3240 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 12, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 3241 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 Charles "Chip" English 12 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 13 Nicole Hancock Brad Prowant 14 FOR SELECT MILK PRODUCERS, INC.: 15 Ryan Miltner 16 For Edge Dairy Cooperative: 17 Dr. Marin Bozic 18 For American Farm Bureau Federation: 19 Danny Munch 20 21 ---o0o--- 22 23 (Please note: Appearances for all parties are subject to 24 change daily, and may not be reported or listed on 25 subsequent days' transcripts.) 26 27 ---o0o--- 28 3242 1 M A S T E R I N D E X 2 SESSIONS 3 TUESDAY, SEPTEMBER 12, 2023 PAGE 4 MORNING SESSION 3245 AFTERNOON SESSION 3375 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 3243 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Jeff Lyon: 5 Direct Examination by Ms. Hancock 3245 Cross-Examination by Mr. Rosenbaum 3256 6 Cross-Examination by Ms. Vulin 3263 Cross-Examination by Mr. Miltner 3268 7 Cross-Examination by Ms. Taylor 3280 Cross-Examination by Dr. Bozic 3284 8 Edward Gallagher: 9 Direct Examination by Ms. Hancock 3289 10 Cross-Examination by Mr. Rosenbaum 3329 Cross-Examination by Ms. Vulin 3352 11 Cross-Examination by Dr. Bozic 3375 Cross-Examination by Mr. Miltner 3377 12 Cross-Examination by Ms. Taylor 3389 Cross-Examination by Mr. Wilson 3400 13 Redirect Examination by Ms. Hancock 3401 Recross-Examination by Mr. Rosenbaum 3406 14 Dr. Mark Stephenson: 15 Direct Examination by Mr. Rosenbaum 3408 16 Cross-Examination by Dr. Bozic 3435 Cross-Examination by Ms. Hancock 3448 17 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 3244 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. 5 174 Testimony of 3245 3289 Jeff Lyon 6 175 Testimony of 3290 3406 7 Edward Gallagher 8 176 Testimony of 3408 Dr. Mark Stephenson 9 177 IDFA-29 3409 10 178 IDFA-1 3410 11 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3245 1 TUESDAY, SEPTEMBER 12, 2023 - - MORNING SESSION 2 THE COURT: Okay. Let's get started. 3 Raise your right hand. 4 JEFF LYON, 5 Being first duly sworn, was examined and 6 testified as follows: 7 THE COURT: Thank you. 8 Your witness. 9 DIRECT EXAMINATION 10 BY MS. HANCOCK: 11 Q. Good morning, Mr. Lyon. Would you mind stating 12 and spelling your name for the record? 13 A. Jeff Lyon, J-E-F-F, L-Y-O-N. 14 Q. And what is your business address? 15 A. Business address is 4001 Nakoosa Trail, Suite 100, 16 Madison, Wisconsin. 17 Q. How do you spell Nakoosa? 18 A. N-A-K-O-O-S-A. 19 Q. Did you prepare NMPF-22 in preparation for your 20 testimony today? 21 A. Yes, I did. 22 MS. HANCOCK: Your Honor, if we could mark that as 23 our next exhibit? 24 THE COURT: Yes. I have the next number as 174. 25 So marked. 26 (Thereafter, Exhibit Number 174 was marked 27 for identification.) 28 MS. HANCOCK: Thank you. 3246 1 BY MS. HANCOCK: 2 Q. Mr. Lyon, would you proceed with your testimony, 3 please? And then just a reminder to be mindful of your 4 speed because of the -- we want to make sure that we get a 5 good transcript. 6 A. Yes. I was listening the other day, and one of my 7 fellow Wisconsinites was told to slow down. And that is 8 kind of the nature of some of us Upper Midwesterners, we 9 crank it out a little fast, so I will try. 10 My name is Jeff Lyon, and this testimony is 11 presented in support of Proposal 7, increase in 12 Make Allowances in the component price formulas to the 13 following levels: Brother, $0.21 per pound; nonfat dry 14 milk, $0.21 per pound; cheese, $0.24 per pound; dry whey, 15 $0.23 per pound. 16 My background and experience -- my testimony is 17 presented on behalf of FarmFirst Dairy Cooperative, which 18 is a longtime member of National Milk Producers 19 Federation. My time in the dairy industry covers more 20 than 30 years working directly for dairy farmers. 21 As General Manager for FarmFirst, I have the 22 overall responsibility for all our divisions and 23 departments. With respect to our milk marketing division, 24 Family Dairies USA, I am involved with setting the monthly 25 milk price, pooling/de-pooling decisions, and Federal 26 Order issues. I represent the cooperative in dairy policy 27 discussions individually, through NMPF, and the Midwest 28 Dairy Coalition. I am a member of the Central Milk 3247 1 Producers Cooperative board of directors. 2 I got my start working on dairy policy issues in 3 July 1985 as an agriculture legislative assistant for 4 former Wisconsin Congressman Steve Gunderson in his 5 Washington DC office. Mr. Gunderson was the ranking 6 member on the Dairy subcommittee, within the House 7 agriculture committee. And I worked on the 1985 Farm 8 Bill, which included the whole herd buyout program and 9 increasing Class I price differentials. 10 In the spring of 1986 through March 1988, I served 11 as assistant director for the National Commission on Dairy 12 Policy, a federal commission created by Congress in the 13 1985 Farm Bill to evaluate U.S. dairy policy. That report 14 was submitted to Congress. 15 For 22 years I worked for the Wisconsin Farm 16 Bureau Federation. In my first four years and last seven 17 years with Farm Bureau, I coordinated the national affairs 18 program and also lobbied on state legislative and 19 regulatory issues. 20 I was the lead staff person for our Dairy Advisory 21 Committee. I lobbied on dairy issues in Washington DC 22 individually, with the Farm Bureau president, the Board of 23 Directors, and young farmers. 24 I prepared testimony for my president and a farmer 25 member for a Federal Order hearing in the early 1990s. 26 For the other 11 years, I led the member relations 27 division and was responsible for coordinating the 28 organization's membership procurement and retention 3248 1 efforts. While not involved daily in dairy policy I had a 2 thorough understanding of our position on dairy issues. 3 Before joining FarmFirst, I served seven years as 4 the Deputy Secretary at the Wisconsin Department of 5 Agriculture, Trade, and Consumer Protection. At DATCP, my 6 primary responsibilities included the implementation of 7 policy and rules affecting DATCP, assisting in the 8 management of 600-plus employees, programs, and operations 9 and representing DATCP in relations with other persons, 10 foreign delegations, and stakeholders including the 11 legislature and the Governor. 12 FarmFirst has been a member of National Milk since 13 2013, when three Wisconsin based cooperatives merged to 14 form FarmFirst. I have served on the National Milk's 15 Board of Directors for six years. I have also been a 16 member of National Milk's Economic Policy Committee for 17 six years. I have been a member of National Milk's 18 Federal Order Task Force, which for almost two years has 19 studied, evaluated, and proposed the NMPF proposals being 20 heard at this national Federal Order hearing. 21 And I would like to thank the Secretary of 22 Agriculture for holding this national hearing to consider 23 NMPF proposals. FarmFirst believes the adoption of 24 National Milk's proposals will benefit the entire dairy 25 industry. 26 FarmFirst has nearly 2600 dairy farmer members in 27 seven Upper Midwestern states, which include Illinois, 28 Indiana, Iowa, Michigan, Minnesota, South Dakota, and 3249 1 Wisconsin. Their milk is pooled under Federal Orders 30, 2 32, and 33. 3 We are a diverse cooperative that provides milk 4 test verification services, markets milk, and owns a milk 5 testing laboratory. We provide milk test verification 6 services for our members that ship their milk to 7 proprietary milk processors, which is the vast majority of 8 our 2600 members. Our members ship milk to 52 processors 9 that are predominantly cheese plants. These plants range 10 from some of the largest to the smallest in the Upper 11 Midwest. 12 Our membership includes all sizes of dairy farms, 13 small, medium, and large, with the largest concentration 14 of our members in Wisconsin. Our members and their farms 15 are critical to the local economy and infrastructure in 16 their communities with their purchases of products and 17 services, including but not limited to banking, equipment 18 dealers, veterinarians, and feed and fertilizer dealers. 19 Through our milk marketing division, Family 20 Dairies USA, we sell nearly 600 million pounds of milk 21 annually to 20 to 25 milk proprietary processors of 22 products in all four classes of milk on behalf of our 135 23 Family Dairies USA patrons. FarmFirst markets all of its 24 milk in Federal Milk Marketing Order 30. 25 We advocate for our members on policy issues based 26 on positions adopted by our delegates at our annual 27 meeting. Our ten-person Board of Directors, all of which 28 are dairy farmers, and staff are responsible for advancing 3250 1 member positions on issues. 2 FarmFirst represents nearly 7.7 billion pounds of 3 milk production annually. In 2022, Hoard's Dairymen 4 ranked FarmFirst as the seventh largest cooperative with 5 respect to milk volume and the second largest cooperative 6 with respect to the number of members. 7 FarmFirst does not own or operate a processing 8 facility to convert milk into a finished product. 9 However, FarmFirst has an intake/reload facility that 10 allows us to store milk for short periods of time to 11 balance the milk going to processors, keeping the milk 12 fresh until delivery. 13 FarmFirst sells milk through negotiated annual 14 supply agreements with our buyers and through "spot" loads 15 that are sold to plants that we do not have a supply 16 agreement with. Our milk buyers pay a premium (a 17 negotiated amount above the Class Ill price), which we are 18 able to return to our patron members. 19 In exchange, our buyers are guaranteed a regular 20 supply of high-quality milk when they need it. We also 21 work with our buyers on a weekly basis and adjust our milk 22 deliveries based on the demand from their customers. We 23 also source organic, A2 milk, and grass-fed milk for our 24 milk buyers when requested. 25 Our customers rely on FarmFirst to handle milk in 26 excess of their needs annually, seasonally, monthly, 27 weekly, or a daily basis. These balancing serves are 28 costly for FarmFirst member owners. 3251 1 Since FarmFirst does not operate a processing 2 facility, my testimony will address the effect that 3 current Make Allowances have had on my members and why 4 FarmFirst supports the National Milk proposal. 5 Over the last few years, FarmFirst has experienced 6 a significant decrease in the premiums we have received 7 for our milk due in large part to outdated 8 Make Allowances. 9 Current Make Allowances have compressed margins at 10 processing plants, which in turn have been passed on to 11 producers in the form of lower premiums so processing 12 plants can manage their margins. Make Allowances need to 13 be updated in the long-term interest of processor 14 reinvestment in their plants. 15 In situations as we are in right now with an 16 oversupply of milk -- and when I wrote this, we were very 17 much in that, tightened up here a little bit recently -- 18 but it makes the situation worse for producers. Milk gets 19 dumped or sold well below the Class price. 20 From January 2020 through July 2023, we 21 experienced a 24% decrease in the average negotiated 22 premium paid per pound of milk, which resulted in 23 approximately $2.7 million or about $0.16 cents per 24 hundredweight on average that we were not able to pay our 25 Family Dairies USA producers. The $2.7 million does not 26 include milk sold under the Class Ill price. 27 For our members that FarmFirst provides milk test 28 verification services, I do not have the manufacturing 3252 1 cost data for the proprietary plants, which is considered 2 confidential information, but the situation is similar 3 with negative Producer Price Differentials and the prices 4 received by our farmer members. 5 Manufacturing costs, or "Make Allowances," are an 6 integral part of the determining milk prices, and Product 7 Price Formulas do not work as intended when 8 Make Allowances are set below the actual cost of commodity 9 manufacturing. 10 As National Milk stated in their petition, "Under 11 Federal Order Reform, Product Price Formulas replaced the 12 previous direct survey of prices paid for manufacturing 13 milk. PPFs moved the process of establishing the basis 14 for Federal Order pricing up the marketing chain one step 15 to survey unregulated buying and selling of wholesale, 16 spot, commodity style, dairy products. 17 "Those dairy product prices became the foundation, 18 working backward via economic formulas, to determine the 19 minimum price of milk used to make those commodity dairy 20 products. Adjusting their prices by subtracting the 21 non-milk costs of manufacturing these products and 22 applying appropriate yield factors determines an implied 23 value for the components of milk used to produce them. 24 "Having accurate and updated plant processing 25 costs, or 'Make Allowances,' and appropriate product yield 26 factors are critical for this indirect method of 27 determining milk prices, which is a principal function of 28 the Federal Order Program. Yet a regular and systematic 3253 1 method of ensuring that these critical PPFs remain 2 accurate and current has not been established." 3 There is no question that manufacturing costs have 4 increased since they were last updated in 2008. During 5 our deliberations on the National Milk Federal Order Task 6 Force, members were concerned that the while the 2018 7 Make Allowance Study commissioned by USDA and conducted by 8 University of Wisconsin-Madison dairy economist Dr. Mark 9 Stephenson provided valuable information on manufacturing 10 costs, there were inconsistencies in his methodology 11 compared to previous Make Allowance surveys, due in large 12 part to the voluntary nature of the survey that 13 disincentivized those plants with a less of a cost 14 increase to respond to the survey. 15 The National Milk proposal makes modest increases 16 to Make Allowances to partially alleviate problems that 17 have led to the disorderly marketing of milk. The 18 National Milk proposal balances producer and processor 19 interests. It is generally understood that increasing the 20 Make Allowance will have a negative effect on producer 21 prices, at least in the short-term. 22 Due to the lack of agreed upon comprehensive, 23 industry-wide data on costs, yields and plant volumes, and 24 the impact on producer margins, it is imperative that 25 Make Allowances only be increased to the levels being 26 proposed by National Milk. 27 Larger increases in Make Allowances that are being 28 proposed by other organizations would only compound the 3254 1 problem and would narrow margins even further to levels 2 that would negatively impact the profitability of 3 producers, thus jeopardize milk production needed for 4 future dairy demands. 5 The impact of even modest increases in 6 Make Allowances will be an additional negative on producer 7 margins when one considers the low projected milk price 8 for the remainder of 2023 and into 2024 and already narrow 9 margins due to high feed costs, and increased labor, fuel, 10 and equipment costs. 11 A perfect example of the tight margins being 12 experienced by producers are the payments received by 13 producers since 2018 through the Dairy Margin Coverage 14 Program, the safety net program that was included in the 15 2018 Farm Bill. 16 The DMC program is a voluntary risk management 17 program for dairy producers that offers protection to 18 dairy producers when the difference between the all-milk 19 price and the average feed price falls below a certain 20 dollar amount selected by the producer. The DMC offsets 21 some of the costs being incurred by producers but not all. 22 I have a table of the payments that have been made 23 in 2019, total payments were just under 452 million. In 24 2020, payments just under 234 million. In 2021, 25 1.187 billion. In 2022, 83, almost 84 million. And in 26 2023, through August 15th, it was at 610 million. And 27 those numbers that I got from USDA, from public numbers. 28 With respect to processors, Make Allowances were 3255 1 never intended to guarantee processors a profit on the 2 products they produce but to determine a value for the 3 components of milk. 4 While not part of this national hearing, National 5 Milk is actively pursuing legislative authority and 6 funding for USDA to conduct regular, mandatory, auditable 7 plant processing cost studies to use to update 8 Make Allowances. If this can be accomplished, the dairy 9 industry will be able to use accurate and more reliable 10 information in updating Make Allowances. 11 In closing, the industry did not get into the 12 Make Allowance situation overnight and USDA should not 13 expect to get out of this situation entirely on the backs 14 of producers. The modest increases to Make Allowances 15 included within the National Milk proposal is a good first 16 step to balance the interests of both producers and 17 processors. 18 More importantly, when USDA is given the 19 authorization and funding to conduct mandatory cost 20 surveys as National Milk is also proposing, this will 21 ensure necessary Make Allowance modifications will be made 22 in the future. This will also ensure such Make Allowance 23 changes are conducted on a regular basis. 24 Once USDA's releases their mandatory plant cost 25 results, then the industry can decide whether to petition 26 for a hearing. This enables the industry to go through 27 the normal hearing process which includes changes being 28 voted on by dairy farmers since Federal Milk Marketing 3256 1 Orders are a program for dairy farmers. Going through 2 this formal process ensures markets will be corrected, 3 which results in market stability and orderly marketing. 4 Thank you. 5 Q. Thank you, Mr. Lyon. 6 MS. HANCOCK: Your Honor, we would make him 7 available for cross-examination. 8 THE COURT: Examination of this witness? 9 Mr. Rosenbaum. 10 CROSS-EXAMINATION 11 BY MR. ROSENBAUM: 12 Q. Steve Rosenbaum for the International Dairy Foods 13 Association. Good morning, Mr. Lyon. 14 My first question, really, just one of 15 clarification, if you can turn to page 3 of your 16 statement. 17 You -- you first talk about 2600 dairy farmers, 18 whose milk is pooled under Orders 30, 32 and 33. 19 A. Uh-huh. 20 Q. And then later you talk about a milk marketing 21 division within your cooperative that sells 600 million 22 pounds of milk, all of which is marked in Federal Milk 23 Marketing Order 30. 24 Can you explain what the difference is between 25 those two -- 26 A. Sure. 27 Q. -- undertakings? 28 A. Sure. The -- like I said, the vast majority of my 3257 1 2600 members in all those Upper Midwestern states, we do 2 test verification services for them. Through the Federal 3 Order system, we need to be a member of a cooperative, 4 like I said, so we do those services for them. These are 5 people that are selling their milk to proprietary dairy 6 processors. So as I said, we do those kind of services 7 for them. My staff regularly checks for components to 8 make sure they are paid properly for components, volumes, 9 those kinds of things. And then -- so that's our function 10 there that we provide for them. And then obviously 11 advocacy efforts as well for them. 12 Q. So you don't take title to the milk? 13 A. No. I have nothing to do with their --they are 14 paid by whoever they are shipping their milk to. Like I 15 said, we're the third party group that evaluates their 16 test verification services. 17 Q. Okay. 18 A. The other portion, the Family Dairies USA, that's 19 my milk marketing division. And that's where I have 135 20 processors, and we pick up milk from the Upper Peninsula 21 of Michigan and the Eastern side of Wisconsin and sell 22 that milk to 20 to 25 processors. 23 Q. Okay. And is that milk, milk of members of your 24 co-op? 25 A. Yes. They will be the Family Dairies members. 26 Correct. 27 Q. Okay. And so in that case, you do take title to 28 their milk, and you are the one who is selling it? 3258 1 A. Yeah. Yeah. We're selling the milk, right. 2 Correct. 3 Q. All right. So appreciate the clarification. 4 The -- on page 4, you talk about how there is an 5 oversupply of milk resulting in milk getting dumped; is 6 that correct? 7 A. There's been a lot of that this past spring. 8 Our -- we're used to demand being slower, you know, during 9 the holiday period, but -- not necessarily a joke, but the 10 comments have been made that Christmas lasted until July 11 this year. It's been very difficult selling milk. 12 Q. And when you say milk has been dumped, do you have 13 some quantification of that from your own experience and 14 how much? 15 A. I don't know how much, but it's public record that 16 milk has been dumped, and there was a story in the 17 Milwaukee Journal Sentinel of milk that was going into a 18 sewer treatment facility. But the rest would be 19 anecdotal. We, fortunately, at Family Dairies have not 20 had to dump milk. We've been able to sell ours. Not at 21 prices we always like, but we have been able to sell it. 22 Q. Okay. And you -- you calculate -- you mentioned 23 that there is a negotiated premium paid -- 24 A. Correct. 25 Q. -- for milk from January -- correct? 26 A. Yes. We enter supply agreements with people that 27 we sell milk to, and we work to, you know, sell that milk 28 at class price and something above for the services that 3259 1 we provide, and making sure that they have the milk, when 2 they want it and in a timely fashion. And then, as I said 3 in my testimony, take care of any, you know, changes they 4 might have. You know, their demand changes, and so 5 sometimes they want more milk, sometimes they want less, 6 and we have to work with them to take care of their needs. 7 Q. Okay. So you are aware that the minimum milk 8 price -- I'm maybe oversimplifying slightly -- but the 9 minimum milk price that a regulated handler has to pay is 10 essentially the market price for their finished product, 11 let's say cheese as an example, minus the Make Allowance, 12 what's left becomes the minimum milk price -- 13 A. Uh-huh. 14 Q. -- is that correct? 15 A. Right. Yeah. 16 Q. Are you saying "yes"? I'm sorry. 17 A. Yeah. The price -- I mean, like I said, that's 18 the -- yeah, the price is, you know, set, you know, 19 whatever the price is going to be. 20 Q. Well, I'm just trying to get to the minimum milk 21 price that's set by regulation. So just the basic concept 22 and approach of the Federal Milk Order system since 2000 23 has been to survey what the price is for -- 24 A. Correct. 25 Q. -- for example, commodity cheddar cheese -- 26 A. Correct. 27 Q. -- to be sold out and -- 28 A. Correct. We sell -- 3260 1 Q. Let me just finish. 2 -- deduct from that the Make Allowance, which 3 today is roughly $0.20 for cheese, and then the remainder 4 becomes the minimum price that the processor has to pay 5 for their milk, correct? 6 A. Uh-huh. 7 Q. Now -- but the fact that you -- you typically try 8 to negotiate a premium over that -- 9 A. Absolutely. 10 Q. -- correct? 11 And the fact that you say you have experienced a 12 decrease in the negotiated premium necessarily means you 13 have, in fact, been able to negotiate some level of 14 premium, correct? 15 A. Correct. And so we have been able to get some. 16 But like I said, that number has decreased due to the fact 17 that the Make Allowance numbers are not accurate. So 18 what's the plant going to do? They are going to cover 19 their costs, and so they are not going to pay as much for 20 the milk, so that's why they pay us -- 21 Q. Right. But I mean -- 22 A. -- less. 23 Q. -- the fact of the matter is that processors are 24 not necessarily able to hang on to the entire 25 Make Allowance, because some of that money ends up being 26 paid to the farmers in the form of an over-order premium, 27 correct? 28 A. In some cases, yes. 3261 1 Q. You have been successful in achieving that, 2 correct? 3 A. Somewhat. 4 Q. Okay. 5 A. My members would like us to be more successful. 6 Q. Doubtlessly. But, I mean, it's fair to say 7 Make Allowances do not constitute a guarantee for the 8 processors as to how much money they actually get to keep; 9 is that fair? 10 A. Say that again, sir? 11 Q. Yeah. That under the order system it's a minimum 12 milk price. The minimum milk price takes away from the 13 processor everything but the Make Allowance from what they 14 have been able to sell the commodity product for. But 15 farmers are still free to and, in fact, succeed in 16 negotiating additional payments in the form of over-order 17 premiums. 18 Isn't that how the system has worked as a 19 practical matter? 20 A. It does work, but what I'm referring to in my 21 testimony is that those numbers have gone down 22 considerably, which means a lot less milk -- or a lot less 23 money that I can pay my producers. 24 Q. And believe me, we're trying to increase those 25 Make Allowances too. But I'm just trying to establish the 26 fundamental point that Make Allowances -- the amount of 27 money reflected in the Make Allowance is not something 28 that a processor is guaranteed to be able to hang on to, 3262 1 and, in fact, you have been successful, historically, in 2 negotiating over-order premiums -- 3 A. On the Family Dairies side, yes. 4 Q. Okay. So does your cooperative engage in 5 base/excess plans or other mechanisms to limit the growth 6 in production by your farmer -- 7 A. We -- 8 Q. I know I can tell you know where my questions are 9 going, but for the court reporter it's very challenging if 10 you don't let me finish my question. 11 A. All right. 12 Q. So go ahead, please. 13 A. Go ahead, finish. 14 Q. No, I finished. 15 A. Yes. So within our cooperative we have discussed 16 a base/excess plan. It's gone through our milk advisory 17 committee. We have had one ready to go. We have not put 18 it in place. But, you know, we have all the numbers that 19 we could -- we could put in place. 20 The thought was -- and, quite honestly, go back to 21 2020 when COVID hit that first Monday, when all the plants 22 were saying they didn't need my milk, I thought we were 23 going to have to dump, and that's when we really started 24 talking and thinking about it. But my members were 25 concerned about, one, how you treat the members. One, 26 they did not want to cut back production because we'd need 27 something different, a smaller herd versus a larger herd. 28 So we looked at it, you know, for, you know, limiting the 3263 1 growth. But we have not implemented as of yet, but we are 2 certainly ready to go if we need to. 3 Q. And I take it you don't have direct information as 4 to cost of manufacture since you don't know anything -- 5 A. No, I don't. 6 Q. Now, are you aware that the kind of survey 7 information, for example, performed by Dr. Stephenson 8 represents the kind of information that has been used by 9 USDA to set Make Allowances since they were first put in 10 place in 2000? 11 A. Correct. Yes. 12 Q. And are you aware that, in fact, in putting those 13 Make Allowances into effect in 2000, when it first began, 14 USDA relied in part upon surveys by Dr. Stephenson 15 himself? 16 A. Correct. Yes. 17 Q. Okay. Okay. In terms of the Dairy Margin 18 Coverage Program, the farmers have to pay something in 19 order to get that coverage? 20 A. Yeah. You pay a premium to basically -- it is 21 like an insurance policy. You pay a premium for it. 22 Q. And do you know how much the payments made by the 23 federal government have exceeded the premiums received? 24 A. No, I don't. That's a question for USDA. 25 MR. ROSENBAUM: That's all I have. Thank you. 26 THE COURT: Further cross? 27 CROSS-EXAMINATION 28 BY MS. VULIN: 3264 1 Q. Good morning, Mr. Lyon. 2 A. Good morning. 3 Q. My name is Ashley Vulin. I'm an attorney for the 4 Milk Innovation Group, a group of fluid milk processors. 5 A. Okay. 6 Q. Thanks for being here with us this morning. 7 A. Yep. 8 Q. I wanted to start by following up on the milk 9 dumping that you described. 10 You said that that occurred quite a bit this last 11 spring? 12 A. Yes. 13 Q. And you said not, though, within your 14 organization, but you were aware of it happening in -- 15 with other producers? 16 A. We were very fortunate. But anecdotally, yes, we 17 knew that there was milk dumping going on by other 18 companies. 19 Q. And was that just in Wisconsin or in other places 20 in the country? 21 A. I only know of it in Wisconsin, not any other 22 parts of the country. 23 Q. And this past spring when you heard about this 24 milk dumping happening in Wisconsin, was that the first 25 time you had ever heard about milk being dumped? 26 A. No. 27 Q. Can you tell me, historically, when you have heard 28 about it happening at other times? 3265 1 A. Well, most recently would have been when the 2 COVID-19 pandemic hit, and like I said, everything was in 3 disarray, and markets went completely -- there was a lot 4 of milk dumped early then. But it changed very quickly as 5 well when we -- the industry figured out what was going to 6 happen. 7 Q. And how about prior to that, because I know that 8 was a very singular moment in time, prior to the COVID-19 9 pandemic happening, were you aware of any milk being 10 dumped in Wisconsin or elsewhere? 11 A. Oh, there could have been. I can't recall. But 12 different times there would always -- you know, within 13 supply and demand for milk, you know, there's going to be 14 times when somebody doesn't have a home for that milk, 15 so -- but I can't recall any specific dates or times. 16 Q. And in Wisconsin specifically, can you identify 17 for me in the last ten years any moments where milk 18 supplies were particularly tight, other than the kind of 19 evening out of the COVID-19 pandemic situation? 20 A. Well, it all -- it all flows. I mean, it is, like 21 I said, just here recently we have had, you know, 22 extremely low prices. We have had soft demand 23 domestically and internationally, and so we had more than 24 sufficient milk supply. But here in recent times, it -- 25 our milk buyers have wanted as much milk as we can give 26 them and things have tightened up. So it is a very 27 cyclical type thing that happens. 28 Q. And you said that you source organic, A2 milk, and 3266 1 grass-fed milk for your buyers? 2 A. Correct. 3 Q. And do you sell that milk at a premium above what 4 you would sell for other milk? 5 A. Yeah, we -- we -- what we try to get is -- on that 6 is get some kind of payment just for our service for doing 7 the work for helping this milk buyer out, that we're doing 8 all the work getting the milk to them, so there's a cost 9 for us to do that. So we try to get some money out of it, 10 but it's -- it's not a lot. 11 Q. More like a brokerage fee? 12 A. It just -- yeah, just a fee, and it keeps our 13 relationship with those people that we're supplying milk 14 because we're providing them services that they can count 15 on us to help them out with other situations. 16 Q. And when you -- when you arrange for the sourcing 17 of that organic, A2, and grass-fed milk, do you help 18 negotiate the sale price? 19 A. Yeah, we'll -- we talk -- yeah, we'll talk back 20 and forth with both buyer and seller on that as to, you 21 know, what they are going to agree upon for that. But 22 that's mostly between the processors buying -- who is 23 going to be the making the cheese, you know, and -- and 24 the customer -- you know, the customer that they have 25 because they want to -- you know, they got to figure out 26 the price that they can actually sell the product at, 27 so -- 28 Q. And for organic milk particularly, are you aware 3267 1 if the prices being negotiated are significantly higher 2 than non-organic milk? 3 A. Oh, organic milk is generally higher priced. 4 Q. And you mentioned that it is important to have 5 accurate and updated processing costs in order to develop 6 the Make Allowances, correct? 7 A. Yes. 8 Q. And you -- you testified that your members have 9 been negatively impacted by low Make Allowances because it 10 has impacted the over-order premiums that you were able to 11 negotiate? 12 A. Correct. 13 Q. So even though your cooperative doesn't own any 14 processing facilities, you would be better off if 15 Make Allowances were set at an accurate level? 16 A. That's -- in this whole discussion has been very 17 interesting and -- for me, within our cooperative, because 18 you're correct, I do not have processing facilities. So I 19 could take the easy way out and say, don't make any 20 changes because it's going to be a negative on the 21 producer pay, you know or -- if we raise it, I could just 22 say, leave them the same. 23 But if I do that, we're still taking -- you know, 24 the farmers are still getting hit because the plants are 25 going to take care of their marginal costs, you know, for 26 running -- operating their plants. And if you go to the 27 high levels that are being proposed by some other groups, 28 farmers are still going to get hit with that because 3268 1 that's going to -- you know, as I said in my testimony, at 2 least in the short run, that's going to affect them as 3 well. So that's partly why I come in here. 4 Like I said, I don't operate a facility, but I 5 sell to plants that are experiencing this, and I want 6 those plants to be able to reinvest, whether it is 7 proprietary, co-ops, whoever it happens to be, because 8 that's what my farmers need. If they're not reinvesting, 9 you know, we go down the drain. And we saw that in 10 Wisconsin years ago where we didn't have reinvestment in 11 or plants. 12 MS. VULIN: Thank you. No further questions. 13 THE COURT: Further cross? 14 CROSS-EXAMINATION 15 BY MR. MILTNER: 16 Q. Good morning, Mr. Lyon. 17 A. Good morning. 18 Q. My name is Ryan Miltner. I represent Select Milk 19 Producers. 20 On page 3 of your testimony, in the middle of the 21 page, you talk about the importance of your members' dairy 22 farms to the local economy. And I wondered if you could 23 comment a little bit more about that, about how important 24 a strong dairy farming community is to the community as a 25 whole. 26 A. Well, in Wisconsin we still have -- I'll use 27 Wisconsin as my example because that's where I have lived 28 all my formative years. My father -- my family's been 3269 1 involved in agriculture in Wisconsin for a long time. 2 And what you see if you look around communities, 3 that when rural communities, when they lose livestock 4 agriculture as a whole, dairy primarily in Wisconsin, but 5 other places where you lose livestock agriculture, you see 6 small towns drying up. And enough people around here know 7 that that happens because the livestock industry, dairy 8 industry requires a lot of services from a lot of 9 different groups, different people as I said in my 10 testimony, that -- so that the dollars get spent very much 11 in our rural communities. 12 Q. So my -- Select Milk Producers has members in New 13 Mexico, among other states. 14 A. Sure. 15 Q. And New Mexico state issued an analysis of the 16 industry suggesting that for every 100 cows, there's a job 17 in the community that is supported, not just on the farm 18 but in the allied industry as you know. 19 A. Correct. 20 Q. Are you aware of any similar data for Wisconsin 21 or -- 22 A. Wisconsin is about 45 and a half billion dollar 23 industry for the state of Wisconsin, and that -- and I 24 don't have the numbers of jobs, but the Dairy Farmers of 25 Wisconsin motion would have all those things. But the 26 number of jobs both in on-farm and in processing are 27 considerable. 28 Q. On page 1 you make a reference to Central Milk 3270 1 Producers Cooperative. 2 Can you explain what -- what Central Milk 3 Producers Cooperative is? 4 A. Central Milk Producers Cooperative was formed in 5 the mid '60s, and it was cooperatives basically working 6 together with respect to -- on the fluid market side of 7 things -- to try to enhance and get the premiums for milk 8 going into the Chicago market. 9 Q. Is it what might be called a marketing agency in 10 common? 11 A. Yeah. Right. It's a group of cooperatives 12 together, right. 13 Q. Does CMPC still set any over-order premiums? 14 A. The CMPC this past summer made the decision to 15 dissolve their -- we're in that process right now. 16 Q. With the dissolution of CMPC, do you expect that 17 the Upper Midwest will have significant Class I premiums? 18 A. That's hard to say where that will all fall out 19 here in the future. 20 Q. Mr. Rosenbaum asked you some questions about the 21 distinctions between FarmFirst and Family Dairies, and I 22 wanted to follow up on a few of those if I could. 23 A. Sure. 24 Q. Where you state that our members ship milk to 52 25 processors that are predominantly cheese plants. 26 That -- when you refer to "52 processors," is that 27 for the entire 2600 farms within FarmFirst? 28 A. Minus the 135 that are Family Dairies people, 3271 1 so -- 2 Q. Okay. And so do each of those 2500 members or 3 so -- 4 A. Uh-huh. 5 Q. -- negotiate their own agreement with a processor? 6 A. They are patrons of whoever they happen to be 7 selling their milk to. So the price that they receive for 8 their milk is between them and the processor. I don't get 9 involved in any way on determining their -- prices for 10 them. That's between them and the processor. 11 Q. Do you know if, except for instances of price 12 inversions and the like, whether that milk is typically 13 pooled? 14 A. Well, it all depends upon in the Upper Midwest 15 Order, all depends where -- where all the numbers are at 16 with respect to Class III, Class IV price, so you are 17 going to make a decision as to whether you want to pool or 18 depool your milk. So it's -- it depend upon -- you know, 19 each month you are going to make a decision as to how much 20 you are going to pool or depool based on where Class III 21 Class IV and -- and the formula we use now for the Class I 22 mover. 23 Q. And when you say you make a decision to pool or 24 depool, for those 2500 farmers or so, is that a decision 25 typically made by their milk buyer? 26 A. By their milk buyer, yeah. So that's them. 27 Q. Do you -- do you know as I guess a rule of thumb 28 or what typically happens, whether the benefits of that 3272 1 depooling are passed through to those 2500 members or not? 2 A. It's difficult to say because each of those plants 3 are in a different position depending upon, you know, 4 their size, their newness, all those different kinds of 5 things, have they done an expansion. So they may be 6 passing that on; they may not be passing it on. Just -- 7 you know, might guess, I don't know, referring back to 8 2020, the COVID pandemic, when the milk price, you know -- 9 or price got high, Class III price was, you know, in the 10 23, 24, something like that. I got calls from my members 11 saying, Jeff, how come I -- my buyer only gave me 19 bucks 12 a hundredweight? How is that when the price is at 23? 13 And so I had to do my explanation on what 14 depooling means and those kinds of activities. And I 15 said, that's -- you know, that's their decision as to 16 whether they want to give you the 23 or the 19, but they 17 are not part of the Federal Order, so they can pay what 18 they want. 19 Q. So in an instant like that, you were -- you were 20 giving advice to that -- that patron, correct? 21 A. I was trying to explain negative producer price 22 differentials, yes. 23 Q. As part of the services that FarmFirst provides, 24 if there's a dispute between a member and a handler, will 25 you serve as an intermediary or advocate for your producer 26 in that situation? 27 A. We -- we do not intervene as far as, you know, on 28 what they are paying -- you know, what a processor is 3273 1 paying the farmer, because like I said, that is their -- 2 that's their business. Like I said, we don't get involved 3 with that. The only time we intervene would be, as I 4 said, on the test verification side of things, if we saw 5 some inaccuracies with respect to component values, that 6 might be where we would get -- you know, if they're not 7 being paid properly for their components, as I said, I 8 have staff that check those regularly, and we also do, you 9 know, tank calibrations and those kinds of things. So it 10 could be on the farmer side or -- or the processor side, 11 you know, are we paying for too much or not enough milk, 12 that kind of thing, so -- 13 Q. At least in my experience, I have seen contracts 14 with cheese plants come in two general varieties: One 15 where the cheese plant will pay a Class III price plus a 16 premium, and some where the pay price is actually based on 17 a formula tied to what that plant manufactures. 18 Do you have any insight as to what types of 19 contracts exist in Wisconsin in your area? 20 A. No, I do not. 21 Q. Are you aware of any -- any contracts between a 22 producer and a cheese plant that is based on an end 23 product formula? 24 A. I am not. 25 Q. Moving on to page 4, and you are describing both 26 the services that you provide for your owners and for your 27 customers. It's the second paragraph there. 28 When you're -- when you are -- when you're 3274 1 describing those balancing challenges, you say, "Our 2 customers rely on FarmFirst to handle milk in excess of 3 their needs." 4 Is that -- 5 A. That -- that -- to correct that, that would be -- 6 that would be more accurate to say Family Dairies, my 7 director of milk marketing, not FarmFirst. 8 Q. Okay. That was my question. 9 A. Correct. 10 Q. So then in the next sentence where it says, "These 11 balancing services are costly for FarmFirst 12 member-owners," is that -- should that also be -- 13 A. Family Dairies -- 14 Q. -- Family Dairies? 15 A. -- correct. Yes. Apologies for the confusion. 16 Q. No need to apologize. 17 A. Kind of interchangeable in my world. 18 Q. So for the member of FarmFirst who has a contract 19 with a cheese plant, that cheese plant has -- do they have 20 to balance all of their own milk needs? 21 A. I am not quite following your question. 22 Q. Okay. Well, does FarmFirst -- let me start over 23 here. 24 We have got a producer. Okay? Who is a member of 25 FarmFirst but not Family Dairies. 26 A. Correct. 27 Q. And the cheese plant that is buying milk from that 28 producer, who is responsible for balancing the milk 3275 1 requirements of that cheese plant? 2 A. The cheese plant that's buying it. I mean, if 3 they have enough milk from all their patrons, then they 4 are balanced and it works out for them, and different 5 times when they need to -- a plant like that may need 6 additional milk, they are going to go to another source 7 for additional supplies of milk and -- and we're one of 8 those sources and -- sources. 9 Q. So unless you get a call from that cheese plant 10 that says, "I need some more milk," you -- you -- 11 FarmFirst does not get involved in the balancing for that 12 plant? 13 A. Well, the -- it's always very interesting because 14 it -- in -- when you are -- let me try to explain a week 15 in my director of milk marketing's life. 16 Does the scheduling on a Thursday. So we start 17 asking all our buyers, how much milk are they going to 18 need, you know, and you would have a general idea of what 19 it is going to be. But then they might say, we don't need 20 as much, you know, demand's down, we are going to shut 21 down the plant because we have to do maintenance on it, so 22 we're not going to be taking milk on a certain day, so we 23 need less milk. 24 So then we find out from our current customers how 25 much milk they need, and then when you know that, then you 26 know how much milk that you are going to have to make 27 phone calls. So that's when you get around and you start 28 to calling people to find out who needs milk. And it is a 3276 1 situation where there's lot of phone calls going back and 2 forth from lots of different people, you know, who needs 3 milk, who has milk. Those conversations happen all the 4 time to -- to take care of everyone's needs. 5 Q. Let me approach this a little bit differently 6 because I think we're thinking of a couple different 7 things. 8 A. All right. 9 Q. Probably because I'm not phrasing my questions 10 perfectly. 11 A. All right. 12 Q. For the producer who sells directly to a cheese 13 plant, is that agreement to sell all of the milk 14 production from that farm, generally? 15 A. Yes. 16 Q. Now, if we -- if we look now at Family Dairies -- 17 A. Uh-huh. 18 Q. -- and you testified that the balancing services 19 are costly for those Family Dairies members, correct? 20 A. Correct. 21 Q. Okay. Those balancing services provided by 22 Family -- by Family Dairies, are those costs shared among 23 all 2600 members? 24 A. No. 25 Q. They are not? 26 A. No, that -- they are separate entities. The 27 Family Dairies and the FarmFirst are separate entities. 28 So when I say costly and balancing, depending upon time of 3277 1 year, depending on demand, and let's say, you know, demand 2 from our buyers is down, and we have several spot loads of 3 milk that we have to sell, then -- you know, then we got 4 get on and sell those -- sell those loads of milk. And, 5 obviously, perishability, we don't -- not having a 6 processing plant, we have to sell that milk. I don't have 7 a -- the ability to make 40-pound blocks of cheddar and 8 sell some other time, so we have to sell that. So 9 depending upon time of year, those -- those loads of milk 10 can be sold at the stretch price. But we are also 11 balancing the needs of some other plants, too. 12 Q. So really you have a small proportion of your 13 cooperative bearing all the balancing costs for 2600 14 members? 15 A. No. 16 Q. "No"? 17 A. As I said in my statement, they are totally 18 separate entities. My milk marketing division Family 19 Dairies operates separately. That's 135 farms, 20 600 million pounds of milk that we sell. We do our 21 pooling, do all the different things and work with that. 22 The members -- your earlier question on the 26 -- 23 the less than 2600 that we do the test verification 24 services, those are farmers that sell to proprietary 25 plants that have agreements with the people that they are 26 selling their milk to. 27 Q. Can you -- can you help me understand a little 28 more, how the adoption of Proposal 7 will alleviate some 3278 1 of those balancing costs that you now have to incur? 2 A. Well, the -- you know, in our review with the 3 National Milk and looking at the Federal Orders, you know, 4 and looking at Dr. Stephenson's and the numbers that came 5 out, and as I said in my testimony, there was -- you know, 6 you know, just the entire industry, you know, because of 7 some inconsistencies in how things were done, everyone 8 agreed that the numbers, you know, where we're at right 9 now, you know, that costs have increased. And it was our 10 thought, you know, looking at it and our -- I think 11 questions have been asked of our members who have 12 testified already about, you know, their own numbers and 13 how we came up with the numbers. But that was, you know, 14 our best estimate that, you know, this is where we should 15 start with these because, as I said, we're trying to 16 balance both the processor and farmer interests in this -- 17 in getting to where we need to be in the future. 18 Q. Thank you. 19 Further down on page 4 you are describing the 20 decrease in negotiated premiums. And are you talking 21 about premiums overall or are those just Class III 22 premiums you are discussing? 23 A. They would be over the Class III price that we try 24 to negotiate. 25 Q. So you note that they have declined by about $0.16 26 per hundredweight, correct? 27 A. Correct. Yep. 28 Q. And that that's a 24% decrease, correct? 3279 1 A. In that timeframe, yes. 2 Q. So if I take 16 and I divide by .24, I get about 3 $0.66. Does that -- would that be about the Class III 4 premium you were starting at in January 2020? 5 A. They all vary. It would depend upon the 6 customers. 7 Q. So in Order 30 it's not a uniform Class III 8 premium, it is negotiated customer by customer? 9 A. Correct. 10 Q. Different from like what CMPC would do for the 11 Class I market? 12 A. Correct. 13 Q. On page 6 you talk about the Dairy Margin Coverage 14 Program. And that program has like two tiers to it, 15 correct? 16 A. Yes. 17 Q. And the first tier covers up to I think it's now 18 5 million pounds of annual production. Does that sound 19 about right? 20 A. That's correct. 21 Q. Of all of your members, and I mean all 2600 or so, 22 do you have an estimate as to how many of them exceed that 23 Tier 1 limit? 24 A. I -- no, I couldn't tell you how many exceed. I 25 would have to -- I would have to dig into my numbers 26 because, like I said, I -- on the test verification side, 27 it would just be looking at the amount that comes in for a 28 test, our revenue that we get from them, so I can do the 3280 1 calculation. But the majority would probably be at the 2 5 million or under. But there's -- there's normal size 3 herds are going to be above that, so -- 4 MR. MILTNER: Thank you very much for your 5 answers. I don't have any other questions. 6 THE WITNESS: Yep. 7 THE COURT: Further examination? Other than AMS? 8 Seeing none, AMS, Ms. Taylor. 9 CROSS-EXAMINATION 10 BY MS. TAYLOR: 11 Q. Good morning. 12 A. Good morning. 13 Q. Thanks for coming to testify today. 14 I was wondering if you could give us a little more 15 detail on your farmer members, particularly if they would 16 meet the Small Business definition, which is $3.75 million 17 in annual gross revenue a year on a whole farm basis. 18 There's been discussion at the hearing that that's around 19 400 cows or so. 20 A. The majority would fall the 400 cows or under. 21 Q. And could you speak at all to whether your members 22 use any types of -- other than DMC, use any types of risk 23 management tools available to them? 24 A. A few years ago, about three, four years ago, we 25 did a survey of our Family Dairies patrons to just find 26 out about their risk management. And as you might 27 expect -- and I'm glad we -- because we encourage, but 28 they are participating in DMC, because that's been a very 3281 1 good program. We offer forward contracting through the 2 cooperative. We have some members that do take advantage 3 of that. And then other members indicated that they do 4 LGM and DRP as well. That would be the majority. 5 Q. Okay. Thank you. 6 Under the premiums you discuss on page 4, I 7 believe that these -- this -- it doesn't say specifically. 8 So to be clear, these are premiums for your family dairy's 9 milk? 10 A. That is correct. 11 Q. Okay. And I -- and I think you just answered some 12 of the questions I had with Mr. Miltner about they are 13 negotiated customer by customer. 14 A. Absolutely. 15 Q. And are they typically done annually? 16 A. Annually, and, you know, we'll have, depending 17 upon the buyer, we have annual contracts, and we might 18 certain types of year have, you know, for several months, 19 that kind of thing, so -- 20 Q. Okay. And have you seen -- you talk about the 21 decrease in 2020 to 2023. So has it just kind of been a 22 steady decline as you move through that period? 23 A. I wouldn't say -- I wouldn't say steady, but, you 24 know, like I said, it comes up from time to time from our 25 buyers saying, hey, we want to talk about this, and so 26 then we have to have that discussion. 27 Q. Uh-huh. So how would you expect the premiums to 28 be impacted if the Make Allowances are increased? 3282 1 A. I think over time that the premiums would 2 increase. I mean, theoretically, that's what would happen 3 is that if you go back, you know, several years when 4 Make Allowances were more in line, you know, the premiums 5 were, you know, significant in the Upper Midwest that we 6 were able to get for that milk. So one would, you know, 7 assume reason that they would go up over time. But I 8 wouldn't -- I would never say that they are going to go up 9 real fast. 10 Q. Okay. On the bottom of page 5 when you are 11 discussing the National Milk proposal specifically, you 12 talk about how it's a modest increase and will partially 13 alleviate the problems that have led to the disorderly 14 marketing of milk. 15 My first question is, can you talk a little bit 16 about the disorder you are citing there? What do you see 17 as disorderly marketing? 18 A. Well, thinking about that last night as to what, 19 you know, the definition of disorderly means. If your -- 20 if your definition is, you know, as far as moving milk, 21 that's, you know, one definition. But disorderly, if 22 we're talking about a program that's for farmers and -- 23 and we're not -- you know, I'm not taking care of them 24 through, you know, the Federal Order program or whatever, 25 disorderly becomes people exiting the business. That's -- 26 that can be disorderly as well, too, so -- 27 Q. And would you say the decrease in, I guess, 28 premiums and the Federal Order prices, or the overall 3283 1 price your farmers get, is something that is leading farms 2 to exit the industry, then? 3 A. There's lots of reasons why people exit the 4 industry. 5 Q. But you believe Make Allowances is one of those 6 reasons. 7 A. Absolutely. If you are getting less for your 8 milk, and you got high costs of production, you make 9 decisions in life. 10 Q. So another question that arises, then, is -- and 11 you talk a little bit about trying to find the right 12 balance, but why are the modest increases appropriate if 13 they don't fully alleviate the problems related to the 14 formulas not working as intended? 15 A. Well, I tried to answer that question, I think, 16 from one of the other people. That if we -- if you do 17 nothing and we just would stay where we're at, you are 18 going to continue on the course we're at right now where 19 plants are going to make sure that they cover their 20 margins on it, because you're not -- we're not making any 21 changes. If you make those changes too drastically and 22 raise it up too high too fast, farmers are still going to 23 take it with respect to the price as far as receiving a 24 lower price. 25 I mean, it's -- it's been recognized, you know, 26 any of the economists that would tell you that at least, 27 as I said in my testimony, in the short-term, you are 28 going to see a decrease in prices to farmers. 3284 1 So that's why -- why National Milk came with the 2 idea of let's go after it with a modest increase with it. 3 And the real problem has been is because it's taken so 4 long since the last survey that was done, that's why -- 5 not in part of the order hearing, but legislative to give 6 USDA the authority and funding to be able to do these on a 7 regular basis so we don't end up in the situation that 8 we're at right now. 9 So, you know, to me, it's a very real economic 10 decision, both to assist the processors and the producers, 11 and that's why I think the numbers that National Milk is 12 proposing are where they should be. 13 MS. TAYLOR: That's it from AMS. Thank you. 14 THE WITNESS: You're welcome. 15 THE COURT: Dr. Bozic. 16 CROSS-EXAMINATION 17 BY DR. BOZIC: 18 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 19 Good morning, Mr. Lyon. 20 A. Good morning. 21 Q. I think I heard you say something, and I wanted to 22 confirm that I heard correctly. Did you say that outdated 23 Make Allowances are increasing farm exits? 24 A. I said there's lot of reasons why farmers exit the 25 industry. 26 Q. Is -- are outdated Make Allowances one of those 27 reasons? 28 A. Well, I don't know if outdated Make Allowances 3285 1 directly, but the fact that the plants are covering their 2 costs and farmers get in a lower price would be the 3 reason. But necessarily, you know, but the Make Allowance 4 is part of that. 5 Q. Well, differently, would increasing 6 Make Allowances help arrest or reduce farm exits, in your 7 opinion? 8 A. I can't -- I can't answer that. Like, as I said 9 before, there's lots of reasons why people enter and exit 10 the business. 11 Q. The other thing I think I heard you say is that 12 over-order premiums, you expect them to come back at a 13 higher level if Make Allowances are increased; is that -- 14 A. I would hope so. 15 Q. Yeah, me too. 16 But -- but I think I also heard you say that you 17 would not expect them to come back instantly or 18 immediately. Is that a fair statement? 19 A. That's a fair statement, because I have -- the 20 prices never go up faster than they go down, and it always 21 seems like it takes a long time for them to get back up. 22 So that would -- if history is any indicator, I would 23 expect that it would go slow. 24 Q. So then would it follow that for a period of time 25 we could sort of have a double whammy, where protein 26 price, regulated protein price, is lower because of higher 27 Make Allowance, but the over-order premiums are slow to 28 react, so net-net, or producers actually get even lower 3286 1 price? 2 A. Say that again? I'm sorry. 3 Q. So if over-order premiums would take time to -- to 4 get back, then on day one, when we get higher 5 Make Allowance, would the net effect of higher 6 Make Allowance and slow-to-react over-order premiums be 7 even lower farm price? 8 A. I would have -- you would have to take that to 9 someone -- an economist or something, and tell me what is 10 going to happen with that. And you would be one of the 11 people that could run those numbers, along with other 12 people. 13 Q. Yeah. So I was just trying to tease out the 14 logical consequences of your expectations regarding the 15 slow-reverting over-order premiums, and -- in face of 16 increasing Make Allowances. 17 The other thing that I'm -- just want to confirm. 18 When -- when we were cross-examining several witnesses 19 yesterday who are representing cooperatives, several of 20 them -- or at least one of them that I cross-examined, 21 stated that they do not anticipate that the cash flow to 22 their cooperative directly would change -- or in any 23 significant way, change because of change in 24 Make Allowances. In other words, they have to reblend 25 right now because their costs are high. If the 26 Make Allowances are increased, they just wouldn't have to 27 reblend as much, but the amount of money they received 28 every month as a sum of the sales proceeds from their 3287 1 products and the draws from the pool, that -- that sum 2 wouldn't change. So, in other words, their producers 3 would not feel the increase in Make Allowances, a lower 4 paycheck that they take home every month. 5 Would you anticipate that as a consequence of 6 higher Make Allowances, your members that sell to 7 proprietary farms would also be held harmless immediately 8 after the Make Allowances are increased? 9 A. I don't -- there's a lot to that question if you 10 are going to be held harmlessly, because a lot depends 11 upon any -- on whether it's a proprietary or a 12 cooperative, whether, you know, on the Make Allowances 13 and, you know, whether you are going to be pooling or 14 depooling, and all the different other aspects that go 15 into those decisions. Because, you know, you can -- you 16 know, the proprietary plant, if you are -- you know, 17 you're not pooled or whatever, you can pay -- you know, as 18 I said earlier, you pay, you know, whatever you want to, 19 you know, to make sure that you have milk to process 20 products. 21 So, you know, it's very difficult. I can't 22 answer -- to whoever you talked to, whoever was on 23 yesterday. But that's -- what's interesting and difficult 24 about it, is that all the plants are so different in what 25 their option, what their needs are as far as 26 modernization, expansions, you know, what they happen to 27 be doing, you know, and just how they want to treat their 28 farmers, too. 3288 1 Q. But in some sense it doesn't have to be that 2 complicated, so let's try to tease this out. 3 Do you have -- are you -- are your members 4 currently shipping to some proprietary plants that are 5 currently pooled on Order 30? 6 A. Yes. If I looked at the USDA, you know, there 7 would be people that would pool. 8 Q. That would be pooling? 9 A. Yeah, they'd be pooling. Sure. 10 Q. So if they are pooled today, that means that they 11 are paying at least the minimum regulated prices today. 12 A. Correct. 13 Q. And if the minimum regulated price goes down as a 14 consequence of Make Allowance, and those proprietary 15 plants cannot reblend, would it not be logical to expect 16 that then the farm price would also tend to go down, at 17 least until the time that over-order premiums adjust? 18 A. Uh-huh. 19 Q. I just hope that doesn't lead to farm exits while 20 the over-order premiums -- 21 A. Absolutely. 22 DR. BOZIC: Thank you very much. 23 THE COURT: Anything further? 24 Redirect. 25 MS. HANCOCK: Your Honor, that's all we have for 26 Mr. Lyon. We would move to admit Exhibit 174. 27 THE COURT: Objections? 28 Seeing none, Exhibit 174 is admitted into the 3289 1 record. 2 (Thereafter, Exhibit Number 174 was received 3 into evidence.) 4 THE COURT: Thank you, sir. 5 Let's break for ten minutes. Come back at 9:25. 6 (Whereupon, a break was taken.) 7 THE COURT: On the record. 8 Raise your right hand. 9 ED GALLAGHER, 10 Being first duly sworn, was examined and 11 testified as follows: 12 THE COURT: Your witness. 13 DIRECT EXAMINATION 14 BY MS. HANCOCK: 15 Q. Good morning, Mr. Gallagher. 16 A. Good morning. 17 Q. Welcome back to the stand and back to 18 Indianapolis. I want to have you, I guess -- 19 MS. HANCOCK: I can't remember, are we having them 20 restate their name and address? 21 THE COURT: Let's not. Unless somebody's got an 22 objection. We're trying to -- it seems like -- thank you. 23 Good suggestion. 24 BY MS. HANCOCK: 25 Q. Mr. Gallagher, did you prepare Exhibit NMPF-24 in 26 support of your testimony today? 27 A. I did. 28 Q. And that's testimony in support of National Milk's 3290 1 Make Allowance proposal? 2 A. That's correct. 3 MS. HANCOCK: Your Honor, if we would mark that as 4 the next exhibit? 5 THE COURT: NMPF-4 will be marked -- 6 MS. TAYLOR: 24. 7 THE COURT: What's that? 8 MS. TAYLOR: NMPF-24. 9 THE COURT: 24. 175. 10 (Thereafter, Exhibit Number 175 was marked 11 for identification.) 12 BY MS. HANCOCK: 13 Q. Mr. Gallagher, if you could go ahead and present 14 us with your testimony in Exhibit 175. 15 A. Yes, thank you. 16 I'm going to skip around a bit and sort of hit the 17 highlights. I am going to -- a little bit different than 18 I did for the milk composition, I'm going to spend a 19 little bit more time reading some of my testimony. 20 I'm curious, how many of you read my testimony 21 already? 22 All right. Thank you. Because I put a lot of 23 work into this, so thank you for reading it. I appreciate 24 it. 25 Okay. So I'm going to start on page 2, the first 26 full paragraph. 27 I'm hear to present evidence about the need to 28 limit the Make Allowance changes to those levels proposed 3291 1 by NMPF. My testimony will cover the existence of 2 significant farm input price inflation, high milk cost of 3 production, and thin dairy profit margins that could lead 4 to a disorderly marketing condition of a substantial loss 5 of raw milk production if a structural change to Federal 6 Order class prices leads to a significant reduction in 7 farm milk prices. 8 The existence of high feed prices and other 9 inflated dairy production costs and longer-term low dairy 10 farmer profit margins provide strong evidence for the need 11 to be responsive to the impacts Make Allowance changes 12 will have on dairy farmer profitability. 13 Aggressive Make Allowance increases, whether or 14 not evidence of higher manufacturing costs exist, will 15 harm dairy farmer profitability, negatively impacting the 16 milk supply and lead to a potentially troubling disorderly 17 marketing condition that risks the ability for U.S. dairy 18 farmers to adequately supply the market's need for milk. 19 DFA and the NMPF member cooperatives have 20 carefully and thoughtfully approached the issue about 21 updating Federal Order Make Allowances. There is no doubt 22 that dairy plant input prices have increased since 2006, 23 the last time the data was included in a Federal Order 24 hearing considering adjustments to Make Allowances. 25 There is also no doubt that dairy plants are more 26 efficient in converting loads of milk into manufacturing, 27 dairy products, and there is no doubt that dairy -- the 28 dairy manufacturing industry has expanded with newer and 3292 1 more efficient technology and larger plant sizes. 2 But the changes to non-milk input prices at the 3 processing level must be balanced against what would 4 happen at the farm level of the dairy supply chain if a 5 Federal Order price formula change led to a significant 6 decrease in milk prices. 7 An increase in Make Allowances reduces class 8 prices in dairy farmer milk prices and shifts that revenue 9 to a credit to those manufacturing dairy products. Since 10 a Make Allowance increase directly reduces milk prices 11 impacting dairy farmer milk checks, we believe a strong 12 burden of proof backed by strong and credible data are 13 absolutely necessary to justify a large Make Allowance 14 increase. 15 The dairy farmer side of the industry has data 16 confidence issues with the survey data in the public 17 domain, that in prior proceedings of this nature, were 18 used to adjust dairy farmer milk prices, via 19 Make Allowance change. 20 I go no further than pointing to the work of the 21 International Dairy Foods Association, and others, to 22 utilize input price changes in equations to update 23 manufacturing costs that were established with the 24 technology in manufacturing infrastructure that existed 25 17 years ago, as an example of evidence of the concerns 26 about the survey's data. 27 If adequate survey data existed, there would be no 28 need to perform these mathematical calculations in an 3293 1 attempt to determine the changes in the manufacturing 2 costs of production or to prove them out. Dairy 3 manufacturing factors of productivity have increased over 4 those 17 years, which cannot be seen by a review of input 5 prices alone or by adjusting an equation by some 6 mathematical exercise to include some other industry's 7 factors of productivity. 8 Dairy farmers across the country are concerned 9 about a wealth transfer from their families' businesses, 10 manufacturing plant operators through their milk checks by 11 federal fiat. We are faced with a looming crisis of 12 confidence from dairy producers. 13 You will hear resounding support from the dairy 14 farming community for the NMPF Make Allowance proposal 15 that balances the recognition of manufacturing plant input 16 price increases against the impact on dairy farmer milk 17 prices and dairy farmer profitability, and in so doing, 18 recognizes the data issues that undermine the confidence 19 of dairy farmers wanting a fair and balanced outcome. 20 DFA, NMPF, American Farm Bureau, IDFA, and others, 21 are working with Congress to establish a procedure for the 22 federal government to survey dairy plant manufacturers 23 about their input prices, costs yields, and other factors, 24 to develop a dataset that has the entire industry's 25 confidence and that can be used as meaningful input in 26 future Federal Order hearings about Make Allowances. 27 Unfortunately, at this point in time, we do not have the 28 data that leads to industry-wide confidence. 3294 1 The NMPF member cooperatives have developed a fair 2 and balanced Make Allowance proposal that provides cost 3 relief to manufacturing plants. Cooperatives are hopeful 4 that this balanced approach will maintain the confidence 5 in and support of the Federal Order program by dairy 6 farmers across this country. DFA and NMPF strongly urges 7 the Secretary of Agriculture to adopt the NMPF 8 Make Allowance proposal. 9 DFA and NMPF will be sharing today data that 10 compares farm input prices, dairy farm costs, and costs of 11 production per hundredweight of milk, and dairy farm 12 profitability in the U.S. and for various regions over 13 time. 14 We will provide data from USDA and private 15 accounting firms as evidence. This evidence will show 16 that there has been significant price inflation on dairy 17 farms. Their costs and cost of production have increased 18 substantially. And the average profitability over time is 19 highly variable and averages less than $1 per 20 hundredweight of milk produced in some areas of the United 21 States. 22 Although you will have information on the record 23 that may show that manufacturing input prices have 24 increased substantially and total costs of production have 25 increased at various milk plants across the United States, 26 beyond $0.04 a pound since 2006, it is important to note 27 that dairy farmers' input prices and costs have increased 28 as well, and their profitability will be substantially 3295 1 harmed if there is a significant increase in 2 Make Allowances. 3 A significant change in the structural basis of 4 U.S. milk prices coming from a significant increase in 5 Federal Order Make Allowances will result in a loss of 6 profitability of dairy farms, more rapid consolidation in 7 the producers sector, reduced milk production than would 8 otherwise occur, which in turn could likely create 9 disorderly marketing conditions relative to the supply of 10 milk to meet the needs of consumers. 11 I begin by presenting farm input price inflation. 12 I expect much to be discussed about farm input price 13 inflation. Manufacturing side, we believe it's important 14 for the Secretary of Agriculture to consider price 15 inflation on farms as well. 16 The U.S. Constitution equivalent of the Federal 17 Order Program, the Agricultural Marketing Agreement Act of 18 1937, as amended, does not reference Make Allowances or 19 manufacturers' input price inflation in the determination 20 of minimum milk prices. It does instruct the Secretary of 21 Agriculture to consider issues related to the price of 22 livestock feed and the ability to adequately supply milk 23 to the marketplace. 24 USDA's National Agricultural Statistical Service 25 administers monthly surveys of agricultural prices 26 received and paid by farmers. Their survey results are 27 presented in their monthly publication, Agriculture 28 Prices. The prices paid section provides relevant 3296 1 information on several farm production inputs, and tracked 2 over time, can show inflationary or deflationary prices 3 faced by farmers across the United States. 4 DFA and National Milk request official notice be 5 taken of the Ag Prices monthly publications from 6 December 1999 to the present. 7 The Ag Prices feed price index is telling of the 8 situation faced by farmers. I show that, page 5, the 9 graph on page 5. 10 It provides general pricing information for the 11 U.S. marketplace where dairy farmers purchase livestock 12 feed inputs in competition with other livestock farmers, 13 ethanol plants, and other businesses using feed stuffs in 14 their manufacturing process. 15 It can also show pressures from overseas buyers 16 that import U.S. grown feed grains. Livestock feed often 17 represents 50% or more of the cost of production on a 18 dairy farm, so inflationary or deflationary aspects of 19 feed are an important factor in the cost of producing 20 milk. 21 The chart on the top of page 5 was produced at DFA 22 using Ag Prices data. We adjusted the base year to be 23 2000 to coincide with the implementation of the Federal 24 Order Reform pricing provisions. We also included 25 producer -- Federal Bureau of Labor Statistics producer 26 price index, or PPI. That statistic, also surveyed and 27 reported monthly, is a common measurement of inflation 28 impacting producers of goods and services across the U.S. 3297 1 It surveys the price that was received for selling 2 the input produced by the manufacturers or service 3 providers. 4 The statistics change over time and provide 5 indications of general inflation or deflation facing 6 businesses, as they raise or lower their selling prices to 7 either pass along higher input prices or pass along 8 deflating input prices. It is for this reason that the 9 Federal Reserve uses this statistic as a guide in making 10 inflationary-based decisions about adjustments to the 11 federal funds rate. 12 DFA and National Milk request official notice be 13 taken of monthly PPI publications from December 1999 to 14 the present. 15 Q. Mr. Gallagher, while you have this pulled up, I'm 16 just wondering if you can zoom in so that we can see just 17 the chart in a larger image. 18 A. The chart, using the Ag Prices information for 19 livestock feed, shows that feed prices are inflationary 20 and deflationary, but tend to be much more inflationary 21 over time than the PPI, which also has been included in 22 the bottom line. This can be seen that the feed index PPI 23 is 3.25 times higher than it was in 2000, while the PPI is 24 about 1.8 times higher. 25 It can also be seen that feed and general PPI 26 inflation ran approximately parallel in 2007 when the two 27 price surveys have seen increasingly larger divergences. 28 Impacting feed prices has been the Federal government's 3298 1 supported use of feed stuffs to produce ethanol and other 2 biofuels, droughts, growing U.S. feed grain export sales, 3 and, most recently, the Russia-Ukraine conflict. 4 But I would note where it jumps, the market 5 jumped, is when ethanol really took off in the United 6 States, and significant quantities of livestock feed were 7 used to produce ethanol. It raised the cost of producing 8 milk to dairy farms across the country by a significant 9 amount. 10 That is my next chart. Unsurprising to you, it 11 would be the DFA risk management has a feed index to help 12 our farmer-owners manage their feed cost index -- or feed 13 cost -- feed costs, and we combine it with our milk 14 price-forward contracting program to help them manage a 15 milk feed margin. 16 This is our index. The variables in the index are 17 corn and soybean meal, both using futures market 18 settlements from the CME Group. Those are the only 19 variables in this -- in our formula. 20 And you can see that our index would suggest from 21 2000 to 2006, other than one spike, that the average cost 22 of feed on a milk per hundredweight basis, using our 23 index, was $4 per hundredweight of milk. 24 Ethanol then took hold. We had some really crazy 25 markets. And as it settled out over time, and if you look 26 at 2015 through 2019, it settled out not at $4 per 27 hundredweight of milk, but at $8 per hundredweight of 28 milk. It doubled. And it's gone up since for other 3299 1 reasons, most notably, most recently, including the 2 Ukraine-Russian conflict. 3 Dairy farmers have been faced with significant 4 feed price inflation that has led to changes in 5 profitability. Federal Order milk pricing formulas and 6 blend price pools do not include a factor to help dairy 7 farmers recover their costs relating to feeding more 8 expensive feed to their herds. 9 The existence of inflated livestock feed prices 10 and the significant impact on dairy farmers' cost of 11 production needs to be measured against a structural 12 change to Federal Order milk prices. With higher feed 13 costs, a significant decline in Federal Order milk prices 14 will harm dairy farmer profitability, leading to reduced 15 milk production that otherwise would occur, threatening 16 the ability to adequately supply the market its milk 17 needs, leading to a potentially supply-induced disorderly 18 marketing condition. 19 The DFA encourages the Secretary of Agriculture to 20 consider the significantly inflated prices for livestock 21 feed when making his decision about changes to Federal 22 Order Make Allowance and use it as evidence to support the 23 NMPF Make Allowance adjustment proposal, even if there's 24 credible evidence of the existence of higher manufacturing 25 costs of production. 26 The next section is about the Dairy Margin 27 Coverage Program. I would say the Dairy Margin Coverage 28 Program is the single best risk management tool that 3300 1 exists. And I appreciate its continuance, and we hope we 2 can strengthen it over time. 3 I'm going to skip to page 8, and I want to show 4 the chart at the top of page 8. This is data that I 5 received from the National Milk Producers Federation, and 6 they received this data from USDA. And it shows for 2022, 7 the year 2022, the number of operations by milk production 8 size that participated in the Dairy Margin Coverage 9 Program. And I'll come back to some of that data here in 10 a minute. 11 For calendar year 2022, U.S. dairy -- I'll do it 12 right now -- U.S. dairy farmers produced 226.5 billion 13 pounds of milk. Of this production, 48.8 billion, or 14 21.5%, had meaningful coverage under the DMC Tier 1 15 coverage and some measure of protection against livestock 16 feed. 17 I'm going to back up. And the chart on page 7 18 shows the Tier 1 and Tier 2 premiums. And so, in essence, 19 every -- it's silly for a dairy farmer not to be covered 20 by Dairy Margin Coverage. Fortunately some are. Every 21 dairy farmer that has coverage should have as much covered 22 under Tier 1 as they can. The larger farms are limited to 23 how much they can get covered under Tier 1. And 24 generally, though, then, what they will do is they will 25 cover the rest of their milk under Tier -- under Tier 2 at 26 $4 per hundredweight because there's no cost. 27 I don't believe there's very much coverage beyond 28 that. We never thought in the history of the world that 3301 1 they would ever get a margin payment at the $4 level, but 2 I think this most recent month they are receiving a 3 payment on the -- on the margin, because the margin is 4 less than $4 a hundredweight. Go figure. Crazy world we 5 live in. 6 So the other -- so we have 26 -- 21.5% of the milk 7 that has some meaningful coverage under DMC to protect 8 them against feed price changes. The other 78.5% of U.S. 9 milk production did not have that type of meaningful 10 protection under this program. 11 The existence of the DMC program does not produce 12 enough benefit on the super majority of the U.S. milk 13 production to be considered an offset against the need to 14 recognize livestock feed price inflation in determining 15 the appropriate limitation on the degree of 16 Make Allowance -- appropriate Make Allowance increase. 17 Now I'm going to talk about the chart at the 18 bottom of page 8. 19 This chart was developed from the Ag Prices data 20 and portrays changes in farm input prices for a variety of 21 inputs. The chart shows significant price inflation since 22 2006, and like everyone else, every manufacturing business 23 in the United States, and around the world, significant 24 price inflation since 2021. 25 The Ag Prices data publication has its own version 26 of an index that would be similar to a PPI. It's called 27 the Prices Paid By Farmers For Commodity Services, 28 Interest, Taxes, and Wage Rates, and it is referred to as 3302 1 PPITW. 2 This chart on page 9 tracks that against the PPI. 3 The red bars at the bottom identify the divergence between 4 the two. 5 Of importance in this proceeding, every business 6 faced steep inflation over the last two years. This 7 includes dairy farmers. However, unlike the request from 8 the milk plant operators in IDFA and the Wisconsin Cheese 9 Makers Association, if dairy farmers cover the 10 manufacturers' increased inflationary input prices, dairy 11 farmers do not have the opportunity to recover their 12 inflationary costs via federal edict. Dairy farmers' 13 inflated cost of production need to be considered when 14 determining the decree of increase to Make Allowance in 15 this proceeding. 16 DFA presents for the record information about 17 dairy farmer costs of production and profit margins. We 18 present data from USDA and the two accounting firms. 19 I would like to take official notice of USDA's 20 milk cost of production documents and include all their 21 information dating back to 1999 in the record. 22 The following table was compiled by me from USDA 23 Economic Research Service Milk Cost of Production 24 Estimates, using 2010, 2016, and 2021 as the base years. 25 I have presented the data for all sizes of dairy farms. 26 They have data that breaks out costs of production and 27 returns over time, by different sizes of dairy farms. But 28 in this chart, it is the average for all dairies in the 3303 1 United States, across all regions, all states. 2 I have made an adjustment from their data. So I 3 copied the data into an Excel spreadsheet and created this 4 chart. I have made adjustments to their total costs 5 listed values by subtracting from the cost the opportunity 6 cost of labor and the opportunity cost of land. I do this 7 to make the data more comparable to the information from 8 the two accounting firms that have previously appeared and 9 included their information in the hearing record. 10 I have adjusted the total cost in the row I call 11 "cost less opportunity cost of unpaid labor and land." I 12 recomputed profitability by subtracting that value and 13 total gross value of production, and the recomputed 14 profitability value is the last row in the chart called 15 "adjusted net profit." 16 This chart that is on page 11 was produced from 17 the data that I have presented on page 10. It charts the 18 total feed cost row, identified in the chart as feed, the 19 cost less operating cost unpaid labor and land, row 20 identified in the chart as total, and the milk sold row, 21 which represents the average milk price identified in the 22 chart as milk sold. It shows that dairy farmers have been 23 under cost pressure. 24 So we can see that the total cost in almost every 25 year is greater than milk sold. It also shows how feed 26 costs change, but how they have gone up over time. And as 27 you get into 2021 and 2022, you can look at the difference 28 between the feed bar and the total bar and you can see 3304 1 that the difference between the two is increasing to show 2 that there are other inflationary pressures also impacting 3 dairy farmer productivity. 4 As I mentioned, USDA also identifies costs of 5 production for various farm sizes. So I created the chart 6 on page 12 to identify two different farm sizes. And I do 7 these two different farm sizes because they are more 8 similar to the data that would be included in the Frazer 9 accounting firm data and the Nietzke Faupel accounting 10 firm data, since those two datasets generally incorporate 11 information from larger-sized farms. 12 From 2012 through 2014, the largest size category 13 that was listed in the -- in the data was 1,000 cows or 14 more. In 2016, they also then started showing 2,000 cows 15 or more. And so I would have gone -- I have got in my 16 data, I pulled the data from the USDA that would have 17 looked like this, except for it was for those two size 18 categories. I recomputed the numbers like I did here, and 19 I looked at their adjusted net profit, and I have listed 20 that in this chart for each year. 21 I do note that from 2012 through 2015, because 22 I -- they don't have 2,000 or more cow data, I just used 23 whatever they had for the 1,000 or more for that column. 24 I also then also on the third column listed the all sizes, 25 so the average size for all dairy farmers throughout the 26 United States. 27 And you can see in that data, very clearly, red is 28 loss, black is profit. And across time there are years 3305 1 when dairy farmers make money and there are years when 2 dairy farmers lose money. Even the largest of the large 3 lose money. 4 What I think is very instructive is what the 5 average is. 2022 was a really good year. Most dairy 6 farmers made money, and they did okay. But 2022, 7 unfortunately, is an anomaly that doesn't occur very 8 often. In the interim, there are a lot of hard times. 9 So I think what's important is to look at the 10 average profitability over time, and you can see the -- if 11 you go all the way to the right, the all sizes, and you 12 can pick your average and the data is there, and you 13 can -- you know, whoever wants to, USDA, I rely on you to 14 sort this however you think is appropriate. 15 But on average, dairy farmers lose money across 16 the United States. But the larger farms on average make 17 money, but they make a lot less than you would think. 18 So, on the 1,000 to 2,000 cow farms, they make 19 somewhere between, on average, $0.70 to $1.00 a 20 hundredweight. And then the even larger farms make, on 21 average, somewhere from $1.20 to $1.45. You got to take 22 this into consideration. 23 By year four of the implementation of the IDFA and 24 the Wisconsin Cheese Makers Association, the structural 25 change in the milk price of their Make Allowance increase 26 would be about $1.45-ish. And you guys can use all -- you 27 guys can recompute what that means, and I'll accept your 28 computation, USDA. But at $1.45, it wipes out the average 3306 1 profitability of pretty much everybody in the dairy 2 industry. 3 So I think there's a milk supply issue if that 4 happens, and I think that creates a disorderly marketing 5 condition. And despite information that would have been 6 included in prior decisions on hearings about Class III 7 and IV prices, largely from the Bush Administration, but 8 certainly not from the Biden Administration, I think you 9 absolutely have to take the impacts on dairy farmer 10 profitability and their costs of production into account 11 in this situation. 12 I do explain how I got to my calculations. If you 13 look on -- and I'm open to correction on any of this, but 14 it's not going to be much different. But I have shown in 15 this chart, on page 13, the impact to the Class III and IV 16 price on the -- based on the National Milk proposal. And 17 I have looked at the cumulative impact by year of the IDFA 18 and Wisconsin Cheese Makers Association proposal. You can 19 see my estimate on the all-milk price is pretty 20 significantly more, almost a dollar a hundredweight 21 larger -- more of a decrease in farm milk prices from the 22 IDFA and the Wisconsin Cheese Makers Association. 23 And I describe above that the utilizations I used. 24 And I'm open to anybody using the utilizations, but the 25 net impact isn't going to change that much from my 26 calculations. There's serious, serious risk to dairy 27 farmer profitability if you go much above the National 28 Milk proposal. 3307 1 Picking up on page 13, right under the -- picking 2 up my testimony right under the chart. 3 The IDFA proposed change is greater than the 4 average profitability of the average U.S. dairy farm and 5 the two largest sized dairy farm groups based on the USDA 6 information. 7 For the two largest sized dairy farm groups, about 8 seven or eight years out of 11, the net farm income 9 averaged less than $1.45 per hundredweight. For the all 10 size groups, it occurred in ten of 11 years. It is DFA's 11 view that the implementation of the IDFA proposal would 12 result in a much more rapid consolidation of the U.S. 13 dairy farming sector and threaten the financial stability 14 of the largest U.S. dairy farms producing most of the milk 15 and create credit-related issues with feed companies and 16 the agricultural lending industry. It would be a wreck. 17 The implementation of the IDFA proposal will lead 18 to severe disorderly marketing conditions that could 19 undermine the ability to adequately supply consumers with 20 fresh fluid milk and it must be rejected by USDA. 21 We provided information from two accounting firms. 22 Leland Kootstra, a partner in Frazer, LLP, presented 23 information already at the hearing, and Jeff Bushey, a 24 partner at Nietzke Faupel also presented information. The 25 information that I'm going to use in my charts can be 26 found in these publications. 27 The reported dairy farm cost of production in 28 these reports, by region, show for 2006 to 2022 3308 1 significant increases. Southern California, up 84%; San 2 Joaquin Valley, up 53%; and so on. The Nietzke Faupel 3 data is Michigan and Ohio, it is up 46%. There's 4 significant cost inflation on dairy farms across the 5 country, even the largest dairy farms. 6 This following chart would show the net income 7 equivalent line on the data sets over the years, and you 8 can see there's a lot of -- there's a lot of red. Highly 9 variable profitability on dairy farms across the country. 10 This chart that says -- I'm showing now looks at 11 some of the data from the above chart. So, to show -- to 12 explain it, for the Southern California data, which is "So 13 CA," which say as reported of the average loss on the 14 Frazer LLP customers that are included, eight years they 15 show average losses. The number of years where profits 16 were $1.45 or less were 15 years. So the additional years 17 of losses, if there's a $1.45 per hundredweight decline in 18 the milk price because of a structural change in class 19 prices, it would increase by seven, there's 20 years of 20 data, 15 years of losses, 75% of the time there would be 21 losses, on average, on the farm surveyed in the -- in 22 Southern California, by the Frazer firm. 23 And that data -- the rest of that data is similar. 24 My Michigan and Ohio, MI and OH, is from the Nietzke 25 Faupel data. 26 The chart at the top of page 17 looks at average 27 profitability. And, again, I take two different time 28 periods. I'll let USDA determine what they think is the 3309 1 appropriate time period to look at. I'm suggesting a 2 couple. 3 And you can see that for most of those regions, 4 the average profitability in most of those regions is less 5 than a dollar. And some may be a little bit more than a 6 $1.45, but if you took a $1.45 out of that profitability, 7 you would be taking away most of their profitability. 8 You have to think about that. Dairy farms are 9 businesses. They are investing in their business to get a 10 return. If you do something that somebody's -- they are 11 pretty profitable. Maybe this says that in the Northwest 12 they have $1.80 average profitability, so they can 13 withstand it. I would say, I think you have to think 14 about, will they still stay in business, because they are 15 expecting a certain return on their investment. And right 16 now that return on their investment when they make that 17 kind of profitability keeps them in the dairy industry. 18 If you take most of that profitability away, I'm not so 19 sure it -- it will encourage them to stay in the dairy 20 industry. You have some significant challenges to ponder 21 over what this means, what these proposals mean on dairy 22 farmer profitability. 23 Too often the view of structural changes to milk 24 prices that emanate from Make Allowance increases are 25 viewed against the milk price. Dairy farm milk price of 26 $20 may seem to be able to support a structural decrease 27 of $1.45 per hundredweight as the change represents about 28 7% of the milk price. This belies the true economic 3310 1 impact of importance, the impact on a dairy farmer's 2 profitability. In this context, the most important 3 context, $1.45 per hundredweight milk price change, at 4 worst, wipes out the long-term average profitability on 5 many dairy farms across the United States, and at best, 6 for some of the larger dairies, as for example the 7 Michigan and Ohio dairies, who would show a profitability 8 from 2012 to 2022 of about $1.88, it reduces that average 9 profitability by 77%. 10 We believe that the impact on average 11 profitability is compelling. It needs to be a factor in 12 the decision by the Secretary of Agriculture that he makes 13 relative to the structural changes to Federal Order milk 14 prices stemming from an increase in Make Allowances. DFA 15 and the National Milk Producers Federation believe this 16 information is sufficient for you to limit any 17 Make Allowance changes to those proposed by the National 18 Milk Producers Federation. 19 I make a distinction in all this between pricing 20 cost and average cost of production. Price is the value 21 of the good or service, can be measured over time to 22 identify price increases or decreases. Increases are 23 commonly referred to as inflation. 24 The producer price index series is an example of a 25 survey of prices, and from it, there can be 26 representations made about price inflation over time. 27 Prices and costs are different. For example, the 28 wage rate or price of the labor input may increase; 3311 1 however, that is not a representation of how a business's 2 cost of labor is changing. For example, as wage rates 3 increase, the hours worked may decrease. This simple 4 example identifies how businesses change their input usage 5 as prices change. 6 The two of these aspects together can be viewed to 7 look at the total cost of labor. However, since there can 8 be input substitution, this would mean that the cost of 9 labor would change differently over time than the price of 10 labor. 11 Furthermore, businesses may, at the same time, 12 change their output. Example, less labor may be used due 13 to increased mechanization that leads to increased output. 14 Cost is a combination of price, input usage, and output, 15 and it's this combination that represents the average cost 16 of production. It is the average cost of production that 17 is relevant at this hearing. 18 We appreciate Dr. Stephenson's interactions with 19 the dairy industry and his participation in surveying 20 dairy manufacturing plants to provide some information for 21 us to think about. He's done as good of a job as he can 22 with the data that's been made available to him. 23 Despite that, we do have -- we do not have 24 confidence in the average manufacturing cost of production 25 that will be presented in this hearing from the private 26 surveys. We believe USDA needs to discount these costs. 27 The widespread requests by industry participants to have 28 Congress legislate authority to USDA to survey these costs 3312 1 is ample evidence of the lack of universal confidence in 2 the private data surveys. It just is. 3 More importantly, what is more relevant is average 4 profitability, which combines revenue with cost. And 5 sorely lacking from the analysis, manufacturing input 6 costs, is a review of profitability at manufacturing 7 plants. We have provided historical dairy farmer 8 profitability information collected by USDA and accounting 9 firms using generally accepted accounting principles, we 10 believe this data to be highly credible and important for 11 USDA to utilize in determining the appropriate 12 Make Allowance changes. 13 Over the last few years, we have seen new cheddar 14 cheese plants built in Michigan, Wisconsin, Texas, 15 production expansion in South Dakota. Additionally, new 16 cheese plants are being built in Kansas and New York. All 17 of these plants were built or planned based on the current 18 Make Allowances used to determine Federal Order milk 19 prices. It is self-evident in economics that all of these 20 milk plants were built based on an expected profitable 21 return. 22 This would suggest that the large, efficient, and 23 modern cheese manufacturing facilities have developed 24 means of profitability despite a fixed cheese 25 Make Allowance dating back to 2008. Increases in 26 Make Allowance will greatly benefit the profitability of 27 the largest and most efficient milk plants that operate at 28 the lowest cost of production. 3313 1 Really large Make Allowance increases will shift 2 income from dairy farmers to large and efficient milk 3 plants that do not need that kind of financial support 4 provided to them by dairy farmers. 5 2023 has been a rough year in the dairy industry. 6 There are extreme losses on just about every dairy farm 7 right now. The milk price, has been testified to by a 8 number of dairy farmer witnesses, has decreased 9 substantially, and their costs have not. 10 My model -- I'm not presenting my model here -- 11 but my model would suggest these losses are 4 or $5 a 12 hundredweight on average right now. I don't expect those 13 losses to zero out. For most of this year, maybe by the 14 fourth quarter, as prices -- if the prices on the CME 15 futures market hold in the prices for milk, and the prices 16 for new crop livestock feed stay at about the level that 17 the CME Group futures price are expecting, we may see, on 18 average, farm returns return to maybe a break-even. And 19 as I look out into 2024, and the model that I run and I 20 use, using the CME Group futures prices would suggest 21 maybe, without other wild changes, that maybe it might be 22 a break-even year, but not a very good year. 23 Going to page 19, I have some testimony on 24 negative other solids prices, and I would just suggest to 25 look at that. The proposal by the Wisconsin Cheese Makers 26 and IDFA would result in significantly increased 27 occurrences of negative other solids prices. 28 Okay. I'm about done. 3314 1 There's some historical precedent. Federal Order 2 Make Allowances -- I'm going to adjust this because I know 3 Mr. Rosenbaum is going to correct me, so hopefully I can 4 get this in the right -- there's been three occurrences 5 when we have looked at Class III and IV milk price 6 formulas, and/or Make Allowances, since Federal Order 7 Reform. There was 2000, I believe 2004, and then again in 8 2007. 9 So during those proceedings, data from multiple 10 sources was used to determine Federal Order 11 Make Allowances, in each proceeding. Additionally, the 12 time between the hearings was relatively short, and price 13 inflation was relatively tame. 14 The resulting changes from these hearings had 15 modest changes in Federal Order milk prices. I believe 16 the biggest changes to milk prices occurred from the 2007 17 hearing that were implemented in 2008. The Class III 18 price declined by $0.34, and the Class IV price declined 19 by $0.25. 20 In 2004, that hearing -- if it was 2005, I'm open 21 to correction on the years -- the Class III price declined 22 by $0.25, and the Class IV price declined by $0.17. And I 23 believe that in the 2000 hearing Class III and IV prices 24 modestly increased as a result of that hearing. I'm open 25 to stand corrected on any of that, but I'm pretty close to 26 being right. 27 So the changes were modest. We're not talking 28 about modest changes here, even -- I would say even the 3315 1 National Milk proposal, but certainly not the IDFA or 2 Wisconsin Cheese Makers Association. 3 For each of those proceedings USDA relied on 4 multiple sources of data, principally a USDA cost of 5 manufacturing study, a/k/a Charlie Lying study -- studies. 6 The California's audited data from their state Milk 7 Marketing Orders also. 8 I may have this wrong, and I stand for correction, 9 because I'm not sure when Mr. Stephenson's study first 10 started, if it was in 2004 or 2006. But we also relied on 11 the Cornell survey information. Cornell at the time, 12 Wisconsin now, in each case -- and so in each of those 13 cases -- and there was also -- there was also data 14 submitted by individual plants and cooperatives, so there 15 was a rich source of information that was on the record, 16 for USDA to use to determine Make Allowance changes. 17 These rich sources of information provided USDA 18 with a relevant set of cost data to form the basis of 19 their decision. No prior case, no prior case, did USDA 20 rely solely on a non-government source of information or 21 on changes in input price relationships developed from the 22 Federal Bureau of Labor Statistics. 23 Unfortunately, we don't have all this data 24 anymore. We now have a significant problem in the dairy 25 farmers' and their cooperatives' confidence in the data 26 available to consider a Make Allowance adjustment. No 27 longer do we have the USDA study and an analysis, nor do 28 we have the California information. 3316 1 We are limited to two private surveys from the 2 University of Wisconsin, one supported by USDA, but that 3 had limited cheese manufacturing participation, especially 4 with the larger cheese plants, and then a cost allocation 5 that we weren't quite sure about at butter/powder plants. 6 And another one, sponsored by IDFA, who has a 7 biased interest in a significant increase in the 8 Make Allowance, and that was administered during the peak 9 of the U.S. and global price environment. In efforts to 10 buttress the obvious shortfalls of the data, my good 11 friend, Mr. Schiek, looked at some input price indexes, 12 used those to estimate production costs. 13 I believe these efforts have their own credibility 14 issues since input consumption and production are fixed at 15 those factors that existed years ago, so assuming there 16 are no economies of scale or size from larger milk plants 17 built over the last few years, no capital investments made 18 at plants to reduce input uses or improve in production 19 efficiencies. And, I think I said this, none of the 20 plants hedged their input prices. 21 It is for this reason that NMPF and its member 22 cooperatives, the American Farm Bureau, IDFA, and others, 23 are requesting Congressional action to provide federal 24 authority to USDA to conduct relevant dairy manufacturing 25 plant surveys to identify input prices, input 26 utilizations, capital investments, production yields, and 27 other factors, and audit the information, to provide the 28 dairy industry reliable and unbiased information to use 3317 1 when considering changes to dairy producer milk prices. 2 In conclusion, there is no doubt that plant input 3 prices are higher today than they were in 2006. There is 4 no doubt that the conversion of milk to manufacture 5 products yields more than occurred in 2006. There is no 6 doubt that a larger proportion of manufacturing output is 7 produced by modern and more cost efficient manufacturing 8 plants than occurred in 2006. 9 Despite this knowledge there is significant doubt 10 of the conversion of those factors into a reliable and 11 accepted cost of production statistic. Additionally, 12 there's doubt about the relevancy of observations that 13 should be used to determine this value: Should it be only 14 large efficient plants? All plants surveyed? All plants 15 but high and low cost outliers? Or other combinations? 16 The dairy industry has not debated these factors. 17 National Milk Producers Federation member 18 cooperatives represent all relevant segments of the U.S. 19 dairy industry. Its members operate significant 20 manufacturing businesses across all cheese categories, 21 butter, and powder. Its members produce a clear majority 22 of the butter and powder manufactured in the United 23 States. Additionally, its member cooperatives market the 24 milk and write the milk checks for their farmer-owners, 25 which collectively represents more than 75% of the U.S. 26 milk production. 75% of the U.S. milk production. 27 The NMPF member cooperatives are uniquely invested 28 in a manner that allows them to see all sides of these 3318 1 issues around Make Allowances and class price formulas. 2 The National Milk Producers Federation member 3 cooperatives have meticulously deliberated over the 4 weighty and important issues surrounding an appropriate 5 Make Allowance change. You have heard from many of us. 6 You have heard from many of us. 7 We agree that the average cost of manufacturing 8 dairy products have gone up since 2006. That's 9 undisputed. However, we struggle with knowing how much 10 these costs have gone up due to the lack of credible and 11 reliable information. 12 Despite the best efforts of many in the dairy 13 industry, credible and reliable information that 14 culminates in reducing dairy farmer milk prices does not 15 exist. Dairy farmers see this and understand this. To 16 make an aggressive Make Allowance change using this flawed 17 data will undermine the confidence dairy farmers have in 18 the Federal Order system. If that information existed, 19 and it suggested a Make Allowance change of more than a 20 few cents per pound, we would be restrained from 21 advocating for the full implementation of the change due 22 to the impact on milk prices and profitability for our 23 farmer-owners. 24 Again, no prior class price formula or 25 Make Allowance has impacted farmer milk checks, I have by 26 more than $0.35. It's probably by more than $0.30 when 27 you do the actual utilizations of the changes from the 28 2008 hearing. 3319 1 To maintain dairy farmer confidence in the 2 credibility of the administrative process of changing the 3 Make Allowance, and in the absence of robust, credible, 4 and audited manufacturing cost information from a federal 5 government source, we believe that the implementation of 6 the National Milk Producers Federation proposed 7 Make Allowance increases are the appropriate adjusted -- 8 adjustments to make all things considered. Our suggested 9 changes will lower farmer milk prices by about $0.50 per 10 hundredweight, which we believe to be an acceptable 11 balance between the milk price and profitability impact 12 and the manufacturers' cost recovery. 13 Appendix 1, which is pages 22 through 24, is the 14 data from the Frazer and the Nietzke Faupel surveys, which 15 is all contained in the information that they provided in 16 the exhibits when they were here to testify. 17 With that, I will end my formal presentation. 18 Thank you. 19 Q. Thank you, Mr. Gallagher. I just have a few 20 questions that I want to make sure that we expand upon 21 before we turn you over for your cross-examination. 22 On page 20 of your testimony, in your conclusion, 23 and then previously in your testimony, you referred to the 24 process that National Milk went through in order to come 25 up with its numbers for Make Allowance that's in its 26 proposal. And we have heard testimony from other National 27 Milk task force members where they have talked about a 28 compromise, and I think some of the questioning has led 3320 1 this into a position to suggest that they were somewhat 2 made up. 3 And I want to -- you were involved in that 4 process, and you provided some of the information here 5 that led you to your position on Make Allowance. I 6 wondered if you could talk about whether or not you 7 believe that National Milk's proposed numbers are a 8 compromise in a way that suggests that they are made up 9 numbers. 10 A. Yeah. Very good. Thank you. 11 They are not made up numbers. We went through a 12 very diligent and robust process to look at and deliberate 13 over what we thought we would propose for Make Allowance 14 changes. 15 We looked at each member cooperative, looked at 16 their own manufacturing costs of production. We looked at 17 price changes and spent time looking at price indexes, but 18 rejected those because the faults -- fault -- faultiness 19 of index changes when you can't take into account 20 productivity changes. So we rejected those fairly 21 quickly. And then we thought about what would be the 22 impact on milk prices for farmer-owners into their 23 profitability. 24 So everything I talked about in here, we 25 deliberated on, and we took a long time. We started this 26 process in January of 2022, and it wasn't until October 27 that we had finally come to terms with what we thought was 28 the best process. 3321 1 We looked at all kind of costs. We included, 2 first, the Wisconsin survey and looked at that 3 information. We looked at old manufacturing cost studies, 4 including the California studies. We took in a lot of 5 information. 6 And at the end of the day, based on all that 7 information, we decided that the best numbers to go with 8 were the ones that we presented because we recognized that 9 we couldn't ask our farmer-owners to experience a dramatic 10 milk price decline that would erode their profitability. 11 And yet we also recognized that all of us have higher 12 costs at our manufacturing plants and that there is a need 13 to provide some cost relief. And we really think we 14 struck the right balance, all things considered, in our 15 review. 16 Q. And how would you -- I think you have touched on 17 this in your testimony. I just want to make sure that it 18 is clear. In that analysis, you weren't -- you weren't 19 working your analysis in a way that was designed to ensure 20 that the process National Milk proposed was protecting 21 just the dairy farmers' profitability, were you? 22 A. No. We were looking at all aspects. We looked at 23 what -- what -- we didn't share our information, but we 24 looked at what our -- you know, we reviewed what our costs 25 of production would be. Had pretty robust conversations 26 about that. 27 Q. And how -- how is it that you believe that the 28 dairy farmers -- to the extent in your testimony you are 3322 1 talking about dairy farmers' profitability and their 2 ability to absorb a change -- how is it that you believe 3 that those changes and the dairy farmers' profitability 4 has an impact on the milk supply or the ability to 5 continue to supply milk into the future? 6 A. Dairy farming is a business. As a business, in 7 order to be successful, you have to be able to earn a 8 profit. In too dramatic of a change in their milk price, 9 that would be a structural change, a structural change. 10 This isn't like Mr. Lyon's testified to demand being 11 slower and so the price went down, eventually demand comes 12 back, and the price goes up. That's not what we're 13 talking about. 14 We're talking about, amongst that, a structural 15 change that reduces milk prices forever. And so those 16 changes can hit on the profitability of dairy farms, and 17 if they're not going to be profitable, some are going to 18 go out of business, and that's going to, you know -- and 19 the cows may not just get shifted to another farm, because 20 the investment for the other farms that are going to stay 21 in business, investment returns aren't going to be strong 22 enough for them to build bigger barns or expand their 23 herds. 24 And so I -- I am significantly concerned that 25 dairy farmers will go out of business, cows will go out of 26 business, and the milk supply could be severely 27 constrained. 28 Q. Thank you. 3323 1 You just referred to Mr. Lyon's testimony, and he 2 talked about some opportunities -- or not opportunities, I 3 said that wrong -- he talked about some times in which 4 there was dumping of milk. I'm wondering if you can talk 5 about whether you have observed times in the industry when 6 milk has had to be dumped and what was it that you 7 observed was causing that situation. 8 A. Yeah. So dairy farmers and their cooperatives 9 hate -- hate the fact that milk can't find a market and 10 that -- but sometimes there just is no market available, 11 and the only -- the only other option is dispose of it. 12 This really reared its head at the beginnings of 13 the COVID pandemic. And so there's lots of -- lots of 14 reasons why milk gets, quote, dumped. During the COVID 15 pandemic, milk got dumped because plants weren't 16 operating, or weren't operating at full capacity, and 17 there was nothing you could do. And that happens a lot. 18 There are plants break down, and so you -- as a marketer 19 of raw milk, you are trying to move milk around wherever 20 you can. 21 And we work -- all of us, everyone does, not just 22 DFA, everyone does -- works really hard to figure out how 23 can we salvage that milk. And sometimes it is you 24 separate the cream, and you can still find somebody that 25 will buy the cream, but nobody wants the skim, and so the 26 skim gets dumped. 27 So -- and these things happen. It may not be a 28 plant breakdown, as Mr. Lyons (sic) testified to. Some of 3324 1 the issues that we have seen recently, it's just the 2 reaction to global inflation had impacts on global demand 3 for dairy products that backed the system up. There just 4 weren't buyers for the milk. 5 And as a manufacturing plant, you may not want the 6 milk, and so maybe they had capacity, maybe they didn't, 7 but they didn't want the milk, so what do you do? You 8 have to dispose of it. 9 You know, this isn't a Make Allowance thing. I 10 mean, sure, go ahead -- it's not a Make Allowance thing. 11 Milk companies, dairy cooperatives aren't going to build 12 milk plants to assure that no milk ever gets dumped, when 13 those milk plants probably most of the time won't even run 14 half full. And so we're not going to lose all kinds of 15 money building milk plants -- regardless of what the 16 Make Allowance is, you can increase it, whatever -- we're 17 not going to build milk plants just to scoop up all the 18 milk that's getting dumped because it's not that much. 19 And that would be a significant profit losing proposition 20 to do that. 21 So there's lots of reasons why, you know, milk 22 gets dumped. It's -- you know, we hate it, but it's not 23 enough yet in any one specific area to build a milk plant 24 about. 25 Q. Do you believe that we have too many dairy 26 producers producing milk? 27 A. No. We don't have too many dairy producers 28 producing milk. 3325 1 Q. Do you have Class III and IV plants that take in 2 raw milk? 3 A. We do. 4 Q. Can you tell me where they are located and what 5 kind of products you produce? 6 A. We have 14. And so let me start on the West 7 Coast. We have a plant in Turlock, California, that makes 8 liquid whey and Italian cheese. 9 We have a plant in Fallon, Nevada, makes skim milk 10 powder and whole milk powder. 11 We have a plant in Beaver, Utah, makes 12 American-style cheese, condensed milk, and cream. 13 We have a plant in Garden City, Kansas, makes 14 nonfat dry milk, skim milk powder, and whole milk powder. 15 We have a plant in Portales, New Mexico, that 16 primarily makes nonfat dry milk and skim milk powder, but 17 it can also make condensed and MPC. 18 We have a plant in Fort Morgan, Colorado, that 19 makes condensed milk, cream, and nonfat dry milk. 20 We have a plant in Pollock, South Dakota, that 21 makes hard Italian cheese and liquid whey. 22 We have a plant in Winthrop, Minnesota, that makes 23 sweetened condensed milk. 24 We have a plant in Zumbrota, Minnesota, that makes 25 hard Italian cheese and has recently been retooled, it can 26 also make American-style cheese. 27 We have a plant in Goshen, Indiana, that makes 28 nonfat dry milk and can condense milk and sell cream. 3326 1 We have a plant in Cass City, Michigan, that is a 2 separation plant: Condensed, milk, cream, skim milk. 3 We have a plant in New Wilmington, Pennsylvania, 4 that makes Italian-style cheese and dry whey. 5 We have a plant in Redding, Pennsylvania, that 6 primarily makes nonfat dry milk, but can also make 7 condensed milk and sells cream. 8 We have a plant in Middlebury Center, 9 Pennsylvania, that can make nonfat dry milk and whole milk 10 powder, also can make condensed -- condensed milk and can 11 sell cream, separate cream. 12 And we have a plant in St. Albans, Vermont, which 13 makes nonfat dry milk and skim milk, and also can condense 14 milk and separate cream and sell cream. 15 Those are our manufacturing plants that take in 16 raw milk for Class III and IV purposes. 17 Q. Did DFA respond to Stephenson's study or survey? 18 A. The first one, yes. We participated -- so, taking 19 a step back. Prior to 2022, I had pretty limited 20 interactions on a lot of this stuff. I am aware that in 21 the 2019 survey, I think that's when it was, 2019, we 22 shared information. I am not sure what we did in the 23 prior surveys. I don't have that historical knowledge. 24 In the 2022 survey, we did not share our data. 25 Q. Is it fair to say that one -- that that becomes 26 the basis for one of the reasons that you questioned the 27 completeness and accuracy with Dr. Stephenson's 2022 28 survey? 3327 1 A. One of the reasons, yes. 2 Q. Among others that you mentioned as well? 3 A. Among others, yes. 4 Q. Thank you. 5 MS. HANCOCK: Your Honor, at this time we would 6 make Mr. Gallagher available for cross-examination. 7 THE COURT: We have been going a little more than 8 an hour and a quarter, so let's take a ten-minute break. 9 Come back at -- let's come back at 11:00. 10 (Whereupon, a break was taken.) 11 THE COURT: On the record. 12 I have a quick question here. This witness asked 13 that official notice be taken of certain USDA documents, I 14 think there's other PPI documents. I think the regs 15 require that folks be given notice of that and the 16 opportunity to argue to me whether they are inaccurate or 17 otherwise that official notice should not be taken. 18 How do we want to handle this? 19 MR. HILL: I would say that we do need to get 20 those documents as well, just as an aside, because 21 usually, if we can have those documents sent to us in some 22 way, because we need a way to confirm which documents they 23 actually need on the record. 24 So for anyone making these requests, if we could 25 get a copy of those documents, or at least the website for 26 the documents, or have them sent to us, or e-mailed, that 27 would be helpful from our perspective. 28 THE COURT: You can do that? Yeah. And I see the 3328 1 testimony -- 2 MR. HILL: And that would be true of everyone who 3 has asked for those type of documents, not just obviously 4 for this witness. 5 THE COURT: Sure. 6 MR. ROSENBAUM: Steve Rosenbaum, your Honor. We 7 would like to see those as well, obviously, and then have 8 the opportunity to -- to take a position whether we have 9 any reason why they should not be subject to conditions 10 once we have seen them. 11 MS. HANCOCK: That ship sailed. 12 THE COURT: Yes. I mean, I think we need at least 13 a website or something. I don't want to -- 14 THE WITNESS: Here's the website. Can you -- 15 where's that guy -- can you put -- 16 MS. HANCOCK: We're going to pull up what we 17 want -- 18 THE WITNESS: There's the website right there, 19 "Milk Cost of Production Estimates." 20 THE COURT: All right. Well, let's circulate a 21 document. Maybe we can mark it as an exhibit, something 22 like that, or otherwise the -- somebody looking at the 23 record doesn't have a way of getting there either. 24 All right. We'll take it up later. I mean, if 25 someone's got an objection, remind me, and we'll take it 26 up. Thank you. 27 Your witness, Mr. Rosenbaum. 28 /// 3329 1 CROSS-EXAMINATION 2 BY MR. ROSENBAUM: 3 Q. This is Steve Rosenbaum for the International 4 Dairy Foods Association. 5 Mr. Gallagher, I understood you in your testimony 6 to talk about how it was important to have the opportunity 7 to have data presented by companies as to their cost of 8 manufacture. 9 Did I hear that correctly? 10 A. In the past hearings, as in this one, different 11 entities have presented their companies' costs. 12 Q. And do you view that as a source of information 13 upon which USDA can reasonably rely? 14 A. It's a source of information to use in making 15 their decisions because it's reasonable to rely on it. I 16 don't know -- I don't know what they -- I have never 17 been -- participated in their decision-making process, so 18 I'm not sure what kind of reasonability they associate 19 with that information. 20 Q. Okay. 21 A. But it is information. It is data. 22 Q. Okay. And, I mean, you don't have any inherent 23 objection to USDA relying upon sworn testimony by 24 manufacturers as to what their actual costs of manufacture 25 are? 26 A. The data is what the data is. They have to 27 determine themselves what the reliability of that data is. 28 Q. I mean, as an example -- 3330 1 A. No, I can't -- I can't help them, you know. 2 Q. I mean, I don't know whether you were here during 3 the testimony, but the Land O'Lakes witness presented what 4 he asserted to be hard data, which I don't dispute, that 5 would indicate that Land O'Lakes since 2008 has incurred a 6 more than 70% increase in its costs of manufacturing 7 nonfat dry milk and butter. 8 Do you have any reason to tell the USDA they 9 should not rely upon that information? 10 A. The -- whatever Land O'Lakes witness testified to 11 is in the record. I'm not particularly aware of that. 12 Again, the -- 13 Q. I mean, assuming that USDA were to find that 14 witness to be credible, that evidence to be reliable, and 15 that the percentage increase that Land O'Lakes says it has 16 itself -- the increase in cost that Land O'Lakes says it 17 has itself incurred since 2008, if that number exceeds by 18 a comfortable amount the Make Allowance increases that are 19 being sought by IDFA, would that provide some reason to 20 conclude that the IDFA data is reliable notwithstanding 21 what you see is certain shortcomings? 22 A. No. 23 Q. Okay. Really? 24 A. Really. 25 Q. So even if -- just as to the reliability of the 26 data? 27 A. So -- so your -- your question to me, the last 28 part of the question, was that if by chance the 3331 1 Land O'Lakes data is reliable -- and I don't know what 2 USDA thinks is reliable -- but it is credible data to 3 prove the IDFA numbers out, so you are asking me to -- 4 to -- to think that one individual business's plants can 5 be used to verify your information? 6 Q. Oh, I am -- 7 A. That's what I'm saying no to. 8 Q. I'm just starting -- 9 A. Just saying no. 10 MS. HANCOCK: Your Honor, if we could let the 11 witness finish the answer, please. 12 THE COURT: One at a time. 13 THE WITNESS: So the connection I'm saying no 14 to -- 15 MR. ROSENBAUM: All right. 16 THE WITNESS: -- the connection -- 17 MR. ROSENBAUM: What -- 18 THE WITNESS: -- that you need more than -- 19 MS. HANCOCK: Your Honor, if we could let the 20 witness -- 21 THE WITNESS: -- that you need -- I'm sorry. 22 THE COURT: Wait a minute, everybody. One at a 23 time. Let the witness finish -- 24 THE WITNESS: One more thing -- 25 THE COURT: Let the interrogator finish. 26 THE WITNESS: What I'm disagreeing with, 27 Mr. Rosenbaum, is that you're asking me to -- to agree 28 with you that one business's data corroborates the IDFA 3332 1 data. That's what I'm saying. I don't believe one 2 business's data is enough to corroborate the IDFA data. 3 BY MR. ROSENBAUM: 4 Q. What -- 5 A. That's what I'm saying. 6 Q. Appreciate that. What if they were to conclude 7 that the testimony of the AMPI witness, that they have 8 incurred cost increases consistent with the IDFA proposal, 9 what if USDA found that also to be credible -- 10 A. Again -- 11 Q. -- would that, to your mind, be reasonably relied 12 upon to conclude that the IDFA cost to manufacture 13 numbers, which are then incorporated into its 14 Make Allowance proposal, is reasonable? 15 A. No. 16 Q. Okay. How about if Northwest Dairy -- I think 17 that's the right name of it, Northwest Dairy -- similarly 18 confirmed in testimony that it had incurred cost increases 19 that were consistent with the IDFA proposal, at that point 20 would the IDFA data, from your mind, reasonably be 21 concluded to be reasonable? 22 A. No. Let me -- let me -- 23 (Court Reporter clarification.) 24 THE WITNESS: First of all, we believe that there 25 needs to be a federal government source collecting the 26 data, analyzing the data, and auditing the data to make 27 significant Make Allowance changes. 28 All of the witnesses that you have referenced from 3333 1 the National Milk cooperatives, other than AMPI, all 2 testified that regardless of what increases in 3 manufacturing costs may be, we have to be careful not to 4 reduce dairy farmer milk prices too significantly because 5 it will too negatively impact their profitability. 6 And I think other than AMPI, you can go through 7 any one of the NMPF witnesses, and I believe they all have 8 said the same thing, that we need to limit the impact on 9 dairy farmer profitability, even if there are additional 10 costs in the system beyond those being in the National 11 Milk proposal. 12 So -- so if you want, we can go through all the 13 National Milk witnesses, and I'm just going to say no to 14 all of them, but that's sort of where I'm coming from. 15 BY MR. ROSENBAUM: 16 Q. I'll do one more. California Dairies, assuming 17 that they testified -- and I believe I have this right, 18 but I could be corrected -- I know one of the members 19 testified that they have incurred 80% increase in cost 20 since 2008. Once again, would that -- 21 A. No. No. 22 Q. But -- but you -- I mean, you have more than one 23 criticism of the IDFA proposal, correct? One of them is, 24 regardless of the veracity of the numbers, you oppose the 25 Make Allowances being proposed because you think it has 26 too big an effect on dairy farmers, correct? That's one 27 of your objections, correct? 28 A. One of our objections is the impact on dairy 3334 1 farmer milk prices and profitability of too large of a 2 Make Allowance increase. 3 Q. And I -- and you just referenced that and answered 4 a previous question of mine. We're going to get to that 5 issue in a minute. But I'm just trying to focus on your 6 other criticism at this point, which is that the -- you 7 don't think the IDFA cost of manufacture data, which 8 translates into IDFA's Make Allowance proposal, is 9 sufficiently reliable, correct? That's another criticism 10 you are expressing in your document, correct? 11 A. Yes. 12 Q. And I'm asking you whether you maintain that 13 criticism, even if multiple members of National Milk have 14 come and testified under oath, with respect to their own 15 costs of manufacture, and a substantial number of them 16 have testified to cost increases that are consistent with, 17 and in some cases in excess of, the increased 18 Make Allowances that are being sought by IDFA. 19 A. What's your question? 20 Q. Does that -- doesn't that, in fact, support the 21 reliability of the IDFA numbers, wholly apart from the 22 question in which you have identified is a separate 23 question, is whether that's how we should go about setting 24 Make Allowances? 25 A. So you are using a subset of the universe, a 26 non-random subset of the universe to substantiate data in 27 a survey, and I don't agree that there's enough 28 information presented on the record from a subset of the 3335 1 universe to substantiate any of the survey analysis, 2 survey results. 3 (Court Reporter clarification.) 4 BY MR. ROSENBAUM: 5 Q. You have provided a history, in part, and I want 6 to discuss that history for a minute. 7 So as I counted, USDA has previously had on five 8 occasions set Make Allowances. Let me recite them and see 9 if you agree. 10 A. Yep. Yes. 11 Q. Number one, they did them in 2000 in the Order 12 Reform itself. 13 Number two, they did it again in late 2000. They 14 actually were under a Congressional directive because 15 there was concern the Make Allowances might not be 16 accurate, so they did it again, in December 2000 as it 17 happens. 18 Then they did it again in 2002. 19 And they did it again in 2006. 20 And they did it again in 2008. 21 Which I get to be five occasions -- 22 A. 2002. Then what year? 23 Q. 2006. 24 A. And then 2008? 25 Q. 2008. 26 A. Well, I wasn't including 2000. 27 Q. Okay. 28 A. And if there's another one, I missed it. 3336 1 Q. Okay. So -- well, we'll have some history 2 presented when -- in our testimony, so I'm not really 3 looking to you for the specifics, so much as an answer to 4 the following question: Am I right that in every case, 5 USDA set the Make Allowance based upon what it concluded 6 was the actual cost to manufacture? 7 A. So I haven't reviewed that history, so I -- I 8 don't know the answer to that. 9 But I'll come back to the Agricultural Marketing 10 Agreement Act stipulates that the cost of livestock feed 11 must be considered, as well as whether there will be an 12 adequate supply of fluid milk. And in all prior hearings, 13 there's never been as significant of a change requested, 14 in light of all of the circumstances, that would so 15 significantly impact the profitability of dairy farmers, 16 that would have an impact on such a potential negative 17 impact on the adequate supply of milk that's required 18 under the law. 19 And so I -- I -- I don't know what they actually 20 said. I don't remember. I didn't review it. But it's 21 different this time by a -- 22 Q. Well -- 23 A. -- by a large measure. 24 Q. -- one difference, and there may be different 25 reasons for this, but one difference is we simply have 26 never waited so many years to update Make Allowances, 27 correct? 28 I have given you the history -- 3337 1 A. Yep. 2 Q. -- so it's simple -- 3 A. I can't disagree with that. 4 Q. Okay. So, I mean, it has been 15 years, correct? 5 A. Yes. 6 Q. And do you -- are you familiar with the fact that, 7 although the most recent decision came out in 2008, it was 8 actually based upon data regarding costs of manufacture in 9 2006 and 2007? 10 A. I am familiar with that, yes. 11 Q. So if you were to look at the gap in cost data, 12 there's probably even an extra year you have to add in to 13 look at how long it's been; is that -- 14 A. Maybe. Sure. I don't know. I don't know -- I 15 don't know -- so you're referring to a hearing record, and 16 I don't recall what the cost information that would have 17 been included in that hearing record. But it's, you know, 18 around the area as far as I'm concerned, whether it's, 19 what, one year or the next. 20 Q. Okay. Now, are you aware that the -- that even in 21 times when only a couple of years had passed since the 22 most recent prior revision to Make Allowances, there were 23 sometimes pretty substantial increases, even over a 24 two-year period? Have you studied that? 25 And I'll give you specific numbers if you want. 26 A. Yeah. I'd like to hear your specific numbers. 27 Q. Okay. So from 2006 to 2008, which is only two 28 years, the Make Allowance for butter increased from 3338 1 $0.1202 to $0.1715. That's over two years. That's a 42% 2 increase in the Make Allowance. 3 Were you aware of that? 4 And I'm -- I'm -- let me just -- 5 A. I'm checking my notes. 6 Q. Yeah, let me -- 7 A. I'm not -- I'm not going to -- the records -- the 8 record is what the record is. I don't know. But USDA 9 knows, so I'm comfortable with what they know. 10 Q. Yeah. Just so -- the citation, I'm looking at 11 73 Federal Register, I believe it begins on 35306 and I'm 12 just looking at the statement by USDA, trying to get a 13 specific page number. It's not jumping out at me 14 immediately. But in any event, they said, specifically 15 the Make Allowance for butter increases from $0.1202 to 16 $0.1715. 17 And were you aware that in that same decision, 18 which only reflected a change from a 2006 decision, and 19 now it is 2008, that the Make Allowance for cheese 20 increased from $0.1682 to $0.2003, which represented a 19% 21 increase just for two years? 22 A. Mathematically, I'm assuming you're correct. I'm 23 confident in your mathematical ability. And I'm confident 24 that you have probably -- and I -- I have in my notes 25 similar Make Allowance numbers that would be similar to 26 what you are saying. 27 Q. Okay. And are you aware that in 2006 -- excuse 28 me, start that question again. 3339 1 Are you aware that in 2008, the increase for dry 2 whey was very modest, but that may, in part, reflect the 3 fact that in 2006, USDA had increased the Make Allowance 4 from dry whey from the 2002 number of $0.159 to $0.1956? 5 A. I -- I don't know the reasoning behind why the 6 whey price only went up a nominal amount, but I would 7 agree that your numbers for the changes in the 8 manufacturing allowance for whey appear to be correct from 9 the notes that I have taken. 10 Q. And that 2006 increase, from 15.9 to 19.56, was an 11 increase over the price that had been set simply four 12 years earlier in 2002? 13 A. Sure. 14 Q. That's a pretty hefty increase over just four 15 years, correct? 16 A. So I believe I have correctly testified to the 17 impact on the Class III and IV prices. Do you dispute 18 what I testified to? 19 Q. I have not done those calculations. I'm not going 20 to -- so I'm not in a position to tell you one way or the 21 other. 22 A. But somebody will come back and check on that, I'm 23 sure. 24 So despite those percentage increases, my 25 information that I have found in some of the USDA 26 documents would say that in the interim final rule for 27 January 31st, 2007, does that sound correct, for that -- 28 for that 2006 hearing? 3340 1 Q. Okay. I can't verify that -- 2 A. Everybody -- 3 Q. I -- 4 A. Everybody -- 5 (Court Reporter clarification.) 6 THE WITNESS: USDA can check the numbers. They 7 have got the data. So I would -- my data shows that from 8 that hearing the Class III price decreased by $0.25, and 9 the Class IV price decreased by $0.17, and stemming from 10 the 2008 hearing the Class III price decreased by $0.34 11 and Class IV price by $0.25, despite whatever percentage 12 increase you have stated for the specific Make Allowance 13 changes. And USDA can check my information because I know 14 they know it. 15 BY MR. ROSENBAUM: 16 Q. Now, you have done some dollar calculations 17 regarding the dollar amount of the increase for the 18 Make Allowances IDFA is proposing, correct? 19 A. Yes. 20 Q. Now, first of all -- I think this is clear to 21 everyone, but we should make it clear -- you're -- you are 22 aware that IDFA is proposing to increase Make Allowances 23 over a four-year period. It's a staggered phase-in, 24 correct? 25 A. I am aware of that, yes. 26 Q. And you have taken for your analyses the final 27 number, which if our proposal were to be accepted, will 28 not actually come into effect until 2028, correct? 3341 1 A. Correct. 2 Q. And in addition, to state the obvious, these 3 Make Allowances are used to set the minimum milk price, 4 correct? 5 A. USDA and the Federal Order program administers a 6 series of set of class prices that are minimum milk 7 prices. 8 Q. Okay. 9 A. To the extent that the minimum milk prices end up 10 being too far away from reasonable milk prices, I'm not -- 11 you know, I'm not sure the system works very well. 12 Q. Well, obviously, you are aware -- deeply aware, 13 I'm sure that -- that often processors have to pay 14 over-order premiums to their -- to their farmers, correct? 15 A. Yes. 16 Q. And you have not attempted to analyze, at least 17 for anything you have shared today, the extent to which 18 over-order premiums would be achieved by farmers in a way 19 that would make the effective milk price higher than the 20 minimum milk price? 21 A. With the existence of over-order premiums, the 22 effective milk price would be higher than the minimum milk 23 price. 24 Q. Okay. And -- and I think you made reference to 25 this previously, but historically, at least, USDA has 26 performed an econometric study in connection with proposed 27 revisions to Make Allowances and other provisions of the 28 borders where its purpose has been to come up with a -- 3342 1 what it views as a realistic determination of what the 2 actual effect would be on milk prices, correct? 3 A. I haven't testified to that. 4 Q. No, no, I know. But I'm just asking you if you 5 are aware that USDA does that, that that's part of the 6 process? Historically that's been part of the process? 7 A. I am aware that they have done econometric 8 analyses of information relating to Federal Order policy 9 changes. 10 Q. Sorry, related -- 11 A. Related to Federal Order policy changes at a 12 proceeding, such as this, a hearing to adjust Federal 13 Order provisions. 14 Q. You are aware that as a -- at least as a general 15 practice, they do in connection with a proceeding like 16 this perform such an analysis? 17 A. I am familiar that -- with the documents that -- I 18 haven't reviewed them extensively for this testimony, but 19 I am familiar in some of the past hearings that they have 20 presented their analysis of -- their estimates of what 21 they think changes would be on a variety of factors, which 22 I -- which I believe go beyond -- which go beyond the 23 impacts on milk prices over time. 24 I would say, as a corollary to that, I'm not sure 25 I have ever seen an analysis that ever got it right. 26 Q. But you have not offered one yourself, correct? 27 A. I have not. 28 Q. So are you aware that USDA has directly 3343 1 confronted, a number of times, the question whether in 2 setting Make Allowances it should take into account dairy 3 farmer cost of production? Are you aware of that? 4 A. I think that was one of your original questions. 5 Q. Okay. 6 A. And I -- I -- 7 Q. Asking it from a little different direction. 8 A. I know. So confronted sounds like it is a battle. 9 It's a little bit what's going on here. So there is a 10 confrontation, I guess. 11 So -- so I guess, I respond the same way. I 12 didn't review the record to be able to sort of give you -- 13 give -- put on this record what I think was all the 14 factors that went into their decision of why they adjusted 15 Make Allowances the way they did in prior hearings. 16 Q. I mean, are you aware that after the 2008 hearing, 17 there were challenges brought to the decision that 18 specifically contended that USDA, by basing the 19 Make Allowances solely on manufacturer cost of production, 20 had failed to carry out its obligation under the 37 Act, 21 that that was the accusation made in those challenges? 22 A. I don't remember if it was 2008, but I'll take 23 your word for that's what it was. But I didn't review 24 those decisions. I vaguely remember that. 25 Q. And are you aware that USDA in responding to those 26 challenges said, quote -- having summarized what they had 27 done, quote, "It is, therefore, neither inappropriate nor 28 surprising that while USDA considers producer cost in 3344 1 fixing prices, it declined to modify the Make Allowances 2 to account for those costs. The Make Allowance is the 3 input in the product pricing formula that accounts the 4 cost manufacturers incur in transforming raw milk into 5 other dairy products. In order to extrapolate the value 6 that raw milk contributes to the commodity prices of dairy 7 products, and thereby approximate raw milk's true value in 8 the marketplace, these manufacturer costs must be included 9 as part of the formula. The costs of producing milk, in 10 contrast, are in the aggregate reflected in the supply and 11 demand conditions that affect the NASS commodity prices of 12 dairy products." 13 You are aware that's USDA's historic explanation 14 of how they go about, A, setting Make Allowances, and B, 15 fulfilling their obligation to consider things like feed 16 and fuel costs? 17 A. I am not aware of that. And I would follow up by 18 saying, a decision written during the Bush Administration 19 I don't think is relevant to the facts that exist today in 20 this proceeding under the Biden Administration. 21 Q. Actually, Order Reform took place under the 22 Clinton Administration, didn't it? 23 A. It's not the Biden Administration. And I would 24 say -- you set me up too well for this. I would say that, 25 as a Secretary of Agriculture -- it escapes me, who was 26 the Secretary of Agriculture in 2000? 27 Q. It will come to me in a minute, but it is not on 28 the top of my mind. 3345 1 A. So as the Secretary of Agriculture, he failed so 2 badly that Congress had to override his decision, not 3 once, but twice. Secretary Glickman. That's just an 4 aside. 5 Q. But you are not -- I thought you were trying to 6 make this somehow a Democratic -- 7 A. No. 8 Q. -- versus Republican -- 9 A. No. This is -- 10 Q. -- issue. 11 A. -- just different administrations, no. 12 Q. I see. 13 A. It is just different administrations, and they 14 view supply chains and the agriculture industry and -- 15 they all view it a little differently. 16 Q. So far they have all done it the same way, 17 actually, which is to only look to the cost of 18 manufacturing in setting Make Allowances; is that right? 19 A. I'm not sure what Mr. Glickman thought when he got 20 corrected by Congress. And I do believe, am I right, that 21 he -- that in the end they raised the Class III and IV 22 prices based on the hearing in 2000? Do you recall -- get 23 Mike Brown to look at that, would you? 24 Q. Let me say, I was there, so you would think I 25 would remember. My recollection is that the changes were 26 modest -- 27 A. Oh, they -- 28 Q. -- since 2000, so -- 3346 1 A. I agree that they were modest, but I think they 2 increased the cost a little bit. 3 Q. So I would like to call attention to a statement 4 you made. It's one of the ones that you read. It's on 5 page 21 of your testimony. And I'm going to -- because 6 this statement follows things you already said, I'm going 7 to throw in a few extra words, but I'm trying to capture 8 what you are saying. Okay? So -- but if I don't do it 9 correctly, you -- I want to you correct me. Okay? 10 What you are saying is, in my parlance -- and I'm 11 just -- the changes I'm making are just to the initial 12 clause. What you are saying is, even if credible and 13 reliable information regarding cost of manufacture existed 14 and it suggested a Make Allowance change of more than a 15 few cents per pound, we would be restrained from 16 advocating for the full implementation of the change due 17 to the impact on milk prices and profitability of our 18 farmer-owners. 19 Is that a fair characterization of what you said 20 there? 21 A. It's almost exactly what I said there. 22 Q. I just stuck in the word "even." I stuck in the 23 word "credible and reliable" -- 24 A. Okay. So -- 25 Q. -- which appeared earlier in the paragraph. 26 A. -- which sentence -- where is it that you are -- 27 because I was focused on your question. 28 Q. Okay. 3347 1 A. I wasn't reading the document. 2 Q. Yeah, okay. So it's -- okay. It's the "if that 3 information existed"? 4 A. Yep. 5 Q. That's what I was reading. 6 A. So can you go through where you are adding words 7 for me? 8 Q. So I'm saying -- and I'm just trying to pick up 9 what you have been talking about when you got to that. 10 I'm really trying to capture what you are saying without 11 having to read six paragraphs into the record, which would 12 be painful for everyone. 13 Okay. Even if credible and reliable information 14 regarding costs of manufacture existed, that's the end of 15 my changes. 16 A. That is the essence of my testimony. Yes. 17 Q. Okay. Okay. So I mean -- so I'm -- I mean, there 18 has been some suggestion -- well, let me back up. 19 We do not have a system in place now where there 20 is audited mandatory costs of manufacture data being 21 gathered, correct? 22 A. Correct. 23 Q. Okay. And industry is basically in agreement that 24 that would be desirable, and indeed I saw you add in your 25 oral testimony, what had not appeared in your written 26 testimony, namely you added IDFA as -- my client -- as one 27 of entities that is seeking legislation to -- to achieve 28 that result, correct? 3348 1 A. That's correct. We have a -- we have a broad 2 coalition that, in my mind, when IDFA and the National 3 Milk Producers Federation and the American Farm Bureau 4 Federation all support the same thing, Congress generally 5 gives it to us. 6 Q. Okay. But what I'm hearing from you in that 7 paragraph is that you -- and I assume by that you mean 8 Dairy Farmers of America -- would be restrained from 9 advocating for the full implementation of a Make Allowance 10 change reflecting that audited data, if it suggested a 11 Make Allowance change of more than a few cents per pound; 12 is that fair? 13 A. It's fair for today at this proceeding. So -- so 14 I don't know what it would mean for Dairy Farmers of 15 America three years from now at a different proceeding. 16 I'm talking about this proceeding. 17 Q. Okay. But I'm just -- fundamentally, you -- there 18 has been some suggestion by some witnesses that, look, we 19 just get the audited -- let's just wait, we'll get the 20 audited data, and we'll just use it. But you are not 21 committed to that; is that fair? 22 A. I'm not going to agree to your characterization of 23 the other witnesses because I think they probably -- we 24 don't know what the data is going to show, and so I think, 25 as an industry, it's important to see the data, evaluate 26 the data, and then discuss within the industry, as we do 27 in the National Milk Producers Federation, what we should 28 do with the data. Again, I'm -- I'm not commenting on 3349 1 what we are going to do as DFA when we get that data. I'm 2 just saying, because of the magnitude of the decrease in 3 the milk price, even if we had that data right now, and it 4 showed that -- if by chance it showed your information was 5 correct, we still would be opposed to increasing 6 Make Allowances by that degree. Fair enough? 7 Q. Yes. And so -- 8 A. Thank you. 9 Q. I mean fair enough as a statement of your 10 position. 11 So it is fair to say, waiting for that information 12 is not a silver bullet that's going to address some of the 13 underlying issues that you have identified, correct? 14 A. I don't know. I don't know. We are all on pins 15 and needles waiting for the information, though. 16 Q. When -- is most of the milk that DFA processes 17 Class I and Class II milk? 18 A. That we process ourselves? 19 Q. Yes. 20 A. Is that the question -- 21 Q. Yes. 22 A. -- not that we sell? 23 Q. Yes. 24 A. I would think it is. I haven't reviewed that 25 information for the purpose of this -- my testimony today. 26 But it would make sense that it would be. 27 Q. Okay. And with respect to the milk that you sell 28 to others for processing, does most of that go to Class I 3350 1 and II? 2 A. Again, I haven't reviewed that information, but 3 there would be a substantial amount of milk going to 4 Class III. 5 Q. And so you mentioned some plant -- a variety of 6 plants you have, and many of them make condensed milk; is 7 that correct? 8 A. A number do, yes. 9 Q. Well, you noted -- 10 A. Yeah. 11 Q. -- them one by one -- 12 A. Yep. 13 Q. -- no reason to go back to that. We can confront 14 that independently if we want to -- look at that 15 independently, not a confrontation -- and see -- and see 16 how many there are. 17 But the condensed milk, you're basically -- I may 18 be making this sound too simple, but you're basically 19 taking out some of the water; is that what you're doing? 20 Or you are doing something more than that? Taking the 21 lactose out? What are you doing? 22 A. We're taking some of the water out. 23 Q. Okay. 24 A. And -- yes. 25 Q. Okay. And -- but -- and then -- and does that 26 then typically go to -- for Class III use? 27 A. It may could -- it could go for ice cream. 28 Q. Okay. 3351 1 A. Could go to a variety of Class II and III uses. 2 Q. Okay. But -- 3 A. And I don't know -- I haven't reviewed the 4 information, and I'm not into the -- not involved in the 5 daily movement of any of our milks, raw milk, or other 6 types of milk, condensed cream. And so I don't know 7 where -- where predominantly it would go or how 8 frequently. 9 Q. And I take it that to the extent that you are 10 making condensed milk and selling it to others for 11 Class III purposes, it's priced at Class III, correct? 12 A. Again, I don't get into the pricing and the pool 13 reporting. I would assume it would get reported on our 14 pool report as a Class III sale. 15 Q. Okay. But most of the cost of actually converting 16 that milk to a Class III product is going to be incurred 17 by your buyer, not by you; is that right? 18 A. I don't know the answer to that. 19 Q. Do you support the proposition that the minimum 20 prices set need to be market-clearing? 21 And let me just read from the 1999 decision that 22 put federal -- the new product pricing regime in place. 23 This is the April 2nd, 1999, decision. It's volume 64, 24 page 16095, quote: "The importance of using minimum 25 prices that are market-clearing for milk used to make 26 cheese and butter/nonfat dry milk cannot be overstated. 27 The price for milk used in these products must reflect 28 supply and demand and must not exceed a level that would 3352 1 require handlers to pay more for milk than needed to clear 2 the market and make a profit," end quote. 3 Do you support that proposition? 4 A. No. 5 MR. ROSENBAUM: That's all I have. 6 THE COURT: Further examination? 7 Ms. Vulin. 8 CROSS-EXAMINATION 9 BY MS. VULIN: 10 Q. Good afternoon, Mr. Gallagher. 11 A. Good afternoon. How are you? 12 Q. Good. How are you doing? 13 A. I'm doing well. Thank you. 14 Q. Good. I'd like to start on page 2, please, of 15 your testimony. 16 A. Okay. 17 Q. The second to the last paragraph at the bottom, 18 the last sentence says, "Since a Make Allowance increase 19 directly reduces milk prices, impacting dairy farmer milk 20 checks, we believe a strong burden of proof backed by 21 strong and credible data are absolutely necessary to 22 justify a large Make Allowance increase." 23 Do you see that? 24 A. I do. 25 Q. What exactly do you mean by large -- excuse me -- 26 "strong burden of proof"? 27 A. We need to have data that has been collected by a 28 government source, that has been audited and has the 3353 1 confidence of the dairy industry. 2 Q. And if you have data that meets this strong burden 3 of proof, then that would be necessary to justify a large 4 Make Allowance increase? 5 A. It -- it would be information that would be 6 included in a decision to adjust Make Allowances, that 7 would have at least some credible value to it. 8 Q. And what I'm getting at is you -- you seem to draw 9 a line here that there is some standard data could meet 10 that would justify a large Make Allowance increase. But I 11 can't quite fit that with your testimony earlier that 12 there's no amount of data that would support a large 13 Make Allowance increase. 14 So can you help me out there? How can both -- 15 A. Sure. There's -- 16 Q. How can both be true? 17 A. I'm sorry. I apologize for cutting you off. 18 They both can be true. So in the first instance, 19 in order to make -- to even consider a significant 20 Make Allowance increase, you have to have the data, which 21 we don't have. 22 In the second instance, then USDA has to take that 23 into consideration relative to the cost of feed and the 24 impact on the supply of milk in making their decision on 25 what that change should be. 26 Q. So the only way you can make a large 27 Make Allowance increase is both if you have data that 28 meets a very high burden of proof and implementation of 3354 1 that Make Allowance level would not negatively impact 2 farmer profit? 3 A. That's how I'm viewing it today. 4 Q. And is the inverse also true? If there were to be 5 a proposal that significantly increased prices that 6 processors had to pay, would you agree that that proposal 7 would also have to meet a very strong or high burden of 8 proof? 9 A. No. 10 Q. So you apply a different standard to processors 11 than to farmers? 12 A. Depends on the proposal that we're talking about. 13 Right now we're talking about a proposal to adjust 14 Make Allowances. If you would like to bring up 15 information about a different proposal, I have 16 opportunities to talk about that later when we actually 17 present our testimony on different proposals. 18 Q. And you anticipate for those different proposals 19 to hold yourself to a different standard than you are 20 applying to processors here? 21 A. It's a different -- I'm sorry, I cut you off 22 again. I apologize. 23 They are different issues, and we need to reflect 24 on what the issues are that are the problems that we're 25 trying -- the disorderly marketing conditions that we're 26 trying to resolve. And it's not a difference in how -- 27 how I would view changes in pricing. And we will more 28 than amply provide evidence on why, when we get there, we 3355 1 need to have a substantial increase in the producer price 2 surface. Stay tuned. 3 Q. Oh, we will. 4 A. I'm sure. 5 Q. So we -- you have talked a bit about the 6 necessary -- the necessity to have adequate survey data, 7 and that you believe Mr. Stephenson's and Mr. Schiek's 8 studies are insufficient, correct? 9 A. Yes. 10 Q. And I believe you testified earlier that NMPF did 11 not participate in Mr. Stephenson's 2022 study; is that 12 right? 13 A. You -- you said NMPF. Did you mean DFA? 14 Q. Yes, I'm sorry. 15 A. Yes. DFA did not participate in the 2022 survey. 16 Q. And one of your criticisms of that 2022 survey is 17 that there's incomplete data; is that right? 18 A. Yes. 19 Q. And so DFA both refused to participate in the 20 study and then is critical of the study because it does 21 not have full participation? 22 A. So we aren't the only ones that didn't 23 participate. And we participated in the prior study in 24 2019 because USDA had some measure of oversight in that 25 study, and we felt that the data that we were sharing in 26 that study had some protection because of the USDA 27 interaction. 28 In the study in 2022, it was a private study by 3356 1 the International Dairy Foods Association, and we did not 2 have confidence in the International Dairy Foods 3 Association to be able to keep our information 4 confidential mand so we didn't participate. 5 Q. But you would have provided the data only to 6 Mr. Stephenson, not to IDFA directly, correct? 7 A. That's incorrect. We would -- we chose not to 8 participate in the study because it was an IDFA-sponsored 9 study that they owned. We weren't sure what they could do 10 with our data. And we didn't want them to have our data. 11 Q. And did NMPF undertake its own Make Allowance 12 study? 13 A. We didn't have a formal study. 14 Q. An informal study? 15 A. We had an informal study. 16 Q. Has NMPF presented that here? 17 A. We have talked a lot about it. Myself and the 18 National Milk witnesses, we have talked a lot about the 19 process that we went through to review different costs of 20 productions across the spectrum of the National Milk 21 member cooperatives, and we have come to our proposal that 22 is a balanced approach, taking into account the impacts on 23 the Class III and IV price and what we believe are 24 Agricultural Marketing Agreements Act's requirements of 25 the Secretary to have a balanced approach. 26 Q. That's a little bit beyond what I asked. 27 Did NMPF provide that informal study for this 28 hearing or does NMPF intend to? 3357 1 A. We -- we don't have a survey to present. 2 Q. You said you had an informal survey, correct? 3 A. We had an informal survey. We don't have a survey 4 to present to the record. 5 Q. But you still are requesting that USDA rely, in 6 part, on the results of your informal survey to raise 7 Make Allowances to the levels that NMPF proposes, correct? 8 A. Yes. 9 Q. If you could go to page 3 of your testimony, 10 please. You say that adoption -- let's see, at the very 11 bottom of the page, right above "Farm Input Price 12 Inflation," at the last sentence of that paragraph, you 13 say that a significant change could result in reduced milk 14 production that would otherwise occur, which in turn could 15 likely create disorderly marketing conditions relative to 16 the supply of milk to meet the needs of consumers. 17 Do you see that? 18 A. Yes. 19 Q. Have you done any economic analysis to support 20 this statement that there will be a decline or reduction 21 in milk production if IDFA's proposals are accepted? 22 A. I have not. I would be more than happy to draw 23 some graphs to show you what in economic theory would 24 happen if you did something like this. 25 Q. And under NMPF's proposal, prices are still going 26 to go down for farmers, correct? 27 A. Correct. 28 Q. Have you done any economic analysis that confirms 3358 1 whether or not that would create disorderly marketing? 2 A. I have not performed any economic analysis, no. 3 Q. And if you could turn to page 6, please. 4 In the middle of that page, you say, "Federal 5 Order milk pricing formulas and blend price pools do not 6 include a factor to help dairy farmers recover their costs 7 related to feeding more expensive feed to their herds." 8 Is that right? 9 A. Correct. 10 Q. But despite that reality, you're advocating here 11 that USDA should adopt a new policy that does take into 12 account those factors? 13 A. So I think you are mischaracterizing what I 14 intended to say, so let me clarify. 15 Q. Please clarify. 16 A. Yes. So there is no -- as there is in determining 17 the product price formula -- to determine the Class III 18 and IV prices using the product price formula, there is a 19 formulation, there is a factor in the law, in the 20 equation, that determines the Class III and IV price 21 formulas, to take into account Make Allowances. 22 When we compute those class prices in -- and bring 23 them into the pool and run the calculation of the value of 24 the pool, there is no Federal Order price factor that 25 includes something for the price or cost of feed paid by 26 dairy farmers or their cost of production. That's what I 27 meant. 28 Q. And you believe that the impacts of inflation on 3359 1 farmer costs need to be taken into account when setting 2 Make Allowance levels; is that right? 3 A. So the Secretary of Agriculture is required to 4 consider what the cost of feed is and whether there's 5 going to be an adequate supply of milk. And so in 6 determining the adequate supply of milk, and including the 7 feed, that there are inflationary factors on feed prices, 8 and there's inflationary factors on other costs of 9 production that erode the profitability of dairy farmers 10 and their ability to adequately supply milk. And so those 11 factors do need to be considered. 12 Q. Beyond the feed, though, nothing else is mentioned 13 explicitly in any regulation or act, correct? 14 A. I would say it's encompassed in the requirement 15 that there is an adequate supply of milk. 16 Q. And so would you agree then that inflationary 17 impacts on processors are also relevant and should be 18 taken into account? 19 A. And we have in the National Milk Federation 20 proposal. 21 Q. And if you could go to page 9, at the bottom of 22 the page, please. 23 You mention that you're presenting data collected 24 by Frazer and -- 25 A. Nietzke Faupel. 26 Q. Thank you. 27 A. You're welcome. 28 Q. Is that data included in the tables here or will 3360 1 it be coming from a later witness? 2 A. The witnesses have already appeared. 3 Q. And who -- 4 A. And they have submitted their data. So I don't 5 know the exhibit numbers. Somebody's going to have to 6 help me. 7 Q. That's all right. Just the names are fine. 8 A. Pardon me? 9 Q. Do you know the names of the witnesses that 10 presented? 11 A. Yeah. Leland Kootstra presented the data for 12 Frazer, and Jeffrey Bushey presented the data for knit 13 Nietzke Faupel. 14 Q. And you think that data is reliable data that USDA 15 should rely upon in making its determination? 16 A. I do. 17 Q. But that data isn't collected by USDA, is it? 18 A. It is not. But it is collected under the 19 generally accepted accounting provisions. 20 Q. And it's not data for all farms, right? It's just 21 those that partic- -- work with those accounting firms; is 22 that right? 23 A. Correct. 24 Q. And then your chart on page 11, if you could pull 25 that up, please. 26 Oh, you can just turn to it, but if you'd like 27 to -- 28 A. I'll pop it up here for you. 3361 1 Q. Thank you. 2 A. Page 11? 3 Q. It is a bar chart with a red line tracking. 4 A. Okay. This one? Maybe I won't pop it up, but I 5 know what you are referring to -- there it is. 6 Q. So this red line, you subscribe it as "milk sold," 7 which represents the average milk price; is that right? 8 A. Yes. 9 Q. What's the source of that data? 10 A. Right here? 11 Q. It is USDA? 12 A. Yes. 13 Q. And do you know, is it minimum prices or -- is it 14 Federal Order prices or mailbox prices? What does it 15 reflect? 16 A. It's the data that USDA collected in their surveys 17 of cost of production and returns of dairy farms. They 18 conduct these surveys every few years. And so they 19 conducted a survey in -- for 2005, 2010, 2016, and 2021. 20 And how the -- how they conduct those surveys and how they 21 get the information is all described on this website. If 22 you go to documentation, you can -- it provides quite a 23 bit of information of -- 24 Q. And rather than go through the website I would 25 like to know from you, as you put this together -- and I 26 can go back and check if you are unsure -- but do you 27 know, does this include government support program 28 payouts? 3362 1 A. I believe it does. 2 Q. And does it include risk management returns? 3 A. I don't know the answer to that. 4 Q. And so you will -- you agree that -- 5 A. Well, wait. Hold on for one second. Let me go 6 back real quick. 7 Q. Sure. 8 A. Milk sold -- I'm not sure. There's a line, "other 9 income." On the footnote for other income -- I should 10 have copied it on this, and I apologize, I didn't, but 11 it's in here. The other income is income from renting or 12 leasing dairy livestock to other operations, renting space 13 to other dairy operations, co-op patronage, dividends, 14 assessment rebates, refunds, other dairy-related sources, 15 and fertilizer value of manure production. That's a good 16 one. 17 So I -- and I was -- I was hoping to have somebody 18 here from USDA to describe this data, and something got 19 messed up in the communication between us and USDA, and 20 there hasn't been a person yet here to describe the data. 21 Q. And the data wouldn't include returns from 22 cooperative-owned plants, correct? 23 A. Not in the "milk sold" line. 24 Q. Uh-huh. 25 A. In the other income, the other income states -- in 26 the footnote, it says cooperative patronage dividends. 27 And so I would suspect -- again, I'm not the one that is 28 the expert on how the data was put together. I would 3363 1 suspect if there was earnings paid out by a cooperative 2 from the profits at their dairy plants, that it would show 3 up as other income. 4 Q. And does it include unpaid family labor or returns 5 to management? 6 A. The milk sold? Which line? Are you still talking 7 about the milk sold line? 8 Q. Uh-huh. 9 A. It does not. 10 Q. And so under NMPF's proposal, that will also lower 11 farmer milk prices, correct? 12 A. I'm confused with your question. Could you 13 restate it? 14 Q. If USDA adopts NMPF's Make Allowance levels as 15 proposed, farmer milk prices will still go down, correct? 16 A. Yes. 17 Q. And when prices go down, as you said, farmer -- 18 farms will consolidate and milk supply could shrink; is 19 that right? 20 A. Mischaracterization a bit. So there are -- and 21 I -- I mentioned it earlier -- milk prices go up and down 22 all the time because supply and demand is changing. So 23 this change is a structural milk price change that reduces 24 milk prices on top of all that other stuff. And it 25 reduces milk prices to a point that is going to be very 26 unprofitable -- if you go all the way to the IDFA 27 proposal, reduces milk prices to the point that it's going 28 to be unprofitable, that over time, there's going to be a 3364 1 restructuring in the dairy industry of those who produce 2 the milk, and there's going to be a long, painful process 3 involving human beings that operate dairy farmers (sic) 4 that aren't going to be able to cash flow, maybe not going 5 to be able to make feed bill payments, aren't going to be 6 able to pay back their loans. And those family farms are 7 going to be forced out of business. And it will be a 8 slow, painful process, that over time will decrease milk 9 production, before something else changes and you reach a 10 new equilibrium and something else changes. It's going to 11 be an ugly situation. And we're trying to prevent that 12 from happening. 13 Q. If supply and demand forces drive that, though, 14 eventually, prices will have to go back up if supply 15 shrinks; isn't that right? 16 A. Some day they will. But the aftermath of -- of 17 that is going to be an awful, awful situation for dairy 18 farmers, leading up to that. 19 Q. And I think it's true that everyone in this room 20 wants to sell more milk, wants to sell more dairy 21 products, and expand that as much as possible. Isn't that 22 right? 23 A. I think everybody in this room has a goal of 24 having the U.S. dairy industry being strong and prosperous 25 for everybody. 26 Q. I absolutely agree. But we're also subject to 27 market forces, correct? 28 A. We are all subject to market forces. 3365 1 Q. And so when considering if supply goes down, and 2 demand will eventually rise above that and bring prices 3 back up, does your forward-looking analysis on the impact 4 on prices take into account that market reaction? 5 A. I don't have a forward-looking outlook that I have 6 presented. I am bothered by your suggestion that there is 7 no harm that's caused in the transition to get to the new 8 equilibrium. 9 Q. And I never meant to suggest there was no harm 10 caused. So apologies if that was misstated. 11 A. Thank you. Thank you. 12 Q. That was kind of the long-term view. 13 In the short-term, isn't it true that over-order 14 premiums could adjust if there are tighter milk supplies 15 or needs for milk that aren't being met through the 16 minimum milk price? 17 A. So over-order premiums exist now. There's 18 manufacturing plants that are paying over-order premiums. 19 I believe Mr. Lyons (sic) testified that those over-order 20 premiums have declined. We have seen that in our own 21 returns, although I don't have data to show you. 22 And I think you have heard from some of the DFA 23 farmer-owners who are worried about a double-dipping, that 24 you are going to increase the Make Allowances even though 25 some of those higher costs that are being complained about 26 in this hearing have been covered by reducing the milk 27 prices by reducing over-order premiums. That's the 28 double-dipping that some dairy farmers reference. 3366 1 And so those over-order premiums some day may come 2 back, but it is -- I don't do this negotiation, but I hear 3 about it -- it is a battle to get a penny a hundredweight 4 from somebody on over-order negotiation. It is -- it is a 5 battle. And so some day maybe some of that value might 6 come back. But I don't know how much, and it's not going 7 to automatically come back, in my mind. 8 Q. And Dr. Wolf testified that the risk of 9 Make Allowances being too high is that manufacturers could 10 make too much product or disrupt the market. But isn't 11 true today that we don't have an issue of too much 12 production being available to farmers? 13 A. I would say we're in a pretty good supply/demand 14 balance right now across the U.S. dairy industry. Our 15 current issue is more of a demand issue than anything 16 else. And that demand issue is stemming from, you know, 17 the reactions to the pandemic and structural supply chains 18 and inflation, and we're still waiting to sort of get back 19 to even on that. And there's all kind of issues with -- 20 leading back to a significant buyer of -- importer of 21 dairy products, businesses in China, who are aren't buying 22 as strongly as they have been. 23 And so we're in this weird supply/demand spot 24 right now that we're trying to work back to an 25 equilibrium. But I would say overall there's a pretty 26 good supply/demand balance across the United States dairy 27 industry. 28 Q. And on page 18 of your testimony, you talk about a 3367 1 number of new plants that were being built and that were 2 built based on the current Make Allowances and FMMOs 3 prices. 4 Do you recall that? 5 A. I do. 6 Q. And -- but these cheese plants can choose not to 7 pool their milk, correct? 8 A. I don't think any of the -- well, I -- let me back 9 up. A lot of the plants that are being built buy milk 10 from dairy cooperatives and don't pool milk because the 11 cooperatives pool the milk. 12 Q. But the cheese plants can choose not to, correct, 13 and then they would not be subject to minimum FMMO prices? 14 A. I think we're missing on something. The -- most 15 of the cheese plants that are being built do not have a 16 producer milk supply of their own, and so -- pooling or 17 depooling is a Federal Order handler decision. And so 18 these cheese plants being built aren't Federal Order 19 handlers, so they don't have a choice to depool because 20 they are not part of a pool report that pools milk. 21 Q. Other than the fact that they were built, do you 22 have any other evidence that these plants were built based 23 on -- or planned or relied upon the current 24 Make Allowances? 25 A. I don't. They didn't consult with me on the 26 economics of the situation, and so I didn't -- I didn't 27 consult with them. And so I don't have that information. 28 Q. So you don't know what milk formulas they used in 3368 1 their business plans to determine the payback for the 2 investment of building those plants? 3 A. I don't. 4 Q. And then you mention that NMPF's members operate 5 significant manufacturing businesses across cheese, 6 butter, and powder, correct? 7 A. Yes. 8 Q. And -- but you would agree with me that when 9 Make Allowances are increased, farmers with 10 cooperative-owned plants would experience financial 11 benefits from those increases through the plant side of 12 their cooperative income, correct? 13 A. No. 14 Q. "No"? Why not? 15 A. So if you could think about two ledgers at a 16 cooperative for determining pay prices at their own 17 plants. One ledger -- I'm not going to be able to get 18 this on the record, I'm sorry, if I use my hands. I like 19 to use my hands to make -- but one ledger is the ledger at 20 the plant, and the other ledger is the ledger of what you 21 pay dairy farmers. 22 So if a dairy cooperative is losing money, they 23 can only afford to pay what -- what they have to pay out, 24 and so dairy producers receive less money. If there was a 25 Make Allowance change of $0.04 a pound that allowed a 26 Class III manufacturer to make $0.50 a hundredweight more 27 on the milk going into their plant, it would on the other 28 ledger result in a milk price decrease to their 3369 1 farmer-owners of $0.50 a hundredweight. So there is no 2 change in the valuation or the value of the farmer milk in 3 that example. 4 Q. And I'm talking about just the plant side of that 5 ledger. So I understand the impact of both, but just on 6 the plant side, farmers who are members of cooperatives 7 with plants would benefit on that side of the ledger from 8 an increase in Make Allowances, correct? 9 A. You have to -- at a dairy cooperative, you have to 10 look at both sides, unlike a proprietary cheese plant that 11 doesn't have its own producers and that $0.50 falls right 12 to the bottom line and there's no additional income for 13 the dairy cooperative whose dairy farmers are supplying 14 the plant. 15 Q. I understand that. And we'll get to the second 16 side of the ledger. I would just like to approach them 17 one at a time. 18 Would you be willing to do that for me? 19 A. Yep. 20 Q. Okay. So just on the plant side of the ledger, 21 farmers who are members of cooperatives that own 22 manufacturing plants would experience financial benefits 23 on that side of the ledger, correct, if Make Allowances 24 are increased? 25 A. They would, but it is not that simple because you 26 got to take into account both sides of the ledger. 27 Q. And on the other side, as you mentioned, right, 28 they would see a decrease that would essentially 3370 1 neutralize or balance out the increase they experience on 2 the plant side; is that right? 3 A. That's what I -- yes, that's what I've been trying 4 to describe. Thank you for clarifying that. 5 Q. Okay. So for members -- farmer members of 6 cooperatives that own significant manufacturing 7 facilities, changes in Make Allowances kind of come out as 8 neutral; isn't that right? 9 A. No. 10 Q. "No"? Isn't that what you just said? 11 A. Well, we -- I was only talking about the milk 12 going into their own plants, not the rest of the milk. 13 Q. Okay. And that's fair. So then for farmers, 14 though, who are members of cooperatives without 15 significant manufacturing plants, they would not 16 experience the same balancing of an increase in 17 Make Allowances; isn't that right? 18 A. Correct. 19 Q. And you had said I believe that DFA has the 20 majority its milk -- or excuse me -- the majority of its 21 processing is for Class I; is that right? 22 A. I believe that's the case. 23 Q. Okay. And do you know what share of DFA's 24 manufacturing milk is sold rather than processed? Can you 25 share that with us? 26 A. I can't. It goes beyond trying -- I don't know. 27 Q. Okay. 28 A. How's that? 3371 1 Q. That's a great way to answer a question. 2 So when thinking, though, about members of NMPF 3 that have more significant investments in Class III or IV 4 plants or a more significant portion of their member milk 5 going into their own III or IV plants, they would benefit 6 much more significantly from higher Make Allowances than 7 perhaps DFA, correct? 8 A. They don't benefit from higher Make Allowances. 9 Q. Well, they would on the plant side of their 10 ledger? 11 A. You got to take in both -- into account both -- I 12 feel like this is a little bit like Abbott and Costello. 13 Q. But let me rephrase. It would not -- that for 14 farmers who are members of cooperatives with a larger 15 share of ownership in Class III or IV plants, they would 16 not experience any negative effects of increased 17 Make Allowances to the same degree as farmers whose 18 cooperatives do not have such a significant share of 19 Class III or IV plants? 20 A. Maybe. So -- so let's go back to the purpose of 21 Federal Orders. So the purpose of Federal Orders, the 22 Agricultural Marketing Agreement Act and Federal Orders 23 were established to fairly distribute -- to prevent 24 uneconomic competition for -- for sales to Class I fluid 25 plants and to fairly distribute that revenue to dairy 26 farmers supplying that milk shed. That's what the purpose 27 of Federal Orders are. And so everything else is sort of, 28 how do you value the rest of the milk in the pool? 3372 1 And so the number one purpose of Federal Orders is 2 all about the Class I market. And if we have a 3 significant Make Allowance change that decreases milk 4 prices by $1.45 a hundredweight, you are significantly 5 decreasing the pay prices for dairy farmers doing what the 6 policy of the federal government is, supplying milk to 7 Class I milk plants. I think USDA needs to consider that 8 impact. Thank you. 9 Q. And that wasn't quite my question, so I would like 10 to revisit that and request that you -- 11 A. I needed to get that in. 12 Q. And you can do that with your counsel, but please 13 don't interrupt. 14 So I'd like to revisit my question if I could. 15 Members -- farmer members of cooperatives that have 16 significant investments in Class III or IV plants, 17 ownership investments, will not experience negative 18 impacts to the same degree as cooperative members whose 19 cooperatives do not have such manufacturing in III and IV 20 if Make Allowances increase; isn't that right? 21 A. It could be, but I don't know. I haven't done the 22 analysis on that. 23 Q. Okay. And you mentioned 14 plants that you said 24 DFA owns that make a Class III or IV product; is that 25 right? 26 A. Yes. 27 Q. And how many of those sell a Class III or IV 28 product? 3373 1 A. Well, they all would. 2 Q. Did -- which of -- how many of those plants sell 3 cheese? 4 A. Turlock California; Beaver, Utah; Pollock, South 5 Dakota; Zumbrota, Minnesota; and New Wilmington, 6 Pennsylvania. 7 Q. And you mentioned that a number of those plants 8 sell a condensed product; is that right? 9 A. I did. 10 Q. And that condensed product is typically sold to 11 another Class III or IV plant, correct? 12 A. Or a Class II plant. 13 Q. And so of the plants that you mentioned, how many 14 will experience a benefit from higher Make Allowances, and 15 which ones? 16 A. So it's the same thing, it is the ledger thing. 17 So there's -- there's no added benefit. 18 Q. I'm asking just on the plant ledger, if you can do 19 that for me, which of DFA's plant would -- 20 A. So I don't want -- I don't want to -- I'm sorry 21 for interrupting, but I don't want to answer that way 22 because you got to take both sides of the ledger into 23 consideration. That is -- that is the reality of the 24 situation. You can't sort of make up a world that there's 25 only one impact when you've got a dairy cooperative. 26 There's two impacts. That's the reality of the world. So 27 I'm not going to agree to answer some hypothetical 28 question that has no reality in the industry. I'm sorry. 3374 1 Q. So -- 2 A. We have to agree to disagree on that one. 3 Q. Well, you refuse to answer the question; is that 4 right? 5 A. No. I'm answering the question. 6 Q. Okay. 7 MS. VULIN: No further questions. 8 THE COURT: Very well. We have been going for 9 about an hour and a half. I don't know whether there's 10 further cross, but would now be a good time? 11 MR. HILL: I think it is an appropriate time to 12 break. 13 THE COURT: Dr. Bozic? 14 I was going to ask if it's an appropriate time for 15 lunch. Can you wait -- 16 DR. BOZIC: I can wait. 17 THE COURT: And I think there may be more, too. 18 Duly noted. 19 We'll come back at 1:30. 20 (Whereupon, a luncheon break was taken.) 21 ---o0o--- 22 23 24 25 26 27 28 3375 1 TUESDAY, SEPTEMBER 12, 2023 - - AFTERNOON SESSION 2 THE COURT: On the record. 3 CROSS-EXAMINATION 4 BY DR. BOZIC: 5 Q. Marin Bozic for Edge Dairy Farm Cooperative. 6 Good afternoon, Mr. Gallagher. 7 A. Good afternoon. How are you? 8 Q. Very good. How about yourself? 9 A. I'm doing well. 10 I got to ask you a question. It's been a long 11 time since I've had to see somebody duck walking in 12 through a doorway. Do you always have to duck walking 13 through a doorway? 14 Q. Maybe just at regulatory hearings. I'm not sure. 15 A. Okay. 16 Q. I only have three questions. 17 With -- my first question, with respect to 18 Proposals 8 and 9, submitted respectively by Wisconsin 19 Cheese Makers Association and International Dairy Foods 20 Association, do you find that Make Allowances as proposed 21 in those requests, in those proposals, are necessary to 22 secure sufficient supply of raw milk for DFA's Class I 23 plants? 24 A. This is their Make Allowance proposal? 25 Q. Yes. 26 A. Are they -- no. 27 Q. At present time are Make Allowances higher than 28 National Milk's numbers or National Milk's proposal needed 3376 1 to secure milk for Class I plants? 2 A. Say that question again? 3 Q. At present time, today, are Make Allowances any 4 higher than National Milk's request, Proposal Number 7, 5 needed to secure milk for Class I plants? 6 A. No. 7 Q. That was my first question. Thank you very much. 8 My second question: With respect to Proposals 8 9 and 9, would you agree that Make Allowances should not be 10 set at such level to single handedly encourage dairy 11 product manufacturing for which there is no defined target 12 buyer? In other words, somebody expands and then just 13 doesn't even have a buyer for their cheese and just pushes 14 it over to CME. 15 A. I would agree with that. 16 Q. And in the Exhibit IDFA-1, did you see that the 17 cost of processing for low cost cheese plants is $0.22? 18 A. That's in the Mark Stephenson study that came out 19 in 2022 -- or using 2022 data? 20 Q. I believe so, yes. 21 A. Yes, I did see that. 22 Q. And as such, can we really rule out the 23 possibility that Make Allowances higher than $0.24, which 24 is requested by National Milk, would not be excessively 25 stimulative? 26 A. No. 27 DR. BOZIC: Thank you very much. 28 THE WITNESS: You're welcome. 3377 1 THE COURT: Anything further? 2 CROSS-EXAMINATION 3 BY MR. MILTNER: 4 Q. I don't have to duck going through a door. 5 A. Mr. Miltner. How are you today? 6 Q. I'm fine, Mr. Gallagher. How are you? 7 A. I'm well. Thank you. 8 Q. I appreciate you providing information on DFA's 9 plants. I have a couple of additional questions -- 10 A. Okay. 11 Q. -- on those, which maybe you can help me with, and 12 maybe you can't. 13 The plants that primarily produce milk powder, so 14 Fallon, Garden City, Portales, Fort Morgan, Goshen, and 15 the plants in the Northeast, do they just take in raw milk 16 to produce their products? 17 A. So when I talk about raw milk, it's milk picked up 18 at the farm that hasn't been processed in any form yet 19 versus a load of condensed fluid milk. They may -- they 20 may purchase loads of condensed fluid milk from time to 21 time, even though they also make condensed fluid milk. 22 (Court Reporter clarification.) 23 THE WITNESS: But I don't have the specific 24 information on that. I'm not involved in the day-to-day 25 operations of any of those plants. 26 BY MR. MILTNER: 27 Q. Okay. I believe you said the Fallon plant 28 produced skim milk powder and whole milk powder. 3378 1 Did I get that correct? 2 A. You got that correct. 3 Q. Do you know what -- do you know what the Fallon 4 plant does with its cream? 5 A. Yeah, good point. I was wondering that too when I 6 got my cheat sheet. 7 I'm sure they also sell cream, but I don't know to 8 what amount. 9 Q. DFA does not produce any butter, does it? 10 A. Yes, we do. 11 Q. You do. At which plant? 12 A. Oh, you know what? Different group. We do at -- 13 no. We do. I'll think of it in a moment. 14 Q. Okay. 15 A. I'll think of it in a moment. We do produce 16 butter at one plant. That's 15 plants then. 17 Q. So for those powder plants -- 18 A. Winnsboro, Texas. That's where our butter plant 19 is. 20 Q. I should have thought of that one myself. 21 A. Yeah. 22 Q. Other than the Winnsboro plant, those plants that 23 are producing -- well, let me back up. Does Winnsboro 24 produce any milk powder? 25 A. Not to my knowledge. 26 Q. Okay. So those plants that do produce milk 27 powders, are they able to utilize all of the nonfat solids 28 in the milk that comes in the door? 3379 1 A. So help me out here a little bit. So you are 2 talking about we pick milk up, raw milk on a farm, and we 3 deliver it to the plant. And then we pump it into a silo, 4 and then we make nonfat dry milk. And so we take that 5 output and then convert it back to see what the milk 6 equivalent would be, and that there might be some slippage 7 called shrinkage. I'm sure there's shrinkage at all our 8 plants, whether they are nonfat dry -- is that -- I'm sure 9 there's shrinkage at all our plants and not just the 10 nonfat dry milk plants. 11 Q. That's a good answer to the question I posed. 12 A. Well, thank you. 13 Q. Most of your answers have been quite good. 14 For a plant that was a true butter/powder plant, 15 when you make butter, you get buttermilk, correct? 16 A. You would get buttermilk as a byproduct, yes. 17 Q. DFA's plants producing powder, because you're 18 skimming the cream and presumably selling it, there's no 19 buttermilk there, correct? 20 A. That is my knowledge. 21 Q. There is some certain amount of nonfat solids in 22 liquid bulk cream, correct? 23 A. Yes. 24 Q. But that's sold with the cream off to whatever 25 it's going to get processed, correct? 26 A. That's correct. 27 Q. There were some questions about the data from the 28 two CPA firms, Frazer and Nietzke & Faupel, and you 3380 1 indicated that you found those -- that data to be reliable 2 for purposes of USDA's analysis, correct? 3 A. Yes. 4 Q. And am I correct in stating that that data was 5 collected in the normal course of business of those dairy 6 operations and those CPA firms, correct? 7 A. I believe it to be. I didn't collect the data, so 8 I can't state it -- state anything other than that. But 9 it would be my understanding that it was. 10 Q. To your understanding, did National Milk or DFA 11 commission, not the testimony, but didn't commission those 12 compilations of data for purposes of this hearing, did 13 they? 14 A. We did not. 15 Q. And so the fact that that information was not 16 compiled for the express purpose of supporting a proposal, 17 does that improve your confidence in the reliability of 18 that data? 19 A. Yes, it does. The data -- the data had been 20 compiled years before this proceeding was ever thought of. 21 At least the beginning of the data series. 22 Q. Mr. Rosenbaum also asked -- or he stated, I think, 23 in preface to a question, more precisely, that we -- a 24 royal we in this case -- have waited 15 years or quite a 25 long time to update Make Allowances. 26 Do you recall that statement? 27 A. I do recall that. 28 Q. Are you aware of any request made to USDA between 3381 1 2008 and 2023 to update Make Allowances? 2 A. No. 3 Q. And are you aware of USDA ever on its own 4 initiating a proceeding to amend a marketing order, absent 5 a proposal? 6 A. Maybe. I'm trying to -- maybe. From time to time 7 Congress requires USDA to change Federal Milk Marketing 8 Orders, and I believe they may -- and I don't know who 9 proposes those hearings, but from time to time there is a 10 hearing that goes along with it. I'm not sure if that's 11 USDA calling the hearing or somebody in the industry or it 12 was Congress but -- so I'm -- I don't know. How's that? 13 That's a big I don't know. 14 Q. How about absent Congress or somebody from the 15 industry, do you recall USDA ever on its own saying, let's 16 have a hearing to update a marketing order? 17 A. No. 18 Q. I flipped past several questions that have already 19 been addressed by others. But I am on now page 12 of your 20 testimony, and I had a question about the data box there. 21 The income figures that get baked into this, this 22 table or this chart, do those include government payments 23 to producers through Dairy Margin Coverage? 24 A. I don't know that specifically, but I believe they 25 do. 26 Q. Okay. And because -- well, assuming that it does 27 include the DMC payments and knowing that they are 28 effectively capped at 5 million pounds a year, would that 3382 1 mean that the profitability of the first column is 2 artificially higher than that in the second column? 3 A. So hoping we could see the chart. So what page 4 are you on? 5 Q. 12. 6 A. Page 12. So you are talking about the chart that 7 shows 1,000 to 2,000 cows, 2,000 and more? 8 Q. Right. 9 A. Okay. So say -- ask the question again. 10 Q. Sure. Assuming that the DMC payments are included 11 in these calculations -- 12 A. Uh-huh. 13 Q. -- and recognizing that Tier 1 of DMC caps at 14 5 million pounds of production -- 15 A. Uh-huh. 16 Q. -- the profitability of the farms in the 1,000 to 17 2,000 column are what I would characterize as artificially 18 inflated by the DMC payment. 19 A. Correct. 20 Q. So if you wanted to really compare the 21 profitability of just the farming operation of these, you 22 would have to somehow back out the DMC payments? 23 A. That's fair. Although I would have to say, I 24 don't think you're backing out very much an a dollar per 25 hundredweight basis because they don't receive that much 26 on a dollar per hundredweight basis on the DMC in that 27 first column. Fair enough? But there is something to 28 back out. 3383 1 Q. Yeah. I think we can look at it, and in certain 2 years it would be more significant than others, right? 3 A. Yes. 4 Q. I'd like to ask you a couple of questions about 5 the data box at the top of page 17. 6 A. Okay. 7 Q. And as a preface to that, at -- on page 18 there 8 is this sentence: "Really large Make Allowance increases 9 will shift income from dairy farmers to large and 10 efficient milk plants that do not need that kind of 11 financial support provided them by dairy farmers." 12 And I'm looking at now the data box on page 17 and 13 the line item for New Mexico. 14 As part of your duties with DFA, do you have 15 familiarity at all with the cheese plants that operate in 16 New Mexico and West Texas? 17 A. I have some familiarity with them, yes. 18 Q. Would those plants be included within your 19 category of large and efficient milk plants that do not 20 need that kind of financial support? 21 A. I'd prefer not to comment since they are good 22 customers of ours. Fair enough? 23 Q. Sure. 24 A. As they are of you and your cooperative. 25 Q. They are. 26 As part of your risk management duties do you work 27 with DFA members in New Mexico? 28 A. My team and I do, yes. 3384 1 Q. Do you find the average net income numbers 2 presented in your data box to be reasonable given what 3 your team understands about your membership in New Mexico? 4 A. I do. We -- I do. We don't have -- receive 5 income statements or balance sheets in our process, but we 6 do have conversations with our farmer-owners about how a 7 current -- or the futures milk prices when converted back 8 to a pay price for the dairy farmers in that area, how 9 that relates to their costs of production, and their 10 profit margin is really tight in that area. 11 Q. I would -- I would -- I would presume that in 12 order to effectively advise your members on the risk 13 management tools available to them, you or your team would 14 need to have some discussions with the members about their 15 input costs, their margins, their profitability overall; 16 would that be correct? 17 A. That is correct. 18 Q. If you -- 19 A. So -- so just as a follow-up to that. One of the 20 DFA farmer-owners that testified last week, Eric Palla, 21 resides in New Mexico. I do not know if his data is in 22 the Frazer dataset, but he did respond that he was 23 concerned about even a $0.50 increase in the 24 Make Allowance would threaten the profitability of his 25 dairy farm. So that would suggest there's some pretty 26 tight margins in New Mexico. 27 Q. Would it -- well, would it surprise you if the 28 most recent information from the Order 126 Market 3385 1 Administrator showed fewer than a hundred farms active in 2 New Mexico? 3 A. I don't know. I don't look at that particular 4 price announcement very often, so I'm not sure what the 5 number would show. 6 Q. As you noted, Mr. Palla had testified about the 7 impact of a $0.50 increase, which is according to the data 8 box on page 13, real close to what National Milk's 9 Proposal 7 would cause in terms of an all-milk price 10 impact. 11 I guess my question for you is, if you look at New 12 Mexico and their negative net income over the last seven 13 years of $0.64 a hundredweight, what do you think an 14 additional $1.45 in all-milk price reduction would mean 15 for the dairy producer industry in the state of New 16 Mexico? 17 A. It would be crushing. I think it would hasten the 18 exit of a lot of dairies in the state of New Mexico. 19 Q. And there are two very significant cheese plants 20 customers of DFA located in the state of New Mexico, 21 aren't there? 22 A. Yes. 23 Q. Which, with a continuing loss of farms in the 24 state, would burden DFA in terms of supplying those cheese 25 plants, wouldn't it? 26 A. At -- yes. 27 Q. You would have to source milk from further 28 distances presumably to service those plants, wouldn't 3386 1 you? 2 A. Potentially, yes. 3 Q. And if that were to occur, that additional hauling 4 cost would be shared among DFA's members in the Southwest 5 council, wouldn't it? 6 A. Yes. Yep. 7 Q. And so not only would you have the loss of the 8 economic impact to the state, a loss of milk supply to the 9 plants, but even those farmers that would be more 10 financially sound would likely have increased costs, 11 correct? 12 A. That's correct. 13 Q. You mentioned DMC, and DMC uses -- to calculate 14 the margin, uses a national all-milk price, correct? 15 A. That is correct. 16 Q. And it uses a national feed price calculation, 17 correct? 18 A. It -- it uses a national corn price the best they 19 can to get a national alfalfa price, but it uses a soybean 20 meal price from the Upper Midwest. 21 Q. But a single soybean meal price, there's one price 22 applicable to the whole country, correct? 23 A. That is correct. 24 Q. Do you know if the pay price received by farms in 25 New Mexico is lower than the national all-milk price? 26 A. Yes, it is. 27 Q. By about $1.50 a hundredweight? 28 A. Maybe. I didn't review that for -- 3387 1 Q. Do you know if the feed costs for farms in the 2 Southwest are higher or lower than the national average? 3 A. Let me look. 4 (Court Reporter clarification.) 5 THE WITNESS: So my first reaction would be to say 6 they are importing feed from an awful long distance, and 7 so the cost of bringing that feed in has gone up 8 tremendously. But they do grow some of their feed in that 9 area, but I don't -- I don't -- I can't -- I don't have a 10 comparison of New Mexico versus the average that I can 11 easily look at. 12 BY MR. MILTNER: 13 Q. So I don't want to pin us to numbers, but if the 14 DMC margin is below $4, which is catastrophic, correct? I 15 think that's the definition of a catastrophic payment. 16 A. We never would have thought that we would ever see 17 a DMC margin less than $4. So it is pretty bad. 18 Q. And for -- I mean, perhaps this is already in the 19 record, but that margin is supposed to represent the money 20 to a farm that is left over after they take their milk 21 check and they feed their cows, correct? 22 A. That is correct. 23 Q. To cover all expenses other than feed, correct? 24 A. That is correct. 25 Q. So if the national number is below $4, and in New 26 Mexico they are receiving a dollar or $1.50 less on the 27 milk and paying more than the national average on grain, 28 that would put them with a margin of 2 to $3 or somewhere 3388 1 in that neighborhood; would you agree? 2 A. If your numbers are correct, I would agree that 3 they are getting less than the national price on milk. I 4 don't -- I'm sure their cost for feed is -- isn't less 5 than the national average. I am just not sure where in 6 relation to the national average it is. But using the 7 example that you -- you suggested, that I would think 8 their -- the New Mexico milk feed margin would be less 9 than the national average. 10 Q. And if you were to reduce that an additional 11 $1.58, they might not even be able to pay their feed bill, 12 right? 13 A. Correct. 14 Q. Or any other bill in addition to that, right? 15 A. Correct. 16 Q. How long does a dairy farm last if that's the 17 situation? 18 A. Until their line of credit runs out and then they 19 are done. 20 Q. The bank will be calling very soon, wouldn't they? 21 A. Yes. 22 MR. MILTNER: Thank you. I don't have anything 23 else. 24 THE COURT: Anything else? 25 Redirect I guess -- or AMS, sorry. 26 MS. TAYLOR: I also take a big long pause to see. 27 THE COURT: I didn't mean to wake you. You 28 weren't asleep. 3389 1 Thank you. You are up, Ms. Taylor. 2 CROSS-EXAMINATION 3 BY MS. TAYLOR: 4 Q. Good afternoon. 5 A. Good afternoon. How are you? 6 Q. I'm great. Thank you for coming to testify today. 7 A. You're welcome. 8 Q. You talk on the second page, and all throughout 9 your testimony really, about not -- not -- the importance 10 of not adopting a Make Allowance that is too large and its 11 impact to producers. And I just want to ask kind of what 12 would you consider too large? That's a pretty subjective 13 statement. 14 And I'll add, you are not the only one who said 15 that, but I'm trying to get your opinion of what is too 16 large. 17 A. I have an opinion. I have a strong opinion. Too 18 large would be something that reduced average dairy farm 19 milk prices by more than $0.56 a hundredweight. 20 Q. That's very objective. 21 A. I try to be objective often. 22 Q. Okay. You have kind of hit on it a little bit 23 here and there about your -- what you consider data issues 24 on some of the surveys that are going to be introduced 25 through this hearing. I just -- we have heard some of 26 those, but I was wondering just to make sure that the 27 hearing record is clear if you could elaborate more kind 28 of what the data issues are that you see with those. 3390 1 A. On the surveys? 2 Q. Uh-huh. I assume that's what you are talking 3 about. 4 A. Yep. So I think more of this will come out during 5 the cross-examination of Mr. Stephenson, but here is one. 6 So -- and I focus on the data collected for cheese 7 manufacturing plants. You know, Mr. Stephenson can 8 only -- can only analyze what the businesses send them, 9 and the cheese businesses didn't send them enough. And so 10 in the first survey in 2019 -- I can't remember if it was 11 eight or ten milk plants that were cheese plants that were 12 included -- and when you looked at the more -- he -- he -- 13 he divides his sample size -- I believe this, and I 14 apologize if I'm misrepresenting it. Mr. Stephenson can 15 correct me when he gets up here -- or he can cross-examine 16 me and fix it right now. 17 I think he takes his data sample and divides by 18 two. And he takes -- he sorts from most -- you know, by 19 lowest costs, so if you had ten, he has an array of ten 20 plants, and he goes in the -- divides -- takes the first 21 five least cost plants, and that's one group, and then -- 22 and he did. 23 So -- so when you look at that in his first study, 24 his first survey, and you looked at then what was the 25 total amount of cheese, it was obvious there was not a lot 26 of large cheese plant contribution. Study two, sort of 27 doing the same thing he had better, better information 28 from the cheese plants, because I believe he had 18 cheese 3391 1 plants. 2 When you take his average for all 18 and multiply 3 it out by the 18 plants, you get about roughly 2.2 to 4 3.9 billion pounds of cheddar cheese made in 2022. And 5 when you look at the nine plants that are most efficient, 6 and you look at -- you convert that back to the average 7 milk intake per month, it's about 130 million pounds of 8 milk a month, on average, for the most efficient. 9 And so there -- there are a lot of very large 10 cheese plants that still did not contribute their data. 11 And I don't know this, but I would be concerned that those 12 large -- those -- the rest of the data is from large -- 13 most of the rest of the data is from really large cheese 14 plants, seven or eight of the largest cheese plants in the 15 United States and that their costs of manufacturing cheese 16 are at the low end. 17 And when you look at his -- his low end, which I 18 believe is $0.22 a pound, if you just took the low end by 19 the delta of the cheese that's missing from the survey, 20 determine the total cost from all that, add it into the 21 total cost that's already in the survey, and then divide 22 it by all the cheddar cheese, you come out with $0.245 a 23 pound. And this is a rough estimate, a 24 back-of-the-envelope calculation that I have done. 25 So that would suggest that the average price that 26 he's -- because he doesn't have the full data -- is 27 suspect in its accuracy. 28 I'd take one more step, though. That in the 3392 1 average of the nine plants that is $0.22 a pound, and we 2 all recognize an average means probably four or five are 3 higher than the average and four or five were lower. We 4 don't know what the lower -- it could be a tenth of a 5 cent, it could be a couple cents. I don't know. I would 6 be concerned that of those seven or eight large cheese 7 plants that I believe aren't included in the survey 8 because they didn't provide Mr. Stephenson with the data, 9 I believe they could be averaging below the average. 10 So there's serious questions about whether we have 11 enough data in the survey that accurately represents a 12 meaningful cost of production to lower dairy farmers' milk 13 prices. I think with what we have done across National 14 Milk Producers Federation have come to a pretty reasonable 15 point that I think, in my back-of-the-envelope 16 calculation, I hope we're not too high. 17 Fair enough? 18 Q. Yes. Thank you for that detail. 19 A. You're welcome. 20 Q. I'm getting questions from all over. 21 A. Oh, can I send you some. 22 Q. I'm not just texting a random person, so -- all 23 over this room. 24 A. I didn't see Mark send you one, so -- 25 Q. No. Only from appropriate USDA people, I'll add 26 that caveat. 27 On your chart on page 5, and I think this is 28 the -- it is the NASS feed price index -- 3393 1 A. Yes. Yep. 2 Q. -- on the top line, and in the bottom line is the 3 PPI for final demand. 4 A. Which is used by Federal Reserve. It's widely 5 talked about in the press whenever they are about to meet 6 or right after they meet. 7 Q. You have to say that a little louder. 8 A. Widely talked about in the press before the 9 Federal Reserve meets or right after they meet because 10 that's an important inflation factor that they look at. 11 Q. Okay. My question was kind of around why is -- 12 why do you feel that PPI is the appropriate one to compare 13 against the NASS feed index? 14 A. It's a well known PPI. That's it. It's a well 15 known PPI that we can compare something to. The -- I 16 didn't have I guess enough confidence in any of the other 17 PPIs that might be more dairy specific. 18 Q. Okay. 19 A. One of the other issues with the other PPIs, the 20 dairy specific PPIs, since it's what -- somewhat a 21 manufacturing business would -- a dairy manufacturing 22 business would sell their product for, most of the cost of 23 what they sell the product for is the cost of milk. And 24 so one of the problems with a dairy PPI is in its 25 inflation review, it also takes into account, did milk 26 prices go up or down. So I -- it doesn't seem like that's 27 an accurate way of looking at inflation overall for a 28 manufacturing business. 3394 1 Q. Okay. On your chart on page 10, I think I figured 2 out the math that you did, but if you couldn't just walk 3 through for the record to make sure it is clear, you can 4 just pick a year, so you can pick 2012 if you want, if 5 that's easiest, how you got to your adjusted net profit. 6 I just want to make sure it's clear for the record where 7 you pulled that from. 8 A. Okay. Very good. Fair enough. 9 So the five rows up from the bottom is total cost 10 listed, and that is a summation of operating costs and 11 allocated overhead. Within the allocated overhead are 12 opportunity costs of unpaid labor and opportunity costs of 13 land. Those two factors are not included in the 14 accounting data that I -- that was provided. 15 So for 2012, I would have taken the $2.16 of 16 unpaid labor, and the $0.02 of opportunity cost of land, 17 so $2.18, and I would have recalculated the cost less. So 18 the second line up is $28.35 minus the $2.18 to get the 19 $16.17 -- excuse me -- the $26.17. And then I took the 20 total gross value of production, and from that I 21 subtracted the information on that second line, that 22 $26.17, to get the minus $4.98. 23 Q. Okay. 24 A. And I did that for the rest of this table. And 25 then, although I don't have the layout like is shown on 26 that table for the two larger production sizes, I would 27 have done the calculation the same way. 28 Q. Is that what's on page 12? 3395 1 A. That's correct. So page 12, if I -- I don't have 2 all this data, but it would be the adjusted net profit 3 line that you would see on page 10, just for those two 4 size dairies. 5 Q. And you used the same ERS data that's broken out 6 for those sizes then? 7 A. I did, yes. 8 Q. Thank you. That's helpful. 9 On page 11 at the top, this cost less 10 opportunity -- let me start again. 11 The milk sold minus cost less opportunity cost 12 unpaid labor and land has averaged 2.06 since 2015. 13 That's just an average of that adjustment over those years 14 for all sizes. Is that where that 2.06 came from? 15 A. Yes. 16 Q. Okay. On page 13 in your chart where you estimate 17 the various impacts to all-milk prices for the different 18 proposals under consideration, I know there was some 19 discussion earlier about I think -- what I will put in my 20 head as the short-term impact of $1.45 coming off 21 producers' checks. I think that's what you talked about, 22 that in your opinion a lot of farms would go out of 23 business if they had to take that hit. Is that correct? 24 A. Yes. 25 Q. That's an appropriate interpretation? 26 A. Yes. 27 Q. Okay. I'm just wondering if you could speak if 28 there would be any type of market reaction that would 3396 1 dampen some of that impact? 2 A. I don't know. We have never gone through -- I 3 don't think we have ever gone through a structural milk 4 price change where there would be that dramatic of a price 5 change. So I'm not sure exactly what would happen that 6 might dampen some of the effect, but there could be some 7 things. 8 But I don't know -- so the one thing that 9 everybody talks about is that you go and you try to 10 renegotiate over-order premiums. On day one, 11 supply/demand hasn't changed. The end of month one, 12 supply/demand hasn't changed. And so you keep taking that 13 another month and another month and another month, and I'm 14 not sure when it changes enough that you can maybe get -- 15 start to maybe get maybe an adjustment in over-order 16 premiums, if at all. So I don't know when that might 17 occur. It could occur, but it is not day one. 18 Q. I think you said something earlier, and I wrote it 19 down, that over-order premiums may come back some day, but 20 it's a battle and takes time. 21 A. That was in some cross-examination. I do remember 22 saying that, yes. 23 Q. That's along the same line. I'm just trying to 24 put -- 25 A. Yes. 26 Q. -- all the pieces together in my head. 27 A. That's correct. That's along the same lines. 28 Q. Okay. On 19, you are talking about the historical 3397 1 precedent. And the last sentence says, "The resulting 2 changes from these hearings had modest changes to farm 3 level milk prices, with the largest impact of $0.35 per 4 hundredweight resulting from the 2006 hearing." 5 Where did the $0.35 come from in that statement? 6 A. Yes. So it was in -- I think it was in your 7 economic policy statement analysis for those hearings. 8 And there is -- there's a narrative about what the impact 9 on Class III or IV prices would be. And I found that for 10 that hearing and the prior hearing. 11 Q. Okay. 12 A. So that's where I got those numbers. 13 Q. Okay. So that's the forecast of what USDA says 14 could possibly happen? 15 A. I'm not sure. I'm not sure if that was the 16 forecast or that was what the immediate change in the 17 prices would be because of the changes. 18 Q. Okay. 19 A. I interpreted it to mean that was the immediate 20 change in the Class III or IV prices as a result of the 21 changes to the formulas. 22 Q. Okay. 23 A. Are you familiar with what I'm trying to describe 24 as the analyses? 25 Q. Yeah. I'm very familiar with that, but I have -- 26 A. Yeah. Well -- 27 Q. -- lot of reading to remind myself of what we said 28 all those years ago. 3398 1 A. Fair enough. 2 Q. Let's see. I think my final question for me, 3 others might have other questions, and I have asked this 4 of other co-op witnesses, trying to square on the one side 5 argument to not ask producers to take a dramatic decline 6 in the prices they receive for a Make Allowance that's too 7 large, as you would term it; on the other side, the 8 testimony that farmers are already paying for this through 9 decreased premiums or reblends, etcetera. 10 And so I'm just trying to kind of get your 11 reaction to that statement on how USDA should think about 12 those two pieces of information that have been put on the 13 record. 14 A. Yes, that's -- that's complicated, and it's not 15 easy to sort of work through. I don't envy your 16 challenge. 17 So first of all, if you make a Make Allowance 18 increase that reduces milk prices by $1.45 per 19 hundredweight, dairy farmers that are supplying the 20 Class I marketplace will receive $1.45 less. And it 21 doesn't matter whether they belong to a dairy cooperative 22 that has manufacturing facilities or not, because any one 23 of those dairy cooperatives with manufacturing facilities, 24 if they are a Federal Order handler, probably has some 25 Class I sales, and so their producers, their farmer-owners 26 will see a net decrease. So that's pretty significant. 27 For dairy cooperative members where their milk 28 goes to their own plants and they're Class III or IV 3399 1 plants, it's a -- it is probably a net sum zero game 2 because there's these two ledgers. Right? 3 We have already seen -- and again, I come back to 4 the cheese side. You have got a block-barrel spread that 5 a lot of the cheddar cheese manufacturers benefit from, 6 that is like a back door Make Allowance increase, that's 7 probably worth 3 to $0.04 a pound to them. I don't think 8 I'm understating that over-order premiums have gone down 9 at least $0.50 a hundredweight, so that's about another 10 $0.05. For some, there's depooling income. For some, 11 they passed higher costs along during the inflationary 12 period because everybody else did. And most of the -- 13 most of the cheese produced in the United States isn't 14 included in a survey, so there is no circularity. 15 And so when you square all that up, some of these 16 cheese plants have over the course of time since 2006 17 received anywhere from 5 to $0.10 a pound or so in reduced 18 cost or increased revenue. And so when you hear of 19 double-dipping, dairy farmers want to make sure that 20 you're not allowing them that and then also taking the 21 value of the milk price away from them. 22 So there's a lot to weigh here, and unfortunately 23 we don't have good data, so you're in a -- you're on a 24 slippery slope about how you look at all these things. 25 And I would say, I think, of the -- of the handlers that 26 are participating in this hearing, I think most of the 27 handlers accept the fact that a Make Allowance increase of 28 the equivalent of the National Milk proposal is okay. 3400 1 That's all I can do to help you out on that. Good 2 luck. We wish you the best. We hope you side with us. 3 CROSS-EXAMINATION 4 BY MR. WILSON: 5 Q. Good afternoon, Mr. Gallagher. 6 A. Mr. Wilson, how are you today? 7 Q. I'm doing well. 8 On page 17 -- well, let's transition from the 9 bottom of page 16, to the top of page 17. The very last 10 line on page 16 references 2002 to 2022. The chart -- 11 A. Good catch. Thank you. It should be 2012. That 12 was a typo. 13 Q. Okay. So it is correct to be 2012 to 2022 as the 14 chart or the table represents? 15 A. Yes. Thank you for pointing that out. 16 MR. WILSON: That is all I have. 17 THE COURT: Is that it for AMS? 18 MS. TAYLOR: Yes, that's it. That's it from AMS. 19 THE WITNESS: So -- so can I follow up on one 20 other thing that I think is important. 21 THE COURT: Well, we're at redirect anyway. Your 22 counsel just asked if there's anything you would like to 23 follow up on. 24 THE WITNESS: Yeah, there you go. 25 MS. HANCOCK: I'd like to adopt the judge's 26 question. 27 THE COURT: I didn't mean to step on you there if 28 you are afraid of following -- 3401 1 MS. HANCOCK: It was the only zinger I had too. 2 REDIRECT EXAMINATION 3 BY MS. HANCOCK: 4 Q. Go ahead. 5 A. So -- 6 Q. You have something you wanted to say? 7 A. So when Jeff Bushey was here from Nietzke Faupel, 8 there was -- there was a question of from Mr. English -- 9 that's okay, you can come up -- there was a question from 10 Mr. English, and he was -- he was pointing to some 11 estimate of a net return for -- for the data of being over 12 a million dollars. And I think he -- I think there was -- 13 I know in redirect, Ms. Hancock and Mr. Bushey covered 14 some things to help people understand it isn't profit, it 15 is profit, but it is not money in the bank because -- 16 like, dairy farm is a business, and like any business, you 17 have to continue investing in your business, 18 recapitalizing your business. You have to buy new things 19 to replace things that get worn out. 20 And so what dairy farmers do, is from their 21 profits, they use that to help buy things they need or 22 make down payments on things they need and then borrow the 23 rest. There are very, very few dairy farmers that -- in 24 fact, I don't know any -- that can borrow 100% of the cost 25 of anything. 26 And for dairy farms to be able to remain viable, 27 they need to continually recapitalize, and that includes 28 recapitalizing their milking facilities, which can cost 3402 1 millions of dollars. They buy tractors. They have 2 lots -- a big farm, a large farm, 2,000-cow farm, they 3 have lots of tractors. And so they need to continue to 4 recapitalize. And a lot of what they earn in profit is 5 used to support that recapitalization. So they are 6 investing it back in their business to maintain the 7 viability of their business. 8 Fair enough, Mr. English? 9 That's all I had on that. I wanted to make sure 10 that was clear. 11 Q. Thank you, Mr. Gallagher. 12 You were asked a question during your 13 cross-examination about the 1999 order language that 14 talked about market-clearing, and I think they -- 15 Mr. Rosenbaum read a sentence from that to you about 16 market-clearing, and you -- and asked you whether you 17 agreed with the proposition that he read you. 18 Do you recall that? 19 A. I do. 20 Q. And you answered no? 21 A. Correct. 22 Q. Would you like to elaborate on that? 23 A. Yes. So one of the things -- thank you for the 24 question -- one of the things we haven't established 25 and -- is, what does market-clearing mean? And it didn't 26 even get established in that 1999 decision. 27 For historical perspective, there's a few of us 28 here in the room that can remember the Dairy Price Support 3403 1 Program. The Dairy Price Support Program doesn't exist 2 anymore. It existed in 1999. It was active in 1999, and 3 2000, and 2001, and in 2002. And it was buying surplus 4 nonfat dry milk products off the market. In fact, we -- 5 when -- if you recall, when the EU removed their dairy 6 quotas, and milk production increased at a time that 7 demand didn't, and they turned that milk powder -- or that 8 milk into milk powder, and we would go to outlook sessions 9 and talk about mountains of powder in storage at the EU. 10 Well, in 1999 and 2000, and 2001, and 2002, we had 11 mountains of powder -- Todd, maybe in caves in Kansas 12 City. 13 And so market-clearing meant something different 14 than it does in my mind now. We do not have mountains of 15 surplus product that have been removed from the U.S. dairy 16 industry. In fact, we don't have any that have been 17 removed because -- by the federal government because there 18 is surplus dairy products. 19 I would say the pricing that we have now is a 20 market-clearing pricing system because pretty -- pretty 21 close supply and demand are pretty closely connected. And 22 there will be from time to time an imbalance. We're 23 seeing a little bit of an imbalance now. There will be 24 seasonal imbalances. There will be imbalances because a 25 plant closes or it shuts down or the workers don't show up 26 and you can't operate the plant for whatever reason. So 27 there's always going to be these imbalances. But we never 28 really defined what market-clearing is. 3404 1 I can tell you that from time to time, there are 2 loads of milk that get sold at Class III minus a dollar, 3 or minus $2, or minus $3, because even with that discount, 4 and the cost of transporting the milk to wherever it's 5 going to go, there's still money left over to pay dairy 6 farmers. But that happens on a small volume of milk. 7 Now, I hope in your deliberation of what 8 market-clearing is that you don't consider that a 9 market-clearing price. Because if that's the 10 market-clearing price that you think you have to set 11 Federal Order milk prices at, there won't -- you don't 12 need to have a Federal Order anymore because you will 13 lower milk prices so much nobody will care if there's one 14 or not. 15 So that's sort of some commentary on 16 market-clearing. Thank you for asking. 17 I guess following up on that gave Nicole a few 18 more minutes. 19 Q. I'm trying to read my note. 20 A. So -- so it is different now than it was when that 21 decision was written. We don't have a federal price 22 support program. We don't have mountains of surplus 23 product that needs to be removed. So -- so the factors 24 that influenced whoever wrote that in that decision is far 25 different today than it was then. And I don't think 26 whatever was written then should just be broadly 27 interpreted and used today. You have to rethink that. 28 Q. And just to follow up on the sentence that was 3405 1 read, the next sentence says that "the prices for milk 2 used in these products must reflect the supply and 3 demand." 4 And that's what you have been talking about in 5 your testimony; is that -- is that right? 6 A. Yes. It is. 7 Q. And -- and one of the factors that you have talked 8 about in your testimony, throughout the course of today, 9 has been the effect on a dairy farmer's willingness to 10 continue to provide that supply if the conditions get too 11 extreme for them? 12 A. That's correct. 13 Q. One other question. You were asked about whether 14 you performed an economic analysis of disorderly 15 marketing. 16 Do you recall that? 17 A. I remember -- remember being asked if I did an 18 analysis of what the impact would be relative to a large 19 Make Allowance increase. 20 Q. And whether that -- you had done an analysis that 21 would have drawn you to the conclusion that it would 22 create disorderly marketing? 23 A. Yes, I remember that. 24 Q. And you said you didn't perform that, but you did 25 perform an analysis about whether or not dairy farmers 26 could absorb the increase as proposed by IDFA; is that 27 fair? 28 A. Yes, that's fair. 3406 1 Q. And that is a condition, if -- if -- that you 2 think, if that was implemented, could cause disorderly 3 market conditions? 4 A. Yes. 5 Q. Okay. 6 MS. HANCOCK: That's all I have, your Honor. We 7 would move to admit Exhibit 175. 8 THE COURT: Any objections? 9 Mr. Rosenbaum. 10 MR. ROSENBAUM: I'm not objecting to the exhibit 11 being admitted, your Honor, but I do have a follow-up 12 question generated by the last round of questions. 13 THE COURT: So we can go ahead and admit this 14 then. Exhibit 175 is admitted into the record. 15 (Thereafter, Exhibit Number 175 was received 16 into evidence.) 17 RECROSS-EXAMINATION 18 BY MR. ROSENBAUM: 19 Q. So the statement that I read from 1999, I read to 20 actually contain its definition, which is as follows: The 21 importance of using minimum prices that are 22 market-clearing for milk used to make cheese and butter, 23 nonfat dry milk cannot be overstated. The prices for milk 24 used in these product must reflect supply and demand and 25 must not exceed a level that would require handlers to pay 26 more for milk than needed to clear the market and make a 27 profit. 28 Isn't the definition of market-clearing here 3407 1 clearly one that says you have to set the price, the 2 minimum price, at a level that would allow handlers to buy 3 milk that's available and make a profit in doing so? 4 You may not agree with that approach, but I think 5 the definition is clear, isn't it? 6 A. That -- that definition was developed in 1999, and 7 this is 2023. 8 Q. And -- 9 A. I'm encouraging USDA to -- to think about whether 10 that's an appropriate -- that the definition as is 11 actually defined and means what Mr. Rosenbaum is 12 suggesting it means, does it mean the same thing today. 13 That's all. Fair enough? 14 Q. You're the testifier, not me. 15 A. All right. You guys will get a whack at it here 16 in a couple of days. 17 THE COURT: Anything further? 18 MS. HANCOCK: Nothing further. 19 THE COURT: Seeing nothing, you are dismissed. 20 Thank you, Mr. Gallagher. 21 THE WITNESS: Thank you. 22 THE COURT: Let's come back at -- let's come back 23 at five of, 2:55. 24 (Whereupon, a break was taken.) 25 MARK STEPHENSON, 26 Being first duly sworn, was examined and 27 testified as follows: 28 THE COURT: Your witness, Mr. Rosenbaum. 3408 1 DIRECT EXAMINATION 2 BY MR. ROSENBAUM: 3 Q. Can you please state your full name for the 4 record? 5 A. Yes. My name is Mark W. Stephenson. 6 Q. And what is your current mailing address or 7 business address? 8 A. My current mailing address is 7791 Priest Road 9 Northeast, that's Mancelona, Michigan, and the zip code is 10 49659. 11 Q. Dr. Stephenson, we have several -- a few exhibits 12 to mark, and a couple others that I will make reference to 13 at the same time. 14 Let's start with updated Exhibit Stephenson-1. 15 Do you have a copy of that? 16 A. I believe I do. 17 Q. Seven pages? 18 A. Yes. 19 Q. Okay. And is that your written testimony for 20 today? 21 A. It is. 22 MR. ROSENBAUM: Your Honor, I'd ask that that be 23 marked with the next Hearing Exhibit number. 24 THE COURT: Yes. That identified exhibit will be 25 identified for the record as 176. 26 (Thereafter, Exhibit Number 176 was marked 27 for identification.) 28 BY MR. ROSENBAUM: 3409 1 Q. All right. And, Dr. Stephenson, you have over the 2 years performed a series of cost of manufacturing reports; 3 is that correct? 4 A. I have done that for many years. More than 5 30 years. 6 Q. I want to just start by making the documents so 7 that we have them all together. The first one that's in 8 our collection is the one that's IDFA Exhibit 29, dated 9 September 1, 2006. 10 Is that, in fact, a copy of the cost to 11 manufacturing study that you did back in 2006? 12 A. That is. 13 MR. ROSENBAUM: Your Honor, I'd ask that this 14 document be marked with the next hearing exhibit number. 15 THE COURT: IDFA Exhibit 29 is marked for 16 identification as 177. 17 (Thereafter, Exhibit Number 177 was marked 18 for identification.) 19 BY MR. ROSENBAUM: 20 Q. And then the next, taking it chronologically, I 21 believe the next report that you did is the document 22 that -- dated July 9, 2007, which was -- has already been 23 marked as Hearing Exhibit 145. It also says IDFA 24 Exhibit 28. 25 Is that correct -- is that a correct copy of your 26 2007 report? 27 A. That is what I have here, yes. 28 Q. Okay. And then continuing chronologically, the 3410 1 next document is a document that's been marked already as 2 Hearing Exhibit 158. It also had the name NMPF 18-C. 3 Is that a true and correct copy of the cost of 4 manufacturing report that you created in December 2021? 5 A. Yes, it is. 6 Q. Okay. And then, lastly, there's a document that's 7 marked as IDFA Exhibit 1, which is entitled Cost of 8 Processing in Cheese, Whey, Butter and Nonfat Dry Milk, 9 June 2023. 10 Is that a copy of the report that you prepared in 11 June of 2023? 12 A. Yes, it is. 13 MR. ROSENBAUM: Your Honor, I'd ask that this 14 document be marked with the next hearing exhibit number. 15 THE COURT: Yes. IDFA Exhibit 1 is marked for 16 identification as Exhibit 178. 17 (Thereafter, Exhibit Number 178 was marked 18 for identification.) 19 BY MR. ROSENBAUM: 20 Q. Okay. Now, I have a few questions before you 21 start and read your written testimony. 22 First, is it correct that you are not here today 23 appearing in support of or opposition to any particular 24 Make Allowance proposal? 25 A. That's correct. 26 Q. And am I correct that you, in this decade, have 27 done initially a study, which has now been marked as 28 Hearing Exhibit 158, that you did at the behest of USDA, 3411 1 correct? 2 A. That's correct. 3 Q. And you have also done the study which is Hearing 4 Exhibit 178. Am I correct that you did this at the behest 5 of my client, the International Dairy Foods Association, 6 as well as the Wisconsin Cheese Makers Association? 7 A. That's correct. 8 Q. And is this Exhibit 178 in certain respects an 9 update of the work you had done for USDA in Exhibit 158? 10 A. It is exactly. The methodology was identical with 11 the exception of the way the final costs were calculated. 12 I'd be happy to elaborate about that. 13 Q. Okay. And your written testimony, which is 14 Hearing Exhibit 176, did you prepare this yourself? 15 A. I did every word, jot, and tittle. 16 Q. And IDFA did not prepare this document, correct? 17 A. That is correct. And there's been no 18 recommendations for changes. These are all my words. 19 Q. Okay. In fact, I believe you e-mailed this in 20 late the evening before it had to be turned in; am I 21 right? 22 A. What is your point? 23 Q. No point. 24 All right. Now, I think you referenced one 25 difference between the 2021 and 2022, '23 report, that is 26 to say between the Hearing Exhibit 158 and Hearing 27 Exhibit 178, which I would just like to bring out before 28 you start talking about it. 3412 1 In Hearing Exhibit 158, did you use a different 2 method to allocate costs between nonfat dry milk and 3 butter than you had used previously? 4 A. I used a somewhat different method for weighting 5 the allocation of costs. The total costs were the same, 6 but there was a secondary weighting scheme that was 7 applied in the 2021 report, Exhibit 158, than there was in 8 178. In 178, I went back to the same methodology that I 9 had used years before, having heard some groaning from the 10 industry. 11 Q. About what was in Hearing Exhibit 158, correct? 12 A. Yes, that's correct. About the additional 13 methodology that placed some weighting on highly 14 transformed products versus lightly transformed products. 15 Q. And do you still think that what you did in 16 Hearing Exhibit 158 makes sense? 17 A. I do, although it makes some of the data in those 18 tables less directly comparable to previous and subsequent 19 report. 20 Q. With that exception, are the two reports, 158 and 21 178, substantively the same, methodologically? 22 A. Precisely the same, yes. The collection of the 23 data was slightly different, just a different mechanism 24 that was used, but same question, same methodology. 25 Q. Now, there has been some testimony about surveying 26 that was done by the California Department of Food and 27 Agriculture, CDFA. 28 So going back to an earlier time period, I'm 3413 1 not -- sort of two decades ago now I guess, when you were 2 doing your very first work on the 2006 survey that's been 3 marked as Hearing Exhibit 177, what, if anything, did you 4 do to examine how the California Department of Food and 5 Agriculture was conducting its surveys and how did that 6 affect what you were doing? 7 A. And, in fact, my interaction with California and 8 the way that they had done their cost studies predated 9 even those two studies that you are talking about. I had 10 done costs of processing collection prior to that without 11 input from or examination of what California had been 12 doing. But I felt that, as I was starting to do more 13 national work collecting data, that it would be important 14 to have a couple of different things that were 15 established. 16 So, for example, California could compel plants -- 17 and did, in fact, do that -- for their data. And they had 18 established a methodology for both collection and 19 allocation, and I wanted to be able to look at California 20 data because I also had California plants included in 21 there, that would allow me to correlate what I had been 22 doing with the California data and then be able to use 23 that same methodology throughout the United States. 24 Q. Okay. And did you actually receive documentation 25 relating to how California performed its surveys? 26 A. I did. California had a -- an instructional 27 method book, fairly substantial as I recall. I haven't 28 looked at it in some time. But it was probably a good 3414 1 half inch thick, at least. And they had a team of, I 2 can't remember, I think probably four people that worked 3 in that branch of CDFA that collected data from the 4 plants. So I did work rather closely with David Ikari, 5 who was the program director there in California Dairy 6 Programs. 7 Q. And to what extent did your own surveying mirror 8 what California was doing? 9 A. Very similar. I did change a couple of things. 10 So as an example, rather than just take the annual 11 expenditures for some of the inputs to manufacturing, like 12 packaging, for example, I used for that portion of it 13 something that we would call an economic engineering 14 concept, where we try to build up the cost of a package. 15 And the reason is that those are smaller dollar values, 16 and if you pre-bought a substantial amount of cardboard or 17 labels or glue or other things, then you could have spent 18 a fair amount perhaps just during that calendar year, the 19 fiscal year that you were looking at, that would have 20 distorted what the packaging costs were. So rather than 21 that, we worked by looking at the cost of a cardboard box 22 and the cost of a yard of tape or the amount of glue 23 that's used on there, and so we build up or construct the 24 packaging cost. That was a little bit different but not 25 much. 26 Q. And is it your understanding that USDA did rely 27 upon your reports, which are Hearing Exhibits 177 and 145, 28 in setting the Make Allowances that we are now under? 3415 1 A. Well, I wasn't in the room where it happened, but 2 I did submit the data and was available for examination 3 and testimony at a Federal Order hearing. And I believe 4 that they -- they did use that as some of the evidence in 5 coming up with the Make Allowances that were changed. 6 Q. Now, were you also involved in interaction with 7 USDA when they were engaged in what's commonly referred to 8 as Federal Order Reform, that is to say when they were 9 putting in place for the first time the methodology for 10 setting milk prices based upon product pricing, finished 11 product pricing? 12 A. Very much a part of that. We -- I was at Cornell 13 University at the time, and our Cornell program on dairy 14 markets and policy coordinated with a number of faculty 15 members in universities around the country to do 16 programatic work within the dairy industry. And this was 17 an opportunity for us to, you know, really work together. 18 We had a team that focused on replacement of the 19 Minnesota-Wisconsin price discovery mechanism, and we also 20 had a team that worked on Class I price relative values. 21 So we had developed the U.S. dairy sector simulator model 22 that was used I believe as input for regional price 23 values. 24 Q. And what -- was some of your cost of manufacture 25 data also used as part of that original reform effort? 26 A. Not at the time. At that time, we had not made a 27 decision yet, within the Federal Orders, as to what the 28 replacement of the MW series would be. That was a big 3416 1 part of the testimony at the Federal Order hearings, just 2 to see what the options were. And then it was a matter of 3 refining the one that was selected as to how that would be 4 done. 5 Q. Okay. So let me ask some questions about your 6 current, most -- by "current," I mean most recent report, 7 it is June 2023, that's pretty current -- which has been 8 marked as Hearing Exhibit 178. 9 First, could you tell us what level of 10 participation did you secure from industry in 11 participating in that survey with respect to the four 12 commodities whose costs of manufacturing are at issue? 13 A. Well, we have -- I have used different 14 methodologies for the types of plants that I was trying to 15 secure. So, for example, in some of the earlier 16 methodologies, we might have been trying to look at what 17 we might refer to as the frontier of plants. In other 18 words, across all sizes of plants, which ones were 19 considered to be best practice plants, and we tried to 20 target plants that we thought were best practice. 21 At another one of the studies that was done, we 22 looked at plants that had randomized stratum -- randomized 23 strata draw from different regions and across different 24 sizes of plants. So we made sure that we had regional 25 representation and size representation. 26 For the 20- -- well, Exhibit 145 -- no, excuse me, 27 not Exhibit 145. I'm getting my numbers mixed up here. 28 For the Exhibit 158, the USDA study, we wanted to look at 3417 1 plants that were constrained to processing products that 2 were surveyed in the National Dairy Products Survey 3 Report. And was doing the same thing with the update for 4 the 2023 study, with the exception that with IDFA's 5 backing and support, they urged members to participate. 6 We had fewer members participate -- fewer members -- we 7 had fewer participants in some of the product categories 8 in the 2021 study. 9 Q. And what percentage of total production of the 10 four commodity products ended up being captured by your 11 survey? 12 A. I don't have that in front of me right now, but 13 cheese and whey were close to 50% of the NASS reported 14 volume, and butter and powder were close to 75 or 80% of 15 the NASS reported volume. So it was a large percentage of 16 product in the country that was represented in the study. 17 Q. And by the "NASS" figures relate to -- to pool 18 production, correct? 19 A. That's correct. 20 Q. Of those products. All right. 21 And when you -- and I understand that information 22 for the most recent report, Exhibit 178, that was -- you 23 had basically devised a computer program where people 24 could enter their information? 25 A. That's correct. I had done that before, but it 26 was a different -- a standalone version of a program, and, 27 in fact, was the one I had used back in the 2007 and '8 28 time period. In technology years, that's an old man at 3418 1 this point in time. And, in fact, there were a few folks 2 who had problems running that just because of the 3 differences in operating systems, the upgrades that had 4 taken place. So for the current version, it was rewritten 5 to be an online web application that asks the same sets of 6 questions, but it was collected as an online web app. 7 Q. And as people submitted data, what, if anything, 8 did you do to assess that data before you accepted it? 9 A. Well, I always look, the -- starting from a long 10 time ago, we ask a number of questions that both help us 11 with the allocation of expenses, but beyond that, provide 12 substantial cross-checks on data. So, in other words, if 13 one calculation does not come pretty close to equalling 14 another calculation that could be done later on in there, 15 it is a flag for me that there's something wrong in the 16 data, that we haven't received it all or it's been 17 improperly recorded or something. So we look for those 18 kind of red flags in here, and we -- we get that sorted 19 out with plants by e-mail exchange or phone calls. 20 The other thing that does also happen that we do, 21 is to take a look at the data that are supplied, and when 22 they are summed in major categories in there, you may look 23 at -- at those to determine whether this is a statistical 24 outlier from the rest of the body of observations that we 25 have. So by the time we have collected all the plants, 26 you can take a look and see, it may not be wrong if it is 27 that, but it's worth following up with a plant to just ask 28 them, is this right or did we miss something here? 3419 1 Q. Okay. And then could you tell me what a mass 2 balance is? 3 A. Sure. This is a concept that is often talked 4 about and used in dairy plants, but this is one where we 5 look at all of the components, both the components in the 6 milk and dairy ingredients that were used in the plant to 7 manufacture all of the products in the plant. Then we 8 look at all of the components in the products that were 9 manufactured as final products from the plant, and those 10 comprise a mass balance. And this is one of those cases 11 that is one of the red flag indicators for me, that do 12 those look approximately equal. There could be minor 13 differences, and you would expect that there would be some 14 plant loss, something we would call shrink in the 15 industry. And if it's minor, then no concerns. If it 16 looks like something is unaccounted for, then that mass 17 balance is telling you something. 18 Q. Okay. And what do you do when -- what did you do 19 when you found a mass balance that looked shaky? 20 A. Well, generally speaking, you follow up with the 21 plant. The most common cause is that plants might have 22 not reported products that they made in the plant that 23 didn't relate to what they understood was supposed to be 24 studied. But, unfortunately, I still need the component 25 balance for those products to be able to allocate costs 26 across the different products made in the plant, so we do 27 collect those then. 28 Q. Okay. And -- and if you had a mass balance that 3420 1 seemed out of whack, did you work with the company that 2 was supplying the information to a point where you came to 3 some conclusion that the information had been made 4 accurate? 5 A. If possible. If it wasn't possible, then I 6 believe in the most recent, the 2023 study, that there was 7 maybe one plant that just had data that I deemed to be 8 incomplete or inaccurate, and it was not included in the 9 study. 10 Q. Okay. Now, I think you referred to this a second 11 ago, but did you -- let me start that question again. 12 Many of these plants make products beyond the four 13 that you were actually trying to determine a cost of 14 manufacture for, correct? 15 A. Yes. 16 Q. And so one of the challenges is to allocate the 17 plant costs among the products so that you have isolated 18 as best as can possibly be done the costs that are 19 associated with the product that you are actually trying 20 to establish the cost for; is that right? 21 A. Yes. 22 Q. Okay. And so does that necessarily mean that you 23 collected data with respect to products beyond the 24 products that you were actually establishing a particular 25 price for? 26 A. Some data. You know, as a good example, if a 27 plant made cheese, cheddar cheese, 40-pound block, and 28 yogurt. I didn't care much about the yogurt except that I 3421 1 needed to know what the pounds of components were that 2 went into the product. I didn't need to know anything 3 about the packaging of that product. So questions like 4 that weren't asked. 5 Q. Okay. Now, did -- when you -- some questions were 6 asked earlier relating to your work, and so now that we 7 have you, we can ask for a definitive answer. 8 When you were calculating costs with respect to 9 cheese, do those cost calculations only relate to the 10 40-pound blocks? 11 A. No, we collected information for a variety of 12 packages. So as a good example, if you manufactured a 13 fair amount of American- or cheddar-style cheeses, I may 14 have asked for information about barrels, as well as 15 640-pound blocks, not a part of the NDPSR survey, as well 16 as the 40-pound blocks. In the report, in the table 17 summaries, those values not reported there were not 18 included in the 40-pound block values that are in the 19 tables. 20 So as an example, I do have barrel values, I do 21 have 640 values, but they are not reported there. Up to 22 the point of packaging, the costs for receiving milk and 23 manufacturing the cheese product itself, and right up to 24 the point of packaging, including utility costs to that 25 point, would have been included, but packaging costs not 26 included. SG&A would have also been included. 27 Q. Okay. Are you comfortable that the number as 28 reported for cheese, for example, the actual dollar number 3422 1 is reflective of the cost of 40-pound blocks? 2 A. To the best of my ability it is. And, obviously, 3 I'm reporting one, or I guess in this case actually three: 4 The high, the low, and the average numbers. But of 5 course, we have individual data from each plant, so there 6 are more data that underlie what's reported here. 7 Q. Okay. Now, another question that came up during 8 some questioning earlier in the hearing related to what's 9 known as high heat nonfat dry milk. 10 Are you familiar with that? 11 A. Yes. 12 Q. And if -- if a company reported information and 13 identified that as relating to high heat nonfat dry milk, 14 did you include that in calculating the nonfat dry milk 15 cost? 16 A. Not if it was reported as such. So it's possible 17 that, you know, it might have been just labeled as nonfat 18 dry milk, but if it was reported as high heat, it wouldn't 19 have been included, just like if somebody had pepper jack 20 cheese, it would not have been included in this either. 21 Q. Okay. Now, are you aware that AMPI during their 22 testimony indicated that they had reported some high heat 23 nonfat dry milk information to you? 24 A. I had heard that, yes. 25 Q. Okay. And I take it that was not labeled as high 26 heat nonfat dry milk in the information you received from 27 AMPI; is that right? 28 A. I did go back and take a look at this because I 3423 1 was curious about it as well. And, no, it wasn't labeled. 2 It was labeled as nonfat dry milk. 3 Q. Okay. Now, have you reached out -- not -- now, 4 you have made promises of confidentiality to the various 5 participants in your study, correct? 6 A. Absolutely true. I -- I always pledge 7 confidentiality at the highest level, and I have never had 8 a breach of that, nor would I. If that was the case, I'm 9 out of business with this. 10 Q. Okay. Now, have you received special permission 11 from AMPI to reveal certain information relating to their 12 cost information for that? 13 A. I did, because when I went back in to look at the 14 data, I wanted to see whether or not this was really 15 influential in the reporting of the numbers in here. And 16 I couldn't skew what people were looking at and be 17 construed as, you know, well, throw the whole thing out. 18 And, no, the answer is, it is not. The AMPI plant 19 granted that -- I'm given permission to say this by 20 AMPI -- was that their data is almost exactly at the mean 21 of the data reported. So even pulling their data out 22 would not change the weighted mean by any significant 23 amount, in the fourth decimal point. 24 Q. Okay. And, Dr. Stephenson, you have obviously 25 already testified in general terms, at least, with respect 26 to your doing -- having done work for USDA to prepare the 27 2021 study, correct? 28 A. I have, yes. 3424 1 Q. And then you did work for the International Dairy 2 Foods Association, my client, and the Wisconsin Cheese 3 Makers Association, correct, the 2023 report, correct? 4 A. Yes. 5 Q. Am I correct that you also have done work for 6 National Milk Producers Federation that relates to the -- 7 what I'll call the Class I price surface issue that we 8 will get to later? 9 A. I have, yes. 10 Q. Am I correct that you also have done work for the 11 Milk Innovation Group relating to some of the work they've 12 done relating to Class I issues? 13 A. I have many friends in this room. 14 Q. Okay. 15 MR. ROSENBAUM: Your Honor, Dr. Stephenson is 16 available for examination. 17 THE COURT: Cross for this witness other than AMS? 18 Dr. Bozic. 19 CROSS-EXAMINATION 20 BY DR. BOZIC: 21 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 22 Good afternoon, Mark. 23 A. Good afternoon, Marin. 24 Q. When you look at your data, surveys are voluntary, 25 and so people don't have to participate. And processors 26 do have the incentive to report the data if they 27 believe -- 28 MR. ROSENBAUM: I'm sorry -- I'm so sorry to 3425 1 interrupt, your Honor. I made Dr. Stephenson available 2 for cross-examination a minute too early. I was going to 3 ask him to read his written testimony. 4 THE COURT: That's a good point. 5 MR. ROSENBAUM: I'm sorry. 6 THE COURT: I forgot too. No worries. I'm not 7 minding the farm here either. 8 MR. ROSENBAUM: Could you please read your written 9 testimony, and then we'll get back to our 10 cross-examination. 11 THE COURT: Yeah. Are we going to read each of 12 these? 13 MR. ROSENBAUM: Sorry? 14 THE COURT: Each of the -- 15 MR. ROSENBAUM: We're going to read 176. 16 THE COURT: 176. 17 MR. ROSENBAUM: Only 176, your Honor. 18 THE COURT: Thank you, sir. 19 You may proceed. 20 THE WITNESS: I'd need another bottle of water if 21 we're going to read all of them. 22 THE COURT: Incoming. 23 THE WITNESS: All right. 24 Judge Strother and personnel of AMS Dairy 25 Programs, I am appearing before you to offer a summary of 26 recent research projects in which I collected data on and 27 summarized the costs of processing in cheese, whey, 28 butter, and nonfat dry milk plants. 3426 1 I am not here to advocate for or against any 2 particular policy action, but rather to offer my insights 3 into the current cost environment for dairy processors. 4 This is a summary of my work and does not represent an 5 official statement of my previous employer, the University 6 of Wisconsin. 7 I have a Bachelor's and a Master's degree in Dairy 8 Science from Michigan State University and a second 9 Master's and doctorate degrees in Agricultural Economics 10 from Cornell University. Over the course of my career I 11 have conducted and published research on the cost of 12 processing dairy products for 35 years. 13 Most recently, I have conducted research on the 14 processing costs of cheddar cheese, dry whey, butter, and 15 nonfat dry milk. These are the four products currently 16 surveyed in the weekly National Dairy Product Sales 17 Report2 (NDPSR) and whose prices are used to determine the 18 component values of butterfat, protein, other solids, and 19 nonfat solids used in the calculation of minimum class 20 milk prices in all Federal Milk Marketing Orders. 21 In 2018, I entered into a Memorandum of 22 Understanding with USDA AMS to update the cost of 23 processing of these four products. The final report was 24 made available to USDA and distributed more widely in 25 2021. That report has also been submitted as Exhibit 158 26 for the hearing record. The bulk of the data from plants 27 participating in that project was largely from the 2019 28 calendar year. Prior to the 2021 report, the last time I 3427 1 had conducted a cost of processing study on these four 2 products was in 2006. 3 Shortly after that study, I offered testimony as 4 to those results in a Federal Order hearing in Pittsburgh, 5 Pennsylvania. More recently, the International Dairy 6 Foods Association (IDFA) and the Wisconsin Cheese Makers 7 Association asked that I update the 2021 study to capture 8 the impact of inflation and supply chain disruptions since 9 the pandemic. 10 This has been done and the results shared in a 11 final report of primarily 2022 calendar year data from 12 participating plants. A copy of that report has been 13 submitted for the hearing record as "IDFA Exhibit 1." 14 I am here to provide results from the 2019 and the 15 2022 data and to answer questions as an expert witness 16 regarding those two research projects. 17 Only plants who manufacture products collected in 18 the NDPSR were solicited to participate in these studies. 19 It is important to note that these plants may not be 20 actual participants in the NDPSR, but they need to be 21 operations manufacturing products whose characteristics 22 are consistent with the NDPSR products. 23 As an example, exported nonfat dry milk might not 24 be included in the NDPSR because the days between contract 25 and delivery dates disqualify the transaction. But, for 26 my purposes, the cost of transforming milk into nonfat dry 27 milk powder is still valid. 28 Participation in the survey is voluntary. I would 3428 1 offer this as both an observation and a potential 2 criticism. I have pledged my adherence to participant 3 anonymity and integrity of their individual data. 4 However, I will offer the observation that in any of the 5 cost projects there has been a great deal of variance 6 across individual plants, and that variability has become 7 greater over the years that I have conducted cost studies. 8 As it is with dairy farms, and most other 9 businesses, there is no single cost that represents all 10 processors. There are, however, statistical measures that 11 are useful to summarize the observations. In my 12 reporting, I use product-weighted averages. 13 But because of the variability observed, it is 14 fair to draw the conclusion that the sample matters. 15 Self-selection to participate can alter weighted average 16 values if the same plants are not participating across 17 different research projects. 18 I do not have audit authority to verify the data 19 submitted by participants. However, there are several key 20 cross-checks in the data collection. Submitting 21 intentionally deceptive costs would raise red flags and 22 prompt questions from me. Follow-up emails or phone calls 23 will usually clarify any data questions that might arise. 24 I also look for statistical outliers across plants to 25 ensure that data entries are as accurate as possible. 26 Beginning with the 2006 cost project, I have used 27 a custom computer program to generate and collect plant 28 data. Prior to that time, paper surveys were used which 3429 1 yield a weighty document that may be sparsely filled out. 2 That results because you need to ask all possible 3 questions to cover the unique aspects of each plant. A 4 computer program can begin by asking basic questions, like 5 what products are produced in the plant, and then follow 6 that up with only questions relevant to those products. 7 The 2006 and 2019 projects utilized a standalone 8 custom application which participants used to complete 9 data entry. I developed an online web application for the 10 2022 project that produced a similar set of customized 11 questions for participants. 12 The papers noted in footnotes 3 and 6 of my 13 testimony include screenshots with example questions from 14 those survey instruments. 15 It is important to understand what plant costs are 16 included in the cost of processing. My objective is to 17 determine the costs of product transformation from, but 18 not including, raw ingredients to finished wholesale 19 products. The costs of raw milk, purchased cream, nonfat 20 dry milk, etcetera, are excluded. But non-dairy 21 ingredients, such as salt or enzymes, are included. 22 Costs are inclusive through product packaging but 23 do not incorporate post-packaging costs such as long-term 24 storage, product aging, sales costs or product 25 distribution. The costs are meant to represent the cost 26 of transformation of milk, or milk ingredients, into the 27 finished wholesale dairy product. An economic 28 depreciation is included to cover consumed capital, and a 3430 1 return on the market value of assets is added to reflect 2 opportunity costs. 3 Some processing costs are easily allocated to the 4 product of interest. For example, the cost of cardboard 5 for a 40-pound block is directly assigned to cheddar 6 cheese. Other costs must be allocated across multiple 7 products. I collect component values on all products 8 produced at the plant. The weight of total component 9 solids in a product becomes the basis for allocation. 10 For instance, if there was 75,000 pounds of 11 components in cheddar cheese produced at the plant and 12 25,000 pounds of components in mozzarella cheese, then 75% 13 of the costs of salt used in the plant would be attributed 14 to the cheddar cheese. 15 Other costs are more complicated to allocate. If 16 a plant brings in only raw milk and produces butter and 17 nonfat dry milk, then the labor cost in the churn room is 18 directly allocated to the butter produced. But if the 19 plant has only one electric meter, the total electric 20 costs are allocated by the pounds of components in the 21 butter and nonfat dry milk produced. 22 This has been a standard practice utilized by the 23 industry and previously used by the California Department 24 of Food and Agriculture in their cost accounting for dairy 25 plants. 26 I had also used this methodology in previous 27 projects, but I found that in some cases it can produce 28 misleading results. For example, a butter-powder plant 3431 1 that brings in milk, but may sell a considerable amount of 2 skim or condensed milk, has not incurred much of the costs 3 of final drying. The pounds of components are the same, 4 but you are now allocating a lower proportion of the final 5 costs to the butter and powder that was produced and too 6 much to skim and condensed. 7 In the 2019 project, I employed a second weighting 8 factor based on the degree of transformation of the 9 product. Products like skim milk are lightly transformed 10 while fully dried and bagged powder has incurred 11 additional utility, labor, packaging, etcetera, costs. 12 This additional methodology fully accounts for the 13 total costs in the plant, but, ceteris paribus, more costs 14 are placed on powder than butter, and much less on the 15 skim milk sold. 16 After the 2019 study was published, I heard from 17 many folks in the industry that they were concerned about 18 the new methodology and were not yet comfortable with its 19 use. 20 For the 2022 study, I have since gone back to the 21 previous methodology using the pounds of components as the 22 allocation factor and not the degree of transformation. 23 Although I stand by the concept of further accounting for 24 the degree of activity needed to produce a product, I 25 believe that the industry needs to be comfortable with the 26 methodology used. 27 Table 1 shows the weighted average product costs 28 from the 2006 study, the 2019 data, and the 2022 plant 3432 1 data. I won't go through all of those data in the cells, 2 but it can be seen in the -- in the exhibit. 3 And I will just acknowledge that I have also 4 included two columns that show a percentage change from 5 the 2022 data in comparison to the 2006 data as well as 6 2019 data in comparison to the 2006 data. 7 Table 1, that I just referenced, summarizes these 8 costs from the years 2006, '19, and '22. The table also 9 provides the current Make Allowances which were last 10 updated in 2008. 11 Observations: The sample matters. In the 2019 12 data, there were 27 nonfat dry milk plants who had 13 participated, while in the 2022 data there were only 15. 14 However, the average pounds of product per plant was much 15 larger and the total pounds of product reported for 2022 16 was slightly more than the previous study. 17 The 2022 data sample included 18 cheddar cheese 18 plants versus 10 in the 2019 data. Like the nonfat dry 19 milk plants, they were also much larger average size and 20 represented a significant proportion of the NDPSR volume. 21 The butter data are the most puzzling for me. 22 Although the number of participating plants are similar 23 (13 versus 12 in the 2019 data) and the total volume of 24 butter represented is similar between the two years, the 25 plants participating are significantly different. 26 The 2022 data represent both larger plants and 27 smaller ones compared with the 2019 data where the size 28 was more homogeneous. I believe that the different sample 3433 1 is most responsible for the very different results. 2 Like the butter plants, dry whey processing had a 3 similar number of operations in the sample. Eight plants 4 were included in the 2019 data and nine with 2022 data, 5 but the volume was almost 50% greater with the most recent 6 sample. 7 There may be a variety of reasons why the sample 8 matters and we see such variations across the plants in 9 the studies. New automation technology has become 10 available, which can reduce labor costs, and there is 11 considerable variation in per unit utility costs across 12 plants. Further, larger multi-plant firms may have input 13 purchasing cost advantages that smaller single-plant firms 14 do not. 15 Plant ownership might possibly suggest different 16 objectives for firms. In a commodity-based industry, 17 proprietary firms can only improve their profit margin by 18 reducing supply chain and processing costs. 19 Cooperatively-owned plants certainly strive for profit for 20 their members, but assuring a home for member milk may be 21 an even stronger objective which could limit plant 22 investment. 23 Because the sample can make a difference, it would 24 be best if plants were compelled to participate. Ideally, 25 the sample would be comprised of all plants with 26 reportable product in the NDPSR. That way the price 27 discovered in the survey for products would most closely 28 correspond to the costs of transformation used in the 3434 1 Make Allowance. 2 I would also suggest that any parameters in the 3 product price formulas, such as Make Allowances and yield 4 factors, have periodic assessment to assure validity of 5 price announcements. 6 It has been 15 years since the Make Allowances in 7 product price formulas were updated. It would be my 8 opinion that this interval is too long between the 9 assessment of processing costs. Per unit processing 10 costs, such as the costs of a therm of gas or a kilowatt 11 hour of electricity, have fluctuated over the intervening 12 years, but some costs, such as wages, have only increased. 13 To some extent, labor used has been reduced by 14 substituting with automation, and there have been energy 15 recapture technologies employed in plants that we didn't 16 see 15 years ago. Over that time, total manufacturing 17 costs per pound have increased. 18 There are safety relief mechanisms in Federal 19 Orders that are only expected to be employed when the 20 system isn't working properly. One of those is depooling 21 of milk. Depooling can happen for various reasons, but 22 one of them is when processors routinely find that 23 obligations to pay the minimum price for milk is more than 24 they can recover from their product prices. This happens 25 when the Make Allowance is inadequate. The relief is to 26 opt out of regulation and pay what you can afford. We 27 have seen much more unregulated milk in the last several 28 years. 3435 1 Table 1 shows that there are surprisingly uniform 2 increases in the cost of processing from the 2006 data to 3 the 2022 data of somewhere around 65 to 70% across all 4 four products. An increase in the Make Allowance 5 reflecting contemporary costs would do much to return 6 product price formulas to the functionality they had in 7 2008 when they were last updated. 8 MR. ROSENBAUM: Thank you. 9 Dr. Stephenson is now available for 10 cross-examination. 11 CROSS-EXAMINATION 12 BY DR. BOZIC: 13 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 14 Dr. Stephenson, anything else you need to read? 15 A. No, thank you. 16 Q. Good. 17 All right. So looking at your data, if surveys 18 are voluntary, and recognizing that processors have 19 economic incentive to effectuate a higher Make Allowance, 20 in which direction would you expect the results to move 21 under a mandatory audited survey, assuming no change in 22 actual costs for packaging, natural gas, etcetera, so the 23 only change is the sampling of participation and auditing? 24 A. I don't know how I could say, Marin. It could 25 very well be the case that we got the complete census of 26 plants involved in NDPSR, evaluated their costs, and it 27 would be exactly the same as what we had here. 28 So I think that what you are hinting at or 3436 1 implying is that maybe there is a self-selection bias that 2 would say, well, if I think I have low costs, I don't want 3 to participate. I'm not prepared to examine the head of 4 people to know whether they would do that or not. 5 Q. Do you find the distribution of costs have higher 6 or smaller variance than your earlier studies? 7 A. As stated in the testimony, it is clearly higher 8 than it was in earlier studies. 9 Q. And is the distribution of costs unimodal or 10 bimodal, and if you could explain in plain words what that 11 means? 12 A. In the past -- yeah, I'll try my best. When we 13 would see plants, there's always a range of costs, and 14 what you are talking about, when you are talking about 15 what does the distribution look like, a normal 16 distribution would be thin at the tails, which would say 17 there would be very few plants at the very low cost or 18 very high cost, and more of them toward the center. 19 What casual observation would tell me from looking 20 at these plants now is that we do see more of a bimodal 21 distribution, which would say that plants tend to cluster 22 either toward the lower or the higher end. 23 Q. Do any plants in your sample have costs of 24 production that's below the current Make Allowance levels? 25 A. We have some that are very close. Very, very low 26 costs. 27 Q. Do any plants have costs of processing below 28 Make Allowances requested by Proposal 7 by National Milk 3437 1 Producers Federation? 2 A. Yes. 3 Q. You partitioned your data to low cost and high 4 cost plants. 5 What insights do you draw from the spread between 6 those two groups? 7 A. It's a little bit hard to say. There certainly is 8 a size element to plants in those two groups. You can see 9 that from the table, generally reported. But it's not 10 fair to characterize all small plants have high costs and 11 all big plants have low costs. We see some very cost 12 competitive small plants. 13 Q. And I'm not sure whether you collected this 14 information. Do plants in the low cost category tend to 15 be more recently constructed plants? 16 A. I don't have that information. And they could be 17 recently constructed or it may be an old structure that's 18 been vastly retrofitted. 19 Q. Sure. 20 So for the next question I'm not looking for a 21 number but just general conditions. 22 When do Make Allowances become stimulated? In 23 other words, when do they encourage further supply of 24 dairy products that is not driven by demand, but rather 25 ability to pass the reduction revenue to producers while 26 keeping stable and profitable profit margins? 27 A. This is a complex question, and I'm not sure that 28 that can have a simple answer. 3438 1 If there were enough money in a pool from which to 2 take a substantial draw, it would encourage participation 3 of manufacturing plants, and you might then think, well, 4 we would like to build additional capacity as a result of 5 that. That depends on whether or not you do indeed have 6 that money in the pool, and it also would mean, do we have 7 the milk available to manufacture those products. 8 So I can't really say that. I mean, in general, 9 if you were going to be building a plant, regardless of 10 what your motives were in doing that, you have to procure 11 the milk to get into the plant to make the products that 12 are there. That means competing for it with other 13 operations. That means paying premiums, probably, that 14 hadn't existed before. 15 So it's a complicated question that you have 16 asked. 17 Q. Of course. No. I'm known for that. So -- 18 A. I agree. 19 Q. -- reading again from the final decision from 20 April 2nd, 1999, on page 16097, I have -- I'm going to be 21 boring a little. You have heard this same set of 22 questions that I asked our colleague Chris Wolf. 23 So in that final decision, AMS stated: "If the 24 Make Allowances are established at too low a level, 25 manufacturers will fail to invest in plants and equipment 26 and reduced production capacity will result." 27 So looking back since 2006, so over 15 years, 28 16 years now, did we -- did we get to a point that our 3439 1 production capacity is insufficient to meet demand? 2 A. As an economist, I would say, shame on you. You 3 are using the word demand as though it were a quantity. 4 It's a relationship between price and quantity. 5 Q. Sure. Maybe I can restate. 6 Are we not importing a higher share of cheese 7 consumed in the country? 8 A. I do think that our classified pricing system has 9 allowed us to manufacture more cheese products than would 10 have otherwise been the case without a classified pricing 11 and pooling system in place. 12 Q. Did the delay in updating Make Allowances distort 13 investment patterns for the last 15 years, or at least the 14 last five, seven years, versus what they would have been 15 in a free unregulated market? 16 A. It's conjecture, Marin. What I will say is that I 17 do see plant capacity being built in places that really 18 don't care if the plant is pooled or not. So apparently 19 farms in the area are willing to supply milk to plants 20 that are unregulated. 21 Q. Would you agree or disagree with the statement 22 that the negative consequences of setting Make Allowances 23 too low are not merely as dire as setting Make Allowances 24 too high? 25 A. I think that one of the problems we can have in a 26 Federal Order system that's establishing minimum prices is 27 establishing a price that's too high. There is a relief 28 valve that's available in this system, and, you know, that 3440 1 is to depool milk if we get into that circumstance. In 2 other words, don't subject yourself to that minimum price 3 regulation that where you can't be profitable. Fluid 4 plants really can't pull that ejector cord, and that's the 5 danger, I think. So we don't want to set prices where 6 they would be above some mythical P star. We want them to 7 be below that point and let premiums bring the marketplace 8 up there. 9 Q. So given -- you mentioned Class I milk, and the 10 primary function of the Federal Order is to be -- to 11 secure supply of beverage milk. What criteria should be 12 considered when setting Make Allowances in life that the 13 primary purpose is to secure supply of beverage milk? 14 A. Okay. Could you just restate that? I want to 15 make sure that I am responding to what I think you said. 16 Q. Sure. Yeah. So you mentioned that depooling will 17 occur if Make Allowances are too low, if I am restating 18 your words fairly. 19 But the purpose of the Federal Orders -- we may 20 consider such functioning to be desirable, but at least 21 the legal purpose of Federal Orders is not to make sure 22 everyone is pooled, but to make sure there is sufficient 23 supply of milk for Class I. 24 So if that is the legal purpose of Federal Orders, 25 how should that influence the criteria we use to -- for 26 setting Make Allowances? 27 A. Well, I don't have the numbers off the top of my 28 head, but I think that Class I utilization in the country 3441 1 is something like 27%. And you have to get down and 2 examine that regionally. In some parts of the country, in 3 some months of the year, it's much higher than that. In 4 other regions, it -- it could only aspire to get to 27% -- 5 Q. Sure. 6 A. -- much lower than that. 7 If you take a look at Class I relative to all milk 8 in the country, not just the Federal Order regulated milk, 9 it's probably more like 18 or 19%. So I think there's 10 plenty of milk available for Class I needs. 11 Q. So if the security of milk for Class I was the 12 primary decision criteria in setting Make Allowances, it 13 would follow that maybe not even changing them would not 14 jeopardize security of Class I; would that be a fair 15 conclusion? 16 A. Could you restate that again? I zoned out for a 17 second. 18 Q. Let me try again. So if the primary criteria for 19 designing Federal Orders was making sure there is 20 sufficient reserve supply of manufacturing milk for 21 Class I, given that we are at 18% nationwide, or 27% in 22 the orders, do we even -- would we even need to increase 23 Make Allowances to have that objective accomplished? 24 A. I think that we have plenty of milk available. 25 The question becomes one of hierarchy. Can we get it into 26 a fluid milk plant with some degree of ease when we want 27 and need it, or can it be pulled away or not made 28 available to that fluid milk plant when it is needed? So 3442 1 that's one of the things I guess I would say. 2 Q. I think my time is up. 3 I appreciate your answer on that. 4 I have a few questions that go a little bit 5 broader than the work you have conducted for -- on 6 Make Allowances, and it is -- the reason I say that's the 7 appropriate to ask you now is because it's really just you 8 and Dr. Wolf that are truly unbiased and disinterested 9 about the outcomes of this hearing, so I'm here to learn. 10 And -- and I wanted to ask you about the concept 11 of disorderly marketing. I was reading recently when 12 Supreme Court Justice Potter Stewart in 1964 was asked to 13 describe his test for obscenity, he responded, "I know it 14 when I see it." And somehow we landed with the same 15 implicit definition here, that you can point to something 16 and say that it's disorderly marketing, but almost 17 everybody struggles to define it. 18 Would you like to try? 19 A. I absolutely would not. It is a term that's been 20 used extensively, and it is a term that we have in 21 literature and history for Federal Milk Marketing Orders. 22 And I do think that, you know, whether you care to make a 23 joke about it or not, disorderly marketing is one of those 24 things that we do seem to know when we see it. But if you 25 could list criteria A, B, C, or D, I think that everyone 26 in this room, including the good folks from AMS, would 27 have a hard time doing that. 28 Q. Would -- if the changes to regulations disturb 3443 1 risk management practices, would that fit your 2 understanding of disorderly marketing? 3 A. If the changes to -- 4 Q. Federal Order regulations -- 5 A. Yeah. 6 Q. -- disturb risk management practices, by producers 7 or processors, would that be -- would that fit your 8 understanding of disorderly marketing? 9 A. This is probably going to wound you to hear me say 10 this, but, no, I don't think it would be. I'm not sure 11 that hedgers or speculators should be first and foremost 12 in the minds of Federal Milk Marketing Order personnel. 13 That's not what they're here to -- to do in my 14 understanding. 15 Q. So now everybody knows that I didn't have a chance 16 to prep this witness, so it's a true arm's length 17 question. 18 Okay. So I wanted to ask a little bit about the 19 circularity or the lack of circularity when it comes to 20 pricing cheese and the National Dairy Product Sales 21 Report. 22 Would you agree that the weekly report, the 23 National Dairy Product Sales Report, does not capture all 24 of cheese, dry whey powder, and butter? 25 A. That it does not capture that. 26 Q. Yes. 27 A. It -- the National -- the NDPSR is all about those 28 products. 3444 1 Q. But of -- would -- does -- does the volume of 2 cheddar cheese, 40-pound block and the 500-pound barrels, 3 reported in NDPSR correspond to the total volume of those 4 products sold that week nationally? 5 A. Well, you know, let me use an analogy. I feel as 6 though I have got a fever. I go to my physician, and he 7 says, well, let me check. You know, he could check on my 8 forehead; he could check in my ear; he could check under 9 my tongue, my armpit, other places. And he would get 10 different readings. And so he would say, perhaps, you 11 know, is this representative of whether you have a fever 12 or not? 13 If you understand the relationship between where 14 the measure is being taken and its impact in the 15 marketplace, I believe it's valid. 16 So the question may be, do 40-pound blocks 17 represent a valid metric or benchmark for whether or not 18 market prices are being moved in the country. To the 19 extent that we have a great deal of cheese volume -- as I 20 understand it, I don't buy or sell cheese -- is priced off 21 of blocks, I would say, yes, we have that. But can we get 22 to a point where we worry about whether or not it's a 23 valid measurement? I suppose so. We got to that point 24 with the Minnesota-Wisconsin price discovery mechanism. 25 We didn't have enough Grade B milk in that area to feel 26 comfortable that it was representative of national markets 27 for milk. 28 So I don't think we're at that point now with 3445 1 those products, but always worth examining that and 2 looking at it in more detail. I haven't done that here. 3 Q. Sure. So the reason I ask is, to increase 4 Make Allowances to say that the cost should be passed 5 upstream to dairy producers, but in the -- one of the 6 classical explanations for why that's necessary is the 7 circularity. If I charge my buyers more for 40-pound 8 blocks, I would have to report it to NDPSR, so I cannot 9 really increase my revenue relative to my obligations, to 10 the pool, if I'm a privately held pooled cheese maker. 11 However, if the -- if there are a number of ways 12 that I can quote/unquote escape reporting to NDPSR, by 13 forward pricing, having reduced fat, being Halal, or other 14 ways, that circularity is broken, and then I think it's a 15 legitimate question why wouldn't increased costs in 16 manufacturing of various cheeses not be passed to buyers 17 of that cheese rather than upstream to producers. 18 That's -- would you like to opine on that? 19 A. Well, I think that there are many ways in which, 20 you know, you need to consider an answer for that kind of 21 question. NDPSR reports a single price every week for 22 butter, for whey, for whatever it might be. I doubt -- 23 I've never been privy to see it -- but I doubt that every 24 survey respondent from NDPSR reported that exact same 25 price. I'm sure there's a distribution of those prices. 26 Every plant does not have a Make Allowance that 27 corresponds to one that's in the formula. There is, as I 28 have reported, a distribution of those things. 3446 1 If you have a higher cost of production than the 2 Make Allowance in the formula, I hope over the long run 3 that you are actually getting a higher price for the 4 product that you are selling that's included in the NDPSR. 5 Otherwise, you're probably not making money. 6 Q. Right. 7 I have a few questions that address other topics 8 in scope of this hearing, and again, I understand you're 9 not here and you would not -- never support one proposal 10 or another. I'm hoping that you can help us think in a 11 deeper way about these topics. 12 One of the questions is whether barrels should be 13 included in calculations of the monthly announced cheese 14 price, and if yes, then to which extent they should be 15 weighted. 16 What are -- what is a useful way to think about 17 that issue? 18 A. Well, I might go back to some of my just earlier 19 comments, you know, and to ask whether or not we're 20 getting representative values about how the market has 21 moved with 40-pound block cheddar prices. My guess would 22 be that if we weren't inclusive of these values, of barrel 23 values in the NDPSR, that we would probably find that the 24 pricing would happen rather quickly that they move to, you 25 know, pricing off the blocks as well. I'd be surprised if 26 that didn't happen. 27 Q. So to make sure I understood you, you believe that 28 if barrels are removed from the survey, that the pricing 3447 1 of barrel cheese would be placed on blocks? 2 A. That would be my -- again, Marin, I have never 3 sold a barrel of cheese in my life. 4 Q. And it shows. 5 A. But I -- I have certainly worked in the industry 6 for a fairly long period of time, and -- and I have come 7 to believe that the markets will express themselves one 8 way or another. And if those barrel markets want to be 9 able to protect themselves against price movements or 10 offer their customers such protection, then they are going 11 to need a means of doing that, and they could probably do 12 that more easily through a 40-pound block association. 13 Q. Thank you, Mark. 14 My last question is truly open ended. We are -- 15 we find ourselves here 15 or plus years since the last 16 hearing. Importance of fluid milk in our sector is lower 17 than it has been in the past, and you said yourself it's 18 27% now. 19 Overall, as the importance of fluid milk decline, 20 how should that guide the decisions regarding maintenance 21 of Federal Orders or modification of -- is there a generic 22 or like some deep principle that you would suggest? 23 A. Your hands are tied until you have substantial 24 change from Congressional authorization as to what you 25 actually can do and what you can look at and possibly 26 change. 27 Within the confines of the hearing system that we 28 have today and what's possible to do, we can tweak at the 3448 1 edges. I don't think we can make the changes that are 2 perhaps radical enough to address all of the things that 3 might be wrong with the dairy industry. 4 And I might question whether we need to. You 5 know, the markets have found a way to express themselves 6 and survive. It is not ideal, and we can probably improve 7 that. But that doesn't mean that, you know, we need to 8 try to ask what we can't possibly do at this point in 9 time. 10 DR. BOZIC: Thank you very much. 11 THE COURT: Further examination of this witness? 12 Other than AMS I meant. 13 Seeing none, AMS. 14 MS. HANCOCK: Your Honor, can we take just a 15 couple minute break so we can check our -- do a touch base 16 really quick? 17 THE COURT: Yes. Let's take five minutes. Come 18 back at 4:15. 19 (Whereupon, a break was taken.) 20 THE COURT: On the record. 21 CROSS-EXAMINATION 22 BY MS. HANCOCK: 23 Q. Good afternoon, Dr. Stephenson. 24 A. Good afternoon. 25 Q. Do you have Exhibit 178 in front of you? 26 A. I do. 27 Q. And I want to start off with looking at -- can we 28 turn to Appendix A which starts on page 16? 3449 1 A. Yes. 2 Q. Is this the computer survey that you used for the 3 2023 survey? 4 A. Yes. 5 Q. We bounce around on dates depending on when it was 6 taken and when it was published, so -- 7 A. Yes. Forgive me. 8 Q. Did you use this for the 2019 survey as well? 9 A. The same set of questions but in a different 10 application. 11 Q. Okay. Did it perform the same way where it was a 12 smart program where if you answered that you produced 13 cheese, it would answer questions specific to cheese? 14 A. Yes. 15 Q. You just changed applications, but otherwise it 16 functioned the same? 17 A. I did. The advantage to doing this is that it 18 could be updated much more easily and didn't have to worry 19 about the operating system that people were using. 20 Q. Okay. And so this Exhibit A (sic) is just you 21 logging in as if you were going to be taking the survey, 22 and then you conduct -- you just did screenshots of each 23 one of the question pages? 24 A. That's correct. There would be a few screens that 25 did not show up here simply because of the example I 26 picked, you know. So, for example, I think this is a 27 cheese one, and you wouldn't see nonfat dry milk questions 28 showing up here. 3450 1 Q. Okay. How did you -- so did you send an e-mail 2 invite out to the industry and invite them to participate, 3 or how did the request to participate happen? 4 A. The request went out primarily as an invitation 5 from IDFA to their members, and we had responses from 6 people and follow-up from there. So it happened, I think, 7 a bit more organically, and it was -- it was done fairly 8 quickly this time around as opposed to the longer time 9 period it took from the 2021 project. 10 Q. Okay. And when you say "2021," that's the one 11 that you started in 2019? 12 A. Yes. The 2019 data. 13 Q. Okay. So -- so the one that went out in -- that 14 is the IDFA-sponsored survey that went out to IDFA 15 membership, did you go beyond the membership for IDFA? 16 A. I -- all were broadly invited. I can't tell 17 whether everybody was invited. They could have possibly 18 been. But whether they were IDFA members or not, I would 19 welcome them to participation in this. So there was no 20 exclusion that was done. 21 Q. Okay. And did you also invite folks who were not 22 IDFA members but who had participated in the 2019 survey? 23 A. There were folks who had declined to participate 24 this time around, but were aware that this survey was 25 being conducted. 26 Q. Okay. So there were -- other than the -- were 27 there anybody who -- were there any entities who were 28 not -- or I'm sorry -- were there any entities who 3451 1 participated in the 2019 survey that were not invited into 2 the 2023 survey? 3 A. I -- not invited is a strong word, very strong 4 phrase. Everybody that had a product that was qualified 5 under NDPSR was invited to participate in this. But there 6 were folks who participated the first time with the 2019 7 data that didn't participate this time around, and vice 8 versa. There was overlap. We did have plants that 9 participated in both efforts. 10 Q. And did you try and estimate the percentages that 11 overlapped and the percentages that did not participate? 12 A. Yes. I do have that. There were -- I can't 13 remember now -- I think 55 plant product observations, and 14 I believe there were 16 or 17 that were overlapping. So 15 whatever that percentage is. 16 Q. Okay. I just want to make sure I'm clear because 17 I have talked about a couple of different dates? 18 When you say there are 55 plant product 19 observations, is that for the 2023 survey? 20 A. Yes. 21 Q. And when you say 15 to 16 overlapped, you mean 15 22 to 16 of those plant product observations overlapped with 23 the two thousand -- 24 A. They participated in both. 25 Q. In the 2019 survey as well? 26 A. Yes. 27 Q. Okay. And so do you know how many plant product 28 observations there were in the 2019 survey? 3452 1 A. I would have to go back and look. I was going to 2 say 57 or 58. It was similar but a little bit more in the 3 earlier one. 4 Q. Okay. Was it surprising that only 15 to 16 5 overlapped between the two? 6 A. I had hoped for greater overlap -- I mean, for 7 more participation, but I understand differences that we 8 see sometimes. 9 In the 2019 data collection, we had plants that I 10 expected would participate, but for whatever reasons, they 11 didn't. Now, many times that gets down to we're just 12 slammed, you know, we're doing our annual meetings or, you 13 know, we have something else going on, it's too much, and 14 you need to wrap this up pretty quickly, we didn't have 15 time to do it. 16 I also had some folks who have called to ask after 17 the survey was done and completed, could we participate 18 now? And the truth is, after the report was done, I 19 didn't want to have multiple versions of the report 20 circulating. 21 Q. Okay. That's fair. 22 And you had said that the 2023 survey was open for 23 a shorter period of time. Could you quantify that for me 24 just to put it in context? 25 A. Well, I -- yes. I -- I needed to complete this 26 before we had this hearing and to have people have plenty 27 of time to view the outcomes, you know, of this, so I -- I 28 felt as though this was something that needed to be done 3453 1 fairly soon. I don't remember exactly how many open days 2 we had, but it was something like two months worth of data 3 collection time period. 4 So could you get this done in a two-month time 5 period? For most plants, if you have a good data 6 management system, something where you can pull this off, 7 I estimate that it will take a full day to collect and 8 summarize the information. It may be a bit more if you 9 are distant from the plant and need to contact and work 10 with a plant manager to get some of the data questions 11 that are being requested here. 12 Q. And when you did the 2019 survey, how long was 13 that survey open? 14 A. That was open for a much longer period of time. I 15 would say, I don't know, four or five months. 16 Q. And is there an ideal timeframe that a study 17 would -- a survey like this would be open to capture 18 maximum response? 19 A. I'm not aware that there is, and to some extent, 20 I'm probably guilty of the same kind of thing, under 21 circumstances, that if my time limit is a long time out, I 22 don't get started on it until it's pretty close to the 23 time limit. 24 Q. I'm guilty of the same. 25 And then did you have -- in the 2019 survey that 26 was published in 2021, did you have multiple versions of 27 that one with updated data or did you just publish that 28 information once? 3454 1 A. That information, I'm not aware that it came out 2 at all. I did have earlier results, you know, that I was 3 looking at. But I have learned over the years to try very 4 hard to not get something out that says preliminary draft, 5 you know, not for reproduction, because it will surely 6 find its way out, and you may have slightly different 7 numbers, and then you have to explain why they look a 8 little different. 9 Q. Were there any material differences in any of 10 those earlier iterations of the 2019 survey? 11 A. No, not really. It was mostly the addition of, 12 you know, plant members that got data in a little bit 13 later but, you know, were still included. 14 Q. Okay. And then do you know, when you say 55 plant 15 product observations, do you know what percentage that 16 makes up of the total milk production or the total plants 17 that are available to provide data responses? 18 A. I would have to take a look. I don't recall 19 exactly. On the last data collection that was done of the 20 2022 data, the volume of product in there, I think I 21 responded to that question earlier, that it was a 22 substantial volume of the total reported to NASS of all 23 plants for those products. 24 Q. I think that you, if I recall correctly, I thought 25 you said it was about 50% of the total volume? 26 A. Of cheese and whey, roughly. And 75 to 80% I 27 believe of the butter and nonfat volume. 28 Q. But of the number of plants, you don't know what 3455 1 percentage that makes up? 2 A. I could look and see, but I don't have that on the 3 top of my head. 4 Q. Okay. That's fair. 5 Okay. I just want to take a look at how this 6 survey worked. So I'm on page -- I'm just going to start 7 at page 18 and hopefully just move through these pretty 8 quickly. 9 So you do collect identifiable information from 10 the participants, but you just let them know that it's 11 going to be confidential information? 12 A. Absolutely. Yes. 13 Q. And that's both for the 2019 survey and the 2023 14 survey? 15 A. That's correct. In all cases, I'm -- I won't 16 accept data if there's not a contact person identified and 17 contact information on there. On the right-hand side of 18 that page 18 screenshot, you can see that there is a 19 particular plant example shown, but one contact person 20 could enter as many plants as they wanted to. So they 21 could be responsible for four or six or eight or one 22 plant. 23 Q. So that -- that brings up a good question. So do 24 you fill this out -- if a responder was filling this out, 25 do they fill one survey out per plant? 26 A. Yes. 27 Q. And so if they were operating four manufacturing 28 plants, they would fill this out four times? 3456 1 A. That's correct. The only information that is 2 static, if that's the case, is the left-hand side of that 3 page 18 screenshot. 4 Q. Is that based on the log-in that they get when 5 they first log in, that's automatically populated? 6 A. It's not populated. They have to enter it, but 7 that's required, yes. They have a user name and -- and a 8 password. And that user name and password then provides 9 them access to all of the data that they have entered. 10 Q. And so when you give the total of the number of 55 11 plant product observations, do you know how many total 12 entities responded to the survey? 13 A. I do. I believe that was actually in the report. 14 I want to say that it was 15 total plants. But I'm sorry, 15 I didn't look at this to refresh my memory, and I probably 16 should have. 17 What's the observation -- so just as an example 18 here, on page 10 of Exhibit 178, it indicates that in the 19 2021 study, which would have been the 2019 data, there 20 were 27 nonfat dry milk plants, while in the 2023 study 21 there were only 15. 22 Q. Okay. 23 A. And so you can see what that was for the 24 additional products that were there. 25 Q. Okay. Sorry, I should -- 26 A. And for the next few paragraphs -- 27 Q. Sorry. Go ahead. 28 A. I'm done. 3457 1 Q. Oh, okay. I was going to say, sorry I didn't -- I 2 didn't catch that the first time through, or maybe in the 3 context of what I'm asking now. 4 And so it looks like you had more plants that 5 responded in the USDA study than in the IDFA study? 6 A. I did, yes. There were larger plants in the IDFA 7 study and on -- in general, but slightly fewer plants. 8 Q. Okay. And so then in the -- is it fair to say 9 then in the IDFA study, it was smaller plants and fewer 10 entities? 11 A. In the IDFA study, smaller plants? No, they were, 12 in general, larger plants. 13 Q. Oh, I thought we were talking about the 2019 when 14 you said they were larger plants? 15 A. Oh. No, I -- when you said the IDFA study, I 16 thought you were talking about the 2022 data. So let's be 17 clear about that. 18 Q. Let's talk about the date. So on the 2021 study 19 that -- for the survey that was conducted in 2019 -- 20 A. Yep. 21 Q. -- that is -- you had 27 plants that responded? 22 A. That's correct. 23 Q. Okay. And then in the -- 24 A. Nonfat dry milk. 25 Q. Of the nonfat dry milk plants. 26 And then in 2023, you said there were 15? 27 A. That's correct. 28 Q. And was the 2023 study that you said that there 3458 1 were larger -- larger plants -- 2 A. Correct. 3 Q. -- who responded? 4 Okay. So if we go into the data, if we go to 5 page 19, this is where you select the products for each 6 plant that would be -- that would be produced at that 7 plant; is that right? 8 A. That's correct. 9 Q. Okay. Did you have a way to verify if you 10 received responses from an entity for all of the plants 11 that they were responding on behalf of? 12 A. I'm not sure I understand the question. The 13 person on the first page, the contact person, would be 14 responsible for the data in each of the plants that they 15 are responding to. We did have a couple of organizations 16 that had two people that responded for different plants. 17 So one person responded for, say, plant A and B and 18 another person responded for plant F and G. 19 Q. Okay. My question is if you had an entity that 20 was responding and they provided responses for three of 21 their plants, but you knew that they had four, is that one 22 of the data points that you would evaluate to follow up 23 on? 24 A. No. It would -- if they didn't offer data for a 25 particular plant, I would not have called and asked them, 26 well, what about, you know, this plant, don't you still 27 have that plant? I wouldn't have done that, no. 28 Q. You just would have analyzed the data that they 3459 1 had provided and not worried about the one that they 2 didn't? 3 A. That's correct. 4 Q. Okay. And then on page 20, in this example that 5 you were going through, this is providing some information 6 about cheddar cheese production at this hypothetical 7 plant; is that right? 8 A. Correct. 9 Q. And so this information is populated specific to 10 information pertaining to the cheddar cheese production? 11 A. Correct. 12 Q. And you have an example of a pull-down there under 13 the package size for 40-pound block of cheddar, and then 14 the volume there is a number that can be populated by 15 whoever is filling in the form? 16 A. Correct. 17 Q. And then does that automatically populate the 18 monthly totals or is that something that's added -- 19 A. No, the monthly are all entered -- the gray boxes 20 at the bottom are being calculated on the fly. 21 Just to give you an example on the package size, 22 I'm only showing 40-pound blocks there, but on the second 23 box down, or even the fourth box, it wouldn't matter what, 24 they could have also identified 640-pound blocks at that 25 same plant or 500-pound barrels or something else. So it 26 was still a cheddar cheese product but different package 27 sizes. That would cue me to be asking different package 28 cost questions later on in the survey. 3460 1 Q. And at the top there the instruction says, 2 "Provide your data for calendar year 2022." That's the 3 period you collected from everyone regardless of whether 4 they were on a calendar year reporting or a fiscal year 5 reporting? 6 A. No. That's just this particular example. If you 7 go back to page 18, where it says, "What do you want to 8 do?" If you wanted to add a plant -- and you don't see 9 that on here, but the pull-down menu would have "add a 10 plant," then it would also open up additional boxes down 11 there that would say "select the 12 consecutive calendar 12 months that you want to report data for." So in this 13 example, I chose a calendar year, but, you know, it could 14 have been November through October. 15 Q. And -- and did you provide any guidance to the 16 survey responders as to what time period they should be 17 looking at? 18 A. I asked them to do the most recent consecutive 19 12 months that they can report. If it's a calendar year 20 where they have maybe summary data available or a fiscal 21 year that they may have some 12-month summary data 22 available, it could be easier for them to pull that off, 23 and that's okay with me. But I didn't want them to go 24 back two or three years and be providing me data, just the 25 consecutive 12-month time period. 26 And the reason I asked for monthly data on some 27 things is because I also want to get an idea about just 28 how seasonally this plant is operating because that can 3461 1 give you some idea about why costs may differ. 2 Q. And why didn't you just use a calendar year for 3 everyone so that you could compare everybody on the exact 4 same months? 5 A. I didn't do that because -- this goes back to when 6 I first started doing the computer entry forms. Easy 7 enough for me to allow 12 consecutive months of -- that 8 would be easiest for participants. Since it is voluntary, 9 I don't want to create additional labor and work for 10 somebody. If they can grab data that's already summarized 11 for a fiscal year, then use that data. 12 Q. Uh-huh. I don't know if it matters. I'm just 13 curious, if they were providing monthly data, would it -- 14 does it matter if they are looking at -- 15 A. They don't provide monthly data for everything. 16 Some things they are providing annual data for. So that 17 was the only reason -- I mean, this was just -- my 18 interaction with industry folks at the time I did the 19 first computer program, we did a lot of debugging and, you 20 know, beta versions, alpha versions, and finally the final 21 product of that. And we had plants that said, well, it 22 would be easier if it was our fiscal year data, which does 23 not coincide with the calendar year. 24 Q. And do you know what the data ranges that you 25 captured amongst the sample size that you have for your 23 26 surveys, meaning what's the earliest month that was 27 captured and the latest month that was captured? 28 A. Yes. There were I think only two plants that did 3462 1 not have calendar year for 2022, and their fiscal year was 2 one month different or maybe two months difference. So it 3 was a huge overlap with calendar year. 4 Q. Okay. 5 A. And by the way, that has been different in the 6 past. In the past, like the 2006 data, I believe, we had 7 a time period that stretched over quite a long period of 8 time. And that was also true for that 2019 data. There 9 was quite a range of plants, you know, the time period 10 they entered data. 11 Q. So that was going to be my next question. What's 12 the time period that you used then for the 2019 survey? 13 A. I used all of the data that were submitted at that 14 time. The bulk of observations, the big bulk of them fell 15 within the 2019 calendar year, and that's why I'm 16 characterizing it as 2019 data. 17 Q. Okay. So the bulk of it fell within calendar year 18 2019. Did you allow them -- was it the same methodology 19 that you used here, that you allowed them to pick the time 20 period that they wanted to report? 21 A. Yes. 22 Q. Okay. And -- and you were able, based on the data 23 you did review, you were able to see seasonal changes and 24 differences? 25 A. There are some seasonal differences. Some plants 26 operate much more seasonally than others do. 27 Q. And which product mixes are most affected by those 28 seasonal differences? 3463 1 A. Off the top of my head, I -- I can think more 2 about individual plants than I can product categories. I 3 should have looked at that, but I didn't. I would 4 conjecture -- and it's only conjecture -- that it would 5 probably be butter and powder operations rather than 6 cheese, although cheese has a very large seasonal 7 component as well. 8 Q. Okay. And then if we look at the next page on 9 page 21. 10 This is you capturing what are the ingredients 11 that are being purchased and brought into the plant; is 12 that right? 13 A. That's correct. 14 Q. So this is where you can capture if there's any 15 additional ingredients that have been brought into the 16 plant in addition to what they have had for raw milk? 17 A. Yes. Dairy ingredients anyway. 18 Q. Dairy ingredients. You capture other costs on 19 other pages? 20 A. Yes. 21 Q. If I'm -- I should have said this earlier, but if 22 I look across the top, there's tabs. Is that where they 23 click on those tabs, and they advance through the next 24 category of information you are collecting? 25 A. Yes. And I -- they are supposed to move from left 26 to right across there. So in other words, fill out the 27 contact information completely before you go on to 28 products, and products before volumes, and so forth. 3464 1 Q. Is it like TurboTax where you click next and it 2 just moves on to the next screen? 3 A. It's like TurboTax but not debugged quite as 4 completely. This was put out rather quickly to, you know, 5 be able to get this done in time. And we found that 6 people that can't help but peeking ahead also required me 7 to go back in and delete screen data, you know, because 8 they were entering twice. 9 Q. Okay. If you -- if somebody was filling it out 10 and they didn't have information on one page, but they did 11 peek ahead and they had some information to enter on the 12 next pages, would it let them go past one page to get to 13 the next? 14 A. It did in this current version. But then, you 15 know, invariably, the product would hang right there and 16 stop. It wouldn't let them go on. Not by my construct, 17 but, you know, that was just the way that the plant -- or 18 the program was operating. And I would get a call and 19 they would say, I can't get past this screen, can you help 20 me. And then I would go in and look, and I could see 21 where they had jumped ahead. You know, they wanted to 22 look and see what was coming up here on the next screen. 23 Q. And -- and then you mentioned that in some 24 instances it resulted in duplication of numbers. How did 25 that happen? 26 A. Well, it happened because, you know, when -- this 27 saves data as you move from one screen to the next, and if 28 you jumped ahead without entering anything in the screen, 3465 1 then that effectively was a screen full of no data, and 2 that got captured. And when they went back, they may have 3 entered data, and now we had two screens, you know, one 4 with some data and one without, and then the program was 5 confused at that point in time when it should have only 6 had one screen and it stopped. 7 Q. At the end of each person's survey, when it's sent 8 over to you, do you get one summary report for each plant? 9 A. No. What I do at that point in time is I will go 10 through the data and look at it and assure myself that the 11 data are complete, that they are filled out, that I don't 12 have questions for it -- or for the entries. And when I'm 13 satisfied that that's the case, then I can begin to run 14 the summaries. 15 Q. And on this ingredient page, you are not -- are 16 you collecting actual cost for the acquisition of those 17 products? 18 A. No costs at all for ingredients, whether it is raw 19 milk or, say, nonfat or condensed or anything else. No, 20 no costs for that. I only want to know the cost of 21 transforming those dairy ingredients into the final 22 product. 23 Q. Okay. You just wanted to take into account any 24 additional volumes so that you knew if your numbers on the 25 raw milk were being distorted in any way? 26 A. That's precisely right. There were some questions 27 that had been asked about mass balance, and this is one of 28 the pages that helps collect that data for mass balance. 3466 1 Q. Okay. And then we go on to the next page. You 2 have collected some utility costs from the responder as 3 well? 4 A. Uh-huh. Yes. 5 Q. And this is, again, just populated based on they 6 select what type of energy source they have, and then 7 it -- and then it asks questions according to that 8 specific energy source? 9 A. That's correct. You know, just as an example with 10 electricity, you could have one meter on the whole plant, 11 or maybe you have got six meters. If you have got meters 12 that are specific to product lines, that's really helpful 13 because it allocates that electricity use to a group of 14 products, and so I'm not arbitrarily allocating at that 15 point in time. 16 The other thing that I do is to give you the 17 opportunity to say whether this particular electric meter 18 is allocated to one of the products that you have got or a 19 group of products or is it unallocated. If it is 20 unallocated, then I do the allocation. 21 Q. And how do you make that allocation? 22 A. I make the allocation based on the pounds of 23 solids in the products. 24 So I'll refine this just a little bit further. If 25 you had two meters in a plant that was making cheese, and 26 you made two kinds of cheese or three kinds of cheese or 27 something like that, and you also made dry whey. Maybe 28 one meter is for the cheese side of the operation, and one 3467 1 meter goes for the whey drying operation side. That's 2 great. I now know what the electric use is for the whey 3 side. 4 For the cheese side, I have to allocate it. And 5 it's not based across all your products, only the ones 6 that are accounted for here. So if you said, this is for 7 all of my cheese products, I then allocated by the pounds 8 of components in the cheese products. 9 Q. What if they had cold storage on site, how would 10 you account for that? 11 A. Again, this would have been through the meter -- 12 or the allocation on here. I specifically ask people not 13 to include costs of long-term storage. If it's cold 14 storage that's necessary for day-to-day operations of the 15 plant, then that's a legitimate expense. 16 Q. Okay. And so if they would have selected the 17 allocation on the drop box that would have allocated it, 18 would there have been another column that opened up for 19 them to provide like a percentage of allocation of the 20 total utility for that month toward the production at that 21 plant? 22 A. No. They could have done that by adding yet 23 another meter in here, and they could have allocated that, 24 but that would have been instructions that most people 25 wouldn't have had. And, you know, so it could be done; it 26 probably wasn't done. 27 Q. Okay. If you had another opportunity, it's 28 another level of detail you could include at another time? 3468 1 A. It is a very valid idea, yes. 2 Q. That's just the first one I have had. Thanks. 3 A. I doubt that. 4 Q. Okay. So then let's turn to the next page on job 5 function -- or it says "Job Function" at the top. This is 6 the "Labor" tab. And tell me what you are trying to 7 capture here. 8 A. I'm trying to capture the total payroll, which is 9 salary and benefits and so forth. And in most cases 10 plants will have some ideas about job functions for 11 those -- there are few plants that basically just have 12 unallocated labor, and they give me one particular number 13 out here. But that -- that's very few operations that do 14 that. Most of them break this down to some degree. 15 So, for example, if I get hard cheese processing 16 that's shown up here as $80,000, all of that will go to 17 cheese and none of that would go to whey. 18 Q. Okay. And this is just left for whoever is 19 filling in this form to make the allocation or 20 determination of how much of the labor in their plant is 21 attributed to the -- to the -- I guess the production of 22 these items? 23 A. Again, when I first began doing the computer 24 program, or even the paper surveys for that matter, 25 working closely with plants, a variety of plants, this was 26 the way that human resource management quite often kept 27 the data for the different centers within the plant. And 28 that's why all of these are here. They don't have to fill 3469 1 out all of them if they don't have data for it. But if 2 they do, any allocation that they can do helps me to get a 3 better number for the products themselves. 4 Q. And if they don't know where to put it, they can 5 put it in either laboratory or the general plant labor 6 category? 7 A. That's correct. 8 Q. And -- and I think, if -- are these the 9 instructions on the right where it has the three small 10 paragraphs there? 11 A. Yes. 12 Q. And so the other pages where it doesn't have 13 instructions, those are just somewhat self-explanatory, 14 and you just let them -- 15 A. I'm hoping so. 16 Q. You are hoping they are just going to understand 17 their numbers well enough? 18 A. In some cases there are pop-up help screens that 19 show up that aren't on this example here. So when you get 20 toward the last screen on here where we are, you know 21 looking at the C&E kinds of things, when it's asking for 22 market value of assets, if your mouse hovers over that box 23 at all, then it pops up a fairly large help screen that 24 tries to describe what I'm looking for when I'm doing 25 that, or when I'm asking for depreciation, you know, it 26 says, I don't want taxable depreciation, I'm looking for 27 an economic depreciation, and I describe what that means. 28 Q. Okay. And is the difference between your decision 3470 1 to put something embedded on the page as opposed to a 2 pop-up, is the difference there just how much you had to 3 write about it and whether it was always going to be 4 necessary for the instruction? 5 A. Yeah. I mean, so, for example, on page 23 here 6 where we're looking at job functions, this is a general 7 description of all of the job functions. For some of 8 these things, as I have just talked to you about in that 9 page 26 screenshot, there are specific directions for line 10 items. 11 Q. Okay. And so if I just look -- so you have asked 12 for the total payroll amount, which includes wages or 13 salary, benefits, FICA, etcetera. So you just want to 14 know what's your total, all-in, sunk cost for labor in 15 each of those categories? 16 A. Correct. I used to ask for that to be broken out, 17 you know, by wages and -- or salaries, and then the 18 benefits and a few other things. But, again, I found that 19 what I was really interested in was the total cost, you 20 know, for a worker, and there was no reason to ask people 21 for that additional level of detail. 22 Q. And then the next paragraph asks for information 23 about -- and just lets people know, you don't have to 24 enter data for specific product areas, if they don't have 25 it handy to them, that you will do that allocation for 26 them if they don't provide that breakdown? 27 A. Correct. 28 Q. Okay. And then -- and that's just based on your 3471 1 knowledge of the -- of the processing responsibilities 2 going into each product? 3 A. No. If you take a couple of examples that are 4 given there, like laboratory, the laboratory is going to 5 be used probably for -- across all products in the plant. 6 So I'm going to allocate a portion of those laboratory 7 worker costs to the cheese products, to the whey products, 8 to, you know, whatever else that plant is producing. And 9 I do that, again, through the pounds of components. 10 Q. And I think you had said earlier, but I want to 11 make sure I understand. So you collected data about all 12 of the products that they produced at the plant, so that 13 you could estimate out when you were doing these 14 allocations how much to assign to the four categories that 15 you were focusing on for the survey? 16 A. Correct. 17 Q. Okay. And so -- 18 A. That is the same way that California -- CDFA had 19 done it. 20 Q. And is that the same way that you did it in 2019? 21 A. Not on the initial report. I have since gone back 22 and recalculated. But, you know, only for the purposes of 23 being able to say, here's a consistent comparison between, 24 you know, the 2006, 2019, and 2023 data. 25 Q. And did -- 26 A. 2022 data. 27 Q. -- you have enough data inputs from the 2019 28 survey to do the same apples to apples allocation that you 3472 1 did in 2023? 2 A. Oh, sure. In fact, I had a little bit more of the 3 plant product observations there. 4 Q. And -- okay. And so -- so if someone were to have 5 labor for maintenance, for example, at the plant, and they 6 produced both, you know, powder and cream, how would you 7 make that allocation for maintenance, for example? 8 A. If those were the only two products from the 9 plant, then depending on the pounds of products in there, 10 the pounds of components in the cream, and the pounds of 11 components in the nonfat dry milk, they would have been 12 allocated that way. 13 And that's a very good example of where I think 14 the usefulness of the transformation weighting comes in to 15 play. If you are only selling cream rather than churning 16 butter and packaging it there, then your -- I think the 17 term was used yesterday, there's a pretty light touch on 18 the stainless steel for the product going through in 19 cream, so very little cost associated with that. 20 Q. And do you take into account the age of any of the 21 equipment or the plant in any of those factorings? 22 A. In the question that's asked about depreciation, 23 or even in the market value of plant assets, yes. 24 Q. Okay. Let's look at page 24. 25 And this is where we're looking at -- you're 26 collecting information about the ingredients that were 27 used to make, in this example, it looks like you are 28 making cheddar? 3473 1 A. Yes. 2 Q. And, again, this is just information that they 3 would populate based on whatever estimates that they have 4 to include in -- in the response survey? 5 A. That's correct. And, you know, this is, again, 6 one of those cases that differs a little bit from the CDFA 7 methodology, because here I'm asking you to kind of build 8 up how much product is used in a culture vat, for example, 9 and what the costs of those units are. Then, you know, 10 how many vats can you make out of that culture tank and 11 what are the other ingredients that are going into that. 12 And so, you know, we build it up. And down at the bottom 13 they can get a -- a visual tab on there as to what my 14 calculation of ingredient cost per pound is. This is 15 non-dairy ingredient cost. 16 Q. Okay. And so as they are inputting data, they 17 have a real life update at the bottom that's allowing them 18 to see what their total ingredient cost per pound of 19 cheese is? 20 A. Yes. And it is the same with the packaging cast. 21 Q. So if they didn't have the same breakdown but they 22 knew what their total was, they could kind of 23 retrospectively build it out? 24 A. If they looked at that and felt like, ooh, that's 25 a number I haven't seen before, then I would hope that 26 they would, you know, go back in to both their methodology 27 and mine and ask themselves why are these different. 28 Q. Okay. And then let's turn to the next page, 3474 1 page 25. 2 And this one looks like we're up to packaging, and 3 so you are estimating costs based on the average of -- 4 starts off with the average volume produced in pounds; is 5 that right? 6 A. Yes. I -- and that's per typical weight of a 7 block of 40-pound cheddar cheese. It is not 40 pounds. 8 It is almost always going to be a little bit more. 9 Q. Okay. And so -- and so you are saying -- you are 10 having -- in this example is a 40.15-pound block there 11 with 32 inches of tape used; is that -- 12 A. To seal the box, yes. 13 Q. Okay. And so -- and so you have tape, you have 14 stretch wrap, and then the number of blocks that are 15 secured on a pallet so that you can calculate the number 16 of pallets; is that right? 17 A. Well, the number of blocks that are on there. 18 That helps me get down to breaking down what the cost of a 19 pallet or the shrink wrap to hold it on a pallet actually 20 is. I mean, it's a pretty small dollar value, but it's 21 accounted for in here. 22 Q. And if they don't have these numbers, they are 23 able to just leave it blank and move forward? 24 A. If you don't actually have it -- you know, so for 25 example, you might not use tape to seal a box, you might 26 lose -- use glue to seal a box, and you can select that, 27 you know, later on to enter that instead of tape. So 28 you -- you are going to have to seal a box with something. 3475 1 And, you know, I want to make sure on all the entries that 2 they look complete to me. 3 Q. Okay. And so if someone doesn't want to provide 4 this information, could they skip these and leave them 5 blank and move on? 6 A. I will come back and ask them for that data. And, 7 you know, this is one of those cases where somebody 8 sitting in an office is unlikely to know how many feet of 9 stretch wrap it takes to secure a pallet, but they will 10 call the plant supervisor, and they will talk to them and 11 ask, and they will say, oh, maybe it's about a hundred 12 feet or something. 13 Q. Okay. 14 A. But they would have the information in the office 15 as to what it costs them to buy a box of stretch wrap, 16 so -- 17 Q. Okay. So if -- if there was something that 18 populated on here, at least on this page, this is 19 something that you would make sure you followed up on and 20 said, give me as much detail as you can? 21 A. If it didn't look like you could package and ship 22 product with what you have answered, then you'd need to 23 explain that to me. 24 Q. Okay. And were you able to get that for everyone 25 of the responders? 26 A. Yeah, as far as I can recall. I don't recall 27 having any that were non-responsive. 28 Q. I want to look at the tab titled "Ledger." 3476 1 A. Uh-huh. 2 Q. And this is the ledger where you are capturing 3 what expenses they have for operating their plant; is that 4 right? 5 A. Not all of them. But, yeah, these are some just 6 line items that they may have in the plant. 7 Q. Okay. And ideally these would be filled in under 8 either the general plant unallocated or specific to the 9 products that they are producing; is that right? 10 A. That's correct. And many of the plants will put 11 data values in both the unallocated column as well as a 12 product column. 13 Q. So where you have an item down here on repair and 14 maintenance, how do you distinguish between this repair 15 and maintenance and the labor maintenance? 16 A. Oh, the -- yeah, these are more like the 17 equipment, the welding supplies, the, you know, gas, 18 whatever it is, that they are utilizing in the plant for 19 repair and maintenance as supposed to the labor. The 20 labor is captured back there in another spot. But I will 21 say that the labor gets allocated back up here in a 22 different spot, you know. But I've broken the labor out 23 because it typically is paid differently. 24 Q. Where do you allocate it here? 25 A. Oh, it's not on this page that it's allocated, but 26 when I'm summarizing, I do. 27 Q. Okay. 28 A. So this is meant to be more like the supplies that 3477 1 a plant would have for repairs and maintenance as opposed 2 to the labor. 3 Q. Okay. So you have, in this example, market value 4 of assets. What is that referring to? 5 A. Yeah. This is one where that screen will pop up 6 when you hover over it to explain it. I'm asking 7 plants -- and I will say that this is perhaps one of the 8 most difficult questions that the plants come across in 9 here, simply because they have never thought of their 10 plant in these terms. But I'm asking them, if you were to 11 put this plant up for sale today, what do you think you 12 would receive for the plant and its assets. 13 The reason that we use that number -- and this, by 14 the way, is not a depreciated value of assets or anything 15 else. I'm asking for the market value, and I -- I explain 16 the difference on that pop-up screen -- is because we want 17 to offer them, when we're building up the costs here, an 18 opportunity cost of capital. So this is the number that 19 that Moody Baa bond value is used for, to provide a return 20 on assets. 21 Q. Okay. And there's -- you are not verifying this 22 information, you are just asking them to use their best 23 estimate? 24 A. Use your best estimate. 25 Q. Okay. And if they haven't marketed it or been in 26 the market for any plant -- 27 A. Most people haven't sold a plant in quite a while, 28 but they have some idea about what they would expect the 3478 1 value of a plant to be. Whether they could actually 2 achieve it or not is, you know, a different question, 3 but -- this is not -- you know, it is a return for the 4 capital that's tied up in the plant and assets. It is not 5 the biggest portion of costs in manufacturing. But it's 6 one that was allowed by CDFA, and one that I think is 7 applicable to have here. 8 Q. And then the depreciation, what -- does that have 9 a pop-up box as well? 10 A. It does. And I ask them to make an attempt to 11 calculate an economic depreciation rather than a gap 12 appreciation, you know, a taxable depreciation. The 13 reason for that is a very old plant, Mr. Bauer was talking 14 about his plant the other day, may be fully depreciated, 15 but it still has value, and if they were to try to sell 16 that plant tomorrow, I'm sure that they could for a 17 non-zero value. I'm also sure that even though the 18 equipment may be fully depreciated from a tax standpoint, 19 it is not used up. This is a depreciation that's meant to 20 capture the consumption of your capital over time. So 21 capital will have to be replaced, but probably not as 22 quickly as the government allows us to write the value 23 off. 24 Q. So the intent in your survey for depreciation is 25 to capture what their estimate is in that moment based on 26 the remaining useful life of their equipment regardless of 27 whether it's been fully depreciated on their books or not? 28 A. That's correct. 3479 1 Q. And so in Mr. Bauer's example, if he had a plant 2 that was fully depreciated, his cost that he's actually 3 tracking for his own -- in his own financials would look 4 much lower than what the cost would be that you would 5 estimate because you would have him assign some 6 depreciation, even though on his books it might be fully 7 depreciated? 8 A. Yeah. I don't know about the modifier "much" 9 lower, but it would be lower, for sure. I mean, I would 10 provide value, you know, for the capital that's still to 11 be consumed there. 12 Q. And I say "much" because when I hear the numbers 13 thrown around about how much these plants cost to either 14 build or even just five years left of residual life, it is 15 a considerable sum money. Would you agree? 16 A. Sure. Plants are expensive. 17 Q. And so even if you only had five years left on a 18 plant that you estimated, or five years left on a piece of 19 equipment that you were going to try and assign a value 20 to, it could still be a considerable number. 21 A. And even at that point the salvage value is 22 probably not zero. 23 Q. Okay. Meaning at the end of that five years, you 24 could still get some additional value in -- 25 A. Even if it is -- 26 Q. -- some way or another? 27 A. -- scrap metal. 28 Q. Okay. And why is it that you chose this 3480 1 methodology to have them assign an economic depreciation 2 as opposed to using some other method? 3 A. California, CDFA, used to go in and would set up a 4 depreciation for every piece of equipment in that plant. 5 So they would assign what they felt was a useful life, the 6 cost of that piece of equipment, and they would depreciate 7 it themselves. For me, that's beyond the scope of my 8 project. I'm not willing to do that. This is not adding 9 a big value on the total cost out here, but I think it is 10 something that should be accounted for. And so this is 11 the old cost/benefit thing. Not that big of a benefit for 12 me; it would be a big cost to try to do that. So I'm 13 asking for these values to be supplied to get in the 14 ballpark at least. 15 Q. And to contrast the Mr. Bauer example with 16 someone, I think Leprino talked about building a new plant 17 in Texas, if they were to assign their number, they would 18 actually have their -- the new plant construction number 19 that they could populate in there, it would be a much 20 higher number because they are starting fresh with a fully 21 newly developed plant? 22 A. Sure. And I don't know what that plant might 23 cost, but let's just say it was half a billion dollars. 24 Okay? Which is not inconceivable for a large modern 25 plant. If you take that kind of value, and the government 26 would let you depreciate equipment over a ten-year time 27 period or something, that's a massive amount of 28 depreciation in those first few years. I think that would 3481 1 overstate your costs of production. So I'm -- I'm asking 2 you to do something different than that. 3 Q. Okay. And what would you do in -- what are you 4 asking them to do in that example? 5 A. Well, in that example I'm asking them to give me 6 an idea about how much you think your capital is actually 7 being consumed in the course of a year. So, maybe it's 8 got equipment that's valuable for a 20-year time period as 9 opposed to ten. 10 Q. Okay. So you might -- you -- would you do a 11 follow-up call in that example and say, you picked -- 12 A. No -- 13 Q. -- a ten-year depreciation? 14 A. -- probably not. I would -- you know, I have 15 asked them, try to explain it here. And, you know, unless 16 the numbers that were given to me look just outrageous 17 relative to the body of data that I'm getting from other 18 plants, I probably wouldn't follow up on that. 19 Q. Okay. 20 MS. HANCOCK: Your Honor, I do have some more 21 questions, but I know we're after 5:00, just pausing to do 22 a check. 23 THE COURT: What's the will of the room? 24 MS. TAYLOR: AMS, at least, will have cross 25 tomorrow, so I think we're fine stopping and carrying this 26 on in the morning, if that's okay with Dr. Stephenson. 27 THE WITNESS: Uh-huh. But I would love to have a 28 target that got me out of here somewhere, you know, close 3482 1 to half the day, anyway. 2 THE COURT: Okay. Let's go off the record. 3 (Off-the-record.) 4 THE COURT: Back on the record. 5 Off the record we went over our witness list -- an 6 aspirational list for tomorrow. With that, I think we can 7 adjourn for the day. 8 Off the record. 9 (Whereupon, the proceedings were concluded.) 10 ---o0o--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3483 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 7, 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