ms. McBride, you can read and/or summarize your 3 statement, which is Exhibit 86. 4 THE WITNESS: Great. 5 THE COURT: The floor is yours. 6 THE WITNESS: Thank you, your Honor. 7 Good afternoon. My name is Lynne McBride, and I 8 serve as executive director of the California Dairy 9 Campaign. Founded over 25 years ago, CDC is a grass roots 10 organization representing dairy farmers throughout 11 California. 12 The California Dairy Campaign Board of Directors 13 voted to -- oh, excuse me. I skipped a line. 14 Our office is located in Turlock, California, in 15 the heart of the Central Valley of California. The 16 California Dairy Campaign Board of Directors voted to 17 approve a proposal to add mozzarella to the Class III 18 pricing formula during our annual meeting in Hanford, 19 California, on January 12th, 2023. 20 THE COURT: I'm sorry. Can you give a mailing 21 address, a non-personal address for yourself for the 22 record. 23 THE WITNESS: Oh, 325 Mitchell Avenue in Turlock, 24 California. 95380. 25 THE COURT: Thank you. You may continue where you 26 left off. 27 THE WITNESS: CDC is a member organization of the 28 California Farmers Union, a state chapter of the National 869 1 Farmers Union, a farm organization representing more than 2 230,000 farmers and ranchers nationwide. 3 I would like to begin by speaking about the 4 special order of business passed during the National 5 Farmers Union convention in San Francisco, California, 6 earlier this year. 7 California Dairy Campaign and California Farmers 8 Union leaders worked with dairy farmers from across the 9 country to finalize the NFU special order titled Family 10 Farming and Dairy Policy Reform, 2023 Special Order of 11 Business. 12 Quote: "Although milk prices paid to dairy 13 farmers improved in 2022, feed prices and input costs 14 reached record highs, reducing dairy farm profitability. 15 Since 1992, the number of US dairy farms has decreased by 16 77%" -- 17 (Court Reporter clarification.) 18 THE WITNESS: Oh, yes. Sorry. 19 "Since 1992, the number of U.S. dairy farms has 20 decreased by 77% or more than 103,577 farms due to low 21 dairy farm margins. To reduce dairy farm closures and 22 improve the outlook for U.S. dairy farmers, we call on 23 Congress to pass a farmer-led incentive-based milk 24 production growth plan to match milk supply with 25 profitable market demand. 26 "As a result of widespread market concentration 27 and consolidation, dairy farmers have little, if any, 28 choice about where to ship their milk, further depressing 870 1 milk prices paid due to a lack of competition. The 2 Federal Milk Marketing Order system was set up in the 3 1930s to establish minimum prices paid to dairy farmers 4 and guard against non-competitive and predatory practices 5 of milk handlers. 6 "Prior to the establishment of the Federal Milk 7 Marketing Order system, dairy farmers around the country 8 were at the mercy of milk handlers who controlled milk 9 prices paid. Because milk is a highly perishable product 10 that must leave the farm each day, Federal Milk Market 11 Order regulations are vital to ensure dairy farmers are 12 paid a minimum price for the milk they produce. 13 "The last Federal Order hearing to consider 14 significant changes in the pricing formulas occurred 15 15 years ago, and the dairy market has grown dramatically 16 more concentrated since then, making Federal Order minimum 17 milk pricing more critical than ever before. 18 "Dairy farmers do not have the ability to change 19 milk handlers given the level of consolidation and 20 concentration that exists today. Therefore, minimum milk 21 prices must ensure that dairy farmers are paid a price 22 that reflects the value of all milk and dairy products 23 sold to sustain dairy farmers and foster a secure food 24 supply for consumers," unquote. 25 The special order of business later supports, 26 quote, "reforming all class formulas to reflect the value 27 and volume of all dairy products sold in the market today 28 as current milk pricing formulas fail to reflect the 871 1 actual market value of dairy products, particularly high 2 moisture and higher value cheese products," unquote. And 3 that's Exhibit 7. 4 THE COURT: What Exhibit 7, is that your -- is 5 that CDC-7? 6 THE WITNESS: CDC Exhibit 7. Excuse me. 7 THE COURT: That is now 92 marked for 8 identification. Thank you. 9 THE WITNESS: Federal Milk Marketing Orders 10 (FMMOs) were established to stabilize the milk market and 11 help equalize the market power of dairy farmers with dairy 12 processors. In effect, the Federal Milk Marketing Order 13 system exists to protect dairy farmer from dairy 14 processors. We consider it important to recall the 15 importance of Federal Orders to dairy farmers throughout 16 history as proposals for changes are considered. 17 Before moving on to the specifics of our proposal, 18 it is important to consider the crisis dairy farmers face 19 today due to milk prices falling well below production 20 costs. The United States Department of Agriculture (USDA) 21 National Agricultural Statistics Service (NASS) reporting 22 indicates that the number of dairy farms has dropped by 23 more than 60% since 2000. 24 Many leaders in our organization have been forced 25 to sell their entire dairy operations because milk prices 26 paid failed to come close to covering the average cost to 27 produce milk today. California Dairy Campaign publishes a 28 monthly milk pricing survey of approximately 40 dairy 872 1 producers who report their prices, including milk 2 components each month from a variety of milk handlers. 3 Although the numbers are still coming in, it is 4 evident that the net price paid will total approximately 5 $14 per hundredweight, an abysmally low price. Our latest 6 pricing survey shows milk prices are well below average 7 production costs. 8 In July, the statistical uniform price in 9 California totaled 15.53 per hundredweight, while the 10 average cost of production in our state totals more than 11 $23 per hundredweight, according to the latest United 12 States Department of Agriculture (USDA) Economic Research 13 Service (ERS) Milk Cost of Production Estimates. 14 Nationally, the average cost of production totals more 15 than $27 per hundredweight, according to the same USDA ERS 16 estimate. 17 In short, multi-generational dairies are going out 18 of business in droves due to depressed milk prices, 19 particularly Class III prices which have fallen this year. 20 Our monthly milk pricing survey shows how Class III 21 shippers are paid significantly less than dairy producers 22 shipping to handlers of other classes. 23 Although Class III prices rose significantly in 24 2020, they have remained below Class IV prices for a 25 prolonged period. As we sit here today discussing the 26 specifics of milk pricing formulas, dairy farmers around 27 the country are facing economic ruin due to high input 28 costs and milk prices comparable to those paid decades 873 1 ago. 2 Dairy farmers want to get off the roller coaster 3 of volatile and chronically depressed milk prices. An 4 increase in the manufacturing cost allowance, as called 5 for in multiple proposals before this hearing, will 6 exacerbate the crisis dairy farmers face. 7 Then there's a graph in there from the Economic 8 Research Service showing milk production and number of 9 dairy farms from 2017 to 2022, and it -- it shows the 10 decline in the number of dairy farms there. 11 Since it began, we have participated in Dairy 12 Together, a nationwide effort of dairy farmers from across 13 the country calling for a nationwide farmer-led 14 incentive-based dairy growth management plan that would 15 match milk production with profitable market demand. 16 An effective growth management plan would improve 17 the outlook for dairy farmers nationwide. We understand 18 and appreciate that it is the role of Congress to change 19 the direction of federal dairy policy to establish 20 incentives for milk production to more closely align with 21 market demand. However, during this hearing much time 22 will be devoted to proposals that would increase the 23 manufacturing cost allowance or Make Allowance. An 24 increase in the Make Allowance will make our nationwide 25 supply/demand imbalance even worse than it is today. 26 In the absence of a dairy growth management plan, 27 today, we have a patchwork across the country of plans 28 that send strong signals to dairy producers about how much 874 1 milk to produce and some that don't. That patchwork is 2 failing. The evidence is the volatile and chronically 3 depressed milk prices paid to dairy farmers nationwide. 4 An increase in the Make Allowance will make plants 5 less responsive to changes in market conditions and less 6 inclined to send signals to dairy farmers about how much 7 milk to produce. We oppose any increase in the 8 manufacturing cost allowance proposed for this hearing. 9 Milk handlers need to look further up the food 10 chain to cover their costs, not saddle dairy producers 11 with higher manufacturing cost allowances. Even worse, 12 one proposal aims to update the cost allowances more 13 frequently. We had a system in California that included 14 frequent updating of Make Allowances, and it led to the 15 growth of dairy processing and increases in milk 16 production that was not based on market demand but instead 17 was a direct result of generous Make Allowances. 18 All the extra milk production and processing in 19 California depressed milk prices nationwide, and we oppose 20 a similar attempt proposed at this hearing to ramp up 21 Make Allowances routinely. The current, voluntary, 22 unaudited manufacturing cost surveys relied on to 23 determine manufacturing cost allowances represent a small 24 fraction of the manufacturing plants nationwide. We 25 oppose any attempt to increase the Make Allowance based on 26 these unreliable cost studies. 27 In addition, the current manufacturing cost 28 allowances include a return on investment. Dairy farmers 875 1 have no similar guaranteed return on investment enjoyed by 2 processing plants. The ROI category is estimated to cost 3 dairy farmers nationwide hundreds of millions of dollars 4 annually and should be removed from the manufacturing cost 5 allowance calculation. 6 Class III Price Formula Undervalues Milk. 7 Our proposal seeks to change the Class III pricing 8 formula to reflect the value of the cheese market today 9 more accurately. The Federal Orders calculate milk prices 10 based on end product prices, and it is essential to 11 include the largest cheese category in the end product 12 price calculation. Our proposal would add a mozzarella 13 price to the protein price included in the Class III price 14 formula. Adding mozzarella to the protein price would 15 make Class III pricing more reflective of the cheese 16 prices paid and yields achieved today. The volume of 17 mozzarella has now significantly exceeded that of cheddar, 18 and the Class III price should be modified to reflect 19 these market conditions. 20 According to the United States Department of 21 Agriculture (USDA) Dairy Products 2022 Summary published 22 in April of this year, Mozzarella production totaled 23 4,497,175,000 pounds, while cheddar totaled 3,963,741,000 24 pounds. Total cheese production in 2022 totaled 25 14.1 billion pounds last year. Mozzarella has surpassed 26 cheddar in total cheese production and should no longer be 27 ignored in the Federal Order pricing formulas. 28 Today's Class III price is based on the price of 876 1 cheddar cheese, which is produced in lower volumes than 2 mozzarella. A 2007 General Accountability Office Report 3 concluded that the Chicago Mercantile Exchange (the CME) 4 was thinly traded and vulnerable to market manipulation. 5 Prices paid on the CME have an outsized impact on the 6 Agricultural Marketing Service National Dairy Products 7 Sales Report. Although CME sales account for less than 1% 8 of all cheese sales, prices paid on the CME significantly 9 impact the Class III price. 10 The CME spot market is where the last load of 11 product is sold, and it serves as a marketplace of last 12 resort. This market is limited to only a few traders and 13 commercial firms. While the market sometimes moves even 14 without sales volume, the CME greatly influences the price 15 for all cheese and butter across the country because these 16 classes impact all milk prices paid to dairy farmers. 17 Unfortunately, this failing milk pricing system 18 has resulted in dairy farmers suffering economic losses 19 due to volatile milk prices paid that fail to cover 20 average farm operating costs. This hearing presents an 21 opportunity to adopt our proposal and make the Class III 22 pricing formula more market-oriented, accurately 23 reflecting prices paid in today's market. (Exhibit 4) 24 THE COURT: CDC-4 -- 25 THE WITNESS: Yes, CDC-4. 26 THE COURT: -- now marked as Hearing Exhibit 89. 27 THE WITNESS: FMMO Hearing 2000 – Mozzarella 28 Ignored in the Pricing Formula. 877 1 During the Federal Milk Marketing Order hearing in 2 Virginia in 2000, California Dairy Campaign Board Member 3 Joaquin Contente, a dairy producer from Hanford, CA, 4 raised the issue of the importance of mozzarella to 5 calculate the Class III price. During his testimony, he 6 questioned Dr. David Barbano about mozzarella, who 7 confirmed at that time that mozzarella was being ignored 8 in the Federal Order pricing system. (CDC Exhibit 6) 9 THE COURT: Which is now Exhibit 91 for 10 identification. 11 THE WITNESS: Although mozzarella now exceeds 12 cheddar cheese production, no change has been made in 13 Class III to reflect the higher value and higher volume 14 mozzarella market. Since 2000, the demand for mozzarella 15 cheese has grown dramatically. According to a recent HTF 16 report, the mozzarella cheese market is expected to double 17 its revenue size due to strong and steady growth. 18 Despite the higher production of mozzarella and 19 the growth in this cheese variety that is expected to 20 continue, Class III prices ignore this important and 21 growing segment of the cheese market. (CDC Exhibit 3) 22 THE COURT: Now marked for identification 23 Exhibit 88. 24 THE WITNESS: Our proposal seeks to add mozzarella 25 to the National Dairy Products Sales Report (NDPSR) to be 26 included in the protein calculation of the Class III 27 price. The National Dairy Product Sales Report is 28 intended to reflect basic commodity products and should 878 1 include mozzarella. 2 (Court Reporter clarification.) 3 THE WITNESS: I apologize. 4 The NDPSR is intended to reflect basic commodity 5 products and should include mozzarella. We consider it 6 essential that more dairy products are part of the 7 mandatory dairy pricing survey to improve transparency in 8 the pricing of milk paid to dairy producers. 9 Mozzarella Specifications. 10 According to information from the United States 11 Department of Agriculture, mozzarella has five main 12 specifications. We propose incorporating mozzarella 13 specifications -- 14 THE COURT: I'm sorry. 15 THE WITNESS: I know, I changed the words. 16 THE COURT: The statement -- the statement says 17 four. Are you now correcting that to five? 18 THE WITNESS: Yes. Yes. 19 THE COURT: Okay. 20 THE WITNESS: We propose incorporating mozzarella 21 specifications based on the highest production to 22 determine the appropriate moisture and fat content for a 23 standardized mozzarella. Until now, there has been no 24 standard specification for mozzarella cheese. USDA 25 collects data about mozzarella cheese production and can 26 use that information to determine moisture and fat content 27 to establish one. (CDC Exhibit 9) 28 THE COURT: Which has been marked Exhibit 94 for 879 1 identification. 2 THE WITNESS: Mozzarella production is the largest 3 category of cheese produced today and deserves a standard 4 specification determined by the volume of mozzarella 5 produced today. USDA publishes the volume of mozzarella 6 in the National Agricultural Statistics Service reports, 7 and the specification of the cheese should be made 8 available publicly and utilized in the protein price in 9 the Class III formula. We propose adding mozzarella to 10 the protein price based on the Van Slyke cheese yield 11 formula, which effectively determines cheese yields for 12 mozzarella. (CDC Exhibit 8) 13 THE COURT: Which has been marked Exhibit 93 for 14 identification. 15 THE WITNESS: The end-product pricing formulas 16 should reflect end-product prices in the market today. 17 Mozzarella is the most significant segment of the cheese 18 market, so it should be incorporated into the Class III 19 end-product pricing formula. 20 At our request, USDA has provided an extensive 21 series of information about mozzarella prices paid titled, 22 quote, "U.S. Mozzarella Production and Wisconsin Wholesale 23 Price, 2000 to 2023." 24 The price series documents the higher and more 25 stable wholesale price paid for mozzarella over more than 26 20 years. For example, when dairy producer prices, 27 including Class III, dropped precipitously in 2009 and 28 2010, mozzarella prices remained stable. If mozzarella 880 1 had been added to the Class III pricing formula back then, 2 it would have improved milk prices paid and fostered more 3 orderly marketing of milk nationwide. (CDC Exhibit 2 and 4 3) 5 THE COURT: Exhibits 87 and 88 marked for 6 identification. 7 THE WITNESS: Concentration and Consolidation 8 Increasing. 9 Our dairy farmer members are concerned about how 10 concentration affects price transparency in dairy pricing. 11 It has undermined price discovery because fewer buyers and 12 sellers are in the market today. (CDC Exhibit 5) 13 THE COURT: Marked Exhibit 90 for identification. 14 THE WITNESS: According to the Congressional 15 Research Service (CRS) Report from 2010 titled 16 Consolidation and Concentration in the U.S. Dairy 17 Industry, quote, Typically, markets work more efficiently 18 when there are many "observable" transactions that provide 19 sufficient information to all market participants about 20 demand, supply, and prices. The move within the dairy 21 industry to a more integrated market, with closer ties 22 between various market players such as custom contracts or 23 other pre-arranged transactions, results in fewer trades 24 of products on the cash or "spot" market. In years past, 25 these sales would account for a greater share of market 26 transactions and provide a good measure of current prices. 27 The primary spot market for dairy is located at 28 the Chicago Mercantile Exchange (CME), where cheese, 881 1 butter, and nonfat dry milk are traded. Actual quantities 2 traded are quite small, but prices determined by buyers 3 and sellers at this market are used to establish wholesale 4 price contracts across the country, subject to premiums 5 and discounts for factors such as quality and 6 transportation. Wholesale dairy product prices are then 7 used to set monthly minimum prices by USDA that milk 8 handlers must pay for farm milk under federal orders. 9 Some dairy producer groups believe that the CME is 10 an inadequate pricing mechanism because of perceptions 11 that the market is too thinly traded, lacks transparency 12 and sufficient oversight, and creates a highly volatile 13 market that adversely affects producers. The GAO study 14 concluded in 2007 that, quote, "certain market conditions 15 at the CME spot market, including a small number of trades 16 and a small number of traders who make a majority of 17 trades, continue to make this market particularly 18 susceptible to manipulation," unquote. 19 We agree that the CME is an inadequate pricing 20 mechanism because it is thinly traded and vulnerable to 21 manipulation. Adding mozzarella to the protein pricing 22 formula would work to counterbalance the impact of the 23 thinly traded CME market. 24 Profitability Further Up the Food Chain. 25 According to the Congressional Research Service 26 Report, Farm-to-Food Price Dynamics, the time lags in 27 retail price response to farm price changes are generally 28 months long, even for perishables like milk. Another 882 1 characteristic of food markets is that adjustments in the 2 retail prices from higher farm prices occur faster and 3 with greater passthrough to the consumer than adjustments 4 to decreases in farm prices, an economic phenomenon often 5 referred to as “sticky” retail food prices. Retail prices 6 follow commodity prices upward rapidly but fall back only 7 slowly and partially when commodity prices recede. 8 The CRS report concluded that a “disconnect” 9 exists between farm and retail prices of agricultural 10 products. There is profitability further up the food 11 chain, and dairy producers should not be required to pay 12 more in manufacturing cost allowances to cover plant 13 costs. The profitability further up the food chain 14 ensures that any improvements in minimum milk prices paid 15 to dairy farmers will not impact consumer prices. 16 Support for other proposals: 17 We support Proposal 1, the National Milk Producers 18 Federation Proposal to amend the milk component factors in 19 the Class III and Class IV skim milk pricing formulas; 20 Proposal 4: The American Farm Bureau Federation 21 (AFBF) proposal to add 640-pound cheddar cheese blocks to 22 the protein price formula; 23 Proposal Number 5: The American Farm Bureau 24 Federation proposal to add unsalted butter to the 25 butterfat and protein calculation; 26 Proposal Number 13: The National Milk Producers 27 Federation proposal to amend the base Class I skim milk 28 price in all Federal Orders to return to the “higher” of 883 1 the Class III and Class IV Advanced Skim milk pricing 2 factor; 3 Proposal 19: The National Milk Producers 4 Federation Proposal to update the Adjusted Class I 5 differentials; 6 And Proposal 21: The American Farm Bureau 7 Federation Proposal to update the Class II differential. 8 As stated before, the California Dairy Campaign 9 opposes increases in the manufacturing cost allowances 10 included in Proposals 7 by the National Milk Producers 11 Federation, 8 by the Wisconsin Cheese Makers Association, 12 and 9 by the International Dairy Foods Association. 13 In conclusion, our proposal aims to improve 14 overall dairy price transparency by expanding the United 15 States Department of Agriculture’s mandatory price 16 reporting system to add additional products like 17 mozzarella. Given the concentration and consolidation 18 that exists, minimum prices paid by the Federal Milk 19 Marketing Order system are critical to ensure dairy 20 farmers are paid prices based on current market 21 conditions. 22 In addition, we oppose an increase in the 23 manufacturing cost allowance because it will further 24 reduce milk prices paid to dairy farmers who are already 25 enduring milk prices well below production costs. If 26 anything, Make Allowances should be lowered to eliminate 27 return on investments because farmers do not have a 28 similar guarantee or any certainty that their costs will 884 1 be covered in minimum milk pricing formulas. 2 On behalf of the California Dairy Campaign, I 3 thank you for the opportunity to testify today. I would 4 like to request the ability to submit additional written 5 testimony on a range of subjects important to dairy 6 farmers for consideration during this hearing. 7 THE COURT: Mr. Rosenbaum. 8 Actually, before we get there, does anyone think 9 it's important that we make a more formal correction to 10 the testimony on page 5 about the four, now five, main 11 specifications for mozzarella? 12 Hearing none, I think we'll just leave the record 13 as it is. 14 Mr. Rosenbaum, your witness. 15 CROSS-EXAMINATION 16 BY MR. ROSENBAUM: 17 Q. Good afternoon, Steve Rosenbaum for the 18 International Dairy Foods Association. 19 Are you generally aware that under the Federal 20 Order system, minimum prices are established by surveying 21 the finished product price and then subtracting the cost 22 of making that finished product? 23 A. Yes. 24 Q. Now, I -- what I'm not seeing anywhere in any of 25 these documents, but correct me if I'm wrong, is any 26 information as to what in fact it costs to make 27 mozzarella. 28 Is -- does that appear some place? 885 1 A. Yeah. That is something in our proposal that we 2 included the standard Make Allowance cost, but that's 3 certainly something we would be interested in calculating 4 what mozzarella cost of production would be. And that's 5 sort of -- that is definitely one of the challenges with 6 the cost studies overall is the ability to get information 7 from plants about what their costs actually are. And so 8 we definitely would be interested in that information. 9 Q. Are you aware that USDA's decision-making after 10 this hearing has to be based upon the evidence that has 11 been presented at the hearing? 12 A. Yes, I am. 13 Q. And as of this point, at least, there has been no 14 information submitted regarding the cost of making 15 mozzarella; is that correct? 16 A. Yes, we do not have that information. We 17 represent dairy producers, not dairy processors. 18 Q. And are you generally aware that the equipment 19 used to make mozzarella is in some respects the same as 20 the equipment used to make cheddar cheese, but in many 21 other respects is used different? 22 A. We understand it's -- it can be different, yes. 23 Q. Okay. I mean, do you understand, for example, 24 that -- that making mozzarella involves stretching the 25 cheese? 26 A. Yes. 27 Q. And that that's not the case with cheddar, as one 28 example? 886 1 A. Yes. 2 Q. Okay. So I want to ask you some questions about 3 the -- well -- and -- start that question again. 4 And obviously there's no evidence in the record as 5 to what the cost of that mozzarella specific equipment is; 6 is that correct? 7 A. Right. We just don't have access to that type of 8 information. Again, we represent dairy producers who see 9 that mozzarella production number, and really think it's 10 important for that to be included in the Class III price. 11 Q. Okay. Well, let's -- I want to ask some specific 12 questions about some of the data you did present. 13 If you could look at your CDC Exhibit 2, which has 14 been marked as Hearing Exhibit 87. 15 A. Yes. 16 Q. Now, this is information, according to the 17 footnotes at the last page, that come from USDA NASS in 18 some respects and in others from Dairy Market News, 19 correct? 20 A. Yes. That's our understanding. 21 Q. So let's just take the information in the very 22 first line on the very first page, which shows in 23 January 2000 -- and I'm just using this as an example; I 24 know it's long time ago, but it's the first one -- where 25 you show mozzarella production of 215,333,000 pounds, 26 correct? 27 A. Yes. 28 Q. Just asking you to -- that I'm reciting the 887 1 numbers correctly. Nothing beyond that at this point. 2 And you show a price range there from $1.5460 to 3 $2.2150, correct? 4 A. Yes. 5 Q. And then there's an average price shown, correct? 6 A. Yes. 7 Q. Now, I mean that's a -- that's a very large range 8 in price in one -- 9 A. Uh-huh. 10 Q. -- single month, you agree, right, I mean, between 11 $1.54 and $2.21? 12 A. Yes. 13 Q. And do you have any -- okay. And -- and in the 14 last column, the average price, do you agree with me the 15 average price as shown on this exhibit is simply the -- 16 you just take -- have taken the minimum price and the 17 maximum price, added them together, and divided by two? 18 A. Yes. So this information was what we had 19 requested from the United States Department of Agriculture 20 when we were at the beginning of our discussions about 21 whether to pursue a mozzarella inclusion in the Class III 22 formula. And so, you know, that's basically the table 23 that we were given. One of the challenges that we have 24 moving forward in this proposal is the limited amount of 25 data. But we found this to be helpful, and that's why we 26 wanted to submit it for the record. 27 Q. But just to be clear, your average price is, 28 simply, the midpoint between the minimum price and the 888 1 maximum price, correct? 2 A. That's our understanding based on the information 3 we were given, yes. 4 Q. It is not a weighted average, correct? 5 A. For my understanding, it isn't. 6 Q. So you don't know whether -- and I'm going to use 7 an extreme example, and I'm not saying this example is 8 right either. But you don't know whether 99% of the sales 9 were for $1.54 and only 1% were for $2.2150, correct? 10 A. Yeah. That's why we would like more information 11 about mozzarella. 12 Q. And if you look at the last page where you have 13 the footnotes, where you provide source information -- let 14 me back up. The -- if you look at the very title of the 15 document, it shows that mozzarella production is the 16 information you got from NASS, and Wisconsin wholesale 17 prices is the information you got from Dairy Market News, 18 correct? 19 A. Yeah. And, again, this was prepared by USDA AMS 20 Dairy Programs. 21 Q. Okay. And -- and in terms of the price, 22 footnote 2 tells us that this is the price of 5- to 23 6-pound mozzarella loaves, correct? 24 A. Right. Correct. 25 Q. Which is that's like the package that gets 26 delivered to a pizza parlor, right? Or do you know? 27 A. Well, it is the -- again, we asked for the 28 information, and this is what we were given in terms of 889 1 what's available. And that's one of our concerns -- 2 Q. So is -- 3 A. -- is that we don't have the pricing information 4 that we think is important. 5 Q. So as far as you know, that's the only 6 available -- only available information you have is the 7 highest price paid and the lowest price paid in a given 8 month for a 5- to 6-pound piece of mozzarella cheese? 9 A. Yeah. And that's why we're -- we're in our 10 proposal asking for mozzarella to be added to the National 11 Product Dairy Sales Report. 12 Q. Well, so -- you are not suggesting these numbers 13 in any way are reflective of what mozzarella cheese sells 14 for at a bulk level to the extent it is sold at bulk? 15 A. Well, again, it is limited information. So in 16 preparation for this hearing, we wanted to provide as much 17 information as we could. 18 Q. Okay. So let me then ask you a question about CDC 19 Exhibit 3, which has been marked as Exhibit 88. 20 And -- and there -- this is -- this is information 21 about production, correct? 22 A. Correct. Again, it was at our request that USDA 23 provided this information, so we thought it would be 24 important, again, because of the limited amount of 25 information we have about mozzarella, to include it in the 26 hearing record. 27 Q. Okay. And this exhibit has a footnote 1, and 28 frankly, I'm a little puzzled by what the footnote means, 890 1 so if you could help me out. 2 It says -- starts by -- it says, "Source: USDA 3 AMS Dairy Market News." And then a footnote to that, 4 which is footnote 1, says, "Due to reduced personal 5 contacts, first-person reporting is no longer used to 6 report mozzarella prices." 7 What does that mean? 8 A. That was, again, provided to us by AMS. So I'm 9 not sure I can speak to that. 10 Q. That's a -- that's a -- is that a written 11 statement? Because I'll be candid, we can't find anything 12 like that statement in USDA AMS Dairy Market News itself. 13 So is this some sort of private communication or what 14 exactly is it? 15 A. Yeah. Again, we were requesting information from 16 AMS, and this was what was provided to us, so -- 17 Q. Okay. All right. So do you understand that to 18 mean that, in fact, these prices as reported here are not 19 based upon that -- any information reported by the seller 20 or the buyer? 21 A. Yeah, I just understood that there was reduced 22 personal contacts, just as it says there. 23 Q. Okay. So do you know where it comes from? If it 24 is not first-person personal contacts, do you know where 25 the information is coming from? 26 A. I guess at this point I don't have that 27 information. 28 Q. Okay. And then it says, "The prices reported are 891 1 adjusted week to week based on the CME Cash Futures 2 settlement." 3 Do you see that? 4 A. Uh-huh. 5 Q. Do you -- do you know what cash futures are being 6 discussed there? 7 A. Yeah. Again, this was information that we 8 requested and was provided to us, so -- 9 Q. You don't -- 10 A. -- I can't speak to that. 11 Q. Do you know if this is Class III futures prices or 12 do you -- 13 A. Again -- 14 Q. Okay. Do you know whether mozzarella generally 15 has a shorter shelf life than cheddar? 16 A. Well, again, you know, we're interested in more 17 information about mozzarella. I represent dairy 18 producers, and we don't have, you know, in-depth 19 information about cheese characteristics. 20 Q. All right. And you have identified five different 21 standard -- let me start that question again. 22 You have identified five different FDA standards 23 of identity for mozzarella; is that correct? 24 A. Yes. And that is in one of our exhibits. 25 Q. Yes. I saw that. 26 And -- and you have not selected, to the extent 27 that mozzarella were ever to be included in the pricing 28 formulas, you have not determined which form of mozzarella 892 1 you would be advocating? 2 A. No. At this point we don't have enough 3 information to do that. 4 Q. And do you know whether there's any general 5 relationship between the differences between the standards 6 and the difference between the prices at which they are 7 sold in the marketplace today? 8 A. Yeah. Again, we were interested in more pricing 9 information about mozzarella, so we can't speak to that. 10 Q. The one specific information that you provided 11 regarding a specific price for mozzarella is set forth in 12 here in Exhibit 95, correct? This is your -- I'm sorry, 13 this is your CDC Exhibit 10. 14 A. Okay. 15 Q. Your last exhibit. 16 A. Yes. That was just another -- in terms of the 17 limited price information we were able to gather, we 18 thought it was important in preparation for this hearing 19 to include that. 20 Q. Okay. And just -- and this is information 21 relating to a -- I'll call it a request for proposal. I'm 22 not sure that's quite the term used here, but request for 23 proposal by the -- by the government for -- for the supply 24 of certain mozzarella product, correct? 25 A. Correct. 26 Q. And you -- and am I -- am I correct in looking at 27 this that if you look on the first page under the heading 28 "Purchase Summary," the word "material," do you see that 893 1 the material at issue there was string cheese? 2 A. Yes. 3 Q. And which necessarily means that this is cheese 4 that after it's been made has been run through whatever 5 stretching or forming equipment is necessary to get it 6 down to a one-ounce size? 7 A. Yeah. 8 Q. And -- 9 A. And, again, just the reason why we included this 10 in our testimony was because it was part of the limited 11 information we were able to gather. 12 Q. I understand. But there's certain pricing 13 information, so we should all know what the pricing 14 information relates to. 15 So it's string cheese. And do you see that it's 16 string cheese that has been cut and packaged into 17 one-ounce -- 18 A. Uh-huh. 19 Q. -- pieces, correct? 20 A. Uh-huh. 21 Q. You have to say yes or no -- 22 A. Yes. 23 Q. -- for the reporter. Thank you. 24 And so not only have -- has the whoever provides 25 this -- whoever won the bid, not only had to stretch it 26 and put it in a string form, but also had to cut it into 27 one-ounce pieces and package it individually, correct? 28 A. Yes. 894 1 Q. And then -- and then, also, am I correct that the 2 prices that are indicated in this document are prices that 3 reflect -- they are delivered prices? 4 A. Right. 5 Q. And in fact, they are delivered prices, if you 6 look at, I don't know, 40 or so -- 7 A. Right. 8 Q. -- different locations all around the -- 9 A. Yes. 10 Q. -- locations around the United States? 11 And does it appear that the number of boxes being 12 provided, you know, 40 boxes of 360-ounce strips per box 13 are going to Birmingham and -- 14 A. Uh-huh. 15 Q. -- 400 to Huntingdon, Pennsylvania, and etcetera, 16 all around the country? 17 A. Yes. 18 Q. Is it fair to say these are delivered prices for 19 what are known as less-than-truck-load -- 20 A. Yes. 21 Q. -- deliveries? 22 A. Again, we were -- you know, just back to what I 23 said earlier, we were interested in providing as much 24 mozzarella pricing data as we had in preparation for this 25 proposal. 26 MR. ROSENBAUM: That's all I have at this time, 27 your Honor. 28 THE COURT: Further cross? 895 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Hi, I'm Ryan Miltner. I represent Select Milk 4 Producers. 5 I would like to start with some questions about 6 your statement, and the first one I think is a 7 clarification. And I got to admit, I was jotting down my 8 questions while Mr. Rosenbaum was asking, so if this is a 9 duplicate, I apologize. 10 But on the first page, third paragraph, you refer 11 to "since 1992, the number of U.S. dairy farms has 12 decreased by 77%." 13 When I look at CDC Exhibit 7, which is that policy 14 statement, I think it is 79 in there. 15 A. Correct. 16 Q. Okay. 17 A. And that was something that I -- there was a -- 18 you know, the correct number is 77. 19 Q. Okay. I just wanted to make sure that -- that we 20 had that clear on the record. So thank you very much. 21 On page 2, you talk about a monthly milk pricing 22 survey that CDC publishes. 23 A. Uh-huh. 24 Q. I did not see that survey or reference to it in 25 any of the exhibits. 26 Was any of that information included in your 27 exhibits? 28 A. No, it wasn't. Yeah, that's something that we 896 1 publish among our membership and circulate among our 2 membership. 3 Q. Okay. So it is published just for the members of 4 the organization? 5 A. Right. So that they can understand what prices 6 are being paid by various milk handlers. And then we as 7 an organization, it really gives us a sense of what actual 8 milk prices are in terms of what our members are being 9 paid. 10 Q. Sure. 11 That's not available on your website or anything 12 like that? 13 A. No. 14 Q. Okay. In that same paragraph on page 2 of your 15 statement, you -- you state, "Although the numbers are 16 still coming in, it is evident that the net price paid 17 will total approximately $14 per hundredweight, an 18 abysmally low price." 19 I agree, it's abysmally low. Is that in reference 20 to July's milk prices? 21 A. Yes. 22 Q. Okay. On page 3, and I think it's also referenced 23 earlier in the statement, you talk about "Dairy Together, 24 a nationwide effort of dairy farmers from across the 25 country, calling for a nationwide, farmer-led, 26 incentive-based dairy growth management plan that would 27 match milk production with profitable market demand." 28 Can we categorize that as a national supply 897 1 management program? 2 A. I think we -- what -- as a member of the Dairy 3 Together coalition, we have been there since it began now 4 years ago, and it encompasses both Farmers Union members, 5 Farm Bureau members, independent dairy farmers from around 6 the country, belonging to a number of co-ops. 7 I think one of the important objectives of the 8 coalition is to ensure that dairy farmers can grow their 9 milk production, but only when it makes sense, when it can 10 be matched with profitable market demand. And I think 11 some of the suggestion on a supply management plan is 12 different than that. We want to grow when it is smart to 13 grow and when the market's demanding it and there's -- and 14 so that's why we think it is important to make that 15 distinction, not to call it a supply management plan but a 16 dairy growth management plan. 17 Q. Is the intent behind that program to -- to lower 18 the milk supply in the country and, therefore, drive 19 prices up for producers? 20 A. I mean, not necessarily. It would depend on 21 what's happening in the market, and if there's a demand 22 for milk, then, you know, that certainly would be -- a 23 plan would ensure that that milk would be produced. But 24 we just think it is really important to balance milk 25 production with profitable market demand. Very small 26 changes in milk production have tremendous impacts on the 27 milk price paid. And when there's even a slight excess or 28 oversupply of milk, it can have a really detrimental and 898 1 devastating impact on the milk price paid to dairy 2 farmers. 3 Q. On the following page, so I'm looking at page 4 4 near the top, and you are describing California's now 5 defunct processing system or pricing system. 6 And you state you state that "the updating of 7 their Make Allowances caused increases in milk 8 production," and I would like to understand that a little 9 more. 10 A. Yeah. That was -- that's been a longstanding 11 concern of our membership was under our state order, there 12 were routine updating of our Make Allowances or 13 manufacturing cost allowances. And there was a concern 14 that that was sending an artificial signal to plants to 15 increase their production, leading to an imbalance. 16 So that's -- that was part of our state system and 17 part -- you know, a big reason why we wanted to -- one of 18 the major reasons why we wanted to join the Federal Milk 19 Marketing Order system is there would be more stability in 20 certainty and alignment between our Make Allowances paid 21 in California as well as those in the Federal Milk 22 Marketing Order system. Also, the prices paid in 23 California are now in alignment with prices paid in the 24 Federal Milk Marketing Order system. 25 So we think Make Allowances can have a detrimental 26 impact if they are too high, and that's why, again, for 27 this hearing we're opposing any increase in the 28 manufacturing cost allowance because we think that it 899 1 could lead to more of an imbalance in supply and demand. 2 Q. So I could understand why Make Allowance increases 3 would result in perhaps a more hospitable environment to 4 increase milk processing. 5 A. Uh-huh. 6 Q. As I read your sentence here, "the updating of 7 Make Allowances increased milk production." 8 Is that -- are you referring to farm production 9 there, that it drove producers to make more milk? 10 A. Well, I think it does have an impact in terms of 11 when there's a Make Allowance in place, it makes plants 12 less responsive to changes in market demand because they 13 do have that --their costs accounted for. And so I think 14 the point we were aiming to make in that statement was to 15 show that we need to have our milk production in alignment 16 with market demand. 17 Q. I want to talk more about Proposal 6, which -- 18 which is the number that -- number of proposal that USDA's 19 put to CDC's mozzarella proposal. 20 And you in -- both in your statement and in your 21 exhibit, you refer back to a 2000 hearing which ended up 22 in a 2002 final decision. 23 A. Correct. 24 Q. At which there was a whole bunch of testimony and 25 evidence about how to create this end product pricing 26 formula, correct? 27 A. Correct. 28 Q. Are you familiar with that hearing in general? 900 1 A. Yes. 2 Q. Okay. At that point, CDC was a member of the 3 Western States Dairy Producers Trade Association, correct? 4 A. Yes. 5 Q. And the Western States group had a number of 6 proposals as part of that hearing, correct? 7 A. I would have to recall those, perhaps. 8 Q. Okay. Well, let's talk specifically about your 9 reference to Dr. Barbano's testimony. 10 A. Uh-huh. 11 Q. Exhibit 6 -- well, your heading here at the top of 12 page 5, you said, "Mozzarella was ignored in the pricing 13 formula." 14 Was it really ignored, or was it just not included 15 at the end? 16 A. Well, I thought it was, you know, important the 17 way it was stated there, that it was not even a 18 consideration during that hearing. So I think ignored 19 would be more appropriate. And so that's why at this 20 hearing we think it's really important to introduce adding 21 mozzarella as an important factor in the Class III. 22 Q. Do you have a copy of CDC's Exhibit 6 with you? 23 A. No. 24 Q. Okay. I don't either, but I have it on the 25 screen. 26 A. Oh, good. So do I. 27 Q. Okay. Good. 28 I'm looking at that -- that exhibit is three 901 1 pages, right? 2 A. Correct. 3 Q. Okay. At the bottom portion of the second page, 4 I'm going to begin at line 14 -- and this is Joaquin 5 Contente asking the question -- 6 A. Right. 7 Q. -- of Dr. Barbano: "Do you feel that the current 8 Class III pricing, end product pricing system, reflects 9 the true value of mozzarella? 10 "Answer: I don't think the current system is 11 intended or even attempts to do that. The current system, 12 as I understand it, for establishment of the minimum 13 Class III price, is focusing exclusively on cheddar cheese 14 and ignores mozzarella cheese. 15 "Question: Would you have any recommendation on 16 how to correct the situation? 17 "Answer: I'm not sure that for the Class III 18 price that there's any correction for the minimum 19 Class III price. I think cheddar is the appropriate 20 product." 21 So my question is, if -- if Dr. Barbano's 22 statement then was that cheddar was the appropriate 23 product, why is mozzarella an appropriate product to 24 include in the formula now? 25 A. Yeah. I mean, I think now 23 years later we have 26 really looked at this, and we have thought of different 27 ways to approach adding mozzarella to the formula. And so 28 that's why we think it is important to add it to the 902 1 protein price in the Class III instead of, as was 2 suggested towards the end of this exchange here, we think 3 that it's important to include it in the Class III. So 4 that's why our Board of Directors voted to add mozzarella 5 to the Class III, and that's why we are testifying in this 6 regard. 7 We think it is important to bring up the testimony 8 back from 2000 to point out that mozzarella as a category 9 was ignored back then, and so that's why we're pursuing 10 our Proposal Number 6. 11 Q. So as a cooperative of producers -- that represent 12 a cooperative of producers, I think we can commiserate 13 with the situation that CDC is in about accessibility of 14 data to support proposals. 15 A. Uh-huh. 16 Q. I think one of the concerns that we would have 17 with mozzarella is not knowing exactly how to incorporate 18 that into the formula. You have stated a little bit as to 19 how that might be done. 20 A. Uh-huh. 21 Q. Have you or any of CDC's folks thought about the 22 mathematics of how to incorporate mozzarella data into the 23 Class III formula? 24 A. Yeah. And that's why, you know, again, the 25 challenge is getting the right data to move forward in 26 that direction. And then just in terms of back to the way 27 to go about this since 2000, there have been a number of 28 economists who have commented publicly about the 903 1 importance of adding mozzarella to the Class III. But, 2 you know, as you said, it is challenging given the limited 3 amount of information to go ahead with those types of 4 calculations. 5 Q. I'm trying to find which CDC exhibit it is. It is 6 the one that's a thesis from Utah State University. 7 Exhibit 8. 8 And the author there talks about the Van Slyke 9 formula and using it as a basis to estimate the yield of 10 mozzarella. 11 Have you had a chance to read through the whole 12 thesis? 13 A. Yes. 14 Q. Okay. So you would agree that even though he 15 starts with the Van Slyke formula, he ends up having to 16 modify it relatively significantly to get predictive 17 values for mozzarella, correct? 18 A. Right. But we thought that, overall, the Van 19 Slyke formula in this context would work, and that's why 20 we included this. 21 Q. But if we were -- I guess if -- if we were to take 22 this and use it as a basis to bring mozzarella cheese into 23 the formula -- 24 A. Uh-huh. 25 Q. -- it would require -- would you agree that it 26 would require a lot of reworking of the Class III formula 27 to try and tie his formula in with the existing Class III 28 formula? 904 1 A. No, I wouldn't agree with that. 2 Q. Okay. 3 MR. MILTNER: Thank you very much for answering my 4 questions. I don't have anything else. 5 THE COURT: Thank you, Counsel. 6 More cross aside from AMS? 7 Ms. Hancock. 8 MS. HANCOCK: Thank you, your Honor. 9 CROSS-EXAMINATION 10 BY MS. HANCOCK: 11 Q. Good afternoon, Ms. McBride. I'd just like to 12 start off with saying that National Milk is appreciative 13 of your support for the milk component proposal, the 14 higher-of proposal, and Proposal 19, to update the Class I 15 differentials. 16 I'm curious if you could talk about, based on what 17 I understand to be is your position about updating the 18 protein component formula, it seems to make sense that you 19 would also support the elimination of barrels from the 20 protein calculation for Class III. You didn't mention 21 that in your testimony. 22 A. Yeah. Our -- our position as an organization is 23 that we would like to see more dairy products included in 24 these calculations, and for that reason we did not support 25 that proposal. 26 Q. Okay. And you just didn't include it because you 27 are not actively opposing it, you are just -- 28 A. Uh-huh. 905 1 Q. -- you would like to have the additional 2 components? 3 A. Yes. 4 Q. Is that -- 5 A. We would like more dairy products included in the 6 formulas. So we do not support removing it, no. 7 Q. Okay. And are you at all concerned about the -- 8 ensuring the consistency with which we track and -- and 9 value those prices? 10 A. Yes, we certainly are. 11 Q. And so having multiple -- multiple products in one 12 as opposed to others, that doesn't offer you any concerns? 13 A. Yeah. Again, that's our policy as an 14 organization, is we would like to see more dairy products 15 included, you know, in these formulas. 16 Q. All right. 17 MS. HANCOCK: I appreciate your time. Thank you. 18 THE WITNESS: Thank you. 19 THE COURT: Anyone else? 20 CROSS-EXAMINATION 21 BY DR. CRYAN: 22 Q. Hi. I'm Roger Cryan with the American Farm Bureau 23 Federation. 24 Hi, Lynne. Nice to see you. 25 A. You too. 26 Q. I should have brought my other glasses. Sorry. 27 So I -- and to sort echo what Ms. Hancock said, we 28 appreciate your support for the proposals, to add the 906 1 640-pound blocks, which is consistent with your desire to 2 have more products, and our Proposal 5 to add unsalted 3 butter, and for the Class II differential update. 4 The -- some of the things you are supporting seem 5 to be aimed at addressing negative PPDs and depooling. 6 I -- I'm -- I assume that's been a part of the 7 conversation, part of the debate, the discussion at the 8 CDC about moving forward on these things. 9 Could you talk about some of the impacts of that 10 and what's led you to some of these decisions? 11 A. Certainly. Yes. When the proposal to eliminate 12 the higher-of was included in the Farm Bill, we opposed 13 that approach. We were concerned about what the 14 implications of what that would be. And unfortunately, 15 when there was a big split between the Class III and IV, 16 it did lead to those unintended consequences and lowered 17 the Class I price significantly and did lead to negative 18 producer price differentials. 19 Which couldn't have really literally happened at a 20 worse time when it was, you know, 2020, the onset of the 21 pandemic, and then just all this pricing uncertainty that 22 was happening generally, and then to have the Class I 23 issue cause such serious losses, and those are continuing 24 to occur, that it's -- really was of great concern to our 25 membership because, you know, Class I plays an important 26 role in -- in all Federal Orders, and the fact that the 27 strength of the Class I was undermined by this change, you 28 know, it was something that was really concerning to our 907 1 members during a really difficult time. 2 Q. Thank you. 3 And I assume that you talked about with the 4 mozzarella, that you would like to see more information 5 available to -- to be able to implement that in the 6 protein formulas. 7 A. Yes. 8 Q. Do you think it would be -- it would be better if 9 you had audited mandatory data to -- on processing costs, 10 so -- in order to implement something like that? 11 A. Absolutely. We think that is critical, is that we 12 have reliable cost data to move ahead with that proposal 13 and in looking at any Make Allowance today. Absolutely. 14 Q. Wonderful. 15 DR. CRYAN: Thank you very much. 16 THE WITNESS: Thank you. 17 DR. CRYAN: Thanks for coming out. 18 THE WITNESS: Absolutely. 19 THE COURT: Mr. Rosenbaum, any follow-up cross 20 based on that examination? 21 RECROSS-EXAMINATION 22 BY MR. ROSENBAUM: 23 Q. Steve Rosenbaum for the International Dairy Foods 24 Association. 25 I wanted to follow up on a question and answer 26 from when Mr. Miltner was -- from Select Milk was asking 27 you questions. 28 And I -- I -- if you look at Hearing Exhibit 91, 908 1 which is your CDC Exhibit 6, this was the excerpt from 2 testimony at the May 10, 2000, hearing held by USDA to 3 consider possible changes to the Make Allowances, correct? 4 A. Oh, the 2000 hearing? 5 Q. Yes. 6 A. Yes. 7 Q. And I believe you testified in response to 8 Mr. Miltner that it was your understanding that mozzarella 9 was -- was I think you said simply ignored or words to 10 that effect. 11 Do you recall saying that? 12 A. That's based on this transcript that we're looking 13 at, yes. 14 Q. Okay. Now, do you know -- are you aware that the 15 testimony that was given at that time, as reflected in 16 here, in Exhibit 91, resulted in a decision -- tentative 17 decision by USDA issued in December of 2000? 18 A. Yes, on or about. 19 Q. Okay. Well, let me -- let me -- I'm going to read 20 you an excerpt from that and -- and -- which says as 21 follows, quote -- this is a page 76846 of volume 65 of the 22 Federal Register, which is the tentative USDA decision on 23 the proposed amendments. 24 Quote: "Several witnesses testified that types of 25 cheeses other than cheddar should be included in the NASS 26 price survey as a more comprehensive basis for identifying 27 cheese price, although such a proposal was not included in 28 the hearing notice. The cheddar cheese included in the 909 1 NASS survey meets certain standard criteria that makes 2 prices for the reported cheese sales comparable. If the 3 survey included other descriptions of cheddar and other 4 types of cheese, such as mozzarella, it would not be 5 possible to consider the reported price as representative 6 of the value of any particular product. Further, the 7 manufacturing costs surveyed are, to a great extent, 8 limited to the cost of processing cheddar cheese," end 9 quote. 10 Isn't it fair to say that it wasn't that 11 cheddar -- excuse me. Let me start that question again. 12 Isn't it fair to say that it wasn't that 13 mozzarella cheese was ignored but rather that USDA reached 14 a considered decision that it was inappropriate to include 15 mozzarella cheese? 16 A. I think what -- what this exchange aimed to talk 17 about was that the Class III at that time ignored 18 mozzarella as a category. 19 Since 2000, the mozzarella production has 20 increased significantly and has now surpassed that of 21 cheddar, so we think it plays a more important role even 22 than it did then. So, you know, we think -- again, the 23 data's limited, but we think it's important to get the 24 data so that we could have a standardized mozzarella that 25 could be included in the Class III. 26 MR. ROSENBAUM: No further questions. 27 THE COURT: Anything else before AMS steps up? 28 AMS, your witness. 910 1 CROSS-EXAMINATION 2 BY MS. TAYLOR: 3 Q. Good afternoon. 4 A. Good afternoon. 5 Q. I'm going to go through your statement, and I have 6 a few questions, and then kind of get to a few more 7 weedy-like questions. 8 On page 2 you talk about -- the second full 9 paragraph at the end -- your monthly pricing survey that 10 you do of your members, and I know it was discussed that 11 that information is made available to your members. But 12 you do say it's evident the net price paid will total 13 approximately $14 per hundredweight. 14 I'm just wondering the time period of some of 15 these numbers, that $14, specifically. 16 A. Yes. So these are numbers that are coming in for 17 July, and if you look at the net that they're reporting, 18 it's in that range when you look at the deductions that 19 dairy producers are incurring. 20 Q. Okay. On the next page, you wrote, "In the 21 absence of a dairy growth management plan, today we have a 22 patchwork across the country of plants that send strong 23 signals to dairy producers about how much milk to produce 24 and some that don't." 25 And I was wondering if you could expand on what 26 you meant by "send strong signals." 27 A. Yeah. What we found in working with our 28 membership is that certain plants have base plans that 911 1 their shippers need to follow and others that don't. So 2 some plants send signals to their dairy producers that 3 they need to about what production they will take on and 4 some don't. 5 Q. Okay. That's helpful. Thank you. 6 And then later on you get into -- you discuss the 7 GAO report that I know you included as an exhibit, and 8 then in this last sentence talk about, "Although CME sales 9 account for less than 1% of all cheese sales." 10 I was curious of the time period on that number. 11 Does that go with the 2007 GAO report? 12 A. I think that was in a more recent statistic that I 13 looked at, but I would be happy to provide that. 14 Q. And is that spot -- the spot cheese market is what 15 you are talking about? 16 A. Yeah. 17 Q. Okay. Later on you reference an HTF Market 18 report. 19 What is HTF? 20 A. Yes. It is a company that publishes market 21 reports. And that was a headline that -- that was out 22 just recently about growth of mozzarella -- the report is 23 actually out now. 24 Q. Okay. That's not one -- but I don't recall that 25 being one of your exhibits. Is it? 26 A. It's a very expensive report, so -- 27 Q. That's fine. I just want to make sure I didn't 28 miss something. 912 1 A. Okay. 2 Q. And then under "Mozzarella Specifications," which 3 is about where the rest of my remaining questions are. 4 A. Uh-huh. 5 Q. But the first thing in that second paragraph, you 6 say, "Mozzarella production is the largest category of 7 cheese produced today and deserves a standard 8 specification." 9 I'm wondering if you could expand on that because 10 you discuss some about how USDA has some specifications 11 and FDA has specifications. So what do you mean in that 12 sentence? 13 A. Yeah. I mean, I think, you know, we -- again, our 14 dairy producer members see that category of mozzarella and 15 question, you know, what type of mozzarella is being 16 produced, what's the price -- the wholesale price that's 17 paid for that mozzarella. So I think, again, that's the 18 reason why we have brought our proposal forward is that we 19 want to make sure that that information is available so 20 that we can get at a standard for mozzarella. 21 Q. A standard being something different than, say, 22 the current FDA standard? 23 A. Well, just like a -- you know, similar to 24 determining what the moisture standard would be of -- of 25 mozzarella based on what's produced. 26 Q. Okay. So kinda going along the lines of asking 27 specifics on how mozzarella would be incorporated into the 28 formulas. 913 1 A. Uh-huh. 2 Q. So the purpose as -- you know, you discuss 3 yourself the Federal Order system is to compute minimum 4 handler prices and producer prices. And on the handler 5 side, we do that by surveying wholesale commodity 6 products, which currently that means cheddar cheese, and 7 we -- we don't survey what we consider value-added 8 products. So our cheese survey is bulk commodity 9 products. 10 A. Right. 11 Q. And assuming that methodology does not change, 12 what mozzarella products would you consider to be 13 wholesale or bulk that should be included as opposed to 14 value-added? 15 A. Yeah. I mean, I think the 5- to 6-pound loaves 16 that are included in our exhibit, you know, might -- would 17 be our suggestion given that that's, you know, the most 18 extensive data that we have. 19 Q. Okay. And FDA currently has a standard identity 20 for cheddar, which we use, and mozzarella also has an FDA 21 standard of identity that can be found in regulation. 22 Do you have any idea how much mozzarella -- what 23 people consider mozzarella production meets that standard 24 of identity? 25 A. Well, I think, you know, that's definitely a 26 question to USDA as it -- as it puts to -- totals that 27 category of mozzarella, what's being considered there. 28 Q. So would you like to see only milk meeting that 914 1 standard be surveyed, or you would -- as I'm taking some 2 of your other testimony, you would consider milk not 3 necessarily meeting that standard of identity -- or 4 mozzarella not necessarily meeting that standard to be 5 surveyed and included in the price formulas? 6 A. Yeah. In terms of what our membership has 7 supported, we would like a mozzarella standard that is 8 representative of what's being produced today. 9 Q. So that's broader than just FDA? 10 A. I would say yes. 11 Q. Okay. Currently, we use weighted average block 12 and barrel survey prices to determine our cheese price. 13 A. Uh-huh. 14 Q. How would CDC propose mozzarella be incorporated 15 into that calculation? 16 A. We would like to be -- have it included as part of 17 that weighted average so that you would look at that 18 mozzarella production, again, that's now greater than 19 cheddar, and weight it that way. 20 Q. Okay. It seems like a small difference, but would 21 it be the percent of mozzarella -- excuse me -- percent of 22 product surveyed or the percent of U.S. production, cheese 23 production? There could be two very different numbers. 24 So you would weight by whatever we surveyed, 25 whatever the mozzarella represented in that survey of 26 products, versus I know you have some NASS data in here on 27 mozzarella and what that production is, and that would be 28 a different number, and I would hazard to guess probably a 915 1 different percentage when you compared it to the cheddar 2 cheese production numbers they put out. 3 A. Yeah. I think we would be supportive of the NASS. 4 Q. So U.S. cheese production? 5 A. Yes. 6 Q. Okay. 7 THE COURT: Off the record. 8 (Off-the-record.) 9 THE COURT: On the record. 10 MS. TAYLOR: Thank you. 11 BY MS. TAYLOR: 12 Q. Your testimony says USDA should rely on the Van 13 Slyke cheese formula to determine a mozzarella yield. 14 I was wondering if you had any information -- I 15 know it's kind of technical, but we USDA people like to be 16 technical. You know, it has a lot of factors in there, 17 and I looked it up online to see what those were. 18 A. Uh-huh. 19 Q. Butterfat recovery and fat and protein factors, do 20 you have any information to put on the record of what you 21 think those factors should be or where USDA should turn to 22 look for those factors? 23 A. That's something we can provide if -- but at this 24 point, for today, we don't have that. We haven't brought 25 that. 26 Q. Okay. Do you have any idea how mozzarella is 27 currently priced in the market? Like, what -- what do 28 manufacturers of mozzarella use to price their cheese off 916 1 of? 2 A. Yeah. We have reached out to some cheese makers. 3 They haven't been that responsive on it, so we don't have 4 that information. 5 Q. So I think generally what I'm hearing is that for 6 those factors that USDA would need to incorporate 7 mozzarella into its current formula, you would advocate 8 that USDA go out and have the authority to collect that 9 information in which to incorporate those factors as it 10 deems appropriate? 11 A. Yes. 12 Q. Okay. One last question. I almost forgot. 13 CDC is a dairy farmer organization. Can you give 14 us an idea of how many would be considered small farmers? 15 And for context, the Small Business Administration defines 16 a small dairy farm as that making $3.7 million or less in 17 annual revenue. 18 A. Revenue? I would say the significant majority of 19 ours would be small then. 20 Q. Okay. Thank you very much. 21 MS. TAYLOR: That's it, your Honor. 22 THE WITNESS: Thank you. 23 THE COURT: Anyone want to try to justify 24 re-cross? 25 Any in the nature of redirect? Is there anything 26 further you wanted to say, anything that occurs to you 27 that you left off in answers to cross-examination 28 questions, Ms. McBride? 917 1 THE WITNESS: No. I think I have had a chance to, 2 you know, say our entire testimony, and really appreciate 3 the opportunity to be here. 4 THE COURT: Very well. 5 In that case, I propose to admit Exhibits 86 and 6 87 through 95. I won't highlight them individually. 7 Does anybody have any objection to the admission 8 into evidence of those exhibits? 9 Mr. Rosenbaum, are you standing to talk or just 10 standing? Just standing. Okay. 11 With that, Exhibits 86 through 95 are admitted 12 into the record -- yes, Mr. Hill. 13 MR. HILL: I wasn't sure if we needed the physical 14 copy. I know that we don't -- 15 THE COURT: Oh, that's right. We're going to get 16 physical copies tomorrow. Thank you. 17 As I understand it, we'll have physical copies 18 available tomorrow, and we'll postpone the actual 19 admission of those exhibits. 20 Although, I will be interested if someone's got an 21 objection tomorrow that they didn't have today, but very 22 well. Yes. Thank you, Counsel. 23 With that, I think it's a ten-minute break. Let's 24 come back at -- let's just come back at 3:00. Let's make 25 it 15. 26 (Whereupon, a break was taken.) 27 THE COURT: We have a new witness, Ms. Hancock? 28 MS. HANCOCK: We do, your Honor. We have Dr. Mike 918 1 Van Amburgh. 2 THE COURT: Okay. Raise your right hand. 3 MICHAEL VAN AMBURGH, 4 being first duly sworn, was examined and 5 testified as follows: 6 THE COURT: Your witness. 7 MS. HANCOCK: Thank you, your Honor. 8 DIRECT EXAMINATION 9 BY MS. HANCOCK: 10 Q. Mr. Van Amburgh, would you mind stating and 11 spelling your name for the record? 12 A. Sure. Michael Van Amburgh, M-I-C-H-A-E-L, capital 13 V-A-N, capital A-M-B-U-R-G-H. 14 Q. Thank you. And I should have called you Doctor. 15 You're a Ph.D. 16 A. Okay. 17 Q. Apologize for that. 18 And what is your mailing address? 19 A. My mailing address -- work or personal? 20 Q. Wherever you would want somebody from this hearing 21 to mail you something. 22 A. 272 -- 23 THE COURT: Well, not your house. We don't want a 24 private residence. 25 THE WITNESS: 272 -- want to make sure we're 26 clear. 27 THE COURT: Yeah, we just don't -- we don't 28 want -- I'm trying to keep out -- just so everyone knows, 919 1 we're trying to keep out personal identifying -- 2 THE WITNESS: 272 Frank Morrison Hall, Department 3 of Animal Science, Cornell University, Ithaca, New York, 4 14853. 5 BY MS. HANCOCK: 6 Q. Thank you. 7 And did you prepare some testimony for the hearing 8 here? 9 A. I did. 10 Q. And is that what we have identified as Exhibit 11 NMPF-3? 12 A. Yes. 13 Q. Okay. 14 MS. HANCOCK: And, your Honor, if we could have 15 that identified with an exhibit number. 16 THE COURT: Yes. NMPF-3 identified -- marked for 17 purposes of identification 96. 18 (Thereafter, Exhibit Number 96 was marked 19 for identification.) 20 MS. HANCOCK: Thank you. 21 BY MS. HANCOCK: 22 Q. And did you also prepare a PowerPoint presentation 23 that has been identified as Exhibit NMPF-3A? 24 A. Yes. 3A through 3T. 25 Q. Okay. 26 THE COURT: Shall we mark that as one -- just mark 27 that as one exhibit, right? 28 MS. HANCOCK: I think that's right, your Honor. 920 1 So for purposes of identification we'll mark that as 2 Exhibit 97. 3 THE COURT: So marked. 4 (Thereafter, Exhibit Number 97 was marked 5 for identification.) 6 MS. HANCOCK: Thank you. 7 BY MS. HANCOCK: 8 Q. Would you mind providing us with an overview of 9 your educational background? 10 A. Sure. I have a Bachelor's of Science from Ohio 11 State University and a Ph.D. from Cornell University. 12 Q. Okay. What's your Bachelor's degree in? 13 A. Dairy science. 14 Q. When did you obtain that degree? 15 A. 1984. 16 Q. And your Ph.D.? 17 A. 1995. 18 Q. What was your -- 19 A. Animal science. 20 Q. Animal science. 21 And can you give us an overview of your 22 professional career? 23 A. Yes. I have been a professor at Cornell now for 24 28 years. I currently lead the Dairy Program. I think 25 relevant to -- the undergraduate Dairy Program, and 26 relevant to this discussion, I also lead the development 27 of a nutrition model called the Cornell Net Carbohydrate 28 and Protein System that's a licensed technology. It is 921 1 currently used to feed about 70% of the cows in North 2 America -- or formulate diets for about 70% of the cows in 3 North America. 4 Q. And other than academia, are you otherwise -- do 5 you hold any other employment or consulting roles? 6 A. No. I just advise a company. 7 Q. I'm sorry, just advise? 8 A. I'm a scientific advisor for a company. 9 Q. Okay. And prior to joining academia, did you -- 10 were you employed in any private capacity? 11 A. I was a district sales manager for an AI 12 cooperative. 13 MS. HANCOCK: Your Honor, we would offer 14 Dr. Van Amburgh as an expert in animal science. 15 THE COURT: Yes. I find on voir dire the witness 16 is qualified to testify as to animal science. 17 MS. HANCOCK: Okay. 18 THE COURT: And what I can tell anything else in 19 this proffered testimony. 20 MS. HANCOCK: Thank you, your Honor. 21 BY MS. HANCOCK: 22 Q. Dr. Van Amburgh, would you mind providing your 23 statement and the presentation that you have before you? 24 A. Yes. I'm here to talk about milk and milk 25 components and where cows are going, what I think cows are 26 going to do or what they are capable of. 27 So with that, I'll read. I'm going to do this in 28 kind of a professorial way. I have slides, and I'm going 922 1 to integrate the slides with my talk. So if you want to 2 follow along, I'll call them out. 3 There are three over-arching factors impacting 4 milk and milk component yield in dairy cattle, and those 5 are genetics nutrition and the combined effects of 6 environment and management. NMPF-3-A and NMPF-3-B. 7 I will spend some time describing each one of 8 those factors and how they independently and 9 synergistically impact milk component yield, sometimes 10 independent of milk yield itself. 11 In other words, we have learned that when we get 12 nutrient supplies, we say more correct, we can -- we can 13 alter milk component yield in high-producing cows 14 independent of changing milk yield. 15 So historically, we used quantitative genetic 16 tools to identify animals within the population that were 17 producing milk or milk components in a manner that 18 characterized them as outliers. This phenotypic 19 observation was combined with parent information and data 20 from contemporaries to make assessments concerning the 21 genetic ability of cattle and possibly their ability to 22 translate that capability. 23 With this process, cows were identified, selected, 24 bred to highly selected and proven bulls to make an 25 offspring. If the offspring was a bull, then the 26 offspring bull would have to grow up, come of age for 27 semen collection, and then wait for daughters to calve in 28 and produce milk, as we needed to follow that cycle again. 923 1 A group of daughters would require productivity 2 measurements to determine if the offspring from the 3 planned mating carried the genetic capacity for increased 4 productivity. This led to generation intervals of at 5 least four to five years, so selection pressure for milk 6 and components was greatly reduced because of that timing. 7 Today, we have genomic selection, in vitro 8 fertilization, and embryo transfer that can reduce the 9 interval to less than four years for phenotypic 10 measurements and two years for genomic testing of 11 newborns. Thus, the rate of genetic change due to these 12 technologies is accelerating the capabilities of dairy 13 animals for increased productivity, including milk 14 component yield. 15 And genomic selection provides rapid information 16 on the calf’s genetic capacity immediately after birth, so 17 the selection process can start very quickly once the calf 18 has been identified. And certain genes have been 19 identified, like DGAT-1 (diglyceride acyltransferase), 20 which is involved in the formation of triglycerides from 21 glycerol and fatty acids. 22 Not that everybody needs the biochemistry, but 23 it's important to know that because we know that gene 24 exists and we know where it is, that that's allowed for 25 increased genetic selection pressure, and you can see some 26 of that discussion on 3-C. 27 In attachments 3-D and 3-E, the milk fat and 28 protein percents for Federal Milk Market Order 1 and 30 924 1 are plotted. In those graphs we can see that over ten 2 years, the milk fat percentage increased approximately 0.2 3 units, or about 5.3%. This is true for both Federal Milk 4 Marketing Orders. 5 The seasonal effect on fat and protein percentage 6 is apparent in both graphs. What is also apparent is the 7 difference between changes in the milk fat and milk 8 protein over the same time. Both fat and protein have 9 been highly selected in the last ten to 13 years. 10 However, we have learned it is easier to observe and feed 11 for increased milk fat percentage and yield in dairy 12 cattle than it is for protein, which is why the percentage 13 of protein has not moved nearly as fast as the fat in 14 those two marketing orders. 15 The data on attachment 3-F from Dr. Paul VanRaden 16 at Beltsville is useful. Above the diagonal are the 17 genetic correlations between milk components and milk, and 18 below the diagonal are the phenotypic correlations. 19 And you can see it's really interesting to me that 20 the genetic correlations are obviously quite high; the 21 phenotypic correlations are even higher. And I think that 22 is important, that fat is correlated with milk 0.4 where 23 phenotypically it is 0.62, suggesting that nutrition and 24 an environment can play a significant role in milk fat. 25 And the same holds true for protein, although the 26 correlations are high for both genetic and phenotypic 27 expression. 28 But I think this data are useful because it helps 925 1 us understand that we can breed for more genetics, but 2 their environment and nutrition are going to play a role 3 as to how those genetics are expressed. And I think we 4 have to keep that in mind. 5 I think what's also relevant to this hearing and 6 the forward-thinking about what has to happen with some of 7 these adjustments is what's seen in the graph in 8 attachment 3-G. And quite frankly, this was a surprise to 9 me when I looked at it, because as somebody who's charged 10 with trying to figure out the requirements of a cow, this 11 makes me realize that we probably aren't doing our job as 12 well as we thought we could. 13 And why I say that is if you look at the graph, it 14 shows the change in sire breeding value for fat, we're 15 looking at fat here, from 1957 to 2021. And the sire 16 breeding value represents the relative change per year in 17 milk fat yield. And you can see from the data that using 18 this range in time, it took 57 years to increase milk fat 19 yield by 300 pounds using non-genomic selection, back to 20 the quantitative genetics, whereas since 2013 with genomic 21 selection, the change has been 154 pounds in nine years. 22 And at the current rate of change, a 300-pound change will 23 be achieved in 15 to 18 years, which is about six times 24 faster. 25 All right. So this is pretty important from my 26 perspective as a biologist because this tells me that 27 knowing which nutrients to feed that cow to meet that 28 genetic potential is going to continue to change, and the 926 1 amount's going to change. Right. We have this great 2 capacity now for these cattle. 3 On attachment 3-H a similar observation could be 4 made for the sire breeding value of protein, and again, 5 the rate of change is almost five times more rapid using 6 genomic selection, which means a near exponential rate of 7 change with genomic selection and shorter generation 8 intervals for most sires in the industry. 9 What this data points to overall is that with more 10 modern genetic selection tools like genomics, IVF, and ET, 11 the rate of change is going to be highly positive and the 12 capacity for milk component yield by Holstein and Jersey 13 cattle will be quite high. 14 This next statement gets me in trouble sometimes, 15 but there is no reason to believe that Holstein cattle 16 cannot routinely be at 5% butterfat and 3.5% protein in 17 the near future and that now most cattle -- most Holstein 18 cattle can easily achieve butterfat percentages of 4.2 to 19 4.6% with protein between 3.1 and 3.4. Jersey cattle have 20 similar capacity for change; however, the component yield 21 will lag the Holsteins simply due to milk volume. 22 The graph on attachment 3-I shows a nearly 23 100-year description of butterfat levels in the U.S. and 24 the rate of change since genomic selection took over in 25 the industry. This slide is important as it represents 26 all breeds. As milk yield increased, the percentage 27 dropped, especially from 1950 to 1970. After 1970, milk 28 fat was stable but lower through to about 2012 to 2013, 927 1 again the onset of genomics. 2 Then from 2015 on, there has been a 0.25 unit 3 increase in butterfat. The drop from approximately 4% in 4 1950 took about 20 years; however, the increase back to 5 those pre-1950 levels took only about five years, right, 6 demonstrating the power of genomic selection and some 7 changes in how we feed cows. 8 There is a dietary formulation relationship here, 9 and I can come back to that if somebody wants to ask. 10 Which does lead to the role of nutrition in milk 11 fat. And it is important and something that was 12 overlooked for many years until the role of particular 13 fatty acids in milk fat synthesis and depression were 14 identified. This is still an emerging area of work, but 15 we now have a good idea of which fatty acids to avoid 16 feeding to not cause what we call milk fat depression. 17 And for many years we overfed unsaturated fatty 18 acids -- fatty acids which have one or two double bonds -- 19 and those fats are toxic to rumen bacteria, so the 20 bacteria -- and so there are bacteria in the rumen which 21 will saturate and hydrogenate those fats. 22 Some of the intermediate fats will negatively -- 23 the ones that don't get saturated will impact the 24 production of de novo fat, which reduces milk fat in a 25 condition we call milk fat depression. Once this 26 phenomenon was fully understood by practicing 27 nutritionists, they began to reduce the feeding of these 28 unsaturated fats, which then allowed for an increase in 928 1 milk fat synthesis by the cow and an increase in butterfat 2 levels. 3 Some of the data on attachment 3-I reflects this 4 situation from 1970 to about 2010 when there is a 5 noticeable increase in butterfat due to the shift in 6 diets. Then in 2016, you can see the combined effect of 7 diet and genomic selection for milk fat in the increase in 8 milk fat percentage. 9 The information on attachment 3-J is background 10 information about how milk fat is formed. I'm not going 11 to go through that, but if somebody wants to know the 12 biochemistry, we can come back to it. How's that? 13 On attachment 3-K there is a graph depicting the 14 effects of feeding particular fatty acids on milk yield, 15 milk fat yield and milk protein yield. It is important to 16 recognize that we have learned how to use particular fatty 17 acids to improve all three outcomes, and generally it is 18 cost effective to do so on a daily basis. 19 You can see in the figure that in the case of fat 20 supplementation, milk fat -- milk yield increases, and for 21 the most part, milk fat yield increases when feeding most 22 of these dietary fats. 23 Of interest is the last plot where milk protein 24 yield is shown to marginally improve when feeding these 25 dietary fats. At first this seems counterintuitive that 26 feeding a fat would affect milk protein; however, what 27 we've learned is that it's part of the regulatory factor 28 where fats will stimulate insulin increases in these cows. 929 1 Insulin will then in turn signal the mammary gland to 2 increase protein synthesis, and one of these outcomes will 3 be more milk protein yield. 4 All right. So what we're learning is that we can 5 feed certain fatty acids and stimulate a milk protein 6 response independent of a milk fat response. And it's 7 quite intriguing as we get more precise about some of this 8 information. 9 An overview of the process is found in attachment 10 3-L, right, where one of the primary promoters of milk 11 protein synthesis is energy, and the energy stimulates 12 insulin secretion, which in turn promotes milk protein 13 synthesis. So again, it's a coordinated event, typical of 14 most functions in metabolism. Again, the details can be 15 discussed if anyone is interested, but it's important that 16 we recognize that energy and insulin are important drivers 17 of milk protein. 18 And on attachment 3-M, there are studies showing 19 where we simply infuse some glucose and some insulin and 20 saw increases in milk protein up to 15% without any 21 additional dietary inputs. Right? And then we did add 22 some amino acids, and we saw increases up to 28% of milk 23 protein synthesis. And again, that was simply due to 24 stimulation through insulin, again, an energy source, not 25 a protein source. 26 All right. So the idea is that there is lots of 27 ways to impact milk components, and as we get more 28 sophisticated in our understanding of this, it means we 930 1 actually have more capacity to do that. 2 Okay. The data on attachment 3-N discusses 3 factors related to diet formulation and milk component 4 yield. In addition to understanding the mechanisms 5 involved in milk fat and protein production, with the 6 increases in genetic capacity, the nutrient requirements 7 for amino acids, fatty acids, and particular carbohydrates 8 are slowly changing, and as an industry, we are likely not 9 meeting all of them due to a lack of knowledge or, a more 10 practical thing, the cost of the ingredients. 11 Okay. When we do a better job of formulating and 12 feeding a diet that meets the requirements for these high 13 genetic capacity cattle, we observe significant increases 14 in milk fat and protein percentage and yield. In many 15 cases, these increases in milk fat and protein in Holstein 16 cattle allows them to yield components similar to 17 historical Jersey cow milk composition, which is higher. 18 The table and information on 3-O shows some 19 historical data on the differences in composition between 20 Holstein and Jersey cattle. This was published in 1998 21 for reference. It is apparent that there is a significant 22 difference between the breeds of cattle in fat and protein 23 percent. 24 As described earlier, to improve milk fat, we want 25 the cow to produce or make more de novo and mixed fatty 26 acids, which are the fatty acids four to six carbons long. 27 In some research studies, we have been able to increase 28 milk fat by up to 10%, meaning going from 4.2 to 4.7, and 931 1 milk protein by 8%, going from 3.1 to 3.35, while 2 maintaining milk yield. Thus, there is significant 3 capability to use nutrition to improve milk component 4 yield, and we are not yet making best use of that in the 5 industry, again, due to a lack of information and the 6 perceived cost of the dietary ingredients versus the 7 benefits. 8 The graphs on 3-P from Dr. David Barbano show 9 where Holstein cattle de novo and mixed fatty acids were 10 in 2019 versus what we observed in one of our recent 11 studies. 12 If you look at the left side of the graph, you 13 will see the regression line with the blue dots, and then 14 you are going to see that red line extended out beyond 15 that. So that red line extended beyond the blue dots was 16 our study. 17 And while we were conducting that study, 18 Dr. Barbano called me and said, "Are you sure you are not 19 feeding Jerseys?" 20 I said, "No, they are actually Holsteins." 21 He said, "I don't believe you." 22 I said, "They are really Holsteins, Dave." 23 He goes, "I don't have any Holstein data that 24 looks like that." 25 I said, "Well, we're getting better at figuring 26 out how to feed the Holsteins." Right? 27 And for a comparison -- which means, you know, my 28 joke is if I can turn Holsteins into Jerseys, I should be 932 1 able to turn Jerseys into water buffalo. Right? If 2 anybody knows anything about water buffalo, they've got 3 10% fat, so we'll see where we can go with those Jerseys. 4 Anyhow, if we look at the right side of that graph 5 on 3P, you can see where the Holsteins were ranking 6 relative to the Jerseys. They were in the top 50% of the 7 Jersey cattle in terms of their de novo and mixed fatty 8 acids. 9 All right. So this is -- to me, this is very 10 telling because this tells us that we have a lot of 11 capacity with our cattle once we truly understand their 12 requirements. It's going to take a lot of re-education to 13 get nutritions and dairy producers to understand that 14 this -- this new higher genetic capacity for milk 15 components is going to require diets that look a little 16 non-traditional. Right? 17 So anyhow, the data clearly shows that the 18 potential for nutrition to impact milk components, and the 19 current industry hold-up is being able to demonstrate to 20 dairy producers and nutritionists that diet composition, 21 especially amino acid balancing, can have a profound 22 impact on milk component yield. 23 To demonstrate that this is not only possible in 24 research data, there's data from two herds from Southern 25 Pennsylvania that are on the attachment 3-O. Again, the 26 important aspects of this are that with the updated 27 formulation guidelines, the nutritionists were able to 28 maintain milk yield and increase the milk fat by 0.4 to 933 1 0.5 units, which was a 9 to 12% increase, and increase 2 milk protein by 0.3 to 0.4 units. 3 So, again, there's Holsteins producing 90 pounds 4 of milk making Jersey components. And this was done 5 through improved formulation using our nutrition model. 6 Again, this reinforces the capability of our 7 current dairy cows to produce more components without 8 increasing their dry matter intake, by simply doing a 9 better job of meeting their nutritional needs with more 10 refined requirement information and better knowledge about 11 how some ingredients can be used to enhance components. 12 Finally, the environmental effect is important to 13 consider. As a consequence of selection for milk yield -- 14 and I don't mean environment as in -- as in the 15 environmental impact of dairy production, more about some 16 things we have to consider relative to their housing and 17 who these animals area. 18 As a consequence of selection for milk yield, cows 19 continue to get larger, which means over time facilities 20 need to be updated to accommodate these cows. The data on 21 attachment 3-R and S shows the change in mature size of 22 cows at the Cornell University Research Facility from 1993 23 to 2016. You can see that mature body weight increased 24 300 pounds, which is a sizeable weight. 25 So if you think about it, in terms of where we are 26 updating facilities and where we're not, you know, I can 27 tell you that Wisconsin has done a great job improving 28 their facilities and reinvesting in barns. New York in 934 1 the Northeast, not so much. Right? 2 So where dairy barns have been updated and cow 3 comfort increased to accommodate the cows, along with a 4 myriad of other factors, like bunk space, water space, and 5 cooling, we can see greater productivity responses. 6 Thus, cow comfort, lying time, and related factors 7 can be a limiting factor for productivity, and although 8 not a driver of milk components like genetics and 9 nutrition, can be a limiting factor for herds that don't 10 have the capacity to update. 11 In summary, cows have a tremendous capacity for 12 milk component yields. It is likely that many Holstein 13 cows in the industry are capable of 5% butterfat and over 14 3.5 true protein while maintaining yield. And Jersey 15 cattle have paralleled capacity. I just don't have the 16 data for the Jersey cows. 17 The use of genomics and other reproductive 18 technologies is enhancing that capacity faster than 19 nutritionists can learn to meet the updated requirements. 20 We are not currently feeding the cows to meet their 21 capability for components. 22 Finally, housing, comfort -- cow comfort, lying 23 time, and other time budget related functions will only 24 enhance the expression of their potential. 25 That ends my testimony. 26 THE COURT: Ms. Hancock, direct? 27 MS. HANCOCK: Your Honor, we'd submit him for 28 cross at this point. 935 1 THE COURT: Who has cross for this witness, 2 besides AMS? 3 Mr. English. 4 CROSS-EXAMINATION 5 BY MR. ENGLISH: 6 Q. My name is Chip English, representing the Milk 7 Innovation Group. 8 I had the privilege of starting with the Chicago 9 Mercantile Exchange this morning on a subject that I knew 10 little about. And I am not a scientist, so I'm -- and 11 this is after lunch, so I really only have a couple of 12 questions. 13 First, what is the AI Cooperative? 14 A. Artificial Insemination Cooperative. 15 Q. Not artificial intelligence, let's be clear. 16 A. No. No. No. 17 Q. Would it be fair to say this is the first time you 18 have testified at a Federal Milk Marketing Order? 19 A. Yes. 20 Q. Would it be fair to say that before you prepared 21 for this hearing -- I mean, I don't know, how much have 22 you studied Federal Orders over the years? 23 A. Not to the degree that you have. 24 Q. Yeah, well. And I don't have a science degree, 25 again. 26 Just a couple of questions. On the bottom of 27 page 1, you reference the capabilities of dairy animals 28 for increased productivity, including milk component 936 1 yield? 2 Increased productivity would also mean more 3 milk -- 4 A. Yeah. 5 Q. -- for -- 6 A. For most people that includes more milk. 7 Q. Yes. Okay. 8 A. Which is also true. 9 Q. Yes. 10 Looking -- well, let me go first to page 3 of your 11 PowerPoint, which is Exhibit 97, or 3-C. 12 A. Yep. 13 Q. And the bottom separated bullet point: "Milk 14 protein is more complex and tightly tied to lactose 15 synthesis and energy sensing by the cow so more difficult 16 to move." 17 What does that statement mean? 18 A. Yeah. So if you look at -- if you look at -- one 19 of the things that I'm trying to get across there is that 20 the liver recognizes nutrient supply, and in response to 21 the nutrient supply will produce things like IGF-1 or will 22 redirect nutrients in coordination with the brain and some 23 other organs to ensure that certain functions are taken 24 care of. 25 So, for example, IGF-1 is one of the major 26 promoters of milk synthesis. It is sensitive to energy, 27 so the first promoter region is sensing energy, something 28 like propionate and glucose, but there's a second promoter 937 1 region in the liver that's sensitive to amino acids. 2 Right? 3 Which what I mean by that is, is that when you 4 have a cow in good positive energy balance and she's 5 eating a good diet and she's making a lot of propionate 6 and converting glucose, the liver will sense that and will 7 produce more IGF-1, which will stimulate more productivity 8 from the mammary gland and redirect nutrients to the 9 mammary gland. 10 On top of that, if you were to supply the 11 appropriate amino acids that would better meet the 12 requirements for milk protein or milk fat synthesis, the 13 liver will also recognize that, send out more IGF-1 to 14 accommodate the recognition that there's more nutrients 15 there to produce more product. Highly complex. 16 Q. All right. So what I'm struggling with is what 17 role does lactose play in this sense, tied to lactose 18 synthesis? I'm -- I'm -- Doctor, I really -- I really -- 19 A. Right. No, no, no, no. 20 Q. -- avoided all the science classes in college. 21 A. So milk protein, if you look at -- if you look at 22 the biochemistry of milk protein synthesis and lactose 23 synthesis, they tend to go more in parallel. And if you 24 were to look at -- and you guys that study the milk market 25 see this, milk fat is highly variable, but milk protein 26 and milk lactose are highly correlated and more tightly in 27 relationship. And that's just simply how the cow produces 28 those two. I don't want to get into those pathways. 938 1 Q. All right. So would that mean -- does that mean 2 what you are saying is, when the cow produces more 3 protein, it produces more lactose in the milk? 4 A. No. No. 5 Q. That's not part of -- 6 A. They have historically been tied together, and we 7 thought that's how it worked, and it still does. But what 8 we're learning is, as I was trying to point out in some of 9 these later pieces of evidence, that we have now figured 10 out how to supply some of these nutrients in a way where 11 lactose is only going to respond based on the amount of 12 glucose that's being supplied to the cows since glucose is 13 going to be converted to lactose. But that when we do a 14 better job of understanding the amino acid requirements 15 per unit of energy intake, that she will respond with more 16 milk protein or milk fat output while holding that lactose 17 constant. 18 Q. Okay. So the lactose doesn't go down, but it's 19 not going up. 20 A. It is not going up. 21 Q. Nonetheless, if we look at page 15 of Exhibit 97, 22 NMPF-3-O, the percent of lactose that's in milk remains 23 higher, say, than protein, correct? 24 A. Yep. 4-point -- depends if you want to do it 25 anhydrous or not. But, yes. It is not the percentage, it 26 is the amount. 27 Q. So, please, it's not -- 28 A. So the lactose is the -- lactose is the major 939 1 osmoregulator of milk yield, so it's never really going to 2 change in percentage, and if it does, you are probably not 3 measuring it right. Right? So you are not going to 4 change the percentage, which you -- the more you produce, 5 the more milk volume you have. 6 So the percent is somewhat irrelevant. It's that 7 how many pounds or how many grams of lactose are you 8 producing, and that's going to be directly related to the 9 amount of milk production you are going to see. Whereas 10 what we have learned is we can uncouple that relationship 11 with our better understanding of amino acids requirements 12 and fatty acid requirements and hold that lactose yield 13 constant while getting the cow to be more efficient by 14 putting out more components. 15 Q. Nonetheless, it is still held constant, correct? 16 A. Lactose is always going to be about 4.78. 17 MR. ENGLISH: Thank you, sir. 18 THE WITNESS: Sure. 19 THE COURT: Additional cross, other than AMS? 20 AMS, your witness. 21 CROSS-EXAMINATION 22 BY MS. TAYLOR: 23 Q. Good afternoon. 24 A. Hi. 25 Q. I'm kind of like Mr. English and stayed away from 26 science classes. So I do appreciate the lesson. And 27 generally, I think I followed along on what you were 28 saying. 940 1 I did have a question. I think there's been a 2 line of questioning, and I'm -- I don't think you were 3 here last week, but in discussion of components and the 4 desire for handlers to get increased components in the 5 milk. And so I can clearly understand why farmers are 6 trying to increase the components in their milk production 7 and then get paid on those. 8 But do you have any information on -- from the 9 processors or the manufacturer side and their desire to 10 get increased components in the milk that they purchase, 11 or is that not kind of your specialty? 12 You have to say no for the record. 13 A. Yeah. So -- so the only -- so the answer -- the 14 real answer is no. That's not where I spend my time. 15 Right? My time is spent trying to figure out how to make 16 a cow more efficient -- 17 Q. Okay. 18 A. -- per unit of intake. 19 The only comment I have ever received from a 20 cheese producer, mostly a cheddar producer, was that if 21 you can't figure out how to get the protein to increase as 22 much as the fat, I might have to skim my milk. But that's 23 the -- that's as -- that's as far as my processor 24 knowledge. 25 Q. Okay. And do you think there's some kind of, 26 like, top line level that eventually will be reached? 27 A. No. I don't -- not at the rate of change that I 28 see right now. 941 1 Q. Okay. I think we had one just technical thing for 2 the record. On page 3 of 4, at the bottom, you reference 3 NMPF 3-O, and then I believe that should be -Q. So I just 4 wanted to -- you talked -- and this is the page that's on 5 the research from two herds in Southern Pennsylvania, and 6 I think that's page Q, and I just wanted to make sure the 7 record was clear. 8 A. Probably. 9 Q. It is the first sentence of the -- 10 A. Yes, I see it. Yes, it should be Q. I agree. 11 Q. It is the first sentence of the very last 12 paragraph in -- 13 A. Yep. 14 Q. -- on page -- 15 A. That should be Q. 16 Q. Okay. 17 A. It is referring to those Pennsylvania herds. 18 MS. TAYLOR: That's it. Thank you so much. 19 THE WITNESS: Thank you. 20 THE COURT: Redirect? 21 MS. HANCOCK: Your Honor, I have nothing further. 22 I would offer Exhibits 96 and 97 into evidence. 23 THE COURT: Any objections? 24 Exhibits 96 and 97 are admitted into the record of 25 this hearing. 26 (Thereafter, Exhibit Numbers 96 and 97 were 27 marked and received into evidence.) 28 THE COURT: Thank you, Doctor. 942 1 MS. HANCOCK: Thank you. 2 THE WITNESS: Thank you. 3 THE COURT: You may stand down. 4 Next witness. 5 MR. ROSENBAUM: Steve Rosenbaum for the 6 International Dairy Foods Association. We call Mr. Mike 7 Brown. 8 THE COURT: Please raise your right hand. 9 MIKE BROWN, 10 Being first duly sworn, was examined and 11 testified as follows: 12 THE COURT: Your witness. 13 DIRECT EXAMINATION 14 BY MR. ROSENBAUM: 15 Q. Could you please state your name for the record? 16 A. Michael Brown. 17 Q. And, Mr. Brown, where are you currently employed? 18 A. International Dairy Foods Association. 19 Q. And what is your title there? 20 A. Chief economist. 21 Q. And how long have you held that position? 22 A. Since January of this year. 23 Q. And could you please take us back in time to cover 24 the various positions you have held in the dairy industry 25 during your career? 26 A. I'd be happy to. 27 I went from working for a cooperative extension in 28 1987, I went to work for National Milk Producers for four 943 1 years -- 2 (Court Reporter clarification.) 3 THE WITNESS: I worked for National Milk Producers 4 Federation for four years as an economist. After that, I 5 worked for a private consulting firm, before going to 6 National All-Jersey, where I worked for ten years, working 7 mostly with cheese plants, on yields, yield assumptions, 8 calculating their yields from their components in their 9 plant, and also, advocating for expansion of multiple 10 component pricing in Federal Orders, including the Federal 11 Order Reform which I was very involved with. 12 After that, I went to work for Dairy Gold as a 13 director of member services where I worked with producers, 14 as well as -- as milk buyers, selling them raw milk. And 15 also -- also, working with risk management programs, other 16 producer incentive programs along the way and managing 17 their field staff. 18 In 2007, I went to work for Glanbia -- who was at 19 that time Glanbia Foods, now it's Glanbia Nutritionals -- 20 based in Twin Falls, Idaho, and I was director of 21 economics and policy. A lot of my time there was spent, 22 again, with plants and yields, determining value of 23 components within plants to develop a payment program for 24 producers to make updates. 25 I also dealt with regulatory things like Federal 26 Orders, and then also did a lot of work with risk 27 management and creative risk management solutions for both 28 Glanbia's producers, as well as some of their end product 944 1 cheese customers. And then that's the one place where I 2 did some work on international trade as well. And, boy, 3 that's an interesting place to be. 4 Left there in 2015 to work for Kroger. I got 5 hired as director of dairy supply chain, where I managed 6 the team that purchased all the dairy products for 7 Kroger's 15 milk and ice cream plants, as well as their 8 two cheese packaging plants. Again, did policy work 9 there, risk management work there, and -- and basically 10 made sure the plants had their products and made sure the 11 Kroger brand products in the stores met needs and were 12 competitively cost. We also managed those purchases. 13 So I've kind of went from the cow to the consumer 14 in my career. 15 Q. All right, sir. And in these positions, did you 16 have experience in analyzing the impact of public policy 17 on dairy plant and dairy industry economics? 18 A. Every single one, yes. 19 Q. And have you been called upon to testify at other 20 Federal Order hearings on those issues? 21 A. Yes, I have. 22 Q. Okay. And how many occasions? 23 A. 2000, 2006, '7, and this one. And the -- all the 24 ones dealing with yields and pricing. But also was very, 25 very involved in the informal rulemaking portion of 26 Federal Order Reform in the late '90s. Worked and 27 actually developed the original set of formulas that were 28 used to price -- price milk. In fact, they were completed 945 1 in a Super 8 in Wisconsin before a Jersey dispersal. 2 Q. A little louder. 3 A. Okay. I -- I actually wrote the first set working 4 with university folks. And then my understanding of 5 cheese yields, we wrote the first set of Federal Order 6 component formulas and worked with USDA to fine tune 7 those, and they were adopted as far as Federal -- part of 8 Federal Order Reform. So very actively involved. 9 Q. And by "Federal Order Reform," are you referencing 10 the new set of regulations that came into effect in 2000? 11 A. That is correct. 12 Q. And focusing on multiple component pricing, tell 13 us a little more about what your experience has been on 14 that subject. 15 A. Well, a lot of my career has been spent -- at 16 National Jersey, give you a little background where I 17 spent ten years of my career, is an organization that 18 advocates for pricing milk and components, but not just 19 regulatory-wise, but working with plants to build 20 incentive programs to get the kind of milk that maximizes 21 the margins in their plants. In fact, that was the -- 22 that was the original work of All-Jersey, along with 23 marketing All-Jersey milk. Used to be a big milk 24 marketing program. 25 So there, and then every place I have been, when 26 you are trying to figure out what the regulated price is 27 of your milk and of your components versus what its value 28 is in your plant, helping people -- helping my employers 946 1 understand the true value of components as they move 2 through a dairy plant, so they know whether they are 3 paying the right price for them. 4 Q. And farm costs and economics, where have you been 5 involved in that? 6 A. Well, before I worked at National Milk, I was a 7 farm extension agent in Upstate New York. So worked -- 8 worked with farm costs there. 9 And then throughout my career, I worked on farm 10 costs. Did an analysis early on with rBST in 11 profitability. That was when I was at National Milk 12 Producers Federation. And particularly with Dairy Gold 13 and with Glanbia, worked with producers -- and also 14 All-Jersey, on farm budgets, on risk management 15 opportunities. And, again, a big part of a successful 16 risk management program is dairymen need to understand 17 their costs, so we would work with them on that. 18 And then I did a lot of regional comparisons of 19 productions costs, at Glanbia in particular, as we're 20 looking where -- where milk was most efficiently produced. 21 So I would collect -- collect cost data from basically 22 across the country, and we'd try to equate it in a format 23 and make comparisons. That was -- I did that every year. 24 That was a regular part of my job. 25 MR. ROSENBAUM: Your Honor, at this point I would 26 like to have Mr. Brown recognized as an expert in multiple 27 component pricing, dairy product yields and values, farm 28 costs and economics, risk management, and the impact of 947 1 public policy on dairy plant and dairy industry economics. 2 THE COURT: Any objections? 3 I find this witness qualified to speak -- to 4 testify as an expert to those topics. 5 MR. ROSENBAUM: At this point I would like to have 6 marked the two exhibits that -- that Mr. Brown has. One 7 is designated as IDFA Exhibit 4, whatever the next number 8 is, your Honor. 9 THE COURT: The next number is 98 by my notes. 10 (Thereafter, Exhibit Number 98 was marked for 11 identification.) 12 MR. ROSENBAUM: And the other is IDFA Exhibit 5, 13 which I guess we'd ask to be marked as Hearing Exhibit 99. 14 THE COURT: So marked for identification. 15 (Thereafter, Exhibit Number 99 was marked for 16 identification.) 17 BY MR. ROSENBAUM: 18 Q. Now, Mr. Brown, is Hearing Exhibit 98 your actual 19 written testimony? 20 A. It is. 21 Q. And given its length, thankfully, you are choosing 22 not to read the entire thing into the record; is that 23 right? 24 A. Especially this late in the afternoon. I think I 25 would be booed out of the room. So that's -- yeah, so 26 we're going to do a summary. 27 Q. Okay. Is Hearing Exhibit 99, which you have put 28 up on the screen and which we have handed copies out, is 948 1 that a PowerPoint that goes through the most fundamental 2 issues that you address in your written testimony? 3 A. Yes, it does. And -- and what it does, it allows 4 us to basically cover what would be more than an hour to 5 read in a summation format, but it covers all the same 6 issue. 7 Q. And to the extent that there are numbers, figures 8 of various kind in Hearing Exhibit 99, the PowerPoint 9 presentation, is there more detailed information regarding 10 the calculation and derivation of those numbers in Hearing 11 Exhibit 98, your written testimony? 12 A. There is. And there's also four appendix items 13 that refer to some -- of how the calculations were 14 completed and refer to the data that was used to calculate 15 it. 16 Q. All right. We're now looking at page 2 of your 17 PowerPoint presentation. 18 And does this basically simply attempt to 19 summarize Proposals 1 and 2? 20 A. Yes, it does. 21 Q. Okay. And those -- and those proposals would 22 simply increase the skim milk component factors based 23 upon -- by changing the assumptions in the Class III and 24 IV formulas for nonfat solids, protein, and other solids; 25 is that correct? 26 A. That is correct. 27 Q. Okay. And then if we go to the next page, which 28 is page 3, is this simply a description of your 949 1 understanding of the information upon which the proponents 2 of Proposal 1 and 2 obtained information relating to the 3 levels of those components? 4 A. Yes. And we heard in testimony, I actually went 5 back and calculated weighted averages, and it does include 6 all of the data. Both the estimates as well as the actual 7 data. 8 Q. So that we're looking at -- at -- now we're going 9 to -- go back one -- yes, thank you. Thank you. 10 So we have various information regarding the 11 concurrent component levels in skim milk in the Federal 12 Order system, correct? 13 A. That is correct. 14 Q. All right. And so let's go to the next page, and 15 basically I think you're intending here just to orient the 16 discussion. The first thing you are going to talk about 17 is what impact, if any, Proposals 1 and 2 would have on 18 Class II, III, and IV pricing in the seven multiple 19 component pricing orders, correct? 20 A. That is correct. 21 Q. And just to orient ourselves, once again, 22 Proposal 1 and 2 in all cases would seek to increase the 23 current assumptions regarding protein, nonfat solids, and 24 other solids in farmer milk? 25 A. In skim milk, that is correct. 26 Q. Skim milk. Thank you for that clarification. 27 All right. So let's go on then to the next slide 28 and tell us what -- what you're saying here and what the 950 1 basis is. 2 A. Well, this refers several times in -- in the 3 testimony so far, milk -- multiple component pricing 4 order milk values encompass 89% of the total order milk 5 marketing in 2022. And I think because it's already 6 priced on components, Proposals 1 and 2 would have no 7 impact whatsoever on Class III and IV handler obligations 8 or producer receipts for Class III and IV milk in the 9 seven MPC orders. 10 Q. And that -- I'm sorry, and just to clarify, that's 11 because in those orders handler obligations and producer 12 receipts are based upon actual component levels, not upon 13 assumed component levels; is that correct? 14 A. It's based on actual pounds of components as 15 measured. 16 Q. And have you also determined that there is a 17 slight impact on Class II from the proposal? 18 A. Yes, we did, and it was a bit of a surprise. I 19 went back and looked at the proposed language. Basically, 20 because you raise the factor in Class II, which uses the 21 nonfat solids factor of 9.41 in the proposal versus 9, it 22 of course raises that base level of -- of Class II skim. 23 But then you add the $0.70 to it to give you that total 24 value. 25 Well, when you divide it back out, because in 26 Class II you determine the nonfat solids value from the 27 total Class II skim price divided by that reference 28 solids, so it's 9.41. It varies because you are dividing 951 1 in one case $0.70 by 9; in the other place you are 2 dividing it $0.70 by 9.41, so it gives you a slightly 3 different -- slightly lower number. It is not big, but it 4 is lower. 5 Q. Okay. 6 A. That's how we interpreted the -- the language. 7 Q. I take it that impact is not itself a major matter 8 of concern either way? 9 A. No. No. It -- it doesn't really make a whole lot 10 of difference. 11 Q. So if we go on to the next slide, slide six, I 12 think maybe you have covered this already, but just 13 summarize, you know, your views as to the effect of 14 Proposals 1 and 2 on Class II, III, and IV in the multiple 15 component pricing orders. 16 A. Well, no -- no effect on III and IV and very 17 negligible on II. But what they really do is that 18 manufacturers of those products are paying prices for 19 components that are either relating to the yield 20 components in that class from the Class II products that 21 may be used to make those products in Class II. So they 22 are very much valued based on the value to the processors, 23 what the products he can make, and, of course, producers 24 are rewarded that back on -- based on the Class III 25 components in the current seven Federal Orders that have 26 component pricing. 27 The other thing would be there is no determination 28 in I and II on any -- on determining handler obligations 952 1 of producer receipts with respect to Class II, III, and 2 IV. They essentially almost the same. 3 And again, the pricing levels, why component 4 pricing works well, is that pricing levels automatically 5 adjust as component levels change. So if a milk supply is 6 higher or lower in component and you are making a product 7 and manufacturing that's made out of those components, you 8 pay according to what the expected yield would be. 9 Q. So fundamentally, is IDFA satisfied with how 10 payments are handled for Classes II, III, and IV in the 11 multiple component pricing orders? 12 A. Yes. And our membership is very supportive of the 13 component pricing on those orders. 14 Q. And Proposals 1 and 2 don't propose to change that 15 in any meaningful way, up or down? 16 A. No. Really not in a significant way. 17 Q. Okay. 18 A. We don't see any negative impact at all. 19 Q. And once again, 89% of the milk in Federal Orders, 20 they're in those seven multiple component pricing orders, 21 correct? 22 A. That is correct. 23 Q. All right. So -- 24 A. 89%. 25 Q. So let's move on, then, to the next topic, which 26 is the effective Proposals 1 and 2 on Class II, III, and 27 IV in the four fat/skim orders. 28 Now -- and go to the next page and tell us what 953 1 the impact of Proposals 1 and 2 would be on those four 2 orders. 3 A. Well, we're going to follow this with the chart. 4 But Proposals 1 and 2 would have direct effects on the 5 price paid for Class II, III, and IV in the four fat/skim 6 orders. That is, of course, because the multiplier 7 factors have changed from 3.1, 5.99 to 3.39, 6.02, and 8 9.41, so they are higher, so the skim values are higher. 9 The increase per hundredweight ranges from 40 to 10 $0.80 per pound depending on the class. III is the 11 highest; II and IV are both at 40. And then we estimate 12 that the total impact based on 2022 utilization of milk 13 and -- and whey based on farmer payments based on the four 14 classes, were about $33 million total using farmers' 15 solids utilized in the classes to calculate that number. 16 Q. Okay. Before you go on, so does that -- is that 17 reflect an annual increase? 18 A. Yes. 19 Q. And is that an annual increase in how much 20 processors would have to pay for the milk that they obtain 21 in those four orders for use in Classes II, III, and IV? 22 A. This would be -- this is the minimum regulated 23 price that they would be expected to pay, yes. 24 Q. And that would go up by about $33 million, 25 correct? 26 A. Yes. 27 Q. Okay. And if you turn to the next slide, please. 28 Tell us what you are showing there. 954 1 A. Okay. A couple slides. The first one off to 2 the -- kind of off to the left, again, I think you have 3 all seen this or something very similar to it before. It 4 is what the skim adjustments would be for Classes II, III, 5 and IV. I did recalculate them myself using USDA 6 exhibits, and they are notated in the -- in the full 7 testimony. 8 You can see that five-year average, $0.40 for II 9 and IV, 80 on III. Slight increase in SNF for Class II 10 because of that divisor of the $0.70. 11 The one off to the left -- the right, excuse me, 12 is the impacts, where there are impacts, on Classes II, 13 III, and IV. Of course, in the multiple component orders, 14 Class II skim doesn't make a difference because they don't 15 pay on skim. There's a slight decline in SNF due to 16 the -- again, that divisor changing. Again, no change in 17 III and IV. They are already at component placing. 18 And in the orders of multiple component pricing, 19 again, based on utilization, you can see skim increases by 20 about 9 million; Class III, about 15.8; Class IV, about 21 8.2, which adds up to the $33 million impact on regulated 22 minimum price. 23 Q. And -- and this would be a result of Proposal 1's 24 proposal to increase the assumed component levels in the 25 milk going into Classes II, III, and IV in the four 26 fat/skim orders; is that correct? 27 A. Yes, that's right. It assumes those levels on all 28 milk. 955 1 Q. Okay. And -- 2 A. And the skim factor. 3 Q. And is that -- that's basically -- is that 4 fundamentally the question, whether that's an appropriate 5 assumption? 6 A. That -- yes. It's a huge question. 7 Q. All right. And so why don't we go on to the next 8 page, which is slide ten. 9 A. And that is the increase is completely unrelated. 10 Now, there is certainly a relationship, kind of like the 11 talk we just had on lactose. But it's -- it's going to 12 vary significantly from those assumed levels. They may be 13 higher; they may be lower. But we don't expect them to -- 14 to -- you can't assume the four fat/skim orders have the 15 same levels, and we'll talk about that. Part of it's 16 heat, part of it's about incentives to make components and 17 best pricing, but there's reason to believe that they 18 would be different, and we found some evidence that that 19 is the case. 20 Q. Okay. Did you discover actual evidence regarding 21 the -- some or all of the component levels in -- in -- in 22 the areas -- geographic areas covered by the four fat/skim 23 orders? 24 A. Yes, we did. 25 Q. Okay. Why don't you go on to the next page and 26 tell us about that. 27 A. The best data we found was from DHIA. That's been 28 mentioned several times. I think a lot of you are aware 956 1 of the HIA. How do they improve the associations that -- 2 basically, they manage cow records. They evaluate -- they 3 go to farms, collect weight, collect samples for 4 components. And then they compile those in records. All 5 the talk about genetics we just had is based on DHI data. 6 In fact, even the genomics benchmarking, when we're doing 7 gene marking, DHA is the reference data that people use to 8 do that. 9 That was managed by USDA up until maybe 15 years 10 ago or so, and now it's run by the Council on Dairy Cattle 11 Breeding. 12 (Court Reporter clarification.) 13 THE WITNESS: 20 -- and we looked at -- we looked 14 at all that data by state. We compiled that based on most 15 the utilization of milk in the state within a Federal 16 Order. And based on those -- on that information, we -- 17 the recorded lactations, the total milk, represented about 18 62% of the total Federal Order value. So it's a very 19 large database, a very large piece of data. 20 BY MR. ROSENBAUM: 21 Q. Okay. So let's go to the next page, page 12, and 22 tell us what your examination of the DHI data revealed by 23 comparing what Proposals 1 and 2 would assume as to the 24 levels of nonfat solids versus what the DHI data suggested 25 would be the actual levels. 26 A. Again, we evaluated all four Federal Orders 27 differently, and the levels do vary. DHIA reports true 28 protein in fat and milk, just like the proposal. We took 957 1 the true protein in milk, divided it by the pounds of skim 2 in the milk based on the fat test for that market to come 3 up with a true protein in skim. And they are certainly 4 higher than 3%, but they are also -- or 3.1, but they also 5 vary a lot. Florida is the lowest; Arizona is the 6 highest. Arizona has more manufacturing, so that's maybe 7 not a surprise, even though it is a skim order. And the 8 weighted average is 3.25, so about .14 below the -- the 9 MCP average and the weighted national average. 10 Q. Well, just so we're clear. The Proposal 1 would 11 assume and would, in fact, impose payment obligations 12 based upon that assumption of protein percentage in skim 13 milk in the four fat/skim orders of 3.39%, correct? 14 A. That is correct. 15 Q. Now, do any of the four fat/skim orders, in fact, 16 have that protein -- 17 A. No. 18 Q. -- level? 19 A. No. They are all -- they are all below. 20 Q. And -- and the current formula assumes 3.1% 21 protein? 22 A. That is correct. 23 Q. And so Florida, for example, is only a smidge 24 above the current formula and materially below the 3.39%, 25 correct? 26 A. That is true. 27 Q. And if you look at all four orders, skim/fat 28 orders combined, their weighted average is 3.25, correct? 958 1 A. That is true. 2 Q. Which is only roughly halfway between the current 3 assumption and what Proposal 1 would attempt to assume, 4 correct? 5 A. We would say a point and a half below the 3.39, 6 roughly, yes. 7 Q. Okay. And then when it comes to total nonfat 8 solids, the proposal would assume, and would require your 9 members to pay on their acquiring milk for Class II, III, 10 and IV in the four fat/skim orders, that total nonfat 11 solids were 9.41%, correct? 12 A. That is correct. 13 Q. And you have stated here that, in fact, based upon 14 the DHI data, the predicted nonfat solids is 9.25%, 15 correct? 16 A. That's true. And let me elaborate on that a 17 little bit, because I did a regression on all months of 18 milk component data back to 2000 that USDA had, and did 19 not only correlations, but did linear regressions. And 20 linear regression in Excel makes us all look smarter than 21 we are, but they are pretty amazing what's related and 22 what's not. And the highest relationship by far is 23 between protein and SNF. Again -- 24 Q. Spell out what SNF means. 25 A. Oh, yeah. Sure. SNF, solids nonfat, nonfat 26 solids. 27 Q. Just so we're clear, solids nonfat -- 28 A. Is the same -- 959 1 Q. -- is the same thing as -- 2 A. -- as nonfat solids. 3 Q. -- nonfat solids? 4 A. I've got to change my -- I have been using SNF for 5 too long. 6 So nonfat solids, again, the R squared is over 7 96%, and that predictor is very, very high. The reason it 8 is very high is because other solids variance is very 9 small compared to the other components of milk. It's 10 pretty well fixed. 11 Dr. Van Amburgh talked about how it's involved 12 with osmotic balance in the cow, and that is the case. 13 That's why it doesn't vary a whole lot. So when you do 14 that based on the component levels we had, it predicts 15 nonfat solids of 9.25, which is really consistent with 16 what you would expect with a 3.25 protein average. So it 17 is -- it is below the 9.41. 18 Q. Okay. Now, let's go to the next slide and talk 19 about whether this was -- these results were surprising to 20 you or not. 21 A. They weren't. I've worked in enough markets and 22 with Kroger bought milk in enough markets to -- to know 23 that there certainly are differences. And -- and there's 24 really a couple reasons. 25 One of the biggest ones is market signals, and 26 that is MCP orders directly pay farmers for higher nonfat 27 solids levels, so you would expect that those farmers 28 would feed and genetics and breed and manage for higher 960 1 components, because they get a direct economic incentive. 2 Fat/skim orders certainly pay for fat, and fat's 3 become more valuable as a share of the milk price. We 4 heard that from our farmer witness on Friday. But that's 5 what they pay for. They don't -- they don't pay for 6 others. So there's less incentive for a dairy producer in 7 those four orders to make protein, unless there's a 8 private program that made for some milk be offered at 9 something outside of the regulated minimum price. 10 Q. Okay. Let's go to the next slide. And you have 11 talked about how, in general, the actual nonfat solids 12 levels are lower in the fat/skim orders than in the MCP 13 orders and why that happened. 14 In -- in the proposal, would the assumptions as to 15 nonfat solids levels be uniform throughout the year? 16 A. No, they are not. They never are. There is 17 seasonality. 18 Q. No, no. I'm talking about in the formulas. Would 19 the -- 20 A. Oh, the formula is absolutely the same. Yeah. It 21 is pounds times the value, yes. 22 Q. Okay. And so would that mean that, essentially, 23 if Proposals 1 and 2 were -- or 2 were adopted, there 24 would be an assumption as to protein, nonfat solid, other 25 solid levels, which would apply year round, correct? 26 A. That is correct. 27 Q. And is that how it works in the MCP orders, or no? 28 A. It is not. And yield is very significantly, I can 961 1 tell you that from personal experience as well. It's one 2 of the reasons before we had regulated protein pricing, we 3 had a lot of plants that Jersey worked with putting in 4 incentive programs, which would -- again, you would have a 5 base, and they would move as the year -- up and down 6 through the year. 7 Q. And so in the MCP orders, does the payment 8 obligation go up and down as -- 9 A. Absolutely. 10 Q. Let me finish. 11 -- as the actual nonfat solids levels go up and 12 down? 13 A. Yes, they do. Whether it's protein or nonfat or 14 other solids, they do. 15 Q. Every -- every month, they go up and down? 16 A. Yes. 17 Q. All right. And tell us why that matters since 18 that is not how things would work if Proposals 1 or 2 were 19 adopted. 20 A. Well, it's kind of the fallacy of an average. I 21 mean, average? If your components average the national 22 average, on average that is what it's going to cost you, 23 assuming you produce the same amount of milk every month. 24 (Court Reporter clarification.) 25 THE WITNESS: But, basically, yields do vary 26 significantly. If you take the Federal Order component -- 27 product yield formulas, and just simply look at yield, not 28 at component value, what you find, that on -- in the case 962 1 of cheese, the yield varies by .8 -- .8 pounds from low 2 month to high month as far as cheese -- cheese yield in 3 that meld. Interestingly, fat and whey cream doesn't vary 4 a whole lot, but the yield does. And then, roughly -- a 5 little smaller for -- not a lot of change in whey; you 6 know, the solids don't vary a lot. Nonfat dry milk, I 7 think it is .28 pounds. 8 So if you're in a cheese market, and say the 9 market is $2, use a simple example, the value of that milk 10 is going to vary by the value of the cheese that's made 11 minus the manufacturing allowance. So in this case, in 12 the $2 market, it would be -- it would be $1.80 for the 13 cheese and .8 pounds -- I mean it would be -- $1.80, 14 .8 pounds of $1.80 is $1.44. 15 So it can be very, very significant the difference 16 between months. 17 BY MR. ROSENBAUM: 18 Q. Okay. And -- and is that a defect in the proposed 19 assumption of a steady, unchange -- unchanging level of 20 nonfat solids? 21 A. I think it is because your yields do vary. And 22 it's one thing to say you will make it up six months from 23 now, but when you've got to pay the banker and pay your 24 producers in a certain month, it can have a significant 25 impact. $1.44 is a lot of money. 26 Q. Okay. 27 A. And so it can. And, again, it doesn't send -- to 28 the buyer of milk or to the seller of milk, it doesn't 963 1 fairly value milk what it is really worth. It doesn't 2 reflect that change in components like component orders 3 do. 4 Q. All right. Let's go to the next slide, please, 5 which is 15. Can you just briefly tell us what that is? 6 A. Yeah. This is my cooperative extension eye chart. 7 There's lots of data on this chart. And this is reprinted 8 both in the slides and also in the written testimony. 9 Basically what this looks at are the yields, 10 again, based on all Federal Orders of components. I used 11 the ones that had actual numbers, although the annual 12 averages, as we know, work out about the same. 13 When you look at this, what you will see -- and 14 these are simple averages, they are not weighted -- but 15 what you'll see when you get over to the product yields 16 off to the right, the last four columns, is the predicted 17 yields from those products, the formulas are at the 18 bottom. They'll look familiar to anybody who's worked 19 with Federal Order formulas. It shows those variations in 20 yields. 21 For example, on -- on cheese yield, based on those 22 averages, you would be between 10.82 and -- and 10.07, and 23 you would have a .75 difference in range -- excuse me, not 24 .8. Whey is not a lot. We said whey -- other solids test 25 doesn't vary a whole lot. SNF, .26 in -- and that's a 26 fat -- and whey is, again, the same. So the variation is 27 really in nonfat dry milk, which is, of course, how we 28 price nonfat solids in cheese yield, which is a function 964 1 of protein value, although there's added value of -- the 2 value of fats included in that -- in that number. 3 Q. So is -- are these the numbers that back up the 4 previous slide? 5 A. Yes. 6 Q. Okay. So if you go to the next page 16, what's -- 7 what's your conclusion regarding whether it's appropriate 8 to change the assumptions regarding nonfat solid levels 9 for the four fat/skim orders? 10 A. Well, based on what we were able to uncover on 11 finding a large dataset that covered milk within those 12 four orders, and based on what we know on the seasonality, 13 that it would often require people to overpay for milk 14 used in the four fat/skim orders, and particularly in 15 those months where the tests are even lower. So it would 16 cause an overpayment. 17 If those -- if those markets want to be paid on 18 components, they should adopt MPC. If the plants would 19 like to be paid -- would like to buy their milk on 20 components, they can also -- they can also ask for 21 multiple component pricing. And it would put them on the 22 same foot on per unit cost of components in their 23 manufacturing plants as in the other seven MCP orders. 24 Q. Okay. 25 A. Basically make them all equal. 26 Q. All right. We have been talking so far about the 27 impact of the proposals on Class II, III, and IV: First 28 in the MCP orders where there was no impact, and second on 965 1 the four fat/skim orders where you have just got through 2 describing the impact. 3 Let's move on now to the next slide, which is 4 slide 17, and talk about the impact of Proposals 1 and 2 5 on Class I skim in all Federal Orders. And go to the -- 6 if you could go to the next slide. 7 A. Yeah. It would -- I think as has been 8 demonstrated in earlier testimony, Proposals 1 and 2 would 9 increase Class I prices in all 11 Federal Orders based 10 upon increased levels of skim milk solids used to 11 calculate the skim values, but in the case of Class I, no 12 corresponding impact on product yield. 13 Q. Okay. So let's just -- just delve into what that 14 means a bit. 15 If -- if you are making a Class II, III, or IV 16 product, so that would be cheese, nonfat dry milk, ice 17 cream, do higher skim milk solids have a benefit to you as 18 a processor? 19 A. They do. In fact, anything you make in II, III, 20 and IV, with the exception of maybe cream, you know, like 21 half and half, you are basically taking moisture out, 22 whether it is butter, whether it is -- whether it is 23 powder, whether it is cheese. And so the component itself 24 determines the yield, not the value. That's what makes 25 manufacturing values so different because it -- it is -- 26 yield is based on those fat and skim components in the 27 milk. 28 Q. Okay. 966 1 A. And Class I, there is no -- it's not even legal to 2 adjust it. So you are -- if you have a hundred pounds of 3 skim, you are going to get the same number of gallons of 4 milk as you would if you had -- no matter what the test 5 levels are. Because of standards of identity, you can't 6 adjust them. 7 Q. Okay. And that's what you mean -- when you say no 8 corresponding impact in product yield, you are talking 9 about here no -- no impact on how many gallons of milk you 10 have to slip in a jug and sell, right? 11 A. That is correct. 12 Q. Okay. So turn to slide 19, please, and tell us 13 what these -- you've got sort of two tables side by side. 14 A. Yes. 15 Q. Tell us what these are all about. 16 A. Again, the first table is the proposed adjustments 17 in those values. Again, you have $0.80 five-year average 18 on III, $0.40 Advance Class IV. So with the current 19 formula with 50/50 plus the adjuster, it would be a $0.60 20 increase in -- in that Class I base price for skim milk. 21 Q. All right. Just to orient ourselves, probably 22 everyone understands it. But Class I -- the Class I price 23 is currently based upon -- well, why don't you finish 24 that. 25 A. Yeah. It's -- it's USDA calculates formula prices 26 basically twice a month but for different purposes. The 27 first one, which is the advanced price announcement, 28 prices Class I fat and skim and also applies to solids 967 1 nonfat, nonfat solids. And those -- those -- they are the 2 same formulas, same -- same calculations as used at the 3 end of the month as far as determining what they are. But 4 they are -- in the case of Class I, there's skim only. So 5 you take that Class I -- Class IV nonfat solids value, 6 that Class III protein, and other solids values, use those 7 factors that we have talked about many times, come up with 8 the skim value. 9 And with the factors proposed by National Milk, 10 the first chart here shows the difference between the new 11 calculations being proposed and the current calculation 12 per hundredweight of skim milk. So that's the change in 13 skim milk price with the different proposals. 14 Q. Okay. And so what is the actual change resulting 15 from Proposals 1 and 2 if they were to go into effect? 16 A. The actual change on Class I would be -- the 17 current Class I formula is -- skim is a simple average 18 plus $0.74. The change would be the simple average 19 between the change in III and IV, which gives you $0.60. 20 Q. So the long -- the long and short of it is, if 21 Proposals 1 and 2, or 2, went into effect, the minimum 22 Class I price would go up by $0.60 a hundredweight in all 23 11 Federal Orders, both the MCP orders and the fat/skim 24 orders, on average, correct? 25 A. That is correct. Yes. 26 Q. All right. And so tell us what -- what the chart 27 on the right-hand side shows. 28 A. Again, we calculated total impacts for orders, and 968 1 that was based on USDA's data. Again, the references are 2 in the big -- in the larger testimony. 3 Based on milk used by class, total -- total 4 class -- total use by class, in this case it's all skim 5 because this is a skim price proposal, and we looked at 6 what the difference would be based on multiplying that -- 7 that -- that change, that $0.60 change, times the 8 utilization of the skim. And it comes up to -- in the MCP 9 orders, about 181 and a half million dollars, about 58.9 10 in the fat/skim. So right at 240 for all orders combined. 11 Q. Let's just stop right there to make sure we're 12 clear. 13 So if Proposals 1 and 2, 1 or 2, came into effect, 14 then Class I handlers would, from a minimum regulated 15 price perspective, have to pay an additional $240 million 16 for milk going to Class I; is that right? 17 A. That is correct. 18 Q. Is that an annual figure? 19 A. Yes. 20 Q. Okay. 21 A. Based on 2022 USDA Federal Order -- 22 Q. Okay. And then column two, I take it that's a 23 repetition of the testimony you did earlier as to the 24 impact on Class II, III, and IV in the skim/fat orders? 25 A. Yes. As well as that small adjustment in the MCP 26 orders on Class II. So that's -- that's the -- again, 27 those are the same numbers, the totals from the other 28 chart. 969 1 Q. Okay. Now -- and then the total impact, if you 2 add the effect of the proposals on Class I in all 11 3 orders plus the effect of Proposal 1 and 2 on Class II, 4 III, and IV, mainly felt in the fat/skim order, a slight 5 impact on Class II, that's the $33 million, correct? 6 A. Correct. 7 Q. Total impact, $271 million a year? 8 A. Yes. 9 Q. Okay. Now -- and just to orient ourselves once 10 again, all of this is based upon assumed increases in 11 nonfat solids in farmer milk, correct? 12 A. It -- yeah. It is based on those national 13 averages. 14 Q. Okay. And so now let's turn to the, if you will, 15 $64,000 question as to Class I milk. 16 In your view, is it legitimate to ask Class I 17 handlers to pay an extra $240 million for the milk going 18 to bottled milk because nonfat solids levels have gone up? 19 A. Well, if you take -- if you're a purist on yields 20 like I am, and you know that protein and fat affect cheese 21 yield, you know nonfat solids affects nonfat dry milk 22 yield, you know other solids affects whey yield. You also 23 know in the case of fluid milk because we cannot legally 24 standardize down, that it is the pounds of skim that 25 determine your yield; it is not the components contained 26 within the skim. 27 Q. Okay. And do you feel that what you just said is 28 something that USDA's previously recognized? 970 1 A. They actually have in -- in -- several times, in 2 fact, going back to the first -- first order on 3 component -- 4 Q. All right. So let's turn to page 21, and this is, 5 I guess, getting to the heart of the opposition, to the 6 proposals. 7 So can you just read into the record what USDA had 8 to say when it first adopted component pricing in the 9 Great Basin and Lake Mead Marketing Areas in 1988. 10 A. Yes, I can. 11 "While protein content was seen to be critical in 12 establishing the value of milk used in cheese, there was 13 no evidence that protein content has any effect on the 14 value of fluid milk products at all. 15 "On the contrary, there appears to be a general 16 agreement that consumers are not willing to pay more for 17 fluid milk with a higher-than-average protein content than 18 they are for low-protein milk. Handlers cannot easily 19 remove protein from fluid milk products to add to products 20 in which it would have value, and it is illegal for them 21 to add water to milk to reduce its protein content. 22 "Therefore, handlers obtain no discernible 23 difference in economic benefit from the various levels of 24 protein contained in milk used in fluid milk products, and 25 there is no justification for requiring them to pay for 26 such milk according to its protein content." 27 Q. And is that consistent with IDFA's views? 28 A. Yes. 971 1 Q. All right. So let's turn to the next page, 22. 2 And do you -- do you -- what's your view as to whether 3 what USDA said in 1988 is still true today? 4 A. Oh, it is still true. US- -- FDA standards of 5 identity still forbid Class I handlers from removing and 6 selling excess skim milk solids and nor can they dilute 7 milk. It is extremely -- they are rigid. There's a 8 minimum, but you cannot -- you can't adjust to meet the 9 minimum. 10 And except for specialty products, and there's a 11 couple that represent only a small share of fluid milk 12 sales, consumers do not perceive value in the skim milk 13 solids in excess of FDA standards of identity 14 requirements. Again, you have some -- and there's a 15 little more conversation on that in our longer testimony. 16 Products like we all know are Fairlife. There's a couple 17 of store brand higher protein products. They are a very, 18 very small part of the sales. And they are big 19 significant increases of protein components versus what 20 we're talking about with skim milk here. 21 Q. Now, you worked for Kroger for a number of years, 22 correct? 23 A. Yes, I -- 24 Q. Kroger -- Kroger is one of the biggest, maybe even 25 top three, I guess, grocery store chains in the United 26 States? 27 A. Well, if you don't call Walmart a grocery store, 28 they are the largest. And they remind us of that a lot. 972 1 Q. Then it is the largest. 2 And do you -- I mean, do you -- did that work you 3 did for Kroger give you some personal insight into the 4 statement you made as to statement number two -- 5 A. It really -- it really did. When you -- when you 6 market fluid milk, typically, you know, regular 7 pasteurized gallons, half gallons, called HTST, 8 high-temperature short-time pasteurization, when you look 9 at that milk and what consumers look for, they look for 10 three things: They look for price; they look for sell-by 11 date, how much freshness is left on that milk; and they 12 look to see for the same product, whether prices within 13 that store of maybe a national brand or a competing store 14 down the street. It is very much a commodity market. It 15 is very much price driven. 16 Q. Okay. All right. Now, let's go to the next 17 slide, 23. There have been in testimony by the proponents 18 in favor of 1 and 2 certain arguments they have advanced, 19 and I'd like to hear your views about those. 20 One is the notion that there has been a narrowing 21 of the pricing between Class I and the other milk classes 22 given that the price paid for high component milk in the 23 MCP orders has gone up as the levels of nonfat solids in 24 those orders has gone up. What's your view about that? 25 A. That again gets back to yield value of the milk, 26 that the class -- that the component pricing is about, 27 determining end product values for milk. And in Class I, 28 the end product value for skim simply doesn't change 973 1 because your yield doesn't change, so you need to take -- 2 you need to take in, in effect, a couple of things. 3 First of all, if you are making cheese or you are 4 making nonfat dry milk, particularly cheese, you can get 5 significant added value out of those components. You 6 don't get added value out of water in cheese, there's 7 plenty of water in milk for cheese, it's the components 8 that are in that milk. 9 Nonfat milk, again, you are drying it to 97% dry 10 matter, so the same thing. You are taking out water. It 11 is that nonfat solids that has value. Same is true with 12 whey. 13 Fluid milk, we don't have that ability. So the 14 yield, a hundred pounds of skim milk is going to yield the 15 same amount of gallons under the concurrent conversion 16 factors for skim as it would under the new one, so there 17 is no added value to a processor. 18 And that's not necessarily a bad thing. That's 19 just the reality of yield and where the milk value is. 20 And it's just -- I would argue it is very consistent 21 between all -- all uses of milk, like USDA talked about 22 back in 1988. 23 Q. Okay. And -- and do you regard the fact that the 24 pay obligation for Class III -- II, III and IV goes up as 25 the -- as the nonfat solids levels goes up, but not the 26 value for class milk -- Class I milk? Is that alignment 27 or misalignment? 28 A. I think it's alignment. It is basically 974 1 yield-based pricing. You get the same -- you don't get 2 more half gallons because the components went up. Skim is 3 still skim. 4 Q. Is that -- from your point of view, is that -- is 5 that -- is the relationship that has evolved as solids 6 have gone up, is that a good thing or a bad thing? 7 A. Again, I think it's an honest reflection of the 8 value of the milk. 9 Q. Okay. 10 A. I think it is actually a good thing. 11 Q. All right. So let's go on to the next slide, 24. 12 And I just want to be very clear about this. Is IDFA 13 suggesting that the price of Class I milk should be 14 decoupled from the price of Class III and IV milk? 15 A. No -- no, we're not. Actually we still believe 16 III and IV as a base for the value of Class I skim works. 17 And in fact, "to the contrary" -- and I'll read here -- 18 "when demand for Class III and IV products or other 19 factors increase the price in which those products are 20 sold, regulated minimum Class III and IV prices 21 automatically increase." 22 As those product values goes up, that milk value 23 goes up. 24 "These increases are automatically reflected in 25 higher Class I minimum prices" -- they already are -- via 26 the base milk prices for Class I skim and milk and 27 butterfat. 28 This is a fundamental basis upon which the Federal 975 1 Order system operates. But the Federal Order system does 2 not and should not increase Class I prices when the 3 increase in Class II, III, and IV payment obligations 4 instead reflect higher nonfat component levels that are of 5 value to Class II, III, and IV, but not Class I products. 6 Q. And then if we turn to the last page of your 7 PowerPoint presentation, page 25, there has also been some 8 discussion by the proponents of a purported need to 9 increase Class I prices in order to attract an adequate 10 supply of milk for Class I purposes. 11 What is -- what is your view on that subject? 12 A. Well, when I was buying milk for 15 clients at 13 Kroger, everywhere from California to Georgia to Ohio, 14 Indiana, Utah, Oregon, never had an issue with milk 15 supply. There was always milk available. And you do pay 16 premiums to get that milk to your plant, and that's part 17 of the negotiation that's expected. And they changed over 18 time. In fact, they increased the last few years. 19 So -- but getting milk was never an issue. In 20 fact, we even had suppliers who would work together to 21 improve efficiency of transportation getting milk into a 22 particular plant, just because it saved transportation 23 costs. So we never found that to be a problem. 24 And there's several things that, you know, 25 indicate that. First of all, essentially all milk is now 26 Grade A. I mean, I always say the only milk that's 27 Grade B is if somebody failed a bulk tank unit with FDA. 28 Until they get their rating back, you will be B. So it's 976 1 essentially all milk. 2 And so the supply of milk versus what we had, even 3 20, 30 years ago is much higher, this eligible percentage 4 of the supply. And -- 5 Q. Just to interrupt there. That's because milk for 6 drinking purpose, it has to be Grade A milk, correct? 7 A. Yes, it does. 8 Q. And there was a time in this country where, I 9 don't know what it was, most milk maybe even was Grade B 10 milk? 11 A. Oh, yeah -- well, back when orders started, it was 12 less than half. 13 Q. Okay. And -- and today it is essentially all 14 Grade A milk? 15 A. Essentially all milk. 16 Q. So all of it is available -- eligible, I should 17 say, not available -- all of it is eligible for 18 Class I purposes -- 19 A. It meets the FDA standard to be bottled as Class I 20 as fluid milk. 21 Q. Keep going, please. 22 A. 27% of marketing is the lowest it has ever been. 23 Q. It's -- what do you mean? 24 A. The utilization of milk in -- of the total Federal 25 Order pool in Class I. 26 I think another thing you may want to mention 27 here, I want to mention, is keep in mind that not all milk 28 is actually marketed through Federal Orders. There's a 977 1 few state orders. They are small. But there's also a lot 2 of unregulated milk. I mean, you look at the total supply 3 of U.S. milk, again, which is essentially all Grade A, 4 that number is around 20% is Class I. 5 Q. 20% is what? What is that number? 6 A. Of the total milk in the Federal Order supply, 20% 7 is Class I. 8 Q. So only 20% of the milk produced in this country 9 actually goes into fluid consumption? 10 A. That is correct. 11 Q. Okay. Keep going, please. 12 A. Okay. And so there's plenty of milk to meet 13 demand. Again, that's my personal experience. And 14 there's some other -- some other empirical evidence I 15 think that shows that. 16 And what are the shipping requirements? Going 17 back to 2010, which is part of -- one of the exhibits from 18 USDA, which was very helpful, no one has been asked to 19 increase shipping requirements to require manufacturers to 20 provide more milk into Class I. In other words, shipping 21 requirements, there was a lot milk that goes to Class I 22 markets has never been increased. 23 However, to the contrary, the orders have 24 routinely lowered these shipping requirements at the 25 behest of the very cooperatives that are now claiming in 26 this hearing that orders should be changed to reflect an 27 alleged -- we think it is alleged -- non-existent supply 28 definition -- deficit for Class I milk. 978 1 Milk has always been available. We -- I think 2 most processors pay premiums to get that milk outside of 3 the order pricing, which goes directly to the supplier who 4 is trying to provide you that market. We think that is a 5 fair way to do it. But there is certainly not a lack of 6 milk for Class I. 7 Q. All right. Does this complete your summary of 8 your testimony? 9 A. Yes, it does. 10 MR. ROSENBAUM: Okay. Your Honor, there are two 11 corrections that Mr. Brown made to his PowerPoint 12 presentation after it was circulated, so they don't appear 13 in the written version. So I would like to tell everybody 14 what they were so they can make a cross-out correction, 15 but my intention is to send USDA a corrected exhibit, 16 Hearing Exhibit 99. 17 But I just want to let y'all know, on page 8 -- 18 THE COURT: Yeah, I think that works, and then 19 that will -- we'll substitute the corrected exhibits for 20 the posted online exhibits and for the official version 21 that we're keeping. 22 MR. ROSENBAUM: We will bring a substitute copy to 23 everybody for tomorrow morning so they don't have to have 24 two copies. 25 But just so you know, on page 8, if you want to 26 turn to that, I'll tell you what the correction was. It 27 says "total impact on the four MCP orders." You should 28 mark out "MCP" and write in "fat/skim." That was just an 979 1 error. 2 And then on page 10, in the second line, there's a 3 word "from," and the word "from" should just be stricken. 4 That was just a typo. 5 As I say, we'll circulate -- we'll file tonight a 6 corrected version, and we'll bring copies tomorrow. 7 Anything else, Mr. Brown, you want to -- 8 THE WITNESS: Not at this time. Thank you. 9 MR. ROSENBAUM: All right. 10 Your Honor, at this point -- well, I'm not sure 11 for the time, if he should be tendered for 12 cross-examination now or available tomorrow morning. 13 THE COURT: We'll find out. Thank you, Counsel. 14 Off the record. 15 (Off-the-record.) 16 THE COURT: Mr. Brown remains on the stand. 17 Mr. Vetne is going to take advantage of 15 minutes 18 or so we have left today, so you can cross-examine. Thank 19 you, Mr. Vetne. 20 MR. VETNE: Thank you, your Honor. 21 CROSS-EXAMINATION 22 BY MR. VETNE: 23 Q. John Vetne, V-E-T-N-E, representing National 24 All-Jersey. 25 Dr. Brown, thank you for being here. 26 I want to start with your PowerPoint page 12, and 27 refer you back to your testimony, Exhibit 98, page 23 of 28 44. 980 1 PowerPoint page 12 represents a summary of the 2 Dairy Herd Improvement information on component levels in 3 various parts of the country, correct? 4 A. Correct. 5 Q. Page 12 in the PowerPoint specifically refers to 6 the areas represented by the fat/skim orders -- 7 A. Yes. 8 Q. -- correct? 9 Is that correct? 10 A. Yes, that's correct. 11 Q. You have to respond out loud. 12 A. I'm sorry. I thought I did. 13 Q. Now I'm looking at page 23 of 44 of your prepared 14 testimony that was marked but not read, thank you, 15 Exhibit 98. And I note that -- that Arizona for 2022, is 16 that Order 131? 17 A. Yes. 18 Q. Okay. In Table 3 of your testimony, shows milk 19 protein content for Order 131 of 3.37%, and on page 12 of 20 your PowerPoint, it says 3.34%. 21 Can you explain the difference? 22 A. Yes. The table on page 12 was mislabeled. It 23 should be 2019 to '22 average protein, three-year average, 24 which was the numbers on the last line of the table on 25 page 23. 26 (Court Reporter clarification.) 27 THE WITNESS: On page 23 of the written testimony, 28 the last line of the chart, Table 3, has those -- those 981 1 numbers for the three years, which is what these are. 2 BY MR. VETNE: 3 Q. Oh, okay. So page 12 of the PowerPoint does not, 4 in fact, represent the year 2022? 5 A. That is correct. It represents the 2019 through 6 2020 -- excuse me -- 2020 through 2022 is three years. 7 Q. So that's another change in the PowerPoint that 8 Mr. Rosenbaum didn't mention. 9 A. Yes. Page 12, we need to change 2022 DHIA to 2020 10 to 2022 DHIA. 11 Q. In that case, let's go look at page 23 of 12 Exhibit 98, your prepared testimony. 13 The MCP order average -- is this weighted average, 14 by the way, the DHI? 15 A. The DHI is weighted by Federal Order milk. It is 16 not weighted by -- it is -- it is weighted averages, yes. 17 Q. Okay. So Order 131, Arizona, for 2022, 3.37 18 protein, not all that different from the weighted average 19 for the MCP orders of 3.39. 20 A. No. 21 Q. Would you agree with me? 22 A. Yes. No, I would not -- I would agree with you. 23 That -- from the average, it is not different. From PNW, 24 it is. 25 Q. Pardon? 26 A. I said from the average, it is not that different. 27 From the Pacific Northwest, which is what was used to 28 assume that order, it is significantly different. You are 982 1 correct, it is very close to the 3.39. 2 Q. But in your data, the two numbers are very 3 similar? 4 A. Yes. 5 Q. And, in fact, starting in the first year of the 6 DHI data, in Table 3 of your prepared statement, Arizona 7 starts with 3.15% protein, which is the same as the 8 starting point for the fat/skim orders, 3.15% protein, 9 correct? 10 A. Yes. 11 Q. And just slightly less than the average in the MCP 12 orders of 3.19% protein? 13 A. Yes. 14 Q. And at that time, the MCP orders had been 15 operating as MPC orders for a few years already, correct? 16 A. Well, it depends on the market. 17 Q. It depends on the market. 18 A. Some are new. Some have been around since the mid 19 '90s. The case of Great Basin since -- 20 Q. Great Basin was one -- the rest of -- 21 A. It was one, which got voted out, moved to Western. 22 But, yes, they have been around, most of them for at least 23 five to six years. 24 Q. So I -- I notice that the Arizona order, though, 25 starting at about the same place as the fat/skim orders 26 total, moved up to pretty close to the MCP orders. 27 A. Which is explainable. They have had a strong 28 protein premium program in Arizona for at least 25 years. 983 1 Q. So -- so they have a private MPC program that 2 produced an incentive to increase protein contents? 3 A. Yes, in cooperation with one of their largest milk 4 buyers. And probably their largest milk buyer in Arizona, 5 they had a protein incentive program back when I was at 6 Jersey in the mid '90s that we were working on. 7 Q. Largest milk buyer being the cheese plant? 8 A. Yes, Schreiber Foods. 9 Q. Schreiber Foods. Okay. 10 And the other large buyer there might be United 11 Dairymen -- 12 A. Yeah, the union -- 13 Q. -- the union plant? 14 A. I would guess that's the second largest, yes. 15 Q. Okay. Do you know if their private MCP program 16 also includes milk going to the powder plant? 17 A. Well, I can tell you -- I don't want to get 18 proprietary, but the milk that is sent to Schreiber is 19 standardized, so all that milk goes through the powder 20 plant. So that protein is standardized before it goes to 21 Schreiber. 22 Q. Okay. 23 A. So it does go through that plant. But it's sold 24 to Schreiber on a different formula than the nonfat dry 25 milk price. 26 Q. Okay. And I think in your response to questions 27 by Mr. Rosenbaum, you also noted that a large part of the 28 country has milk that is not regulated under the Federal 984 1 Order, but which is priced on some kind of multiple 2 component basis? 3 A. That is correct. 4 Q. And in -- are you aware that in -- strike that. 5 We're talking about the old Great Basin area, 6 Idaho, which has a large volume of milk, correct? 7 A. Yes. Very much. 8 Q. Are you aware that some of those private pricing 9 plans don't use exactly the MCP program that the Federal 10 Order uses but instead uses a cheese yield formula, 11 which -- 12 A. Yes. 13 Q. -- adjusts based on the relationship between fat 14 in the milk and protein in the milk; is that correct? 15 A. It is. I wrote them when I was there. We updated 16 them. 17 Q. I'm sorry. You have to speak louder. 18 A. I'm sorry. When I -- I'm sorry, my voice is 19 fried. 20 I helped write -- revise those when I worked for 21 Glanbia in Idaho. And, yes, they are DRU formulas. Some 22 adjust for fat-to-protein ratios. Some do not. They tend 23 to use whey protein concentrate in the case of Glanbia 24 rather than whey because they make whey proteins. They 25 use the average of -- average of mostly weekly WPC34 26 price. But they are yield-based pricing. They also tend 27 to use CME 90, not NDPSR prices. 28 Q. Okay. In the seven federal MCP orders, when the 985 1 rules are applied, the same per unit per pound price 2 applies to protein in each of those markets, correct? 3 A. Yes. The minimum price is the same in all MPC 4 markets. 5 Q. I'm glad you used that term minimum price. 6 So there's a uniform Class III minimum price in 7 those markets that makes protein prices the same for all 8 competitors? 9 A. Within the Federal Orders, yes. 10 Q. And the same is true for the solids nonfat price? 11 A. Yes. 12 Q. And the same is true for the other solids price? 13 A. Yes. 14 Q. Okay. But within the fat/skim markets, if I 15 understand your testimony correctly, that does not apply? 16 A. That would be correct. 17 Q. And within the fat/skim markets, as we see the 18 chronological chart on page 23 of your testimony, 19 Exhibit 98, in each year, the protein content is greater 20 than that assumed in the federal formula? 21 A. That is also correct. 22 Q. And that also has been rising? 23 A. It has. In a slower rate, but it has been rising. 24 But it is below the national average. 25 Q. That's true. If one were to compare the uniform 26 protein price, then, and apply it to the protein content 27 of skim milk in the fat/skim orders, is it your complaint 28 that -- do we not agree that that -- those handlers have 986 1 been underpaying for the protein they receive under the 2 current system? 3 A. Unless they have a voluntary incentive plan, their 4 protein price has been lower. Perhaps a few times in the 5 summer not, but generally, yes. 6 Q. Would you also not agree that Proposal 1 and 2 7 would bring those payments, on average, closer to what 8 their competitors are paying for protein and solids nonfat 9 in the MCP market? 10 A. Depends on their tests. And aren't we talking 11 minimum pricing here? 12 Q. Yes, we are. 13 A. Because you could -- you would actually overcharge 14 them. Are we going to -- are we going to -- we need to 15 find the right way to keep those prices equal -- I think I 16 know where you are going -- but we -- we -- they should be 17 the same in all markets for fairness on a minimum price, 18 in my personal opinion. 19 Q. Okay. 20 A. And none of the solutions of the current does 21 that, unfortunately. 22 Q. Okay. Would you agree -- or did you read or hear 23 the testimony of Erick Metzger? 24 A. Yes. 25 Q. Okay. Would you agree with Erick Metzger's 26 conclusions that the existing system undercharges 27 Class II, III, and IV handlers in -- in the Southeast 28 markets, considerably, but the proposal in Proposals 1 and 987 1 2 would overcharge them a little bit? 2 A. I think it would overcharge them significantly, 3 and I have some data from one of our members that will 4 show -- show that. They will be testifying themselves. 5 It really varies from plant to plant. Let's go back to 6 USDA's chart. There was a very clever chart they put 7 together on ranges of tests within plants. They vary a 8 lot. And the only way you solve that is if you price on 9 pounds of components for II, III, IV, otherwise you still 10 have a lot of difference between plants. It's very easy 11 to do. 12 Q. There was a producer here earlier in the hearing 13 from Southern Indiana, Holland, Indiana. 14 Did you hear her testimony? 15 A. Yes. Full disclosure, she's a personal friend. 16 Yes, I did. 17 Q. Yeah. And she testified that she has worked to 18 increase the component content of fat in her milk. 19 Did you hear that? 20 A. Yes. 21 Q. And we have also heard that when you increase the 22 fat content, the protein content tends to follow. 23 A. It does tend to follow, not as strong as the 24 relationship between protein and SNF, but there's 25 certainly a positive relationship. 26 Q. Okay. 27 A. It also depend on your genetic selection. I mean, 28 that's in general -- most people who select for fat, they 988 1 are going to get their protein, but it -- those 2 relationships on genetics are not identical. It has a lot 3 to do with selection. In general, though, it is true as 4 Dr. Van Amburgh talked about. 5 Q. They are not precisely correlated, but they are 6 related? 7 A. Yes, they are certainly related. And they are 8 fairly strongly related. I wouldn't say they are not. 9 THE COURT: Mr. Vetne, when you come to a logical 10 stopping point, I think we -- we're there. 11 MR. VETNE: Fine with me. 12 THE COURT: All right. With that, we're adjourned 13 for today. We'll see everyone back here at 8:00 a.m. 14 tomorrow. Thank you. Thank you for helping us make use 15 of that time. 16 (Whereupon, the proceedings concluded.) 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 989 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 7, 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