2968 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 September 11, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 2969 1 A P P E A R A N C E S: 2 FOR THE USDA ORDER FORMULATION AND ENFORCEMENT DIVISION, USDA-AMS DAIRY PROGRAM: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 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 Ashley Vulin 11 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 12 Nicole Hancock 13 Brad Prowant 14 FOR SELECT MILK PRODUCERS, INC.: 15 Ryan Miltner 16 For Edge Dairy Cooperative: 17 Dr. Marin Bozic 18 19 ---o0o--- 20 21 (Please note: Appearances for all parties are subject to 22 change daily, and may not be reported or listed on 23 subsequent days' transcripts.) 24 25 ---o0o--- 26 27 28 2970 1 M A S T E R I N D E X 2 SESSIONS 3 MONDAY, SEPTEMBER 11, 2023 PAGE 4 MORNING SESSION 2973 AFTERNOON SESSION 3121 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 2971 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 James "Cricket" Jacquier: 5 Direct Examination by Ms. Hancock 2974 Cross-Examination by Mr. Rosenbaum 2983 6 Cross-Examination by Dr. Bozic 2990 Cross-Examination by Mr. Miltner 2994 7 Cross-Examination by Ms. Taylor 3002 Redirect Examination by Ms. Hancock 3008 8 Recross-Examination by Mr. Rosenbaum 3012 Recross-Examination by Mr. Miltner 3013 9 Christopher Wolf: 10 Direct Examination by Ms. Hancock 3015 11 Cross-Examination by Ms. Vulin 3039 Cross-Examination by Mr. Rosenbaum 3054 12 Cross-Examination by Dr. Bozic 3061 Cross-Examination by Mr. Miltner 3080 13 Cross-Examination by Ms. Vulin 3088 14 Catherine de Ronde: 15 Direct Examination by Ms. Hancock 3109 Cross-Examination by Mr. Rosenbaum 3121 16 Cross-Examination by Ms. Vulin 3130 Cross-Examination by Dr. Bozic 3137 17 Cross-Examination by Mr. Miltner 3143 Cross-Examination by Mr. Rosenbaum 3152 18 Cross-Examination by Ms. Taylor 3155 Redirect Examination by Ms. Hancock 3159 19 Recross-Examination by Mr. Rosenbaum 3160 Redirect Examination by Ms. Hancock 3161 20 Paul Bauer: 21 Direct Examination by Ms. Hancock 3162 22 Cross-Examination by Mr. Rosenbaum 3179 Cross-Examination by Mr. Miltner 3191 23 Cross-Examination by Ms. Taylor 3194 Cross-Examination by Mr. Miltner 3200 24 Cross-Examination by Dr. Bozic 3201 Redirect Examination by Ms. Hancock 3214 25 Travis Campsey: 26 Direct Examination by Ms. Hancock 3216 27 Cross-Examination by Mr. Miltner 3227 Cross-Examination by Ms. Taylor 3232 28 Cross-Examination by Mr. Rosenbaum 3236 2972 1 M A S T E R I N D E X 2 INDEX OF EXHIBITS 3 IN CHRONOLOGICAL ORDER: 4 NO. DESCRIPTION I.D. EVD. 5 165 Testimony of 2973 Joaquin Contente 6 167 Edge-5 2973 7 168 Testimony of 2975 3015 8 James "Cricket" Jacquier 9 169 Testimony of 3015 3108 Christopher Wolf 10 170 Testimony of 3109 3160 11 Catherine de Ronde 12 171 Testimony of 3163 3215 Paul Bauer 13 172 Testimony of 3216 3237 14 Travis Campsey 15 173 LSMP-2 3224 3237 16 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 2973 1 MONDAY, SEPTEMBER 11, 2023 - - MORNING SESSION 2 THE COURT: On the record. Good morning. We have 3 some housekeeping to take care of, I think. I don't know 4 where to start. 5 We had Exhibit 165 from Mr. Contente, a dairy 6 farmer witness here virtually. Exhibit 167 -- I put a 7 hold on for admission. 8 Can we admit that? 9 Seeing no objections, Exhibit 165 is admitted. 10 (Thereafter, Exhibit Number 165 was received 11 into evidence.) 12 THE COURT: We had 167, which was Edge-5, Witness 13 Peterson. I think -- I don't think we had copies last 14 time is what was going on, and now copies have been made 15 available, I hope, at least to me. 16 Very well. Any objections? 17 Mr. Rosenbaum, you are looking -- 18 MR. ROSENBAUM: I'm looking for the copies that 19 have been made available. 20 THE COURT: Do you want a moment or -- 21 MR. ROSENBAUM: No, apparently it is online. 22 THE COURT: Okay. You are all good? 23 So Exhibit 167, which was Edge-5, is admitted into 24 the record. 25 (Thereafter, Exhibit Number 167 was received 26 into evidence.) 27 THE COURT: Any other preliminary business? 28 Ms. Taylor. 2974 1 MS. TAYLOR: Just to note, as you can tell, we're 2 in a smaller room, and there's some cameras set up and 3 mics. So please be careful when you are walking in this 4 space, I was asked to say, so no one trips over and has a 5 camera fall on them. 6 THE COURT: Okay. Dr. Bozic, welcome. 7 All right. Do we have -- should we put a witness 8 on? Is it Paul Bauer? 9 MS. HANCOCK: Your Honor, our first witness is 10 dairy producer Jacquier. 11 THE COURT: Vert good. 12 Raise your right hand, please. 13 JAMES JACQUIER, 14 Being first duly sworn, was examined and 15 testified as follows: 16 THE COURT: You may proceed. Your witness. 17 DIRECT EXAMINATION 18 BY MS. HANCOCK: 19 Q. Good morning, Mr. Jacquier. Would you state and 20 spell your name for the record, please? 21 A. James Jacquier, J-A-M-E-S, J-A-C-Q-U-I-E-R, also 22 known as Cricket, C-R-I-C-K-E-T. 23 Q. Okay. And what is your mailing address? 24 A. 40 Shattuck Road, Andover, Massachusetts, 01810. 25 Q. And how do you spell Shattuck? 26 A. S-H-A-T-T-U-C-K. 27 Q. And did you prepare testimony in support of NMPF's 28 proposals? 2975 1 A. I did. 2 Q. And is that what's been identified as Exhibit 3 NMPF-70? 4 A. Yes, it is. 5 MS. HANCOCK: Your Honor, I believe we were up to 6 168. 7 THE COURT: Yes, that's what I have. This NMPF-70 8 will be marked for identification as 168. 9 (Thereafter, Exhibit Number 168 was marked 10 for identification.) 11 MS. HANCOCK: Thank you. 12 BY MS. HANCOCK: 13 Q. Mr. Jacquier, would you mind providing us with 14 your testimony, please? 15 A. Well, thank you for the opportunity to testify 16 today. My name is Cricket Jacquier. I'm a third 17 generation dairy farmer and owner of Laurelbrook Farm in 18 East Canaan. I work alongside my wife, parents, brother, 19 nephews, niece, and son. Together we operate a 20 diversified agricultural business that includes a 1500-cow 21 dairy, 3,000 acres of corn and alfalfa, plus a compost and 22 soil business. Our goal is to operate an efficient and 23 sustainable dairy business that can be carried on for 24 generations. 25 I am Chair of the board for Agri-Mark, Inc. 26 Agri-Mark is a dairy cooperative owned by approximately 27 550 dairy farm families in New England and New York. Our 28 members are pooled in Federal Order 1. Our cooperative 2976 1 has been marketing milk for dairy farmers since 1916. We 2 have headquarters in Andover, Massachusetts, and in 3 Waitsfield, Vermont. 4 Our farm families supply more than 3.2 billion 5 pounds of milk annually that we use to make our 6 award-winning Cabot branded cheese, dairy products, and 7 ingredients. Agri-Mark operates three cheese 8 manufacturing facilities located in Cabot, Vermont; 9 Middlebury, Vermont; and Chateaugay, New York. These are 10 pooled supply plants. 11 In addition to cheese, the Middlebury, Vermont, 12 plant also produces valuable whey proteins that are 13 marketed around the world. Agri-Mark also operates a 14 butter-powder facility in West Springfield, Massachusetts 15 that is a non-pooled supply plant. Lastly, Agri-Mark 16 supplies fresh fluid milk to the region's largest dairy 17 processors. 18 I am a Director for New England Dairy Promotion, 19 and prior Director for Dairy Management, Inc. 20 Additionally, I am on the National Milk Producers 21 Federation Board as a member of the executive committee, a 22 position I've held since 2020. In that capacity I have 23 witnessed firsthand the time and dedication of National 24 Milk's member cooperatives and staff, as they collectively 25 worked in lockstep for nearly two years on a comprehensive 26 proposal to modernize the Federal Milk Marketing Orders. 27 Agri-Mark was a part of this process, and we 28 support all aspects of National Milk's proposal. My 2977 1 testimony today focuses on our support of NMPF Proposal 1, 2 increasing the Make Allowances in the component price 3 formulas. I thank USDA for allowing me to represent 4 Agri-Mark's farmer-owners and cooperative interests today. 5 As a cooperative owner and board chair, I know all 6 too well that inaccurate Make Allowances are significantly 7 and negatively impacting the cooperatives' businesses that 8 I and my fellow farmer-owners have worked hard building 9 for over a century. Cost of processing has increased for 10 our cooperative by 20% since the last Make Allowance 11 update in 2008. Labor, insurance, utilities, you name it. 12 Agri-Mark is no different. Our costs of processing are 13 consistent with data and testimony provided by others. 14 The trend is clear, every cost has gone up, and we've 15 waited too long to make a change. 16 As a farmer, I understand personally and directly 17 the challenging nature of increasing Make Allowances. 18 National Milk Proposal 1 will reduce pay prices for all 19 farmers. None of us want to see reduced milk prices, 20 especially in a year where dairy farmers are facing 21 extreme financial challenges and margins at decade lows. 22 However, today’s inadequate Make Allowances have 23 created a reality in which some farmers are already 24 receiving reduced pay prices compared to their neighbors. 25 This inequity goes directly against the fundamentals of 26 the Federal Milk Marketing Order by creating disorderly 27 markets. Proposal 1 takes a significant step towards 28 correcting for this. 2978 1 And As owners of primarily Class III and IV 2 manufacturing, today's outdated Make Allowances have 3 forced solutions within our cooperative. The increase in 4 costs has been transferred to members via lower returns 5 and pay price adjustments. It is hard to watch as we've 6 been backed into a corner, having to make decisions that 7 impact our members. 8 When these impacts are different than our 9 neighbors, our competitiveness within the milk shed 10 becomes tarnished. We must update Make Allowances at the 11 Federal Milk Marketing Order level. This will alleviate 12 the mismatched pressure placed on the cooperatives, 13 thereby helping to return to the orderly markets Federal 14 Milk Marketing Orders were intended to protect. 15 Today’s Make Allowances are also preventing our 16 ability to invest in the future. The marketplace is 17 looking for this investment and innovation, but with 18 today's pricing, we struggle to meet the market's demands. 19 We must make changes now and continuously into the future 20 to ensure we can meet the bright future we see ahead for 21 our industry. 22 National Milk's approach to update Make Allowances 23 follows two tracks. First, NMPF Proposal 1 offers an 24 immediate and interim update to the current 25 Make Allowances. The Make Allowance numbers in Proposal 1 26 are intentionally set as a first step in the direction of 27 correcting for today's woefully low Make Allowances. 28 National Milk acknowledges that from a manufacturing 2979 1 perspective, the proposed numbers are not adequate to 2 cover the increase in cost of processing since the last 3 Make Allowance update in 2008. However, NMPF also 4 recognizes that a more realistic increase would be abrupt 5 and cause significant disruption to producers. 6 Second, National Milk is leading a legislative 7 effort to improve the industry's ability to collect robust 8 cost of processing data for use in future hearings and 9 Make Allowance updates. National Milk plans to use the 10 upcoming Farm Bill to give USDA authority to conduct 11 mandatory and auditable surveys. Farmers and the industry 12 at large need trust in these numbers to make future 13 changes. Agri-Mark and many others support the need for 14 this data and are working alongside National Milk to push 15 this important legislative effort. 16 National Milk's stepped approach strikes a fine 17 balance between manufacturing needs and producer impacts 18 in the short-term. In the long-term, it creates a process 19 where Make Allowances can be updated on a continuous 20 cycle. Such a cycle is crucial to the success of our 21 farmers and the manufacturing assets we own. 22 In summary, it is imperative that we address 23 Make Allowances and address them now. Yes, a reduction in 24 milk prices will weigh heavily on farmers. However, the 25 reality is that farmers who are members of manufacturing 26 cooperatives have already been carrying this burden for 27 years. Deductions in milk prices that should be coming 28 out of Make Allowances are instead being passed along to 2980 1 some farmers as market adjustments or reduced profit. 2 Additionally, inadequate Make Allowances are 3 limiting cooperatives' ability to adequately invest in 4 cooperative manufacturing assets, brands, and the overall 5 success of their business. Successful cooperatives make 6 successful farmers. 7 The trend of increased cost of processing since 8 2008 has been well documented by expert witnesses. We 9 must update Make Allowances to alleviate the significant 10 stress they are causing our cooperatives. I believe 11 National Milk's two-step approach puts the industry on the 12 right path, striking the right balance in the interim and 13 lending support to both our farmers and cooperatives. 14 Thank you. 15 Q. Thank you for your testimony. I just wanted to 16 follow up with a couple of questions. 17 This testimony is focusing on the support for the 18 Make Allowance proposal that National Milk submitted; is 19 that fair? 20 A. Yes. 21 Q. But you started off by saying that you support all 22 of aspects of National Milk's proposals. 23 That's all five of them that National Milk has put 24 forth for this hearing? 25 A. Yes. 26 Q. And in your support of all five of those proposals 27 and talking -- well, strike that. Let me come back. 28 In your -- in your support of the Make Allowance 2981 1 that you're talking about primarily in this testimony, you 2 recognize that there is a cost that will -- that the dairy 3 farmer will have to absorb if Make Allowances are 4 increased? 5 A. Yes, I do. 6 Q. But you also recognize that with some of the other 7 proposals that National Milk has put forth, there are 8 aspects of that that can increase dairy farmer prices as 9 well? 10 A. Yes. 11 Q. And is -- is your support of the increase in 12 Make Allowance part of your support for the totality of 13 all five proposals that National Milk has put forth? 14 A. Yes. 15 Q. So in support of a complete package? 16 A. Yes. So I'm here today testifying on the 17 Make Allowance individually, which we fully support. 18 Okay? For example, if -- with just a Make Allowance 19 adjustment, all by itself, that is really important for 20 farmers as well, as we have had -- there's an opportunity 21 here for us to increase the Make Allowance, which will 22 decrease the farmer pay price, right? 23 But at the same time, we are already covering 24 those costs within our cooperative, so our farmer price 25 adjustments will actually be reduced as well. So it's 26 really we're already carrying that burden, and we need to 27 get this corrected in the Federal Milk Marketing Order 28 process now. 2982 1 Q. Okay. And you might get some additional questions 2 about whether there's a natural offset about that, but 3 maybe I just ask you now. Is -- is it -- is it a 4 one-for-one offset between what the dairy farmers are 5 expecting to receive with a Make Allowance increase and 6 what will be deducted out of their milk check? 7 A. Yeah. So being part of all of the discussions, 8 you know, comprehensive approach was really, really 9 important. All of the work that's gone behind this to get 10 to this point to come to you all with this has been a 11 really important part to have -- really to try to become, 12 I guess, as cost neutral as we could to the farmer, if you 13 will, through a comprehensive approach. We feel that's 14 the best way. But today I'm here just speaking directly 15 to the Make Allowance. 16 Q. Okay. And is that because in your experience, on 17 your farm, and for the farms that are around you that you 18 know, you recognize that there's a lot of financial 19 pressures on dairy farmers today? 20 A. There absolutely is. And -- yes. 21 Q. Is there a lot of margin left in a dairy farmer's 22 paycheck to absorb cost increases in excess of what 23 National Milk has proposed? 24 A. You know, there's -- there's not a lot of margin 25 right now in the dairy business for this year. And 26 certainly, as we -- as we look at the go-forward -- that's 27 why I think it's really important that this comprehensive 28 approach that we're taking makes the most sense. I think 2983 1 the numbers that we're seeing in the National Milk, that 2 approach is -- is kind of the right balance, if you will, 3 between the two. 4 But as you look at Make Allowance specifically, I 5 know there's been a broad range of numbers that have been 6 out there. But given the data that we have had to work 7 with, we feel that's the right balance at this point in 8 time. And it's also really important that we have the 9 next step, and that is the mandatory cost surveys and all 10 of that that will allow us to update those with real 11 auditable in data in the future. 12 Q. Okay. Thank you. 13 MS. HANCOCK: Your Honor, at this time we'd make 14 him available for cross-examination. 15 THE COURT: Cross-examination for this witness? 16 Mr. Rosenbaum. 17 CROSS-EXAMINATION 18 BY MR. ROSENBAUM: 19 Q. Steve Rosenbaum for the International Dairy Foods 20 Association. 21 I assume that you would agree that USDA has the 22 obligation to examine each proposal individually and only 23 to accept those that it determines are meritorious? 24 A. Yes. 25 Q. And so if they were to determine that some of your 26 proposals are meritorious and some are not, they would be 27 obligated to accept the ones that are meritorious and 28 reject the ones that are not; is that fair? 2984 1 A. Yes. 2 Q. I mean, you are not suggesting that it is an up or 3 down decision on all your proposals at one time, are you? 4 A. No. 5 Q. Are you -- are you aware that Agri-Mark was 6 actually the principal proponent of the Make Allowance 7 revisions that took place in 2007 and 2008? 8 A. Yes. 9 Q. Were you around -- strike that. 10 Were you involved in Agri-Mark at that point in 11 time? 12 A. I was not directly. I joined the board in 2010. 13 Q. Okay. Has -- are you aware that Agri-Mark 14 endorsed USDA's reliance upon survey -- surveys conducted 15 by -- by Mark Stephenson in support of its proposal at 16 that time to raise the Make Allowances? 17 A. Yes, I am. And I believe we have participated in 18 all three of the surveys. 19 Q. Has Agri-Mark lost confidence in any way in the 20 reliability of Mark Stephenson's work? 21 A. We contribute -- I don't -- could you ask that 22 question again? 23 Q. Yes. I mean, in 2007 and 2008, Agri-Mark urged 24 USDA to rely, in part, on Mark Stephenson's cost surveys 25 to determine what the Make Allowances should be. 26 And I assume that when -- at that time, Agri-Mark 27 had confidence in the reliability of Dr. Stephenson's 28 work; is that fair? 2985 1 A. I would just say that we contributed -- you know, 2 we brought forward our numbers for the cooperative and 3 believe that they were put in good hands. You know, I 4 think, right now, as we look at this, we need to have 5 larger numbers of surveys out there to make sure that 6 we're representing a broader spectrum of the dairy 7 industry or the dairy processing, if you will, across the 8 country. 9 Q. Okay. Well, Dr. Stephenson will testify as to 10 what has gone into his most recent survey? 11 But have you -- I mean, has Agri-Mark as an 12 institution lost any confidence in Dr. Stephenson? 13 A. I don't believe I can answer that accurately. 14 Q. Have you personally? 15 A. No. 16 Q. Okay. Have you -- now, so it is -- if I read your 17 testimony correctly, Agri-Mark acknowledges that the -- 18 number one, the current Make Allowances are too low in 19 terms of current cost of production, correct? 20 A. Yes, sir. 21 Q. And it is Agri-Mark's view as well that the 22 National Milk Producers Federation proposal as to how much 23 to increase the Make Allowances does not increase the 24 Make Allowances enough to actually cover current costs of 25 manufacture; is that correct? 26 A. Could you restate that question? 27 Q. Yes. That the -- am I correct that Agri-Mark is 28 of the view that the National Milk Producers Federation 2986 1 proposed increases in Make Allowances is not a large 2 enough increase to actually cover the increase in costs of 3 production since 2008? 4 I mean I'm -- 5 A. That's true. 6 Q. -- I'm paraphrasing -- 7 A. That's accurate. 8 Q. -- the fifth paragraph on -- 9 A. Yep. 10 Q. -- on the second page of -- of your testimony here 11 in Exhibit 168. 12 A. Uh-huh. 13 Q. And -- so -- but you have -- you have suggested 14 that there would be a mandatory survey conducted, correct? 15 A. Yes. 16 Q. Have you performed any analysis of what the time 17 table would be by which USDA would be able to conduct -- 18 well, assuming that USDA to begin with is given the 19 legislative authority to conduct such mandatory surveys, 20 what the time table would be over which USDA would 21 realistically be able to implement new Make Allowances 22 based upon such a mandatory survey, assuming they are 23 given the authority to conduct one? 24 A. I'm not aware of the exact time table that that -- 25 how that process -- 26 Q. Are you aware that the proposed legislation -- 27 which is supported by all facets of the industry, 28 including my own, I'm not suggesting we're not in favor of 2987 1 there being that authority -- but have you -- you know, 2 have you -- do you have an estimate as to how many years 3 it would be before we actually would have the ability to 4 have new Make Allowances? 5 A. Well, I understand I don't have -- I understand 6 that we're going to -- you know, with the changes that 7 National Milk has put forward, that's a step one. Right? 8 We have to do the -- there's a process to go out and 9 gather that data. I think that some of this data has -- 10 we have got some experience now, if you will, to collect 11 some of that data. And if it is mandatory, I believe that 12 data can come in, and I feel that we'll have an effective 13 tool to move forward, to move our industry ahead, at a 14 respectful timeframe. 15 Q. Have you assessed, for example, how long it will 16 take USDA simply to adopt regulations carrying out its 17 newfound power to conduct mandatory surveys, assuming that 18 it actually has been given such power by Congress? 19 A. I don't know that exact timeframe. 20 Q. And do you -- are you familiar enough with the 21 proposed legislation that you are aware that USDA is not 22 under the legislation given the authority on its own to 23 increase Make Allowances based upon that data? 24 A. Right. 25 Q. That there would have to be another hearing? 26 A. Yes. 27 Q. Like the one we're in now, correct? 28 A. Yes. 2988 1 Q. And the same process of people -- witnesses being 2 called, cross-examined, corrections to the transcript, 3 post-hearing briefing, a recommended decision, followed by 4 the final decision, unless the conditions for an emergency 5 ruling have been met? Are you familiar with that whole 6 process? 7 A. Yes. 8 Q. I mean -- okay. 9 And all the while, the processing industry, will 10 be operating under Make Allowances that, by your own 11 statement, are inadequate to cover the increase in cost of 12 processing, as it exists today; is that fair? 13 A. Yes. 14 Q. I want to talk about -- at least ask you a 15 question. Is there another -- let me just start by 16 saying, is there another Agri-Mark witness going to take 17 the stand as well, or are you the only one at this point? 18 A. For the Make Allowance alone? 19 Q. Yes. 20 A. We have -- yes, we have one more Agri-Mark person 21 that would be -- 22 Q. Okay. You said -- I'm just trying to, frankly, 23 figure out who I should be asking these questions about. 24 Okay. Maybe it is you, and maybe it is the other witness. 25 But you make a statement that "the cost of 26 processing has increased for our cooperative by 20% since 27 the last Make Allowance update in 2008." 28 Are you -- were you involved in performing that 2989 1 calculation? 2 A. No. I was not involved with that calculation. 3 The next witness could explain that further. 4 Q. Okay. 5 A. That was an average of all classes of milk. That 6 was an average 20% increase from 2008 to now. That's how 7 that came about. 8 Q. And just if I were to tell you that Land O'Lakes 9 testified that their costs have increased by over 70% -- 10 or provided numbers that so indicate, that's probably a 11 fairer way to describe it -- do you have any idea why 12 there would be such a disparity? 13 A. I'm just speaking to the numbers that we have for 14 Agri-Mark. As we benchmark our facilities, we use the 15 Make Allowance numbers to benchmark our facilities each 16 and every day. 17 Q. And what -- okay. Do you know which plants, which 18 Agri-Mark plants participated in whatever analysis was 19 performed to come up with that 20% number? 20 A. I believe -- I need to be accurate, so I'll let 21 the next witness speak to that specifically, if you will. 22 Q. Okay. Okay. And you do have a statement: 23 "Deductions in milk prices" -- I'm looking at the last -- 24 let me start again. 25 If you turn to your -- to your testimony, 26 Exhibit 168, to the second page, the next to the last 27 paragraph, you say: "The reality is that farmers who are 28 members of manufacturing cooperatives have already been 2990 1 carrying this burden for years. Deductions in milk prices 2 that should be coming out of Make Allowances are instead 3 being passed along to some farmers as market adjustments 4 or reduced profit." 5 Do you see that? 6 A. Yes. 7 Q. Okay. And are -- are those deductions sufficient 8 such that some farmers are not being paid the blend price 9 for their milk? 10 A. Agri-Mark pays the Federal Milk Marketing Order 11 announced price, but we also have a line item market 12 adjustment for transparency to our membership that adjusts 13 that price. 14 Q. Okay. And most -- 15 A. A lot of that is due to the inadequate 16 Make Allowance numbers that are involved, but also just 17 the -- some disorderly marketing within the Federal Milk 18 Marketing Order. 19 Q. If one nets one against the other, do you end up 20 with a paycheck to your farmers that actually is less than 21 the blend price? 22 A. Can you repeat that question? I'm sorry. 23 Q. Sure. Once you deduct those deductions, is the 24 net amount received by your dairy farmers something less 25 than the blend price? 26 A. Yes. 27 MR. ROSENBAUM: That's all I have. Thank you. 28 THE COURT: Further cross? 2991 1 Yes, Dr. Bozic. 2 CROSS-EXAMINATION 3 BY DR. BOZIC: 4 Q. Good morning. Marin Bozic for Edge Dairy Farmer 5 Cooperative. 6 We don't know which of the five proposals USDA 7 will adopt or deny; would that be a fair statement? 8 A. Yes. 9 Q. And should USDA decide to grant National Milk 10 the -- or to approve the increase in Make Allowances per 11 National Milk's request but deny changes to all other four 12 topics, so no increase in milk composition, no removal of 13 barrels, no increase in return to higher-of, and no change 14 in the Class I differentials, so just Make Allowances on 15 their own, if everything else is denied, how would that -- 16 what would be the impact of that change on your farm? 17 A. The impact of Make Allowance alone on our farm, So 18 there would be almost no impact. Okay? Because the 19 Make Allowance adjustment is a decrease. We're getting 20 market adjustment. That would be offset. So there's zero 21 impact. 22 Q. Would that be -- would that extend also to 23 Agri-Mark producers in general? 24 A. For Agri-Mark producers, yes. 25 Q. So would it then be fair to say that 26 Make Allowance increase is only fair in the context of a 27 broader -- would it be fair to say that the Make Allowance 28 increase is only beneficial in the context of a broader 2992 1 package? 2 A. Correct. 3 DR. BOZIC: Thank you. 4 MR. MILTNER: Sorry, for the record, can I go back 5 to that last question that you just -- is that -- how do 6 you do that? Sorry. 7 THE COURT: You may. You can -- you don't have an 8 objection to that, do you? 9 DR. BOZIC: No, I just -- 10 THE COURT: You can -- if you want to follow up, 11 you can -- 12 MR. MILTNER: I just wanted to restate the 13 question. 14 THE COURT: I don't want to go back and forth. 15 Thank you, Mr. Miltner. 16 MR. MILTNER: Would you restate your last 17 question. 18 DR. BOZIC: Yes. 19 BY DR. BOZIC: 20 Q. If USDA -- okay. So where were we? Would it be 21 fair to say that in the absence of the full package, a 22 change in the Make Allowance alone would not be beneficial 23 to your farms? 24 A. Not be beneficial to our farms? That's incorrect. 25 Q. That is incorrect? 26 A. Yeah. 27 Q. Could you please elaborate? 28 A. So -- 2993 1 Q. If anything -- if nothing else changes, only Make 2 Allowances go up, I'm looking for -- 3 A. It would be -- okay. So it would be cost neutral 4 to our farms. 5 Q. Uh-huh. 6 A. That's where it is. 7 Q. Okay. 8 A. Okay. 9 Q. And if it's a cost neutral to your farm, is that 10 beneficial, harmful, or neutral? 11 A. It's bene- -- it would be beneficial for us 12 because our cooperative -- our cooperative is getting 13 hurt. We're lacking the investments that were needed. We 14 need orderly marketing throughout. So it's important that 15 this gets -- that the Make Allowance is part of it. 16 Q. So in other words, even if USDA comes forward with 17 the rule that nothing else is changing, only 18 Make Allowances go up, you would represent that to your 19 fellow farmers as a beneficial change? 20 A. It's -- it's one of the -- it's one of the changes 21 that would be challenging for a lot of farmers. But our 22 unique situation, given that we have Class III and 23 Class IV assets, this is beneficial for our farms to -- if 24 it was even just the Make Allowance. But we are really 25 after the whole comprehensive package here to get to where 26 we need to be. 27 Q. The part that I don't understand is, like, how can 28 it be at the same time cost neutral and beneficial? 2994 1 A. So -- so the Make -- so the problem is I see it as 2 the fact that, you know, across the country, we're 3 getting -- it's kind of pitting farmers against farmers is 4 what's happening with the Federal Milk Marketing Order 5 system and the Make Allowance. We -- so a step in the 6 right direction is correcting at least a part of this, 7 which is -- which is the Make Allowance. So that's why I 8 feel it would be beneficial for us to get that part of it 9 at least taken care of now. 10 DR. BOZIC: Thank you very much. 11 THE COURT: Thank you for allowing that, 12 Mr. Miltner. 13 MR. MILTNER: No problem at all. 14 CROSS-EXAMINATION 15 BY MR. MILTNER: 16 Q. Ryan Miltner representing Select Milk Producers. 17 Good morning, Mr. Jacquier. 18 A. Good morning. 19 Q. Have you been listening to any of the hearing 20 while it is been going on or -- 21 A. You know, I have not. 22 Q. Okay. That's probably good. 23 I have asked questions of a number of witnesses 24 about the products they produce at their various plants 25 that affect the Make Allowances and the other formulas, so 26 that's where I would like to start my questions with you. 27 Okay? 28 A. Sure. 2995 1 Q. Your plant in Cabot. You note that it produces 2 cheese, and I'm -- I'm really familiar with the Cabot 3 brand cheese. Really enjoy it. 4 Is that what is produced at that plant, that Cabot 5 aged cheddar cheese? 6 A. Yep. Cabot -- Cabot produces cheese and yogurt 7 culture. 8 Q. Okay. Is it just that cheddar cheese that's 9 produced there that I -- you know, I can find that at 10 Kroger or Costco or wherever? 11 A. Yeah. And a lot of flavored cheeses as well. 12 Q. Okay. Does it produce any 40-pound block cheddar 13 that would be reported to the NDPSR? 14 A. So we produce 40 and 640s. 15 Q. Okay. 16 A. Both. 17 Q. And are those reported to the NDPSR, those 18 cheddars? 19 A. So that question I would have to refer to our next 20 witness, if you will. 21 Q. Okay. 22 A. Sorry, that's a little out of my -- 23 Q. That's quite all right. 24 A. -- to be accurate. 25 Q. What type of yogurt -- did you say yogurt or 26 cultured products produced there? I forget exactly what 27 you said. 28 A. Cultured, so -- yep. 2996 1 Q. So a lot of -- or a -- how much of the production 2 there would be those Class II cultured products? 3 A. It's a small percentage. Again, I think those 4 details you would have to ask our next witness. 5 Q. Okay. Thank you. 6 The Middlebury plant, does it produce a similar 7 product profile as the Cabot plant? 8 A. The -- yes, cheese. 9 Q. Okay. And the plant in Chateaugay, what do they 10 produce there? What do you produce there? 11 A. Chateaugay produces cheese as well. 12 Q. The same types of cheese produced at the other 13 two? 14 A. Yes. 15 Q. And then the whey processing at Middlebury, do you 16 know, do they produce dried whey or whey protein 17 concentrate? 18 A. WPC, dry whey, sweet whey. 19 And to be accurate, I need to go back to the Cabot 20 plant. 21 Q. Sure. 22 A. The Cabot is just the 40-pound block, I believe, 23 and not the 640s there. 24 Q. Okay. 25 A. Middlebury is the only one doing the 640s and the 26 cheddar. And the 40. 27 Q. Do any of those plants produce barrel cheese? 28 A. We do not produce barrel cheese. 2997 1 Q. The West Springfield plant, does it produce butter 2 and powder? 3 A. Yes, it does. 4 Q. And of the butter it produces, would it be 5 producing bulk salted butter? 6 A. So we have -- we have branded -- we do a lot of 7 branded salt and unsalted butter. 8 Q. Branded butter, that's in a one-pound package 9 quarters that you would buy at the grocery store, correct? 10 A. Yeah. 11 Q. Okay. Do you know if it produces its butter in 12 bulk volumes for sale to commercial operations? 13 A. I'm going to leave that for the next witness. 14 Q. That's great. I appreciate that. 15 A. You are getting into some details that I want to 16 be 100% accurate. Okay? 17 Q. Of course. I appreciate that as well. 18 I think in response to Mr. Rosenbaum you said that 19 Agri-Mark did participate in Dr. Stephenson's cost 20 studies. That's -- I heard that correctly? 21 A. Yes. 22 Q. Okay. Did Agri-Mark also provide its cost 23 information to National Milk's survey of members when it 24 was preparing Proposal 7? 25 A. Yes. 26 Q. And did it report costs for all four plants? 27 A. That level of detail should be asked by the next. 28 Q. Great. 2998 1 The Springfield plant, I think in your statement 2 you refer to it as a non-pooled supply plant. Why does 3 Agri-Mark choose not to pool that plant but to pool the 4 cheese plants? 5 A. There's a -- I guess, to be honest with you, there 6 is some history there. It's been that way for 30 years, 7 and it just hasn't been back to a pool plant. But all of 8 our member milk is pooled. 9 Q. Okay. I had a question about a couple of 10 statements -- or sentences in your -- in your statement 11 that I was hoping you could help me understand a little 12 more fully. 13 At the top of page 2, you testified that "today's 14 inadequate Make Allowances have created a reality in which 15 some farmers are already receiving reduced pay prices 16 compared to their neighbors." 17 And I wonder if you could give us an example of 18 how that's happening with your part of the world and -- 19 and what kind of discrepancies might be occurring? 20 A. Sure. So certainly being from the Northeast, with 21 Class III and Class IV as being our -- you know, our major 22 landing spot, if you will, for milk making cheese and 23 yogurt, we are more impacted than maybe somebody just 24 going directly to a Class I market type stuff. 25 And so the Make Allowances play a significant role 26 in our ability to really derive profits and put 27 accurate -- to put adequate investments, if you will, into 28 our plants' infrastructure and equipment that's necessary. 2999 1 So when you just really go not too far away from us, you 2 know, we have to adjust with that to our farmers, with the 3 market adjustment, if you will. And you can -- you don't 4 have to go too far, and it could be very different for 5 somebody else, just because of the assets that they own or 6 their outlet for their milk. So it is very different for 7 many across the country. 8 Q. Would it be accurate to say that the difference in 9 producer pay prices in your region are a function of which 10 cooperative is marketing the milk and the costs that that 11 cooperative has for operating its plants? 12 A. Yes. 13 Q. And then further on page 2, it's in the third 14 paragraph, where you -- you state, "The marketplace is 15 looking for this investment and innovation, but with 16 today's pricing, we struggle to meet the market's 17 demands." 18 What are the market demands that Agri-Mark is not 19 able to meet? 20 A. We're in a position right now with, you know, 21 lacking the investment in our brand. As you know, we have 22 a lot of branded product. Our Cabot brand is really 23 important for us, and it has really carried the weight, if 24 you will, for our farmer-owners there in the Northeast. 25 And given the current situation where there's really 26 pretty flush in milk in the Northeast, and as you know, 27 the West Springfield plant, which was referred to in 28 parentheses as a balancing plant, you know, it just 3000 1 balances really our internal member milk supply and 2 demand, and it fluctuates really daily, weekly, however. 3 It's just reacting to our own members' milk. 4 So that balancing facility is running full. So I 5 don't know if you want to call it a balancing facility 6 anymore. It's just a manufacturing plant. And also, our 7 cheese plants are really balancing our member milk as well 8 from a standpoint of making branded cheese and then 9 commodity cheese. 10 So our plants are flush, and we are looking -- we 11 need investment to put in to handle the growth in our 12 business, to invest in our business, to invest in our 13 brand, to get out in that marketplace, and really move the 14 needle for our farmers. And we are very held back, if you 15 will, from that standpoint as we are constantly, like I 16 have said, benchmarking against Make Allowances, as we're 17 investing in operational efficiencies at our plants to get 18 us to make sure that we can stay there. 19 But we need to go further, faster. Our 20 member-owners are looking for opportunities for milk. We 21 have great ideas, but we have the inability to enact on 22 those. 23 Q. Thank you for that -- that additional context. 24 In terms of all the cheese that Agri-Mark 25 produces, is -- is more of it the Cabot branded cheese or 26 is it more of it the commodity cheese? 27 A. We have more commodity cheese. 28 Q. Okay. When Dr. Bozic was asking you some 3001 1 questions about the impacts of Make Allowances, I think I 2 heard you suggest that the impact of the Make Allowances 3 would offset the deduction that Agri-Mark has on its 4 paychecks. 5 Did I gather that correctly? 6 A. Yes. 7 Q. Okay. Have -- has Agri-Mark done an estimate 8 about -- or National Milk for that matter -- about what 9 the pay price impact for your members would be just on the 10 adoption of the Make Allowances? 11 A. Could you repeat that question? 12 Q. Sure. Has Agri-Mark tried to peg a number and 13 say, if National Milk's Make Allowances numbers get 14 adopted, this is what we think the impact on our members 15 would be? 16 A. I believe I have seen the numbers around $0.50. 17 Q. Okay. I normally wouldn't ask this question, but 18 because you have kind of let it into the testimony, does 19 that mean that the deduction you're imposing on your 20 members each month is $0.50? 21 A. No. 22 Q. So if the Make Allowances are changed as National 23 Milk requests and the blend price or the uniform price 24 drops $0.50, how does that leave your producers in the 25 same spot then? 26 A. If we reduce the pay price $0.50, there will be 27 $0.50 less on the market adjustment. 28 Q. Okay. 3002 1 A. That's why it's neutral. 2 Q. Okay. So your market adjustment is more than 3 $0.50 then, I would surmise. 4 Mr. Rosenbaum said that the answer wasn't audible, 5 if you could say that again. 6 A. The answer wasn't audible? 7 Q. Yes. 8 A. So which answer would you like? 9 Q. The last question I believe was that I can surmise 10 that Agri-Mark's market deduction is more than $0.50? 11 A. Right. 12 MR. MILTNER: Okay. I don't think I have anything 13 else. Thank you. 14 THE COURT: Very good, sir. 15 Further cross of this witness? 16 Seeing none, redirect. 17 MS. TAYLOR: AMS has a couple questions, your 18 Honor. 19 THE COURT: I'm sorry. 20 MS. TAYLOR: It is Monday morning. 21 THE COURT: I'm not in the swing of things yet. 22 AMS has a special status as to cross, so when I say cross 23 the first time, it doesn't include AMS. Yes, I intended 24 to go back. Sorry. 25 CROSS-EXAMINATION 26 BY MS. TAYLOR: 27 Q. Good morning. 28 A. Good morning. 3003 1 Q. Thank you for coming to testify today. 2 I wanted to ask first just a couple of questions 3 about your farm and not on the co-op. We have asked other 4 producers here, we are gathering information about the 5 impact to small businesses, and for the Small Business 6 Administration, they define it for a dairy farm as that 7 making $3.75 million or less in revenue on a whole -- 8 gross revenue annually on a whole farm basis. 9 Would your farm meet that? 10 A. No. 11 Q. We have also asked other producers when it comes 12 to risk management, there's been talk all through the last 13 four weeks about, you know, if USDA does make some of 14 these changes, kind of what would the implementation 15 timeframe be and discussion on how that could impact risk 16 management positions of dairy farmers. 17 So do you use risk management tools? 18 A. So, currently, you know, from a DRP example, we do 19 not use DRP today. I have been -- I have used DRP for 20 last year. Just haven't seen the opportunity this year to 21 use that risk management tool. 22 Q. Thanks. 23 And when you did use it, about how far out did you 24 look to lock in positions? 25 A. About one year. 26 We also use -- have used LGM. I do not have any 27 of that right now as well. 28 Q. Okay. Thank you. 3004 1 Now, on the co-op, switch over to the co-op side 2 of things. 3 A. Sure. 4 Q. Can you give us a little description of your co-op 5 members? Are they similar in size to you, in the range, 6 etcetera? 7 A. Okay. So -- well, maybe in the context from a 8 small business, right, the $3.75 million, I guess that 9 perspective is -- if you put it in context of maybe that's 10 around 400 cows -- 11 Q. Uh-huh. 12 A. -- 85% of our membership would meet the small 13 business. So we have a large group of small farms in the 14 Northeast, in New York. 15 Q. Thank you. Your testimony and in cross you talked 16 about the impact of Make Allowances and the, as you term 17 them, inadequate levels and how that's been on your farmer 18 members in your deducts and pay prices. I just wanted you 19 to expand a little bit more, and you did touch on it, 20 about how that is an inequity between your member farms 21 and then non-member farms in the area, and I wondered if 22 you could expand on that just a little bit. 23 A. Yes. So I think it comes back to maybe why we're 24 here. You know, the Federal Milk Marketing Orders have -- 25 there's a lot of opportunities in my mind from a 26 disorderly marketing. And, you know, our cooperative has 27 had to do a lot of explaining to members, if you will, of 28 like why there's that market adjustment that may be 3005 1 associated with some of the Make Allowances type things. 2 But also understand that, you know, it's not just 3 about me. You know, our farm is really important. Our 4 farmers are really important as a cooperative. But, guys, 5 it goes even broader than that. And to me, that's where I 6 think, you know, organizations like National Milk, where 7 we've spent a lot of time building consensus that, no, we 8 have to compromise here a little bit. We're going to -- I 9 think the steps we need to get in place to where we need 10 to be, I think we're all learning a lesson here today as 11 well, that time has gone too long, that we're here, and we 12 need to be more frequently making sure that we're updating 13 this to accurately reflect the marketplace. 14 And, you know, I keep thinking about Federal Milk 15 Marketing Orders and what are they -- why are they here? 16 What do they do? You know, we shouldn't be negatively 17 talking about them. They should be working for us. And, 18 you know, for -- for us, these Federal Milk Marketing 19 Orders are here to -- we talk about orderly marketing, but 20 it is to realize the true value for our milk, and they 21 need to do that. And along the way we need to make sure 22 our processing assets can be invested in, and at the same 23 time our farmers are a key part of this as well. So we 24 need to strike that right balance. 25 Q. And on the investment side of things, I was -- you 26 talked about how you -- the Make Allowance will help the 27 co-op -- or let me rephrase this. 28 You talked about inadequate Make Allowances are 3006 1 limiting the cooperative's ability to adequately invest. 2 So adequately means, to me, that you have done some 3 investment -- 4 A. Yes. 5 Q. -- maybe not as much as you all would like and in 6 the form. 7 So could you expand on what Agri-Mark has done, 8 you know, in the last 10 to 15 years? 9 A. Sure. So we look at it maybe, you know, two real 10 key investments, one in Chateaugay, at our Chateaugay 11 facility, a $30 million investment to really increase some 12 production there, capacity, and produce more cheese. And 13 in addition, at our West Springfield plant, to increase 14 some of the drying capabilities as well. 15 But really, these investments are a reaction to 16 really member -- member needs, maybe not so much 17 cooperative needs, as the need to grow from our 18 farmer-owners is really important. So, you know, we'd 19 really like to get to that next level, if you will, of 20 investments that really can move the brand and put 21 innovation back into the marketplace, all of those things 22 that we feel are really important. Not just from a 23 cooperative standpoint, but as a farmer-owner, those types 24 of things are absolutely imperative for the -- for our 25 long-term multi-generational dairy farmers, which really 26 is the majority of our farms across the country. 27 Q. So I think I took from that, when you say your 28 investments have been more for your member needs, is that 3007 1 more just to find ways to take all your member milk at 2 this point, right? 3 A. We significantly lack processing in the Northeast. 4 We significantly lack it. There's lack of investment 5 going on. And a lot of it is from the reason why we're 6 here today. 7 Q. Uh-huh. Okay. Thank you. 8 My last question is you have a sentence in here, 9 and you talked about how this is a compromise position, 10 and you say that "National Milk recognizes that a more 11 realistic increase would be abrupt and cause significant 12 disruption to producers." 13 Could you expand on that thought? 14 A. You know, I think there's another approach maybe 15 to go a little stronger on the Make Allowance adjustment. 16 Right? And I just think that -- I go back to the impacts 17 to what that farmer community is. That's kind of why we 18 have got to this point. We have gotten to a consensus, 19 and we have also gotten to a point of where we lay out 20 that roadmap where we can get accurate data, real cost. 21 Because I think once the real data gets in front of a 22 farmer, we can support of where that movement needs to go. 23 So I think that's more of where I was saying on the 24 adequate investment side I was referring to. 25 Q. Okay. But you also said "a too abrupt increase 26 would cause significant disruption to producers." 27 And I'm just curious what you -- 28 A. Well, that's, you know, going significantly here 3008 1 today to I think I have heard $1.50 type stuff. That is a 2 significant impact right away for farmers, if you will. 3 Okay? And it's really important that we stay together on 4 all of this type of stuff. I understand that there's the 5 processor side, there's the co-ops, and there's our 6 farmers. So we got to strike that balance. I think 7 that's really, really important to -- as we move forward. 8 MS. TAYLOR: That's it from AMS. Thank you so 9 much. 10 THE WITNESS: Thank you. 11 THE COURT: Any further questions for this 12 witness? 13 Redirect. 14 REDIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. You were asked some questions about risk 17 management practices, and I think you said that you have 18 used it in the past, but you are not currently using some 19 of the tools. I'm wondering if you could expand on that a 20 little bit and talk about why not right now. 21 A. Yeah. So I might approach this a little bit 22 differently than you might think. Just thinking from the 23 farmer perspective, we have a great tool now called DMC. 24 Right? That we have to remember a majority of our farms 25 across the country are still small farms, and we have -- 26 all farms can participate in the DMC component of that 27 right now. So every farmer is getting used to some risk 28 management tool behind the scenes, which is fantastic. 3009 1 There's also another layer called the Dairy 2 Revenue Protection. That really is for farms maybe above 3 that 5 million pounds of milk on an annual basis. And I 4 think we're learning. I think you have to recognize that 5 farmers in the last couple years were just getting more 6 used to and accustomed to risk management. And, you know, 7 certainly as we look forward, the futures pricing and 8 those types of things, there is a lot of folks that don't 9 see the opportunity today to lock in so-called 10 near-the-break-even price for milk. 11 So I think that's why there's a lack of 12 participation or less right now than there might have 13 been, say, two years ago where the market outlook was 14 quite different. So these tools are really important for 15 us in the future, for sure. 16 Q. Okay. So whereas even if you are not using it 17 right now, it's just situational depending on what the 18 market conditions are? 19 A. That's true. Those -- I look at those weekly, 20 opportunities. 21 Q. And I think you were talking with Mr. Miltner 22 about the market adjustment deductions in a dairy 23 producer's paycheck coming out of your cooperative. I'm 24 wondering if you could -- if you would be willing to share 25 what all is included in those market adjustment 26 deductions. 27 A. So we look at -- I mean, one of our challenges 28 from the Make Allowance has really been able to address 3010 1 the home for milk from a standpoint of investment. Right? 2 So really it's the -- some of the balancing type stuff 3 that is -- that is part of -- for our own cooperative that 4 we include in that. 5 Q. Okay. And is that because the cooperative has a 6 responsibility that it owes to its members to take all of 7 the milk? 8 A. Absolutely. 9 Q. And that's whether you have a place to put it 10 and -- or manufacture it; is that right? 11 A. That is correct. 12 Q. Okay. So different than a proprietary plant, for 13 example, where they can just choose not to take milk if 14 they don't have a place to put it? 15 A. Yes. Accurate. 16 Q. Okay. And -- and so the additional cost that the 17 cooperative has to incur, it's able to deduct those 18 balancing costs out of those market adjustments as well? 19 A. That is correct. That is -- that is the case 20 that's happening, just because of, again, the main reason 21 why we're here today. 22 Q. Okay. And then I think you also talked about the 23 confidence level that you have in Mark Stephenson's 24 survey. And I think if I heard you right, it wasn't lack 25 of confidence in his ability to conduct the analysis, it 26 was lack of confidence in whether he had the most 27 comprehensive dataset, available to him when he was 28 conducting that survey; is that right? 3011 1 A. That is correct. 2 Q. Okay. And you understand as part of your role 3 with National Milk that National Milk does not have the 4 confidence that it would like to see in a voluntary 5 unaudited survey? 6 A. A voluntary situation didn't work in our minds. 7 Q. Okay. And when you compare and contrast the two 8 surveys that he did most recently, were you able to see 9 some evidence of that? 10 A. Repeat the question? I'm sorry. 11 Q. Yeah. In your role with National Milk and you 12 were able to look at and evaluate the two most recent 13 surveys that Stephenson conducted, you were able to see 14 some evidence of how with some additional input it gets 15 even more accurate; is that right? 16 A. Yes. 17 Q. And so your expectation is, is that with an 18 mandatory survey that's audited, that you will have an 19 even greater level of confidence in those numbers? 20 A. And I think that's really important for dairy 21 farmers. 22 Q. And that's -- and when you say "that's really 23 important for dairy farmers," one final question, when you 24 were talking about the need for Make Allowance, you're 25 somewhat wearing the processing hat that you wear; is that 26 right? 27 A. Yes. But, you know, as a dairy farmer, the market 28 is just as important as my -- the cooperative success is 3012 1 just as important as my farm business. They go hand in 2 hand. Without one, the other doesn't exist. And I think 3 our farmers, we are all realizing how important our market 4 is and our marketing in our -- our -- and where this 5 product lands. We're just so tied into it. So we're 6 vested into that. We're invested in it every single day. 7 And it is just another arm or extension, if you will, of 8 my farm that needs to be sustainable. 9 Q. Okay. And that's because your farm alone isn't 10 enough to -- to keep you alive and well, you have to rely 11 on the profits coming out of the processing side of the 12 business as well? 13 A. Right. True -- right. 14 MS. HANCOCK: Okay. Thank you. 15 That's all I have, your Honor. We would move to 16 admit Exhibit 168. 17 THE COURT: Mr. Miltner and Mr. Rosenbaum both 18 have follow-up. A door got opened on redirect? 19 MR. ROSENBAUM: Some questions were asked, yes. 20 RECROSS-EXAMINATION 21 BY MR. ROSENBAUM: 22 Q. Steve Rosenbaum, again, for the International 23 Dairy Foods Association. 24 But when did you make the $30 million investment 25 in -- you pronounce it as Chateaugay, but I'm not sure I'm 26 saying that correctly. 27 A. Chateaugay. 28 Q. Chateaugay. 3013 1 A. We made that over the last about four years. 2 Q. Okay. And what about West Springfield, the 3 increased drying capability? 4 A. We have been working on those investments over the 5 last four years as well. 6 MR. ROSENBAUM: Okay. That's all I have. Thank 7 you. 8 RECROSS-EXAMINATION 9 BY MR. MILTNER: 10 Q. Ms. Hancock asked a couple of questions about 11 your -- the market -- market deduction or market 12 adjustment. 13 What term do you like to use for that? 14 A. The market adjustment. 15 Q. Market adjustment. Okay. 16 It sounded like part of that market adjustment was 17 triggered by production within your membership that can't 18 be easily handled at your existing facilities; is that 19 correct? 20 A. Yeah. Yes. 21 Q. Okay. Does Agri-Mark have a base program? 22 A. Agri-Mark does have a base program. 23 Q. Okay. And as I understand, it's a $5 deduction 24 per hundredweight on overproduction; is that correct? 25 A. That is incorrect. 26 Q. It is incorrect. 27 A. We have a base program that's been in place, and 28 it's basically due to the lack of being able to balance 3014 1 our own internal member milk supply. 2 Q. Okay. So if there were reports in what I will 3 call the dairy press that overproduction -- over-base 4 production was a $5 deduction, that would not be correct 5 today? 6 A. Correct. 7 Q. Okay. Was that an accurate number at some point 8 in the last five years? 9 A. No. 10 Q. Okay. So whatever the number is right now, it's 11 not sufficient to cover the cost associated with your 12 membership's overproduction? 13 A. Correct. 14 MR. MILTNER: Okay. Thank you. 15 THE COURT: Re-redirect? 16 MS. HANCOCK: Your Honor, I'd just move to admit 17 Exhibit 168. 18 THE COURT: Any objection? 19 Oh, yes. 20 MR. HILL: Not an objection. I just note that the 21 copy that we have in the room has a number at the bottom 22 of page 1 that says 20%, whereas the online version has an 23 X. So I just want to make sure that we get the correct 24 copy. 25 MS. HANCOCK: Thank you for that. I should have 26 noted that. And I think that he submitted that this 27 morning because he realized it was an omission in the 28 version that he submitted earlier. So if you don't have 3015 1 it, we'll resubmit it for your electronic files. 2 MR. HILL: So as long as it has the 20% on it, 3 we're fine with it being admitted. But it is not online. 4 THE COURT: Yeah. Thanks for that note. And our 5 official keeper of the exhibits has the 20% version? 6 MS. TAYLOR: We didn't get it electronically. 7 MS. HANCOCK: Okay. We'll make sure you do. 8 THE COURT: Very good. Thank you. 9 With that, Exhibit 168 is admitted into the 10 record. 11 (Thereafter, Exhibit Number 168 was received 12 into evidence.) 13 THE COURT: You can step down. Thank you. 14 THE WITNESS: Thank you. 15 THE COURT: Ten-minute break. Let's come back at 16 9:20 a.m. 17 (Whereupon, a break was taken.) 18 THE COURT: On the record. 19 MS. HANCOCK: Your Honor, next witness will be 20 Christopher Wolf. 21 THE COURT: Raise your right hand. 22 CHRISTOPHER WOLF, 23 Being first duly sworn, was examined and 24 testified as follows: 25 THE COURT: Your witness. 26 DIRECT EXAMINATION 27 BY MS. HANCOCK: 28 Q. Good morning, Mr. Wolf. Would you mind stating 3016 1 and spelling your name for the record? 2 A. Christopher Wolf, C-H-R-I-S-T-O-P-H-E-R, W-O-L-F. 3 Q. And what is your business address? 4 A. 137 Reservoir Avenue, Ithaca, New York, 14853. 5 Q. And did you prepare Exhibit NMPF-27 in support of 6 your testimony today? 7 A. I did. 8 MS. HANCOCK: Your Honor, if we could mark that 9 for identification as Exhibit 169? 10 THE COURT: So marked. 11 (Thereafter, Exhibit Number 169 was marked 12 for identification.) 13 BY MS. HANCOCK: 14 Q. Would you mind starting off by providing us with 15 some of your background, your educational background and 16 then your professional background? 17 A. Sure. So I have a Bachelor's degree in 18 agricultural economics from the University of Wisconsin 19 Madison, a Ph.D. in agricultural economics from the 20 University of California Davis. And I'm currently the 21 E.V. Baker professor of agricultural economics at Cornell 22 University. 23 Q. When did you obtain your -- your -- well, let's 24 starts with your undergrad degree? 25 A. '91. And Ph.D. in '97. 26 Q. And when you said you are currently the E.V. Baker 27 for agriculture, can you tell us what that means? 28 A. I have a chair, a special chair at Cornell 3017 1 University in agricultural economics. 2 Q. A special chair? 3 A. Yes. Well, it's a named professorship. So 4 it's -- put the title on afterwards. I'm the second 5 holder of the E.V. Baker chair. 6 Q. And what falls under the scope of the 7 responsibilities that you hold at Cornell? 8 A. Well, both of the holders of this chair have been 9 working specifically in the dairy industry in dairy 10 markets and policy. 11 MS. HANCOCK: Your Honor, we would offer Dr. Wolf 12 as a dairy market and dairy economist expert to be 13 qualified. 14 THE COURT: Seeing no objections, I so find. 15 MS. HANCOCK: Thank you. 16 BY MS. HANCOCK: 17 Q. Dr. Wolf, would you mind providing us with your 18 testimony? 19 A. Sure. 20 Q. I guess I didn't verify first if you were able to 21 get your computer online yet. 22 A. I will have it up momentarily. Sorry. 23 THE COURT: Did we get an address for him? 24 MS. HANCOCK: We did. 25 (Off-the-record.) 26 THE WITNESS: Happy to be here. Thanks for having 27 me this morning. 28 In this testimony, I would like to offer an 3018 1 academic perspective on dairy farm financial information, 2 particularly considering farm management and ag lender 3 aspects. My intention is to discuss the financial 4 conditions on dairy farms -- 5 MS. HANCOCK: Just briefly, I forgot to remind 6 you, if you just could be mindful of your speed for our 7 court reporter as well. 8 THE WITNESS: I'll try to go slow. Thanks. 9 My intention is to discuss the financial 10 conditions on dairy farms and the factors that describe 11 the financial conditions. My testimony provides 12 background on dairy farm profitability, financial risk, 13 and the cost of production as well as the factors driving 14 those measures. 15 Profitability is the extent to which net income is 16 generated and represents a return to labor, management, 17 and capital invested. There are multiple measures of 18 dairy farm profitability. To measure the profitability, I 19 prefer to use the rate of return on assets without 20 appreciation, which is ROA. ROA is defined as operating 21 profit divided by total farm asset value, which controls 22 for asset size allowing for comparisons across farms and 23 over time. 24 ROA measures before tax profitable earnings per 25 dollar of investment in assets and reflects how 26 efficiently the farm business uses all assets, whether 27 borrowed or equity capital, to generate profit. 28 Using the Cornell Dairy Farm Business Summary, the 3019 1 average rate of return on assets for New York farms since 2 2000 was 6.1% with a great deal of variation both across 3 farms and over years. One important consideration is that 4 these are not random farm participants. Instead, these 5 farms voluntarily participate in the program. The 6 participants in University Farm Business Summaries 7 (including Cornell's) tend to have larger milking herds 8 and achieve above average financial performance. Thus, 9 the average farm profitability of the general population 10 would be expected to be below the figure values in a given 11 year. 12 The long-run average of 6.1% ROA is not a level of 13 profitability with which many industries would be 14 comfortable realizing over long periods of time. This 15 relatively low average profitability reflects the large 16 dairy farm investments in land, facilities, machinery, and 17 equipment on dairy farms. It is also important to 18 recognize that this measure does. 19 Dairy farm financial performance has tended to 20 have a "boom" or "bust" aspect for the last couple of 21 decades, specifically and especially in the case of 22 profitability. 23 So examining the New York farm returns from 2000 24 through 2022, 2007, 2014, and 2022 were profitable years, 25 while 2009 and 2012 resulted in large losses. This is 26 reflected in Figure 1 which is up on the screen here. 27 Using definitions that a "good" profit year was 28 more than 25% above that average rate of return on assets, 3020 1 a "poor" profit year was more than 25% below, and then any 2 returns within that band were "average," of the 23 years 3 here included eight were "good" years, six were "average," 4 and nine were "poor" years. 5 Of particular importance is that, since 2014, 6 every year until 2022 was either "poor" or "average." 7 Studying dairy farm financial resiliency makes it clear 8 that "good" profitable years are necessary to recharge 9 liquidity and solvency and ensure farm viability. The 10 results reveal a tendency for margins and profitability to 11 move back toward the average value as milk production and 12 consumption react to demand or supply shocks. 13 The results in Figure 1 reveal that 2022 was the 14 first "good" profit year since 2014. The seven-year 15 period from 2015 through 2021 was difficult financially 16 for dairy farms across the country. 17 At the current time, 2023 is forecasted to be a 18 below average profitability year. The consequences and 19 relationship between profitability and the other financial 20 aspects including liquidity and solvency I'll discuss 21 shortly. 22 Long-term examination of dairy farm financial 23 performance reveals that milk sales provide the 24 overwhelming majority of dairy farm revenue and is the 25 major source of risk. 26 Another robust profitability result is that cost 27 of production is the major driver in performance across 28 farms. This research used 7,826 annual farm financial 3021 1 observations were available from 758 dairy farms in 2 Wisconsin and Michigan. We can further divide rate of 3 return on assets into operating profit margin ratio and 4 asset turnover rate to examine drivers of profitability. 5 Operating profit margin measures the proportion of 6 every dollar of sales that is kept by the farm as profit. 7 Asset turnover measures farm efficiency generating sales 8 using its assets. 9 The result is that operating -- that rate of 10 return on assets equal operating profit margin times asset 11 turnover. Dividing rate of return on assets in this 12 manner helps to identify whether a farm is deficient at 13 generating profit per dollar of sales, which would low 14 operating profit margin, or sales per dollar of asset are 15 low, which would be low asset turnover. 16 If the asset turnover is low, the farm is not 17 generating enough sales for the amount of assets they're 18 utilizing, which in general means the farm is 19 overcapitalized. One solution in this case is to sell 20 unproductive assets. If the operating profit margin is 21 low, then the solution is to examine cost of production as 22 these dairy farms are price-takers in the milk market. 23 Table 1 on the screen displays the summary 24 statistics from Wisconsin and Michigan dairy farms from 25 2000 through 2016. The average profitability on these 26 farms was 4.8% over that 17-year period. You can see that 27 there was a wide range. The coefficient of variation was 28 1.51, which is quite high, on operating profit margin, 3022 1 where as asset turnover had a coefficient variation which 2 is the mean divided by the standard deviation .49. 3 Similar to the New York farms, the rate of return 4 on assets on Michigan and Wisconsin farms had a "boom" or 5 "bust" pattern over the period considered. Asset turnover 6 and operating profit margin were similar to rate of return 7 on assets, which is not surprising as both are greatly 8 affected by the farm milk price received. 9 The operating profit margin was very volatile 10 throughout the period and was the primary driver of farm 11 profitability. Not only did the average operating profit 12 margin by year vary, but within year there was a large 13 amount of variance and standard deviation across farms. 14 And Figure 2 displays for that period the 15 operating -- the rate of return on assets is the solid 16 line; the operating profit margin is the red dashed line; 17 and asset turnover is the green line at the top. 18 So this would be a very similar pattern to the New 19 York farms over the period considered. I just don't have 20 the Wisconsin and Michigan farms for as many years on 21 this. 22 The next aspect I want to talk about is financial 23 risk. 24 Financial risk is defined as uncertainty about 25 interest rates, willingness of lender to keep or put money 26 into the business, ability to meet cash flow needs, and 27 the market value of collateral. Financial resilience, 28 then, is the ability to withstand events that impact firm 3023 1 income. Key thresholds depend on safety measures that are 2 often determined by agricultural lenders as access to 3 outside affordable capital is critical to commercial dairy 4 farms. 5 To measure the financial risk and resilience, we 6 used farm data from a balanced panel of 105 New York dairy 7 farms from 2010 through 2019. There are many dimensions 8 of financial condition that we look at when assessing 9 financial risk and resilience. 10 Four area of the business I'm going to talk about 11 today that lenders consider and should be benchmarked to 12 assess the financial risk on farms: Solvency, liquidity, 13 repayment capacity, and financial efficiency. 14 Across these four areas there are many different 15 measures that might be utilized. I'm going to examine one 16 measure for each, including debt coverage ratio, equity to 17 asset ratio, current ratio, and operating expense ratio. 18 Solvency is the ability of the business to cover 19 all liabilities if the farm business exits. Percent 20 equity or equity to asset ratio, which is EA here, 21 represents the portion of the assets on a market value 22 basis that would be returned to the family after paying 23 all liabilities. 24 The equity to asset ratio is calculated by 25 dividing total net worth, or equity, by total assets from 26 the market value balance sheet. The higher the equity to 27 asset ratio, the less risk there would be for covering 28 liabilities at the time of exit if that occurred. A 3024 1 larger equity to asset ratio indicates less risk of 2 insolvency. 3 Lenders use equity to asset or a similar measure 4 of net worth to assess insolvency risk and charge higher 5 interest rates to farms above established risk thresholds. 6 One common ag lender benchmark value is to maintain an 7 equity to asset ratio above 0.5, with lower values 8 indicating more risk. 9 Of course, farm operators might set their own 10 target above that benchmark, particularly if they are risk 11 averse. Similarly, lenders may tolerate lower equity to 12 asset ratios if other measures such as debt, repayment 13 capacity, or other key factors are judged to be 14 exceptionally high. 15 Farm solvency measures are primarily driven by 16 debt and asset values that are specific to farm investment 17 and are more appropriately benchmarked to lender or 18 industry standards than they are to other farms over time. 19 Liquidity is the ability of the business to meet 20 financial commitments over the next 12 months. Liquidity 21 refers to whether the business has the ability internally 22 to absorb negative impacts that might occur. 23 If the current ratio is greater than one, then the 24 farm has more current assets available than expected 25 liabilities. Current ratio is calculated current assets 26 divided by current liabilities. 27 If there are not sufficient current assets to 28 cover the liabilities, the current liabilities, then the 3025 1 farm must either use off-farm income, sell longer-term 2 assets, or borrow money. Therefore, higher current ratio 3 values indicate less risk. 4 The safety threshold -- the critical safety 5 threshold is 1.0, although lenders often become concerned 6 if the current ratio is below 2. So lenders tend to want 7 $2 of current assets for every dollar of current 8 liabilities. 9 Repayment capacity is the ability of the business 10 to service debt payments over the next 12 months. 11 Repayment capacity considers whether there's sufficient or 12 excess cash or earnings after expenses and family 13 withdrawals to cover planned principal and interest 14 payments. 15 The debt coverage ratio is based on earnings so it 16 does not reflect cash that may have come in through other 17 sources such as sale of capital assets or contributed 18 capital. The higher the debt coverage ratio, the less 19 risk the family has for meeting their debt payment 20 obligations. The safety threshold for the debt coverage 21 ratio for lenders is 1.15, or 115%. 22 So I've got the three measures up here. Similar 23 to the profitability pattern, the data in Table 2 here 24 reveal a pattern of farm financial risk that varies with 25 milk price over the decade considered. 26 Solvency positions were relatively stable because 27 they are based on longer-term asset and liability values. 28 Although you can see in 2018 on these well-managed New 3026 1 York dairy farms, that 20% of the farms were below the 2 equity to asset threshold of .5%. 3 And what tends to happen here is that if you have 4 low profitability years and you end up taking on more 5 debt, then the equity to asset ratio will go down as the 6 debt to asset ratio increases. 7 And you can clearly see that after some pretty -- 8 so what this is -- and I should be clear -- this is the 9 percent of the farms out of the 105 that were -- exceeded 10 the threshold in a bad way. Okay. So the higher are 11 these. That's the percent of the farms that would be 12 endangered by these lender thresholds by these different 13 measures. 14 Okay. So when it says 20% in 2018, that would be 15 20% of the farms that had equity to asset ratio of below 16 the 50%. 17 Okay. And the first thing that happens in that 18 case is that you end up paying a risk premium to borrow 19 money, and the next thing that happens is that you don't 20 have access to capital. 21 So it becomes -- and if we think about the 22 interest rates that we're talking about, if they put a 23 risk premium of 1 or 1.5% on these loans, that's a 24 significant increase in the amount of interest expense on 25 these farms. 26 Solvency positions were stable. During the poor 27 years, the percent of farms below the danger thresholds 28 for liquidity and debt repayment capacity spiked, 3027 1 indicating that these farms were at higher risk of 2 financial default. In particular, the debt coverage ratio 3 indicates that the majority of these well-managed New York 4 dairy farms were experiencing high levels of financial 5 risk in 2015 through 2018, basically without respite. 6 All lenders look at a portfolio of these measures 7 and make decisions about what -- whether they are going to 8 give the farms loans and, you know, what the interest rate 9 is going to be. 10 In my experience, I have worked with several 11 lenders on the risk rating. The debt coverage ratio and 12 equity to asset ratio would be the two biggest measures 13 there. 14 So when the debt coverage ratio indicates in 2018 15 that 70.5% of these farms were experiencing -- well, 16 problems in their debt coverage ratio, that's pretty 17 alarming. As, again, these are 18 better-than-average-managed farms. 19 Finally, cost of production. Virtually all U.S. 20 farm milk production can be characterized as a commodity 21 in the sense that aside from some flexibility on quality 22 components and perhaps volume premium, an individual farm 23 has little control over the milk price received and 24 essentially takes what the market is offering. 25 In a commodity market, the primary method to 26 increase profit by dairy farmers involves lowering cost of 27 production. Table 3 on the screen displays the average 28 cost from New York dairy farms from 2013 through 2022, 3028 1 from the Cornell Dairy Farm Business Summary. 2 As these costs are per hundredweight of milk 3 produced, they adjust for the quantities used and the 4 gains in efficiency over time. For example, the price of 5 labor has increased greatly in the past decade for these 6 farms through market forces as well as the State of New 7 York increasing minimum wage and instituting overtime 8 rules during this period. 9 In response to increasing input prices, dairy 10 farmers may have an ability to more efficiently utilize 11 that input or perhaps substitute away. In the case of 12 increased labor cost, farms may have been able to adopt 13 new production technologies that can replace some of the 14 hired labor. Even so, as the table displays, the cost of 15 labor per hundredweight increased by 16% over that decade. 16 Most costs have increased steadily over the time 17 period examined, even accounting for changes in technology 18 and management. Total accrual costs adjust for changes in 19 inventories, prepaid expenses, and accounts receivable and 20 payable. 21 Total farm operating costs are estimated by 22 deducting non-milk accrual receipts from the total accrual 23 operating expenses, including expansion livestock 24 purchased. These would be the operating costs that would 25 have to be covered by the sale of milk only. Milk 26 marketing costs including hauling costs more than doubled 27 over the period examined. 28 The average gross milk price, revenue, and net 3029 1 farm income are also displayed in the table. But as they 2 are primarily driven by the national farm milk price, they 3 vary greatly depending on the market conditions. 4 Consistent with the discussion above, in years such as 5 2015, 2016, and 2018, the net farm income realized was 6 very low. 7 In summary, the farm milk price received is the 8 primary determinant of farm profitability and farm 9 financial resilience. Even the best-managed dairy farms 10 struggle financially in years of low milk prices. 11 Financial stress from low milk prices can cause dairy farm 12 managers to exit the dairy industry, whether undertaking 13 other ag enterprises or leaving farming entirely. 14 Large amounts of farm exits would have impacts on 15 those families as well as their local communities. My 16 hope would be for USDA to be cognizant of these aspects 17 when considering the Federal Milk Marketing Order changes 18 that might significantly impact farm milk price. 19 Thanks for the opportunity to testify. 20 DIRECT EXAMINATION 21 BY MS. HANCOCK: 22 Q. Thank you, Dr. Wolf. 23 While you have Table 3 up on the screen, I'm 24 wondering if you could walk us through what's included in 25 this table. 26 A. So -- well, this table has a number of different 27 measures over the ten-year period. So total farm 28 operating costs would be the cost that are not involved 3030 1 with financing of the farm, so primarily things on the 2 dairy side, like feed, labor, fuel, marketing expenses, 3 things of that nature. 4 And total accrual cost would then adjust for the 5 inventories from year to year because -- so when we do the 6 business summaries at the university, we follow Farm 7 Financial Standards Council. I believe you had testimony 8 last week maybe from a gentleman from an accounting firm, 9 and they followed generally accepted accounting practices, 10 GAAP. Most farms that do their own recordkeeping do not 11 follow GAAP, they follow Farm Financial Standards Council. 12 And they are similar in many ways, but Farm Financial 13 Standards, we always value things at market price. GAAP 14 is strictly cost. 15 But over time, if you are tracking this, if you 16 think about, for example, a farm that was bought many 17 years ago, the cost basis of the land is probably not very 18 relevant to what the current land value is, for example, 19 but under GAAP they stay at cost. The generally accepted 20 accounting practices also handle some expenses 21 differently, like deferred taxes and raised livestock. 22 And so in any event, when farmers do their 23 recordkeeping, one of the fundamental reasons they keep 24 the records is for taxes. Right? And with a few 25 exceptions, most dairy farms are following cash accounting 26 for their tax recordkeeping, and so we need to make 27 accrual adjustments. 28 So the second line up there accounts for the fact 3031 1 that if you had a good year, probably going to have more 2 prepaid expenses to end the year than you did to start the 3 year, and things of that nature. And if you ignore that, 4 you can -- well, you can see, on some of the years it 5 makes quite a difference, and some of the years it doesn't 6 make nearly as big a difference in what the expenses are. 7 So accrual adjustment is going to be ending value 8 minus beginning value. So if it is bigger at the end, you 9 know then it's going to be a deduction. 10 And then operating cost to produce milk are the 11 direct costs that have to be covered by the farm, 12 basically by the milk check, assuming that the other 13 enterprises on the farm are break even. 14 So most dairy farms are primarily focused on the 15 milking herd and the -- and the revenues and expenses 16 around the milking herd, but sometimes they have a bigger 17 crop set of enterprises and stuff. And in this case what 18 that measure assumes is that the crop enterprise is a 19 break even. 20 Now, over the long-term that's probably not a bad 21 assumption. There's going to be some years where at $7 22 corn you might make money growing corn, but there's also 23 going to be years at $4 corn where you are going to lose 24 money growing corn. So that kind of assumes that's a 25 wash. 26 And then you've got total cost to produce the milk 27 then from these farms. And, you know, I've got a change 28 at the end in the last column there, but honestly, a lot 3032 1 of these measures don't just go up. Right? They kind of 2 vary depending on what kind of year it was. 3 The one that really jumps out is the milk 4 marketing cost, which does not vary, in the sense that it 5 is up the entire time that -- here. 6 And I -- the milk marketing cost includes hauling, 7 primarily, but it also includes stop charges, fuel 8 surcharges, co-op dues, CWT participation if they are in 9 there, and any deductions from two-tier to over-base 10 pricing system, and market adjustments. So basically 11 everything that's related to milk marketing goes in that. 12 Q. Okay. So it's just isolated and limited to just 13 the production of milk? 14 A. Yes. 15 Q. And that's why you said earlier that you have 16 assumed net neutral effect based on any other crops that 17 they might grow or -- 18 A. Right. We're just trying to -- well -- so on 19 these farms are going to be -- 85% or more of the revenues 20 are going to be from the dairy enterprise. So that would 21 be milk and cull cows and any other livestock sales and 22 maybe earnings from co-ops. But -- you know, so the -- 23 most of these farms have other enterprises, but they are 24 in support of dairy enterprise. And that's where -- there 25 are economies of size in milking cows and in 26 specialization and managing. And managing the dairy herd, 27 you know, is certainly full time. 28 Q. And this is based on the sampling of the -- of 3033 1 the -- of your dairy farms that you have included in your 2 study, which I think you have said you would characterize 3 as above average or larger more efficient operations? 4 A. Absolutely. On average, these -- these farms in 5 this table on average are about a thousand cows. But 6 there's a lot of variation. There are some smaller farms 7 and some bigger farms in there. But they are -- yes, 8 the -- the performance financially is going to be on the 9 higher end of the distribution. 10 Q. And is it fair to say that the larger the herd 11 size, the more you would expect to see efficiencies and 12 greater profitability because of those efficiencies? 13 A. There are definitely economies of size in milking 14 cows in the sense that the average cost curve declines as 15 you spread the fixed costs from investing in milking 16 facilities, barns, manure, and all this. It doesn't cost 17 twice as much to build facilities for a 2,000-cow 18 operation as it does for a 1,000-cow operation. So 19 definitely there are economies of size there. 20 So, everything else equal, I would expect them to 21 probably do better in that sense. But there is variation 22 from farm to farm and from year to year, so certainly 23 there are big farms that have bad years and small farms 24 that have -- smaller herds that have good years. 25 Q. And, for example, if you were a smaller farm 26 producing a premium product like an organic milk, you 27 could have profitability margins that are far in excess 28 just based on the higher sales price for your milk? 3034 1 A. You could have. 2 Q. Okay. But you don't know? 3 A. You didn't in 2022. 4 Q. Okay. 5 A. Well, I -- there are -- there are organic farms in 6 here, but they are not separated out. I would -- 2022 was 7 not a good year for organic farms. 8 Q. Okay. 9 A. But that's -- that's -- but there are some in 10 there, but we -- they are not separated out. 11 Q. Okay. And do you know what percentage of the 12 farms that were included in your sampling that would be 13 organic farms? 14 A. It would be about five. 15 Q. 5%? 16 And do you know, on average, what -- how they 17 compare to the other conventional milk that's produced 18 under your sampling? 19 A. Not consistently over time. I just know that last 20 year was a bad year -- 21 Q. Okay. 22 A. -- for organic farms, because even though the milk 23 prices were high, the feed prices went up by a 24 disproportionate amount for the organic farms in 2022. 25 (Court Reporter clarification.) 26 BY MS. HANCOCK: 27 Q. I think it is normal for our voices to kind of 28 trail off at the end of the sentences, but sometimes that 3035 1 means it is not audible for the court reporter. 2 On page 3 of your testimony, you provide a 3 percentage of 6.1%. And as I understand it, that is what 4 you are saying is the -- just the average rate of return 5 on assets for -- I think this one is specifically for New 6 York farms; is that right? 7 A. That is for New York farms, over a 23-year period, 8 yes. 9 Q. Okay. And do you know how that compares to the 10 average rate of return on assets for other farms in other 11 areas as well? 12 A. So for other dairy farms? 13 Q. For other dairy farms outside of the New York 14 area. 15 A. Well, not necessarily for that specific set of 16 years. But the second part that I talked about with the 17 operating profit margin and asset turnover, that was for 18 Wisconsin and Michigan dairy farms. And I have worked 19 with the Farm Business Summary data from Michigan and 20 Wisconsin and New York, and the patterns are very similar. 21 I would say that the Wisconsin and Michigan averages were 22 in the same ballpark but a little bit lower. But that 23 partly reflected more small farms, particularly in 24 Wisconsin over that period. 25 Q. Okay. And so, again, just to reiterate, then, you 26 can see some loss of efficiencies when you look at the 27 smaller farms on their ability to gain that higher rate of 28 return on their asset investment? 3036 1 A. Yes. What you also see is that in -- so the way 2 it has tended to work is you have got to make money in the 3 good years so that you have the reserves to deal with the 4 down years. And that's not just a dairy industry thing, 5 but it is more of an agriculture thing. But it is 6 definitely true in the dairy industry. 7 But what we see is that -- so -- is that all the 8 small farms and the big farms tend to have about the same 9 performance in the very poor years, but in the good years, 10 the bigger herds do better, even adjusting for the size of 11 the business. 12 Q. And you talked about how, I think, three out of 13 2020 -- I'm sorry -- three out of 22 years, these farms 14 were profitable; is that right? 15 A. Well, I just measured there were -- it was eight 16 out of 23 on the one. But I did point out three that were 17 particularly high. 18 Q. Okay. And you said on page 3 from between 2000 19 and 2022, it was 2007, 2014, and 2022 were profitable. 20 A. Those were -- those were all much more profitable 21 than the other years. 22 Q. Okay. And then you noted that the other years 23 were either close to break even or losses? 24 A. Yes. 25 Q. And -- and so is your point there to say that 26 there's a cumulative effect, that because there weren't 27 those recovery years, it has taken a cumulative toll on 28 dairy farms throughout that 22-year period? 3037 1 A. Well, it definitely was true in the period from 2 2015 through 2019, 2020. 3 Q. And then 2022 you note was a profitable year, but 4 2023 tends to be trending back downward again? 5 A. 2023 is -- has very tight margins. So, you know, 6 Dairy Margin Coverage Program will help some herds 7 depending on their size. But, yeah, it -- the milk to 8 feed price margin, which is very closely correlated with 9 profitability, has been very low. 10 Q. And it also depends on whether a dairy farm 11 participates in the program? 12 A. Absolutely. 13 Q. Okay. And so I want to just briefly cover the -- 14 let's see which chart it was. 15 It is on your Table 2, and this is where you are 16 looking at, at least, three of your measures of the farm's 17 resiliency I think you described it as? 18 A. Yes. 19 Q. And I think what I understood you to say is that 20 as -- as these -- as this cumulative pressure has 21 continued to kind of mount, and one example was the DCR 22 for 2018, where 70.5% -- 23 A. Uh-huh. 24 Q. -- fell below threshold, that it actually will 25 cost the dairy farms additional money just to operate. 26 A. Right. If you are -- if you are seen as high risk 27 from the lenders' perspective, then -- then your cost of 28 capital is going to be higher. 3038 1 Q. And that would mean that if you are having that 2 cumulative effect, you are looking for additional leverage 3 opportunities to try and take loans out just to cover your 4 operating expenses? 5 A. You might have to, yes. 6 Q. And then if you are seeing that cumulative 7 additional pressure, just the cost of taking out those 8 loans would go up if the lenders are seeing that this is a 9 risky environment? 10 A. Correct. 11 Q. Okay. And then I think what you described as 12 there are pay risk premiums, and then just sometimes there 13 can just be lack of complete of access to capital if the 14 lenders don't even want to lend them money based on these 15 risk factors? 16 A. That would be correct. That would be a very bad 17 sign for the liability record. 18 Q. And then when you are under the cost of 19 production, you have a couple of time periods in here. I 20 wanted to clarify which time periods we're talking about. 21 And you're referring to Table 3, which is the last 22 table that we looked at, and you say, "The table displays 23 the cost of labor per hundredweight increased 16% over the 24 past decade." 25 That's that 2013 to 2022 timeframe? 26 A. That is correct. Yes. 27 Q. Okay. And then at the very end of the next 28 paragraph, when you talk about there being more operating 3039 1 costs that have to be covered by the sale of the milk, and 2 that the milk marketing costs, including hauling costs, 3 have more than doubled over that time period, is that that 4 same time period? 5 A. Yes. 6 MS. HANCOCK: Your Honor, at this time we would 7 make Dr. Wolf available for cross-examination. 8 THE COURT: Cross? Other than AMS I mean. 9 CROSS-EXAMINATION 10 BY MS. VULIN: 11 Q. Good morning, Dr. Wolf. 12 A. Good morning. 13 Q. My name is Ashley Vulin, and I'm an attorney for 14 the Milk Innovation Group, a group of fluid milk 15 processors. 16 I would like to start on page 2 of your testimony, 17 please. And at the top of the page you have a list of 18 four what I believe you describe as aims of Federal Milk 19 Marketing Order; is that right? 20 A. Yeah. 21 Q. And the first one you say, "Orderly marketing 22 activity; markets that function smoothly, predictably, and 23 at a reasonable cost: 24 Do you see that? 25 A. Yes. 26 Q. Reasonable cost to whom: Farmers, processors, 27 retailers, consumers? What did you mean there? 28 A. Well, I think it would have to be to the system. 3040 1 So it would have to be to everybody. 2 Q. So the purpose of Federal Milk Marketing Order is 3 to ensure all participants are paying a reasonable cost? 4 A. Yes. I -- yeah. 5 Q. Okay. And is that earning a reasonable cost for 6 their product as well? 7 A. Well, it would have to work at all levels of the 8 supply chain if it was going to be -- work efficiently. 9 Yes. 10 Q. And what makes a cost reasonable? 11 A. Well, that the factors of production that are 12 involved get a fair return. 13 Q. For every participant in the supply chain? 14 A. Well, in a market economy, if it's going to work, 15 then, yes, it would need to work for all the participants. 16 Q. And then the next point you say "price stability." 17 Do you see that? 18 A. Uh-huh. 19 Q. And same question, for whom -- you know, where in 20 the supply chain are you referring to for price stability? 21 A. Well, I think, in the original Act, I would have 22 characterized it as being at the farm level. 23 Q. Still today, do you believe that the purpose of 24 the Federal Milk Marketing Order is just to create price 25 stability for farmers? 26 A. No. But I do -- that's -- but I do think maybe 27 reducing uncertainty is an important part, which is why I 28 have that parenthetically there. 3041 1 Q. And do you believe price stability at other levels 2 besides the farm level are important aims of Federal Milk 3 Marketing Orders today? 4 A. I don't know that -- I mean, you would have to 5 define stability in this case. I think reducing 6 uncertainty is not a bad thing because excess uncertainty 7 leads to inefficiency in the sense that investment doesn't 8 happen, for example, when it maybe otherwise would. 9 And -- and some variation would -- I mean, there's 10 seasonality, for example, that is maybe not stable, but 11 it's not unexpected. And so you would have to be maybe 12 more specific there. 13 Q. Well, stability is your word, so I would use it 14 however you used it in your testimony. 15 A. Right. But I'm saying that I think reduced -- 16 that that means reducing uncertainty. 17 Q. And at all levels? 18 A. I mean, perhaps. It depends on what the 19 trade-offs are. I mean, you know, there is always 20 trade-offs, right? If there weren't trade-offs, this 21 would be a trivial set of decisions, and we wouldn't need 22 to spend a month and a half or whatever this is. 23 Q. That's optimistic. 24 A. Well -- 25 Q. So number three you say "adequate and wholesome 26 supplies of fluid milk." 27 Do you see that? 28 A. Yes. 3042 1 Q. Do you mean supplies of fluid milk at the farmer 2 level, supplies of fluid milk to consumers? 3 A. Well, I believe that the intention was to get it 4 to the consumers. The farmers can only drink so much. 5 Q. I'm sure they do their best. 6 A. They do. 7 Q. And then the fourth point, "equitable returns to 8 farmers." 9 Do you see that? 10 A. Yes. 11 Q. And so where in the FMMO statutes or regulations 12 can we find that an aim of Federal Milk Marketing Orders 13 is to ensure equitable returns to farmers? 14 A. I'd have to go back and look. I don't remember 15 the 1937 Act. I don't know if it says that or if that was 16 me characterizing it that way. 17 Q. Okay. So you are not sure if this is an actual 18 aim or just a personal goal you think FMMOs should have? 19 A. No, I think that's a reasonable goal for the 20 Federal Milk Marketing Orders to have, yes. 21 Q. That wasn't my question exactly. It was, you 22 don't recall if this is actually an enumerated goal of 23 FMMOs or if there is just a personal goal -- 24 A. That is correct. 25 Q. Okay. If you could turn to Table 2 on page 4, 26 please. 27 And if you wouldn't mind calling it up. Sometimes 28 that can be useful. 3043 1 A. Up there? 2 Q. Yes, please. 3 Sorry Figure -- Figure -- yes, Table 2. 4 A. This one? 5 Q. Yes. Thank you. Not on page 4 I'm seeing now. 6 A. Well, there's a single-spaced version and a 7 double-spaced version of that, so it might be on different 8 pages for different people. 9 Q. And actually I see now I did make -- intend to 10 take you to page 2, but it's Figure 1. So that was my 11 error. 12 A. This one? 13 Q. Yes. Thank you. 14 So here the red line is measuring the return on 15 investment? 16 A. Rate of return on assets annually averaged across 17 the farms who participated in that year. 18 (Court Reporter clarification.) 19 BY MS. VULIN: 20 Q. And is it a weighted average? 21 A. It is average across farms. So it is just every 22 farm. So not weighted by cows and production if that's 23 what you are asking. 24 Q. Yes, that was what I was asking. 25 A. Average across farms. 26 Q. And can you remind me again -- I'm sorry? 27 A. I was going to say, if you go read the reports, 28 you can see that we break it further down by sizes and -- 3044 1 but I didn't do that here. So you can get into the 2 reports, and there will be, for example, less than 300 3 cows, 300 to 600 and, you know, 600 plus, depending on the 4 year, where those breaks are. So you can have it broken 5 down, but this is averaged across all farms. 6 Q. And remind me again, the source of this data? 7 A. This is from the Cornell Dairy Farm Business 8 Analysis -- 9 Q. Okay. 10 A. -- project. 11 Q. And that data is gathered, is that through 12 voluntary survey, a mandatory survey? How is that 13 gathered? 14 A. This would -- it's not a survey. It's in person. 15 So this would be farms that are cooperating with the 16 extension educators that are part of Cornell Cooperative 17 Extension and Pro Dairy Program. And so this is -- they 18 sit down on an annual basis, and you get accrual adjusted, 19 income statements, and balance sheets with market values, 20 that then are checked for accuracy. And then -- then they 21 would be part of this project. 22 And what the farms get out of it is they can 23 benchmark their performance over time against other farms, 24 and what we get out of it is the ability to have what I 25 would call economic intelligence about what's going on in 26 the farms to use for research and extension. 27 Q. Okay. So not all farms in New York participate in 28 this study? 3045 1 A. Absolutely not. 2 Q. It is -- the participants, it is an opt-in option? 3 A. That's correct. 4 Q. Or voluntary as we might call it? 5 A. Yes. 6 Q. But despite the fact that this study is the result 7 of voluntary participation, you still think it is 8 reliable? 9 A. Absolutely. And as I said, it's -- this would be 10 indicative of better-managed farms. I'm not -- there 11 absolutely is a selection bias here. These are the 12 better-managed farms. 13 But what I would also say is if you are 14 benchmarking performance, you want to benchmark against 15 the better-managed ones. And we also -- so these are the 16 means. We also will tell you what the 25th and 17 75th percentile is for a given year. 18 Q. What percentage of farms participate in the study? 19 A. Well, it varies a bit by year, because there are 20 farms exiting. I mean, there are farms entering too, but 21 that's less common. And there are farms that are growing 22 over time here. 23 So this last year, it would have been 150-some 24 farms out of, let's say, 3,000 in New York. So it's not a 25 big percentage. It would be a much more significant 26 percentage of the milk production, though, if we -- if 27 you -- I mean, we could go through and do it. I can -- a 28 thousand cows in milk production, we can figure out the 3046 1 percentage of milk. So what is that, 5% of the farms, 2 roughly? 3 Q. You are probably better at that than I am. 4 A. 5% of the farms, but it is going to be more like, 5 you know, 20% of the milk or something of that nature. 6 I -- but I could calculate that. 7 And in earlier years -- this is not the exact same 8 set of farms. There's farm attrition over this time. 9 Q. And you had flagged I believe it was 2017, 2014, 10 and 2022 as -- 11 A. 2007. 12 Q. 2007, thank you. 13 A. Correct. 14 Q. And do you notice, do you get more farms 15 participating in a good year than a bad year? 16 A. Not in -- not in this set. These -- these farms 17 are -- most of these farms have been doing this for a very 18 long period of time, and this is a standard part of their 19 management practices. I -- I see where you are getting 20 at. I think that there are -- there probably are -- 21 everybody likes good news more than bad news, and so I 22 could see how in some systems you might get more 23 participation in the good years than the bad years. Of 24 course, the bad years is actually when that information is 25 probably more important. 26 Q. Uh-huh. 27 A. But these farms are -- you know, on average they 28 have been doing this for a long period of time. In fact, 3047 1 we just had one farm that I think they were -- did their 2 50th year in a row of this, so -- 3 Q. But it also looks like in addition to 2007, 2014, 4 and 2022, we have got 2004, 2001 it looks like, 2011, 5 2020. 6 A. Right. There were eight years that were 7 profitable by my definition of being more than 25% above 8 that, so they would have been in that, you know, 7.5% or 9 more, eight years in that period. They were more frequent 10 in the early years on this. 11 Q. And these are aggregated numbers, so you don't 12 track if a farm is profitable over time compared to others 13 or if the variation is felt uniformly across -- 14 A. Oh. 15 Q. -- the industry? 16 A. We do. I don't have that here. I have -- we have 17 a study that discusses how you should be benchmarking over 18 time and calculate the transition probabilities of moving 19 between profitable and unprofitable over time. But I 20 didn't go into that here. But I can give you the 21 reference. It's at the end of this testimony. 22 Q. Okay. Thank you. 23 And are the net benefits of risk management 24 included in this calculation? 25 A. They are. 26 Q. And what about government payments to farmers, are 27 those included in these calculation? 28 A. Yes. 3048 1 Q. So the $2 billion in pandemic assistance is 2 included here? 3 A. Correct. 4 Q. And does the farms' profitability also -- do you 5 include their returns from plant assets or other 6 cooperative assets? 7 A. Any returns from the co-ops are in there, also. 8 Q. So for farms that may own manufacturing plants, if 9 there's underperformance due to Make Allowances from those 10 plants, that could be impacting these numbers? 11 A. Yeah. I mean, that might be what is driving some 12 of the increase in marketing costs in recent years, in 13 some situations. That -- because that is where it would 14 show up, the fact that it comes through the milk check, it 15 would be in that -- in that marketing of cost increase. 16 Q. And do you calculate a cost of milk production 17 annually as part of the study? 18 A. Yes. 19 Q. Is that included here? 20 A. It's in Table 3. 21 Q. All right. 22 A. Total cost to produce milk is right in the middle. 23 I have got it -- it is a very busy table. I could even 24 put more stuff on here. 25 But, right, so total cost to produce milk is in 26 the middle of that table there. 27 Q. And I appreciate you turning to this. I had a few 28 questions on this table as well. 3049 1 So tracking these numbers over time, the top line 2 is total farm operating costs; is that right? 3 A. Yes. 4 Q. And just so everyone has it, this is on page 13, 5 the second to the last page of your testimony. 6 A. Yes. 7 Q. Okay. So I'm looking at these costs over time, 8 and I look at 2013, it's $19.62. Then if we go to 2016, 9 total operating costs go down to $17.31; is that right? 10 A. Correct. 11 Q. And then we'll jump to 2020. They are up to a 12 little over $18. And then 2022, they are up to $22.53; is 13 that right? 14 A. That is correct. 15 Q. Okay. And then I was comparing that to the total 16 revenue, which is the second to the last line, which in 17 2013, at $24.70, is higher than it was in many of the 18 years between that year and present, correct? 19 A. Yes. 20 Q. But then if we look at those same example years, 21 in 2016, it goes down to 19.75, back up to 22.83 in 2020, 22 and then a little over $30 in 2022? 23 A. Yes. 24 Q. So as I'm comparing these total farm operating 25 costs and total revenue, they -- they shift over time 26 somewhat in tandem, it seems. 27 A. Yes. That does happen. 28 Q. And so would you agree that as kind of revenue 3050 1 fluctuates, the total farm operating costs also fluctuate 2 in line with that? 3 A. To some extent. To some extent -- I mean, you are 4 going to -- you are going to spend a little bit 5 differently when you have got -- you can make investments 6 that you wouldn't have otherwise made if you have extra 7 money to spend. 8 Q. Thank you. That was kind of my next thought. 9 So how do farms manage costs of production in good 10 years and in bad years? What kind of costs do they 11 control? 12 A. Well, so are we talking operating costs or all 13 costs? 14 Q. We'll do total operating costs. 15 A. So operating costs, so we're not thinking about 16 doing long-term investments and things of that nature. 17 You know, the -- one of the big drivers of the operating 18 cost changes over time is -- is feed costs. So, for 19 example, you were pointing out that the cost in 2016 was 20 17.31, and that was down from earlier years. 21 And if you look at the purchased grain cost, for 22 example, you see how high purchased grain was in 2014 and 23 how it -- you know, we came off of that $7 corn in 2014, 24 because one solution to high commodity prices is high 25 commodity prices. And then we plant, you know, 94 million 26 acres of corn and bring the price back down. And so a 27 large driver of that drop was just the purchased feed 28 cost. 3051 1 Q. What about other expenses, I'm thinking about kind 2 of capital investment or things that aren't -- 3 A. That wouldn't be operating costs. That would be 4 in total costs, right? 5 (Court Reporter clarification.) 6 BY MS. VULIN: 7 Q. I said, moving beyond operating costs, what about 8 other capital investment costs that could flow from either 9 increased revenue or decreased revenue? 10 A. So what you tend to see is that when you have a 11 good year is when you can make the investment, and because 12 of the cash basis tax accounting and because of things 13 like Section 179 and bonus depreciation, you can invest at 14 the end of a good year. 15 So, you know, hopefully all dairy farms coming up 16 in November are going to do a pretax estimate -- all 17 farms, not just dairy farms -- will do a pretax estimate 18 in November to figure out what their kind of tax liability 19 might look like. And then if you have had a good year, 20 then you think about maybe a new chopper or some other 21 investment like that. 22 And so in a good year there will be more 23 investment, and in the bad year, there will be less. So 24 you can track things like depreciation and repairs. So on 25 these farms, if it's not a good year, you will see 26 relatively more repairs and relatively less tax 27 depreciation, because they just didn't have the money to 28 spend, so you have got to make due with what you have got. 3052 1 Q. The concept being that you can kind of adjust 2 expenses, or at least track them, as your revenue adjusts 3 as well? 4 A. You have to. Family draw also adjusts. That's, 5 you know, like the ultimate residual claim on the -- in 6 the income on these farms. 7 Q. And you also said something earlier. You need to 8 make money in the good years to cover you in the down 9 years. 10 Do you recall that? 11 A. Yes. 12 Q. And so really looking at isolated years might not 13 tell you the full story because you don't make money and 14 only keep it in that one year, it would be spread out over 15 time; isn't that right? 16 A. That's true. 17 Q. And you were asked some questions earlier about 18 organic. You said that this analysis does include organic 19 farms, correct? 20 A. There are some organic farms in this set, yes. 21 Q. And you -- 22 A. They are not broken out separately. We don't have 23 enough to do -- we would like to have enough to do a 24 separate organic report. We're working on that. We do 25 not have that. 26 Q. And you would agree with me that the costs to 27 produce milk for organic milk are much higher than 28 non-organic milk? 3053 1 A. Yes. 2 Q. And did you include A2 milk in this study? 3 A. There might be one farm. I don't know. 4 Q. What about grass fed? 5 A. Well, there are certainly farmers utilizing 6 pasture. You'd have to tell me where you think the 7 threshold is. See, and -- so, yes. But not -- you know, 8 I couldn't tell you how many or -- 9 (Court Reporter clarification.) 10 THE WITNESS: No, there are lots of farms 11 utilizing pasture in New York. We have good climate and 12 water. 13 BY MS. VULIN: 14 Q. And you had said a figure earlier, 5%. Was that 15 5% of the farms in the study are organic or was that of 16 milk in New York? 17 A. That would be in the study, 5%. There are -- I 18 believe USDA's number is in the neighborhood of 500 19 organic dairy farms in New York, out of 3,000, 3200, was 20 last number that I saw. 21 Q. And then if you could flip back to page 12, 22 please, of your testimony. 23 I'm looking at your summary and conclusions. And 24 your second to the last sentence, you say, "My hope would 25 be for USDA to be cognizant of these aspects when 26 considering Federal Milk Marketing Order changes that will 27 significantly impact farm milk price. 28 Do you see that? 3054 1 A. Yes. 2 Q. And when you say "these aspects," you are 3 referring to farm profitability and financial impact of 4 the proposals? 5 A. That is correct. 6 Q. Okay. And how -- what do you mean by "be 7 cognizant"? Like, what specifically would you like USDA 8 to do with this information? 9 A. Well, I think that you have got to look at the 10 trade-offs. And I'm -- you know, I'm not telling them 11 anything that they are not aware of. But, you know, they 12 have got to consider what the trade-offs are on the 13 different changes that they put in place. 14 Q. And what trade-offs are you recommending USDA 15 make? 16 A. I'm not recommending any trade-offs. I mean, I -- 17 look, again, there is -- there's no free lunch here. Any 18 changes that are made are going to have positive aspects 19 in some place and negative aspects in others. And so just 20 be aware of those trade-offs. 21 Q. And can USDA be aware of the impact on farm prices 22 yet still raise Make Allowances? 23 A. I assume they can. That would be up to them. 24 MS. VULIN: Nothing further. Thank you. 25 CROSS-EXAMINATION 26 BY MR. ROSENBAUM: 27 Q. Steve Rosenbaum for the International Dairy Foods 28 Association. 3055 1 Good morning. 2 A. Good morning. 3 Q. Are you -- as you may be aware, in this 4 particular portion of the hearing, we are mainly focused 5 upon Make Allowances. 6 Are you aware of that? 7 A. Correct. Yes. 8 Q. Now, are you aware that USDA historically has 9 taken a sort of hardline view that farmer costs of 10 producing milk are simply not a factor that they will 11 consider in setting Make Allowances? 12 A. I was not aware of that. 13 Q. All right. Let me just -- could I -- if I -- let 14 me just read a sentence to you when USDA was defending the 15 2008 Make Allowances, which were challenged. Quote: "It 16 is, therefore" -- referring to things they've talked about 17 already -- "it is, therefore, neither inappropriate nor 18 surprising that, while USDA considers producer cost in 19 fixing prices, it declined to modify the Make Allowances 20 to account for these costs," end quote. All right? 21 A. Okay. 22 Q. And then let me -- let me read from the USDA 23 decision in 2008, along the same lines, quote: "Opponents 24 of increasing Make Allowances argue a number of points, 25 that they are already set at too high level, that dairy 26 farmer production costs also increased significantly due 27 to higher energy and feed costs, that processors should 28 look beyond asking dairy farmers to receive less for their 3056 1 milk by charging more for manufactured products, and that 2 Make Allowance increases should be made only when all 3 dairy farmer production costs are captured in their milk 4 pay price. These are not valid arguments for opposing how 5 Make Allowances should be determined or what level 6 Make Allowances need to be in the Class III and Class IV 7 product pricing formulas. 8 "It is reasonable to conclude" -- I'm skipping 9 down -- "it is reasonable to conclude that the 10 Make Allowances used in the Class III and Class IV product 11 price formulas should be updated to reflect changes in the 12 costs manufacturers incur in producing cheese, butter, dry 13 whey, and nonfat dry milk. It is necessary to reflect 14 changes in manufacturing costs so that with the prevailing 15 market prices for manufactured products, minimum Federal 16 Order classified prices can be set," end quote. 17 Now, are you asking USDA to change any of those 18 principles, if you will? 19 A. I'm not. No. 20 Q. Okay. And just to -- and then USDA also stated, 21 getting to your point, quote: "In the aggregate, the 22 costs of producing milk are reflected in the supply and 23 demand conditions for the dairy products," end quote. 24 And they said, similarly, quote: "The costs of 25 producing milk are in the aggregate reflected in supply 26 and demand conditions that affect the NASS commodity 27 prices of dairy products," NASS being the survey entity 28 that surveys dairy product pricing. 3057 1 So do you agree with me that -- do you agree with 2 USDA that the costs of producing milk are in the aggregate 3 reflected in the supply and demand conditions for finished 4 dairy products, in a given -- supply and demand in a free 5 market economy? 6 A. Well, I mean, if you are going to derive the farm 7 milk price from a product price, then the way that it has 8 been done is to subtract off the Make Allowance of 9 manufacturing costs, and then the residual would be the 10 farm milk price. 11 Q. And that, therefore -- and that the farmer costs 12 of producing milk, and the rise or decline in that, over 13 time, is going to be captured in the formula by the -- by 14 the finished product pricing, correct? 15 A. It's going to be compensated that way. Long-term 16 it might -- if you can't make it based on that, then you 17 are going to have a long-term viability problem at the 18 farm level. I -- so month to month I don't know that I 19 would say that that is necessarily the market's fair 20 return, but that's how it's compensated. 21 Q. Well, but obviously the farmers' willingness to 22 produce the milk is going to be dependent upon being paid 23 a price that will cause them to produce that milk, right? 24 A. Yes. Longer term. I mean, there's a lot of 25 capital costs involved in here, so you are not going to 26 jump in or out from month to month, which is part of the 27 issue, I think, at the farm level because you need to 28 make -- being a viable farming operation long-term means 3058 1 making good long-term investment decision. 2 Q. And -- and of course -- and the Federal Order 3 system, if you will, provides as follows, and I'll quote 4 again from USDA's decision: "Dairy farmers face no 5 regulatory minimums in their costs and face no regulated 6 minimum payment obligations in the way that regulated 7 handlers must pay dairy farmers for milk." 8 Correct? That's an accurate statement of the 9 system, correct? 10 A. Yes. 11 Q. Okay. I mean, as opposed to processors who 12 actually effectively are having their profits capped, 13 right? They can never make more than the Make Allowance 14 if they are making a commodity price -- of a commodity 15 product, correct? 16 A. Are you assuming that they never get above the 17 average price received? 18 Q. Well, I'm saying, on average -- let's assume the 19 average price for cheddar cheese is $2, okay, and let's 20 assume that the Make Allowance for cheese is $0.20, which 21 it currently is. 22 Are you aware that if you are in the Federal Order 23 system, and you are a processor, you have to pay your 24 farmer 1.80 for the milk, correct? 25 A. Yes. 26 Q. And -- and if -- if you -- if the market improves 27 and now you are able to sell your cheese for $2.10, you 28 still only get to hang on to your $0.20 Make Allowance, 3059 1 and now you have to pay $1.90 to your farmers as a minimum 2 milk price. 3 Are you aware of that? 4 A. If you are always at the average. 5 Q. Yes. Well, obviously, we're using the average. 6 A. Well, if there is a distribution or maybe you 7 could do things so that you received a price above the 8 average. 9 Q. Well, and -- well, you have given a lot of average 10 numbers, so I'm going to stick with my average numbers. 11 In -- viewed as a whole, the manufacturers of 12 cheddar cheese who are part of the Federal Order system 13 are capped in the amount of money they can make by the 14 Make Allowance, correct? 15 A. Yeah. No. 16 Q. If they are making commodity cheddar cheese, they 17 have to -- 18 A. Only if -- only if they can't improve things to be 19 above the average. I am using averages, but I'm also 20 telling you there's a lot of variation behind those 21 averages. 22 Q. In this context, doing better than average would 23 mean that, what, you can make the cheese for less than the 24 Make Allowance? 25 A. Perhaps, or you can sell the cheese for above the 26 average price. 27 Q. But on average -- okay. You're -- you're focusing 28 entirely then on non-average numbers as opposed to average 3060 1 numbers? 2 A. You asked me whether you were capped at that. 3 Q. Okay. 4 A. And I said, no, there are other things you can 5 control. You are not capped at that. 6 Q. The industry as a whole is capped at that, right? 7 That's the whole purpose of Federal Order -- 8 A. Well, again, I would have to know some more about 9 the distributions and things of that nature. 10 Q. You mean distribution in the sense of, what, some 11 people may get more and some people less? 12 A. The cost of production distribution and the 13 revenue, the price distribution. 14 Q. Well, that's the whole issue here, obviously, is 15 that we are in a situation where, in our view, and indeed 16 National Milk agrees, the cost of production actually 17 substantially exceeds the Make Allowance. 18 So assume that's the case and answer my question 19 if you would, please. 20 A. So I'm an economist, and we argue about 21 assumptions, and so I'd have to accept that assumption. 22 Q. Well -- 23 A. I understand that's what makes economists a pain 24 sometimes, but that's what we do. So you have to justify 25 the assumption. And if I don't buy that assumption and 26 your entire argument is based on that assumption, then, 27 no. 28 Q. Okay. I will assure you that in this hearing 3061 1 there will be much more than simply assumptions as to what 2 the costs of production are for making cheddar cheese. 3 But if you would make that assumption for me, that 4 the costs of production exceed $0.20, which is the current 5 Make Allowance for cheddar cheese, then the processing 6 side is sort of stuck, right? 7 A. Everything else equal, if they can't change it, 8 then, yes, if they are willing to buy that set of 9 assumptions. 10 Q. Okay. Now, Make Allowance is only one of several 11 issues we're facing in these hearings. 12 Have you examined the proposals that address 13 things other than Make Allowances to determine to what 14 extent, if at all, your testimony is relevant to them? 15 A. Not -- not that I would be comfortable testifying 16 about. 17 MR. ROSENBAUM: That's all I have. Thank you. 18 THE WITNESS: Yeah. 19 CROSS-EXAMINATION 20 BY DR. BOZIC: 21 Q. Good morning, Professor Wolf, Dr. Bozic. 22 A. Good morning, Dr. Bozic. 23 Q. I'll switch to Chris. It feels weird otherwise. 24 I want to first establish your -- your neutrality 25 and expertise in this hearing. 26 Are you currently consulting for any party 27 participating in this hearing? 28 A. I'm not. 3062 1 Q. Does Cornell University have a preferred dairy 2 policy? 3 A. Absolutely not. 4 Q. Do you have an ownership share in any dairy farm 5 or dairy processing? 6 A. No. 7 Q. And you're tenured, right, so no job -- 8 A. Right. 9 Q. -- insecurity? 10 A. That's what they tell me, yes. 11 Q. And is this likely to be your only appearance at 12 this hearing? 13 A. Yes. 14 Q. Would you disagree with the statement that Baker 15 chair is the most prestigious academic position 16 specializing in dairy markets and policy? 17 A. Would I disagree? You might be N of one, so -- I 18 mean, you know, it might be the most and the least. I 19 mean -- 20 Q. Where I'm going with this is that when -- when the 21 administrative law judge swears us in, he's asking us to 22 affirm that we'll be speaking truth and nothing but the 23 truth, but not the whole truth, and you are one of the few 24 people that we can hope to hear the whole truth here, so 25 that's why this preamble set of questions. 26 I want to run down the topics of the hearing and 27 examine their influence on farm finances. 28 So the first topic of the hearing is the standard 3063 1 milk composition. 2 Based on your research what would you anticipate 3 the increase in standard milk tests to be on producer 4 price differentials? 5 A. Sorry, ask that again? 6 Q. I'm checking whether you read the paper that we 7 wrote together. 8 A. Producer price differentials. 9 Q. Yeah. 10 A. Oh, okay. Sorry. I didn't understand. I didn't 11 understand you were talking about the PPD. 12 Q. Yeah. 13 A. So -- well, one of the things that has eroded the 14 producer price differential over time, since multiple 15 component pricing started, was the increasing component 16 values because everything gets paid at Class III 17 components first and there's less left to go into the PPD. 18 Q. Would it be fair to say that the standard milk 19 tests are increased the net farm profit would benefit 20 from? 21 A. I haven't analyzed that formally, but it seems 22 like the likely outcome. 23 Q. Thank you. 24 And moving on to the second topic of the hearing 25 on milk surveys, and particularly on removal of barrels. 26 And if the block-barrel spread inverts, meaning 27 that barrels get priced higher than blocks, due to 28 additional block capacity -- again, if that happens -- 3064 1 what would be the impact of removing barrels on that farm 2 profit? 3 A. So if you remove the -- so the proposal to remove 4 barrels from calculating Class III? 5 Q. Right. But under the assumption -- I'm here to 6 sell a set of assumptions, since you are buying. 7 If -- so under the scenario where the block-barrel 8 spread inverts due to additional block capacity, what 9 would be the impact of removing barrels on the net farm 10 profit? 11 A. If it inverts, so that we now have barrels above 12 blocks? 13 Q. That's correct. Yes. 14 A. Well, then that would have a negative effect if 15 that were to happen. 16 Q. Yeah. Thank you very much. 17 I'm going to move on to the topic number three on 18 Make Allowances, and I'm going to cite from the final 19 decision published on April 2nd, 1999. I'm not going to 20 ask you to affirm that that's the case because I don't 21 have it printed, so, you know -- so in that final decision 22 on page 16,097, so 1-6-0-9-7, USDA writes: 23 "If the Make Allowances are established at too low 24 a level, manufacturers will fail to invest in plants and 25 equipment, and reduced production capacity will result. 26 If the Make Allowances are established at too high a 27 level, there will be unwarranted incentive to increase 28 capacity above the needs of the industry, leading to 3065 1 overcapacity, resulting losses to manufacturers. 2 "Either scenario would not be in the best interest 3 of the dairy industry. Manufacturing dairy plants who 4 find the level of Make Allowances inadequate compared to 5 their actual costs also have the alternative to not 6 participate in the Federal Order marketwide pool." 7 So I'm going to go back to the first sentence that 8 if the Make Allowances are established too low, 9 manufacturers will fail to invest in plants, reduced 10 production capacity will result. 11 To your knowledge, are we now net importers of a 12 higher share of the cheese consumed in the United States 13 than we were maybe ten years ago? 14 A. I believe we're not higher importers. 15 Q. In your opinion, are real price -- real prices 16 corrected for inflation -- are real prices for 17 manufactured dairy products increased since the last time 18 where Make Allowances were adjusted, so let's say 2009? 19 A. Are you talking about retail prices, wholesale -- 20 I guess it doesn't matter. Retail, wholesale? 21 Q. Yes. 22 A. I -- I have -- off the top of my head, I would 23 guess that they have not exceeded the rate of inflation, 24 so -- 25 Q. In your opinion, over the past decade, has the 26 domestic supply of dairy products successfully met the 27 domestic demand for dairy products? 28 A. Has the domestic supply met the domestic demand? 3066 1 Q. Yes. 2 A. Yes. 3 Q. And when we talk about the adequate investment, in 4 your opinion, should that refer to -- should that be 5 measured against the producer's desire to grow their farm 6 production or against market stability to absorb dairy 7 products? 8 A. Say that again -- 9 Q. Yes. 10 A. -- please? 11 Q. When the -- it -- a lot of speakers before me, and 12 probably some after me, will talk about the adequate 13 investment -- the characterization will be whether the 14 investment is adequate or inadequate. 15 And how should one measure the adequacy? Should 16 it be measured against the producer's desire to grow their 17 production of raw milk or against market's ability to 18 absorb the increase supply of dairy products? 19 A. Well, if we were picking one of the two, it would 20 probably be the latter, but at some point you would have 21 to consider both. 22 Q. Yeah. In your opinion, has the dairy policy since 23 2009 distorted location of new dairy plants? In other 24 words, would free market result in plants that have been 25 built or are currently under construction, would free 26 market result in plants be located in different locations 27 than where we are observing them over the last 15 years? 28 A. I don't think I can answer that. 3067 1 Q. What information would you need to be able to? 2 A. Well, I think there's a lot of concern about, you 3 know, for a lot of areas that have -- like, so the 4 Northeast where I live, that there's been -- as the 5 speaker before me was talking about, you know, finding a 6 home for some of the milk, and the market adjustments that 7 come out of that, that also was happening pretty 8 frequently for a period of time in the Mideast and 9 Michigan. And so there's certainly lots of interest in 10 who is investing and where, but I -- I don't know that I 11 have enough information to -- to -- to say whether I think 12 actually the policy was driving those location decisions. 13 Certainly may have on the margin, but I don't know that. 14 Q. Thank you for your answer. 15 So going back to the final decision from '99, the 16 USDA contemplates the phrases "too low" and "too high." 17 And I was wondering if you would be willing to comment on 18 the distortions that would -- you know, which one would be 19 sort of more severe, setting the Make Allowances too low 20 or setting the Make Allowances too high. 21 A. I suppose that that depends very much on where you 22 are sitting, right? So the -- I mean, this is -- I think 23 that what you read reflects the fact that USDA was being 24 very aware of the fact that there are trade-offs, right? 25 And that if you set them -- if they are too low, then 26 there's going to be issues, like what we talked about, 27 underinvestment possibly of manufacturing capacity, in 28 reblends on some of those manufacturing losses that go 3068 1 right into the farm milk checks and stuff. So clearly, 2 you know, that's something that would not be great. 3 If they were too high, as that opinion that you -- 4 or whatever it was that you just read noted, right? You 5 wouldn't want manufacturing built just to take advantage 6 of economies of size and -- I'm not saying this would 7 happen, but you would have to be careful about -- about 8 that. 9 And, you know, a lot of the -- what I have heard 10 in this hearing and what is being suggested is to get a 11 good handle on what the manufacturing costs look like and 12 the manufacturing cost distribution, and then, you know, 13 the neutral referee has to decide where in that 14 distribution this should be set and trading those kind of 15 factors off. 16 Q. Thank you for your answer. 17 I'm reading the -- from the Proposal 7 as noticed 18 by USDA, and in the exhibit, I believe USDA 1. And it's 19 listed there that the Make Allowance for cheddar cheese 20 would increase from $0.2003 to $0.24 per request from 21 National Milk. 22 In the Exhibit IDFA-1, on page 14 -- I'm not sure 23 whether we need to provide it to the witness -- on the 24 page 14 on Exhibit IDFA-1, which is Dr. Stephenson's 25 study, the reported total cost for the low cost plants for 26 cheddar cheese is $0.22, $0.2201. 27 Is there a risk that even National Milk's proposal 28 could potentially set the Make Allowance too high for 3069 1 cheese given the results of Dr. Stephenson's study? 2 A. So in Dr. Stephenson's study, there was a low -- 3 he divided the costs further into a low cost group and a 4 high cost group; is that -- I have read it, but I don't 5 have it in front of me. 6 Q. That's my understanding. 7 A. Okay. Well, I mean, to the extent that there is a 8 distribution in that there is, for example, economies of 9 size in producing some of these things that get surveyed, 10 you know, there are potentially firms that are going to do 11 better out of it and firms that are going to do worse, 12 right? So, you know, it's conceivable that it could be 13 too high. I mean, it depends on what you mean by "too 14 high," right? We could have a long discussion or argument 15 about that. 16 Q. If we set the Make Allowances $0.02 higher than is 17 needed to provide normal returns on efficient cheese 18 plants, could that encourage further investment in cheese 19 capacity where none is warranted by the market demand? 20 A. Possibly. 21 Q. Thank you for your answer. 22 To your knowledge, does the weekly National Dairy 23 Products Sales Report capture all of the cheddar cheese 24 produced? 25 A. I don't believe it does. 26 Q. Okay. And if sellers of cheddar cheese are not 27 subject to NDPSR, for example, because they forward price 28 or they have lower fat or high moisture, etcetera, could 3070 1 they compensate for outdated Make Allowances by increasing 2 the basis over the NDPSR or increasing the basis over CME? 3 A. Is it possible? I -- I suppose. I don't know. I 4 haven't looked at it. 5 Q. Yeah, yeah. I'm not asking whether it is actually 6 happening. We don't have that information. 7 A. Right. 8 Q. But I -- 9 A. Well, I mean, part of the problem -- not to be 10 pedantic -- but if the question is, is it possible, 11 probably yes. 12 Q. Yeah. And the reason I'm asking is because the 13 argument is often about circularity, that you cannot 14 increase the price that you are charging to your customers 15 because that would be captured by NDPSR. 16 A. Right. 17 Q. But to the extent that NDPSR may not capture all 18 of the cheddar, then that argument also is limited. 19 Could mozzarella sellers do the same given that 20 mozzarella is not part of the NDPSR? If the 21 Make Allowances are outdated, could mozzarella sellers 22 compensate for that by increasing the basis versus the 23 40-pound block that they use as their base? 24 A. Presumably they could if they didn't have to worry 25 about outside -- 26 Q. Competition? 27 A. -- imports or some other type of competition. 28 Q. Sure. Sure. Sure. 3071 1 Moving -- thank you for the answer on that. 2 In -- in your understanding, how has the whey 3 market evolved over the last 20 years? 4 A. Well, I'm not an expert on the whey market. I 5 would say that there is -- my sense of it is that there is 6 less, for example, dry whey and more -- more innovative 7 products like whey protein concentrates, whey protein 8 isolates, and things of that nature. But I'm old enough 9 to remember when we fed the whey to the heifers, so -- 10 Q. Given that -- if that is indeed the case, that a 11 larger share of liquid whey is dried into higher protein 12 powder, whey protein concentrates or isolates, would it be 13 irrational to infer that profitability is higher in making 14 WPC rather than dry whey? 15 A. Well, presumably, if more firms are moving into 16 that, they are doing it because there's an economic 17 incentive. 18 Q. So if that is indeed the case, then if the 19 Make Allowance is set to return normal returns on the 20 efficient plants that make dry whey, could they still -- 21 could that number still provide for extraordinary profits 22 to produce WPC or the isolates? 23 A. I suppose it could. That would be maybe returns 24 to innovation. 25 Q. Yeah. But to the extent that the standard plant 26 being built is no longer dry whey plus cheddar, but 27 isolates or concentrates versus cheddar, that's presumably 28 something that should be taken into consideration? 3072 1 A. One of the interesting things about the dairy 2 industry, as well as the more difficult things, is the 3 variation in the vintage of the production and the size of 4 the production and the different commodity -- you know, 5 the portfolios the different firms have, certainly. And 6 the Federal Milk Marketing Orders have to kind of 7 necessarily simplify, right? You can't get everything in 8 there. 9 Q. Sure. Yeah. 10 I'm going to switch a little bit to the risk 11 management. And are you familiar with the efficient 12 market hypothesis? 13 A. Yes. 14 Q. For -- for those in the room that are not geeks 15 like you and I, could you please explain it in simple 16 words? 17 A. Well, I don't know if I want to do that right now, 18 but go ahead. You go ahead. I mean, where are you going 19 with this, Marin? I'm a little concerned about where 20 we're going with this set of questions. 21 Q. I'm about to sell you a set of assumptions. 22 A. Oh, okay. You are going to test the assumption of 23 the efficient market hypothesis? 24 Q. So would it be fair to summarize the efficient 25 market hypothesis that any predictable change in the 26 market would be priced in the futures price? 27 A. If markets are efficient, then they will be 28 pricing that -- 3073 1 Q. Yes. 2 A. -- correctly, yes. 3 Q. So -- so -- 4 A. But in the real world, right, sometimes not. 5 But -- but go ahead, yes. 6 Q. So -- so, in other words, if the only two 7 proposals regarding Make Allowances are IDFA and National 8 Milk, would it -- would the economic theory suggest that 9 the futures markets would have to price in as the final 10 result some sort of weighted probability between those two 11 proposals? In the futures markets I mean. 12 A. Right. So assuming that there's not a market 13 failure there, the participants in the futures markets are 14 probably paying attention to this decision, to the extent 15 that it makes changes on the margin. And, yes, in the 16 same sense that there's a whole literature in economics 17 that suggests that it's not news if the markets already 18 knew it. 19 Q. Right. 20 A. Right? So if the Federal Reserve comes out and 21 announces that there will not be an increase in the 22 interest rate and the markets don't react, then the 23 assumption is that the markets had already priced that in. 24 Is that where you are going with this? 25 Q. My next question is where I'm going. So if the 26 Make Allowances are indeed priced in the futures as a 27 weighted average between National Milk and IDFA, and if 28 AMS announces the Make Allowances as National Milk has, 3074 1 would then that lead to hedging gains or hedging losses 2 for producers that have short positions in 2025 futures 3 contracts? 4 A. So they have taken the sell position? 5 Q. Yes. 6 A. And it -- they announce at where? 7 Q. So the market prices it in as the weighted average 8 between National Milk and IDFA, and AMS announces it at 9 National Milk's numbers. 10 A. So they announce it at a lower number? 11 Q. That's correct. 12 A. Oh. So then the farm milk price ends up being 13 higher? 14 Q. That's correct. 15 A. So they end up -- so they sold, so they have to 16 buy back? 17 Q. Yes. 18 A. So then they're going to take a loss? 19 Q. So in other words, like hedging -- regulatory 20 uncertainty could actually lead to hedging losses, even 21 if -- if National Milk gets their way? 22 A. In that example. 23 Q. In that example. Yes. Thank you much for that 24 clarification. 25 So the next question is a little bit more open 26 ended, but I would be remiss not to ask because I get 27 asked this a lot by dairy farmers. And farmers ask, well, 28 where is my Make Allowance? What makes it fair -- I'm 3075 1 paraphrasing -- what makes it fair to ensure processors 2 get risk-free profits but farmers must go out of business 3 if there's too much product that depresses the milk 4 prices? 5 So how -- how do you go about explaining to dairy 6 farmers that processors get risk-free profit, but 7 producers get to bear the risk? 8 A. Well, I guess, first of all, if we were thinking 9 about the discussion that I had with Mr. Rosenbaum a 10 minute ago, he would -- to be consistent, I would probably 11 have to say that they don't necessarily get risk-free -- 12 Q. But -- 13 A. -- gains there. 14 Q. -- but those are the costs of processing that are 15 below Make Allowances, they would get risk-free profits, 16 assuming there are no over-order premiums? 17 A. Right -- well, I mean, by the efficient margin 18 hypothesis, if they were generating exceptional returns, 19 we would expect it to get -- to be spent somewhere, right? 20 So, yeah, that's maybe where over-order premiums would 21 come in in your example, or something of that nature. 22 Q. Or more capacity? 23 A. Or more capacity, or some other expenditure that 24 way. 25 You know, when you start with product prices and 26 then work backwards to the farm, it's -- I think -- I was 27 asked about the cost of production earlier, right? And -- 28 I mean, part of the -- so, yes, the farms end up as kind 3076 1 of the residual claimant on that difference. Of course, 2 keeping in mind that it gets blended and there are 3 components and over-order premiums, hopefully, and some 4 other things like that. 5 Q. I want to -- thank you for your answer. 6 I want to move on to the topic of base Class I 7 mover, topic four in this hearing, and how it relates to 8 your area of expertise in risk management and farm 9 finances. 10 Would you say that complexity of milk pricing is 11 one of the factors keeping utilization of risk management 12 by dairy farmers from being even higher? 13 A. I would say it's the primary one. We have a paper 14 from about -- well, from 2014 now, where we surveyed a 15 thousand -- I can't remember how many dairy farmers -- 16 across the country, and the ones that did not use risk 17 management -- and I would assume that this is still true 18 today -- the primary impediment to it was understanding -- 19 well, and management time, which really goes together. If 20 you had more management time, you could spend more time 21 understanding. 22 Q. Okay. Do the existence of advanced pricing make 23 risk management by dairy farmers easier to execute or more 24 complicated? 25 A. Everything else equal, advanced pricing probably 26 makes it -- probably gives you a little more basis risk. 27 Q. But basis risk for those that are not experts 28 means more complicated? 3077 1 A. More complicated, yes. 2 Q. So would it follow that abolishing advanced 3 pricing would make risk management by dairy farmers more 4 straightforward? 5 A. Yeah, it might, but there might be a trade-off 6 there that we're not considering at the moment. 7 Q. Does any come to mind? From a dairy farmer 8 perspective. 9 A. Strictly from a farmer perspective? No. Except 10 for the extent that they might be in the co-op, that it 11 would make it more difficult and shows up through the 12 co-op activities. 13 Q. Okay. So are you familiar with the theory of 14 storage and the impact that storage has on dynamics of 15 commodity prices? 16 A. I am but -- 17 Q. You did study in Davis -- 18 A. I did, but that was a long time ago, and I haven't 19 looked -- you know, on a farm, we don't concern ourselves 20 with storage a whole lot, on dairy products. 21 Q. Well, I'll chart the path where I'm going -- 22 A. I have read Brian Wright's stuff, but I wouldn't 23 want to be quizzed on it right now. 24 Q. I can commit to that. 25 So which product is more storable, cheddar cheese 26 or nonfat dry milk powder? 27 A. Nonfat dry milk powder. 28 Q. And which plants are -- 3078 1 A. Although, I mean, you know, I have had like 2 20-year-old aged cheddar, and it is pretty good. 3 Q. Let me clarify. Which product is storable without 4 altering its functionality or -- or -- 5 A. Okay. 6 Q. Powder, right? 7 A. Yes. 8 Q. Okay. Which plants are typically used for 9 balancing, would it be cheese plants or powder plants? 10 A. I would expect powder plants to be used for 11 balancing more often. 12 Q. So given what we know about storability and excess 13 capacity, which means balancing, which product is 14 theoretically more likely to be subject to explosive 15 growth in prices, would it be Class III price or Class IV 16 price? 17 If something happens in the market and prices have 18 to react by increasing, which one is more likely to have 19 an explosive, more dramatic increase? 20 A. Class III. 21 Q. Class III? Yeah. 22 And I believe you said before that 2014 and 2022 23 were among the most profitable years for dairy farmers? 24 A. That is correct. 25 Q. Do you recall which class price was higher in 26 those two years? 27 A. Class IV was higher in 2022. It was higher in 28 2014 also, I believe. 3079 1 Q. Yes. That's my recollection as well. Okay. 2 Well, so that's -- all things considered, given 3 what you have answered before about the exclusivity of 4 Class III versus Class IV, if the spread between III and 5 IV were to widen suddenly, widen meaning that it is not -- 6 they are not close, they are apart -- is it more likely to 7 be in favor of Class III or Class IV? 8 A. Well, I would think if it's explosive, it would be 9 Class III. 10 Q. It would be in favor of Class III. Okay. Great. 11 Is there anything else that we have not asked 12 anybody in the audience that would point to some important 13 trade-offs that -- and I know you are not here to 14 recommend, do this, not that. But, like, is there 15 anything else that you would like on the record in terms 16 of trade-offs, trade-offs that are relevant in 17 decision-making on topics in the scope of this hearing? 18 A. No. 19 Q. Okay. 20 DR. BOZIC: Thank you very much. 21 THE WITNESS: You're welcome. 22 THE COURT: We have been going for about an hour 23 and 20 minutes. Should we have a ten-minute break? 24 Let's come back at 11:10 a.m. 25 (Whereupon, a break was taken.) 26 THE COURT: Back on the record. 27 Do we have further cross-examination for Witness 28 Wolf, when we gets back up here? 3080 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Ryan Miltner representing Select Milk Producers. 4 Good morning. 5 A. Good morning. 6 Q. On page 2 of your statement you listed four goals 7 of the Federal Orders, and I think Ms. Vulin had some 8 questions on those. 9 A. Uh-huh. 10 Q. The last one is about equitable returns to 11 farmers. A court reviewing one of the last hearings on 12 Make Allowances quoted some authority, and it said that 13 "USDA regulates milk prices in order to advance market 14 stability, supply adequacy, milk cost equity between 15 handlers, and milk price equity between producers." 16 Would that be the type of topic you were referring 17 to there? 18 A. Yes. 19 Q. Okay. So in my experience dealing with farms, a 20 lot of them have three separate financing tools that they 21 utilize: Like a facility loan, a cow loan, and an 22 operating loan. 23 Is that similar to the financing structure you 24 might find for the farms that you survey for your reports? 25 A. It would be similar. 26 Q. Given the ups and downs that you cite in terms of 27 farm profitability, do you do any analysis to determine 28 whether the line of credit, the operating line, for 3081 1 instance, is sufficient to ride out those variations in 2 profitability? 3 A. That's a good question. That would be one of the 4 things that was being stressed during that four- or 5 five-year period from 2015 through 2019 with multiple 6 years of low loans. Because, generally, right, an 7 operating loan by definition is, you take it out and you 8 -- it's a current loan, and you pay it back that year. 9 And so if you -- during that period there would have been 10 some of those farms, if they couldn't pay it back, would 11 have rolled it into longer-term loans. And, of course, 12 the cost of doing that today would be a lot higher than it 13 was during that period when we had very low interest 14 rates. 15 Q. In the absence of their ability to ride out those 16 longer-term, I guess medium-term perhaps, price 17 depressions, is that where the farms would then need to 18 dip into equity or look at other means to maintain their 19 existence? 20 A. Well, yes. And what we see is sometimes there are 21 one-time things that farms can do, like nobody has logged 22 the back 40 since, you know, great grandpa, but you only 23 get to do that once -- well, for a while then, you know -- 24 so some -- what we see with these farms is doing -- 25 sometimes having one-off things that they can do. The 26 problem is if you have to get into a situation where you 27 have to sell productive assets, intermediate or long-term 28 assets, that that's affecting the viability of your farm. 3082 1 Q. Is that something that you see occurring with 2 farms in New York, that they have tapped into selling some 3 of those assets in order to maintain their viability? 4 A. It does happen, but sometimes that's happening as 5 the last thing that they do before an involuntary type of 6 exit. And when we're working with farms, we would prefer 7 that if they were exiting, they did so voluntarily, 8 preserving equity. Because, in general, for these farm 9 families, the equity they have in the farm business is 10 their retirement plan. 11 Q. On page 3 of your testimony, you're talking about 12 the rate of return on assets at 6.1%, and you note that 13 "the long-run average of 6.1% ROA is not a level of 14 profitability with which many industries in the general 15 economy would be comfortable realizing over long periods 16 of time." 17 In terms of just the farm community, do you have a 18 benchmark that you like to have farms realize over a long 19 period of time? 20 A. It kind of depends on what's acceptable to the 21 owner-operator, right, as the residual claimant. I mean, 22 part of what we have is if they are doing this for a long 23 period of time, then what the returns -- so if we're 24 thinking specifically about the farmer, we could look at 25 rate of return on equity, which is related to but 26 different than rate of return on assets here, and the 27 question would be what's a sufficient rate of return on 28 equity to keep the business assets invested there. And 3083 1 part of what we would have -- an economist would assert is 2 that if they are doing it for a long period of time, then 3 it must be an okay return. Right? 4 But you also have some asset fixity from 5 management and -- well, you know, tradition and other 6 things like that, that maybe you are considering other 7 factors beyond whether it's a fair return. 8 Q. On page 5 of your testimony -- and you may want to 9 look at this because I have a question about what was 10 written out there. 11 A. Okay. 12 Q. It's about two-thirds of the way down after you 13 set out your formulas. And it reads, "The result is that 14 OPM equals OPM" -- 15 A. Oh, yeah, that was a -- yeah, sorry. That was a 16 typo. It should say ROA equal OPM times ATO. 17 Q. That's what I figured because -- 18 A. I noticed that when I was reading it -- 19 Q. I did that -- 20 (Court Reporter clarification.) 21 BY MR. MILTNER: 22 Q. Because if I do that -- if I look at that formula, 23 then the value of farm production cancels out, right, and 24 then that takes us back to the formula you had on the 25 previous page. Okay. 26 Then on page 10, and you show these various 27 measures over a ten-year period. My question is: Do you 28 track any of the farms here longitudinally throughout that 3084 1 period? 2 A. Not here, no. Do we? Yes, in the sense that the 3 individual farms that are participating are getting their 4 numbers and then, you know, track them against the -- 5 their peer farms. 6 Q. And Table 2 sets out those that I -- you say were 7 at a higher risk of financial default. 8 A. Uh-huh. 9 Q. Do you know if, for instance, the 21.9% of farms 10 in 2010 there, how many of those are the same farms that 11 appear in 2011? In other words -- well, do you know that 12 answer? 13 A. Off the top of my head, no, but they would be 14 highly correlated. 15 Q. Okay. So a farm that would start showing 16 financial default -- or risk -- higher risk of financial 17 default, do you find that those farms improve over time 18 and some exit, or once they reach a higher risk of 19 financial default, are they kind of on a glide path to 20 going out of business? 21 A. It depends on what's causing that. Sometimes 22 there are management factors that can be -- that you can 23 use to address those type of issues and -- and get 24 yourself back on firmer financial footing, and sometimes 25 there are not. I mean, it depends -- sometimes there is, 26 you know, something structural about the way the farm is 27 operating that's harder to address. 28 The way I use Table 2 is to -- is -- is to help 3085 1 farms look where their financial resiliency measures are 2 relative to these thresholds and advise them that as you 3 get closer to those thresholds, it is more important that 4 you think about risk management, which might be something 5 like a Dairy Margin Coverage or a Dairy Revenue 6 Protection, but might not be. And it doesn't tell you 7 what you should do, but it does tell you when you should 8 be paying attention to that. 9 Q. Were you here this morning for our first witness 10 from Agri-Mark? 11 A. I was. 12 Q. Okay. And then he had testified about the market 13 adjustment that is made to Agri-Mark producer checks. 14 And I think when you were explaining Table 3, on 15 page 13, that those types of market adjustments would show 16 up in your row of milk marketing costs; is that correct? 17 A. That is correct. 18 Q. And also what would show up in there would be an 19 assessment for an over-base program as the Agri-Mark 20 witness had talked about, correct? 21 A. That is correct. 22 Q. So you noted I think that the bulk of that cost is 23 hauling, which -- 24 A. Yes. 25 Q. -- has gone up quite a bit, correct? 26 A. It has. 27 Q. 100% as you note -- or I shouldn't say that. The 28 milk marketing cost is up 100%, correct? 3086 1 A. Correct. 2 Q. But the bulk of that total cost is hauling? 3 A. Yes. 4 Q. Okay. So I have four things that I think have 5 been identified as making up that milk marketing cost: 6 The hauling, market adjustments, over-base programs, and 7 cooperative dues -- oh, and CWT assessments if they are 8 participating? 9 A. CWT, stop charges. 10 Q. Okay. 11 A. Fuel surcharges. You got the over-base. You got 12 the market adjustments. Yes. 13 Q. So fuel surcharges, would those be fuel surcharges 14 on hauling? 15 A. Correct. 16 Q. Okay. How common are stop charges in New York? 17 A. I don't think they are very common, but they do 18 occur sometimes. 19 Q. Right. 20 A. Yes. And so in this set we have -- these farms 21 are from a number of different -- are shipping to a number 22 of different places. Some are, you know, co-op members, 23 some are not. Most are co-op members, but they are going 24 different places. And the different co-ops would have 25 different programs that are affected here. 26 Q. Thank you. 27 I really wanted to keep all of my questions to 28 farm costs, but there were a few questions asked of you 3087 1 about hypotheticals, and I wanted to follow up on one of 2 them. And I hope it won't take very long. So here's my 3 setup. And you can let me know if you can agree with my 4 assumptions for purposes of our Q&A. 5 I want you to assume there's a cheese plant that 6 sells only -- that manufactures and sells only commodity 7 40-pound cheddar blocks. And those sales are made at the 8 exact price reported to NDPSR, or announced by NDPSR, and 9 that the plant buys all of its milk at exactly the 10 Class III price, and that plant's manufacturing costs are 11 higher than the Make Allowance assumptions in the current 12 formulas. 13 That plant would probably lose money, wouldn't it? 14 A. If the Make Allowance is a fair reflection of 15 their cost, yes. 16 Q. Now, the Make Allowance assumes a return on 17 investment, so it -- I guess it might be that they could 18 make money, just not make a high -- as high a return on 19 investment as assumed by the formula. 20 Would you agree with that? 21 A. Yes. 22 Q. Okay. So now I want to change a couple of those 23 assumptions. 24 Let's assume that plant makes an aged cheddar that 25 is sold at retail to consumers. 26 Would we be able to draw the same conclusions 27 about that plant's profitability? 28 A. I wouldn't think so. 3088 1 Q. If that plant -- let's assume we're back to 2 selling just 40-pound cheddar blocks, but that that plant 3 is able to consistently sell its cheese for a price higher 4 than that reported by NDPSR. 5 We couldn't draw the same conclusions about that 6 plant's profitability, could we? 7 A. No. 8 Q. And now let's assume that it's still 40-pound 9 blocks, still being sold at the announced NDPSR price, but 10 now, for whatever reason, that plant is able to buy its 11 milk for less than Class III, whether it's through a 12 discount, through over-base assessments, or it's a 13 non-pool plant. 14 We cannot make that same conclusion about the 15 plant's profitability, can we? 16 A. No. 17 MR. MILTNER: Okay. Thank you. That's all I 18 have. 19 THE COURT: Further cross other than AMS? 20 CROSS-EXAMINATION 21 BY MS. VULIN: 22 Q. Hello. I just wanted to follow up on the 6.1% 23 return on asset issue that Mr. Miltner raised. 24 Would you mind pulling that table back up for us? 25 I guess it is Figure 1, please. 26 I worry there was a lack of precision, probably on 27 my part, in our first discussion, so I just want to 28 clarify a few things. 3089 1 So the 6.1%, is it return on asset that -- 2 A. Correct. 3 Q. -- is that the term? Okay. 4 The 6.1%, that is that bolded line -- 5 A. Yep. 6 Q. -- you have here? 7 A. That is the whatever color green, black, whatever 8 color that is, that goes above 5% there. 9 Q. So your Y-axis percentage here is the rate of 10 return, correct? 11 A. Yes. 12 Q. And the zero there that we see, that line is, you 13 know, largely below most of your graph, correct? 14 I can phrase that much better. 15 The rate of return on assets only dips below zero 16 for one year, correct? 17 A. Yes. 18 Q. And that was it looks like 2009 during the 19 recession? 20 A. Yes. 21 Q. So other than that one year, the average return on 22 investment -- or return on assets was positive for the 23 entire period? 24 A. Yes. 25 Q. Okay. It's just that at certain times it dipped 26 below what you believe the optimal or minimum of 6.1%? 27 A. Well, it -- I mean, that was the average, so, yes, 28 it was below that. You know, I don't know how these -- 3090 1 well, these are distributed reasonably normally, actually, 2 over time. 3 But if -- you know, if you look at, for example, 4 2002 and 2003, you know, that was on the order of 1% each 5 of those years, and that's returns to all of the unpaid 6 factors, including unpaid labor, management, and capital. 7 So, you know, when -- even at 6%, most firms are not going 8 to be super happy with that kind of return. 9 Q. And are you aware from the real world there are 10 any problems -- in your experience are dairy farmers 11 experiencing problems with obtaining loans because of what 12 you believe is lower return on assets? 13 A. Well, the rate of return on assets would be 14 correlated with some of the other measures that I talked 15 about, although not perfectly. Lower rate of return on 16 assets would be one of the factors that the lenders would 17 consider. And so in -- so it's possible. It depends on 18 the situation. And -- and as I said, the first thing that 19 happens is you are borrowed capital gets more expensive. 20 Q. But have you seen that happen? 21 A. Yes. 22 Q. In terms of obtaining loans? 23 A. Yes. 24 MS. VULIN: Thank you. No further questions. 25 THE COURT: Further cross other than AMS? 26 Seeing none. 27 MS. TAYLOR: We're having a separate question, and 28 I missed whatever -- 3091 1 THE COURT: You didn't miss a thing. 2 CROSS-EXAMINATION 3 BY MS. TAYLOR: 4 Q. Good morning. 5 A. Good morning. 6 Q. Thank you for coming to testify today. 7 A couple of questions, I'll try to get through the 8 weeds first, and then ask for big picture questions. 9 So on page 2 of your statement, under dairy farm 10 profitability, you define ROA as operating profit divided 11 by total farm asset value, but the equation says average 12 farm asset value. I'm wondering if that is the same or -- 13 A. It is the same. It's meant to be average total 14 farm because, typically -- okay. So asset value, like any 15 wealth measure is, is a snapshot at a point in time. And 16 typically with these farms we have beginning asset value, 17 from the beginning balance sheet, and an ending one. If 18 you had other ones throughout the year, you would average 19 them over that. So usually it is a beginning plus ending 20 divided by two to get average. And only the farm assets, 21 not -- not the house, not the car, not -- so we're trying 22 to figure out how the farm business is performing. 23 Q. Okay. Thank you. 24 And the talk of the 6.1% ROA, and you say it's not 25 level of profitability, which many industries would be 26 comfortable with. And I know you had a previous question 27 about, well, what would be comfortable for dairy, and it 28 depends is basically, I think, what your answer was. 3092 1 But taking it a further step back, other 2 industries, you know, what -- what are their benchmark 3 ROAs? 4 A. 12 to 15. 5 Q. Okay. 6 A. I mean, you know, like -- but part of it is just 7 how much capital is required to be a farm today. You 8 know, 80% of the asset value in U.S. agriculture is land 9 value. That would not actually be true of a typical dairy 10 farm. It would be a little less than that because there's 11 so much in facilities and machinery and equipment, and so 12 on and so forth. But the Walmarts of the world have a lot 13 of asset value but not relative to their sales, right? 14 So, you know, Walmart would not settle for 6% rate of 15 return on assets. 16 Q. Right. 17 A. They are turning -- they are generating more sales 18 per dollar of assets. 19 Q. Okay. Thank you. 20 On your chart on page 4, and I -- I know -- I 21 think you just answered my question, but I was thinking 22 about my question, and I didn't hear your full answer. So 23 I'll ask it again. Or asked by Ms. Vulin, and I think you 24 answered it. 25 But unpaid family labor, where is that accounted 26 for or not in these numbers? 27 A. It is not. 28 Q. Not at all? 3093 1 A. No. 2 Q. Okay. 3 A. No. No, there's a return to management that we 4 put in as a minimum surcharge. And so some of these farms 5 are going to have very little or none unpaid family labor, 6 some of them are going to have a lot. And that's kind of 7 part of the difference that you see, right, when you look 8 across farm size for dairy farms. 9 And one of the things that is unique about dairy 10 farms is that there's almost no part-time farms. Right? 11 So lots of commodities in U.S. agriculture, the small 12 farms would be typically part time for hobby, and that's 13 fine, good for them. Right? 14 But it's -- I mean, I have known two part-time 15 dairy farms in my life, and one of them, the poor guy had 16 a heart attack, so -- from, you know, getting up every 17 morning and milking and then going to work and coming home 18 and doing it. So you just don't see part-time farms. 19 Q. Okay. Thank you. 20 I did have a question. I wanted to look at the 21 chart you have on page 4, Figure 1, and then flip to the 22 Figure 2 on page 7. 23 So Figure 1 is New York dairy farms. 24 A. Yes. 25 Q. And Figure 2 is Wisconsin and Michigan farms. 26 And we're curious just why the ROA, if I compare 27 the two, it seems like New York was a lot more volatile 28 over time than Wisconsin and Michigan, and I'm just 3094 1 curious if you might expand on why that might be. 2 A. Part of that is scale, because I have got asset 3 turnover on Figure 2, and asset turnover is up there in 4 the 40th percentile range. So if we chopped that off and, 5 like, capped it at 20, which I can easily do for you, 6 there would be more relative volatility. So I think 7 that's a big part of what you are seeing there. 8 And we also didn't have the last five or six years 9 on there, which there was a couple of ups and downs. But 10 I can put them on the same scale, but mostly it's vertical 11 scale. 12 Q. Okay. Great. Thank you. 13 On page 5, in the paragraph that begins right 14 after the equations you have there, this is just a 15 technical cleanup question. You have OPM equals OPM times 16 ATO. 17 Is that supposed to be a different -- 18 A. That is supposed to be ROA, yes. I found a number 19 of typos since I sent this in. 20 Q. We have all been there. 21 A. Well, hopefully I can resubmit something that's 22 cleaner. 23 Q. Certainly. 24 On the Table 3, which is on page 14, the chart 25 that we have been discussing, on the milk marketing cost 26 line, there's a big jump between 2021 and 2022. I'm 27 wondering if you could maybe illuminate why we might see 28 such an increase. 3095 1 A. That's a good question. Jason Karszes is the one 2 that I work with on this and does a really good job 3 putting this together, and we were just having a 4 conversation about breaking out these milk marketing 5 costs. And, in fact, he's probably working on it today. 6 My sense is the two biggest drivers -- so it goes 7 from $1.34 hundredweight to $1.69. That was mostly the 8 over-order -- or no, not over-order -- over-base or 9 two-tiered pricing and market adjustment costs that went 10 in there, which also to some extent probably reflected 11 fuel cost because -- so, you know, hauling costs have gone 12 up because of fuel costs, but not only that -- at the farm 13 level, but if the co-op had to go further to find a home, 14 that would have been in those market adjustment costs. 15 Q. Okay. And that other -- that's also where you say 16 the reblends for, say -- that account for manufacturing 17 losses would be, showing up in that market adjustment? 18 A. Correct. Yes. 19 Q. Okay. 20 A. Well, I can -- I mean, not that it does us any 21 good today, but we're going to break that down more here. 22 Q. Okay. 23 And then does the 13th check for co-op members 24 show up anywhere on this chart? 25 A. We put it into the price, into the revenue. It is 26 in the revenue. So the -- it would show up -- we do the 27 accrual adjustment, so it will show up in the milk price 28 once we adjust for that. 3096 1 Q. In the gross milk price? 2 A. Yeah. And total revenue would include that and 3 government payments and, you know, crop sales and things 4 of that nature. 5 Q. That's my other question. The government payments 6 show up down there? 7 A. Yes. 8 Q. Okay. And might that explain some of the large 9 increase in total revenue between 2021 and 2022 as well? 10 A. Yes. 11 Q. Now, I want to take a step back since you have 12 been doing this kind of -- I won't ask you any 13 hypotheticals. I will ask you questions hopefully based 14 on your observations over time of doing these 15 profitability studies. 16 A. Okay. 17 Q. Can you talk about -- and we have heard a lot of 18 testimony on the impact the lower Make Allowances have had 19 on co-op members and the market adjustments as they show 20 up in your tables. 21 So can you talk about how you have seen 22 differences between co-op members maybe in their milk 23 check versus independent shippers who wouldn't have those 24 market reblends on their check? I mean, have you observed 25 that? 26 A. There are some years when you observe what seems 27 to be bigger variations from farm to farm in the net milk 28 price they receive at the end. Yeah. I mean, it shows 3097 1 up, definitely. 2 Q. Okay. And then while you are doing these as well, 3 and I know Dr. Bozic asked some questions on risk 4 management, but can you talk about how you have seen over 5 time dairy farmers' use of risk management and maybe does 6 it depend on their size and -- I mean, I just -- you know, 7 we're having questions -- getting testimony on the impact 8 of implementing any changes on risk management positions 9 for dairy farmers. So we have been trying to ask a lot of 10 questions about how does this really -- how would this 11 really impact them, etcetera. I was wondering if you 12 could just add some thoughts on that. 13 A. Sure. So as I said, we did a -- ten years ago, it 14 was better than ten years ago, we did a big -- fairly big 15 national survey of dairy farmers using risk management, 16 both on the milk side and the feed side. And what we 17 found was that about 15 to 20% were using it semi 18 regularly or regularly, and a lot of the feed side risk 19 management actually goes along with tax management because 20 you can prepay feed if you are doing cash basis income 21 taxes. 22 But the biggest impediment was lack of knowledge, 23 and along with that, lack of management time. And, you 24 know, so my sense is in addition to kind of economies of 25 size in milking cows, there's also -- beyond the cost 26 benefit, there's -- there are benefits to having a 27 management team. 28 So we have a different survey, more recently, 3098 1 where we looked at how the management time on a dairy farm 2 was allocated. And on the bigger herds with management 3 teams, they could allocate 10 to 15% of the time to 4 financial and risk management, and on the smaller -- you 5 know, the smaller herds where it was perhaps one operator 6 or two, you simply can't specialize like that. 7 So there's abilities -- so when I was a kid, if 8 somebody was coming back to the farm, you know, maybe the 9 two or three kids would come back to the farm and they 10 would -- or they wouldn't come back to the farm, they 11 would buy a farm nearby and the family would maybe operate 12 three farms and do some things together. 13 And my sense is that in recent years it is less 14 likely to be that and more likely to be that the kids come 15 back to the home operation, and the home operation grows, 16 and you get a management team then of five or six people 17 where you can, you know, put time into it, because there 18 is definitely a learning curve on this risk management. 19 And, you know, dairy co-ops and others have -- 20 well, USC had a dairy options pilot program, I don't know 21 if you guys remember this. It was 2002, so it is getting 22 old now. But I remember doing that around the state of 23 Michigan, to teach farmers -- the whole idea was to 24 subsidize their options trading to incentivize them to do 25 it and learn about it. 26 And so, you know, at the current -- the other 27 thing that's happened is there's a lot more liquidity in 28 the futures market, right, than there used to be. There 3099 1 used to be -- especially you didn't know if you were going 2 to get a trade done, and now you don't worry about that 3 nearly as much on most of the dairy commodities. 4 But I think the big thing is the ability to put 5 the time in and -- you know, from a risk management point 6 of view -- and I do a lot of producer meetings. One of 7 the things that I am talking about there is specifically 8 aimed at risk management. 9 And I understand that there's some overlap between 10 doing this for risk management, but I don't want to lose 11 money doing it. But if you are consistently doing it, you 12 know, a lot of farms have found that it's very useful for 13 them and so, you know, do you have the time, do you have 14 the -- to allocate to that, and, you know -- and do it 15 consistently. 16 Q. So of the farms that you have observed using those 17 tools, do you have any guess on how far out they look to 18 lock in positions? I'm sure there's a range but -- 19 A. Well, my personal opinion is that the best place 20 to be is nine to 15 months out. That you have enough time 21 value to make it worth -- although it's more expensive, 22 you pay for the time value -- but, you know, in the 23 nearby -- well, the nearby, it is just -- there's not as 24 much time value, there's not as much volatility. 25 The futures market is really bad at predicting big 26 turns either way. I mean, if you look at it from a 27 financial point of view, the dairy futures market is 28 efficient and unbiased in the long-term, but it misses big 3100 1 turns. 2 Which is kind of the whole point. Right? If 3 you -- if you -- and if you are in a farm financial 4 situation where you can't be resilient enough to manage 5 through a big turn, then, you know, those tools are -- are 6 useful. 7 Q. Okay. 8 MS. TAYLOR: That's it from AMS. Thank you. 9 THE WITNESS: Thank you. 10 THE COURT: Anything further from anyone other 11 than redirect? 12 Redirect. 13 MS. HANCOCK: Thank you, your Honor. 14 REDIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. I want to start -- I just have a couple of 17 follow-up questions. I want to start with Mr. Miltner was 18 talking with you about the amount of maybe continuity in 19 the farms that had changed over time and -- that's been in 20 your survey. I think you actually talked with Ms. Vulin 21 about that as well, saying that some of the farms that you 22 have surveyed or that you have included in your 23 statistical historical data are not the same ones that you 24 have today. 25 Do you recall that? 26 A. Yes. 27 Q. For those that you are no longer serving, is it 28 fair to say that a good percentage of those have just gone 3101 1 out of business or are no longer farming? 2 A. Most of them. 3 Q. And so for those that are represented in your most 4 current years for data, those have been the ones that have 5 been able to successfully weather the downturns? 6 A. Correct. 7 Q. And so does -- is it fair to say then that the 8 numbers that are reflected most currently show those farms 9 that are over the historical data collection than the ones 10 that have been the most successful, and so the numbers 11 would be most favorable keeping them throughout the course 12 of your historical data collection? 13 A. Yes. 14 Q. Okay. Do you have a name for that? 15 A. Well, I mean, there's a survivorship bias that we 16 have. I mean, these data are not statistically 17 representative as we went through. And it's certainly 18 possible that over time the bias is -- I mean, so the 19 farms that leave the Farm Business Summary tend to either 20 exit, which is most of them, or some of them grow to the 21 point where they are big enough where they move with -- to 22 have a full-time accountant or something and don't have as 23 much use for participating in our program. 24 Q. Okay. So the farms that are reflected over the -- 25 you have between 2013 and 2022, they just become more 26 successful over time? 27 A. The ones that are still there, yes. 28 Q. Okay. You -- let's see. You also had some 3102 1 questions from Mr. Rosenbaum about Federal Order 2 regulation language. 3 Do you recall that? 4 A. Yes. 5 Q. And you -- first off, you are not here to be a 6 witness to testify as an expert on Federal Order language; 7 is that fair? 8 A. That's fair. 9 Q. Okay. But to the extent that you are talking 10 about the financial implications as it pertains or should 11 be considered by USDA in applying that language, I want to 12 talk about it in that context. And one of them was 13 some -- I think Dr. Bozic was asking you about if -- if 14 there was a governing principal that increasing 15 Make Allowances too high could result in too much or an 16 overproduction of a product, that that could create some 17 disorderly market situations. 18 Do you recall that? 19 A. Yes. 20 Q. And -- and you understand that National Milk and 21 IDFA have both put forth some proposals with respect to 22 increasing Make Allowances? 23 A. Yes. 24 Q. And IDFA's proposal has a tempered approach for 25 year one but then automatic increases that by year four 26 would allow it to get to 100% of what it contends to be 27 the Make Allowance. 28 Do you know that? 3103 1 A. Yes. 2 Q. And so if we're talking about what the estimates 3 are for increases, would you agree with me that having an 4 automatic increase over four years to get to 100% number, 5 that that has a much greater likelihood on your 6 probability scale of being too high of a Make Allowance? 7 A. Well, it would certainly have a higher probability 8 than if you didn't change it. 9 Q. And in your questions with Dr. Bozic, he had asked 10 you about probabilities versus possibilities, or he had 11 actually asked you about possibilities, and you kind of 12 chuckled. But I want to make sure that the record is 13 clear. 14 When we're talking about possibilities, is it fair 15 to say in your world that nearly everything is a 16 possibility? 17 A. Yes. 18 Q. Okay. And -- but when we look about -- when we 19 look at statistically whether something is more likely or 20 not, it is more valuable for us to know when something is 21 actually more likely to occur than not; is that fair? 22 A. That's fair. 23 Q. And so when we look at whether -- at National 24 Milk's proposal and IDFA's proposal, is it fair to say 25 that IDFA's proposal has a much greater likelihood of 26 creating a situation where Make Allowances are too high 27 than National Milk's proposal which would allow for an 28 interim approach and then the collection of real mandatory 3104 1 audited survey data that would be based on the actual 2 Make Allowance? 3 A. Yes. 4 Q. And then, finally, Ms. Vulin came back up a few 5 moments ago and showed you back your graph on -- I think 6 that it's Figure 1 on ROA -- 7 A. Yes. 8 Q. -- and that you have charted? 9 And she said that -- she had you acknowledge that 10 in year 2009 was the only year that it fell below zero on 11 your ROA. 12 Do you recall that? 13 A. I do. 14 Q. You're not saying that that's the only year that 15 dairy farms were not profitable under your survey; is that 16 right? 17 A. Well, no. I mean, so it -- it -- no. The rate of 18 return on assets there is the return to the unpaid 19 factors, and none of these farms have no unpaid factors. 20 So, you know, the investment that goes into the land, the 21 facilities, the capital that could be doing something 22 else, you know, it needs to earn a return or it needs to 23 find a better use. 24 So it doesn't have to be -- I mean, 2009 was 25 catastrophically bad. What happened in 2009 was that 26 people milked cows 365 days a year and paid for the right 27 to do it. But hopefully that was a once in a lifetime. 28 Although every time I say that was a once-in-a-lifetime 3105 1 activity, shortly something happens that teaches me that 2 that wasn't the case. 3 Q. Fair enough. 4 And then one thing on Table 3 that I want to make 5 sure that we have clear. Do you know, when we were 6 talking about the milk hauling cost, and you have 7 enumerated a number of items that would be put into that 8 category, do you know what percentage -- and we could take 9 2022 as an example year -- but do you know what percentage 10 of those milk marketing costs are represented by -- or are 11 hauling costs? 12 A. Off the top of my head, no, but I would guess more 13 than half of that. 14 Q. Okay. And has that consistently become a higher 15 percentage over the course of the time that you have been 16 tracking those numbers? 17 A. Has the hauling cost consistently? No, the 18 hauling cost I would say has consistently gone down. 19 Q. As a percentage of -- 20 A. As a percent of this total, because other costs -- 21 at the beginning of this time period, we weren't finding 22 things like the over-base deductions and two-tiered 23 pricing systems and market adjustments like what we have 24 had in recent years. 25 Q. And so while we know that over time the actual 26 number of hauling costs have actually increased, the 27 hauling percentages as a total percentage of the milk 28 marketing costs has gone down? 3106 1 A. Correct. 2 Q. Okay. 3 MS. HANCOCK: That's all I have. Thank you, your 4 Honor. 5 We would move -- or thank you, Dr. Wolf. 6 And, your Honor, we would move to admit 7 Exhibit 169. 8 THE COURT: Mr. Rosenbaum thinks you have opened a 9 door. 10 MS. HANCOCK: Okay. 11 MR. ROSENBAUM: I know so. 12 RECROSS-EXAMINATION 13 BY MR. ROSENBAUM: 14 Q. Steve Rosenbaum for the International Dairy Foods 15 Association again. 16 Let me start with sort of the last set of 17 questions. I think you have testified that to the extent 18 that there are what I'll call base/excess plants or things 19 of that nature, those are reflected in your statistics; is 20 that correct? 21 A. Yes. 22 Q. And you know what I mean by -- a base/excess plant 23 is where a co-op will say to a farmer, for a certain 24 quantity of milk, we'll pay you X, but if you go beyond 25 that, we're going to pay you less, correct? 26 A. Correct. 27 Q. And that's sort of meant to be a disincentive to 28 increase production, correct? 3107 1 A. It is. 2 Q. And the statistics you collect, they cover farmers 3 that are members of a number of different cooperatives, or 4 what? 5 A. Yes. 6 Q. Okay. So can you provide us -- do you have any -- 7 know how many different cooperatives your statistics 8 cover, even a rough number? 9 A. Half a dozen. 10 Q. Okay. And of those half a dozen, how many of them 11 currently are operating these base/excess plants; do you 12 know? 13 A. I can't -- I know at least one, but it -- it 14 varies. So I can't give you a definitive answer. Sorry. 15 Q. It varies in that some of them have had them in 16 the past but don't right now, and some have them right 17 now? 18 A. Correct. 19 Q. Okay. So now getting back to the probability of 20 risks. 21 If -- if -- if it's National Milk's own position 22 that Make Allowances are currently lower than cost of 23 production and that their proposed increase is not 24 intended to cover the actual cost of production, does that 25 suggest that our current situation is one in which 26 Make Allowances are too low? 27 A. It might suggest that. 28 Q. Yes. And so if there is -- was a -- if you will, 3108 1 a risk at being too low and a risk at being too high, 2 we're pretty much guaranteed that we are in a situation 3 where currently the risk is one that is fulfilled, and 4 it's too low, correct? 5 A. Possibly. 6 Q. Okay. And are you aware that we will be 7 presenting evidence as to what survey evidence suggests is 8 the actual cost of production? Are you aware of that? 9 A. Yes. 10 Q. And you are aware that we are asking for 11 Make Allowances to be increased only to that level, 12 correct? 13 A. I understand that at least in the first iteration. 14 Q. Okay. Well, are you aware that our entire 15 four-year stairstep is intended to bring us to 16 Make Allowance that are equal to what the 2022 costs of 17 production are? 18 A. Yes. 19 Q. Okay. 20 MR. ROSENBAUM: That's all I have, your Honor. 21 THE COURT: Any re-redirect? 22 MS. HANCOCK: Your Honor, we would move to admit 23 Exhibit 169. 24 THE COURT: Seeing no objection, Exhibit 169 is 25 entered into the record. 26 (Thereafter, Exhibit Number 169 was received 27 into evidence.) 28 MS. HANCOCK: Thank you, Dr. Wolf. Appreciate 3109 1 your time. 2 THE WITNESS: Thank you. 3 MS. HANCOCK: Catherine de Ronde is our next 4 witness. 5 CATHERINE de RONDE, 6 Being first duly sworn, was examined and 7 testified as follows: 8 THE COURT: Your witness. 9 DIRECT EXAMINATION 10 BY MS. HANCOCK: 11 Q. By three minutes, good morning, Ms. de Ronde. 12 A. Good morning. 13 Q. Thank you for being here today. 14 Would you mind stating and spelling your name for 15 the record? 16 A. Yes. My name is Catherine de Ronde, 17 C-A-T-H-E-R-I-N-E, D-E, R-O-N-D-E. 18 Q. Is it a capital R in your last name? 19 A. It is a lower case D and a capital R. 20 Q. Okay. Would you provide your business mailing 21 address? 22 A. 40 Shattuck Road, S-H-A-T-T-U-C-K, Andover, 23 Massachusetts, 01810. 24 Q. Thank you. 25 Did you provide written testimony on behalf of 26 National Milk that we have identified as Exhibit NMPF-20? 27 A. Yes. 28 MS. HANCOCK: Your Honor, I believe we're at 3110 1 Exhibit 170 for identification. 2 THE COURT: That's what I had. So marked. 3 (Thereafter, Exhibit Number 170 was marked 4 for identification.) 5 MS. HANCOCK: Thank you. 6 BY MS. HANCOCK: 7 Q. Ms. de Ronde, would you provide us with your 8 testimony, please? 9 A. Happy to. 10 Thank you for allowing me to speak with you today. 11 I am Catherine de Ronde, vice president of economics and 12 legislative affairs for Agri-Mark, Incorporated. I'll 13 refer to us as Agri-Mark from here on out. 14 I have been with the cooperative for six years, 15 three in my current capacity and three as the 16 cooperative's economist. My responsibilities include 17 watching dairy market trends, forecasting milk prices, and 18 working on state and federal legislation affecting 19 Agri-Mark members. 20 Prior to joining Agri-Mark I worked as an 21 agricultural economist with the Massachusetts Department 22 of Agricultural Resources. While at the Department, I 23 worked with the variety of agricultural industries, most 24 notably the dairy industry. I have a Bachelor's and 25 Master's degree in environmental science and resource 26 economics from the University of Connecticut. 27 Agri-Mark is a dairy cooperative -- 28 MS. TAYLOR: Excuse me. Can you slow down a 3111 1 little bit for the court reporter? 2 THE WITNESS: Yes. I was trying to be aware of 3 that, but I guess unsuccessfully. 4 Agri-Mark is a dairy cooperative owned by 5 approximately 550 dairy farm families in New England and 6 New York. 7 Our members are pooled in Federal Order 1. Our 8 cooperative has been marketing milk for dairy farmers 9 since 1916 and has headquarters in Andover, Massachusetts 10 and Waitsfield, Vermont. Our farm families supply more 11 than 3.2 billion pounds of milk annually that we use to 12 make our award-winning Cabot branded cheeses, dairy 13 products, and ingredients. 14 Agri-Mark operates three cheese manufacturing 15 facilities located in Cabot, Vermont; Middlebury, Vermont, 16 and Chateaugay, New York. These are pooled supply plants. 17 In addition to cheese, the Middlebury, Vermont, plant also 18 produces valuable whey proteins that are marketed around 19 the world. Agri-Mark also operates a butter-powder 20 facility in West Springfield, Massachusetts, that is a 21 non-pooled supply plant. Lastly, Agri-Mark supplies fresh 22 fluid milk to the region’s largest dairy processors. 23 My testimony today is on behalf of Agri-Mark and 24 our 550 farm families. Milk pricing is front and center 25 for our farmers, particularly given the market volatility 26 of the past few years. We thank USDA for granting this 27 hearing and for the opportunity to testify today. 28 Agri-Mark, along with 15 other dairy cooperatives, 3112 1 served on National Milk Producers (NMPF) Task Force 2 focused on Federal Milk Marketing Order modernization 3 (FMMO) over the past many months and nearly two years now. 4 Agri-Mark is in support of all aspects of the 5 comprehensive NMPF FMMO modernization proposal. My 6 testimony focuses on our support of Proposal 7 submitted 7 by NMPF to update the FMMO Make Allowances in each of the 8 component price formulas. 9 Of all the modernization pieces the NMPF Task 10 Force reviewed, updating Make Allowances was by far the 11 most challenging topic. The Task Force spent months 12 evaluating different data sources and methods to update 13 the cost data we had. Despite the challenges, it became 14 apparent quickly that the dairy industry needs a new, 15 consistent, and accurate method to collect robust cost of 16 processing data. 17 FMMOs are intended to meet several objectives, 18 including promoting orderly milk marketing. Through end 19 product pricing, raw milk prices are determined via a 20 series of economic formulas. If any aspect of those 21 economic formulas is not reflective of the marketplace, 22 the resulting calculated prices will be unsuitable, and 23 disorderly marketing may occur. 24 This may be easiest to illustrate using 25 Make Allowances, which were last updated in 2008 using 26 2006 cost of processing data. While the FMMO 27 Make Allowances have remained fixed, actual manufacturing 28 costs have increased over the past fifteen years, 3113 1 resulting in overvalued FMMO prices. 2 Impacted manufacturers are forced to solve for 3 this with individual solutions. However, solving for Make 4 Allowances at the manufacturing level, versus the FMMO 5 level, creates discrepancies in producer pay prices within 6 the same marketplace. Increased costs of manufacturing 7 must be addressed through FMMO Make Allowances now and 8 often in the future to correct for cost discrepancies and 9 maintain orderly markets. 10 Agri-Mark supports NMPF's legislative efforts to 11 provide USDA with the authority to conduct mandatory and 12 auditable costs of processing surveys every two years. 13 Granting USDA this authority legislatively will provide a 14 robust, accurate, and timely source of processing cost 15 data for the industry to evaluate. 16 Hearing requests can be made if the survey data 17 suggests Make Allowances may be unrepresentative of actual 18 processing costs. In the absence of this data, 19 maintaining accurate FMMO pricing is a challenge. With 20 widespread industry support for this effort, we are 21 confident that this authority will be granted. 22 With published, audited processing cost data 23 derived from mandatory surveys, the industry will be much 24 better positioned to make educated decisions on 25 Make Allowances in the years to come. 26 However, current Make Allowances are extremely out 27 of date, and the industry needs an interim fix. We cannot 28 wait. The sense of urgency is widespread, but 3114 1 particularly crucial to cooperatives with Class III and 2 Class IV manufacturing assets. These cooperatives, 3 including Agri-Mark, struggle to maintain profitability 4 while paying members minimum announced milk prices. These 5 cooperative members face financial burdens beyond those 6 without manufacturing assets. An interim fix is required 7 to return to orderly markets. 8 Agri-Mark supports NMPF's proposal to increase the 9 Make Allowances incorporated within the component price 10 formulas as follows: 11 (1) Butterfat, from $0.1715 to $0.21 per pound of 12 butter; 13 (2) Nonfat solids, from $0.1678 to $0.21 per 14 pound of nonfat dry milk; 15 (3) Protein, from $0.2003 to $0.24 per pound of 16 cheddar cheese; 17 (4) And lastly, other solids, from $0.1991 to 18 $0.23 per pound of dry whey. 19 These numbers represent per pound increases of 20 $0.0385 for butter, $0.0422 for nonfat dry milk, $0.0397 21 for cheese, and $0.0309 for dry whey. 22 Agri-Mark supports Proposal 7 submitted by NMPF. 23 Agri-Mark acknowledges, as does NMPF, that from a pure 24 manufacturing perspective, the proposed Make Allowances 25 are not adequate and will not cover the full increase in 26 costs of processing Agri-Mark and many other Class III and 27 Class IV manufacturers have incurred since 2008. 28 These increased costs, instead of being captured 3115 1 in a Make Allowance, are transferred to members via lower 2 returns and pay price adjustments. Further, they stymie 3 cooperatives' ability to invest in the future. 4 As a cooperative, we must balance the financial 5 needs of our manufacturing assets and member pay price 6 implications. The results from an overdue change in 7 Make Allowances will be dramatic in and of itself. 8 Agri-Mark views Proposal 7 as the first step in 9 the right direction, providing some financial relief to 10 manufacturers, while ensuring a reasonable producer 11 impact. Paired with a legislative fix to conduct future 12 costs of processing studies, Agri-Mark holds that this 13 two-step approach is the best for the industry at large. 14 Other NMPF witnesses have testified to the 15 numerous data sources evaluated by the NMPF Task Force 16 over the last nearly two years. Those include studies by 17 Cornell University, the California Department of Food and 18 Agriculture, and the University of Wisconsin. 19 Each have its limitations, but all show a clear 20 trend. Manufacturing costs of butter, nonfat dry milk, 21 cheddar cheese, and dry whey have increased since 2008. 22 NMPF and others have conducted trends and regression 23 analysis on these costs and have reached the same 24 conclusion. 25 An analysis of Agri-Mark's cost of manufacturing 26 tells a similar story. Costs of processing across our 27 four plants have increased on average 20% since 2008. 28 Increases are found across all cost categories. Most 3116 1 recent and notable are increases in cost of insurance, 2 manufacturing labor, and benefits, and repair and 3 maintenance. 4 Agri-Mark has made investments in our plants to 5 improve efficiencies and reduce costs of processing; 6 however, these noted increases are in categories that are 7 largely market-driven and outside of our control. 8 For instance, insurance premiums have increased 9 tremendously in response to general conditions in 10 insurance markets. Regarding repair and maintenance, we 11 continue to spend money to upgrade and keep our plants 12 going; however, increases in supplies and labor are more 13 expensive. Lastly, labor is critical to our operations 14 and continued investment in our employees is essential. 15 Costs of labor and benefits must be competitive and move 16 with the local markets. 17 Our three cheese plants produce cheddar cheese, in 18 a mix of 40-pound blocks and 640-pound blocks. Cheese 19 produced is sold as a mixture of branded and commodity 20 cheese, through a combination of retail, private label, 21 and foodservice channels. 22 Our Middlebury, Vermont, plant processes all the 23 whey generated by the three cheese plants, and produces 24 dry whey, whey protein concentrates, and whey permeate. 25 Costs of processing vary by plant, based on plant 26 volumes, efficiencies, and product mix. On a weighted 27 average Class III basis, these three plants have seen 28 costs of processing increase 23% since 2008. 3117 1 Our butter/powder plant in West Springfield, 2 Massachusetts, produces retail, private label, and 3 foodservice butter, as well as commodity nonfat dry milk. 4 Cost of processing have increased 17% on a Class IV basis 5 since 2008. 6 It is worth noting that our West Springfield 7 facility has a long history of balancing milk in Federal 8 Order 1. In recent years, as the Northeast has become 9 long in milk and Class I utilization has decreased, this 10 dynamic has shifted. 11 Today, West Springfield often runs at full 12 capacity. In the future, however, as additional capacity 13 comes on, we expect West Springfield to return to its 14 critical function of balancing the Northeast market. 15 While we recognize the essential role this plant has to 16 the region, we also are keenly aware that it is a service 17 that comes at a higher cost of processing to Agri-Mark and 18 its member-owners. 19 In summary, all data sources point in the same 20 direction, manufacturing costs have increased since 2008. 21 Today’s Make Allowances are inadequate for all four 22 commodities and are leading to disorderly marketing 23 conditions. 24 Agri-Mark supports Proposal 7 submitted by NMPF 25 because it strikes the right balance of addressing the 26 needs of manufacturing plants and producer pay price 27 implications, in a way that minimizes disorder in the 28 marketplace. 3118 1 Agri-Mark is supportive of the two-step approach 2 NMPF has outlined in its proposal to update 3 Make Allowances: 4 (1) Provide an interim increase to alleviate the 5 acute problems and disorderly market conditions created by 6 the current, clearly insufficient Make Allowances; 7 (2) Enact the authority for the Department to 8 conduct mandatory, auditable plant processing cost 9 studies, conduct such a study under that authority, and 10 present the resulting data to the industry, which will 11 enable interested parties to make requests for further 12 Make Allowance adjustments on the basis of proper and 13 adequate data; 14 (3) Continue to conduct and report plant 15 processing cost studies regularly and systematically under 16 the same legislative authority and mandate. 17 The impact of increasing Make Allowances on 18 producer pay checks is well known. Agri-Mark does not 19 take this impact lightly. Likewise, the financial stress 20 of outdated Make Allowances on cooperative profitability 21 is well known. Agri-Mark members have invested in their 22 cooperative and manufacturing capacity for over 100 years. 23 We look forward to continuing this legacy. 24 BY MS. HANCOCK: 25 Q. Thank you, Ms. de Ronde. I want to -- just a 26 couple of questions here. 27 You and a dairy farmer that testified earlier 28 today that also sits on your board, and you heard some 3119 1 questions that were posed to him about this 20% increase 2 in your cost of production since 2008. 3 Do you recall that? 4 A. I do. 5 Q. And -- and did you help collect the numbers and 6 report the numbers of that 20% increase? 7 A. I was part of the team along with our finance and 8 accounting team that looked at that number. 9 Q. Okay. The numbers that you have acknowledged on 10 page 2 of your testimony that align with National Milk's 11 proposals, those are all approximately a 20% increase to 12 the current Make Allowance; is that right? 13 A. I don't have that math in front of me, but they 14 are pretty close to that 20% mark. 15 Q. Okay. And that aligns with the 20% increase that 16 your entity has experienced since 2008; is that accurate? 17 A. That is correct. But I will clarify that that 20% 18 is an average over all four of those commodities. So on 19 average, we align at that 20%, but on a 20 category-by-category basis there are some discrepancies. 21 Q. Yeah. And so you have some product lines that 22 will have an increase that's greater than 20% and some 23 that will be lower than that? 24 A. Correct. 25 Q. And you are able to make business decisions as you 26 continue to operate your business over those years, as to 27 which product lines you want to emphasize or some product 28 lines that you might want to de-emphasize, based on your 3120 1 own profitability analysis; is that right? 2 A. That's correct. 3 Q. And that profitability analysis would take into 4 account that cost of production for Agri-Mark's business? 5 A. It would. 6 Q. And during that same time, you have been able to 7 have some plant improvements that you have implemented in 8 your various plants? 9 A. Yes. 10 Q. And other -- other improvements that -- where you 11 have been able to create new lines for your production as 12 well; is that right? 13 A. That's correct. 14 MS. HANCOCK: Your Honor, I would offer 15 Ms. de Ronde for cross-examination at this time. 16 THE COURT: Yes. Cross? 17 MR. ROSENBAUM: Should we break for lunch, your 18 Honor? 19 THE COURT: Okay. We've got this witness up. 20 Let's come back in an hour, at 1:15. 21 (Whereupon, the lunch recess was taken.) 22 ---o0o--- 23 24 25 26 27 28 3121 1 MONDAY, SEPTEMBER 11, 2023 - - AFTERNOON SESSION 2 THE COURT: I think we introduced this witness, 3 marked her statement with an exhibit number, and I'd asked 4 if there was cross-examination. 5 Mr. Rosenbaum. 6 CROSS-EXAMINATION 7 BY MR. ROSENBAUM: 8 Q. Good afternoon. Steve Rosenbaum for the 9 International Dairy Foods Association. 10 I have some initial questions relating to the 11 question of cost increases at your plants since 2008. But 12 before I even get to that, just to make sure the record is 13 actually clear, you are aware that Dr. Stephenson 14 published this year in 2023 a study of costs of 15 manufacture in 2022, correct? 16 A. Yes. 17 Q. And did Agri-Mark participate in the survey? 18 A. We did. 19 Q. Okay. So -- and as I understand it, you have four 20 plants in Cabot, Vermont, Middlebury, Vermont -- and 21 Chateaugay, is that how that's pronounced? 22 A. Chateaugay. 23 Q. -- Chateaugay, New York, and West Springfield, 24 Massachusetts, correct? 25 A. Correct. 26 Q. And when you are reporting on your cost increases 27 since 2008, you're covering all four of those plants, 28 correct? 3122 1 A. When I reference the 20%, that's covering all four 2 plants. 3 Q. Okay. Now, am I correct that you did not, in 4 calculating the cost increases, limit yourself to the 5 products that actually are used to set minimum milk 6 prices; is that correct? 7 A. No. So the 20% is looking at cheddar cheese, dry 8 whey, butter, and nonfat. 9 Q. Okay. 10 A. We took our cost of processing in 2008 for those 11 four commodities, and we took the same cost of processing 12 for these same four commodities in 2023, and that 13 difference is 20%. 14 Q. Okay. And when you say you included butter, was 15 it all butter, or did you limit that to commodity butter? 16 A. So all of this would just be on commodity. So 17 anything that we would have sold via brand would not be 18 included in that. 19 Q. Well, I see you say you make retail, private 20 label, and foodservice butter -- 21 A. Uh-huh. 22 Q. -- at your West Springfield plant. 23 So were all of those categories included in the 24 cost survey? 25 A. The cost of -- yes. 26 Q. And I'm -- let me be a little more specific. 27 A. Sure. 28 Q. I really didn't mean to say the cost survey. 3123 1 Were all of those kinds of butter included in 2 calculating the increase in cost of processing that you 3 are reporting in your testimony here in Exhibit 170? 4 A. So the cost of processing for butter in this 5 example, what we would have used for the cost would have 6 been in line with what we submitted with the Stephenson 7 study. 8 Q. All right. One second. 9 So I know there was testimony by your -- by the 10 previous Agri-Mark business as to material investments 11 made in the -- I'm going to get this wrong again, Chat- -- 12 A. Chateaugay. 13 Q. -- Chateaugay plant as well as -- which he 14 qualified at $30 million. 15 Is that a correct number? 16 A. That is correct. 17 Q. And then he also mentioned an investment in the 18 West Springfield plant, although he did not identify 19 exactly what that cost expense was. 20 Is that right? 21 A. Yep. 22 Q. Okay. So let's talk about the other two plants 23 first, which would be the Middlebury plant and the Cabot, 24 Vermont, plant. 25 A. Okay. 26 Q. Have you made significant investments in those two 27 plants recently? 28 A. We -- not significant. And I think there's -- you 3124 1 know, there's some definition around significant. When we 2 think significant investments for our entire organization, 3 the two that pop out are the West Springfield and the 4 Chateaugay. 5 Q. Okay. 6 A. That's not to say that we haven't had smaller 7 investments in those plants from an efficiency standpoint. 8 Q. Okay. So when it came to Cabot and Middlebury, 9 how did you calculate depreciation for purposes of doing 10 your calculations, or were they fully depreciated? 11 A. I was not involved in those calculations, so I 12 don't want to speak to that specifically. 13 Q. All right. So then what about then the two plants 14 for which there were material investments, Chateaugay and 15 West Springfield? 16 A. Uh-huh. 17 Q. Do you know how you determined depreciation for 18 these plants? 19 A. So same answer, I was not part of those 20 calculations. 21 Q. Just to ask, your answer may be the same, but just 22 so we're clear, do you know whether the people used GAAP 23 accounting or tax accounting or something else? 24 A. I could make an educated assumption on that, but 25 for the record, I will not answer that because I don't 26 know for sure. 27 Q. All right. And -- and do you know whether you 28 included an allocated general administrative cost in those 3125 1 numbers? 2 A. I believe that G&A was included. 3 Q. I don't see that mentioned specifically in your 4 testimony. 5 A. It is not mentioned specifically, no. 6 Q. Is it -- are you positive one way or the other 7 whether it was included? 8 A. It was part of it. 9 Q. Okay. What about energy? 10 A. Energy would have been included in that as well. 11 Q. Okay. But if I understand correctly, your 12 testimony remains that the current Make Allowances are 13 lower than your cost of production, correct? 14 A. On average, yes. 15 Q. And if the Make Allowances are increased to the 16 level that National Milk is seeking, your costs of 17 production will continue to exceed the Make Allowances; is 18 that right? 19 A. For some of our products. 20 Q. Okay. You mean for some of the four products that 21 you have listed there? 22 A. Uh-huh. 23 Q. Okay. Are you wanting to tell us which ones? 24 A. No, I'm not. 25 Q. Okay. And what switching topics. 26 What -- what -- what activities does Agri-Mark 27 engage in that would tend to retard the growth in milk 28 production by your farmers, be it base/excess plants or 3126 1 things of that nature? 2 A. As was mentioned this morning by our farmer 3 witness, Agri-Mark does have a base/excess program in 4 place. 5 Q. Okay. And can you describe the general contours 6 of that program -- 7 A. Yes. 8 Q. -- with whatever specificity you are willing to do 9 that? 10 A. Sure. So it is a base/excess program where we -- 11 the intent of that is to manage our milk volumes with the 12 capacity that we have both internally and within the, you 13 know, external marketplace in the Northeast. 14 Q. Okay. And is it fundamentally a system whereby as 15 long as the farmer stays within his or her base production 16 level, he or she gets paid basically what I'll call a full 17 price, and once he or she goes beyond that, he or she gets 18 a lower price, correct? 19 A. That's correct. 20 Q. And is the lower price sufficiently lower that, as 21 a practical matter, it makes it difficult for the farmer 22 to make any money by producing that extra milk? 23 A. Yes. 24 Q. And is the goal basically to limit the farmer to 25 his or her base? 26 A. The goal is to disincentivize production beyond 27 their base. 28 Q. Is it successful? 3127 1 A. It is successful. 2 Q. Okay. All right. And so you, I think, probably 3 were here when I was asking some questions to I believe 4 the president of your -- 5 A. Chairman. 6 Q. -- the chairman of Agri-Mark about timing. So 7 I'll ask you those questions here. 8 Let me just ask: You are on the National Milk 9 Producers Federation task force; is that right? 10 A. Correct. 11 Q. You personally? 12 A. Correct. 13 Q. Okay. Was there -- do you recall discussion as to 14 if there was, in fact, legislative authority granted to 15 USDA to engage in mandatory audited surveys, what the 16 timing would likely be by which new Make Allowances could 17 be adopted based upon that? 18 A. Well, I think that the timing is probably anyone's 19 guess given that we would be putting that in the hands of 20 Congress to make that progress in terms of timing. But I 21 think, as you know, our goal is to get that in the next 22 Farm Bill, whenever that Farm Bill may be. 23 Q. But was there any discussion you can recall about 24 the timing of next steps? 25 And let me just lay out what we would see as the 26 next steps. You can dispute any of them if you wish. 27 One is USDA would have to publish implementing 28 regulations that would cover how they would conduct the 3128 1 expanded authority they would be given, correct? 2 A. Uh-huh. 3 Q. And the second is they would have to conduct the 4 survey, correct? 5 A. Correct. 6 Q. And they would have to gather the information and 7 perform whatever review or audit of the information they 8 thought was appropriate before they actually published the 9 result, correct? 10 A. Correct. 11 Q. And then, and only then, would there be an 12 opportunity for anyone to request a hearing to consider 13 the adoption of new Make Allowances based upon those new 14 numbers, correct? 15 A. Correct. 16 Q. And if USDA followed its normal practices, upon 17 receiving a request for proposal, they would 18 potentially -- they would potentially either turn down the 19 request or invite others to submit counterproposals by 20 some specified point in time, correct? 21 A. Correct. 22 Q. And USDA would have a certain amount of time to 23 decide what proposals to include in the hearing, correct? 24 A. Correct. 25 Q. They would put out a Notice of Hearing, correct? 26 A. Correct. 27 Q. They would hold a hearing, correct? 28 A. I'm feeling a little déjà vu here. Correct. 3129 1 Q. Déjà vu and the future. 2 A. Yes. 3 Q. And they would hold the hearing -- I'm not sure if 4 I said that already -- but they would hold the hearing, 5 correct? 6 A. Correct. 7 Q. They would potentially be an opportunity to 8 correct the transcript once the transcript is published 9 some days or weeks later, correct? 10 A. Correct. 11 Q. Briefs would then be filed by a certain date, 12 correct? 13 A. Correct. 14 Q. USDA would then issue a recommended decision, 15 unless someone had submitted a request for an emergency 16 decision, which could go in effect without a recommended 17 decision, and USDA could do that if it felt the criteria 18 were met for that, correct? 19 A. Correct. 20 Q. And if it didn't have an emergency decision, and 21 therefore issued a recommended decision, there would be 22 opportunity to comment on the recommended decision, 23 correct? 24 A. Correct. 25 Q. A final decision would be issued, correct? 26 A. Correct. 27 Q. And then there would have to be a farmer 28 referendum? 3130 1 A. Correct. 2 Q. So during that entire time period -- and this, of 3 course, presupposes we get the legislation from Congress 4 to begin with -- but during this entire time period, 5 processors would be operating under Make Allowances that, 6 according to your own testimony, even assuming they -- and 7 under a scenario they have adopted, a National Milk 8 proposal, not our proposal -- processors would be 9 operating under a scenario in which they would be 10 incurring cost of production materially in excess of the 11 Make Allowances; is that right? 12 A. I believe so. 13 MR. ROSENBAUM: Okay. I think that's all I have. 14 Thank you. 15 THE COURT: Further cross for this witness? 16 CROSS-EXAMINATION 17 BY MS. VULIN: 18 Q. Ashley Vulin, an attorney with the Milk Innovation 19 Group. Nice to see you this afternoon. 20 A. You too, Ashley. 21 Q. I'll start with just a couple of questions on the 22 base/excess program. 23 Do all cooperative members of NMPF have a 24 base/excess program? 25 A. I'm not -- I won't speak for other National Milk 26 processors. 27 Q. Do you know of any cooperative members of National 28 Milk who don't have one, a base/excess program? 3131 1 A. I'll let others answer that. I don't want to 2 answer for them. I don't know for sure. 3 Q. And you raise in your testimony issues of 4 disorderly marketing arising from insufficient 5 Make Allowances. 6 Do you recall that? 7 A. I do. 8 Q. I'll specifically point you to page 3 under the 9 summary of your testimony. You say, "Today's 10 Make Allowances are inadequate for all four commodities 11 and are leading to disorderly marketing conditions." 12 Do you see that? 13 A. Can you tell me where on page 3 that is, please? 14 Q. Yep. At the bottom under "Summary." It's the 15 second sentence. 16 A. Yep. 17 Q. Can you describe for me, what are the disorderly 18 marketing conditions occurring today due to insufficient 19 Make Allowances? 20 A. When I think about the disorderly market 21 conditions because of Make Allowances, when we -- you 22 know, so for Agri-Mark in particular, we know where 23 there -- where we have deficiencies. And we as a 24 cooperative are forced to react to that. 25 When we react differently than a neighbor, we're 26 put on a different competitive playing field than that 27 neighbor. And I believe it is the intent of the Federal 28 Milk Marketing Order to level the playing field and put us 3132 1 all on an equal playing field, competitively speaking. 2 And if Agri-Mark's milk checks need to be adjusted 3 differently than others because of how we operate in the 4 marketplace, I believe that that is disorder in the 5 marketplace. 6 Q. And when you say in comparison to a neighbor, are 7 you referring to another cooperative and farmer or another 8 plant? 9 A. In that case I was referring to another 10 cooperative or plant. 11 Q. And then you mentioned a few times in your 12 testimony that Agri-Mark acknowledges that NMPF's proposed 13 Make Allowances won't cover the full increase in costs of 14 processing for Agri-Mark, correct? 15 A. Uh-huh. Yes. 16 Q. So how will those disorderly marketing conditions 17 cease to exist under NMPF's plan? 18 A. Yeah. So I -- this is a tricky one, a tricky line 19 for us to walk. But we are supporting the National Milk 20 proposal in its entirety because we feel that there are 21 multiple areas of the orders that are causing -- that 22 where there are discrepancies and there are causing 23 disorderly markets. And Make Allowance is the prime 24 example of that. 25 If we were just Agri-Mark, we would be going for 26 higher Make Allowances, okay, to cover us. But we operate 27 in a marketplace with a lot of farmers outside of 28 Agri-Mark, and quite frankly, the National Milk proposal 3133 1 takes into account that there are many other co-ops other 2 than Agri-Mark, and we are all in a very different place 3 from a Make Allowance perspective. I think you heard last 4 week folks say that this was a compromise amongst our 5 group, and that's a compromise we're comfortable with. 6 But -- so I think that goes to explain kind of the line 7 that we're walking here. 8 Q. Uh-huh. 9 A. So for us we may not be made whole in all of those 10 commodities necessarily, but for a greater dairy industry 11 perspective, we firmly believe that the National Milk 12 proposal is that appropriate fine line. 13 Q. And would you -- so would it -- would you agree 14 with the statement that under National Milk's proposal, it 15 won't cure the disorderly marketing induced by 16 insufficient makes, but it will lessen that disorderly 17 marketing? 18 A. Yes. And I think I had an adjective in here 19 somewhere, lessen or something along those lines. But, 20 yes, I would agree with that statement. 21 Q. And you talked about the increase in costs of 22 production for your various plants, correct? 23 A. Yes. 24 Q. And you said that for your Class III plant the 25 weighted average -- on a weighted average basis, the 26 processing costs increased by 23%, correct? 27 A. That is correct. 28 Q. It's on page 3 of your testimony? 3134 1 A. Yep. 2 Q. And that's slightly above where NMPF's proposed 3 Make Allowances for Class III, correct? 4 A. Correct. 5 Q. So Agri-Mark's cost of -- increased cost of 6 production is almost accounted for but not quite? 7 A. Correct. 8 Q. And then you said for your butter/powder plant in 9 West Springfield, that the processing costs have increased 10 17%, correct? 11 A. Correct. 12 Q. And by my calculation, NMPF's proposed increases 13 for butter are a 22% increase, and for nonfat dry milk a 14 25% increase. 15 So for that plant, the Springfield plant, would 16 Agri-Mark have its increased cost of production met under 17 NMPF's proposal? 18 A. Under butter but not powder. 19 Q. Okay. And so at least for the butter portion, 20 Agri-Mark would be in a place of advantage because more 21 than its cost of production would be covered, correct? 22 A. We are slightly under the current make. 23 Q. And your colleague testified earlier about milk 24 check deductions and how those are caused by insufficient 25 Make Allowances at the plant level, correct? 26 A. Correct. 27 Q. So how do current milk check deductions -- I'm 28 sorry. Strike that. 3135 1 And you had said just now that those deductions 2 would either go away or that essentially Agri-Mark's 3 farmers would be in a better position with higher makes 4 than what NMPF is proposing, correct? 5 A. If we have higher make than what National Milk is 6 proposing, then we would still be met short on those 7 particular commodities. 8 Q. Even under IDFA's proposal? 9 A. I would need to reference those numbers, and I may 10 have them. 11 Yes, it differs by commodity. But as I said, some 12 of the National Milk numbers make us whole, some do not. 13 Q. Okay. 14 A. And that's the same for IDFA. 15 Q. And in determining the amount or the level at 16 which NMPF's proposed Make Allowances are landing, you had 17 talked about a compromise amongst the group to reach those 18 numbers; is that right? 19 A. Yes. 20 Q. And in your testimony, at the top of page 3, the 21 end of the paragraph there, you say, "NMPF and others have 22 conducted trend and regression analyses on those costs and 23 have reached the same conclusion," about trends with 24 Make Allowances -- or with manufacturing costs increasing, 25 correct? 26 A. Correct. 27 Q. So did NMPF use any of that trend and regression 28 analysis in landing on its final proposed Make Allowance 3136 1 numbers? 2 A. My recollection is that the trend in regression 3 analysis that was conducted by National Milk was used to 4 support the directional trend that we were looking at. 5 The numbers that we are proposing came from what others 6 before me have mentioned with the survey that we did 7 within the National Milk group. 8 Q. And that survey wasn't a survey of 9 Make Allowance -- or manufacturing costs of the 10 participants, it was just a pure 11 what-number-would-you-agree-to survey? 12 A. I'll tell you how we answered it, and we answered 13 that based on what our manufacturing costs were. 14 Q. Was that the prompt in the survey, though? Was it 15 to report your manufacturing costs or was it to request a 16 compromise number that you could live with, although not 17 based on a mathematical calculation? 18 A. My recollection was it was slightly a mix of both. 19 So in an instance, for example, where maybe you were 20 making cheddar cheese, but you did not make butter, folks 21 could have submitted what they thought may have been a 22 butter number without actual cost data. 23 Q. And did anyone audit any of that cost data to 24 ensure it tracked with NMPF respondents' vote of what 25 number the Make Allowance should be set at for NMPF's 26 proposal? 27 A. Not that I'm aware. 28 MS. VULIN: Nothing further. Thank you. 3137 1 CROSS-EXAMINATION 2 BY DR. BOZIC: 3 Q. Good afternoon, Catherine. Marin Bozic for Edge 4 Dairy Farmer Cooperative. 5 And the court reporter has already given me the 6 evil eye, so I'll speak very slowly. 7 I want to make sure that I understand your 8 reasoning for how higher Make Allowances specifically 9 benefit Agri-Mark. 10 Is it -- you're content that currently you are 11 forced to reblend more than some of your competitors in 12 the region because of your manufacturing setup; is that a 13 fair statement? 14 A. That is a fair statement. But I will be clear 15 that Make Allowances are a portion of the challenges that 16 we're going through. So when we think about our milk 17 check deduction, part of that is absolutely correct what 18 you just said, but it is not the full story either. 19 Q. Full story being the other four topics of the 20 survey -- of the hearing or -- 21 A. No. Nope. You know, if you think about our 22 cooperative, and we have branded products, there are costs 23 associated with that that we -- that are outside of 24 traditional manufacturing costs. 25 Q. Oh, sure. Sure. So how come this other co-op 26 doesn't have to reblend as much as you? 27 A. I'm not going to speak to other co-ops and why 28 they do what they are going to do. 3138 1 Q. I guess where I'm going with that is let's say 2 that AMS increases the Make Allowances, and you no longer 3 have to reblend. Would it not be the case that it would 4 be a reasonable expectation that your competitors would 5 pay the same to their producers or relative to you that 6 maybe they would then pay over-order premiums? I guess 7 I -- I'm -- I'm -- from your statement one could infer 8 that higher Make Allowances would not be transferred to 9 over-order premiums by your competitors; is that a fair 10 statement? 11 A. Yeah. I mean -- so when we worry about being 12 competitive with our neighbors, what's important for us is 13 that if there is a piece of the Federal Order formulas 14 that should be -- should capture market intelligence, 15 market data, right, what's going on, we want those to be 16 part of the regulated price. 17 Q. So -- 18 A. That would be a prime example with makes. We want 19 that to be captured in the regulated price, so that, 20 again, we're on the same playing field as our competitors, 21 not in an unregulated price via a milk check deduction. 22 Q. But you are not contending that the pool 23 accounting, once the Make Allowances are changed, leaving 24 all the other changes aside, that the pool accounting 25 would result in a higher draw for Agri-Mark from Order 1; 26 is that correct? 27 A. Could you please state that again? 28 Q. Let's say that AMS doesn't change anything else 3139 1 other than increase Make Allowances. 2 A. Uh-huh. 3 Q. As a result of that, do you anticipate Agri-Mark 4 would have a higher draw from Order 1, total dollar 5 numbers that you would draw from Order 1? 6 A. I haven't done the math on that, but the 7 deductions in the Class III and IV price would flow into 8 the Class I formula, so I would think that that would -- I 9 don't know how that math would work out, you know, if 10 we -- 11 Q. But because both the Class I skim and the 12 Class III and IV would go down, it's reasonable to assume 13 it would be roughly a wash? 14 A. I would think so, but I haven't done that math. 15 Q. So if we increase Make Allowances -- AMS, I don't 16 have that authority -- if AMS increases Make Allowances, 17 wouldn't that make it easier for private handlers to be 18 pooled rather than opt out from the pool system from the 19 Federal Order system? 20 A. Ask me that one more time, please. 21 Q. If I'm a private handler, privately held handler, 22 and the Make Allowances are insufficient for my cost of 23 production, the only recourse I have today is to opt out 24 of pooling, be unregulated. 25 A. Uh-huh. 26 Q. If the Make Allowances are increased, I might come 27 back and pool again. 28 So far so good? 3140 1 A. Yep. 2 Q. So if more privates pool -- and I will admit, I 3 don't know enough about Order 1 -- but if, in general, if 4 more privates pool on the order, would it not -- would it 5 not follow that whatever is the surplus between the 6 handlers' value of the milk and the commodity value of 7 milk, would have to be split over more pounds? 8 A. I don't know. I don't know. And I think, you 9 know, you may or may not know, but in the case of Federal 10 Order 1, our pooling provisions are extremely strict. So 11 depooling in Order 1 is kind of a once-in-a-lifetime 12 opportunity. The stars really need to align to see 13 pooling -- or excuse me -- to see changes in pooling in 14 Order 1. 15 Q. I grant that for Order 1. But let's -- in 16 general, the math should not be difficult. If you add 17 more pounds to the pool, you don't charge more to Class I, 18 so the amount of money we can distribute as a PPD doesn't 19 change, there's more total PPD, there's -- 20 A. Class III utilization would be going up. 21 Q. Class III -- that's a good way to put it. Or 22 Class IV. 23 So the manufacturing class utilization goes up, so 24 therefore, PPD has to be split among more pounds so the 25 draw per hundredweight actually goes down. 26 A. Okay. Yep. 27 Q. Is that a fair statement? 28 A. Yes. 3141 1 Q. So wouldn't that not follow that increasing 2 Make Allowances on its own, not as a sort of gambit to get 3 higher composition or Class I differentials, but increase 4 in Make Allowances on its own could actually reduce the 5 total draw by co-ops who are consistently pooled in orders 6 where privates do currently depool? 7 A. Please state that once again. 8 Q. Let's say that in Order 30 we had a private cheese 9 manufacturer who is looking at Make Allowances today and 10 say, no, they are too low, I'm out. And then, 11 Make Allowances go from $0.20 to $0.24 on cheese and with 12 others -- other products go up as National Milk wants, and 13 now that same cheese manufacturer in Order 30 is looking 14 at Make Allowances and says, yeah, I can make this work, 15 I'm going to start pooling again. We didn't start selling 16 more fluid milk, more beverage milk in the Upper Midwest 17 just because -- 18 A. Your weights are changing. 19 Q. Right. 20 A. Yep. 21 Q. Yeah. So wouldn't that mean that if a co-op such 22 as Ellsworth or Foremost or Land O'Lakes, who are 23 presumably consistently pooled, wouldn't that mean that 24 per hundredweight their draw would actually be lower as a 25 consequence of increasing Make Allowances? 26 A. Yes. 27 Q. Would it also not be the case then if 28 Make Allowances are increased to a point that it makes 3142 1 sense to build a new powder plant, because they cover 2 costs of production, maybe even to your level, and then 3 somebody build a new plant, and it's more than they need 4 for normal returns of capital, would it not follow that 5 Agri-Mark would have a stiffer competition for your 6 products? 7 A. Yes. 8 Q. Could that hurt your members? 9 A. It could, but it could also open up capacity in 10 the Northeast, which would be very beneficial to our 11 members. 12 Q. But if -- if that competition builds a plant in 13 Mideast or Central or Southwest, that would not mean more 14 capacity for Northeast? 15 A. Correct. 16 Q. Only more competition for Northeast? 17 A. Uh-huh. 18 Q. So there is tangible danger of overdoing it on 19 Make Allowances for AMS, correct? 20 A. Correct. 21 Q. And given that the survey results are not audited, 22 would you say that the plants submitting their results 23 voluntarily to Dr. Stephenson's survey, would you say that 24 they had the -- I'm not saying that anybody's acting in 25 best way, just looking at incentive, would you say that 26 they have the incentive to represent their numbers to the 27 extent that there is ambiguity on the high end or the low 28 end of cost? 3143 1 A. I think that's the risk of the voluntary, 2 non-audited survey. 3 Q. So would you say the other risk of a voluntary 4 survey is the sample bias? In other words, if you have a 5 low cost plant, you maybe choose not to participate? 6 A. Correct. 7 Q. So from that perspective going with the -- before 8 there's a mandatory survey going on and could present the 9 real danger of doing too much? 10 A. Correct. 11 DR. BOZIC: Thank you very much. 12 THE COURT: Additional cross other than AMS? 13 CROSS-EXAMINATION 14 BY MR. MILTNER: 15 Q. Good afternoon. I'm Ryan Miltner representing 16 Select Milk Producers. 17 A. Good afternoon. 18 Q. Are you at all familiar with Agri-Mark's position 19 in the last Make Allowance hearing? 20 A. Yes. 21 Q. Okay. I believe that Mr. Wellington then had 22 suggested that the Make Allowance be set at one of two 23 levels: A level that would allow a minimum of 80% of 24 producer milk used by Class III and IV plant to cover 25 their costs, or a level that would allow a minimum of 25% 26 of the producer milk volume used by Class III and IV 27 plants in any specific Federal Order pooling at least 28 4 billion pounds of milk to cover their costs? 3144 1 A. Without having that in front of me, you lost me a 2 little bit. 3 Q. Okay. 4 A. But I'm going to trust that you are looking at 5 that. 6 Q. I am. 7 A. Okay. 8 Q. My question is, does Agri-Mark have a position now 9 as to where within the universe of plant cost data USDA 10 should draw the line and say, this is what the 11 Make Allowance is? 12 A. We do not have a position today. 13 Q. Okay. Okay. Mr. Jacquier had some questions that 14 he deferred to you. 15 A. I love when that happens. 16 Q. So I think some of these questions you have 17 answered, so I'll just tick through those. Hopefully they 18 will be simple. 19 Agri-Mark did participate in Dr. Stephenson's 20 study in 2018 or so, as well as the update last year? 21 A. Correct. 22 Q. And you participate in National Milk surveys, 23 correct? 24 A. Correct. 25 Q. The West Springfield plant, that's your 26 butter/powder plant, correct? 27 A. Correct. 28 Q. It does produce a certain amount of bulk salted 3145 1 butter; is that correct? 2 A. Yes. It does. 3 Q. Okay. And as far as the powders that it produces, 4 you have mentioned nonfat dry milk. 5 Does it produce any other milk powders? 6 A. No. 7 Q. Of the volume of butter that is produced at 8 Springfield, is it predominantly bulk butter or 9 predominantly butter for consumer sale? 10 A. I don't have that breakout in front of me. 11 Q. Does Agri-Mark report to the NDPSR nonfat sales 12 and butter sales from that plant? 13 A. Nonfat sales only. 14 Q. Okay. Does -- do you report any butter sales to 15 the NDPSR? 16 A. No. 17 Q. The Middlebury plant where you process whey, 18 first, is that the only plant at which Agri-Mark processes 19 whey? 20 A. Yes. 21 Q. Does it produce dry whey? 22 A. Yes. 23 Q. Is that reported to the NDPSR? 24 A. Not that I'm aware. 25 Q. The Chateaugay plant produces 40-pound blocks and 26 640-pound blocks? 27 A. Correct. 28 Q. And it also produces Cabot cheese that would be 3146 1 more sold at retail, correct? 2 A. Yes. 3 Q. Does it also produce milk under the McCadam brand? 4 A. Yes. 5 Q. And does that plant produce predominantly 6 commodity cheese or predominantly consumer cheese? 7 A. All three of our cheese plants produce a mix of 8 commodity and branded. And so that -- what is determined 9 to go branded versus commodity depends on the quality of 10 that cheese. 11 Q. Okay. The Springfield plant, you list it as a 12 non-pooled supply plant? 13 A. Correct. 14 Q. But I believe your chairman said that all producer 15 milk from Agri-Mark is producer milk pooled on the 16 order -- 17 A. Yes. 18 Q. -- is that -- both of those are correct? 19 A. Yes. 20 Q. Would the Springfield plant become a pooled supply 21 plant if the Make Allowance changes proposed by National 22 Milk are adopted? 23 A. That's not an analysis that I have been a part of. 24 Q. Okay. Now, these all have to do with your 25 statement. 26 And I forget if this was Ms. Vulin or 27 Mr. Rosenbaum, but you looked at the Make Allowance 28 proposed increases from both National Milk and from IDFA, 3147 1 and you were asked whether those changes respectively 2 would cover Agri-Mark's cost of production. You answered 3 that under both proposals, some -- for some commodities it 4 would cover Agri-Mark's costs, and for some it would not; 5 is that correct? 6 A. That is correct. 7 Q. When you were looking at the IDFA numbers, were 8 you looking at their year one numbers or their year four 9 numbers? 10 A. I was looking at their year one numbers. 11 Q. Okay. Would your answer be different in year 12 four? 13 A. Yes. 14 Q. And in year four would Agri-Mark have all of its 15 costs covered for every commodity? 16 A. And then some. 17 Q. This was Ms. Vulin's questions to you. She asked 18 and compared the current Make Allowances, and she 19 increased them by the amount of the percentages that were 20 reflected in your statement. I didn't -- 21 A. Can you say that one more time? I was looking 22 at -- 23 Q. Sure. She looked at the current Make Allowances, 24 and I think she increased them by the percentages you had 25 indicated in your statement. 26 A. Yep. 27 Q. Okay. I did something a little different. I took 28 the numbers that Agri-Mark requested the USDA adopt in 3148 1 2007, and I increased them by the same amounts. So I want 2 to go through those with you if I -- 3 A. If I -- by the -- in the same amount with what? 4 Q. By the 23% and 17% you had described. 5 A. Okay. 6 Q. So for cheese, for protein, Agri-Mark had 7 requested $0.2154, and I multiplied that times 1.23, and I 8 came to $0.2649. 9 A. And you are using -- what is -- what are the 10 numbers that you are using? What we provided in the two 11 thousand -- 12 Q. The last time that Make Allowances were updated, 13 so it was a 2007 hearing and a 2008 decision. 14 A. Okay. So what we put on the record? 15 Q. This is what Agri-Mark put in their brief -- 16 A. Okay. 17 Q. -- and said, we would like this. 18 A. Okay. 19 Q. So would $0.2649 cover Agri-Mark's cost for 20 cheese? 21 A. Yes. 22 Q. For butter, Agri-Mark requested $0.1725. I 23 multiplied that times 1.17, and I arrived at $0.2018. 24 Would that cover Agri-Mark's costs for butter? 25 A. Yes. 26 Q. For nonfat dry milk, Agri-Mark requested $0.1782, 27 which I multiplied times 1.17 and arrived at $0.2085. 28 Would that cover Agri-Mark's cost of production? 3149 1 A. No. 2 Q. And for whey, Agri-Mark requested $0.2080, which I 3 multiplied times 1.23, and arrived at $0.2558. Would that 4 cover Agri-Mark's cost of production? 5 A. Just about. 6 Q. Okay. So, first of all, I appreciate you being so 7 forthright with those costs because, you know, you are 8 under no obligation to do so. So I appreciate that. 9 But I think as I map that out, the numbers you 10 provided at 23% and 17% are pretty darn close to what you 11 had related on your cost increases; would you agree? 12 A. Yes. 13 Q. Would you -- do you have an opinion as to whether 14 Agri-Mark's cost of production for the four surveyed 15 commodities are higher or lower than a national average? 16 A. What are you assuming is the national average? Or 17 you are asking for my opinion? 18 Q. I don't know what the national average is. 19 A. Based on what I know at our own plants, I do have 20 an opinion of whether we are in line or not in line, but 21 I'll leave it at that. 22 Q. Okay. Mr. Rosenbaum asked a series of questions 23 about how long it may take us to get from today to an 24 audited mandatory cost survey. Without belaboring the 25 specifics, which I did with the witness a week or so ago, 26 Agri-Mark knows fully well that there's a gap between now 27 and when and if that survey happens, correct? 28 A. Yes. 3150 1 Q. And that timeframe is a black box, right? 2 A. Yes. 3 Q. But Agri-Mark in the interim, you want to make 4 your -- you want to make money for your producers, right? 5 A. Yes. 6 Q. You would like your -- you would like your plants 7 to be profitable, or at least not hemorrhaging cash, 8 correct? 9 A. Correct. 10 Q. And so you're comfortable, given the math we just 11 went through and knowing that we have got a black box in 12 front of us, that you are comfortable with whatever that 13 that delay might be? You are -- you sit in full support 14 of Proposal 7? 15 A. As I think I said to Mr. Rosenbaum, or maybe it 16 was you, I do -- it's a risk. 17 Q. Right. 18 A. But it is a risk that we're willing to take 19 because we do feel very strongly that audited mandatory 20 surveys are the best way to go. And historically we have 21 always gone through that same process of hearing and 22 making sure that we call a hearing and go through this 23 process every time we do this. 24 Q. I appreciate that very much. Thank you. I think 25 I have just one more question on a couple related 26 questions to ask. 27 In a -- in responding to Mr. Rosenbaum, you made 28 an acknowledgement that if National Milk's Proposal 7 were 3151 1 adopted, that the cost of production for a commodity plant 2 will materially exceed -- I'm sorry -- you acknowledged 3 that for a commodity plant, their cost of production will 4 materially exceed the Make Allowances in Proposal 7. 5 Is it your intent to acknowledge that? 6 A. Can you please restate that? 7 Q. Sure. The acknowledgement that I thought I heard 8 was, if Proposal 7 gets adopted -- 9 A. Uh-huh. 10 Q. -- the actual cost of production for the plants 11 making commodity products will exceed the Make Allowances. 12 A. I'm speaking specifically for us, some of those 13 commodities. 14 Q. Some of those commodities. Okay. So not all. 15 A. No. 16 Q. And given that you have testified your costs of 17 production are in the range of other plants, wouldn't that 18 mean that there are plants that will have higher costs 19 than Agri-Mark and lower costs than Agri-Mark, correct? 20 A. I believe so, yes. 21 Q. So if we adopt -- if USDA adopts Proposal 7, there 22 will be plants with a cost of processing lower than the 23 Make Allowances in place, correct? 24 A. Most likely. 25 Q. And there will be plants with a cost of processing 26 higher than the Make Allowances, correct? 27 A. Most likely, but I don't know what those are, of 28 course. 3152 1 Q. But those are reasonable conclusions to draw based 2 on your professional experience, what you know about 3 Agri-Mark's costs, correct? 4 A. Yes. 5 MR. MILTNER: Thanks. That's all I have. 6 THE COURT: Further cross? 7 Okay, Mr. Rosenbaum. 8 CROSS-EXAMINATION 9 BY MR. ROSENBAUM: 10 Q. Steve Rosenbaum for the International Dairy Foods 11 Association again. 12 I'd like you to assume with me something that I 13 think the record establishes, which is that the witness 14 for Land O'Lakes testified that when he looks at 15 Land O'Lakes' costs in 2022 compared to 2008, those costs 16 have gone up by over 70% looking at butter and nonfat dry 17 milk. Okay? 18 Do you have -- assuming those numbers are 19 accurate, do you have any explanation why your numbers 20 would be so much lower? 21 A. All I will speak to is what I know about our cost 22 numbers. I have no visibility into Land O'Lakes' numbers. 23 Q. Now, let me -- let me -- put yourself in a 24 situation of a company that operates processing plants as 25 you do, except it is a proprietary, not a co-op owned 26 company. Okay? 27 So if your plant is regulated by the Federal Order 28 system, you -- there is a regulated price for Class III 3153 1 and IV milk, but you are, as a co-op, entitled to engage 2 in reblending and actually pay a lesser amount to your 3 farmers, correct? 4 A. Correct. 5 Q. And so if the current Make Allowances, because 6 they are too low, are causing your plant to operate at a 7 loss, which apparently at least some of that is true for 8 some of the commodities you are making, what you can do is 9 basically deduct those losses in the farmers' paycheck and 10 end up paying them less than the minimum regulated price 11 for the milk, correct? 12 A. Correct. 13 Q. And that's just not just hypothetical, that's what 14 you actually do, correct? 15 A. Correct. 16 Q. Now, if you are a proprietary plant pooled on the 17 Federal Order system, you are required by law to pay the 18 minimum price, correct? 19 A. Correct. 20 Q. And you are not -- there's no reblending 21 permitted, correct? I mean, you have to pay that price, 22 correct? 23 A. As far as I'm aware. 24 Q. Okay. And so if that price is simply -- start 25 that question again. 26 So if the minimum milk price for that proprietary 27 handler is such that -- start that question one more time. 28 If the Make Allowance, because it's too low, 3154 1 results in a milk price that is so high that the 2 proprietary handler can't cover its costs and make a 3 profit based upon what it is selling the product for, it 4 just has to eat that loss, correct? 5 A. Correct, if that's excluding, you know, any 6 premiums or anything like that in the conversation. 7 Q. Well, I take it the fact that you are taking 8 deductions from your farmers for the losses your plants 9 suffer would be an indication that if you are able to gain 10 premiums in the marketplace today, they are not sufficient 11 to avoid -- 12 A. I didn't make that statement in regard to our own 13 situation. I was going with your proprietary example. 14 Q. Okay. But if -- if their finances are comparable 15 to your own, there's not enough -- start the question 16 again. 17 I mean, assuming you're selling the commodity for 18 the average price at which the commodity is being sold, 19 and that the $0.20 Make Allowance is not -- on cheese, for 20 example, is not sufficient to cover your cost, and you're 21 required to turn over to the farmer, as a matter of law, 22 for his or her milk whatever you sold that cheese for, 23 except you get to keep $0.20, you are going to be in a 24 loss position, correct? 25 A. Correct. 26 Q. And I mean, in effect, aren't you able to, through 27 reblending, to a certain extent, reset the minimum price 28 of milk that you have to pay, but proprietary handlers 3155 1 don't have that capacity? 2 A. Yes. 3 MR. ROSENBAUM: That's all I have. 4 THE COURT: Anyone else? 5 AMS. 6 CROSS-EXAMINATION 7 BY MS. TAYLOR: 8 Q. Good afternoon. 9 A. Good afternoon. 10 Q. Thanks for coming to testify today. 11 In your statement you talk about how the 12 manufacturing allowances are too low and that this causes 13 manufacturers to solve this with individualized solutions, 14 is the words you used. 15 So I wonder if you could talk more about how 16 Agri-Mark has worked -- what individual solutions that you 17 have had to implement that kind of balance the needs of 18 the -- financial needs of your manufacturing side of the 19 house and also your member pay prices on the other side. 20 A. Yes. So due to inadequate Make Allowances, 21 because we have not adjusted for those in formulas and, 22 you know, adjusted for that at a regulated price, 23 Agri-Mark is having to adjust that in an unregulated price 24 via milk check deduction. 25 Q. And I think I heard it from an earlier statement, 26 or in answer to a question, you talked it is your opinion 27 that more of that -- more of the manufacturing cost should 28 be reflected in the regulated price than currently, but it 3156 1 is not your position necessarily that it has to cover all 2 plants. 3 A. We are supporting the National Milk proposal in 4 its entirety, and I have acknowledged that for us that 5 will not cover all of our costs throughout our 6 organization with all of our commodities. 7 Q. And throughout your statement you talk about how 8 the current situation creates disparities among producer 9 pay prices between -- and what I took as your answer to a 10 different question, was it's not only between producers 11 that are co-op members and direct shippers, but it is 12 producers of co-op A versus co-op B? 13 A. So depending on where you stand in the marketplace 14 and what products you consume -- or excuse me -- what 15 products you make, so for us being a manufacturer of 16 Class III and IV primarily, where those Make Allowances 17 are really impactful for us, that puts us in a position 18 where because our farmers have invested in those 19 manufacturing assets, we are not able to recoup those, and 20 our paychecks as compared to our neighbors can look a lot 21 different at times. 22 Q. And I think you talked some about how you all had 23 put plant investments into West Springfield and the 24 Chateaugay plants? 25 A. Yes. 26 Q. And I was wondering if there was any -- have you 27 in your other plants looked to put or have put investments 28 in there to gain some efficiencies? 3157 1 A. Yes, absolutely. So as I think was mentioned 2 earlier this morning, we are continuously looking at 3 current Make Allowances as our benchmark and looking at 4 any sort of investment projects that will allow us to 5 perform better compared to that benchmark. 6 Q. You talked about how your one plant was -- about 7 West Springfield, has a long history of being a balancing 8 plant, but recently pretty much runs at full capacity. 9 Can I infer from that that your per unit cost at 10 that plant then, maybe that accounts for some of your 11 lower than other costs that we have heard in testimony 12 over the past -- 13 A. I think that that's a fair statement. So in the 14 past, when that plant has operated as more of a 15 traditional balancing plant, we would -- our cost per unit 16 would have looked worse than what they are today. We 17 would -- on one hand, we would love to have West 18 Springfield return to a traditional balancing plant from a 19 milk utilization standpoint, but on a Make Allowance 20 standpoint, that does benefit us. 21 Q. Yeah. And so when it used to run at -- provide 22 more of its balancing service, can you -- do you know 23 about what the range was on your plant capacity during the 24 year? 25 A. I don't have that off the top of my head. 26 Q. Okay. I'm reading questions that many people sent 27 me, so I'm trying to make this logical. 28 A. Take your time. 3158 1 Q. So for the powder plant, though, it's running at 2 capacity now, not because of demand but more of a supply 3 response? 4 A. Yes. 5 Q. You talked about how in the future, however, as 6 additional capacity comes on, that's when you expect it to 7 return to its balancing function. 8 Is there additional plant capacity expected in the 9 Northeast, or you are just saying generally? 10 A. We have seen announcements for additional capacity 11 in the Northeast. In addition, our Chateaugay projects 12 that we have referenced earlier today is going to increase 13 some capacity as well. And it would be our hope that in 14 the future, we would see more capacity beyond that come 15 into the marketplace as well. 16 Q. So I don't know if you listened to any of the 17 testimony last week -- 18 A. Yes. 19 Q. -- but we did ask some representatives of other 20 co-ops, kind of in the grand scheme of things, as pretty 21 much all of you have testified to, is the market has 22 adjusted to the fact that Make Allowances are lower than 23 what you believe they should be and that increasing makes 24 would then from a co-op perspective result in different 25 reblending. Maybe the deductions wouldn't be as low. 26 And so I'm just bigger picture trying to gather 27 your thoughts on how this isn't just a zero-sum game. 28 A. Again, I'll say that, from our perspective, the 3159 1 importance of these hearings, not only from a 2 Make Allowance perspective but all the other proposals 3 that are being heard as well, the intent of all of these 4 is to derive what a true market value is for milk. Right? 5 And that that market value be part of the regulated price. 6 And that's really, you know, why we're here, why we want 7 the Make Allowances to be adjusted and why we want some of 8 these other formulas to be adjusted as well. 9 Q. And that market value reference, and what you mean 10 by that, would be the basis for the minimum price, which 11 is what -- 12 A. Yes. 13 Q. -- Federal Orders are supposed to do? 14 A. Yes. 15 MS. TAYLOR: That's it from AMS. Thank you. 16 THE COURT: Anything else? 17 Redirect. 18 REDIRECT EXAMINATION 19 BY MS. HANCOCK: 20 Q. You were just talking with Mr. Rosenbaum about 21 proprietary plants and minimum pricing. It's also true 22 that for those proprietary plants, they could elect not to 23 pool their products? 24 A. Correct. 25 Q. And if that's the case, then they are not 26 regulated by the Federal Order's minimum price and they 27 can pay what the market will bear. 28 A. Correct. 3160 1 Q. Thanks. 2 MS. HANCOCK: That's all I have, your Honor. We 3 would move to admit Exhibit 170. 4 THE COURT: Any objection? 5 Exhibit 170 is admitted into the record. 6 (Thereafter, Exhibit Number 170 was received 7 into evidence.) 8 MR. ROSENBAUM: Your Honor? 9 THE COURT: Yes. 10 Okay. There's a contention she opened a door 11 there or something different here? 12 MR. ROSENBAUM: It is going to be something 13 different, your Honor. It's going to be based on that. 14 RECROSS-EXAMINATION 15 BY MR. ROSENBAUM: 16 Q. I mean, as you say, in Order 1, where you are more 17 or less you are in or you are out, correct? 18 A. Correct. 19 Q. And obviously, a manufacturing plant, if they are 20 in, one reason to be in is, of course, they get to share, 21 to the extent it is -- it exists, the difference between 22 the Class I price and the manufacturing price, correct? 23 A. Correct. 24 Q. And that's lost if you -- if you drop out, 25 correct? 26 A. Correct. 27 Q. And how does that -- how does that affect the 28 competitive situation of the proprietary plant versus the 3161 1 co-op plant in terms of attracting a milk supply if they 2 don't have the benefit of the shared Class I proceeds? 3 A. Well, I mean, there's -- you can think about it 4 the other way too. Right? So if you have the ability to 5 pool or you don't have the ability to pool, you know, 6 that's a competitive advantage or disadvantage as well. 7 Q. But a co-op can pool and then participate in the 8 Class I proceeds and then pay its farmers as it sees fit, 9 correct? 10 A. Correct. 11 MR. ROSENBAUM: That's all. 12 THE COURT: Any redirect? 13 MS. HANCOCK: Yes, your Honor. 14 REDIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. And just to be clear, that disincentive to depool 17 limitation, to the extent it exists in Federal Order 1, 18 that's the only Federal Order where it exists? 19 A. It is very -- we are highly disincentivized to 20 depool in Federal Order 1. 21 Q. Okay. And you are not aware of that same 22 situation in the other Federal Orders? 23 A. My understanding is it is the most strict in 24 Federal Order 1, and that is a tool that, for a Class III 25 manufacturer in Federal Order 1, we don't have that others 26 do. 27 Q. And to the extent that you as a cooperative can 28 engage in any kind of reblending, it also comes with the 3162 1 responsibility of taking all of your members' milk as 2 well; is that right? 3 A. We have the responsibility to take all of our 4 members' milk, and we also have the responsibility to pay 5 a competitive price. 6 MS. HANCOCK: Your Honor, that's all I have. We 7 move to admit Exhibit 170. 8 THE COURT: I think we did that already. 170 is 9 in the evidentiary record. 10 MS. HANCOCK: And at long last, we would like 11 Mr. Bauer to join the stand. 12 THE COURT: Very good. 13 Ma'am, thank you for coming. 14 Welcome back. Please raise your right hand. 15 PAUL BAUER, 16 Being first duly sworn, was examined and 17 testified as follows: 18 THE COURT: Your witness. 19 DIRECT EXAMINATION 20 BY MS. HANCOCK: 21 Q. Good afternoon, Mr. Bauer. Thank you for making 22 the return trip back out here today. I appreciate that. 23 You're here today to testify for a second time, 24 this time on Make Allowances; is that right? 25 A. That is correct. 26 Q. And did you prepare a testimony identified as 27 Exhibit NMPF-15 for your Make Allowance testimony? 28 A. I did. 3163 1 Q. Before we dive into this, I want to maybe expand 2 on some of the experience that you gave us previously. 3 Have you been doing costing work on cheese in 4 your -- throughout your career? 5 A. I have about 30 years of experience in cost 6 accounting in Federal Order 30 and different varieties and 7 types of cheeses. 8 Q. Okay. 9 MS. HANCOCK: Your Honor, I -- if we could mark 10 this as the next exhibit number. I believe we're at 171. 11 THE COURT: That's what my -- yes. Mr. Bauer's 12 NMPF-17 (sic) is marked 171 for identification. 13 (Thereafter, Exhibit Number 171 was marked 14 for identification.) 15 MS. HANCOCK: Thank you. 16 BY MS. HANCOCK: 17 Q. And, Mr. Bauer, would you proceed with providing 18 us your testimony in Exhibit 171? 19 And then just, if you weren't here, we're just 20 being extra mindful about reading slow for the court 21 reporter. 22 A. I will. 23 Q. But not too slow we should say. 24 A. I know it's not going to make a horse-a-piece, but 25 really it's Exhibit 15, not 17, your Honor, NMPF. 26 THE COURT: I'm sorry, I picked up the wrong 27 document. My mistake, yes. 28 MS. HANCOCK: I didn't even -- 3164 1 THE COURT: NMPF-15 is Mr. Bauer's statement, and 2 it's marked 171. 3 MS. HANCOCK: Thank you. 4 THE WITNESS: I'm here in support of National 5 Milk's change to the Make Allowance of $0.24 for cheese 6 and $0.23 for whey. 7 Hello, I am Paul Bauer, CEO and General Manager 8 since 2008 of the Ellsworth Cooperative Creamery. 9 Ellsworth has a barrel plant and a sweet whey drying 10 plant. In 2022, Ellsworth produced 70.9 million pounds of 11 cheese through its barrel plant and processed 33.7 million 12 pounds of sweet dry whey -- whey solids, excuse me. The 13 total patron pounds for that year were 77 million pounds. 14 We also opened a new cheese plant in 2022 in Menomonie for 15 specialty and block cheese. In addition, the cooperative 16 runs a process cheese plant in New London, Wisconsin. 17 The ECC (Ellsworth Cooperative Creamery) has the 18 unique position of supplying information to NDPRS on two 19 products, barrel cheese and sweet whey powder. In 20 December of 2022, only 10 barrel plants and 14 dry whey 21 plants reported information to NDPRS. So the cost to 22 convert and make products are very relevant to Ellsworth 23 and the entire classified milk pricing system. 24 In addition, we have a new block cheddar plant 25 that soon will be reporting to NDPSR as we increase 26 production, and this will help to explain the cost 27 differences in the final packed form of dairy products. 28 The Ellsworth plant has seen its barrel cheese 3165 1 production cost rise significantly from 2006 levels. 2 We have a long history at Ellsworth with barrel 3 cheese and sweet whey products, so we have the data from 4 this time period forward. The reason I am using the 2006 5 time period is that it ties most closely to the last time 6 Make Allowances were surveyed and increased. While the 7 Make Allowance may have increased in 2008, the costs are 8 related to 2006. 9 Further, I have broken the costs down as it 10 relates to Make Allowance by product to be comparable to 11 Dr. Mark Stephenson survey work study published in 2022. 12 Those groups are supplies (packaging), wages (processing 13 labor), depreciation (return on investment), utilities 14 (utilities) and other (non-labor or non-utilities costs 15 for processing and general administration). 16 I tracked those costs to those groupings from 2006 17 forward to the year 2022. The one area that would differ 18 is depreciation, as the survey uses a calculated value for 19 return on assets, whereas I used actual depreciation based 20 on our GAAP accounting. 21 Barrel Cheese: 22 Since 2006, our production volume has increased 23 53% in cheese output to 2022. In 2009, we added a whole 24 milk UF at the start of our process to increase the 25 efficiency of each vat cycle. This accounts for a good 26 portion of our ability to keep production costs where they 27 are today. We are not able to increase production 28 significantly in the future without major investment in 3166 1 cheese equipment, whey processing, and site wastewater 2 needs. 3 As a recap, our cost of supplies for cheese in 16 4 years are up 545%. This does represent an accounting 5 change that happened in prior years included in the 6 grouping labeled other costs. This area of costs was up 7 as a result of inflationary pressures. This area covers 8 plastic, cardboard, starter, and rennet. The result is a 9 $0.022 increase per pound. 10 The next area is wages to make cheese. On a per 11 pound basis, wages are up $0.059 per pound in the 16-year 12 period. This is a 322% increase. Wages include all time 13 worked, vacation, bonus time, plus mandatory benefits like 14 Social Security, unemployment, etcetera. It also includes 15 all the direct expenses related to health care. Since we 16 are self-insured, these can be variable per year. 17 The amount of depreciation for cheese production 18 represents the direct capital costs to expand cheese 19 output in 2009 and a portion of improvements in wastewater 20 and site improvements proportion to cheese production. In 21 16 years, on a per pound basis, this was up 77%. This 22 change is equal to $0.002 per pound. Since Ellsworth has 23 an established plant, our depreciation is very low. 24 The cost for utilities to make cheese has 25 increased 33% in the 16-year time period. We have used 26 several methods to reduce costs in our plant. One is 27 using third-person marketers to reduce gas cost and its 28 variability. The pre-purchasing of natural gas and the 3167 1 basis (space in the pipeline) will take spiking costs out 2 of the gas purchases and the delivery basis charges. 3 Since we are a very stable consumer of natural gas, we 4 can, to a high degree, predict consumption to avoid major 5 swings in gas prices. 6 The second item is electrical rates, which we pay 7 a very low rate because we have a steady load of 8 electrical needs. Ellsworth gets very low rates since we 9 have steady electrical loads between peak loading and low 10 peak loading. These two factors keep our utility costs 11 low to make cheese. In that period, our cost per pound 12 went down $0.004. 13 The last grouping for cheese is other. This is 14 somewhat the catch-all for all items that did not fall 15 into the other groups. We have changed our accounting 16 process so that the larger supply expenses are not placed 17 in this category. As a result, the other cost for cheese 18 processing was up 10% in 16 years. On a per pound basis, 19 it went down $0.011. 20 In total, our costs, as stated, in our plant to 21 make barrel cheese have gone up $0.064 per pound in 16 22 years. We can support the National Milk Producers 23 Federation proposal to increase the Make Allowance to 24 $0.24 per pound on cheese as it is a starting point to 25 collect better cost data for future increases in the 26 Make Allowance. 27 Dried Sweet Whey: 28 Our dried sweet whey side of the business 3168 1 production has only increased 6% in 16 years. The reason 2 for this is in 2006, Ellsworth stopped purchasing whey 3 solids from other companies and started to process only 4 its own whey as we increased cheese production. As a 5 result, we do not have increased whey capacity at the 6 plant. 7 Using the same categories as cheese and using the 8 groupings of Dr. Stephenson's survey, we have supplies, 9 wages, depreciation, utilities, and other to track costs. 10 In the supply category, costs are up 102% as 11 compared to the prior 16 years. On this side of the 12 business, like the cheese side, had an accounting 13 recording change, so some of the supplies were listed in 14 2006 as other expenses. 15 Whey has gone through a change in packaging 16 options compared to 2006. The chart below shows the 17 change in production to include condensed whey solids, 18 which now represents 23% of production in 2022. The 19 packaging shift will lower the spend for packaging 20 material. The supply costs in total for this time period 21 went up $0.005 per pound. 22 Further, the change in packaging material (bags 23 and totes) was a positive change of $0.004 per pound, and 24 the change in makeup of product shipped was a negative 25 $0.0029. So the cost of packaging material less the 26 change in final packaging mix increased by $0.0011. 27 Wages for producing dried whey was up 270% in 16 28 years. On a per pound basis, this is an increase of 3169 1 $0.043 per pound. Again, wages include all time worked, 2 vacation, bonus time, plus mandatory benefits like Social 3 Security, unemployment tax, etcetera. As with cheese, it 4 also includes the direct expenses related to health care. 5 Since we are self-insured, these can be variable per year. 6 Dried whey depreciation has increased 67% in this 7 time period. This is a $0.003 increase per pound. Again, 8 we have an established plant and as such do not have a lot 9 of depreciation. We currently use GAAP accounting on 10 depreciation. The amount of depreciation is not 11 sufficient to replace the assets we have in place, which 12 further supports the need for better costing information 13 from the USDA. 14 For utilities, we have pre-purchased gas and 15 limited electrical costs through various business tools 16 that keep our costs low. We have seen a 37% increase in 17 total costs and a per pound increase of $0.003. 18 The other grouping of costs has gone up 1% in 16 19 years. This has a decrease in cost of $0.001 per pound. 20 This again represents a change in accounting some costs as 21 supplies in 2022 that were recorded as -- supplies in 2022 22 that were recorded in 2006 as other. 23 In total, the cost to produce dried sweet whey has 24 gone up $0.054 per pound in 16 years. We can support the 25 National Milk Producers proposal to increase the 26 Make Allowance to $0.23 per pound on dried sweet whey as 27 it is a starting point to collect better cost data for 28 future increase in the Make Allowance. 3170 1 Issues In the Make Allowance Discussion: 2 In working to collect our plant data, it helps to 3 highlight some of the areas where better methods need to 4 be implemented in the dairy reporting of complex 5 information. Since not all of us do cost accounting in 6 the same fashion, it can lead to different values on a per 7 pound basis. 8 The process of collecting information differently 9 than other companies is fine because the internally 10 collected information can be used inside the organization. 11 However, it does become an issue when trying to aggregate 12 information to adjust a Make Allowance. 13 As an example, where do the costs of supervision 14 or quality supervision to make cheese get grouped? 15 Further, where does labor to load the truck or take 16 samples get placed for the Make Allowance values? 17 Without clear guidelines as an industry, we cannot 18 get costs that are similarly allocated when a plant has 19 mixed products that are not included in the survey work. 20 Limitations of Using The 2018 Survey Results 21 Compiled By Dr. Stephenson: 22 Another issue in the survey work is the cost per 23 end product. There are two very different requirements to 24 make cheese when you have a barrel and a block plant. 25 They are not the same product, yet they are lumped in the 26 same cost survey as they were in Dr. Stephenson's work. 27 To be accurate, this needs to be tracked and then 28 brought to the same level to make accurate Make Allowance 3171 1 cost discoveries. The material packaging costs on barrels 2 and blocks are very different. On a per pound basis an 3 additional cost of $0.03042 per pound is needed for block 4 production (see chart below of actual costs of materials 5 for Ellsworth and its Menomonie Block plant). 6 This difference alone makes the Make Allowance for 7 block cheese up by 14% of the total cost, just on the 8 required material. This does not include the extra 9 handling of blocks compared to barrels. 10 At present, we collect only one set of information 11 on the Make Allowance which does not distinguish between 12 barrels, 640s, or blocks. Since we use end product 13 pricing, less one Make Allowance, it would not support 14 block cheese manufacturing as it would underrepresent 15 their costs. 16 It would be important for future survey work to 17 find the cost of packaging by end cheese type being 18 produced. This will allow for the end product price less 19 Make Allowance to reflect actual costs to make each 20 product. This will assist in providing long-term market 21 conditions to allow the market to have dairy assets in 22 place for processing milk and thus provide orderly 23 marketing of milk. 24 The Ellsworth Cooperative Creamery can support the 25 adjustment to the Make Allowance as proposed by National 26 Milk Producers Federation and the creation of a survey to 27 update the Make Allowance via a regulated mandatory 28 reporting. 3172 1 DIRECT EXAMINATION 2 BY MS. HANCOCK: 3 Q. So I just want to cover a couple of your numbers 4 because I think when we were reading them, some of the 5 numbers didn't match up with what was in here, and I just 6 want to make sure that we say them correctly. I'm going 7 to do my best to catch the ones that I caught. 8 If you look at page 3 of your testimony, the cost 9 for utilities to make cheese has increased. In your 10 testimony you have 37%, and I think you said 33% when you 11 were reading it. 12 Is that 37%? 13 A. 37 is accurate. 14 Q. Okay. And then I think on the same page, when we 15 were talking the next full paragraph down, last sentence, 16 it says the other cost for cheese processing was up 10% in 17 16 years, and on a per pound cost it went down -- did you 18 mean $0.014 cents? 19 A. Correct. Or a dollar-point-oh-14, depending how 20 you want to say it. 21 Q. Okay. 22 A. It is not as smooth to say dollar-point-oh-14, 23 so -- 24 Q. Well, point -- but you mean point-zero-14-dollars 25 or point -- sorry -- .014 cents is -- 26 A. Correct. 1.4 cents down. 27 Q. Okay. Let's not convert it. Let me do this. 28 Let's just put it in terms of cents, and then we can make 3173 1 sure that it is accurate. 2 As it's written there, that one is accurate where 3 it's .014 cents -- or $0.014 -- I'm sorry, I'm saying it 4 backwards. It's my problem, and this is why I'm not 5 hearing it correctly. $0.014 is 1.4 cents. 6 A. Are the same number. 7 Q. Yeah. Okay. I'm so sorry. Goodness gracious. 8 If I say it enough times, it will come out in my head. 9 And then on the next page, on page 4, it is $0.005 10 per pound. And this is in the supply cost and total for 11 this time period, in the middle of that. 12 A. Went up, it would be .5 cents per pound. 13 Q. And then on page 6, on a per pound basis, an 14 additional cost of $0.03042 per pound. 15 A. On page 5? 16 Q. I'm on page 6. 17 A. It -- the difference in cost in packaging is 18 3.042 cents per pound. 19 Q. Okay. And then if we could just take a step back. 20 If you look at your total costs that have increased from 21 2006 to the present on cheese, what's the total percentage 22 of cost increase that Ellsworth has experienced since 23 2006? 24 A. It's approximately 45%. 25 Q. Okay. 26 A. We have historically produced below the 27 Make Allowance. 28 Q. Okay. At what point did Ellsworth cooperative, 3174 1 if -- let me back up. 2 So if Ellsworth had historically been producing 3 below the Make Allowance, at some point did its cost of 4 production exceed the Make Allowance? 5 A. In 2022, we are at or above the Make Allowance. 6 Q. Is 2022 the first time, on average, that Ellsworth 7 had exceeded the Make Allowance that had been set back in 8 2006? 9 A. It is. 10 Q. Okay. So -- 11 A. For both whey and cheese. 12 Q. From that, from the time that it was calculated 13 using those 2006 numbers, all the way up until two 14 thousand -- through 2021, Ellsworth was able to produce 15 below that Make Allowance? 16 A. That is correct. 17 Q. And that's the goal, right, because that's how you 18 can make -- add to your profits; is that right? 19 A. That is correct. 20 Q. Okay. And so it's only been in 2022 that you're 21 at or exceeding that Make Allowance number? 22 A. That's correct. 23 Q. Okay. You talk about your barrel production here, 24 and you earlier had provided some testimony on the barrel 25 elimination proposal that National Milk has put forth. 26 After your testimony, Edge had presented a 27 compromised position or an alternative position. Are you 28 familiar with what I'm referring to? 3175 1 A. I am. I have read that. 2 Q. And how do you understand Dr. Bozic's proposal to 3 work? 4 A. It's basically using a method or some way to limit 5 the impact of barrel cheese into the formula. However, 6 the problem becomes is that barrels are not a substitute 7 for block cheese, which is what we're -- what the system 8 has been based on. And plus or minus a few percentage 9 points, 90% of the cheese is priced on the block market. 10 So no matter how you look at it, barrel 11 manufacturers in Federal Milk Marketing Orders are 12 subsidizing other producers of cheese, the other 90%. 13 It's no different than the equivalent of using, in modern 14 terms, child labor to make an iPhone and saying, we're 15 going to take and make less child labor to make that 16 iPhone. If it's wrong, it's wrong. And it's wrong to 17 include barrels in the calculation and have those 18 producers suffer through that consequence. 19 I also heard testimony from another cooperative, 20 that makes barrels, they are not against the removal, they 21 are scared of the future on how to price barrel cheese. 22 And that will come. There are other methods and examples 23 in the industry. 24 But we can't be -- if it's wrong that it was 25 included, in today's environment, and how it has changed, 26 and how the lens looks at it now, then we need to get it 27 out of the legislation. Making it a permanent form, even 28 at a lesser percentage, still makes it wrong. 3176 1 Q. Okay. So do you believe that the weighting -- and 2 maybe this is obvious in what you said already, but I want 3 to unpack this a little bit more. 4 You understand that the weighting he has proposed 5 is based on the total -- weighting the production amounts? 6 A. Weighting a wrong number doesn't make it better. 7 It lessens the impact, but it's still wrong. I -- it 8 doesn't matter if it's 1% or 2% or the 35% that was 9 proposed. It's still wrong. It institutionalizes a 10 problem within the system. It's just like saying, it is 11 okay, my iPhone only has 1% of child labor in it. It is 12 still wrong. 13 Q. Okay. So you don't believe that having a 14 weighted -- a weighted number based on the actual volume 15 of production would solve the concerns between the spread 16 between barrels and block pricing? 17 A. It would institutionalize it and continue it with 18 the only -- right now, when you talk to buyers, it's like, 19 well, that's part of the price formula. They have 20 institutionalized that deficit, and it is not going to 21 change until that's taken out of the system. I spent many 22 years working with others in the industry, and the root 23 cause comes back to it's part of the Federal Milk 24 Marketing Order system, so we can't do anything with it. 25 Well, maybe we should take it out. We should take it out, 26 at 100%, and then we can go on. It does not -- if it 27 doesn't do anything to the industry, for barrel 28 manufacturers like Ellsworth. It will not decrease our 3177 1 income. We still will get the income from the barrel 2 cheese sales. Everyone that makes barrel cheese. The 3 only way is to get it out of the institutionalized system 4 of being part of the price discovery system, when we have 5 a chance to move barrel cheese to be priced off the block 6 market. And I know that's beyond the scope of the Federal 7 Order system, but by them including it, it does legitimize 8 it. 9 Q. And -- and you had just talked -- I mean, you -- I 10 think when you were here to testify previously you talked 11 about that when you are producing barrels, there is 12 usually a customer on the other side that is already 13 pre-determined by the time you have -- by the time you 14 have decided which volume of barrels you are going to 15 produce? 16 A. Correct. 17 Q. And is that what you mean when you say, there's a 18 buyer on the other side of these deals, and so you know 19 how to build that pricing into -- or you know what the 20 pricing is going to be because it's a negotiated arm's 21 length transaction for you? 22 A. In advance, based off of third party market, 23 correct. 24 Q. And then I think earlier when you were giving us 25 your reaction to the alternative proposal, you had 26 included in there that there had been another barrel 27 manufacturer who had testified about some of the concerns 28 that he had with if -- if you remove barrels, he was 3178 1 concerned about whether he would be able to continue 2 because he wasn't sure how his barrels would be priced. 3 Do you remember that testimony? 4 A. I do. 5 Q. And you don't share those concerns based on what 6 you have said? 7 A. His income, as his cooperative, if the market 8 still stays, which I hope it doesn't, his income will stay 9 the same, because that market may or may not exist. The 10 upside -- there's only upside to that manufacturer and all 11 manufacturers in the Federal Order system to get more 12 value, because he will get more value from the pool, 13 potentially, if they do pool their milk, or they have the 14 ability to renegotiate and reprice those third-party 15 deals. 16 Q. So you don't have the same concerns about whether 17 the barrel pricing will be affected if barrels are removed 18 from the Class III pricing formula? 19 A. Well, the fear of the unknown is -- is somewhat 20 there. But I know what we have today costs my producers a 21 lot of money. And since 2017, I totaled it up earlier, it 22 is $33 million. We can't sustain $33 million losses. If 23 we continue at this, we'll stop -- either cease doing 24 production or not make barrel cheese, and barrel cheese 25 will not be produced in the Federal Milk Marketing Order. 26 So either fix the -- get the -- get it out of the system 27 so we can change, but if we institutionalize it, it's 28 going to go away in some way, shape, or form because we 3179 1 can't sustain those losses forever. 2 MS. HANCOCK: Thank you, Mr. Bauer. 3 Your Honor, at this time we would make him 4 available for cross-examination. 5 THE COURT: Dr. Bozic. 6 Are we due for a break or -- did you have a 7 question about the order of cross? 8 MR. ROSENBAUM: No. I was really rising to say 9 I'm happy to proceed, but it's been an hour and a half if 10 we want to break first. 11 THE COURT: Yes, it has been -- I think it's time 12 for a break. Let's come back at 3 o'clock. 13 (Whereupon, a break was taken.) 14 THE COURT: On the record. 15 Mr. Rosenbaum. 16 CROSS-EXAMINATION 17 BY MR. ROSENBAUM: 18 Q. Steve Rosenbaum for the International Dairy Foods 19 Association. 20 Mr. Bauer, let me just start with a point that 21 actually is sort of the point you end your written 22 testimony, Exhibit 171, on, which is your section called 23 "Limitations in Using the 2018 Survey Results Compiled By 24 Dr. Stephenson." 25 Do you see that? 26 A. I'll get there. Yep. 27 Q. And you -- you start by saying, "Another issue in 28 the survey's work" -- and that's referencing 3180 1 Dr. Stephenson's work, correct? 2 A. Correct. 3 Q. -- is the cost per end product. There are two 4 very different requirements to make cheese when you have a 5 barrel plant and block plant. They are not the same 6 product, yet are dumped -- lumped in the same cost survey 7 as they were in Dr. Stephenson's work. 8 Do you see that? 9 A. I do. 10 Q. And is that based upon your assumption that when 11 Dr. Stephenson reports cost on a per pound basis, he is 12 including both 40-pound blocks and 500-pound barrels? 13 A. I'm not exactly sure what was included in the 2006 14 work because there was only ten plants included. What I 15 can imply from his work is that when you look at the cost 16 per pound on packaging, there is a very significant 17 difference between the high cost plants and the low cost 18 plants, meaning the top five and the bottom five. And in 19 that work, the differences almost equal to the packaging 20 costs. So there really was no definition of what plant 21 was being surveyed within the cheese framework. 22 Q. But you reference here specifically to his 2018 23 survey, which I assume is a reference to what ends up 24 being his 2021 report, correct? 25 A. That is correct. 26 Q. And Dr. Stephenson will testify, and if he 27 explains that although he gathered information regarding 28 500-pound barrels, but in fact, his cost data only relates 3181 1 to 40-pound blocks, am I correct that the criticism you 2 have lodged on page 6 goes away? 3 A. I would say that's incorrect based on the data 4 that was supplied on the low cost plants. The value of 5 packaging is not sufficient to cover the cost of material 6 to put it into a 40-pound block. See, there could be a 7 640 plant in there. There could be anything. It is just 8 not determined. Which goes to the point, either 9 Dr. Stephenson was given -- or people volunteered 10 information in that survey, and that's just one of the 11 implications that we're having trouble with reconciling. 12 Q. Didn't the survey ask that plants specifically 13 identify whether they were 40-pound blocks versus 14 640-pound blocks versus 500-pound barrels? 15 A. I don't know that specifically but -- but in the 16 summary of information, there was no distinguishing what 17 was what. 18 Q. So let's assume that Dr. Stephenson will explain 19 that, yes, he gathered information as to all three 20 varieties, that is to say 40-pound blocks, 640-pound 21 blocks, and 500-pound barrels, but when it came to 22 reporting costs, he limited himself to 40-pound blocks. 23 Wouldn't that eliminate the criticism you've made on 24 page 6? 25 A. If he testifies to that, it may. But I still will 26 stand by the numbers of what it costs to package a piece 27 of cheese in a 40-pound box is not sufficient that was 28 outlined in his survey. 3182 1 Q. And this will be a clarification. I'm not 2 pointing fingers, and I'm certainly not suggesting you 3 have said anything that you didn't understand to be the 4 case. But he'll explain for us what he actually did, 5 correct? 6 A. I believe so. 7 Q. So let's now switch back to the major topic of 8 your testimony, which relates to the cost of your company, 9 correct? 10 A. Correct. 11 Q. So let me just start with the bottom line and work 12 my way back a little bit. Okay? 13 So on page 3 of your statement, which is, as I 14 say, Hearing Exhibit 171, you say that your costs for 15 making cheese have gone up by 6.04 cents since 2007, 16 correct? 17 A. Incorrect. 6.4 cents, not 6.0 cents. 18 Q. I thought it was 6.04. Let me just go back and 19 look at the numbers. Maybe I wrote it down incorrectly. 20 A. I know, they get confusing. 21 Q. You know, you're absolutely right. I put an extra 22 zero in there. So I'm going to ask the question again. 23 A. Okay. 24 Q. Good to have the correction. 25 On page 3 you indicate that your costs of making 26 cheese have gone up by 6.4 cents, correct? 27 A. Correct. 28 Q. And you're aware, I'm sure, that the National Milk 3183 1 Producers Federation proposal is to increase the cheese 2 Make Allowance by four-point -- I think it is 22 cents; is 3 that correct? 4 A. I believe it is -- it's 3.97-something. If we 5 round to four, I think we can agree to that. 6 Q. Okay. So it's -- let's just -- it is by roughly 7 $0.04. Let's use that rough number. That's how much 8 National Milk would increase the Make Allowance, correct? 9 A. Correct. 10 Q. So that there would be an -- even with that 11 increase, there would be a shortfall, if you will, of 12 approximately $0.022 per pound of cheese in terms of what 13 it costs you to make cheese versus what the Make Allowance 14 will be? 15 A. No, sir. We produce -- up until last year, we 16 produced below the Make Allowance. 17 Q. Well, you are the one -- 18 A. Even though our costs have gone up $0.064, we 19 produce barrel cheese at less than the -- we used to 20 produce it at less than the Make Allowance. 21 Q. I see. Okay. All right. All right. 22 But using your increases as a benchmark, the 23 National Milk Producer proposal, in terms of cents, is 24 less than the cost increase you have included -- you have 25 incurred, correct? 26 A. That is correct. 27 Q. Okay. And then when it comes to nonfat dry milk, 28 similarly, you have costs of $0.054 per pound, correct? 3184 1 A. In -- 2 Q. Increased cost of $0.054, correct? 3 A. Incorrect. You said nonfat dry milk. 4 Q. Okay. 5 A. It would be sweet -- dried sweet whey. 6 Q. Okay. Let me start the question again. Another 7 accurate correction. 8 You report that your costs of making whey have 9 increased by $0.054 since 2007, correct? 10 A. Correct. 11 Q. And the National Milk new Make Allowance proposal 12 would increase the whey Make Allowance by approximately 13 $0.031, correct? 14 A. Correct. 15 Q. Okay. And so you have experienced an increase of 16 $0.023 more than -- yes, than the National Milk proposed 17 increase, correct? 18 A. Correct. 19 Q. Okay. Now, one thing that -- so that is sort of 20 the bottom line numbers. I would now like to dig in, a 21 little bit, to what actually makes up your numbers, if you 22 see what I'm saying, because you provided some information 23 about that. 24 So one thing -- and so I want to start by talking 25 about depreciation. 26 Now, you indicated on page 2, that you -- you 27 tried to track how Dr. Stephenson had grouped various 28 costs in his 2022 report, and you felt you had done so, 3185 1 except for depreciation where Dr. Stephenson uses a -- I 2 think he calls it economic depreciation calculation, and 3 you are using instead GAAP accounting depreciation as you 4 keep them on your books; is that correct? 5 A. That is correct. 6 Q. Okay. So -- and then you give some figures for 7 how much -- how much depreciation has increased, correct? 8 A. I do, yes. 9 Q. You have figures both for cheese and for -- and 10 for whey, correct? 11 A. Correct. 12 Q. So for cheese, the figure appears at the top of 13 page 3, and you say, in 16 years, on a per pound basis, 14 depreciation was up 77%, which worked out to two-tenths of 15 a cent per pound, correct? 16 A. Correct. 17 Q. So if I just do the back calculation as to, well, 18 what must depreciation have been to increase it by 77% 19 only produces two-tenths of a penny, I get that 20 depreciation was $0.0025. Do you see what I'm saying? Is 21 that right? 22 A. I am not sure I can confirm your math. 23 Q. Well, what I'm -- the math I'm doing is .77, 24 that's the 77%, times X equals two-tenths of a cent, 25 because you said that your depreciation is up two-tenths 26 of a cent, and that's 77% increase. So I think in my 27 formula, X would tell us what depreciation was before you 28 did the increase. And I get, you know, roughly -- I mean 3186 1 what I get exactly is $0.00259. So I'm getting roughly a 2 quarter of a penny per pound. 3 A. Yeah. A quarter of a penny per pound sounds more 4 accurate. And I did my math up here, and I come up with 5 that. You originally had said 2.5 cents, and I thought 6 that was too high, so -- 7 Q. If I said that, I misspoke. I'm sorry. And I 8 appreciate your correcting that. It is -- depreciation 9 was a quarter of a penny per pound, correct? 10 A. Correct. 11 Q. I mean that's -- if we -- and that's on your 12 cheese, right? So -- 13 A. If you are asking if we have an old plant, your 14 answer is yes. 15 Q. You must have a plant that is pretty much fully 16 depreciated? 17 A. It is. 18 Q. Okay. 19 A. We have been in the same spot for 110 years. 20 Q. Okay. All right. 21 A. Our building is fully depreciated. 22 Q. Okay. And I mean, Dr. Stephenson included 23 depreciation way back in his 2007 study, and his average 24 number for cheese was $0.0334 per pound depreciation. 25 Okay? 26 A. Okay. 27 Q. We have got documents in the record. People can 28 look at it. But I mean, you -- it's fair to say -- have 3187 1 extraordinarily low depreciation? 2 A. Yes, we do. 3 Q. Okay. And -- okay. So obviously, if there were 4 companies out there that have made substantial capital 5 investments that are being depreciated as we speak, they 6 would end up with cost increases materially more than 7 you're setting forth; is that fair? 8 A. That is fair. 9 Q. Okay. And then let's just do the same number for 10 whey. 11 For whey, you state -- and I believe this is on 12 page -- the bottom of page 4, that depreciation for dried 13 whey has increased 67%, which represents a three-tenths of 14 a cent per pound increase, correct? 15 A. Correct. 16 Q. And if I do my back calculation, I compute that 17 means that your depreciation upon which that increase was 18 calculated is just a little more than four-tenths of a 19 cent; is that right? 20 A. I get the same math. 21 Q. Okay. And, once again, then, when it comes to 22 whey, your plants are essentially fully depreciated, 23 correct? 24 A. Ironically, we have actually put millions into 25 them, but they are so depreciated, it doesn't make any 26 difference. 27 Q. Okay. And once again, if we look back at 28 Dr. Stephenson's numbers from 2007, people -- you know, I 3188 1 think that report's already in the record -- in that 2 report, the weighted average depreciation for a whey plant 3 was $0.058. Take that as a given. 4 Once again, you obviously are, for better or 5 worse -- I'm not casting aspersions in any way 6 whatsoever -- but for better or worse, you are unusual in 7 that you really have fully depreciated your plants, and 8 that's not a cost you are incurring, correct? 9 A. We are fully -- we are nearly fully depreciated on 10 our assets, on our cheese making assets, correct. 11 Q. And depreciation is, obviously, a line item in the 12 calculation of -- of costs of manufacture, correct? 13 A. Correct. 14 Q. Okay. All right. So let me now move on to a 15 different part of your calculations, which is on page 4 as 16 well. And this relates to your Table 1, and I just want 17 to understand the implications of the change in what kind 18 of whey you are producing. Okay? 19 Namely, in 2006, you had no condensed whey, but 20 today you have 23% condensed whey, correct? 21 A. Correct. 22 Q. So in your table you are focusing on the packaging 23 differences between the two, correct? 24 A. Correct. 25 Q. And obviously there's no packaging -- well, I 26 shouldn't say obviously -- am I correct there's no 27 packaging for condensed whey? 28 A. Technically you have a label, but that's about it, 3189 1 you are correct. 2 Q. Okay. So had you been using the same packaging 3 styles for whey in 2022 that you had been using in 2006, 4 your costs would be higher in 2022 because they would 5 include more packaging costs, correct? 6 A. Correct. On the flip side, though, we also 7 receive less revenue for condensed whey. So they -- they 8 pretty much counter one another. But in the essence of 9 the -- of a cost survey, I'm -- all I can report is the 10 numbers that I have. 11 Q. Not -- and I appreciate your reporting your actual 12 numbers. That's great. 13 But if you were simply doing a cost of manufacture 14 analysis, which is sort of what a Make Allowance is, you 15 would have had higher costs of manufacture had you been 16 producing the whey and packaging it in the manner you had 17 been doing in 2006 as opposed to what you actually did in 18 2022? 19 A. That is correct. 20 Q. And then the other difference, and tell me if I'm 21 wrong about this, but I believe condensed whey -- 22 condensed whey is not fully dried whey; am I right? 23 A. You're correct. 24 Q. All right. So -- which I would think means you 25 have reduced costs now because you don't have to dry it as 26 much, correct? 27 A. Correct. 28 Q. And so, once again, if you were drying -- let me 3190 1 start the question again. 2 With respect to the 23% of your total whey as of 3 2022 that is condensed, you have lower drying costs than 4 you would have had had you still been drying that whey and 5 making it a dry whey, correct? 6 A. Correct. 7 Q. Okay. And when you condense it to what -- you 8 know, is there a percent associated with that, as to, we 9 condense it to X percent? 10 A. Well, for travel purposes, you -- there's kind of 11 a sweet spot that -- that works best for our particular 12 products. Other companies can get to a higher percentage, 13 and -- and ours is around that 32%. 14 Q. Okay. And what is the 32%? 15 A. 32% solids. 16 Q. Okay. Meaning that you -- that there is 68% 17 moisture that you haven't taken out; is that right? 18 A. Well, if you -- to be really technical, dried whey 19 has 1.5% moisture, so less that 1.5%, that would be an 20 equivalent. 21 Q. Okay. So there's 65.5% moisture that you -- 22 sorry. 23 A. Of water has not been removed. 24 Q. 66.5% water that has not been removed? 25 A. Approximately. 26 Q. And you obviously have saved that cost, correct? 27 A. Correct. 28 Q. So on page 2, I think I know the answer, but I 3191 1 think to make sure the record's clear, I just want to ask 2 it. 3 You talk about cheese production volume having 4 increased 53% between 2006 and 2022. 5 A. That's correct. 6 Q. Is that limited to your barrel production or -- 7 A. This is only barrel. 8 Q. Okay. Because you mention elsewhere that you've 9 opened up a new plant and things like that. I assume that 10 that number does not include that new plant? 11 A. This is only barrel cheese production. 12 Q. I assumed that was the case, but I just wanted to 13 make sure that was right. 14 MR. ROSENBAUM: That's all I have at this time. 15 Thank you. 16 THE COURT: Further cross? 17 CROSS-EXAMINATION 18 BY MR. MILTNER: 19 Q. Good afternoon, Mr. Bauer. 20 A. Good afternoon. 21 Q. Ryan Miltner representing Select Milk Producers. 22 On the first page of your statement you describe 23 both the volumes of production and your -- the volume of 24 milk that is produced by your cooperative's patrons. 25 Does the plant, the barrel plant, only take milk 26 from cooperative patrons? 27 A. Up until -- for the collection of this data, the 28 answer is yes. 3192 1 Earlier this year, we were able to purchase some 2 outside milk. I believe that was in Maine. We took on a 3 little -- May or June we took on a little bit of extra 4 milk. 5 Q. Does milk from the cooperative's patrons regularly 6 get delivered to plants that are not Ellsworth processing 7 plants? 8 A. We have one such arrangement that we have, and 9 it's approximately -- it varies between two and three 10 loads of milk a day. 11 Q. The new cheese plant in Menomonie, were any of the 12 costs from that plant included in the information you 13 described today? 14 A. Absolutely none. 15 Q. And your processed cheese plant -- I have to 16 admit, I'm not extremely familiar with the process of 17 making processed cheese. Is there any additional milk 18 that gets delivered to that plant or is it just barrels 19 and other ingredients? 20 A. Barrels and other ingredients. And obviously, 21 none of those costs are included. 22 Q. Right. 23 Okay. On page 2 where you begin describing your 24 barrel cheese costs, you note that you added "whole milk 25 UF at the start of our process to increase the efficiency 26 of each vat cycle." 27 So although this is pretty self-evident, that was 28 an investment made after the last Make Allowance 3193 1 adjustment, correct? 2 A. Correct. 3 Q. And if you could, explain for me how adding that 4 UF process at the beginning increases your efficiencies? 5 A. So we have vats that hold 55,000 pounds of milk, 6 or liquid, and by running the milk through a whole milk 7 UF, the best way it was described to my board was it takes 8 Holstein milk and turns it into Jersey milk. So we're 9 able to run approximately 77,000 pounds of milk equivalent 10 for every vat cycle. In addition, our plant was designed 11 to handle 21 vats per day, and through efficient use and 12 scheduling, we have been able to get 24 vats per day. So 13 the UF and better management techniques, we have been able 14 to increase our production. 15 Q. In addition to increasing the throughput, does 16 that also help with your casein to fat ratio or anything 17 like that related to how much yield you can produce? 18 A. No. Because if we run -- we don't separate 19 anything prior to making cheese, so all we're doing is 20 moving the -- removing the lactose to allow more efficient 21 use of each cycle. 22 Q. What kind of vats do you use when you produce your 23 barrel cheese? Are they open vats or verticals or 24 horizontals? 25 A. Horizontals. 26 Q. Okay. I asked this of Agri-Mark's witnesses, and 27 I would like to ask the same of you. 28 Do you think that Ellsworth's costs of production 3194 1 for barrel cheese are above or below the average for all 2 barrel producers? 3 A. I will say we are -- we -- I can answer it this 4 way. Our costs of production, up until 2022, was below 5 the Make Allowance, for both cheese and whey. I don't 6 know what other costs are for other manufacturers. 7 Q. Okay. I have what I think is I guess a 8 philosophical question for you that came to mind while you 9 were answering some others. 10 If USDA elects to exclude barrel prices from 11 formulas, should USDA consider the cost data from barrel 12 manufacturers in setting the Make Allowance? 13 A. No, they shouldn't. 14 Q. Okay. 15 A. That was an easy philosophical question. 16 Q. I thought I knew what your answer might be, but it 17 was worth asking. 18 MR. MILTNER: I -- I don't think I have anything 19 else. Thank you. 20 THE COURT: Other cross other than AMS for this 21 witness. 22 Seeing none, AMS. 23 CROSS-EXAMINATION 24 BY MS. TAYLOR: 25 Q. Good afternoon. 26 A. Good afternoon. 27 Q. Welcome back. Let's see here. 28 This first one is another easy question as well. 3195 1 I think I know the answer. But just to be clear, when you 2 are comparing the costs here between 2006 and 2022, that's 3 your actual 2006 cost, that is not the survey from 2006? 4 A. It is actual cost. 5 Q. And you talk -- I mean, you give us all the barrel 6 cheese costs that you have experienced, and later on you 7 list packaging differences between barrel and blocks. 8 But would you say that the other costs for block 9 cheese are similar to your barrel costs? 10 A. There is a couple that are very similar. Labor in 11 one seems to be very -- between our two plants, I'm going 12 to say no. But when I look at our survey work between 13 what was provided, labor seems to be very consistent 14 between the two. 15 The problem that -- voluntary survey work and how 16 it's compiled is no one knows what they are including for 17 the right numbers and how they are including that. So it 18 becomes very difficult to say, this is the right number. 19 It's the number that was given to Dr. Stephenson, and 20 that's what he's working with. So it's hard to -- it's 21 hard to say. 22 So when I use packaging cost, as an example, 23 that's one item I can clearly break out to say, this is 24 not right, because I know what it costs. And I may not 25 buy cardboard specifically at the best, but it is not 26 going to be off by 100%. 27 So that's just where I can see differences in the 28 survey on how the information was reported. 3196 1 Q. Okay. Thank you. I appreciate that 2 clarification. 3 So for your cheese costs, I guess the first 4 question, you have the last grouping for cheese is other, 5 and you say that is a catch-all. 6 Can you give a few examples of what catch-all 7 costs would be in that category? 8 A. They actually got smaller over time because -- oh, 9 in 2006, I was not there yet, and when I started in 2008, 10 we started to actually do cost studies, and we started to 11 break them out. So as I mentioned the rennets and the 12 plastic, we started tracking those specifically. So it's 13 generally going to be like the catch-all, USDA 14 inspections, Wisconsin inspections. Those kind of things 15 would be in the other. And generally, when they are 16 spread out over a larger cost -- or a larger tonnage, they 17 don't have a lot of significant impact. 18 Q. Well, that was kind of my second question. So you 19 talk about how utility costs went up 37%, but yet you saw 20 a decrease -- 21 A. More throughput. 22 Q. -- and the same thing for other, went up 10%, and 23 yet you saw a decrease of $0.014. So I wonder if you 24 could explain for the record why. 25 A. Because we're spreading out the same cost over a 26 larger amount of product, whether it's cheese or whey. So 27 one of the ways to get more efficient, whether it's 28 milking cows or running a cheese plant, is to get more out 3197 1 of the same fixed asset. 2 Q. And part of that was -- driving that maybe was 3 your -- well, increasing your production was -- your 4 efficiency was the UF part that you installed? 5 A. UF and adding more vats. But predominantly, the 6 UF. 7 Q. Okay. So I -- well, not just me -- we added all 8 the costs that you list for the cheese side of the house. 9 We came up with a slightly different number of .065, but 10 in your testimony you have .064. And I'm wondering if 11 that just might be a rounding issue somewhere. 12 A. I believe it is. I used a spreadsheet, and they 13 round those numbers. 14 Q. Okay. The next one's a little more detailed. 15 So on page 4, we're on your whey side, talking 16 about supplies. So if we looked at this right -- and I'm 17 going to look at the last sentence before the Table 1. 18 Supply costs for this period went up .005. The change in 19 packaging material was also up .004. And the change in 20 the makeup of the product shipped was down .0029. When we 21 add those numbers up, we don't come to .0011. 22 A. And it is really hard to get there because you 23 have to have the other root numbers, which I did not 24 include, because it -- it just varies on the product mix 25 and the packaging type. So if you just look at the cost 26 of raw materials, i.e., a bag to put whey in, or a tote, 27 those are one set of costs that went up. And because we 28 changed the mix and spread it out over a different 3198 1 quantity, it gets convoluted. 2 At the end of the day, if I were to report, as we 3 did, to Dr. Stephenson's report, we would have reported at 4 basically a negative 1.001 cost difference for packaged 5 product. 6 Q. Okay. So what gets us confused then, if we add up 7 those numbers, we get to .0491, but on page 5, you get to 8 a total cost of .054. However, if I use the .0061 number 9 that we had computed, we actually do get to the $0.54. 10 A. That's correct. Good math. I love that. 11 Q. So we're just trying to make sure we understand 12 the numbers, you know, as they are presented. 13 A. And I'm trying to add some context -- 14 Q. Uh-huh. 15 A. -- that dairy plants are not static. The dairy 16 industry is not static. We change, we adjust to what 17 market condition is out there, even on commodity products 18 like sweet whey. And -- but at the end of the day, our 19 costs still went up, that $0.0054 cents per pound to 20 process it, even though there are other changes within it. 21 Q. Okay. On the packaging costs for -- you list in 22 Table 2 and Table 3, what years are those for? Do you 23 remember? I don't think it's marked on the table. 24 A. They would have been for, I believe, March or 25 April of this year. 26 I will state for the record, we have -- our 27 packaging costs are based on corrugated cardboard fiber. 28 I think there's actually a futures market for that. And 3199 1 that's actually gone down. So we have seen some costs go 2 down from the high point, and cardboard is one of that. 3 Some of the plastic products have gone down from the high 4 of 2022. 5 Q. Okay. You touched a little bit on your utility 6 costs and how you purchase natural gas and electricity. 7 A. Correct. 8 Q. And that helps keep those prices more stable for 9 you. 10 Can you talk about whether this is a common 11 strategy used amongst plants that you are aware of? 12 A. I am not sure how common it is. One of the 13 benefits that we have is that we run our plant 14 consistently, and that is one of the keys in order to get 15 those -- that pricing lower. We really don't have any 16 downtime. Everything is always running. 17 Our -- for electrical rates they charge you a peak 18 loading rate and a base loading rate. We don't have any 19 difference. It's the same -- practically the same 20 numbers. So all our equipment is on all the time, so they 21 give us a pretty low rate for that. 22 On gas, for example, there is a little bit of 23 variation, but you have to have standard purchasing 24 throughout the month, and we're pretty consistent on that, 25 too. So we just have been steady Eddie on what our gas 26 and electrical consumption has been. 27 MS. TAYLOR: I think that's it from AMS. 28 THE COURT: Anything else? 3200 1 Mr. Miltner. 2 CROSS-EXAMINATION 3 BY MR. MILTNER: 4 Q. I neglected to ask one question of you. 5 The UF facility or the UF equipment that you 6 installed, obviously, it increased your costs, correct, to 7 install that, right? 8 A. Correct. 9 Q. And you have incorporated those costs into the 10 data you have presented here today, correct? 11 A. Correct. 12 Q. And you're asking for USDA to recognize the steps 13 you have taken or that Ellsworth has taken to become more 14 efficient, correct? 15 A. Correct. 16 Q. But there's a cost that comes with that, and 17 you're asking that the formulas reflect both the 18 investment and the efficiencies received, correct? 19 A. The answer is correct, just as they always have to 20 use depreciation or return on investment within the 21 calculation. 22 MR. MILTNER: Thank you. That's all. 23 THE COURT: Dr. Bozic. 24 DR. BOZIC: Your Honor, I apologize for not being 25 available for cross earlier. Unfortunately the world 26 doesn't stop just because we are here. I had a call I had 27 to take. 28 THE COURT: Anyone objecting to this as -- 3201 1 Hearing none, you may continue. 2 DR. BOZIC: Thank you. Thank you, your Honor. 3 CROSS-EXAMINATION 4 BY DR. BOZIC: 5 Q. Mr. Bauer, as an iPhone owner, I got really 6 concerned by your testimony. 7 You don't have information about child labor in 8 iPhones, do you? 9 A. All I read about is in the news about child labor 10 being in this product or that, and boycotting, and it's 11 like, okay, so... 12 Q. Well, I would never use a product that has child 13 labor, and also, like yourself, I would never propose a 14 proposal for which I would have any degree of confidence 15 that would hurt dairy farmers. We might not agree on 16 the -- how to solve the barrel problems, but I do want you 17 to know I appreciate the passion with which you represent 18 your members. 19 A. Thank you. 20 Q. I wanted to visit a little bit on your experience 21 with cost accounting, and you recently went to a process 22 of expansions and new facility buildings. 23 Have you explored how much savings there are in 24 these really large cheese plants that have been popping up 25 around the country last six, seven years, on a per pound 26 of cheese? How much do they save versus, let's say, a 27 plant of your size? 28 A. I am not privy to their information, but that's 3202 1 not to say that I can't speculate based on the stated 2 numbers that they are throwing around to build these 3 plants. It's pretty substantial investment for these 4 plants to go up. And it becomes a pretty hefty amount, 5 and I'm going to say dollars per hundredweight that 6 somebody has to fund these new plants, well beyond the 7 current Make Allowance. 8 Q. So you would suggest that the Make Allowance that 9 would satisfy the cost structure of new plants is even in 10 excess of Make Allowance that would cover your costs? 11 A. If I understand the question correctly, the -- a 12 new plant, Make Allowance would be in excess of what is 13 being proposed for the Make Allowance? If I understand 14 the -- that's what the question was, then the answer is 15 yes. 16 Q. The answer is yes. Okay. Okay. Then I won't go 17 down that path more. 18 The other question I had is regarding the risk 19 management for barrel manufacturers. What -- I understand 20 that you disagree with the Edge's natural outgrowth 21 proposal for barrels. 22 Would you agree that if AMS does implement that 23 proposal, that barrel sellers as well as barrel buyers 24 would have an easier time managing risk than it is the 25 case today? 26 A. If -- can you -- can you state that again, please? 27 Q. So let's say that the AMS comes up with a proposal 28 where the barrel weight ends up being exactly, let's say, 3203 1 25%, and everybody knows in advance that for the next 2 12 months it's going to be 25%. 3 Would it follow that by using the combination of 4 all cheese futures and block cheese futures, yourself as a 5 barrel seller, as well as your clients who are buying 6 barrel cheese from you, that both of you would have an 7 easier time understanding what the projected price for 8 barrels is and potentially even lock that price in? 9 A. The assumption is, is that you can actually use 10 the futures market and have liquidity to do that, and it 11 does not have that. We have been trying to use the 12 futures market to limit our hedge -- or limit our 13 exposure, but at some points we end up being 25 to 50% of 14 the open interest in the market. There is not enough 15 liquidity in the market to support that assumption. 16 Q. CME has traditionally pursued very tight specs for 17 their contracts in order to encourage more liquidity and 18 reduce basis. For example, if you look at the corn 19 contract, it is #2 yellow, 5,000 bushels, these particular 20 months of the year, etcetera, etcetera. 21 If the uncertainty is removed regarding the weight 22 that blocks versus barrels would have in that 23 relationship, wouldn't that be a step towards resolving 24 the liquidity issue? 25 A. You are assuming, because I believe the CME can't 26 agree on a new spec for barrels, that there would be such 27 a contract or item to go forward. So I don't believe that 28 the future -- the history has not supported that 3204 1 conclusion. 2 Q. To be clear, Edge's proposal does not require any 3 action from CME. Because the weights for blocks and 4 barrels would be fixed, one could use the all-cheese 5 futures and the block cheese futures to figure out what 6 the implied barrel futures would be, and they would be -- 7 A. It still does not help the producers at all. 8 It -- it limits their producers. I know Dr. Vitaliano has 9 done a chart based on the 35%, and it does improve the 10 percentage that the producer -- the American dairy farmer 11 would get. But it is not -- it pales in comparison to 12 eliminating it entirely. 13 So, again, I go back to the analogy, that it -- if 14 you are going to have barrels subsidized exactly, the rest 15 of the -- 90% of the industry, what's the difference if 16 you are using child labor law to build your iPhone or your 17 Nike tennis shoes or whatever? It is still in that 18 product. 19 Q. Yeah. 20 A. I don't know if you are wearing Nikes or not. 21 And I use those two because people pick on them 22 because they are big brands. I mean, that's really what 23 they are, so -- 24 Q. No, I understand. But, of course, your assumption 25 there is that the unfavorable price relationship between 26 barrels and blocks would continue going forward, as it was 27 last the few years? 28 A. And even if it -- if we change to price off of 3205 1 blocks, we'll have continued transparency in the industry. 2 We won't have 90% priced off of blocks, we'll have 100% 3 priced off of blocks, and then we have a much clearer 4 basis and transparency in using the futures market to -- 5 to have our customers and our farmers have clear and 6 transparent prices in the future. No need to do the math. 7 We all price off the same unit, just like the other three 8 commodities, other three commodities are used to price 9 different component values. 10 Q. Mr. Bauer, if you offer barrels off blocks, and 11 your competitor comes in, and they are willing to price 12 barrels differently, and they come in $0.15 below you, how 13 much -- how confident are you that your potential client 14 will not switch vendors and go from you to your 15 competitor? 16 A. It's very difficult to switch formulas within a 17 manufacturer setting. And the -- most of the barrels in 18 the Upper Midwest are already presold, so these 19 discussions need to be had with the customers years in 20 advance. 21 And, in fact, we're trying to get our customers to 22 look at how they can hedge their product and their raw 23 material for their end customer, and when you talk to 24 them, it's like, hey, look, all you got to do is use the 25 block market, and this basis over -- they are like, oh, 26 it's that easy? 27 We have such a complicated formula because that's 28 what we invented. We can change it. USDA can change it 3206 1 and make it more transparent and a more profitable dairy 2 industry by getting rid of the barrels in the calculation 3 and Class III component -- Class III protein pricing. 4 Q. Mr. Bauer, if an exporter can choose to produce 5 either I'd say frozen mozzarella for exports or either 6 blocks or barrels for domestic market, and they switch 7 based on their export competitiveness, and if you 8 essentially eliminate the price discovery for barrels 9 markets, would you expect them to start making blocks when 10 they have struggles in exporting mozz overseas? 11 A. I think they will make the best decision that they 12 can at the time. 13 Q. If that best decision turns out to be blocks, what 14 would that do to the price of blocks? 15 A. Well, then there would obviously be more cheese in 16 the market and then lower the market. But it would lower 17 it at an equal value, like it would for all the other 18 products versus a mythical 52% or 48% depending on the 19 time of the year. It would be an actual market. No 20 different than for whey or butter or nonfat dry milk. 21 We'd have parity with the other products, finally. 22 Q. Mr. Bauer, thank you for your answer. 23 I believe Mr. Brown testified that barrels can be 24 stored for a period of up to six months at a certain 25 temperature without affecting their functionality. 26 Is that your understanding as well? 27 A. And I understand blocks can be stored for ten 28 years. So cheese can be stored for extended periods of 3207 1 time. It's another way to arbitrage your product and 2 pricing for manufacturing of processed cheese or other 3 products. No different than butter or dried sweet whey, 4 they all have long-term storage capabilities to it. 5 Q. Would you have to use different starter cultures 6 if you are going to make blocks that would need to be 7 stored for that period of time? 8 A. It depends on how you want to store your product 9 and how you want it to function in the end. 10 Q. If you wanted that block to function as a fresh 11 cheese, in the end, would you be able to do that? 12 A. Well, it would -- the same -- same concept if you 13 wanted your barrel cheese to function as fresh cheese. It 14 is not going to. You have to understand how your product 15 and how your end consumption is going to be on that 16 product. 17 Q. So your claim is that barrels and blocks are -- 18 that one form of cheddar over the other has no advantage 19 in storage without change of functionality? 20 In other words, if you don't want your cheese to 21 age, you just want to freeze it and bring it back six 22 months later, you're saying there's no advantage if you 23 make barrels versus blocks? 24 A. There's all kinds of different things cheese 25 manufacturers can do to limit the aging profile on cheese, 26 and temperature or freezing is certainly one of them. 27 Q. And that can be equally successfully applied to 28 blocks and barrels? 3208 1 A. It depends on what the outcome is and how they 2 want to handle it. 3 Q. But -- 4 A. If you are using processed cheese, at the end of 5 the day, you still have to have a firm body in order for 6 that cheese to function, which requires cheese less than 7 30 days old. Even if you freeze it or bring it back, 8 there are some slight differences. 9 And remember, processed cheese is all about 10 consistency. And we have very skilled people that can 11 take less than originally spec cheese and turn it into a 12 great product in the end for our consumers in foodservice. 13 Q. Thank you for your answer. 14 The capacity increases in barrel manufacturing in 15 the period 2016 to 2019 or so has been quite substantial; 16 would you agree with that, capacity increase in barrel 17 manufacturing? 18 A. It may. I'm not exactly certain of that, because 19 I have seen other barrel manufacturers go out of business 20 in that same timeframe. 21 I think what has changed is people are out of the 22 Federal Order system, using different methods to price 23 their raw material and using the CME as a way to market 24 product versus selling the product ahead of time. 25 What's interesting is that USDA has a great stat. 26 It's the NASS data quick stats, and you can look up 27 processed cheese in there. And it is grown substantially 28 in the last two years to 2.8 billion pounds from a pretty 3209 1 steady 2.3 billion pounds. So the industry's dynamic, and 2 it is changing. 3 And I don't necessarily believe that added 4 capacity from out west -- because I do know of at least 5 two plants that have gone out of barrel production, and 6 some have added additional capacity. But there's also 7 been additional need within the industry, too, for 8 processed cheese. 9 Q. If over the next 24 months we have substantially 10 new block making capacity but no new barrel making 11 capacity, and if AMS does not heed your advice and 12 eliminate barrels, would you anticipate that the 13 block-barrel spread might get inverted in 2025? 14 A. It could or could not. It all depends primarily 15 on where the processed cheese is going to be used and 16 processed, because processed cheese can still use 640s or 17 40s depending on the price. But what will happen is if 18 more cheese manufacturing comes online, there could 19 potentially be a shift in how the industry has either more 20 or less product available, which will increase or decrease 21 supply and demand. So just fundamental economics. 22 Q. Would you agree that if block-barrel cheese -- 23 excuse me -- block-barrel spread gets inverted in 2025, 24 that that may hurt farmers if your proposal is adopted? 25 A. If it's inverted, there -- as it did the prior 26 year in 2022, for only half the year, and it then 27 self-corrected. The problem is, is we had a great first 28 half of the year and a bad second half of the year. By 3210 1 pricing off of one consistent product, we can use the 2 futures market to protect our margins, both on the plant 3 level, on a processing level, and on a farm level, and we 4 can't do it under today's environment when blocks are 5 included in the calculation of Class III protein. 6 Q. Does your answer depend on the assumption that 7 your clients would agree to forward basis? 8 A. Even if they use the government programs that are 9 available today, they still have a hard time securing 10 their basis because we are so heavily involved in 11 blocks -- excuse me -- in barrels, that it's hard to 12 determine what their basis is going to be. So they have a 13 hard time, they have a basis risk greater than most. 14 Q. What I was asking is for a barrel buyer to agree 15 to, you know, buy off -- price their purchases off blocks, 16 for you to be isolated from the oversupply of barrels, you 17 would also have to have a contract where it says something 18 like, you will pay me, let's say, $0.03 below blocks for 19 any barrels shipped to you over the next 12 months, that 20 that basis would also have to be fixed; is that correct? 21 A. When we compare block manufacturers to barrel 22 manufacturers and how it's priced, there will have to be a 23 readjustment in the marketplace. 24 What I find interesting about this -- and I know 25 you had a presentation at the cheese con earlier this 26 year, and I know Mike Brown had a presentation at cheese 27 con -- and what was so striking in that presentation is 28 how barrel manufacturers, in essence, were subsidizing 3211 1 block manufacturers because of the Make Allowance. So 2 that is what the reality has been happening, the barrel 3 manufacturers have been screaming, National Milk, and we 4 have been waiting for a holistic approach that's -- I'm 5 going to come back to the whole proposal of National 6 Milk -- make a holistic approach. And we can support 7 that, because we don't get quite everything that we want, 8 and neither does anyone else. 9 At the end of the day, the dairy farmer has to 10 support this. And that's why we have the Make Allowances 11 set where they are. Removing the barrels is part of that. 12 Changing the Class I movers, the higher-of, all the 13 proposals within National Milk make a comprehensive 14 package that every dairy farmer can get behind and 15 hopefully passes once USDA gets the recommendation out. 16 Q. I appreciate your answer. Just to make sure that 17 I got the answer to my previous question, for you to have 18 stability regarding the barrels yourself, is it true that 19 your clients would have to agree to pay a price that's 20 based on block plus a basis that is fixed for an extended 21 period of time? 22 A. They would have to -- which is what they do today, 23 only on the barrel market. So we would have to rotate to 24 a different market. It would be a very simple, 25 negotiated, third-party transaction calculation. 26 Q. But in other words, if they don't agree to a fixed 27 basis, we can still price it off blocks. We would still 28 be exposed to the availability of surplus barrels? 3212 1 A. If -- if in the worst case scenario, if the 2 industry does not move, dairy farmers will still be better 3 off because we'll have more value in Class I that we can 4 potentially bring back to our farmers. 5 The worst case scenario is we still get better in 6 the dairy industry. So that's why it's -- I'm so 7 passionate about it because there is -- the downside is to 8 keep what we have, institutionalizes that barrel 9 manufacturers get penalized and block manufacturers get 10 rewarded. And that's what -- it is not orderly marketing 11 in the industry. 12 Q. Mr. Bauer, I don't question your passion, just 13 economics. 14 So, again, the assumption that you would be better 15 off assumes that any surplus milk that cannot be converted 16 to mozz that's exported, would not find itself way back to 17 the block market that would then depress the block prices 18 the same way that it's currently depressing the barrel 19 market. 20 A. Well, under the same scenario, if all the barrel 21 manufacturers go out, then we're in the same boat, are we 22 not? 23 Q. I'm not concerned about all barrel manufacturers 24 going out of business. I'm just -- 25 A. So if we have one barrel manufacturer setting the 26 price for 50% of the milk, that's acceptable? I don't 27 think we have the economics of what's -- the economics 28 will come to bear on whatever they are. I understand -- I 3213 1 fully recognize and understand that what is happening 2 today in the barrel market is not sustainable. To have 3 one out of six years where we get back to normal is not 4 sustainable. Our creamery already is at a disadvantage of 5 about $33 million. We can't keep doing that. We'll 6 either stop making barrels or make a different product. 7 And that's one less barrel manufacturer, and that's just 8 going to go to the next one and the next one, until pretty 9 soon we don't have any barrel manufacturers, except for 10 the largest ones out west. And they are not part of the 11 Federal Order system, they are just part of the price 12 calculation. 13 Q. And, again, I appreciate your passion to remain in 14 the barrel business. I do want to be on the record that 15 your proposal will take you out of the barrel business 16 because you will be out completely by those -- 17 A. I'm still competing with them to this day. And I 18 will next year, absent -- but I don't have the opportunity 19 to work within the system to change it because it's 20 institutionalized that, oh, well, that's part of the milk 21 calculation. If it's not part of the milk calculation, I 22 have that ability to talk to my customers and do something 23 different. 24 Q. I appreciate your answers. And, again, I do want 25 to emphasize, again, because these exchanges can get quite 26 intense, but, you know, everybody in the organization that 27 I represent wishes nothing but the best for all Upper 28 Midwest manufacturers, Ellsworth included. 3214 1 DR. BOZIC: Thank you, your Honor. 2 THE COURT: Okay. That was some late cross. I 3 forget where we are. AMS has gone. We have redirect. 4 AMS is finished, right? 5 MS. TAYLOR: Done. 6 THE COURT: After all that, no further questions. 7 MS. HANCOCK: I wasn't sure if it restarted 8 everything, so -- 9 THE COURT: Well, me either. I would rather 10 declare an end to this and move into -- unless you have 11 got something further after -- 12 MS. HANCOCK: I just have a couple of questions. 13 THE COURT: All right. 14 REDIRECT EXAMINATION 15 BY MS. HANCOCK: 16 Q. And, frankly, some of this might have been cleared 17 up already, but I just want to make sure that I have this. 18 You had some questions earlier that was talking 19 about essentially what I would characterize as the 20 innovations of your products and how they have changed 21 over time and whether you are really comparing current 22 data apples to apples with your historic data. 23 Do you recall that? 24 A. I do. 25 Q. Is it fair to say that over time you have evolved 26 your product mixes and the techniques that you have used 27 to manufacture your products as ways to build in 28 efficiencies to say profitable? 3215 1 A. That is true. 2 Q. And -- and we can see that when we look at your 3 Table 1, when we look at your packaging style of whey in 4 comparing 2006 to 2022? 5 A. Correct. 6 Q. And -- okay. 7 MS. HANCOCK: That's all I have on that, your 8 Honor. We would move to admit Exhibit 171. 9 THE COURT: Any objections? 10 Seeing none, Exhibit 171 is entered into the 11 record. 12 (Thereafter, Exhibit Number 171 was received 13 into evidence.) 14 THE COURT: Thank you. 15 Yeah, we have been going for only an hour, but we 16 only have an hour left, so take a break? The court 17 reporter says she doesn't need a break. 18 (Off-the-record.) 19 MS. HANCOCK: It is a very delicate balance to hit 20 the mark on the schedule. 21 THE COURT: I understand. 22 MS. HANCOCK: So at this time we're going to call 23 Travis Campsey. 24 THE COURT: Raise your right hand. 25 TRAVIS CAMPSEY, 26 Being first duly sworn, was examined and 27 testified as follows: 28 THE COURT: Your witness. 3216 1 DIRECT EXAMINATION 2 BY MS. HANCOCK: 3 Q. Good afternoon, Mr. Campsey. Would you state and 4 spell your name for the record, please? 5 A. It's Travis Campsey, C-A-M-P-S-E-Y. 6 Q. And what is your business address? 7 A. 813 8th Street, Suite 300, Wichita Falls, Texas, 8 76301. 9 Q. Thank you. 10 And have you prepared testimony identified as 11 Exhibit LSMP-1? 12 A. Yes. 13 MS. HANCOCK: And, your Honor, I believe we're at 14 Exhibit 172 for identification. 15 THE COURT: We are. So marked. 16 (Thereafter, Exhibit Number 172 was marked 17 for identification.) 18 MS. HANCOCK: Thank you. 19 BY MS. HANCOCK: 20 Q. Mr. Campsey, would you provide us with your 21 testimony? 22 A. Yes, I will. 23 So there's a little bit of the intro in the 24 written document. I guess I will go ahead and introduce 25 myself. My name is Travis Campsey. I work for Lone Star 26 Milk Producers. I have been there for the last 21 years. 27 Graduate of Midwestern State. 28 Q. I think your microphone is off just a smidge. 3217 1 A. Is this better? Good. 2 My name is Travis Campsey. I'm the CFO for Lone 3 Star Milk Producers. I have been with the company for the 4 last 21 years. I'm a graduate of Midwestern State 5 University in Wichita Falls, Texas, with a Bachelor's in 6 accounting and a Master's in business administration. I'm 7 a Texas CPA and a CMA as well. I have been an active 8 member in the National Society of Accountants for 9 cooperatives for the last 20 years as well. 10 Over the years, I have served in various roles for 11 the co-op. Some of those titles have included secretary, 12 treasurer, and vice president of manufacturing. I have 13 been a board manager of Lone Star Milk Producers' 14 subsidiaries, as well. A lot of the time has been spent 15 on finance and accounting for the cooperative and its 16 subsidiaries. 17 Over the time I have spent about ten years working 18 with the Oklahoma City plant which has produced powder, 19 cream, and condensed milk. A lot of that work was 20 accounting and finance, and I learned something about 21 operations of the powder plant in that time. And then for 22 several years I headed up the marketing for cream and 23 condensed and nonfat dry milk sales. 24 I have been involved in the Lone Star dairy 25 products plant in Canyon, Texas, from conception through 26 now. And I served as the on-site CFO for about 15 months, 27 ending in December of 2022. 28 So in the written testimony, I'll start in the -- 3218 1 just at the end of the first paragraph here, I guess. 2 So, Lone Star Milk Producers, Inc., is a 3 Capper-Volstead cooperative association, is qualified to 4 market milk on Federal Milk Marketing Orders, is a member 5 of National Milk Producers Federation, and fully supports 6 Proposal Number 7. 7 Lone Star regularly markets its members' milk on 8 the Appalachian, Southwest, Southeast, and Central Federal 9 Milk Marketing Orders. 10 My testimony will focus on the need for an update 11 and improvement in the Federal Order Make Allowances, the 12 adjustment to the wholesale dairy product prices, that 13 along with yield factors allow the conversion of the 14 wholesale dairy product prices to the Order Class and 15 Component prices. 16 Lone Star supports National Milk's Proposal Number 17 7, as listed on the Notice of Hearing. We offer today 18 relevant data on changes in costs of milk processing that 19 we, as the operator of a cream, butter, and nonfat dry 20 milk processing plant, have experienced over the last five 21 years. 22 Lone Star's butter and nonfat dry milk plant is 23 located in Canyon, Texas, which is approximately 20 miles 24 south of Amarillo, and is a relatively new plant, opened 25 in 2017, which was subsequent to the most recent update in 26 Federal Order Make Allowances. 27 The plant's official name is Lone Star Dairy 28 Products LLC. I might refer to it as LSDP. 3219 1 The LSDP plant qualifies as a pool supply plant on 2 Order 126. And as I stated a moment ago, I worked out 3 there from September of 2021 to December of 2022, and I 4 have been on their board since inception. 5 Regular monitoring of the financial results of the 6 plant is an area I have been tasked with since the 7 beginning of the business. 8 So, seemingly, almost all newly constructed milk 9 plants experience operational challenges when they first 10 open. Lone Star Dairy Products is no exception. 11 Consequently, we determined that cost data from 2017, the 12 year LSDP came online, would not be indicative of the 13 costs of operating the plant on an ongoing and regularly 14 operating basis. 15 The data presented in LSMP-2, which is a one-page 16 exhibits that we'll get to in a moment, compares certain 17 costs experienced for the operation of the plant, just in 18 a small sample, during the months of January through May 19 of 2023 and the same, so January through May of 2018. 20 The several cost items compared are hourly labor 21 rates, utilities costs, and property insurance. We have 22 expressed these time-period comparisons as a percentage 23 change since the underlying dollar cost or per unit cost 24 would reveal competitively sensitive proprietary 25 information. 26 The data presented in Exhibit LSMP-2 are 27 summarized from the books and records of LSDP, and are 28 reasonable and correct to the best of our knowledge and 3220 1 belief. 2 In no surprise, costs of operating our plant have 3 risen considerably in the five years since early 2018. 4 For labor costs, hourly wages, depending on the operations 5 department, increased between 27 and 49%, which was an 6 average increase across the various operations departments 7 of approximately 35%. 8 This is only the gross wage number. It does not 9 include payroll taxes, fringe benefits, health insurance, 10 work comp insurance. It doesn't include any of those 11 things. Just the pure base gross wage number. 12 Utilities costs at LSDP overall are virtually 13 unchanged across the five years, but only because we 14 invested millions of dollars during this period to upgrade 15 and significantly increase the throughput of our 16 wastewater treatment facility. 17 The wastewater treatment expansion increased our 18 ability to process wastewater five-fold from when the 19 plant was built. This substantial capital expense has had 20 the effect of actually reducing our ongoing monthly water 21 and sewer charges. 22 Unfortunately, we have no such mitigation 23 potential when it comes to the use of electricity and 24 natural gas, and their costs both increased roughly 25% 25 over the five-year period. 26 It is interesting to note for natural gas, in the 27 recent past, there have been five-month averages where the 28 rates were more than double those of the five-month 3221 1 average of January through May 2023. 2 So it's -- as a footnote, I think in 2022, there's 3 probably about a 400% difference between the low and the 4 high on the rate on natural gas out where we are. So 5 pretty volatile stuff. 6 The recent real shocker in plant costs is property 7 insurance, which increased nearly 378% in one year, most 8 of which occurred in March of 2023. Insurance companies' 9 recent loss experience due to multiple milk dryer fires, 10 hurricanes, winter storms, and other large-scale disasters 11 across the U.S. have resulted in the massive increase in 12 property insurance costs. We diligently shopped for 13 insurance at the most recent renewal, and this was the 14 best we could do. These insurance cost increases are 15 frightening, and we doubt we will see much moderation any 16 time soon. 17 The dryer fire losses experienced at other plants, 18 which caused our insurance rates to increase, also 19 forcefully reminds us that we are dealing with mechanical 20 devices, and there is always the risk of something very 21 bad happening, and that risk must be mitigated by proper 22 maintenance and ongoing safety protocols, neither of which 23 are cheap if done right. 24 Fortunately, the more modern milk-drying equipment 25 is equipped with many redundant safety features to lower 26 the risk of catastrophic failures, and LSDP is so 27 equipped. This is important for reduction of risk, but 28 does make the cost of purchasing and operating the 3222 1 equipment higher than in the past. 2 Lone Star, through its milk products manufacturing 3 plant, experiences on a daily basis what it costs to 4 operate a hard product manufacturing facility, and as such 5 we see how inadequate the current Federal Order 6 Make Allowance values really are, because our operation 7 costs at LSDP exceed the current Federal Order 8 Make Allowances. 9 However, although we suspect our experience of 10 increasing costs is much like that of other processors, we 11 also suspect that the way we capture the cost data likely 12 is not exactly comparable to the way other processors 13 complete these analyses. 14 A standard set of cost reporting and cost 15 evaluation criteria are needed to make sure industry-wide 16 costs are gathered and compared apples to apples, and thus 17 provide consistent data for the industry and the Secretary 18 to evaluate when establishing Federal Order 19 Make Allowances. 20 Plainly, we are not there today. Voluntary 21 surveys, combined with potentially imprecise methods of 22 reporting and collecting cost data brings into question 23 the cost data's usefulness in developing Make Allowances. 24 A better mouse trap is needed, and it needs to be an 25 obligatory one. 26 In other businesses, for example Medicaid and 27 Medicare, cost determination methods are rigid, 28 standardized, reporting is required, and the individuals 3223 1 who create and file those reports are required to be 2 trained and certified before they are qualified to submit 3 such reports. Not that those models necessarily represent 4 the best of the best, but the concept of using a standard 5 method that is consistent across the industry seems a 6 reasonable prerequisite to having valid, comparable cost 7 data. 8 We at Lone Star support National Milk's proposal 9 to make modest increases in the Make Allowances as 10 proposed. This first step as proposed by National Milk 11 Producers Federation almost assuredly does not capture the 12 entirety of the raw milk conversion cost increases 13 experienced by dairy product manufacturers, since the last 14 time these rates were set in 2008, but it moves us in the 15 proper direction. 16 This cautious step recognizes both the need to 17 make an adjustment in Make Allowances, but is reserved 18 enough in its magnitude as to not jeopardize the 19 confidence the industry has in Federal Order pricing. 20 Additionally, this measured proposed increase in 21 Make Allowances recognizes, and accounts for, the needs of 22 dairy farmers to not see excessively large downward 23 changes in the Orders' Class prices, since such large 24 changes can themselves create market disorder. 25 Lone Star fully supports the Make Allowance 26 increase provided in Proposal Number 7 as a prelude to 27 consistent, auditable, mandatory processing cost reporting 28 which will bring confidence in the process, and support 3224 1 the orderly marketing and pricing of milk. 2 This concludes our prepared testimony. I'd like 3 to thank the Department and others for allowing us to 4 appear here. 5 Q. Thank you, Mr. Campsey. 6 And then the final page of the exhibit is actually 7 a separate marked exhibit LSMP-2 that you referenced in 8 your testimony. 9 MS. HANCOCK: Your Honor, if we could mark that as 10 Exhibit 173? 11 THE COURT: Yes. So marked. 12 (Thereafter, Exhibit Number 173 was marked 13 for identification.) 14 MS. HANCOCK: Thank you. 15 BY MS. HANCOCK: 16 Q. Mr. Campsey, you also -- when you reference that 17 LSMP-2 in your testimony that we have now marked as 18 Exhibit 173 -- and the title on this is just comparing 19 January through May of 2023 with January through May of 20 2018. 21 Is it just those two time periods that you 22 provided a snapshot comparison of it? 23 A. Yes. 24 Q. Okay. And is it fair to say that there's been 25 some variability in between there, but this is the net 26 effect of what those numbers are? 27 A. Correct. Yes. Particularly on the utilities. 28 Q. Okay. And does this take into account the 3225 1 additional expenses that were incurred in building, 2 constructing, and opening the plant in Canyon, Texas? 3 A. These costs are not -- I guess I don't know how 4 location specific they are or costs of the total build. 5 These are -- these are normal operating type costs. 6 Q. Okay. And would those normal operating costs have 7 already been incurred by 2018 if it opened in 2017? 8 A. Right. Things had leveled out, if that's what you 9 are getting at. 10 Q. Yeah. 11 A. From total startup mode. 12 Q. And my point is, just those two snapshot periods 13 would have already taken into account that new plant 14 operation? 15 A. Uh-huh. Correct. 16 Q. Is that a "yes" -- 17 A. I think so, yes. 18 Q. -- just so the record is clear? 19 A. I -- I believe so. 20 Q. And that would also take into account any 21 efficiencies gained by having the new plant design and 22 implement operations? 23 A. In theory, yes. We still work every day to become 24 more efficient. 25 Q. And that's fair. That's just always an ongoing 26 task that you have to undertake in order to build in the 27 best and most efficient processes to capture the most 28 efficient way to operate your plant? 3226 1 A. Correct. 2 Q. And do you know how the Exhibit 173 cost compared 3 to 2006? 4 A. I don't have a good comparison since this plant's 5 only existed since 2017 is when it started. 6 Q. Okay. And did you have a different plant where 7 you were producing under previously that had been closed 8 down? 9 A. We did. 10 Q. And do you know how the -- this plant compares to 11 your prior plant in the cost of operation? 12 A. I haven't studied that for today. The other plant 13 was about a 1965 model. So I'm not sure those are apples 14 and apples. 15 Q. Okay. Fair to say the 1965 model was much more -- 16 or much less efficient? 17 A. Could be. 18 Q. Okay. And then does Lone Star engage in any kind 19 of risk management practices? 20 A. Not particularly at this point. 21 Q. Okay. Can you talk about -- about that and how 22 you have reached that point? 23 A. So the tools are complex on the risk management 24 side of things. If you are talking about like a farm's 25 ability to hedge its own Class III prices or Class IV 26 prices and so on, we leave that up to our farmer members 27 and suggest that they get the help of a broker that's 28 familiar with the subject matter, so that they can design 3227 1 their own program, they can catch their feed, and their 2 milk cost, and all that kind of stuff together. 3 Q. And do you know what percentage of your membership 4 uses or utilizes the risk management tools? 5 A. No, I don't know. 6 Q. Okay. And do you assist them with that, though? 7 A. No. No. 8 Q. Okay. 9 MS. HANCOCK: Thank you, your Honor. At this time 10 we would make him available for cross-examination. 11 THE COURT: Who has questions for this witness, 12 other than AMS? 13 CROSS-EXAMINATION 14 BY MR. MILTNER: 15 Q. Good afternoon, Mr. Campsey. 16 A. Good afternoon. 17 Q. Ryan Miltner representing Select Milk Producers. 18 My first question actually doesn't have to do with 19 your statement. In the last hearing on manufacturing 20 formulas, Lone Star supported certain proposals that were 21 led by dairy producers of New Mexico which were very 22 similar to Proposals 10, 11, and 12 in this hearing that 23 Select has introduced. 24 Does Lone Star have a position on those proposals? 25 A. I would say that another witness would probably be 26 in a better position to answer that question. 27 Q. Okay. For your plant in Canyon, what products are 28 produced there? 3228 1 A. We make a variety of products out there. Just 2 running down the list, on the fat side, there's cream and 3 butter. On the skim side, there might be condensed skim 4 milk, skim milk powder, nonfat dry milk powder. 5 Q. Do you make any whole milk powder? 6 A. No. 7 Q. Have you ever? 8 A. No. 9 Q. Do you make any buttermilk powder? 10 A. Not -- not by itself. No. 11 Q. Okay. On the website for the plant those products 12 are both listed. So the website would be incorrect? 13 A. I think the equipment is designed to be able to 14 handle those products, but we don't have the volume to 15 make them on a regular basis or to get into that. 16 Q. Got it. Okay. 17 For the butter that's manufactured, is that bulk 18 butter? 19 A. Yes. 20 Q. Okay. Do you make any butter that would be 21 packaged for consumer use, like in quarter-pound sticks 22 or -- 23 A. No. It is all 25KG boxes. 24 Q. Does the plant report sales of its nonfat dry milk 25 to the NDPSR? 26 A. It does not. 27 Q. Is that because of the volume or because of the 28 specifications? 3229 1 A. It's based on the rules of what's reportable and 2 what's not. 3 Q. Okay. Does it report its butter sales to the 4 NDPSR? 5 A. No, we don't. 6 Q. Did Lone Star provide information on production 7 costs for Dr. Stephenson's most recent update to his cost 8 analysis in 2022? 9 A. I don't believe so. 10 Q. Did Lone Star provide cost data to the National 11 Milk working group for their preparation of Proposal 7? 12 A. I don't believe so. 13 Q. Do you know if Lone Star was asked to provide that 14 information for either of those studies? 15 A. If it was, it didn't make it to my desk. 16 Q. Okay. On page 3 you talk about natural gas 17 charges that the plant experienced. 18 The plant is located in Texas, right? 19 A. That's correct. 20 Q. And Texas experienced some very unique situations 21 with natural gas availability and costs two winters ago, 22 didn't they? 23 A. Yes. Yes, the winter storm was -- 24 Q. Where -- 25 A. -- an adventure. 26 Q. And during that winter storm, natural gas prices 27 went up a thousand percent; is that right? 28 A. I'd have to look back at our data to see what 3230 1 happens with ours. 2 Q. That would be a reasonable number, though? 3 A. I don't think I would -- I'm not going to hazard a 4 guess on that one. 5 Q. Fair enough. 6 Were you able to even obtain natural gas during 7 that storm? 8 A. We were fortunate to stay upright and operating 9 for the great majority of that storm. 10 Q. On page 4, you state that your operations costs at 11 LSDP exceed the current Federal Order Make Allowances. 12 If National Milk's Proposal 7 were adopted, would 13 your operations costs still exceed the Make Allowances? 14 A. I'd say that's likely. It depends a bit on the 15 definition of the operating costs and how you might 16 package that. 17 Q. Did -- did you or anybody that works with you 18 determine the manufacturing costs for Lone Star's products 19 on a product basis? 20 A. We have run calculations for that each month in 21 order to prepare our financial statements. 22 Q. Okay. So for nonfat dry milk and bulk butter, if 23 National Milk's Make Allowances were adopted, would Lone 24 Star still have manufacturing costs higher than the 25 Make Allowances? 26 A. I believe so, yes. 27 Q. Okay. I think you were in the room when 28 Ms. de Ronde was testifying from Agri-Mark, correct? 3231 1 A. Yes. 2 Q. Okay. So you also state that this: First step as 3 proposed by NMPF almost assuredly does not capture the 4 entirety of the raw milk conversion cost increases 5 experienced by dairy product manufacturers." 6 Are you speaking to all four of the surveyed 7 commodities or only those that Lone Star produces? 8 A. I expect they are all too low. 9 Q. You heard -- I'm sorry. Go ahead. 10 A. The ones I'm intimately familiar with are on the 11 nonfat dry milk and the butter. 12 Q. I don't think I'm misstating this. If I do, I 13 apologize. But I believe Ms. de Ronde suggested that if 14 National Milk's Make Allowances were adopted that 15 Agri-Mark's butter/powder plants would be either operating 16 at costs below the Make Allowances or very close to them. 17 Do you recall that? 18 A. I think I recall that being said. 19 Q. Okay. So where you say that National Milk's 20 proposal almost assuredly doesn't capture the entirety of 21 the raw milk conversion cost increases, that's true for 22 Lone Star, correct? 23 A. Correct. 24 Q. But it's not true for all butter/powder plants, 25 would it be? 26 A. I don't know the particulars of all butter and 27 powder plants. 28 MR. MILTNER: Okay. Thanks. I don't have 3232 1 anything else. 2 THE COURT: Other cross aside from AMS? 3 Seeing none, AMS. 4 CROSS-EXAMINATION 5 BY MS. TAYLOR: 6 Q. Good afternoon. 7 A. Good afternoon. 8 Q. Thank you for coming to testify today. 9 Let's see. Your statement focuses on Lone Star's 10 costs at your plant. But can you talk a little bit about 11 how the fact that your manufacturing costs are more than 12 what's covered in the Make Allowance currently and how 13 that impacts your Lone Star producers? 14 A. I think we'll hear some testimony from others on 15 sort of the ripple effect of the Make Allowances through 16 the other parts of the Federal Order system and pricing. 17 But as it relates to our plant, at Canyon, the 18 benchmark -- it sets a benchmark price that's -- you have 19 to compensate for that in other ways I guess is the way to 20 put that. 21 Q. And other witnesses will -- from Lone Star will 22 elaborate on those other ways? 23 A. I -- I'm not sure. If you are talking about the 24 plant particularly, then we end up discounting milk 25 frequently -- 26 Q. Okay. 27 A. -- to go in there. 28 Q. Okay. And that shows up on your producer milk 3233 1 checks somehow? 2 A. All of it works its way to a producer check. 3 Q. Okay. For your butter/powder plant, for costs 4 that can't be directly allocated to a product, how do you 5 allocate costs when you are looking at that? 6 A. It's kind of a -- I guess I would call it a -- 7 each product gets a different weight depending on how much 8 of the plant that we figure that it utilized to get made. 9 For example, cream is relatively quickly in and out. It 10 touches receiving twice through the separators, through 11 the HTST and then back out. So it gets less of the 12 overhead, I guess is the way to describe that. Powder 13 runs the whole thing from -- from nose to tail, so it gets 14 the most. 15 Q. Okay. Would you call it a little bit of an art 16 form then as you figure out how to allocate those costs? 17 A. Let's say the term reasonable basis of allocation 18 is a hurricane path. Right? There's a lot of room in 19 there to be one way or the other. 20 Q. Yes, there's a lot of room to be reasonable 21 sometimes. I can appreciate that. 22 On the last page of your statement you talk about 23 the overall support of the Make Allowances offered by 24 National Milk, even though, as you testified, those would 25 still be less than what Lone Star experiences. But you 26 say "is reserved enough in its magnitude so as not to 27 jeopardize the confidence of the industry" -- "that the 28 industry has in Federal Order pricing." 3234 1 And I wondered if you could expand on that 2 thought. 3 A. I would say the bigger the -- the bigger the step 4 you take, as the first step or the next step, the more 5 scrutiny that's going to come under when you go to talk to 6 farmers and the more sort of a concrete background they 7 are going to expect to have to back up the number. This 8 step does not -- doesn't get us all the way there, I would 9 say. But it gets us to the -- to a next place to gather 10 that more -- you know, hand in hand is to gather the more 11 information and try to get it consistent. 12 Q. So when you say they would expect a more concrete 13 background, can I infer from that, you know, the higher 14 the number, the more they are going to want to know that 15 this number is right, that you can point to something to 16 say, this is the number? 17 A. I would -- I would expect that, yes. They are 18 going to want to see a higher confidence level in those 19 that are giving them the number. 20 Q. And then in the next sentence you say, dairy 21 farmers -- "accounts for the needs of dairy farmers not to 22 see excessively large downward changes in the order class 23 prices, since such large changes can themselves create 24 market disorder." 25 Can you talk a little bit about how they could 26 create market disorder and kind of maybe what you would 27 look at as considered a large change? 28 A. When you start moving things around north of a 3235 1 dollars a hundredweight on milk price, that's a pretty 2 big -- pretty big shock to the system. The disorderly 3 marketing could happen a couple of places. That could be 4 at the farm level or that could be at the plant level. 5 You -- you know, anyone who has been in a milk shed where 6 a plant went out of business suddenly, that leaves a hole 7 that leads you to do things with the milk that are not 8 very economical until the system sort of levels itself 9 back out. 10 At the farm level, if -- if they see a change, 11 just a rapid change in the milk price and the way that 12 works, that might affect their ability to hedge, change 13 their basis, all those kind of things. So try to do that 14 in moderation, I guess. 15 Q. Okay. Thank you. 16 On your comparison of processing costs, this is 17 Exhibit 173. In these percent changes, are these on a per 18 pound basis or just a total cost basis for the plant? 19 A. So the average hourly wages by department, that's 20 on a per employee basis. So for every regular hour of 21 work that we need to buy today, or at least in the early 22 part of 2023, we pay 34% more for that hour of work for a 23 dryer operator than what we did in 2018. 24 On the utilities costs, these are sort of an 25 absolute cost. So just the total bill has gone up by 25% 26 on the electricity, 24 on natural gas, and so forth. 27 Q. And obviously, then, same thing on insurance? 28 A. Yes. 3236 1 Q. And for the two time periods you selected, were 2 the plants running at a similar capacity, or was maybe in 3 '18, not as much? 4 A. I don't recall checking the pounds through there, 5 but gut feel says that '23, we have run more efficiently 6 than we did in '18 -- or in terms of total pounds of milk 7 through the plant is higher. 8 Q. Okay. Thank you. 9 MS. TAYLOR: That's it from AMS. Thank you. 10 THE WITNESS: Thank you. 11 THE COURT: Mr. Rosenbaum. 12 CROSS-EXAMINATION 13 BY MR. ROSENBAUM: 14 Q. Steve Rosenbaum for the International Dairy Foods 15 Association. Just a follow-up on the last set of 16 questions. 17 If the poundage had gone up somewhat by 2023, 18 would that have caused the electricity to have gone up as 19 well? 20 A. It might have, but it's not a direct relationship. 21 Q. What about natural gas? 22 A. Again, it may have. The rate on those varies kind 23 of. So you could end up with a different result on more 24 pounds or less pounds. 25 MR. ROSENBAUM: That's all I have. Thank you. 26 BY MR. ROSENBAUM: 27 Q. Just one more question. 28 You have the plant capacity, the loads -- 53 loads 3237 1 of milk per day, 49,500 pounds in a load. 2 Is it a seven-day week, 365-day operation? 3 A. Right. The plant runs 24/7, 365, as long as 4 they're not down for some reason. 5 Q. About a billion pounds of milk? 6 A. I'd have to run the math, but you are in the 7 neighborhood, yes. 8 MR. ROSENBAUM: Thank you. That's all. 9 THE COURT: Okay. Redirect? 10 MS. HANCOCK: Your Honor, that's all the questions 11 we have now. We would move to admit Exhibits 172 and 173. 12 THE COURT: Objections? 13 Seeing none, Exhibits 172 and 173 are admitted 14 into the hearing record of this proceeding. 15 (Thereafter, Exhibit Numbers 172 and 173 were 16 received into evidence.) 17 THE COURT: Thank you. 18 THE WITNESS: Thank you. 19 MS. HANCOCK: Your Honor, we don't have someone 20 that we think is going to fit within the timeframe. We 21 thought we would just move to talking about lineup for 22 tomorrow, but we might need a minute to just double-check 23 on our team first. 24 THE COURT: Yes. I think -- let's go off the 25 record -- we don't need to be on the record to talk about 26 tomorrow, do we? 27 MS. HANCOCK: I don't think so, no. 28 THE COURT: I mean, if appropriate, we can 3238 1 summarize what we talked about off the record. Let's go 2 off the record. 3 (Off-the-record.) 4 THE COURT: Back on the record. 5 MS. HANCOCK: Okay. So for witnesses tomorrow, 6 we -- at most what we're going to have is Jeff Lyon, Karl 7 Rauscher, Ed Gallagher, and then we have a dairy farmer 8 Brittany Nickerson, and then we will move to IDFA/USDA on 9 Stephenson. And we believe that that should take us all 10 the way through tomorrow and partway into Wednesday. 11 THE COURT: Okay. Very well. I think with that, 12 we can -- any other business we have to take up, either on 13 or off the record? 14 Seeing none, we're adjourned for the day. See 15 everyone tomorrow at 8:00. 16 (Whereupon, the proceedings concluded.) 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 3239 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: October 5, 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