1279 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 30, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 1280 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 Todd Wilson 4 Erin Taylor Brian Hill 5 FOR THE AMERICAN FARM BUREAU FEDERATION: 6 Roger Cryan 7 FOR THE INTERNATIONAL DAIRY FOODS ASSOCIATION: 8 Steve Rosenbaum 9 FOR THE MILK INNOVATION GROUP: 10 Charles "Chip" English 11 Sally Keefe Ashley Vulin (Remote) 12 FOR THE NATIONAL ALL-JERSEY, INC.: 13 John Vetne 14 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 15 Nicole Hancock 16 Brad Prowant Peter Vitaliano 17 Calvin Covington 18 FOR SELECT MILK PRODUCERS, INC.: 19 Ryan Miltner 20 FOR DAIRY FARMS OF AMERICA: 21 W. Todd Miller 22 ---o0o--- 23 24 25 26 27 28 1281 1 M A S T E R I N D E X 2 SESSIONS 3 WEDNESDAY, AUGUST 30, 2023 PAGE 4 MORNING SESSION 1284 AFTERNOON SESSION 1406 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 1282 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Ken Nobis: 5 Direct Examination by Ms. Hancock 1284 Cross-Examination by Mr. Miltner 1297 6 Cross-Examination by Mr. Rosenbaum 1300 Cross-Examination by Ms. Taylor 1304 7 Cross-Examination by Mr. Wilson 1307 8 Edward Gallagher: 9 Direct Examination by Ms. Hancock 1308 Cross-Examination by Dr. Cryan 1331 10 Cross-Examination by Mr. English 1336 Cross-Examination by Mr. Miltner 1338 11 Cross-Examination by Dr. Covington 1342 Cross-Examination by Mr. Rosenbaum 1347 12 Cross-Examination by Dr. Vitaliano 1348 Cross-Examination by Ms. Taylor 1350 13 Sally Keefe: 14 Direct Examination by Mr. English 1374 15 Cross-Examination by Mr. Miltner 1406 Cross-Examination by Ms. Hancock 1426 16 Cross-Examination by Dr. Covington 1434 Cross-Examination by Dr. Cryan 1444 17 Cross-Examination by Mr. Wilson 1448 Cross-Examination by Ms. Taylor 1458 18 Redirect Examination by Mr. English 1464 19 Steve Galbraith: 20 Direct Examination by Mr. Rosenbaum 1465 Cross-Examination by Mr. Miltner 1474 21 Cross-Examination by Mr. Wilson 1477 Redirect Examination by Mr. Rosenbaum 1480 22 Dr. Peter Vitaliano: 23 Direct Examination by Ms. Hancock 1482 24 Cross-Examination by Mr. Rosenbaum 1494 Cross-Examination by Mr. English 1502 25 ---o0o--- 26 27 28 1283 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 NO. DESCRIPTION I.D. EVD. 4 108 Testimony of Ken Nobis 1285 1308 5 109 Testimony of 1311 1372 Edward Gallagher 6 110 Dairy Farmers of America 1311 1372 7 Brochure 8 111 Testimony of Sally Keefe 1374 1465 9 112 Document MIG-5A 1374 1465 10 113 Testimony of 1466 1480 Steve Galbraith 11 114 Testimony of 1483 12 Dr. Peter Vitaliano 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1284 1 WEDNESDAY, AUGUST 30, 2023 - - MORNING SESSION 2 THE COURT: On the record. 3 MR. MILLER: Good morning, your Honor. I would 4 just like to enter an appearance. I'm Todd Miller, Baker 5 Miller in Washington DC, representing Dairy Farms of 6 America. 7 THE COURT: Welcome, Mr. Miller. Thank you. 8 Okay. Where are we? 9 Ms. Hancock, good morning. 10 MS. HANCOCK: Good morning. Your Honor, we have 11 producer Ken Nobis here to testify this morning. 12 THE COURT: Let's welcome him to the stand. 13 I'll swear you in. Raise your right hand. 14 KEN NOBIS, 15 Being first duly sworn, was examined and 16 testified as follows: 17 THE COURT: Your witness, Ms. Hancock. 18 MS. HANCOCK: Thank you. 19 DIRECT EXAMINATION 20 BY MS. HANCOCK: 21 Q. Mr. Nobis, would you mind stating and spelling 22 your name for the record? 23 A. I'm sorry, what? 24 Q. Could you state your -- 25 A. Oh, state my name. My name is Ken Nobis. 26 Q. How do you spell that? 27 A. K-E-N, last name is N-O-B-I-S. 28 Q. Okay. Are you a dairy farmer? 1285 1 A. I am a dairy farmer. 2 Q. And you are here to provide some testimony today 3 for the hearing? 4 A. Yes. 5 Q. Did you prepare a written statement? 6 A. I'm sorry. 7 Q. Did you prepare a written statement? 8 A. I did prepare a written statement. 9 MS. HANCOCK: Your Honor, we have identified his 10 written statement as Exhibit NMPF 61, if we could have an 11 exhibit number for identification purposes. 12 THE COURT: Let's mark the next one -- my notes 13 indicate we should identify that exhibit as 108. 14 (Thereafter, Exhibit Number 108 was marked 15 for identification.) 16 THE COURT: For identification. 17 BY MS. HANCOCK: 18 Q. And Mr. Nobis, can you provide your mailing 19 address? 20 A. My mailing address is 1513 Lowells Road, 21 L-O-W-E-L-L, St. Johns, Michigan, 48879. 22 Q. Okay. Thank you. 23 Would you mind sharing with us your written 24 testimony in Exhibit 108? 25 A. Yes. 26 Q. Thank you. Proceed. 27 THE COURT: We're going to have this witness read 28 his statement? 1286 1 MS. HANCOCK: Yes, your Honor. 2 THE COURT: Very good. 3 Sir, you may read your statement. It's maybe -- 4 well, I'll keep this on the record. It appears to be 5 human nature, observed here and other places, that we all 6 tend to speed up as we go along when we're reading 7 something. So in consideration of our reporter so she can 8 get everything down, I'd ask you to be mindful of that, 9 and I'll try to remind you if we speed up. It's not just 10 you. 11 THE WITNESS: I may need that reminder. 12 THE COURT: We -- I do myself. 13 Thank you, sir. You may proceed. 14 THE WITNESS: Thank you. 15 Well, I am Ken Nobis. I'm a dairy farmer from 16 St. Johns, Michigan. My farm is located 20 miles north of 17 Michigan's capital, Lansing. And we also are very near 18 the campus of Michigan State University in East Lansing. 19 Our farm is also located 65 miles of east of Grand Rapids, 20 Michigan, and just five miles from St. Johns. 21 Nobis Dairy Farms is a family partnership that 22 farms 2500 acres and milks 1,000 Holsteins. Since our 23 farm is just 20 miles from the MSU campus and because 24 researchers at MSU work on a lot of projects that they 25 need to apply in a practical application, we have worked 26 extensively with them over the years on their research 27 projects. 28 I also serve as a College of Ag and Natural 1287 1 Resources shareholder at MSU, and I am especially proud of 2 the fact of being honored by MSU granting me Honorary 3 Alumnus status in 2019. 4 I served on the Michigan Milk Producers Board of 5 Directors for 27 years, 12 of those years I was Chairman 6 of the Board. And along with that service, I served on 7 the National Milk Producers Federation Board for 15 years. 8 I held positions of Treasurer and 1st Vice Chair on the 9 National Milk Producers' Board. 10 I appreciate the opportunity to testify at this 11 Federal Order Hearing, and I support all five of the 12 National Milk Producer Federation proposals. But my 13 testimony is directed more specifically at Proposal 1. 14 Because many factors have changed since 2000. For 15 one thing, producers deal with a lot more volatility today 16 than they did in the year 2000. On our farm, the 17 volatility in the year 2000, our pay price varied by just 18 $0.52, from a high of $12.95 a hundredweight to a low of 19 $12.43 a hundredweight. In the last 12 months that 20 variance has been $7.46, from a high of 22.50 to a low of 21 15.04. 22 Also back in the year 2000, we bought corn to feed 23 our cows for $2.10 per bushel. Soybean meal was purchased 24 back then for around $200 a ton. Today corn will cost you 25 over $5 a bushel and soybean meal is over $500 a ton 26 frequently. 27 It is important to highlight that producers are 28 compensated for only 9 pounds of protein and other solids 1288 1 in Class I skim milk sales via Federal Order Number 33 2 pool. They are compensated for the actual protein and 3 other solids used in all other classes of milk. 4 Federal Order 33 is a very large Class I market, 5 routinely exceeding 500 million pounds per month. In 6 Federal Order 33 Class I utilization, the utilization 7 ranges from 33% to 41% depending on volume of milk pooled 8 each month. It is time the formula involved in pricing 9 Class I milk reflects the actual value of the milk being 10 produced on our farms today. 11 The changes made by farmers to produce a better 12 product will continue into the future. Our long research 13 relationship with MSU and seeing firsthand what results 14 could be achieved has been especially gratifying. 15 I think the first project we cooperated with was 16 the use of prostaglandin to synchronize estrus in heifers, 17 and that was in the mid-1970s. Since then, we have worked 18 with MSU on many things that include various cow comfort 19 adaptations which led to greater component values in 20 butterfat, protein, and other solids. 21 Cow comfort adaptations started with curtain-sided 22 barns and sand-bedded free stalls in the 1980s. We have 23 been working with Dr. Richard Pursley at MSU for over 25 24 years as he has been instrumental in developing successful 25 timed breeding protocols. Timed breeding lead to greater 26 efficiency and therefore greater cow comfort which leads 27 to higher milk production and greater component 28 production. 1289 1 My objective in highlighting some of the research 2 projects is to show how we strive to improve our cow 3 comfort, nutrition, and genetics. This has led to 4 continued -- and will continue to lead to higher milk 5 production and higher component content of the milk 6 supply. 7 Our milk supply in our farm in the year 200, our 8 production per cow in the year 2000, was 24,930 pounds of 9 milk, 1,024 pounds of butterfat, and 769 pounds of 10 protein. 11 As of August of this year, 2023, our production is 12 34,992 pounds of milk, 1357 pounds of butterfat, and 1,054 13 pounds of protein. Those numbers are going to continue to 14 up. I know Michigan is the leader in production per cow, 15 but production per cow across the nation has grown 16 percentage-wise the same as it has in Michigan, pretty 17 much. 18 I support the request to have milk pricing formula 19 updated with a mechanism in place to update the formula in 20 the future every three years. Dairy farmers have done 21 their part, having recognized the marketplace’s call for 22 increased protein and other solids and have made decisions 23 to meet the need. I don't think farmers have reached the 24 end of that road, and further improvements can be 25 expected. This formula update will help make certain that 26 producers are properly compensated for meeting consumers’ 27 expectations. 28 Producers are facing serious cost of production 1290 1 issues today. I know we are not unique in that respect. 2 But it adds to the reasons why we need to address the 3 issue today and allow for a method to assure that we stay 4 current as component production changes. 5 Now I would like to go into a little more detail 6 on some of the general things I have mentioned that has 7 led to higher milk production and higher component 8 production. 9 Greater cow comfort is very significant in leading 10 to these increases. We started probably back in the 1980s 11 with those open-sided barns, and the idea of an open-sided 12 barn is to keep the cows cooler in the summertime. 13 So they are curtain-sided. So in the summertime, 14 the curtains are up, which adds to greater air flow, 15 keeping the cows cooler. And then that wasn't enough. 16 The next step we took was to add fans to those barns to 17 increase the cooling and the cow comfort issue. 18 When you put fans in the barn, it keeps the cows 19 cooler on those quiet humid days in the summertime. But 20 then, even if it doesn't get that hot in the daytime, 21 having the fans in place cools that barn much cooler when 22 the sun goes down in the evening. 23 One other thing, I don't have it in my written 24 presentation here, but I think it's very significant. 25 When we did all that, opened those barns up and put the 26 fans in, one thing we quit using and have never used since 27 is fly spray. 28 Flies really do bother cows, and they do have an 1291 1 impact on milk production, and the best fly spray around 2 doesn't keep them off all day. We have to use -- don't 3 use those chemicals anymore, but yet we never see a fly. 4 The only place we use fly spray in our farm today is in 5 the milking parlor, in the milk house. 6 So when we used to have the heat impact on those 7 cows in July and August, in Michigan, all of the Midwest, 8 that affect -- affected component production and milk 9 production, and you didn't see that returning to normal 10 until at least November, when it got cooler. 11 So overall, that's really helped add to annual 12 milk production on those cows because they don't have that 13 impact. And there's hardly a farm out there today that 14 doesn't have those measures in place. 15 One of the other things we have done is on barn 16 design. One thing is -- is higher eave heights today, 17 which allows for more airflow. And another one that 18 doesn't seem that important, but barns today are oriented, 19 at least in the Midwest, on an east-to-west axis, because 20 it takes full effect of the natural air flow. 21 Another issue is calf raising. We just have so 22 much better calf care today than we did years ago. We 23 understand what they need and don't need. 24 In fact, it's so good, the survival rates are so 25 good, the growth rates are so good, that we don't need to 26 keep all of our heifer calves anymore. On our own farm we 27 only keep half of them. They are from our best cows. And 28 my best cows, I'm talking about milk production and 1292 1 component production. 2 And we select the best bulls, and the best bulls 3 are bulls that will match that production and -- and 4 component production for matings, which allows for an even 5 faster genetic improvement in the herd today. That's why 6 you are seeing some of the -- much greater, faster upticks 7 in milk production, component production than what we used 8 to see. 9 Feeding dairy cows is a lot more scientific today 10 than it was even in the year 2000. I think most all of us 11 are using professional nutritionists today than we did 12 even in the year 2000. 13 But just some things you don't think of. The 14 genetics of the food feed supply is different. Corn 15 silage is more digestible than it used to be. The 16 equipment we have today to harvest that, especially 17 alfalfa silage, is so much better than it was in the year 18 2000. 19 For example, in the year 2000, we could harvest 20 alfalfa maybe ten to 12 acres per hour. Now it's more 21 like 35 acres per hour, which allows us to get that crop 22 harvested at peak value and decreases the risk of weather 23 damage on that hay. So the base ration is -- excuse me -- 24 is a forage, and the better job you can do with the 25 forage, the better job you are going to do with milk 26 production and component production. 27 Also, along the way, especially when you are 28 talking about components, there are products we can use 1293 1 today that really didn't exist or were just coming on the 2 market in the year 2000 to enhance the production of 3 protein and other solids. 4 Those products aren't always economically viable. 5 In fact, I'm not using all of them on our farm right now 6 because it just doesn't pencil out. And every farm is 7 different. Every farm has a different feed supply. Every 8 farm is managed a little bit differently. For some 9 people, it works; in our particular case, right now, it 10 doesn't work. Although, I have asked my nutritionist to 11 review it again, and he's in the process of doing that 12 today. But the point is the products do exist to help 13 push that issue. 14 And along the pricing side, the current Class I 15 skim milk value is at 3.1% protein, 5.9% other solids, so 16 the total is 9%. It's been static calculation since the 17 year 2000. Meanwhile, the actual composition of the skim 18 milk produced is 3.39% protein and 6.02% other solids for 19 a total of 9.41%. 20 An imbalance of pool revenue versus producer 21 value, the 9 versus 9.41, dilutes the value of the 22 producer price differential. This does not promote 23 orderly marketing in the milk. 24 A PPD based on total actual component value would 25 provide an incentive for me as a producer to supply milk 26 to the Class I market in Grand Rapids, which as I stated 27 earlier is 65 miles away, versus sending all of it to the 28 cheese plant that's five miles away in St. Johns. So it 1294 1 would help promote a more orderly marketing of -- for 2 Class I market. 3 But based on historic averages, the protein price 4 at 2.58 a pound and other solids price at $0.21 a pound 5 and a 37% Class I utilization -- and this is averages, 6 this is what we're using here -- the PPD is reduced by 7 $0.29 per hundredweight if the composition factor remains 8 at 9%. So this does not accurately reflect the component 9 value of the milk the producer is putting on the 10 marketplace today. 11 So I hope I have been able to highlight how dairy 12 farmers have been working diligently through the years to 13 improve the milk production and component makeup of the 14 milk that they produce. Dairy producers are very 15 innovative. They are willing to adopt new technology to 16 keep the business viable and to meet the expectations of 17 the Class I consumer. 18 But technology is becoming ever more expensive to 19 implement and producers need an economic signal from the 20 marketplace that provides the necessary incentive to 21 continue to be innovative. 22 And increasing the value of Class I skim milk in 23 the Federal Order pool will provide us some of that 24 incentive. This pricing formula change is necessary to 25 keep farmers in a position to continue to produce milk. 26 I would like to thank Secretary Vilsack for 27 holding this hearing and providing me the opportunity to 28 testify. And I would be happy to answer any questions 1295 1 that people might have. Thank you. 2 BY MS. HANCOCK: 3 Q. Thank you, Mr. Nobis. 4 I just had a couple of questions. You said early 5 on in your testimony in Exhibit 108 that -- that you farm 6 and you have the dairy farmer operations; is that right? 7 A. Yeah. We -- we have a cash crop operation in 8 addition to the dairy operation. 9 Q. And you talked about some of the additional 10 expenses that -- that you have experienced over the years. 11 I'm wondering if you could talk about, to the extent you 12 are comfortable, the profitability of your dairy farming 13 operation. 14 A. In the last ten years there's been more than half 15 the time that it was difficult to justify milking cows 16 versus selling cash crops. Last year, 2022 was a good 17 year for the dairy farm; this year has not been so great. 18 But we just -- we have had this continual good 19 price for the corn and soybeans and wheat that makes it 20 difficult to justify milking cows, to be honest with you. 21 We have been in it for the long run. That's why we have 22 stuck with it. 23 But by the same token, all across the country, we 24 have lost a heck of a lot of dairy farms, and the primary 25 reason is because they have not been profitable. 26 Q. And how is it that you have been able to stay in 27 business? 28 A. I have a partnership. And I manage the dairy, and 1296 1 my brother manages the cash crops. There's been some very 2 heated discussions about why are we milking cows anymore. 3 But as I said, we have been in the business. We both 4 started -- I came back from the military in '68, so I have 5 been on the farm ever since then. My brother came back in 6 '72, I think. 7 So there were a lot of years in there where the 8 dairy side of the business kept the cash crop side afloat. 9 It is just that in this -- we have had this switch in the 10 last few years due to a lot of outside factors, global 11 food supply, things like that that have given us -- given 12 the cash crop side of the industry a boost. 13 And when that cash crop side gets a boost, it's 14 good for the cash crop side, but it's that much worse for 15 the dairy side because we're -- we have to pay for that 16 feed that has a much higher value today than it did in the 17 year 2000. 18 Q. So is it fair to say that you have to have the 19 diversified operations that you have with both the farming 20 to -- to go hand in hand with your dairy farming operation 21 in order to survive? 22 A. It's helped us survive with more profits in those 23 lean years, yes. I mean, there's been other dairies that 24 have survived without the cash crop side. It is just that 25 we have been able to do a little bit better by having the 26 diversification. 27 And it's unfortunate because the dairy investment 28 is extremely high. It is labor intense, and that's what 1297 1 makes the -- that's why people are leaving the dairy 2 industry today. You need an incentive to milk cows 3 because of the challenges that are involved in the dairy 4 industry with labor, with more management, with everything 5 that you have to do. So it's important that we get the 6 right value for the milk that we produce. 7 Q. Okay. 8 MS. HANCOCK: Thank you for your time. 9 THE WITNESS: Thank you. 10 THE COURT: Are there questions from other 11 parties? Aside from AMS? 12 Yes, Mr. Miltner. 13 MR. MILTNER: Thank you, your Honor. 14 CROSS-EXAMINATION 15 BY MR. MILTNER: 16 Q. Good morning, Mr. Nobis. 17 A. Good morning. 18 Q. My name is Ryan Miltner. I represent Select Milk 19 Producers. 20 I just have a couple of questions on your 21 statement under your pricing bullet points here. 22 Actually, I have one prior. You talk a lot about 23 the feed costs on the farm -- 24 A. Right. 25 Q. -- and how that's really impacted margins over the 26 last year. 27 Are you aware that the Secretary is supposed to 28 take those types of costs into account when setting the 1298 1 minimum prices? 2 A. For -- repeat your question? 3 Q. Sure. Maybe I should rephrase it a little bit, 4 too. 5 Are you asking the Secretary to take those costs 6 into account when they decide what to do with Proposal 1? 7 A. Well, there's two issues. I think the primary 8 issue is, is that the producers not -- in the Class I 9 market are not being properly compensated for the milk 10 that we are producing, because we're using that old 11 formula that was accurate in the year 2000, but it's not 12 accurate for the milk that we're producing today. 13 It is more an issue of fairness in getting out 14 of -- being paid for what we are producing than it is for 15 asking the Secretary to look at feed costs. 16 Q. Thank you. 17 On the last page of your statement, you -- you 18 say, "Imbalance of pool revenue versus producer value (9.0 19 versus 9.41) dilutes the value of the PPD." 20 That's an interesting concept and a good point. 21 Can you explain for us a little more about what you mean 22 by that statement? 23 A. For me, it's very simple. I'm not getting full 24 value for what -- excuse me -- for what I'm producing. 25 Q. And then the next point in your statement, you say 26 that a PPD based on today's actual component values, would 27 provide an incentive for you to supply milk to the Class I 28 plant in Grand Rapids versus I assume Midwest Cheese there 1299 1 in St. Johns. 2 A. Right. 3 Q. Can you explain that a little more for everybody 4 here in the room? 5 A. The -- the issue is that when my milk hauler 6 leaves our farm, she drives -- actually it is 4.5 miles to 7 Midwest Cheese to unload the milk. So we're going to 8 get -- to haul it to the Class I market in Grand Rapids is 9 an additional 60 miles. It is a transportation issue in 10 that case. 11 Q. In -- in today's market, I have heard some people 12 suggest that it costs about a dollar a hundredweight to 13 move milk 100 miles. 14 Does that sound about right to you? 15 A. I have heard that same number, yes. Yeah. 16 Q. So for your farm, updating the PPD would be enough 17 of a benefit to incur that additional hauling cost to get 18 to that Class I plant? 19 A. It would help, put it that way. 20 Q. I'm curious, before Mid -- well, does your -- does 21 your milk go to Midwest Cheese right now? 22 A. Yes, it does. 23 Q. Okay. And Midwest Cheese, that's a relatively new 24 plant, right? 25 A. Yes. 26 Q. Do you know or recall where your milk was shipped 27 before Midwest Cheese opened? 28 A. So Michigan Milk Producers -- I'm a Michigan Milk 1300 1 Producers member, obviously, we stated that -- has a 2 contract with Midwest Cheese to provide X number of pounds 3 of milk per day. Prior to that, I'm also 16 miles away 4 from Ovid, which is an MMPA processing plant. Our milk 5 went to that Ovid plant prior to Midwest Cheese. 6 Q. How far is Ovid from your farm? 7 A. Oh, I think it's about 16 miles, I think. 8 Q. Okay. 9 MR. MILTNER: Thank you very much for coming to 10 testify today and for answering my questions. I 11 appreciate it. 12 THE WITNESS: You're welcome. 13 THE COURT: Further questions for this witness? 14 Mr. Rosenbaum. 15 CROSS-EXAMINATION 16 BY MR. ROSENBAUM: 17 Q. Steve Rosenbaum for the International Dairy Foods 18 Association. 19 I have a question about the data that appears on 20 the bottom of the first page of your testimony, if you 21 could look at that. And I'm looking at specifically the 22 last sentence as to how many pounds of milk you produced, 23 how many pounds of butterfat, and how many pounds of 24 protein. 25 Now, am I correct that if one wanted to determine 26 what your protein levels were in skim milk, what you would 27 do is take your 34,992 pounds of milk, subtract the 28 1,357 pounds of butterfat, and then you would divide the 1301 1 1,054 pounds of protein by that number, namely the pounds 2 of milk minus the pounds of butterfat. 3 Is that the math? 4 A. To get the percentages, yes. 5 Q. Okay. And as I do that math, I have 34,992 minus 6 1,357 is 33,634 (sic). And so when I divide the 1,054 7 pounds of protein by your 33,635 pounds of skim, I get 8 3.13367% protein; is that right? 9 A. That sounds right. 10 MR. ROSENBAUM: That's all I have. 11 THE COURT: Anyone else have questions for this 12 witness? 13 THE WITNESS: Could I add to that answer? 14 THE COURT: I'm sorry? 15 THE WITNESS: Could I add to that question -- 16 answer? 17 THE COURT: Oh, please. 18 THE WITNESS: So I didn't -- I think what you are 19 getting at is that our herd does not test as high as the 20 average herd in the United States on -- on protein and 21 other solids, and it doesn't. 22 And part of that is genetics, but the major issue 23 is, as I explained, we are a diversified farm. We also 24 raise soybeans and wheat and some corn for cash crops. We 25 are not feeding the way most producers do to capture a 26 higher butterfat and higher protein average because we 27 have the cash grain sales. 28 For example, we harvest corn silage -- we have 1302 1 1137 acres of corn silage this year -- or corn, excuse me. 2 We will harvest about half of that for roughage for the 3 cows. The other half will be harvested for grain. 4 In our case, we can make more money, when we look 5 at the whole farm, picture, by selling that excess corn 6 grain in the cash grain market and buying back a 7 commodity, a byproduct, to feed to the cows. 8 It's a complicated string of numbers you have to 9 put together. But even though we're getting less than 10 what the average producer is because of our protein and 11 butterfat isn't as high, but we have that we're selling -- 12 we're buying back a commodity cheaper than what we could 13 feed the corn that we produce. We're making more money on 14 the corn by selling it and buying back a commodity, even 15 though we don't have as high of solids value in our milk. 16 So there's a reason why we do it that way. 17 Other producers are not in the same situation. 18 Most of them, obviously. And as I also stated, there are 19 products that we could be including in our ration that 20 would boost both our butterfat and our protein, but it's 21 questionable if it's economically viable at this point in 22 time. 23 In fact, my nutritionist, who is pretty sharp, we 24 work with Purina, he -- he says it's 50/50 whether it 25 works or not. And we -- we review those numbers, you 26 know, on a yearly basis. 27 But, again, there's volatility in everything that 28 we deal with today. Methionine, for an example, is a 1303 1 product you can add that's going to boost those levels. 2 It's not a stably priced product. It is up and down. And 3 if you catch it when it is down, you get it locked in, 4 maybe it would work. 5 But I don't want to spend -- I have -- that's the 6 reason -- and I'm talking about our particular farm. When 7 I'm sitting up here testifying, I'm talk about the 8 industry as a whole. 9 MR. ROSENBAUM: Your Honor, if I could just ask a 10 couple of follow-ups on that. 11 THE COURT: No, of course. I mean, you sat down, 12 but your -- the witness answered after you sat down. So, 13 please. I'm interested. 14 BY MR. ROSENBAUM: 15 Q. So are you -- is your milk pooled on a multiple 16 component pricing order? 17 A. Is it what? 18 Q. Do you know what the term a multiple component 19 pricing order means? If you don't, you don't. It's a 20 technical term. 21 A. I'm not sure I understand your question. 22 Q. Okay. I mean, do you -- all right. Are you -- 23 does -- does the -- does the money you receive, is that -- 24 does that reflect the nonfat solids level in your milk? 25 A. The money that we receive reflects -- 26 Q. When you receive a -- you know, a check for your 27 milk, is that -- is that -- is that amount affected by -- 28 A. Yes. It's -- it is -- the butterfat, protein, and 1304 1 other solids are highlighted, yes. 2 Q. Okay. So -- all right. 3 MR. ROSENBAUM: That's all I have. Thank you. 4 THE WITNESS: Yes. 5 THE COURT: Do we have another questioner for this 6 witness other than AMS? 7 Seeing none, AMS, Ms. Taylor? 8 CROSS-EXAMINATION 9 BY MS. TAYLOR: 10 Q. Good morning. 11 A. Good morning. 12 Q. Thank you for being with us today. 13 A. Thank you. 14 Q. The Small Business Administration defines a small 15 business for a dairy farm as those making $3.75 million or 16 less in gross revenue a year. 17 Would your farm be considered a small business 18 under that definition? And this is whole farm revenue, 19 not just from the dairy side. 20 A. What was the number again? 21 Q. 3.75 million. 22 A. 3.75 -- in gross? 23 Q. Yes. 24 A. Yes. We would be just over that. 25 Q. Okay. Thank you. 26 And does your farm use any risk management tools 27 to hedge in for your milk price or, you know, your feed, 28 whatever? Do you use any risk management tools? 1305 1 A. I'm sorry? 2 Q. Do you utilize any futures contracts on the CME or 3 do any type of forward contracting or DRP Dairy, any of 4 those kind of tools to help you manage your risk? 5 A. Yeah. We do, yes. Not all the time. 6 Q. Okay. 7 A. But we do, yes. 8 Q. Okay. You used to be on the board of MMPA. 9 Do you have any ideas about how much MMPA milk 10 goes into Class I plants? 11 A. MMPA itself? 12 Q. Yeah, the co-op as a whole. And if you don't 13 know, that's fine. 14 A. I -- I don't have it off the top of my head, so I 15 wouldn't be speaking with true facts. 16 Q. You indicate your pay price in the last 12 months 17 varied, had a variance of about $7.46. 18 Is that a gross price or is that a mailbox price 19 that would net out, you know, hauling and other deducts? 20 A. That would be -- no, it would be gross. 21 Q. Gross. Okay. 22 On the last page of your statement, I just wanted 23 to go through some of your bullets just to make sure the 24 record's clear. And I think Mr. Miltner did some of that 25 to help clear it up, but just to be sure. 26 Your third bullet talks about the imbalance of 27 pool revenue versus producer value and it dilutes the PPD. 28 If I wanted to rephrase that, would I interpret that as 1306 1 currently handlers of Class I milk gets paid in at the 2 current standard of 9 pounds of solid -- for 9.0 solid 3 standard. But -- and producers are paid on that -- let me 4 gather my thoughts for a second. 5 Let me just say it this way. If you want to 6 expand on that 9.0, 9.41, are you saying that milk gets 7 paid in at 9.0, but you get paid out on components, which 8 on average are higher than that, so that money gets paid 9 out in the Class III component value to everyone, and 10 there's not that revenue left over to pay out in the PPD. 11 Is that what you mean by imbalance? 12 A. Basically, yes. 13 Q. Okay. And so if the PPD was higher, and that 14 imbalance was corrected, in your opinion you would be able 15 to service the Class I market because the higher PPD would 16 cover your addition- -- some of your additional hauling 17 costs to get it to that further-away Class I plant? 18 A. Right. 19 Q. Okay. And then on your last bullet you say, based 20 on the historic average of protein price, you have a 21 protein price, other solids price. You say the PPD is 22 reduced by $0.29 per hundredweight. 23 Can you give us the time period for that historic 24 average you used? 25 A. I don't remember -- 26 Q. Okay. 27 A. -- how far back that went. 28 Q. Okay. 1307 1 A. Yeah, I -- yeah, I don't -- I don't remember how 2 far. 3 Q. Okay. 4 CROSS-EXAMINATION 5 BY MR. WILSON: 6 Q. Good morning, Mr. Nobis. Todd Wilson from Dairy 7 Programs. 8 You answered Mr. Miltner -- or Mr. Rosenbaum a 9 little bit ago about the last paragraph on page 1, talking 10 about your milk per cow, pounds of fat per cow, those 11 numbers there. Are those the same -- if you were to 12 calculate the percentage as Mr. Rosenbaum went through the 13 math there, is that the same percentage that would be 14 applied to your gross price up in the upper portion of 15 where you -- where Ms. Taylor mentioned that there was a 16 variability of $7.46? Is that -- that is at test. That 17 variance is at test. Is that correct, of the $7.46? 18 A. It's $7.46 at test is the gross value of the milk 19 check. 20 Q. And that's at your -- 21 A. At -- 22 Q. -- at your component levels? 23 A. That our -- that was our -- that was -- I was 24 quoting the checks that we received for our milk. 25 Q. Thank you very much. 26 A. Okay. 27 MS. TAYLOR: That's it for AMS. Thank you very 28 much. 1308 1 THE WITNESS: You're welcome. 2 THE COURT: Any redirect? 3 MS. HANCOCK: Thank you, Mr. Nobis, for your 4 testimony today. 5 Your Honor, we would move to admit Exhibit 108. 6 THE COURT: Any objection? 7 Exhibit 108 is entered into this record. 8 (Thereafter, Exhibit Number 108 was received 9 into evidence.) 10 THE WITNESS: Thank you. 11 THE COURT: Mr. Nobis, I appreciate coming out, 12 too, for this. 13 MS. HANCOCK: Your Honor, at this time we would 14 call Ed Gallagher for our next witness. 15 THE COURT: Mr. Gallagher, please raise your right 16 hand. 17 EDWARD GALLAGHER, 18 Being first duly sworn, was examined and 19 testified as follows: 20 THE COURT: Your witness, Ms. Hancock. 21 MS. HANCOCK: Thank you, your Honor. 22 DIRECT EXAMINATION 23 BY MS. HANCOCK: 24 Q. Good morning, Mr. Gallagher. 25 A. Good morning. 26 Q. Would you mind stating your name and spelling it 27 for the record? 28 A. My name is Edward Gallagher, E-D-W-A-R-D, 1309 1 G-A-L-L-A-G-H-E-R. 2 Q. And where are you employed? 3 A. I'm employed by Dairy Farmers of America. 4 Q. Would you mind providing your business address? 5 A. I have got two. One is -- I'll use this one. It 6 is my home -- it is my office address. 5001 Brittonfield 7 Parkway, East Syracuse, New York, 13221. 8 Q. Thank you. 9 Would you mind providing us with a little 10 information about your background, starting with your 11 education? 12 A. Sure. Well, first, I was raised on my family's 13 dairy farm in Central New York. I attended Cornell 14 University as an undergrad and received a Bachelor's 15 degree in agricultural economics and farm business 16 management. 17 After completing my Bachelor's degree, I was hired 18 by the Federal Order Number 2 Market Administrator's 19 Office and worked there for a few years. And was a Wilson 20 scholar. The Market Administrator's Office sent me to 21 graduate school. I went to the Ohio State University and 22 got a Master's of Science degree in agricultural 23 economics. 24 I completed 12 years of employment with USDA, 25 finishing up with the Market Administrator as its chief of 26 market research, analysis, and information. 27 In 1996, Dairylea Cooperative hired me to be their 28 economist and to help lead them through the Federal Order 1310 1 Reform process. During that time at Dairylea, I -- in 2 addition to my duties on Federal Order policy, I took on a 3 number of different management roles within Dairylea, 4 including managing their milk price-forward contracting 5 program. 6 In 2010, I was hired by Dairy Farmers of America 7 to manage their milk price risk management forward 8 contracting program. My position at Dairy Farmers of 9 America is president of DFA risk management. And I also 10 am responsible now since January 2022 for their Federal 11 Order policy initiatives. 12 Q. When you say "risk management," what does that 13 mean to you? 14 A. So we operate -- Dairy Farmers of America 15 operates -- probably the leading dairy farmer forward 16 contracting -- milk price-forward contracting program 17 globally. We offer a number of risk management services 18 who are farmer-owners. They are widely used. We also are 19 -- my team of 19 people also support the dairy risk 20 protection insurance program, or agents that provide that 21 insurance program. We also operate risk management 22 programs for our 83 milk plants and their customers. 23 Q. Is it fair to say that you operate on both the buy 24 and the sell side of risk management tools? 25 A. I do. We do, yes. 26 Q. Okay. 27 MS. HANCOCK: Your Honor, at this time, I would 28 offer Mr. Gallagher to be qualified as an expert in 1311 1 agricultural economics, Federal Milk Marketing Orders, and 2 risk management. 3 THE COURT: I find him so qualified. 4 MS. HANCOCK: Thank you. 5 THE WITNESS: Thank you. 6 BY MS. HANCOCK: 7 Q. Mr. Gallagher, did you prepare a written statement 8 in anticipation of your testimony here at this hearing? 9 A. Yes. 10 Q. And is that what's been identified as Exhibit 11 NMPF-4? 12 A. Yes. 13 MS. HANCOCK: Your Honor, I would ask to have 14 NMPF-4 identified as Exhibit 109. 15 THE COURT: Yes, so identified. 16 (Thereafter, Exhibit Number 109 was marked 17 for identification.) 18 MS. HANCOCK: Thank you. 19 BY MS. HANCOCK: 20 Q. And then, Mr. Gallagher, did you also provide a 21 brochure from Dairy Farmers of America that's been 22 identified as Exhibit NMPF-4A? 23 A. Yes. 24 MS. HANCOCK: Your Honor, we would ask to identify 25 NMPF-4A as Exhibit 110. 26 THE COURT: Yes, so marked for identification. 27 (Thereafter, Exhibit Number 110 was marked 28 for identification.) 1312 1 MS. HANCOCK: Thank you. 2 BY MS. HANCOCK: 3 Q. Mr. Gallagher, would you mind providing us with 4 your testimony today. 5 A. Yes, thank you. 6 What I would like to do is provide a summary and 7 use my statement, which I'm projecting on the screen, to 8 show some of the charts that I want to explain a little 9 bit further, and hopefully we can get through this a 10 little bit quicker. 11 So specifically today, I'm here to talk about our 12 proposal -- the National Milk Producers Federation 13 Proposal Number 1, to update the factors in the skim milk 14 price formulas under the Federal Orders, to update them to 15 the current producer price -- or excuse me -- the producer 16 component test in Federal Orders. 17 Simply put, what we are doing is asking USDA to 18 re-establish the skim milk minimum price, skim milk 19 formulas to the same policy initiative that they 20 implemented under Federal Order Reform, to provide a more 21 accurate skim milk price formula for more accurate skim 22 milk prices, for minimum prices, across all Federal 23 Orders, for Class I, Class II, Class III, and Class IV. 24 I'm here to testify about the impact of this on 25 risk management programs in the dairy industry. 26 So changing the skim milk factors will change the 27 pricing formulas, and changing the pricing formulas will 28 have an impact on risk management transactions that were 1313 1 entered into prior to the knowledge of what the change 2 will be and the timing of when the change will be 3 implemented. 4 Failure to recognize that change and delay the 5 change, we're asking for a 12-month delay in its 6 implementation, will create financial harm to dairy 7 farmers, milk plants, end users, and others who entered 8 into risk management transactions prior to the knowledge 9 of the change and the timing of it. 10 We -- we realize that we need to update the skim 11 milk factors. There has been ample evidence that has been 12 provided in prior witness testimony, undisputed evidence, 13 that the component tests and the producer supply that 14 increase significantly since the year 2000 -- well, the 15 late 1990s when the factors were determined that were 16 implemented on January 1, 2000. 17 We recognize the need for this change, but we also 18 recognize the impact that it will have on risk management 19 transactions, and because of that, we're asking for the 20 12-month delay, to let those transactions or most of those 21 transactions roll off before those skim milk price 22 formulas actually are effective. 23 So what the big concern is, from the producer 24 hedging side, is that we, with our proposal, updating the 25 skim milk components is going to update what I call the 26 standard milk test for announcing class prices. 27 So currently, that standard milk test will be -- 28 is 3.5% butterfat, 2.9915% true protein, and something 1314 1 like 5.6985% on the solids. When we -- when we make this 2 change, we are going to be changing that standard 3 component level, and they are going to be higher. 4 And the problem in risk management, especially for 5 dairy farmers who have made these transactions, is that 6 they rely on the component basis as an informed value in 7 making their risk management decision. When we make this 8 change, that component basis, a lot of it, sometimes all 9 of it, will be consumed in the class price and won't be 10 available for dairy farmers anymore as part of their risk 11 management transactions. 12 We work with a lot of DFA farmer-owners on their 13 risk management strategies. Our focus working with them 14 is to help -- to try to help them lock into a profit 15 margin. And oftentimes, when we are doing these 16 transactions, they talk to us about a profit margin that 17 they can lock in, their gross milk price all in, all 18 components, PPD, the whole nine yards, less what they 19 believe their costs of production are. A lot of times 20 they will lock prices in when they know they can get a 1 21 or $2 per hundredweight profit margin. 22 As an example, in the fall of 2019, we worked with 23 a lot of our farmer-owners to manage their milk price risk 24 for the first half and the second half of 2020. And they 25 were telling us they were locking in profit margins of 26 around $2 per hundredweight. Not all of them, but that 27 was a common theme. 28 When COVID hit and prices crashed, and the milk 1315 1 prices fell to intolerably low levels, the dairy farmers, 2 farmer-owners that used our programs on the milk they 3 forward-contracted were able to earn a profit in cash flow 4 on that transaction. 5 Now, I say $2. I'm going to run through my 6 statement once through some examples on the farmer's side 7 assuming a Class III hedge. 8 And so there's a term that's important, and the 9 term in risk management is called basis. Simply put, the 10 basis is what a farmer gets paid in their milk check in 11 this case, a dairy farmer gets paid in their milk check, 12 minus the hedge that they are transacting. 13 So on a Class III forward contract, their basis 14 would be the PPD, and also it would be the additional 15 components above the standard. As we have seen, 16 undisputed in the record, that the component levels -- the 17 component levels on dairy farmer-produced milk are now -- 18 it's not unusual to see dairy farmers produce Holstein -- 19 Holsteins produce 4% butterfat and about 3.25% protein. 20 And so that difference from the current standard 21 that the Class III price is now pretty significant. In 22 fact, for 2020, 2021, and 2022, I bet that component 23 standard for a lot of dairies was about $2 per 24 hundredweight. 25 And so what's that risk that we're talking about 26 is that basis that they rely on that is what they look at 27 as their profit margin when they enter into these 28 transactions will be partly eroded and consumed in the 1316 1 milk price and not available for them anymore. 2 And that gets explained later on in my testimony 3 on pages 11 through 16 about how component basis is 4 cannibalized. 5 And on page 3, at the top of page 3, there's a 6 chart that is the U.S. All-Milk Price, and you can see it 7 changes tremendously. This is the primary price that 8 influences the revenue for dairy farm families across the 9 United States. This is a key statistic that shows what 10 dairy farmers across the United States receive in their 11 revenue. 12 Most of us get a salary, and you know, we have 13 had -- we have seen over the last 36 months quite a bit of 14 volatility in our lives with inflation and other things 15 going on, but our salaries didn't go down because of some 16 economic event. 17 In the dairy industry, for dairy farmers, their 18 salaries go up and down every month, and it's tremendously 19 volatile, as you can see from that chart, which is why 20 dairy farmers need to implement and think about and be 21 consistent users of risk management strategies to better 22 protect their fairy farms. 23 In addition to the programs that we use to help 24 dairy farmers lock into a profit margin, we find 25 significant use of a program through the Federal Crop 26 Insurance Program called Dairy Revenue Protection 27 Insurance Program, which effectively puts a floor on milk 28 prices, and they get all the upside. Pretty good deal. 1317 1 So a lot of times, if our farmer-owners aren't 2 using a forward contract to lock in their milk price, they 3 will use the Dairy Revenue Protection Program -- Insurance 4 Program, put a floor on their milk price, to prevent 5 further price erosion from happening. So there are a lot 6 of important tools that are available in the dairy 7 industry. 8 By the time this proceeding gets to a final 9 decision and is implemented, all of those transactions 10 will be settling against the announced class price, at 11 whatever the standard component test is at that time. And 12 so all of those transactions will be impacted by the 13 change in the component levels if we don't delay it. 14 Another area that I discuss as a challenge that 15 would be for the consumer side, the plant side, is the 16 impact on cross hedges, and that discussion in my 17 statement is on pages 16 through 19. 18 What a cross hedge is, is that you try to build 19 into a -- say, a Class IV price by using the components of 20 butter, or butterfat, and nonfat dry milk for nonfat 21 solids. And we use this quite a bit at DFA. 22 So for -- we have a target blend program that's 23 very popular with our farmer-owners to help them lock into 24 their milk price. Oftentimes, we will use the CME Group 25 futures products to hedge our risk, the risk that DFA 26 takes on to offer a fixed price to one of our 27 farmer-owners. We back everything so that we can be 28 assured if a dairy farmer wants a price, we cover it with 1318 1 some sort of hedge transaction, so that we are assured and 2 they are assured that we can honor that price, and we're 3 protected. And the dairy farmers that -- of owners of 4 our -- of DFA that aren't using these risk management 5 programs don't take on any risk. 6 So oftentimes, what we will do is there will be -- 7 we'll have some transactions on the plant side. For 8 instance, we're one of the largest ice cream manufacturers 9 in the United States, and so we'll lock into an ice cream 10 price for one of our customers. When we do that, we are 11 generally going long on a butter futures contract, because 12 the ice cream manu- -- the ice cream buyer doesn't want 13 something to happen later on that increases the price of 14 butterfat and will raise their ice cream price if they 15 just buy it as it comes. And so we have opportunities for 16 them to lock in their butterfat price, or lock in their 17 ice cream price. 18 We also export dairy products around the world. 19 And there's oftentimes that we have an export buyer from 20 another country buying our powder that wants a fixed 21 price, and so we will use financial derivatives to lock in 22 that price. Same situation, they don't -- they don't want 23 their price to go up. They are willing and accepting that 24 if prices go down, they will give up the lower price. 25 They don't want their price to go up. 26 And so we go long, and when you go long in the 27 futures market, if the price goes up, the futures contract 28 is profitable, which then creates revenue for DFA to cover 1319 1 the higher input cost that maybe we're buying from our 2 farmers to make the product, and it allows us to give them 3 a fixed price. 4 Well, a lot of times we'll do those two 5 transactions in the futures market, but not always, 6 because with our blend price program, which is a short 7 position, so farmers don't want their milk price to go 8 down, so they sell in the futures market, and if the price 9 goes down, that financial transaction, that derivative is 10 profitable and covers that loss of income. 11 So we have got -- we have got a sell side with our 12 farmers and a buy side with a couple customers, and so 13 what we do is sometimes we match them up without going to 14 the futures market. 15 The challenge that we have right now is that 16 because we don't know what this change will be or when 17 it's going to be implemented, we aren't going to be 18 utilizing those internal transactions to make that hedge 19 because we won't be able to come equal on both sides, and 20 we'll have a loss in the middle. And that is explained 21 in -- on pages 16 and 19. 22 Ms. Krema testified from the CME on Monday and did 23 an extraordinary job providing insights into U.S. dairy 24 derivatives markets, and I think her testimony was very 25 credible. 26 And the top of page 5, I provide a chart very 27 similar to what Ms. Krema showed in her testimony. The 28 difference between my chart and her chart is that hers was 1320 1 average daily open interest and mine is open interest on 2 the last trading day of each one of those years. 3 And I'd like to use this chart just to highlight 4 something a little bit more. The last time we were 5 together, or some of us were involved, in a national 6 hearing to consider class price formula changes, was back 7 in 2007, 2008. And when you look at this chart, you can 8 see the number of transactions on the CME Futures Dairy 9 Complex, which would be whatever their futures contracts 10 were at the time, had been growing, but is significantly 11 less than what it is now. In fact, now it's three to four 12 times the level. 13 So the last time we got together to discuss class 14 price issues at a national Federal Order hearing, the use 15 and -- and understanding of these derivative transactions 16 was not as significant nor was as significant of an issue 17 back at that time. Far different than it is now. 18 In fact, I recall in that time period, I was a 19 Dairylea employee, helping to work with the Dairy Farmers 20 of America risk management program. And I was asked to 21 join the DFA salespeople and other account managers when 22 they met with some of our customers, during 2008, 2009, 23 2010. And they would have a topic list of things that the 24 customer wanted to talk about, and frequently the number 25 one topic at those meetings was how they could use the DFA 26 risk management program, forward contracting programs, to 27 help their -- protect them against milk price volatility. 28 Now I don't go to those meetings so much, and the 1321 1 difference is a lot of the buy side has invested in people 2 who are very sharp at using these derivative programs and 3 understood their use. And so that is part of the reason 4 why we have seen such a significant increase in the use of 5 these programs. 6 On the sell side, when I started at Dairy Farmers 7 of America in 2010, we had an astonishingly low volume of 8 milk covered under our forward contracting program. I 9 totally changed our approach on how we interact with a 10 farmer-owner. In fact, we were outsourcing it in some 11 cases. The education effort, we were outsourcing to 12 others. The silliest thing I had ever heard of. 13 I stopped that, day one stopped that, and I hired 14 people that could work with dairy farmers, explain risk 15 management to dairy farmers, and take what was happening 16 in the derivative market and relate it back to their milk 17 checks so they could understand it. And the use in our 18 forward contracting program skyrocketed, which is part of 19 the reason that you see the significant increase over 20 time. 21 Others -- others in the industry, that would be 22 brokers that worked extensively with dairy farmers, also 23 did a lot better job of explaining how to use these 24 programs to dairy farmers. 25 And so the use is significant and is of -- and is 26 now something that is so intertwined with the Federal 27 Order program because every one of these types of futures 28 contracts settle to an announced price by USDA that has 1322 1 backstopped with an important price in the Federal Order 2 pricing system. 3 Ms. Krema did a better job than I did, as we go to 4 the top of page 6, in showing open interest information. 5 This is a snapshot of two particular days this year, the 6 open interest of futures and options on the CME Group 7 Dairy Complex. It is May 26th and August 8th. 8 And what I'd like to point out is just sort of the 9 role on how these futures contracts demand the amount of 10 open interest changes over time. So you can see that on 11 May 26th, we hadn't settled the May class -- the May 12 Federal Order prices yet, so those contracts were still 13 treading. They still had open interest. 14 You can see 12 months out, you get to May 2024, 15 and you can see fairly significant open interest through 16 May 2024, and then it falls off fairly considerably. In 17 fact, the second half of 2024 at that point had very 18 little open interest. 19 You move to August where both May and June prices 20 have been announced, and those futures derivatives on the 21 CME had rolled off the board and new ones have come on. 22 And you can see the significant change in open interest, 23 and you can see it extends out well beyond the 12 months. 24 And Ms. Krema's data that she showed in her 25 testimony, I think, was much better than this in showing 26 sort of the seasonality and the change. 27 I talked about the Federal Crop Insurance Program. 28 On page 7, middle of the page, is a chart. What that 1323 1 chart is, that's data from the Risk Management Agency that 2 I have summarized, and it shows the coverage by crop year. 3 Now, a crop year runs from July 1st to June 30th, and a 4 crop year -- so we look at -- let's take 2022. The crop 5 year of 2022 doesn't mean all those transactions settled 6 out in that crop year. It's just the insurance policy was 7 taken out sometime between July 1 of 2021 and June 30th of 8 2022. That's the 2022 crop year. 9 It shows significant use. When you average those 10 numbers, because we don't know exactly what the coverage 11 would be for any one annual time period, any one January 12 through December, when you average those out, it's pretty 13 close to about 53 billion pounds of milk has been prior -- 14 at least up until 2023 crop year. That's about 23% of the 15 U.S. dairy supply. 16 In the DFA risk management programs, the volume of 17 milk that's covered by our farmer-owners and forward 18 contracting is about the same as the volume of milk that's 19 covered under our Dairy Revenue Protection Insurance 20 Programs. They are both pretty significant. They have 21 both grown. In fact, in 2022, we had record volumes in 22 both programs. 23 And so sort of interpolating a little bit that 24 the -- relative to our use, and interpolating what I think 25 that means for producer coverage using the CME Group 26 futures derivatives for dairy farmers, that I think 27 somewhere between -- in 2022 -- somewhere between 35 and 28 45% of the U.S. milk supply was hedged by dairy farmers 1324 1 across the United States. So it is pretty significant. 2 It's pretty significant. 3 I mentioned that we use risk management to support 4 exports. I'm going now to the middle of page 10. So we 5 are very fortunate in the United States to have such a 6 robust and well used dairy risk management program. The 7 CME Group futures market is by far and away the leading 8 dairy risk management futures market anywhere. 9 And it creates a significant strategic benefit to 10 the United States versus who we would say would be our 11 competitors in international marketplaces. In Europe, 12 there's a futures market, the EEX. And for New Zealand 13 they have a futures market that they can use for dairy; it 14 is the SGX. Neither of them have grown very much. They 15 are getting more and more use. 16 But if you look at this chart, the open interest 17 when you take their contracts, which are smaller sized 18 than the U.S. contracts, you convert them to their U.S. 19 equivalents, and you add up then their U.S. equivalent of 20 contracts that they would have, again, on the last day of 21 trading, for 2022, their open interest was about 20,000 22 contracts, which is about where the U.S. dairy industry 23 was in the early 2000s. So we have a significant 24 advantage over our European competitors when it comes to 25 the export markets to be able to strategically use these 26 programs to support the growth in U.S. dairy exports. 27 Okay. On page 11 is where I start my discussion 28 of the impact to dairy farmers and the need to delay 1325 1 12 months. And so simply put, this chart goes through the 2 transaction and the determination of the Class III milk 3 price, using factors that I have -- use as an example. 4 And my example is that 2021 average component prices, 5 announced by USDA, the average cross amounts for 2021, the 6 annual average, the butterfat price, the protein price, 7 and the other solids. 8 And it goes through what the component factors are 9 to determine the Class III price: 3.5% butterfat, 3.1 10 other protein, and 5.9 other solids. It's the 3.1 and the 11 5.9 which we are seeking to modernize and update to meet 12 the average component test in producer supply. 13 As you go through that, and you come out with a 14 17.08 Class III price. I'm going to use that -- I use 15 that 17.08 Class III price in my example of what all this 16 means to dairy farmers. 17 Now, when I go through this example, I'm going 18 to -- I'm going to use an example where -- I'm going to 19 page 13, the middle of the page. I'm going to use an 20 example where I'm using different protein and other solids 21 component tests, and I'm not changing the butterfat price. 22 Right? 23 So in this example, on this dairy, that dairy 24 probably actually had a 4.0 butterfat test, but if I use 25 that 4.0 in what I'm trying to show to show you the impact 26 of what would happen when we change these factors, it will 27 cloud it by adding in butterfat component basis that we 28 aren't concerned about because we aren't changing the 1326 1 butterfat standard. So I leave butterfat as 3.5 for 2 convenience to show the change. 3 And so this particular chart, though, looks to 4 be -- what's the full component test? So the change 5 hasn't occurred yet. This is an example of a dairy farm 6 who produces 3.5% butterfat, 3.27 protein, and 5.81 other 7 solids, and so their full component Class III price is 8 $17.90. 9 The Class III price that they would hedge at would 10 be 17.08, which means they have a component basis of 11 $0.82. It's that $0.82 that ends up at risk of being 12 cannibalized as we raise the component factors in the skim 13 milk test. It is that $0.82 I talk about as part of that 14 basis, that when we say dairy farmers lock in a 1 to $2 15 profit, the $0.82 is part of that. The rest of the 1 to 16 $2 is on the butterfat side, but we aren't changing 17 anything in this proposal that's going to impact the 18 butterfat, so I'm leaving that out. 19 Going to the bottom of page 19, so this converts 20 to the butterfat, protein, and other solids factors -- or 21 excuse me, not the butterfat -- it converts the protein 22 and other solids factors to our proposal. And it goes 23 through and it recalculates what the announced Class III 24 price would be. 25 Now, I specifically -- going back to this chart -- 26 I specifically chose these component tests when I 27 converted them to a skim milk value -- would be the same 28 as these -- to help show my point. 1327 1 So now we go through, you realize the brilliant 2 testimony that the National Milk Producers Federation has 3 provided, and you choose to adopt our proposal. Thank 4 you. We appreciate that. But we're changing what the 5 announced Class III price would be. It's now going to be 6 17.90 instead of 17.08. 7 Going to page 15, middle of the page, this chart. 8 So here's sort of what the dairy farmer was thinking 9 about. All right. So the dairy farmer did this 10 transaction months before they knew what the change was 11 going to be or when it was going to be implemented, but as 12 it turns out, this -- this hedge they did settles after 13 the change happens. 14 So that dairy farmer had an expectation of locking 15 in a Class III price of 17.08, knowing that they then had 16 a component basis in addition to that of about $0.82, they 17 said for $17.90, I can make a profit on my dairy farm, and 18 so I'm going to lock it in. 19 Now we go to the change, after the fact, and the 20 announced Class III price is $17.90. But there's no 21 additional component basis, it's been absorbed into the 22 Class III price. 23 So the dairy farmer then, the transaction is they 24 hedged at 17.08. They didn't want the price to go down. 25 Nothing else changed that -- the component prices were the 26 same when they hedged as when they settled the price. The 27 only thing that changed was the factor in the formula. 28 And so the formula then said the settlement price 1328 1 that would be used by the CME and by our forward 2 contracting programs would be 17.90. So they hedged at 3 17.08 to protect themselves from the price going down, but 4 the price went up, so they had a loss on that hedge. They 5 had a loss of $0.82 a hundredweight. 6 So they ended up at the price that they wanted in 7 the futures market that they saw, they are ending up at 8 17.08, but what's missing is they don't any longer have 9 that component basis because when they sold their milk to 10 whoever they were -- they were selling it to, they got 11 paid the 17.90. They got paid their full components. 12 They got the 17.90. But there was no additional value in 13 that basis than what they were -- as they were expecting 14 when they made the transaction. 15 And that's where the challenge, that's what the 16 problem is, why we are asking to delay this for 12 months. 17 I'll stop there, Nicole. The last part, pages 16 18 through 19, go through sort of the cross hedge 19 transaction, but I'll stop there and be happy to entertain 20 questions. Thank you. 21 Q. Thank you, Mr. Gallagher. 22 One question on the last part that you were just 23 mentioning on this delayed implementation. If we're at 24 this hearing today, and it's going to take us some time 25 before any kind of anticipated change that could happen 26 will actually be effective, I'm wondering if you could 27 talk about when that 12-month period or why that 12-month 28 commencement of the delayed implementation would occur at 1329 1 the -- at the final order or the implementation of any 2 change as opposed to why people couldn't build that into 3 their risk management tools starting today so that we 4 could have the advantage of this kind of foreshadowing? 5 A. Correct. Thank you. That's an excellent 6 question. 7 So unfortunately, uncertainty is uncertainty, and 8 so not knowing when this is going to happen is then 9 becoming a guessing game. And what our risk management 10 programs are meant to do is to take uncertainty away and 11 make it more certain. 12 And so, you know, we have some view in our mind 13 when we think this final decision may be announced, and so 14 for transactions that would be occurring after that date, 15 we have quite a bit of uncertainty on how we use these 16 programs to support effective risk management for both our 17 dairy farmer-owners, our milk plants, and our customers. 18 Did I get to where you wanted to go? 19 Q. Yeah. I mean, I think is another part of this as 20 well, that they can't afford to not continue to engage in 21 their risk management tools because it's so integrated 22 into their current business practices? 23 A. Yes. So if I may sort of answer -- add to that 24 answer. 25 So, Mr. Nobis mentioned that he used risk 26 management sometimes. And so if Mr. Nobis was a DFA 27 farmer-owner, I would pull him aside after I'm done here 28 and explain to him the need to be consistently using the 1330 1 programs because you never know. 2 We found, and unfortunately, a year -- so last 3 year, the end of 2022, there were some pretty decent 4 prices that dairy farmers could cover for the first half 5 of this year. But those prices that were offered didn't 6 offer a profit margin, so they didn't cover. We begged 7 them. Some covered, but not as many as usual. And 8 unexpectedly, prices fell off the charts, as we know. It 9 happened in the spring and into the summer. 10 What the challenge is, is that we probably will 11 see less risk management coverage because of the 12 uncertainty that we're going to be facing. And you never 13 know when prices are just going to fall off the shelf and 14 decline rapidly like they did last -- this -- this past 15 spring and into the summer. And so that is going to -- 16 that uncertainty will bring a lot of challenges to 17 financial -- the financial operations of a lot of dairy 18 farmers. 19 Q. And then in Exhibit 110 that you have in front of 20 you, that's the Dairy Farmer of America brochure, if you 21 look at the second page there, can you talk about the map 22 that's reflected there? 23 A. Yes. So the dots represent one of our DFA 24 farmer-owner farms. So you can see where we're located. 25 We have seven operating councils. Each operating council, 26 you can see there sort of their geographic boundaries by 27 the light blue outline on the gray scale map. And our 28 operating councils -- or each operating council for that 1331 1 region is responsible for marketing the milk of our 2 farmer-owners, getting paid, and determining pay prices, 3 and writing the milk checks for our farmer-owners in those 4 areas. 5 Q. Okay. 6 MS. HANCOCK: Thank you, Mr. Gallagher. 7 Your Honor, we would submit the witness for cross 8 now. 9 THE COURT: Questions for this witness, other than 10 AMS first? 11 CROSS-EXAMINATION 12 BY DR. CRYAN: 13 Q. I'm Roger Cryan with the American Farm Bureau 14 Federation. 15 A. Hello, Roger. How are you? 16 Q. Very well. How are you today? 17 A. I'm good. Thank you. You? 18 Q. I think I said so. I think I said I'm very well. 19 Thanks. 20 Okay. I'm -- I have been impressed with the way 21 you have grown DFA's market -- risk management programs 22 over the years. It really feels like it is part of DFA's 23 recommitment lately to serve the members in the industry 24 and the community, and I -- I -- I'm -- I thought this was 25 a good reflection of that. 26 A. Thank you. 27 Q. Now, you talked about 2020, and some of the 28 volatility, some of the crazy things that happened that 1332 1 year. You've talked about prices dropping off the table. 2 And if I understand your programs correctly, and 3 you haven't -- I don't think you quite brought this up -- 4 but when there was some real chaos in terms of basis risk 5 and with respect to uniform prices versus Class III and IV 6 prices, for example, in 2020, your -- a lot of your 7 programs covered -- covered producers, right? A lot of 8 your producers who were using your forward contracting 9 program as set forth saw a lot of that risk managed; is 10 that right? 11 A. That's correct. And we paid out between -- on our 12 forward contracting programs, we paid out tens of millions 13 of dollars to our farmer-owners during that period. And 14 those that would have had the Dairy Revenue Protection 15 Insurance Program, although we don't write those checks, 16 that comes from RFA -- 17 Q. Sure. 18 A. -- they also got tens of millions of dollars. So 19 a very effective risk management implementation during 20 that time period -- 21 Q. Yeah, you -- 22 A. -- that was beneficial to our farmer-owners. 23 Q. Very good. 24 And you -- and your program, because you are 25 serving the farmers as producers, trying to help them 26 manage risk, and not just selling some product, you 27 dovetailed all the different options they have, like the 28 USDA programs, the various USDA programs and risk 1333 1 management, and the crop insurance and dairy margin 2 coverage, and then you fill the gaps with -- 3 A. Yeah. 4 Q. -- futures and options and so forth; is that 5 right? 6 (Court Reporter clarification.) 7 BY DR. CRYAN: 8 Q. And then you fill the gap with futures and options 9 and other forward contracting tools; is that right? 10 A. Yes, that's correct. So I didn't spend time 11 talking about the Dairy Margin Coverage Program. That's 12 widely known, I believe -- 13 Q. Yes, it is. 14 A. -- and is by far and away the single best risk 15 management program in the dairy industry. And so when we 16 work with our farmer-owners, we start and look at how much 17 they have -- they can get covered under the Dairy Margin 18 Coverage Program, and so that's -- that's covered. 19 Q. Okay. 20 A. And then we work on whatever delta they have in 21 their milk production with our other programs. 22 Q. So putting those all together gets kind of 23 complicated. And in 2020, when -- when basis blew up and 24 there was massive amounts of depooling, a lot of the 25 programs, a lot of the proposals from National Milk are 26 aimed at -- including this one -- are at least in part 27 aimed at addressing class price misalignments and negative 28 PPDs and depooling, trying to -- trying to address that. 1334 1 Could you talk about some of the impacts that 2 negative PPDs and depooling had on DFA as a -- as a -- as 3 a company, as a co-op that was taking on a lot of risk for 4 its members, and on the members themselves? 5 A. Yeah. So we're a little bit different than others 6 in the marketplace because we offer blend price-forward 7 contracts, and we offer producer price differential 8 forward contracts. 9 And so when those negative basis hit, dairy 10 farmers that had a blend price-forward contract were 11 protected, and those that -- so if you think a little bit 12 about, you know, you -- if you buy corn, right, you buy 13 corn, you can buy off the board, you can buy the basis, or 14 you can buy it delivered. 15 So think of our blend price-forward contract as 16 the delivered price. And then we have other dairy -- 17 other farmer-owners that will say, I just want the board 18 price, which will be covering Class III. And then there 19 will be others saying, I just want the basis, which would 20 be the PPD. So we have -- we can cover all three of those 21 options for our farmer-owners. So a little bit different. 22 A lot of our transactions on risk management were 23 protected against that basis change, but not all of them. 24 And so because of some of the anomalies that happened in 25 dramatic differences between class prices that resulted 26 from various actions during COVID, the -- those 27 farmer-owners that didn't cover that PPD basis in one way 28 or another had very negative impacts on what they were 1335 1 expecting for the outcome of their hedge. 2 Not because of component basis changes 3 necessarily, but because when they were making their 4 transaction, they weren't expecting to have a minus -- I'm 5 making this up a little bit, but it's in the ballpark -- a 6 minus $8 PPD. They were either expecting a zero or maybe 7 slightly higher. And so when you lock in to a $20 milk 8 price, and you think you're going to get a PPD of zero, 9 and that $20 milk price is pretty good, then that's fine. 10 But when you lock into a $20 milk price and you end up 11 with an unexpected minus $8 PPD, you are really netting 12 $12, and that is not a financially viable transaction, 13 unfortunately. 14 And so some of -- you know, the five proposals 15 that National Milk is offering up would support stronger 16 PPDs and would lead to more effective risk management 17 transactions by dairy farmers across the industry. 18 Q. Yeah. Larger and -- and more consistent, right? 19 Less variability in the PPD, that's -- those are kind of 20 two of the aims that will help support your -- your 21 support for producer risk management. 22 A. We would like stronger and more consistent PPDs. 23 I don't have analysis to know if our proposal is going to 24 do that or not -- 25 Q. Okay. Very good. 26 A. -- consistently. 27 Q. Thank you, Ed. Thanks very much. 28 DR. CRYAN: That's all I have. Thank you. 1336 1 THE COURT: Anyone else? 2 Mr. English. 3 MR. ENGLISH: Your Honor, I actually think this 4 would be a good time for a break. 5 THE COURT: The hearing reporter thinks so too. I 6 think so too. 7 And I'm beginning to wonder whether ten minutes is 8 enough. Enough? Okay. 9 The hearing reporter says it's enough. Let's come 10 back at 9:50. 11 (Whereupon, a break was taken.) 12 THE COURT: On the record. 13 Mr. English, your witness. 14 MR. ENGLISH: Thank you, your Honor. 15 CROSS-EXAMINATION 16 BY MR. ENGLISH: 17 Q. Good morning, Mr. Gallagher. My name is Chip 18 English. I think we have known each other since probably 19 1987 or something like that. 20 A. I think so, yeah. Good morning. 21 Q. And in this proceeding, I represent the Milk 22 Innovation Group. 23 A. Very good. 24 Q. So I -- I realize your testimony is about Issue 1, 25 but I think it is important to understand the philosophy 26 behind the testimony. So I want to ask sort of a holistic 27 question about the whole proceeding. 28 Is it your position that USDA should postpone 1337 1 implementation of whatever changes it makes from this 2 proceeding all at one time? 3 A. Clarify that. 4 Q. Okay. So let's say, contrary to our position -- 5 because we're not in favor of Issue 1 -- if the Secretary 6 were to adopt your Proposal 1, which you seek to have 7 12 months delay, should the Secretary similarly delay 8 implementation of any decisions on Issues 2, 3, 4, and 5? 9 A. The only implementation delay we are asking for is 10 for the implementation delay on the component changes to 11 the minimum class skim milk prices. 12 Q. So you are not going to appear later or someone on 13 National Milk's behalf is not going to appear later to 14 request that, say, for instance, Issue 2, survey changes, 15 would be implemented later? 16 A. What are Issue 2 -- 17 Q. That's the survey. That's like removing barrels 18 from -- from the survey, adding 640-pound blocks, adding 19 mozzarella, things like that. I mean, I basically -- I 20 think -- I think if I'm correct, because this would be a 21 really short cross-examination -- if what you are saying 22 is that National Milk is only asking to delay 23 implementation of Issue 1 and not any of the other 24 proposals, is that what you are saying? 25 A. Yes. 26 Q. Well, then let me suggest, to the extent it is 27 helpful and the extent -- obviously USDA's not bound by 28 anything. But nonetheless, there is a concept called 1338 1 negotiated rulemaking. Let me suggest to you since we 2 oppose Issue 1, your proposal, and you are in favor of 3 Issue 1 and seek that it be implemented 12-month delay, we 4 are entirely in agreement. 5 MR. ENGLISH: And I think my cross-examination is 6 over. 7 THE WITNESS: Thank you Mr. English. 8 CROSS-EXAMINATION 9 BY MR. MILTNER: 10 Q. Good morning, Mr. Gallagher. 11 A. Good morning. How are you? 12 Q. I'm well. Thank you. Ryan Miltner, and I'm 13 representing Select Milk Producers. 14 When you talk about DFA's risk management programs 15 available to its members, what does that all entail? What 16 are the different programs that you offer? 17 A. Quite extensive. So we -- we pride ourselves on 18 being able to create forward contracting programs to cover 19 price risk of any dairy product. 20 So, for instance, to get into the weeds a bit, 21 the -- if we have a farmer-owner who wants to solely cover 22 the Class III price risk in their blend price, but feels 23 that maybe the whey price is so low that it could only go 24 up, so they don't really want to lock the whey price in, 25 we have a method to help them just cover the protein price 26 and protect the protein price and let the whey price 27 change. 28 We also offer, through our forward contracting 1339 1 programs, opportunities for our farmer-owners to hedge 2 feed price risk, and we build that into the milk price 3 that they would receive through a milk price-forward 4 contract. 5 So we have got -- on the producer side, on the 6 farmer-owner side, a significant number of options, and we 7 have ways that they can lock the price in. We have 8 opportunities for them to get a floor where they get all 9 the upside. We have transactions that we call min/max 10 forward contracts where they lock in the floor or they get 11 a floor price, but instead of getting all the upside, they 12 only get some of the upside, but in -- in -- in -- in 13 recognition of that, they get paid a certain value for 14 that transaction, or it reduces -- it reduces the cost of 15 the floor to limit the upside. 16 We have other programs where if they're locked in, 17 we have something that we have created that we call the 18 upside rider. So an upside rider, if you were locked in 19 at say a $20 Class III price, and you were okay with -- 20 with prices going higher, but if they really went higher, 21 if they went to $28, you would really feel bad, you would 22 want to get some of that, the upside rider that allows us 23 to do a transaction with the forward contract and adjust 24 that price. So let's say for a particular fee, that when 25 the Class III price exceeded $23, that they would get the 26 value above $23, and they would only be locked in up to 27 that $23. 28 So we have got quite a variety of programs. We 1340 1 used to show it -- interestingly -- we -- when -- when we 2 sort of -- we are constantly learning how to do a better 3 job to talk to our farmer-owners and simplify our whole 4 process. One of the things we used to do, we were too 5 proud of ourselves, we used to show a chart, an extensive 6 chart, that had about 40 lines on it, that were most of 7 our risk management transactions. And we found that when 8 we showed that in our -- in our intro to risk management, 9 it was so overwhelming that it turned our farmer-owners 10 off. So we don't show that anymore, and we just sort 11 of -- but we have -- we have lots of options and lots of 12 variety. And we can extend all of that, also, over to our 13 own plants, and we can extend it to our customers, 14 depending on what their needs are. 15 Q. Are the underpinnings of all of those different 16 programs ultimately CME derivatives? 17 A. Absolutely. So I -- I did reference that we can 18 do internal transactions. I referenced that when I was 19 presenting my statement. But most of the hedges that we 20 do are transactions with a CME futures product. 21 Q. Tell me about the -- you mentioned an internal 22 hedge. What is that, and how does that work? 23 A. Sure. So a -- we would have a dairy farmer, 24 farmer-owner, that wants to cover the class -- as an 25 example -- Class IV price risk in their blend price. They 26 don't want the price to go down, so they are going to -- 27 we're going to -- so we do a forward contract with them 28 for that Class IV piece. We go into the futures -- 1341 1 normally we would go into the futures market and we would 2 sell a Class IV futures. 3 Sometimes, instead of doing that, we are able to, 4 at the same time, know that we have a customer who we are 5 selling ice cream to who wants to lock in their ice cream 6 price, who then would have -- we would make a transaction, 7 normally in the futures market, to buy a butter futures. 8 And at the same time maybe we have an export 9 transaction for nonfat dry milk powder where we are 10 selling to our customer overseas at a fixed price, and 11 normally, what we would do to support that fixed price is 12 that we would buy a nonfat dry milk futures price. 13 Instead of going into the futures markets for 14 producer farmer-owner transaction and the two pieces of 15 the transactions with our customers, we just meet in the 16 middle and we do it internally without going to the 17 futures market. 18 That's what I -- that would be the internal 19 transaction. And in my testimony, I talk about the 20 middleman. DFA would be the middleman in that 21 transaction. 22 Does that make sense? 23 Q. It does, thank you. 24 On those types of internal transactions, what 25 exposure is there to the cooperative, and therefore its 26 owner members, if -- if a Proposal 1 is not delayed 27 12 months? 28 A. Yeah. We -- we -- as the middleman we won't get 1342 1 back to -- so as it stands now, we can sort of perfectly 2 match up everything, so that as the middleman we don't 3 take on any risk of profit -- I mean, profit -- we don't 4 take on risk of loss. But as this occurs, we do. And we 5 will -- we will -- there will be an amount we -- we will 6 be uncertain whether we can get back, not knowing what the 7 change is, when it changes, the implementation date. So 8 that creates an exposure to us that we can't manage. 9 Q. And DFA, like all cooperatives, it's owned by its 10 farmer members, correct? 11 A. DFA is owned by I think it is 11,000 -- we have 12 11,000 farmer-owners, operating about 6,000 family farms. 13 Q. So would it be correct that in addition to the 14 impacts on your members with respect to the transactions 15 you describe in your testimony, exposure that DFA may have 16 through internal transactions, or otherwise, that's farmer 17 exposure too, isn't it? 18 A. Yes. 19 Q. Okay. Thank you. 20 MR. MILTNER: I don't have anything further, your 21 Honor. 22 THE COURT: Anyone else other than AMS? 23 CROSS-EXAMINATION 24 BY MR. COVINGTON: 25 Q. Calvin Covington, Southeast Milk, Incorporated, 26 I'm representing. 27 Good morning, Mr. Gallagher. 28 A. Good morning. How are you? 1343 1 Q. Just fine. Thank you. 2 I want to ask a few questions and focus on the 3 earlier part of your testimony. 4 But first thing I want to ask you, though, is, 5 over the last couple of years, have you been a part of the 6 National Milk Producers Federation group of 7 representatives from the various dairy cooperatives to 8 develop this proposal, Proposal 1, that you are talking 9 about? 10 A. Yes. 11 Q. Okay. And what is the purpose of National Milk's 12 Proposal Number 1? 13 A. So -- so our purpose is to -- to re-establish the 14 accuracy of determining minimum skim milk prices across 15 all Federal Orders, for Classes I, II, III, and IV, by 16 returning to the policy initiative that they implemented 17 during Federal Order Reform, meaning that the skim factors 18 to determine minimum skim milk prices be based on the 19 average producer component tests across Federal Orders. 20 Q. All right. And why -- why is that update needed? 21 A. As we have -- as has been shown in testimony, I 22 think, by everybody that has presented evidence on 23 component tests, that these component tests have increased 24 substantially and that we no longer have the accurate 25 determination of those minimum skim milk prices across all 26 Federal Orders. 27 Q. Okay. Now, in your testimony, and the response 28 here, we keep using the term skim milk components, which 1344 1 Proposal 1 is about. 2 What are the purpose of those skim milk component 3 factors? 4 A. Those skim milk component factors are used to take 5 the product derived protein, nonfat solids, other solids, 6 and convert them to skim milk prices. 7 Q. Okay. And why does the Federal Order system need 8 those skim milk prices, that conversion? 9 A. Skim milk prices are reflective of the -- it's 10 important that the skim milk prices are reflective of the 11 general component tests across the industry, and that when 12 establishing Class I prices, Class I price is the Class I 13 mover plus a differential at the minimum Class I price. 14 And in Federal Order Reform, the initiative, the 15 policy initiative, is that the Class I mover was meant to 16 reflect average manufacturing prices. And right now, it 17 doesn't, because in all of the component orders, the 18 average manufacturing prices, really what the components 19 are in the order, which are significantly higher than they 20 were in 2000, and so the skim values are out of date. And 21 we don't see the connection -- Mr. Nobis very ably 22 explained its impact on his dairy, that -- that we don't 23 see the connection with the Class I price, that minimum 24 Class I skim milk mover being priced off of manufacturing 25 price anymore. 26 Q. Okay. So the skim milk prices per hundredweight, 27 as you just responded there to the earlier question, that 28 are calculated from the component prices, they are needed 1345 1 to help establish the Class I mover skim and also the 2 published Class II, III, and IV skim milk value prices? 3 A. Yes. 4 Q. Okay. All right. When the Federal Order Reform 5 was implemented back in 2000 that you referred to several 6 times, did those published Class III and Class IV skim 7 milk prices per hundredweight approximate the actual 8 Class III and IV skim milk prices at test at that time? 9 A. Yes. 10 Q. Okay. All right. And then, again, as you just 11 testified and also as you have responded, where component 12 prices have increased, do the current published Class II, 13 III, and IV skim milk values and also the Class I mover 14 skim milk value, do they approximate the current component 15 levels at the time? 16 A. Could I ask you to ask the question again? 17 Because I think you said component prices instead of 18 component tests. 19 Q. And I very, very well could have been, so I -- I 20 appreciate that. 21 Do the current -- does the current Class I mover 22 skim value per hundredweight, Class II, III, and IV skim 23 milk values per hundredweight, do they approximate -- 24 published prices, do they approximate the actual prices at 25 test of the current II, III, and IV skim milk prices? 26 A. In the Federal Orders that have multiple component 27 pricing, Class II, III, and IV values approximate. The 28 Class I values do not. When you look at what the skim 1346 1 milk -- minimum skim milk prices would be, they do not 2 approximate in any order what the actual producer tests 3 are right now. 4 Q. Thank you. 5 When the current skim milk components were 6 implemented back in 2000, as a part of Federal Order 7 Reform, were they ever intended to designate the minimum 8 skim milk component levels in Class I Federal Order skim 9 milk? 10 A. No, they were not. 11 Q. Okay. And if the National Milk Producer Proposal 12 Number 1 is implemented, does that mean that the Class I 13 skim milk must meet the proposed update -- updated skim 14 milk component levels? 15 A. No. 16 Q. Okay. And has been testified, the National Milk 17 Producer Proposal 1 would increase the Class I skim milk 18 price. 19 Does that increase give any kind of economic 20 advantage to one fluid handler over another in the Federal 21 Order system? 22 A. So the change would result in the average -- or 23 excuse me -- the Class I skim milk price mover being 24 higher, but being the same in every single Federal Order. 25 So there would be no competitive -- inter-competitive 26 advantage or disadvantage for any of the regulated 27 handlers. 28 Q. Okay. And currently under Federal Order 1347 1 revisions, Class I handlers, to meet their obligation to 2 the Federal Order system when it comes to the skim milk, 3 they account for that skim milk on a per hundredweight 4 basis; is that correct? 5 A. Yes. 6 Q. Does National Milk Producers Federation 7 Proposal 1, does it change that? 8 A. No. 9 Q. Okay. Thank you, Mr. Gallagher. 10 MR. COVINGTON: Your Honor, that's all my 11 questions. 12 THE WITNESS: You're welcome. 13 THE COURT: Next, Mr. Rosenbaum. 14 CROSS-EXAMINATION 15 BY MR. ROSENBAUM: 16 Q. Steve Rosenbaum for the International Dairy Foods 17 Association. 18 You have provided your views as to the purpose of 19 various undertakings during Federal Order Reform in 2000. 20 Can you point to any specific statement in the 21 decision by USDA when they implemented those reforms as to 22 whether there would be a need for any future revision in 23 the skim milk composition assumptions, one way or the 24 other? 25 A. I don't have anything to point to from the record. 26 Q. Okay. And -- 27 A. That I am aware of. 28 Q. And were you aware that at the time that Federal 1348 1 Order Reform was instituted in 2000, USDA had issued 2 previously decisions where they made the explicit 3 statement that with respect to Class I, there was no value 4 in additional nonfat milk solid components? 5 A. I would answer your question first by directly 6 responding, I'm not aware of that. 7 But I would answer -- also follow up, in that the 8 same -- when they -- when they implemented the Federal 9 Order Reform decision, they struck it at the average 10 component test that existed at that time. 11 Q. Did they actually say that's what they were doing 12 in a decision, as opposed to simply trying to come up with 13 a formula that roughly approximated the current pricing 14 under the MW series? 15 A. I don't have specific information to add to that. 16 MR. ROSENBAUM: That's all I have. Thank you. 17 THE COURT: Anything further from anyone? 18 Yes. 19 CROSS-EXAMINATION 20 BY DR. VITALIANO: 21 Q. Peter Vitaliano, National Milk Producers 22 Federation. 23 Mr. Gallagher, I would like to just follow up on 24 the question from Mr. Rosenbaum just now with regard to 25 whether the Federal Order Reform decision contained 26 anything that anticipated further adjustments in the 27 future. 28 Is it your understanding that in terms 1349 1 specifically of the component composition factors in the 2 Class III and Class IV formulas, the skim milk formulas, 3 that at that time of Federal Order Reform around 2000, the 4 average composition of producer milk was pretty stable and 5 not changing very much, and therefore would not 6 necessarily be something that they would comment on in the 7 Federal Order Reform decision? 8 A. Mr. Vitaliano, I would say that it was fairly 9 stable. I don't know -- I can't -- I can't get into the 10 mind of USDA at that time and the relative merits of 11 commenting or not commenting. 12 But I think if you -- if you look at the 13 testimony, the evidence that has been submitted at this 14 hearing, you will see a change in the component tests that 15 have been pretty significant, beginning around 2010, that 16 have increased substantially. And it is not -- as you had 17 mentioned in your question -- it is -- it is not sort of 18 just a little change or consistent component tests. They 19 are significant. 20 Certainly Mr. Nobis's testimony referenced why. 21 The testimony from Dr. Van Amburgh at Cornell University 22 testified why. And so there's just been significant 23 component production growth across the U.S. milk supply, 24 and it is my expectation and belief it is going to 25 continue. 26 Q. That is the very reason for Proposal 1. But my 27 question specifically was the situation around the time of 28 Federal Order Reform. 1350 1 DR. VITALIANO: Thank you. No more questions. 2 THE COURT: Anyone else? 3 AMS, your witness. 4 CROSS-EXAMINATION 5 BY MS. TAYLOR: 6 Q. Good morning. 7 A. Good morning. How are you today? 8 Q. Well, Ed, I'll be honest, risk management is 9 something I have not had to learn for my entire career in 10 detail, so this is good way to start a Wednesday. 11 A. Well, hey, welcome to my world. 12 Q. So bear with me a little bit. 13 A. Yep. I understand completely. 14 Q. I do appreciate you coming here to testify today 15 on this subject. So thank you very much. 16 A. You're welcome. 17 Q. I think I heard from an answer you gave to someone 18 else's question that DFA has 11,000 farmer-owners and 19 6,000 dairy farms. 20 Did I hear that correctly? 21 A. Yes. 22 Q. Okay. And what percentage of those farms use risk 23 management tools? 24 A. So can we count Dairy Margin Coverage? 25 Q. Yeah, any risk management tool. 26 A. I would say close to 100%. 27 Q. And then since you're talking about the impacts to 28 the CME, and that doesn't necessarily deal with DMC, what 1351 1 would you give an estimate on without DMC? 2 A. I -- I believe it's over 20% of our farmer-owner 3 farms. 4 Q. Okay. And do you know about how much production 5 then is covered? 6 A. I do, but I don't want to -- because of the 7 information I have put in this testimony, and some others, 8 our -- our -- others in the industry will be able to back 9 into some of the types of coverages that we sort of feel 10 is proprietary. 11 Q. I certainly can understand that. Thank you. 12 I don't know if you can speak to for DFA as a 13 whole -- and I have asked the same question of other 14 witnesses -- about their members meeting the small 15 business definition of $3.75 million in gross revenue. Do 16 you know about how many of your farms or farmer-owners 17 meet that definition? 18 A. We recognized that you would ask that question. 19 We don't have the access to our farmer-owners 20 financials, so we -- we don't know for sure. But we've 21 done some estimations based on what we think based on each 22 farmer-owner's annual milk production, and backing into a 23 size -- an estimated size of farm, because we don't 24 necessarily know the number of milk cows that they have, 25 either. But recognizing that it is around a 700-cow 26 dairy, we think that about 80% of our farmer-owner farms 27 would meet the small business definition. 28 Q. Great. Thank you. I appreciate the 1352 1 back-of-the-envelope calculations. 2 Another question. Have you seen in recent years, 3 especially as we went through COVID and getting out of 4 that, an increase in the use of risk management tools from 5 your members? 6 A. Yes, we have. So for calendar year 2020, we saw 7 record use of our program -- programs, and for calendar 8 2022, we saw record use of our programs. And I would say, 9 I believe I'm right, I don't have my statistics in front 10 of me, but in 2022 that record volume was almost double 11 the prior record volume. So significant uptick in risk 12 management. 13 And when you -- Ms. Taylor, when you think about 14 the growth that's going to occur in the U.S. milk supply, 15 there will be growth in all sizes of farms, but as the 16 math works, most of the growth is going to occur on 17 dairies in excess of 700 farms -- 700 cows, just that's 18 the math. Right? 19 And so as the growth occurs -- so -- so -- on 20 those dairies, if you are -- any -- any dairy, any size 21 dairy has debt. When you get to these larger farmer 22 operations, they have millions of dollars of debt and a 23 slim profit margin, and they will be -- I'll be talking 24 more about that when we get into the Class III and IV 25 issues -- well, what profit margins look like on dairy 26 farms. 27 And so it is a necessity for most of these 28 dairies, especially the larger dairies, to utilize risk 1353 1 management transactions because they cannot afford a 2 long-term low price that is below their cost of 3 production, and there are many, many opportunities to use 4 these derivative markets to protect against that. And as 5 the dairy industry's milk production grows, there's going 6 to be a greater concentration of that growth on these 7 larger sized dairies taking on greater amounts of debt and 8 needing to use these programs even more, later than they 9 do now. 10 Q. So you expect that to accelerate? 11 A. Yes, I do. 12 Q. Okay. In your testimony, you refer to the term -- 13 to "run-off." And I know -- I think that term was used 14 last week, and I'm pretty sure it's an industry term. So 15 if you would like to just explain for the record what that 16 means. I think I know what it means, but I'll let you 17 explain. 18 A. That's a technical economic term in risk 19 management. Run-off, it means that -- so as an example, 20 we typically have a farmer-owner that will forward 21 contract their milk today for the next 12 months. And so 22 when I refer to a run-off, that means when -- so they have 23 their forward contract for September 2023 through 24 August 2024. And so when I mean a run-off, is one month 25 settles out. So the September forward contract settles, 26 technically, in October. Then whatever result of that 27 forward contract occurs, gets into that farmer-owner's 28 October milk check, and so we had one month of run-off. 1354 1 So that's what I meant by run-off. 2 Q. Thank you. 3 A. You're welcome. 4 Q. On page 7 of your testimony, towards the bottom, 5 this is under the Federal Crop Insurance for Milk section. 6 Oh, first on the chart, I wanted to make sure I 7 got this correct. For your crop years from July 1st to 8 June 30th, does that mean 2019, for example, is July 2018 9 to June 2019? 10 A. Yes. So we're currently in the 2024 crop year. 11 So the 2024 crop year started on July 1, 2023. 12 Q. Okay. Thank you. 13 And those numbers coverage, billion pounds of 14 milk, I think you said, this is when the coverage was 15 taken out, not when the contract ends. 16 Did I hear that correctly? 17 A. You did hear that correctly. 18 Q. Okay. And then in the text at the bottom, you try 19 to explain why the coverage -- the numbers show a decrease 20 in 2023, for two reasons. And the first one you state, 21 "First, Class III and IV price levels offered were 22 considered" -- "were down considerably, but production 23 costs were at or near record high levels making the hedge 24 less interesting." 25 Can you expand on what you mean there? 26 A. Sure. Our focus with our farmer-owners is to help 27 them manage to a profit margin. And so we we're not -- 28 we're not milk brokers. 1355 1 Q. You are not milk, I'm sorry, what? 2 A. We're -- we're not a -- we're not a brokerage 3 firm. We don't have -- a dairy farmer-owner doesn't have 4 an individualized account with us. We are doing -- we are 5 changing the price of the physical product. So -- and we 6 focus on profit margins and how we can help them bring -- 7 we can bring value to them on their operation to try to 8 create a more consistent profit or protect against price 9 erosion. 10 So we aren't ever talking to them about which 11 direction we think the market is going and to try to get 12 them to make a bet on direction. And so when I say it's 13 less interesting, it means when we present them with a 14 perspective of what the futures market would show would be 15 the milk prices, and we have got a proprietary process of 16 taking whatever the futures market presents itself at any 17 one moment, and bringing that back in and presenting to 18 our farmer-owners what that would look like in their milk 19 check each month, going forward many months. 20 And so it was not interesting because when we -- 21 we took that futures market information, put it into our 22 formula and showed them what the milk price -- milk check 23 milk price on their dairy would look like in the future, 24 they looked at it and they said, I can't lock in a profit. 25 And unfortunately, they also said, and because of that, we 26 think the price has to go up. 27 So the less interesting part was they couldn't 28 lock in a profit, and so they didn't do as many 1356 1 transactions as we would have hoped they would have 2 normally done. 3 Q. And -- and is it fair to say they couldn't lock in 4 a profit because of the feed costs were -- let me see what 5 you used here -- production costs were near record high 6 levels? 7 A. That is very fair. And when I -- I will 8 eventually return, make a return appearance to talk about 9 topics with the Class III and IV proposals, I will be 10 presenting information on cost inflation on dairy farms 11 across the United States, that will show specifically what 12 that challenge would be. 13 Q. Okay. Bear with me. This was my late night 14 reading, so I have to remember what all my little notes 15 mean. 16 A. You stayed awake. I'm impressed. 17 Q. Okay. I'll get to that question later. 18 On page 9, at the top, you say, "I would estimate 19 the use of CME Group futures and options by dairy farmers 20 was equivalent to about 20 to 25 billion pounds." 21 That's not just DFA numbers, correct, that's just 22 industrywide? 23 A. That is my estimate of industrywide, correct. 24 Q. Okay. And so the use of CME plus the Revenue 25 Protection Insurance Program. 26 And are you talking DRP and LGM Dairy combined 27 into that number? 28 A. Sure. 1357 1 Q. Yeah. 2 A. The LGM Dairy is so small, it's a rounding error. 3 But, yes. 4 Q. Okay. But not -- 5 A. Even though it's a good program. 6 Q. I heard last week it's going to increase, so -- 7 A. Yeah. I'm sure the guy that owns it has got to 8 promote it. 9 Q. On page 10, in this chart, it is the -- you have 10 stuff from -- I think that's New Zealand and the European 11 futures markets? 12 A. Correct. 13 Q. Okay. And you convert -- I just want to make sure 14 I'm clear. You took their contracts, numbers, and the 15 volumes, and you converted that over to show the CME 16 equivalent contracts. 17 And CME contract volumes are what again? 18 A. So for Class III and Class IV, that's 19 200,000 pounds of milk; for butter and cheese, is 20 20,000 pounds; for whey and nonfat dry milk powder, it's 21 44,000 pounds. 22 Q. What was that for whey? 23 A. 44,000. 24 And Ms. Krema is listening, and she will text me 25 pretty quick if I got any of that wrong. 26 Q. Well, good, because I'm going to quote her here 27 shortly for you. She can text me -- or I don't have her 28 number -- she can text you if I'm wrong. 1358 1 Okay. I was curious. On page 12, you are talking 2 about DRP, and I recognize -- well, I know you all use 3 this program, so I -- I -- you talked a little bit about 4 changes that are in -- in -- being considered right now to 5 that program. And I think as I read it, the change would 6 be that DRP would settle against the formula -- the change 7 would be -- the DRP contract would settle against the 8 formula at the time of settlement, not at the time of 9 entering into the contract. That's the proposed change. 10 Do I understand that right? 11 A. That's correct. Did Dr. Bozic describe that when 12 he testified? 13 Q. I don't think in quite the detail, or maybe I just 14 didn't pick up on it at the time. 15 A. Okay. 16 Q. But you're up here, so I'm going to use this 17 opportunity to ask a few questions about it. He did say 18 there was a change that would be for the next year 19 upcoming. 20 A. Yes. 21 Q. But if I remember correctly what he said was, that 22 change would solve the upcoming year's issue, but it 23 wouldn't solve the year after that. It was like a 24 temporary fix. And -- and I might be getting that wrong. 25 I would have to go back and read the record. 26 But when I read what you wrote here, right, so 27 that's the change they're proposing, it struck me as then 28 why doesn't that change solve the DRP problem when it 1359 1 comes to the implementation -- it might not solve your CME 2 issue, but why doesn't that solve the DRP issue? 3 A. The -- the -- what I'm expecting the change to be. 4 Q. Yeah. Uh-huh. 5 A. So presently, the Dairy Revenue Protection 6 insurance settlement price is based on whatever the 7 formula that existed in Federal Orders at the time you 8 took the transaction out. It -- it is my understanding 9 that I -- I -- is that sometime in the future, that it's 10 going to be changed to whatever the formula is at the time 11 of the settlement price, which puts it on the same footing 12 as how the CME transactions are settled. So it -- it 13 follows through -- the same issues exist that I described 14 for dairy farmers that would use those tools and the 15 consumption of the component basis would be the same for 16 the Dairy Revenue Protection Insurance transactions as 17 well after that change is made. 18 Q. Okay. On the bottom of 12, going onto 13, the 19 sentence reads: "Basis is the difference between the 20 price that is being hedged and the price, based on the 21 hedge, that the producer expects to receive. For dairy 22 producers, the producer price differential would be part 23 of their basis when hedging the Class III price." 24 I just wondered if you could explain that a little 25 bit more for me. 26 A. Sure. So if you think about Todd's statistical 27 price announcement when they announced the PPD, there is a 28 section where they show what the statistical uniform price 1360 1 is, and that section is the Class III price at standard 2 test plus the PPD equals the statistical uniform price. 3 And so when we have a -- when we have farmer-owners trying 4 to hedge their milk check, milk price, which is more like 5 their blend price, and they may be using a Class III 6 hedge, then that basis would be the difference between 7 statistical uniform price and the Class III price, and 8 some of that basis then becomes the PPD. 9 Did that sort of resonate okay? Did that make 10 sense? 11 Q. Yeah. I'm just going back to look at your other 12 charts. 13 A. And so -- so just clarifying, when I went through 14 my example in my statement, I assumed there was no PPD. 15 Q. Okay. Thank you. That was the first time you 16 mentioned it, so that's why I was asking. 17 A. Yep. 18 Q. Okay. So the PPD would be in the -- so, for 19 example, on page 13, if we could go to that chart. 20 A. Yes. 21 Q. So they are locking in -- they are taking the 22 hedge out at 17.08; is that correct? 23 A. That is correct. 24 Q. But they expect to receive -- 25 A. 17.90. 26 Q. -- 17.90? 27 A. Yes. 28 Q. But that doesn't include any of the PPD? 1361 1 A. Correct. So -- 2 Q. They would expect to receive in reality -- 3 A. Maybe -- 4 Q. -- 17.90 plus some PPD? 5 A. PPD plus the butterfat component. 6 Q. Right. Okay. 7 A. That's -- I didn't include as well. 8 Q. Okay. Okay. Thank you. That's helpful. 9 A. You're welcome. 10 Q. Let me move to my questions on my computer instead 11 of on my sticky notes. 12 I know you weren't here last week. Did you listen 13 to Ms. Krema's testimony? 14 A. I -- I listened to it driving to the airport. 15 Q. Okay. 16 A. I got some of it. 17 Q. I'm sure you can still answer these questions, but 18 I do want to just -- 19 MS. TAYLOR: Your Honor, can I bring up Exhibit 78 20 to him? Because I do want to refer to a table in there. 21 THE COURT: Yes. 22 MS. TAYLOR: And this is the testimony that 23 Ms. Krema entered into the record last week. 24 THE WITNESS: Thank you. 25 BY MS. TAYLOR: 26 Q. First is just a general question. My second 27 question, we'll get into a piece of that. 28 So the CME witness who testified last week 1362 1 mentioned the over-the-counter market, and I don't see 2 that mentioned at all in your testimony. 3 So I was just curious about DFA's use or your 4 members' use of the over-the-counter markets? 5 A. Yes. So I can't comment on our members' use of 6 the over-the-counter market. We -- we sometimes -- so 7 when we execute our hedges, our main coverage will be in 8 the CME futures, and then there's some other areas that we 9 can also cover. We may have a direct forward contract 10 with a customer. We may have some internal. Or we may 11 use the over-the-counter market. 12 I was trying to get some statistics on the 13 coverage, the use of the over-the-counter market, and I 14 didn't get what I needed in time, so I didn't include it. 15 I believe in Ms. Krema's testimony she indicated 16 that most -- so to give an example of an over-the-counter 17 hedge, so -- which is also known as a swap. So a bank may 18 be the intermediary on that swap. So I'll -- I'll use 19 energy. It is not part of milk, but it is no different. 20 We may hedge the natural gas input price at our 21 milk plants, and instead of going to a -- directly to a 22 futures market ourselves, we'll go to a swap partner. 23 That may be a bank. And I'm not sure what the bank does 24 to manage their risk, but they may likely go to the 25 futures market themselves, because they can bundle all 26 these other entities that are doing the same hedge and -- 27 and get better coverage. 28 So that same type of transaction happens in the 1363 1 dairy industry, and it could happen for Class III, cheese, 2 or nonfat dry milk, where somebody's going to an entity, 3 doing a swap, and that entity then is covering -- 4 generally covering their risk, and a lot of times it goes 5 back to the CME. 6 So even though there are these OTC transactions, I 7 don't -- I don't have a way of knowing how that builds 8 beyond what I'm already suggesting is coverage that 9 would -- that would be coverage. Right? It just may be 10 another means of covering that transaction. 11 You did make a specific question. We have -- from 12 time to time, we will have a swap with a dairy farmer to 13 cover their feed. But we don't do a lot of swaps with our 14 farmer-owners. We handle most of everything through a 15 forward contract. 16 Q. Okay. So following up on that then. From what I 17 gather then, you don't see the OTC market kind of as a 18 useful transition tool during this implementation time 19 possibly? 20 A. It is a useful tool. They would suffer from the 21 same challenges as we would going to the futures market. 22 Q. Okay. I do want to refer in the Exhibit 78 we 23 handed you, to page 4, Figure 3, which is at the bottom. 24 So last week -- or this was Monday. Already seems 25 like last week. As Ms. Krema explained when she testified 26 on Monday, this chart shows the average open interest 27 distribution from 2018 to 2022. And so when I look at 28 this chart, and I'll read, say, the second line of data, I 1364 1 read that as saying, on any given day, 75% of the open 2 interest contracts on the CME will close within six 3 months. 4 Would you say that's an accurate reading of that 5 line? 6 A. So I didn't produce the chart. 7 Q. Right. 8 A. It sounds accurate. 9 Q. Okay. 10 A. Okay. 11 Q. So if you just assume for -- 12 A. Yes. 13 Q. -- this discussion it's accurate, I guess what our 14 question is, and I know Proposal 1 is asking for a 15 12-month implementation, but what would the impact be if 16 USDA, if we -- the Secretary decided to implement 17 Proposal 1, and chose a different implementation schedule 18 than NMPF has offered, given that this open interest shows 19 that, you know, a vast majority of contracts are only 20 about six months out on any given day? 21 A. Yeah. We -- we advocate for the 12-month delay, 22 and without -- and I don't think it's appropriate for me 23 to comment on something less than that, especially not 24 knowing what that something less would be and not knowing 25 what the amount of time would be from the date you 26 announce the final decision until the implementation of 27 everything else. Because I'm assuming that's not going to 28 be within 30 days, but maybe it would be. So there's 1365 1 there's other variables I'd have to take into 2 consideration to be able to more appropriately reply to 3 that question. 4 Q. Okay. And along that line, when USDA issues a 5 final decision, at that point is when we go out for a 6 producer vote. And then assuming the vote is a yes vote, 7 we then issue a final rule, which gives the implementation 8 timeline. 9 You wouldn't consider the time period after the 10 final decision as proper notice to the industry of kind of 11 the changes USDA would be recommending as adopted? 12 A. We may. And I -- instead of -- we may. It's a 13 reasonable question. Again, I guess it would -- it 14 would -- would be important to know how many months that 15 would be. So I get what you are saying. 16 And as an example, so the record's more clear with 17 what I'm saying. So, for instance -- I'm making this 18 up -- that you said on -- make it easy for everybody -- 19 that you said that the -- that the final decision came out 20 on January 1, and you were going to implement it on 21 June -- July 1, and the implementation of the component 22 factors was the following January 1. That's about 23 12 months. We -- well, that would support I think the 24 12-month delay. 25 Q. Okay. 26 A. And if not, somebody else from the team will be up 27 here and correct me later. 28 Q. If they don't ask you a question when I'm 1366 1 finished. 2 A. But we support a 12-month delay in implementation. 3 Q. Okay. But the start of that 12 months could 4 possibly be the final decision point, not necessarily the 5 final rule point? 6 A. Yeah. 7 But on one other thing to consider, it has yet to 8 be determined the outcome of the Milk Innovation Group's 9 complaint and the National All-Jersey group complaint, and 10 there could be a delay in your implementation time because 11 of something. And it may not be that, it could be 12 something else. 13 Q. Uh-huh. 14 A. And so -- so that can really change that dynamic 15 of do we actually have that lead time and then shorter 16 implementation time after that. That's a hard thing to 17 know. Right? 18 Q. Yes. Okay. Thank you. 19 A. You're welcome. 20 Q. And in response from a question that Mr. English 21 asked you, you said that NMPF is only seeking an 22 implementation delay for Proposal 1. 23 Ad I'm curious why -- if you can explain why you 24 don't see any similar risk management issues if other 25 factors that are being considered in this proceeding are 26 also changed. 27 A. So I do. But when we weigh balance of everything, 28 for the other proposals, we weigh what the changes are, 1367 1 the needs for the industry to change, make those changes, 2 and then the risk management impacts, as we weigh those 3 balances at the National Milk Producers Federation, we 4 come to the conclusion that for the other proposals, they 5 need to be implemented immediately, because of the impact 6 to the -- to the entire dairy industry, weighing 7 everything. 8 And we're sort of in a -- we're sort of -- 9 National Milk Producers Federation is sort of in a unique 10 position when we look at what's best for the U.S. dairy 11 industry. Right? 12 The National Milk member cooperatives represent 13 about 75% of the milk produced in the United States. They 14 write milk checks to the farmer-owners of -- you know, the 15 National Milk Producers Federation member cooperatives 16 write the milk checks to their farmer-owners, and we have 17 got a governance structure. Every one of us, every 18 National Milk member cooperative has a governance 19 structure that allows for easy access and communication 20 from farmer-owners, up through the management, to the 21 boards of directors. It is an amazing, amazing process. 22 We also operate every kind of milk plant you can 23 think of. We are leaders in Class I processing. We're 24 leaders in Class II processing, III, and IV. And so we 25 are in this really unique position to be able to weigh all 26 these things together and how it impacts every aspect of 27 the dairy industry. 28 And when we do that, we come to the conclusion 1368 1 that the need for some of these adjustments outweigh the 2 potential negative impacts on some of the risk management 3 transactions, and that's why we are not in support of a 4 delay for changes for National Milk's other four 5 proposals. 6 Q. And so in that case, if any of those proposals 7 were recommended by the Secretary and eventually 8 implemented, in those instances, producers would lose that 9 basis of those -- 10 A. Well, now you ask. So from a dairy farmer 11 perspective, if they hedged in advance of the 12 Make Allowances increase which results in the class prices 13 going down, they have protected themselves against that 14 decline, and the impact on their component basis from 15 whatever that change would be is not very much. So if 16 they have actually hedged, they will -- they will get the 17 price they were expecting for the most part. And for a 18 lot of the other proposals that we have, ultimately 19 improves the PPD, so their basis improves. 20 Q. Okay. So it's the Proposal 1 scenario where their 21 basis would decline. 22 A. Correct. 23 Q. Okay. Thank you. 24 A. You're welcome. 25 Q. Let's see here. Proposal 1 seeks to have the 26 changes implemented in March. Curious if it makes any 27 difference, assuming -- let's just assume Proposal 1's 28 adopted, and under that assumption there's a 12-month 1369 1 delay, but maybe it doesn't work out to be March. 2 Is there a different consequence if the changes 3 happen in the spring versus the fall, for example? 4 A. No. Not to my knowledge. If there is, we'll 5 brief or -- 6 Q. You'll come correct it later. 7 A. Someone will correct me. We got lots of 8 opportunities to correct whatever I'm saying here. 9 Q. We will be here for a while. 10 So the time of year isn't -- doesn't necessarily 11 matter; it is just the 12-month piece that matters? 12 A. Yeah. So a little bit on how we -- how Peter 13 constructed that. He did a nice job. Mr. Vitaliano is 14 Peter. For the National Milk Producers Federation. We 15 knew that -- we think that by early March we would know 16 the component tests for the previous year, and so it -- we 17 didn't think it would take very long to make a computation 18 on what the averages were, and then we would want to 19 notice the industry as soon as we can. So that's how we 20 came up with that. But if there's a better construct for 21 you, we would be open to that. 22 Q. Okay. My apologies. I try to -- 23 A. You're quite all right. Take your time. 24 Q. -- go in logical order, and I didn't -- I missed 25 one technical question. This should be my last question. 26 On page 16, and that's where you start to get into 27 your discussions of the cross hedging. But you did have a 28 statement in here that says, "We are concerned that some 1370 1 of the liquidity providers will permanently exit the CME 2 Group futures and options market." 3 I'm wondering if you could just expand on that 4 statement, on that concern and its implications. 5 A. Yeah, I want to show -- I want to show a chart, so 6 bear with me. 7 Q. Uh-huh. 8 A. Okay. This is the chart I was looking for. 9 So in addition to the milk brokerage companies 10 that work directly with dairy farms -- this is on page 5 11 of my testimony, statement. 12 In addition to that -- and the efforts of DFA and 13 others to educate, one of the things that also has 14 occurred over time is the brokers have hired individuals 15 to trade in our futures markets to support more 16 transactions. And so, for instance, maybe we had a dairy 17 farmer that wanted to cover their milk 18 months out for 18 one month, but there was no buy side opportunity in the 19 general commercial business place. 20 So the brokers would hire people to potentially, 21 for that brokerage, take the other side of that position, 22 or maybe it would be what would be a full commission 23 merchant, which would be the entity that housed all the 24 trades for a group of brokers and worked directly with the 25 CME. 26 So they started investing more in those people 27 around the 2008, 2009, 2010, 2011, 2012. And so then -- 28 so they would be considered liquidity providers because 1371 1 they aren't necessarily hedging, they are supporting the 2 growth in transactions. 3 Also, what has happened is there is -- you would 4 potentially maybe have heard of hedge funds that transact 5 in corn markets or soybean markets. Well, there are 6 entities, I don't know who they are, entities that might 7 be like a hedge fund, that have decided to come in and do 8 transactions in some of our dairy markets, that also would 9 be considered -- they aren't necessarily hedging a 10 commercial transaction in the dairy industry. It may be 11 part of something that they are doing to protect the 12 business from inflation or whatever. And so they would be 13 considered liquidity providers. 14 Those individuals -- and I have -- those 15 individuals are -- are from time to time nervous because 16 there's participants like me who know more about what 17 might be happening in futures markets than maybe they do, 18 and that they then would be concerned that they may -- may 19 not -- they may not be in an equal footing in knowing what 20 may happen to markets, so they can be kind of skittish. 21 And so if all of a sudden there are these 22 significant changes to -- consistent changes, more 23 frequent changes, to the pricing formulas, they may find 24 that their knowledge of these is not strong enough to know 25 how to manage their transactions to protect themselves 26 from losing money, and they may take their investment 27 money out of the Dairy Complex and use it somewhere else 28 in another commodity or somewhere else instead of -- and 1372 1 that's what Anne was referring to, is sort of those 2 individuals that are sort of making their own -- risking 3 their own capital and providing more transactions, that 4 liquidity, but they will leave the markets. 5 And if they do, or they reduce their activity, 6 that probably would result in -- I don't know if it will 7 result in reduced open interest or slower growth, but it 8 would have a negative impact. 9 Q. Okay. Thank you. 10 A. You're welcome. 11 MS. TAYLOR: I think that's it for AMS. Thank 12 you. 13 THE COURT: Anyone else have a claim of re-cross? 14 Seeing none, redirect. 15 MS. HANCOCK: Thank you, Mr. Gallagher, for your 16 time today. 17 Your Honor, we would move to admit Exhibits 109 18 and 110 into evidence. 19 THE COURT: Any objections? 20 Exhibits 109 and 110 are admitted into the record. 21 (Thereafter, Exhibit Numbers 109 and 110 were 22 received into evidence.) 23 MS. HANCOCK: Thank you. 24 THE WITNESS: Thank you. 25 THE COURT: You are excused, Mr. Gallagher. Thank 26 you for being here. 27 Mr. English, you have arisen from your chair. 28 MR. ENGLISH: Chip English for the Milk Innovation 1373 1 Group. 2 We have been doing a really good job off the 3 record discussing among counsel witnesses, and we wish to 4 put as the next witness for the Milk Innovation Group 5 Ms. Sally Keefe. 6 THE COURT: All right. Sounds good. Thank you 7 for those efforts behind the scenes. It makes a 8 difference in the procedures you alluded to. Helps us be 9 efficient. 10 MR. ENGLISH: Before we mark them, I'm going to 11 hand out what has been previously submitted as Exhibit 12 MIG-5 and Exhibit MIG-5A, and I have a comment on 13 Exhibit 5A. But if I may approach, your Honor, I want to 14 give you a copy first. 15 THE COURT: Yes, please. 16 MR. ENGLISH: And the court reporter a copy. 17 We have 15 single-sided copies unstapled, because 18 they were stapled last night, of 5 and 5A for USDA. 19 I have copies for the audience of both 5 and 5A. 20 THE COURT: Let's go off the record. Come back at 21 11:25 a.m. 22 (Whereupon, a break was taken.) 23 THE COURT: It is 11:25. Let's reconvene. 24 Technical issues resolved. Our witness is ready 25 to talk to us. 26 Mr. English. 27 MR. ENGLISH: Thank you, your Honor. 28 THE COURT: I didn't swear in the witness. I'm 1374 1 sorry. 2 MR. ENGLISH: Oh, thank you. 3 THE COURT: Please raise your right hand. 4 SALLY KEEFE, 5 Being first duly sworn, was examined and 6 testified as follows: 7 THE COURT: Your witness, Mr. English. 8 MR. ENGLISH: Thank you, your Honor. 9 So let me start by saying that before and during 10 the break we handed out what was submitted as Exhibit 11 MIG-5, and I'll comment on some modifications to what was 12 submitted this morning, Exhibit MIG-5A. 13 But if we first have them marked. I believe we 14 are now up to Exhibit 110. I would like Exhibit MIG-5, 15 which is Ms. Keefe's testimony, marked as Exhibit 110, 16 your Honor. 17 THE COURT: Actually I had -- I had Gallagher's 18 last exhibit as 110. So this should be 111, your Honor. 19 MR. ENGLISH: Thank you, your Honor. 20 THE COURT: So marked. 21 (Thereafter, Exhibit Number 111 was marked 22 for identification.) 23 MR. ENGLISH: And then Exhibit MIG-5A as 24 Exhibit 112, your Honor. 25 THE COURT: Yes. Exhibit 112 is marked for 26 identification. This was MIG-5A. 27 (Thereafter, Exhibit Number 112 was marked 28 for identification.) 1375 1 MR. ENGLISH: And that is a 27-page -- 28-page 2 document. 3 (Court Reporter clarification.) 4 MR. ENGLISH: So I'm going to start by making -- 5 just noting some corrections because we did upload, I 6 think, last night or early this morning, what is now 7 marked as Exhibit 112, also known as Exhibit MIG-5A, and I 8 wanted to note that there are three changes. 9 First, to some of the colors, to clarify the 10 colors on page 3. The colors just didn't come out the way 11 we intended, so we have what is now in front of everybody, 12 and also we have resubmitted to USDA, colors have been 13 changed. 14 On page 15, there was a legend issue. So page 15 15 now has the correct legend referencing Order 51. 16 And then page 22, there was a title modification. 17 For page 52 -- or page 22. Page 22. 18 So those are the three changes, and they are now 19 online. In case somebody had downloaded and printed out 20 from this morning, those are the differences. But they 21 are all in the corrected versions that have been provided 22 to your Honor, the court reporter, to USDA, and the 23 audience. 24 The next administrative matter, your Honor, is 25 that this witness, of all the witnesses we have had so 26 far, does not have a business address. And it is my 27 understanding from a prior hearing what she has done 28 instead is she has provided her address confidentially to 1376 1 the court reporter. 2 THE COURT: Yes, exactly. Yes, again, the concern 3 is personal identifying information being released 4 unnecessarily to the public that would cause any harm. 5 So, yeah, I think that -- that was a suggestion, what I 6 suggested. Well done. 7 MR. ENGLISH: Thank you. All right. With that, 8 we will get started. 9 DIRECT EXAMINATION 10 BY MR. ENGLISH: 11 Q. Good morning, Ms. Keefe. Could you state your 12 full name and current professional work? 13 A. Good morning. My name is Sally Keefe, S-A-L-L-Y, 14 K-E-E-F-E. I'm the owner and principal of skFigures, a 15 company that provides consulting services to all verticals 16 of the dairy industry. 17 Q. On whose behalf are you appearing today? 18 A. I'm here today as a representative of the Milk 19 Innovation Group, MIG. 20 Q. What is your educational and professional 21 background? 22 A. I received my BA in economics from Middlebury 23 College and my MBA in finance and entrepreneurship from 24 the University of Colorado. Before entering the dairy 25 field, I worked as an environmental economics and policy 26 consultant. 27 Then in 1996, I joined Horizon Organic Dairy where 28 my work there focused on operations and milk procurement. 1377 1 In 2003, I joined Aurora Organic Dairy as supply 2 chain director as a key member of the team that launched 3 that new, innovative organic dairy company. I served in 4 that and other roles in supply chain management before I 5 became the vice president of legal and government affairs 6 for Aurora Organic Dairy in 2007. 7 I served as Aurora's VP of legal and government 8 affairs until 2012. At that time -- and during that time, 9 I directed the company's legal, regulatory, and 10 legislative activities in both the dairy and organic 11 certification policy areas. 12 In 2012, I left Aurora Organic Dairy and founded 13 skFigures, my own firm. I provide management consulting 14 services, as well as technical and policy expertise to 15 agricultural and food businesses. I have a particular 16 expertise in Federal Milk Marketing Orders and have 17 testified in prior FMMO proceedings. 18 Today my clients include farmers, agricultural 19 cooperatives, dairy processors, corporations, trade 20 associations, as well as investors. 21 Q. And what kind of work do you do? 22 A. As part of my work as a consultant, I routinely 23 work with data from both processors and Federal Milk 24 Market Order MA, Market Administrator, reports. I'm very 25 familiar with the handler reporting of receipts and 26 utilization to the MA's, the monthly handler producer 27 settlement fund obligation statements, select the 28 computation of obligation, as well as, like, producer 1378 1 payroll reporting, and the related FMMO reports and data. 2 As a routine part of all of this work for my 3 clients, and when I was an employee of handlers, I 4 regularly considered the components in milk, so both at 5 test and then also on a skim basis. 6 Q. Have you filed or assisted in filing of handler 7 Market Administrator reports? 8 A. Yes, I have been doing that sort of work since the 9 mid '90s at Horizon Organic Dairy. Horizon used 10 co-packers, and I was the person at Horizon that provided 11 the information to the co-packers where -- in order to do 12 the monthly MA reporting. 13 And then at Aurora Organic Dairy, I was the person 14 that did all of the MA reporting until I left the company. 15 And then since leaving Aurora, I have helped my clients 16 with their MA reporting. 17 Q. So you used a term that has not, I think, been 18 used so far in the record. And so for clarification, what 19 are co-packers? 20 A. Oh. Co-packers are when a dairy -- when a 21 business might outsource some of their manufacturing. So 22 other terms that you hear for this in business would be 23 like contract manufacturing, stuff like that. 24 So Horizon did not at that time, when I was an 25 employee at Horizon, didn't own any of its own 26 manufacturing facilities, and so all of its processing was 27 done in -- in plants that were owned by third parties. 28 Q. And for all those co-packers, you provided, 1379 1 basically, the MA reporting data for Horizon to them so 2 they could use it in their handler reports, correct? 3 A. Yes, that's correct. 4 Q. When you say you regularly considered the 5 components of milk both at test and on a skim milk basis, 6 what do you mean? 7 A. Well, as we have all heard here in this proceeding 8 over the last week or so, the information that the MAs 9 collect as far as the milk, it really matters what's in 10 the milk. And so what we're talking about there are the 11 butterfat tests, the protein tests, the other solids 12 tests, solids nonfat test. 13 And so from both, you know, FMMO reporting and 14 compliance perspective, I consider that sort of 15 information. And then, quite frankly, that information is 16 also very important for the routine operation of all sorts 17 of dairy processing operations. 18 And so in my supply chain roles earlier in my 19 career, you know, that was the sort of information that I 20 routinely considered to figure out, you know, which milk 21 do I want to have at what plant on what day, you know, 22 what is going to be the best milk supply for a particular 23 processing activity, for a particular production run, 24 things like that. 25 MR. ENGLISH: Your Honor, at this time I move that 26 Ms. Keefe be recognized for this proceeding as an expert 27 in Federal Order compliance, especially the financial 28 impacts of regulations on milk producers and processors. 1380 1 THE COURT: Any objections? 2 I so find. 3 BY MR. ENGLISH: 4 Q. Now, Ms. Keefe, later in your testimony, you are 5 going to discuss within what is Exhibit 112, a portion of 6 112, a survey that you conducted for this proceeding, 7 correct? 8 A. Yes. 9 Q. Have you conducted surveys like this one you'll 10 discuss later in the past? 11 A. Yes, I have, both for -- both for clients earlier 12 in my career when I was working for another consulting 13 firm, within my own business, and then also, you know, as 14 an employee, at both Horizon Organic Dairy and Aurora 15 Organic Dairy. 16 Q. When was the first study that you can recall? 17 A. So the first one that I recall is very early in my 18 career, so in the early '90s, a really fun study for the 19 American Water Works Association, where we were looking at 20 the feasibility of connecting small -- smaller water 21 treatment plants and whether that would provide more 22 efficiencies for their operations and assist with their 23 compliance with -- compliance and cost, really, for that 24 one. 25 Q. And before this proceeding, have you ever sort of 26 done a count of how many of these kinds of surveys you 27 have done? 28 A. No. I had never tried to count up anything like 1381 1 that until you asked me that question. 2 Q. So with that -- okay. I'll ask you the question. 3 So how many do you think, approximately, you have done in 4 your time since the 1990s, if you can -- if you can have a 5 round number? 6 A. So I would say a round number would be somewhere 7 you know, as far as like something as broad as what we're 8 talking about here, we would probably be talking in the 9 neighborhood of, like, one a year or so. So, you know, 10 20-ish. 11 Q. Is it fair to say these kinds of surveys are 12 conducted in order to provide valuable business insights 13 to your employer or its clients or your clients? 14 A. Oh, absolutely. You know, to provide 15 benchmarking. To, you know, help find efficiencies, you 16 know, for -- you know, for an organization that is doing a 17 lot of contract manufacturing. To compare different 18 vendors, different suppliers, things like that. There's a 19 lot of reasons why people do this sort of -- these sorts 20 of comparisons. 21 Q. Is there anything unusual in this survey that you 22 conducted for your testimony? 23 A. Well, first, I have to say, the most unusual thing 24 about this particular project was the really short and 25 tight timeframe that we had to put this data -- put this 26 dataset together and analyze it and maintain the 27 confidentiality of the data while we were doing that. You 28 know, honestly, the short timeframe made participation a 1382 1 challenge for some of the organizations. We started with 2 the members of the MIG group, then Albertsons, and Kroger 3 joined the work. And with the short timeframe that we're 4 all operating under here, you know, it was -- that was 5 definitely a heavy lift. 6 Q. Did you make any decisions to -- you know, of 7 which entities were selected as opposed to which data you 8 got for use in the survey? 9 A. What -- when you -- 10 Q. Did you exclude any entity because the results 11 were inconvenient? 12 A. No. I didn't exclude any entities because the 13 results were inconvenient. There is one member of MIG 14 whose data is not included in the survey because the terms 15 under which they procure their milk are -- are very 16 different than the rest of the survey group. 17 Fairlife, which is a product that we have heard a 18 fair bit about over the last week now, is a high protein, 19 high solids product. It's -- and they -- the milk that 20 they bring in starts off at much higher component levels, 21 and they have very different procurement terms for their 22 producer milk receipts than the other plants in the group. 23 Q. Did you receive any data, for instance, that you 24 couldn't use because it didn't have -- you know, didn't 25 meet other requirements? 26 A. Oh, absolutely. There was -- we had all the usual 27 data problems. We had the incomplete data. We had the 28 data that doesn't necessarily make sense, so you need to 1383 1 go to a secondary source, things like that. 2 And so for this data, the time period that we 3 looked at was January 2021 to December 2022. For most of 4 the plants in the survey group, that means that their MA 5 report data has gone through the Market Administrator 6 audit process, and so is frankly like very, very robust 7 and double-checked. 8 As you get later in the period, like in the back 9 half of 2022, those audits haven't been completed yet, and 10 so you will still find, like, a stray thing in there where 11 you will be like this -- this is out of line, this number 12 doesn't seem to be correct. And so then I would work with 13 the participant to look at a secondary data source, like 14 their internal receiving reports, things like that, so 15 that we made sure that we were using accurate information. 16 Q. So one other item that's unusual is primarily this 17 data is audited by the government, correct? 18 A. Yes. 19 Q. And did you use weighted average data? 20 A. Yes, I did. 21 Q. Did you use any estimated data? 22 A. I did not use any estimated data. And so if -- if 23 I wasn't able to get the full 24-month series for a plant, 24 then they were not included in the study. 25 Q. So what is MIG's position on Proposals 1 and 2? 26 A. So MIG is opposed to Proposals 1 and 2. My 27 testimony today is based on my analysis of both USDA's 28 data on the component tests and producer milk by order, 1384 1 which I believe is Exhibit 17, and the data that I 2 collected from the fluid milk plant survey on their 3 producer milk receipts. 4 Q. What did you do first? 5 A. Well, first, I considered the current skim milk 6 formula factors, along with the fluid milk standards of 7 identity, and compared those to Proposal 1. And for 8 simplicity here with my testimony, I'm just going to refer 9 to Proposal 1, but what I have to say applies equally to 10 Proposal 2. Like there's not -- it's -- think plural 11 proposals. 12 Q. So for this first part of your exercise, what did 13 you find? 14 A. Well, looking at pages 3 and 4 of Exhibit 111, my 15 written testimony, you will find a table where I compare 16 the four relevant standards for the milk component 17 factors. The current skim formula component factors are 18 found at 7 CFR, Section 1000.50. Then I review the skim 19 factors from Proposal 1, and next the federal and 20 California composition standards for fluid milk. The 21 federal fluid milk standard of identity is found at 22 21 CFR, Section 131.110. In my written statement I 23 provide the citation to the California composition 24 standard. 25 Q. So let me interrupt for a moment, please. 26 Yesterday, in helpful questions from USDA that 27 were directed to the HP Hood and Shehadey witnesses, there 28 were questions asked about, you know, Y-axis labeling 1385 1 issues, which I believe happened because you wanted the 2 document to be as large as possible, correct? 3 A. Yes. 4 Q. So why don't we see if we can address that issue 5 ahead of time. 6 So for pages 1 through 24, how would you know -- 7 how would someone know what the Y-axis is? 8 A. So in Exhibit 112, for pages 1 through 24, the 9 Y-axis is going to be the first part of the title. So 10 like on page 1, it would be the Y-axis is referring to 11 protein as a percent of skim milk. 12 Q. And that would be true for whatever that first 13 part is through page 24, correct? 14 A. Yep. All the way through page 24. 15 Q. And how about pages 35 through 27, what are -- 16 what is the Y-axis? 17 A. 25 through 27 is just a -- is a count. So it is 18 just the number of plants. And so the Y-axis there is 19 number of plants, and it runs from zero up to 32. 20 Q. So now let's continue to what you did first. You 21 were referring to the federal California fluid milk 22 composition standards? 23 A. Uh-huh. So -- so one thing to bear in mind is 24 that the federal and California fluid milk composition 25 standards are expressed for milk, not for skim in those 26 regulations. 27 And so for an apples-to-apples comparison with the 28 current and proposed FMMO skim milk price formula factors, 1386 1 I converted the composition standards to a skim basis. 2 That's just an algebra conversion. It is nothing -- no 3 econometrics, nothing like that. It is just algebra. So 4 it is just removing the butterfats that we can talk about 5 the milk on only the skim, the skim basis. 6 Q. And you are not going to read those tables into 7 the record, correct? 8 A. No. Those tables are in my written statement, and 9 I don't see any -- we need to take the time to read the 10 table into the record. 11 Q. That's Exhibit 111. 12 What did you do next? 13 A. So next I looked at USDA's data in Exhibit 17, 14 which was formally known as USDA Data Request Table 2. 15 And that data and information provided by USDA shows -- 16 shows the components by order, by month, from 2000 to the 17 present. I was most interested in the 24-month period of 18 January 2021 to December 2022 as that was also the study 19 period for the survey. 20 Q. So your results are found on charts -- on pages 1 21 through 4 of what is now Exhibit 112? 22 A. Uh-huh. 23 Q. "Yes"? Not uh-huh? 24 A. Yes. 25 Q. So if you would now turn on your screen, let's 26 start with the page 1. 27 A. Great. 28 So on -- so here, on page 1, we have the protein 1387 1 percent of skim by FMMO for January 2021 to December 2022. 2 These are the seven multiple component FMMOs. So we have 3 the Northeast, the Upper Midwest, Central, the Mideast, 4 California, the Pacific Northwest, and the Southwest here. 5 And those are the colored curves. 6 And then the yellow line at the bottom is the 7 current skim milk formula factor for protein, and the 8 orange line in the middle is the proposal skim milk 9 formula factor for protein. 10 Q. So what does this data show for you? 11 A. So to me, what this data shows is that there is 12 both a very distinct, as you would expect, seasonal 13 pattern to the component level of protein in the Federal 14 Order producer milk receipts. Generally speaking, the 15 protein levels are highest in the winter months and lowest 16 in the summer months. 17 It also shows that there is a fair bit of regional 18 variation. We have got Order 1, the Northeast is the 19 black line that is found at the bottom of the group. And 20 then we have got Orders 124 and 126, so the Pacific 21 Northwest and the Southwest, the purple and blue lines, 22 near the top -- at the top. 23 Q. So let's move forward now to page 2 and move 24 forward quickly through other solids. 25 A. Okay. So for other solids, as has been discussed 26 previously in the hearing, it doesn't have the same -- it 27 doesn't have the same seasonal pattern as what you would 28 find with the protein or the nonfat solids information. 1388 1 I do note that there are some differences between 2 the orders, but, you know, quite frankly, they are -- they 3 are grouped pretty close together, and it doesn't -- it 4 doesn't have a distinct seasonal pattern. 5 Q. And just for clarity, you used the same colors 6 throughout these. So in other words -- 7 A. Yeah. So -- 8 Q. -- the yellow line is the current standard, the 9 orange line is the proposal, and all the colors you 10 described previously are the same, you didn't change from 11 page to page? 12 A. Right. I didn't change from page to page. So, 13 like, the black is always the Northeast, and purple is 14 always the Pacific Northwest, and all the other colors 15 stay the same. 16 Q. So now let's turn to page 3, nonfat solids. 17 A. So, again, on the nonfat solids page, that is very 18 much following the same seasonal pattern as the protein, 19 with much higher levels in the winter months than the 20 summer months, and also showing some variation regionally 21 going from the Northeast, continuing across to the west, 22 getting out to the Pacific Northwest in purple. 23 Q. So go to page 4. What about butterfat? 24 A. So page 4 has the butterfat on it. And that is -- 25 this chart is the only one where the colors are a little 26 bit different than the others because I have got the 27 butterfat here for all 11 of the Federal Orders. And so 28 we have got Florida is the yellow line down near the 1389 1 bottom. And then we have also got orange, mustard, and 2 pink to bring in the Appalachian, the Southeast, and 3 Arizona. 4 And so much like the protein and the nonfat 5 solids, there is seasonal variation to the butterfat data. 6 And the main reason why the butterfat charts are included 7 here in the packet is, you know, a reminder and a 8 reference to be able to have a visualization of what's 9 going on between the milk when you are testing it and it's 10 milk, and then we have got the skim, and we're only 11 talking about part of the milk. And so the other part of 12 the milk is represented here by the butterfat. 13 Q. And there's no yellow straight line or orange 14 straight line for current or proposed because that's not 15 relevant here, correct? I mean, we have 3.5 is the -- is 16 what the standard is, but there's no -- there's no purpose 17 in the price that we're talking about for them, correct? 18 A. That's correct. So today, the formulas for the 19 reference prices are calculated at a 3.5% butterfat, but 20 the proposals don't seek to change that in any way. And 21 so this is -- you know, the butterfat tables in the packet 22 of charts is in- -- they are informational. 23 Q. Did you reach any conclusion about what the yellow 24 line for Order 6 tells you? 25 A. Well, for Order -- given the previous testimony 26 regarding the correlation between butterfat and solids 27 nonfat, and butterfat and protein, I would expect that the 28 levels of both protein and solids nonfat would be lower in 1390 1 Florida than, say, the Pacific Northwest because the 2 butterfat in Florida is, you know, so much lower than what 3 is found in other parts of the country. 4 Q. So what did you do next? 5 A. So I wanted to examine the actual milk receipts 6 for fluid plants and compare that to this data in -- that 7 we have just looked at on pages 1 through 4. And so, you 8 know, before -- so early in the process, after the hearing 9 notice came out, on behalf of MIG, and under the direction 10 and control of Davis Wright Tremaine, MIG's lawyers, I 11 conducted a survey of fluid milk plant receipts. The 12 survey data is from the actual MA report receipts and 13 utilization submissions made by those plants and the 14 handler obligation statements received, so the report that 15 goes in and the statement that comes back. 16 And then I received under confidentiality terms 17 the same sort of Market Administrator report information 18 and handler obligation statement information from two 19 non-MIG members, Albertsons and Kroger. I carefully input 20 and double-checked the data from all of the participants. 21 Q. And in fact, I think you testified earlier, if 22 something didn't make sense, you went back and asked about 23 it? 24 A. Absolutely. 25 Q. So can you tell me a little bit more about your 26 dataset? 27 A. So the survey dataset includes 36 fluid plants 28 from across the country. Of the 36 plants, 32 had skim 1391 1 component information available. The primary data source 2 was each plant's milk receipts, so their producer milk 3 receipts as reported to and audited by the Market 4 Administrator. As I mentioned earlier, a secondary data 5 source that I used in conjunction with the MA reports were 6 the plant's internal milk receiving component test 7 records. I analyzed the 24-month period of January 2021 8 to December 2022 and -- 9 Q. Exhibit 112. 10 A. Exhibit 112, page 28, lists the participants, the 11 FMMO they're regulated under, and there's a little table 12 there that shows the count of participants by FMMO as 13 well. 14 Q. What are your survey results? 15 A. After analyzing the data, I developed charts 16 graphing the component levels for four of the orders and a 17 summary chart for all the survey plants in MCP orders. 18 Those charts are found in Exhibit 112 on pages 5 through 19 23. 20 I just want to note, there aren't individual 21 charts for Orders 33 and 126 as there were not enough 22 participants from those FMMOs to present that information 23 and maintain confidentiality. The -- the summary chart 24 for the MCP orders as a whole does include the data from 25 Orders 133 and 126. 26 Q. You mean 33, not 133? Correct? 27 A. Yes. I mean Order 33. We did not just get a 28 twelfth order. 1392 1 Q. And just to be clear, when you dealt with 2 confidentiality, you -- you basically used the same rule 3 that USDA rule does, that there have to be three separate 4 owners, correct? 5 A. Yeah. We needed to have three separate owners 6 and, obviously, at least three plants. So there could be 7 a situation where there might be four plants in an order, 8 but if they only had two owners, then I wouldn't include 9 that information in a breakout. 10 You know, this dataset is unique in that it deals 11 with a group of competitors, and we need to be very 12 conscious of that information and those -- and those 13 relationships to maintain confidentiality of each 14 participant from one another. 15 Q. So what charts did you develop? 16 A. So I developed four charts each for Orders 1, 32, 17 51, 124, and the MCP orders as a group. Each order has a 18 chart that shows the surveyed plants' weighted average 19 protein, other solids, nonfat solids, and butterfat 20 component levels. These actual fluid plant producer milk 21 receipts are compared to that same data for the order as a 22 whole, and so that's the data from Exhibit 17, Data 23 Request Table 2, as well as the current skim formula 24 factor and the Proposal 1 skim milk formula factor. 25 In every chart I track the FMMO order-wide data, 26 so that would be the Exhibit 17 information in green and 27 the survey participants' data in blue. And then like the 28 first three charts on pages 1 through 3, the skim milk 1393 1 formula factors, the current is in yellow, and the 2 Proposal 1 factors are in orange. 3 You know, my goals were to compare how the actual 4 fluid plant receipts stack up next to the order-wide data, 5 and then I wanted to compare the fluid plant receipts to 6 the current and proposed skim milk formula factors. 7 Q. And before we review those pages, what did you do 8 next? 9 A. So I also looked at on a plant-by-plant basis, for 10 the 32 plants that we have the skim component information 11 for, whether they were above or below the proposal levels, 12 by month, for the 24-month period. For this, I looked -- 13 you know, like I said it is only the 32 plants that have 14 data available. I didn't do any sort of estimating for 15 the four plants that are in butterfat skim orders and 16 don't have and -- and simply didn't have comparable data 17 and information available. 18 Q. What conclusions did you reach? 19 A. Well, so my three key takeaways from the data were 20 that Class I plants routinely receive component levels 21 below the average level for the order, that Class I plants 22 routinely receive component levels below the Proposal 1 23 levels, and that there is remarkable seasonal and 24 geographic variation in the components as well. 25 Q. How does the data support your conclusions? 26 A. You know, the data to me, it affirms what, you 27 know, you would -- what you would infer, that the 28 incentives created by the current FMMO skim component 1394 1 formula factors are that, you know, it makes sense to send 2 the higher component milk to where it can be best used, 3 and the higher component milk is best used in the 4 manufacturing classes. And so I wasn't super surprised to 5 see that -- you know, it's not all the time, but a fair 6 bit of the time that the fluid plants in this survey are 7 receiving -- their producer milk receipts are below that 8 of the order as a whole. 9 Q. That's not a criticism, is it? It is a logical, 10 reasonable business decision, correct? 11 A. Oh, absolutely. I mean, those are -- that's where 12 that milk has more value in those uses than it does in a 13 fluid use. Like, you're going to be able to produce more 14 cheese, you are going to be able to dry more powder. 15 Like, that's where it should go. That's -- that's what we 16 want to have happen. 17 Q. So what does the actual fluid milk receipts data 18 tell you about this Proposal 1? 19 A. So to me, the actual fluid milk plant receipts 20 data show that USDA really must deny Proposal 1. The 21 fluid milk plant survey data, like the FMMO data, does not 22 support a national standard set at the Proposal 1 levels. 23 Exhibit 112, pages 25 to 27, clearly show that much of the 24 time most of the fluid milk plants surveyed are below the 25 skim component factors in Proposal 1. The components 26 received by Class I plant are not consistent. They vary 27 from FMMO to FMMO. They vary seasonally. And -- but I do 28 know that even in the wintertime, there are survey plants 1395 1 receiving milk with components below the proposals. 2 Q. When you say in the wintertime, because that's the 3 one time you would expect the components to come up? 4 A. Yeah. 5 Q. So let's go through some of the charts, not -- 6 we'll go through some of them as samples and then not 7 cover every single one. 8 What does page 5 show? 9 A. So page 5 shows protein for the Northeast. And so 10 this is where we have got the survey group is in blue; the 11 FMMO is in green; the current formula factor is the yellow 12 line at the bottom; the proposal formula factor is the 13 orange line at the top. 14 And so what we're looking at here is, you know, 15 that most of the time the order as a whole for the 16 Northeast, as well as the survey plants, are running along 17 in between the current level and the proposed level, and 18 also, that the plants in the survey group for the 19 Northeast closely track the order as a whole on their milk 20 receipts. 21 Q. They track the order as a whole, but if we look 22 back at page 1, Order 1 was the lowest throughout the 23 whole country, correct? 24 A. Yes. Order 1 is the lowest for the MCP orders. 25 We don't know what that would look like for the butterfat 26 skim orders. 27 Q. So what about the -- what -- what does this tell 28 you about seasonality? 1396 1 A. It tells me that the components are lower in the 2 summer than the winter and that, you know, going back to 3 high school math, you've got a nice cosign function there. 4 Q. So let's turn to page 6, and we'll talk about 5 other solids just once. So page 6 on other solids. 6 A. So here we have got the other solids in the 7 Northeast. This is pretty similar to what we were looking 8 at on page 2. You know, the survey, it -- there is not 9 the same seasonality with the other solids as we have got 10 going on with the protein, and the -- and it's very much 11 like above and below the proposal levels and -- but not on 12 a distinctive seasonal basis like the others. 13 Q. Let's turn to page 7. 14 A. So page 7 is nonfat solids for the Northeast. 15 Again, in the Northeast, the survey group plants are very 16 closely tracking the order as a whole, and I would note 17 that both are, for the most part, most of the time below 18 the level of the proposal. 19 Q. Let's turn to chart 8, which is butterfat, and 20 we're only going to talk about butterfat once. 21 A. Yeah. So, again, the butterfat pages, so here on 22 page 8, and then continuing on as the fourth one in each 23 group, the butterfat -- the butterfat charts are provided 24 for informational purposes. It shows -- butterfat shows 25 the same seasonality as protein and the nonfat solids, and 26 for the Northeast, the butterfat here is tracking really 27 close between the survey group and the order as a whole. 28 The survey group is maybe a little bit lower but not a 1397 1 lot. 2 Q. So we're now going to turn to Federal Order 32, 3 the Central order, which is page 9. Could you tell us 4 what's shown on page 9? 5 A. So page 9 is showing the -- the protein for the 6 Central order. The survey group is blue; the Central 7 order as a whole is in green. And so what we see here is 8 that for the survey group plants, they are actually 9 receiving for the -- for the -- they are receiving milk 10 with lower protein levels than the order as a whole. 11 Q. Every single month? 12 A. Every single month for this order, and for 13 protein. 14 Q. And there's a couple months within this where the 15 protein for seasonality just barely breaks the current 16 level, correct? 17 A. Yes. For the fluid plants. Now, the order as a 18 whole is not as close to the -- to that current level, but 19 the fluid plants in the Central order are very close to 20 that current level that are in the factors today. 21 Q. Let's turn to page 11, which is nonfat solids for 22 the Federal Order 32, please. And tell us what that 23 shows. 24 A. So this is pretty similar to the story that we saw 25 for -- for protein. There are -- with respect to the 26 nonfat solids, there's a little bit more of the time when 27 the survey plants are exceeding the Proposal 1 level, but 28 most of the time they are not. And the survey group 1398 1 plants are showing levels that are lower than that of the 2 order as a whole. 3 Q. So now we're going to turn to Federal Order 51, 4 which is chart 13. 5 A. So chart 13 is Order 51, so for California, sort 6 of the hybrid case here between the Northeast and the 7 Central order. So, you know, the beginning of the data is 8 a lot more like the Northeast where the survey group 9 plants are very, very close to the order as a whole, and 10 then in the later months, the protein levels for the 11 survey group plants are below that of the order. I also 12 note that in California the component levels, both for the 13 order as a whole and the survey group, are much higher 14 than they were in the Northeast. 15 Q. And that quite logically because -- partly because 16 of the composition standards in California -- 17 A. Yeah -- 18 Q. -- or you don't know? 19 A. To me -- to me, it's because California has been 20 using a component pricing system for a very long time, and 21 so, you know, producers in California have been focused on 22 components for a long time. 23 And then there's another big difference when you 24 are thinking about comparing between the orders. The 25 utilization of the milk in those orders is not the same. 26 And so, generally speaking, there are more manufacturing 27 uses for milk out in California than -- so more milk being 28 used in Classes III and IV, than what is going on out in 1399 1 the Northeast, and so that would also create incentives to 2 have more high component milk in the pool because, you 3 know, those -- that higher component milk is, you know, 4 valuable and needed for the manufacturing classes. 5 Q. So now let's turn to page 15. And first I'm going 6 to ask you to talk about what it shows, and then I have 7 one further question. 8 So nonfat solids in FMMO 51, California, what does 9 this show? 10 A. So here we have got nonfat solids for FMMO 51. 11 And this is, you know, very similar to what was going on 12 on their protein chart, where at the beginning of the 13 study period, the -- at the beginning of the study period, 14 the survey group plants and the FMMO 51 data are very much 15 aligned. And then you see the -- you see the survey group 16 plants drop below Order 51 in the later months, like 17 towards the back in 2022. 18 Q. And before you actually testified, I corrected the 19 fact that on page 15 the legend had said 32 and was 20 resubmitted earlier this morning is now 51. 21 A. Uh-huh. 22 Q. Did you confirm that, nonetheless, this was 23 Order 51 data as opposed to 32? 24 A. Yes. The data here is for Order 51. 25 Q. So it was literally just a typo in the legend, 26 correct? 27 A. I believe -- I believe so. 28 Q. However it happened. 1400 1 A. Yes. 2 Q. So if you turn to page 17, please. 3 A. So here on page 17 we have got the chart that 4 shows the protein for Order 124, the Pacific Northwest. 5 So it's got a similar pattern to California where the 6 survey group and Order 124 are close together at the 7 beginning of the study period and then the -- for the most 8 part, later in the time period, like most of 2022, aside 9 from that one strange month in the spring, we have got the 10 survey group plants dropping below the order as a whole. 11 Q. And so page 19, please. 12 A. So 19 are the solids nonfat for the Pacific 13 Northwest. Very similar in terms of the relationship 14 between the survey group and Order 124 over the course of 15 the study period. I would note that the overall level 16 here, so the nonfat solids for Order 124, is very much 17 higher than what we have -- than what we see in Order 1, 18 for example, so the first group of charts that we were 19 looking at. 20 Q. All right. So now let's turn to page 21, which I 21 believe -- why don't you tell me what that is. 22 A. Yeah. So page 21 shows the protein levels. This 23 is a weighted average across the participants. These are 24 for the plants that are regulated on Orders 1, 32, 33, 51, 25 124, and 126. So this includes all of the participants. 26 We did not have anybody in the survey that operates a 27 fluid plant in Order 30. 28 Q. So I note with this one, though, there is no green 1401 1 line for the Federal Order. 2 A. Yeah, that's correct. Like, for me to be able to 3 add the Federal Order green line here, there would have 4 been a lot of estimating and a lot of math under the 5 covers, because the -- the amount of -- the distribution 6 of the plants across in the survey, and so the -- and the 7 distribution of the volume of their milk in the survey 8 doesn't match the distribution of milk in those six 9 orders. And so, like, doing the weighted average, it -- 10 the amount of information that would be under the covers, 11 I did not think that would be a fair comparison. 12 Q. And moreover, involve estimation, and you did not 13 do any estimates? 14 A. I did not do any estimating. 15 Q. So turn to page 23, please. And please tell me 16 what that is. 17 A. And so this is the same chart as we were just 18 looking at on page 21, but this is for nonfat solids. So, 19 again, it is the plants on the six multiple component 20 orders. And what we see there is that for most of the 21 time the plants are below the Proposal 1 levels. They are 22 definitely receiving milk that's very much above the 23 current levels. But there's only, you know, a little bit 24 of time on the average, and so this is a weighted average 25 for all of them, only what we're seeing there is in the 26 winter months in 2021 and then again in the winter months 27 in 2022, that the plants are receiving nonfat solids above 28 the proposal level, but the rest of the year they are not. 1402 1 Q. So in the spirit of time, we have already briefly 2 discussed tables 25 through 27. But could you still, 3 looking just at one of them, help out because there's 4 increments like there were yesterday, correct? 5 A. Yes. Happy to help. And now wishing the font was 6 larger on the Y-axis. 7 The -- so what we have got here is a count. This 8 is for the 32 plants that we have the component data for, 9 and it is showing whether or not the plant is above or 10 below the Proposal 1 skim formula factor on their actual 11 producer milk receipts. And so, for example, for 12 January 2021, what we're seeing here are 19 plants of the 13 32 below the proposal protein percent and then 13 plants 14 above. 15 Q. And that would be similar for the following two 16 pages -- 17 A. Uh-huh. 18 Q. -- for other solids and nonfat solids, correct? 19 A. Yeah. And so, like, if you look at June of 2021, 20 June on the protein chart, that would be one plant up 21 there at the top where they are above the proposal level 22 for the skim. 23 Q. And in August of 2022, it was zero? 24 A. Yes. That's right. 25 Q. So how does your data connect up to the theories 26 underlying the Federal Milk Order system? 27 A. So the FMMO system is a minimum pricing system. 28 And I believe that the FMMO system needs to recognize that 1403 1 Class I plants are not receiving the components found in 2 Proposal 1 on an average basis, and moreover, because of 3 seasonal variation, there are months when they are 4 receiving components closer to the current level. And -- 5 Q. Go ahead. 6 A. And so I just want to emphasize again that our 7 system with the Federal Order system, it is a system of 8 regulated minimum prices. 9 Q. So how does this all impact Class I milk? 10 A. Well, so we have seen increases in components over 11 the last 20 years, and at the same time that that's been 12 happening, fluid milk is on a downward trajectory. It is 13 honestly, for someone like myself who has been focused on 14 the fluid side of our industry, it's a discouraging trend. 15 And it is -- it's a real problem for our industry, the 16 decline in Class I sales, on an absolute basis, on a per 17 capita basis. 18 And while we have seen the components going up 19 with -- we haven't really seen an increase in products 20 necessarily, you know, touting the components. And the 21 components that are out there that do make those claims, 22 so like a Fairlife or, you know, something that has some 23 added solids in it, those -- those processors undertake 24 significant investment in technologies like 25 ultra-filtration to concentrate the protein or they 26 undertake the expense of adding solids. And when you add 27 solids using NFDM or condensed skim, you are -- or if you 28 are using ultra-filtration processing technologies, you 1404 1 are adding significant costs, you are adding large costs 2 beyond the milk itself. 3 And to me, I think that if more could be done to 4 get consumers to recognize the value of the components in 5 fluid milk, I think that processors would have pivoted in 6 that direction. They would be doing it because all -- 7 fluid processors are trying so hard to increase sales. 8 So, you know, the component increases, you know, 9 claimed by NMPF and National All-Jersey, they don't change 10 the value proposition when it comes to fluid milk, and 11 raising Class I prices based on components would be 12 taking, you know, even more money from Class I, that it's 13 going to have a really hard time recovering in the 14 marketplace. 15 Q. Do you have a concluding comment? 16 A. Proposals 1 and 2 presume that the Class I fluid 17 market is similar to Classes III and IV when it comes to 18 component valuation, and this just isn't true. Yesterday, 19 we heard from Dr. Van Amburgh that the changing genetic -- 20 was that yesterday or was it Monday; God, I think it was 21 Monday -- that changing genetics also increases the volume 22 of milk that the cows produce. And that's honestly where 23 the value is for Class I. It is in the volume; it is in 24 the butterfat. And when it comes to the volume, Class I 25 pays for those additional hundredweight. And Class I 26 plants don't derive value once you move beyond the 27 butterfat, and they also don't receive annually, 28 consistently, on a seasonal basis, they just don't receive 1405 1 these components. And so Proposals 1 and 2 need to be 2 denied. 3 MR. ENGLISH: And with 24 seconds left in my one 4 hour, this concludes the direct testimony, and the witness 5 is available for cross- examination. And I note that it 6 is almost 12:30. 7 THE COURT: Yes. Unless someone has an objection, 8 I suggest we take lunch, come back at 1:30. 9 (Whereupon, a luncheon break was taken.) 10 ---o0o--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1406 1 WEDNESDAY, AUGUST 30, 2023 - - AFTERNOON SESSION 2 THE COURT: Okay. On the record. We're back from 3 lunch with the cross-examination of Witness -- Cathy? 4 THE WITNESS: Sally. 5 THE COURT: -- Sally Keefe. 6 I forget who we had up about to commence cross. 7 Mr. Miltner, I think. 8 MR. MILTNER: Thank you, your Honor. 9 Before I get started, so I don't have to 10 interrupt, I'm going to grab some exhibits from USDA, if I 11 could. 12 THE COURT: Yes, sir. 13 MR. MILTNER: It is 15, 17, 33, and 52. 14 CROSS-EXAMINATION 15 BY MR. MILTNER: 16 Q. Okay. For the record, my name is Ryan Miltner. I 17 represent Select Milk Producers. 18 Hi, Sally. 19 A. Hi, Ryan. 20 Q. How are you? 21 A. Good, thanks. I feel like I'm louder. 22 Q. How was your lunch? 23 A. Lunch was great. Thank you. 24 Q. Excellent? 25 My first question is about the plants that you 26 included in -- in your data here. And so I'm looking at 27 the very last page of your 5A, which is Exhibit 112, and 28 if you want to grab I think it's Exhibit 33, let me know 1407 1 when you have got papers situated. 2 A. Okay. I have got 33 here. 3 Got it. 4 Q. Okay. So looking at page 28 of your exhibit, you 5 have plants from Albertsons and from Kroger included 6 there, correct? 7 A. Yes. 8 Q. Okay. So I'm trying to match them up against 9 what's on Exhibit 33. I want to start with Albertsons. 10 So the one I'm looking at, there's one in Denver. That 11 one shows up on the list. 12 A. Uh-huh. 13 Q. There's one in Order 51, City of Commerce and San 14 Leandro. I see Safeway plants listed on Exhibit 33. 15 A. Which page of Exhibit 33, Ryan? 16 Q. I'm sorry. I'm looking at the very first page of 17 it. 18 A. Got you. 19 Q. And I don't see really any on here that are -- 20 they are listed alphabetically on there, right, not by 21 order? 22 A. Yeah. 23 Q. Okay. 24 A. Yeah, they are not -- my list here is sorted by 25 order, and then it's alpha with the plant and the city 26 name. And Exhibit 33 is, as I understand it, the list 27 that USDA has on its website of regulated pool 28 distributing plants, and there's usually like two tabs in 1408 1 the file. There's a pool distributing plant file -- 2 there's a distributing plant tab and then there's a supply 3 plant tab. And so I believe that 33 are the distributing 4 plants. 5 Q. Okay. And I think it is because at least I'm 6 pulling that from the top that it is distributing plants. 7 I think 34 was the supply plants. 8 A. Okay. 9 Q. Maybe I can just shorten this question. If you 10 look at page 2 of that? 11 A. Of thirty -- 12 Q. Of 33. 13 A. Yeah. 14 Q. Okay. About two-thirds of the way down there's a 15 bunch that are listed as Safeway stores? 16 A. Yep. 17 Q. Do you know if those are the Albertsons plants 18 that you reference? 19 A. Yeah. So on this page, page 2 of Exhibit 33, so 20 like where you see Safeway Belleview, Safeway City of 21 Commerce, Clackamas, Denver, San Leandro, and then Tempe, 22 those -- Safeway and Albertsons are one and the same now, 23 although the pool plant list doesn't necessarily -- hasn't 24 necessarily updated the names on here as ownership has 25 changed of the plants. 26 Q. Right. 27 A. And so like the very first plant on my list is 28 Albertsons in Hatfield, PA, and that's the same as the 1409 1 third row down on page 2 of Exhibit 33, Lucerne Dairy in 2 Hatfield, PA. 3 Q. That was going to be my next question, if that was 4 the plant. Thank you. 5 I don't see the Safeway plant in Tempe listed in 6 your survey. Is that one of those that had perhaps data 7 issues? 8 A. Yes. 9 Q. Okay. Similarly, as I look at Exhibit 33 -- and 10 refer to it, if you'd like, but you may not need to. 11 A. Okay. 12 Q. Kroger plants in Indianapolis and Santa Ana, 13 California, data issues? 14 A. Likewise. 15 Q. Okay. 16 A. And as far as that goes, Albertsons and Kroger 17 joined the -- joined the study late. And so the ability 18 of those participants to be able to cure any data problems 19 was more limited just because of the tight timeline. 20 Q. I appreciate Mr. English's question that there was 21 no data excluded for convenience sake. Not that I would 22 have expected that, but appreciate that statement from 23 him. 24 I'd like to look at now your written statements, 25 which I think we marked as Exhibit 111. And I'm looking 26 at page 3 and your table there. 27 A. Yep. 28 Q. Okay. And you have four different let's call them 1410 1 categories or different types of standards listed there, 2 correct? 3 A. Uh-huh. 4 Q. The one listed as current, that is the current -- 5 current standards for the Class I base price, correct? 6 A. Yes. So those would be the current skim formula 7 standards that are used in just the skim portion of the 8 Class I. 9 Q. And then so the second is the same -- the same 10 information, but as it would be under Proposals 1 and 2, 11 correct? 12 A. Yes. If Proposals 1 and 2 were adopted, these are 13 the levels -- the factors that have been proposed for 14 those. 15 Q. So those two lines represent standards that are 16 applicable to the pricing formulas under the Federal 17 Order? 18 A. Yes. Those are pricing standards, absolutely. 19 Q. Okay. And the third line, that's a federal 20 standard -- you have it listed as a federal standard. As 21 I understand that, that is the -- that is the standard -- 22 the standard of identity for milk under FDA regulations, 23 correct? 24 A. Yeah. So that's FDA's composition standard for 25 milk, not -- it's not a pricing standard. 26 Q. And the same -- the fourth is California's 27 composition standard for bottled milk, correct? 28 A. Right. And, again, that's a composition standard 1411 1 for the milk, it's not a pricing -- it is not part of the 2 pricing formulas, those two. 3 Q. So since they are not part of the pricing 4 formulas, help me understand the importance of those two 5 lines to your opinions and your analysis. 6 A. So for me, those two lines -- so if you take those 7 and you keep going into the milk, if you take the federal 8 standard and you keep converting, you are going to be at 9 8 grams of protein per serving on a nutrition fact for 10 fluid milk, and that's what our -- that's what consumers 11 of our products see. 12 And then what the California standards -- I'm not 13 a -- I'm not a California girl. I'm not quite as good at 14 going all the way to the grams per serving for California, 15 but I believe that that one is higher. I think it is 16 10-ish. And so, again, like that's -- that's what 17 consumers see and expect. 18 Q. Okay. Okay. Can we turn to page 6 of your 19 statement, please? 20 A. Sure. 21 Q. The very first paragraph under section E, you 22 write, "The fluid milk plant survey data, like the FMMO 23 data, does not support a national standard set at the 24 Proposal 1 levels. Exhibit MIG-5A, pages 25 to 27, 25 clearly show that much of the time the fluid milk plants 26 surveyed are below the skim milk component factor levels 27 in Proposal 1." 28 And I'm drawing -- well, when I look at your 1412 1 tables and your graphs -- 2 A. Uh-huh. 3 Q. -- from which you draw those conclusions, are 4 these the same -- are those the same type of charts that 5 were presented yesterday by, I forget if it was both Hood 6 and Shehadey, but the same data -- or same information you 7 are trying to relate? 8 A. Yes. So that's the same type of information that 9 both Hood and Shehadey -- the Hood and Shehadey witnesses 10 yesterday were working with. But in the case of Hood and 11 Shehadey, they were each talking about their plants only. 12 They weren't talking about the group as a whole. 13 Q. Can you grab Exhibit 112, your graphs and tables? 14 A. Yep. 15 Q. And at the same time, if you would grab 16 Exhibit 17. 17 A. Yep. 18 Q. Okay. So we're going to -- I want to look at the 19 first page of Exhibit 17 and page 5 of Exhibit 112. 20 A. Yep. 21 Q. The blue line on page 5, that is your surveyed -- 22 tell me if I have got this right -- your surveyed protein 23 among your group in Order 1 over that defined period. 24 A. Yes. And that would be protein as a percent of 25 skim. 26 Q. And there's a -- they overlap or they are very 27 close, but there's also a green line there. That's the 28 Federal Order data for protein and skim, correct? 1413 1 A. Yep. And that Federal Order data is also as 2 protein as a percent of skim. 3 Q. Okay. The yellow line represents the presumption 4 of protein and skim under current standards, correct, 5 current pricing standards? 6 A. Yes, under the current pricing standards. It is 7 not the composition standards we were talking about 8 earlier. 9 Q. Great. So I want to look at -- and the chart, 10 your table, your chart, covers January '21 through 11 December 22nd -- or December of 2022? 12 A. Yes. It's a 24-month period. It starts in 13 January of 2021 and goes through December of 2022. 14 Q. If you look at Exhibit 17, on the first page -- 15 and have you seen 17 before? You have looked at it, 16 right? 17 A. I have indeed seen Exhibit 17 before. 18 Q. I figured that was a safe assumption. 19 A. I don't actually think I have ever seen Exhibit 17 20 on paper before, to be fair. 21 Q. Now we have. 22 If I look at the protein test column, beginning 23 right at the top, that's Federal Order 1, beginning in 24 January of 2000. 25 A. Uh-huh. 26 Q. If I look at that column for protein test, and I 27 cover 24 months, ending halfway down the page of 28 December 2001. If you were to plot that protein test on 1414 1 your page 5, that line would be entirely under that 3.1, 2 wouldn't it? 3 A. So before you would be able to plot the column for 4 the protein test here, because this is showing 3% or -- 5 you know, January of 2000 is 2.99% in milk. And so just 6 like the formula factors, the charts are all as a percent 7 of skim, and so you would need to take the protein test 8 and put it in terms of skim. 9 Q. So it would be roughly 3% higher? 10 A. Roughly. 11 Q. And in which case it pretty well would still be 12 below that yellow line all across the board, right? 13 A. You are asking me to speculate. But, roughly, 14 yes. 15 Q. Yeah. 16 A. Yeah. 17 Q. And if you flip to page 9 of the MIG exhibit, 18 which is Exhibit 112, and page 26 of Exhibit 17. 19 A. Got you. 20 Q. Okay. So we're now looking at the Central order 21 on your graph, and we have turned to the Central order 22 information on Exhibit 17. 23 A. Uh-huh. 24 Q. For that same period, January 2000 through 25 December of 2001, those protein tests, somewhat higher 26 than Order 1 but still would fall in large part below 27 that -- that yellow line on your -- your graph, right? 28 A. Yeah. They would be closer, though, once you did 1415 1 the -- once you converted them to a skim basis because, 2 like, January of 2000 for the Central order was 3.08% milk 3 for protein, and so once you did the bump to skim, you 4 would be -- I think that one would -- 5 Q. Be really close, if not just over it? 6 A. I think it would come out just over it. 7 Q. Okay. But then July of 2000 where it is 2.93, 8 you'd probably land somewhere around 3.05, right? 9 A. -- 'ish, yes. 10 Q. Back in your written statement, the part we looked 11 at says -- where you say, "The fluid milk plant survey 12 data does not support a national standard set at 13 Proposal 1 levels." 14 Is that -- that's your expert opinion? 15 A. That's my opinion, yes, my -- and I believe Chip 16 qualified me as an expert, so I get to say that's my 17 expert opinion. 18 Q. He did, and I did not object to that. 19 Do you think the data in 2000 to 2001 would have 20 supported base prices at those levels given the protein 21 numbers we just looked at? 22 A. I think they would probably be pretty close. I 23 haven't gone back and looked at them all on a skim basis 24 for those. It is a -- but it seems like they would 25 definitely be closer than -- 26 Q. All right. On the very last page of your written 27 statement, right before your conclusion, you write, "But 28 the component increases claimed by NMPF and NAJ don't 1416 1 change the value of the fluid milk, and raising Class I 2 prices based on components would be taking more money from 3 Class I that it cannot recover in the market." 4 Is that your expert opinion? 5 A. That's my opinion, yes. 6 Q. Okay. On what do you base your opinion that the 7 Class I handlers cannot recover that increased price from 8 the market? 9 A. My opinion is based on -- similar to the testimony 10 that we heard from Jed Ellis with Shehadey yesterday about 11 what happens when you -- when as a fluid processor you 12 have got higher component milk that you have made for the 13 California market at, like -- and that meets the 14 California composition standard, and then you are trying 15 to market that to a non-California customer. The price 16 pushback that you get is significant and real. The 17 customers are -- within California, they recognize that 18 that is their composition standard and that they have to 19 pay for it. 20 When you go outside and you are -- when you are 21 moving outside of California and you are trying to sell 22 that same product -- like, it could be a situation where 23 you are like, look, like, I want to do all -- I want to do 24 all of my production on Tuesdays to California standard so 25 that I have efficient production, less shrink, you know, 26 stuff like that, in the plant. 27 And then you try to, like -- and then you're 28 sitting there, and you are trying to weigh it, you are, 1417 1 like, okay, but if I do everything to California standard, 2 then I need to be able to sell everything I made that day. 3 Okay? And if I can't sell it all within the state of 4 California, where am I going to sell it? And then you 5 are, like, okay, well, let's get some sales out, let's try 6 and get more price. 7 And the pushback is real and phenomenal. It 8 doesn't happen. And you wind up eating those extra costs, 9 and you -- and you are -- you make it -- you have to -- 10 you have to make a decision, and you have to say, okay, 11 that makes sense from -- perhaps from a plant efficiency 12 perspective or whatever to -- to do that that way. 13 Q. And that's a real situation. But as you describe 14 it, isn't that a function of California's standard and not 15 the Federal Orders standard? 16 A. Well, if Proposals 1 and 2 were in place, and the 17 Class I processors are paying more for the skim 18 components, you know, they -- I don't think it's fair to 19 expect someone to pay for something that they are not 20 actually getting and actually using and putting in the 21 milk. 22 And so, you know, what the formula factors imply, 23 the FMMO price formula factors imply, is that if 24 Proposal 1 is adopted, Class I as a group is going to need 25 to go out to its customers and is going to need to say, 26 there is more -- there's more here, and we need you to pay 27 for that. And -- and interestingly, like, because there 28 is today more there in California, as an industry, we have 1418 1 an example for what happens when a fluid milk processor 2 tries to -- tries to do that with customers in the real 3 world today. 4 Q. Other than organic processors, when they buy raw 5 milk for Class I use, they buy it based off of the 6 announced Class I price, correct? 7 A. Typically, yes. 8 Q. And -- but the organic price is typically a fixed 9 price? 10 A. The organic prices are typically fixed, 11 non-classified and, frankly, much, much higher than the 12 prices that we have been talking about here. 13 Q. When a Class I processor sells its products, are 14 they pricing that off of some Class I underlying price? 15 A. They are using the Class I prices and then looking 16 at their processing, their manufacturing cost, their 17 packaging costs, like, they are putting it all together 18 and taking it out to the market. 19 Q. In the past we have had some discussions about 20 some of those costs, but things like resin caps, labels, 21 transportation, balancing, all of those things, correct? 22 A. Even glue. 23 Q. But the largest proportion of the cost from the 24 plant to its customer is the milk, correct? 25 A. Absolutely. The milk dwarfs all of it. I mean, 26 we can talk for a really long time about caps and resin 27 and the glue for a corrugated box and pallets and all the 28 rest of it. We can talk about dairy crates and cases. At 1419 1 the end of the day, the most important thing is the milk 2 itself. 3 Q. And not in every case, but typically, that milk 4 price fluctuates month to month based on the announced 5 Class I price? 6 A. Typically, yes. 7 Q. Were you here for Peter Vitaliano's testimony back 8 on day one? 9 A. I believe I was, but it feels like it was more 10 than a week ago. 11 Q. Technically it was -- no, it's just a week, isn't 12 it? 13 I don't want to pull that out, but I think as I 14 looked at it he thought Proposal 1 would add $0.80 to 15 Class III and $0.41 to Class IV. 16 For our discussion will you accept that? 17 A. That -- it rings a bell, Ryan. 18 Q. Okay. So if we keep a Class I mover based on the 19 average of III and IV, can we suggest that Proposal 1 20 would add about $0.60 to the Class I price? 21 A. Yes. Definitely. 22 Q. Can you grab -- go ahead. 23 A. Which am I supposed to grab? 24 Q. Well, I think you were going to say something and 25 I cut you off. 26 A. It's fine. 27 Q. 15. Is this one seared into your head like 28 Exhibit 17 is or -- 1420 1 A. Actually, it is not. 2 Q. Okay. 3 A. No. 4 Q. Would you turn to the last page of it, please? 5 And do you see that what's -- it is the third column where 6 it says base Class I price? 7 A. Yep. 8 Q. Okay. Do you need a second or two to look at that 9 before I ask you a couple of questions? 10 A. That would be nice. Thank you. 11 Q. Yep. 12 Okay. If you look at the year of 2021, if you 13 look at the base price in January and the base price in 14 December, there's a huge fluctuation there, correct? 15 A. Absolutely. 16 Q. About $4, $4.03, correct? 17 A. Uh-huh. 18 Q. So over the course of that calendar year, a 19 Class I handler selling to its customers, based on the 20 regulated price alone, is going to pass through $4 of cost 21 changes over the course of the year, correct? 22 A. For most of the them, yes. I mean, as we have 23 heard from previous witnesses, there is different -- folks 24 have different time frames for those sorts of pricing 25 adjustments, and so not everyone is changing monthly. And 26 so -- but over the course of that year, if you're -- if 27 you are not figuring how to pass along that $4 change, it 28 is going to be a problem for your business. 1421 1 Q. And this type of fluctuation is just a function of 2 our Federal Order system, correct? 3 A. It is -- absolutely. It is a function of the way 4 that we price Class I off of III and IV. 5 Q. If you look at that same column, the change from 6 May to June, one month, is $1.19, correct? 7 A. Yeah. So for May of -- 8 Q. 2021? 9 A. Okay. Yeah, those two are $1.19. 10 Q. So that fluctuation as a result of the order 11 system and our -- the way we select a mover and other 12 factors can cause the Class I price to increase by $1.19 13 or more in one month? 14 A. Uh-huh. 15 Q. By the way, all of our -- are all of the handlers 16 in MIG federally regulated handlers or fully or partially 17 regulated Class I handlers? 18 A. Yes, they are all going to be either fully or 19 partially regulated. They may have -- there are some 20 members of the group that have plants in unregulated areas 21 completely, like -- 22 Q. Like Hood? 23 A. All of Hood's plants are fully regulated. 24 Q. Oh, I'm sorry. But their main plant was in an 25 unregulated area. 26 A. Oh, yeah. It is located in Maine, but fully 27 regulated on Order 1. And that's a great example of I 28 think what you are trying to talk about, maybe. 1422 1 Q. Maybe. That's good. 2 If these handlers can pass through in one month an 3 increase of $1.19, why couldn't they pass through $0.60 if 4 they are all subject to the same regulated minimum price? 5 A. They may be able to. It will increase the price, 6 and overall, when you increase the prices, that is going 7 to have an impact on consumers. While milk is relatively 8 inelastic, it is not perfectly inelastic, and so volume 9 decreases. 10 And I would also point out that this volatility of 11 the fluid milk prices that you were showing me on 12 Exhibit 15, that is something that is a real headwind for 13 Class I. Those prices changing all the time for the 14 consumers in the store is not a great thing. When you are 15 competing against other beverage products, other sort of 16 beverages, these -- that have a much more stable price, 17 and consumers know what to expect every single time, it is 18 in my opinion an easier proposition for the consumer to 19 understand what they are getting and why they are getting 20 it and the chart -- and the price they are being charged. 21 Milk is unfortunately -- fluid milk, our structure 22 that we have in the industry leads to some real 23 consumer -- confusion may be a bit too strong of a word, 24 but it is a headwind. 25 Q. Are you aware of USDA-collected data on the retail 26 prices of either conventional or organic milk? 27 A. I'm aware of that data, but I'm not super familiar 28 with it. 1423 1 Q. You -- have you done any analysis to determine a 2 correlation between the regulated price and the retail 3 price of milk? 4 A. I haven't done any analyses on -- on those, no. 5 Q. Would you -- would you be surprised if, in fact, 6 the correlation between the regulated price and the shelf 7 price is not very strong? 8 A. It would not surprise me. 9 Q. Have you done any studies or have your members 10 shared any information about the frequency of price 11 changes of their products at the retail level? 12 A. So I have -- so, yes, our members have shared 13 information with me, as well as, you know, as recently as 14 yesterday in the hearing regarding the -- their price 15 change intervals. And it varies. Some are as much as 16 monthly; some are, you know, less than annually. And so 17 it's -- it runs the gamut. 18 Q. Is that a price change from your members to their 19 retailers? 20 A. That would typically be a price change from our 21 member to their retail customer. For the most part, the 22 member -- so I'm going to need to make a little bit of a 23 distinction here. So the survey included Albertsons and 24 Kroger who are clearly also retailers, okay? So the 25 comments that I'm about to make do not in any way refer to 26 Albertsons and Kroger. Albertsons and Kroger participated 27 in the survey. They are not members of the Milk 28 Innovation Group. The members of our group are 1424 1 processors, and so they sell to a retailer. They do not 2 control the price at the shelf. That is controlled by the 3 retailer. 4 Q. Do your members keep track at all of what the 5 retailer markets their products for and the frequency of 6 the shelf price change? 7 A. Absolutely. 8 Q. Do you -- do you have that data for us? 9 A. I do not have that data for you. Those could be 10 some -- you -- I believe that members of our group will be 11 testifying over the course of the hearing. If that's 12 something of interest, I would suggest asking them. 13 Q. All right. I want to change gears a little bit 14 and talk about organic. 15 You stated that the raw milk price to an organic 16 handler is typically a fixed dollar price, correct? 17 A. Typically, yes. 18 Q. And in the rare instance, if it's ever occurred, 19 that the Class I price rises above that, there would be an 20 additional cost, correct? 21 A. In the rare instance when the Class I price is 22 above the organic, like, fixed contract price, the handler 23 would have to pay the regulated minimum price. 24 Q. And I'm trying to recall the transactions that I'm 25 aware of, and I can't think of that ever occurring. 26 With Horizon or Aurora, has that ever occurred? 27 A. It never occurred during my time at Aurora. 28 It did actually occur during my time at Horizon. 1425 1 There were a few times when the Class I prices were high 2 enough, and the organic prices, candidly, were lower then, 3 and the Class I exceeded the -- the organic. 4 Q. And if the words weren't used by you, I'll use 5 them and see if you agree. An extraordinarily rare 6 occurrence for that to happen, right? 7 A. And that happened an extremely long time ago. 8 That would have been back in the '90s. 9 Q. So if Proposal 1 is adopted and the Class I prices 10 are increased, it really wouldn't affect the cost of milk 11 to an organic handler, would it? 12 A. It would not impact the cost of their milk itself. 13 It would impact the way that their obligation to the pool 14 is determined. 15 Q. How it's determined or the amount that's 16 calculated? 17 A. The amount that's calculated, when the formula 18 factors go through to determine the pool calculation. 19 MR. MILTNER: I don't think I have anything else. 20 Thank you very much. 21 THE WITNESS: You're welcome, Ryan. 22 Oh, wait, I have got lots of things that don't 23 belong to me. 24 MR. MILTNER: Do we want to leave them with the 25 witness in case anybody else wants to ask about them, or 26 would you like me to collect them now? 27 THE COURT: Let's leave them, but let's remember. 28 MR. MILTNER: Thank you. 1426 1 THE COURT: Ms. Hancock. 2 MS. HANCOCK: Thank you, your Honor. 3 CROSS-EXAMINATION 4 BY MS. HANCOCK: 5 Q. Good afternoon, Ms. Keefe. 6 A. Good afternoon. 7 Q. So I want to start off on the data that you 8 collected. You said that you did this through a survey of 9 MIG members; is that right? 10 A. MIG members plus Albertsons and Kroger. 11 Q. Okay. Did you ask anyone else other than 12 Albertsons and Kroger beyond the MIG membership to 13 participate in the survey? 14 A. We also -- we asked Saputo to participate as well. 15 Unfortunately, with the tight timeline, they were unable 16 to participate. 17 Q. Okay. When did you do the survey? 18 A. Over the course of the last month. 19 Q. And how much time would you need to do a complete 20 comprehensive survey to make sure that you got a full 21 response? 22 A. Well, the survey is what it is. I mean, this 23 is -- this is the complete comprehensive response for 24 the -- for this hearing. I mean, it is what it is. Like, 25 it is complete. 26 Q. Okay. So you feel like the information that you 27 have is complete enough? 28 A. Like a lot of projects, if -- if there were more 1427 1 time, like the plants that -- that Ryan was asking about, 2 like he mentioned like a couple of Kroger plants, he's 3 like, I don't -- you know, I see them here in the list of 4 pool plants, but they are not on your survey list. And, 5 you know, with more time, perhaps, more of the plants 6 could have had a complete 24 months, so that there 7 wouldn't be like -- like, the Kroger facility in 8 Indianapolis, for example, I didn't have a complete 9 24-month period, so they weren't included. 10 Q. Okay. Do you know how many Kroger plants there 11 are? 12 A. I don't know how many Kroger plants there are. 13 Q. In Mr. Brown's testimony I believe that he said 14 there were 14 Kroger plants. 15 Were you here for his testimony? 16 A. I wasn't here for his testimony. 14 sounds -- it 17 could be right, it could be wrong. I don't know, and I 18 don't want to speculate. 19 Q. Okay. And you know Mr. Brown worked for Kroger? 20 A. I do know that he worked for Kroger. 21 Q. Okay. No reason to disagree with him on that 22 point? 23 A. Well, I think that he may be including some of 24 their plants that aren't necessarily Class I plants. He 25 may be including some of their Class II facilities, some 26 of their other manufacturing facilities in that 14, and 27 that's why I'm a little reluctant to just go with 14. 28 Q. Okay. And if I'm doing the math on your 1428 1 Exhibit 112, it looks like you have seven of Kroger's 2 plants listed there? 3 A. Is that page 28? 4 Q. The last page, 28 of 28 of Exhibit 112. 5 A. Uh-huh. 6 Q. Okay. So if it was 14, that would be about half 7 of the plants surveyed? 8 A. Yeah. One -- because we were interested 9 particularly in people's component data, Kroger 10 operates -- so, like, over the last month I have seen a 11 lot of this stuff, but one of the things I remember, for 12 example, with Kroger was that one of their plants in -- 13 one of their plants in like the Southeastern order, for 14 example, we didn't have like the complete set, for 15 example. So stuff like that. 16 Q. Okay. So like Atlanta, you don't have the numbers 17 from Atlanta? 18 A. Yes. You have found. We have outed. 19 Q. What about -- and then -- I can't remember which 20 one Mr. Miltner asked you about, but Ohio and Virginia 21 Kroger plants, did you include that data? 22 A. Does Kroger have a plant in Virginia? 23 Q. Do you know if they do? 24 A. I don't know if Kroger has a plant in Virginia. I 25 do know that Kroger has a plant in Ohio and a plant in 26 Indiana, and they were not -- those two plants were not 27 able to comply -- provide complete data. 28 Q. Okay. What about for the other handlers with 1429 1 MI- -- that are members of MIG, were you able to get the 2 data for all of their plants? 3 A. Yes, all of their plants. The MIG members, 4 because we -- the group has been working together for 5 quite a few months, they were a little bit more prepared 6 for my data request than Albertsons and Kroger were. 7 Q. Okay. So you believe you were able to get all of 8 data for all of the plants for all of the MIG members, 9 with the exception of Fairlife that you said you culled 10 out? 11 A. Yes. 12 And then there is one other MIG member plant. 13 Danone has a plant in Salt Lake City, Utah, and that plant 14 is located in an unregulated area, and then is partially 15 regulated, and then does all of its tracking on a 16 butterfat and skim basis. So they are not included. 17 Q. And that's just essentially because you didn't 18 believe that it would compare apples to apples? 19 A. Yeah. 20 Q. Okay. 21 A. They -- just not like the others. 22 Q. Okay. And I want to talk for a second about 23 Fairlife. You said that you culled out Fairlife because 24 they have a higher protein requirement for the -- their 25 milk; is that right? 26 A. Yes. The -- Fairlife's requirements for their 27 producer milk, the milk that they're -- the milk that they 28 are procuring from their suppliers is a very different 1430 1 situation than this group of plants right here. 2 Q. Would you consider Fairlife to be something more 3 kind of innovative and a modern way to sell milk to 4 consumers? 5 A. Fairlife's products are definitely an innovative 6 product. It is -- 7 Q. In fact, it is a patented product, isn't it? 8 A. Indeed it is. 9 Q. Okay. And you understand that with that comes the 10 opportunity for a higher premium price that can be charged 11 to consumers? 12 A. Indeed. 13 Q. And that's based on the higher protein values that 14 Fairlife requires in its raw milk that it takes in that it 15 ultimately is able to sell to customers? 16 A. My understanding of the process there would go far 17 beyond just the raw milk that they are receiving. A great 18 deal of the value add there would be related to their 19 proprietary ultra-filtration process that concentrates 20 those -- those nonfat solids. 21 Q. Did you attempt at all to run just Fairlife's 22 numbers, even separately, just to use as a comparison? 23 A. Fairlife's separate data is confidential and 24 proprietary, and I am not going to discuss Fairlife's 25 confidential information. 26 Q. Okay. Understood. 27 If you can take a look at Exhibit 112. 28 If we just look at the first page there, 1431 1 Mr. Miltner had asked you -- I think he was using 2 Exhibit -- I think it was 17, where you said you were 3 familiar with the data, because you have been using -- is 4 that the source of the data that you used to do your 5 conversion to skim? 6 A. Yes. So I used -- yes. Charts 1 through 4 are -- 7 1 through 3 are from Exhibit 17, but on a skim basis, and 8 then chart 4 would be the butterfat, just from Exhibit 17. 9 Q. Okay. And if we look at just the first three 10 charts, there's not any occurrence in which any of the -- 11 any of the data points that you graphed between 2021 and 12 2022, that they even touch the current standard; is that 13 correct? 14 A. For -- yes. This data is for the orders as a 15 whole, and none of -- they are all above the current skim 16 formula factors. 17 Q. Okay. So for purposes of the graph, the current 18 standards are functionally irrelevant, aren't they? 19 A. When you are looking at it for the order as a 20 whole, I think it's important that -- the reason why I 21 included the current formula factors and the proposed 22 formula factors is so that we could understand how the 23 real producer milk receipts compares to the formula 24 factors. So, you know, I was trying to compare actual 25 producer milk receipts to the current and proposed formula 26 factors. 27 Q. Okay. And to the extent that that current 28 standard is even tracked on there, these -- this graphing 1432 1 shows that it is irrelevant for purposes of measuring 2 where those components are today; is that right? It never 3 even dips below it. 4 A. So if -- if you look at the order by order 5 information, for the survey plants, you will see that it's 6 much closer. And so, for example, I think, if we look at 7 page 9, which is the protein for the Central order, you 8 see that the survey group is, you know, just above the 9 current level in the summer months. 10 Q. Okay. It gets -- it gets closer to it, but still 11 doesn't even cross over -- 12 A. It doesn't dip below here for -- for the survey 13 group from Order 32 as a group. 14 Q. And if you look -- look at the overall blend, or 15 we can stay even on page 9, it looks like with time, and 16 what we were just looking at on Exhibit 17, with time, 17 even with these seasonal changes that occur that you 18 have -- that you have graphed on here, with time, we can 19 see that the overall trend is that those components are 20 continuing to move upward; is that right? 21 A. Yes, absolutely. Over the last 20 years the 22 components, both butterfat as well as the skim components, 23 have increased in the milk. 24 Q. And we know that, as you have noted here, that 25 there is a seasonal effect on this. But would you agree 26 that overall it's somewhat of a ratcheted system in that 27 with the improvement of genetics and the dietary or 28 nutritional feeding methods, that those components 1433 1 continue to retain those trends of moving upward over 2 time? 3 A. Yes. The components are moving up. 4 Q. Okay. And they are keeping that trend line going 5 in that direction; is that right? 6 A. Yes. And I believe that Dr. Van Amburgh suggested 7 that we should expect that they are going to continue to 8 increase. 9 Q. And is that consistent with -- with the data that 10 you have been tracking and monitoring as well? 11 A. You know, the data that I have been tracking 12 and -- the data that I have looked most closely with is 13 just this 24-month period. And so, you know, the sort of 14 thing that you are -- that we're talking about right now 15 is over a much longer period of time, so -- 16 Q. Well, but you would agree that even on the 17 24-month period that you are tracking, we can see that 18 that trend line continues to move up, even looking at that 19 two-year period? 20 A. I wouldn't agree that -- in the two-year period, 21 like what we can talk about is the seasonal change. But 22 the two years, like, I wouldn't want to, like, run a 23 regression through this and be, like, yeah, it tips up. 24 I -- that's -- that -- that feels like a short period of 25 time to me to be making a statement like that. 26 Q. Okay. But, for example, if we just looked at the 27 first page of Exhibit 112, it looks like this, at least 28 for the protein percentage by skim for the Federal Milk 1434 1 Marketing Orders for this two-year period, you can see 2 that if you compare the two time periods to similar 3 months, from 2021 to 2022, that those move upward. 4 A. Indeed. Like, if you look at the Pacific 5 Northwest for January of '21 relative to January '22, 6 December '22, you are going to see them going up. 7 I would also say that, like, this is only 24 8 months. And the tail end there in November, December 9 2022, those are some pretty -- before I put a trend 10 through this, I would want to see what happens in the 11 first two quarters of 2023. 12 Q. And you can look back, at least with your 13 familiarity with Exhibit 17, you can look back all the way 14 to 2000 for that; is that right? 15 A. Yeah, I could. I have not done that work to date. 16 Like I said, my focus has just been on these comparisons 17 over this 24-month period. 18 Q. Okay. 19 MS. HANCOCK: Thank you for your time. Appreciate 20 it. 21 THE WITNESS: Yep. 22 CROSS-EXAMINATION 23 BY MR. COVINGTON: 24 Q. Calvin Covington representing Southeast Milk. 25 Good afternoon, Ms. Keefe. 26 A. Good afternoon, Mr. Covington. 27 Q. I want to -- just a couple questions here 28 regarding producer pricing. 1435 1 And you are familiar with how minimum Federal 2 Order prices are established in orders that are required 3 to be paid producers? 4 A. Yes, I'm familiar with both classified -- the 5 class prices that the processors have to pay, as well as 6 the producer pricing, the uniform prices. 7 Q. Okay. Good. Thank you. 8 In Federal Milk Marketing Orders with multiple 9 component pricing, each month the Market Administrator is 10 going to announce a protein price per pound, a butterfat 11 price per pound, an other solids price per pound, and also 12 a producer price differential. And subject to location 13 adjustments, they would be the minimum prices that a 14 regulated handler would need to pay to producers. 15 Do you agree with that, if I'm summarizing that 16 correctly? 17 A. Yes. And I would add that the butterfat price, 18 the protein price, the other solids price, those prices 19 are going to be the same across the whole country. They 20 are not going to change. 21 Q. Right. Very -- yeah. Yes. The only thing that 22 would change would be the producer price differential 23 among the orders? 24 A. Among the orders, the PPD is going to change, and 25 then everyone is going to be changing based on location. 26 Q. Yes. 27 And let's take, for example, one step further how 28 it works. Assume I'm back being a dairy farmer, and I'm 1436 1 producing milk of above average protein content. And -- 2 and I'm located marketing my milk in a Federal Milk 3 Marketing Order with multiple component pricing. And 4 within the same location adjustment area, at about the 5 same distance from my farm, I could sell my milk to a 6 cheese plant that is regulated under a Federal Milk 7 Marketing Order, or I could sell my milk to a fluid milk 8 plant regulated under Federal Milk Marketing Order. 9 For one particular month, say, here the month of 10 August, would the minimum price that that cheese plant had 11 to pay me or that fluid milk plant had to pay me, would 12 they be different or would they be the same? 13 A. So you are talking about the price paid to the 14 producer irrespective of whether -- where the milk was 15 shipped? 16 Q. Yes. Yes. 17 A. Yeah. So the minimum price to a producer is the 18 same for -- irrespective of where the milk is shipped. 19 Q. Yeah. It is the same regardless where the milk is 20 shipped, as long as it is in the same location adjustment 21 and regardless of how the milk is used? 22 A. Uh-huh. 23 Q. Is that a basic premise of Federal Milk Marketing 24 Orders for uniform pricing? 25 A. Yeah. 26 Q. Okay. Then is there any economic incentive for 27 me, in that example that I used -- just used as a high 28 protein producer, is there any economic incentive for me 1437 1 to go to one plant over another? 2 A. At the minimum, definitely not. 3 Q. Okay. 4 A. That said, you know, you were just asking me about 5 the regulated minimum price. You know, there -- that's 6 not the be all and the end all of -- that's the base. 7 That's like where we start with the prices. And so there 8 could be premiums, there could be reasons why you might 9 prefer one destination over another as a farmer. 10 Q. But either of those plants could pay me an 11 over-order premium? 12 A. They could pay you an over-order premium based on 13 your volume, but there could also be premiums based on 14 your components. 15 Q. But you would agree, though, that here at this 16 hearing, and Federal Order provisions, we're only involved 17 in establishing minimum prices? 18 A. We are definitely only talking about minimum 19 prices around here. 20 Q. So under Federal Order regulations, there's no 21 economic incentive for me to go to one plant over the 22 other, the Federal Order price is going to remain the 23 same? 24 A. As your producer price is going to be the same. 25 Q. Okay. Then go back to your written statement, 26 your written statement, Exhibit 111. And I'll wait until 27 you pull that up. 28 On page 6, your last sentence there before you get 1438 1 to the bold E, where you state that "suppliers are 2 maximizing revenue by supplying higher component milk to 3 manufacturing classes." 4 Again, going back to my example, again, using 5 minimum Federal Order prices, can you explain to me then 6 how I would get an advantage of my high protein milk going 7 to a manufacturing plant when the Federal Order minimum 8 prices are the same? 9 A. So what I'm talking about there is not the uniform 10 prices, I'm talking about the class prices there, and 11 whether the milk -- say, like, when a cooperative is 12 marketing the milk, whether they would be better off 13 selling the load to a fluid plant or to a cheese plant. 14 And so I'm not talking about the producer prices there. 15 Q. Okay. Well, let's go back to my example. And I 16 said I was a dairy farmer. Let's say I'm a cooperative. 17 And as a cooperative, going to regulated plants, those 18 regulated plants have to pay me the minimum Federal Order 19 price. 20 So are you saying that if I'm a dairy farmer 21 versus being a cooperative, then the minimum price would 22 change? 23 A. The minimum producer price isn't going to change. 24 I was talking about the classified prices that handlers 25 pay in that paragraph. I was not talking about minimum 26 producer pricing there. 27 Q. Okay. So -- so, again, suppliers, you don't refer 28 then to a person that's supplying the milk. You consider 1439 1 a person supplying the milk as being a supplier? 2 A. A supplier could be a cooperative. A supplier 3 could be a producer. It could be a direct ship like 4 Patrons. There's -- there's different ways that it 5 happens in the industry. 6 Q. Okay. 7 A. But I -- like I said, this paragraph is about the 8 classified prices paid by the processors as opposed to the 9 uniform price paid to the producer. 10 Q. The classified prices that -- that are paid by the 11 processors that were regulated under a Federal Milk 12 Marketing Order, those classified prices, are they used 13 for the particular regulated handler to make a settlement 14 with the Market Administrator? 15 A. Absolutely. 16 Q. Okay. So if those prices, classified prices you 17 referring to here, are used to settle with the Market 18 Administrator, so, again, if I'm a dairy farmer or a 19 cooperative, and I'm getting the minimum price that's paid 20 to me, how do I gain, if I'm a high protein producer, 21 going to a manufacturing class then under the order? 22 A. Can you repeat that question? 23 Q. Yes. 24 A. I'm a little lost. 25 Q. Be glad to. 26 We have already talked about that both a fluid 27 milk plant or a cheese plant that's regulated, okay? Are 28 going to pay producers or the cooperative -- consider 1440 1 cooperative as a producer -- supplying milk to any of 2 those plants the minimum price. In component pricing 3 orders, there's going to be protein, other solids, 4 butterfat, and the producer price differential, minimum -- 5 and we agree to that; is that correct? Both plants would 6 pay the same minimum producer price? 7 A. The minimum producer price is going to be the 8 same. The classified prices that are going to be used 9 for -- that are going to be put together and then used to 10 determine the PPD, those are going to be different between 11 the plants. 12 Q. So are you saying if I went to the manufacturing 13 plant, I would receive a different producer price 14 differential than going to the fluid milk plant? 15 A. No. I'm sorry, I think we're -- I feel like we're 16 talking past each other a little bit. And maybe I'm just 17 not following your -- the example that you are trying to 18 get me to follow. 19 The PPD is going to be the same for all the 20 producers in the order. Okay? So -- and then the uniform 21 price is going to be the same for all the producers in the 22 order. But if we have four plants in our order, and one 23 is a -- one does I, plant two does II, plant three does 24 III, and plant four is in Class IV, each of them is going 25 to have a different classified price for their milk. 26 And so the Class I plant is going to be buying 27 their milk on a butterfat skim basis. And then the 28 Class II plant is going to be buying their milk with 1441 1 typically butterfat and nonfat solids. And then the 2 Class III plant is going to be buying their milk across 3 all the components. And then the Class IV plant is 4 going -- we're going to be back to like II with the 5 butterfat and the solids. 6 And so then over here, on the producer side, we're 7 going to have -- you're going to be paid out for your 8 components. You are going to be paid for your butterfat, 9 your protein, your other solids, then you are going to get 10 the PPD, and then there's going to be location 11 adjustments. And so -- and so my statement on page 6 of 12 my written statement, my -- the paragraph there just above 13 E, I was talking about classified pricing there. I was 14 not talking about producer pricing. 15 Q. Okay. So suppliers there does not refer to a 16 dairy farmer or a cooperative supplying any of those four 17 different plants there then? 18 A. Suppliers does refer to the -- the suppliers are 19 producers and cooperatives. The plants, the processors, 20 are required to pay the minimum classified price. They 21 have to pay those minimum class prices. And the pool 22 hangs out here, in the middle, so that -- to equalize 23 amongst these four different so that we get the one 24 uniform price over here for the producers. And so there 25 is no processor paying the uniform price. The processors 26 buy and sell at class. And then -- and then we have the 27 pool, and then the producers get the uniform. 28 Q. But as a supplier, can I get an economic advantage 1442 1 at minimum prices paid under the order by going to one 2 plant over another? 3 A. I believe in multiple component order, as a 4 supplier, it is my view that you would be best off going 5 to -- if you have high component milk, you are going to be 6 best off going to, like, the cheese plant, where you are 7 going to get paid out for those components. 8 Q. Okay. So if I went -- my milk went to a fluid 9 plant that's regulated under multiple component pricing 10 order, are you saying I'm not paid for my components, that 11 the minimum order price is not components? 12 A. Who are we talking about right now? I'm sorry. 13 I'm lost again. 14 Q. Okay. I'm a dairy farmer, marketing my milk under 15 a Federal Milk Marketing Order. 16 A. Uh-huh. 17 Q. Okay. That uses multiple component pricing. 18 A. Okay. 19 Q. And I have an opportunity to sell my milk to two 20 different regulated plants, one bottling fluid milk, one 21 manufacturing cheese. Both of them are regulated. 22 Is my price as a producer any different regardless 23 of which plant I go to? 24 A. Your producer, the uniform price, is going to be 25 the same in both cases. 26 Q. So there's no economic advantage, me as a dairy 27 farm supplier, of going to a fluid milk plant over a 28 manufacturing plant at the minimum order prices? 1443 1 A. The uniform price that the producer gets is the 2 same whether -- no matter where they are shipping the milk 3 to, assuming all their components and everything else are 4 equal. 5 Q. In my example, one is a fluid plant, one is a 6 cheese plant, I'm going to get the same minimum price? 7 A. The regulated minimum price is for the order. The 8 regulated minimum price does not depend on any one plant's 9 utilization. 10 Q. Okay. Again, no economic advantage going to one 11 plant over another? 12 A. The regulated minimum price is the same all the 13 time. 14 Q. Okay. If National Milk Producers Federation 15 Proposal 1 was adopted, and we all agree that it would 16 increase the Class I skim milk price, what -- what impact 17 would that have on producer prices in multiple component 18 pricing orders? 19 A. It would depend on the fluid milk, the Class I 20 utilization in each one of those orders. So like with 21 Mr. Miltner, he just reminded me of Peter Vitaliano's 22 testimony last week with the -- I think it was $0.50 and 23 $0.80, and we agreed that it was about $0.60 for Class I. 24 And so in an order that has very high Class I 25 utilization, say, like, down in the Southeast, that's 26 going to increase the uniform price more down there 27 because the Class I utilization is higher. In an order 28 that has very low Class I utilization, like the Upper 1444 1 Midwest, it would have a very small impact on the uniform 2 price. 3 Q. In multiple component pricing orders, if we 4 increase the revenue coming in from skim milk, any change 5 in revenue would show up in the producer price 6 differential; is that correct? 7 A. Yes, it would. 8 Q. Okay. Thank you. 9 MR. COVINGTON: That's all I have, your Honor. 10 MS. HANCOCK: Your Honor, I just -- 11 THE COURT: Ms. Hancock, I can't tell if 12 someone -- it is not. Ms. Hancock. 13 MS. HANCOCK: I just have one brief question, if I 14 may. 15 THE COURT: Yes. 16 CROSS-EXAMINATION 17 BY MS. HANCOCK: 18 Q. Ms. Keefe, if National Milk's Proposal Number 1 19 were recommended by the USDA to be implemented with the 20 multiple components as proposed by National Milk, would 21 MIG support the delayed implementation? 22 A. Yes. If the Department were to adopt Proposal 1 23 or Proposal 2, we would want to see the 12-month delayed 24 implementation for risk management purposes. 25 MS. HANCOCK: Thank you. 26 CROSS-EXAMINATION 27 BY DR. CRYAN: 28 Q. Good afternoon. I'm Roger Cryan with the American 1445 1 Farm Bureau Federation. 2 So I appreciated your analysis. I found a couple 3 of things striking. The most striking thing I found about 4 it was how well it demonstrates that these tests are all 5 above the current standard, pretty clearly across the 6 board. 7 MR. ENGLISH: Is that testimony or -- 8 BY DR. CRYAN: 9 Q. Would you agree with that? 10 THE COURT: Yeah, I think it is testimony by 11 Mr. Cryan. But I think you better put a question mark in 12 there somewhere, Mr. Cryan. 13 BY DR. CRYAN: 14 Q. Would you agree with that Sally? 15 A. My analysis demonstrates that on the average, for 16 the orders as a whole and for the survey group, that 17 the -- that most -- that most of the tests are slightly 18 above or -- the current level, and then -- but they are 19 also mostly below the proposed level. 20 Q. Depending on which graph you are looking at, 21 because there's some of these where it seems like the 22 proposed level sort of cuts right through the middle of 23 the line, it seems to me. 24 Does that -- does it seem like that to you? 25 A. It doesn't seem like that to me, that the proposal 26 cuts right through the middle of it, no. 27 Q. So on Table -- on page 1, in Exhibit MIG-5A, it 28 did -- I mean, the proposal is to -- is based on averages, 1446 1 previous averages. And it is -- and the -- an average 2 means that some will be below and some will be above. 3 The -- again, on page 1, does that not show a line more or 4 less going through the protein -- through the middle of 5 the protein tests on your -- on your graph? 6 A. So the proposals are definitely based on averages. 7 And I would point out, again, that we have a minimum 8 regulated price system and that it's very important to 9 consider the low points and the seasonal impact. 10 Q. Uh-huh. 11 A. And additionally, this -- the -- this information 12 on the first chart is only for the seven multiple 13 component orders for two years. 14 Q. Okay. Does it appear to you that there's an -- 15 that your graphs generally show an upward trend from even 16 over just the course of two years, from beginning to end, 17 for these tests? 18 MR. ENGLISH: Asked and answered. 19 THE COURT: Yes, Mr. English? 20 MR. ENGLISH: That was a question asked by 21 Ms. Hancock and -- 22 (Court Reporter clarification.) 23 MR. ENGLISH: And so it's asked and answered. I 24 mean, if we're going to keep asking the same questions, 25 we're going to never get done with this hearing. 26 THE COURT: Well, my memory is not perfect. 27 Unless Mr. Cryan admits that that's been asked and 28 answered -- 1447 1 DR. CRYAN: I -- 2 THE COURT: -- I'm going to allow it this time. 3 DR. CRYAN: Okay. 4 BY DR. CRYAN: 5 Q. So a yes or no is fine. 6 A. So as I was discussing with Ms. Hancock, this 7 data, for example, on the first chart with the Pacific 8 Northwest, Ms. Hancock and I went through some of that, 9 and I noted that before I put a trend line through this 10 data, I would want to see what was happening before and 11 after. This is only a 24-month period. 12 Q. And it's a 24-month period that ends about nine 13 months ago. 14 Do you have any indication that there's been a -- 15 well, you said that you don't acknowledge a trend. Okay. 16 DR. CRYAN: I'm -- I think -- that's -- I'm done. 17 Thank you very much. Thank you. 18 THE WITNESS: You're welcome. 19 THE COURT: Any further cross? 20 Seeing none, redirect? 21 MS. TAYLOR: AMS has some questions, your Honor. 22 THE COURT: I'm sorry. I'm going to do that the 23 rest of the hearing, I can tell. 24 MS. TAYLOR: We don't mind. I do think -- 25 THE COURT: I mind. 26 MS. TAYLOR: -- Mr. Wilson's going to start. 27 THE COURT: Yes, Mr. Wilson, your witness. 28 MR. WILSON: Thank you, your Honor. 1448 1 CROSS-EXAMINATION 2 BY MR. WILSON: 3 Q. Todd Wilson, Dairy Programs. 4 Hello, Ms. Keefe. 5 A. Hi, Mr. Wilson. 6 Q. So I've been accused of being in the weeds 7 sometimes, so I have got some questions relating to some 8 of the things that you had in your testimony, as well as 9 some of the information on the graphs. 10 Page 4, you indicate that the survey that you 11 conducted was from the MA report receipts and utilization 12 submissions, and then in the next paragraph, you talked 13 about audited and reported. And then in the next sentence 14 you talked about secondary data sources. 15 So could you go through maybe -- you know what 16 those terms mean, so I would like for you to kind of talk 17 to that. 18 A. Sure. So every month a handler submits a report 19 of their receipts and their utilization, and that goes in 20 to the Market Administrator. And then about a week later, 21 or not even a week later, you turn it in on the 7th, and 22 then on about the 10th, so a few days later, you get back 23 your monthly statement of handler obligation. 24 Typically, the receipts and utilization on -- that 25 you are reporting are going to match out to your statement 26 of handler obligation unless something's been found at 27 pool and that there's a -- you know, it could be that you 28 fat-fingered something or whatever, and so there's been a 1449 1 correction there, a difference between what you submitted 2 and then what comes back. And then later in the process, 3 usually a few months later, then all of that will go 4 through audit, and there could be yet another correction 5 phase. 6 And then as far as the secondary data that I was 7 referring to, that would be like the plants, like, 8 receiving records on their component tests on their 9 producer milk at receiving. So this isn't like component 10 testing that the plants are doing to check their 11 composition standards for, you know, sale of finished 12 goods. This is on, you know, raw milk in the silos type 13 of stuff. 14 And there what I found in the data, particularly 15 in the later part of the period where we weren't -- where 16 we haven't necessarily -- that the plants haven't been 17 through their audit yet, that there would be some things 18 where it would be, like, there's a number here that 19 doesn't make sense, like, can we try to get this right so 20 that we don't have a total outlier and need to exclude the 21 plant. 22 Q. So is it safe to say that the secondary data 23 sources were used to validate information or could that 24 information actually be in the data? 25 A. That it was used to validate, and then in a 26 handful of instances, the secondary data source was used 27 as opposed to the primary data source when it was clear 28 that the primary data source had an error in it, that 1450 1 based on my experience, a few of these plants in the 2 survey will probably have an audit adjustment coming in 3 their future. 4 Q. I would hope so. 5 The -- could you -- do you know approximately how 6 much data you might have that had been audited? 7 A. Most of the plants were I -- and I believe that 8 everybody was through the audit for the first six months 9 of 2021. About half of them, it was all of 2021; about 10 half of them, they weren't done with 2021 yet. And there 11 may have even been a few that were into 2022. But it 12 varied it -- it -- it varies. Like, it's not the same -- 13 everybody's cycle isn't the same. 14 And, you know, typically, when the audits are 15 completed, like they're doing multi- -- the Market 16 Administrator offices are doing multi-month blocks at a 17 time, and so like you could have a plant in Order 32 that 18 has 12 months of audited data, but there might be another 19 one that has nine and one with 15. Like, that is the sort 20 of stuff that I was seeing. 21 Q. And so the submitted information, is it fair to 22 say that that was from the obligation report that comes 23 back from the Market Administrator? 24 A. Yes. 25 Q. Okay. 26 A. Yeah. 27 Q. Thank you. 28 Continuing on to -- so on pages toward the end of 1451 1 your testimony, you went into the -- your charts, I 2 believe, that you have made. You have converted -- you 3 have converted the test of protein, other solids, and 4 solids nonfat back to a skim portion, skim milk. 5 Did you -- can you go through that calculation for 6 me? 7 A. Sure. So probably the easiest way to look at that 8 would be in my testimony. If we look at the table on 9 page 3, which is skim, versus the table on page 4, which 10 is milk. If you -- so -- so the current nonfat solids on 11 a milk basis is 8.69, when you still have 3.5% butterfat. 12 And then the page before on page 3, if you have got no 13 butterfat left -- and I would point out that this is 14 formula butterfat, I have not met a separator yet that 15 gets it down to zero -- that then we would be at 9% on a 16 skim basis. And so the amount in the milk there is the 17 same between the table on page 3 of my statement and the 18 table on page 4. It's like the sort of -- 19 Q. So in your graphs you have -- you have -- instead 20 of taking 3.5% butterfat out of producer milk, you took 21 out the pounds of fat or the test of fat in producer milk 22 to get back to skim? 23 A. Can you repeat that, Todd -- 24 Q. So -- 25 A. -- Mr. Wilson? 26 Q. -- on page 1 of your 28-graph page of MIG-5A, 27 that's on a skim basis? 28 A. Uh-huh. 1452 1 Q. So the protein there, you -- you have removed the 2 fat -- 3 A. Yes. 4 Q. -- from the pounds to compute a protein percent? 5 A. Yes. On a skim basis. 6 Q. On a skim basis? 7 A. And I removed all of the fat. Like, formula -- 8 formula skim, perfectly zero. 9 Q. And I'm not sure -- we were kind of looking at our 10 graphs that were submitted through USDA, and there seemed 11 to be one in the submission that somehow was missing a 12 line. It's on --it's on the printed copy, but I -- 13 A. Oh, really? 14 Q. -- just wanted to make a point of that, maybe to 15 clarify that. I think it was on page 17, if I remember 16 right. Yeah. So page 17, the 124 survey line did not 17 show up on the -- on the graph. 18 A. So the -- so you are saying that the -- on 19 page 17, the blue survey line isn't showing up in the PDF? 20 Q. Correct. 21 A. Okay. 22 Q. On the website. 23 A. That's weird. 24 MR. ENGLISH: Can I look? 25 Your Honor, obviously we submitted -- the papers 26 copy have it, correct? 27 MS. TAYLOR: Yes. 28 MR. WILSON: Yes, the paper copies -- 1453 1 MR. ENGLISH: So it's only the website? 2 MR. WILSON: Yes. 3 MR. ENGLISH: So we will obviously resubmit as 4 soon as we can figure out why it is that something loaded 5 that shouldn't have loaded. 6 THE COURT: Thank you. 7 THE WITNESS: That's strange. 8 MR. ENGLISH: Technology. 9 MR. WILSON: Usually it is because I have got a 10 different OS, but I don't think that's the case this time. 11 BY MR. WILSON: 12 Q. So on page 25 of those charts, you have got 32 13 plants in your survey. That equates out to 768 data 14 points. 15 In -- the prior witness from Shehadey testified to 16 the number of occurrences that was either above or below. 17 A. Yeah. 18 Q. Is there a way that you would be able to provide 19 us in these -- these stacked bar graphs, the number of 20 occurrences over the -- over the 24-month period that was 21 above and below? 22 A. Yes, I'd be happy to do that. So you are talking 23 about putting the data labels on the bars? 24 So like, for example, for, like, on page 25, like 25 showing -- if we look at June of 2021, we have got 31 26 below and one above. That sort of information? 27 Q. As just a combined number of -- out of the 768 28 occurrences. 1454 1 A. Yeah. I'd be happy to do that. 2 Q. I have also been told that page 19 might need to 3 be looked at as well on the website submission. 4 A. Okay. 5 MR. WILSON: That's all I have, your Honor. 6 THE COURT: Ms. Taylor? 7 THE WITNESS: Ms. Taylor, can we wait for just one 8 moment while I write down the page 19? 9 MS. TAYLOR: Certainly. Of course. 10 THE WITNESS: Mr. Wilson or Ms. Taylor, do either 11 of you know which is the one that isn't coming through on 12 the PDF as opposed to the print? 13 MR. WILSON: It's the PR survey. 14 MS. TAYLOR: The PR survey. 15 MR. WILSON: It would be the blue. 16 MS. TAYLOR: The blue line. 17 THE WITNESS: Okay. 18 THE COURT: Should we go off the record and talk 19 about it? 20 MS. TAYLOR: We'll figure it out. 21 MR. ENGLISH: There's no way I will figure out how 22 that happened. Obviously, you know, all I can tell you is 23 we loaded the PDF, but we will -- we're here right now. 24 We can't load it again right this second. But we assure 25 you we will figure this out, although somebody else will 26 figure it out than me. 27 THE WITNESS: I'm going to be honest, somebody 28 else other than me maybe will figure this out, because I 1455 1 sent the print job from the same PDF, and so why once it 2 goes through the website the line disappears, I'm really 3 perplexed. 4 MR. WILSON: I bet somebody's already figured it 5 out. It's only been three minutes ago. 6 I do have a couple more. I'm sorry, your Honor. 7 THE COURT: I'm not sorry. No reason for you to 8 be sorry. 9 MR. ENGLISH: All I can say is our person on the 10 ground says what we sent -- looking at what we sent to 11 USDA has the line. So somehow between getting it to you 12 and getting it posted, which -- that's a technology issue. 13 MS. TAYLOR: Yeah. That might be an accessibility 14 issue that happened, so let us check into that. We have 15 to convert them when we get them to be able to put them on 16 our website -- 17 MR. ENGLISH: So it could be a conversion -- 18 MS. TAYLOR: -- and it might have been a 19 conversion -- 20 MR. ENGLISH: Before we resend, we'll work 21 together to fix this. 22 MS. TAYLOR: No problem. 23 THE COURT: Off the record a second. 24 (Off-the-record.) 25 THE COURT: Back on the record. 26 BY MR. WILSON: 27 Q. So page 28. 28 A. Okay. 1456 1 Q. That's the last page listing of MIG IDFA fluid 2 plant -- fluid survey plants. 3 A. Uh-huh. 4 Q. The Federal Order column, is that an indication of 5 if it's regulated or not or -- 6 A. It's -- it's generally which -- which Federal 7 Order the plant is reporting -- reporting to. There is 8 one plant that -- Danone's plant in Mount Crawford, 9 Virginia, typically reports to 5. They are a partially 10 regulated plant. Sometimes they are fully regulated, and 11 when they are fully regulated, they are typically fully 12 regulated on 1. And so I included them at -- on 1. 13 Q. Okay. So sometimes that plant might be fully 14 regulated on 1; some -- sometimes it might be a partially 15 regulated plant. So there is -- there are partially 16 regulated plants in this listing as well? 17 A. Yep. Yes, there are. 18 Q. Could I also point out, about a third of the way 19 down, Kroger, Winchester, Kentucky, Order 5. You have 20 that listed in the butterfat protein other solids column. 21 A. Yes. So Kroger at their Winchester, Kentucky, 22 plant, that -- so they get my data gold star award. So 23 lest anyone think from the earlier conversation that -- 24 that the Kroger plants were not -- were having data 25 problems, like some of them were, some of them weren't. 26 But Winchester, Kentucky, is on Order 5, which is a 27 butterfat skim order. And they actually had records for 28 their butterfat protein and other solids, and they were 1457 1 able to show me that the butterfat in these records was a 2 match for their -- the information that they were 3 reporting on their butterfat skim report for -- that they 4 report to Order 5. 5 Because you're quite right, the other Order 5 6 plants did not have that and then -- and that's not 7 uniform across Kroger, like you can see. Like, Kroger in 8 the Murfreesboro, Tennessee, that's a butterfat only 9 available, and so -- but that plant in Winchester, 10 Kentucky, had it available. 11 And, likewise, I would also point out that Mount 12 Crawford, Mount Crawford reports to Order 5, but then when 13 they are pooled, they are pooled on Order 1, and so they 14 have all the data all the time for the components. 15 Q. Okay. So to follow that line of thought through 16 the graphs. Is the data from Mount Crawford -- 17 A. Uh-huh. 18 Q. -- is it listed in the Order 1 and subsequent data 19 points for components? 20 A. Yes. So like the Order 1 -- so Mount Crawford 21 would be part of the -- would be one of the data points in 22 the Order 1 graphs, and then -- and then Mount Crawford 23 would also be in the group of graphs that are the -- all 24 the MCP together. And then the bar charts at the end with 25 the above and the below. 26 Q. And for Kroger Winchester, for the stacked bar 27 that you just mentioned, are -- is Winchester going to 28 be -- 1458 1 A. Winchester will be one of the 32 plants in the -- 2 in the stacked bar chart. 3 Q. And if I -- 4 A. Sorry. And that's Kroger in Winchester, Kentucky. 5 There is another Winchester in here, so it can get 6 confusing quickly. 7 Q. Yes. And that one's actually Order 1? 8 A. Yes. 9 Q. Thank you for that clarification. 10 MR. WILSON: That's all I have, your Honor. 11 CROSS-EXAMINATION 12 BY MS. TAYLOR: 13 Q. Good afternoon. 14 A. Good afternoon. 15 Q. I have a few non-weedy questions, as I like to 16 call them. 17 You spoke about the difficulty that MIG members 18 face when they need to attempt to pass along monthly 19 Federal Order cost variations to their customers. 20 Do you know if MIG members utilize any risk 21 management tools to help them hedge that risk? 22 A. Some do and some do not, so -- and I expect that 23 the members will be attending subsequent later in the 24 hearing and will be speaking to that directly. 25 Q. Okay. And then one of the sentences Mr. Miltner 26 asked you about was on the end of your statement, page 7, 27 about "raising Class I prices based on components would be 28 taking more money from Class I that it cannot recover in 1459 1 the market." 2 And if I remember your answer correctly, it had -- 3 that you specified your discussion about basically milk in 4 California has to meet those fortification standards, and 5 what I took from that is if a handler in California has 6 to -- has extra milk that they can't sell in the state, 7 and maybe they try to sell it elsewhere, they are unable 8 to recoup that additional fortification cost. 9 A. Generally, yes, that's -- yeah. 10 Q. Is that phenomenon seen anywhere else outside of 11 those California handlers? 12 A. With respect to this particular issue, I -- I 13 don't think so. I mean, it's very -- it is a very 14 California specific thing. 15 Q. Okay. Would you agree or disagree that one 16 objectives of the Federal Order system is to create 17 uniform raw milk costs between similarly situated 18 handlers? 19 A. Yes. It's my view that the -- that the system is 20 designed to create uniform regulated minimum, so, like, 21 the regulated minimum at the bottom, at the floor. 22 Q. And then that would allow the handlers to compete 23 on other competitive factors in the marketplace? 24 A. Yes. Other competitive factors in the marketplace 25 above the minimum. 26 Q. Correct. Okay. 27 And so in -- I'm going to ask a question I have 28 asked of other witnesses, a similar question. So if all 1460 1 fluid milk processors face the same regulatory change on 2 their raw milk costs, how does this -- or does this change 3 the competitive relationship between those plants when it 4 comes to that -- those raw milk costs? 5 A. When it comes to those raw milk costs in the 6 regulated minimum price, they would be similarly situated. 7 I would point out that there is a wide variety of 8 different types of processors in our industry today, so 9 you have proprietary bottlers. You have the captive 10 bottlers that are owned by a retailer. You have the 11 cooperative bottlers. There's a -- there's a wide 12 variety. And so, you know, the way those competitive 13 relationships between the different types of bottlers out 14 there, I think that there is -- that there are nuances 15 there that are probably -- that need to be considered. 16 Q. Okay. And then if I could sum up what I have 17 heard over the past few days of MIG's primary objections 18 to adoption of Proposal 1 or 2, I think the first 19 objection as I have heard it is that higher component 20 levels -- I don't know the right word to use -- but really 21 aren't of importance to Class I handlers because they sell 22 on a volume basis, not on a component basis, so getting 23 additional components above a certain level of minimum 24 components is -- is -- it doesn't really matter to them. 25 Would that be correct as one objection to those 26 proposals? 27 A. Yes, that's correct. 28 Q. And then as I have heard it, the second objection 1461 1 would be that the levels proposed in Proposals 1 and 2 far 2 exceed the actual component levels of milk received by 3 fluid plants owned by MIG members. 4 A. That's correct. 5 Q. Okay. So I know USDA put on data into the record 6 on Federal Order component averages for pooled milk. 7 So if we had the ability to look at audited 8 component data for milk delivered specifically to fluid 9 milk handlers, would using those component averages better 10 reflect what your plants actually received rather than 11 Federal Order pooled milk averages? 12 A. That sort of an average would definitely better 13 reflect it. I also think that we should be thinking hard 14 and looking at whether it should be an average or the 15 minimum. 16 Q. Can you just expand on that a little more for the 17 record? 18 A. Sure. What I mean by that is that we have a 19 minimum regulated price system, and so rather than setting 20 those component factors at the -- at the average, and so 21 if we were doing that at the average, like, maybe we 22 should be talking about raising the 3.5 and the reference 23 price to a higher number, and because butterfat also no 24 longer averages 3.5. 25 And so, to me, it would make a lot of sense to 26 think about the minimum levels that are out there being 27 received by fluid plants. 28 And certainly one very real problem with the 1462 1 average is the seasonal nature of all of this, and that 2 you have got this high in the winter, low in the summer 3 thing going on that is another real kind of picky issue to 4 try to, like, wrap your head around that math and those 5 pricing implications as well. 6 Q. Okay. And so taking the discussion of averages 7 one step further in your -- MIG's concern about using 8 averages. I mean, would that extend to other factors we 9 may be considering later in the hearing on pricing 10 formulas that might look at an average of some data series 11 that's put on instead of a min or a max number? 12 A. So I'm -- I think that -- I think that it's a 13 little bit different here on the -- not all the stuff 14 that's being considered here in the hearing is exactly the 15 same as the -- when it goes through the formulas. And, 16 you know, it's, frankly, much like the question that 17 Ms. Hancock asked me, and Mr. English asked Mr. Gallagher, 18 about the skim formula factors and the impact on risk 19 management with the 12-month -- with needing to have a lag 20 for risk management. 21 This part of the formula is what you're actually 22 buying. It's like the real -- it's -- it's the quantity 23 part of what's going on. Whereas other parts of the 24 formula, say, like, a manufacturing cost survey or 25 something like that, to me at least, that's a little bit 26 different. Like, that is -- that is talking -- that's -- 27 that algebra that we need to go through in our end product 28 price formula system to go from the commodity price to get 1463 1 to the milk price. And so I don't think that this whole 2 thing of minimums versus averages is a one-size-fits-all 3 sort of situation. But to be fair, there are other places 4 where I think that the minimum is more appropriate than 5 the average. 6 Q. Make me beg the question, an example of one? 7 A. So coming up in later issues, I am confident that 8 you will hear from me on my views about minimums and 9 averages. So -- we can save that for another afternoon. 10 Q. I'll save that for further conversation. 11 MS. TAYLOR: I think that's it. Thank you so 12 much. 13 THE WITNESS: You're welcome. 14 THE COURT: It's 3:22. Do we have redirect? 15 MR. ENGLISH: I do but -- 16 THE COURT: How long, Mr. English, do you think? 17 MR. ENGLISH: I don't know how long, but I -- I 18 need a break. 19 THE COURT: I'm sorry, you need a break? I need a 20 break. 21 Let's come back -- let's come back at 25 of. 22 Let's come back at 3:35. 23 (Whereupon, a break was taken.) 24 THE COURT: Back on the record. 25 Mr. English, you have redirect. 26 MR. ENGLISH: It will be very short, I hope, your 27 Honor. 28 /// 1464 1 REDIRECT EXAMINATION 2 BY MR. ENGLISH: 3 Q. So, Ms. Keefe, Mr. Miltner asked you a couple 4 questions about organic milk. 5 A. Yes. 6 Q. And I just wanted to clarify for the record 7 because I got a little confused about what was asked and 8 what was answered. 9 So organic milk, by and large, is priced on 10 long-term fixed price contracts, prices significantly 11 higher than the Federal Orders, correct? 12 A. Yes. Typically organic milk is bought and sold 13 at -- on a long-term fixed price contract, at prices that 14 are substantially above the Federal Order class prices, 15 and those prices are generally not tied in any way to the 16 class prices. 17 Q. So if Proposal 1 -- or for that matter, any other 18 proposal in this hearing later, is considered and adopted 19 which raises the Class I price, what is the practical 20 impact for an organic handler? 21 A. The practical impact for an organic handler would 22 be a change in -- for the proposals that you just asked 23 about, an increase in their pool obligation, so it changes 24 their fully landed cost of milk. So it's -- you know, the 25 cost of getting the milk off the farm, to the plant, the 26 cost of the milk itself, the regulatory costs, in this 27 case the pool obligation on the milk. It wouldn't change 28 the actual price paid for the milk itself under the fixed 1465 1 price long-term contract. 2 MR. ENGLISH: That's all I have, your Honor. 3 THE COURT: Any further questions? 4 Yeah, let's go ahead and put these -- 5 MR. ENGLISH: I move admission of Exhibits 111 and 6 112, your Honor. 7 THE COURT: Objections? 8 Exhibits 111 and 112 are made a part of this 9 hearing record. 10 (Thereafter, Exhibit Numbers 111 and 112 were 11 received into evidence.) 12 MR. ENGLISH: Ms. Keefe ended up with a number of 13 documents that were provided to her that I believe belong 14 to USDA, and we obviously want to make sure they get back 15 to USDA. 16 MS. TAYLOR: Yes. 17 MR. ROSENBAUM: Your Honor, Steve Rosenbaum for 18 the International Dairy Foods Association. We would like 19 to call as our next witness, Mr. Steve Galbraith. 20 THE COURT: Yes. Raise your right hand. 21 STEVE GALBRAITH, 22 Being first duly sworn, was examined and 23 testified as follows: 24 THE COURT: Your witness, Mr. Rosenbaum. 25 MR. ROSENBAUM: Your Honor, we have distributed an 26 exhibit which is Mr. Galbraith's written testimony as IDFA 27 Exhibit 24. We would ask that it be marked as Hearing 28 Exhibit 113. 1466 1 THE COURT: So marked for identification. 2 (Thereafter, Exhibit Number 113 was marked 3 for identification.) 4 DIRECT EXAMINATION 5 BY MR. ROSENBAUM: 6 Q. Mr. Galbraith, could you start by telling us what 7 your job title is? 8 A. I am currently vice president of procurement and 9 commodity risk management for Saputo USA. I work out of 10 the Dallas office at 2711 North Haskell. 11 Q. Okay. Before we get into your reading your 12 testimony, which has been distributed in hard copy and was 13 posted to the website as well, I understand that you have 14 a small correction to make to the table that appears 15 attached to your testimony. So why don't we go ahead and 16 do that before we have you start your testimony. 17 A. So on the Excel spreadsheet, pardon my fat 18 fingers, the boxes at the bottom should read, the averages 19 for 2022, the bottom should be 9.1391, and the one below 20 that for the total of the 19 months should be 9.1327. 21 Q. All right. So just to be clear, there's a number 22 that right now is 9.1070, and that should be changed to 23 1-point -- excuse me -- should be changed to 9.1391; is 24 that correct? 25 A. Correct. 26 Q. And then there's another figure that's 9.1212, and 27 that should be 9.1327? 28 A. Correct. 1467 1 Q. Okay. All right. Could you please read your 2 testimony? 3 A. Sorry. My background? 4 Q. Yes, please. 5 A. Well, I'm Steve Galbraith, as I mentioned, vice 6 president of procurement and commodity risk management at 7 Saputo Cheese. I have held this position since April of 8 2013. I'm located at the Dallas office on North Haskell. 9 Saputo operates 29 plants in 13 states across the 10 United States, manufacturing and packaging a variety of 11 cheese, cultured dairy products, whey ingredients, 12 extended shelf life, and aseptic dairy products. 13 Saputo is among the top three cheese manufacturers 14 and one of the largest producers of extended shelf life 15 fluid products. 16 22 of the 29 plants in the United States process 17 milk and receive milk pooled in seven different Federal 18 Marketing Orders. Most of the milk we buy is regulated by 19 Federal Order system and extends, at least to some degree, 20 of all classes of milk. 21 We frequently source milk, cream, and condensed 22 dairy products from ten of the 11 Federal Marketing Orders 23 as well as unregulated regions of the Western United 24 States. Consequently, Saputo does have a strong interest 25 in the decision resulting from this hearing. 26 A little bit about my background. As vice 27 president of procurement and commodity risk management at 28 Saputo, my primary responsibilities involve negotiating 1468 1 contracts for the purchase and delivery of dairy 2 commodities for the Class II manufacturing facilities -- 3 (Court Reporter clarification.) 4 THE WITNESS: So my primary responsibility is in 5 negotiation of contracts and purchase and delivery of 6 dairy commodities for the Class II manufacturing 7 facilities, as well as administration of commodity risk 8 management programs for all of Saputo USA. 9 Prior to my experience at Saputo, I spent nine 10 years as VP of procurement in the White Wave, Morningstar, 11 and Corporate Divisions of Dean Foods, and I started my 12 procurement career at Nestle USA where I spent my entire 13 15-year tenure in the procurement group, working most of 14 the time on the commodity procurement and risk management 15 teams. In the last five years at Nestle I held the 16 position of VP of commodity procurement and risk 17 management for dairy, fats, and oils, and sweeteners, at 18 Nestle. 19 I also serve as president of the California 20 Creamery Operators Association. 21 I grew up in Eastern Kansas on a farm, although 22 not a dairy farm, and I graduated from Kansas State 23 University, with undergraduate degrees in animal science 24 and business. 25 So I have spent most of the last 55 years of my 26 life working in agriculture for some -- at some extent, 27 and the last 25 years heavily focused in the dairy sector. 28 That's the background. 1469 1 So I think the position that we would have 2 regarding -- we have reviewed and support the testimony of 3 Mr. Mike Brown representing the International Dairy Foods 4 Association. And I want to -- specifically want to 5 testify on Proposals 1 and Proposals 2. 6 BY MR. ROSENBAUM: 7 Q. All right. And just so we have it on the record, 8 is it your understanding that Proposals 1 and 2 would 9 raise the current protein assumption in the milk 10 composition formula from 3.1% to 3.39%? 11 A. That is correct. 12 Q. And the other solids would be raised from 5.90% to 13 6.02%? 14 A. Correct. 15 Q. And the nonfat solids, total nonfat solids, would 16 be increased from 9% to 9.41%; is that correct? 17 A. That is correct. That is my understanding. 18 Q. With that orientation, could you please continue 19 with your testimony? 20 A. So that proposal, which would update the milk 21 component factors in the skim milk, should be rejected and 22 is opposed by Saputo for the following reasons. 23 The raw milk components delivered to the Saputo 24 plants in Federal Marketing Orders Number 6 and Number 7 25 do not support the component values submitted by the USDA 26 as part of these hearings. 27 Q. So let me just interrupt you right there, because 28 I want to get into that data. 1470 1 Are -- are Orders 6 and 7 so-called fat/skim 2 orders? 3 A. Yes, they are. 4 Q. Okay. If we can turn then to the table that's 5 attached to your testimony, the one that you made the 6 small correction on a little bit ago, tell us -- tell us 7 what information -- it spreads on pages 4 and 5 -- 8 A. Right. 9 Q. -- of this document. So tell us what it is your 10 you're reporting here. 11 A. So what I'm reporting is the tests for skim solids 12 and butterfat for -- in three of our plants, in Decatur, 13 Alabama, Murray, Kentucky, and Plant City, Florida. And I 14 went back and asked the QA managers at each plant to pull 15 the records on the loads of milk that came in from January 16 of 2022 through July of '23, and summarized the solids 17 nonfat component as well as the butterfat component, 18 summarized that on this sheet, and came up with averages 19 across Florida, Alabama, and Kentucky. 20 Q. Okay. So these are -- the data here runs, I 21 believe, in all -- in all cases, from January through 22 December of 2022, and then also from January through July 23 of 2023; is that correct? 24 A. That is correct. 25 Q. So this is basically the most recent 18 months of 26 data that's available? 27 A. Correct. 19 months, correct. 28 Q. 19 months. I stand corrected. Thank you. 1471 1 And if we look in the two boxes at the bottom of 2 page 4, is the top box the data for calendar year 2022? 3 A. Correct. 4 Q. And is the bottom box the data for the first seven 5 months of 2023? 6 A. No, it is an average of the entire 19 months. 7 Q. I stand corrected. Thank you. 8 And so what was the total of skim solids in 2022? 9 A. The average skim solids as a percent of raw milk 10 was 8.78%, and as a percent of skim milk was 9.1391. 11 Q. All right. And just to lay this, if you will, 12 upside, the Proposal 1 for these three plants combined for 13 2022, the average total skim solids was 9.1391%, correct? 14 A. As a percent of skim, correct. 15 Q. And if Proposal 1 were to be adopted, am I correct 16 in understanding that Saputo would be required to pay for 17 that milk as if it had total skim solids of 9.4%? 18 A. Correct. In those three plants. 19 Q. Okay. And then if we look at the bottom box, 20 which as you have explained reflects averages for the 21 entire 19 months covered by your tables -- 22 A. Right. 23 Q. -- for those three plants, your total skim solids 24 on a skim milk basis is 9.1327%, correct? 25 A. Correct. 26 Q. And, once again, if Proposal 1 were to be adopted, 27 Saputo would be required to pay for that milk as if it 28 contained 9.4% nonfat solids; is that correct? 1472 1 A. Correct. That's my understanding. 2 Q. And is that something you think is appropriate? 3 A. No. And the reason it is not appropriate is -- 4 and the reason we measure these solids is because we 5 formulate certain levels of solids nonfat in our finished 6 product. So what we have to do then is bring the fluid 7 milk in, we know what the solids are, and then we fortify 8 it with either condensed, skim, or with powder. So we 9 would in essence have to pay for the solids twice. 10 Q. And you would pay for the solids once because you 11 would be required to account to the pool as if the milk 12 had 9.4% nonfat solids, correct? 13 A. Correct. 14 Q. And then you would actually have to go out to the 15 marketplace and buy solids to make that up? 16 A. Correct. 17 Q. And that's what you mean by paying for it twice? 18 A. We would have to pay the delta between the 9.1 and 19 the 9.4. That gap, we would have to backfill and pay for 20 it again. 21 Q. Okay. Could you turn to page 2 -- I know I 22 interrupted you when you were reading, but I thought it 23 was important to -- to go ahead and look at the attachment 24 the first time you referred to it. I think it was the -- 25 I think we've sort of gotten through the first bullet 26 point under number one. So if you could continue on, 27 please. 28 A. So on many of the products that are classified as 1473 1 Class II necessitate minimum levels of nonfat solids to 2 meet the standard of identity. An example of that would 3 be ice cream mix. And to meet these standards of 4 identity, as I mentioned, we would have to go out and 5 purchase either condensed skim or we'd use powdered milk 6 to make up for that difference in the formulas to meet 7 those minimum standard requirements. 8 And so in order -- and basically receive raw milk 9 that has the pricing formula built in, which is -- does 10 not adequately reflect the component values. It's simply 11 paying for milk solids that do not exist. I call those 12 ghost solids. That's my term. It's an unofficial term 13 within the industry. 14 And the subsequent purchase of condensed skim to 15 meet product requirements that are replacing those ghost 16 solids is simply paying for the skim solids twice. And 17 what that does is, it means that those plants in -- in 18 Kentucky and Alabama and Florida now have a competitive 19 disadvantage because they are paying for the solids twice 20 as opposed to solids that are in the component priced 21 orders. 22 Q. Because of the component price order, you actually 23 only pay for how much solids are really there? 24 A. That is correct. 25 Q. Okay. If you could continue, please. 26 A. So the products that we fortify in our plants are 27 ice cream mix, frappe mix, aerosol whipped topping, and we 28 do do some specialty milks for California in our Murray, 1474 1 Kentucky, facility that we have to standardize to 2 California standards, and so we end up having to pay for 3 that twice as well. 4 So those are the four big categories that we -- 5 that we formulate skim solids for and put extra solids in, 6 and the delta between the 9.1 and the 9.4 was just that 7 gap I'm talking about that we would have to double pay 8 for. 9 So we would not support Proposal 1, and for the 10 same reasons, we would not support Proposal 2. 11 Q. And I think on the very last page you indicate you 12 would support these becoming multiple component prices? 13 A. Yes. Absolutely. 14 Q. So meaning you are happy to pay for whatever 15 solids are actually there, you just don't want to pay for 16 what's not there? 17 A. Right. And paying for the solids that are there 18 drives productivity and efficiency, and it promotes the 19 farm and the plant operations. So I would definitely 20 support the component pricing. 21 MR. ROSENBAUM: Your Honor, the witness is 22 available for cross-examination. 23 THE COURT: Okay. 24 Who has cross? 25 CROSS-EXAMINATION 26 BY MR. MILTNER: 27 Q. Good afternoon, Mr. Galbraith. 28 A. Good afternoon. 1475 1 Q. My name is Ryan Miltner. I represent Select Milk 2 Producers. 3 I don't have very many questions, but I do have 4 one. In your role as the vice president of procurement, 5 you say that your responsibilities involve negotiating 6 contracts for the purchase and delivery of dairy 7 commodities. 8 Does that include raw milk contracts to supply 9 your plants? 10 A. No. The raw milk contracts are purchased in 11 another group that buys cheese, so that would be a 12 different group. It would be the cream, condensed, 13 condensed whey, condensed buttermilk, and commodity risk 14 management. 15 Q. Are you familiar with the raw milk supply 16 agreements for Saputo? 17 A. Somewhat, yes. 18 Q. Do you know if those contracts include 19 specifications for a minimum level of butterfat in the 20 milk that's delivered? 21 A. No, I -- I do not believe that -- I don't believe 22 they do. 23 Q. Do you -- do you know if they have terms that 24 include a minimum level of protein or other milk solids? 25 A. No. They do not. I do not believe they do. 26 Q. Okay. Do you -- do you know why they do not 27 include those terms? 28 A. We don't pay for -- we don't need the protein in 1476 1 the formulation. We -- in a Class II product, the protein 2 is not something that we add the value to the customer 3 within a Class II product, so we don't pay additional 4 premiums for the protein. We do in the cheese but not in 5 the Class II. 6 Q. Explain, if you could -- I'm looking at page 2 of 7 your statement, where you list several products fortified 8 or standardized with solids nonfat. 9 A. Yes. 10 Q. Could you explain the relevance of that to the 11 issue with Proposal 1 and 2 if you could? 12 A. So when we bring -- when milk comes into our 13 facility and we pay the Class -- the proposed Class II 14 9.41, and we are receiving less than that, then we have -- 15 and we have to fortify on top of that, then what happens 16 is we end up double paying for that. We have to add skim 17 solids back to those products to meet standard of 18 identities and/or performance issues that we have within 19 those products, and in order to do that, we have -- we do 20 buy other solids and fortify that. 21 Q. And are you suggesting that Proposal 1 will cause 22 that to occur more often or increase the cost to Saputo, 23 either one of those? 24 A. It will increase the cost. 25 Q. Would that cost be mitigated if you required your 26 raw milk to have a certain level of other solids in it? 27 A. Yes, it would be. 28 Q. But Saputo you say does not do that today? 1477 1 A. Not today. 2 Q. There's nothing that prevents them from doing 3 that, though, is there? 4 A. No. 5 MR. MILTNER: Thank you. 6 THE COURT: Other than AMS, does anyone else have 7 cross? 8 Seeing none, AMS, do you have cross for this 9 witness? 10 MR. WILSON: Yes, your Honor. 11 CROSS-EXAMINATION 12 BY MR. WILSON: 13 Q. Todd Wilson, Dairy Programs. 14 Good morning -- or good afternoon -- 15 A. It's good evening. 16 Q. -- Mr. Galbraith. It seems like I want to be back 17 in the morning, maybe. I don't know why. Maybe tomorrow 18 morning. 19 So as you are aware -- maybe, maybe not -- USDA 20 identifies -- or Small Business Administration identifies 21 companies for determination of small business, that is -- 22 how many employees does Saputo have, estimated? 23 A. Twenty- -- worldwide? 24 Q. Yes. 25 A. 20,000. 26 Q. Thank you. 27 The information you have provided indicates that 28 your -- on page 2, there's a couple of terms, and I just 1478 1 want to better understand the testimony. There's a group 2 of bullet points under products fortified/standardized 3 with solids nonfat. 4 A. Yes. 5 Q. What does LFM indicate? 6 A. Lactose-free milk. 7 Q. Thank you. 8 Under number two right below that you indicate 9 NMPF Proposal 2. Are you referring to NMPF Proposal 1 or 10 NAJ Proposal 2 or possibly something different? 11 A. I'm referring to Proposal 2, which is the annual 12 milk component factors update annually. 13 Q. Okay. Thank you. 14 A. That's what I'm referring to. 15 Q. On a previous witness we heard from, indicated 16 plants in a USDA exhibit -- I don't remember what number 17 it is, but it's a long list of plant names, and whether or 18 not they are regulated and non-regulated plants. 19 You have identified two plants that you have and 20 given information on, Decatur, Alabama, and Murray, 21 Kentucky, and Plant City, Florida. 22 A. Yes. 23 Q. Can you identify if -- if any of those are fully 24 regulated plants or not? 25 A. They are partially-regulated plants. 26 Q. Partially-regulated plants. Okay. 27 Is the Sulphur Springs plant partially regulated? 28 A. It is fully regulated. 1479 1 Q. It's fully regulated. It wasn't highlighted in a 2 different color, and I missed that. 3 A. I just use that as a reference point since it sits 4 in East Texas close to Louisiana. It's still in 5 Order 126. 6 Q. Yes. Thank you. 7 We've heard from a few different witnesses about 8 risk management. I noticed in your background information 9 that was one of the -- one of the things that is listed as 10 your experience with. 11 Can you tell us if Saputo utilizes risk management 12 tools in their -- in their risk assessment? 13 A. Yes, we do. 14 Q. Thank you. 15 Can you -- when you say "yes," can you expand a 16 little bit on what type of products you might use? We 17 have had several testimonies -- witnesses' testimony on 18 CME or LGM Dairy. 19 A. We use both OTC, over-the-counter instruments, as 20 well as exchange traded financial instruments on the CME, 21 depending on what commodity and what product and what 22 we're doing. 23 Q. Very good. Thank you very much. 24 MR. WILSON: That's all, your Honor. 25 THE COURT: Ms. Taylor, do you something? 26 MS. TAYLOR: No, that's it. Thank you. 27 THE COURT: Okay. Is that it for -- no one opened 28 the door, I don't think? 1480 1 Mr. Rosenbaum. 2 MR. ROSENBAUM: I just have a follow-up question 3 or two regarding the questions you got from Mr. Miltner. 4 REDIRECT EXAMINATION 5 BY MR. ROSENBAUM: 6 Q. You were asked whether you could contractually 7 demand that your dairy farmers provide higher nonfat 8 solids milk, correct? 9 A. We can, yes. 10 Q. He asked that -- 11 A. He asked that question, yes. 12 Q. And based upon who is supplying you with milk now, 13 are they capable of doing that at this point in time? 14 A. We would have to have a conversation with them and 15 see if they are. We haven't had that conversation, but we 16 could have that. 17 Q. But based upon what they are supplying you so far, 18 they're a considerable distance below 9.4%; is that right? 19 A. The evidence would indicate that they are not able 20 to ship that. 21 MR. ROSENBAUM: Thank you very much. 22 THE COURT: Well, let's offer Exhibit 113 for 23 identification into evidence, if that's fine with you, 24 Mr. Rosenbaum. 25 MR. ROSENBAUM: So moved. 26 THE COURT: Seeing no objection, it is in the 27 record. Thank you. 28 (Thereafter, Exhibit Number 113 was received 1481 1 into evidence.) 2 THE COURT: You may step down. 3 THE WITNESS: Thank you. 4 THE COURT: Mr. Galbraith, thank you for coming. 5 MR. ENGLISH: I believe that we are sort of moving 6 on to Issue 2. I just want to say that -- I know this -- 7 I think this has been discussed before, but I want to make 8 sure the record is clear. There will be -- unlike 9 yesterday's witnesses, who hopefully will have follow-up 10 from HP Hood and Shehadey -- there will be other MIG 11 members who will testify later in the hearing, and their 12 testimony will touch on Issue 1. So I just want to make 13 sure -- you know, we're moving on to Issue 2, but I think 14 we have talked all along about the fact that somebody may 15 end up talking about an issue at another time. So I just 16 want to make sure that's clear for the record. 17 THE COURT: Anyone else have anything they want to 18 say about that? 19 I guess they'll object if they have a problem 20 then, but it sounds like general agreement within the room 21 since no one -- no one objected. 22 Okay. Are we -- are we going to keep going today 23 or -- I thought so. 24 Ms. Hancock. 25 THE COURT: Raise your right hand. 26 PETER VITALIANO, 27 Being first duly sworn, was examined and 28 testified as follows: 1482 1 THE COURT: Welcome back. 2 THE WITNESS: Thank you, your Honor. 3 MS. HANCOCK: I don't know if this is the first 4 time we're putting on a witness previously -- or that had 5 previously testified. Do you want us to do the same, 6 address, and name for the record? 7 THE COURT: Anyone see a need for that? I don't. 8 It's all in the record. 9 MS. HANCOCK: Okay. 10 THE COURT: If you wanted to remind us -- I know 11 we like to say things out loud rather than just do it on 12 the paper. But I'm not going to interrupt you if you 13 wanted to remind us of why this witness is qualified to 14 testify. But I'm sure you asked before whether he was 15 qualified to come, you can do that. But when you asked if 16 he was qualified to testify as an expert, did you cover 17 all the topics do you think? 18 MS. HANCOCK: Okay. Thank you. 19 THE COURT: Did you? I mean I may have already 20 found that, so -- 21 MS. HANCOCK: Yeah. 22 DIRECT EXAMINATION 23 BY MS. HANCOCK: 24 Q. Okay. Good afternoon, Dr. Vitaliano. This is 25 your second round at testifying at this hearing; is that 26 right? 27 A. That is correct. 28 Q. And this testimony that you are offering today, 1483 1 what is the topic on which you will be talking? 2 A. My testimony today is in support of Proposal 3, 3 one of five proposals submitted by the National Milk 4 Producers Federation, hereafter known as NMPF. 5 Q. Okay. And just so our record is clear, you 6 previously in this hearing have been qualified as an 7 expert. I'll just note that here for this portion of the 8 transcript. So if there's any question, it at least 9 creates an anchor point to refer back to day one of 10 testimony. 11 A. Very good. 12 Q. And did you prepare a statement on behalf of your 13 testimony in support of barrel elimination? 14 A. I have. 15 Q. And is that what's been identified as Exhibit 16 National -- or excuse me -- Exhibit NMPF-6? 17 A. It has. 18 MS. HANCOCK: Your Honor, I'd ask that this be 19 marked as the next exhibit for identification purposes. 20 THE COURT: So marked. 21 MS. HANCOCK: I don't recall what the number is. 22 THE COURT: I'm sorry, 114. 23 (Thereafter, Exhibit Number 114 was marked 24 for identification.) 25 MS. HANCOCK: 114. Thank you. 26 BY MS. HANCOCK: 27 Q. Dr. Vitaliano, would you mind presenting your 28 testimony as outlined in Exhibit 114? 1484 1 A. Yes. I am Peter Vitaliano, vice president of 2 economic policy and market research at National Milk 3 Producers Federation. This testimony is presented in 4 support of Proposal 3, one of five proposals submitted by 5 National Milk Producers Federation. 6 I am going to summarize parts of my testimony. 7 Those are the parts that are identical to the -- my 8 testimony a week ago, and it was just one week ago, 9 although it may seem longer to some of us. 10 The parts that I want to summarize concern 11 description of the National Milk Producers Federation; a 12 background of Federal Order Reform emphasizing the very 13 important transition in Federal Order Reform from the 14 direct survey of milk prices to the indirect price 15 discovery of milk prices through the end product price 16 markets, through a combination of formulas that translate 17 those product prices into a raw milk price; the importance 18 of those formulas to mirror closely the structure of the 19 U.S. dairy industry that guides that transformation; the 20 fact that the product price formulas adopted in Federal 21 Order Reform contain mostly fixed factors that have 22 largely not changed since the time of Federal Order 23 Reform, contrasted to the relatively rapid structural 24 evolution of the U.S. dairy industry that affects those 25 factors; and the corresponding need to update those 26 factors in a systematic fashion; describe the intensive 27 and lengthy process that the National Milk Producers 28 Federation has undertaken for the purpose of that 1485 1 modernization; and ending in the five proposals that we 2 have brought to this hearing, as well as two other 3 proposals, two other recommendations whose -- we are 4 seeking to achieve through other forums. 5 Also, included was a brief description of the 6 economic and market impacts of our package of proposals, 7 impacts on producers, processors, consumers, and small 8 businesses. I will not repeat those -- those sections. 9 They are identical in my statement Exhibit NMPF-6 as read 10 into the record a week ago and as contained in Exhibit 11 NMPF-6, which is available on the website. 12 This testimony -- this portion of my testimony is 13 in support of Proposal 3 concerning surveyed commodity 14 products. Proposal 3 can be described as remove the U.S. 15 average survey price for 500-pound barrel cheddar cheese 16 from the computation of the protein component price. 17 NMPF requests the Secretary to amend 18 7 CFR 1000.50(n) applicable to all Federal Milk Marketing 19 Orders as specified at the conclusion of this testimony, 20 which would remove barrel cheddar cheese -- or cheddar 21 cheese packaged in 500-pound barrels from the cheese 22 reference prices specified in the Federal Order protein 23 component price formula. 24 Disorder caused by the inclusion of 500-pound 25 barrel cheddar cheese prices in the current computation of 26 the protein price: 27 The Class III milk price in Federal Orders is 28 derived from calculations of component prices for protein, 1486 1 butterfat, and other solids. The protein component price 2 formula references two survey price series for cheddar 3 cheese submitted by manufacturers through the Dairy 4 Product Mandatory Reporting Program and reported in the 5 weekly National Dairy Product Sales Report, or NDPSR. 6 These are the 40-pound block yellow cheddar cheese price 7 and the 500-pound barrel cheddar cheese price. 8 The total cheese price used in the protein price 9 calculation is the weighted average of the block and the 10 moisture-adjusted barrel price plus $0.03 per pound 11 weighted by sales volumes reported in the survey. The 12 respective reported sales volumes of block and barrel 13 cheese are roughly equal on average but with blocks 14 ranging from 37% to 60% of total reported weekly volumes 15 from 2017 through this past July. 16 The Federal Order Reform final decision explained 17 the current cheese price computation as follows, and I'm 18 quoting, with a few explanatory words added in parenthesis 19 in the written statement. 20 "The NASS cheese survey price" -- at that time it 21 was NASS that was surveying the prices -- "will be 22 determined by adding $0.03 to the moisture-adjusted barrel 23 price and then computing a weighted average price" -- 24 volume weighted average price -- "using the block cheese 25 price and the adjusted barrel price... Including both 26 block and barrel cheese in the price computation increases 27 the sample size by about 150%, giving a better 28 representation of the cheese market. 1487 1 "Since the Make Allowance in the protein component 2 price formula is for block cheese, the barrel price" -- 3 "the barrel cheese price must be adjusted to account for 4 the difference in cost for making block versus barrel 5 cheese. The $0.03 that is added to the barrel cheese 6 price is" -- emphasis here -- "generally considered to be 7 the industry cost" -- "standard cost difference between 8 processing barrel cheese and processing block cheese," end 9 of quote. 10 This method of computing the cheese price for the 11 protein component formula worked reasonably well as long 12 as the difference in the respective market prices of 13 blocks and the moisture-adjusted barrel price remained 14 close to these assumed $0.03 per pound processing cost 15 difference. 16 From 2000 to 2016, the spread between the NDPSR 17 block and barrel cheese prices annually remained within a 18 tight range of a few cents per pound. Subsequently, 19 however, the correlation between the block and barrel 20 prices deteriorated significantly starting around 2017. 21 The weighted average spread of block over barrel 22 prices in the weekly NDPSR during January 2017 through 23 July 2023 was $0.12 per pound, with a much wider and more 24 volatile range of between minus 30 and a half cents per 25 pound to 72.7 cents per pound. The highest monthly block 26 barrel spread during that period, monthly spread, was 27 $0.69 per pound and the lowest was minus $0.29 per pound, 28 slightly -- slightly tighter range on the monthly basis 1488 1 compared to the weekly basis. This change in the weekly 2 price relationship is shown clearly in Figure 1. 3 And I apologize that my computer is set up to do 4 two monitors, and so I can't -- I can't do the display 5 setting on PowerPoint because it's on the other monitor 6 that here is a phantom monitor. 7 But you will see the pattern. Again, this goes 8 from the beginning of 2017 through this past July, with 9 the weekly NDPSR reported price difference between, again, 10 block prices and the moisture-adjusted barrel cheese price 11 without the $0.03 in it. 12 The dotted line represents the $0.03 standard. 13 The solid blue line represents the $0.12 average during 14 that period, four times the current regulatory $0.03 15 standard, with a considerable wide variation, which, by 16 any measure, an economist would describe as volatility in 17 that barrel block spread. 18 The CME block cheddar cheese price is used as a 19 pricing index for most cheese produced in the United 20 States, cheddar 40-pound blocks, 640-pound blocks, 21 mozzarella, other American type cheese, and other types of 22 cheese, including cream cheese and Hispanic cheeses, 23 typically use the 40-pound block price as an index for 24 pricing purposes. 25 Approximately 90% of natural cheese produced in 26 the United States is sold using the CME 40-pound block 27 cheese price as an index. The CME barrel cheese price is 28 used as an index to price barrel cheese and processed 1489 1 cheese products, but it's not often used to price other 2 natural cheeses. 3 Working with its cheese-producing member 4 cooperatives and their expertise, NMPF estimates that the 5 CME barrel cheese price is used to price only about 9% of 6 total domestically-produced natural cheeses during 7 calendar year 2022, including barrels themselves. 8 The volatile block barrel spread over the past 9 five years has negatively impacted both dairy producers 10 and processors. Historically, using both block and barrel 11 cheese prices in the Class III pricing formula effectively 12 increased the volume of cheddar cheese reported in the 13 NDPSR. As long as the block barrel spread was relatively 14 stable and consistent at around $0.03 per pound, including 15 both block and parallel prices, did not result in 16 unpredictable and disruptive fluctuations in the Class III 17 price. 18 Since 2017, however, the significantly wider and 19 increasingly volatile block barrel spread has caused 20 instability in the cheese market. It has reduced dairy -- 21 revenue for dairy producers because barrels, at 22 approximately half of the price survey volume, and an 23 average price roughly four times lower than current 24 regulatory standard $0.03 per pound, overrepresented the 25 roughly 10% of total U.S. cheese production that relies on 26 the CME barrel market as a price index, which accordingly 27 results in a Class III price that undervalues milk to 28 produce cheese. It undervalues that milk to all producers 1490 1 paid under Federal Milk Marketing Orders. 2 The proposed solution in Proposal 3 is to remove 3 the survey price for 500-pound barrel cheese from the 4 computation of the protein price. From the Federal Order 5 Reform final decision quoted above it is clear that the 6 intent of using barrel cheese prices to determine -- to 7 partially determine the protein price was to bolster the 8 volume of surveyed 40-pound block cheddar cheese. The 9 purpose of determining the requisite price used -- cheese 10 price used in the protein component formula. It did so by 11 adjusting the barrel cheese price to resemble a block 12 cheese price. 13 But what worked reasonably well for a decade and a 14 half or so subsequently became a disorderly marketing 15 condition when the market dynamics for barrel cheese 16 deviated significantly from those for blocks. And the 17 spread between the block and barrel prices widened and 18 became unstable. Block and barrel cheddar cheese are no 19 longer essentially the same product, simply in different 20 packaging, as the current regulations effectively assume. 21 This widening and increasing volatility of the two 22 prices no longer results in barrel cheese prices 23 resembling block prices. The increase in the spread has 24 lowered Class III prices, lowered producer prices, and 25 created disorderly marketing conditions. 26 Eliminating the barrel cheese -- cheddar cheese 27 barrel price series from the Class III price calculation 28 will result in Federal Order pool values that more 1491 1 accurately reflect the value of milk used to produce 2 cheese. It will reduce financial uncertainty for 3 procedures and processors by ensuring that the cheese 4 price in the protein component formula represents the 5 single basic commodity cheddar cheese product that prices 6 almost all other cheese rather than what have effectively 7 become two different products. 8 Price risk management opportunities for processors 9 will be enhanced because there are risk management tools 10 built around block cheese that do not exist for barrels. 11 Existing risk management tools, including the Class III 12 price and the cheese futures and options, will become more 13 effective means to price cheese for consumers and to 14 manage input price risk. 15 Eliminating the cheddar cheese barrel price series 16 from the Class III price calculation will create more 17 orderly marketing in Federal Orders for all of these 18 reasons. 19 Calculated, again, just arithmetically, not an 20 economic analysis, but simply an arithmetic calculation, 21 eliminating the cheddar cheese barrel price series from 22 the Class III price calculation would have increased the 23 cheddar cheese price used in the Federal Order protein 24 component calculation by 4.31 cents per pound, which would 25 have increased the Class III price by $0.41 per 26 hundredweight using average product prices for 2017 27 through 2022. 28 During 2019 through July 2023, the NDPSR weekly 1492 1 survey volumes represented 33% of the total U.S. natural 2 cheese production, 30% of U.S. dry whey production, and 9% 3 of U.S. butter production. It is estimated that reported 4 volumes of 40-pound block cheese represents about 16% of 5 total U.S. natural cheese production. 6 Limiting barrel cheese from the protein component 7 price formula would still provide adequate value of 8 cheddar cheese for price discovery purposes in determining 9 a component price for protein in the context of the 10 corresponding percentages for butter and dry whey. Doing 11 so would also bring the survey cheese price into 12 conformity for those for butter, nonfat dry milk, and dry 13 whey, in their respective Federal Order component price 14 formulas, namely in their use in a truly single commodity 15 product, with a single price, determined by a single spot 16 market. 17 That consistently effective process -- practice 18 for the other three products in their respective component 19 price formulas, together with the unfortunate experience 20 of deviating from that practice for cheese, lends powerful 21 support for the adoption of Proposal 3. 22 This testimony provides an overview of our 23 justification for adoption of Proposal 3. More detailed 24 testimony will follow that supports all or key portions of 25 Proposal 3, including testimony provided by Darin Hanson, 26 representing NMPF member cooperative Foremost Farms USA, 27 other members of the NMPF task force that developed our 28 Federal Order modernization proposals, and producers who 1493 1 are members of NMPF member dairy cooperatives. 2 Finally, the regulatory language we propose -- and 3 I have written our regulatory language to reflect the 4 total package of five NMPF proposals. 5 So our proposal for modification pursuant to 6 Proposal 3 of Federal Order regulation CFR -- 7 CFR 7 1000.50 (n), protein price, the protein price per pound 8 rounded to the nearest one-hundredth cent shall be 9 computed as follows: Strike all subsequent parts of this 10 paragraph and insert in lieu thereof: 11 (1): Subtract the cheese Make Allowance from the 12 U.S. average AMS survey price for 40-pound block cheese 13 reported by the Department for the month, and multiply the 14 result by 1.383; 15 (2): Add the amount computed pursuant to 16 paragraph (n)(1) of this section an amount computed as 17 follows: 18 (i): Subtract the cheese Make Allowance from the 19 U.S. average AMS survey price for 40-pound block cheese 20 reported by the Department for the month, and multiply the 21 result by 1.572; and 22 (ii): Subtract 0.9 times the butterfat price 23 computed pursuant to paragraph one of this section from 24 the amount computed pursuant to paragraph (n)(2)(i) of 25 this section; and 26 (iii): Multiply the amount computed pursuant to 27 paragraph (n)(2)(ii) of this section by 1.17. 28 This concludes my testimony. 1494 1 Q. Thank you, Dr. Vitaliano. 2 MS. HANCOCK: Your Honor, we would submit him for 3 cross-examination. 4 THE COURT: Yes. 5 Who has cross for this witness aside from AMS? 6 Mr. Rosenbaum. 7 CROSS-EXAMINATION 8 BY MR. ROSENBAUM: 9 Q. Good afternoon, Dr. Vitaliano. Steve Rosenbaum 10 again for the International -- 11 A. Good afternoon, Mr. Rosenbaum. 12 Q. -- International Dairy Foods Association. 13 So you are aware that the question whether or not 14 the barrels should be included in the cheese price survey 15 was a question that was addressed during the 2000 order 16 reform? 17 A. Yes, it was -- I quoted the Department's 18 conclusion, explanation, and justification for making the 19 current decision, yes. 20 Q. And are you -- you are aware that at that time, 21 your organization, National Milk Producers Federation, 22 opposed the inclusion of barrels, but the USDA concluded 23 otherwise? 24 A. Yes. My organization did oppose the inclusion of 25 barrels as we are doing now, and we -- that was -- the 26 Department did not agree with it. 27 Q. And are you -- you recall, of course, then there 28 were subsequent hearings in 2006, I think 2007 as well, 1495 1 resulting in a decision in 2008 that made a variety of 2 changes to the Federal Order system, correct? 3 A. Yes. But I'm mostly familiar with the changes 4 affecting the Make Allowances in those proceedings. 5 Q. Are you -- are you -- are you aware that at that 6 time, once again, there was a proposal by not National 7 Milk but co-op organizations to remove the barrel cheese 8 from the survey? 9 A. I have heard that. I have not read that 10 particular decision. 11 Q. I think National Milk sat out those hearings. Am 12 I right about that? 13 A. I think so, because I do not recall that we 14 participated in those hearings. And -- and I don't recall 15 that we took a position on Make Allowances at that time. 16 That was -- my impression is that that was the dominant 17 topic of those hearings. 18 Q. Okay. Do you recall that USDA, once again, 19 addressed the issue whether or not blocks should be 20 included in the survey? 21 A. They must have because blocks are still included 22 in the survey. 23 Q. Well, that they -- but it's not just that it is a 24 carryover, they explicitly reexamined the question and 25 determined that the decision they had made in 2000 was 26 still correct? 27 A. Yes. But that -- given that -- that does not 28 prevent us from recommending that and bringing Proposal 3 1496 1 to this proceeding. 2 Q. And -- 3 A. And I will point out to you that the Federal Order 4 Reform discussions were held prior to 2000. The more 5 recent proceeding that you reference was I think concluded 6 in 2008. And you will hear me -- you will recall that I 7 said many times in my written statement that -- that I 8 just testified to, that the problems with including barrel 9 cheese, even though National Milk recommended not 10 including it way back in Federal Order Reform, the problem 11 did not become acute and represent disorderly marketing 12 until 2017. 13 So I would propose that my testimony primarily 14 talks about the current dairy market, particularly the 15 current barrel and cheese and block cheese market. Going 16 back, again, to our overarching statement of purpose for 17 what we're -- you know, our entire package of Federal 18 Order modernization proposals was to recognize the changes 19 that have occurred in the dynamic dairy market, in this 20 case changes which take have taken place only since 2017, 21 as being particularly pertinent to what we're testifying 22 to at this hearing, and not necessarily to basically going 23 back over the past, other than to create -- basically 24 recreate the conditions that led to the decisions in the 25 past that we still have today. 26 Q. Well, let's talk about some of the similarities or 27 differences. 28 What -- what percentage of surveyed cheese today 1497 1 is -- is block versus barrel? 2 A. In the survey? 3 Q. Yes. 4 A. It's a little -- it's a little more than 50%. I 5 think it is getting up to about 54% of the reported 6 volumes are barrels, and a little -- and the one -- you 7 know, 100% minus that 54, 55. So I track those prices 8 weekly, but I don't -- I don't memorize the numbers. But 9 it's around 54, 55, 45. 10 Q. Okay. So if we look at the 2008 decision where 11 USDA said, quote, "Record evidence reveals that barrel 12 production in the NASS survey is often in excess of 50% of 13 the total cheese volume surveyed," end quote, that remains 14 true today, correct? 15 A. That remains true today, yes. Slightly more than 16 the 50%. 17 Q. Okay. And -- 18 A. And that -- and that is exactly part of the reason 19 for our proposal, that that 54, 55% is vastly 20 overweighted -- vastly overweights the importance of 21 barrel cheese in the NDPSR weekly cheese price 22 calculation, and therefore the monthly price calculation, 23 compared to the volume of cheese that is actually priced 24 with reference to the block cheese price versus the barrel 25 cheese price. 26 So, yes, indeed, I fully agree with you, that that 27 50-some percent barrel cheese in the -- in the survey is 28 very pertinent to Proposal 3 and our support therefor. 1498 1 Q. Now, you say -- you make reference on page 4 of 2 your testimony to -- to this $0.03 difference, correct? 3 A. That's correct. 4 Q. But correct me if I'm wrong, but I read that 5 language -- this is on page 4 of your testimony -- to be 6 entirely addressing the understanding of USDA as to the 7 difference in the cost of making the products, not 8 difference in the price at which the products are sold. I 9 mean, just look at language you quote. 10 Is that a fair characterization? 11 A. No, I don't believe it is. Because even though 12 they use that language, cost difference, and adjusting the 13 Make Allowance, the entire context of that quote from the 14 Federal Order -- from the Federal Order Reform decision 15 implicitly assumes that barrel cheese is the same product 16 as block cheese, only in a slightly different package, 17 just like say the butter specification in the survey 18 specifies metric and English units of package labeling. 19 The point I'm making is that the assumption for 20 the Federal Order Reform decision to include barrels 21 implies -- basically is found -- is built upon the 22 assumption it's the same product in a different package; 23 therefore, the only standardization necessary to bring 24 barrel prices into a reasonable mimicking of block prices 25 is the processing costs. 26 Q. Well -- 27 A. That assumption no longer applies. These are two 28 different products that behave in two different ways. So 1499 1 in a sense, the standard for judging the appropriateness 2 of including barrel cheese as a adjunct to -- as a 3 different type of block cheese -- which is also very 4 apparent in the language that you have just quoted, that 5 paragraph -- that no longer applies. So it is perfectly 6 pertinent to -- to do the analysis of the different 7 marketing prices, as I have laid out in my testimony. 8 Q. All right. So let me read you the words, and you 9 tell me where they are talking about price as opposed to 10 cost. 11 Quote: "The barrel cheese price must be adjusted 12 to account for the difference in cost of making block 13 versus barrel cheese. The $0.03 that is added to the 14 barrel cheese price is generally considered to be the 15 industry standard cost difference between processing 16 barrel cheese and processing block cheese." 17 It is all cost -- 18 A. I interpret the use of the word "cost" in that 19 paragraph to be totally in the context of the assumption 20 in that paragraph that barrel cheese is block cheese in a 21 different container. And the only -- the only thing that 22 needs to be adjusted for the barrel cheese to compare it 23 and treat it like block cheese is to adjust the moisture 24 and adjust the cost, which is my understanding was 25 basically just the -- the packaging cost. 26 And I am testifying to the extent that that 27 assumption that barrel cheese is block cheese in a 28 different package no longer applies. So the -- going back 1500 1 to the 2000 -- 1999 language that uses the word "cost" 2 is -- may have been appropriate at that time. It is no 3 longer appropriate. And that is part of our position on 4 Proposal 3. 5 Q. Well, if the two products had been absolutely 6 identical, wouldn't -- what would be the point of even 7 having included barrels -- 8 A. To increase -- I'll read that. It's right in that 9 paragraph, sir. 10 Q. All right. 11 A. "Including both block and barrel cheese in the 12 price computation includes" -- "increases the sample size 13 by about 150%." 14 You would always want to include -- increase the 15 sample size if you indeed had consistent products. 16 Q. Aren't they -- 17 A. It would make it -- it would make sense to do that 18 if barrel cheese was effectively block cheese in a 19 different package. But that's no longer the case. 20 Q. Haven't they always had different uses? 21 A. They always have. 22 Q. Okay. I mean, let me read you what CME -- 23 A. But -- 24 Q. Let me just finish. 25 Let me read you what the CME block cheese futures 26 says, quote, "Although" -- and I'm going to ask you if you 27 agree -- "Although blocks and barrels are both cheddar 28 cheese products, their end uses are diverse. Typically, 1501 1 manufacturers use block cheddar cheese for chunks, loaves, 2 shreds, and snack-sized natural cheese, while barrels are 3 often consumed in the processed cheese category." 4 Is that accurate? 5 A. Well, yes. What you just read makes -- further 6 supports the point that we are making in supporting 7 Proposal 3. The block and barrel cheese are different 8 products, different end uses, and now increasingly very 9 different market dynamics. 10 Q. Well, they -- they both represent market dynamics 11 in the cheese market, correct? 12 A. They represent different market dynamics in the 13 broader cheese market. We are talking -- in terms of 14 Proposal 3, we are focusing on the dynamics of the block 15 cheese market. And the Federal Order Reform decision 16 effectively affirms that, that we're basically looking at 17 considering barrels -- that decision considered barrel 18 cheese to be a different kind of block cheese. They 19 talked about using the Make Allowance for block cheese, 20 and the only thing that needed to be adjusted was the 21 difference. 22 Q. Well, they talked about the cost of making it -- 23 they talked about -- strike that. 24 They talked about if you wanted to adjust the cost 25 of making it -- 26 A. Right. 27 Q. -- $0.03 would capture that? 28 A. In the overarching assumption that block barrel 1502 1 was block cheese in a different kind of package. And 2 implicitly, if at the time of Federal Order Reform we saw 3 the kind of instability between block and barrel cheese 4 prices, I would seriously doubt -- I cannot speak for the 5 Department -- but I would seriously doubt that the 6 Department would have made that decision. 7 MR. ROSENBAUM: That's all I have at this time. 8 Thank you. 9 THE COURT: Mr. English. 10 CROSS-EXAMINATION 11 BY MR. ENGLISH: 12 Q. Good late afternoon, Doctor. 13 A. Good late afternoon, Mr. English. 14 Q. So let me start on page 5. And you say that 15 National Milk estimates that the CME barrel cheese price 16 is used to price only about 9% of total 17 domestically-produced natural cheeses. 18 A. Yes. 19 Q. Now, that -- that -- that is different from the 20 concept of the survey where more than 50% of the survey is 21 barrel, correct? 22 A. Yes. And, in fact, my testimony specifically 23 draws attention to the disparity between the 50%-plus 24 weighting of barrels in the survey, and the only 9% in 25 terms of its role -- barrel's role in pricing all natural 26 cheese. 27 Q. So, now, when you talk about all natural cheese, 28 though, that then is much larger than blocks, correct? 1503 1 A. Much larger, yes. 2 Q. So now we're comparing -- you have got blocks, 3 which you are okay with keeping in, but you want to 4 exclude barrels because you are comparing barrels to all 5 natural cheese. Isn't that an inept comparison? 6 Shouldn't you be comparing blocks to barrels? 7 A. Can you repeat that question? I'm not sure 8 exactly I fully understand it. 9 Q. Well, I'm the one who doesn't understand what is 10 the relevance given the fact that -- well, let me 11 backtrack. 12 When you use the phrase natural cheeses, what's 13 include in natural cheeses? 14 A. Basically all cheeses except processed cheese, 15 cottage cheese, the sort -- as I kind of loosely laid out, 16 40-pound blocks, 640-pound blocks, mozzarella, other 17 natural cheese. In the practical sense, I would -- I 18 would consider all natural cheese to be what is reported 19 by USDA's National Agriculture Statistic Service, or NASS, 20 under the categories of American cheese, including cheddar 21 and other types, Italian cheese, including mozzarella and 22 other types, and Hispanic cheeses, cream and Neufchatel 23 cheese, Swiss cheese, those -- those things. Basically, 24 the -- you know, NASS gives you the most disaggregated 25 statistics on the production of various varieties of 26 cheese. 27 Q. But aren't a lot of those -- and let's go back to 28 mozzarella. We heard about mozzarella earlier this week. 1504 1 Aren't a lot of those products a value-added 2 products? 3 A. But they are cheese products. When you make 4 mozzarella cheese, the Class III price is the appropriate 5 price -- price that cheese manufacturers pay into the 6 pool. I'm talking about whatever cheese prices, natural 7 cheese prices, are produced for which the processors pay 8 the Class III price into the pool. So the Class III price 9 is a -- is a broad -- I'm looking at the universe of 10 natural cheese as all cheese that is basically -- whose 11 production pays into Federal Order pools at the Class III 12 price. 13 Q. But isn't the whole point of using the blocks and 14 the barrels because those are deemed to be the products 15 that are commodity products, and Class III and Class IV 16 are designed to be market-clearing prices? 17 A. The purpose of the products that are to be 18 included in the product price formulas, and the NMPF 19 modern -- Federal Order modernization process spent a lot 20 of time on this, including examining things like unsalted 21 butter, including mozzarella, 640-pound blocks, is to 22 select the commodity product, the product that you make 23 when you have milk that you have no other use for, but 24 need to process it into a product, cheese, butter, nonfat 25 dry milk, dry whey. That's the product -- that's the 26 product that you want to have in your -- in your component 27 price formulas. 28 In the case of butterfat formula, the case of the 1505 1 nonfat solids formula, and the case of the other solids 2 formula, you have a single product that is truly the 3 commodity product that is in those formulas. For historic 4 reasons, mainly to extend the volume reported, as going 5 back to the quote on Federal Order Reform, the purpose of 6 including blocks and barrels was the feeling at that time 7 that just like butter, for example, is packaged in, you 8 know, different kinds of package, labeled metric and 9 otherwise, that blocks and barrels were the same product, 10 and you simply had to adjust the moisture and put that 11 $0.03 difference to basically a larger sample of the same 12 product. 13 We are claiming in -- basically, in accordance 14 with our overall procedure in approaching our 15 recommendations for Federal Order Reform, look at how the 16 industry has changed and how that affects the 17 appropriateness of the formulas that were adopted, often 18 without subsequent change, for instituting end product 19 pricing. What may have made sense on barrels and blocks 20 in 2020 and up through 2016, we claim no longer makes 21 sense when you look at the fundamental purpose of the 22 cheese protein price formula. 23 Q. I understand you say this -- but, now, isn't 24 barrel cheese effectively exactly what you are saying, a 25 product where you put milk as a matter of last resort? 26 A. In some cases. But the change -- the cheese 27 industry is a very large industry in this country, and it 28 may have two -- it clearly has two commodity -- or basic 1506 1 commodity products. And the point we're making is that 2 the commodity product, if you want to call it such, that 3 is barrel cheese, is seriously overweighted in the 4 reported volumes that set the Class III price compared 5 to -- set the Class III price for determining the value of 6 milk that dairy farmers produce that is used to make 7 natural cheese seri- -- the inclusion of barrel cheese in 8 the formula seriously overweights the importance of 9 that -- of barrel cheese relative to the volume that it 10 represents in terms of actually pricing natural cheese. 11 And that that imbalance, which does not affect the 12 use of butter, nonfat dry milk, and dry whey, the single 13 product in the other three component formulas, that 14 product -- that problem does not exist. It exists in 15 cheese because the Department chose for the purpose of 16 enlarging the reported volumes on the assumption that we 17 had the same product in different packaging types, 18 basically has ended up causing problems. 19 And, therefore, we're effectively advocating for 20 an approach to using a product -- a single -- truly single 21 product, with a single price, and a single spot market, in 22 all four formulas. We are advocating to bring the cheese 23 price used in the protein component formula into 24 conformity with the other three component price formulas. 25 Q. So -- but is there another product in butter that 26 has ever been viewed to be a place where you put the 27 excess butter when you have no other use for the milk? 28 A. In this country I -- my understanding is that -- 1507 1 is that 80% salted butter, according to the legislatively 2 mandated standard, is where you put -- where you put 3 your -- your excess cream if it could go nowhere else. We 4 looked extensively, with some support in some of our 5 members, at including unsalted butter as a way to increase 6 the volume of butter, which is reported in the survey, 7 which is about 9%. It is the lowest one. 8 And we had a vigorous discussion on that, and 9 those of our task force who were involved in the butter 10 business says, unsalted butter is not the commodity 11 product, it is a specialty product, it doesn't necessarily 12 have a standard. We will get to that at another -- 13 another testimony. 14 Q. But the difference is milk used to make barrel 15 cheese is the milk of last resort source, correct? That's 16 where it ends -- 17 A. In some -- in some areas of the country but -- 18 Q. Well, are those people supposed to just be 19 completely abandoned? 20 MS. HANCOCK: Your Honor, can he finish his 21 answer, please. 22 THE COURT: Yes. 23 Mr. English isn't asking for an instruction here, 24 but I do feel like there's starting to be disconnect 25 between the question asked and the answers given. 26 Mr. English asked whether there was another commodity 27 used, and I don't -- I'm not even sure that ever got 28 answered, but a lot else did. 1508 1 So for the purposes of the record, I think I would 2 ask the witness to answer the question asked a bit more 3 directly and stop there unless further elaboration is 4 required on that answer. 5 Is that okay with you, Mr. English? 6 MR. ENGLISH: It is. I also won't step on the 7 answer. But I also do think that -- that I've had 8 circular answers and sort of the same answer over and over 9 again. 10 BY MR. ENGLISH: 11 Q. So I'm trying to understand, is milk used to make 12 barrel cheese, at least in some parts of the country, the 13 place of last resort for milk? 14 A. I don't have a detailed knowledge of the cheese 15 industry to that extent, but that -- I would not disagree 16 with your statement. 17 Q. And if those that price on blocks had a problem 18 with the volatility in the block/barrel relationship, why 19 would they continue pricing on blocks? 20 A. Could you repeat that question? 21 Q. If those that price their products, that you claim 22 in this list on page 5, price on blocks, have a problem 23 with the volatility in the block/barrel relationship, why 24 would they price on blocks? 25 A. They price on blocks because that is the industry 26 standard, and those who price on blocks, I'm not sure that 27 volatility -- I mean, the dairy industry is full of 28 volatility. What would be their alternative? They can't 1509 1 stop the volatility by going to some other product. 2 Q. So the -- 3 A. The -- 4 Q. -- what are the barrel -- producers of barrels 5 supposed to do if you eliminate barrels from the survey? 6 A. The barrel cheese, there is a spot market for 7 barrel cheese that will, I assume, continue to function 8 and -- and basically be a price discovery mechanism for 9 the price of barrel cheese. 10 Q. But it won't be included in USDA's survey, which 11 actually then results in the price of milk that they use 12 to be changed, correct? 13 A. Yes. 14 Q. Will that not cause disorderly marketing when the 15 entities that are trying to produce barrels have a 16 disconnect with their price, that their price is no longer 17 used for price discovery for USDA price-setting purposes 18 but is used for price discovery purposes elsewhere? 19 A. Didn't you ask that that -- if that was 20 reasonable? 21 Q. No, I asked if that's going to be disorderly 22 marketing for them. What about those entities and the 23 dairy farmers who ship to those plants? 24 THE COURT: Do you understand the question? 25 THE WITNESS: I understand the question, but my 26 answer is, is it reasonable to expect dairy farmers 27 through the Federal Order program to subsidize the 28 production of barrel cheese at their expense of being 1510 1 underpaid for the true value of the milk they produce that 2 is used to produce cheese in the United States, under -- 3 at least under the Federal Orders. 4 BY MR. ENGLISH: 5 Q. And yet you are going to exclude the value of the 6 milk used to produce barrels? 7 A. We looked at the option of continuing to include 8 barrel cheese in the formula, but to weight it more 9 appropriately compared to its value in -- or to its -- to 10 the proportion of barrels that -- that actually -- of 11 cheese that is actually priced by barrels, which would 12 have been a -- a weighting of the survey prices of around 13 90% blocks and 10% barrels. 14 That would have been unprecedented to, basically, 15 enforce a weighting procedure, and the feeling was that 16 would be disruptive in itself, in its -- by itself. It 17 would require USDA to annually or periodically survey 18 volumes. And decided that the 10% contribution from -- 19 for barrel cheese would be not worth that extra effort, so 20 we went, you know, the next step and said, let's just take 21 barrel cheese out of the formula and return the cheese 22 price to a single product, like the other three component 23 formulas. 24 Q. So what's the point of having a survey if you are 25 just going to say, we don't think this product is valuing 26 milk correctly, and therefore we're just going to exclude 27 it? 28 A. Well, under the current regulations, if barrel 1511 1 cheese were excluded, USDA would no longer have the 2 authority to require -- require its price to be processed 3 to report -- be reported to the NDPSR. 4 Q. Precisely. And so as a result, the processors who 5 make barrel cheese, products of milk of last resort, and 6 the dairy farmers who ship to them, will be basically 7 told, never mind, we don't want your product because we're 8 not going to continue you in the survey. 9 A. I don't agree that excluding it -- that -- that 10 having it excluded from the survey would amount to a -- to 11 a determination or a declaration that we don't want your 12 product anymore. Processed cheese is going to continue to 13 be -- to be produced. Barrel cheese will continue to be 14 produced, will continue to be priced. And -- and so I'm 15 not sure I agree with the presumption behind your 16 question. 17 Q. Why shouldn't industry practice, that is to say 18 the fact that barrel cheese is being produced, conform to 19 industry regulation, rather than the other way around? 20 A. If the regulation is causing disorderly marketing 21 conditions, then the regulation should be changed. That's 22 why we're here. 23 Q. And the disorderly marketing is that somehow as a 24 result of including milk for last resort going into 25 barrels, is somehow undervaluing milk for dairy farmers, 26 correct? 27 A. It is, yes. 28 MR. ENGLISH: I have no further questions. 1512 1 THE COURT: Any further cross aside from AMS? 2 Yes, Mr. Miltner -- so it is 5:02. I would ask -- 3 that's our -- we're after our normal cutoff. I don't know 4 how much cross you have, Mr. Miltner. I don't know how 5 much cross AMS has. I think we could -- or how much 6 redirect there would be. I'm suggesting we come back 7 tomorrow with this witness. 8 MS. TAYLOR: I think that's a good idea. 9 THE COURT: Okay. With that, we'll return 10 tomorrow morning at 8:00 a.m. to resume the examination of 11 this witness. 12 (Whereupon, the proceedings were concluded.) 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1513 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 14, 2023 11 FRESNO, CALIFORNIA 12 13 14 15 16 MYRA A. PISH, RPR CSR Certificate No. 11613 17 18 19 20 21 22 23 24 25 26 27 28