4991 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 Jill Clifton, Judge 15 16 ---o0o--- 17 18 Carmel, Indiana 19 September 25, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 4992 1 A P P E A R A N C E S: 2 FOR THE USDA ORDER FORMULATION AND ENFORCEMENT DIVISION, USDA-AMS DAIRY PROGRAM: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 Michelle McMurtray 6 FOR THE AMERICAN FARM BUREAU FEDERATION: 7 Roger Cryan 8 FOR THE MILK INNOVATION GROUP: 9 Ashley Vulin 10 Charles "Chip" English 11 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 12 Nicole Hancock Brad Prowant 13 FOR SELECT MILK PRODUCERS, INC.: 14 Ryan Miltner 15 FOR EDGE DAIRY COOPERATIVES: 16 Dr. Marin Bozic 17 FOR LAMERS DAIRY: 18 Mark Lamers 19 ---o0o--- 20 21 22 (Please note: Appearances for all parties are subject to 23 change daily, and may not be reported or listed on 24 subsequent days' transcripts.) 25 26 ---o0o--- 27 28 4993 1 M A S T E R I N D E X 2 SESSIONS 3 MONDAY, SEPTEMBER 25, 2023 PAGE 4 MORNING SESSION 4996 AFTERNOON SESSION 5134 5 6 ---o0o--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4994 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Craig Alexander: 5 Direct Examination by Ms. Hancock 4999 Cross-Examination by Ms. Vulin 5021 6 Cross-Examination by Mr. Sjostrom 5051 Cross-Examination by Dr. Bozic 5053 7 Cross-Examination by Dr. Cryan 5060 Cross-Examination by Mr. Miltner 5063 8 Cross-Examination by Ms. Taylor 5066 Cross-Examination by Mr. Lamers 5074 9 Redirect Examination by Ms. Hancock 5076 Recross-Examination by Dr. Bozic 5080 10 11 Chris Hoeger: 12 Direct Examination by Ms. Hancock 5083 Cross-Examination by Ms. Vulin 5091 13 Cross-Examination by Mr. Sjostrom 5106 Cross-Examination by Mr. Miltner 5107 14 Cross-Examination by Dr. Bozic 5114 Cross-Examination by Mr. Lamers 5131 15 Cross-Examination by Ms. Taylor 5134 16 Calvin Covington: 17 Direct Examination by Ms. Hancock 5142 Cross-Examination by Dr. Bozic 5157 18 Cross-Examination by Ms. Vulin 5166 Cross-Examination by Mr. Miltner 5187 19 Cross-Examination by Mr. Sjostrom 5193 Cross-Examination by Ms. Taylor 5193 20 William Schiek: 21 Testimony Read 5203 22 Cross-Examination by Dr. Cryan 5220 Cross-Examination by Ms. Hancock 5228 23 Cross-Examination by Mr. Miltner 5245 Cross-Examination by Ms. Taylor 5247 24 25 ---o0o--- 26 27 28 4995 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. 5 245 Testimony of 4999 5082 Craig Alexander 6 246 Federal Milk Order Number 1 5044 5082 7 247 Testimony of Chris Hoeger 5084 5141 8 248 Testimony of 5143 5200 9 Calvin Covington 10 249 Testimony of 5202 5255 William Schiek 11 250 Dairy Institute-2 5220 5256 12 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4996 1 MONDAY, SEPTEMBER 25, 2023 - - MORNING SESSION 2 THE COURT: On the record. We're back on record 3 resuming this milk rulemaking hearing on September 25, 4 2023. It's approximately 8:01 a.m. We're in Carmel, 5 Indiana, and my name is Jill Clifton. 6 More about why I am here after we do some other 7 preliminary matters. 8 I would invite someone from the Agricultural 9 Marketing Service to put on the record what we anticipate 10 for today and basically where we are in the hearing. 11 MS. TAYLOR: Good morning, your Honor. This is 12 Erin Taylor with AMS. 13 I think on today's agenda we'll start with 14 National Milk witnesses, and here are -- in the room will 15 be Craig Alexander, Chris Hoeger, and Cal Covington. And 16 then if we have time, we could put on Mr. -- Dr. Schiek 17 from the Dairy Institute of California. And there may be 18 time at the end of the day where we'll be able to get 19 someone else on, but I think that will take up a good 20 portion of the day. 21 THE COURT: And what time would you anticipate we 22 would leave this room? 23 MS. TAYLOR: Typically we go until 5:00. We have 24 been breaking from noon to 1:00-ish -- 12:00-ish to 25 1:00-ish for an hour for lunch. We do try to take two 26 breaks in the morning, and two in the afternoon, short 27 breaks, to give the court reporter a rest. 28 THE COURT: And all the other participants. She's 4997 1 more durable than everyone else. 2 MS. TAYLOR: She's the most important person 3 besides yourself in this room, so I want to make sure 4 she's with us. 5 THE COURT: Well, I'm delighted to be here. 6 Channing Strother, our USDA Chief Judge, is very 7 disappointed that he is not here. He felt fine Thursday, 8 played golf. On Friday, he didn't feel so well. 9 So Friday afternoon, after he had been with a sore 10 throat and very non-energetic, very not typical at all, he 11 tested, and he showed up positive for COVID. So he knew 12 he should not come, and invited me to step in. And I was 13 delighted, so here I am. 14 I will just wait to see whether he wants me to 15 continue on until this hearing ends or whether my role 16 will end this week. A lot will depend, I think, on 17 whether the government funding lapses. Because if the 18 government funding lapses, I don't know what happens with 19 the rest of the hearing. So we'll just stay tuned on 20 that. 21 All right. What other preliminary matters? 22 Mr. English, would you take the floor, identify 23 yourself, and just state what you revealed to me and AMS 24 before we went on record. 25 MR. ENGLISH: Good morning. It's great to see 26 you, Judge Clifton. My name is Chip English for the Milk 27 Innovation Group. 28 Mr. Rosenbaum, for the International Dairy Foods 4998 1 Association, is celebrating Yom Kippur and, therefore, is 2 not available today until sunset. But we are -- you know, 3 we are here for the Milk Innovation Group to do the best 4 we can, especially since the issues today are Class I, to 5 protect the interests of both the Milk Innovation Group 6 and the International Dairy Foods Association. 7 THE COURT: Thank you. And I'm very mindful that 8 it is Yom Kippur, the holiest day of the year for much of 9 the population of the world, and it's a solemn day of 10 fasting, atonements, and so on. So I -- I'm mindful of 11 that. We will do anything we can to accommodate those who 12 are observant of that holy day today. 13 All right. The only other thing that I think I 14 must note as to where we are in the history is we are very 15 near Indianapolis, and the Indianapolis Colts won a 16 squeaker yesterday and are to be congratulated. 17 MS. TAYLOR: Boo. Booing on the record. 18 THE COURT: All right. What other preliminary 19 matters need to be put on the record before the witness 20 who is in the stand begins to testify? 21 MS. HANCOCK: Is it okay to proceed with the 22 witness? 23 THE COURT: Yes, you may. So first I'd like you 24 to state and spell your name for the record. 25 THE WITNESS: My name is Craig, C-R-A-I-G, 26 Alexander, A-L-E-X-A-N-D-E-R. 27 THE COURT: And have you previously testified in 28 this proceeding? 4999 1 THE WITNESS: No, I have not. 2 THE COURT: All right. I'd like to swear you in 3 at this time. You may remain seated. 4 CRAIG ALEXANDER, 5 Being first duly sworn, was examined and 6 testified as follows: 7 THE COURT: Thank you. 8 You may proceed. 9 DIRECT EXAMINATION 10 BY MS. HANCOCK: 11 Q. Mr. Alexander, would you mind stating your address 12 for the record as well? 13 A. My current business address is 700 Ellicott 14 Street, E-L-L-I-C-O-T-T, Street, Batavia, New York, 14020. 15 Q. And I'm not -- I don't recall which exhibit number 16 we're up to. 17 Mr. Alexander, did you prepare a written statement 18 identified as Exhibit NMPF-31? 19 A. Yes. 20 MS. HANCOCK: Your Honor, if we could mark that as 21 Exhibit 245? 22 THE COURT: It shall be done. 23 (Exhibit Number 245 was marked for 24 identification.) 25 MS. HANCOCK: Thank you. 26 BY MS. HANCOCK: 27 Q. Mr. Alexander, proceed with your statement, 28 please. 5000 1 A. Thank you. 2 Good morning. My name is Craig Alexander. My 3 testimony today is provided on behalf of and in support of 4 the National Milk Producers Federation (NMPF) Proposal 13 5 to restore the original Class I skim milk mover enacted 6 under Order Reform in all Federal Milk Marketing Orders 7 (FMMOs). 8 My testimony is provided on behalf of Upstate 9 Niagara Cooperative, an NMPF member cooperative that 10 supports the full package of NMPF proposals at this 11 hearing. 12 Upstate Niagara Cooperative is headquartered in 13 Lancaster, New York, and is owned by about 250 farmers 14 including conventional and organic farms. The cooperative 15 markets over 2.5 billion pounds of milk annually and 16 operates eight processing plants, seven in New York and 17 one in Pennsylvania. 18 The processed products include fluid packaged 19 milk, cultured products, concentrated milk and cream, 20 nonfat dry milk, butter, and retorted beverages. These 21 products are sold to foodservice, retail, and 22 institutional buyers across the nation and in Puerto Rico. 23 We also market milk to several other bulk milk customers 24 located in Western and Central New York, Western 25 Pennsylvania, and Ohio. We market milk within Federal 26 Order 1 and 33, as well as unregulated and state-regulated 27 areas in New York and Pennsylvania. 28 I grew up on a small dairy farm in Central New 5001 1 York and attended the State University of New York at 2 Albany and Cornell University, where I received a master 3 of science in agricultural economics with a focus on dairy 4 markets. I have spent 40 years involved in a variety of 5 professional capacities for Upstate Niagara Cooperative, 6 Dairy Institute of California, Cornell University, and 7 O-AT-KA Milk Products Cooperative. I currently serve as 8 the senior director of planning and regulatory affairs for 9 Upstate Niagara Cooperative. I have appeared in several 10 state and Federal Milk Order hearings since the 1980's. 11 Background of the Current Class I Mover. 12 Pricing of farm milk for fluid drinking purposes 13 has been a focal point in the industry since the infancy 14 of commercial milk processing and distribution to stores 15 and consumers. An imbalance of market position between 16 farmers with a perishable product and fluid milk 17 processors with variable demand saw the developing need to 18 price milk differently for fluid needs versus milk used 19 for manufacturing cheese, nonfat dry milk, butter, and 20 other storable products. 21 While at first, producer cooperatives attempted to 22 recognize this difference by pricing milk by use, the 23 inherent bargaining disadvantages dairy farmers had in 24 marketing milk saw the breakdown of the early forum of 25 classified pricing. This was especially true as surpluses 26 developed, sales declined, and the economy fell into the 27 depression of the 1930s. As result, government action was 28 necessitated and a variety of economic regulations, both 5002 1 at the state and federal levels, were implemented, with 2 some involving classified pricing mechanisms to stabilize 3 producer returns. 4 The modern form of this economic regulation now 5 known as Federal Milk Marketing Orders (FMMO), was enacted 6 in 1937 in the Agricultural Marketing Agreements Act 7 (AMAA). It allowed for producers to propose and vote on 8 regulations to set classified prices based on use and 9 combine the proceeds such that producers supplying a 10 market could equitably share the benefits of the higher 11 value Class I fluid market, but also share the burden of 12 the lower value class or classes. 13 Class I prices were set by a variety of means. In 14 some markets, economic formulas were used, while in 15 others, market-clearing manufactured product price 16 indexes, plus some regulated fixed premium, was used. 17 At first, markets were relatively small and 18 isolated to the areas around major cities. Over time, 19 transporting milk supplies and distribution of finished 20 fluid milk products became more feasible. The wider areas 21 of competition between processors necessitated a more 22 coordinated means to set Class I prices both over time and 23 over geographic distance between different milk order 24 areas. 25 The Minnesota-Wisconsin Monthly Milk Price Survey 26 of unregulated Grade B milk came to be used instead of 27 economic formulas and indexes in the 1960s, with Class I 28 prices set using the previous month's survey price. This 5003 1 would essentially set the coming month's Class I price in 2 advance. In this way, Class I processors would know their 3 costs in advance and be able to announce prices to 4 customers. 5 However, with being set monthly based on 6 competitive pay prices, prices could move over time to 7 represent milk values to producers. The supply and demand 8 forces shaping milk markets could be reflected in a timely 9 fashion. The MW price was a single price which blended 10 the value of the Grade B milk used to manufacture butter, 11 dry milk powder, and cheese products. 12 At the same time, Class I price differentials were 13 added to the MW mover to recognize Grade A production 14 costs, servicing of fluid markets, and geographic 15 dispersion of location value, recognizing transportation 16 costs between and within market areas. This provided 17 price signals between areas of reserve milk supply to 18 areas with greater Class I fluid needs. 19 Although not in lockstep with the MW each month, 20 the higher Class I price and monthly movement provided a 21 short-time lag and signaled incentives to supply Class I 22 milk by allowing processors of Class I products advanced 23 cost information. Thus, both the location value and the 24 time value of price signals were combined with the 25 valuation of milk through classified pricing and together 26 were key components of the pricing system of Federal Order 27 regulation. 28 While the MW price mover worked well for several 5004 1 decades, during the 1990s it became apparent that a 2 shrinking Grade B milk supply and reduced number of plants 3 buying the milk was leading USDA to have less confidence 4 in the survey's statistical basis. For a short time, a 5 modified version of the MW mover that was known as the 6 basic formula price, or BFP, was used. The BFP operated 7 in a similar fashion, moving Class I prices monthly based 8 on a survey of results, along with product price changes, 9 but suffered from the same declining Grade B milk volume. 10 I'm going to summarize a bit here what 11 Dr. Vitaliano went over, but during the FMMO reform 12 process, several alternatives to set and move Class I 13 prices were reviewed. The transition to the new class 14 price formulas involved the uniform adoption of four 15 classes of milk, including two manufacturing use classes, 16 Class III and Class IV. USDA had to then decide on a 17 replacement to the MW BFP to set and move Class I prices. 18 In 1999, the Department determined that the mover 19 should be the higher-of the Class III or Class IV price as 20 calculated using the first two weeks of the prior month's 21 price survey data. 22 During that reform process over a number of 23 different areas of the reform, there was committees that 24 looked at different aspects of the Federal Order system. 25 One of those areas, obviously, was Class I price. And 26 USDA laid out four criteria that they used in evaluating 27 the mover. Dr. Vitaliano talked about that. And those 28 those four factors were basically looking at the fact that 5005 1 given the separation of manufacturing milk into two 2 classes, using the higher-of Class III or Class IV would 3 assure that shifts in demand for any one manufactured 4 product will not lower the Class I price. 5 Second, using the higher-of the two classes to 6 move Class I prices would help to reduce the volatility in 7 milk prices. 8 Third, a major consideration was to address class 9 price inversions and depooling. 10 And fourth, and very important, was the -- the 11 ability to -- or the -- to purpose to help incent movement 12 to Class I buyers and thereby assist Class I processors in 13 the competition for available raw farm supplies. 14 I'll reiterate a quote from that decision that 15 speaks to the issue we have here today. And in that 16 quote, "In some markets, the use of a simple or even 17 weighted average of the various manufacturing values may 18 inhibit the ability of Class I handlers to procure milk 19 supplies in competition with those plants" -- 20 Q. Mr. Alexander, just -- if you could just be 21 mindful of your speed. 22 A. Slowing down. Yep, I will. Thank you. 23 -- "supplies in competition with those plants that 24 make the higher-of valued of the manufactured products. 25 Use of the higher-of the Class III or Class IV price will 26 make it more difficult to draw milk away from the Class I 27 uses for manufacturing." 28 For all these four reasons, it was included that 5006 1 the higher-of the Advanced Class III or Class IV skim milk 2 value should be the mover for Class I prices. The 3 higher-of mover fit within the precedence and norms of 4 historical use of how Class I prices relate over different 5 Federal Milk Marketing Orders over periods of time and 6 between other class prices since the early '60s under the 7 MW milk mover formula. This use of the higher-of mover 8 for pricing Class I skim milk prevailed in all orders in 9 the Federal Order system until the 2018 Farm Bill 10 legislation. 11 Again, I'm just going to skip over some of that 12 that Dr. Vitaliano discussed in terms of the history of 13 implementation of the average-of mover, which was chosen 14 and implemented in the 2018 legislation. But suffice to 15 say that it was the intention of both Class I buyers and 16 dairy farm sellers that the change would be revenue 17 neutral over the long-term and would accommodate certain 18 buyers' interest in using available price risk management 19 tools. 20 However, due to the Congressional mandate, the 21 USDA could not apply the four criteria as originally 22 adopted when choosing the higher-of mover and as clearly 23 articulated in the 1999 Final Decision of Federal Order 24 Reform. 25 Unfortunately, untended consequences resulted as 26 the 2018 amendment has not operated as intended or 27 anticipated by NMPF or its producers. It has, instead, 28 exacerbated disorderly marketing conditions and negatively 5007 1 impacted producer revenue. These serious and negative 2 outcomes will continue so long as the average-of Class I 3 mover remains in place. 4 Disorderly Conditions Caused By the Average-of 5 Mover of Class I Prices. 6 The following problems were revealed by the change 7 to the average-of mover and resulted in the erosion of 8 producer confidence in the operation of the FMMO system as 9 a consequence. 10 Number 1: Pricing of Class I milk was 11 significantly reduced without recovery for producers in 12 other class prices. Producers with higher Class I 13 utilization were most severely impacted. 14 2: Due to increased price discrepancies and price 15 inversions, depooling increased with inequitable impacts 16 for handlers and producers, especially those who do not 17 have options to depool, while others can avoid the pool 18 when price inversions occur. 19 3: Class I prices meant to incent movement of 20 milk to fluid processors relative to manufactured prices 21 were disrupted more of the time under the average-of mover 22 than occurred with the higher-of mover pricing. 23 4: The pricing discrepancies were not a one-time 24 anomaly and, in fact, have caused and will continue to 25 cause problems for orderly marketing -- markets in the 26 future if not remedied and put back to a higher-of mover 27 pricing. 28 Negative Producer Prices and Income Impacts. 5008 1 Dr. Vitaliano discussed various aspects of the 2 impacts of the average-of mover in terms of both the 3 asymmetric risk of dairy producers. He well discussed and 4 explained in great detail when prices spread between 5 Class III and Class IV above $1.48 per hundredweight, then 6 that can create a loss of income to producers. In 7 essence, there's a $0.74 cap in terms of how high that 8 Class I price can go, and so that creates a reduction in 9 income to producers. 10 Chart 1 shows on a monthly basis the difference in 11 price between the higher-of versus the average-of mover 12 plus $0.74. So you can see from the chart that large 13 differences and reductions during some months in the past 14 few years. 15 Producers painfully saw the shortfall in milk 16 checks using the average-of mover during 2020 with the 17 large spread in prices between manufacturing classes. 18 Class I skim milk prices under the average-of mover 19 deviated by over $5 a hundredweight in December of 2020. 20 Obviously, this asymmetric price risk of the 21 current average-of mover became particularly acute during 22 the COVID-impacted markets driven by government policies 23 and stimulating cheese consumption. However, negative 24 impact on producers happened again throughout much of 2022 25 and 2023. This suggests that this is not a one-off 26 pandemic-era issue. 27 During 2022 and 2023, Class IV prices have well 28 exceeded Class III. When Class III and Class IV spreads 5009 1 widen, the average-of mover performs poorly compared to 2 the higher-of mover. 3 National Milk Producers Federation Exhibit 30A 4 details the calculation of losses by month and by Federal 5 Order since the legislative average-of mover became 6 effective in May 2019. The combined market losses on 7 pooled Class I skim milk values in all orders has reached 8 over 940 million pounds -- dollars through July 2023. In 9 the Northeast, FMMO producers lost 178 million during that 10 time. The largest loss across all Federal Milk Marketing 11 Orders occurred in December 2020. 12 Another witness will discuss the serious impact on 13 the Southeast market, where producers suffered larger per 14 hundredweight negative returns as a result of the current 15 average-of mover, as the region has higher Class I 16 utilization and a strong demand for milk. 17 More recently, in 2022 and early 2023, we can see 18 there are significant losses in 12 of the 19 months since 19 January '22, resulting in a net loss of $264.9 million. 20 National Milk Producers Federation appreciated and 21 supported Secretary Vilsack's partial compensation of 22 these losses through the Pandemic Market Volatility 23 Assistance Program. However, as stated by Dr. Vitaliano, 24 this would not have been needed if the change to the 25 Class I mover had not been made. 26 Even more importantly, producers cannot rely on 27 USDA -- cannot rely on Congress, nor can we rely on 28 taxpayers to always make up the difference due to pricing 5010 1 disparities caused by the average-of mover. This type of 2 policy also does not make up for the loss of timely market 3 signals needed during periods of strong demand and/or 4 tight supply. 5 Negative Impacts From Increased Depooling. 6 Depooling of producer milk typically can happen 7 where manufacturing class prices rise above the pooled 8 returns generated by the different classes of use in the 9 market pool. As described previously, this is not an 10 efficient or equitable condition, and USDA sought to 11 reduce this disorderly result as a rationale for the use 12 of the higher-of mover during Order Reform. 13 The in and out of depooling milk was something the 14 USDA tried to mitigate through the regulation of Class I 15 price levels and relationships with other class prices. 16 For example, USDA expressly chose to reduce the time lag 17 in pricing information by using the two-week advance 18 Class III and IV movers in the Federal Order Reform to 19 help limit price inversions -- that's when Class I prices, 20 being below one or more of the other classes -- and 21 thereby reduce incentives to depool milk. 22 The change to the average-of mover significantly 23 increased the level of disorderly marketing because 24 Class I prices were lower relative to one of the other 25 manufacturing classes. This created greater incentives to 26 depool milk. This ultimately led to lower uniform prices 27 for pooled milk, and the situation has recurred more 28 frequently since the legislative change to the Class I 5011 1 mover was made. 2 This reality confirms the 1999 Final Decision 3 justification that the higher-of mover would assure that 4 shifts in demand for any one manufactured product will not 5 lower Class I prices. 6 To reiterate and provide an example, there was 7 enhanced demand for cheese generated by the Farmers to 8 Families Food Box Program. The Program's significant 9 purchases of cheese for food assistance relative to the 10 demand for butter and nonfat dry milk led to the 11 comparatively lower Class I prices. These class price 12 inversions resulted in substantial depooling of Class III 13 milk and disorderly marketing conditions during the second 14 half of 2020. Other proponent witnesses will provide 15 further information and discussion around the increased 16 problem of depooling caused by the average-of mover. 17 However, the problems of 2020 are not a one-time 18 phenomenon. Class price inversions recurred in 2022 and 19 2023. This time it featured higher Class II and Class IV 20 prices compared to uniform market or blend prices. The 21 result was substantial depooling of Class II and Class IV 22 milk, while other milk was required to remain in the pool 23 and disproportionately absorbed the impact of price 24 inversion. 25 As an example, Table 1 shows Federal Order 33 26 pooled milk in Class II and Class IV during October 2021 27 and October 2022. October 2022 Class II and Class IV 28 prices were $25.73 per hundredweight and $24.96 per 5012 1 hundredweight, respectively. With the lower announced 2 uniform price of just -- that should be $22.99 -- $21.81 3 was actually the Class III price. 4 THE COURT: Let me interrupt you. Identify where 5 in the document you just made a correction. 6 THE WITNESS: That was in the second paragraph, 7 seventh line, I believe, in -- on page 7 of my written 8 testimony. 9 THE COURT: All right. And tell me what used to 10 be there and what it should be. 11 THE WITNESS: Okay. The uniform price should have 12 been stated as $22.99. Instead, what was printed was 13 $21.81, which was, in fact, the Class III price in that 14 month. 15 THE COURT: Thank you. You may resume. 16 THE WITNESS: Thank you. 17 The announced Class I price was $24.71 with the 18 average-of mover, and would have been $26.79 under the 19 higher-of mover, $2.08 higher, and higher than both the 20 Class II and Class IV milk price. 21 Table 1 simply shows the difference between 22 October 2021 and October '22 in terms of pooled milk 23 volumes and shows a substantial decline in October '22 of 24 both those classes dramatically reduced to a third in 25 October '22 versus '21 on Class II milk and almost nothing 26 in terms of Class IV, 166 million pounds to 14.6 million 27 pounds in 2022. 28 Pooling is a complicated phenomenon impacted by 5013 1 more than just one factor. However, a change in pricing 2 which contributes to a lower relative Class I price to 3 manufacturing prices, such as we have seen, can't help but 4 reduce incentives to pool. The use of the average-of 5 mover results in more depooling and increased potential 6 for different price returns to producers within a market 7 area. Ultimately, this undermines the FMMO goal of 8 uniform returns to producers. 9 With the potential for greater discrepancies 10 between producers and less milk pooled, there will be 11 reduced incentives to supply Class I milk and increase 12 potential for differences of raw milk cost to processors 13 of like dairy products. Should the average-of mover 14 continue to be used, it will be destructive to efficient 15 operation of milk markets over the long run, as 16 production, processing, and milk movement incentives will 17 adjust accordingly. 18 Negative Impacts to Timing of Price Signals to 19 Producers and Processors -- Or to Processors and 20 Producers. 21 The generally higher prices for Class I milk act 22 as a realtime signal for Class I processors to producers 23 to draw more milk when needed to Class I use versus 24 manufacturing uses and encourages farmers to produce more 25 milk than needed. Under the higher-of mover, as there was 26 with the BMW BFP mover, there is a short delay, although 27 the higher-of mover is actually 18 days shorter than the 28 MW BFP of market prices being transported -- transmitted 5014 1 to producers. 2 This does sometimes result in a variance or 3 inversion as to how Class I prices relate to manufacturing 4 prices. Typically these inversions resolve quickly as 5 markets regain equilibrium. However, the change to the 6 average-of mover exacerbates delays in price transmission 7 to an even larger magnitude. Months go by where the 8 prices not only do not catch up, but, in fact, never get 9 caught up due to the maximum upside value being no greater 10 than $0.74 per hundredweight for producers. 11 Using an averaging concept disconnects the Class I 12 price from the competitive manufacturing prices, and there 13 is no recovery of lost income for producers. This 14 disconnect further disrupts the price signals by 15 disincentivizing the movement of milk to Class I outlets 16 where other options exist, as well as depooling already 17 discussed. 18 Additionally, the larger and longer variance in 19 the market signals reduces the incentive for farmers to 20 produce and supply milk when the market needs it. Both 21 characteristics of disrupted price signals are at odds 22 with the purposes of the AMAA and FMMOs. 23 The AMAA speaks directly to correcting such 24 problems inherent in fluid milk markets prone to 25 disorderly marketing problems, not exacerbating them. Our 26 witnesses, both producers and cooperative representatives, 27 have or will further enumerate with additional testimony 28 the significant cost and disruption to them. 5015 1 Negative Impacts Are Likely to Recur. 2 The current Class I mover does not operate as 3 intended because it builds in an unintended asymmetric 4 risk to producer income, resulting in millions of dollars 5 in losses of producer income. As we have seen, price 6 volatility and periodic significant Class III and Class IV 7 price discrepancies have been a basic feature of dairy 8 markets in the recent past. 9 Since 2000, I have calculated the difference in 10 Class III and Class IV prices when they have exceeded 11 $1.48, and that's the level where current Class I prices 12 are capped at the -- at the average-of mover plus $0.74 as 13 compared to the higher-of mover, 106 months out of a total 14 of 282 months between 2000 and June of '23, or 39.6% of 15 the time, using data from USDA Exhibit 15. 16 It has more often been the case that Class III 17 prices exceed Class IV by the wider margin, however, not 18 always. And, in fact, in 42 of the 106 instances, or 19 37.6% of the time, it has been Class IV that has exceeded 20 Class III. 21 And this is not insignificant. In 2022, in nine 22 of the 12 months, Class IV exceeded Class III by more than 23 $1.48. In July 2023, Advanced Class IV skim milk pricing 24 factor was $3.61 per hundredweight higher than the 25 Advanced Class III skim milk pricing factor, well above 26 the point where producers see any benefit from the 27 average-of mover. 28 There's no reason to believe that these types of 5016 1 discrepancies will not continue into the future featuring 2 all of the unintended problems we have described. 3 The Benefits of the Average-of Mover Are Not Worth 4 the Cost to Dairy Markets. 5 The change by Congress may have been well 6 intentioned, and neither processor nor producer groups 7 anticipated the problems created. The goal of 8 facilitating more use of existing hedging tools by some 9 Class I processors was an idea that, at the time, seemed 10 to have merit with minimal impacts to markets and 11 producers. Obviously, we have seen otherwise. In fact, 12 the demand for hedging of Class I sales is less than 13 clear. 14 In our own case, our cooperative has four Class I 15 plants and supply a variety of Class I customers which 16 includes retailers, foodservice distributors, and 17 institutions such as schools and hospitals. From the 18 interactions we have with our customers, there has been 19 widespread acceptance of moving prices based on Federal 20 Order price announcements by our conventional fluid 21 customers across our different distribution channels. 22 It's been shared with me that conventional customers have 23 been less interested in pursuing a fixed price if there 24 was any chance that they would be uncompetitive in the 25 marketplace in any given month. Customers have also been 26 reluctant to pursue risk management/fixed pricing, unless 27 it comes at no additional cost to them. 28 Regardless of the amount hedging occurred in the 5017 1 Class I market, we would question the disruption of market 2 signals and costs to producers by use of the average-of 3 mover. We recognize that there may be some processors or 4 end users in specialized Class I product channels that may 5 utilize hedging. However, we would contend that it is a 6 relatively small slice of total Class I sales. 7 By way of illustration, if we assume that this 8 segment represents 15% of total Class I sales -- and this 9 is just an illustration. There's no data that's been 10 presented yet that I'm aware of that tells exactly what 11 that volume would be. 12 So assuming 15% of total Class I sales, and 13 Class I sales on a national basis are about 30%, the 14 percentage of milk that maybe interested in hedging would, 15 at most, calculate out to be 4.5% of all pooled milk. 16 Obviously some markets have more and some less than the 17 30% Class I example used. However, the point remains 18 valid. It is likely a relatively small factor in the 19 overall fluid milk market. 20 While we appreciate that there has been growth in 21 specialized fluid milk products, it is our contention that 22 milk sales of some of these products were strongly 23 trending up prior to implementation of the average-of 24 mover. This was due to changing consumer preferences and 25 the ability of some processors to respond to that demand 26 with innovative products. As such, if the higher-of mover 27 is restored, as we recommend, consumer preferences will 28 drive sales, not the change in Class I mover. 5018 1 The question we have is whether the cost of 2 disorderly marketing and negative producer returns is 3 worth the benefits it may provide to a small segment of 4 the dairy market. We have discussed how the average-of 5 mover was a significant departure with decades of 6 precedent adopted by USDA and approved by the producer 7 community regarding the movement of Class I prices 8 relative to other class prices since the early 1960s. We 9 believe the answer is clear. The cost is too high and 10 disorderly market conditions too great to maintain the 11 current average-of mover formula. 12 We will have other witnesses with experience in 13 processing and selling Class I products that will testify 14 to their knowledge and experience regarding the amount of 15 hedging within the Class I fluid product category. The 16 expert industry witness that has already testified, and 17 will again follow me tomorrow, will discuss the specific 18 efficiency of hedging Class I milk and associated issues 19 under different pricing systems. 20 The 2018 legislation authorized future changes 21 through hearings. The 2018 legislation passed by Congress 22 changed the Class I mover, but also allowed for hearings 23 to amend the Class I formula after two years. 24 And just taking from that legislative language: 25 "Throughout the 2-year period beginning on the effective 26 date of this sentence (and subsequent to such 2-year 27 period unless modified by amendment to the order)." And 28 that's from Section 1403 of the Agriculture Improvement 5019 1 Act of 2018. 2 So the language provided by Congress established 3 this trial two-year period and, in effect, returned future 4 pricing authority to producers and to the judgment of the 5 Secretary of Agriculture. This is important as problems 6 did indeed occur, and wisely, Congress allowed for the 7 changes to be subsequently made through the normal FMMO 8 hearing process. 9 We are here today to support the reversal of this 10 change and recommend that the Secretary use this 11 authorizing language to respond to problems, albeit 12 unintended, that the average-of mover created. 13 Restoring the Original Higher-of Class I Skim Milk 14 Mover. 15 For all the foregoing reasons, the National Milk 16 Producers Federation supports the return to the higher-of 17 mover formula and maintaining current advanced pricing. 18 Reverting back to the higher-of mover will restore more 19 orderly markets and producer confidence in the FMMOs by: 20 1: Eliminating the asymmetric risk to producer 21 prices and income that was devastating to milk producers 22 under the average-of mover. 23 2: Enhancing market signals to producers with 24 Class I milk being based on the higher manufacturing class 25 that will improve the timeliness for returning value to 26 farmers closest to when the market is signalling needed 27 milk supplies. The higher-of mover will create better 28 alignment and incent milk to move to Class I use to assure 5020 1 milk is being supplied. 2 3: Reduce incentives to engage in depooling 3 practices which undercuts the ability to equitably provide 4 returns to producers, which is a separate -- central tenet 5 of Federal Orders. 6 And 4: Restore the historical concepts of price 7 movement and relationship of Class I prices to other class 8 prices which have long been supported by producers in 9 USDA. 10 In summary, we support the proposal and language 11 as drafted by NMPF in the hearing petition. The higher-of 12 mover proposal is widely and enthusiastically supported by 13 the producer community. Others testifying at the hearing, 14 including producers and cooperative representatives, will 15 discuss the issues of revenue impacts at the farm level, 16 depooling, attracting Class I milk supplies, and a concern 17 that problems will continue if left unaddressed. They 18 will also discuss the question of a cost benefit of 19 upending decades of experience with price regulation for a 20 small segment of the dairy industry and the failure to 21 find an acceptable alternative to the higher-of Class I 22 mover. 23 On behalf of Upstate Niagara Co-op and the 24 National Milk Producers Federation, we appreciate the 25 opportunity to testify today, and ask for the 26 consideration of our proposal to return to the higher-of 27 mover for calculating a Class I skim milk mover. And we 28 thank USDA and Secretary Vilsack for holding this 5021 1 important hearing. 2 MS. HANCOCK: Thank you, Mr. Alexander. 3 Your Honor, we would make him available for 4 cross-examination at this time. 5 THE COURT: Thank you. 6 It's 8:42. I would like us to just take five 7 minutes to stretch right here in place. I don't expect 8 anybody to leave the room. Let's go off record. 9 (An off-the-record discussion took place.) 10 THE COURT: Let's go back on the record. 11 All right. We're back on the record. It is 12 8:47 a.m., and I would like the counsel who is at the 13 podium to identify herself, please. 14 MS. VULIN: Yes. Thank you. Ashley Vulin with 15 Davis Wright Tremaine, representing the Milk Innovation 16 Group. 17 THE WITNESS: Good morning. 18 CROSS-EXAMINATION 19 BY MS. VULIN: 20 Q. Good morning, Mr. Alexander. 21 You are with Upstate Niagara Cooperative, correct? 22 A. That's correct. 23 Q. How many Class I plants does Upstate have? 24 A. In my testimony, we have four with milk plants. 25 Q. And how many are in Order 1? 26 A. There are three that are pooled in Order 1. 27 Physically, just I think one -- anyway, at least -- at 28 least probably three that are pooled on Order 1. 5022 1 Q. And where are all the four plants located? 2 A. Okay. So the four plants, there's one in Buffalo, 3 one in Rochester, one in Syracuse, and one in 4 Williamsport, Pennsylvania. 5 Q. And you said four -- or excuse me -- three are 6 pooled on Order 1. 7 The last one, is it partially regulated? 8 Unregulated? 9 A. It's a state order pool plant, but also partially 10 regulated by the Federal Order. 11 Q. Which state and which partial order? 12 A. New York State. 13 Q. And which -- 14 A. And actually, Williamsport is also regulated by 15 Pennsylvania. 16 Q. So the Buffalo, Rochester, and Syracuse plants are 17 pooled under Order 1, correct? 18 A. State that again? 19 Q. Buffalo, Rochester, and Syracuse plants are pooled 20 under Order 1? 21 A. No, Rochester, Syracuse, and Williamsport are 22 pooled. 23 Q. Got it. 24 And Buffalo? 25 A. Is a partially-regulated for the Federal Order. 26 Q. Partially regulated under Order 1 as well? 27 A. Order 1. 28 Q. Okay. And how long have you had each of the four 5023 1 plants? 2 A. Well, the Rochester and Buffalo plant, going back 3 at least to the '60s. Syracuse has been, I think, within 4 the last five or six years. And I think something similar 5 in terms of Williamsport. 6 Q. About five years? 7 A. Something in that -- I don't have the exact dates 8 with me. 9 Q. And do any -- 10 A. Fairly recently. 11 Q. I'm sorry. 12 A. Fairly recently. 13 Q. Does Upstate sell any branded Class I products? 14 A. We have some branded products. 15 Q. What's the breakdown between branded and 16 unbranded, just roughly, percentage-wise? 17 A. I would say the vast majority are private label. 18 I don't have the exact quantities, but it's probably less 19 than 20% is branded. 20 Q. And what do you consider to be Upstate's most 21 successful Class I product? 22 A. I think our, just our regular conventional milk 23 has been successful. But in terms of some sales, some of 24 the chocolate milks that we sell have been popular. 25 Q. And how many plants does Upstate have that are not 26 Class I? 27 A. Are not Class I? We have three cultured product 28 plants. 5024 1 Q. Can you tell me about where those are located and 2 what they sell? 3 A. So we have a cultured plant in Buffalo, one in 4 Batavia, and one in North Lawrence in Northern New York. 5 Q. And of the three non-Class I plants, which ones 6 pool their milk? 7 A. We have milk that goes in that's pooled, but it's 8 not a pool plant, so there's milk that's pooled in those 9 plants. 10 Q. And under which order is that milk pooled for each 11 of the plants? 12 A. Most of it is Order 1. 13 Q. And I don't need any specifics, but does Upstate 14 Niagara have any products that are exported? 15 A. We do. It's a little bit of -- well, I'm not sure 16 you could consider it exports, but we do have some yogurt 17 products that get into distribution, out of the United 18 States proper that is. But in -- in -- I think -- I think 19 probably the principal export products that we have would 20 be the longer shelf life products from O-AT-KA Milk 21 Products -- that's the eighth plant by the way -- and we 22 do export a little bit of product, evaporated milk. 23 Q. Sorry. Tell me about the eighth plant. 24 A. The eighth plant is O-AT-KA, O-A-T-K-A, Milk 25 Products, in Batavia. 26 Q. And you say that plant sells yogurt? 27 A. No. That -- that plant sells a variety of 28 products, including butter/powder, retorted products, 5025 1 including canned evaporated milk and some formulated 2 beverages. 3 Q. So does Upstate sell products -- or sorry, strike 4 that. 5 Does Upstate manufacture products in all four 6 classes? 7 A. Yes. 8 Q. And for all of your plants, do your plants have 9 exclusively-owned supply milk? 10 A. We purchase a little bit of milk. 11 Q. So mostly-owned supply milk? 12 A. Mostly-owned supply. 13 Q. And does Upstate send any of its milk to other 14 plants? 15 A. Yes. 16 Q. And approximately how frequently, when Upstate is 17 a supplier, how frequently do you negotiate milk supply 18 agreements? 19 A. Some are annual contracts. Some are just 20 handshake agreements that historically we have supplied 21 over time. Some are longer-term. 22 Q. When you say "longer-term," you mean more than 23 annual? 24 A. Yes. 25 Q. And as a plant owner, how frequently does Upstate 26 negotiate its milk supply agreements when it is purchasing 27 milk? 28 A. Typically annually. 5026 1 Q. And do the cooperative-owned plants have to buy 2 the owned-supply milk via a negotiated price? 3 A. I don't understand what that means. 4 Q. Does -- do the two arms negotiate kind of 5 independently to come to a price, or is there kind of 6 joint decision-making based on the finances of both? 7 A. That would be very strange to think that there 8 would be some kind of, you know, negotiation like you 9 would with a third party. So it's determined internally 10 in terms of how that pricing structure will be set. 11 Q. So different than how you would negotiate with a 12 third party for the milk you are supplementing at the 13 plants? 14 A. Yes. 15 Q. And as a supplier, how -- how quickly can Upstate 16 change its buyer in response to market pricing changes? 17 A. How quickly can we change its price? 18 Q. The buyers. So -- so, for example, you said you 19 annually negotiate agreements, typically. 20 A. For our supply? 21 Q. For your -- and when you are the supplier as well, 22 correct? 23 A. So when we sell? 24 Q. Yes. 25 A. Again, it depends on the -- the contractual 26 arrangement. Most of our arrangements are annual. 27 Q. So about once a year you would be able to make a 28 decision to shift who you sell your milk to, correct? 5027 1 A. Yes. 2 Q. And how quickly can the cooperative members of 3 Upstate ramp up milk production in response to market 4 signals? 5 A. Well, I think it depends on the producer and 6 how -- what capacity they have to respond. There's a 7 variety of tools that producers have these days to change 8 their milk production output. They can change, basically, 9 their culling habits with or culling strategy in terms of 10 their cow numbers. They can change their feeding profile 11 in terms of how much milk they want to generate depending 12 on prices and opportunities. So there's -- there's 13 different mechanisms that producers can do. Sometimes 14 they cap out in terms of just how many animals they can 15 house. So there's limitations in terms of capacity that 16 would take some time to put on additional capacity. 17 Q. And what's the time horizon between the decision 18 to ramp up production and when you see results in higher 19 milk volume from a farm? 20 A. I think, again, it depends on the farm. But some 21 are pretty able to -- to change feeding practices. I 22 would say that, in general, it takes a -- you know, some 23 period of time, whether that's, you know, a month or two, 24 to look at things in terms of what they are doing. I 25 mean, in general, most producers are trying to maximize 26 output most of the time, but there are things that they 27 can do in terms of their -- their rations. 28 Q. So -- 5028 1 A. And cow numbers. 2 Q. And I'm just trying to get a sense of the 3 timeline, right? So if the farmer says, hey, I want to -- 4 you know, the market is telling me to produce more milk, 5 and I want to do that, from that decision point to -- to 6 coming up with the feed plan, acquiring the feed, setting 7 that all up, what's kind of the time horizon you see on 8 average? 9 A. You know, I haven't extensively studied it. But 10 my impression is, is that it may not be a day or two or 11 three. It's probably more like, you know, we're talking 12 more like weeks. But not, like, years. Unless we get 13 into a capacity situation, then it's going to take a 14 little bit of time to respond. 15 Q. "A capacity situation" meaning? 16 A. In terms of just the number of -- of the number of 17 square feet that the producers have to house their 18 animals. 19 Q. So it could be as quick as weeks, or if it takes 20 larger ramp-up efforts, it could be months, potentially 21 years? 22 A. Yes. 23 Q. And on the converse, how quickly can suppliers 24 ramp down their milk production in response to market 25 signals? 26 A. They could cull animals pretty fast, so it 27 wouldn't be a capacity issue. Obviously there's a whole 28 decision regarding cash flow that they are going to take a 5029 1 look at -- pretty hard at that in terms of what they would 2 do to then recover that in terms of, you know, costs and 3 revenue. But they can sell cows pretty fast. 4 Q. And as a plant owner, what are the factors -- I 5 don't need the specifics -- but what are the factors you 6 consider in pricing your finished products for customers? 7 A. What are the factors? 8 Q. Uh-huh. 9 A. I mean, obviously that would include costs of our 10 processing and the competitive situation. 11 Q. Can you be more specific? The competitive 12 situation? What do you mean by that? 13 A. Well, what are other suppliers of the same 14 products quoting. 15 Q. And cost of processing, that would include both 16 the cost of purchasing your materials, like raw milk and 17 also all of the manufacturing costs? 18 A. Yes. 19 Q. Anything else? 20 A. Those are the two big ones I can think of off the 21 top. I may have missed something. 22 Q. And I believe a prior witness testified that over 23 50% of Class I processing in the United States is now 24 owned by cooperatives. Did you hear that, or do you agree 25 with that? 26 A. I heard it. I haven't done that calculation or 27 made that estimate, but I heard it. 28 Q. Do you have any reason to believe that's wrong? 5030 1 A. I don't honestly know what the calculation is 2 right now. 3 Q. And on page 5 of your testimony you have Chart 1. 4 Do you see that? 5 A. Yes. 6 Q. And this calculates the difference between what 7 farmers would have been paid if the current average-of -- 8 when the current average-of mover was in place versus the 9 higher-of; is that right? 10 A. It's the higher-of calculation minus the 11 average-of plus $0.74 per hundredweight. 12 Q. And this is the difference in what the uniform 13 price would have been? 14 A. No. This is the difference strictly in what the 15 Class I mover price would be. 16 Q. And so I'm looking for -- I'm looking at 2020. I 17 believe this is December 2020 when it goes below negative 18 $5.00; is that right? 19 A. That's correct. 20 Q. And so in other words, if NMPF's proposed 21 higher-of had been in place, Class I processors would have 22 had to pay $5 per hundredweight more into the pool in 23 December of 2020 because of the cheese price that month, 24 correct? 25 A. That's correct. 26 Q. And Niagara Upstate owns a Class I plant, three or 27 four, right? 28 A. We have four plants. 5031 1 Q. And so how would -- how would Upstate have been 2 able to absorb a $5 per hundredweight increase in their 3 Class I price in December of 2020? 4 A. Our Class I prices would be moving with the mover. 5 Q. And the question is, how would you have been able 6 to absorb a $5 increase in that? Would that have been 7 easy? Do you have that capability? 8 A. Our conventional milk customers buy milk based on 9 the mover. 10 Q. And so -- 11 A. Class I price announcements from the Federal 12 Order. So to the extent they go up or they go down, those 13 prices move with that formula. 14 Q. So you would have passed that price on to your 15 customer? 16 A. That's correct. 17 Q. And then they would have passed it on to the 18 consumer you presume? 19 A. That would be up to them. 20 Q. And how do you think they would have reacted to 21 the $5 increase? 22 A. I think it's -- the changes in pricing have been a 23 normal course of business for our customers, so that -- I 24 don't know, because it didn't happen this way, but I 25 presume they would have passed that through as they see 26 fit. May not have passed it through, I don't know. 27 MS. VULIN: And, your Honor, I would like to ask 28 the witness about an exhibit already introduced, 5032 1 Exhibit 15. May I approach? 2 THE COURT: You may. This is Exhibit 15? 3 MS. VULIN: It is. And I have two copies, so I 4 can give one to your Honor and one to the witness. And I 5 believe everyone else should have copies from prior 6 distribution. And it's online. 7 THE COURT: Thank you so much. 8 BY MS. VULIN: 9 Q. So do you recognize this Exhibit 15? 10 A. I have seen it. 11 Q. And at the top it says, "Announcement of Advanced 12 Prices and Pricing Factors, January 2000 to 13 August 2022" -- sorry -- "2023." 14 Do you see that? 15 A. Yes. 16 Q. And if you could turn to page 7 for me, please. 17 And at the very bottom row, conveniently for us, 18 is December of 2020. And so I wanted to ask you about 19 some of these prices. 20 So in December of 2020, the Class IV price, 21 Advanced Class IV skim milk pricing factor, was $8.21, 22 correct? 23 A. Yes. 24 Q. And the Class III advanced price was $20.07. 25 A. That's correct. 26 Q. And under the higher-of, this base skim milk price 27 for Class I, instead of $14.88, it would have been that 28 $20.07, correct? 5033 1 A. That's correct. 2 Q. And if that had been the case, which as you all 3 are proposing, the goal would have been to have more money 4 in the pool, right? 5 A. Yes. 6 Q. And so in December of 2020, did Niagara -- did 7 Upstate Niagara value its Class I milk at $5 more than it 8 did under the other formula? 9 A. I'm not sure I understand what you mean by value. 10 Q. So, Niagara Upstate -- Upstate Niagara's proposal 11 is that this price should have been $5 higher, correct? 12 A. Yes. 13 Q. And I'm asking, in December of 2020, was this milk 14 $5 more valuable to you? Did you get a $5 benefit at the 15 time? 16 A. No. I mean, we passed through, based on the 17 formula pricing with our customers, the price that was 18 announced. 19 Q. And so the milk wasn't actually more valuable to 20 you at the time, regardless of the formula used? 21 A. As I said, we base our pricing based on a formula 22 with our customers. So what we valued it at is really 23 kind of subjective. Obviously, our producers were 24 disappointed that the higher-of was not in place and would 25 have reflected a higher price if it was. 26 Q. But from an objective perspective, you didn't feel 27 the milk that you had in December of 2020 was more 28 valuable because you got to pay $5 less under the current 5034 1 formula? 2 A. I don't know how you can feel and be objective at 3 the same time, so I'm not really -- I'm still struggling 4 with this question. 5 Q. And what I'm trying to tease out is the difference 6 between price and value, right? And so what I'm trying to 7 understand, is to Upstate, if -- what is the value of that 8 milk, or are you testifying that the value is whatever the 9 FMMO price tells you it is? 10 A. Value is subjective. Value is in the eye of the 11 beholder. That's clear. 12 Objective is, this is the price announced. It's 13 also clear that under the higher-of, it would have been a 14 higher price, and we would have passed that price through. 15 Q. Did Upstate's Class I plants have trouble during 16 this time, December of 2020, obtaining milk supplies 17 because of the base Class I skim price? 18 A. I don't remember that situation. I wasn't in 19 charge of milk handling at that point, but I do not 20 remember that. 21 Q. So the fact that this average-of was in place 22 instead of the higher-of didn't impact your plant's 23 ability to acquire milk for fluid use? 24 A. Well, like I say, we have mostly our own supply, 25 and also we have balancing capacity that we can draw on if 26 we're short of Class I needs. 27 Q. And this issue of market signals and responses. 28 So I'm looking at December, right, where we have this $20 5035 1 Class III price on page 7? 2 A. Uh-huh. Yes. 3 Q. And then if I look to the next page, so we're now 4 on January of 2021, that drops to $10.25. 5 Do you see that? 6 A. The which price? 7 Q. The Advanced Class III skim milk pricing factor. 8 A. Yes. 9 Q. So it's roughly a $10 drop from December of 2020 10 to January of 2021, correct? 11 A. Yes. 12 Q. And so this issue of sending correct market 13 signals, the Class III -- the Advanced Class III skim milk 14 pricing factor in December of 2020 was quite high, right? 15 A. Correct. 16 Q. And that could have arguably sent market signals 17 to producers to produce more milk to meet that price, 18 correct? 19 A. Yes. 20 Q. But then here we are one month later and it drops 21 to $10, correct? 22 A. Right. 23 Q. So we probably don't want producers responding to 24 single-month pricing signals given how quickly they can 25 fluctuate, correct? 26 A. At the supply level, that's correct. But 27 generally, it can be a fairly short time and -- and can be 28 responded to. It also can be responded to by suppliers of 5036 1 milk selling milk to Class I processors in terms of their 2 incentive. 3 Q. And so you are saying that the signal that -- that 4 NMPF believes the higher-of would have sent in December of 5 2020 is to send more milk to Class I? 6 A. Yes. I mean, over time that's the -- that's been 7 the price signal that we have used historically is the 8 higher value of the Class I milk. 9 Q. But given -- excuse me. I didn't mean to 10 interrupt there. 11 Given the Food Box Program and this pricing signal 12 of $20, isn't the market telling everyone to send more 13 milk to cheese? 14 A. That's -- that's why we need the Class I mover be 15 set at the higher-of so it doesn't artificially send price 16 signals that would draw milk away from Class I milk 17 supply. 18 Q. Do you believe that the Food Box Program was 19 artificially valuing cheese at such a high level at that 20 time or it was actually that valuable given the program? 21 A. Again, we're using the value thing. But 22 government, obviously, subsidized the Food Box Program, so 23 they basically artificially subsidized that price to go 24 up. So that's why the -- the cheese price reacted to that 25 in-demand situation from the government program. 26 Q. Are you saying you believe the cheese price 27 doesn't accurately reflect -- 28 A. No, the cheese price reflects what the price was 5037 1 in the competitive value of cheese, but it was responding 2 to a government program in the market that stimulated 3 demand and the pricing that responded to it. 4 Q. And thinking about this December of 2020 example, 5 during this time, if the higher-of had been in place, the 6 intent would have been that less or fewer Class III 7 processors would have depooled and there would have been 8 more money in the pool; is that right? 9 A. The incentive would have been less to depool. 10 Q. And if there was more money in the pool, that 11 means under the uniform price, milk for Class IV uses 12 would have been paid out at a higher level, correct? 13 A. It depends on those comparative prices. If 14 there's higher priced milk in those classes and that it's 15 pooled instead of depooled, it would tend to support the 16 uniform price. 17 Q. And you can see the prices here at the bottom of 18 the page. Is that true under the prices you see here with 19 Class III at roughly $12 less? 20 A. Which price are we talking about? 21 Q. Still in December of 2020, at the bottom of 22 page 7. 23 A. Okay. We're back on page 7. 24 And we're looking at which price, the Class IV 25 price. 26 Q. Well, I'm asking if -- if -- if NMPF's proposal 27 had been adopted -- 28 A. Yes. 5038 1 Q. -- and the higher-of had been in place, and there 2 was more money in the pool because you are incentivizing 3 milk to stay in the pool, the uniform price for all milk 4 would have been higher, correct? 5 A. Yes. That's correct. 6 Q. And so Class IV processors and suppliers who 7 supplied Class IV that were in the pool, those suppliers 8 would have received a higher price for their milk as well, 9 correct? 10 A. Their producers would have received a higher 11 price, yes. I mean, there would be a -- there would be a 12 draw from the pool -- 13 Q. So wouldn't that have made -- 14 A. -- for their producers. 15 Q. I'm sorry, I didn't mean to interrupt. 16 A. Yes, for their producers. It's not processors 17 that would get that. 18 Q. I'm sorry if I misspoke there. 19 So if the -- if the producers who supplied 20 Class IV got more money from the pool that month, wouldn't 21 it be harder, then, for Class III to attract milk from 22 Class IV if -- if needed to fulfill the needs of the Food 23 Box Program? 24 A. I think there would have been similar incentives 25 in either case to -- to move milk where it's needed. So 26 if milk was needed by a Class III processor, they would 27 have paid for that milk. 28 Q. The Class III processor would have. 5039 1 A. Yes. 2 Q. And wouldn't they have had to pay more because a 3 supplier who was supplying Class IV would have received 4 more milk from the pool that month under the higher-of? 5 A. It's possible. I don't know that that's what 6 would have happened. I mean, you are asking me for a, you 7 know, a scenario that I'm really not sure how that would 8 have transpired. 9 At least in our case, if a manufacturer needs more 10 milk, we try to supply that to them. We know that in 11 either case there will be a draw from the pool for our 12 producers. So really there's -- there would -- we would 13 try to react to the needs of our customers. 14 Q. Don't you believe it's important for NMPF and all 15 of us here to consider how NMPF's higher-of proposal could 16 and would disrupt price signals between III and IV? 17 A. Well, I think in terms of what we know, and we 18 know that Class I has been the driver of how this program 19 works over the years, really Class III and Class IV are 20 ancillary to the objectives of the program. That's why, 21 you know, we focus so much on the Class I price and why 22 it's so important to us to restore the higher-of. 23 Q. If Class III and IV are so ancillary, why a 24 proposal that is designed to incentivize Class III to stay 25 in the pool? 26 A. Because we -- a couple different reasons. First 27 of all, when depooling happens, then we know that there's 28 other returns and other prices that potentially are in the 5040 1 market, both to producers and to processors in terms of 2 what they are paying for milk. So the idea with Federal 3 Orders, at least in terms of pooled milk, is we try to 4 achieve equal -- or equity in terms of returns to 5 producers and equity in terms of raw product cost to 6 processors of like products. So when there's depooling, 7 there's a potential that both of those conditions are 8 violated. 9 Q. So Class III and IV aren't ancillary to the 10 program, the FMMO program? 11 A. They are important in terms of making sure that 12 there's competitive equity, but they are not the driving 13 force in terms of Federal Order pricing. 14 Q. And you mentioned depooling. 15 Do you believe depooling is disorderly? 16 A. Depooling can be disorderly. It's a symptom. 17 Right now -- and this has been discussed quite a bit here 18 at this hearing, it's quite a bit over the course of time 19 with Federal Orders -- depooling is a symptom. And it may 20 not be that you ever eliminate depooling, but depooling 21 tends to be a symptom in terms of a problem. 22 And like I said before, and others have said, it 23 starts to look like there's different prices out in the 24 market being paid for producers. So if a processor 25 depools their milk, now there's a different potentially 26 return for that milk. They are basically not contributing 27 into the market pool anymore, they are able to basically 28 keep that money either for their producers or for their 5041 1 company, and it's not being paid, so that's potential for 2 different -- different costs of -- of pricing to producers 3 and to the processors themselves. 4 If you pull milk out of the order, and it's not 5 available to Class I processors, and a Class I processor 6 needs that milk, now all of a sudden there's not a 7 sufficient signal to draw that milk. They have to go out 8 and potentially pay a premium to get that milk away from 9 that -- that processor. 10 Q. But you would agree with me, the Federal Orders 11 can't require Class III to pool their milk, correct? 12 A. While they can't require it, it's voluntary in 13 that sense. Really the lever that USDA has used 14 principally and what is the subject of this hearing is not 15 pooling regulations, it's about pricing. Pricing signals 16 incentivize the pooling of milk, and right now we don't 17 feel that there's proper price signals in terms of 18 those -- in terms of the pricing of the milk for pooling 19 purposes. 20 Q. And do you -- you don't agree that performance 21 standards are how FMMOs can incentivize Class III 22 participation in the pools? 23 A. Performance standards can assist with that, that's 24 true. Performance standards, in and of itself, is not a 25 prime -- necessarily a prime objective of the Federal 26 Order system. The idea really is to reflect equitable 27 prices to producers in terms of the value of Class I milk 28 and -- and -- which is sharing in the benefits of that 5042 1 higher value with -- with producers as well as I guess 2 what's historically called the burden of that reserve 3 supply, which is the lower class prices. 4 Q. And you said the concern with depooling is that it 5 draws milk away that is needed for fluid use, correct? 6 A. It can, yes. 7 Q. So if there's more than a sufficient supply of 8 milk for fluid use, depooling would not be disorderly, 9 correct? 10 A. It's depends on the situation. It depends on who 11 has the milk and who needs it, where it is, what day of 12 the week it is, what time of the year it is. So it's a 13 variable situation. Because on average, it looks like 14 there's a surplus of milk to Class I use doesn't mean 15 there's a sufficient supply every day of the -- every day 16 of the year. And it changes the incentive structure in 17 terms of supplying that milk if those options exist to go 18 outside the pool. 19 Q. But in response to a situation that you describe 20 as variable, geographically, temporally, day by day, you 21 are asking USDA to set a national pricing formula based on 22 incentivizing Class III to stay in the pool? 23 A. We're asking for a host of reasons. That is one 24 aspect of the pooling issue. The whole package of 25 proposals that National Milk has includes things that we 26 feel will help assist USDA and assist our nation's farmers 27 in terms of incentivizing pooling. 28 Q. And in the -- in the market areas where Upstate 5043 1 operates, is there a currently a sufficient supply of milk 2 for fluid use? 3 A. Yes. 4 Q. So in those areas, you would agree with me we 5 don't need to incentivize Class III participation in the 6 pool in order to ensure there is sufficient supplies of 7 fluid milk? 8 A. We have sufficient supplies today. We don't -- 9 haven't always in the past. There's been time periods in 10 the past where it has been difficult to -- to supply 11 Class I milk. 12 Q. But today -- 13 A. Generally speaking, we have our supply. So we 14 can -- we can move milk to where we need it, when we need. 15 Q. And I'm asking about kind of the marketing area, 16 right? So Federal Order 1, have you heard of anyone else 17 having any trouble having -- obtaining a sufficient supply 18 of milk for fluid use? 19 A. Not currently. But over the years I have attended 20 call hearings and -- and in the -- what was the old New 21 York/New Jersey Order 2 where there wasn't enough milk to 22 supply Class I processors because the manufacturers didn't 23 want to give it up. 24 Q. What year was that? 25 A. Technically there was more milk than Class I 26 sales, but because of the incentive structure, they didn't 27 need to -- to -- to send any milk, there wasn't any 28 purpose for them to do it, so it was -- they'd have to 5044 1 call a hearing to discuss how to supply those Class I 2 processors. 3 Q. What year was that? 4 A. That was back in the late '80s. 5 Q. Okay. So it's been quite some time since that has 6 happened? 7 A. Quite some time. But over -- since that time, 8 there's been occasions when there's been short supply, 9 especially in the fall. 10 Q. And I have an exhibit that I would like to 11 distribute. I did not write down the next exhibit number, 12 I'm sorry. 13 THE COURT: Isn't it, so we're right now on 245. 14 Would it be 246? 246. 15 MS. VULIN: Exhibit 246. And we have copies 16 coming around. 17 (Exhibit Number 246 was marked for 18 identification.) 19 MS. VULIN: May I approach? 20 THE COURT: You may. 21 MS. VULIN: Thank you. 22 BY MS. VULIN: 23 Q. Now, this document is entitled Federal Milk 24 Market -- Federal Milk Order Number 1. 25 Do you see that at the top? 26 A. Yes. 27 Q. And the subject is, "Request to reduce fall month 28 shipping percentages, approved 10% for 2022 and 2023." 5045 1 Do you see that? 2 A. Yes. 3 Q. Do you recognize this document? 4 A. I have seen similar documents in the past. 5 Q. Uh-huh. If you look halfway down the first page, 6 it says "Petition." 7 "In their 2022 petition Queensborough cited 8 declining Class I sales, a decline in the number of 9 Class I customers seeking to purchase milk for Class I 10 usage, and a comment that they, as a longstanding 11 participant of the Northeast Dairy industry, were unaware 12 of any instances where Class I needs have not been 13 covered." 14 Do you see that? 15 A. Yes. 16 Q. So this document reflects that in 2022, March of 17 2022, Queensbourough requested that the shipping 18 percentages in Order 1, under Section 1001.7(c)(2), be 19 reduced from 20% to 10% for September, October, and 20 November. 21 Do you see that? 22 A. Yes. 23 Q. Do you recall this request? 24 A. I recall that. Yes. 25 Q. And if we go to the very last page, please. This 26 is a letter that Upstate submitted in support of that 27 request. 28 Do you see that? 5046 1 A. Yes. 2 Q. And do you -- did you have any involvement in the 3 submission of this letter? 4 A. I remember seeing a -- a draft of it. 5 Q. And you didn't tell everyone, don't send that, we 6 need more fluid milk? 7 A. No. 8 Q. Okay. And if I read under the "lowering shipping 9 percentages heading," it says, "Upstate Niagara does not 10 oppose the request to lower the shipping percentages for 11 this year. The downward trend in Class I markets is 12 well-documented. While we keep adjusting the percentages 13 to accommodate milk that's willing to service the market 14 in the spirit of preventing disorderly marketing by 15 uneconomic and unnecessary movements of milk, we must also 16 recognize that there simply isn't the same requirement for 17 as much milk to service the declining fluid market. 18 Do you see that? 19 A. Yes. 20 Q. And you don't disagree with that, do you? 21 A. No. But I would continue on further with the next 22 paragraph where there's been requests for more permanent 23 changes. And because of the past experience with volatile 24 supplies and demand at times, we would prefer to see the 25 market order look at it periodically to the assess 26 whether, in that particular situation, for that particular 27 year, there's an adjustment. 28 Adjustments are not new. They could also go up. 5047 1 Q. And do you recall if the MA's office granted this 2 request? 3 A. I believe they did. 4 Q. Uh-huh. And did they grant it for two full years, 5 2022 and 2023, for that September to November window? 6 A. I don't recall. 7 Q. If you go to page 6, which is at the top right 8 corner, you will see there it says, halfway through, down 9 the page, "Considering 2022 will be the fifth year in a 10 row that the shipping percentage will have been reduced to 11 10%, and given that the market conditions that warranted 12 previous reductions continue to exist, the reduction in 13 the shipping percentage to 10% will apply to September to 14 November for years 2022 and 2023." 15 A. I see that. 16 Q. Okay. So it looks like the request was granted. 17 A. For a limited basis as opposed to permanent. 18 Q. And -- but you, on behalf of Upstate, still 19 maintain that the higher-of needs to be in place in order 20 to attract more milk to Order 1? 21 A. We believe that over time it's the correct 22 incentives to put in place to move prices. 23 Q. And I'd like to finish up by asking you about a 24 statement you made about hedging. It's on page -- one of 25 the last pages, I'm sorry. Page 8. 26 Under "the benefits of the average mover are not 27 worth the cost to dairy markets," the second paragraph, 28 you say, "In fact, the demand for hedging of Class I sales 5048 1 is less than clear." 2 And then you go on to recognize that there are 3 some processors that may utilize it, but that you believe 4 it is a very small slice of Class I total sales; is that 5 right? 6 A. That's my opinion. I'd be interested in other 7 data that shows that it's significant. 8 Q. So it's merely an anecdotal observation of yours 9 that Class I -- 10 A. It's our own personal experience in terms of our 11 customer base, that there's not a demand for hedging. 12 Q. And I just want to make sure I can finish my 13 question, so just let me -- that's why my hand was trying 14 to give you the signal. 15 So just to be clear, it's only your own 16 observation on behalf of Upstate that you don't believe 17 that Class I is engaging in significant amounts or 18 meaningful amounts of hedging? 19 A. That's my opinion. I don't know. 20 Q. You haven't undertaken any kind of survey or 21 analysis of the extent of Class I hedging utilization by 22 Class I? 23 A. Just conversations with people. I don't have any 24 survey data. 25 Q. And you -- you said that because Class I 26 utilization itself is so low, if Class I engages in 27 hedging, that will also be a small part of the market; is 28 that right? 5049 1 A. Correct. 2 Q. And -- but isn't it true that Class I utilization 3 is low because it's been on a downward decline for years? 4 A. It's been moving down, yes. 5 Q. Uh-huh. And so wouldn't you think that it would 6 be important for Class I processors to have at their 7 disposal tools necessary to slow that decline? 8 A. Not at the cost of dairy farmers. 9 Q. And you would agree with me that Class I 10 processors are the only ones who can't opt out of the 11 pool, correct? 12 A. If they are pooled under the Federal Order, that's 13 correct. 14 Q. And if the goal of FMMOs is to ensure a sufficient 15 supply of milk for fluid consumption, wouldn't it be 16 extremely important to ensure that Class I processors are 17 able to utilize risk management tools? 18 A. That's one of the goals. If it's at the cost of 19 impacting -- negatively impacting producers in terms of 20 income and uniform pricing, then that's why I believe it's 21 questionable that a small fraction can impact the rest of 22 the market that way. 23 Q. So is the goal of ensuring income for farmers a 24 more important goal under the FMMOs than ensuring a 25 sufficient supply of fluid milk? 26 A. That's an important goal, sufficient supply of 27 milk. But one of the ways to do that is to assure that 28 producers are receiving fair income. 5050 1 Q. Okay. So -- so just -- I just want to be clear 2 there. The assurance that farmers are receiving 3 sufficient income for their milk is not an independent 4 goal of FMMO's. It is only a goal so far as that is 5 necessary to ensure a supply of fluid milk? 6 A. A -- right. That's a supply of fluid milk. 7 MS. VULIN: Okay. Thank you. No further 8 questions. 9 Oh, and I did promise I would return Exhibit 15, 10 unless others may want it. 11 And I also would like to move admission of 12 Exhibit 246, please. 13 THE COURT: Let me ask, are we going to wait for a 14 motion to admit 245 until cross-examination and redirect 15 are completed? 16 MS. HANCOCK: That's what we have been doing, your 17 Honor. 18 THE COURT: All right. And I think I will wait on 19 your motion until I can deal with them together. 20 MS. VULIN: Okay. Thank you, your Honor. 21 THE COURT: So it's 9:31, if there's going to be 22 another examination of Mr. Alexander by another person, 23 and I think it looks like there will be, I would like for 24 us to take a ten-minute break right now. 25 So let us go off record at 9:32. Please be back 26 and ready to go at 9:42. 27 (Whereupon, a break was taken.) 28 THE COURT: We're back on the record. It is 9:43. 5051 1 Counsel, would you please identify yourself? 2 MR. SJOSTROM: Good morning, your Honor. 3 Lucas Sjostrom for Edge Dairy Farm Cooperative. 4 THE COURT: Would you spell all of that? 5 MR. SJOSTROM: I had earlier, but I certainly can. 6 L-U-C-A-S, S-J-O-S-T-R-O-M. 7 THE COURT: Thank you. 8 MR. SJOSTROM: Thank you, your Honor. 9 THE COURT: You may proceed with your 10 cross-examination. 11 MR. SJOSTROM: Sure. 12 CROSS-EXAMINATION 13 BY MR. SJOSTROM: 14 Q. Good morning, Mr. Alexander. 15 A. Good morning. 16 Q. Just a few short questions pertaining mostly to 17 the farmer side risk management. 18 A. Okay. 19 Q. So as a farmer, I'd just like to ask you some 20 questions. 21 Today is September 25th. You mentioned the 22 pricing was done the 23rd or before, correct? The 23 advanced pricing happens on the 23rd of each month or 24 before. 25 A. Yes. 26 Q. Thank you. 27 And so we'll just -- we'll just keep today as the 28 September 25th and not talk about the 23rd and get 5052 1 confused. 2 And just curious, if you were managing a budget as 3 a farmer, would it be easier if I told you the amount of 4 your paycheck in October today or would it be easier if I 5 told you that on the -- some of the first five days of 6 November? Which would be easier for you to manage your 7 budget? 8 A. I suspect it would be easier if I know. 9 Q. And -- thank you. And if -- 10 (Court Reporter clarification.) 11 THE WITNESS: It would be easier if you knew the 12 price. 13 BY MR. SJOSTROM: 14 Q. Today already? 15 A. Yes. 16 Q. Yes. Yes. Thank you. 17 And if you were going to be short on cash in 18 October because you needed to make a big purchase for 19 borrowing and for risk management purposes, would it be 20 better for today or for November, to know? 21 A. I suspect that if you knew today, that would be 22 best. But if you had a reasonable forecast, that would 23 probably be helpful as well. 24 Q. Thank you. 25 And then, finally, would it make sense in that 26 setting if -- if you as a -- you know, if you were paying 27 the co-op milk checks, if you paid some farmers today and 28 you paid other farmers -- or excuse me. 5053 1 If you told some farmers what they were going to 2 get paid today and told other farmers what they were going 3 to get paid in November for their October milk, do you 4 think that would be a significant advantage or 5 disadvantage for farms? And I know this doesn't happen, 6 but in that scenario, is that -- do you think that would 7 be a disadvantage and advantage to some farmers versus 8 others? 9 A. It's possible. 10 Q. Okay. 11 MR. SJOSTROM: That's all the questions I have. 12 Thank you. 13 THE COURT: Thank you. 14 Additional cross-examination of Mr. Alexander? 15 Would you state and spell your name, please. 16 DR. BOZIC: Good morning, your Honor. Marin Bozic 17 for Edge Dairy Farm Cooperative, M-A-R-I-N, B-O-Z-I-C. 18 THE COURT: Thank you. You may proceed with your 19 cross-examination. 20 CROSS-EXAMINATION 21 BY DR. BOZIC: 22 Q. Good morning, Craig. How are you today? 23 A. Good morning. 24 Q. Would removing advanced prices help reduce 25 depooling? If we didn't have advanced pricing, would that 26 help reduce depooling? 27 A. It's one of the things that could help. There's 28 other things that can help. That's part of the package of 5054 1 our proposals is to help get the pricing signals correct. 2 Q. Would removing advanced prices help or hurt 3 producer risk management? 4 A. I'm not an expert on risk management related to 5 hedging. I have hedged some commodities, but -- but as 6 far as farm price hedging, there's others that are better 7 at explaining that. 8 Q. Sure. 9 Does -- in your opinion, does the average-of make 10 it easier for fluid milk processors to engage in risk 11 management than the higher-of approach? 12 A. I know that some believe it is that are testifying 13 here. We also had some testimony that there's 14 complications in any case for Class I hedging, whether 15 it's the higher-of or average-of. 16 Q. What would be closer to truth, in your opinion? 17 A. I -- again, we don't have customers that require 18 it. I suspect there's inherent issues in both 19 circumstances. And I think there's probably some other 20 implications in both circumstances in terms of other 21 effects on the market. 22 Q. Would depooling in 20- -- that happened in 2020 23 and 2022, would it have happened even if we had the 24 higher-of? 25 A. I suspect that there would be some depooling if we 26 had. But the point of the matter, and I want to 27 underscore this, it's a complicated subject with many 28 factors that influence depooling decisions. The Class I 5055 1 mover is just one of them. Advanced pricing is just one 2 of them. And -- and there's pros and cons of every one of 3 those issues. We believe there's more pros to going back 4 to the higher-of in terms of assisting the uniform price 5 be reflected back to producers in a proper fashion. We 6 also believe, on balance, keeping advanced pricing is a 7 benefit to the industry that overcomes the issues in terms 8 of advanced pricing impacts to advance price 9 relationships. 10 Q. Are you familiar with the Edge's proposal, I 11 believe it's Number 17 or 18, that would return Class I 12 mover to higher-of but at the same time remove advanced 13 pricing? 14 A. Yes. 15 Q. So I understand that your cooperative opposes that 16 proposal, but if you could entertain a thought experiment. 17 Let's say that that is indeed a proposal that AMS 18 offers in their recommended decision, in their Final 19 Decision, and it is indeed approved referendum. So 20 let's -- if you could work with me off that scenario where 21 it becomes the state of the play. 22 How would your cooperative change its practices if 23 that were indeed to become the regulations under which you 24 must operate? 25 A. Well, just because that changes, doesn't mean that 26 our customers are going to say yeah, that's okay, we 27 don't, really care about the price until after the month 28 is over. 5056 1 Q. Right. 2 A. They are going to want to know. They are going to 3 want to know what their price is in advance. So somehow 4 Upstate would have to figure out a way to deal with that, 5 inherently increasing the risk that we would have in terms 6 of how to manage through that situation, in terms of how 7 far we announce prices, what we would have to do to deal 8 with that. And so, you know, we feel that that creates 9 more risk actually back to our cooperative owned by 10 producers in that circumstance. 11 MS. TAYLOR: Mr. Alexander, excuse me for 12 interrupting. Can you make sure you talk closer to the 13 mic? 14 THE WITNESS: Yeah. Sorry. 15 BY DR. BOZIC: 16 Q. So sticking with that thought experiment, if CME 17 were to introduce a new futures contract that settles on 18 the base Class I mover as announced by USDA, would it be 19 fair to say that one of the ways you could manage that 20 risk is by entering into a futures position that would 21 then allow you to offer a price to your buyers on or 22 before the 23rd of the prior month? 23 A. I can't say for sure just how that would 24 transpire, but I can tell you that it adds a new wrinkle 25 in terms of our strategy. It adds a new wrinkle that 26 creates potential for differences between us as a seller 27 of packaged milk products and other sellers. Again, that 28 creates additional risk in terms of what happens in the 5057 1 marketplace. It would be a pretty dramatic change from 2 historical standards in terms of how we have dealt with 3 prices under Federal Orders, even probably prior to 4 Federal Orders. 5 Q. In your testimony you listed several major 6 dramatic changes: In the '60s, introduction of FMW; in 7 the late '90s for BFP; and then the order consolidation 8 reform. So we've had dramatic changes in the past. We 9 mostly survived. 10 Times have changed. Would you agree that the 11 times today are quite different than 30 years ago? 12 A. Milk is still perishable off the farm. 13 Q. But the markets that we have available for risk 14 management are much more mature than 30 years ago. 15 Would you agree with that? 16 A. They are more mature, but doesn't necessarily 17 solve all the problems all the time. 18 And hedging carries cost. They are more costly 19 than -- I guess if you want to call it self-insurance, 20 there's definitely more cost attached to hedging. So 21 that's -- that's definitely a situation that somebody's 22 going to bear that cost. 23 Q. So I'm not an attorney, so I don't go always off 24 the script. I try to engage in intellectual exercise. 25 A. I know, it's hard. 26 Q. So let's say that the cost of hedging is to the 27 tune of let's say $0.07 a hundredweight. 28 What if USDA were at the same time to remove 5058 1 advanced pricing and increase the base Class I 2 differential by $0.07, would that be a way to address the 3 increased hedging costs? 4 A. It -- I mean, that's a way. I don't know that 5 that would solve the problem. Certainly there's plenty of 6 other problems. I don't know how that would work in terms 7 of actually recovering that -- that value. 8 And it doesn't necessarily solve the problem in 9 terms of customers that want to be assured that their 10 price basis is the same as others. In other words, they 11 don't want to lose out. And some of our conversations 12 internally have been that customers are most concerned 13 about their competitive situation in the market. 14 Q. But, Mr. Alexander, assuring that all customers 15 are guaranteed the same price, wouldn't that run contrary 16 to some principles of competitiveness, where they have to 17 compete with others for best price, for market share, for 18 customer loyalty, etcetera? 19 A. Well, I think you could argue that, you know, 20 deregulation of the Federal Milk Market Order system 21 creates competition. The question is, is it competition 22 that extracts a toll on dairy farmers. 23 Q. I would agree that it extracts a toll on dairy 24 farmers. And I hope that we can agree that what we are 25 discussing in the context of advanced pricing is not a 26 deregulation, rather than change in regulation of pricing. 27 Would you agree with that? 28 A. I think there's some concern as far as where we're 5059 1 going in terms of the various practices and various 2 proposals. But I'm okay with saying that in this case 3 it's limited, but I have -- I have concern. I mean, we -- 4 we -- we experimented with the average-of. We found 5 problems. Experimenting with something like removing 6 advanced pricing is disruptive to decades of past 7 practice. I'm not sure how it would work out. 8 Q. But -- okay. But, you know, National Milk is 9 offering other experiments in their package, including 10 periodically updating protein tests and butterfat -- 11 A. Those aren't experiments, Doctor. I have to 12 disagree. Those aren't experiments. Those were 13 fundamental bases of moving to milk component pricing was 14 using average composition. So I mean, those are things 15 that are being updated. They are not being radically 16 changed. 17 Q. You just said that removing advanced pricing would 18 add a wrinkle to what your cooperative would do. 19 But wouldn't it, at the same time, add some 20 bulldogs, or remove a wrinkle for dairy producers who are 21 doing risk management? 22 A. Again, I'm not an expert on how it -- it -- the 23 advantages and pros and cons in terms of removing it. I 24 think it -- like I say, I know it creates a problem, and 25 our co-op doesn't support it. 26 DR. BOZIC: Thank you for your answers. 27 THE WITNESS: Thank you. 28 DR. BOZIC: That's all. 5060 1 THE COURT: Thank you. 2 DR. CRYAN: Good morning, Craig. 3 THE WITNESS: Good morning, Roger. 4 THE COURT: Please state and spell your name. 5 DR. CRYAN: My name is Roger Cryan with the 6 American Farm Bureau Federation, R-O-G-E-R, C-R-Y-A-N. 7 Thank you. 8 THE COURT: Thank you. 9 CROSS-EXAMINATION 10 BY DR. CRYAN: 11 Q. Good morning. 12 A. Good morning. 13 Q. You talked about -- you -- in response to, I think 14 a question from Dr. Bozic, you said that you have 15 concluded that the benefits of advanced pricing outweigh 16 the disadvantages. 17 Did you -- could you elaborate what are the 18 benefits of advanced pricing of Class I? 19 A. Well, we're likely to have -- I didn't necessarily 20 intend on testifying today about advantaged pricing. 21 Q. Right. 22 A. So it's very likely that we're going to have some 23 further testimony from some others about that. 24 But I know for us, it allows for pricing to be 25 reflected to our customers, and you can get a sense as a 26 supplier as far as directionally what prices -- how prices 27 are moving. Not having advanced prices creates a slew of 28 issues starting with, well, what price do you announce, 5061 1 how you come up with it, how do you get your customer to 2 support it. 3 And -- and then, depending on what happens, after 4 the fact, can you recover any differences that would have 5 happened if you had had pricing in advance, or is there 6 any true-up, so to speak in terms of the difference, 7 between the actual and what you had forecast for that 8 customer. That can cut across a whole range of issues and 9 different customers in terms of how you do that. 10 It's not clear to me that the -- that that's a 11 panacea in terms of being able to implement some of those 12 things without additional risk to us as a producer-owned 13 processor of Class I products. 14 Q. So if I understood right, you were talking 15 primarily about timing and the ability to price for 16 customers, and that that gives you the ability to price 17 for customers just before the month of -- 18 A. Correct. 19 Q. -- but also in response to Dr. Bozic, you talked 20 about the wider range of potential opportunities the 21 Class I futures contract would -- would create. And then 22 you began to -- you had a couple thoughts on that. 23 But could you elaborate on that? 24 A. Which part? 25 Q. The -- the potential -- you talked about the 26 potential for pricing for customers based on the existence 27 of a Class I futures contract, if such a contract existed. 28 Is that -- that would address the kind of issues 5062 1 you are talking about and let you go beyond that? As I 2 understood it from what you were saying, it would go 3 beyond that to provide longer-term fixed pricing, to do 4 more than just knowing what the price is on the 23rd of 5 the month before. 6 A. Well, first of all, the fact that we don't do it, 7 we haven't had customers that want it, kind of speaks to 8 why are we -- why would we -- why are we going down this 9 path. 10 But -- but, you know, beyond that, I think that 11 it's not clear to me what those opportunities would be, I 12 guess, and would really depend on, you know, kind of where 13 we are with customers in terms of how that would impact 14 them, and whether they would subscribe to it, how we would 15 execute it. And so I think it's a -- it's an open 16 question. 17 And the advanced pricing has worked literally for 18 decades since the infancy of probably commercial fluid 19 milk pricing, even before Federal Orders. So it's not 20 clear to me just exactly how that new opportunity, what 21 would be the demand for it, and how would it be used. 22 The more uncertainty there is around pricing -- I 23 don't think our customers like uncertainty. They -- they 24 like knowing that the price basis is going to be pretty 25 consistent amongst their competitors. And now going to a 26 new basis, they are going to say, well, yeah, maybe that 27 looks good, but, gee, next month when somebody is offering 28 a low price, they are going to say, well, what's their 5063 1 basis for their -- their price? 2 So it's very difficult to know how that would work 3 out. It would be very difficult, also, to -- potentially 4 to administer. 5 Q. Is part of that -- that answer that folks are -- 6 they haven't had opportunities to do the longer-term 7 pricing, so they are not used to that, and the long -- the 8 decades of practice just means folks are used to the 9 current advanced pricing? 10 A. Well, some of those buyers are pretty used to 11 pricing in other products, in other dairy products. Some 12 may be more interested than others; some may depend on 13 whether it's their own label or a branded label. But, 14 again, I can only speak to, you know, at least our 15 experience is, is that there's been satisfaction with how 16 prices move in terms of Class I. 17 DR. CRYAN: Okay. Thanks very much. 18 THE WITNESS: Thank you. 19 CROSS-EXAMINATION 20 BY MR. MILTNER: 21 Q. Good morning. My name is Ryan Miltner. I 22 represent Select Milk Producers. It's R-Y-A-N, 23 M-I-L-T-N-E-R. 24 Good morning, Mr. Alexander. 25 A. Good morning. 26 Q. I wanted to ask you a few questions based on 27 USDA's discussion during Order Reform about setting the 28 Class I mover. And there were, as you recall, probably 5064 1 several different issues they were trying to balance. But 2 they made a few statements, and I wanted to ask you about 3 Upstate Niagara's experience and your thoughts on those 4 points, if I could. 5 So in 1999, USDA wrote that there were several 6 conflicting issues that they have to balance when setting 7 the Class I mover. The first is, as they stated, the 8 retail demand for Class I milk is independent of the 9 demand for manufactured dairy products. 10 Do you believe that's still the case today? 11 A. That tends to be the case. 12 Q. The second is, the raw material used in both 13 Class I products and manufactured dairy products is the 14 same and, therefore, the separate uses must compete for 15 the given supply of milk. 16 Do you believe that's still the case? 17 A. Yes. 18 Q. Third, the elasticity of demand for the various 19 dairy products is significantly different creating 20 different consumer responses to the changing prices for 21 various dairy products. 22 Do you believe that is still the case? 23 A. Yes. 24 Q. Now, in terms of just generally having a Class I 25 price that is higher than the manufacturing classes, USDA 26 wrote that the higher price also allows Class I uses of 27 milk to compete for the raw milk supply against 28 manufactured dairy products. 5065 1 Do you believe that is still an important 2 objective of the pricing structure? 3 A. Yes. 4 Q. Now, further in its discussion -- and, again, they 5 are balancing lots of different options, including of a 6 higher-of and including the timing of price announcements 7 in this discussion -- but USDA writes that overvaluing 8 Class I milk -- excuse me -- "undervaluing Class I milk is 9 a particular problem since it reduces producers' pay 10 prices at a time when producers should be receiving a 11 positive price signal." 12 Do you agree with that statement as well? 13 A. Absolutely. 14 Q. Now, if we look at just this narrow issue that's 15 part of Proposal 13 about moving to a higher-of versus an 16 average, do you believe that one of those two options is 17 better at giving producers the price signal that USDA 18 found was important? 19 A. Yes. 20 Q. Which one? 21 A. That's the higher-of. 22 Q. And can you explain just briefly why you think 23 that's the case? 24 A. Well, it's a clear signal that it has a higher 25 value than the alternative manufacturing class prices. So 26 it's a clear signal, both to producers and then also to 27 others in the marketplace, in terms of the relative value, 28 so that Class I processors can compete for milk and 5066 1 producers can get the signal to supply it. 2 Q. And then I think this is my last question. 3 USDA wrote, again, further in that 1999 Order 4 Reform decision: "When the effective Class I differential 5 is negative, it places fluid milk processors and dairy 6 farmers or cooperatives who service the Class I market at 7 a competitive disadvantage relative to those who service 8 the manufacturing milk market." 9 Is that the experience of Upstate Niagara? 10 A. Yes. 11 Q. Do you believe that moving to the higher-of would 12 help to minimize that type of occurrence? 13 A. It would help. 14 MR. MILTNER: Thank you. I don't have any other 15 questions. 16 THE COURT: Is there any further cross-examination 17 of Mr. Alexander? 18 MS. TAYLOR: AMS has some questions. 19 CROSS-EXAMINATION 20 BY MS. TAYLOR: 21 Q. Good morning. 22 A. Good morning. 23 Q. Thanks for testifying today. 24 A. Sure thing. It's been a while coming. 25 Q. I want to turn to page 8 of your statement. Make 26 sure I don't spill my coffee. 27 Under the header there you have "negative impacts 28 are likely to reoccur." 5067 1 And so your first paragraph you calculate the 2 difference when -- the number of times when the difference 3 between III and IV exceeded $1.48? 4 A. Correct. 5 Q. But in the second paragraph you talk specifically 6 about when IV exceeds III. 7 A. Yes. 8 Q. I'm just wondering if you could illuminate why you 9 pointed that particular situation out. Why is that 10 important? 11 A. I chose it because there's an assumption by some 12 that Class III is always the driver of these markets, and 13 at times it has been. At times, for example, when we had 14 the support program in effect in the early 2000s, there 15 was surplus product nonfat, and that tended to depress the 16 market. 17 But more recently, as we have become more 18 exporters of nonfat dry milk, and, you know, we see that 19 there's changing capacities in terms of cheese production, 20 it's very possible that Class IV -- and, in fact, in the 21 past year and a half, we have seen Class IV actually 22 become more often a driver of what is the higher price, 23 manufacturing price. 24 The other thing I want to mention here, and 25 something I didn't put in my testimony, but it's kind of a 26 particular aspect of the Class III skim formula. And 27 interestingly, while one product, nonfat dry milk prices, 28 impact the Class IV skim price, multiple ingredients 5068 1 impact the Class III skim price. So prices changing for 2 cheese, prices changing for whey, and prices changing for 3 butter. 4 So holding cheese prices and whey prices constant, 5 if you increase the butter price, you reduce the skim 6 value. So it's kind of an unstable price just because of 7 how it moves. And so having the higher-of and having that 8 other aspect of Class IV kind of providing a little bit of 9 a balance to that, we think is another aspect that makes 10 higher-of a better idea. 11 Q. Okay. On the bottom part of the page under the 12 next header, "the benefits of the average mover aren't 13 worth the cost to dairy markets," you talk about not -- 14 and I know you have had some other questions, so not by 15 first-person experience, but you have talked to people 16 that have said that your customers aren't looking to do 17 risk management. 18 And was it your impression that the average-of 19 mover was meant for processors to be able to do risk 20 management or for the processors' customers to do risk 21 management? 22 A. That's actually a good question that I'm not sure 23 of the answer on that, whether it was for customers or for 24 the processors themselves, whether they were faced with 25 situations where that made it advantageous to them to 26 hedge or whether it was their customers demanding it, so I 27 don't know the answer because we don't engage in it. 28 So that's a good question, but I don't know the 5069 1 answer. 2 Q. Okay. On the bottom paragraph there the second 3 part of the first sentence reads, "We would question the 4 disruption of market signals and cost to producers by use 5 of the average-of mover." 6 And you have talked about those disruptions a lot. 7 But I was wondering if you could speak to how you -- under 8 orderly conditions, how you would expect market signals to 9 be transmitted? 10 A. Under? 11 Q. Orderly marketing conditions. You've talked about 12 the disorder you have seen from -- in your opinion, from 13 moving to the average-of. But could you talk some about, 14 well, what is orderly marketing and proper price -- what 15 you would consider proper price signals to producers? 16 A. Well, proper pricing means that what goes into the 17 pool reflects market values as -- you know, as we have 18 kind of operated with in terms of classified pricing. 19 So -- and because -- because we have operated with Class I 20 being the highest priority or highest price, then we 21 believe that orderly would mean that that price would be 22 reflected and go into the pool. That would then enhance 23 the uniform price paid back to producers. 24 So we feel that would be an orderly circumstance 25 just in terms of price transmission from -- from basically 26 the market back to producers. It would also be proper in 27 terms of pricing for Class I processors in terms of what 28 they do in terms of communicating the price forward. 5070 1 It also means that -- that -- you -- we talked 2 about some of the aspects of depooling, which is a 3 complicated subject and really kind of a difficult one to 4 necessarily solve all of the issues and incentives for 5 depooling. But obviously adding money into the pool when 6 it makes sense, which is with the higher-of, helps the 7 uniform price be where it is to help reduce the depooling. 8 Doesn't eliminate it, but it would help reduce it, so we 9 feel that's orderly. 10 When you have depooling, then you have the 11 situation where you have multiple prices out in the 12 market. You have the possibility that, in order to -- for 13 a Class I processor to get milk, they might not be 14 competitive or they might not -- they might have to pay 15 higher costs in order to gather that milk in terms of 16 over-order premiums just to get a supply, if they could 17 get it. 18 So those are kind of a few things that -- that 19 normally order regulations try to -- you know, try to 20 incentivize. There's only, in this hearing anyway, levers 21 related to pricing to kind of send that signal to operate 22 correctly. There's other issues that have been brought up 23 regarding pooling requirements, but those aren't the 24 subject of this hearing. 25 Q. Speaking of kind of pooling requirements, in the 26 Northeast, it's been discussed at this hearing a number of 27 times how things are different up there, different type of 28 pooling standards that keep milk on the order. 5071 1 So can you talk about -- and I don't know if I 2 read -- gathered from your statement, in particular, the 3 experience in the Northeast during COVID when the price 4 signals were what they were, as you would call them 5 disorderly, and how that impacted things in the Northeast 6 where it was a little more difficult to get on and off the 7 pool. 8 A. There was less depooling, so that the way those 9 provisions work to create longer-term pooling. But 10 decisions can be made in certain time periods where milk 11 can be depooled. I know that June of 2020, I think, was 12 one of those months when significant milk was depooled. 13 So do those provisions help? They help, but not 14 necessarily in the long run. And we talked about 15 depooling being one aspect of the problem with the 16 higher-of. It's not the only one. 17 So while that provision helps in the Northeast for 18 now, you know, I think that it's reasonable to say that 19 that's -- that's been a help in terms of the depooling 20 issue. 21 Q. It helped, but you still saw some depooling -- 22 people still made the decision not to pool milk -- 23 A. Yes. 24 Q. -- even with those stricter standards? 25 A. Yeah. And I think, you know, back to the aspect 26 of our package of proposals, higher-of, component issue, 27 change in the elimination of the barrels, the 28 Make Allowance, the Class I price service, all those 5072 1 things together will change incentives on pooling, and we 2 think for the better. 3 Q. Okay. Thanks. 4 This is my last question. And I know your 5 statement kind of takes a guess at perhaps how much milk 6 might be using risk management tools, so you can't 7 necessarily speak to actual experience. But since Upstate 8 doesn't use it, is there -- is there, like, a threshold 9 maybe at one point you would consider using risk 10 management or that's just not on the cards for the co-op? 11 A. Well, to some degree it's an aspect of a 12 competitive situation. So -- so I -- I can't really speak 13 to at what point we would say, hey, you know, we're going 14 to do it. I think that, you know, if we saw a number of 15 customers that -- that started to say something about it, 16 I mean, the first thing we would do -- and it doesn't take 17 a change in the mover to necessarily start to have that 18 conversation. As Ms. Dorland talked about, talked to our 19 hedging person and -- and asked them, is there some 20 opportunities for creating an over-the-counter swap or 21 something where we could design something that would 22 address whatever hedging goal a customer might have. So 23 that would be a possibility. 24 But I think, you know, one of the concerns we 25 would have is that it opens the door of an already pretty 26 open door in a competitive market to more factors to worry 27 about in terms of how to price milk. 28 Q. Okay. I always think of one more, but I went back 5073 1 to my first page. 2 For Upstate, you talked about you have 250 farmer 3 members. Can you talk a little bit about the size of 4 those farms when it comes to the Small Business threshold? 5 And if you are not sure what that is, I can repeat it 6 again. 7 A. Yeah. I was provided with the percentage being 8 something like 85%. 9 Q. Are small? 10 A. Yeah, that's looking at milk revenue and not at 11 other sources of revenue on those farms. 12 Q. Thank you. 13 And does Upstate offer any risk management tools 14 to its producers? 15 A. We used to. I don't think we do very much at this 16 point. I think they have addressed the issues in their 17 own private ways, if at all. 18 Q. Okay. 19 MS. TAYLOR: I think that's it from AMS. Thank 20 you so much. 21 THE WITNESS: Thank you. 22 THE COURT: I knew that Erin Taylor's questions 23 got everybody thinking, and I see that there are some more 24 questions from you others. And I will invite that, and 25 then I'll ask again, Ms. Taylor, to follow up if she has 26 anything before we have redirect. 27 So who would like to be the first again to 28 cross-examine Mr. Alexander? 5074 1 MR. LAMERS: Mark Lamers, Lamers Dairy, Appleton, 2 Wisconsin. That's L-A-M-E-R-S. 3 CROSS-EXAMINATION 4 BY MR. LAMERS: 5 Q. Good morning, Mr. Alexander. 6 A. Good morning. 7 Q. There's a lot of talk about using the Class I 8 mover along with the Class I differentials as to help 9 prevent depooling. 10 And would you agree with me that the original 11 intent of the Marketing Agreement Act is to provide 12 uniform blend price to producers? 13 A. Tries to support that as a goal. 14 Q. Okay. And in the months of depooling, and I'm 15 particularly looking at November of 2020 in Federal 16 Order 30, there was 20 billion -- sorry -- 2 billion 17 pounds of milk depooled from the order, which equated to 18 almost $67 million withheld from the pool if all handlers 19 were required to pay into the pool. 20 A. Okay. 21 Q. Okay. So for a Class I handler who has to pay 22 that minimum -- that minimum blend price, they have to pay 23 money into the pool, competing against manufacturers for 24 that supply of milk. They are using premiums to help 25 attract that milk to fluid use. 26 Would that -- would they be at a disadvantage for 27 attracting that milk, knowing they have to pay into the 28 Federal Order pooling system when manufacturers are not 5075 1 required to do that? 2 A. I think I have already testified that that can be 3 a problem. Depooling can create the issue of different 4 prices, and why USDA tends to support ways to reduce that, 5 if not eliminate it. But they only have certain tools 6 that -- to be able to address that at this hearing. 7 Q. Should using the higher-of, which increases the 8 Class I differential, that mover, adding more money into 9 the pool, does that go beyond potentially what the 10 original intent of the Act was? When you talk about 11 highest use value, in the months where Class III prices 12 are higher, does it go against that? 13 A. I think it actually supports it by addressing the 14 issue we have talked about in terms of making sure that 15 Class I value has the highest value in the market. 16 Q. But if the months of depooling, isn't the cheese 17 market value higher based on the cost net, with price-net 18 manufactured milk? 19 A. At times it can be, but the higher-of helps to 20 drive that Class I price higher than the cheese value, if 21 it's the higher-of. 22 Q. In the months of depooling, shouldn't that value 23 of that depooled milk be returned to all producers? 24 A. I guess that's an equity issue that is not really 25 the subject at this hearing. I sympathize with that 26 issue, but it's not a proposal before this -- you know, 27 this hearing, and has been handled on a regional basis in 28 terms of pooling provisions. 5076 1 Q. So would you -- by stating that, would you think 2 that maybe that should be left up to the Market 3 Administrator in each order to look at those pooling 4 provisions? 5 A. They have some degree of latitude in terms of 6 requirements, but it's also been through hearings in terms 7 of, you know, significant changes. 8 MR. LAMERS: Okay. Thank you. No other 9 questions. Thanks. 10 THE WITNESS: Thank you. 11 THE COURT: Mr. Lamers, how to you spell Mark? 12 MR. LAMERS: M-A-R-K. 13 THE COURT: Thank you. 14 Who else? Oh, I thought there would be more. 15 Ms. Taylor, any follow-up before redirect? 16 MS. TAYLOR: No. 17 THE COURT: Redirect. 18 MS. HANCOCK: Thank you, Your Honor. 19 REDIRECT EXAMINATION 20 BY MS. HANCOCK: 21 Q. Mr. Alexander, can you anticipate any time in the 22 future where Class I supplies might be insufficient to 23 supply the market? 24 A. Well, I think there's certainly conditions that 25 would tend to change the tone and the supply/demand 26 balance, and new plants can create that kind of a 27 scenario. 28 Q. Do you know if in your area if there are any new 5077 1 plants being contemplated that would serve the Class I 2 market? 3 A. We have multiple plants either currently in 4 construction or anticipated to be in construction in the 5 near future. There's at least four that are -- that are 6 that are in play. 7 One is HP Hood in Batavia. There's been an 8 announced expansion there. That plant is actually 9 relatively new to the market already. 10 There's also the Great Lakes expansion in the 11 Southern tier in Western New York. They are doubling the 12 size of that plant. 13 The -- there's a new plant that's being 14 anticipated to be built in Rochester, New York. That's 15 Fairlife. And so that's a sizeable new plant. 16 And then there's a smaller plant expansion. 17 That's Wells Dairy, Dunkirk. It's ice cream. 18 Q. What was the last one? Say it -- 19 A. That's Wells Dairy. 20 Q. Okay. And that's just the ones that you already 21 know of that are either under construction or to start 22 imminently? 23 A. Correct. 24 Q. And so that doesn't take into account anybody else 25 in -- in this -- and this is all just within your Federal 26 Order 1 market area? 27 A. That's all within Western New York. 28 Q. Okay. And then you also talked about -- I think 5078 1 when you were talking with Ms. Vulin about -- she was 2 asking you about Class I supply and whether there were any 3 issues in getting milk, and I think you had given an 4 answer about, well, it depends on where and it depends on 5 when. 6 I'm just wondering if you could elaborate on when 7 those supply challenges occur with Class I. 8 A. Well, a classic one, and it's probably even more 9 disruptive moving milk into the Southeast, but it's 10 basically the first week of school opening, where the 11 pipeline is dramatically tightened and milk has to move in 12 anticipation of all the school milk that's going to be 13 consumed, so that tends to have a significant draw on the 14 market. So that -- that needs to be available at that 15 point in time. 16 That's not the only time. There's certainly 17 plenty of circumstances -- and we know these real well in 18 Western New York where there's snow. Even just the 19 forecast that there's going to be more than six inches, 20 and we get an impact at the supermarket level in terms of 21 milk orders. 22 And certainly some of the big impacts that we had 23 during COVID and some of those situations where it really 24 shortened up our supply availability dramatically in terms 25 of, you know, how much milk we could move into a Class I 26 plant and have it processed. 27 The situation in terms of Christmas is the other 28 way around, where you basically lose those sales, well, 5079 1 you know, customers are doing other things, and plants 2 tend to shut down, so we basically have a lot of milk back 3 in our lap. 4 Same situation when we talked about schools 5 opening, schools closing. Now all of a sudden there's a 6 lot of milk that now has to be processed. 7 So you have to be -- you have to have ways in 8 which to balance that milk supply, both going up and going 9 down. So that's -- that's kind of just a fact of life. 10 In the Northeast, we have a fair bit of 11 manufacturing, so there's availability of that 12 manufacturing supply to some extent. But even there 13 sometimes that supply is locked up in contract, so it's 14 not necessarily always available. 15 However, when you look at some other markets like 16 the Southeast, they are particularly tenuous in terms of 17 their availability to supply. So those supply conditions 18 can really change pretty dramatically. 19 Q. Okay. 20 MS. HANCOCK: Thank you. 21 I have no further questions, Your Honor. We would 22 move at this time for admission of Exhibit 245. 23 THE COURT: Let me recognize the gentleman on the 24 back row. Come to the mic and tell me why you raised your 25 hand. 26 DR. BOZIC: Further cross. 27 THE COURT: I'll allow it. Please state your 28 name. 5080 1 DR. BOZIC: Marin Bozic, Edge Dairy Farm 2 Cooperative. Further cross-examination prompted by 3 redirect? 4 THE COURT: You may. 5 RECROSS-EXAMINATION 6 BY DR. BOZIC: 7 Q. Mr. Alexander, you mentioned, I believe you said 8 four new fluid milk plants in the Northeast? 9 A. I mentioned four plants. Not all of them are 10 fluid. One is actually a cheese plant, and the other is 11 an ice cream plant. 12 Q. So two new fluid plants. 13 A. Yes. 14 Q. Are they being -- 15 A. They are beverage, you know, fluid beverages. 16 Q. Are they being built because of an increase in 17 fluid milk demand in the Northeast? 18 A. I suspect that there's been some demand in 19 increase, yes. 20 Q. An aggregate increase in demand or demand -- or 21 increase in demand for a particular type of milk beverage 22 or milk products, fluid milk products that they would be 23 producing? 24 A. I think that there would be a particular demand. 25 Q. Would it be rational to expect that if there is no 26 increase in the aggregate demand, an increase in demand 27 for some products, that there would be a reduction in 28 demand for other products? For example, we've seen the 5081 1 increase in sales of ESL milk, while at the same time we 2 have seen many, many closures of HTST plants over the last 3 few years. 4 A. Is that a question? 5 Q. Yes. Albeit a long one. 6 Would it be rational to assume that if there's no 7 increase in aggregate demand, but there is an increase in 8 demand for some products, that that would mean a reduction 9 in demand for other products? 10 A. I guess I haven't done a study on that, but I 11 guess that's a possible conclusion to come to. 12 Q. If there is no increase in aggregate demand, and 13 if there are new plants being erected to supply, 14 presumably ESL, not HTST, would that create a risk for 15 your business model given that your buyers are primarily 16 HTST business? 17 A. I -- first of all, I don't know that that's the 18 case with them being my customer. 19 And, secondly, I don't know that that's 20 necessarily a risk. 21 Q. Do you supply any ESL milk now? 22 A. No. 23 DR. BOZIC: No further questions. 24 THE COURT: Thank you. 25 Does that prompt any other questions, either from 26 Ms. Taylor or on redirect? 27 No. All right. 28 You have moved the admission into evidence of 5082 1 Exhibit 245. 2 Oh, did you -- 3 MS. VULIN: I just wanted to also move admission 4 of Exhibit 246 at this point. 5 THE COURT: All right. Very good. Thank you. 6 So let me ask first. Is there any objection to 7 the admission into evidence of Exhibit 245? 8 There is none. Exhibit 245 is admitted into 9 evidence. 10 (Exhibit Number 245 was received into 11 evidence.) 12 THE COURT: Is there any objection to the 13 admission into evidence of Exhibit 246? 14 There is none. Exhibit 246 is admitted into 15 evidence. 16 (Exhibit Number 246 was received into 17 evidence.) 18 THE COURT: All right. Let me see where we are. 19 First of all, can this witness step down? 20 Secondly, can Mr. Alexander be excused or might he 21 be recalled? 22 MS. HANCOCK: Your Honor, we have not been making 23 that delineation, but I believe that he'll be available at 24 least for a period of time this week. 25 THE COURT: Very good. And let me see. 26 It's approximately 10:33. I think we had a break 27 recently, so we can just go on to the next witness. 28 Who would that be? 5083 1 MS. HANCOCK: Chris Hoeger. 2 THE COURT: Say that again? 3 MS. HANCOCK: Chris Hoeger. I would spell it, but 4 he will in just a moment. 5 THE COURT: Yes. Thank you. 6 MS. HANCOCK: I don't know if you're getting 7 copies of the exhibits. Do you want copies? 8 THE COURT: I have no idea what I have. I don't 9 think I have them all. If you have an extra, I would be 10 delighted. 11 Mr. Hoeger, would you state and spell your name, 12 please? 13 THE WITNESS: Chris, C-H-R-I-S, Hoeger, 14 H-O-E-G-E-R. 15 THE COURT: H-O-E-G-E-R? 16 THE WITNESS: Correct. 17 THE COURT: And have you testified previously in 18 this proceeding? 19 THE WITNESS: Yes, I have. 20 THE COURT: You remain sworn. 21 THE WITNESS: Very good. 22 THE COURT: You may proceed. 23 MS. HANCOCK: Thank you. 24 CHRIS HOEGER, 25 Having been previously sworn, was examined 26 and testified as follows: 27 DIRECT EXAMINATION 28 BY MS. HANCOCK: 5084 1 Q. Mr. Hoeger, good morning. 2 Did you prepare Exhibit NMPF-33 in support of your 3 testimony today? 4 A. Yes. 5 MS. HANCOCK: Your Honor, I believe we are at 6 Exhibit 247, if we could mark this exhibit. 7 THE COURT: Yes. This shall be marked as 8 Exhibit 247. 9 (Exhibit Number 247 was marked for 10 identification.) 11 MS. HANCOCK: Thank you. 12 BY MS. HANCOCK: 13 Q. Mr. Hoeger, proceed with your testimony, please. 14 A. Yes. 15 Prairie Farms supports National Milk Producers 16 (NMPF) proposal for restoring the higher-of for 17 establishing Class I mover from original Federal Order 18 Reform. 19 I'm going to skip the next two paragraphs because 20 I have already read it in my previous testimony. 21 PF was part of the consensus of organizations that 22 originally supported moving to the average-of the 23 Class III and Class IV skim mover to set the Class I mover 24 when it was presented by NMPF and IDFA in 2018. We were 25 supportive of the move as we felt that we might see an 26 increase in hedging activity from our customer base, 27 whereas prior to the change to the average-of mover, our 28 hedging on Class I products was non-existent. We felt 5085 1 that our customers would be more active on hedging after 2 changing to the new formula for price discovery. 3 Since 2018, we have seen many challenges with milk 4 pricing for the producer community, not the least of which 5 is the unexpected creation of disorderly marketing, 6 especially with extreme price volatility. We have found 7 several issues that have negatively affected the producer 8 community, as well as milk processors. 9 Since going to the average-of price mover, several 10 problems have become evident with this price mechanism as 11 compared to the higher-of mover previously used: 12 1: Revenue to producers was significantly reduced 13 without recovery. PF members were severely impacted due 14 to the price volatility due to increased depooling of milk 15 in the various multiple component pricing (MCP) orders, 16 where they have farms and plants. 17 2: Class I prices meant to incentivize movement 18 to fluid processors should have created more orderly 19 marketing, instead they actually created marketing that 20 is -- that is more disorderly. 21 Number 1, revenue to producers was significantly 22 reduced without recovery. 23 Since the changing to the average-of in May of 24 2019, there have been more volatility in producer pricing 25 due to additional depooling and creating disparity of 26 producer pay prices. The incorporation of the average-of 27 in the Class I formula has led to significant increase in 28 depooling between the classes of milk. 5086 1 Farms that are suppliers to a pool distributing 2 plant do not have the ability to depool their milk. With 3 the average-of formula, producers will fall into two 4 groups, the haves and the have-nots, as there is always 5 some depooling of either Class III or Class IV. 6 The average-of analysis shows that there is 7 asymmetrical risk when the difference between Class III 8 and Class IV advanced skim pricing factors is greater than 9 $1.48 per hundredweight, as per Peter Vitaliano's 10 testimony. 11 This asymmetric risk increases the probability of 12 depooling, which negatively affects producers supplying to 13 pool distributing plants. Pool distributing plants do not 14 have the ability to depool, so these plants are required 15 to take the pool price, while others can be can depool and 16 take advantage of the price inversions. 17 This occurred in the fall of 2019, prior to the 18 2020 complications caused by COVID issues that were 19 encountered in the later part of 2020 and early 2021. 20 Those who could depool were able to avoid the price 21 inversion, while others had to stay in the pool and absorb 22 the impact of the increased Class III prices. 23 USDA recognized this became an issue and attempted 24 to remedy the situation through Pandemic Market Volatility 25 Assistance Program, better known as PMVAP. But those 26 payments did not occur for some time after when producers 27 had to endure the pricing problem, and those were unique 28 circumstances that may not allow the USDA to provide such 5087 1 assistance again in the future should an increase in 2 prices occur again. 3 PF dairy producers are appreciative of the support 4 from the USDA through the PMVAP payments made in 2022 and 5 2023 for the changes to the cheese prices in part caused 6 by the USDA's Food Box Program. However, those payments 7 did not fully compensate all producers or as timely as it 8 would have been under the higher-of Class I pricing 9 formula. 10 Dairy producers want a pricing system that gives 11 them market indicators at the time, and not payments 12 received later from the taxpayers. In fact, many dairies 13 producers were no longer in business when the PMVAP 14 payments were distributed. The higher-of would compensate 15 the producers at the time the milk is sold and supports 16 moving in an over -- milk in an oversupply to its highest 17 value use. 18 Disorderly marketing due to higher depooling. 19 Another issue generated from the average-of versus 20 the higher-of is higher instances of depooling. This 21 results when one of the manufacturing classes is higher 22 than the average pool price. In 2022, 2023, PF 23 experienced a situation where some of the closest milk 24 supply to a Class I market became unavailable unless it 25 received a premium due to the milk being utilized for a 26 higher value, more distant market, providing a higher 27 return. As such, that closer milk was not part of the 28 pool because it was shipped to other locations outside of 5088 1 the pool. 2 When this situation occurs, it forced PF to secure 3 milk supplies from further markets due to the financial 4 inequities between classes. PF tried to secure milk to 5 supply its plants that would have been less than 150 miles 6 from the supply to the plants, but it was asked to pay a 7 premium over the over-order premium to secure the milk and 8 move this milk. 9 The supplier did not want the consequences of this 10 milk being pooled and opted to sell the milk to a farther 11 away market to secure the higher premium price and avoid 12 the pool. This occurred when the spread between Class III 13 and Class IV were larger than $1.48 per hundredweight and 14 supply conditions in other markets. 15 These inefficiencies of swapping markets and 16 driving up prices because of the desire to depool and 17 capture higher market prices in other areas resulted in 18 disorderly market conditions. 19 Due to this disorderly marketing, PF saw higher 20 costs caused by moving milk around, which increased the 21 food miles cost and added more environmental concerns from 22 the transporting of milk a farther distance. 23 As shown in the chart below, since switching to 24 the average-of, producer price differential has become 25 larger and tended to be more negative more frequently when 26 compared to the higher-of. 27 Data from Federal Milk Marketing Order (FMMO 32) 28 during the six-year period prior to May 2019 revealed 5089 1 27.36 of the months were associated with a negative PPD, 2 averaging a negative $0.34 per hundredweight, and the 3 four-year period since May 2019, shows a negative PPD in 4 37.36% of the months, with an average of a negative $2.85 5 per hundredweight. 6 PF supplies many types of large and small 7 customers within retail, convenience store, QSR, and 8 foodservice outlets. PF was supportive of the average-of 9 price mover as we believed it would support our customers' 10 ability to hedge more Class I product. This has not been 11 the case. 12 Under the higher-of price mover, the only real 13 fixed price contracts were done by schools. PF absorbed 14 the risk of these fixed price arrangements, as it is a 15 nominal part, or a small part, of our overall business. 16 Since going to the average-of, we have not seen an 17 increase in Class I fixed price sales agreements. Our 18 fixed price sales agreements continue to be requested and 19 utilized by the same customers prior to the change. If 20 anything, we have more customers interested in fixed price 21 agreements for Class II products. 22 PF has seen a decrease in the producer forward 23 contracting with our members engaged in hedging risk 24 management. Negative PPDs is a negative basis that dairy 25 producers are unable to hedge or mitigate the risk. As 26 shown below, the two farms that have hedged for many years 27 as a way to manage their margins, are an example of what 28 dairy producers received for a revenue stream. 5090 1 Table 2 shows the various negative basis. The 2 negative basis makes managing milk price risk considerably 3 more difficult for dairy producers. The result is that 4 dairy producers are not engaging in risk management tools 5 like they did previously. 6 In summary, dairy producers have used risk 7 management tools for decades to support their business and 8 manage their margins. Basically, dairy producers have 9 made sacrifices by taking on additional risk themselves 10 and giving up a higher Class I price under the assumption 11 processors would develop their own risk management tools 12 for Class I. But processors have not done so. PF has not 13 seen an increase in customers requesting Class I fixed 14 price agreements after changing to the average-of Class I 15 formula. 16 We need to return to the higher-of so dairy 17 producers can have a reliable tool in their toolbox to 18 manage their business without the need for inviting 19 additional risk. 20 PF expresses its appreciation to the Secretary of 21 Ag and the Dairy Division for holding this hearing. We 22 strongly recommend the Secretary to adopt National Milk's 23 (NMPF's) Proposal 13, return to the higher-of for the 24 calculation of the Class I skim mover. This will promote 25 orderly marketing of milk and ensure an adequate supply of 26 milk for Class I operators to serve their markets. 27 Respectfully submitted, Chris Hoeger. 28 MS. HANCOCK: Thank you, Mr. Hoeger. 5091 1 Your Honor, we would make him available for 2 cross-examination at this time. 3 CROSS-EXAMINATION 4 BY MS. VULIN: 5 Q. Good morning, Mr. Hoeger. How are you? 6 A. Good morning. And you? 7 Q. Good. Thank you. 8 Ashley Vulin with the Milk Innovation Group. 9 You are here with Prairie Farms, correct? 10 A. Correct. 11 Q. And how many Class I plants does Prairie Farms 12 have? 13 A. 30, including our joint venture plants, which we 14 are the managing partner of. 15 Q. 3-0? 16 A. 3-0. 17 Q. And where are these plants located? 18 A. As stated, I guess that's the part of my testimony 19 I didn't read, but it's from the Midwestern states, from 20 the Canadian border, all the way down to the Gulf of 21 Mexico, comprises in nine different states -- no, excuse 22 me, more than that. 16 Midwestern states. 23 Q. And are all of them located in Federal Milk 24 Marketing Orders? 25 A. No, not all of them. One of them is in a state 26 order up in North Dakota. 27 Q. And are the remaining 29 all fully regulated? 28 A. Yes. 5092 1 Q. None are partially regulated? 2 A. No. They are all fully regulated. 3 Q. And which orders are they pooled under? 4 A. We have six different Federal Orders that they are 5 pooled under. Federal Order -- start at the bottom -- 30, 6 32, 33, 5, 6 -- no, excuse me -- 5, 7, and 126. 7 Q. I usually need the map. 8 A. I rattle off 5, 6, and 7 because that's just part 9 of the Southeast, but we're not in Florida. 10 Q. That's okay. No problem. And I usually need the 11 map to do that, so job well done. 12 Does Prairie Farms sell any branded Class I 13 products? 14 A. Yes, we do. 15 Q. What is the breakdown between the branded products 16 and the non-branded products, just roughly? 17 A. Hate to admit that, but I really don't know. But 18 if I was to estimate, it's probably similar to 19 Mr. Alexander's, it's probably 20 to 25% is branded. 20 Q. Is branded? 21 A. Branded, yes. 22 Q. And what do you consider to be Prairie Farms' most 23 successful Class I product? 24 A. One that we have the toughest time and I guess 25 it's, you know, limited production, is probably our iced 26 coffee. And that -- I mean, overall it's probably our 27 core group of gallons and half gallons that we offer to 28 the consumer as a volume perspective. 5093 1 Q. Sorry? 2 A. Gallons and half gallons of the various fat levels 3 are probably our volume, you know, when you look at -- if 4 you want to talk successful based on volume or uniqueness, 5 I would say volume, it's the gallons and half gallons of 6 our brand. 7 Q. And those are HTST milk? 8 A. Combination of both. We also have ESL operations. 9 Two of those 30 plants are ESL. We do do, in the ESL 10 operation -- or pints and quarts, so we have gotten 11 national distribution on a lot of those. 12 Q. And what's the shelf life for your ESL products? 13 A. You are testing my memory there. I'm going to say 14 90 days. I'm not on the sales side, so apologize. 15 Q. An estimate works. 16 How many plants does Prairie Farms have that are 17 not Class I? 18 A. We have a total of 50 plants, so that I would 19 guess if I said 30, that would leave 20 that are non. 20 Q. And can you give me a summary of what types of 21 products those plants sell? 22 A. Those are ice cream plants, cultured plants, 23 cheese plants. 24 Q. And are those pooled? Do those plants pool their 25 milk as well? 26 A. We pool them through the pool system, whether it 27 be a pool silo -- you know, a supply plant or a pool silo. 28 So we'd qualify that milk to be pooled. 5094 1 Q. And has Prairie Farms ever, we call it depooled or 2 not pooled milk for those plants? 3 A. Yes, we have. We did the depool during COVID. 4 Q. Why? 5 A. It was a very hot, contentious topic with our 6 members. It's -- it's part of the -- allowed in the 7 order. We were not able to depool near what probably 8 others were, but we -- we were able to pool a little bit 9 of our -- probably -- well, it was less than 10% of our 10 total milk supply. 11 Q. You were able to depool 10%? 12 A. Yeah. 13 Q. Okay. And why did you depool that milk during the 14 pandemic? 15 A. Because the market warranted, and the depooling 16 rules, I mean, Class III was higher at the time. 17 Q. You say the "market warranted." You were able to 18 return -- 19 A. Well, I shouldn't say warranted, but, yeah. 20 The -- we were able to return a higher value to our 21 members. 22 Q. By depooling the milk? 23 A. Yeah. Or on the flip side, being -- we have also 24 at certain times you have to depool if you want to remain 25 competitive, because if that other part or other 26 competitor of yours is depooling, then they have more 27 margin dollars to be more aggressive with their pricing. 28 So that necessarily means that just because we depooled we 5095 1 were able to return those dollars to our members. We were 2 also probably able to move cheese because we were able to 3 remain competitive in the marketplace, because if your 4 competitor's depooling, you need to react to the 5 competitive natures. 6 Q. And do any of Prairie Farms plants use the split 7 plant provision? Are you familiar with that? 8 A. We have a couple plants that -- that are -- as far 9 as like, we -- we do not have any, that I'm aware of -- 10 you know, a split plant, but we have a couple plants, I'll 11 use our Fort Wayne plant as an example, that are highly 12 heavy Class II, but yet it's a pooled distributing plant, 13 so you are not able to depool that plant. Whereas, you 14 are competing against other Class II operators that may 15 have, if they are a full -- a full Class II plant that can 16 depool, then again, you run into those competitive 17 pressures. 18 Q. And for Prairie Farms' 50 plants, do all of those 19 plants use owned supply milk? 20 A. No. We have always over our history strategically 21 planned that we purchase about 20 to 30% of our milk 22 supply from outside partners and supply partners. 23 Q. And does Prairie Farms then send any of its own 24 milk to other plants, or is it fully utilized in your 50 25 plants? 26 A. We -- we -- because of logistic reasons, we 27 have -- I'm going to say it's a half percent that go to, 28 like, a few cheese plants, mainly sometimes on the weekend 5096 1 or just logistically it makes sense. 2 Q. And when purchasing milk, how frequently do you, 3 as -- and when I say "you," I mean Prairie Farms -- how 4 frequently does Prairie Farms, as a purchaser, negotiate 5 milk supply agreements with its non-cooperative member 6 suppliers? 7 A. Typically it's annually. We do have a couple 8 contracts that are longer than annual that were part of 9 the -- some of the latest acquisitions that we have done. 10 Q. Do you have any contracts that are shorter than 11 annually? 12 A. We have a lot of handshake agreements. And under 13 that handshake agreement they know that -- and it's -- I 14 mean, whether I want to say that it's not technically in 15 an agreement, but I follow it up with an e-mail knowing 16 that if we lose a customer, we may -- we will -- we will 17 have to back off on our need or -- you know, need for 18 supply. 19 Q. Okay. So the intent would be to keep them on as 20 long as you could? 21 A. Yes. I mean, we -- we value them as partners, so 22 we want to try to do the right thing and, you know, honor 23 our agreements and take as much of their milk as we can. 24 But the Class I is -- is an up-and-down market, too, 25 because it -- it ebbs and flows every, hate to say it, 26 every 48 hours it seems like some days, because the 27 consumer doesn't buy on a consistent pattern. 28 Q. Uh-huh. And I -- I believe you were sitting in 5097 1 earlier when I was talking to Mr. Alexander. I'm trying 2 to get a sense of the time horizon. We have talked a lot 3 during this portion of the proceeding about market 4 signals -- 5 A. Okay. 6 Q. -- and producers responding to market signals, and 7 processors responding to market signals. 8 But from a producer perspective, if the market is 9 telling them to do something different with their milk, 10 either ramp up or ramp down production, what is the time 11 horizon for responding to that market signal? 12 A. We typically have been told by our producers that 13 it's four to six months for them to react in any 14 significant way. 15 Now, if you want a -- a one -- you know, 1% 16 increase, they could probably change their rations, change 17 their culling practices, no different than Mr. Alexander 18 indicated. 19 Q. Okay. 20 A. But if you really want to significantly add 21 supply, they have -- they have shared with us that it's 22 probably four to six months, if not even a little bit 23 longer than that, depending if there's a need for 24 infrastructure build out and so forth. 25 Q. And in your testimony you say that the problem 26 with the average-of as the base Class I skim formula is 27 that revenue to producers was significantly reduced 28 without recovery. 5098 1 Do you recall that? 2 A. Yes. 3 Q. And so are Federal Milk Marketing Orders price 4 enhancement programs? 5 A. No. But they are -- they are there to as -- to 6 provide a basis or a foundation of -- of kind of an 7 equilibrium and balance the classes milk. That's -- 8 that's the purpose of allowing Class I to be the -- you 9 know, the highest price, because Class I is a little bit 10 more -- unlike we have cheese plants, so we -- we could 11 pretty well schedule our cheese plants -- I can schedule 12 my cheese plants two weeks from now and it's going to be 13 relatively the same volume. 14 But on a Class I, it ebbs and flows by the weeks 15 and the days of the week, just due to the fact of the -- 16 like I mentioned earlier, it's sometimes 48 hours that 17 we -- we get our orders from our customers 48 hours in 18 advance. 19 Q. And if -- if there are sufficient supplies of milk 20 to meet fluid use, is there any reason why FMMOs should 21 increase revenue to producers? 22 A. Well, it's a relative term, I guess, when you say 23 that there is sufficient supplies. Yes, I wouldn't 24 disagree that for the most part there are sufficient 25 supplies. But we're also seeing that some milk that is 26 closer, as I described in my testimony, that is close, and 27 when it comes to even some things that Mr. Alexander 28 indicated, to volatility within the Class I, a snowstorm 5099 1 comes or something of that nature, that where there's a 2 need for an increase, because some of the closer depooled 3 or whatever milk that's going to a higher value is going 4 away from a Class I plant, and so we're having to pool 5 milk farther. And with the need for transportation, milk 6 is traveling farther, which, hence, sometimes creates 7 challenges to get production. 8 We have had -- we have had times where we have had 9 to shift production from different plants and shift -- 10 because the raw milk supply was there amongst our 30 11 plants versus getting it to probably the plant that we 12 really needed it at. 13 Q. When you are talking about a snowstorm, setting a 14 minimum price in Federal Milk Marketing Orders can't 15 address supplies if there's a snowstorm for a weekend, 16 correct? 17 A. No. Totally agree. But going back to, like I 18 said in -- on page -- page 2 of my testimony, there is -- 19 there is some milk that is less than a hundred miles from 20 some of our plants, and we have tried to work out supply 21 agreements with that company. And because they are a 22 Class IV operator, all of '22 and '23, they have had no 23 interest in even talking unless we pay them a significant 24 premium. And so then, hence, we have to go farther away. 25 And the farther you go away from the market to get -- to 26 get your supply, the more risk that is involved. If you 27 had the higher-of, that supplier has fully admitted that 28 they would gladly entertain into an agreement or a 5100 1 contract to supply us. 2 Q. So absent the higher-of, that supplier believes 3 that it is more valuable for them to use their milk for 4 Class IV purposes than Class I? 5 A. Right now it is. And if you look at, you know, 6 even going back to what we have talked about the 7 asymmetrical risk, 22 -- or excuse me, 14 out of last 8 21 months, in 2022 and 2023, there has been larger than 9 that $1.48 difference. And so right now, that supplier 10 has that feeling. If it flips, then maybe they will 11 change. But right now, it doesn't appear that way. 12 Q. But you -- in your Class I plants, you have been 13 able to get sufficient milk to meet your needs for fluid 14 use, correct? 15 A. Not in all situations. We changed the way we did 16 business. We actually did it in twofold situation. 17 A, we knew that we were not going to be able to 18 get the supply in the three-week or four-week ramp-up with 19 schools that just occurred here, so in two -- a couple of 20 our markets we purposely, knowing that we're going to 21 struggle to get supply, we moved and we went with an 22 aseptic product, or even longer than extended shelf-life, 23 because we also -- we have that co-manned for us. And so 24 we distributed that to schools during the ramp-up period. 25 Q. Other than the school ramp-up period in the last 26 year, have you had any trouble getting sufficient milk to 27 your fluid plants? 28 A. We have had a few instances in the fall of the 5101 1 year that have carried on, but it's just as purely a 2 situation that we have gone to a much farther market to 3 bring milk in. 4 Q. And earlier Ms. Taylor had asked a question of 5 Mr. Alexander, how would you define orderly marketing? 6 And I believe his response was that what goes into the 7 pool reflects market value. 8 Would you agree with that statement? 9 A. That should be the goal. 10 Q. Okay. And you would agree with me that sometimes 11 the market values milk for Class III over Class I, 12 correct? 13 A. No different than the example that I said on the 14 Class IV. 15 Q. And in that case, the pool should reflect that 16 milk for Class III is more valuable than for Class I, 17 correct? 18 A. It should. But the whole purpose of one of the 19 foundations is -- for Class I is -- because, again, what I 20 mentioned earlier, Class I is demanding, so it should -- 21 that's why we view it should be the higher priced item, is 22 because we don't take it consistently. We don't -- unlike 23 manufacturing. We take it periodically in the sense of 24 even during the week. 25 I mean, there's -- on the weekend we don't take 26 milk as a -- as consistently as we do during the week. We 27 always -- because of that whole 48-hour that I referenced, 28 our biggest demand days are Tuesday, Wednesday, Thursday, 5102 1 because our plants are gearing up for production to 2 deliver to our customers for the weekend, because that's 3 when the vast majority of the consumers, from what we have 4 gotten indication from our customers, shop. 5 Q. And so you believe that adopting the higher-of 6 should disrupt those market signals to ensure that Class I 7 remains at the highest price? 8 A. What do you mean by "disrupt market signals"? 9 Q. Well, so you agreed with me that the pool should 10 reflect market value, and then you agreed with me that the 11 market sometimes values Class III over Class I. But it 12 is, as I understand it, your position that the Class I 13 price should be always the highest price even if the 14 market is not valuing Class I that way. 15 And so my question is, do you believe that the 16 higher-of should be utilized in order to disrupt market 17 signals in the pool to keep Class I above Classes III and 18 IV? 19 A. But how do you -- I guess, again, how are you 20 trying to say that the classes -- Class III -- if you are 21 pricing the Class I off of the higher-of, then you would 22 be the price the same as the Class III, correct? 23 Q. After, yes. Right? But now you are kind of 24 getting in a circle where Class I is the highest because 25 you're pegging Class I over the other classes. So that's 26 why I started my question with what's going on in the 27 market, right? 28 And so -- and -- 5103 1 A. But the Class III and Class IV are part of what 2 makes up the Class I, whether you do the average-of or the 3 higher-of. 4 Q. Uh-huh. 5 A. So if we are to say that we wanted Class I to 6 ensure the highest value, then you would always price it 7 on the higher-of versus the average-of. 8 Q. Okay. And I think that answers my question, but 9 I'll circle back if I need to. 10 MS. TAYLOR: Excuse me, Judge Clifton, I do hate 11 to interrupt, but it is 11:05 and I'm thinking the court 12 reporter might need a second break, if this was an 13 appropriate place to take it. 14 MS. VULIN: Sure. 15 THE COURT: It is. Very good. 16 Was ten minutes adequate last time? 17 Good. So it's now 11:06. Be back and ready to go 18 at 11:16. 19 (Whereupon, a break was taken.) 20 THE COURT: Let's go back on record. We're back 21 on record. It's 11:16. 22 Ms. Vulin, would you identify yourself again? 23 MS. VULIN: Thank you. Ashley Vulin with the Milk 24 Innovation Group. 25 BY MS. VULIN: 26 Q. Just a couple of quick questions. 27 A. Sure. 28 Q. The couple instances you said where your plants 5104 1 had issue attracting sufficient milk for fluid use, did 2 you utilize any of the call provisions under any order? 3 A. Okay. Chip had asked me that in some of my 4 original testimony. But there's not call provisions. 5 Because ironically, I called Mr. Wilson that Monday after, 6 because I was short 30 loads of milk, and in Order 32 7 there are no call provisions. 8 If you are aware of one, I'll take some milk on 9 demand. 10 Q. Have you asked to change the performance standards 11 in any of the orders? 12 A. In Order 32 we have not done any changes, and 13 there were changes done in Order 30 within the last couple 14 years. 15 Q. To raise the performance standards? 16 A. No, to -- to lower those. 17 Q. Okay. And you'd agree with me, if you are short 18 on milk needed for fluid use, raising performance 19 standards would be a pretty direct way to address that? 20 A. Correct. 21 Q. And then -- 22 A. But that's one of multiple tools to do that. I 23 mean, going to the higher-of is going to be one tool. 24 Some of the other National Milk proposals to attract milk 25 to the Class I, such as the price surface, which I know 26 we'll be discussing later, are another tool. But that's 27 why National Milk has come with a comprehensive package to 28 address all of it in one big group. 5105 1 Q. And you agree those are all national changes, 2 correct? 3 A. Correct. 4 Q. Whereas performance standards could be changed on 5 an order-by-order basis, correct? 6 A. Correct. 7 Q. And if you could go to page 3 of your testimony, 8 please. 9 A. Sure. 10 Q. Now, this table you have in your testimony, I just 11 want to make sure I understand the point here. The point 12 being that during the higher-of prior to 2019, in FMMO 32, 13 there was a negative PPD 27% of the time? 14 A. Correct. 15 Q. But after the adoption of the average-of plus the 16 adjuster, there was a negative PPD 37% of the time. 17 Is that what you are showing here? 18 A. Correct. 19 Q. So an increase of 10% in negative PPDs after the 20 adoption of the average-of? 21 A. But also the significant increase from $0.34 22 negative to $2.85. 23 Q. And what portion of this increase in depooling is 24 caused by the base Class I skim price moving from the 25 higher-of to the average-of versus other market factors? 26 A. The base class skim price, I'd have to go back and 27 research that in further detail. All I did was build this 28 graph from that. I don't have that data readily available 5106 1 at my fingertips. 2 Q. Okay. So what you are showing here is there is 3 correlation between negative PPDs and the shift to the 4 average-of, but you don't know if there's actually 5 causation? 6 A. Correct. 7 MS. VULIN: Nothing further. Thank you. 8 CROSS-EXAMINATION 9 BY MR. SJOSTROM: 10 Q. Good morning, Chris. How are you? 11 A. Good morning, Lucas. 12 Q. Lucas Sjostrom, Edge Dairy Farm Cooperative. 13 You heard my questions to the previous testifier, 14 I presume, on risk management of farms and timing. 15 I just have one question. 16 A. Sure. 17 Q. Would you agree it's better for your farmers to 18 know about pricing before the price happens, if that was 19 available, for planning and risk management purposes? 20 Would that be superior for your farmers than to know after 21 the prices are announced and paid? 22 A. Are you talking versus advanced pricing? 23 Q. In general. 24 A. In general. 25 Q. Is it better to know for planning purposes, prices 26 ahead of a month or after the month has already happened? 27 A. Well, I think they would honestly be like 28 anything, if you knew in advance, that would be better 5107 1 than always looking in the rearview mirror. 2 MR. SJOSTROM: That's all. No further questions. 3 Thank you. 4 CROSS-EXAMINATION 5 BY MR. MILTNER: 6 Q. Ryan Miltner representing Select Milk Producers. 7 Good morning, Mr. Hoeger. 8 A. Good morning, Ryan. 9 Q. In your testimony, you -- under Item 2, so bottom 10 of page 2, continuing on to page 3, you're describing some 11 efforts by Prairie Farms to secure milk, and there was 12 some questioning from, I think Ms. Vulin about this, but 13 you were trying to attract additional milk to your plants. 14 And I did not hear, was that -- was that from 15 another cooperative you were looking to purchase from? 16 A. Yes. 17 Q. Now, I want to talk about the price inversion that 18 perhaps triggered that to occur. 19 That cooperative, they were making a rational 20 economic decision for their members at that time, correct? 21 A. Yeah. I don't fault them for that. And they -- 22 if they were wanting to help us out and serve the Class I 23 market, they wanted the average-of along with any 24 over-order premium, was still lower than what they were 25 going to receive in the Class IV market, so it's a 26 business decision. And I don't fault them for that. 27 Q. Yeah. And -- but your testimony, I think, is that 28 the adoption of Proposal 13 would change that economic 5108 1 decision perhaps for that cooperative and make it easier 2 for Prairie Farms to make the most efficient and 3 economically advantageous acquisition decisions; isn't 4 that correct? 5 A. Correct. They have told me repeatedly that if it 6 was the higher-of, that they would gladly sell us milk. 7 Because economically, it would even be better for them, 8 because it's a shorter distance for them to travel than 9 where they are going currently. But even with the little 10 bit further distance that they have to travel, it's still, 11 under the current program, more economically advantageous 12 for them to go to the Class IV plant. 13 Q. So it's only economically efficient because of the 14 current Class I mover? 15 A. Correct. 16 Q. And it is environmentally inefficient because of 17 the additional hauling distance, correct? 18 A. We -- yes. And there's -- I mean, that's a whole 19 Pandora's box, because there's a lot of milk that moves 20 around. But in the simplest form, with all the 21 environmentally going green programs that we're challenged 22 to try to do, this would be an easy fix. 23 Q. Well, let's take the environmental impacts out of 24 it, and everything that comes with that. 25 It's logistically inefficient, correct? 26 A. More importantly, it is logistically inefficient 27 and presents less challenges. Because any time you move 28 milk farther, you run the risk of disruption of supply. 5109 1 Q. Would you characterize that as an uneconomic 2 movement of milk? 3 A. Yes, because you are adding costs into a system 4 that has to be recovered in one shape or form. 5 Q. Now, there are a couple of other proposals which 6 we haven't heard yet, alternatives to moving to the 7 higher-of, which I would characterize as modifications to 8 the average-of. 9 A. Yes. 10 Q. Are you generally aware of those proposals? 11 A. Yeah. And when, as being part of the National 12 Milk task force, we looked at six different proposals, if 13 I remember -- for sure six, maybe even seven different 14 proposals, whether it be the higher-of or the average-of 15 plus a different adder than the $0.74. We went to even 16 looking at a Class III Plus an adder, whatever the case 17 may be. And we always resorted back to the higher-of. 18 And the interesting thing was, was even in our 19 meetings when we were discussing it, we always kept 20 comparing it to the higher-of. And even if you look at 21 some of the other testimonies, they are always comparing 22 it to the higher-of. 23 And, again, with some of those lookback periods, 24 the higher-of is what compensates the dairy producer at 25 the time of sale. All those other programs resort back to 26 compensating them in the future. And if that dairy 27 producer isn't in business, he's missing out on the 28 compensation. 5110 1 Q. And to the point you raise in your statement, do 2 you think that tweaking the average-of mechanism would 3 address the issue Prairie Farms has experienced with 4 getting milk in from its closest sources? 5 A. It might, depending on that -- on that adder, 6 because of the size of the adder. Because, again, it 7 comes down to what we just talked about. It's an economic 8 decision. The current Class IV co-op that I was 9 referencing in page 2 of my testimony, if that adder was 10 high enough, it may incent that -- that co-op to look at 11 going to Class I. But looking at some of those other 12 testimonies -- or not testimonies, excuse me -- proposals, 13 that's -- that's always a lookback, so it's a moving 14 target. So is it on this year and off next year? I mean, 15 that -- that to me looks like disorderly marketing. 16 Q. And there were also some questions asked of you 17 trying to compare the value of milk when the Class III 18 price, for instance, exceeded that of Class I. 19 Do you recall some of those questions? 20 A. Yes. 21 Q. Now, I want you to think about the Class III price 22 announced for any specific month, and the -- and in the 23 Class I price announced for any specific month. Even 24 though those prices apply to the same calendar month, are 25 they pricing the same milk? 26 A. No. Because Class I is in the -- what I will call 27 the here and now, and Class III is cheese, and that is -- 28 unless it's going to be cheddar, but there's a lot of 5111 1 other cheese made out in the industry as our -- some of 2 our plants make other variety of cheeses, that Class III 3 is for future month's sales. 4 Q. And so in your experience, is it -- is it -- is it 5 appropriate to look at the announced Class I and Class III 6 prices for a calendar month and use that to compare the 7 value of milk? 8 A. No, I do not. 9 Q. On page 4 of your statement you provide some 10 comparisons -- 11 A. Uh-huh. 12 Q. -- for producers that have hedged their milk. 13 Is the negative PPD perhaps the biggest open risk 14 to a producer who is trying to actually manage their risk? 15 A. Yeah. Because it's an unknown until after the 16 fact. You really don't know what that's going to be. I 17 mean, when you are -- when you are doing a forward 18 contracting program or a risk management program, your 19 anticipation is that that PPD will be minimal, positive, 20 or negative, as indicated in the previous chart from, you 21 know, prior to going to the average-of. That producer 22 could go through a hedging program, and yeah, it may be 23 negative $0.40 -- $0.30, $0.40, or it could be positive 24 $0.30 or $0.40. 25 But when you get into thinking you have locked in 26 a price -- the one producer that I -- farm B -- and I'll 27 honest, I thought that this -- this situation was going to 28 put them out of business, because in May -- April and May 5112 1 of 2020, when the COVID pandemic had hit, they went out 2 and actually hedged November milk, because at that time, 3 they made a business decision, saying, okay, $15.91 milk 4 is pretty attractive compared to milk right now being $10, 5 $11. So they hedged. 6 Well, then because of some of the unforeseen 7 causationable reference that, of the Food Box Programs, 8 they ended up going home with about 8 bucks a 9 hundredweight, which I thought for sure was going to put 10 them out of business. But they have got -- they had a 11 strong balance sheet that they were able to withstand 12 that. 13 And you wouldn't anticipate that. I mean, in a 14 normal hedging, what they have done for decades, and this 15 producer, A and B, have been hedging on a forward 16 contracting program for -- for well over a decade, and 17 they were able to always hedge. And, okay, yeah, I know I 18 got $15.91, the PPD is generally going to be slightly 19 positive or slightly negative, so they are still going to, 20 for the most part, go home and bank, you know, $15.50 to 21 $16.50 is a lot of their anticipation. 22 Q. And longer ago than I care to state on the record, 23 there was a -- there was a hearing on depooling in the 24 Central order, and the witness from Prairie Farms at the 25 time said, since we have diversions of surplus milk to 26 standalone manufacturing plants, we depool when it's 27 advantageous. Although we do this, we do not feel that 28 doing so is in the best interest of the Federal Order. 5113 1 Is that still a pretty good statement of Prairie 2 Farms' position on the issue? 3 A. Yes. If I was to take a survey of our members and 4 that they wholeheartedly are against depooling because 5 they feel that we should be all -- for the most part, as 6 much as possible, be part of the pool and share in those 7 efforts. 8 Q. And yet as a representative, and perhaps even a 9 fiduciary for your members, you have an obligation to 10 maximize their income within the bounds of the 11 regulations, don't you? 12 A. I use my term in the office that it's like going 13 to your buddy's house to play poker. And if the rule of 14 the -- if he has house rules, if you're not going to play 15 by house rules, you're probably not going to be in the 16 poker game long. 17 So, again, unfortunately, if depooling is part of 18 it, no different than I testified earlier on some of the 19 other cross, we did depool milk in 2020 and 2021. We did 20 that because, if our competition is also depooling milk, 21 another cheese operator, and they take that lower cheese 22 price because they take some of those dollars that they 23 don't have to pay into the pool in a form of lower price, 24 then we're going to be competitively at a disadvantage 25 price-wise, so we need depool. Not necessarily all those 26 dollars get returned to our dairy producers, but they a 27 lot of times help generate or assist in maintaining or 28 growing sales. 5114 1 Q. And just to be clear, you believe that adoption of 2 Proposal 13 will help to reduce the instances where it's 3 economically advantageous to depool milk. 4 A. Correct. 5 MR. MILTNER: Thank you. 6 CROSS-EXAMINATION 7 BY DR. BOZIC: 8 Q. Marin Bozic for Edge Dairy Farm Cooperative. 9 Good morning, Chris. 10 A. Good morning, Marin. 11 Q. Are you aware that Brian Henrichs was asked last 12 week by Mr. Miltner whether he would support removing 13 advanced pricing? 14 A. I will say that I was here that day, but that 15 exact question, I don't really recall that answer. So 16 I -- I -- I don't recall for sure the -- want to have the 17 court reporter replay it, I am fine, and I could help 18 answer a question if there's a question there. 19 Q. She'll make a voodoo doll of us if we ask her. 20 I'm not sure what's the appropriate way to ask the 21 follow-up question given that we cannot decide -- 22 A. I'm sorry, I mean it's two weeks ago, and 23 there's -- there's been a lot going on. 24 Q. No, I understand. I understand. I don't think 25 that you were trying to be evasive. 26 But could you think of any reason why your 27 producers may, in fact, not oppose removal of advanced 28 pricing? 5115 1 A. I think our producers would have to be very 2 educated on it, because, in my mind, no different than 3 Mr. Alexander expressed, what -- if you get rid of 4 advanced pricing, what are you going to replace it with? 5 And I know you had mentioned in questions with him about 6 some type of Class I futures contract. 7 But in that same breath, then how do, on a 8 day-to-day application -- because we pay 668 dairy farms 9 every day, how do we pay them, and how does the Market 10 Administrators settle up the pool? Because whether it's 11 advanced pricing or a futures contract, you are still 12 going to square up to something. 13 Q. Right. 14 A. And so I don't know if getting rid of advanced 15 pricing, if your question is getting rid of advanced 16 pricing is going to rid of negative PPDs. 17 Q. I would not stipulate that it would. 18 A. Okay. 19 Q. I would -- yeah. I will have to reserve 20 explanation for my testimony, so I don't testify from here 21 when I'm supposed to cross-examine you. 22 But would it be fair to say that removing advanced 23 price -- I understand that you have other concerns noted, 24 but would it be fair to say that removing advanced pricing 25 would also help reduce depooling? 26 A. Again, I don't know how that possibly will, 27 because you are going to have to set a standard. 28 One of the other concerns I would have with 5116 1 eliminating advanced pricing is that some of our customers 2 require that we provide the month prior -- the advanced 3 price, we -- we -- they require, because they want to 4 audit us on movement, so they -- we have to provide the 5 previous month's mover with the new advanced mover coming, 6 because they -- I mean, it's not to say they cannot do 7 that on a -- on a Class I futures contract, but that's 8 some of the day-to-day stuff that we have to manage 9 through. 10 Q. So the three proposals that are noticed for the 11 hearing would -- so that would be Edge's proposal 12 Class III Plus, the higher-of without the advanced, as 13 well as the Farm Bureau's proposal, three proposals that 14 are noticed, all three of them would settle Class I on the 15 announced prices in various ways, but all three of them 16 would settle on announced pricing. 17 So, again, setting aside merits or demerits in 18 your opinion of those proposals, my specific question is, 19 is that if there is no impact of rally on negative PPD, 20 wouldn't that reduce your incentive to, for example, 21 occasionally depool your cheese assets? 22 A. Well, to go back, though, to your original 23 statement of, if you settled to the class prices, how are 24 you going to price to your customer if your customer is 25 wanting some type of -- as Mr. Alexander stated, too, and 26 I would agree with his statement -- that our customers 27 prefer some type of uniform class price that's announced 28 in advance, A, so they can set their retails. Now, 5117 1 Class I futures could possibly do that. 2 But it's announced by the government, the advanced 3 price, so that gives them a comfort level of some type 4 of -- that everyone is going to be held or charged some 5 similar cost standard. 6 Q. Okay. 7 A. Whereas, if you are doing a futures price, we -- 8 we all know how the futures price, whether it be 9 Class III, Class IV, and the -- possibly this new Class I, 10 depending on how the liquidity is, that could be very 11 volatile. 12 Q. I understand that you find issues with the 13 proposal -- 14 A. Yes. 15 Q. -- but if we could -- I think that, you know, one 16 of the concepts of cross-examination is that you ask a 17 pointed question and try to get a pointed answer, right? 18 A. Please repeat your pointed question, and I'll give 19 you that pointed answer. 20 Q. My pointed question is, would removing advanced 21 pricing, so would settling pool obligations of Class I 22 handlers based on announced prices, would that reduce 23 depooling? 24 A. I'd honestly have to sit down and do some analysis 25 in that. 26 Q. Well, so maybe we can -- so you are seated, I'm 27 standing, let's do the analysis on the fly. 28 So let's say that the price for cheese goes up by 5118 1 $0.50 between the 23rd of the prior month and the end of 2 the current month. Right? So we have a Food Box Program 3 or something like that. There's a massive rally in 4 cheese. 5 A. Uh-huh. 6 Q. Now, suddenly on your cheese assets, you're not 7 drawing from the pool, you are paying to the pool because 8 of that rally. 9 A. Correct. That's causation that would cause that 10 to... 11 Q. Right. So would it then be fair to state that if 12 that rally did not cause the discrepancy between the 13 advanced price for protein and the announced price for 14 protein, that on its own, there would be other reasons why 15 you may want to depool, but on its own, that would reduce 16 your incentive to depool the cheese plants? 17 A. Possibly. But, again, I -- how are you going to 18 settle the pool when the Class III wouldn't be -- there 19 wouldn't be -- if there was that dramatic jump from again 20 when that was set? 21 Q. Well, so if you are selling Class I milk on 22 announced, then how much you have to pay to the pool -- in 23 quotation marks, because there's a more technical way to 24 say that, the PSF -- but the amount that you would have to 25 pay to the pool would be based on the -- in the context of 26 Proposal 17 and 18, on the higher-of Class III and 27 Class IV announced skim milk price. 28 We can have a separate debate on challenges, 5119 1 logistical challenges that would cause you and your 2 relationship with your customers, but my specific question 3 is on depooling. 4 A. Sure. But, again, it's all kind of -- because if 5 you are going to charge your customer one price, whether 6 on Class III future -- 7 Q. Right. 8 A. -- and that Class I future is a combination of 9 either the higher-of III or IV or the average-of, whatever 10 the Department eventually settles on, and then that 11 dramatically increases, how are you going to pay your -- I 12 guess I'm trying to understand how -- and I don't mean to 13 cross-examine you on yours but -- 14 Q. As long as I can stand. 15 A. I want to make sure I can directly answer your 16 original question. 17 Q. Am I permitted, your Honor? 18 THE COURT: You are doing very well, both of you. 19 DR. BOZIC: Okay. Should I be sworn in? 20 BY DR. BOZIC: 21 Q. Well, one way to do that -- and, again, you know, 22 I think the liquidity is a fair concern. But one way 23 for -- for that would be, that if you set the price to 24 your customers on the 23rd of prior month based on 25 whatever the futures have been on that day, or some period 26 prior to that day, so now you know exactly how much your 27 customer is going to pay to you. 28 And then if in addition to that, if you were to 5120 1 buy Class I futures as Prairie Farms, then if there's a 2 rally between the 23rd of the prior month and the end of 3 the current month, you would have hedging gains, so that 4 the total revenue that you as a company achieve on that 5 Class I sale, is a sum of what your customer committed to 6 pay to you on the 23rd of prior month and the hedging 7 gains that you have on the Class I futures. So your total 8 revenue would actually match the Class I mover. 9 A. I -- I can understand where you are. But with our 10 margins being -- that -- that's a lot of extra trading 11 activity, right or wrong, that will add cost to the 12 product. And I -- 13 Q. I don't dispute that. So let's say that that cost 14 is, let's say, $0.07 a hundredweight, you know -- 15 A. Which is $0.06 of a cent per gallon, and on 16 some -- some bid -- bid, or RFP as they call them nowadays 17 from what I understand from my sales team, that's razor -- 18 we get down to that level. 19 Q. I understand. So, you know, in that context, if 20 AMS were also to recognize that then say, well, we will 21 also increase the Class I differential by $0.07 to 22 compensate for the higher trading costs, then you would be 23 made whole, correct? 24 A. And I -- I'm sure from what we have gotten for 25 general feedback from our customer base, if it's 26 transparent and a part of some Market Administrator 27 announcement, that cost, because then they know that's 28 being uniformly, that probably would be accepted. 5121 1 Q. I -- I did -- I did contemplate that, but I don't 2 mean to be cagy, but I think it is more appropriate if I 3 cover that in my direct testimony, which may happen later 4 today or tomorrow, and then I'm happy to visit again as 5 appropriate. 6 Okay. Now, could we also agree -- so in your 7 testimony you state that "negative basis makes managing 8 milk price considerably more difficult for dairy 9 producers," and you define negative basis in terms of PPD 10 on the previous page. 11 A. So that is feedback, yes, that I have heard from 12 several of our dairy producers. 13 Q. Yeah. And I don't dispute that, even though some 14 of the other witnesses from National Milk would consider 15 equating PPD with basis to be problematic. 16 So -- so given your testimony, would it be fair to 17 say that removing advantaged pricing would help producer 18 risk management -- and, again, you may want to educate 19 them that they may lose money on returns at the end of the 20 year because your margins would be lower, etcetera. 21 But just focusing on producer risk management, 22 would it be fair to say that removing advanced pricing 23 would simplify producer risk management? 24 A. It probably would simplify, but I think the devil 25 will be in the details to make sure that they clearly 26 understand, because it would be a real education process. 27 Q. Sure. 28 A. And I have seen in the ten-plus years of just 5122 1 working with dairy producers, there are -- it's no 2 different than what we went through in explaining negative 3 PPDs, just in general, not necessarily the negative basis. 4 Q. Right. Right. 5 A. I could explain it six times, six different ways 6 to the same producer, and some are still not going to 7 comprehend, because they still have the opinion that it's 8 money that was taken from them. 9 Q. But that only goes to reinforce the fact that 10 simplicity does matter, right? The more we can simplify, 11 the more risk management will take place. 12 A. Uh-huh. 13 Q. Now -- 14 THE COURT: Did you want a response to what you 15 just said? 16 DR. BOZIC: Would you agree with that statement? 17 THE WITNESS: Yes. 18 DR. BOZIC: Okay. Thank you, your Honor. 19 THE WITNESS: Sorry, your Honor. 20 DR. BOZIC: Your Honor, I'm actually an economist, 21 not an attorney, so I probably will make more such basic 22 mistakes. 23 BY DR. BOZIC: 24 Q. Would you also -- so most -- you said, I believe 25 in the cross that -- or direct, that you have some 30 26 fluid milk plants? 27 A. Uh-huh. 28 Q. How many of those do ESL products? 5123 1 A. Two of them. 2 Q. Do you envision going forward that a larger share 3 of your portfolio would be -- or a growing share of your 4 portfolio would be ESL? 5 A. That tends to be where the growth has been -- 6 Q. And if -- 7 A. -- in our operations. 8 Q. I apologize, I didn't mean to interrupt. 9 A. You haven't gotten slapped yet for talking too 10 fast, so you're doing well. 11 Q. So -- and ESL is more storable than HTST, correct? 12 A. Correct. 13 Q. So in that context, wouldn't it be reasonable to 14 assume that ESL will open new ways to compete, even if -- 15 even if we hope -- go back to the higher-of and nobody 16 does risk management? 17 What I mean by that, is that as long as there's a 18 seasonality in manufacturing prices, there could be some 19 saying, well, maybe we made the products when the price is 20 cheap and then offer some sort of -- 21 A. With our ESL, like I said, we're -- I'd answered 22 in previous testimony, I believe it's about 90 days, no 23 more than 120 that we put on for shelf life. You're -- 24 typically if you are going to do what you are referencing, 25 like some excess production to carry for the high demand 26 periods, I -- I would be concerned with still running into 27 code date issues in that, because your high supply versus 28 high demand, Christmas -- well, high demand is always 5124 1 going to be in the fall of the year -- 2 Q. Sure. 3 A. -- leading before Christmas, and then after 4 Christmas into the spring flush, that tends to be your 5 higher supply, and that's going to be more than that 90 to 6 120 days. So I don't know if we could really -- we 7 wouldn't be able to justify making that production ahead. 8 Q. But -- fair point. Unless there is further 9 advances in computer technology or process that would 10 extend the code date. 11 A. Sure. Sure. 12 Q. But would it also be fair to say that if anybody 13 is going to start hedging in Class I space, that it's more 14 likely to be an ESL player than an HTST player? 15 A. Correct. And when it comes to Class I, like I had 16 stated in my testimony, we do not have any Class I being 17 hedged. And then we do have a lot of Class II, and that 18 continues to grow. And there's a -- there's a large -- 19 one of the largest in the U.S., ESL operators that I have 20 served on multiple committees with on IDFA and, =when we 21 were a member of, and also several other dairy 22 organizations, him and I had a conversation back this 23 spring in February of this year, when we were at an ADPI 24 board meeting, that we were talking about the make fee 25 and, obviously, the differences between National Milk and 26 IDFA. 27 Well, we also got in talking about other some of 28 the other proposals that National Milk was proposing. And 5125 1 I -- I had asked him point, does he do a lot of Class I 2 hedging on the ESL side, and he stated, no, none. And he 3 says all of his hedging that he does on the ESL side is on 4 the Class II side. 5 Q. That was a statement reflecting his experience to 6 date, not his long-term plans; is that correct? 7 A. Correct. But I don't think his long-term plans 8 have changed since six months ago. 9 Q. What I'm trying to say is, and I think you 10 indicated this earlier, is that it took a long time for 11 dairy producers to pick up hedging after the tools became 12 available for them to do so. 13 Would that be fair to say? 14 A. Well, our dairy producers? 15 Q. For dairy producers. 16 A. Our dairy producers have been -- I mean, this goes 17 back to, I mean, prior to myself even being with Prairie 18 Farms, when I was at Swiss Valley, we started hedging our 19 forward contracting programs back with them back in the 20 '90s, and our dairy producers have been actively engaged 21 in that. But some of those same -- these two dairy 22 producers are Legacy and Swiss Valley that came to Prairie 23 Farms that have slow -- or done less since... 24 Q. Would it be fair to say that your volume on those 25 forward-pricing programs four years since the date when 26 you first offered it, is not -- was not as robust as ten 27 years after you started offering it? Did it grow over 28 time, in other words? 5126 1 A. I'd have to go back and look at the records, but 2 that's probably a fair statement. 3 Q. Where I'm going with this is that people may say, 4 well, five years and a billion dollars later we are ready 5 to be done with this experiment. But the whole truth 6 would also have to account for the -- you know, how the 7 risk management would evolve further, not only what 8 happened to date. 9 Would that be fair to say? 10 A. I guess can you repeat your question? 11 Q. I'll rephrase it. 12 A. Rephrase. 13 Q. It -- it takes a long time for anybody to develop 14 a risk management program, and just based on the amount of 15 hedging done to date, we cannot fully predict whether 16 there will be growth or not going forward. 17 Would that be fair to say? 18 A. Yeah. Because, I mean, we have currently 19 customers that -- and it's not Class I, but it's -- 20 whether it be cheese or butter or other products, that 21 they Monday morning -- I call it Monday-morning- 22 quarterback themselves. 23 And I have to be perfectly honest, until the 24 butter price recently took off here, I would have thought 25 that we would have had this situation where I had seen it 26 over the years, that someone will go in, the commodity 27 that they hedged went down -- and you have had to see this 28 in your hedging career -- that the next year they feel 5127 1 they -- no different than dairy producers feel they left 2 out with the negative PPD, or lost out, they feel they 3 left out -- lost out on the hedge, and then they don't, 4 and then they regret it because the market -- 5 Q. It's a bit of a yo-yo, right? 6 A. Yes. But overall, risk management continues to 7 become more and more part of the business. 8 Q. So one of the earlier witnesses for National Milk 9 made a fairly bold statement that risk management for 10 fluid milk processors under higher-of is no more difficult 11 than risk management under the average-of. 12 Is that the view that you also subscribe to? 13 A. Well, if you want to go to the OTC market, the 14 traders, I'll call them the traders out there, can get 15 very creative in creating a Class I, whether it be under 16 the higher-of or the average-of. 17 Looking at it from a simplistic form, as you 18 mentioned, it would be -- it -- it would be easier 19 probably to do because you have to get into a lot more of 20 analysis to maybe doing multiple contracts versus two 21 contracts. 22 Q. So just to make sure the record is clear. Did you 23 say that it would be easier to do under OTC or easier to 24 do under the average-of and CME? 25 A. Well, I guess I'm probably talking in the sense 26 that, in the simplest form, it's easier to do the 27 average-of because you have got two contracts, which I 28 think we both would agree on that. 5128 1 Q. Sure. Yeah. 2 A. When you get to the higher-of, then you are still 3 dealing with multiple contracts, but then you are getting 4 into, are you buying or selling versus just flat out 5 whether you want to go long or short on the average-of. 6 Q. So the higher-of -- other benefits 7 notwithstanding, the higher-of is more complicated for 8 fluid milk processors? 9 A. But in IV, like I reiterated in my testimony, I 10 mean, we have done this for four years, and we have had no 11 interest in even -- I don't -- I was just with a large QSR 12 customer here recently, and they buy a lot of Class II. 13 And we have been doing -- we started a hedging program 14 with them in the last three years on a lot of Class II 15 product, and we've been doing -- again, as we both know, 16 hedging is really the insurance policy to keep your prices 17 stable. 18 They have not -- they also buy a tremendous amount 19 of fluid milk in the half pints, pint cartons, and if 20 anyone is going to be more interested, in my mind, of 21 trying to have a stable price -- because they can't change 22 their menu every month, like you -- like, per se, in the 23 retail side. They really have that probably more of a 24 challenge. So if they were going to be interested in 25 hedging, I would think they would also be very interested 26 in their Class I. But they have -- they don't have any 27 interest in that. 28 Q. So if your Honor will allow me, I would like to 5129 1 ask for personal advice from Mr. Hoeger. 2 I have a four-year-old son. He -- he knows about 3 half the letters. But I have given him enough time to 4 learn the entire alphabet. Do you think I should give up? 5 A. No. 6 Q. Yeah. But do you think we should give up on fluid 7 milk processors just because they don't know how -- 8 A. No, I don't think we should give up. But also 9 going back to this QSR restaurant, they have a very robust 10 that they do hedging on a lot of other commodity groups, 11 so I don't necessarily think that's a fair comparison, 12 because we're already doing a lot on the Class II. And we 13 have even discussed with them about it whether they want 14 to go to the Class I, and they have not had any interest. 15 Q. Okay. I will -- thank you for answering that. 16 Just to close the loop on the OTC -- 17 A. Uh-huh. 18 Q. -- I agree with you that hedging Class I is 19 possible under higher-of through the OTC. But wouldn't it 20 be fair to say that -- you stated that even if it costs 21 you as little as $0.06, if we were to remove advanced 22 pricing, that could eat up your entire profit margin, so 23 it's technically feasible but cost prohibitive. 24 Could it also be the case that OTC for Class I, 25 while technically feasible, is indeed cost prohibitive 26 under the higher-of? 27 A. It all depends. Because I know of some OTC, and 28 we use some OTC markets, and there are some that are more 5130 1 focused on Class IV and -- and there always seems to be a 2 decent amount of liquidity on Class III side. Then 3 sometimes liquidity concerns is on Class IV, but we have 4 found some OTC handlers or markets that they -- they seem 5 readily available and willing to do some of those things 6 if we needed or wanted to. 7 Q. I will agree with you the cost of the OTC products 8 are not -- offers are not uniform across everything they 9 do. They differ based on how soon they can offset their 10 risk at their warehousing. 11 A. Yeah. I mean, we have had some OTC that actually 12 are -- have been willing to take less than what the -- per 13 se the Class IV, so that offsets any of that additional 14 cost that possibly would be there. 15 Q. Right. Right. Going back to the depooling and 16 the average-of. In your opinion, the depooling that we 17 have seen in 2020 and 2022, would it have happened if we 18 had higher-of approach since 2020 or since 2019? 19 A. There's still -- because of the causation of what 20 caused, there still would have been some depooling, 21 because it was to traumatic. 22 Q. The spread was traumatic? 23 A. The spread. 24 But in the same breath, if you go back to November 25 of 2019, that was the negative $3 in Order 30. So that 26 depooling wasn't necessarily caused by the USDA Food Box 27 Program or COVID-related issues. So I mean, that 28 depooling still would have occurred because there was a 5131 1 dramatic movement upward in Class III. 2 Q. Have you done any research or are you familiar 3 with any research that would quantify how much depooling 4 would have happened if we had higher-of? 5 A. No. But I'm sure you have a document. 6 Q. I'm working on it. Thank you. 7 DR. BOZIC: That's all the questions I have. 8 MR. LAMERS: Mark Lamers, Lamers Dairy. 9 CROSS-EXAMINATION 10 BY MR. LAMERS: 11 Q. Mr. Hoeger, just a quick question. 12 You would agree that Marketing Agreement Act and 13 any changes have to be in the public's best interest, 14 correct? 15 A. Correct. That's the goal. 16 Q. Okay. And in talking about the higher-of the 17 Class III or Class IV, there's times when you can see, 18 particularly Class IV price, being almost $3 or $4 a 19 hundredweight higher. And I was particularly looking at 20 the month of June this past year. 21 A. June and July have been, yes. 22 Q. Okay. And if we attach Class I differentials to 23 that higher-of in that particular month, isn't that 24 artificially raising the price to the consumer? 25 A. What -- what Class I differential? The current 26 ones? 27 Q. Any Class I differential in that, when you use the 28 higher-of -- 5132 1 A. -- that Class I -- 2 Q. -- when you have the higher-of, and let's say 3 Class IV is $3 to $4 higher than the Class III price, the 4 question was, isn't that artificially increasing the cost 5 of milk to producers -- I mean, I'm sorry -- to the 6 consumer? 7 A. That is raising the Class I differential; though, 8 is to also help move milk and -- to the Southeast, because 9 that's the purpose of the Class I differential. And 10 that -- but on the higher-of, whether it would have been 11 before or now, that Class I differential hasn't changed at 12 this point in time. 13 Q. Right. 14 A. So that really hasn't changed what the impact of 15 the -- whether it would have been in 2018 or going 16 forward, that still would have had the same impact. 17 Q. The Class I mover is attached to the higher -- if 18 you are talking about the higher-of, it's attached to 19 that? 20 A. Correct. 21 Q. Okay. So in Federal Order 30, Class IV is about 22 half a percent of the milk on the market. 23 Do you think it's appropriate using the higher-of 24 in that market, particularly if you see that high of a 25 spread? 26 A. Well, Order 30 is a unique order because it has 27 such a high concentration of Class III and such a low 28 Class I utilization. But this is a national hearing, so 5133 1 this isn't addressing just Order 30 challenges. 2 We need to look at it as a whole, that it's a 3 national to draw that. So if setting the Class I on the 4 higher-of, which would be to your point, Class IV, that 5 will also draw the milk from those high -- from those high 6 concentration orders to the orders that need. 7 Q. Do you know of milk in the Midwest moving down to 8 the Southeast market? 9 A. We move some ourselves. We also pull a fair 10 amount of milk from Wisconsin, as much as we can attract. 11 But we have also now had to start pulling milk out of 12 Kansas into the St. Louis market. 13 MR. LAMERS: Thank you. No further questions. 14 MS. TAYLOR: Might we take our lunch break now? 15 THE COURT: And do you -- you will have some 16 questions when we come back? 17 MS. TAYLOR: Yes, we will. 18 THE COURT: Good. So it's 12:05. Please be back 19 and ready to go at 1:05. Thank you. 20 (The lunch recess took place.) 21 ---o0o--- 22 23 24 25 26 27 28 5134 1 MONDAY, SEPTEMBER 25, 2023 - - AFTERNOON SESSION 2 THE COURT: Let's go back on the record. 3 All right. We're back on the record. It is 4 approximately 1:05 p.m. The witness is ready, and we will 5 resume any further examination questions. 6 Who would like to begin, someone from AMS or 7 someone else? 8 All right. We'll proceed with AMS. 9 MS. TAYLOR: Good afternoon. 10 THE WITNESS: Good afternoon, Erin. 11 CROSS-EXAMINATION 12 BY MS. TAYLOR: 13 Q. Good afternoon. Just a couple quick questions for 14 you. 15 I want to go through, you discussed the two 16 problems that were evident in moving to the average-of. 17 And for the first one, under revenue to producers, which 18 was significantly reduced without recovery, on the bottom 19 sentence of that first paragraph reads, "Those who could 20 depool were able to avoid the price inversion, while 21 others had to stay in the pool and absorb the impact of 22 the increased Class III price." 23 So my first question is, can you just elaborate 24 when you say "avoid the price inversion," what that means. 25 A. Well, from the -- what created the negative PPD 26 would have been, obviously, the Class III was set with 27 advanced pricing, and then the inversion between III and 28 IV, III took off, which, then, hence generated -- the 5135 1 Class III producers could depool, whereas our producers, 2 who are primarily Class I, could not depool. 3 Q. Okay. So avoiding a price inversion is depooling 4 and not having the negative PPD impact those producers? 5 A. Correct. 6 Q. Okay. And then my second question was the "absorb 7 the impact," "while others had to stay in the pool and 8 absorb the impact." 9 And from your first definition, that is those 10 processors that couldn't depool, and so the producers were 11 impacted by the negative PPD? 12 A. Correct. 13 Q. Okay. Under the second one, "disorderly marketing 14 due to higher depooling," you discuss where you -- you 15 discussed in your direct and on cross the situation where 16 some of the closest milk supply was unavailable and you 17 had to go farther out to get milk. 18 A. Correct. 19 Q. We have had -- we have had price inversions in the 20 past. So did that not happen in those instances as well? 21 I'm just trying to get for the record why it's different. 22 A. Under the higher-of, those price inversions were 23 one or two month. But in the current environment that we 24 have been under, and no different than I mentioned as part 25 of my testimony -- or part of our cross, was even taking, 26 as an example, 2022 to 2023, even if we count October, 27 which was just announced last week, 14 out of those 28 22 months there's been that asymmetrical risk of Class IV 5136 1 is higher than the Class III. And so that -- when it 2 seems to be that ongoing, a lot of operators have made the 3 decision to depool for an extended period of time versus 4 maybe only being a shorter-term period. 5 Q. On that next page, on page 3, when you talk about 6 how the spread between III and IV, when this occurs, so 7 you are talking about your situation where milk wasn't 8 going to Class I and you had to go further out to get it. 9 And you said, "This occurs when the spread between III and 10 IV was larger than $1.48." 11 And so I wanted to clarify if this occurred on 12 more than one occasion. I think your example was you had 13 an occasion, but your experience is that was more than 14 once? 15 A. Yes. 16 Q. Okay. And then you -- the second part of that 17 sentence, "versus when the spread was larger than $1.48 18 and supply conditions in other markets." 19 Can you elaborate what that means, when the supply 20 conditions that are in other markets? Are you talking 21 about in III, IV markets specifically? 22 A. Yes. Depending on the demand of some other -- of 23 those other markets over the surrounding markets, it's -- 24 it's prohibited to us to secure a, I guess -- we try to 25 get the closest milk always to the closest plant. That's 26 always been a fundamental principle in that. 27 So depending on, A, the pooling obligations of 28 that party, if they want to pool or not pool. And then 5137 1 also depending on the demand of even the next -- we'll 2 call it the next potential supplier in line, if they have 3 a shortfall on their -- whatever commodity they are 4 making, they may have been unwilling to supply. And a 5 third issue, what kind of ties into this more so is, there 6 are some -- some milk that is -- as an example, Order 30 7 that is supplying Order 33, and if I needed an Order 32, 8 because of that constraint, they don't want to qualify it 9 on 32 when they already have it on Order 33 qualification. 10 Q. Uh-huh. So you used the word "unwilling," and 11 that brought me to my next question. Because you did get 12 questions from multiple people on whether there is a 13 sufficient supply of milk for Class I already. 14 And is the problem a sufficient supply of milk, so 15 not enough milk production, or is the problem a 16 willingness for that production to go to where -- 17 A. I would say it's more of a willingness due to 18 economic decisions that are being made, no different than 19 Mr. Miltner, you know, pointed out in the one -- one 20 example, it's business. And no different than some cheese 21 manufacturers or to Class IV or butter or whatever 22 commodity you are making, they are gearing their plants to 23 operate at a certain efficiency level, and sometimes they 24 are not going to lower to serve the Class I, just -- just 25 because they are nice guys. It's an economic decision. 26 They have done the analysis to understand that their cost 27 margins are that tight, that they have got to run -- 28 they've got to run full, as an example. 5138 1 Q. Okay. So on the bottom of page 3 you talk about 2 hedging and risk management. And so Prairie Farms, 3 despite having numerous Class I plants, does not hedge its 4 Class I? 5 A. No. 6 Q. Can I ask what -- why doesn't -- what are the 7 considerations that Prairie Farms looks at to make that 8 decision that you didn't want to use that tool? 9 A. For ourselves, for our branded product, is I'm 10 assuming the question is directed at? 11 Q. Sure. 12 A. I walked into that question, didn't I? 13 Part of it is the correlation between -- we -- we 14 try to price our branded product as a correlation of the 15 private label that we do, because they are going to be on 16 the shelf together. So I get a lot of things to do in my 17 day job, regular job, but one of the things is trying to 18 price forecast. And if I give my sales team the wrong 19 forecast and all of a sudden we want a $0.50 per gallon 20 difference between -- and I'm using a theoretical 21 number -- between our brand and the private label, because 22 our sales team knows -- sorry, stepped away from the mic a 23 little bit -- that we'll get -- we'll hit our targeted 24 sales goals. 25 But if I go out and tell them, hey, let's lock in 26 because I -- I think the market is going up, well, it's 27 like I tell our dairy producers a lot of times when they 28 ask me for a price forecast, you know, my price forecast 5139 1 is only as good as the next five minutes, because it's 2 like the weatherman, my forecast can be shot out the 3 window. 4 So with that being the case, our sales team has 5 been hesitant to do that because their fear is, if the 6 price does go down, then the private label goes down, then 7 all of a sudden we may have a higher disparity, and then 8 they are not hitting their sales targets, if that makes 9 sense. 10 Q. That does make sense. Thank you. 11 And so I'll ask you a question I asked 12 Mr. Alexander. When Prairie Farms was looking back in '17 13 and '18 to support the change -- 14 A. Yes. 15 Q. -- was it your understanding that the change was 16 to help Class I processors hedge or to help the customers 17 of Class I processors to hedge? Because I -- 18 A. There's a distinction there. 19 Q. -- think I heard them both. 20 A. Yes. We looked at it as a view that we felt our 21 customers would be doing more hedging, which would be also 22 included in some of that private label business that we 23 do. 24 As far as ourselves, again, we probably would not 25 have done -- we weren't looking to do it for our branded 26 product. It was more so to be able to have another tool 27 in the toolbox to offer to our customers. 28 Q. And you talked about, in your statement, how your 5140 1 customers don't seem to be utilizing that. 2 Have you had conversations with them as to why 3 they are not, what goes into their thinking about why they 4 are not using that tool? 5 A. A lot of them is the same fear as I just described 6 with the sales -- about our sales team being out of 7 price -- you know, out of whack. Is that if they locked 8 in on a fixed price and the market went down, and their 9 competitor didn't go down -- or didn't -- excuse me -- 10 didn't hedge, and they went down, then all of a sudden 11 it's a financial disadvantage, whether it be in lower 12 margins or -- or just flat out too high of a price, and so 13 you lose market share. 14 Q. Okay. On the last page 4 you have a table there. 15 And I don't think anyone's asked you yet if you could just 16 walk through for the record and explain the table, so 17 we're not assuming anything incorrectly. 18 A. Sure. So for simplicity I'll just stick with 19 July. 20 Farm A hedged 2.2 million pounds of milk at a 21 hedge price -- or fixed -- they locked in Class III, 22 because that's what they are paid off of, $18.93 for July 23 of 2020. The negative -- and I'm going to keep them 24 separate, and then I'll come back to Farm B. The negative 25 PPD, which is in the -- I guess we'll call it the fifth 26 column over, was a negative $7.51. So, hence, the farm on 27 a Class III basis received $18.93 minus $7.51. Now, that 28 wasn't what they totally received as a mailbox price 5141 1 because they do get component values and so forth as part 2 of their pay price, but that's -- that's -- in the 3 simplest form, that's what that would be. 4 And then no different than for Farm B who hedged 5 150,000 pounds of their milk for the month, they hedged at 6 a $16.53 price, and with a negative PPD of $7.51, they 7 netted out $9.02. And, again, on a Class III basis. 8 Q. And so under these two examples you provided, it's 9 Prairie Farms' position that the change -- the change is 10 not only -- in your opinion, not being used by Class I 11 processors to hedge -- or customers of Class I 12 processors -- 13 A. Correct. 14 Q. -- to hedge, but it also makes hedging for farmers 15 more difficult? 16 A. We have heard from our producer base that it is -- 17 and no different than Brian Henrichs who testified, that 18 it's become more challenging for them to hedge. 19 MS. TAYLOR: I think that's it for AMS. Thank 20 you. 21 MS. HANCOCK: Your Honor, we have no further 22 questions. We would move to admit Exhibit 247. 23 THE COURT: Is there any objection to the 24 admission into Exhibit 247? 25 There is none. Exhibit 247 is admitted into 26 evidence. 27 (Exhibit Number 247 was received into 28 evidence.) 5142 1 MS. HANCOCK: Thank you. 2 Your Honor, at this time we would call Calvin 3 Covington. 4 THE COURT: Would you state and spell your name, 5 please. 6 THE WITNESS: Yes, ma'am. Calvin, C-A-L-V-I-N, 7 Covington, C-O-V-I-N-G-T-O-N. 8 THE COURT: Now, adjust that microphone so that 9 it's going to be comfortable for you. You're a tall man. 10 THE WITNESS: Is this okay? 11 THE COURT: That's perfect. 12 THE WITNESS: All right. Thank you. 13 THE COURT: Have you testified previously in this 14 proceeding? 15 THE WITNESS: Yes, ma'am. 16 THE COURT: All right. You remain sworn. 17 THE WITNESS: Yes, ma'am. 18 THE COURT: You may proceed. 19 MS. HANCOCK: Thank you, your Honor. 20 CALVIN COVINGTON, 21 Having been previously sworn, was examined 22 and testified as follows: 23 DIRECT EXAMINATION 24 BY MS. HANCOCK: 25 Q. Mr. Covington, did you prepare Exhibit NMPF-34 in 26 preparation for your testimony today? 27 A. Yes, ma'am. I did. 28 MS. HANCOCK: And, your Honor, I believe we're to 5143 1 Exhibit 248. If we could mark that as the next exhibit 2 number? 3 THE COURT: It will be so done. 4 (Exhibit Number 248 was marked for 5 identification.) 6 BY MS. HANCOCK: 7 Q. Mr. Covington, would you proceed with your 8 statement, please? 9 A. Thank you. 10 On the first page of my exhibit, I'm going to skip 11 over part of that because it's the same verbiage of 12 previous testimony. 13 But I will start out, this testimony is presented 14 in support of Proposal 13, restore the original Federal 15 Order Reform Class I skim milk mover as proposed by 16 National Milk Producers Federation. And this testimony is 17 presented on behalf of Southeast Milk, Incorporated, a 18 longtime member of NMPF. 19 I'm going to skip over the next couple of 20 paragraphs, but come down to clarify a question from my 21 previous testimony. 22 As of June 30, 2023, SMI's membership consists of 23 114 dairy farmer members who own and operate 119 Grade A 24 dairy farms. SMI estimates 93 of these members meet the 25 Regulatory Flexibility Act's definition of a Small 26 Business. 27 My testimony will focus on the challenges 28 resulting from the use of the average-of versus the 5144 1 higher-of in calculating the Class I mover skim milk price 2 for dairy farmers marketing milk under the Appalachian, 3 Florida, and Southeast Federal Milk Marketing Orders. 4 Implemented in May 2019, the average-of has 5 lowered revenue to dairy farmers compared to using the 6 higher-of to calculate the Class I mover skim milk value. 7 The revenue loss occurs when the difference between the 8 Advanced Class III skim and Class IV skim milk price 9 exceeds $1.48 per hundredweight. 10 From May 2019 through June 2023 the average-of 11 decreased revenue to the three Southeastern Federal Milk 12 Marketing Order producing pools by $192,371,500. And I 13 had this there in Table 1. This revenue decline was a 14 direct result of calculating the Class I mover skim milk 15 price using the average-of versus the higher-of. 16 The use of the average-of has decreased revenue to 17 Federal Milk Marketing Order pools, including the 18 Appalachian, Florida, and Southeast Federal Milk Marketing 19 Orders. This, in turn, has lowered the blend or uniform 20 milk price. 21 As shown in Table 1, and using data from May 2019 22 to June 2023, the Appalachian Federal Milk Marketing 23 Order's blend price was reduced by $0.38 per 24 hundredweight; the Florida Federal Milk Marketing Order's 25 blend price was reduced by $0.41 per hundredweight; and 26 the Southeast Federal Milk Marketing Order's blend price 27 was reduced by $0.36 per hundredweight. This is a 28 significant and unexpected reduction in dairy farmer 5145 1 revenue from a milk price formula change that was intended 2 to be revenue neutral. 3 Dairy farmers in these three Federal Milk 4 Marketing Orders appreciate their fellow taxpayers 5 providing partial reimbursement of the loss through the 6 Pandemic Market Volatility Assistance Program. However, 7 the revenue should have come directly from Federal Milk 8 Marketing Order pricing provisions and the marketplace as 9 the Federal Milk Marketing Order system is intended. 10 If the higher-of pricing remained in place, these 11 inconsistencies would not have occurred. Taxpayers should 12 not be required to cover the losses. The Pandemic Market 13 Volatility Assistance Program was a one-time program. It 14 will not be around in the coming years to save dairy 15 farmers from the unintended lower pricing that occurs by 16 using the average-of pricing mechanism. 17 The negative financial impact of the average-of 18 was not limited to just a few months. During the 50-month 19 period from May 2019 to June 2023, the average-of lowered 20 the Class I mover skim milk price in 27 months, compared 21 to what would have been paid had the higher-of price been 22 utilized. 23 The average-of was lower than the higher-of 24 two-months in 2019, eight months in 2020, six months in 25 2021, nine months in 2022, and two months in 2023, as of 26 June. The average-of lowered revenue to dairy farmers 27 before and after the coronavirus pandemic. 28 The negative financial impact of the average-of 5146 1 was not solely due to the Class III skim mover over $1.48 2 hundredweight higher than the Class IV skim mover. It was 3 also due to the Class IV skim mover, $1.48 per 4 hundredweight higher than the Class III skim mover. 5 MS. TAYLOR: Mr. Covington? Could you slow down 6 just a bit? 7 THE WITNESS: Yes, ma'am. 8 MS. TAYLOR: Thank you. 9 THE WITNESS: Thank you. 10 From May 2019 to June 2023, the negative financial 11 impact occurred in 16 months due to the Class III skim 12 milk value exceeding Class IV by over $1.48 per 13 hundredweight in 11 months when Class IV exceeded 14 Class III by $1.48 per hundredweight. 15 More recently, both the June and July 2023 Class I 16 movers are lower due to the use of the average-of 17 calculation compared to the higher-of calculation. The 18 July 2023 Class I mover skim milk price was announced at 19 $7.88 per hundredweight. Using the higher-of, the July 20 Class I mover skim milk value would be $8.94 per 21 hundredweight, $1.06 per hundredweight higher than the 22 actual price. 23 Worse yet, the average-of lowered revenue to dairy 24 farmers at a time when dairy farmer margins are extremely 25 low. The July gross margin calculated under USDA's Dairy 26 Margin Coverage Program was only $3.52 per hundredweight. 27 This is $6.40 per hundredweight lower than the margin in 28 July of last year, and up to that time, it was the lowest 5147 1 margin in the history of the program. The average-of 2 calculation is reducing dairy farmer milk prices during a 3 financially challenging time for dairy farmers. 4 Further, the average-of calculation plus $0.74 per 5 hundredweight limits any recovery of losses when there's 6 wide variation between the Advanced Class III and IV skim 7 prices. The average-of can only exceed the higher-of by 8 $0.74 per hundredweight. 9 On the other hand, there's no cap on how much the 10 average-of can fall below the higher-of. In 11 December 2020, the average-of was $5.19 per hundredweight 12 lower compared to the higher-of calculation. In 13 October OF 2022, the Class I mover skim value was $2.08 14 per hundredweight lower than the higher-of calculation. 15 The average-of inadvertently and unnecessarily places more 16 risk on dairy farmers, and the downside risk is greater 17 than the upside risk. 18 To date, the largest Federal Milk Marketing 19 Order -- reduction in Federal Milk Marketing Order 20 revenue -- 21 THE COURT: Would you just start that paragraph 22 again, please? 23 THE WITNESS: Yes, ma'am. 24 To date, the largest reduction in Federal Milk 25 Marketing Order revenue resulting from the average-of was 26 in calendar year 2020. The Appalachian Federal Milk 27 Marketing Order blend price was reduced by $1.28 per 28 hundredweight; the Florida Federal Milk Marketing Order 5148 1 blend price was lowered by $1.37 per hundredweight; and 2 the Southeast Federal Milk Marketing Order blend price was 3 $1.16 per hundredweight lower. At the time, dairy farmers 4 were not assured they would receive any reimbursement for 5 the losses sustained due to the blend price reduction. 6 Such a large reduction in blend price was the tipping 7 point for some dairy farmers to exit the dairy farming 8 business. Such farm exits further reduced the milk supply 9 in an already milk deficit marketing area. 10 Granted, a partial reimbursement was received for 11 2020 losses. However, it was not until 2021 and 2022 12 before partial loss payments were received, long after the 13 time when dairy farmers had to pay their bills. This was 14 a one-time remedy, and there's no guarantee of a future 15 such remedy if this occurs again. 16 The Appalachian, Florida, and Southeast Federal 17 Milk Marketing Orders do not have an adequate supply of 18 farm milk year round to meet consumer fluid milk demand. 19 Supplemental milk is purchased outside the three orders to 20 meet demand. The average-of calculation resulting in 21 lower blend prices makes attracting supplemental milk more 22 challenging. 23 The three Southeastern Federal Milk Marketing 24 Orders have the highest Class I utilization among all 25 Federal Milk Marketing Orders. In 2022, the three 26 Southeastern Federal Milk Marketing Orders combined for a 27 Class I utilization of 73.7%, compared to 23.1% for the 28 other eight Federal Milk Marketing Orders. The higher 5149 1 Class I utilization results in higher blend prices in the 2 three Southeastern Federal Milk Marketing Orders than for 3 all other Federal Milk Marketing Orders. A higher blend 4 price helps procure needed supplemental milk to meet fluid 5 demand. 6 Due to the higher Class I utilization and the 7 incorporation of the average-of, the three Southeastern 8 Federal Milk Marketing Orders experienced a larger 9 reduction in blend prices compared to the other Federal 10 Milk Marketing Orders. This narrows the difference in 11 blend prices between the Southeastern Federal Milk 12 Marketing Orders and the other Federal Milk Marketing 13 Orders, including those which have historically been a 14 source of supplemental milk. It requires more money 15 beyond Federal Milk Marketing Order blend prices to 16 attract the supplemental milk needed to meet fluid demand. 17 Dairy farmers, through their cooperatives, purchase most 18 of the supplemental milk needed in the Appalachian, 19 Florida, and Southeast Federal Milk Marketing Orders, 20 which reduces dairy farmers milk checks. 21 Although my testimony focuses on the Southeastern 22 Federal Milk Marketing Orders, the average-of creates 23 challenges for all Class I handlers and all Federal Milk 24 Marketing Orders. Milk handlers compete for the same milk 25 for different uses. 26 As the Secretary of Agriculture pointed out in the 27 2000 Federal Order Reform decision, the Class I price 28 should exceed Class III and IV prices. This is to ensure 5150 1 an adequate supply of milk for fluid use. This is a 2 primary reason why higher-of was implemented back in 2000. 3 The Secretary of Agriculture understood what would 4 happen by using an average-of the manufacturing milk 5 prices versus the highest manufacturing milk price in 6 establishing the Class I price. The 2000 reform Final 7 Decision emphasized that using an average-of manufacturing 8 milk prices to establish a Class I price makes it more 9 difficult for Class I handlers to procure milk from plants 10 with a higher value manufactured product. 11 The Secretary further pointed out the use of THE 12 higher-of in the Class I formula makes it more difficult 13 for milk needed for Class I to remain at manufacturing 14 plants. Using an average-of two milk classes, III and IV, 15 results in occasional difficulties for those supplying the 16 fluid milk market to compete with those supplying the 17 manufacturing milk market. The Class I price established 18 by using the average-of approach may not be high enough to 19 attract milk for fluid use. 20 Federal Milk Marketing Orders need to heed the 21 2000 Federal Order Reform decision and its rationale and 22 return to the higher-of in calculating the Class I mover. 23 Federal Milk Marketing Orders have two primary 24 purposes as contained in the Agricultural Marketing 25 Agreement Act of 1937: One, maintain orderly marketing 26 conditions; and two, protect the interest of the consumer 27 by ensuring an adequate supply of milk for fluid 28 consumption. 5151 1 Using the average-of versus the higher-of makes it 2 more difficult for Federal Milk Marketing Orders to meet 3 those two purposes. Previous witnesses have testified how 4 the average-of creates the opportunity for depooling, thus 5 leading to disorderly marketing conditions. 6 Other hearing proposals related to the Class I 7 mover skim milk price include an adjuster added to the 8 advanced or announced Class III and/or IV skim milk 9 prices. SMI appreciates the submitters of these other 10 proposals recognizing the challenge with the current 11 average-of method and wanting to make a correction. 12 However, these other proposals call for revenue 13 losses to dairy farmers resulting from the average-of paid 14 back to dairy farmers after the fact. Being paid after 15 the fact creates challenges for dairy farmers. 16 Generally dairy farmers must pay their labor cost 17 biweekly. Most other expenses are paid monthly or upon 18 receipt of the product purchased. Dairy farmers need the 19 revenue from milk sales now, not after the bills are past 20 due. 21 Adjusting the Class I mover in later months to 22 compensate for losses resulting from using an average-of 23 creates challenges. Dairy farmers may not be compensated 24 at all or not equitably compensated. Dairy farmers may 25 have exited the business before receiving the adjustment. 26 In some cases, the dollar difference between the 27 average-of and higher-of may be the determining factor in 28 their milking cows or not. The milk volume of some dairy 5152 1 farmers may be more or less when the adjustment shows up 2 in their milk check, compared to the volume produced when 3 the loss occurred. 4 Providing dairy farmers with the proper economic 5 signal is vitally important. Making the adjustment after 6 the fact could occur at a time when milk supply greatly 7 exceeds milk demand. The economic signal at the time the 8 adjustment is paid may need to be to produce less milk. 9 However, the adjuster added to the Class I mover may be 10 providing a different economic signal. On the other hand, 11 at the time when the spread between the Advanced Class III 12 and IV skim values is large could be a time when milk was 13 needed. The average-of can fail to provide the proper 14 economic signal. 15 It is good to see other dairy organizations 16 recognizing the challenges in the current average-of 17 method and their desire to correct it. However, the other 18 proposals cannot improve on the higher-of as the method to 19 calculate the Class I mover skim milk price. 20 In summary, the average-of has lowered dairy 21 farmer revenue compared to the higher-of. The economic 22 loss has been greater in Federal Milk Marketing Orders 23 with an adequate supply of farm milk needed for fluid milk 24 consumption. 25 THE COURT: Would you re-read that last sentence, 26 please? 27 THE WITNESS: Yes, ma'am. 28 The economic loss has been greater in Federal Milk 5153 1 Marketing Orders without an adequate supply of farm milk 2 needed for fluid milk consumption. 3 Southeast Milk, Incorporated, expresses its 4 appreciation to the Secretary of Agriculture and the Dairy 5 Division for holding this hearing. We strongly encourage 6 the Secretary to recommend the adoption of Proposal 13 -- 7 Now, you see I have Proposal 3. I failed to 8 update it from the original proposal numbers, so it needs 9 to be a 1 in front of that 3. 10 -- return to the higher-of in calculating the 11 Class I mover. This is needed to promote orderly 12 marketing of milk and help ensure consumers have an 13 adequate supply of fluid milk for consumption. 14 That's the end of my testimony. 15 BY MS. HANCOCK: 16 Q. Thank you, Mr. Covington. 17 Were you involved at the time that average-of 18 was -- was implemented? 19 A. I was involved in the dairy industry, but I was 20 not involved in putting that together. 21 Q. Okay. Well, tell me how you were involved in the 22 dairy industry at that time. 23 A. Well, I retired from full-time work at Southeast 24 Milk, but -- but since then, when I retired in 2010, I 25 remained connected with Southeast Milk, advised them on 26 various issues. And also, I have done some consulting 27 work for other dairy organizations, and done a fair amount 28 of speaking at various dairy organizations. 5154 1 Q. And what -- what is it that you understood was 2 intended to occur at that time? 3 A. Okay. Well, when that took place, you know, 4 again, it was a part of that 2018 Farm Bill, and, again, 5 it went in in May of 2019. And the first questions I 6 received about it was probably when I was speaking down at 7 the Georgia Milk Producers annual meeting. I got several 8 questions there about it. 9 And what my response was to those dairy farmers, 10 and also to other dairy farmers, I was very glad to see, 11 finally, the dairy processors lobby and dairy producers 12 coming together to support a change in Federal Milk 13 Marketing Orders. I hoped that might be something good 14 that would carry on, both processors and producers working 15 together. And then I -- I knew people who had the 16 developed it, and I told them I think I have confidence in 17 those people, that they designed the program where it was 18 to be revenue neutral. 19 However, and I have said this many times, I'm 20 always very leery when Congress gets involved in 21 legislating or changing Federal Order provisions. To me, 22 Federal Order provisions needed to be changed in hearings 23 like this where they can be properly vetted. Everybody 24 can put in their own $0.02, you might say. 25 And this one, in my opinion, was done pretty 26 quickly. And -- and, again, I'm not trying to fault 27 anybody, but, again, it was done through legislation, not 28 through a process like this. 5155 1 But I says, if you read the legislation, you know, 2 it has a two-year clause in there. So that tells me, 3 well, let it work for two years, and then it says in 4 there, if it doesn't work in two years, then we can come 5 to a hearing to change it. 6 Q. And in your observations, and as you testified 7 today, what is it that you -- that you believe that it was 8 trying to accomplish at the time average-of was 9 implemented? 10 A. Well, again, you know, I had -- I wasn't involved 11 in it, so I got a lot of information just by reading it. 12 It was trying to encourage fluid -- or make it easier for 13 fluid milk processors or buyers of packaged milk to be 14 able to use the futures contract and to help them -- and 15 the -- use the futures contract in hedging their Class I 16 milk price, and hopefully, maybe help to sell more fluid 17 milk. I mean, that was what I could read as I quizzed 18 people what the purpose of it was. 19 Q. In your observations since that implementation, do 20 you believe that it's been able to accomplish those goals? 21 A. Well, again, we have heard previous people 22 testify, right before me were two cooperatives that have 23 fluid milk plants, and, again, their response was they 24 were using it very -- using hedging very little or none at 25 all on milk. 26 It's been a year now since I had regular contact 27 with the fluid milk customers of Southeast Milk, but at 28 that time, you know, in conversations with them, they had 5156 1 no interest. 2 And then knowing I might be asked a question here 3 at this hearing, I asked the people now who are at 4 Southeast Milk who are having regular contact with 5 Southeast Milk's fluid customers, and still again, there's 6 been -- there's been no interest. 7 Q. And this has been after four years of time within 8 which, if there was going to be some hedging activity that 9 could be conducted, it could have occurred at any point in 10 time? 11 A. Well, like I say, it's been four years. 12 Q. Okay. And of all of the proposals that National 13 Milk is putting forth at this hearing, what do you believe 14 that the dairy farmers are most passionate or concerned 15 about? 16 A. Well, I have been working for dairy farmers for 17 about 50 years now, and when you work with dairy farmers 18 that long, and attend a lot of dairy farmer meetings, get 19 to know a lot of dairy farms, you hear dairy farmers 20 voicing or vetting to you. 21 And there's been a lot of vetting done to me 22 over -- over the years about so many different dairy 23 policies issues, or this, that, and the other. But I'd 24 say this issue of higher-of, whether I have been talking 25 with dairy farmers in Florida, talking with dairy farmers 26 in Oklahoma, Missouri, Kansas, Wisconsin, wherever, this 27 higher-of has just really been at the top of the list. 28 This has sort of got them more riled up than any other 5157 1 ones I can think of for a long time. 2 Q. And in 2021, we heard some testimony when 3 Dr. Vitaliano was on the stand, in February of 2021, 4 National Milk had -- had made some suggestions about using 5 average-of with some kind of truing up at a later date 6 that would put farmers in a similar position than if they 7 had just gone back to higher-of. 8 Do you -- what do you think about whether that is 9 a viable proposal as an alternative to the higher-of being 10 implemented as National Milk has sponsored it? 11 A. Well, I give them credit for trying to correct it, 12 and I even give people who put the other proposals with 13 some kind of adjuster of trying to correct it. But I can 14 tell you just based upon the feedback I received from 15 dairy farmers, they are -- they want the higher-of back. 16 That's the one they are comfortable with. 17 By nature, dairy farmers are very cooperative. By 18 nature, dairy farmers are willing to give most anything a 19 chance. And so they gave this a chance, but it's got them 20 in the pocketbook. It's hurt them in the pocketbook, and 21 so they are very suspicious of anything other than going 22 back to the higher-of. 23 Q. Okay. 24 MS. HANCOCK: Your Honor, at this time we would 25 make Mr. Covington available for cross-examination. 26 CROSS-EXAMINATION 27 BY DR. BOZIC: 28 Q. Marin Bozic Edge Dairy Farm Cooperative. 5158 1 Calvin, how are you? 2 A. Fine. Thank you. 3 Q. Just a few questions. 4 Is it correct to state that there are no 5 over-order premiums in Southeast today? 6 A. No. 7 Q. What would be the typical level of over-order 8 premiums paid by retailers for Class I milk? 9 A. Retailers do not pay an over-order premium on raw 10 milk. 11 Q. I apologize, for Class I milk that retailers buy 12 from bottlers, do they pay -- 13 A. They are -- there are over-order premiums in the 14 Southeast. 15 And I guess I'm going to have to ask -- generally, 16 I'm under confidentiality agreements with the cooperatives 17 I represent on those -- as established in those over-order 18 premiums, because it's part of marketing agreements that 19 we have with the various fluid processors. I'd prefer not 20 giving that since it's proprietary and confidential 21 information, but there are over-order premiums. 22 Let me back up. Southeast -- I can't speak for 23 other cooperatives. Southeast Milk does charge over-order 24 premiums. 25 Q. And I certainly wouldn't want you to break any 26 contracts. I didn't mean to ask you for that purpose. 27 But would it be fair to say that over-order 28 premiums had a downward trend in recent years in 5159 1 Southeast? 2 A. Yes, that's correct. 3 Q. And if there were -- and if they are on the way 4 down, then that limits how much bottlers in the Southeast 5 can afford to pay when they attract milk from other 6 regions; is that fair to say? 7 A. I'm going back up just a minute, if you don't 8 mind. 9 Q. Sure. Sure. 10 A. I'm going to go back to the downward trend. 11 Q. Yep. 12 A. Yes. There was a downward trend in over-order 13 premiums in the Southeast, for particular Florida. But 14 over the last year, 18 months, or maybe 24 months, there's 15 been a trend coming back up of over-order premiums. 16 Now, they are still not the level that I think 17 they need to be to adequately compensate cooperatives for 18 the services they are provided, but the trend went down 19 and is now starting to come back up. I hope it continues, 20 but we don't know for sure. 21 Q. So how much can you share about what's driving the 22 reversal in trend in over-order premiums? 23 A. Cooperatives started working together. When it 24 comes to over-order premiums, cooperatives are their own 25 worst enemies. 26 Q. Yeah. So have there been any unfilled orders by 27 retailers calling their cooperatives asking for fluid milk 28 products and cooperatives saying, we just can't deliver 5160 1 because we cannot source milk? Has there been any such 2 periods, prolonged periods, I guess, other than the first, 3 maybe, six weeks of the lockdown where everything went 4 haywire? 5 A. I could tell you -- and you have got both -- 6 you're talking about processors and retailers and 7 cooperatives. I can tell you there have been several -- 8 because dairy farmers have taken pictures. There's been 9 several instances over the last couple of years in the 10 Southeast where some grocery store shelves have not had 11 fluid milk on them, or very little. 12 I can tell you that the grocery store closest to 13 my farm where I stop and get my milk, there's been more 14 than one occasion when I have gone in there and the only 15 thing has been just a gallon or two of skim milk. 16 And, again, I don't know whether that was the 17 retailer or the processor. I do know there's been some -- 18 you know, as you can -- processor cases where there's been 19 some consolidation of processors in the Southeast. 20 I do know last year when school started, it was a 21 challenge to make sure that schools could get milk, a lot 22 of it just because of the distance involved. I know our 23 cooperative had to get involved with one of the plants 24 that we provide, find them additional milk so he could 25 work with some distributors that supply the schools. 26 Again, nothing intentional is done, because, you 27 know, we're in the business to sell milk, and farmers 28 milking cows, and you know, we need to get it out there. 5161 1 But I think there's been a variety of factors. 2 I can tell you that Southeast Milk, in the past, 3 has sold fluid milk to other cooperatives in order to help 4 them meet their demand. But over the past year, Southeast 5 Milk has backed out of some of those agreements because it 6 just didn't have the milk it needed to serve its own 7 customers. 8 What's happening in the Southeast, and, again, you 9 know, you were down there with me at Georgia, and you 10 heard from those farmers. We keep losing dairy farmers, 11 so the distance we have to come out to get milk just keeps 12 getting further and, you know, greater miles. 13 Q. So the reason I'm asking about the unfilled orders 14 or the over-order premiums, is because it seems to me -- 15 please correct me if I'm reasoning inappropriately -- it 16 seems to me that if the average-of introduced challenges 17 in sourcing milk from other regions, then it would have 18 manifested that such challenges would manifest either in 19 form of unfilled orders or some form of charging customers 20 above and beyond what normally they would be charged based 21 on where the Class I price is. 22 Would that be a fair reasoning? 23 A. Well, I think you might have answered your own 24 question right -- right -- right there, Doctor. 25 As I told you, in the Southeast, you know, 26 premiums move down, but over the last couple years or so, 27 have been coming back up. And it was -- again, it was -- 28 and cooperatives have to work together to have successful 5162 1 over-order premiums. You got to work together, use a 2 common marketing agency in order to make it work. If not, 3 you are going to have unequal raw product cost among the 4 processors. 5 So I think you sort of answered your question 6 there, where milk prices got so low. Again, you see 7 what -- 8 Q. Sure. 9 A. -- the average-of, how much it lowered it. It 10 finally got the attention of cooperatives, management, and 11 cooperative leaders, hey, we better get back in the room 12 and try to work this thing out if we are going to try to 13 keep what dairy farmers we have. 14 Q. So if I've answered my own question, haven't they 15 solved their own problem? 16 A. It's still a ways to go. Because when I first 17 went to work for Southeast Milk, I know dairy farmers got 18 me in the room and says, Calvin, you got to push the 19 envelope when it comes to getting higher over-order 20 premium. 21 And, again, I think all cooperative managers down 22 there, cooperative leaders, are trying to push the 23 envelope. And I was -- when I was back as CEO a year ago, 24 I was involved in having discussions of trying to even up 25 it more. 26 But the feedback I got from the customers of 27 Southeast Milk is, okay, we'll do some, but we're still 28 concerned. Our biggest concern is, we want to make sure 5163 1 that what I pay for milk is the same thing that guy over 2 there is paying for milk. And there's still a lot of 3 hesitancy, and that's what's held back bringing them up 4 any further. 5 Q. Okay. I hear you. Thank you for answering that. 6 As you think about the 2017, 2018 deal between 7 National Milk and IDFA, would it be fair, would you agree 8 with the statement that the original sin, so to speak, of 9 that deal is that it did not have a mechanism to get back 10 fast to revenue neutrality? 11 A. Well, I wouldn't call it a sin. My definition of 12 sin is probably a little bit different than that. 13 Q. Here you depool, you don't go to hell, so that -- 14 A. Okay. I think -- and, again, you know, the two 15 people involved in putting that together, one of them used 16 to work for me for several years, and the other one's a 17 good friend of mine. I think they went at it with their 18 best intentions. Their best intentions. And I -- and it 19 just didn't work. I mean, they're -- based upon the 20 numbers in my testimony, it's cost dairy farmers money. 21 Now, I have to give -- you know, one of the 22 hardest things to do if you put so much effort in a 23 program and then it doesn't work, is to admit you were 24 wrong. And so I have to give some credit to National Milk 25 of coming up with this proposal. 26 Q. What do you think of the IDFA's proposal that 27 would floor the mover to $0.74? So it can be higher, but 28 not lower than $0.74. 5164 1 Is it fair to state that over the long run -- and, 2 you know, we can leave aside -- I would not dispute that 3 some people will go out of business, etcetera -- but is it 4 fair to say that the over the long run that would increase 5 the price received over the higher-of? 6 A. I don't know. And, again, we are going to hear 7 testimony about that probably later today or tomorrow 8 or -- or the next -- or the next day. I mean, we just 9 don't know what's going to happen. 10 But I -- I guess, I'm just going to go back. I am 11 a firm believer in the higher-of. Even if we set aside 12 the money issue, I go back to the purposes of Federal Milk 13 Marketing Orders as I have outlined. 14 And if we go back in history, even back when -- 15 back in the 1930s when we had licenses and the Federal 16 Milk Marketing Orders were just starting, and cooperatives 17 were working together in the New York City area trying to 18 organize, if you go back and read that history up to now, 19 when it comes to establishing the Class I price, we have 20 got a history of taking the highest manufacturing price 21 and going from there. And, again, even setting aside what 22 it's done money-wise to dairy farmers, you know, I go back 23 to that. 24 If we want to fulfill the purpose of Federal Milk 25 Marketing Order to serve that Class I market, we need to 26 start with the highest manufacturing price, just like I 27 quoted the Secretary of Agriculture in the 2000 decision, 28 and go from there. 5165 1 Q. If you would indulge me and engage in a thought 2 experiment. And I understand that you are not authorized 3 to speak on behalf of an organization, if you are willing 4 to share your opinion. 5 Let's say that IDFA were to come -- and I'm not 6 saying this, I'm not obviously speaking on their behalf -- 7 let's say they were to come and say, let's go with the 8 higher-of, but with a floor -- and I'm going to offer a 9 ridiculous number just to prove a point -- let's go with a 10 floor of $3 per hundredweight. 11 How would you assess that proposal? 12 A. I can't speak for any other than Southeast Milk. 13 But, personally, just because what I answered to you 14 earlier, I would say no. You know, there's just something 15 about pulling numbers out of air. I think a number, 16 whatever number you use, needs to be based upon good, 17 sound economics. 18 And, again, I go back of what we have used for -- 19 for so many years in the Federal Order system, you know, 20 start with the manufacturing price and go from there. 21 Q. Would you be willing to go on the record that you 22 would also reject the proposal with a floor of $6 per 23 hundredweight? I'm going somewhere with this. 24 A. Again, I just have an issue of, you know, picking 25 a number, you know, without being -- you know, with 26 sound -- sound economics on it. 27 Q. Okay. 28 A. And, again, I just -- I go back to -- to using the 5166 1 higher-of. And I mean, we have done pretty good for, 2 what, 65 -- well, excuse me, really didn't get going until 3 1962 when everything converted over from economic formulas 4 to competitive prices, the manufacturing and the MW and so 5 forth, of taking the highest manufacturing price and going 6 from there. 7 Q. So where I'm going with the $3 and $6 is it seems 8 to me that in addition to fulfilling the basic functions 9 of Federal Orders, the point that you were referring to, 10 it seems to me that the original design flaw of 2018 is 11 not just the speed of convergence to revenue neutrality, 12 it's also lack of compensation for the asymmetric risk. 13 Would you agree with that? 14 A. I had it in my testimony, you know, dairy farmers 15 took all the downside risk. 16 Q. Right. Right. 17 So in other words, if there should be ever a 18 consensus on higher-of, there -- an essential part of that 19 would have to include a compensation for asymmetric risk? 20 A. Again, I'm not proposing that. You know, maybe 21 there might be a proposal on that later on. But, again, 22 I'm -- I go back, I'm a firm believer in the higher-of. 23 DR. BOZIC: No further questions. Thank you, 24 Calvin. 25 THE WITNESS: Uh-huh. 26 CROSS-EXAMINATION 27 BY MS. VULIN: 28 Q. Good afternoon, Mr. Covington. 5167 1 A. Good afternoon, ma'am. 2 Q. I'm going to ask about Exhibit 241. So I'm 3 wondering -- I forgot to give a heads-up in advance that I 4 would need a copy of that, so if you will give me just a 5 moment. 6 THE COURT: And state your name for the record. 7 MS. VULIN: Ashley Vulin with the Milk Innovation 8 Group. 9 May I approach? 10 THE COURT: You may. 11 BY MS. VULIN: 12 Q. This is Exhibit 241. It's a PowerPoint that 13 Ms. Dorland put on on Friday. Were you able to listen 14 in -- or Wednesday of last week. Were you able to listen 15 in on her testimony? 16 A. I probably heard five or ten minutes of it. 17 Q. Okay. If you could go, please, to page 11 of this 18 PowerPoint. She has some bar charts here that track 19 proposal performance and dollars per hundredweight. 20 Do you see that? 21 A. Are you talking about these lines here? 22 Q. Yes. 23 A. I see them. 24 Q. And based on my review of those, it looks like, 25 other than 2020, MIG's Proposal 15 would generate more 26 money than NMPF's Proposal 13. 27 And so my question is, if that's the case, why is 28 NMPF not supporting MIG's Proposal 15? 5168 1 A. I'm not familiar with these calculations. Before 2 I would want to answer that question, I'm always sometimes 3 leery of other people's calculations, and so I -- I would 4 like to study this before I would answer that question. 5 Q. So these came from NMPF's expert. And so I'll ask 6 just for purposes of this question, if you could assume 7 for me, assume that in 2019, 2021, 2022, and the first 8 half of 2023, that MIG's Proposal 15 would have generated 9 more revenue than NMPF's Proposal 13. 10 Would that change the proposal you think should be 11 implemented? 12 A. Again, I'm here supporting higher-of, representing 13 Southeast Milk, and we support the National Milk proposal. 14 I haven't done this kind of analysis. I would 15 have to look at it and do my own -- and see if these -- if 16 I felt these numbers were correct. 17 But, again, here I'm supporting the higher-of, 18 going back to the higher-of. 19 Q. Have you done your own analysis of what kind of 20 revenue the higher-of proposal would generate as opposed 21 to MIG 's Proposal 15? 22 A. No, I have not. 23 Q. You said that the higher-of is one of the most 24 emotional issues at this hearing for farmers, correct? 25 A. No. 26 Q. Oh, I thought I had heard you say that. 27 A. I did not use the word emotional. 28 Q. Oh, I'm sorry. I didn't mean to misstate your 5169 1 testimony. 2 Can you tell me -- or was it the most important? 3 What are -- you had mentioned talking with farmers and 4 having them feel very strongly about this. And I just 5 want to get at, what about the higher-of, if it's not 6 generating more revenue, what about that calculation is so 7 important to dairy farmers? 8 A. As I said in answer to previous questions, dairy 9 farmers are very -- by nature, very cooperative. They 10 are -- they are willing to work with other -- anybody to 11 try to help sell more milk. 12 And, again, when the average-of that the dairy 13 processor lobby, the National Milk Producers came together 14 and put together, again, they felt good about it here. 15 And it's producers and processors willing to work 16 together, and they took at face value that it was going to 17 be good for everybody, that it was going to be revenue 18 neutral. 19 And as time has showed -- and, again, you know, I 20 had the numbers here in my testimony -- it's hit them in 21 the pocketbook, and it's something they can see right 22 upfront. Especially dairy farmers where I represent where 23 it's a high Class I market, it's hit them more than other 24 parts of the country. I mean, it's -- it's -- we are 25 talking about 100 -- $92 million. 26 So they are very hesitant of deviating anything 27 from the higher-of, and about somebody pulling numbers or 28 pulling a number out, hey, we went with it one time, let's 5170 1 go back to something that we know and we're comfortable 2 with. And plus, it helps meet the purpose of the Federal 3 Milk Marketing Order. 4 Again, as I answered to -- to the doctor's 5 questions, if we go back in history of regulated milk 6 pricing, or back when cooperatives were trying to organize 7 together in New York City working with milk dealers and so 8 forth back then, it started with the highest manufacturing 9 price and building from there to arrive at the Class I 10 price. 11 And, again, the Federal Milk Marketing Order 12 system adopted that after it went away from economic 13 formulas with a -- with the Minnesota-Wisconsin in 1962. 14 And it fits in with what the purposes -- one of the 15 purposes of Federal Milk Marketing Orders, is to ensure 16 that consumers have an adequate supply of fluid milk for 17 drinking. 18 Q. But the current higher-of, not the current, but 19 the prior version that we're talking about here, wasn't 20 adopted until Federal Order Reform, correct? 21 A. Well, prior to the Federal Order Reform, we just 22 had -- you know, we had Class III, and one time in there 23 we had IIIA, I can't remember all the years. But the one 24 we have right now with III and IV of, the higher-of, 25 because we had two distinct classes, was adopted in 26 January 1 of 2000. 27 Q. But the version that was in place then was adopted 28 when end product pricing formulas came into effect after 5171 1 Federal Order Reform, correct? 2 A. The current version that we use right now, the 3 higher-of, it -- and when we put in the extra class, 4 Class III and IV, the way we determine the Class I mover 5 now, as of Federal Order Reform, that started January 1 of 6 2000, was the higher-of the Advanced Class III or IV skim 7 prices. 8 Q. And the purpose of the base Class I skim price 9 formula is to further the goals of the FMMOs as enumerated 10 by statute through -- by Congress and by USDA in 11 regulation, correct? 12 A. No. 13 Q. What do you believe the purpose of the base 14 Class I skim formula is? 15 A. To establish the Class I price. 16 Q. And do you -- 17 A. It's a -- 18 Q. And do you agree that the purpose of establishing 19 the Class I price is to further the goals of FMMOs, which 20 is to ensure a sufficient supply of fluid milk for Class I 21 use? 22 A. The -- the Federal Milk Marketing Orders, as I had 23 in my testimony, has two primary goals. It's to promote 24 orderly marketing of milk and help ensure that the 25 consumers have adequate supply of fresh fluid milk for 26 drinking. 27 The classified pricing system that we have now, 28 the Class I differentials, all the provisions of Federal 5172 1 Milk Marketing Orders, we better hope so, that all of them 2 work together to carry out those two purposes. Because if 3 they all don't work together to carry out those two 4 purposes, we're violating the Agricultural Marketing 5 Agreement Act of 1937. 6 In fact, when I read the decisions that these 7 people sitting over here have written in the past, they 8 make sure that it complies with that Act. If it's not, it 9 is illegal. 10 Q. And you mentioned earlier that the two-year clause 11 that's in the statute that established the higher-of -- or 12 excuse me -- that established the average-of currently in 13 place. 14 Do you recall that? 15 A. I responded to that in the question, yes. 16 Q. So the two-year clause, then, required that the 17 average-of be reconsidered in two years; is that right? 18 A. No. 19 Q. What did it require? 20 A. I don't have the exact language in front of me, so 21 I'm going to have to paraphrase what it says. But it says 22 to be in place for two years, and after two years you can 23 go through the order system to change it. 24 Q. And so you agree that even within the statute 25 authorizing the use of the average-of, there was an idea 26 that it would be reconsidered as near as two years from 27 then? 28 A. I don't know. 5173 1 Q. Based on that language? 2 A. Based upon -- based on your question, I don't 3 know. I don't know. I could give you my opinion of what 4 I thought it was, but I don't know what the authors of 5 that legislation. 6 Q. Well, that's a big question certainly, right? 7 But what is your opinion of what the two-year 8 clause meant? 9 A. My opinion was, just like I have, you know, stated 10 earlier, that was put in there that there might have been 11 some reservation, some reservation, hey, let's give this 12 thing two years and see if it works. If it doesn't work, 13 we have a clause in here where we have a method where we 14 can go and see about changing it. 15 Q. And you would agree that that likely built in some 16 uncertainty as to whether or not the average-of would be 17 remaining in place long-term, correct? 18 A. Could you repeat that again? I lost you there 19 about halfway through. 20 Q. The two-year clause that you said indicated that 21 perhaps everyone in two years should come and reconsider 22 if this is the right approach built in uncertainty in the 23 industry regarding whether or not the average-of was going 24 to remain in place long-term? 25 A. What you said at the beginning is not how I 26 answered your previous question. 27 Q. I'm not trying to misstate your answer. So will 28 you clarify that for me and then answer the question I 5174 1 placed? 2 A. As I understand -- and this is my opinion. I 3 haven't interviewed people who wrote that. But when I 4 read that, they put two years in there, said, hey, here's 5 two years it has to stay in, but after two years, if we 6 think it needs to change, here's the way we can go about 7 changing it. 8 Q. And so you would agree with me, then, that that 9 builds in some level of uncertainty as to whether or not 10 it will remain in place after the two years? And by "it," 11 I mean the average-of formula. 12 A. I wouldn't agree to use the word uncertainty. 13 I'll go back to my previous answers here to you. That was 14 put in there to let it go for two years. Then if it 15 wasn't worked, there was a language in that legislation 16 said, hey, we could go through the Federal Order process 17 and make a change. 18 You used the word "uncertainty." I don't know if 19 I would use the word uncertainty, but at least it gave a 20 method in there if it didn't work, I guess that's probably 21 the word I would use, hey, this is the way you can go back 22 and change it. 23 Q. I have a couple of questions about SMI. 24 Does SMI operate any plants? 25 A. No. 26 Q. And how much of SMI's member milk is marketed to 27 Class I fluid plants? 28 A. All of Southeast Milk, Incorporated's customers 5175 1 are pool distributing plants. But because of balancing, 2 there will be times of the year that milk would go to a 3 non-pool plant. 4 Q. And you said Southeast Milk -- how does -- you 5 said all of Southeast Milk's milk goes to a pool plant. 6 Do you mean all -- by that, do you mean Class I? 7 A. Now, that's not what I said. 8 Q. So then that was my question. So I'll ask again 9 just to make sure we're on the same page. 10 How much of Southeast Milk's member milk is 11 marketed to Class I fluid plants? 12 A. All of Southeast Milk, Incorporated's customers 13 are pooled distributing plants. 14 Q. Okay. 15 A. Okay? Because of balancing, holidays, those type 16 of things, there's going to be a percent of that milk that 17 will end up going to non-pool plants. 18 We try -- I can't -- I don't have the numbers with 19 me to give you an exact number, but it would be a small 20 percent, because it costs a pile of money if we can't go 21 to one of those pool distributing plants. But especially 22 at holidays, springtime, especially around Memorial Day, 23 we're going to have to find somewhere for that milk to go 24 when we can't get it in the pool distributing plant. But 25 our market is to go to the pool distributing plants. 26 Q. And you said that SMI's membership consists of 114 27 dairy farmer members who own and operate 119 Grade A dairy 28 farms. 5176 1 Do you recall that? 2 A. It's in my written testimony. 3 Q. Does SMI have any Grade B dairy farms that are 4 members? 5 A. No, ma'am. 6 Q. Is it a requirement that a dairy farm be Grade A 7 in order to be a member of Southeast Milk? 8 A. Yes, ma'am. 9 Q. How long has that been the case? 10 A. Day one. 11 Q. When was day one? 12 A. Southeast Milk was formed of a merger of 13 cooperatives, and its starting date was October 1, 1999. 14 And then all its predecessor cooperatives go back to the 15 late '50s when commercial dairying started in Florida. 16 And the best of my remem- -- and, again, it was started to 17 market Grade A milk. In the best of my memory, and if I 18 go back in history, I don't think any of those other 19 cooperatives would have had a Grade B producer. 20 Q. Why? 21 A. There was no need to. The cooperative was formed 22 to serve the fluid milk markets in Florida. The only 23 cheese plants that you are going to -- well, there's one 24 on the farm, but there's no to speak of commercial cheese 25 plants in Florida. 26 Where you will find the most cheese plants, you 27 will find -- you go down to Miami and you will find a 28 bunch of people making cheese in their bathtubs, and that 5177 1 type of thing, and so forth, and they get caught pretty 2 regular. But just -- Florida is a fluid milk market. 3 Q. I have heard of rum in the bathtub, but not 4 cheese. 5 You mention at the bottom of page 3 that certain 6 dairy farmers have -- in the Southeast, have exited the 7 dairy industry due to low prices. 8 Is that true in other orders as well, to the 9 extent you know? 10 A. If you look at the total dairy farmer numbers 11 that's published once a year by USDA, they list licensed 12 dairy farms by numbers. You can find that. It comes out 13 in January of every year by the National Agriculture 14 Statistic Service. And that number's been constantly 15 going down. 16 Q. Is it worse in the Southeast? 17 A. It's worse in the Southeast. 18 Q. But the base Class I skim price applies uniformly 19 to all orders, correct? 20 A. The Class I mover or base price is the same in all 21 Federal Milk Marketing Orders. 22 Q. And there's been a lot of talk about providing 23 dairy farmers with the proper economic signals. What are 24 the proper economic signals that the base Class I skim 25 price should be sending to farmers? 26 A. The main reason that most dairy farmers go out of 27 business, especially in the area of the country that I 28 represent, it's just unprofitable. They can't make any 5178 1 money. And you are going to hear from one that's going to 2 be here tomorrow. It's just unprofitable in a few cases 3 where the opportunity costs are greater than dairy 4 farming. And so if we want to keep those dairy farmers in 5 business, we got to make it profitable. 6 Milk price is one of the things that help makes it 7 profitable. You know, again, there's other -- other -- 8 and Southeast Milk has done some of it, too, to try to 9 help them be better managers and so forth. But we got to 10 make them more profitable if we want to keep them in 11 business. Give them that economic incentive that, hey, we 12 can make money, the kids can make money, the grandkids can 13 come back and farm. And the milk price is one of the 14 things that helps farm be profitable. 15 Q. And so the higher-of -- or you support putting the 16 higher-of in place because that will ensure that FMMOs are 17 creating prices that help dairy farmers remain profitable? 18 A. No. 19 Q. Okay. So then what are the economic signals that 20 the base Class I price is sending to farmers? Because you 21 had said that it needs to be profitable, so that's why I 22 asked the follow-up of, so then that's the purpose of that 23 market signal, but you said no. So I'm just trying to 24 understand. 25 What are -- you talked about the base Class I skim 26 price sending proper signals. What are the signals that 27 you want farmers to get from that price? 28 A. Okay. We go back to the purposes of Federal Milk 5179 1 Marketing Orders that we talked about, I have in my 2 testimony. Again, we want orderly marketing, and also, to 3 make sure we supply that Class I -- Class I market. 4 And one of the ways that Federal Milk Marketing 5 Orders supply that Class I market is the Class I price is 6 the highest of the classes. And the way -- up until the 7 change of the average-of, if we go back in history, the 8 Class I price has been established by starting at the 9 highest manufacturing price and add the Class I 10 differentials on from there, because you want to attract 11 milk to serve the Class I market. 12 So in the market I represent, and I had in my 13 testimony, that we're predominantly Class I. And if we 14 want to increase the milk price, you know, we need to have 15 an adequate Class I price that's going to help keep those 16 dairy farmers in business so they can be profitable. 17 Q. And outside of the Southeast, if there's a 18 sufficient supply of milk for fluid use, then you would 19 agree with me the FMMO doesn't need to send a price signal 20 to draw more milk for fluid use under Class I, correct? 21 A. No. 22 Q. Why not? 23 A. Because there are cases outside the Southeast 24 where fluid milk plants or cooperatives supplying those 25 fluid milk plants have challenges getting milk to serve 26 them, to serve those plants, and they are having to go 27 greater distances to do it. 28 Q. But they are able to get milk, correct? 5180 1 A. Well, one thing you will -- and I don't know how 2 much time you have ever spent with dairy farmers or dairy 3 cooperatives, especially dairy farmers, they are going to 4 do what it takes to get the job done. And, again, as a 5 dairy cooperative, we have agreements with those fluid 6 handlers to see that they got milk. 7 And I have gone all the way to New Mexico to find 8 milk. Maybe a few times we had to go to Idaho, even in 9 Florida. We'll do what it takes to supply milk to make 10 sure they -- they have it, because we still got the local 11 farmers there we need to keep that market for. 12 And so that's just the nature of the business. If 13 you have a contract of supplying milk, you are going to do 14 your best you can to find the milk. 15 Q. And on page 2 of your testimony you talk about how 16 implementation of the average-of has lowered revenue to 17 dairy farmers compared to using the higher-of to calculate 18 the Class I skim mover value. 19 That's that table you have there, correct? 20 A. The table I have here just applies to three 21 Federal Milk Marketing Orders: The Appalachian, the 22 Florida, and the Southeast. 23 Q. Thank you for that clarification. 24 And the comparison here is the revenue that would 25 have returned to farmers under the higher-of as opposed to 26 the average-of, correct? 27 A. What I -- what I did in Table 1, I just took the 28 monthly Market Administrator reports, did a pool 5181 1 calculation from each of those three orders, and just 2 averaged up what the Class I skim value is. You can find 3 it on those reports. And then I just went back and 4 calculated it based upon using the higher-of, and 5 calculated the difference, and then put the producer 6 pounds, and just did the arithmetic. 7 Q. So this is the difference in the revenue generated 8 by the higher-of and the average-of during that time 9 period fort Southeast, correct? 10 A. No. 11 Q. I am really not trying to misstate things or catch 12 you on anything. I just want to make sure that we're on 13 the same page about what you are doing here. 14 A. It not only includes the Southeast Federal Milk 15 Marketing Order, it also includes the Appalachian and the 16 Florida Milk Marketing Order. 17 And, again, I'm talking about what's -- the 18 revenue shows in the Federal Milk Marketing Order pool. 19 Q. Okay. What's the purpose of this table? Maybe 20 that will get us this there. 21 A. The purpose of this table is to show the economic 22 impact of what -- of higher -- of what the average-of has 23 done to higher-of. And so the revenue that would come out 24 of these three pools for this period of time was reduced 25 by $192,371,500. 26 Q. So you are trying to show with this that farmers 27 would have made more revenue under the higher-of than the 28 average-of for these Orders? 5182 1 A. I'm not trying to show you. These are the 2 numbers. These are actual numbers that shows the 3 difference in these three Federal Milk Marketing Order 4 pools, what the difference would have been between -- in 5 this Class I skim value, from using the higher-of versus 6 the average-of. 7 Q. I think we're on the same page here, so I'm not 8 going to belabor it any further. 9 But what I want to know is, have you run a 10 similar -- is there any proposal at this hearing that 11 proposes keeping the average-of plus $0.74 in place as is? 12 A. There's other proposals. And, again, I'm going to 13 learn more about them as this testimony is presented, that 14 is -- has -- again, I refer to it in my testimony, that 15 uses an average-of versus an adjuster. 16 Q. Uh-huh. And so what I'm asking, is this 17 comparison doesn't tell us anything about any of the 18 current proposals, correct? 19 A. Because they are just proposals. I compared to 20 what -- what's in place now. 21 Q. Okay. So this table doesn't tell us the 22 difference between NMPF's Proposal 13 and the higher-of, 23 and MIG's Proposal 15 with a different average-of, 24 correct? 25 A. No, it doesn't. 26 Q. So it can't tell us anything between the proposals 27 currently pending? 28 A. That wasn't my intention. 5183 1 Q. And in -- in demonstrating the revenue that would 2 have been generated between the higher-of and the current 3 average-of, I had kind of a similar thought process to 4 Dr. Bozic, that if we're just looking at revenue, isn't a 5 proposal that's the average-of plus $10 the ideal proposal 6 if all you consider is revenue? 7 A. Again, to me, that's theoretical, just picking a 8 number $10. It would be nice if you would agree, you 9 know, representing processors, that you wanted to add $10 10 hundredweight to the milk price, you'd probably get a lot 11 of dairy farmers supporting it. 12 But I'm trying to deal with what's practical. I 13 just don't think it's practical that everybody's going to 14 agree to a $10 per hundredweight increase in milk price. 15 Q. Okay. So you agree that whatever proposal is 16 adopted needs to both be practical and driven by 17 economics? 18 A. In my history of working with Federal Milk 19 Marketing Orders and going to these kind of hearings, the 20 provisions has to take all that into account -- excuse 21 me -- the decisions on the proposals has to take all that 22 into account. 23 Q. And you'd agree that FMMOs don't create revenue, 24 right? They distribute the created revenue amongst all of 25 the producers? 26 A. Federal Milk Marketing Orders do not -- they 27 can't -- Federal Milk Marketing Orders can't make money. 28 They can't create money. 5184 1 Q. They are there to distribute the money that the 2 market generates, correct? 3 A. Federal Milk Marketing Orders have several 4 different duties, and one of their duties is to set 5 minimum prices based upon how milk is used to bring that 6 money together in a pool and calculate a uniform price and 7 to see that it's properly distributed to producers who 8 meet the qualifications of the particular order. 9 Q. And you'd agree with me that that issue of 10 depooling is created by the disparity between the 11 announced Class III -- excuse me -- the Advanced Class III 12 and Class IV prices relative to each other, correct? 13 A. Not necessarily. I'll refer you to -- and I think 14 it was on the first hearing day number three, four, or 15 five -- might have been -- one of the early hearing days, 16 talking about Proposal 1. There was a -- a document, 17 research paper referred to. I don't know if it was 18 entered as an exhibit. And Dr. Bozic was one of the 19 authors of it. And it broke down all the things that did 20 impact or cause depooling. And I think it was four or 21 five. I can't go from memory. I don't have a copy of it. 22 But I would refer you to that. That would give you the 23 breakdown. I think it had in there what the impact of -- 24 of how much weight the average-of had in it or other 25 things. But it was four or five factors in there, it 26 wasn't just one single one. 27 Q. Great. Well, we'll take a look at Dr. Bozic's 28 paper and revisit those. I appreciate that. 5185 1 A. I mean, that'd give you more exact numbers than me 2 just trying to guess. 3 Q. That's okay. Hearing day three was about 100 days 4 ago, so... 5 So just the last thing I wanted to revisit. You 6 had talked about over-order premiums. And so you would 7 agree with me that for short-term, right, immediate milk 8 needs, processors could pay over-order premiums to attract 9 milk, correct? 10 A. You know, a processor can pay any price he wants 11 to for -- as long as he pays the minimum price, if he 12 wants to pay above that minimum price, that's up to him. 13 I mean, there's no regulation to say he couldn't pay $100 14 a hundredweight for milk. That's up to him. But he's 15 going to need to remain -- all the ones I have worked with 16 got to remain com- -- want to remain competitive. 17 Q. And you said that the over-order premiums have 18 gone down for about two years previously, but then this 19 year they are going back up. 20 Did I remember that correctly? 21 A. No, ma'am. 22 Q. Can you tell me again what your testimony was 23 about that trend of over-order premiums? 24 A. Yes, I can. 25 Over-order premiums -- and bear with me, I might 26 be off a year or so on this -- but over-order premiums 27 started trending down, probably hit their lowest about 28 20- -- excuse me, I can only talk to you about over-order 5186 1 premiums in the Florida market. 2 Q. Of course. 3 A. Okay. That's all I have -- I mean, I got some of 4 others, but the Florida market for sure. 5 They trended down, probably hit the low about 6 2019, 2020, and now they have started to gradually come 7 back -- back up. 8 Q. What -- what, in your opinion, is driving them 9 going back up? 10 A. Low milk prices, and finally the dairy farmers 11 knocking their co-op leadership on top of the head with a 12 two-by-four and saying, you need to get in a room and work 13 together and try to get our milk price back up. 14 Q. Work -- you mean different cooperatives working 15 together -- 16 A. That's right. 17 Q. Sorry, just to make sure I finish my question. 18 You mean different cooperatives working together 19 to ensure they're negotiating over-order premiums? 20 A. Yeah. The Capper-Volstead Act allows cooperatives 21 to come together and form marketing agencies. And one of 22 the main points when you are serving a fluid market, those 23 fluid processors want to make sure they have got equal raw 24 product cost. So the cooperatives got to work together in 25 making sure they are doing that, and so they all got to 26 agree on the same over-order premium. 27 Q. And because of that, cooperatives have been able 28 to obtain higher over-order premiums in the last year or 5187 1 so? 2 A. Progress is being made to turn them back up. 3 MS. VULIN: Nothing further for me, other than 4 collecting Exhibit 241. Thank you. 5 MR. HILL: And while those record copies are being 6 returned, I think this is a good time to suggest a break. 7 THE COURT: And would this be a ten-minute break? 8 MR. HILL: Yes, it would. 9 THE COURT: Good plan. All right. Let's go off 10 the record at 2:32. Be back and ready to go at 2:42. 11 (Whereupon, a break was taken.) 12 THE COURT: Back on the record. 13 All right. We're back on record. It's 2:44. 14 And good, we have another examiner. You may 15 identify yourself and proceed. 16 MR. MILTNER: Thank you, your Honor. This is Ryan 17 Miltner representing Select Milk Producers. 18 CROSS-EXAMINATION 19 BY MR. MILTNER: 20 Q. Mr. Covington, I gave you back Exhibit 241, which 21 you were asked some questions about before, and I actually 22 want to look at the same slide you were looking at before 23 on page 11. 24 So Ms. Vulin asked you some questions about the 25 various proposals and their impacts. And I understood 26 that -- that you have not intimately looked at this 27 document, but I did want to ask you a couple of questions, 28 if I might, about what, at least, this tends to show, if I 5188 1 could do that. 2 And can you see by these graphs that they are 3 trying to -- trying to reflect the proposals -- how do I 4 want to state this correctly? I don't want to misstate 5 it. 6 But that it's showing the various Class I movers 7 for different periods of time. Do you see that? 8 A. I'm going to turn it sideways here. 9 Q. That's what I did here, too. 10 A. Okay. So I assume what you are telling me, each 11 of those bars, is that the average Class I mover or 12 average Class I skim value? 13 Q. I believe it's the skim value. 14 A. Okay. 15 Q. And so if you are looking at it in that 16 orientation, the blue bar at the top is our current 17 average-of III and IV plus $0.74. The next bar down is 18 Proposal 13, followed by Proposal 14, and that's an 19 adjusted average plus add-on, and then 15 is another 20 adjustment to the average. And so here -- that's the 21 lead-up to my questions. 22 In 2020, at least this analysis shows that 23 Proposal 13, the higher-of, would return more than -- 24 would have returned more than our current -- our current 25 mover. And then in 2021, they are about the same, but the 26 higher-of is slightly lower. In 2022, the higher-of is 27 slightly higher. And then for 2023, for that period, they 28 are about the same. 5189 1 Now, here's my question. If -- if in some years 2 producers end up with more under the average, and some 3 years they end up with more under the higher-of, what is 4 the main reason why your producers still want to have the 5 higher-of as opposed to the average? 6 A. Well, first of all, as I responded to the previous 7 attorney before you, this was the first I have looked at 8 these numbers, and I haven't done my -- I haven't done 9 similar calculations. 10 Q. Yeah. 11 A. But, again, as I responded before, we don't know 12 what the -- well, I haven't responded to this. We don't 13 know what the future is going to hold. I mean, we 14 don't -- we don't know which of these proposals would 15 generate more money going down the road. We can only make 16 decisions based upon, you know, what we do know and what's 17 happened in the past. 18 And as I testified earlier, you know, dairy 19 farmers were willing, wanted to be cooperative in 20 accepting the average-of. But they have seen what 21 happened, what it's done to their revenue, and they are 22 just leery of something new coming out. They are just -- 23 they're just leery of it. Says, hey, we had this 24 higher-of, we gave it up, and you can see what it cost us. 25 But, again, personally, I go back -- and you can 26 call me a traditionalist or a purist or whatever -- but I 27 go back to the Federal Milk Marketing Orders in 28 establishing that Class I price. If we go back what's 5190 1 happened in history and tradition, it's worked to start 2 with the highest manufacturing price as the base and go 3 from there. 4 I'm willing, if we get -- well, I won't be around 5 in -- if I'm around five or ten years from now and we find 6 out one of these other proposals happened to be more or 7 whatever, I don't know what dairy farmers will say. But I 8 would be willing to stand up for them and tell them, hey, 9 you know, we are doing something based upon what way it's 10 worked by having the highest manufacturing price, then 11 adding on to that, and that's what I advocate. 12 Q. Given your broad experience in the industry, would 13 one of the reasons that the highest manufacturing price 14 should be supported is because using that price helps to 15 give producers the best economic signals about what milk 16 demand looks like? 17 A. Yes. Over time, you know, it's just common sense. 18 You know, milk is going to move to where it gets the 19 greatest return. I mean, that -- I mean, it might not 20 happen overnight because of contracts, logistics, other 21 things, but over time, milk's going to move to its highest 22 value. 23 Q. And just by nature of the average, I think you 24 kind of blunt that message to producers, if you didn't 25 rely on the highest of those prices, correct? 26 A. Yes. Maybe -- I mean, that's what we want to do. 27 We want milk to move to its highest -- highest price. 28 Q. You were asked a few other questions about the 5191 1 two-year, the clause in the Farm Bill that -- that locked 2 us into this average-of for two years. Of course we're 3 out beyond that now. I think you were asked whether there 4 was uncertainty as a result of that. 5 And it's true that any element of the Federal 6 Orders are subject to being noticed for a hearing for 7 consideration, correct? 8 A. It's my understanding any person can submit a 9 petition to ask for a hearing to consider a change in a 10 provision of the Federal Milk Marketing Orders. 11 Q. And that applies to Class I provisions, and 12 Class II, and all of the classes, correct? 13 A. All the classes. Any -- any provision in the -- 14 in any of the Federal Order regulations. 15 Q. And so for two years we were certain we were not 16 going to deal with the higher-of or the average-of, 17 correct? 18 A. As I read the law, what it said, for two years. 19 Q. Now, with respect to that provision, it's no more 20 uncertain than any other provision in the Federal Order, 21 is it? It's subject to a hearing just like any other. 22 A. Again, as I read the law, you know, it said that 23 after two years you could go to a hearing with it. 24 Q. Okay. One other thing I had to ask you, and this 25 is in your statement. It's on page 3. In the third 26 paragraph you start off by stating, "Worse yet, the 27 average-of lowered revenue to dairy farmers at a time when 28 dairy farmer margins are extremely low. The July gross 5192 1 margin calculated under USDA's Dairy Margin Coverage 2 Program was only $3.52." 3 So you have testified that part of the losses to 4 producers were made up by taxpayers as part of the PMVAP 5 program, correct? 6 A. Yes, sir. 7 Q. Now, as I heard you read the sentences, I just -- 8 I just read back, it seems to me the taxpayers might have 9 also picked up some of the cost of this change through DMC 10 payments that might not otherwise have been triggered or 11 were larger than they would otherwise be. 12 Would that be your assumption as well? 13 A. It's my understanding that part of the premiums 14 under the Dairy Margin Coverage Program are subsidized. 15 But, again, the part that's subsidized and where it's 16 economical for how much coverage that you signed up for is 17 geared more to the smaller dairy farmers. 18 The dairy farmers more in Southeast Milk, almost 19 all of them are way over that. I can't remember the exact 20 cap number. So if they participate in the gross margin 21 program, they picked up a little -- a little bit. 22 But we got to remember, the dairy gross margin 23 program is separate from Federal Order provisions. It's 24 an entirely different program. You know, it's -- it's 25 an -- I call it an insurance program. And to me, it needs 26 to be kept separate from Federal Order provisions. 27 MR. MILTNER: All right. Thank you so much for 28 that. 5193 1 I'll grab that exhibit back from you so I can get 2 that back to USDA. 3 MR. SJOSTROM: Your Honor, Lucas Sjostrom, Edge 4 Dairy Farm Cooperative. 5 CROSS-EXAMINATION 6 BY MR. SJOSTROM: 7 Q. Mr. Covington, I'll be asking the same question I 8 asked the previous two witnesses, in essence. 9 Is it better in a business scenario, as maybe CEO 10 of SMI or any other entity, that you know -- is it better 11 to know your revenue ahead of time for a future month, or 12 if that number is the same, would it be better to know it 13 the month after? 14 A. It's preferable to know in advance. 15 Q. That's all. 16 MR. SJOSTROM: Thank you, your Honor. 17 CROSS-EXAMINATION 18 BY MS. TAYLOR: 19 Q. Good afternoon. 20 A. Good afternoon. 21 Q. Don't have too many questions. 22 On page 3, if we could start in the middle of the 23 page, and the paragraph starts "further." It's, "Further, 24 the average-of calculation plus $0.74 per hundredweight 25 limits any recovery of losses when there is a wide 26 variation between the Advanced Class III and IV skim 27 prices." 28 I'm wondering if you could talk about, that your 5194 1 phrase "limits any recovery of losses," and if you could 2 look at it from maybe the short-term versus the long-term 3 perspective. 4 A. If -- I'm going to use the example -- and I hope I 5 can do the arithmetic in my head okay, so you correct me 6 if I get off. 7 So let's say that the -- I'm going to use regular 8 round numbers -- say the Class III price is $15 and the 9 Class IV price is $13.52, so that's $1.48 difference in 10 there. 11 Using the average-of plus $0.74, or the higher-of, 12 we're going to come out with the same Class I mover. All 13 right? 14 If that $13.52 were to move up and both of them 15 were to be $15, both III and IV, we could go up to $15.74. 16 So the average-of is $0.74 higher. But that's -- on the 17 upside, that's as high as you can go with the average-of. 18 But go back and we still have the $15, let's say 19 that $13.52 went down to $10, then the average is $12.50. 20 Add $0.74 to that, we're up to $13.24. 21 And so you see the downside risk is so much 22 greater than what the upside risk is. 23 Am I -- was that your question or -- 24 Q. Yeah, it was. I just was thinking, you know, I 25 mean -- the discussion from National Milk witnesses has 26 been about -- well, there's been many things, but one of 27 the things is that the change was supposed to be revenue 28 neutral. And I was wondering if you could touch on, given 5195 1 the volatility in market prices that -- that's been 2 discussed at the hearing, since 2017, right, things are 3 more volatile, we have discussed that over many proposals. 4 Is it difficult under the current mover to ever 5 return to revenue neutrality in the long-term if your 6 upside is capped but your downside is never capped, as how 7 you all perceive it to be? 8 A. In my opinion is yes. And the reason I say that, 9 if we go back to 2018, when the work on that was done to 10 be revenue neutral, it's my understanding that the 11 representative from IDFA and the representative from 12 National Milk Producers Federation worked together and 13 they went back in history quite some time. 14 If we go back in history some time, it wasn't all 15 that long ago we had the Dairy Price Support Program, and 16 that kept prices a little more stable. If we go back in 17 time, we weren't doing as many dairy exports. And when we 18 see now exports can go up and down, that impacts the 19 price. 20 So what -- this is just my opinion is, is when 21 that calculation was done, they used the time period when 22 prices were more stable, and so you -- based upon history, 23 you would expect it to be more neutral by the -- by the 24 average-of and $0.74. 25 But in my opinion, going forward, I think we're 26 going to be -- going to see more volatility in prices. 27 We're going to see greater spreads between the Class III 28 and IV prices. And I think one of the reasons we're going 5196 1 to see that, I think is because of butterfat. I think 2 we're going to see a new era with butterfat. Butterfat 3 prices are going to stay higher. As butterfat prices go 4 up, because of the way the formula is, it lowers the 5 Class III skim value, but you have to bring up the 6 Class IV. 7 So I think under the current system, looking 8 forward, and nobody has a true crystal ball, it's going to 9 be more and more difficult for the average-of plus $0.74 10 to be revenue neutral. 11 Q. Thank you. 12 On page 5 of your statement at the top, and you 13 are talking about from the bottom of page 4, in Federal 14 Order Reform, the decision and rationale to return to the 15 higher-of calculation, and one is to -- the first one was 16 to maintain orderly marketing conditions. 17 How would you define orderly marketing conditions? 18 A. Well, I will tell you, first of all, my definition 19 of an orderly market, it might be a little longer than 20 some people. All right? Because I think it's composed of 21 several different things. And I think it -- and I'm going 22 to start at the top of the supply chain. 23 What I consider to measure whether a market is 24 orderly or not, I'm going to start with the consumer, that 25 one indication of an orderly market is that you go into a 26 grocery store or whatever, and that consumer can find 27 fresh quality milk in that retail case. The case is going 28 to have milk in it, it's not going to be empty. That's 5197 1 number one. And that gets back to the purpose of Federal 2 Orders, consumers have milk. 3 Number two, that pool distributing plant or that 4 fluid processor that's supplying that milk, that plant 5 needs to make sure it's got an adequate supply of raw milk 6 when they want it, when they need it, to make sure they 7 can get the milk in that dairy case. And the price that 8 they pay for that milk, they need to have assurance that's 9 it's going to be an equitable or equal raw product cost 10 with their other competing handlers within that same 11 marketing area, and also have the proper balance in their 12 price with any milk that might be coming from outside the 13 marketing area of -- or from other marketing areas, to 14 make sure everybody's operating under a level playing 15 field. 16 The next thing on my -- on my list is, on the 17 orderly marketing, that the dollars that that pool 18 distributing plants are going to pay to dairy farmers or 19 dairy farmer cooperatives, you know, needs to be paid in a 20 prompt manner, know that the money's coming, and also, it 21 needs to be paid uniformly so all the producers in that 22 same marketing area have the potential to start with the 23 same dollars coming from that milk. Again, we go back to 24 the Agricultural Marketing Agreement Act talks about 25 having uniform prices. That's one of the reasons we have 26 pooling. 27 And then the last thing on my list is sort of a 28 combination of some of those, that if we're going to keep 5198 1 order in the market, hopefully we got some stability of 2 dairy farms in that marketing area that are supplying milk 3 that were keeping them -- we're keeping that milk flow and 4 not having a mass exodus of dairy farms. 5 So I put all those together is my definition of an 6 orderly market. And the provisions that we're talking 7 about here today, or the proposals put forth by the 8 National Milk, hopefully it's helping to support all that. 9 Q. I think you talked about, or was it some other 10 person on cross, I can't remember whom exactly, about how 11 SMI customers you don't believe use any type of risk 12 management tools, your Class I buyers. 13 Is that -- am I remembering that correctly? 14 A. Yeah. What my response is, it's been a -- a year 15 since I have had regular contact with SMI customers of 16 pool distributing plants that Southeast Milk sells to. At 17 that time, none of them were using risk management on 18 milk. They were -- might have been using it on orange 19 juice or things like that, but not on milk. 20 In anticipation of this hearing, I thought I would 21 receive a question about that. So the people now at 22 Southeast Milk who have regular contact with the 23 customers, I asked them, you know, to the best of your 24 knowledge, your conversations with them, any requests, are 25 any of them using it now? And, again, same response, no. 26 And then both to them, and also it was to me, 27 their biggest concern, anytime you bring anything up like 28 that, hey, we just want to make sure that what we're 5199 1 paying for milk is competitive, who we're competing with 2 in the marketplace. For years that's been the number one 3 thing I hear from the pool distributing plants. 4 Q. So you understand their concern to be, well, if 5 somebody -- if I use it but someone else doesn't use it, 6 and they get an advantage later on, that's a problem? 7 A. Yeah, because they are just -- it's such small 8 margins in fluid milk, and it's -- what's the old saying, 9 that two prices that consumers remember, the price of a 10 loaf of bread and a gallon of milk, and they just want to 11 make sure they are staying competitive with their 12 competitor. 13 Q. That's certainly what we hear about when we talk 14 about inflation, isn't it? 15 A. Yeah. 16 Q. Okay. Another question. The witness from Prairie 17 Farms talked a bit about their producer's ability to use 18 risk management tools and basis risks because of negative 19 PPDs. 20 Are you able to talk any bit about that when it 21 comes to SMI producers? 22 A. Well, one thing about it in the Florida market, 23 most producers don't know what a producer price 24 differential is, so we don't have to -- to worry about 25 that. 26 Q. That's true. 27 A. In the past, when I was working there full-time, 28 when the cooperative had its own feed mill, yeah, we'd 5200 1 forward contract on feed because we supplied a lot of our 2 dairy farmer members with feed, and that's a common 3 practice. 4 There's a few of them that are using -- will use 5 the futures or are using the Dairy Revenue Protection 6 plan. And I know of a couple that are using livestock 7 gross margin. They were early on in that. There will be 8 a dairy farmer from Southeast Milk here tomorrow that I 9 think that might be using it some. 10 But based upon my knowledge, and I still maintain 11 contact with most of them, it's a small number that are 12 using any -- any risk management. When I bring it up, 13 they come back to me, they say, Calvin, we'll use it if 14 you will guarantee that we'll make money on it. 15 Q. If you could do that, you would have a lot of 16 business. 17 A. Well, that's correct. 18 MS. TAYLOR: I think that's it from AMS. Thank 19 you. 20 THE COURT: I must applaud you. Those were 21 excellent questions, and the answers were stunning. 22 MS. HANCOCK: Then I have no further questions. 23 We would move to admit Exhibit 248. 24 THE COURT: Is there any objection to the 25 admission into evidence of Exhibit 248? 26 There is none. Exhibit 248 is admitted into 27 evidence. 28 (Exhibit Number 248 was received into 5201 1 evidence.) 2 THE COURT: All right. This witness may step 3 down. 4 Will you be remaining available? 5 THE WITNESS: I can be available -- is that 6 correct? 7 MS. HANCOCK: It's your schedule. 8 THE WITNESS: Yeah. I'll be here most of this 9 week. Then I'm back for another proposal. 10 THE COURT: Very fine. 11 MS. TAYLOR: Your Honor, I think next up we have 12 Dr. Bill Schiek. I think he's next on the list to testify 13 today. 14 THE COURT: Very good. 15 Dr. Schiek, you may -- so you are going to sit in 16 the witness chair. 17 And is anyone going to ask you questions or are 18 you going to be on your own? 19 DR. SCHIEK: Ask my own questions? 20 THE COURT: The exhibit is being distributed. 21 Let's go off the record momentarily. 22 It is approximately 3:11 p.m. 23 (An off-the-record discussion took place.) 24 THE COURT: All right. Let's go back on the 25 record. Back on the record at approximately 3:12. 26 Dr. Schiek, would you state and spell your name? 27 THE WITNESS: Yes. Excuse me, my name is William 28 Schiek. That's W-I-L-L-I-A-M; Schiek is S-C-H-I-E-K. 5202 1 THE COURT: Have you previously testified in this 2 proceeding? 3 THE WITNESS: I have. 4 THE COURT: You remain sworn. 5 THE WITNESS: Thank you. 6 WILLIAM SCHIEK, 7 Having been previously sworn, was examined 8 and testified as follows: 9 THE COURT: I have been handed a document that's 10 been marked as Exhibit 249. Is your copy so marked? 11 THE WITNESS: It is not. 12 THE COURT: All right. Would you read into the 13 record how yours is identified up in the upper right-hand 14 corner? 15 THE WITNESS: Mine is identified as Exhibit Dairy 16 Institute-1. 17 THE COURT: Very fine. 18 Did you have an opportunity to mark yours? 19 THE WITNESS: I did not, and you know, I left my 20 pen down at the desk. 21 (Exhibit Number 249 was marked for 22 identification.) 23 THE WITNESS: Okay. Should I begin? 24 THE COURT: Let me -- let's go off record for 25 adjust a moment. 26 (An off-the-record discussion took place.) 27 THE COURT: Back on the record at approximately 28 3:14 p.m. 5203 1 So, Dr. Schiek, you have marked your Exhibit 249. 2 And I have already forgotten, did you tell me you 3 have previously testified in this proceeding? 4 THE WITNESS: I have, yes. 5 THE COURT: You remain sworn. 6 THE WITNESS: Correct. 7 THE COURT: All right. Good. You may proceed. 8 DR. SCHIEK: All right. Thank you. 9 My name is William Schiek, and I'm executive 10 director of Dairy Institute of California. I have a 11 paragraph in here of my background, but since we went 12 through that the last time I testified, I'm going to skip 13 down and just start talking a little bit about the Dairy 14 Institute of California. 15 Dairy Institute is a trade association 16 representing fluid milk processors and dairy product 17 manufacturers with plants in California. Dairy 18 Institute's offices are located at 1127 11th Street, 19 Suite 718, Sacramento, California, 95814. 20 The Dairy Institute provides member companies with 21 market and regulatory information services, and advises 22 them on regulatory and legislative issues impacting their 23 business operations. The Institute also serves as its 24 members' primary advocate on dairy legislative and 25 regulatory matters. Our membership includes companies who 26 process fluid milk and cultured dairy products, frozen 27 dairy products and ice cream mixes, cheese, and some 28 packaged Class IV products, including butter and condensed 5204 1 and evaporated milk. The positions on the proposals under 2 consideration at this hearing were adopted by Dairy 3 Institute's Board of Directors. 4 Dairy Institute's Regulated Pricing Principles. 5 Dairy Institute believes that regulated prices 6 should be minimum prices that undergird the market. 7 Disorderly marketing results from setting prices too high, 8 whereas the market corrects if prices are set too low. 9 Regulated prices should allow for the use of competitive 10 premiums to direct milk to its highest and best use and, 11 therefore, minimum prices should not intrude on the market 12 so as to distort natural market signals. 13 Dairy policies should encourage, or at least not 14 discourage, investment, innovation, and new product 15 development, as these are the keys to unlocking more 16 demand for dairy products. The minimum regulated prices 17 for manufacturing classes, that is Class III and IV, 18 should not be set above market-clearing levels. 19 In its 1999 Final Decision on Federal Order 20 Reform, USDA stated, "The importance of using minimum 21 prices that are market-clearing for milk used to make 22 cheese and butter and nonfat dry milk cannot be 23 overstated. The prices for milk used in these products 24 must reflect supply and demand and must not exceed a level 25 that would require handlers to pay more for milk than 26 needed to clear the market and make a profit." 27 In setting regulated minimum prices, the danger is 28 not in setting minimum prices that are too low, but in 5205 1 setting it too high. Regulated prices that are set too 2 low, that is below the market-clearing level, can be 3 compensated in the marketplace through competitive 4 premiums. Regulated prices that are set too high can lead 5 to the milk produced by dairy farms being dumped at the 6 farm or moved out of area to find a processing home. 7 Minimum regulated prices must be set to levels 8 where the plants can clear the market and operate 9 profitably. Dairy Institute also believes that 10 performance-based pooling standards are necessary to 11 direct milk to Class I uses, and that Class I 12 differentials should not be considered pure price 13 enhancement for producers, but exist along with 14 performance standards to encourage suppliers to serve 15 Class I markets. 16 Dairy Institute's Positions on Submitted 17 Proposals. Milk Composition. 18 Proposal 1: The National Milk Producers 19 Federation, or NMPF, proposes to increase the assumed 20 protein and other solids in Class III skim milk formula 21 and the nonfat solids in the Class IV skim formula to 22 national component averages. Specifically, National Milk 23 Producers Federation proposes increasing the assumed 24 nonfat solids test in Class IV to 9.3% and the protein 25 test to 3.3% and other solids test to 6.0% in Class III 26 skim. This change would increase the cost of Class I skim 27 in all orders and the prices of Class II, III, and IV skim 28 in the four fat/skim pricing orders. 5206 1 Proposal 2: National All-Jersey proposes annually 2 updating assumed milk components in the Class III and 3 Class IV skim milk formulas using the previous year's 4 weighted average-of component tests from milk component 5 pricing orders with a 12-month implementation lag. 6 Dairy Institute opposes both Proposal 1 and 7 Proposal 2. 8 Regarding manufacturing classes in fat/skim 9 orders, it is true that milk with higher components will 10 lead to higher finished product yields. A good argument 11 can thus be made that producers should receive a revenue 12 benefit from the higher component levels they produce, 13 which result in higher yields in Class II, III, and IV 14 products. 15 However, if underpayment is the issue, a better 16 solution is for producers in those skim/butterfat pricing 17 orders to petition USDA for a change to multiple component 18 pricing. Such a change would ensure that handlers who 19 derive a yield benefit from the higher components would 20 compensate their suppliers for that benefit. 21 Components vary by order. Utilizing the average 22 component test from the multiple component price orders 23 could result in manufacturers overpaying relative to the 24 components they actually receive, particularly if fat/skim 25 orders average components are lower -- lower than those in 26 multiple component pricing orders. Component data is 27 available from USDA for the orders that currently have 28 component pricing. The current fat/skim orders could have 5207 1 lower component tests than others, particularly in the 2 summer months. 3 Regarding Class I, the changes in Proposals 1 and 4 2 would impose higher milk cost to fluid milk processors. 5 Additional solids in Class I do not confer the same yield 6 benefit as they do with manufactured products, so there 7 does not appear to be a valid economic justification for 8 applying the proposed change to Class I. 9 Furthermore, this proposal does not seem 10 consistent with the idea of regulated prices as minimum 11 prices, and there does not appear to be much evidence that 12 fluid milk processors generally receive milk at milk 13 component pricing order average component tests. The 14 Dairy Institute believes that Proposals 1 and 2 should not 15 be adopted. 16 Surveyed Commodity Products. 17 Proposal 3: National Milk proposes eliminating 18 barrel cheddar from the cheese price calculation in the 19 Class III formula. Dairy Institute opposes Proposal 3. 20 The relationship between block and barrel prices 21 has become more variable since 2000 when the FMMO reform 22 was implemented. Block and barrel markets are related, 23 though not identical. Eliminating barrel prices from the 24 Class III price calculation will put barrel cheddar 25 manufacturers' margins under increased pressure when block 26 prices exceed barrel prices, as Class III milk prices 27 based solely on blocks would be higher than they are now. 28 Eliminating barrels also lowers the cheese volume that is 5208 1 used in establishing milk prices. 2 NDPSR block survey prices are still largely driven 3 by CME pricing. If we were to eliminate barrels from the 4 NDPSR, there would be a somewhat greater likelihood of 5 Class III prices being subject to thin market problems. 6 Barrels are an important outlet for producers' milk, and 7 their pricing conveys information about the overall supply 8 and demand balance for cheddar. Such information would be 9 lost from the FMMO prices if barrels were eliminated from 10 the formula. 11 Proposal 4: The American Farm Bureau Federation 12 proposes adding 640-pound cheddar blocks to the cheese 13 price calculation in the Class III formula. Dairy 14 Institute opposes Proposal 4. 15 While the inclusion of blocks would add more 16 volume to the NDPSR survey price, it would add relatively 17 little in the way of new pricing information to the extent 18 that 640-pound blocks are priced based on the 40-pound 19 block price. 20 Proposal 5: American Farm Bureau Federation 21 proposes adding unsalted butter to the butter price 22 calculation in the butterfat price formula. Dairy 23 Institute opposes Proposal 5. 24 It is our understanding that most of the exported 25 butter is unsalted and is also manufactured to 26 international customers' requirements of 82% milk fat. 27 Domestic butter is 80% milk fat and, therefore, a less 28 expensive product. There is also a question of how 5209 1 subsidies on exported butter would be handled in the price 2 reporting of the product. 3 Proposal 6: California Dairy Campaign proposes 4 adding mozzarella to the cheese price calculation in the 5 Class III formula. Dairy Institute opposes Proposal 6. 6 There are multiple types of mozzarella products 7 sold and no clearly definable or agreed upon commodity 8 type product. Mozzarella manufacturing requires 9 additional steps and is, therefore, likely to have 10 different costs than cheddar and different product yields. 11 Including mozzarella prices in the cheese survey without 12 accounting for these manufacturing differences would lead 13 to an inaccurate representation of the milk value in 14 the -- of the product. 15 Trying to account for all these differences 16 between cheddar and mozzarella would unnecessarily 17 complicate the formula. Dairy Institute believes that the 18 minimum regulated price should be based on a definable 19 commodity product with established standards. Cheddar 20 cheese is the best product to be representative of the 21 value of milk used in making cheese. 22 Class III and Class IV Formula Factors. 23 Proposal 7: National Milk Producers Federation 24 proposes increasing manufacturing allowances to consensus 25 levels of the following values: Cheddar cheese, $0.24 a 26 pound; dry whey, $0.23 a pound; butter, $0.21 a pound; 27 nonfat dry milk, $0.21 a pound. Dairy Institute opposes 28 Proposal 7. 5210 1 There is no transparency as to how the consensus 2 Make Allowance levels in the proposal were determined. It 3 is extremely difficult to evaluate how these consensus 4 levels relate to actual plant costs of NMPF members or how 5 representative they are of the current dairy -- of current 6 dairy manufacturing generally. 7 National Milk Producers Federation witnesses have 8 consistently acknowledged that manufacturing costs are 9 higher than the levels in Proposal 7, significantly higher 10 than the current Make Allowances established in 2008. But 11 National Milk Producers Federation has provided little 12 information regarding how far below current costs its 13 proposed levels are. Also, the proposal lacks any 14 timeline as to how and when Make Allowances will be 15 updated to reflect current costs. 16 Proposals 8 and 9: Wisconsin Cheese Makers 17 Association and IDFA have identical proposals to increase 18 the Make Allowances for cheese, dry whey, butter, and 19 nonfat dry milk, based on the simple average of 2022 costs 20 derived from plant surveys, the Stephenson study, and 2022 21 costs estimated from regression analysis of CDFA 22 manufacturing cost data, the Schiek study. Dairy 23 Institute supports Proposals 8 and 9. 24 Under the Wisconsin Cheese Makers and IDFA 25 proposals, 50% of the change from the current cost would 26 be implemented in year one, with the remaining 50% being 27 added in equal increments over the following three years, 28 for a four-year total implementation, until the full 2022 5211 1 costs are attained, or until dairy manufacturing costs 2 from new USDA audited surveys are available. 3 Manufacturing costs were last updated in 2008 4 based on 2006 and 2007 data. An average of Stephenson's 5 survey data with CDFA data was employed by USDA to 6 establish the current Make Allowances in 2008. For the 7 regulated prices generated by the end product pricing 8 formulas to accurately reflect the value of milk to 9 manufacturing plants, it is important that the 10 manufacturing cost be as accurate and as current as 11 possible. Given the time that has elapsed since 12 Make Allowances were last updated, it is important that 13 they be amended. 14 IDFA and Wisconsin Cheese Makers approach of using 15 average cost data from two data approaches is reasonable 16 given USDA's history of employing manufacturing cost data 17 compiled by Dr. Stephenson and CDFA. The average cost 18 data is more moderate than either study alone. Schiek's 19 cheese cost estimates were higher than Stephenson's, while 20 Stephenson's butter, nonfat dry milk, and whey cost 21 estimates were higher than Schiek's. 22 Proposal 10: Select Milk Producers proposes 23 increasing the cheese making fat recovery factor in the 24 Class III formula to 93% from its current 90% value. 25 Dairy Institute opposes Proposal 10. 26 Select's proposal would increase the butterfat 27 yield in cheese from 1.572 to 1.624. In the past, a fat 28 recovery value in the formula of 90% made sense, because 5212 1 even though some of the more efficient plants achieved 2 higher fat recovery, older plants may not have been able 3 to achieve the higher fat recovery of the most efficient 4 newer plants. Therefore, from our view, a fat recovery of 5 90% in the formula was consistent with the notion of 6 regulated prices as minimum prices. 7 Select has brought us expert testimony suggesting 8 that fat recovery in newer cheese plants, or those using 9 newer fat designs, may well be more than 90%, although 10 specific level is not known. Our opposition to the 11 proposal stems from the fact that we do not have data 12 regarding fat recovery levels across many plants 13 representative of the cheddar manufacturing industry. 14 Proposal 11. Select proposes to update the 15 assumed farm-to-plant shrink factor in the Class III 16 protein price formula to account for actual farm-to-plant 17 shrink based on Select data. This would increase the 18 yield factors for butterfat, protein, and butterfat in 19 cheese. Dairy Institute opposes Proposal 11. 20 As was the case with Proposal 10, our opposition 21 to Proposal 11 is based on the lack of broader data 22 available on farm-to-plant shrinkage. The witness from 23 California Dairies, Inc., (CDI) presented testimony 24 suggesting that there are reasons to expect that 25 farm-to-plant shrink in California might be higher than 26 Select's proposal due to less than full tanker load 27 shipments. Given the smaller farm sizes in the Northeast 28 and the Midwest, farm-to-plant shrink there is likely even 5213 1 higher. 2 Proposal 12: Select proposes to increase the 3 nonfat dry milk yield factor in the Class IV formula from 4 .99 to 1.03. Dairy Institute opposes Proposal 12. 5 Nonfat dry milk yields based on solids going into 6 the nonfat dry milk dryer are likely higher than the 7 current formula yield of .99, owing to the presence of 8 some amount of moisture in the finished product. 9 However, not all of the nonfat solids in producer 10 milk end up in the nonfat dry milk dryers. Some nonfat 11 solids from cream remain in the liquid byproduct of butter 12 churning (buttermilk), and those nonfat solids end up in 13 buttermilk powder. The lower yield (.99) is to compensate 14 for generally lower buttermilk powder prices compared to 15 nonfat dry milk prices and the higher costs associated 16 with drying buttermilk compared to nonfat dry milk. 17 While noting that not -- that Dairy Market News 18 information indicates that the buttermilk powder price 19 discount relative to nonfat dry milk prices has narrowed 20 in recent years, we acknowledge that the issue of the 21 nonfat dry milk yield appears in need of additional study, 22 but we are not supporting a change to yield at this time. 23 Base Class I Skim Milk Price. 24 Proposal 13: Nonfat -- excuse me -- National Milk 25 Producers Federation proposes returning to the higher-of a 26 Class I mover -- the higher-of Class I mover, instead of 27 the current average-of plus $0.74 mover. Dairy Institute 28 opposes Proposal 13. 5214 1 Our opposition to this proposal stems from the 2 fact that it would make Class I hedging extremely 3 difficult, if not impossible, for most Class I processors. 4 Our Class I members feel that the ability to hedge Class I 5 milk is becoming increasingly important for some growing 6 market segments, such as extended shelf-life products and 7 foodservice. 8 In many of the these segments, our members are 9 competing with other beverage options that have an ability 10 to offer fixed pricing so that their customers, retailers 11 and foodservice establishments, can plan pricing and 12 promotion strategies more efficiently. Milk is at a 13 competitive disadvantage to alternative beverages when our 14 industry does not have the ability to effectively manage 15 risk and offer fixed pricing to our customers. The 16 current mover allows Class I processors to manage risks, 17 while Proposal 13 would not. 18 Proposal 14: IDFA proposes an updated Class I 19 mover that is the average-of the Advanced Class III and 20 Class IV skim milk prices, plus the higher-of either $0.74 21 hundredweight or an adjuster equal to the 24-month rolling 22 simple average difference between the advance Class III 23 and Class IV skim milk prices. 24 Proposal 15, from the Milk Innovation Group, 25 proposes to retain the current average-of formula for the 26 Class I skim milk price and update the adjuster monthly 27 using a 24-month lookback with a 12-month lag, that is for 28 the preceding 13- through 36-month period. 5215 1 The Dairy Institute supports both Proposal 14 and 2 Proposal 15, as either proposal would align Class I milk 3 prices more closely than the current mover with the prices 4 generated under the old higher-of formula. Both proposals 5 would also allow Class I handlers to hedge and provide a 6 fixed price to customers who desire it. 7 Proposal 16: Edge Dairy Farm Cooperative, or 8 Edge, proposes changing the Class I skim milk price to the 9 announced Class III price, plus an adjuster. The adjuster 10 would be a 36-month average, August through July, of the 11 monthly differences between the higher-of Advanced 12 Class III and IV skim milk -- III or IV skim milk price 13 and the Class III skim milk price. 14 While this proposal would allow for Class I 15 hedging using Class III futures contracts, Dairy 16 Institute's Class I processor members are concerned that 17 the lack of Advanced Class I pricing would be problematic. 18 To be able to offer customers a pricing in advance of the 19 month, the proposal might require hedging of all Class I 20 milk, even standard HTST retail accounts where milk 21 monthly Class -- where monthly Class I milk price changes 22 are currently passed through to retail customers. 23 Alternatively, the proposal could require Class I 24 processors to true up monthly with customers once the 25 regulated price is announced after the milk has already 26 been sold. It is unclear whether customers would accept 27 this change and Dairy Institute members are not ready to 28 support such change. 5216 1 Proposal 17: Edge proposes a second alternative 2 for changing the base Class I skim milk price to use the 3 higher-of announced Class III or Class IV skim milk price. 4 Dairy Institute opposes Proposal 17. 5 The lack of advanced pricing and a return to the 6 higher-of methodology will not allow for Class I hedging, 7 and the cost of milk would be unknown when it is sold to 8 the retail customer. 9 Proposal 18: The American Farm Bureau Federation, 10 that should be AFBF, proposes the elimination of advanced 11 pricing on all Class I and Class II skim. It would change 12 the Class I mover to the higher-of the announced Class III 13 or Class IV price. The Dairy Institute opposes 14 Proposal 18 as it suffers from the same shortcomings as 15 Proposal 17. 16 Class I and Class II Differentials. 17 Proposal 19: National Milk Producers Federation 18 proposes to increase the Class I differentials in all 19 locations by various -- varying amounts with increases 20 around the country by an average of roughly approximately 21 $1.50 per hundredweight. Dairy Institute opposes 22 Proposal 19. 23 Dairy Institute does not believe the Class I price 24 differential increases as proposed by National Milk 25 Producers Federation are warranted. In California, the 26 proposal would increase Class I differentials by $0.70 to 27 $1.10 per hundredweight depending on the county. It 28 appears that the proposal would do little to incentivize 5217 1 the movement of milk to Class I plants, as Class I price 2 gradients have not changed substantially. The proposal 3 appears to be designed more for producer price enhancement 4 than for facilitating orderly movement of milk to Class I 5 markets. 6 To the extent that the cost of bulk milk 7 transportation has increased, those additional costs are 8 probably being paid in the form of higher transportation 9 charges that cooperative milk suppliers charge their 10 Class I customers. 11 Class I differential changes are historically 12 contentious because they can have substantial competitive 13 impacts with winners and losers. The additional Class I 14 revenues available to Federal Order milk pools will 15 further disadvantage producer cooperatives that own 16 manufacturing plants and that are already contending with 17 inadequate Make Allowances. 18 Conversely, cooperatives that own Class I plants 19 or that are primarily milk suppliers to Class I processors 20 will benefit from the higher Class I prices, as well as 21 the elevated prices for other cheese -- for other classes 22 that result from Make Allowances that are too low. 23 Proposal 20: MIG proposes to eliminate the 24 Class I differential of $1.60 per hundredweight. It is 25 arguing that the base differential is no longer needed to 26 attract milk to Class I plants in milk surplus areas. 27 Only location differentials would be added to the Class I 28 mover to establish a particular county's Class I price. 5218 1 The Dairy Institute is neutral on Proposal 20. 2 Proposal 21: American Farm Bureau Federation 3 proposes increasing the Class II differential from its 4 current value of $0.70 per hundredweight to a new value of 5 $1.56 per hundredweight. Dairy Institute opposes 6 Proposal 21. 7 The American Farm Bureau Federation proposal 8 appears based on the notion that plants would be willing 9 to pay as much as $1.56 above the Class IV price before 10 they are incentivized to use ingredients rather than milk. 11 Dairy Institute believes that Proposal 21 will result in 12 nonfat dry milk being substituted for Class I skim in the 13 production of Class II products. Therefore, the proposal 14 should not be adopted. 15 THE COURT: Dr. Schiek? What's printed here in 16 the next to the last line of that paragraph is Class II 17 skim, and you -- you said Class I skim. 18 THE WITNESS: Ah. It should be Class II skim. 19 Dairy Institute believes that Proposal 1 will 20 result in nonfat dry milk being substituted for Class II 21 skim in the production of Class II products. Therefore, 22 the proposal should not be adopted. 23 THE COURT: And that's as to Proposal 21? 24 THE WITNESS: 21, correct. 25 THE COURT: Yes. Thank you. 26 THE WITNESS: And finally, AMS Proposal. 27 Proposal 22: USDA proposes that it be allowed to 28 make any changes as may be necessary to make the 5219 1 respective individual milk marketing orders conform with 2 any amendments that result from the hearing. 3 Dairy Institute understands that the need to make 4 conforming changes to the individual order language. 5 However, we can neither support or oppose these changes 6 until we know what they are. 7 That concludes my testimony on behalf of the Dairy 8 Institute, and thank you for the opportunity to testify. 9 THE COURT: Let's take a five-minute stretch 10 break. It's 3:43. Let's go off record. 11 (An off-the-record discussion took place.) 12 THE COURT: Let's go back on record. 13 All right. We're back on record. It is 14 approximately 3:48. 15 Mr. English. 16 MR. ENGLISH: Thank you, your Honor. 17 Chip English with the Milk Innovation Group. 18 I rise, your Honor, because, in addition to, I 19 believe, Exhibit 249 -- 20 MR. HILL: Yes. 21 THE COURT: So 249 is the one that -- 22 MR. ENGLISH: The statement that he just read. 23 THE COURT: -- he just finished? 24 MR. ENGLISH: Yes. Dr. Schiek has also provided 25 both USDA and yourself a document labeled, right now, 26 Exhibit Dairy Institute-2, which is a one-page document, 27 and I am wondering if we could have that marked as the 28 next exhibit. 5220 1 THE COURT: We will. I will mark it as 250. 2 (Exhibit Number 250 was marked for 3 identification.) 4 MR. ENGLISH: And then I'd like to give Dr. Schiek 5 an opportunity to explain what this document is. 6 THE COURT: Excellent. You may do so. 7 THE WITNESS: This -- thank you. 8 This document -- excuse me -- was requested by 9 Ms. Erin Taylor, from USDA, in response to -- or during 10 the cross-examination of me as -- in my earlier 11 appearance, where I was presenting information on a cost 12 modeling -- dairy manufacturing cost modeling analysis 13 that I did. 14 And so she had asked for the websites for the 15 different explanatory variables that were used in my 16 analysis. And so what I have done here is listed each of 17 those variables and provided the web address of where 18 those -- where those -- where that data came from. 19 MR. ENGLISH: And that's all. I was trying to 20 move the ball forward, your Honor. 21 THE COURT: Thank you. Appreciate it. 22 Now cross-examination of Dr. Schiek. Who would 23 like to begin? 24 CROSS-EXAMINATION 25 BY DR. CRYAN: 26 Q. Good afternoon. I'm Roger Cryan with the American 27 Farm Bureau Federation. 28 A. Dr. Cryan. 5221 1 Q. Hello, Dr. Schiek. How are you? 2 A. I'm well. Thank you. 3 Q. It's always good to see you. 4 A. Good to see you. 5 Q. You oppose -- on behalf of the Dairy Institute of 6 California, you oppose Proposal 4 because you believe that 7 adding 640-pound blocks to the block cheddar cheese survey 8 adds little price information because they are already 9 priced -- 10 A. Off of 40-pound blocks. 11 Q. -- off of 40-pound blocks. 12 So you agree they are essentially the same market? 13 A. Most of the time I think that's how 40 -- 640s are 14 priced, based on my understanding and what I'm told. I 15 also referred to the testimony from James DeJong earlier 16 on 640s, because he sells a lot of them, and I don't. 17 Q. Okay. And so what would be the -- what would be 18 the harm, what would be the damage of adding 640s to that 19 survey? 20 A. I think -- I think the issue is, might be that 21 when 640s are -- well, for one thing, they are often made 22 to customers' specs, so there can be some differences in 23 the product and in the specs that individual customers 24 have. That, I believe, James DeJong testified to. 25 So the sort of commodity definition of them is not 26 necessarily established because of those different 27 customer specs. 28 I think the other issue is, when they are long, 5222 1 they are sold at auction. There's no, like, clearing 2 market for them, or clearing commodity market for them. 3 At least that was what has been testified to, I believe. 4 And so you don't have the same pricing information coming 5 from that market-clearing function. 6 Q. So if it was narrowly defined according to 7 commodity specification, that would help? 8 A. It would. 9 Q. Very good. 10 You oppose Proposition 5 on behalf of the Dairy 11 Institute of California to add unsalted butter to the 12 survey. 13 A. Uh-huh. 14 Q. Those -- the butter is graded according to the 15 same standard, whether it's salted or unsalted; is that 16 correct? 17 A. That's my understanding, yes. 18 Q. And there is substantial salted butter sold at 19 82%; is that correct? 20 A. I don't know the answer to that. 21 (Court Reporter clarification.) 22 BY DR. CRYAN: 23 Q. Okay. Would you agree that the best source of 24 data for adjusting Make Allowances is an audited mandatory 25 survey for processing costs and yields? 26 A. I think, yes, that would be the best source of 27 data. 28 Q. And you used -- in your analysis, you used CDFA 5223 1 surveys which were audited -- 2 A. Correct. 3 Q. -- mandatory and audited surveys. 4 Would you agree that as one uses that data to 5 extrapolate into the future, that it becomes problematic? 6 That it's challenging? That for 2016, the data was very 7 good, but the further out you extrapolate by whatever 8 method, the more challenging it is to rely on that data? 9 A. I would say that in any econometric model where 10 you are estimating from one dataset and then forecasting 11 out, the farther you get out, the more challenging it is, 12 yes. 13 THE COURT: Dr. Schiek, your voice is still very 14 quiet compared to Dr. Cryan, so it will be nice if they 15 are the same volume. 16 THE WITNESS: Okay. Is that better? 17 THE COURT: Yes. 18 THE WITNESS: Maybe I should take a drink of 19 water. 20 DR. CRYAN: I think it's a little easier to hold 21 this microphone in front of you when you standing here 22 then when you are sitting up there. 23 BY DR. CRYAN: 24 Q. Would you agree that a CME Group Class I futures 25 and options contract would address a lot of the risk 26 management issues for Class I handlers that you refer to 27 when you talk about the difference between the higher-of 28 and the average-of? 5224 1 A. I think a Class I futures and -- Class I futures 2 and options contracts would be a marked improvement in 3 terms of ability to manage risk, yes. 4 Q. And that would also address one of your major 5 concerns in the elimination of advanced pricing? 6 A. It would -- it would -- it would address the 7 concern of the higher -- of the idea of not knowing which 8 product that you need to pick as your hedge. 9 Q. So what would -- what is the -- if there were a 10 Class I -- if there were Class I futures and options, what 11 is the damage, what is the harm to bottlers of eliminating 12 advanced pricing? 13 A. As long as their customers are willing to 14 accept -- well, as long as -- as long as there's enough 15 liquidity, I would say, in the market for them to fully 16 hedge advanced price versus the actual price they receive, 17 then there probably isn't a problem. But currently we 18 don't have that market. If one were established, there's 19 liquidity issues for the amount of volume that would 20 probably need to be hedged. 21 Q. Well, which leads to my next question, which is 22 that there's an awful lot of the policy proposals from the 23 Dairy Institute of California and IDFA, for whom you 24 presented data, that seems to rely very heavily on the 25 status quo and the current dairy futures and options 26 complex. That would seem to make CME the arbiter of 27 Federal Order policy. 28 Is that an appropriate situation to be in? 5225 1 A. I think what I'm voicing here, first of all, we 2 don't have any -- Dairy Institute does not have any 3 proposals at this hearing. Dairy Institute is either 4 supporting or opposing proposals that are out there. 5 But I think what I'm saying is, our position is 6 based on our concerns. Our concerns are based on what's 7 currently available to us in terms of managing risk. 8 So -- you know, that's what I'm saying, basically. 9 Q. You do have policy -- I mean, whether you have 10 submitted a policy, you have policy to oppose or support a 11 variety of these? 12 A. Correct. Correct. 13 Q. Thank you. 14 And in the elimination of Class II advanced 15 pricing for Class II skim milk, since the Class II 16 butterfat is already priced on current prices, and because 17 Class II is much more -- Class II processing and pricing 18 seems quite a bit more like Class III and IV than it is 19 like Class I. 20 Could you talk about what -- what is the harm, 21 what's the damage of eliminating Class II skim advanced 22 pricing? 23 A. Currently customers are -- are used to the 24 Class II pricing that we have. And to the extent that 25 there's passthrough pricing, that's -- that's what they 26 are used to. And so eliminating that Advanced Class II 27 skim pricing takes away that -- that ability to, at least, 28 forecast that part of the of the price. 5226 1 Q. It would disrupt what they are used to? 2 A. Correct. 3 Q. And regarding the Class II differential, the 4 proposal from the Farm Bureau, American Farm Bureau 5 Federation, how is the $1.56 proposal different from the 6 original $0.70 logic, the logic behind the original $0.70 7 differential? 8 A. In terms of the logic, it's not. And I think -- 9 but what we find is when powder is advantageous -- nonfat 10 dry milk powder is advantageously priced, it's fairly easy 11 to switch. And that full rewetting in the sort of drying 12 and rewetting, isn't actually what needs to happen, 13 because, you know, a lot of times you are able to rewet 14 those solids with other dairy liquids that are already 15 there. In other words, you are not, like, using 100% 16 powder. It's -- you are using powder in addition to other 17 dairy liquid products. So you are reducing the amount of 18 Class II milk that you use and using more of the 19 ingredient. And I don't think from a policy perspective 20 it's necessarily good to encourage more powder use if you 21 want to have Class II milk use. 22 Q. But do you -- do you realize that the Class II -- 23 that the AFBF proposal for the $1.56 does not include a 24 rewetting cost, it's just a drying cost? 25 A. I -- I guess I didn't realize that. 26 Q. Okay. 27 A. But I will say that when we look at the number 28 that the members indicated, that they -- they could 5227 1 utilize powder more efficiently -- or more often in that 2 situation. 3 Q. And would eliminating Class II advanced pricing 4 help avoid some of the price discrepancies, the price 5 differences between Class II and IV that from time to time 6 encourage that sort of reconstitution, as Class II prices 7 lag behind falling Class IV prices? 8 A. I didn't do any analysis on that. 9 Q. And does -- does the use of ingredients help 10 balance the market? 11 A. Yeah, I hadn't really thought of that as a 12 balancing function. I think the products are being made, 13 and usually there's powder available to buy, so -- 14 Q. Okay. 15 A. -- it's a -- it's really a -- an arbitrage, a 16 product form arbitrage decision. 17 Q. Okay. Of the sort that could help balance the 18 market? 19 A. It could if it was -- if it was matched up. 20 Obviously, it's another use of those products, so it's -- 21 it would -- it would tend to lead more -- more producer 22 milk from Class II use to Class IV use. 23 Q. Very good. Thank you for your testimony, and your 24 being here, and your thoughtful responses. 25 A. Thank you. 26 DR. CRYAN: Thank you very much. 27 CROSS-EXAMINATION 28 BY MS. HANCOCK: 5228 1 Q. Good afternoon, Dr. Schiek. 2 A. Good afternoon, Ms. Hancock. How are you? 3 Q. I'm doing fine. How are you? 4 I just have a few questions. You were talking 5 about the purpose the Federal Order system. 6 Is it also true that in addition to the items 7 you've discussed in your exhibit, that a purpose of the 8 Federal Order system is a producer price improvement or an 9 enhancement under the Federal Milk Marketing Order? 10 A. I think the purpose of ensuring adequate producer 11 prices is to ensure that there's adequate milk, fluid 12 milk, for consumers. 13 Q. Is it also true that a purpose is to enhance the 14 producer prices as well? 15 A. Again, I think the enhancement of producer prices 16 is to serve the larger goal of ensuring that the market is 17 served. 18 Q. And in order to do that, you have to make sure 19 that producers are fairly paid and they are able to stay 20 in business? 21 A. Yes. 22 Q. And so is it also true that it was designed to 23 neutralize or level the bargaining power between producers 24 and handlers? 25 A. Yeah. I believe that was a purpose. 26 Q. And the net effect of that is that because of the 27 Federal Order system, prices are higher for producers than 28 they would be without a Federal Order system? 5229 1 A. That's the goal, yes. 2 Q. On page 3 of your written statement in 3 Exhibit 249, at the very bottom paragraph there, you 4 have -- I think it's your third sentence, it states, 5 "Regulated prices that are set too high can lead to milk 6 produced by dairy farmers being dumped at the farm or 7 moved out of the area to find a processing home." 8 Do you know what sentence I'm referring to? 9 A. Yes. Yes. I know what you are referring to. 10 Q. Do you have any examples of that occurring? 11 A. It was occurring in California at various times, 12 okay, so this experience, this is when regulated prices 13 were high and Make Allowances had not been adjusted in 14 California, where we had too much milk in the state for 15 the amount of processing capacity. 16 So the idea here is, you've got a market-clearing 17 price. Supply and demand, graph crosses right here, 18 right? If it's too high and it's above that, you have -- 19 you have a supply that's greater than the demand at that 20 price. So you have this issue of, okay, what do we do 21 with the excess milk. 22 If it's below that, then you have got a situation 23 where there's -- there's more demand at that price then 24 there is supply, and that tends to bring the -- bring the 25 price back to equilibrium, and it's done through 26 competitive premiums, and that's a more orderly process 27 than if you have a situation where it's too high and you 28 don't have homes for the milk. 5230 1 That's the argument I'm making here. 2 Q. Okay. And you said that you do have examples of 3 when it had occurred in California? 4 A. We -- we saw that in California at various times 5 from 2006, probably up until milk production peaked in 6 California in 2014, I think. 7 Q. And during that time period between 2006 and 2014, 8 when -- are you saying that that was the window of time in 9 which the milk supply was too high as compared to the 10 demand in the market? 11 A. Correct. 12 Q. And then what happened? 13 A. I think what happened -- well, we had the -- we 14 had the financial crisis. That was the first thing that 15 led to a drop in demand. And then over time, costs of 16 production began rising, and then the price wasn't too 17 high anymore. So milk production costs rose and milk 18 production started declining. 19 Q. Okay. And it took the full eight years between 20 2006 and 2014 for the market to right itself under those 21 conditions? 22 A. No. It would right -- you know, markets tend to 23 move from one disequilibrium to another. So equilibrium 24 is kind of a moving target concept. 25 What was happening during that time is you were 26 having a lot of shocks to the market. So sometimes milk 27 was in surplus, then -- then prices fell, and milk was no 28 longer in surplus. And then sometimes production costs 5231 1 would fall, and milk -- milk supply would grow again. 2 Q. And so when you say the market tends to, I guess, 3 overcorrect itself, that's just the pendulum swung too far 4 the other direction; is that right? 5 A. That often happens, yeah. 6 Q. So when you say -- I just want to talk about this 7 timeframe in there. You said in around 2006 is when you 8 believe that there was too much milk in California? 9 A. Uh-huh. 10 Q. Is that yes? 11 A. Correct. 12 Q. Okay. And -- and you believe that in 2006, the 13 reason there was too much milk in California is because 14 the prices were set too high? 15 A. The regulated price was too high. And I -- I say 16 that because Make Allowances for manufactured milk were 17 not -- not keeping up with costs. So there was a hearing 18 in 2006, and that -- that spring there was milk being 19 dumped in California. Some of that is on testimony -- you 20 know, on the record in the CDFA testimony. 21 As a result of that hearing, the Make Allowance 22 was increased. After that, we weren't having the problem 23 with excess supply for a while. And then we had the 24 financial crisis, demand dropped, and we had excess supply 25 because of that. It was a different reason. 26 Q. So you are talking about manufactured products? 27 A. Yes. 28 Q. Okay. And this is at a time when CDFA was 5232 1 conducting an annual survey of the prices in the market in 2 California? 3 A. Yes. 4 Q. And -- and -- and then I think we talked about 5 this previously, but then CDFA would bring the -- bring 6 the data back that they would collect, and then apply all 7 of the market conditions that they observed, and create a 8 Make Allowance that they thought was appropriate for the 9 market? 10 A. Correct. 11 Q. And they did this on an annual basis. 12 A. The -- the adjustment didn't necessarily happen on 13 an annual basis. Pretty much like here, you know, you 14 have to have a hearing, so someone petitions for a 15 hearing. A petition is not always granted, you know. 16 Generally they are looking for more support or, you know, 17 real clear evidence in the data that that change needs to 18 happen. So you might have petitions where there's no -- 19 no hearing but -- so, again, long answer to a short 20 question. It didn't happen on an annual basis even though 21 the information was coming out on an annual basis. 22 Q. Okay. The information was available to CDFA in 23 the market on an annual basis, but the change didn't 24 necessarily occur to Make Allowances on an annual basis? 25 A. Correct. 26 Q. And you said it started in 2006, and then the 27 financial crisis was, what, 2008 to 2010? 28 A. Yeah, that time period. 5233 1 Q. Okay. And so the market factors, before a change 2 could be made by CDFA under the regulatory regime, the 3 market had some occurrences that tended to have an effect 4 on the market as well? 5 A. Yes, there were other forces at work at times. 6 Q. And the -- was the -- that caused a decrease in 7 demand in the market, and the supply and demand curve 8 tended to right itself based on those market conditions. 9 A. Yeah. The -- well, the decrease in demand led 10 to -- at least initially, led to an oversupply of milk. 11 But then the high cost of -- or the low prices of milk, 12 milk prices corrected, and that brought production down 13 again. So you had -- you had both forces at work 14 during -- at the same time, during the financial crisis. 15 Q. Okay. So in that case, it wasn't the regulated 16 prices that corrected it, it was the market conditions? 17 A. In that case, yes. 18 Q. So back to your statement here where you said the 19 regulated prices resulted in farmers dumping their milk or 20 moving out of the area to find a different processing 21 home, can you think of an example when that occurred that 22 was related specifically to the regulated milk price that 23 was set? 24 A. Well, I think that was the situation we faced in 25 2006 in California. 26 Q. Okay. All right. And then maybe just high-level, 27 on Proposal 1, that's National Milk's proposal on the milk 28 components. 5234 1 A. Uh-huh. 2 Q. Were you here when National Milk put on its case 3 related to the milk components? 4 A. I think I was here for -- for some of it, yes. 5 Q. Or listened to it? 6 A. Yeah. 7 Q. Okay. Is it fair to say that for the fat/skim 8 orders, implementation of National Milk's proposal will 9 cost processors more money in those areas? 10 A. I would say, yes, that would be true. 11 Q. And California Dairy, do you have any facilities 12 out in that location, in the locations in those fat/skim 13 orders? 14 A. We do not. And California's a multiple component 15 pricing order. 16 Q. And would the changes proposed by National Milk 17 cause an increase in any of the pricing that California 18 Dairies would pay? 19 A. California milk processors you mean, in 20 California, buying milk in California -- 21 Q. Yeah. 22 A. -- is that -- not for Classes II, III, and IV. 23 Q. But it would for Class I? 24 A. Correct. 25 Q. Because based on whatever kind of mover that is 26 finally settled on, it would still be based on the III and 27 IV? 28 A. Yeah, I assume our component levels in California 5235 1 are higher than the -- than the assumed component levels. 2 Q. So the financial impact of National Milk's 3 proposal on California Dairy Institute would be that it 4 would increase its Class I milk prices? 5 A. It would increase the Class I milk prices for 6 members, yes. 7 Q. Okay. And then National Milk's Proposal Number 3 8 to eliminate barrels from the Class III pricing, does -- 9 maybe I should back up. 10 I think when -- you kind of skipped over the 11 introduction, but you said that Dairy Institute represents 12 fluid milk processors and dairy product manufacturing 13 plants in California; is that right? 14 A. Yes. 15 Q. How many plants do you have? 16 A. How many plants? I don't know. How many 17 processors? We have 23 processor members who have plants 18 in California. Some of them have more than one. 19 Q. And do you know what the makeup is as between 20 fluid milk and dairy product manufactured products? 21 A. I would say right now we're probably about 50% of 22 the membership, maybe a little more than 50% is doing 23 fluid milk and/or cultured frozen products, and then the 24 other -- the remainder is mostly cheese, with one or two 25 fluid Class IV products. 26 Q. Okay. So about half of your membership has 27 products in Class III? 28 A. It's probably a little less than half, yep. But 5236 1 they are -- they are, by and large, larger companies that 2 are buying more milk than the others. 3 Q. Okay. And then National Milk's Proposal 3 that 4 would eliminate barrels from the protein pricing formula 5 that would set Class III prices, if that were to occur, 6 the net effect of that would be to potentially increase 7 the price for Class III milk; is that right? 8 A. Yeah. Based on historic data, that would be -- 9 that would be the case, because historically blocks are 10 higher than barrels. 11 (Court Reporter clarification.) 12 THE WITNESS: Okay. Historically, cheddar block 13 prices have averaged higher than barrels by -- by more 14 than the $0.03 adjustment. 15 BY MS. HANCOCK: 16 Q. And Proposal Number 7, National Milk's proposal 17 with respect to Make Allowance, you and I have already 18 discussed. 19 A. We did. 20 Q. But if I can just summarize it here. One of your 21 concerns with National Milk's proposal is that it doesn't 22 go far enough in increasing Make Allowances; is that fair? 23 A. Yes. Relative to what we think costs are. Yes. 24 Q. Okay. And when you say "relative to what we think 25 costs are," you have instead opted to support Proposals 8 26 and 9 for the Make Allowance increases that would 27 ultimately result in a higher increase to Make Allowance? 28 A. That's true. That's what would happen. 5237 1 Q. And so that would, in turn, reduce the pay price 2 that your members would have to pay for the products that 3 they -- for which they would get to deduct the 4 Make Allowance. 5 A. That's true. Yes. 6 Q. And then, as I understand Dairy Institute's 7 position, you oppose Select's proposal due to lack of 8 information on shrinkage, fat recovery, and nonfat yields. 9 Is that fair? 10 A. Yes. Are you talking about Proposals 11 -- 10, 11 11, and 12? Is there one particular one you are talking 12 about, or all of them? 13 Q. I just kind of lumped them together. 14 A. Okay. Yeah. I think Select has done a good job 15 of pointing to part of the formula. I just -- I think 16 Dairy Institute members felt like we would like to see 17 more -- a broader set of information before being 18 comfortable making those changes. 19 Q. And the work that you did on your kind of metric 20 modeling didn't include any yield data or analysis? 21 A. Did not. It did not. 22 Q. And you're not aware of anyone asking 23 Dr. Stephenson to add yield data into any of his -- any of 24 his analysis either? 25 A. I'm not aware, no. 26 Q. Okay. And then I want to turn now to National 27 Milk's Proposal Number 13, which is the one we have been 28 talking about this week, to move the -- from the 5238 1 average-of back to the higher-of. 2 And you were present, at least today, for that 3 testimony? 4 A. Today. Yes. Uh-huh. 5 Q. And it's fair to say that historically, since 6 average-of has been put in place, it has resulted in a 7 price point that was lower than what it would have been 8 had the higher-of been paid; is that accurate? 9 A. That's been accurate to date. 10 Q. Okay. And one of the reasons that you have 11 articulated for opposing National Milk's Proposal 12 Number 13 to move to the higher-of is because of some 13 concerns you have with whether hedging can be conducted 14 using the higher-of; is that right? 15 A. Yes. That is the concerns that our members 16 expressed. 17 Q. And do you know how much of your membership is -- 18 is hedging today, using the average-of? 19 A. I don't know. I have heard from of my fluid milk 20 processors. I have heard -- four of them have told me 21 that they use futures for certain customers to hedge and 22 provide a price for certain customers. 23 Q. Do you know what products they are using? 24 A. I don't. I believe it's mostly ESL fluid milk 25 products, extended shelf-life fluid milk products. 26 I did have one who -- who said they had one HTST 27 customer that was asking for it, and they were using it 28 for that. 5239 1 Q. Okay. And what about their customers, have you 2 heard anything about their customers using any hedging 3 tools? 4 A. I don't know what their customers are doing. 5 Q. Do you know what the risk exposure for Class I 6 processors are that they are managing? 7 A. I do not. 8 Q. Does Dairy Institute do any kind of risk 9 management or engage in any kind of risk management 10 training? 11 A. No. I think we -- you know, we don't -- we -- I 12 should say we have had and have invited -- during milk 13 pricing workshops, we have invited folks to come in and do 14 a session on risk management, but we don't do any risk 15 management ourselves. We don't -- you know, we're not a 16 broker or anything. We don't hedge for our members. We 17 are just an advocacy organization. 18 Q. When you say "an advocacy organization," what do 19 you advocate for? 20 A. We advocate on behalf of our members on 21 legislative and regulatory matters. 22 Q. Things that have a financial impact on their 23 businesses? 24 A. Yeah. I would say ultimately they are looking for 25 the health of their business and the health of the 26 industry -- 27 Q. And -- 28 A. -- so that they can do business in the industry. 5240 1 Q. And do you know what risk management tools would 2 be available to your members if the -- if we return to the 3 higher-of mover for Class I pricing? 4 A. I don't personally know what tools would be 5 available. I -- I know that hedging with -- with the 6 contracts would be a lot more difficult. I don't know how 7 you would construct that hedge. 8 I do know, I heard testimony that there are 9 over-the-counter market makers who will -- will do 10 something to provide a price, for a price. 11 Q. Okay. And all of the risk management tools come 12 with a price, don't they? 13 A. Some -- some come with more cost than others. 14 But, yeah, they all come with a price. 15 Q. Okay. And what about swaps, would that be an 16 option if the higher-of movers were put back in place? 17 A. I'm not an expert on swaps, but I'm assuming that 18 you might be able to find somebody to do a swap. I just 19 do not know what they would charge for that swap. 20 Q. And what about options, would that be an option to 21 have an option under a -- under a higher-of mover? 22 A. I think -- I mean, options are options on futures 23 contracts, so I assume you would have the same -- some of 24 the same issues. 25 Q. Forward contracting or fixed pricing, would that 26 be an option? 27 A. Forward contracting can -- can be an option for 28 some classes of milk. I don't see it as an option for 5241 1 Class I. 2 Q. Okay. Do you know? I mean, have you done any 3 kind of analysis? 4 A. I don't know anyone who is using it right now. 5 Q. Well, no one can use it right now under the 6 higher-of model, right? Because it doesn't exist yet. 7 Again -- 8 A. Yeah, and there's an issue with -- with -- when 9 you are below the regulated minimum. 10 Q. And then what about inventory? Is inventory used 11 as a risk management tool? 12 A. For Class I? 13 Q. For Class I. 14 A. Not that I'm aware of. 15 Q. What about for ESL products? 16 A. I don't -- I don't know. 17 Q. Okay. If we look at page 10 of your testimony, 18 your written statement, at the bottom, maybe two full 19 sentences up from the bottom there's a sentence that 20 starts, "to the extent." And it states, "To the extent 21 that the cost of bulk milk transportation has increased, 22 those additional costs are probably being paid in the form 23 of higher transportation charges that cooperative milk 24 suppliers charge their Class I customers." 25 Do you know if that is actually happening? 26 A. What I hear from my members in conversations is, 27 is they will say they are paying more, they're paying 28 higher transportation charges. And, you know, I think 5242 1 that that's -- that's fair. Obviously if transportation 2 costs have gone up, and cost of serving the market is 3 higher, then they are paying those charges from their 4 suppliers. 5 Q. Yeah. Do you know who is absorbing the cost of 6 those transportation cost increases? 7 A. I would assume ultimately it comes through to the 8 price charged to the -- to the retailer from the 9 processor, if they can pass it on, if they can absorb that 10 cost. 11 Q. And your statement here says that Dairy Institute 12 opposes National Milk's Proposal Number 19 to increase the 13 Class I differentials; is that accurate? 14 A. Yes. 15 Q. And if Proposal 19 were adopted, it would -- it 16 would cost your membership additional monies to acquire 17 its Class I products; is that accurate? 18 A. It would increase the Class I price, yes. 19 Q. And so that would be a yes, it would increase your 20 members price as well? 21 A. Correct. 22 Q. Okay. If you turn the page, I'm at the top of the 23 page 11 on your statement. And the sentence that started 24 on the prior page but continues over, says, "The 25 additional Class I revenues available to Federal Order 26 milk pools will further disadvantage producer cooperatives 27 that own manufacturing plants and that are already 28 contending with inadequate Make Allowances." 5243 1 I'm wondering if you can help me understand what 2 you mean there. 3 A. So what I'm talking about there is to the 4 extent -- if a manufacturing plant that's pooling its milk 5 on the Federal Order and obligated at order minimum 6 prices, it's paying manufacturing costs -- manufacturing 7 prices -- so let's use a Class III, for example. They are 8 paying a Class III price that doesn't -- doesn't have a 9 Make Allowance that -- that accurately reflects the cost 10 of converting milk into that cheese. That either creates 11 a loss in the plant or the plant will pass that on to its 12 member-owners. Okay? 13 A loss in the plant can be carried for a while by 14 avoiding certain maintenance or, you know, new plant 15 investments, putting them off for a period of time, but 16 ultimately the producer who owns the plant is going to be 17 paying that price. 18 So -- so that's the inadequate Make Allowance 19 thing that -- where they are earning a price -- or 20 having -- not having their costs fully -- fully covered in 21 that conversion by the inadequate Make Allowance, if they 22 are paying the regulated minimum price. Okay? 23 So then you have got a cooperative that's mainly 24 selling milk, as opposed to turning it into a product and 25 operating a manufacturing plant. So they are selling milk 26 to customers. 27 If you increase the Class I price, they are going 28 to benefit from that price in terms of the pool. They are 5244 1 already benefitting from the higher manufacturing milk 2 price that doesn't fully reflect the manufacturing cost. 3 And so the manufacturing plant is kind of left 4 with a -- with the issue of, do I pool to get the Class I 5 revenues and pay that higher manufacturing cost, that 6 manufacturing price that doesn't reflect my cost, or do I 7 depool so I can not pay that higher manufacturing cost to 8 the pool, but then I miss out on the Class I revenue. So 9 it creates an unequal playing field for those two 10 different handlers. 11 Q. Okay. And so you are saying in here, though, that 12 it disadvantages the producer cooperatives. 13 Are you distinguishing that from the proprietary 14 cooperative or from proprietary plants or -- 15 A. Yeah. Here I'm just talking about two different 16 types of cooperative handlers. 17 Q. Okay. And so you -- 18 A. One that's selling milk and one that's 19 manufacturing products. 20 Q. Okay. And so you're saying that the one that 21 would be disadvantaged would be the one -- 22 A. Manufacturing. 23 Q. -- that owned the manufacturing plant as opposed 24 to the Class I? 25 A. Correct. 26 Q. Okay. I understand. Thank you. 27 MS. HANCOCK: That's all the questions I have. 28 Thank you. 5245 1 MR. MILTNER: Ryan Miltner representing Select 2 Milk Producers. 3 CROSS-EXAMINATION 4 BY MR. MILTNER: 5 Q. Good afternoon, Dr. Schiek. 6 A. Good afternoon, Mr. Miltner. 7 Q. On Select's Proposal Number 10 regarding butterfat 8 recovery, does the Dairy Institute, as an organization or 9 any of its members, intend to introduce any evidence on 10 the butterfat recoveries that they experience? 11 A. Not that I'm aware of. 12 Q. With Proposal 11, do any of the Dairy Institute's 13 plants intend to introduce evidence on their experiences 14 in measuring farm-to-plant shrink? 15 A. Not that I'm aware of. 16 Q. On Proposal Number 12 regarding nonfat yields and 17 the uses of buttermilk, same question, does the Dairy 18 Institute or any of its members intend to introduce any 19 evidence or data on their experiences? 20 A. Again, not that I'm aware of. 21 Q. Okay. You had some questions earlier about high 22 prices leading to milk being dumped at the farm or moved 23 out the area, and you described California's experience in 24 the 2006 to 2014 range. 25 During that time, of course, California operated 26 its own order system, correct? 27 A. Correct. 28 Q. And I think during that period, whether explicitly 5246 1 or implicitly, California adopted a policy of establishing 2 prices at a level that incentivized the growth of 3 manufacturing capacity in the state; is that correct? 4 A. That's correct. 5 Q. Would you also say that some of the movement of 6 dairy farms out of the state were due to land values and 7 the availability of what's known as a 1031 exchange? 8 A. I would say that 1031 exchange was used, 9 particularly with dairymen who were selling out in 10 Southern California. 11 Q. And in Southern California you had longstanding 12 dairies that found themselves in the wonderful position, I 13 suppose, of being able to sell their acreage by the square 14 foot, correct? 15 A. Yes. And my understanding is, some of them 16 relocated to the Central Valley and expanded there, some 17 of them relocated to far-flung places like New Mexico and 18 Idaho and expanded there. 19 Q. And those that chose to remain in California found 20 themselves in the situation where they were required, if 21 they were using a 1031 exchange, to invest their proceeds 22 in agricultural operations, correct? 23 A. That's my understanding. I'm not an expert on 24 taxes, but that's my understanding of how it worked, yeah. 25 Q. And usually those farms -- I guess I should ask 26 this more as a question. 27 Is it your understanding that as those farms 28 relocated, in many instances, they -- they vastly expanded 5247 1 their herds? 2 A. That is my understanding, yeah. 3 MR. MILTNER: Thanks. That's all I have. 4 THE COURT: Tell me if you want another break 5 before 5:00. It's now 4:35. 6 No? Just keep going until 5:00? Good. All 7 right. 8 Are there any other questions before we hear from 9 what the Agricultural Marketing Service will ask? No? 10 Let us hear from the Agricultural Marketing 11 Service. 12 CROSS-EXAMINATION 13 BY MS. TAYLOR: 14 Q. Good afternoon. 15 A. Good afternoon, Ms. Taylor. 16 Q. I'm going to try not to be duplicative. 17 A. Good, because I only have a little bit of water. 18 Q. Oh, I can remedy that. Let's see. 19 On page 5, at the bottom, when you -- this is on 20 regards to opposition to Proposal 5, adding unsalted 21 butter. And the carryover sentence to the next page says, 22 "There is also a question of how subsidies on exported 23 butter would be handled in the price reporting of the 24 product." 25 Can you expand on that? 26 A. I was thinking of the CWT program and any 27 assistance given to selling exported butter. 28 Q. So that's not government subsidies? 5248 1 A. No. 2 Q. That's private? 3 A. Private, right. 4 Q. Okay. I wanted to turn to Make Allowances, which 5 starts on page 6. And first we have a carryover question 6 from the first time you were here, so we'll not -- I will 7 take this opportunity. 8 So the proposals that Dairy Institute supports and 9 of which you testified on your own study, is averaging the 10 Stephenson study with your own study. 11 A. Uh-huh. 12 Q. I guess one question is, why would it be 13 appropriate -- why do you think it's appropriate to 14 average the two studies when there are California plants 15 accounted for in the Stephenson study, whereas in previous 16 hearings, when we have updated Make Allowances, those 17 studies were averaged, and at that time the CDFA study, 18 because there were not California plants included in the 19 Stephenson study? 20 A. Yeah. I think, again, because it's -- it's two 21 different approaches to the same issue. I think if -- if 22 you -- if you're fully comfortable with the Stephenson 23 study, you know, it has California data in it. If -- if, 24 you know, the fact that it's not fully audited is a 25 concern, then this is another piece of data that I think 26 has some -- some value for consideration. 27 Q. Okay. And at bottom of that first paragraph you 28 have a sentence that "the averaged cost data" -- and 5249 1 you're talking about the average of the two studies -- "is 2 more moderate than either study alone." 3 Can you expand on how you find it to be more 4 moderate? 5 A. Just an observation about, you know, where the 6 average numbers come out compared to the individual 7 numbers from either study. That's all it is. 8 Q. And can you talk a bit about your Dairy Institute 9 members? I think what I caught was a little less than 10 50% of them have manufacturing plants in III or IV, and 11 most of that is in cheese, of your members; is that 12 correct? 13 A. Yes. 14 Q. So can you talk a little bit about whether or how 15 their costs -- the manufacturing costs of those Dairy 16 Institute members are or are not representative of the two 17 cost methodologies we have in front of us? 18 A. Yeah. I don't know, you know, for example, who 19 participated from -- other than I believe Hilmar indicated 20 that they did, and they certainly, of the cheddar cheese 21 making today, are a large part of that. 22 Beyond that, I'm not sure. We have a couple of 23 other cheddar makers in California, and I don't know that 24 they participated. I don't know if they did or if they 25 didn't, but they would be smaller. 26 And, I'm sorry, now I have kind of lost your 27 question in kind of looking at my -- my information. 28 Q. Sure. 5250 1 So just a question, because I'm not sure if other 2 Dairy Institute members will be testifying, trying to get 3 an idea from your members' perspective, are their costs, 4 you know, covered by the surveys as -- you know, before 5 USDA right now to consider? Are their costs less than 6 those survey results or more than those survey results? 7 Like, trying to pull out some actual data, I guess, or 8 thoughts on actual costs? 9 A. And I don't -- I would love to be able to help 10 you. I don't know what those costs are on those other 11 plants. I think, you know, given that, you know, Hilmar 12 participated in the survey, I assume that it's probably -- 13 you know, given how large they are, I assume it's probably 14 fair to -- to say that they -- their costs are on the 15 lower end. Right? 16 The other cheddar manufacturers are probably -- 17 one's probably somewhat higher and one is probably much 18 higher because one is sort of a plant that -- I would call 19 them medium-sized and the other is a plant that's quite 20 small. 21 Q. Okay. And do you know anything about your members 22 when it comes to survey products currently, or products 23 that we survey, so then we gather manufacturing costs on 24 them, about your members' ability to invest in those 25 plants to try to lower their manufacturing costs over the 26 last five years? 27 A. Yes. I -- I don't -- yeah. I don't really know 28 that information, internal information from those 5251 1 companies, and probably couldn't say if I did. 2 Q. Okay. Turning to the next page, which is page 8, 3 in your opposition to Proposal 12. Then you have, towards 4 the end, middle, lower half of that paragraph, "The lower 5 yield (.99) is to compensate for generally lower 6 buttermilk powder prices compared to nonfat dry milk 7 prices and the higher costs associated with drying 8 buttermilk powder compared to nonfat dry milk." 9 As we look at -- it's a yield. So how did you 10 come to this conclusion it's supposed to compensate for 11 lower powder, buttermilk powder prices? 12 A. I think when I was reading the hearing decision 13 from the 2000 hearing, there was a discussion of that in 14 that decision, and that's -- that's what I read. I -- I 15 think a witness from CDI talked a bit about that in his 16 testimony as well. 17 Q. On the hedging proposal -- well, excuse me -- on 18 the base Class I skim milk price, I think Ms. Hancock 19 asked you about whether any of your members, fluid 20 members, hedge, and I think you said you believe four of 21 your fluid plants do that? 22 A. I talked to four who said they do that with some 23 of their customers, yeah. 24 Q. How many total fluid members do you have, if I may 25 ask? 26 A. Let's see if I can -- sorry, looks like about ten, 27 if I added them up quickly. Actually, that's right, it's 28 a little under 50% of our membership. 5252 1 Q. Okay. Thank you. 2 I'm going to turn to page 10, and this is your 3 discussion on the Class I and II differentials. 4 I want to start in the middle of that paragraph: 5 "It appears that the proposal would do little to 6 incentivize the movement of milk to Class I plants as 7 Class I price gradients have not changed substantially." 8 I guess my first question is, what would you see 9 as a substantial change, if what you are contending now is 10 National Milk, whatever they proposed for California, you 11 don't believe is substantial enough to actually make milk 12 go to the fluid plants? 13 A. Yeah. I was thinking more about the location 14 differences rather than the actual size of the 15 differentials. So right now we have a $1.60 differential 16 in sort of the Fresno, Tulare, Kings County, sort of 17 that's the biggest milk supplier in the state. 18 And in Los Angeles, San Diego, that area, 19 there's -- Orange County, where a lot of the population in 20 the state is and where there's a lot of fluid milk sold, 21 it's $2.10. So you have a $0.50 gradient, and I -- I 22 don't think that gradient is changed in the proposal, 23 which was surprising to me. 24 Now, maybe there's reasons for that, but, you 25 know, I would -- I've heard it's more expensive to move 26 milk into Southern California from the Valley, and a lot 27 of milk does move that direction. I would have expected 28 if the proposal was to incentivize movement, that there 5253 1 would be more of a gradient there, but what we have seen 2 is just all the differentials have gone up. 3 Q. Right. 4 A. That's what I was talking about. 5 Q. Okay. So is it appropriate for USDA to look at 6 that or to look at where the actual supply area is for 7 those locations? So the supply area for L.A., for 8 example, where that milk comes from, to see if that 9 gradient changed, which might be different than Tulare to 10 L.A., for example? 11 A. Yeah, you probably would want to consider how the 12 milk is moving, for sure. 13 Q. In your next sentence says, "To the extent that 14 the cost of bulk milk transportation has increased." 15 I know Ms. Hancock asked you a few questions, and 16 I'm not sure I caught all of the answers. But from your 17 members' experience, or from your own knowledge of in 18 California, do you see that the bulk cost of transporting 19 milk has increased? 20 A. I hear from members periodically that their 21 supplier has come to them and said, yeah, we have got to 22 increase your transportation charge because costs are 23 going up. 24 Q. And is it -- do you have an opinion on whether 25 that transportation cost should be -- or whether it all 26 should be or some of it should be captured in the Federal 27 Order minimum prices, or done outside of the Federal Order 28 prices? 5254 1 A. Yeah. You know, I would argue that part of the 2 purpose of the differentials is to help pay for a portion 3 of that cost, of movement to help incentivize that 4 movement. I think historically that's how the 5 differentials have been viewed. I am not sure that if you 6 increase the differentials, that those transportation 7 charges would come down from the suppliers. 8 It would probably take an individual handler 9 starting to build their own supply if they could do it for 10 that, for the charges to come down. 11 Q. And on the sentence that ends that page and goes 12 into the next page, and I know you had a discussion with 13 Ms. Hancock about this, but I just want to make sure that 14 we are clear. 15 So when you are talking about how the Class I 16 change, differential change for National Milk, let's see, 17 would be available in the pools but would further 18 disadvantage producer cooperatives that own manufacturing 19 plants. 20 So as I understand it, when I want to compare a 21 manufacturing co-op versus a marketing co-op, that 22 manufacturing co-op would have to decide, I'm either going 23 to depool to recoup my manufacturing costs that I am not 24 recouping in the order system, or I'll pool and capture 25 the additional Class I revenue that I get to share. 26 So that's the decision you are making or that they 27 have to make? 28 A. Right. Correct. 5255 1 Q. I feel like I have a further question, but I 2 haven't processed what that is yet, so -- let's see. 3 For Proposal 21 on the Class II differential, you 4 state that you think "it will result in nonfat dry milk 5 being substituted for Class II skim in the production of 6 Class II products." 7 Do you have an analysis or any data to support 8 that? 9 A. No. That was just what some of my members 10 indicated based on when they looked at the numbers. As we 11 were discussing a policy position on that proposal, that 12 was what I heard from them. 13 Q. I think Mr. Wilson and I are going to contemplate 14 your answer this evening. 15 A. I have a feeling you will probably be hearing some 16 of these concepts again from other witnesses before we are 17 done. 18 Q. We'll figure it out before we're done then. 19 MS. TAYLOR: That's it from AMS. 20 MR. ENGLISH: If there's no other examination, 21 then I would, on behalf of Dr. Schiek, move the admission 22 of Exhibits 249 and 250. 23 THE COURT: Is there any objection to the 24 admission into evidence of Exhibit 249? 25 There is none. Exhibit 249 is admitted into 26 evidence. 27 (Exhibit Number 249 was received into 28 evidence.) 5256 1 THE COURT: Is there any objection to the 2 admission into evidence of Exhibit 250? 3 There is none. Exhibit 250 is admitted into 4 evidence. 5 (Exhibit Number 250 was received into 6 evidence.) 7 THE COURT: Dr. Schiek, before we let you go, do 8 you have anything else you would like to add based on all 9 those questions that have been put to you? 10 THE WITNESS: I do not, surprising. 11 THE COURT: All right. Thank you. You may step 12 down. 13 How would you like to instruct us about tomorrow? 14 MS. TAYLOR: Thanks, your Honor. I think we have 15 a number of people needing to testify tomorrow, and 16 tomorrow's their only day, so hopefully we can make this 17 all work. 18 I have Sara Dorland returning tomorrow to finish 19 her cross-examination, and she was called on behalf of 20 National Milk Producers Federation. Then we have John 21 Umhoefer from the Wisconsin Cheese Makers Association that 22 needs to go on tomorrow morning. And then I have two IDFA 23 witnesses that will be here tomorrow, and I apologize, I 24 don't have their first names. 25 MR. ENGLISH: Kimberly Greenbaum and Chris 26 Herlache. 27 THE COURT: What's that second one? 28 MR. ENGLISH: Herlache, H-E-R-L-A-C-H-E. 5257 1 We'll talk tonight about whether -- Ms. Greenbaum 2 does not have flexibility. I don't know for a fact yet 3 about Chris. But we're trying to work with people on 4 this. 5 I heard some -- did someone say something about a 6 dairy farmer? 7 MS. HANCOCK: That's Wednesday. 8 MR. ENGLISH: Oh, that's Wednesday. Okay. 9 MS. TAYLOR: So those are the only four that I 10 have that need to testify tomorrow. 11 THE COURT: Is anyone else aware of a witness who 12 wants to be on tomorrow? 13 DR. BOZIC: Dr. Bozic, your Honor, Marin Bozic. I 14 can be tomorrow, if there's time. I'm flexible. 15 MS. TAYLOR: I have you on the list, Dr. Bozic. 16 And I didn't know if you were here all week or you just 17 had to be on -- I didn't know how your availability was. 18 DR. BOZIC: Well, if my marriage gets shaky, I 19 might leave earlier, but otherwise I'm planning to be here 20 all week. 21 THE COURT: But have you completed your proposal 22 about the hedging? 23 DR. BOZIC: Our proposal is ever evolving to much 24 chagrin of our -- of the parties. 25 MS. TAYLOR: So if we get through those four 26 tomorrow, and I'm not sure if there's any farmers showing 27 up to testify tomorrow in person, but then perhaps we can 28 move to Dr. Bozic after that. 5258 1 THE COURT: It will be a late night for you, lad. 2 All right. Good. Is there anything further 3 before we go off record? No. 4 So we'll close this record at approximately 4:54, 5 and we will go back on record at 8:00 tomorrow morning. 6 Thank you. 7 (Whereupon, the proceedings concluded.) 8 ---o0o--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5259 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: November 9, 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