5540 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 27, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 5541 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 Charles "Chip" English 10 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 11 Nicole Hancock 12 Brad Prowant 13 FOR SELECT MILK PRODUCERS, INC.: 14 Ryan Miltner 15 FOR EDGE DAIRY COOPERATIVES: 16 Lucas Sjostrom Dr. Marin Bozic 17 FOR INTERNATIONAL DAIRY FOODS ASSOCIATION: 18 Steve Rosenbaum 19 FOR LAMERS DAIRY: 20 Mark Lamers 21 ---o0o--- 22 23 (Please note: Appearances for all parties are subject to 24 change daily, and may not be reported or listed on 25 subsequent days' transcripts.) 26 27 ---o0o--- 28 5542 1 M A S T E R I N D E X 2 SESSIONS 3 WEDNESDAY, SEPTEMBER 27, 2023 PAGE 4 MORNING SESSION 5545 AFTERNOON SESSION 5685 5 6 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5543 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 John Umhoefer: Direct Examination by Mr. Rosenbaum 5546 5 Cross-Examination by Ms. Hancock 5556 Cross-Examination by Mr. English 5571 6 Cross-Examination by Mr. Miltner 5575 Cross-Examination by Dr. Cryan 5577 7 Cross-Examination by Mr. Lamers 5581 Cross-Examination by Mr. Sjostrom 5583 8 Cross-Examination by Ms. Taylor 5585 Cross-Examination by Mr. Sjostrom 5597 9 Cross-Examination by Ms. Taylor 5601 10 Brian Riordon: Direct Examination by Mr. Hill 5606 11 Cross-Examination by Mr. English 5611 12 Lucas Sjostrom: Direct Examination by Dr. Bozic 5618 13 Cross-Examination by Dr. Cryan 5635 Cross-Examination by Ms. Hancock 5638 14 Cross-Examination by Mr. Miltner 5644 Cross-Examination by Ms. Hancock 5653 15 Cross-Examination by Dr. Vitaliano 5656 Cross-Examination by Ms. Taylor 5662 16 Redirect Examination by Dr. Bozic 5681 17 Sally Keefe: Direct Examination by Ms. Vulin 5686 18 Cross-Examination by Ms. Hancock 5709 19 Brittany Nickerson-Thurlow: Direct Examination by Ms. Hancock 5735 20 Cross-Examination by Dr. Cryan 5747 Cross-Examination by Ms. Taylor 5750 21 Sally Keefe: 22 Cross-Examination by Mr. Miltner 5756 Cross-Examination by Dr. Bozic 5764 23 Cross-Examination by Mr. Lamers 5770 Cross-Examination by Ms. Taylor 5772 24 Redirect-Examination by Ms. Vulin 5785 25 Jacob Schuelke: Direct Examination by Ms. Vulin 5789 26 27 ---o0o--- 28 5544 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. 5 258 Testimony of 5547 5605 John Umhoefer 6 259 WCMA-4 5547 5605 7 260 USDA-60 5607 5617 8 261 USDA-61 5607 5617 9 262 Testimony of 5684 10 Lucas Sjostrom 11 263 Testimony of 5686 5788 Sally Keefe 12 264 MIG-9A 5686 5788 13 265 PowerPoint of Sally Keefe 5686 5788 14 266 Testimony of 5735 5755 15 Brittany Nickerson-Thurlow 16 267 MIG-Crystal-13 5790 17 268 MIG-Crystal-13A 5790 18 19 ---o0o--- 20 21 22 23 24 25 26 27 28 5545 1 WEDNESDAY, SEPTEMBER 27, 2023 - - MORNING SESSION 2 THE COURT: Let's go on record. 3 We're back on record. It is September 27th, 2023. 4 It is Wednesday. It is approximately 8:00 in the morning. 5 This is the continuation of the hearing that's 6 been going on longer than a month. 7 I'd like just a word or two from the Agricultural 8 Marketing Service before we begin with the first witness. 9 MS. TAYLOR: Good morning, your Honor. This 10 morning we're going to start with Mr. Umhoefer from the 11 Wisconsin Cheese Makers Association. 12 Then we had a request that the USDA witness put 13 on -- we had two additional data requests that came in, 14 and we have that data ready, so we'll put our USDA witness 15 on after that. 16 And then I think we have a witness from Edge that 17 needs to go today, first, and then we'll move on to our 18 Milk Innovation Group witnesses. 19 At some point there will be a dairy farmer here 20 and that person can go on when he or she arrives. 21 THE COURT: And I believe yesterday they told us 22 that would be afternoon. 23 MS. TAYLOR: Yeah. 24 THE COURT: Good. Excellent. 25 Now, the witness maybe seated in the witness 26 chair. 27 Please state and spell your name. 28 THE WITNESS: Sure. It's John Umhoefer, J-O-H-N, 5546 1 and U-M-H-O-E-F-E-R. 2 THE COURT: Thank you. 3 Have you previously testified in this proceeding? 4 THE WITNESS: No. 5 THE COURT: I'd like to swear you in. 6 JOHN UMHOEFER, 7 Being first duly sworn, was examined and 8 testified as follows: 9 THE COURT: Thank you. 10 MR ROSENBAUM: Good morning, your Honor. Steve 11 Rosenbaum, International Dairy Foods Association. 12 DIRECT EXAMINATION 13 BY MR. ROSENBAUM: 14 Q. Mr. Umhoefer, we have placed before you two 15 documents, which is -- we have provided a copy to your 16 Honor and distributed copies to the audience. 17 The first one is Exhibit WCMA-1. Is that your 18 written statement regarding the Class III and Class IV 19 formula factors? 20 A. Yes, it is. 21 Q. And we have also placed before you a document 22 entitled Exhibit WCMA-4. 23 Is that your testimony regarding Hearing 24 Proposals 4 and 6? 25 A. Yes, it is. 26 MR. ROSENBAUM: Your Honor, I would ask that the 27 document exhibit WCMA-1 be marked with the next Hearing 28 Exhibit number, which I believe is 258. 5547 1 THE COURT: Correct, 258. 2 (Exhibit Number 258 was marked for 3 identification.) 4 MR. ROSENBAUM: And I would ask your Honor that 5 the document marked as Exhibit WCMA-4 be marked as Hearing 6 Exhibit 259. 7 THE COURT: 259, correct. 8 (Exhibit Number 259 was marked for 9 identification.) 10 THE COURT: And Mr. Umhoefer, like "hey"? 11 THE WITNESS: Umhoefer we say. 12 THE COURT: I got too German. Umhoefer. 13 THE WITNESS: Yes. 14 THE COURT: Okay. Thank you. 15 BY MR. ROSENBAUM: 16 Q. Could you please read your testimony into the 17 record? 18 A. Yes. 19 My name is John Umhoefer, and I'm here today on 20 behalf of Wisconsin Cheese Makers Association in support 21 of Proposal 8, which seeks to update current Make 22 Allowances with a four-year phase-in implementation 23 schedule. 24 While Proposal 8 was developed in conjunction with 25 the International Dairy Foods Association, which has 26 submitted the identical proposal as its own Proposal 9, 27 Proposal 8 was subject to the Wisconsin Cheese Makers 28 Association's independent review and approval process. 5548 1 I serve as executive director of the Wisconsin 2 Cheese Makers Association. In that role, I oversee a 3 committee of manufacturing members who discussed the 4 recommended changes for Federal Milk Marketing Orders 5 during meetings, held throughout 2021, 2022, and into 6 2023. 7 The Board of Directors of WCMA, including 17 dairy 8 manufacturers, two dairy converters or processors, and two 9 industry suppliers, accepted recommendations from this 10 committee and voted on association activities related to 11 this rulemaking and hearing. 12 WCMA as a whole includes 81 dairy manufacturers, 13 cooperatives -- excuse me -- cooperative and private 14 companies that process milk into fresh dairy products at 15 249 locations. These member dairy manufacturers have 16 headquarters in 16 states and manufacturing sites in 32 17 states. These manufacturers, as well as companies that 18 further process dairy products or sell goods or services 19 to the industry, more than 600 in total, voluntarily join 20 the association via annual payment of dues. 21 In March 28th, 2023 -- in a petition, March 28th, 22 2023, supplemented by a letter dated April 14th, 2023, 23 WCMA requested that USDA hold a hearing to amend all Make 24 Allowances in Federal Milk Marketing Orders, amend -- 25 administered by USDA dairy programs. We pointed out that 26 accurate and up-to-date Make Allowances are absolutely 27 critical to a properly functioning FMMO program, given 28 that for Class III (cheese) and Class IV (butter and 5549 1 nonfat dry milk) products, a manufacturer is legally 2 required by the FMMO to pay farmers supplying it milk the 3 money the manufacturer receives from selling its finished 4 products to customers (as determined by monthly audited 5 surveys of actual finished product prices for the core 6 Class III and IV products), minus the cost incurred in 7 making those products as set forth in the FMMO 8 regulations. And this is also known as the Make 9 Allowance. 10 Thus, it is critical that Make Allowances reflect 11 the accurate current cost of making these products. Yet 12 the current Make Allowances were set in 2007 and 2008, 13 based upon 2005 and '6 cost data. Actual manufacturing 14 and other costs considered in Make Allowances have risen 15 dramatically during the past 16 years since Make 16 Allowances were last revised. FMMO provisions have 17 effectively stopped manufacturers from covering these 18 higher costs through Make Allowances. 19 We pointed out that this is a major problem for 20 dairy manufacturers like plant operator members of WCMA 21 where the current Make Allowances are insufficient to 22 cover plant costs. These everyday losses and significant 23 cost increases are impossible to sustain. Some 24 farmer-owner cooperatives routinely return dairy farmer 25 payments with significant deductions from FMMO uniform 26 minimum prices, and proprietary members with WCMA are 27 absorbing losses, attempting to sell specialty cheeses at 28 prices designed to mitigate losses and/or are failing to 5550 1 invest in plants and facilities. This is not sustainable 2 for the plants, nor for the dairy farmers who depend on 3 those plants as outlets for their raw milk. 4 WCMA's proposal asked that USDA take the requisite 5 regulatory action and amend the manufacturing allowances 6 for Class III and Class IV product formulas, as enumerated 7 in the 7 CFR 1000.50, in order to reflect the substantial 8 increase in-plant manufacturing costs since Make 9 Allowances were last revised in 2008. 10 THE COURT: Mr. Umhoefer, I just want to make sure 11 it's clear what regulatory section you cited. 12 Could you just read that cite again? 13 THE WITNESS: You bet. It's 7 CFR 1000.50. 14 Thank you. 15 THE COURT: Thank you. 16 THE WITNESS: WCMA indicated that the amendment 17 should be based on record evidence that will include -- 18 that has already included a new cost study from Dr. Mark 19 Stephenson and a study by Dr. William Schiek. 20 Dr. Stevenson has completed his study, which is 21 entered in this hearing as IDFA Exhibit 1. This 2023 22 Stephenson survey is especially robust, relying on cost 23 data from 18 plants, cheese plants, nine dry whey plants, 24 15 nonfat dry milk plants, and 13 butter plants. 25 Dr. Stephenson's determination of the cost of 26 manufacture are comparable to -- yes -- are comparable to 27 the cost study by Dr. Schiek, who projected 2022 costs 28 based on California Department of Food and Agriculture 5551 1 audited cost surveys performed in 2016 and changes in 2 relevant cost factors since that time. Dr. Schiek's study 3 is entered in this hearing as IDFA Exhibit 2. 4 On June 20, 2023, based on these datasets from 5 Dr. Stephenson and Dr. Schiek, WCMA asked the Secretary to 6 consider for adoption Make Allowances equal to a simple 7 average of the costs of manufacture as determined by the 8 2023 Stephenson study and the 2022 Schiek study. 9 Because Make Allowances have not been regularly 10 updated during the last 16 years, this proposal seeks to 11 adopt these new Make Allowances using a phased in -- using 12 a phase-in period to spread the impact of these Make 13 Allowance changes across a reasonable amount of time, 14 rather than installing these proposed up-to-date cost of 15 production allowances immediately in a final hearing 16 decision. 17 As the chart in my testimony indicates below, and 18 as our proposed language changes in this testimony 19 detailed below, these changes implement half of the 20 increase in each Make Allowance in the first year of 21 implementation and then implement the remaining 50% of the 22 increase spread across three equal steps in the subsequent 23 three years. 24 It was only after considerable debate that WCMA's 25 Board of Directors agreed to support this staggered 26 implementation. The current cost of manufacture would 27 come into effect in year four, and WCMA could have 28 requested the current cost be implemented and fully and 5552 1 immediately in year one. The proposal to delay full 2 implementation for four years is intended to be an 3 accommodation to our WCMA members' dairy farmer suppliers. 4 However, I now understand that some parties at 5 this hearing are proposing a one-year or even longer delay 6 before any of the proposed Federal Order amendments are 7 implemented. WCMA strongly opposes any such delay given 8 the current Make Allowances are already so far out of 9 date. Such a delay would mean that WCMA members would 10 continue for an entire additional year to suffer the 11 financial stress currently being inflicted by today's 12 out-of-date Make Allowances. If USDA were for some reason 13 to agree to such a delay in implementation, as noted -- 14 which as noted, WCMA strongly opposes -- then the year 15 four Make Allowances set forth below should be implemented 16 in year one. 17 In other words, if there is to be a one-year delay 18 in implementation, there should no longer be a staggered 19 implementation of the new Make Allowances. 20 BY MR. ROSENBAUM: 21 Q. I don't think it's necessary that you read into 22 the record the actual numbers. They are in the written 23 document. 24 A. Sure. 25 Q. And the same with the proposed order language on 26 page 4, you don't need to read that into the record since 27 the document will come in. 28 A. There are two closing paragraphs. 5553 1 Q. If you could just go to your two closing 2 paragraphs, that would be great. 3 A. Thank you, sir. 4 So going to page 5, a third to the last paragraph 5 from the bottom, counting up one, two, three. 6 We have a proposal for a new section "r" to 7 subsection 1000.50, to provide authority for these 8 proposed Make Allowances to be supplanted by new 9 regulations that could create a new program of audited 10 dairy product cost studies executed by USDA staff of all 11 manufacturers of products used to set the Class III and 12 Class IV prices and then adopt Make Allowances from that 13 audit program. 14 WCMA fully supports the concept of USDA-led dairy 15 product cost studies executed biannually or triannually so 16 that Make Allowances can be updated on a regular basis. 17 Today's 16-year gap in updating Make Allowances in 18 Class III and IV formulas proves that a regular agency-led 19 system is needed to revisit milk price formulas. 20 My two testifiers noted have already spoken, so... 21 Q. Steve Rosenbaum. 22 Just to clarify, at the time you prepared this 23 testimony, WCMA members had not yet testified, correct? 24 A. Correct. 25 Q. But they have now testified, correct? 26 A. Yes, sir. 27 Q. So your last paragraph on page 5 that talks about 28 what WCMA and members would do, that's actually now 5554 1 happened, correct? 2 A. That's already happened. Yes, sir. 3 Q. Okay. Thank you. 4 Could you now proceed to read your other 5 statement? 6 A. Yes, sir. 7 I think I will skip the first paragraph which is 8 redundant with my last talk. And I'll start at the second 9 paragraph. 10 At the request of the executive committee of the 11 WCMA, Wisconsin Cheese Makers Association, I seek to share 12 with you the opposition of our trade association to 13 Proposal 4 and Proposal 6 in this hearing. 14 Proposal 4 would add 640-pound cheddar cheese 15 blocks to the protein price formula. Based on feedback 16 from WCMA cheese manufacturer members who produce 17 640-pound blocks, the WCMA executive committee asked that 18 I state our opposition to this proposal in our testimony. 19 Feedback from members included the concern that 20 640-pound blocks do not have a unique price discovery 21 mechanism and, thus, add no new price information. The 22 industry uses 40-pound block prices to price their 640s, 23 and that price is already used in the protein formula. 24 Members also expressed concern that the 25 development of a 640-pound cash market would create 26 another thinly traded dairy product market with few buyers 27 and sellers. The kind of price volatility and divergence 28 seen with the use of the cheddar barrel and block price 5555 1 series would be made even more complex and frustrating 2 with the addition of yet another price series. 3 Members also noted that a cash market for 640s, 4 would not be attractive to non-direct end users, keeping 5 the stable of buyers in a cash market pit very small. 6 Relatedly, the return of wooden or plastic structural 7 packaging would deter potential buyers. For these 8 reasons, our association opposes adoption of Proposal 4. 9 Proposal 6 would add mozzarella cheese to the 10 protein price formula. Based on feedback from WCMA cheese 11 manufacturer members who produce mozzarella, the WCMA 12 executive committee asked that I note our opposition to 13 this proposal in our testimony. 14 Feedback from members included the concern that 15 mozzarella cheese is produced in dozens, if not hundreds, 16 of shapes, sizes, weights, moistures, fats, flavor 17 profiles, and functional profiles. Members uniformly note 18 that there is no standard mozzarella cheese that could be 19 surveyed by the government or created as a cash market for 20 price discovery. The wide variety of forms and 21 functionality of each unique make of mozzarella cannot be 22 overstated. Individual manufacturers report producing 23 multiple mozzarella types throughout the year, based on 24 each customer's unique needs. For these reasons, our 25 association opposes the adoption of Proposal 6. 26 MR. ROSENBAUM: Your Honor, the witness is 27 available for cross-examination. 28 THE COURT: Thank you, Mr. Rosenbaum. 5556 1 CROSS-EXAMINATION 2 BY MS. HANCOCK: 3 Q. Good morning, Mr. Umhoefer. I'm Nicole Hancock 4 with National Milk. 5 Let's start at Exhibit 259, the one that you just 6 read. 7 A. Sure. 8 Q. Is it accurate to say that you oppose adding 9 640-pound blocks, in part, because, I think you state in 10 here, it would be more complex and frustrating to add 11 another product to the cheese pricing? 12 A. Right. I could read that sentence again if you 13 like. 14 Q. Okay. I just wanted to make sure I'm 15 understanding that that was one of the basis for opposing 16 it? 17 A. The kind of price volatility and divergence seen 18 with the use of the cheddar barrel and block price series 19 would be made even more complex and frustrating with the 20 addition of yet another price series. 21 Q. Okay. Meaning that we already have two components 22 going into setting cheese prices, and adding another one 23 would make it more complex and frustrating to manage and 24 deal with? 25 A. Yes. That's what that is intended to mean. 26 Q. Okay. It's -- and cheese is the only product 27 that's priced with multiple products; is that fair? 28 A. I think that's correct, yes. 5557 1 Q. Okay. And so you're just saying keeping it simple 2 makes it less complex, less frustrating, easier to use? 3 A. Right. We don't have a position on any other 4 proposals, but that was some of the feedback I got on this 5 proposal, yes. 6 Q. Okay. Let's turn to Exhibit 258. 7 A. Uh-huh. 8 Q. Wisconsin Cheese Makers, it says you have 81 dairy 9 manufacturers, cooperatives, and private companies that 10 make up your membership; is that right? 11 A. Yes. 12 Q. Can you give us a breakdown of how many are 13 manufacturers, how many are cooperatives, and how many are 14 private companies? 15 A. That's probably more like two breakdowns. I'm not 16 sure what you need there. 17 Q. I'm just wondering of the 81, how many -- do you 18 compartmentalize them in those three categories? 19 A. Well, they are all manufacturers in the 81, so you 20 mentioned that as one of the three categories. But they 21 are all manufacturers, so -- 22 Q. Okay. How many are cooperatives, then? 23 A. I don't have an exact number, but there's a large 24 percentage of, say, the production in the association is 25 cooperatives. 26 Q. Okay. Based on volume of production? 27 A. Yeah. Yeah. 28 Q. And do you know what percentage of the volume of 5558 1 production for your membership that is made comes from the 2 cooperatives? 3 A. I don't have that as a figure that I could lend 4 right now. 5 Q. Okay. Do you think it would be more than 80%? 6 A. Do I think it would be more than 80%? Off the top 7 of my head, I'd say no. 8 Q. Okay. And then you point out, the bottom of that 9 page, going into the next page, that a manufacturer is 10 legally required to pay -- by the Federal Order, to pay 11 farmers the minimum prices in the Federal Order system; is 12 that right? 13 A. If they pool their milk, yes. 14 Q. Okay. And that was the qualifier I wanted to make 15 sure we're clear on. 16 A. Okay. Sorry. 17 Q. You are just talking about -- 18 A. -- that could be in there, yes. 19 Q. Yeah. Just for the pooled milk? 20 A. Yes. 21 Q. Okay. And then on that same page 2 in the third 22 paragraph there, you state that the proprietary members of 23 Wisconsin Cheese Makers Association are absorbing losses, 24 attempting to sell specialty cheeses at prices designed to 25 mitigate losses? 26 A. Uh-huh. 27 Q. I'm just wondering if you can elaborate on what 28 you mean there. 5559 1 A. Yeah. I was thinking about that. You know, you 2 write these things a long time ago, and then you mold them 3 as time moves on. And I was thinking of Mr. Heiman's 4 testimony, which was earlier in the hearing, and he said 5 if they were only making cheddar cheese today at his 6 midsized cheese factory, they would be out of business, 7 which were his words. I do have his testimony here if you 8 want to hear that sentence. 9 So they, like others, have had to find other 10 products where they try to make more cents per pound so 11 that they can stay in business. And that's -- we see a 12 lot of that in Wisconsin, where we have a lot of members 13 that have made Wisconsin the number one specialty cheese 14 state because of the need to be competitive and paying for 15 milk and meeting the costs to stay in business. 16 Q. Okay. So instead of just making commodity 17 cheeses, they have also -- some of your members have had 18 to diversify their product portfolio to create some 19 premium cheeses that will allow them to obtain some higher 20 margin opportunities for the success of their business. 21 Is that a fair statement? 22 A. It is. And what's interesting about that is that 23 they also will say in the same breath that there's more 24 cost associated with those high-quality cheeses. 25 When they added a feta line at Nasonville Dairy, 26 for example, they had to make an entirely different cheese 27 line costing millions of dollars to make that new cheese. 28 It's packaged differently in smaller sizes, which requires 5560 1 more machinery and more people, and it's marketed more 2 intensely because you don't do a lot of sales and 3 marketing for a 40-pound block, but you have to get in the 4 marketplace and do advertising, you know, typical -- you 5 know, whether it's newspaper, Internet, you have to tell 6 people you are making a beautiful little cheese. 7 So there are costs associated with -- even with 8 the value-added that are beyond what USDA looks for in the 9 survey. So they -- they are not a perfect panacea, these 10 specialty cheeses, but they do get a higher price per 11 pound, and you hope that your extra costs don't then wipe 12 out that gain that you try to get by making something 13 special. 14 Q. Okay. So fair to say that it's a way to diversify 15 the portfolio, but it comes at a cost as well? 16 A. I think that's fair, yes. 17 Q. And, you know, the expectation for a business is 18 that if you invest the additional cost, you hope it will 19 bring a greater return on that investment? 20 A. I think that's fair, yes. 21 Q. And generally, these premium products come with a 22 higher profit margin than what a commodity cheese would 23 bring? 24 A. That's the hope, yes, that the costs don't 25 overwhelm the attempt at getting a higher price. 26 Q. And isn't that what all businesses have to do, 27 make sure that they maximize their opportunities and look 28 for ways to diversify their businesses in order to stay 5561 1 successful? 2 A. Yeah. But the funny thing about dairy is 3 there's -- there's a need to move milk as well. And so a 4 lot of people are making the larger formats because those 5 are then chunked by, you know, a second processor or 6 shredded and moved into foodservice. There's a lot of 7 bulk needed in the industry, a lot of bulk product that 8 moves more readily, and trucking. 9 So I guess my point is, you can't just make 10 specialty cheese in the United States. You have to -- you 11 have to have everyone be healthy, the commodity processors 12 and the specialty cheese makers. 13 Q. And do you have any members that make just 14 specialty cheeses? 15 A. Oh, sure. Sure. Absolutely. 16 Q. So sometimes there is a market for -- for 17 businesses that will just have premium specialty cheeses 18 as their business model? 19 A. I think that's fair to say, yeah. 20 Q. And you mentioned in the bottom of that paragraph, 21 Dr. Stephenson's study and then Dr. Schiek's study. 22 Did you -- did you have any involvement in 23 retaining Dr. Schiek or Dr. Stephenson to conduct the 2023 24 studies or analysis? 25 A. When you say "retaining them," like, calling them 26 up and asking them to do it, or what do you mean? 27 Q. Yeah. 28 A. I didn't call them up and ask them to do it, no. 5562 1 Q. Were you involved in coordinating Dr. Stephenson 2 to conduct his 2023 survey in any way? 3 A. Yes. We were in talks on a regular basis with 4 IDFA staff. And they were kind of the main voice in 5 direct communication, but we were involved in those 6 conversations. 7 Q. Did you participate in compensating him for his 8 survey? 9 A. Which one, Mr. Stephenson, Dr. Stephenson? Yes. 10 Q. And Dr. Schiek, did you participate in 11 compensating him for his economic analysis? 12 A. I actually don't know if he's being compensated 13 for that. I really don't. 14 Q. Okay. So Wisconsin Cheese didn't -- 15 A. True. 16 Q. -- participate -- 17 A. True. 18 Q. -- financially in that? 19 A. True. True. 20 THE COURT: Wait, wait, wait. One at a time. 21 You may ask your question. 22 THE WITNESS: Sorry. 23 BY MS. HANCOCK: 24 Q. Wisconsin Cheese didn't financially participate in 25 retaining Dr. Schiek to do his analysis? 26 A. That's true. 27 Q. Okay. Did you send out any communications to your 28 membership asking them to participate in Dr. Stephenson's 5563 1 survey? 2 A. Yes. In our newsletter we said, there's this 3 survey, and please click this link and get involved. 4 Q. Do you know what percentage of your membership 5 participated in the survey? 6 A. I have no idea because I have no idea who 7 participated in the survey. 8 Q. Okay. Did you get any feedback from your 9 membership as to whether anyone participated in the 10 survey? 11 A. Not that I recall. I -- yeah, I can't verify. I 12 don't know if someone was going to promise they would and 13 didn't or -- in fact, I do know some that probably 14 promised they would and didn't. So I don't know who 15 participated. 16 Q. We heard from Dr. Stephenson that I think it took 17 maybe four hours or more to complete it. 18 So not a light undertaking; is that fair? 19 A. I guess it is what it is. 20 Q. Did you -- did you fill out any part of 21 Dr. Stephenson's form or go through the survey yourself? 22 A. No. I don't make cheese. 23 Q. Okay. I didn't know -- you didn't assist any of 24 your membership? 25 A. No. No. 26 Q. On -- I'm on page 3 of your testimony. 27 A. Okay. 28 Q. And you -- the first full paragraph on that page 5564 1 you have a statement that says, "Because Make Allowances 2 have not been regularly updated during the last 16 years," 3 and then you go onto talk about how it's time to do that 4 update. 5 Do you see where I'm at there? 6 A. Yes. Yes. 7 Q. And how long have you been at Wisconsin Cheese 8 Makers Association? 9 A. I have been executive director since 1992. 10 Q. Okay. That's the year I graduated high school. 11 A. Are we done? 12 Q. Almost. So you were at -- were you in the same 13 role in 2000 -- or 2007? 14 A. Yes. Yes. 15 Q. As the executive director of Wisconsin Cheese 16 Makers? 17 A. Correct. In 2000? Yes. 18 Q. And -- well, so then in 2000, Make Allowances were 19 last updated in -- 20 A. Yes. 21 Q. -- 2007 and 2008? 22 A. Yes. 23 THE COURT: Mr. Umhoefer, pause. 24 THE WITNESS: Sorry. 25 THE COURT: Thank you. 26 THE WITNESS: Sorry. 27 BY MS. HANCOCK: 28 Q. It's a very unnatural way to have a conversation. 5565 1 Sorry. 2 Okay. And -- and did you participate at the time 3 in the hearing that allowed the Make Allowances to be 4 changed at that time? 5 A. That's an interesting question. I did not 6 testify. I may have attended. 7 Q. Okay. Did you participate in any other way in any 8 of the studies or on behalf of your membership? 9 A. You are taxing my memory, honestly. I may have in 10 2006 asked someone to take the Stephenson survey, but 11 honestly, I don't remember. 12 Q. When did you first start hearing from your 13 membership that they felt that Make Allowances were not 14 sufficient to cover the cost of manufacturing their 15 products? 16 A. I don't remember when I first heard it. But I 17 have seen people make changes. I have seen companies go 18 out of business. I have seen companies consolidate. I 19 have seen companies move into -- you know, try to 20 diversify their product ranges. But all of that's a web 21 of years; some people earlier, some people later. I can't 22 tell when you I first heard that sort of thought. 23 Q. When did you start working on a proposal to ask 24 for Make Allowances to be updated? 25 A. We started holding meetings in 2021 to discuss 26 Federal Order reform, you might say. 27 Q. And you go on on that same page on page 3 to talk 28 about it was only after considerable debate that your 5566 1 Board of Directors agreed to support this staggered 2 implementation? 3 A. That is true. It was an interesting discussion. 4 Q. Meaning there's a wide variety of opinions and 5 beliefs? 6 A. Yes. You know, as -- as -- if you do the math, I 7 don't know if it's math, but people like my members that 8 presented earlier this week are often presenting 2022 9 data. It's the last finished year that -- you saw that 10 data from Mr. Heiman, for example. And as he has pointed 11 out to me, even this week, by this staggered plan he 12 wouldn't see what would be, you know, a proposed cheese 13 Make Allowance here of $0.28, $0.284 in our proposal, 14 until 2028. So he has -- in 2022 he told you he needed I 15 believe $0.32 to make cheddar successfully, and he won't 16 see even $0.28 until 2028. 17 So that's a bit vexing for someone who is already 18 way behind on costs, can't cover costs on cheddar. 19 They -- there was some -- quite a bit of discussion about 20 how they will have to keep waiting and waiting and waiting 21 to get to a level that will be $0.28, if this was 22 accepted, in 2028. And what will their costs be in 2028? 23 He assumed that they will, like inflation, continue to 24 grow. 25 Q. Okay. And continue to grow for everyone 26 throughout -- throughout the whole supply of milk; is that 27 fair? 28 A. Yeah, I think that's fair. 5567 1 Q. And so the debate that you had at your board from 2 2021 until your vote board approved it, was that in 2023? 3 A. Yes. I believe it had to be there early part of 4 2023, just meeting the deadlines of USDA in this process. 5 Q. So throughout the course of that debate, the 6 debate was around whether it would be full -- a request 7 for the full amount now or whether it would be a staggered 8 implementation? 9 A. That was a decision they talked about and had to 10 make. Yes. That's true. 11 Q. Okay. And did -- did the board debate 12 Dr. Stephenson's -- or discuss Dr. Stephenson's 2021 13 survey? 14 A. They discussed the idea that came out of the 15 committee, and what came out of the committee that we had, 16 which was just, you know, a group of members, of what had 17 come out of the discussions with how should we best move 18 forward. So that was a look at the -- what I think we're 19 calling the 2023 Stephenson study and the 2022 Schiek 20 study, if I'm correct. 21 Q. Okay. Did you review or analyze the 2021 survey 22 results that Dr. Stephenson had performed? 23 A. We didn't. We thought that the best data would be 24 the data that was just collected. 25 Q. Okay. And you would agree with me that that data 26 that was collected was for calendar year or fiscal year 27 2022, depending on how the processor responded. 28 A. Or depending on the fiscal year of the processor, 5568 1 yes, I think your timeframe is good. But some people have 2 a fiscal year that ends different times of the year. 3 Q. I incorporated that into my question. 4 A. Okay. Okay. Sorry. Yeah, basically they tried 5 to give their most recent data is my understanding. 6 Q. And that was either calendar year 2022 or fiscal 7 year -- 8 A. Okay. Sure. 9 Q. -- 2022? 10 A. We can put it that way, sure. 11 THE COURT: Mr. Umhoefer, how will I get you to 12 stop before you answer? 13 THE WITNESS: Sorry. 14 THE COURT: You just need to let Ms. Hancock's 15 voice die down. 16 THE WITNESS: Sorry, your Honor. 17 THE COURT: No worries. You are very energetic 18 this time of day. 19 MS. HANCOCK: He's waited a long time to get on 20 the stand. 21 THE WITNESS: That's right. 22 BY MS. HANCOCK: 23 Q. And I just want to make sure that our record has 24 your response. 25 You understood that the most recent survey for 26 Dr. Stephenson was based on calendar year 2022 or fiscal 27 year 2022? 28 A. That is my understanding. 5569 1 Q. Okay. Are you aware of any other Federal Order 2 provision that has ever locked in future increases in 3 prices as what you support in the Make Allowance proposal 4 by IDFA and Wisconsin Cheese Makers? 5 A. I don't think we're locking in price increases. I 6 think we're asking for $0.284 on cheddar cheese, $0.3172 7 on whey, etcetera, but then staggering the pathway there. 8 So we're asking for the year four figures. We're 9 not asking for a bunch of increases. We're asking for the 10 year four figures. 11 Q. And the proposal is, is that year one, if we take 12 cheese, for example, it would be $0.2003; is that right? 13 A. That's the current Make Allowance. 14 Q. I'm sorry. I should say, you're asking that in 15 year one it be $0.2422 for cheese? 16 A. That's exactly what this says. 17 Q. And is that what you are asking for? 18 A. Yes. 19 Q. And then year two it would be $0.2561? 20 A. Yes. 21 Q. Year three it would be $0.2701? 22 A. Yes. 23 Q. In year four it would be $0.284? 24 A. Yes. 25 Q. So those would be, under your proposal, a 26 locked-in increase year over year until you achieve the 27 full amount in year four? 28 A. Right. Those are the prices we're asking for to 5570 1 happen in a Final Decision from USDA. That's correct. 2 Q. Those are based on the 2023 Stephenson survey and 3 2022 Dr. Schiek's economic analysis? 4 A. Right. As noted, they had numbers that they came 5 up with, and we took a simple average of those numbers. 6 And that yielded a number, and those numbers appear in 7 year four. 8 Q. And you agree that if you had a perfect world, 9 though, or a better world, it would be better to use a 10 mandatory audited cost survey to make sure that the 11 information that we had to increase Make Allowances would 12 be accurate? 13 A. Yeah. In my testimony, I noted that when the dust 14 clears from this hearing and we get some relief for 15 16-year-old Make Allowances, then I hope a process will 16 begin in the Farm Bill, which may be more than a year 17 away, where we would have a program developed at USDA 18 where they would audit dairy plants that make the products 19 that appear in these price formulas. They would conduct 20 those audits, that they would develop Make Allowances, 21 that there would be -- who can say what the process would 22 like. It would be nice to have an expedited process to 23 move USDA's numbers into the Federal Order language each 24 two or three years, whatever all this happens. But I can 25 only imagine that that is at least five years away given 26 all the steps necessary. 27 Q. Okay. And you would agree with me, though, that 28 having that mandatory audited cost survey would be a 5571 1 better and more accurate reflection of what the actual 2 costs are for the Make Allowances for any manufactured 3 products? 4 A. We think that would be the best way to move 5 forward after we do this fix. 6 Q. Okay. 7 MS. HANCOCK: Thank you so much for your time. 8 THE WITNESS: Thank you. 9 CROSS-EXAMINATION 10 BY MR. ENGLISH: 11 Q. Good morning, Mr. Umhoefer. My name is Chip 12 English, representing the Milk Innovation Group. 13 And as was mentioned a little earlier you have 14 waited a long time to testify. You could have testified 15 maybe a couple of weeks ago. That's telling where we are 16 with the schedule. 17 In the interim, you still have been monitoring the 18 hearing, correct? 19 A. True. Yeah. 20 Q. And after you departed when you were unable to 21 testify on schedule, there was discussion of Proposals 10 22 through 12 with respect to yield factors, correct? 23 A. Yeah. 24 Q. And -- 25 THE COURT: Mr. English, with respect to yield? 26 MR. ENGLISH: Yield factors. 27 THE COURT: Thank you. 28 /// 5572 1 BY MR. ENGLISH: 2 Q. And following that conversation, you are aware 3 that there was discussion about Select's experience with 4 respect to full tanker loads of milk, correct? 5 A. Uh-huh. Yes. Select Milk, yes. 6 Q. And the impact that that would or would not have 7 on farm-to-plant shrink, correct? 8 A. Yes. 9 Q. Did you, in the interim, having heard that 10 testimony, look into that issue with respect to your area 11 of the country? 12 A. Yes. And we have Wisconsin in our name. We have 13 a lot of Wisconsin members. It's a different world in the 14 Upper Midwest, and so that is -- that -- that testimony 15 does strike the ear. 16 And I understand the dairy industry. There's a 17 lot of -- a lot bigger farms out west and a lot of milk 18 travels the distance. 19 But in Wisconsin, we have got a range of farm 20 sizes. And if you try to find the range of farm sizes, 21 the best data -- almost the only dataset I could find was 22 the 2017 Census of Agriculture from USDA. And in there, 23 the -- in Wisconsin, in that year, there were 5,644 farms 24 that were under 99 cows. It was -- the math was it was 25 60% of the farms in Wisconsin were under 99 cows -- had 26 under 99 cows. 27 And so it's a different world in Wisconsin. We 28 don't -- you don't fill a tanker load on a farm with 50, 5573 1 60 cows, 70 cows. You have to go from farm to farm. And 2 this is -- this is a reality everyone in Wisconsin 3 instantly understands. It happens every morning and every 4 afternoon in Wisconsin, trucks drive from farm to farm and 5 they pick up milk. And sometimes it's two farms that fill 6 up the truck, sometimes it's eight. 7 And so, yeah, that's -- it's a different world in 8 Wisconsin. We have multiple-farm pickup. 9 Q. So actually, if you think about that 60% under 100 10 cows, and you do the math based upon how many pounds they 11 are producing, is it probable that for those size farms 12 it's probably six pickups? 13 A. I mean, you'd have to find an average. I would 14 say -- yeah, I mean, it depends on the pickup, but it's 15 multiple pickups per farm. Six is quite possible. 16 Q. So in addition, there was discussion about various 17 kinds of cheese vats -- V-A-T-S, vats -- and there was 18 conversation in an expert witness's discussion about what 19 is called Double O vats, correct? 20 A. Yes. 21 Q. So what is a Double O vat? 22 A. So a Double O vat is -- it's a vat with two 23 chambers that are interlocked. They are side by side, two 24 circles interwoven like a Venn diagram. And they have 25 vertical shafts which rotate, and on those rotating 26 vertical shafts are knives that rotate like this, and 27 they -- they agitate the milk, and they cut the cheese 28 that is created inside the vat. 5574 1 Q. And with respect, again, to Wisconsin, and having 2 heard some of that discussion from last week, do you have 3 any information regarding the number of operations that 4 you know of that are still using Double O vats in 5 Wisconsin? 6 A. I don't have exhaustive knowledge of that. But I 7 do know that there are five -- and then there may be 8 more -- plants in Wisconsin using Double O vats. 9 Q. And what relative size would those operations be? 10 A. Yeah. Those operations would range from about a 11 half a million pounds of milk received per day up to about 12 2 million pounds of milk received per day. 13 Q. And is that small? Medium? Large? 14 A. Well, 2 million used to be large, but I think now 15 you might call that range of half a million to 2 million a 16 medium-sized plant. 17 Q. Turning to a different subject briefly. One 18 follow-up on questions from National Milk's counsel. 19 You were here yesterday because you were hoping to 20 testify yesterday, correct? 21 A. Yes. 22 Q. And so you heard some discussion in 23 cross-examining, for instance, the Schreiber Foods 24 witness, that this discussion about higher-of versus 25 average-of, in National Milk's view, would not leave dairy 26 farmer whole over time. 27 Did you hear that conversation? 28 A. Perhaps. Yes. 5575 1 Q. So let me ask, in light of the questions asked by 2 NMPF, are manufacturers going to be made whole if you're 3 going to wait until 2028 for updates on their costs? 4 A. I think it will always be a lag. Because we will, 5 as I noted, be meeting the needs of some large amount of 6 cheese manufacturing, whey manufacturing, nonfat dry milk 7 manufacturing, and butter manufacturing, when we hit 2028. 8 But it will be a different world in 2028, and there will 9 be new costs, new inflated costs of goods and services and 10 labor and -- and so, no, we'll never be made whole. 11 MR. ENGLISH: Thank you. I have no further 12 questions. 13 CROSS-EXAMINATION 14 BY MR. MILTNER: 15 Q. Good morning, Mr. Umhoefer. I'm Ryan Miltner. I 16 represent Select Milk Producers. And I thought I was 17 going to let a witness go without any questions, but 18 Mr. English scuttled those plans. 19 Of course Wisconsin has a diversity of farm sizes, 20 and many of which, you know, cannot fill a tanker. 21 Does Wisconsin Cheese Makers have any information 22 about the shrink of milk from farm to its members plants? 23 A. I don't have any for this hearing, no. 24 Q. Now, Mr. English also asked about Double O vats in 25 use with your members. 26 I believe you said there were five to six 27 manufacturers you were aware of that are using Double O 28 vats. Did I hear that correctly? 5576 1 A. I said five that I'm aware of. 2 Q. Five? Okay. 3 And the range of their volumes, 500,000 to 4 2 million, was that pounds of milk receipts? 5 A. Yes, sir. Per day. 6 Q. Per day. Okay. 7 Would it -- would it be that those Double O vats 8 now are for the most part 30 to 40 years old? 9 A. You know, I honestly don't know when they -- 10 I'm -- I don't know. I don't know if they stopped making 11 them that long ago or if you could have bought one 12 20 years ago. 13 Q. Part of the reason that Wisconsin Cheese Makers is 14 asking for an increase in Make Allowances is to increase 15 investment in plants and their equipment; is that correct? 16 A. I think it's fair to say that people are hoping 17 to -- that that would be a part of making whole their 18 books, yes. That's -- it's a chance for the industry to 19 move forward. Sure. 20 Q. Have any of your members discussed replacing old 21 cheese vats or other equipment with the additional revenue 22 they might have following a Make Allowance increase? 23 A. Not specifically. But I wouldn't say it is out of 24 the bounds to say that, you would have an opportunity for 25 plants to be renovated. 26 Q. Are you aware of any plants in Wisconsin that say 27 in the last 15 or 20 years have installed a new vertical 28 vat? 5577 1 A. You mean a horizontal vat or vertical vat? 2 Q. No. A vertical vat, a Double O style vertical 3 vat. 4 A. Similarly to your earlier question, I don't know 5 the answer to that question. 6 Q. Okay. Do you have any information from your 7 membership regarding the butterfat recovery or butterfat 8 retention that they realize at their plants? 9 A. I don't have that today, no. 10 MR. MILTNER: Thank you. 11 I don't have any other questions, your Honor. 12 CROSS-EXAMINATION 13 BY DR. CRYAN: 14 Q. Good morning. Roger Cryan for American Farm 15 Bureau Federation. 16 Hello, Mr. Umhoefer. It's very nice to see you 17 again. 18 A. Thank you. 19 Q. I appreciate your being here to testify, and I 20 appreciate your honest and well-informed testimony. 21 So you oppose inclusion of 640s in the survey; is 22 that correct? 23 A. Yes. Speaking on behalf of my board, yes. 24 Q. Of course, when I say "you," I'm -- well, I'll try 25 to make that clear. 26 A. Okay. 27 Q. And you say you -- Wisconsin Cheese Makers 28 Association say it doesn't add to price discovery because 5578 1 it's not traded on an exchange? 2 A. Right. When I talked with members that make 640s, 3 that was some of the feedback I received. 4 Q. Are all 40-pound blocks traded on the CME? 5 A. Are all 40-pound -- no, there's restrictions on 6 the age and on the color and so forth. 7 Q. But there are additional 40-pound blocks that are 8 priced under the survey that are -- where the price is 9 collected in the survey -- in the current NDPSR survey? 10 A. Did you say there's more than something else? 11 Q. There's more -- there are substantially larger 12 volume of blocks traded on the NDPSR -- I'm sorry, not 13 traded -- there's a substantially -- let me take a breath 14 and slow down. I think everybody will appreciate that. 15 There's substantially -- a substantially larger 16 volume reported in the NDPSR survey of 40-pound blocks 17 than are traded on the CME every month? 18 A. Well, I don't have data in front of me. I think I 19 could say that that's probably true. Yes. 20 Q. Okay. And so does that additional reporting in 21 the survey add to price discovery through the NDPSR? 22 A. The NDPSR is price discovery for the purpose of 23 setting the Class III and IV price -- Class III price. 24 And IV, excuse me. 25 Q. But there's substantially more volume in the 26 survey than there is on the exchange, and if the -- in 27 effect, those blocks are traded, they are being sold on 28 the basis of the exchange in the same way that you are 5579 1 saying that 640-pound blocks are traded on the basis of 2 the exchange, would you advocate for using only the CME 3 price in the pricing of Class III milk? 4 A. I definitely didn't come here with any sort of 5 proposal like that. 6 Q. But is that the implication of the argument that 7 640s don't add to price discovery? 8 A. The argument that they don't add to price 9 discovery is that they are using -- when they report to 10 the government or when they sell at the CME, the industry 11 uses the 40-pound block to decide the price of a 640 -- or 12 as a basis for the price. 13 Q. The 640s are traded on the basis of those 40-pound 14 blocks? 15 A. Right. Some value related to -- not identical, 16 obviously, but it is the -- they use the 40-pound block as 17 a basis. 18 Q. Very closely related, you are saying not identical 19 but very closely related? 20 A. I don't know. 21 Q. Okay. In your discussion with Ms. Hancock you 22 suggested a difficulty in getting cheese makers to fill 23 out the survey for Dr. Stephenson's survey. 24 Are any of your members opposed to including 640s 25 in the survey, at least in part, because they don't want 26 to be bothered to complete the weekly surveys or to be 27 subject to regular review and audit for those surveys? 28 A. Well, I don't agree with the first part of what 5580 1 you said. I didn't describe a situation where members 2 were reluctant to fill out that survey. But 3 Dr. Stephenson did. That's how he started -- 4 Q. You said there were some that said they would and 5 didn't. You thought that there were. 6 A. Yeah. I don't know who ended up filling it out. 7 Q. Let's forget the first part. Let's talk about the 8 second part. 9 A. Okay. 10 Q. Did some of your members oppose the inclusion of 11 the 640-pound blocks in the -- in the NDPSR because they 12 don't want to participate in the survey? 13 A. I did not receive that feedback. 14 Q. Okay. How many of your -- of the proprietary 15 cheese plants in your membership are pooled plants? 16 A. I don't know. 17 Q. Are there many? 18 A. A pooled plant? 19 Q. Specifically a pooled plant, not receiving pooled 20 milk, but a pooled plant. 21 A. Pooled when they pool? 22 Q. Pooled as a plant. If you don't understand the 23 concept -- 24 A. Sometimes they pool, and sometimes they don't. 25 Q. Sometimes they pool the milk, or sometimes they 26 pool the plant, the proprietary plants they pool -- 27 A. I think a shorter answer would be that I don't 28 have that data with me today. 5581 1 Q. Okay. Well, if -- if most of the plants are -- 2 okay. You don't have an answer for that. 3 DR. CRYAN: Okay. I'm done. Thank you. 4 CROSS-EXAMINATION 5 BY MR. LAMERS: 6 Q. Mark Lamers, Lamers Dairy. 7 Good morning, Mr. Umhoefer. 8 A. Good morning. 9 Q. Hey, something that seems to be kind of not talked 10 about here, and that is with the Make Allowance proposals, 11 the concern is that it's going to reduce producers' 12 income, correct? 13 And is it true that in -- 14 (Court Reporter clarification.) 15 THE COURT: Whoa, good question. When he said 16 "correct," what was your response? 17 THE WITNESS: Was that the -- it seemed like he 18 was moving on to the rest of his question. 19 THE COURT: Oh, okay. He was, but he asked one, 20 so let's get an answer. 21 THE WITNESS: Could you restate the question? 22 BY MR. LAMERS: 23 Q. The question is, the concern with the 24 Make Allowances is that it would reduce income to the 25 producer? 26 A. Some have expressed a concern like that at this 27 hearing that I have heard in testimony. 28 Q. Right. 5582 1 So in a supply and demand market, has it been your 2 experience that when supply is tight, that the price goes 3 up? 4 A. In -- in textbook economics, sure. 5 Q. Yes. Okay. So something that hasn't been brought 6 up is, if there was some kind of supply control, is it 7 feasible to expect that the price of the cheddar market 8 could go up, that it could offset the Make Allowances so 9 that producers would see an actual return? 10 A. Supply control on -- 11 Q. Fluid milk -- on fluid milk to the market. 12 A. Raw milk? 13 Q. Raw milk to the market, yes. 14 A. I am not an economist, and I do not have an 15 opinion today on supply management. If I did, I don't 16 think you would want to hear it. 17 Q. Okay. Well, there's many things that -- you know, 18 we talked about signals to the producer, you know, whether 19 the -- if the price is high, they may produce more because 20 they have more income, and if the price is too low, they 21 supply more because they need to cover their costs. 22 So if there was some kind of supply control on 23 that, that -- would that maybe help the market as a whole? 24 A. I guess I'm not going to render an opinion on the 25 supply management program today because it's -- it's not 26 in the scope of the hearing and not something our board 27 has discussed for years. 28 MR. LAMERS: Okay. Thank you. 5583 1 CROSS-EXAMINATION 2 BY MR. SJOSTROM: 3 Q. Good morning, John. 4 A. Good morning. 5 Q. Lucas Sjostrom, Edge Dairy Farmer Cooperative. 6 Mr. Umhoefer, do any of your member plants 7 restrict how much milk they can send to the processor, 8 whether it's private or cooperative, restrict how much a 9 producer can send to your plants -- excuse me, your member 10 plants? 11 A. I don't -- I don't know if I know the answer to 12 that on a nationwide basis. 13 Q. You don't know if any of the plants whom are your 14 members restrict how much farms can send to those plants? 15 How much milk those farms can send to those plants? 16 A. That was my answer, yes. 17 Q. Regardless, are your member cheese plants that 18 would be subject to Make Allowances, are they restricted 19 in how much cheese they can make, how much that would be 20 subject to Make Allowances? 21 A. Restricted by whom? 22 Q. Anybody. Is there a limit on how much cheese they 23 can sell if they are also receiving a Make Allowance for 24 that cheese? 25 A. Imposed by whom? 26 Q. Anyone. Is there a limit, if you received -- if 27 you are a cheese plant that receives the Make Allowance, 28 is there a limit on how much of that cheese you can make? 5584 1 A. Is there a limit on how much cheese a dairy plant 2 can make? 3 Q. Correct. 4 A. Well, there's limits based on their sales, 5 perhaps, their ability to have a market for that product, 6 their available labor on a given day, the functioning of 7 the equipment, the weather. 8 So, yeah, there are -- there are limits on what a 9 dairy plant can do on any given day. 10 If you are asking about is there a government 11 program that stops a cheese maker from producing product; 12 is that what you are asking? 13 Q. Yes. Is there -- if you want to make a bet that, 14 okay, maybe I don't have the labor, the weather's 15 terrible, I can't even get the milk trucks, but I want to 16 make a trillion barrels of cheese, or 40-pound blocks, 17 because I think next week someone's going to buy that, can 18 you make a trillion? 19 A. Not under that scenario, you can't, no. 20 Q. Could you, if all the pieces fell together? Is 21 there an upper limit of what you can make? 22 A. Yes. The available milk would be one of the 23 limits you would face. 24 Q. And would it -- would it make sense to you that 25 your members put milk supply limits on their patrons? 26 A. Again, I don't have a board discussion to bring to 27 you about what has suddenly become an interest in supply 28 management at this hearing. 5585 1 Q. So you have heard of nothing in the industry of -- 2 you know of no one in the industry, or at least of your 3 membership, who have put supply controls on their farms? 4 A. I don't have any information on that to bring to 5 this hearing today, no. 6 Q. Have you heard of base/excess plants among your 7 membership for their farms? 8 A. I don't think I was told to come here today and 9 discuss the payment programs of individual members. 10 Q. So -- so you are not answering yes or no, you are 11 just not willing to bring that information today, just to 12 be clear for the record? 13 A. I don't have knowledge of what you are talking 14 about today to bring to this hearing. 15 Q. Okay. 16 MR. SJOSTROM: Thank you for your time. 17 THE WITNESS: Thank you. 18 THE COURT: I would entertain questions from the 19 Agricultural Marketing Service. 20 CROSS-EXAMINATION 21 BY MS. TAYLOR: 22 Q. Thank you for coming back. I feel like I say this 23 to you almost every day, but I'm glad you got up this 24 morning. 25 A. Thank you. 26 Q. Just a couple questions, and I don't think it's 27 been covered yet. 28 I know you mentioned you have members -- as a 5586 1 trade organization, you have members that are 2 manufacturers, cooperatives, and -- but you are both 3 cooperatives and private-owned companies. But I think you 4 said there's other members, two dairy converter/processors 5 and two industry suppliers on your Board of Directors. 6 Did I get that right? There's 17 -- how many 7 members are on your board? I guess -- 8 A. 17 and two and two, there are 21. 9 Q. I haven't had enough coffee yet to put together a 10 coherent thought, apparently. 11 But since your board kind of spans different 12 sectors of the industry, can you just expand on how the 13 board reaches a recommendation? Does it have to be a 14 majority vote, a consensus vote? How do you -- 15 A. Sure. To clarify that second group, there's a 16 tier of processors in the industry who take finished dairy 17 products and further process them. Most commonly they are 18 cutting that cheese, or they are doing something with 19 butter to further package it. They didn't make it, they 20 are just moving it forward to the consumer. 21 Q. And if I can ask one question on that piece. 22 Then -- 23 A. Sure. Sure. 24 Q. -- those particular members do not buy milk from 25 dairy farmers? 26 A. That's correct. 27 Q. And are not subject to Federal Order regulation? 28 A. That's correct. 5587 1 Q. Okay. 2 A. That's a good distinction. 3 Q. Okay. 4 A. Yes. We have a consensus model for the board. We 5 look to make unanimous decisions in the board meetings. 6 Q. Okay. Is it required or that's just the idea? 7 A. There's nothing in the bylaws to that effect, but 8 there is decades of precedent, even preceding me, that 9 it's a board that looks to find the answer that builds the 10 consensus that leads to a unanimous vote. 11 Q. Of the 17 dairy manufacturers in the board, 12 because you mention you have co-op members, are any of 13 those co-op members? 14 A. Yes. 15 Q. And I don't know if I caught the answer to this. 16 A. Yes, there are. 17 Q. I -- I think it was asked earlier, and I don't 18 think I caught the answer. 19 Of your 81 members how many are cooperative 20 members? 21 A. All right. I didn't answer that question because 22 I didn't have that data with me today. And we don't -- 23 another board decision many years ago was that we don't 24 list our members publicly, so -- 25 Q. Okay. 26 A. -- they asked me to honor that. 27 Q. Thank you. I would not want to you not honor 28 that. So thank you. 5588 1 Do you know if any of the members are -- any of 2 your members are also members of National Milk? 3 A. Do I know that? I know that. I don't know if 4 that would come close to sort of divulging -- 5 Q. I'm not asking -- I wouldn't want you to divulge. 6 I'm just -- we have one group of cooperative 7 representatives asking for one thing. And since you have 8 cooperative members, that's why I'm curious if there was 9 some crossover there, or they're just a distinct set of 10 cooperative members? 11 A. I think I'll stay with what I said earlier, where 12 we don't name our members, so -- 13 Q. Okay. 14 A. -- I wouldn't want to -- 15 Q. And I know Mr. Cryan asked some questions on the 16 plants of your members, but I'm -- since they are mostly 17 cheese plants in Wisconsin, I'm guessing most of them are 18 not pooled plants, but they might get pooled milk. 19 A. Yes. 20 Q. They might not be pooled themselves. 21 A. Some -- I think most are pooled plants. 22 Q. Okay. At some point? 23 A. Yeah. 24 Q. Okay. Can you talk about -- or has your 25 membership had any discussions on, since they are mostly 26 manufacturers, when they choose to pool and when they 27 don't choose to pool, and kind of what goes into that 28 decision-making? 5589 1 A. Well, that is -- that's an interesting question. 2 We -- we have seen where the rising costs for labor and 3 energy and materials and so forth have put a lot of my 4 members in a position where the price they receive from 5 the marketplace for their dairy products isn't sufficient 6 to cover their costs. And so when they look at that 7 announced Class III price, sometimes they don't have the 8 money. You set a target that's too high for them, and 9 they have to depool. 10 And another exacerbating element to that is that 11 many of my members -- and this is something we have 12 written to USDA about for decades -- many of my members do 13 not produce dry whey. Many of my members do not process 14 whey. And you heard from Mr. Wills who says he got 15 pennies for his wet skimmed -- maybe skimmed -- whey. 16 Where the dry whey price might be 50, 60, 70, $0.80 a 17 pound, he's getting -- I think he's -- he had a figure in 18 his testimony that was pennies. 19 And so that is another factor where the Class III 20 target price for a cheese maker that does not produce dry 21 whey and is facing higher costs, that's a double whammy 22 for them to -- try to meet that Class III price. They 23 just don't have the money. And that's when you see 24 depooling take place. 25 Q. So for those members who choose not to pool for 26 whatever reason, are they able to utilize forward 27 contracts? How do they -- what's -- what are some of the 28 systems they set up to pay their farmers if it's not 5590 1 necessarily what the minimum uniform price is? 2 A. So I'll stick with my cheese maker in Wisconsin 3 who is facing some of these concerns. They do not 4 contract with farms for milk. They -- there aren't 5 contracts in Wisconsin for most of the milk between the 6 farm and the plant. 7 Q. So the farms can just move around if they can find 8 a willing buyer? 9 A. Yes. 10 Q. And the buyers can decide not to take the milk for 11 whatever reason if they so decide. 12 A. Yes. There's no binding document between them, 13 that's true. 14 Q. Do you think if the Make Allowances, as you have 15 proposed, were adopted, that your members would return to 16 more regular pooling? We have heard some -- I asked this 17 question. We have heard discussion about how some people 18 find depooling to be disorderly. So in that context of if 19 the Make Allowances were higher, would they choose to 20 return some milk to the pool? 21 A. Yes. In the scenario I laid out where it's really 22 this Make Allowance that is not now covering the costs 23 they face, if a future Make Allowance was set at a higher 24 level that helped them cover their costs, they would not 25 have to hit the panic button and depool. 26 Now, as I said, there are other reasons people 27 depool in and it's related in the -- in this instance to, 28 for example, their lack of revenue on the dry whey side. 5591 1 But it would go a long way toward helping them 2 have a good balance sheet that would allow them to remain 3 in the pool if they could see a higher Make Allowance. I 4 think it would be healthier for their business and 5 healthier for their ability to collect milk and be 6 competitive payers. 7 Q. I forgot to ask this question. But you say all 8 your members are manufacturers. So does that mean none of 9 them are Class I bottlers? Would that be accurate? 10 A. That is accurate. 11 Q. And does WCMA market any milk or payroll any dairy 12 farmers? 13 A. No. 14 Q. Okay. On the bottom of page 2, that's where you 15 talk about the two surveys -- or the one survey and the 16 one forecast methodology, Dr. Schiek's study. 17 And I have asked this question of other witnesses. 18 You know, in the past USDA has done averages of various 19 studies that were presented on the record, but in this 20 case we're being asked to use an average of a study and a 21 forecast. 22 So can you explain why you think it's appropriate 23 for USDA to use a forecast to determine Make Allowances? 24 A. Sure. I -- when our board discussed this with -- 25 what I've tried to tell them from my perspective was that 26 we come here to give you information and ideas, and then 27 you have to come up with a decision. 28 And so we saw the opportunity to give the fresh 5592 1 data from the Stephenson study, and take the audited data 2 from California which was -- was a gold standard at the 3 time, and asked Dr. Schiek to update that using some 4 indices showing cost inflation that are readily available. 5 And that combination of data seems useful. 6 And we simply took that data, and because you 7 wanted a Make Allowance for cheddar and a Make Allowance 8 for dry nonfat dry milk, etcetera, we took a simple 9 average of those two. And now we hand those to you, and 10 you may decide what to do with them. But it's good data, 11 and it's -- it's up-to-date data, and we hope you enjoy 12 working with that data. 13 Q. I'm sure the Secretary is very much going to enjoy 14 working with this data. 15 On the implementation schedule that is being 16 proposed, so initially 50%, and then one-sixth, one-sixth, 17 and one-sixth, how did you all decide that that was an 18 appropriate -- you know, how did you come to those 19 numbers? 20 A. I can tell you that I did not come to that 21 conclusion myself. So it was -- it was -- you would have 22 to ask other people who created that particular scheme. 23 But our board agreed with that scheme, so the -- how they 24 got there may be relevant, but it's where we landed. 25 Q. Okay. And I take it, I think from questioning 26 from Ms. Hancock, that that was a particular when you talk 27 about considerable debate the board had, that 28 implementation schedule is what you are talking about, and 5593 1 some perhaps wanted it all in the first year and... 2 A. Yes, it is true to say that some of my members, 3 you know, really feel the pain of falling behind on their 4 ability to hit these class milk targets and would like to 5 see Make Allowance relief sooner than later. That's fair 6 to say, yes. 7 Q. And I forgot to ask this. Of your members, do you 8 know how many -- because I think you mentioned that some 9 of your members just make specialty cheese? 10 A. That's fair. 11 Q. But how many -- approximately how many members 12 make actual commodity cheddar? 13 A. Well, most of the volume of cheese that my members 14 would produce would be commodity -- oh, cheddar, just 15 cheddar? You said commodity cheddar. I thought you were 16 saying commodity cheese. Most of the cheese -- 17 Q. I asked -- I'm asking on cheddar since makes is 18 for cheddar, so comparable products. 19 A. Well, makes are for everything. But how much 20 commodity cheddar is made by my members, I -- I would have 21 to work up that data for you. 22 Q. Okay. 23 A. A lot. 24 Q. That is more informative than "a little," I guess. 25 On the new paragraph that you are proposing, 26 paragraph R, that talks about if there's a study done and 27 USDA has funding and conducted it earlier than when a 28 staggered implementation would hit, you just want that 5594 1 number adopted, January 1st? 2 A. That's true. If -- if -- if that could happen, 3 that would be great. 4 Q. And so I just want to be clear then. You would 5 want that to be automatically updated and skip this lovely 6 hearing that we're having right now or it would still go 7 through the rulemaking process? 8 A. That's a great question. I think that part of the 9 discussion in the industry should have -- when we try to 10 make language, presumably in the Farm Bill, I doubt a 11 separate bill would ever pass -- that would be part of the 12 discussion, how will we do this. And I -- my members 13 would, I'm sure, get behind the idea that we want -- if 14 USDA could take over this process and create a new gold 15 standard auditing program that's national, we would want 16 the industry to look at that and say, that's the number. 17 If we have got this impartial government body with trained 18 staff, sweeping the nation, getting this data, crunching 19 the numbers, and saying, here's what the Make Allowance 20 should be, then that's what the Make Allowance should be. 21 And so you would think you could implement that 22 then as quickly as possible without a lot of debate 23 because you don't have a dog in this fight. You would 24 find a number that -- that a person that's an accounting 25 style person would say, this is what we discovered, and 26 this is what we're going to set. 27 Q. And if I can ask, on yields, there's been some 28 discussion about having this survey and it would look at 5595 1 both manufacturing costs and yields. 2 So does that same sentiment carry over to the 3 yield side or -- 4 A. For you to audit for Make Allowances are you 5 saying? 6 Q. There's been discussion that a survey that comes 7 out of the Farm Bill would allow USDA to look at 8 Make Allowances, manufacturing costs, but also look at 9 yields, so there can be some consideration of whether the 10 yield factors in the formulas would be updated. And so 11 let's just assume, for illustrative purposes, that that is 12 in the Farm Bill. 13 So then would you want this to include an 14 automated update of yields as well if we were able to, you 15 know, find those numbers out through this survey? 16 A. I guess that's a discussion that I think is in our 17 future, as an industry, as an association, as an agency. 18 What this looks like and what it includes I think is a 19 future discussion. Haven't had that discussion yet in our 20 in our group, so I would hope to defray that answer. 21 Q. Okay. I wanted to turn to your other statement 22 and opposition to Proposals 4 and 6. 23 A. Okay. 24 Q. Okay. You have a sentence in here talking about 25 the -- one of the reasons your members don't support 26 adding 640s is because basically having blocks and barrels 27 in the price series for cheddar already kind of brings in 28 a bit of price volatility and divergence, and so adding 5596 1 640s would make that worse. I'm summarizing what your 2 sentence says. 3 A. That's a fair summary. 4 Q. I was curious if you had a position on removing 5 barrels being the case that you say that those two things 6 add volatility, since we do have that proposal in front of 7 us. 8 A. We do not, as an association, have a position on 9 that topic. 10 Q. Okay. And the last question. You have a sentence 11 on here, this is something I had not heard yet in these 12 past few weeks. Another reason was: "Relatedly, the 13 return of wooden or plastic structural packaging would 14 deter potential buyers." 15 Could you just expand on that? 16 A. Sure. I think what people were saying is you 17 might, in a cash market, have brokers and other sort of 18 middlemen willing to take product and resell it. When the 19 thought from a member was that if you -- and that pretty 20 much moves one direction, and if the truck empties, then 21 life is good. 22 When you have 640s, you have this material, that 23 is the packaging, the wood, the springs, or the stretch 24 wrap -- which I'm okay, they can throw away the stretch 25 wrap -- or the plastic box is something you don't deal 26 with with a 40-pound block. That material has to go to 27 the -- it has to be disposed of by a party to a third 28 party, which will then recondition the wood, or, you know, 5597 1 the companies that do that, they prepare that packaging 2 for yet another use, or it has to return back to the 3 manufacturer. That's a step that doesn't exist with the 4 cardboard, 40-pound block. You just throw away the 5 cardboard. 6 So it was just seen as another deterrent to having 7 anyone, just anyone, decide they are going to speculate 8 and buy a load and resell a load of 40-pound block. It's 9 just an impediment to the ease of cash purchase. 10 Q. Okay. And then of your membership, do -- I 11 know -- I think your members that testified earlier in 12 this proceeding said they make 40-pound blocks. 13 Do any of your members make 640s? 14 A. Yes. 15 Q. And do any of your members make barrels? 16 A. Yes. 17 Q. Okay. 18 MS. TAYLOR: I think that's it from AMS. Thank 19 you. 20 THE COURT: Does anyone else have a question 21 before redirect? 22 CROSS-EXAMINATION 23 BY MR. SJOSTROM: 24 Q. Hi, again. 25 A. Hello. 26 Q. Ms. Taylor had some good questions that created 27 some good questions. 28 Lucas Sjostrom, Edge Dairy Farmer Cooperative. 5598 1 I just wanted to get to the membership question, 2 because it's always curious when it's understandably not 3 wanting to be revealed. 4 But how -- if you are a member of the WCMA Board 5 of Directors, do you need to be a member or from a member 6 organization? 7 A. Someone on our board has to be a member of 8 Wisconsin Cheese Makers Association, yes. 9 Q. Thank you. 10 And therefore, if we can infer from your website 11 that Ellsworth Cooperative Creamery, Associated Milk 12 Producers, Inc., and Foremost Farms are all members of 13 National Milk, they would be members -- they are members 14 of your Board of Directors, they would also be members of 15 the WCMA? 16 A. Right. Our Board of Directors appears on our 17 website, and you went to our website -- 18 Q. Yes, sir. 19 A. -- and found that. So you see some of our 20 members. Yes, that's correct. 21 Q. All right. Yes. And I was just noting that there 22 was some crossover to help Ms. Taylor. But I understand 23 the -- 24 A. Right. I can't confirm who is a member of 25 National Milk. It sounds like you are confirming that. 26 Q. Correct. 27 A. Standing there, you are confirming that data. 28 Q. My question was, if we can affirm that they are 5599 1 members of National Milk, then they would be crossover. 2 A. I don't know. 3 Q. We'll leave it at that. 4 Did -- and this is from earlier -- did all of your 5 members -- you mentioned a very contested conversation. 6 Did all of your members support an increase in 7 Make Allowances, and then there was a difference in 8 opinion on how far they should go up, or did some of your 9 members not support an increase in Make Allowances? 10 A. Our members supported our proposal -- 11 Q. My question -- 12 A. -- which has Make Allowance increases. 13 Q. Correct. 14 My question was, did all of your members support 15 some increase in Make Allowances? 16 A. Well, we have a structure with committees and a 17 board, so the committee makes recommendations to the 18 board. So there's some members on the committee and 19 there's some members on the board, so that was the pathway 20 for the decision. 21 So you said, I think you said all members. I 22 can't say what is in the mind of every single member of 23 the association, but I can tell you that's how our board 24 voted. 25 Q. Understood. 26 And so it could be possible, in other words, that 27 some of your members supported no increase or even a drop 28 in Make Allowances, as unlikely as that is? 5600 1 THE COURT: That's too speculative. 2 MR. SJOSTROM: That is speculative. I'll 3 withdraw. That's fine. 4 BY MR. SJOSTROM: 5 Q. Ms. Taylor asked a question about written 6 contracts, and I -- that part I wasn't clear about. 7 Did you say some, none, or all have written 8 contracts? 9 A. As you probably know, there's a vast majority of 10 farms in Wisconsin that are not -- do not have a contract 11 with their milk buyer. I believe there are some farms in 12 Wisconsin that do. But I was speaking to the vast 13 majority of Wisconsin dairy farmers and milk buyers. 14 Q. And your -- your membership's much broader than 15 Wisconsin, correct? 16 A. True. I have been falling back on my Wisconsin 17 roots at times in this hearing. 18 Q. Yes. 19 And so that statement would be for beyond 20 Wisconsin, I suspect, throughout your whole membership, or 21 is that Wisconsin specific? 22 A. Right. I believe that there's a mixed bag in the 23 United States of milk that is not related to a contract 24 between buyer and seller and milk that is. 25 MR. SJOSTROM: Thank you. That's all I had. 26 Appreciate it. 27 THE COURT: I'd hear from Agricultural Marketing 28 Service. 5601 1 MS. TAYLOR: Thank you, your Honor. I had a few 2 more questions get sent to me I didn't see while we were 3 cross-examining. 4 CROSS-EXAMINATION 5 BY MS. TAYLOR: 6 Q. We -- we had a discussion about the 7 appropriateness of using an average of Dr. Schiek's 8 forecast and Dr. Stephenson's study, both of which -- 9 well, Dr. Schiek's just California plants, and 10 Dr. Stephenson's had California plants in it. 11 So your opinion on, you know, if we're asked to 12 take the average, is that somehow skewing the results in 13 some way towards California plants that would be doubly 14 counted in the average? 15 A. I don't think it's right to say they are doubly 16 counted. I think they simply appear in both, but I don't 17 think they are getting anything doubled. Like a volume 18 isn't being doubled. I think you should have perhaps 19 gotten similar data from the two surveys, or the survey 20 and the study, or the two studies, what have you. 21 But I think that this data is yours to consider as 22 you see fit. I think the value of the Schiek study is 23 that it's based in the audited data from the California 24 Department of Food and Agriculture. That was, as I said 25 earlier, the gold standard in the United States for cost 26 data. Unfortunately they didn't continue doing it, but I 27 think Dr. Schiek did a marvelous job of trying to carry it 28 forward with indices of costs. 5602 1 And having that robust data and the data from 2 Dr. Stephenson, the most simple thing, the most fair thing 3 that we could think to do was to simply put them together 4 for you. 5 Q. But you wouldn't think that those -- that average 6 might skew the results towards the plant structure that's 7 prevalent in California or their cost characteristics 8 that's prevalent more in California and not in the rest of 9 the country? 10 A. I can tell you that I guess it must have come out 11 in the hearing where maybe Dr. Stephenson said where his 12 data came from. That would have been a revelation to me 13 during the hearing had I heard that, because I did not 14 hear that, and our board did not know that previously, 15 because we had zero information on who had participated in 16 his survey. 17 So something for you to consider, but I still 18 think that in the mix is that good, actually audited plant 19 data from California that has a key role to play in the 20 Make Allowance decision. 21 Q. Okay. And then so you do find those numbers or 22 your members find those numbers reflective in some ways of 23 the cost that they incur in Wisconsin and surrounding 24 states? 25 A. You know, there's a saying that when you pick a 26 Make Allowance, it's -- it's nobody's Make Allowance, 27 right? It's a number. And it's not Mr. Heiman's 28 Make Allowance, it's not Mr. Wills' Make Allowance, who 5603 1 both testified earlier in the hearing. Theirs were $0.32 2 and $0.77 to make a pound of cheddar. But it will be a 3 number that you try to find that is just right to try to 4 keep a diversity of plants and farms thriving in the 5 United States. 6 Q. So that -- that's a good answer to lead me to my 7 next question. 8 A. Okay. 9 Q. And I appreciate the deference to USDA finding the 10 right number, but this is the industry's program, and so 11 we do try to take everyone's thoughts and advice into 12 consideration. 13 So given that, you know, for Dr. Stephenson's 14 study, we have an average, and we have a high cost number 15 and a low cost number as he breaks it out for each 16 product. 17 So you have been head of Wisconsin Cheese since 18 the '90s as you indicated. So given that, your experience 19 in the industry and -- you know, what would you say is a 20 fair Make Allowance? Where should it be set? Should it 21 cover all the high cost plants? Should it cover only the 22 low cost plants? I mean, what's your opinion on that? 23 A. Well, I think that's a great question. It comes 24 down to a goal really. Because it's going to be somewhere 25 on that spectrum. So you have to decide, what's our goal? 26 What are we trying to accomplish when we set this 27 Make Allowance? 28 And I would say that this industry and in this 5604 1 hearing, you often hear a lot of talk about commodity 2 product, and that's because these -- we use commodity 3 product to set these prices. And I guess then by design 4 you don't hear a lot about the consumer or trying to 5 please the consumer or delight them with great dairy 6 products. 7 But part of that is having the specialty cheeses 8 and the specialty butters and whatever we can dream up in 9 the industry from Class I to Class IV to win back 10 consumers that are leaving us in some cases or are, you 11 know, growing up in a family that -- that didn't drink 12 fluid milk or have moved on from cheese. We have -- we 13 have a bigger battle here than this battle. 14 And so I advocate and have tried to advocate my 15 whole career that we have a job to face the consumer and 16 stop facing and talking to ourselves. We need to have 17 these specialty cheese plants and these gourmet products 18 that are the spear point of our marketing effort. 19 So I'm hoping USDA will keep in mind we're not 20 just trying to make a program that -- that makes cheddar 21 block. We're trying -- to have a diverse dairy industry, 22 to have a diverse set of small farms and big farms is to 23 have a diverse set of small plants and big plants. Our 24 small plants, cheese plants, for example, thrive on having 25 small farms. They can be overwhelmed by having one big 26 farm. They fear having one big farm serving them because, 27 you know, the relationship is tenuous. 28 So we want a diverse thriving industry that sets 5605 1 the Make Allowance to let some of those specialties stay 2 afloat, and -- and we all win I think as an industry, if 3 you set them -- the Make Allowance at a place where we 4 have diversity in product, and diversity then in farm size 5 and plant size. 6 Q. So could I look at that as your kind of definition 7 of what a fair Make Allowance would be -- 8 A. Sure. 9 Q. -- in coming to a fair Class III price? 10 A. Sure. 11 MS. TAYLOR: I think that's it. Thank you. 12 MR. ROSENBAUM: Your Honor, Steve Rosenbaum, 13 International Dairy Foods Association. 14 At this point I would simply like to move Hearing 15 Exhibits 258 and 259 into evidence. 16 THE COURT: Is there any objection? 17 There is none. Exhibit 258 is admitted into 18 evidence. 19 (Exhibit Number 258 was received into 20 evidence.) 21 THE COURT: Exhibit 259 is admitted into evidence. 22 (Exhibit Number 259 was received into 23 evidence.) 24 THE COURT: Mr. Umhoefer, thank you so much. 25 It's time for either -- oh, an hour and a half. 26 It's time for a ten-minute break. Please be back and 27 ready to go at 9:45. 28 (Whereupon, a break was taken.) 5606 1 THE COURT: Let's go on record. 2 We're back on record. It is 9:46. 3 What witness will testify about the exhibits that 4 we have been handed? 5 MR. HILL: That will be Brian Riordon. 6 THE COURT: Good morning. Before I swear you in, 7 I want you to experiment with that chair and that mic to 8 see if you like, you know, your ability to read your 9 document and speak into the mic. You may have to adjust. 10 All right. 11 Please state and spell your name. 12 THE WITNESS: My name is Brian Riordon, B-R-I-A-N, 13 R-I-O-R-D-O-N. 14 THE COURT: Have you previously testified in this 15 proceeding? 16 THE WITNESS: I have, your Honor. 17 THE COURT: You remain sworn. 18 THE WITNESS: Thank you. 19 BRIAN RIORDON, 20 Having been previously sworn, was examined 21 and testified as follows: 22 DIRECT EXAMINATION 23 BY MR. HILL: 24 Q. So since you have already testified, I'm going to 25 make this quick and easy for you. 26 THE COURT: Mr. Hill, please identify yourself. 27 MR. HILL: Brian Hill, USDA. 28 BY MR. HILL: 5607 1 Q. So when you testified earlier, did you do so in 2 response to a data request? 3 A. I did. 4 Q. And is your testimony today made for the same 5 reason? 6 A. Yes. 7 Q. And in front of you, do you have two documents 8 that are marked in the top right corner Exhibit 60 and 9 Exhibit 61? 10 A. Yes, I do. 11 Q. And I do want to say online these are actually 12 USDA Exhibits 60 -- or USDA 60 and USDA 61. Online it is 13 identified as such on the links for those documents. 14 So the first document -- hold on one second. 15 Are these documents prepared by the USDA in 16 response to a data request? 17 A. Yes, they were. 18 Q. All right. 19 MR. HILL: I would like to mark these for 20 identification, your Honor, as I believe, actually, 21 Exhibit 260, for what's shown as Exhibit 60, and 261 for 22 what's shown as Exhibit 61. 23 THE COURT: How did you get that to come out 24 exactly like that? Excellent. 25 So Exhibit 260 is USDA Exhibit 60, and Exhibit 261 26 is USDA Exhibit 61. 27 (Exhibit Numbers 260 and 261 were marked for 28 identification.) 5608 1 BY MR. HILL: 2 Q. So, again, these were prepared by the USDA 3 pursuant to a data request; that's correct? 4 A. Yes. 5 Q. Okay. So -- and you are the lucky person who 6 stepped forward to testify to them; is that correct? 7 A. Yes. I was the lucky person that didn't step back 8 last week, so I'm happy to be here to do this. 9 Q. You beat me to the punch line. That's where I was 10 going. 11 So if we could look at what's now identified as 12 Exhibit 260. Could you just kind of walk us through that 13 document and let us know -- share what that's about. 14 A. Yes. This document shows producer milk by state 15 and county for the Central Federal Order. This is Order 16 Number 32. The -- it shows data for all the months of 17 2002, January through December. That -- the table 18 includes the name of the state, the state code, and the 19 county code, county, and it does include the number of 20 producers in each county and the producer milk. And I 21 believe at the bottom it's -- I don't know if there's a 22 total -- yeah, there's some totals at the bottom as well. 23 Q. And so it just goes on like that for each state? 24 A. It does. For each state, each county, and then 25 each year. 26 Q. And I notice under the county, it appears at the 27 end of each state, under the county, there's something 28 that says "restricted." 5609 1 Could you explain that for us? 2 A. Yes, I can. So the restricted line basically is a 3 subtotal of any of the counties that were restricted and 4 we couldn't show individually. So the totals for the 5 producer and the pounds were just subtotaled together and 6 shown. 7 Q. Okay. Thank you very much. 8 So let's look at Exhibit 260 -- excuse me, 261, 9 and please explain that document for us. 10 A. Okay. This is document, also at the request of a 11 proponent, was put together. It has two different tables. 12 I'll talk about the top table first. 13 The top table is Federal Order 33 producer milk 14 pounds received at pool distributing plants and partially 15 regulated distributing plants by state requested for 2015 16 and 2002 (sic). 17 We have got a footnote on "requested." That's 18 basically indicating that the states that are listed in 19 this table were specifically requested by the National 20 Milk Producers Federation (NMPF), who were the requesters 21 of this particular information. That footnote will also 22 hold for the bottom table. 23 So the first table is showing the columns for 24 year, 2015 and '22, and then columns showing Indiana, 25 Michigan, Ohio, Pennsylvania, and then a total. And then 26 the numbers inside are just reflecting the total volume by 27 pound. 28 Q. All right. Is there anything else in Exhibits 260 5610 1 or 261 that you would like to add to your testimony? 2 A. Oh, yeah. I'll just go over the second, the lower 3 table of this Exhibit 261. 4 Q. Yes. 5 A. I was just pausing for everyone to absorb that. 6 Q. Dramatic effect. 7 A. Dramatic effect. 8 So Federal Order 33 receipts of producer milk 9 pounds by state requested for 2015 and 2022 are presented 10 in the second table. Same structure of the table, it's 11 showing year 2015 and '22, and then columns for the 12 corresponding states in the above table, Indiana, 13 Michigan, Ohio, Pennsylvania, and then a total. 14 MR. HILL: I think that's all I have, your Honor. 15 He's available for examination. 16 THE COURT: Is this moment the first time that the 17 participants who are here in person have seen the data? 18 No. 19 MR. HILL: No, it's been online, I know, for a 20 long time, yes. 21 MS. TAYLOR: For weeks, we notified them. 22 THE COURT: She said a week. You said a long 23 time -- 24 MR. HILL: She said "weeks." 25 THE COURT: Oh, weeks. I just wanted to be clear. 26 MR. HILL: That's fine. 27 THE COURT: It's been online for weeks. Very 28 good. Thank you. 5611 1 MR. ENGLISH: Chip English for the Milk Innovation 2 Group. And I confirm that it's been online for quite a 3 while, and we thank the Department. 4 CROSS-EXAMINATION 5 BY MR. ENGLISH: 6 Q. So, sir, I have a couple of questions, and we'll 7 see how far I can get. 8 So I've forgotten, how long have you been with 9 USDA. 10 A. USDA, since 2000. 11 Q. Okay. So maybe this will work. 12 So let me start with my shorter discussion, I 13 think, which is Exhibit 261. And so this information does 14 not purport to represent, for instance, how much 15 Pennsylvania milk would be received at an Order 1 pool 16 distributing plant, correct? 17 A. Yes, correct. 18 Q. Okay. And also would not reflect, for the second 19 chart, receipts of producer milk other than pool 20 distributing plants for Pennsylvania that were actually 21 received in Order 1, correct? 22 A. Correct. 23 Q. It also wouldn't reflect, to the extent that there 24 is a Central -- a portion of Central Pennsylvania that is 25 not presently subject to federal regulation, milk received 26 at those plants, unless they are were partially regulated, 27 correct? 28 A. Correct. 5612 1 Q. And similarly, if -- if there were, for instance, 2 Indiana milk, it could just as well be pooled on Order 5, 3 correct? 4 A. There -- there could be Indiana milk pooled on 5 Order 5, yes. 6 Q. So the bottom line is this does not represent the 7 total volume of producer milk. It is literally limited to 8 those states as received at either pool -- either pool 9 distributing plants or as producer milk for Order 33 10 plants only, correct? 11 A. Correct. 12 Q. Okay. So turning to Exhibit 260. 13 Unlike Exhibit 261 -- and I apologize if -- if I 14 missed it writing my questions -- who requested this 15 information for what is Exhibit 260? Which entity? 16 A. I cannot remember who the requester is. 17 MS. TAYLOR: I think it was NMPF. 18 THE WITNESS: Was it National Milk? I think you 19 are right, I think we got it in the same letter, but I 20 don't have it in front of me. But I think I just recently 21 saw the letter, and they are both included. 22 MR. ENGLISH: And I'm going to try to keep this as 23 brief as possible, but nonetheless -- 24 THE COURT: I want to make sure that that answer 25 is clear. 26 So you believe it -- 27 THE WITNESS: I believe I saw the letter that -- 28 I'm trying to recollect the letter. I don't have it with 5613 1 me. But I think I saw both requests under the same 2 document, saying they were from National Milk. 3 BY MR. ENGLISH: 4 Q. Thank you, sir. 5 A. You're welcome. 6 Q. So if we could turn for a moment, as an example, 7 to February 2002, page 9, which I think is the first page 8 for February 2002. I think given the fact that this 9 document is going to be in the record, I think it is 10 important for this record to understand a few things 11 historically. 12 There is, at the very top of that page in terms of 13 the state, I think it looks like six counties listed, plus 14 a restricted for California, correct? There's producer 15 milk by state and county from California, correct? 16 A. It looks like seven counties, maybe. 17 Q. Okay. All right. Fine. 18 Nonetheless, there's a number of -- there's a -- 19 there's a total of 68 million pounds of producer milk from 20 California from February 2002, correct? 21 A. Correct. 22 Q. Okay. And similarly, there is a listing 23 restricted for Idaho, correct? See Idaho as being listed 24 restricted? 25 THE COURT: Where are you? 26 MR. ENGLISH: I'm on page 9. 27 THE WITNESS: Does that go to page 10 restricted 28 for Idaho? 5614 1 MR. ENGLISH: Well, I see it in the margin here 2 right under Colorado. Maybe I should go to a different 3 month. No, it's -- 4 THE COURT: So what you are asking is what we're 5 used to seeing as the last item, might be the item at the 6 top for Idaho? 7 MR. ENGLISH: I'm on page 9, and it's -- for some 8 reason the state is actually a -- you know, listed a 9 little farther west. So I'm just seeing the word Idaho, 10 correct? 11 THE WITNESS: I do see Idaho, and then to the 12 right it does look like there's a 999 with a restricted -- 13 yeah, there's a line that says that. 14 BY MR. ENGLISH: 15 Q. And that would -- in order to protect confidential 16 data, that means there was either one or two producers, 17 but not more than two producers, correct? 18 A. That the -- yes, that would be a reason to 19 restrict. 20 Q. Okay. So there was a time shortly after Federal 21 Order reform that, for reasons I do not want to dwell on 22 for the moment, that milk from California or say Idaho was 23 pooled on various Federal Orders, correct? 24 A. I don't have the data with me. I believe I may 25 remember what you are talking about, but I don't have any 26 information to reflect on. 27 Q. Well, looking at USDA's website -- that is 28 extremely valuable, thank you -- post-Federal Order 5615 1 reform, there were a series of what we would call 2 performance standard hearings in the early 2000s, correct? 3 A. Correct. 4 Q. And, in fact, there were two such hearings in the 5 Central Order, correct? 2001 and 2004? 6 A. I don't have a clear recollection at that time, 7 but I know that there were a series of hearings that 8 addressed that. 9 Q. And do you recall whether those hearings addressed 10 the issue of, you know, distant milk that might have 11 limited relationship to the order being pooled? 12 A. That was my understanding. 13 Q. Okay. And the result of those hearings, in 14 seriatim, was that if you looked post say 2005, it's 15 highly unlikely you are going to see California milk 16 pooled anymore on Order 32, correct? 17 A. I have to look back at the data, but -- 18 MS. TAYLOR: If I could just stipulate. 19 Mr. Riordon works out of our Northeast office -- 20 MR. ENGLISH: All right. 21 MS. TAYLOR: -- so he will have limited 22 information on those hearings, as none of them occurred in 23 his marketing area. 24 MR. ENGLISH: Because they had real pooling 25 standards, but anyway. 26 BY MR. ENGLISH: 27 Q. Okay. All right. So I apologize, I asked the 28 wrong question. So -- 5616 1 A. And some of this was back when I was a Federal 2 Order youngling, so... 3 Q. We were all Federal Order younglings once upon a 4 time, sir. 5 So nonetheless -- and I think the Northeast 6 actually did have one of these hearings, correct? 7 A. Correct. 8 Q. Okay. But regardless, whatever historical data we 9 may be seeing from 2002 could very well be different post 10 that and that series of hearings that included one hearing 11 in the Northeast, correct? In terms of milk that's being 12 pooled that looks -- I mean, for want of a better 13 phrase -- odd to see California milk pooled under 14 Order 32? 15 A. Are you saying there was a chance there were 16 different regulations -- 17 Q. Yes. 18 A. -- in place? 19 Q. Yes. 20 A. There -- between this year and after, there very 21 well may have been, yes. 22 MR. ENGLISH: That's all I have. Thank you. 23 THE COURT: Mr. Hill, do you have any other 24 questions for this witness? 25 MR. HILL: No further questions, and I would move 26 for admission of 260 and 261. 27 THE COURT: Are there any objections? 28 Exhibit 260 is admitted into evidence. 5617 1 (Exhibit Number 260 was received into 2 evidence.) 3 THE COURT: Exhibit 261 is admitted into evidence. 4 (Exhibit Number 261 was received into 5 evidence.) 6 THE COURT: Thank you. You may step down. 7 THE WITNESS: And I just want to add, I'm happy 8 that I didn't scuttle Mr. Miltner's plan to have a witness 9 he didn't have to ask questions. Thank you. 10 THE COURT: Ah, so you have many things to 11 distribute. 12 MR. SJOSTROM: Yeah. So we don't an Umhoefer 13 situation, for the record, if anyone wants to go before 14 me, you certainly can, but I'm available. 15 Okay. I'll go with that. 16 THE COURT: Okay. Let's go off record. Documents 17 are being distributed among the participants who are here, 18 and then we'll go back on record and tell you what we have 19 done. 20 (An off-the-record discussion took place.) 21 THE COURT: Let's go back on record. 22 All right. We're back on record at 10:04. 23 First I would like the gentleman in the witness 24 chair to identify himself and spell his name. 25 THE WITNESS: Lucas Sjostrom, L-U-C-A-S, 26 S-J-O-S-T-R-O-M, representing the Jer-Lindy Farms, LLC, in 27 this position. 28 THE COURT: Have you previously testified in this 5618 1 proceeding? 2 THE WITNESS: No, your Honor. 3 THE COURT: I'd like to swear you in. 4 LUCAS SJOSTROM, 5 Being first duly sworn, was examined and 6 testified as follows: 7 THE COURT: Thank you. 8 Would you identify yourself. 9 DR. BOZIC: Marin Bozic for Edge Dairy Farmer 10 Cooperative. Good morning, your Honor. 11 THE COURT: And just because your name is 12 difficult to spell, I'd like you to spell your whole name 13 for us. 14 DR. BOZIC: M, for milk, A-R-I-N; B, for boy, 15 O-Z-I-C. 16 THE COURT: Thank you. 17 DIRECT EXAMINATION 18 BY DR. BOZIC: 19 Q. Mr. Sjostrom, did you prepare the Exhibit Edge-11 20 that you have in your hands? 21 A. I did. 22 Q. And you're presenting this testimony representing 23 Jer-Lindy Farms, not Edge Dairy Farmer Cooperative; is 24 that correct? 25 A. Yes, sir. 26 Q. Would you like to read your testimony? 27 A. Will do. 28 I'm Lucas Sjostrom, and today I'll explain my 5619 1 background and why my farm supports Proposal 1 with 2 logical outgrowth to update fat, submitted by Edge Dairy 3 Farmer Cooperative; Proposal 3, with the logical outgrowth 4 proposal to use a weighted average of blocks and barrels 5 submitted by Edge Dairy Farm Cooperative; a delay in 6 Make Allowances, increasing yields until yield factors are 7 considered, and if it increases more than $0.40 per 8 hundredweight, all milk price equivalent divided over four 9 years; Proposal 16, Class III Plus as proposed by Edge 10 Dairy Farmer Cooperative, especially with the elimination 11 of advanced prices; and a 15.5 month or greater delay on 12 any changes affecting hedging, contracting, and federal 13 risk management programs. 14 I am here as one of four owners of Jer-Lindy 15 Farms, LLC. My parents-in-law, Gerard and Linda 16 Jennissen, both grew up on dairy farms in Stearns County, 17 Minnesota. My wife, Alise, grew up on our current farm, 18 where we currently live, and we raise our family with 19 three young children. 20 I also grew up on a Minnesota dairy farm, Sjostrom 21 Farms, LLP, in Lafayette, Minnesota. My grandparents, 22 parents, brother, and sister-in-law all continue farming 23 there today. 24 Both my current farm and home farm are co-owners 25 of Bongards Premium Cheese, where our milk is further 26 processed into many different products. However, this 27 testimony is not on behalf of our cooperative, nor my 28 parents' operation. I share those notes for transparency 5620 1 purposes. 2 Jer-Lindy, LLC, based in Brooten, Minnesota, is a 3 200-cow dairy with a robotic milking system, feed pusher, 4 manure collectors, and activity monitors for health and 5 reproduction. We are a Minnesota Agriculture Water 6 Quality Certification program participant, which built 7 upon the Minnesota Milk Five Star Dairy Program. 8 We were recognized as a 2016 U.S. Dairy Industry 9 sustainability award winner due to our formation of an 10 on-farm cheese plant, and the International Dairy Foods 11 Association innovative dairy of the year in 2017. 12 We currently have cows making 4.4% butterfat and 13 3.3% protein on average. And that's last week, not a 14 yearly average. 15 I will go slower. Thank you, Counsel. 16 With my wife and her parents, we also own Redhead 17 Creamery, LLC, an award-winning farmstead cheese operation 18 which received first place natural rind cheddar at the 19 2023 U.S. championship cheese contest, in addition to 20 numerous other awards at the American Cheese Society and 21 Minnesota State Fair, since our operations began in 2014. 22 Our creamery has about six full-time and five part-time 23 staff making 70,000 pounds of cheese and providing tours 24 to about 10,000 people annually. 25 Because of agri-tourism, or lack thereof, we do 26 not believe our farm would or will exist without our 27 creamery, and we don't believe our creamery would or will 28 exist without our farm. And that's a future-based 5621 1 statement. 2 Our latest venture is branded Redhead Creamery 3 Spirits. I was thrilled to learn about what we could do 4 with lactose as we split it, ferment the resulting glucose 5 and lactose, and create alcohol. I also now understand 6 how we derive whey, lactose, and various permeates and 7 retentates through that process. 8 Away from the farm I hold a Bachelor's and 9 Master's degree in animal science from the University of 10 Minnesota Twin Cities. I have completed the Young Dairy 11 Leaders Institute by the Holstein Foundation and was 12 admitted as a policy fellow at the nine-month University 13 of Minnesota program. 14 My project -- and this is in reference to graduate 15 school -- was on winter housing for an organically-grazed 16 herd, but also consisted of precision data collection on 17 pasture growth, activity monitors, milk quality, and fly 18 management. 19 I have worked in government relations and 20 communications for Holstein Association U.S.A. as an 21 associate editor with Hoard's Dairyman magazine, associate 22 editor with Dairy Herd Management magazine, and farmer 23 relations for Midwest Dairy. 24 Today, I concurrently work as executive director 25 of Minnesota Milk Producer's Association and managing 26 director at Edge Dairy Farmer Cooperative. Minnesota Milk 27 Producers Association focuses on issues affecting the 28 state capital in St. Paul and, therefore, has taken no 5622 1 positions on any of these issues. 2 First I will provide my experience as a farmer. 3 My wife and I officially became part of the farm 4 in 2015. We had worked on the farm for hourly wages since 5 moving back into her childhood home in 2012. We were 6 pleased that trade associations like Edge and Minnesota 7 Milk have advocated for risk management programs. I 8 worked at the U.S. House Agriculture Committee as an 9 intern during the last year of the minimum $9.90 dairy 10 price support program milk price upon expiration in 2007. 11 That is no more. 12 There was first an overlap of the milk income loss 13 contract program, begun in 2002, as the first 14 countercyclical dairy program in the modern era, followed 15 by the Margin Protection Program in 2014, and ultimately, 16 that was rebranded and reconfigured into the Dairy Margin 17 Coverage Program in 2018. 18 As support was moved from pricing, products such 19 as Dairy Revenue Protection and Livestock Gross Margin for 20 dairy were added. I have attended many sessions 21 explaining how each of these programs works, and because 22 of my other job, explaining the costs and benefits of the 23 latter three programs, not as an expert, but an effort to 24 connect farmers with resources who can help. 25 I spell out these various tools because questions 26 are being asked whether risk management should be 27 considered in this hearing. As I show above, Congress has 28 clearly signaled that dairy farmers should not plan for 5623 1 support to continue and should rely on risk management. 2 To simplify things, there are two types of farms 3 in this country: Those with debt, and those without. 4 Obviously, this is a gross simplification, but let me 5 restate it in another way. There are farms that can't or 6 won't reinvest into their farm, and there are farms, like 7 mine, taking on debt to move our farm to a more 8 sustainable place financially. 9 My parents-in-law began their herd with a Farmers 10 Home Administration loan with a slightly negative net 11 worth at the time. They experienced a few good years from 12 1979 to 1982, before feeling the 1980s farm crisis right 13 as they took on the loan for our farm, their permanent 14 home. 15 Long story short, they felt like they recovered in 16 2002, and after 20 years of at least one of them having an 17 off-farm job, both returned as -- 18 THE COURT: I'm sorry. 19 THE WITNESS: Yes. 20 THE COURT: You read off-farm. 21 THE WITNESS: Thank you. 22 THE COURT: The statement says on-farm. 23 THE WITNESS: That's both -- 24 THE COURT: But they were both on-farm. 25 THE WITNESS: That's both true and not true. They 26 both held off-farm jobs while they were on-farm. That 27 should read off-farm. That's a correction. 28 THE COURT: Thank you. 5624 1 THE WITNESS: So both having an off-farm job -- or 2 excuse me -- at least one of them having an off-farm job, 3 both returned as full-time farmers. 4 They built a freestall barn in 2002, were 5 convinced with state and federal grant money to build an 6 experimental small-scale digester in 2007, and built a pit 7 parlor in 2009. Since we moved home in 2012, we have 8 built a creamery and a machine shed, and are currently 9 converting everything within reach to automation. As we 10 do that, we try to plan our income as best we can in 11 effort to get a loan. 12 Our DMC program is locked in at 2014 rates, when 13 we had about 60 fewer cows. For those of us attempting to 14 improve our farm's sustainability, it is not a realistic 15 risk management program. 16 So we turned to DRP to have a more -- to have more 17 risk protection as we take on more projects like these. 18 We ask a broker to always look as far out as possible. As 19 a reminder, DRP trades in quarters of the year, not 20 months. 21 So you are receiving an average of the available 22 opportunity for each day of the quarter rather than a 23 monthly contract. In effect, we are always looking 24 24 months out, but as noted earlier by Dr. Bozic, 15.5, 25 15-and-a-half, months notice would be acceptable to 26 implement changes for trading purposes. 27 As such, I believe DRP, LGM-Dairy, and CME type 28 hedging is important for farms like mine more than ever 5625 1 before, farms that fit the definition of a small business 2 for the purpose of this program. DMC is a great program, 3 but to call it ample risk management for a dairy like ours 4 with the next generation trying to dairy farm for another 5 40 years is a gross overstatement. 6 I should mention that, in 2023, things take a lot 7 longer. It took about one year to build the package loan 8 for our creamery and robotic expansion, and it is taking 9 about eight months to build everything related to it. 10 Those are probably twice as long as ten years ago. 11 In other words, not only is risk management a 12 bigger part of life for small business dairy farmers who 13 are growing into their next adventure, but you need to 14 look out longer than usual due to the supply change issues 15 caused in part by the hangover from COVID-19 disruptions, 16 as well as the breakup of globalization. 17 As a farmer, I cannot understand the rush to 18 implement things like Make Allowances or other sections 19 discussed here. In most simple terms, an increase in 20 Make Allowances lower the paycheck for farmer milk -- 21 excuse me -- lowers the paycheck for farmer milk. Without 22 our diversified business and my off-farm job, I don't 23 think our farm would be worth reinvesting to, and the 24 previous generation has plainly told us many times, they 25 would have been done years ago if we weren't home. 26 But while USDA says farmers don't deserve a 27 Make Allowance for various reasons -- and I understand the 28 need for one in the current formula -- anything providing 5626 1 comfortability eliminates risk. Without risk, there's no 2 innovation. Help us encourage but manage risk. 3 And while every dairy farm is managed by a 4 hard-working family who must know many things about 5 biology and financial management, I hope USDA pays special 6 attention to the farms who are looking to grow into their 7 next chapter, and thus, those that will take a little more 8 risk than the average. 9 I attended the October 2022 American Farm Bureau 10 Federation gathering on FMMOs and found it extremely well 11 done. However, due to harvest timing, membership, and 12 interest, only about six farmers from the Upper Midwest 13 states representing -- that should say -- over 40% of the 14 milk and farms in the country attended. 15 Like Farm Bureau's membership, attendance was 16 heavily skewed to the Southeast. I don't mean this as a 17 criticism, but rather to point out that some issues 18 weren't really debated, such as Class III Plus versus the 19 higher-of. Rather, we just all talked past each other in 20 some areas to serve our regional interests. 21 Class III Plus was certainly brought up as a 22 proposal, and at my table where we were able to discuss it 23 with members from across the country, it rose to the top. 24 As a newer proposal heard for the first time at 25 that forum by many, I don't believe you could characterize 26 that there was any vigorous debate about the different 27 proposals. 28 I fully recognize Farm Bureau has an extensive 5627 1 resolutions process, and higher-of is their preferred 2 method of figuring the base Class I skim milk price. 3 However, to say it would -- it was unanimous would be 4 disingenuous. 5 Next I will share from our creamery's point of 6 view. 7 As a creamy taking just 12% of our farm's 8 production per year, we do not participate in the pool. 9 However, we could certainly make a 40-pound block of 10 cheese. What would that cost? Using estimates, I think 11 our costs would be around $5.50 per pound. If USDA does a 12 mandatory survey, I hope they consider the most efficient 13 plants as their benchmark. I don't think creameries our 14 size should be included, but it sounds like we certainly 15 could be. 16 Another way to measure efficiency would be to 17 weight the average make costs by the volume. 18 A lot of talk during this hearing has focused on 19 the early days of the pandemic, whether it will happen 20 again, and how to fix Federal Orders as a result. I'm 21 sure many other cheese plants can relate to what happened 22 at our cheese plant on March 13, 2020. We received an 23 order for $0 worth of cheese from our distributor, after 24 seeing a stable and growing market over the past five 25 years. 26 We live two hours from a major metro area. And 27 basically, we use our distributor to cover our payroll and 28 other sales to cover our other costs. The other costs and 5628 1 employees on payroll remain part of our business, but 2 suddenly our revenue was gone. 3 We started a delivery service 24 hours later, 4 using social media to get the word out. Over the next 5 three months I distributed cheese in empty parking lots of 6 closed stores to some of our new biggest fans. Can 7 everyone pivot as quickly as a small company like ours? I 8 would argue that they could if they tried, especially if 9 they needed to. 10 Anything we do in this hearing is supposed to 11 affect minimum pricing and the formulas and data behind 12 them. I wish more would go after the maximum rather than 13 charts looking forward with supply and demand on inelastic 14 products, take a $2 pound of cheese and turn it into an 15 experience, like Starbucks and others took a $0.50 cup of 16 coffee and turned it into a morning drive-through lineup 17 that sticks out into traffic. 18 We have heard testimony here today that many of -- 19 this was written previously -- that many of the largest 20 plants are more than covered by the Make Allowance. One 21 area where FMMOs do affect even small farmstead cheese 22 companies like ours is on grants and loans. Any drop in 23 the official FMMO minimum price for our region can mean 24 less opportunities for federal or private grants and loans 25 if a farm is borrowing or matching against milk as an 26 ongoing asset. 27 And finally, I will give my experience as a state 28 trade association executive director since 2017. 5629 1 Although the Minnesota Milk Producers Association 2 is not focused on federal policy, we are focused on our 3 state's farmers. So as the calls come, we answer and make 4 impact with our contacts within the federal government as 5 appropriate. 6 In 2018 we began talking in our boardroom about 7 the block barrel spread and what we could do about it. In 8 2020, National Milk Producers Federation suggested 9 legislation to implement supply management, and we 10 suggested the Dairy CORE (COronavirus REcovery) program, 11 similar to what USDA ultimately rolled out. Minnesota 12 Milk and Edge have long stood against supply management. 13 I cannot imagine Redhead Creamery selling 14 500 units of cheese curds and then next week, due to, 15 quote, national demand, learning we need to cut back by 5% 16 and sell less of our sold-out cheese. But this proposal 17 keeps rearing its head every few years based on the 18 advantages and disadvantages of certain processors, 19 cooperatives, and regions of the country. 20 In 2021, our organizations helped create Class III 21 Plus in response to quick action asked for by NMPF at the 22 time. For two years we had conversations with economists 23 about the usefulness of Class III Plus, and we have 24 approved upon it with carry-forward provisions. While no 25 pricing schema setting a price for perishable product can 26 be perfect, we should use the data that most sets the 27 price for that commodity. 28 Class III milk futures carry more liquidity than 5630 1 Class IV and, therefore, are better represented to set the 2 price. As I understand it, there's not an inherent 3 advantage for a cheese producer or disadvantage for other 4 manufacturers. 5 Most groups partnering with dairy farmers look for 6 ways to smooth out the peaks and valleys of milk prices. 7 Smoothing out the peaks and valleys invigorates demand 8 and, therefore, creates more orderly marketing. 9 At Redhead Creamy, LLC, our customers appreciate a 10 steady price. It would disadvantage both us and the 11 customers if we raised and lowered with every change in 12 the market, or our costs, week by week. Our customers 13 want to see the same price as last week. The average-of 14 was an attempt to do this, but, of course, no 15 organizations here are advocating for it to stay. 16 Class III Plus gets us back to the benefits of the 17 MW price series as we focus on the constantly traded 18 commodity. As testimony has shown, the MW price series 19 went out due to a lack of data, a lack of Grade B milk in 20 the market. We did not throw it out because basing the 21 price primarily on the vigorous cheese market of the Upper 22 Midwest was hurting anyone else around the country. 23 My most important role as executive director of 24 Minnesota Milk and managing director of Edge is to solve 25 problems for farmers. I have been in this role since 26 2016, and it is clear the industry has changed since the 27 year 2000. 28 One of the biggest changes I believe AMS needs to 5631 1 consider is the full structure of our dairy processing 2 plants. Processors are, I would suggest, logically and 3 wisely lining up their supply with their demand. We 4 operated for about 100 years where there was nearly always 5 another market to which you could bring your milk. 6 Unfortunately, the past eight years have proven this 7 expectation no longer true, and USDA AMS should take this 8 into account. 9 As we think about minimum pricing, constantly full 10 plants means prices will stay closer to minimum pricing. 11 While many of us work in our local geographic areas to 12 increase demand and plant capacity, the dairy plant of the 13 future is more likely to ensure the cow's milk production 14 lines up with the dairy plant needs. 15 This creates a system where I have received the 16 following calls, paraphrasing, mostly over the past four 17 years: 18 1. I have 15 days to find a new milk market. My 19 private processor just sent me a letter, and I have 20 nowhere to go. 21 2. I have 30 days to find a new milk market. My 22 private processor lost their market, and I have nowhere to 23 go. 24 3. My cooperative has let a farm go for animal 25 welfare practices, which they seemed to ignore for several 26 years. That farm is now out of business. 27 4. My cooperative is insisting that my hint that 28 I might shop around for another milk buyer was my notice 5632 1 that I was leaving the cooperative. Effectively, they 2 dropped me 20 days after I explained I would be looking 3 around, but luckily, I was talking to my milk hauler and 4 found out that he was done picking me up March 1st. I 5 hope I can get on another truck in the next ten days. 6 5. I think my plant has listed large negative 7 PPDs on my milk check without actually pooling their milk. 8 6. My cooperative gave me a contract that states 9 I can no longer speak publicly about my milk -- that 10 should say milk price. Any disparagement of the 11 cooperative results in my departure, and there's no due 12 process to fight these. I have no options but to sign the 13 contract because I have nowhere to go. 14 7. My cooperative is paying about $3 per 15 hundredweight behind my neighbors, but although I want to 16 ask questions and make a change, I believe calling my 17 cooperative board member could result in my immediate 18 dismissal. 19 8. I have almost all my feed up for the year, but 20 my cooperative just sent me a letter that they will be 21 tripling hauling costs to true cost of hauling with 22 15 days notice. I'm so far away from a plant, along with 23 other farmers in my area, that I need to be done milking 24 cows. How could they give their own cooperative members 25 such little notice? 26 9. My cooperative thinks my milk had foreign 27 matter, but both myself and my milk hauler believe it was 28 just a gasket that had made its way into the milk tank. 5633 1 The cooperative immediately suspended me with no 2 opportunity for appeal. 3 10. My private processor, a fluid milk bottler, 4 called last night and said they don't need my milk. I 5 have found a depooled cheese plant instead. What are the 6 protections for me getting paid? 7 About half of these calls were in 2023, and I hope 8 AMS considers it is an extremely difficult time for 9 farmers to speak out against their milk buyer. 10 Relationships are different in any situation, but I 11 believe the above situations were not supposed to exist 12 under a Federal Milk Marketing order scheme and represent 13 disorderly marketing. 14 Further, as cooperative board members often have 15 high value benefits such as company health insurance, many 16 would be incentivized to "work for" their cooperative 17 whenever needed. I'm not saying any words on stage were 18 pitched from a dishonest state, but rather we should not 19 expect to hear from all the voices that should be 20 represented with the current state of the market in 2023. 21 These situations put the integrity of both the FMMO system 22 and cooperative system at risk, and these are both systems 23 I believe should be preserved. 24 To reiterate my support for proposals, our farm 25 supports Proposal 1 with the logical outgrowth to also 26 update fat submitted by Edge Dairy Farmer Cooperative for 27 the simple fact that butterfat percentages, in even 28 Holstein herds like ours, have grown to levels not thought 5634 1 possible 50 years ago with genetics, nutrition, and demand 2 provided by the butterfat. 3 Section 2: Our cooperative also works extensively 4 with barrels. However, we worry about their overinfluence 5 of the market. Therefore, we support Proposal 3 with the 6 logical outgrowth proposal to use a weighted average of 7 blocks and barrels submitted by Edge Dairy Farmer 8 Cooperative. 9 It is difficult for us to support any of the 10 proposals related to Class III and IV formula factors on 11 their own or as part of a package. We know that our farm 12 and cheese operation are always looking for efficiencies, 13 but receive no "Make Allowance" for milk production. Yet, 14 when it comes to the higher costs in the processing plant, 15 farms feel the same labor, fuel, and disposables impact on 16 a percentage basis. 17 With such a lag in Make Allowance updates and no 18 call for it in over 20 years, 15-and-a-half-month delays, 19 and slow step-ups over a handful of years would be the 20 best way to ensure more farms stay in business and 21 everyone can plan and manage their risk for the future, no 22 matter what the level will be. 23 We support Proposal 16, Class III Plus as proposed 24 by Edge Dairy Farmer Cooperative. We should note -- oh, 25 you can strike that last line. 26 THE COURT: All right. Tell us what you would 27 strike? 28 THE WITNESS: From "we should note that" to the 5635 1 end of that non-sentence. 2 Finally, I would just like to thank, on behalf of 3 my farm, the Secretary and USDA for allowing us to testify 4 at the hearing. 5 THE COURT: I'd like you to read that last 6 sentence. 7 THE WITNESS: Jer-Lindy Farms, LLC, thanks 8 Secretary Vilsack and the Department for the opportunity 9 to testify at the hearing. I am fortunate to have been 10 involved in milk pricing over the past 15 years and see 11 the evolution of farming, risk management, and processing 12 opportunity for farms like mine. 13 DR. BOZIC: Marin Bozic for Edge Dairy Farmer 14 Cooperative. 15 Your Honor, we would make our witness available 16 for cross-examination. 17 CROSS-EXAMINATION 18 BY DR. CRYAN: 19 Q. Good morning. I am Roger Cryan with the American 20 Farm Bureau Federation. 21 Hello, Lucas. 22 A. Good morning, Roger. 23 Q. You're a Farm Bureau member yourself; is that 24 correct? 25 A. Yes, sir. Long time. 26 Q. I appreciate you coming to the forum in October, 27 but I have some questions about your representation of 28 that event. 5636 1 You say here that only six farmers from the Upper 2 Midwest represented over 40% of the milk. 3 What -- what states make up 40% of the milk? 4 A. That's a great question, Dr. Cryan. I did the 5 math writing the testimony, and I don't have that at my 6 disposal right now. 7 Q. Do Minnesota and Wisconsin by themselves make up 8 40% of the milk? 9 A. No, sir. 10 Q. Would you disagree if I said there were at least 11 35 farmers there from the Midwest, including Illinois, 12 Indiana, Iowa, Kansas, Minnesota, Missouri, Ohio, and 13 Wisconsin? 14 A. Not if you include all of those states. 15 Q. Okay. How many states do you have to include to 16 get to 40% of the milk? 17 A. That's, again, a question I don't have -- or an 18 answer I don't have at my disposal. 19 Q. It's not just Minnesota and Wisconsin? 20 A. No, sir. 21 Q. Okay. Would you say that -- I appreciate that you 22 brought another idea, the Class III Plus to that meeting. 23 Do you believe that most of the farmers, most of 24 the people there were aware of that proposal before that 25 meeting? 26 A. I don't believe they were. 27 Q. Do you believe that the outcome of the program was 28 essentially an opportunity for some discussion and not 5637 1 ultimately reflection of what -- what farmers and other 2 folks were already bringing to that meeting and the ideas 3 they already had in their conception? 4 A. Yes. But this testimony was in reference to 5 previous answer in cross-examination that there were no 6 other issues discussed other than the higher-of. So I 7 just -- I just wanted to make reference that there were 8 certainly other issues brought forward as viable 9 solutions. 10 Q. Your last sentence in that paragraph -- your 11 paragraphs about that event say it is -- to say it was 12 unanimous -- that is the higher-of -- was unanimous would 13 be disingenuous. 14 Did we ever say it was unanimous? 15 A. That's what I took from the cross-examination 16 testimony. I don't believe you or -- or Mr. Munch said 17 that. 18 Q. If I told you that we said that was the consensus, 19 would you agree with that? 20 A. Depends on your definition of consensus. Some 21 people believe -- 22 Q. Would you just -- I'm sorry, finish your answer. 23 A. Some people believe consensus and unanimous mean 24 the same thing. 25 Q. Do you believe that? 26 A. I would need to look at a definition. 27 Q. Okay. And just to clarify, do you support 28 Proposal 17? 5638 1 A. Over other options, I do. 2 Q. So are you testifying -- your testimony right now 3 is on behalf of Jer-Lindy Farms; is that right? 4 A. Yes, sir. 5 Q. You are not testifying right now on behalf of 6 Edge? 7 A. Yes, sir. 8 Q. Yes, you are, or you aren't? 9 Are you testifying right now on behalf of Edge? 10 A. I'm testifying on behalf of Jer-Lindy Farms. 11 Q. And you are not testifying on behalf of Edge right 12 now? 13 A. That's correct. 14 Q. Are you testifying on behalf of Minnesota Milk 15 Producers right now? 16 A. No, sir. 17 Q. Okay. 18 DR. CRYAN: Thank you very much. 19 CROSS-EXAMINATION 20 BY MS. HANCOCK: 21 Q. Good morning, Mr. Sjostrom. Can you hear me okay? 22 A. Yes. 23 Q. Okay. 24 THE COURT: Name, please. 25 MS. HANCOCK: Nicole Hancock on behalf of National 26 Milk. 27 BY MS. HANCOCK: 28 Q. On page 1 -- 5639 1 MS. HANCOCK: Did we give this an exhibit number, 2 262? 3 THE COURT: Yes. Correct. 4 MS. HANCOCK: Okay. 5 BY MS. HANCOCK: 6 Q. On page 1 of Exhibit 262 you identify that you're 7 one of four owners of Jer-Lindy Farms, and that's a dairy 8 farm operation that produces milk? 9 A. Yes. 10 Q. And where do you -- you sell some of that milk to 11 your own creamery, but do you -- where do you sell the 12 rest of it? 13 A. Bongards Premium Cheese. 14 Q. So you have an ownership interest in two different 15 processors? 16 A. Yes. 17 Q. One of them is Bongards that you are one of 18 multiple owners with? 19 A. Yes, about 200. 20 Q. Okay. And what products do you produce with 21 Bongards Premium Cheese? 22 A. We make raw milk, and they turn it into cheese 23 products and whey products. 24 Q. When you say "we make raw milk," do you mean 25 Jer-Lindy Farms delivers raw milk and then you turn it 26 into cheese and whey? 27 A. Correct. Yes. 28 Q. Okay. And then -- okay. 5640 1 And then Redhead Creamery, you make cheese and -- 2 out of that facility? 3 A. Yes. And now whey also. 4 THE COURT: I'm not sure "that" facility is 5 identified. 6 BY MS. HANCOCK: 7 Q. Redhead Creamery, LLC, is that the other? 8 A. Yes. 9 THE COURT: Out of which you also make? 10 THE WITNESS: Cheese and whey. 11 THE COURT: All right. Thank you. 12 BY MS. HANCOCK: 13 Q. On page 4 of your testimony under the title 14 "Experience of the Federal Milk Marketing Orders from a 15 farmstead creamery's point of view," if you want to track 16 along with me, and you said, "As a creamery taking just 17 about 12% of our farm's production per year." 18 Which creamery are you referring to there? 19 A. The Redhead Creamery, LLC, that our farm ownership 20 also has identical ownership. 21 Q. Okay. And so does the remaining 88% go to 22 Bongards? 23 A. Approximately, yes. 24 Q. Okay. And you say at the bottom of that 25 paragraph, if USDA does a mandatory survey, you would like 26 them not to include your creamery because you did not 27 believe that it's representative of what would be surveyed 28 across the nation; is that fair? 5641 1 A. Yes. I believe that plants like ours that are 2 focused on specialty and definitely not focused on 3 producing those figures that are within the Make Allowance 4 calculations would have very distorted costs. 5 Q. Okay. Do you think that Bongards should be 6 surveyed? 7 A. I would need to know where they fit on the 8 efficiency scale. 9 Q. Okay. So do you think only the most efficient 10 plants should be surveyed for Make Allowances? 11 A. I believe it would be hard to know where the most 12 efficient line is unless you have a mandatory survey. 13 Q. Okay. And so is it fair to say then that your 14 position is you would like to have a mandatory cost 15 survey, but you would like someone with market knowledge 16 to apply some subjectivity in analyzing that data to 17 determine what the reasonable amount of a Make Allowance 18 would be? 19 A. For the most efficient plants, yes, I would agree. 20 Q. Okay. And on page 6 going into 7 of your 21 testimony, you have a list of some feedback that you have 22 received from different dairy producers; is that right? 23 A. Yes. 24 Q. And is it fair to characterize the comments that 25 you have received here as stating that the dairy farmers, 26 that their margins are so thin and the financial pressures 27 are so severe that they just have no more capacity to 28 absorb the issues that are being thrown at them? 5642 1 A. That -- that may be part of it. However, at -- 2 today, and where I sit receiving calls from mostly 3 Minnesota producers, the financial side, milk price-wise, 4 matters less than the capacity side. There is -- there is 5 a chance we could have high milk prices and full plants, 6 which is less likely. But if that were to occur and you 7 still were unable to move or change plants or be locked 8 into your supply contract, you still could feel the 9 pressure from your milk buyer, unlike years past. 10 So I think the financial considerations are 11 certainly important and relevant. However, it's more of 12 being stuck where you are, you may -- you may be paid 13 great financially, but politically, in the broadest sense 14 of the word, disagree with something that your cooperative 15 or your private processor has done. And right now you 16 don't have the opportunity to disassociate yourself unless 17 you shut down your farm. 18 Q. Okay. Somewhat you are locked into the buyer that 19 you have available to you? 20 A. Correct. 21 Q. And that's just based on proximity to plants and 22 the location of where you're at? 23 A. Yes. 24 Q. On that same page, on page 6, I'm going to move 25 back up, under the title that started on -- or the header 26 that started on the prior page, "Experience of the Federal 27 Milk Marketing Orders from a state trade association point 28 of view," in this section, this is you putting on your hat 5643 1 working for Minnesota Milk Producers Association; is that 2 right? 3 A. Correct. 4 Q. And in that section you are stating that Class III 5 prices would "get us back to the benefits of the MW price 6 series, as we focus on the constantly-traded commodity." 7 Wondering if you could explain that a little bit 8 more. 9 A. Similar to the MW system where we were basing all 10 of our pricing off of the commodity Class B demand for 11 milk that by and large was going into cheese production, 12 with Class III as a chart -- I don't have yesterday -- I 13 don't have in my mind what it is, but as a chart showed 14 yesterday, Class III is by far the most liquid product you 15 can find in the market -- sorry for the pun -- but liquid 16 being the one most traded. 17 And so to me, that makes sense to base our -- our 18 discussion in this section, the base class -- base skim 19 Class I price on the commodity that is traded the most and 20 most liquid in the market. 21 Q. And Class IV is -- is traded every day. You are 22 just saying not to the same volume levels as Class III. 23 A. Correct. Class I and IV, as I understand it, 24 those plants are far more likely to turn on and off. 25 Q. Okay. And you would agree with me that depending 26 on the same location, that there are different markets 27 that have a different percentage of use of where that milk 28 is going and how it's used? 5644 1 A. Yes. 2 Q. Some -- some markets are more Class I heavy, some 3 markets are more Class III or Class IV heavy? 4 A. That's true. 5 Q. Okay. And if you -- I don't know if you know this 6 or not, but does the MW price to the farms increase the 7 full amount when cheese prices went up immediately? 8 Meaning, were they reactive immediately? 9 A. I think -- I don't know. 10 Q. Does that mean you wouldn't know if when the 11 prices went down, if the MW price series was able to react 12 immediately to that as well? 13 A. I believe we used the system until it expired 14 because it was such a great, again, liquid asset, so to 15 speak, for our industry. 16 Q. Okay. And -- and -- okay. 17 MS. HANCOCK: That's all I have. Thank you so 18 much for your time. 19 CROSS-EXAMINATION 20 BY MR. MILTNER: 21 Q. Good morning. 22 A. Good morning. 23 Q. Ryan Miltner representing Select Milk Producers. 24 I'd like to ask you some questions about some of 25 the statements you have received, and you set those out on 26 pages 6 and 7 of your statement. And you suggest that 27 those situations represent disorderly marketing. 28 A. Yes, sir. 5645 1 Q. Can you explain why you reached that conclusion? 2 A. I -- I believe that if we are going to base -- I 3 believe the rules of the Federal Order system were set up 4 at a time where we did not think these things would 5 happen. And so my fear is that we have created Federal 6 Order rules at a time when this wouldn't happen, and 7 therefore, with these things happening, we are 8 inadvertently, with Federal Order rules, creating 9 disorderly marketing. 10 These -- these situations I don't think are to be 11 expected by today's Federal Order rules, and therefore, we 12 should know that they are impacting farmers' ability to 13 market their milk. 14 Q. So I want to just quickly look at each of the 15 statements you have set forth and ask what you think a 16 Federal Order fix might be for that. 17 So with your first statement in the situation, I 18 assume that the farmer had a contract with a private 19 processor. 20 A. I don't know if -- sorry. 21 Q. No, no. Go ahead. 22 A. I don't know if there was a contract. 23 Q. Okay. Do -- do most producers that ship directly 24 to a processor that are part of either Edge or Minnesota 25 Milk Producers have a written contract? 26 A. Did you say "private" or did you say "all"? 27 Q. I think I said private. 28 A. I -- I would say I don't know if the answer is 5646 1 most, but I would say a large percentage have no contract. 2 Q. Are you suggesting that the Federal Order needs to 3 have a requirement that there be a written contract 4 between an independent producer and its milk buyer? 5 A. No. My suggestion in this -- in all ten of these 6 statements is to ensure the Federal Order keep as much 7 power and leverage in the hands of the farmer. 8 Q. I want to talk about statement three, and in this 9 example it's a cooperative releasing a member farm, 10 correct? 11 A. Yes. 12 Q. Do you know if -- do you know if in this instance 13 this is a marketing cooperative or a service cooperative? 14 A. In this instance, "service" meaning they are 15 manufacturer? 16 Q. Well, service meaning that they don't actually 17 market the milk of the producer. 18 A. I can tell you it was a marketing and 19 manufacturing cooperative. 20 Q. Do you know if in that instance the member had an 21 a written marketing agreement with its cooperative? 22 A. I know that cooperative has agreements, but I also 23 know that not all members uniformly were given agreements. 24 Q. You understand that producers own their 25 cooperatives, correct? 26 A. Very much so. 27 Q. And that producers have a right to elect the 28 members of their Board of Directors, correct? 5647 1 A. Yes. However, as I stated in some of the final 2 statements there, I think that power dynamic has changed. 3 Where, if this is your sole source of revenue, that 4 election process, that feedback loop may be unfortunately 5 broken, hopefully temporarily. 6 Q. Is that specific to cooperatives you have 7 experience with in Minnesota? 8 A. I don't -- yeah. I don't believe this is a 9 universal example by any means. 10 Q. Are you suggesting the Federal Order include 11 provisions that would apply to all cooperatives and their 12 contracts with their members? 13 A. Again, my hope was to ask AMS to keep as much 14 power in the farmers' hands as possible due to these 15 situations. 16 Q. Do you understand that each state has statutes 17 which govern the operation of cooperative associations? 18 A. I do. 19 Q. And do you understand that those are not uniform 20 across the country? 21 A. I do. 22 Q. Are you aware if Minnesota or Wisconsin have any 23 provisions in their state laws addressing any of the 24 concerns you outlined with respect to cooperatives? 25 A. What are my concerns? 26 Q. Well, you state that a farm was let go for animal 27 welfare practices, and they seemed to ignore those 28 practices for several years. So a concern like that. 5648 1 A. No. 2 Q. How about a concern that a cooperative terminates 3 a member for exploring business opportunities? 4 A. Was your question Minnesota specifically? 5 Q. Yes. 6 A. I believe -- I believe there are laws related to 7 competition. However, I don't know where the co-op law 8 fits into that. 9 Q. Do you know if the producer in item 4, if their 10 marketing agreement was expiring on or about this time? 11 A. This was -- this was an example where the contract 12 had not been signed for several years and that this visit 13 spurred re-upping of the contract. 14 Q. When you say the contract was not signed, was it 15 not signed by the producer or by the cooperative? 16 A. As I understand it, some cooperatives ask their 17 members to sign yearly agreements, but they are not always 18 followed to the date. If you sign it on September 26th, 19 they would want you to sign it next year on 20 September 26th, and that had not been happening for 21 various reasons. 22 Q. Did that producer seek legal counsel to enforce 23 their contractual rights? 24 A. Luckily with about three days to spare, they found 25 another plant. 26 Q. With regard to your statement number 6, the 27 cooperative -- my cooperative gave me a contract that 28 states I can no longer speak publicly about my milk. 5649 1 A. Price. 2 Q. It doesn't say price? 3 A. I added that in testimony. 4 Q. Got it. 5 Any disparagement of the cooperative results in my 6 departure, and there's no due process to fight these. 7 You're aware that cooperatives have, in most 8 instances, bylaws that outline the rights of members? 9 A. Yes. And I did not say in any of these ten things 10 anything was illegal. 11 Q. Do you know if the bylaws of the cooperatives you 12 are referring to outline a procedure for the expulsion or 13 termination of a membership? 14 A. We asked for several bylaws but were not given 15 them. 16 Q. Did the producer -- did you ask the producer for 17 these bylaws? 18 A. This is a specific case where the producer was 19 afraid to ask their board member for the bylaws. 20 Q. They were a member of the cooperative and did not 21 possess the bylaws? 22 A. Yes, sir. 23 Q. And you think that's an issue that the Federal 24 Order would want to address? 25 A. I think the Federal Order, especially in terms of 26 Make Allowances, but in every -- every other opportunity 27 we have here should keep as much power in the hands of the 28 farmer as possible. 5650 1 Q. Okay. In number 7, you -- a situation where a 2 producer wants to ask about their pay price and whether 3 it's competitive, and they think that calling the co-op 4 could result in their dismissal. 5 Is that -- did that producer, in fact, ask the 6 cooperative about the pay price? 7 A. I don't know. 8 Q. When they say calling the cooperative, you stated 9 it was to call the cooperative board member. 10 Do you know if that -- that producer had other 11 people within the cooperative outside of the board member 12 to ask about their pay price? 13 A. When I get these calls, unless there's something 14 outside the law or something I can do, I'm not a milk 15 buyer or seller, I just share information. It was my 16 suggestion that they call their co-op board member. They 17 had talked to their field representative already. 18 Q. Does Minnesota Milk Producers serve as an advocate 19 for its members in helping them resolve these types of 20 issues? 21 A. Yes. 22 Q. Did you reach out to the -- did Minnesota Milk 23 Producers reach out to the cooperative to ask for 24 information on this point? 25 A. I have. 26 Q. And did you receive any information from the 27 cooperative? 28 A. No. 5651 1 Q. Did you have an opportunity to look at the 2 members' marketing and membership agreement to figure out 3 what rights that the producer might have under those 4 documents? 5 A. Yes. 6 Q. And did those documents provide the producer a 7 right to this information? 8 A. Not explicitly. 9 Q. Are you aware whether the governing cooperative 10 law provided a member a right to that information or not? 11 A. I don't know. 12 Q. With respect to the various situations where a 13 producer was terminated from a plant or their milk was no 14 longer picked up, do you know if those events breached any 15 agreement between the producer and the handler? 16 A. The situation number 4 with the lapsed contract, I 17 think, in spirit, would have done that, since the contract 18 was lapsed and not re-signed. But legally I don't -- I 19 don't know how that would be ruled. 20 Q. Where I think this is -- this would be item one 21 and item two, and ten, do you know if the producer in 22 those three instances had a contract that entitled them 23 the right to supply those plants that was violated? 24 A. I believe in all three situations -- I believe in 25 all three situations -- I know for sure in at least two of 26 them, they bought and sold milk on a handshake agreement. 27 Like others are referencing legislation, I have personally 28 and Edge Dairy Farmer Cooperative has been working on 5652 1 legislation to work so that farmers would have written 2 contracts. That would solve this. But again, not asking 3 within this hearing or within the Federal Milk Marketing 4 Order. 5 Q. Thank you. 6 Looking back at page 3 of your statement, and here 7 you are talking about risk management. 8 With respect to the proposals in this hearing, 9 which ones do you think should be delayed in 10 implementation for purposes of risk management? 11 A. I would have a difficult time naming the 12 proposals, however, anything that would interact with milk 13 pricing should be delayed. 14 Q. So any proposal that changes the calculation of a 15 component or class price should be delayed? 16 A. I think that's accurate. 17 Q. If those proposals were not delayed, if they took 18 effect right away, how would that negatively impact your 19 farms' existing risk management? 20 A. Yes. First it would -- I think it would take away 21 options, especially in DRP, as I think we have heard 22 previously could be frozen. And CME, I think it would be 23 hard for both sides to come to agreement on pricing, and 24 so therefore it limits options for us as we are in a major 25 building period right now and we are trying to fix as many 26 unknowns as we can because we know we will have many other 27 unknowns, and so, for us, risk management is extremely 28 important right now. 5653 1 Q. Would it affect any contracts that you have in 2 place right now? 3 A. No. 4 Q. If it were -- let's just say it's going to take 5 effect on October 1st of 2025. Let's go 2024. Let's not 6 go out that far. And you have risk management contracts 7 in place on September 30th. 8 Would you expect that those contracts in place on 9 September 30th, would not be honored according to their 10 terms? 11 A. I'm certainly not an expert on that. I don't 12 know. 13 Q. Okay. Thank you. 14 MR. MILTNER: That's all I have. 15 THE WITNESS: Thank you. 16 THE COURT: It's 11:06. Let's get another 17 ten-minute break in. We'll be breaking for lunch, but 18 please be back and ready to go at 11:16. 19 (An off-the-record discussion took place.) 20 THE COURT: We're back on record. It is 11:18. 21 Ms. Hancock. 22 MS. HANCOCK: Thank you. 23 CROSS-EXAMINATION 24 BY MS. HANCOCK: 25 Q. You just mentioned something with Mr. Miltner that 26 prompted another question for me. 27 I think that you said that, you know, as a dairy 28 farmer you are not marketing any milk. Remember talking 5654 1 with him about that a minute ago? 2 A. Well, can you clarify what you said or what you 3 think I said? 4 Q. Just that as a dairy farmer you are not marketing 5 any milk? 6 A. Oh, on the board, on the forward contracting, you 7 are correct, right now. 8 Q. Okay. And then you serve as the managing director 9 for Edge Dairy Cooperative? 10 A. Yes. 11 Q. How long have you served in that role? 12 A. Since November of last year. 13 Q. Of 2022? 14 A. Yes. 15 Q. Can you tell me what Edge as a cooperative does? 16 A. Yes. We are a verification cooperative. We 17 represent members who ship to private processors. 18 Q. Okay. And so does Edge buy any milk? 19 A. No. 20 Q. Does Edge sell any milk? 21 A. No. 22 Q. When you say it's a verification cooperative, what 23 does it verify? 24 A. I don't have the statute in front of me, but 25 through federal law or rule, you -- if you do not ship to 26 a cooperative, you must have your milk verified either by 27 USDA at the testing lab or by a verification cooperative 28 such as ourselves. 5655 1 Q. Does -- and does Edge, as a cooperative, provide 2 testing services for dairy farmers? 3 A. We verify the testing services. 4 Q. Okay. So -- and then the dairy farmers pay Edge 5 for that service that it provides? 6 A. Yes. 7 Q. And so is that the totality of what Edge does is 8 provide that verification of the testing services? 9 A. Our three services that we provide are the 10 verification services, bulk tank calibrations, and then 11 political representation. 12 Q. Okay. And so when Edge -- I think that you or 13 maybe Dr. Bozic or someone had said something with respect 14 to the size of Edge being one of the largest cooperatives. 15 Is that -- do you know what I'm talking about? Is 16 that a way that you represent yourself as a Edge 17 cooperative? 18 A. Yes. 19 Q. But when you represent that, is that based on the 20 number of members that you provide those services to? 21 A. We have about 800 members. We say that we're the 22 third largest in terms of milk production cooperative. 23 Q. Okay. But you don't actually engage in any sales 24 of milk production, though, right? 25 A. No, but we certainly care about our 800 farmers. 26 Q. Okay. Yeah. 27 And do those farmers belong to other cooperatives 28 as well, in part? 5656 1 A. It's -- it's possible, but it would be a very 2 small percentage. 3 Q. Okay. And so when you say that you're a 4 cooperative, it's under the verification cooperative 5 designation only? 6 A. Today, yes. We have the ability to do whatever 7 our Board of Directors directs us to do. 8 Q. Okay. 9 MS. HANCOCK: Thank you so much. 10 DR. VITALIANO: Your Honor, Peter Vitaliano with 11 National Milk Producers Federation. 12 CROSS-EXAMINATION 13 BY DR. VITALIANO: 14 Q. Good morning, Mr. Sjostrom. 15 A. Good morning. 16 Q. On page 5 of your testimony you have a paragraph a 17 little more than halfway down: "In 2018, we began talking 18 in our boardroom." And from the context it looks like you 19 are speaking on behalf of Minnesota Milk Producers 20 Association at that time. You're talking about you 21 discussed the block-barrel spread, what you could do about 22 it. 23 Then you mention, "In 2020, National Milk 24 suggested legislation to implement supply management, and 25 we" -- I guess that's Minnesota Milk -- suggested CORE, 26 Dairy CORE. And then you go on to refer to Redlands 27 Creamery learning we needed to cut back by 5% and sold -- 28 sell less of our sold-out cheese. 5657 1 Could you explain a little bit more of the point 2 you were trying to make in that paragraph that had 3 references to a number of different things? 4 A. Yes. I think the point was just that although 5 we're sitting here in 2023, I -- we have taken notice of 6 things that would have impact Federal Orders over the past 7 65 years based on this chronology. 8 Q. Can you say more specifically what program would 9 have required Redlands Creamery to sell 5% less of your 10 cheese? 11 A. Well, if there was any national -- any national 12 supply management program implemented, and assuming there 13 were across-the-board cuts as has been proposed by many 14 proponents many times, in theory, our farm would need to 15 cut back, our cooperative would need to cut back, and as a 16 result, since our cheese plant is directly tied to our 17 farm, the cheese plant may need to cut back just due to a 18 lack of supply. 19 Q. But you're not -- do you mean to suggest then -- 20 you don't mean to suggest then that the creamery itself 21 would have a, you know, 5% quota cutback or something? 22 A. As I -- sorry to interrupt. 23 As I mentioned in previous testimony, I don't 24 believe -- or in previous questions -- I don't believe 25 there's any limit on the amount of product that need to be 26 produced. 27 Q. Okay. 28 DR. VITALIANO: Your Honor, I would like to offer 5658 1 a correction in the record to this statement that National 2 Milk Producers Federation suggested legislation to 3 implement supply management. 4 At the beginning of 2020 -- early 2020, in the 5 early days of the pandemic when the industry was very 6 disrupted, National Milk and the International Dairy Foods 7 Association presented a joint COVID crisis plan to USDA -- 8 did not suggest legislation -- that includes, urged the 9 USDA to make use of all available tools to deal with the 10 crisis, and that included a producer market balancing 11 assistance program that would have been implemented by 12 USDA, which USDA did not follow up on. But we did not, 13 National Milk did not suggest legislation. 14 MR. ENGLISH: Is there a question there somewhere? 15 THE COURT: Yes, the word legislation suggests 16 something that a legislature like a Congress might do? 17 DR. VITALIANO: Yes. 18 MR. ENGLISH: But was there a question? 19 THE COURT: Well, I just want to make sure I 20 understand what he's -- 21 (Court Reporter clarification.) 22 THE COURT: I can't believe how guilty I was. 23 Mr. English, come back. Finish your thought. 24 MR. ENGLISH: I am sure it was not you, your 25 Honor, I am sure it was me -- or I. 26 I -- I did not hear a question there. I heard a 27 statement about a representation, which I think is fine, 28 but it is more appropriate to be made by someone who I 5659 1 expect to testify at least once more at this hearing. And 2 so unless there's going to be a question to get this 3 witness to agree with that, I don't know what the purpose 4 of that statement is. 5 I understand why you are trying to do it. I just 6 don't think it's appropriate unless there is a question or 7 if you want to testify about it. 8 THE COURT: Understood. 9 Now that you have laid the background, is your -- 10 is your question to the witness as to whether he is 11 certain that the word "legislation" is the proper 12 characterization? 13 DR. VITALIANO: Yes, that's an excellent way to -- 14 to suggest that. While I'm up here, rather than taking 15 the time to go on the stand again, I figured I would take 16 the chance. 17 BY DR. VITALIANO: 18 Q. Do you -- do you accept the fact that your use of 19 the term "legislation" is -- was misstated? 20 A. Mr. Vitaliano, I -- I don't know what National 21 Milk wanted to do or is capable of doing. What you 22 mentioned may or may not have been in a press release or 23 public statement. I don't know if -- if -- if they would 24 have pursued legislation, if that was possible. I would 25 be happy to add "or regulation" after the word 26 legislation. 27 DR. VITALIANO: Okay. 28 THE COURT: Let's do that, and then you decide 5660 1 whether you want to testify. 2 DR. VITALIANO: Okay. No more questions. 3 THE COURT: Well, let me ask, before Agricultural 4 Marketing Service asks its questions, should we address 5 now the changes to your statement that we may want to have 6 on the record copy? 7 THE WITNESS: Yes. 8 THE COURT: Let's -- let's do that. 9 All right. Let's -- so let's start on page 2 -- 10 let's start on page 3. Page 3, the only one I noted that 11 actually would require a change on the document was in the 12 fourth full paragraph that begins "long story short," the 13 next line, the change that you suggested would be that 14 "on-farm" would be changed to "off-farm." 15 Do you want that change made in your record copy 16 of your statement? 17 THE WITNESS: Yeah. 18 And alternatively, your Honor, we could provide 19 updated written testimony. Is that an easier -- 20 THE COURT: No. 21 THE WITNESS: No. I was just kidding. Let's 22 change -- let's change "on" to "off." 23 THE COURT: All right. Let's go ahead and do that 24 now. Temporarily striking O-N. 25 USDA REPRESENTATIVE: Okay. What page? 26 THE COURT: Oh, we're page 3 of Exhibit 262. And 27 we're striking O-N, and we're showing in the margin that 28 what was meant was O-F-F. 5661 1 USDA REPRESENTATIVE: In which paragraph? 2 THE COURT: The paragraph starts "long story 3 short." It's the third full paragraph. 4 All right. So that line would read, "having an 5 off-farm job." Okay. 6 Then the next place -- some of your deviation from 7 your testimony I don't think requires any kind of a 8 document change, but I would suggest on page 4, the -- 9 one, two, three -- fourth full paragraph begins, "I 10 attended the October 2022," at the beginning of that 11 paragraph. Third line down, the word "represented" was 12 changed to "representing." 13 Is that correct? 14 THE WITNESS: Sure. Yes. 15 THE COURT: So we just strike the E-D and write in 16 instead I-N-G, so that that line reads, "farmers from the 17 Upper Midwest states representing over 40% of the milk and 18 farms in the country." 19 And then the one we just made, we're on page 5, 20 and there's a heading in the middle of that page that 21 says, "Experience of FMMOs from a state trade association 22 point of view," go to the second paragraph of that 23 section. That paragraph begins, "In 2018," comma, go to 24 the next line down and find the word "legislation" and 25 insert "or regulation." So that line would read: 26 "... about it. In 2020, National Milk Producers 27 Federation suggested legislation or regulation to 28 implement supply." 5662 1 And then the next one is on page 6. The last line 2 on that page, in number 6, the last line, instead of 3 starting "milk," comma, it will say "milk price," comma. 4 And then the last one that I noted was on page 8, 5 the second line down from the top has a partial sentence 6 that we struck. So that partial sentence that we're 7 striking the entire thing, "We should note that contrary 8 to prior testimony in an exchange between." 9 Were there any other changes that you recall that 10 I should -- 11 THE WITNESS: No, your Honor. 12 THE COURT: Thank you. All right. 13 DR. BOZIC: I confirm as well, no more changes. 14 THE COURT: Very good. 15 And now I'd like to hear from Agricultural 16 Marketing Service. 17 CROSS-EXAMINATION 18 BY MS. TAYLOR: 19 Q. Good morning. 20 A. Good morning. 21 Q. Thank you for coming to testify today. I first 22 want to start off and ask you my normal Small Business 23 question. 24 Would your farm qualify as a Small Business? 25 A. The farm and the creamery both, although we hope 26 not too much longer. 27 Q. That's fair. 28 Let's see. So I want to run through on your first 5663 1 page the specific proposals you are talking about, just to 2 make sure everything's clear on the record. 3 So for Proposal 1, what you are saying here is you 4 would like to see the -- man, this is a long time ago, I 5 have to think back from August -- the composition 6 standards updated to include the fat. 7 A. Yes. 8 Q. Okay. And Proposal 3 -- and I had a question 9 later on, but I'll ask it now. Proposal 3 looks to remove 10 barrels. 11 A. Yes. 12 Q. You are not actually -- or are you actually 13 supporting Proposal 3, or what I understand the proposal 14 that you would prefer is the weighted between the two? 15 A. Yeah, I prefer the weighted between the two, not 16 knowing if our proposal will be accepted. That's why I 17 threw them together. 18 Q. Okay. Okay. 19 And then the next bullet deals with 20 Make Allowances. And this is new to me, so I'd like to 21 see if you could explain that a little bit what you are 22 meaning by that. I don't believe I remember seeing 23 anything on -- other than what has actually been proposed 24 by IDFA and Wisconsin Cheese Makers, a delay in 25 Make Allowances. 26 So what are you looking for there? 27 A. Yeah, I could not find a proposal on this either. 28 I think we have heard testimony from many farmers that 5664 1 $0.50 per hundredweight would be quite a bit to take, and 2 for us it would be the same thing. 3 We are cognizant of why cooperatives, cheese 4 plants are asking for what they are asking for -- all 5 plants are asking for what they are asking for. But yield 6 factors, as -- as Edge had proposed in their initial ask 7 for yield factors to be considered, and many others had 8 asked, we don't believe -- I don't believe that 9 Make Allowances should be considered until yield factors 10 are included because of the technology that's been 11 changing those plants. 12 And once those are considered, if it's over $0.40, 13 again, due to the testimony of many others, and we would 14 agree, that $0.50 is a very large burden for dairy farms 15 to take on on an all-milk price basis to divide that over 16 at least four years. 17 Q. Okay. So that would be evenly 25% each year? 18 A. You can -- you can go zero for three years and 19 then 100 if you would like. 20 Q. Okay. Okay. So with that in mind then, you would 21 oppose any of the Make Allowance proposals here if the way 22 they have been characterized was they would actually 23 increase or decrease the all milk price by at least $0.50, 24 if not more? 25 A. Yeah, I'm personally, I have a really hard time 26 supporting any -- and I think you have heard many farmers 27 say, it's really hard for me to support any Make Allowance 28 increase. But seeing that that's inevitable, this is how 5665 1 I would do it. 2 Q. Okay. And then your next Proposal 16 supporting 3 Class III Plus. Can you explain that proposal and how it 4 would operate? 5 And I ask because this is kind of the first time 6 we have had a witness talk about this one, and -- and 7 since you are on the board, you are -- you are a staff of 8 Edge, could you explain how that would operate? 9 A. So can I wait until tomorrow? 10 Q. Sure. 11 A. Or I mean until Dr. Bozic's testimony tomorrow on 12 the subject? Would that be -- I don't want to misstate 13 anything. 14 But in general, we would be basing the skim -- the 15 base Class I skim price on Class III, and then looking 16 back three years, that difference between the higher-of 17 and average-of, and adding that difference when there is 18 one. 19 Q. Okay. And so we have had testimony from other 20 farmers about the importance of what they would term 21 getting current market signals, which is why they want to 22 return to the higher-of. We have heard other testimony 23 about how farmers would be made whole with whatever 24 rolling adjuster you want to calculate over time because 25 the adjuster is going to be updated more regularly. 26 So what's your position kind of with those two 27 diverging viewpoints on whether you would be made whole 28 under this rolling adjuster or not? I guess that's where 5666 1 I'll start. 2 A. Yeah. I think -- I think there's -- I believe 3 Class III Plus is the best one. That's what attracted me 4 to work for Edge. That's why we have been working on this 5 in my other roles previously, as both a farmer and as a 6 trade association executive director. 7 I think having something that's hedgeable for all 8 participants in the industry is -- is something we have 9 achieved to a very large extent, and something we should 10 keep now that we have it. 11 Again, nobody here is proposing to stay with the 12 current average-of, so I think the solution we are all 13 looking for is what to do next. 14 And so me -- to me, I get probably more calls, 15 besides the recent situations that I have outlined in 16 those ten that I have talked about with a few counselors, 17 probably one of the top things I get calls about is 18 innovation in Class I. 19 And like I, as I'm trying to grow and innovate our 20 creamery business, want to be able to hedge and lock in 21 some of the unknowns. I want -- and I believe farmers 22 would love innovation. And I think the way to do that is 23 to allow them to -- allow them, meaning Class I, to lock 24 in some of their risk. 25 Q. So we have had other farmers testify about the 26 impact over, you know, the COVID period that depooling and 27 the resulting negative PPDs had on their hedge positions. 28 Can you talk a little bit about how that impacted 5667 1 you? 2 A. It did not impact my farm. It definitely impacted 3 my phone. I got many calls from farmers who thought they 4 had locked in positions, and when they found out that the 5 PPDs were negative, they realized what they thought they 6 had hedged did not exist. And so all of a sudden, in a 7 worst case scenario, they thought, well, I have at least 8 this price locked in, whatever that price was when they 9 hedged it. And then they got their milk check, and it 10 was, 3, 4, $5 less than what they had presumed. So our 11 farm, not; other farms, very much so. 12 Q. Can I ask because, you know, risk management -- 13 how were you able to not have that -- how were you able to 14 not have those impacts of depooling as others have 15 explained it impacted their positions? 16 A. I believe -- well, I don't know. I didn't go back 17 and check. I would -- I would suspect as we ship to a 18 cheese plant, they made that decision to depool or to not 19 depool in the best interest of their patrons. And, you 20 know, I think probably the class most impacted was the 21 fluid class, so those -- those members of cooperatives and 22 proprietary plants who ship to fluid. 23 Q. So if your Class III plant depooled that you ship 24 to, they didn't -- that negative PPD wasn't reflected 25 on -- there's been talk about how even if a plant depooled 26 and they weren't required to pay minimum prices, somehow 27 that negative PPD was still reflected on their producer 28 check? 5668 1 A. Yes. 2 Q. And what I'm gathering from you was that was not 3 your experience then? 4 A. No. I think there's a reason why I am able to 5 talk here, and I have a very high trust with my 6 cooperative, and I'm very proud of what they do 7 transparently on their milk checks. I don't think that's 8 the case for all farmers today. I hope that changes. 9 Q. Okay. And then moving down to the last bullet 10 there, you want -- are seeking a 15-and-a-half month or 11 greater delay on any changes affecting hedging, 12 contracting, and federal risk management programs. 13 And I know there's proposals to delay the 14 implementation of the component factor updates, but are 15 there any specific proposals you are talking about with 16 that delay? 17 A. Again, anything that would change milk price I 18 believe should be delayed. Anything that would affect 19 hedging, contracting. 20 Q. So any piece of the formulas. Because I ask 21 because there was a witness weeks ago who said, even if 22 the Make Allowances were changed -- there was no delay in 23 implementing any Make Allowances, they weren't seeking a 24 delay in that because of the hedging position, somehow it 25 wouldn't be affected. But you hold a different view. 26 A. Again, I -- I would -- I would consider myself 27 much closer to a farmer than an economist or lawyer, so 28 I'm not going to state it right if I try to pin it down. 5669 1 But I don't want anyone's -- as we saw in the pandemic 2 with depooling, and as we could see if something here 3 substantially changed, the milk price farmers are getting, 4 I don't want anyone to lose ability to manage risk or 5 especially lose something they have thought they have 6 locked in and it be disrupted by regulation implemented 7 here. 8 And I think from what I have heard, you know, 9 especially from Dr. Bozic, 15-and-a-half months achieves 10 most of that. 11 Q. Okay. And I know later in your testimony you talk 12 about you're always looking 24 months out, but 13 15-and-a-half months is acceptable notice. 14 Based on your experience as a farmer and your 15 hedge positions, where do most of those contracts lie? 16 How many months out do you look? I know you look 24, but 17 that doesn't mean that you lock in 24. 18 A. Yeah. And I think you have heard here, so DRP is 19 what we use most, but we -- how we do it is we have 20 basically set up rules for our agent and said, if it's 21 here, do this; if it's here, do that. And so they are 22 constantly watching. 23 Unfortunately, I think due to the -- well -- well, 24 as we have seen, since 2020, as previous exhibits have 25 shown, trading volume has increased in dairy, and that is 26 a building situation. 27 If you want to buy oil, I believe you can go nine 28 years out. If you want to buy corn, I believe you can go 5670 1 two years out. As we heard yesterday from the witness 2 from Nestle, they think liquidity is about six months out. 3 We can't get to a year, or a year and a half, or 4 two years until people take the risk to try to lock in 5 those positions. 6 And so, you know, back to your question, I think 7 much of the time it's hard to get much beyond that 8 15-and-a-half month point, and especially in Dairy Revenue 9 Protection the past two years, it just hasn't made 10 economic sense to lock in more than a few months out at a 11 time. 12 But that's not always the case. Sometimes as the 13 markets and futures change, it makes a lot of sense, and 14 depending on the building project on your farm, sometimes 15 it makes a lot of sense to go as far out as you can. 16 Q. And do you use any other tools other than DRP? 17 A. We have not for some time. But that's partially 18 because DRP, as previous witnesses have stated, captures 19 all the upside and eliminates most of your downside risk. 20 Q. Okay. So you said some of your -- I think 12% of 21 your milk goes to your on-farm creamery, and the rest goes 22 to Bongards; is that correct? 23 A. Correct. 24 Q. And you say you're a co-owner of Bongards. 25 Does that mean -- to make clear for the record, is 26 Bongards a cooperative? 27 A. It is. 28 Q. Okay. And does Bongards reblend? 5671 1 A. I don't know. I assume -- I know they have the 2 ability to, but I don't know if they have a stated 3 position to do so or not do so. 4 Q. Okay. So your -- does your milk check reflect 5 that or your milk check -- if I may ask, and you don't 6 have to answer -- reflect whatever the uniform price is 7 for the month, plus or minus, you know, premiums, 8 etcetera? 9 A. I don't -- I don't think most farmers, including 10 myself, pay attention to that. On our milk check it will 11 state the Class III price, our price, and the order 12 minimum price, and those are the three things we pay 13 attention to. Whether they reblend it or not, I don't -- 14 I don't believe is listed on our milk check, or I have 15 never seen it. 16 Reblending can be up or down, right? So I -- I 17 have never seen that listed on our milk check. 18 Q. Okay. And then do you know if your milk is pooled 19 or does -- do you, as a farmer, ever know whether it's 20 pooled or not pooled? Because you did state earlier that 21 during some parts of the past recent history you know 22 Bongards didn't pool all the milk? 23 A. If I call and ask, they will quickly tell me, but 24 I don't know month to month. 25 Q. Okay. And when your milk goes to Bongards, how 26 far is that haul? 27 A. It never gets there. We do swaps. We have a 28 cheese plant 20 miles away. A cheese plant 35 miles away. 5672 1 It typically goes to the cheese plant 60 miles away. 2 Occasionally we have gone to the -- it's been a couple of 3 years now, but occasionally it's gone to the Woodbury 4 fluid plant also, which is about 120 miles away. 5 Q. Okay. And you talked a bit about how a lot of 6 producers in your area, and Mr. Umhoefer this morning said 7 the same thing, don't actually have contracts with their 8 cheese buyer. 9 But do you have a membership -- I assume you have 10 a membership agreement with Bongards? 11 A. No. 12 Q. No agreement, you are just a member? 13 A. Handshake, yes. 14 Q. I'm fascinated. 15 A. Me, too. Here I am. 16 Q. Just in general, I guess, up there that -- that -- 17 and not to say that we at USDA haven't had similar 18 discussions about this, about how producers, you know, 19 don't up there have contracts with their buyers. Is it -- 20 A. Is that a question? 21 Q. That's a fair question. 22 A. I'm ready. 23 Q. I'm just fascinated to why that is the market 24 dynamic up there, I guess. 25 A. So I -- I believe, again, with a lot of trust, 26 that they have very good reasons for it. But in those ten 27 examples that I have in my testimony, and I'm not sure if 28 you are asking about those, but in those ten examples, 5673 1 some of those have resulted in banks or lenders calling me 2 and saying, what? I thought the Federal Order mandated 3 they are going to get paid no matter what at least twice a 4 month? 5 And I called some of the smart, good looking 6 people at Federal Order 30, and just try to figure out, 7 all right, what do we have promised or not promised here? 8 And there's been a lot of education, in the past 24 months 9 especially. 10 Everyone has the ability to enter into contracts. 11 There's also reasons not to. And one of the things we 12 would like to do, as Edge, wearing my other hat, 13 legislatively, is rebuild that trust. 14 Oh, sorry to the court reporter. 15 Q. I'm so fascinated, I didn't even realize you were 16 talking fast. 17 A. Yeah. It's gets me excited. 18 And I think we often in this room hear, oh, that 19 would be good for farmers. And maybe right now, based on 20 where milk prices and dairy farmer economics are, it would 21 be. But there are times in the marketplace where I think 22 that would also be very advantageous for dairy processors 23 to have written contracts knowing that their milk supply 24 can't leave at any given time and things are held from a 25 legal perspective on that end. 26 And so our -- again, outside of this hearing, but 27 our legislation we have proposed tries to build that 28 contract of trust better amongst all producers and 5674 1 processors. 2 And within this testimony, and within the Edge 3 Dairy Farmer Cooperative packages -- package of testimony, 4 we have tried to do within Federal Orders the best 5 building of that we can. However, we think you are, as 6 AMS, very much bounded and not able to do everything I 7 would like to see you complete. 8 Q. And so for you in particular, then, since you also 9 don't have an agreement, written agreement, so do you 10 forward contract your milk? 11 A. We can. 12 Q. You can, but you don't, I guess? 13 A. We have. 14 Q. You have. Okay. 15 On the -- towards the bottom of page 3, this is 16 where you are talking about different risk management 17 tools. And you say, "DMC is a great program, but to call 18 it ample risk management for a dairy like ours is a gross 19 overstatement." 20 And I just wanted to ask you for the -- for the 21 record, you know, expand on why you think that? Why you 22 think that is? 23 A. Just because we have grown. If you add another 24 family, like we have, to your farm, typically you need to 25 grow -- in the commodity business for that 88% of our raw 26 milk that is a commodity, you typically need to get better 27 every year. Lower costs, every year. And volume is one 28 way that most of us try to overcome those higher costs 5675 1 each year. So any growing dairy farm, which as I 2 mentioned, not all of them are, I think DMC becomes really 3 less and less effective every year. 4 Q. And I just want to make sure it's clear. And 5 that's because it has the two-tier levels of what is 6 covered? 7 A. No. No. Below 5 million pounds you are locked 8 into whatever you made in the highest of the 2012, 2013, 9 or 2014. 10 Q. Your base is locked in? 11 A. Correct. 12 Q. Okay. On page 4, in the second full paragraph, 13 you say, I see the need for one -- and here you are 14 talking Make Allowances and the current formula -- 15 "anything providing comfortability eliminates risk. 16 Without risk, there is no innovation." 17 Can you expand on that thought for us what you are 18 talking about there? 19 A. Yeah. In -- in simple terms, if -- if it costs -- 20 like I mentioned here, if it costs $5.50, including 21 reinvestment, for Redhead Creamery to make a 40-pound 22 block of cheese, and we had an equivalent Make Allowance 23 where USDA ensured we were paid $6, I don't know why we 24 would make anything besides 40-pound blocks of cheese. 25 So when there's no risk, we wouldn't go look for 26 other markets. We wouldn't create anything new or 27 different. 28 Q. So does that thought carry over to where you 5676 1 believe eventually Make Allowances should fall? And -- 2 and so I had another question later, but I'll ask it now. 3 So then what's your opinion of what a fair 4 Make Allowance is? You know, we have proposed for us 5 different numbers, and the studies have different numbers 6 themselves than what's been proposed. There's a high 7 cost, a low cost, an average. 8 So kind of what do you think is appropriate, given 9 that sentiment? 10 A. Yeah. I believe that it should be correlated to 11 the highly efficient plants. I don't work in those plants 12 or know their numbers besides what's been presented here. 13 And so I don't have a number. I don't think dairy farmers 14 who aren't on board of co-ops or proprietary plants would 15 know what number that should be pegged at, and I certainly 16 don't. 17 Q. And I'm not asking for a specific number, just 18 kind of, you know, you're a policy guy, right? What's 19 the -- what's your thought of, policy-wise as a farmer, 20 where that number should set? 21 And from what I'm getting from you, I'm taking 22 away that not necess- -- it shouldn't necessarily cover 23 the high cost plants, and maybe it shouldn't necessarily 24 be set at the average, is what I'm gathering from your 25 statement? 26 A. Yeah. Well, first, I hope "policy guy" was a 27 compliment and not a derogatory statement. 28 Q. It was. 5677 1 A. But second, yeah, I think your statement summed it 2 up. Again, if we're eliminating risk for this entire 3 industry of people who make cheese that are subject to 4 Make Allowances, why would we expect any innovation in the 5 industry? 6 Q. And you see it as, if their makes aren't fully 7 covered, then that will make force them to innovate? 8 A. Yeah, or exit. Unfortunately, the same thing that 9 happens to dairy farmers. 10 Q. Right. Okay. On page 5 you -- in the paragraph 11 above the heading that's in the middle, here you are 12 talking about how Federal Orders even do affect farmstead 13 cheese companies like yours who don't participate in the 14 pool, because it affects your grants and loans. And I'd 15 just like -- this is the first of that we have heard, so 16 if you could expand on that statement. 17 A. Yeah. We have been beneficiary of some USDA grant 18 and loan resources, and the easiest way for us to make the 19 case of assets, future assets, revenue, is to say, here, 20 here is a federal document that represents our area that 21 says this is what our milk is worth. 22 Q. Okay. And down below you talk about -- and you 23 had some discussion with Dr. Vitaliano, and you talked 24 about your Dairy CORE program that you all, as Minnesota 25 Milk Producers, had put together, and that it's similar to 26 what USDA ultimately rolled out. 27 Can you be more specific? Because there were a 28 lot of programs that were rolled out. What you are 5678 1 talking about there? 2 A. I'm hoping my counsel can recall the acronym or 3 name of what -- what ultimately it was, but I can't 4 remember the name of it. 5 Q. And given that, can you describe what your Dairy 6 CORE program would have been? 7 A. Yeah. Essentially it would -- rather than a 8 supply management program, it allowed -- I'm not going to 9 go into it. That was a long time ago, so I bet counsel 10 can ask me a question that recalls that. 11 Q. Okay. I understand a long time ago. I feel like 12 six weeks was a long time ago, so that was three years 13 ago. 14 On page 6, you have a statement, "Class III Plus 15 gets us back to the benefits of the MW price series as we 16 focus on the constantly traded commodity." 17 And I'm wondering if you can expand on how that -- 18 how that proposal does that and why you think that's 19 beneficial. 20 A. Yes. Cheese, and therefore whey, as I understand 21 it -- and I think as testimony has been provided here -- 22 are plants that are meant to run as close to 24/7, as 23 close to 365 days a year, as they can, aside from 24 maintenance and staffing shortages and all the other 25 things that interrupt your work flow. But of the four 26 classes, Class III would be most represented of plants 27 that are built to always demand raw milk and, therefore, 28 are built to always be producing the product that they are 5679 1 intended to make over the other categories. 2 Q. And so you think it's beneficial to go back to 3 something more like what the MW used to be? 4 A. I think it's beneficial to go to something that is 5 constantly made, constantly traded. 6 Q. Okay. And the next question, you talk about -- 7 and this goes on to your -- what you just mentioned about 8 plants always running full these days. 9 And as we think about it, minimum pricing -- "As 10 we think about minimum pricing, constantly full plants 11 mean prices will stay closer to minimum values." 12 I just wanted you to expand on that. And I think 13 you make that statement and you're trying to talk about 14 kind of how the market is different now. 15 A. Yeah. Again, I think the last time orders were 16 evaluated, these ten situations that I get to after the 17 following paragraph wouldn't have happened because the 18 plants, the physical processing plants, were not full. 19 And so when they aren't full, even in a supposedly 20 competitive market like the Upper Midwest, there would be 21 no reason to pay higher premiums, there would be no reason 22 to solicit milk with those premiums, and so therefore, 23 when milk can't move, it doesn't make as much sense for 24 plants to pay above what they need to, because that is 25 what the market is telling them, pay what you need to, and 26 you are not trying to entice more vendors, I guess, in 27 this case, if you call the farms vendors. 28 Q. Okay. So in that case, the minimum price is all 5680 1 they need to pay is what you are saying? 2 A. I think that's what we have seen, or lower. 3 Q. So you do list some information on different calls 4 you got, and I don't really want to get into that any more 5 than what you have already had to discuss. 6 But I do ask the question -- want to ask the 7 question as kind of what do you see as that -- how do you 8 see Federal Orders providing for orderly marketing? That 9 is their policy objective. And so as a farmer, what do 10 you interpret that to be for you? 11 A. Yes. So, again, Federal Orders providing orderly 12 marketing, I believe we should have regularly updated 13 numbers at a set time, make them as mandatory as possible, 14 as low Make Allowances as feasibly possible, because 15 again, otherwise, I believe plants will be marketing 16 products that maybe don't actually have a real life 17 market, and allowing -- allowing farmers to know what some 18 hedging forward contracting, OTC, some -- some device of 19 their choosing, that they will have based on current time 20 and current information, an idea of what their milk price 21 is as far out as possible. 22 Today, some countries have that, and we do not. 23 Q. So if I could summarize. That's, you know, 24 transparency, market information, and I would probably 25 guess enforcement of some of those prices? 26 A. Yeah. And no overstatements of any fixed -- fixed 27 costs or fixed prices like Make Allowances. 28 Q. Okay. 5681 1 MS. TAYLOR: That's it from AMS. Thank you. 2 THE COURT: Thank you. 3 Is there any other cross before we have redirect? 4 No. Let's go to redirect. 5 REDIRECT EXAMINATION 6 BY DR. BOZIC: 7 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 8 Lucas, did your creamery in any way, assist, 9 review, provide input, or otherwise collaborate with you 10 in writing of your testimony? 11 A. Bongards Creamery? No. The others at Redhead 12 Creamery? Also, no. 13 Q. So -- so it's fair to say that they are really -- 14 they were not aware in any way of the -- any words 15 regarding the -- or any statements that you made about 16 other incidents in our broader milk shed? 17 A. No, they were not. 18 Q. I believe at one point you said that you used DRP. 19 Just to make sure that it is on the record, you 20 also do use DMC regularly? 21 A. Yes. 22 Q. Okay. In discussing briefly -- and this goes to 23 Ms. Taylor's question in discussing Proposal 16, I think 24 you refer to the lookback as the difference between the 25 higher-of and the average-of. 26 Did you mean the difference between the higher-of 27 and the appropriate variable related to Class III? 28 A. Yes. 5682 1 Q. Okay. On page 4, first full paragraph, you write, 2 "In simple terms, an increase in Make Allowances lowers 3 the paycheck for farmer milk." 4 Dr. Stephenson seems to be of the opinion that 5 it's not a big deal if we set the allowances rather high 6 because that will be compensated for by the over-order 7 premiums. 8 Do you share his confidence that that will happen? 9 A. Based on the current markets, absolutely not. I 10 don't see a future based on farm structure and plant -- 11 processing plant planning where over-order premiums 12 return. 13 Some of the ten examples, like I shared, many of 14 them -- many of them were the last six months. And in 15 several cases, hearing about this in the industry, the 16 first call came from cattle jockeys, and they weren't 17 looking to sell the cows to a harvesting plant, they were 18 looking to sell the cows to another farm. 19 When prices are low, farmers are trying to 20 increase their volume and -- with base/excess plans and 21 supply management plans, which make a lot of sense at the 22 plant level many times, I don't see economically how -- 23 how we would see such a return to over-order premiums. 24 Q. So I believe you stated somewhere in your 25 testimony you have about 200 cows. 26 A. Yes, sir. 27 Q. If you were to just go from 200 to 2,000 cows and 28 then call your field rep, I have more milk, would they be 5683 1 happy that you have more milk to provide, and would they 2 take that additional milk with no questions asked? 3 A. They would not take it, and I don't think my wife 4 would take it, either. 5 Q. Yeah. So -- so then it's fair to state that in 6 your milk shed there are producers who would be willing to 7 supply more milk at current mailbox prices than farms 8 are -- than the plants are willing to take? 9 A. Yeah. I gave ten examples here. I have many more 10 examples of miscommunications, misunderstandings, I 11 thought we agreed I could add a thousand cows, I have 12 taken out the loan, now what? I thought we agreed -- the 13 list goes on and on. 14 So, yes, I have received many calls from farmers 15 in our area to do just that, expand so that they can 16 better cash flow and manage their families' financial 17 future. 18 DR. BOZIC: I have no further questions. 19 And I have been taught the last few days by other 20 professionals in the room that this is the time where I 21 need to move the testimony into evidence. 22 Did I say that correctly? 23 THE COURT: And you notice the witness refers to 24 you as counsel, so -- 25 DR. BOZIC: I keep thinking of Robert Duval in 26 Godfather. 27 THE COURT: Is there any objection to the 28 admission into evidence of Exhibit 262? 5684 1 There is none. Exhibit 262 is admitted into 2 evidence. 3 (Exhibit Number 262 was received into 4 evidence.) 5 DR. BOZIC: Thank you, your Honor. 6 THE COURT: Thank you, both. 7 It's time for lunch. Do we want to talk about who 8 the next witness will be when we come back from lunch? 9 MS. VULIN: Ashley Vulin with the Milk Innovation 10 Group. 11 We'll have Sally Keefe after lunch, and then 12 potentially a dairy farmer at some point this afternoon I 13 understand for NMPF. We will also have Jacob Schuelke 14 with Crystal Creamery, and then Mike Newell with HP Hood. 15 THE COURT: You won't run out. 16 MS. VULIN: No. 17 THE COURT: Excellent. All right. 18 Please be back and ready to go back on record at 19 1:10. We now go off record at 12:08. 20 (Whereupon, the lunch recess took place.) 21 22 ---o0o--- 23 24 25 26 27 28 5685 1 WEDNESDAY, SEPTEMBER 27, 2023 - - AFTERNOON SESSION 2 THE COURT: We're back on record at 1:11. 3 MS. VULIN: Ashley Vulin with the Milk Innovation 4 Group. 5 We would call Sally Keefe to the stand, please. 6 THE COURT: Would you state and spell your name. 7 THE WITNESS: My name is Sally Keefe, S-A-L-L-Y, 8 K-E-E-F-E. 9 THE COURT: Have you previously testified in this 10 proceeding? 11 THE WITNESS: Yes, I have. 12 THE COURT: You remain sworn. 13 THE WITNESS: Thank you. 14 SALLY KEEFE, 15 Having been previously sworn, was examined 16 and testified as follows: 17 THE COURT: Counsel, you may proceed. 18 MS. VULIN: I have distributed three copies of 19 exhibits entitled MIG-9, MIG-9A, and MIG-9B. I believe 20 everyone should have a copy, but please let me know if you 21 don't. 22 THE COURT: Our previous exhibit before lunch was 23 262. So how do you want to number the ones that we now 24 have? 25 MS. VULIN: I would ask that MIG-9 entitled 26 Testimony of Sally Keefe, Part 2, be labeled with 27 Exhibit 263. 28 I would ask that Exhibit MIG-9A, which is a 5686 1 spreadsheet that says Proposal 15, Base Class I Skim Price 2 Computation, be given Exhibit 264. 3 And that MIG-9B, which is a copy of the PowerPoint 4 presentation Ms. Keefe will give, be given the number 5 Exhibit 265. 6 THE COURT: They have been so marked. 7 (Exhibit Numbers 263, 264, and 265 were 8 marked for identification.) 9 MS. VULIN: Thank you. 10 DIRECT EXAMINATION 11 BY MS. VULIN: 12 Q. Good afternoon, Ms. Keefe. 13 A. Good afternoon. 14 Q. We have already put your business address in the 15 record, so I think that's all of our preliminaries. 16 But can you please remind everybody who you are 17 and who you are speaking on behalf of today? 18 A. Absolutely. 19 So my name is Sally Keefe, and I am a consultant 20 for the Milk Innovation Group. The Milk Innovation Group 21 has ten members. They are: Anderson Erickson, Aurora 22 Organic Dairy, Crystal Creamery, Danone North America, 23 Fairlife, HP Hood, Organic Valley/CROPP Cooperative, 24 Shamrock, Shehadey Family Foods, and Turner Dairy Farms. 25 Q. Okay. Thank you, Ms. Keefe. 26 And can you just remind us a little bit about your 27 professional experience and role on behalf of the group? 28 A. Sure. I do -- I'm a consultant for the group. I 5687 1 have helped the group develop the proposals, and have 2 provided analysis in support on their work here for the 3 hearing. 4 Q. And I understand you are here to present MIG's 5 Proposal 15, correct? 6 A. Yes. That's correct. 7 Q. Thank you. 8 So if you could please open the PowerPoint that 9 you have prepared, which is Exhibit 265. 10 So I understand that all of the MIG members are 11 Class I processors, correct? 12 A. Yes. The MIG members are largely Class I 13 processors or handlers of Class I fluid milk. 14 Q. And can you tell us, what's the current state of 15 Class I, particularly in contrast to where it was during 16 Federal Order Reform in 2000? 17 A. So, at the time of Federal Order Reform in 2000, 18 Class I was nearly 40% of FMMO milk utilization. Today, 19 Class I is less than 30% of FMMO milk utilization. For 20 2022, we were at just a titch over 27% in Class I. 21 Q. And so what's the trend you have seen, then, from 22 2000 to present? 23 A. It's Class I milk utilization has been decreasing. 24 The peak of Class I utilization on the Federal Orders 25 happened shortly after order reform in 2004, at just over 26 43.6%. 27 Q. And have you seen any other trends in the 28 marketplace, or differences between what the market looked 5688 1 like in 2000 and present, particularly in regards to 2 exports or other things in the marketplace? 3 A. Sure. There's a lot more milk being used for 4 products that are exported, as well as for cheese. So the 5 amount of milk utilization within the Federal Orders and 6 in total is much higher in Classes III and IV today than 7 it was at the time of order reform. 8 Q. And just at a high level, can you describe to us 9 what are the factors that go into the Class I price? 10 A. Sure. When I think about the Class I price, I 11 think about three kind of big buckets. We have got the 12 base Class I skim milk price, which is what we're here 13 talking about in issue 4. We have got the advanced 14 butterfat price. And then we add on to that the Class I 15 differentials, which will be coming up in our next topic. 16 Q. Okay. And we have been here, as you said, talking 17 about the base Class I skim price. 18 What's the purpose of the base Class I skim price 19 in the formula? 20 A. So I see that the purpose of the base Class I skim 21 price is that we need to attract a sufficient supply of 22 milk for fluid use. 23 Q. And do you see any aspect of that relating to a 24 relationship between Class I and other classes? 25 A. Sure. The base Class I skim price fundamentally 26 is a relationship. It's the relationship between Class I 27 and the manufacturing classes to the Class III and IV 28 prices. 5689 1 Q. And is the Class I -- the base Class I skim price, 2 is that derived from any other -- any processing costs or 3 production costs, is it discovered in the same way as we 4 talk about Make Allowances, or how does that work? 5 A. No. The -- it's -- the Class -- the base Class I 6 skim price is not a formula that uses Make Allowances 7 related to fluid milk processing. It's price relationship 8 driven. It's the relationship between Class I and 9 Classes III and IV. 10 Q. And in your opinion, what type of relationship 11 should the base Class I skim price have with the 12 manufacturing classes III and IV? 13 A. It should reflect a big picture value for skim 14 milk, so it should reflect the value of skim milk. 15 Q. Why? 16 A. You know, because ultimately farm milk can be used 17 in any of the four classes. So, you know, the orders are 18 designed to ensure that we have enough milk for fluid use, 19 but not so much that we're drawing milk away from 20 Class III or Class IV when a manufacturing use would be 21 highest and best value. 22 Q. And I understand that you are here on behalf of 23 MIG's Proposal 15, which is a proposal with a formula for 24 the base Class I skim price; is that right? 25 A. Indeed. 26 Q. And at the beginning of your testimony we had 27 marked as Exhibit 263 your written testimony in support of 28 Proposal 15, correct? 5690 1 A. Yes. 2 Q. Okay. 3 A. And so on page 7 of my written testimony, you can 4 find a description of how MIG's Class I, base Class I skim 5 milk price formula works. 6 Q. Just in a big picture kind of summary form, can 7 you walk us through how that formula works? 8 A. Sure. So much like the current formula today, 9 which is an average-of Class III and IV plus $0.74, MIG's 10 formula is an average-of Class III and IV plus an 11 adjuster. MIG is proposing to update the adjuster and to 12 make the adjuster a 24-month rolling average that has a 13 12-month lag. 14 Q. And why did MIG develop this proposal as opposed 15 to advocating to keep the current average-of formula in 16 place? 17 A. Well, from a practical perspective, you know, 18 we -- the members of the group wanted to put forth a 19 proposal that reflected the concerns that they had heard 20 expressed from the producer community, from cooperatives, 21 throughout industry, regarding the current average-of 22 formula, but they wanted to -- they also felt strongly 23 about protecting risk management opportunities for 24 Class I. 25 Q. And was the intent that Proposal 15 result in 26 roughly revenue neutral -- revenue neutrality? 27 A. Yes. So much like the current formula, the idea 28 was to come up with a formula that was roughly revenue 5691 1 neutral to the higher-of. 2 Q. So beyond the practical perspective of reflecting 3 concerns heard from farmers and cooperatives, and then 4 MIG's goal of preserving the right to hedge, are there any 5 other policy goals that MIG's Proposal 15 fulfills? 6 Policy goals meaning goals of FMMOs generally, or of that 7 factor in particular. 8 A. Uh-huh. So we -- MIG wanted to maintain that 9 the -- MIG wanted to put forth a proposal with a formula 10 for the base Class I skim price that maintained the 11 competitive relationship between the classes. And because 12 we -- and we don't want to stop milk from going to 13 manufacturing if that is where it needs to go. 14 And then, you know, like I mentioned before, we 15 wanted to facilitate risk management. Members of the 16 group have a lot of concerns about managing volatility 17 within their business. 18 Q. Okay. And do you believe that the base Class I 19 skim price should be in a formula that prevents any type 20 of price inversion from ever occurring? 21 A. No, not necessarily. I mean, price inversions can 22 provide a valuable market signal. You know, when it 23 happens, when a Class III or IV price exceeds the Class I 24 price, that's sending a signal that milk is valued more 25 highly for cheese and powder in that particular moment. 26 Q. We have heard more about hedging in this hearing 27 than I had ever heard before, and it's clearly -- it's 28 clearly a big deal. 5692 1 Can you tell us, why does hedging matter so much 2 to Class I? 3 A. You know, given -- given the declining utilization 4 share for Class I, the downward trends in per capita 5 consumption, absolute volume, our group thinks that it is 6 very important to preserve risk management, that hedging 7 is an incredibly valuable tool to manage price risk, and 8 that if you can effectively manage your price risk, you 9 can provide more stable prices to your customers and to 10 consumers and, you know, ultimately, you know, stem the 11 declines in fluid milk. 12 Q. And are you aware of any -- 13 THE COURT: I'm sorry, what was the last part? 14 THE WITNESS: Stem the declines in fluid milk. 15 THE COURT: Thank you. 16 BY MS. VULIN: 17 Q. Are you aware of any Class I processors who are 18 hedging today? 19 A. Yes, I am. We have heard from some yesterday, and 20 I believe we'll hear from more today and tomorrow. So, 21 yes. 22 Q. Are you an expert in hedging? 23 A. I am not an expert in hedging. That is not my 24 area of expertise. 25 Q. But you are aware of its importance within the 26 industry? 27 A. Absolutely. I mean, you know, I work in 28 agriculture. I work in dairy. Like, it is -- I recognize 5693 1 that risk management is incredibly valuable and incredibly 2 important. But, you know, I am not constructing hedges. 3 I'm not buying futures options, swaps, all of those sorts 4 of things. 5 Q. And we haven't had 100% adoption of this, of this 6 risk management tool across Class I, correct? 7 A. No, definitely not. I mean, the different parts 8 of Class I have adopted this tool more than others. You 9 know, I think that -- I think that it's important to 10 remember that this is a relatively new change. 11 The 2018 Farm Bill put the change into motion, and 12 it became effective in May of 2019. The Farm Bill 13 language included a two-year review period and, you know, 14 round about -- and then we have 2020 with a global 15 pandemic. We also have, you know, the review period 16 coming up and -- at that time. And then by the winter, 17 you know, late winter of -- by, like, December 2020, 18 January, February of 2021, you know, you were already 19 seeing, you know, significant voices within the producer 20 community requesting a reversion to the higher-of. And so 21 that creates a situation with regulatory uncertainty. 22 As we have heard witnesses testify about, it takes 23 time to set these programs up. It takes resources. It 24 takes knowledge, like -- and, you know, when -- when you 25 are thinking about the priorities within your business, 26 you know, you can't necessarily do everything at once. 27 And so, you know, not everyone has had the time to 28 integrate this change and move to a system -- move to 5694 1 adopt hedging and other risk management strategies to 2 manage their Class I price risk. 3 Q. And in your experience in Class I, do you think 4 this risk management tool could be adopted more broadly 5 within that segment of the industry? 6 A. Absolutely. I really think it could be adopted 7 much more broadly. I -- I think that it is a -- that it 8 is very valuable in terms of stabilizing the price at the 9 shelf for consumers. And I -- I think that moving to that 10 sort of a system where you can provide a more stable price 11 for consumers at the shelf is very valuable. 12 Q. You say "very valuable." In terms of competition 13 for fluid beverages -- we lost the screen for a second, 14 but we're back. 15 So you said that it could be "very valuable." In 16 terms of its value, is there anything about Class I's 17 ability to compete in the marketplace that you think price 18 stability and risk management could bring value to? 19 A. Yes. I think that one of the things that's very 20 different today than in 2000 is how many more beverages, 21 beverage substitutes, just how many more things fluid milk 22 competes with, and many of those things are priced on a 23 more stable basis to consumers. And we need to be mindful 24 of that competitive set that's out there and, ideally, you 25 know, put our best foot forward with an offering that can 26 compete in many different facets on the shelf. 27 Q. And then in terms of consumers, you mention that 28 in your testimony, and you have mentioned it just a bit 5695 1 now. 2 Do you have any observations about consumers and 3 price stability? 4 A. So most of my observations are that price 5 stability and -- and staying away from a roller coaster of 6 prices are desirable traits in products that people are 7 buying in the grocery store, particularly stuff that you 8 are buying routinely. You don't want to go in and be 9 faced with a dramatic change in price between shopping 10 trips. 11 Q. Okay. And that's based on your experience in the 12 industry? 13 A. That's based on my experience in the industry. 14 And I have been in the industry for a long time. 15 Most of my experience, much of it has been on the organic 16 side of things, which frankly does tend to price this way, 17 so I will just put that bias out there. Like, it's, you 18 know, a lot of my experience has been on that end of the 19 business. 20 Q. Do you think Class I, organic Class I's ability to 21 offer more stable pricing has been a piece of the success 22 of that sector? 23 A. I think it has been. I mean, it's -- you know, 24 there's many different parts of it. It's not going to -- 25 like I mentioned before, it's multi-faceted. It's not 26 just a stable price. Like, you also have to have a 27 product that consumers want, and you have to be putting 28 it -- there's -- there's a lot of aspects to getting the 5696 1 consumer to pick it up and take it home, and then come 2 back and do it again next week. 3 Q. And you think price stability could be a part of 4 that. 5 A. Price stability is a part of that. It's not the 6 only thing, but it's an important part of it. 7 Q. And we have heard a lot about depooling so far in 8 the hearing. 9 And if you could go to the next slide, please. I 10 just want to talk about a little bit of that. 11 So this observation of depooling occurring, in 12 your experience, is this a new phenomenon based on the 13 average-of being adopted as the Class I base skim formula? 14 A. No. I -- if you -- you know, way back six weeks 15 ago when we were at the beginning of the hearing, you 16 know, one of the exhibits is Exhibit 30, and it's looking 17 at milk eligible to be pooled that was not pooled. And, 18 you know, that data goes back to the beginning. It goes 19 back to the year 2000. Depooling has been part -- has 20 been a practice within the system for a very long time. 21 Q. And in your opinion, is depooling necessarily a 22 bad thing? 23 A. I don't think depooling is necessarily a bad 24 thing. I think depooling is the market at work. I think 25 depooling is a way that market participants respond to the 26 value of their products and milk, and it's -- it's 27 rational economic behavior, for lack of a better way to 28 put it. 5697 1 Q. And I understand that you have looked at some time 2 periods over the course of the last 23 years and have some 3 observations about the rates of depooling. 4 Can you tell us about those? 5 A. Sure. So, you know, depooling happens. It 6 depends on where the prices are at. And so, you know, 7 just looking at one order, Order 32, and, you know, back 8 in the 24-month period of January 2012 to December 2013, 9 first there was a period in late 2012 where there were six 10 months of Class III depooling, and then we had a situation 11 in late 2013 that was followed by Class IV depooling 12 because of where the prices were at. 13 And then, you know, after the pandemic, you know, 14 recently here with the new formula, with the average-of 15 formula for Class I, you have got seven months of 16 Class III depooling, and you have got 13 months of 17 Class IV depooling. So it -- it happens. 18 Q. And you -- did you pick a time period meant to 19 reflect under the higher-of and under the average-of? 20 A. Yeah, I just wanted to compare a time period 21 before and after and, you know, roughly -- roughly apart 22 from each other. And then also, to be quite candid, I did 23 not want to include 2020 because that was just so, the 24 events were so extraordinary at that time. 25 Q. And we do observe slightly more depooling in the 26 later time period under the average-of in your example, 27 right? 28 A. Uh-huh. 5698 1 Q. How do you know that wasn't caused by the move to 2 the average-of formula? 3 A. Well, a lot of things in addition to the formula 4 have changed over that ten-year time period. So the -- 5 the trend of Class I utilization moving down was happening 6 then. We also had -- we have heard testimony during the 7 hearing about that depooling can sometimes -- that 8 depooling can be related to inadequate Make Allowances. 9 And so I would -- in my view, ten years ago the 10 Make Allowances were not as out of date as they are today. 11 And then we also have heard a lot about the widening 12 spread between the prices for Class III and Class IV, and 13 that is definitely -- the spread between III and IV is 14 wider now than it was at that prior period. 15 Q. And can USDA control or set the spread between III 16 and IV? 17 A. No. And USDA also doesn't, like, control the 18 utilization rate of Class I milk. Like, the only factor 19 there that I mentioned that's sort of like within the 20 realm of control of the regulation is the Make Allowance 21 thing and -- 22 Q. And you mentioned utilization as well. 23 Tell me, how does utilization going down impact 24 depooling or the frequency of depooling? 25 A. Well, ultimately, you know, Class I, as -- as we 26 all know, is the class that's here all the time. Class I 27 is the required participant. And as Class I's share of 28 the total volume has gone down, and as their absolute 5699 1 volume has gone down, that means that there is frankly 2 less Class I dollars being spread over more and more and 3 more milk. 4 Q. And as we saw before with the utilization going 5 down, is that utilization uniform between orders? 6 A. No. There's a lot of regional variation in 7 Class I utilization. You have orders that are very high, 8 like Florida; orders that are very low, like the Upper 9 Midwest; you have got orders that are more, you know, 10 typical, like, the Northeast, Central, the Southwest, 11 places like that. So it's not -- Class I utilization is 12 not a uniform situation across the country. 13 Q. So I want to go back to the proposals. 14 So tell me again about the formula that MIG is 15 proposing and how it's either similar to or different from 16 the current average-of formula. 17 A. So the primary difference between MIG's proposal 18 and the current formula is that MIG is proposing to 19 replace the static $0.74 adjuster with a dynamic rolling 20 adjuster. The adjuster would be updated monthly, like 21 other monthly price changes that happen within the system. 22 And then the -- and then the adjuster would be lagged by a 23 year to facilitate hedging. 24 Q. And how is MIG's -- we have -- so we have got the 25 average-of formula currently in place -- 26 A. Uh-huh. 27 Q. -- we have MIG's average-of formula under 28 Proposal 15, and then I know we have an average-of formula 5700 1 under IDFA's Proposal 14. 2 How does that differ from MIG's proposal? 3 THE COURT: I do think it would help the record 4 when you are acknowledging that what counsel is saying is 5 correct, you would utter "yes." 6 THE WITNESS: Thank you for the reminder. 7 THE COURT: You're welcome. 8 MS. VULIN: Likewise. 9 BY MS. VULIN: 10 Q. Okay. So we have the average-of formula under the 11 current formula. We have MIG's Proposal 15. 12 And then tell us how IDFA's Proposal 14 is similar 13 to, and different from, MIG's Proposal 15. 14 A. So IDFA's Proposal 14, like -- like MIG's 15 proposal, preserves the ability for Class I processors to 16 hedge. 17 MIG's proposal is -- MIG's -- IDFA's Proposal 14 18 puts a floor on the adjuster of $0.74; MIG's proposal does 19 not have a floor. 20 And then MIG's -- MIG's adjuster changes every 21 single month. And so every month, a month rolls on, a 22 month rolls off. And IDFA's adjuster changes every year. 23 Q. And why does MIG -- why did MIG propose a similar 24 but slightly different proposal with the average-of but an 25 adjuster that is dynamic each month? 26 A. MIG's members felt that the dynamic rolling 27 adjuster better reflects market conditions than changing 28 once a year. So changing monthly was aligned with the way 5701 1 that other prices work within the system. 2 And then the -- with an adjuster that changes just 3 one time per year, you can get large changes at once. And 4 so by moving gradually, by doing a rolling 24 months with 5 the drop, putting on and falling off the -- you get a more 6 gradual change over time. 7 Q. Does MIG's proposal have any kind of ceiling? 8 A. No, there's no ceiling. 9 Q. Does MIG's proposal have any kind of floor? 10 A. And there's also no floor. And so the -- the 11 members of MIG felt strongly that -- feel strongly that 12 floors and ceilings can create price distortions, and we 13 wanted to present something that we felt was market -- 14 reflected the market. 15 Q. And you -- and you do have, I believe, a slide 16 that compares the proposals. Thank you. 17 So talking about these proposals out in action. I 18 know you have done some proposal comparisons between MIG's 19 proposal, the current proposal, and NMPF's Proposal 15. 20 Is that math found in your Exhibit MIG-9A, which 21 has been marked as Exhibit 264? 22 A. Yes. So Exhibit 264 shows the computation of 23 MIG's Proposal 15 in action. It's a "what-if." It 24 pretends that the formula had been in place during this 25 period. And because the proposal is designed to maintain 26 that same higher-of price relationship, NMPF's Proposal 13 27 is necessarily there. It is the -- it says Proposal 13, 28 and then underneath there's a little -- it's the sixth 5702 1 column across, not including the date. 2 Q. And this is where you did the calculations that we 3 can see in page 4 out of 5 of your PowerPoint. 4 A. Yep. 5 Q. Thank you. 6 So let's look at a couple of your comparisons. I 7 know you said 2020 was a pretty extraordinary year, so 8 let's talk about the other years. 9 Tell me, what you do see or what are your 10 observations about the impact of the different formulas in 11 2018, '19, '21, and '22? 12 A. The main thing that I notice is that they are 13 roughly -- they are roughly equivalent. They are roughly 14 equal. They are not exactly equal, they're not going to 15 be exactly equal, unless they are the exact same formula. 16 I mean, that the -- you know, so in 2018 we're looking at 17 the current formula would have had -- the 12-month average 18 would be $6.56, MIG's proposal would have been at $6.54, 19 and the higher-of actually would have been lower than 20 those two at that time, it would have been $6.23. 21 In 2019, the average plus the $0.74 would be at 22 $8.40, and then you wind up with MIG's rolling adjuster at 23 $8.29, and the higher-of being $8.31 for average for the 24 year. So not exactly the same, but very close together. 25 Q. And we observed previously the fact that MIG's 26 Proposal 15, at times, generates a higher price than 27 NMPF's Proposal 13. 28 So what does that say to you about the importance 5703 1 of risk management to Class I, that they would put forth a 2 proposal that could generate a higher price for the base 3 Class I skim than NMPF's proposal? 4 A. It says to me that risk management is very 5 important to Class I processors, that Class I processors 6 are -- are willing and ready to preserve the higher-of 7 price relationship, but they need risk management. They 8 need to be able to hedge. And so here we are. 9 Q. And so we had set aside 2020, so let's circle back 10 to that year. 11 We do see a bit more divergence in these formulas 12 in that year, right? 13 A. Oh, for sure. 14 Q. So what's driving that? 15 A. You know, what's driving that, in large part, is 16 there was a tremendous spread between Classes III and IV, 17 and in the back half of 2020. And so what -- you know, so 18 what we're going to see there is that the average plus 19 $0.74 is $11.13, MIG's proposal would be at $10.89, and 20 then the higher-of would be higher, it would be $12.89. 21 Q. And why or why wouldn't we want this base Class I 22 skim price to ride the swing with these huge shifts or 23 divergences between III and IV? 24 A. Those huge shifts, the roller coaster there that 25 was happening in 2020, doesn't accurately reflect the 26 fundamentals related to supply and demand for Class I 27 fluid milk. It has a lot more to do with many other 28 things that were happening in the market at that time. 5704 1 And so designing a Class I price formula, we want to think 2 about things that can reflect the big picture, but not 3 necessarily have us ride a month-to-month roller coaster. 4 Q. Okay. And I know you have some other averages 5 here over a time period. So if we could look at the first 6 one, the five-year, 2018 to 2022, tell us about how the 7 formulas work in that timeframe. 8 A. Yes. So that would be the 60-month average for 9 that period. So five years, 60 months, the current 10 formula, the average was $9.99, Proposal 15 would be 11 $10.10, and then the higher-of would have been $10.36. 12 And, you know, what happens is, as you expand your 13 time horizon and as you have more months in the analysis, 14 things begin to converge, and they wind up roughly neutral 15 to each other over time. They are not necessarily the 16 same in any particular month. They are not necessarily 17 the same, even in a relatively short time period. 18 Q. And we have talked a lot about 2020 where these 19 swings are kind of raising the price and lowering the 20 price. But given that it averages over time, does that 21 also mean you could have short-term prices that would be 22 problematic or undesirable on the farmer end, right? If 23 it's going to be too high sometimes; it could also be too 24 low other months. And with this price stability, do you 25 see any benefits on the farmer side? 26 A. I do think that stability is good for all the 27 market participants. I think -- I'm a big fan of price 28 stability from the consumer, to the customer, the 5705 1 processor, the producer, all the way along the chain. 2 Q. Now, looking at that 20-year, we see they are all 3 kind of roughly converged around each other. 4 Given that similarity and given that we did have 5 the higher-of for nearly 20 years, what would you say to 6 someone who thinks, well, it sure worked then. We still 7 have a dairy industry. The world will not come crashing 8 down over our heads if we adopt it again, so let's go back 9 to something that's familiar? 10 A. The world has changed in 20 years, and risk 11 management is a lot more important to market participants 12 today than it was 20 years ago. And I think that it is 13 not -- I don't think that it is a good idea to design a 14 price formula -- or to adopt a price formula that cuts a 15 core part of our industry out of risk management. 16 Q. And you say "a core part of the industry." Aren't 17 they the only part that has to stay within the order? 18 A. Class I is -- Class I processors are the mandatory 19 participants. 20 Q. And so it seems fairly significant if they are 21 saying that these risk management tools are core to their 22 company? 23 A. I believe so. 24 Q. So let's go to the last slide, if we can, please. 25 I want to talk a bit about the adjuster and how the price 26 kind of works as a whole. 27 So can you explain to us what -- what this chart 28 is showing about the base Class I skim price under MIG's 5706 1 formula? 2 A. Sure. So this is just looking at the 60-month 3 period from January 2018 to December 2022, and it is the 4 percent, the share, that the adjuster is of the total 5 price. And so what you see is the adjuster is making up 6 about 5 to 15% of the total base Class I skim price. 7 Q. Okay. So when we talk about MIG's Proposal 15 and 8 the formula, the overwhelming majority of that price is 9 going to be made up by the average-of calculation, 10 correct? 11 A. Yes. That's right. Most of the price is the 12 simple average-of Class III and Class IV for that month. 13 Q. Okay. And this adjuster is an addition to that, 14 that tracks the historical averages we discussed, but -- 15 but really is a much more minor part of that overall 16 formula? 17 A. It is the smaller part. It is -- there's two 18 things here. We have the average and we have the 19 adjuster. And most of the price is the average, less of 20 the price is the adjuster. 21 Q. And we have heard some discussion about the 22 adjuster being outdated or too historical looking because 23 of the year lag and the time period it averages. 24 So why don't you tell us just to start, why did 25 MIG pick an adjuster that has a two-year average with a 26 one-year lag? 27 A. So first I'll talk about the lag. 28 Our members felt strongly that the lag was very 5707 1 important for actually hedging, that they would like to be 2 able to get to the point where they are able to stake 3 their positions in the market 12 months out. 4 Today, as I understand it, the liquidity in the 5 market, most people are not hedging on that time horizon 6 today, but we thought that we should put something out 7 there that would facilitate getting there. 8 The next part of it would be the 24 months. And 9 the 24 months was not too long and not too short. So we 10 looked at longer periods of time, and we looked at shorter 11 periods of time. As the adjuster is shorter, if it's less 12 than 24 months, it creates more volatility. And then when 13 the adjuster is longer, it does not transmit market 14 signals as well over time. 15 Q. On the lag, you said the one year allows Class I 16 processors to set up their hedge more accurately or 17 effectively. 18 And -- and is my understanding is that's because 19 there's more predictability of one of the components of 20 their formula for their price; is that right? 21 A. Yes. So -- so when they are constructing their 22 hedge, the adjuster will be known, and so the basis risk 23 would be reduced, if not eliminated, on the adjuster part 24 of the formula. There are obviously a lot of other risks 25 that have to be considered when you are doing that. 26 Q. And why do you think that Proposal 15 is better 27 than the current formula? 28 A. I think the Proposal 15 is better than the current 5708 1 formula because I think that the fatal flaw of the current 2 formula is that the adjuster is static. It's fixed. It 3 doesn't change. 4 And, you know, at the hearing we have heard a lot 5 about things that don't keep up in realtime, and so 6 structuring something that is self-correcting that, you 7 know, keeps up over time, that changes on its own, I think 8 is a good thing. It is -- the chances that you can have a 9 fixed adjuster and that you can get the number right 10 strike me as very small. 11 Q. And why do you think Proposal is -- why do you 12 think Proposal 15 is better than other proposals that have 13 been presented on this factor, at this hearing? 14 A. There are tradeoffs here. And, you know, from my 15 perspective, the higher-of is also flawed. The higher-of 16 is -- makes Class I risk management very difficult. 17 And so what we're asking USDA to consider are the 18 tradeoffs. It's the tradeoff between a -- the pure 19 higher-of formula that you see in Proposal 13 and 20 facilitating risk management for the FMMO's mandatory 21 participants for Class I. 22 Q. And given that the proposals are roughly revenue 23 neutral, that's not a tradeoff USDA would have to make 24 between MIG's Proposal 15 and the higher-of because they 25 are roughly revenue neutral, right? 26 A. That's correct. 27 Q. And so when looking beyond that, it sounds like 28 your testimony is that the next big tradeoff we want USDA 5709 1 to think about is this opportunity to manage risk? 2 A. Yes. We would like USDA to consider the need for 3 Class I to have access to the risk management tools that 4 are widely used throughout the dairy industry and 5 throughout agriculture as a whole. 6 Q. Thank you. 7 MS. VULIN: Nothing further. 8 CROSS-EXAMINATION 9 BY MS. HANCOCK: 10 Q. Good afternoon, Ms. Keefe. Thank you for your 11 time today. All right. 12 THE COURT: Did you say Nicole Hancock yet? 13 MS. HANCOCK: I did not. I'm Nicole Hancock. I 14 just assumed that the court reporter has a shortcut key 15 now. 16 THE COURT: How about the people that might be 17 just tuning in remotely, can they even see you on the 18 screen? 19 MS. HANCOCK: That's more considerate than I was 20 being. Thank you. 21 BY MS. HANCOCK: 22 Q. Okay. Ms. Keefe, I would like to start with 23 Exhibit 265, your presentation, and just -- I'll just walk 24 through the questions that I have, if you have that in 25 front of you. 26 A. Sure. 27 Q. Okay. Let's turn to page 2. 28 And as I understand it, on page 2, what you are 5710 1 comparing here, it is just -- or maybe what you are 2 showing here is just that Class I utilization as a 3 percentage of the total amount that's pooled under the 4 orders has just decreased? 5 A. Yes. That's correct. 6 Q. Okay. And do you know if in that decrease, there 7 has been any -- well, strike that. Let me say this 8 different. 9 I think one of the areas that you talked about 10 with Ms. Vulin was to -- to -- whether Class I or the 11 other classes of milk could be responsive to market 12 conditions and land in the places where they should land 13 at the right times; is that fair? 14 A. Yes. When we were talking about depooling and 15 other things. 16 Q. Okay. And you were concerned that you didn't want 17 there to be a draw of -- to Class -- or of the Class I 18 milk away from the manufacturing if the need was in the 19 manufacturing classes; is that accurate? 20 A. That's accurate. And I do note that this is the 21 FMMO pool utilization on this chart, so it's not going to 22 include milk that wasn't pooled. This is only pooled milk 23 here. 24 Q. Okay. And did you -- are these average numbers or 25 is there a strike date within the calendar year that's 26 noted there? 27 A. It's the total for the year. It's a weighted 28 av- -- it's weighted across all the orders, but there's 5711 1 other differences between 2000 and 2022. In 2000, 2 California was a state order; now California is a Federal 3 Order. So, like, California wouldn't be part of the 2000 4 column. And then, in 2000 we still had the Western Order, 5 and now we don't have the Western Order, and so, like, 6 that's not part of the 2022 column. This is just FMMO 7 pool milk. The data source is down there at the bottom of 8 the table. 9 Q. Okay. And -- and this wouldn't take into account 10 any kind of ebbs and flows in market needs in -- on a 11 daily or weekly, or even monthly basis, would it? 12 A. Oh, no. Definitely not. 13 Q. So, for example, if we look at what we have heard 14 testimony on in -- in, you know, August, September, of any 15 year, where there's a greater need for Class I milk in 16 those time periods, that wouldn't be reflected in what we 17 see in your table here, would it? 18 A. No. This table is a comparison of the entire year 19 for 2000 and 2022. Certainly the data exists to compare 20 it on a monthly basis and to do it by order over time. 21 Q. Okay. And you would agree with me that one of the 22 tools that -- that the order is designed to do is to allow 23 milk to move in the moment that it's needed; is that 24 accurate? 25 A. Yes. We want the orders -- we want fluid 26 processors to have their needs met on -- kind of hesitate 27 on daily -- but weekly, monthly, annually, like, we want 28 to make sure that fluid processors are getting the milk 5712 1 they need so that consumers have the milk they need. 2 Q. And there are very real seasonal circumstances, 3 especially with respect in the Class I market, that affect 4 the need for milk on a weekly or monthly basis throughout 5 the year; isn't that true? 6 A. Yes. The milk sales are seasonal. It is not -- 7 the demand is not the same in every month of the year. 8 Q. So if we look at the middle of August to the 9 middle of September, historically, that's been a time 10 period when -- when Class I is needed to be called away 11 from the manufacturing plants; is that right? 12 A. The middle -- you know, so when school is starting 13 back up in mid-August to mid-September, Class I demand 14 would be higher than it was the month before in the middle 15 of summer. 16 Q. And using the higher-of mover is a way that you 17 could respond to the immediacy of that need, isn't it? 18 A. The higher-of mover is going to -- the higher-of 19 mover is going to respond to whichever is the maximum of 20 Class III and Class IV. It -- it is -- it's just the 21 higher of the two. 22 Q. Yeah. It's going to let Class I compete with the 23 most expensive manufacturing product, isn't it? 24 A. Yes. 25 Q. Let's take a look at page 3. And as I understand 26 it, in this slide you are comparing the time period of 27 January 2012 to December of 20- -- I'm sorry, to 2013. 28 And so if I look at Class III, that was six months 5713 1 of depooling that you had noted there; is that right? 2 A. Yes. Six months of depooling for that in that 3 24-month period, on -- on Order 32. And in that 4 particular case, they happen to be a consecutive six 5 months. 6 Q. And so I guess where I was struggling in how to 7 ask the question was, is -- is it -- I mean, not -- I 8 mean, six months, how did you measure that? 9 A. So every month I reviewed the uniform price 10 announcements. And so the uniform price announcements 11 include the amount of milk in the pool. And so, you know, 12 one of the things that I track and look at is the volume 13 of milk in each class by order. 14 Q. And so do you know what the maximum waterline is 15 for that order that you should expect to see in that year? 16 A. Yes. 17 Q. And so you are saying if it dropped down from that 18 high waterline, high watermark line, then you would 19 consider that to be a month in which there was depooling 20 that occurred? 21 A. Yes. 22 Q. Okay. And is that -- and you said that you were 23 looking at it -- well, what was the source that you said? 24 A. I was using the -- for the table, it's the 25 Order 32 uniform price announcements. 26 Q. And that's reported in volume of milk? 27 A. Oh, the uniform price announcements have a wealth 28 of information on them, and so -- including the volume. 5714 1 Q. But that's what you were saying, it was the volume 2 amount that you used to set that high watermark line? 3 Is that a "yes"? 4 A. Yes. 5 Q. Okay. 6 A. Thank you. 7 Q. Okay. And so is that reported in pounds? 8 A. You know, I don't have one of them in front of me 9 right now. I believe it's pounds, but it might be 10 hundredweights. 11 Q. One or the other. 12 A. Yes. Definitely pounds or hundredweights. 13 Q. Okay. And -- and so how much would it have had to 14 dip down under that volume level for you to have indicated 15 that that was a month in which you observed depooling? 16 A. So -- so in -- so in my spreadsheet where I track 17 this, I have conditional formatting set up so that it -- 18 it triggers on the -- on the -- on the volume. And I -- 19 there's no way that I can remember the number and the 20 formula sitting here without looking at the spreadsheet. 21 Q. Okay. Some threshold amount where it would 22 indicate to you that it -- there's enough of a volume 23 movement that it would indicate that there's some 24 depooling that occurred? 25 A. Yes. And my threshold for that is relatively -- 26 my threshold for that is relatively lax. It takes a lot 27 to trigger my conditional format. The -- someone else 28 could look at the same data series, and for the 24 months 5715 1 of January 2012 to December 2013, and would be like -- and 2 could easily make an argument that there should be more 3 months. I don't think that somebody would look at my 4 threshold and say that there should be fewer months. 5 Q. Okay. So you have erred on the side of being 6 conservative in the number of months that you estimated 7 depooling occurred? 8 A. I believe so, yes. 9 Q. Okay. And do you think it's greater than a 20% 10 deviation? 11 A. I have not been in the weeds of that formula this 12 week, so I -- I really -- I don't want to speculate about 13 that. 14 Q. Okay. And you didn't provide that to us, did you? 15 A. No. I did not provide the threshold. This is -- 16 this is meant to just be directional. It's just -- it's 17 not meant to -- there are 11 orders. There's 20 years. I 18 mean, if we wanted to go through all the entire time 19 periods and all the orders, like that would -- that's a 20 lot. 21 Q. Okay. I just want to make sure I'm clear on what 22 we have. 23 But your spreadsheet that you used to track this, 24 you do just on a regular basis as a consultant in the 25 industry? 26 A. Yes. 27 Q. And that spreadsheet that you used for your 28 consultancy work is actually tracked in volumes, whether 5716 1 it be pounds or hundredweight? 2 A. Yes. 3 Q. Why didn't you give us the volume in this 4 spreadsheet? 5 A. Honestly, because I didn't think that would be of 6 quite as much interest. And the -- the -- you know, I was 7 trying to present this information in, you know, just a 8 straightforward kind of fashion, you know. And there is a 9 lot of information about depooling in the record in 10 Exhibit 30, and that information that is in Exhibit 30 is 11 for all of the orders kind of together. But because of 12 California coming in and out, when you look at the 13 volume -- it's, you get an apples-and-oranges problem. 14 And so -- 15 Q. But it's fair that you could still do a comparison 16 of the percentages of the volume lost as compared to the 17 high amount of the volume; is that right? 18 A. Can you repeat that? 19 Q. Yeah. Maybe better. 20 You could, if you had the volumes like you track 21 on your spreadsheet for your work, even with California 22 historically not being part of the order, you could still 23 compare a percentage of the amount of volume that was 24 depooled as it compared to when the pool is at its maximum 25 capacity or at its high waterline? 26 A. Yes. You could do that with the monthly data in 27 Exhibit 30. 28 Q. Okay. And then, nonetheless, the point of what 5717 1 you were showing here is that while there is a -- there -- 2 that there is a change, at least in this Federal Milk 3 Marketing Order, between the original time period 2012 to 4 2013 as compared to 2021 to 2022? 5 A. Uh-huh. Yes. Thank you. 6 Q. And so if I look at Class IV, the difference there 7 is 2.6 times more depooling had occurred, or more months 8 of depooling had occurred under the average-of? 9 A. Yes. During the time period after the average-of 10 formula was in place, so January 2021 to December 2022, 11 there were 13 months of depooling then in Order 32 with 12 Class IV milk. You know, the -- some of that from -- from 13 my perspective, is likely related to, still related to the 14 pandemic, with those more storable products and longer 15 periods of time and stuff like that. But, you know, I 16 wanted to present information that was before and after 17 the change. 18 And these -- and -- but you are quite right, like, 19 there is more depooling with Class IV in the later period 20 than the earlier one. 21 Q. Why didn't you look at the period of 2016 to 2017 22 as the higher-of comparator months? 23 A. The -- I was trying to get further -- I -- I like 24 the ten-year thing. I just picked the ten-year thing. It 25 wasn't -- there wasn't -- it wasn't very calculated at 26 all. It was just what I picked. 27 Q. Okay. So if we just stay on the subject of 28 depooling for a second. If we were under a higher-of 5718 1 system again, like we were in this 2012 to 2013 time 2 period, it's true that the amount of money paid into the 3 pool on a regular basis would be higher than what's paid 4 into the pool under the average-of mover? 5 A. Can you repeat that? I'm sorry, I wasn't 6 tracking. 7 Q. That's okay. 8 It might take me a second, but I want to -- if 9 we're under a higher-of mover as compared to an average-of 10 mover, if we are under the higher-of mover system, it is 11 true that more money would be paid into the pool on a 12 day-to-day basis than under the average-of system? 13 A. Not necessarily. Because there are some months 14 where the average-of plus the adjuster will exceed the 15 higher-of. So it's not always one or the other. 16 Q. I knew the flaw was that I didn't give you a time 17 period. 18 If we look at the -- let's look at 2022, for 19 example. In 2022, if we were under the higher-of system, 20 there would have been more money paid into the pool on a 21 day-to-day basis, or a monthly basis, than there was under 22 the average-of; is that right? 23 A. So looking at Exhibit 264, on page 3, so if we 24 look at January 2022, we see the higher-of, and there's a 25 kind of gray with Proposal 13 there of $12.21, and then we 26 see Proposal 15 of $13.04. And so there would be more 27 money going into the pool in January of 2022 with 28 Proposal 15 than Proposal 13. 5719 1 Q. Okay. And then we, at some point -- maybe I got 2 the wrong year. Let's use 2020 then, as an example. 3 In 2020, for example, then, we see in January of 4 2020, we see the opposite happening, right? 5 A. That's right. 6 Q. We have $12.65 under the higher-of, $11.50 under 7 what would have been MIG's proposal if it had been in 8 place at the time? 9 A. Yes. 10 Q. But then if we look at the current, it was at 11 $11.71? 12 A. Right. 13 Q. Okay. If we look at page 4 of -- and I'm back on 14 Exhibit 265, I think what -- this is a way that you have 15 tried to chart or characterize a comparison on an annual 16 basis, the difference between the current MIG's proposal 17 and National Milk's proposal; is that right? 18 A. Yes, that's right. I was -- so this comparison 19 table, which is on page 4 of my PowerPoint, which is 20 Exhibit 265, and it is also found on page 3 of 21 Exhibit 263, is a summary for the time periods indicated 22 of the monthly information that is found in Exhibit 264. 23 Q. Okay. And then did you just average them out on 24 an annual basis? 25 A. Yes. So -- so for 2018 to 2022, those are 26 12-month averages for those years. Then we have a 27 60-month, and 120-month, 15 years -- I can't do that math 28 in my head -- and then we have 20 years, so -- and it's an 5720 1 average of the monthly data. 2 Q. So if we look at, on 265, page 4, if we look at 3 2020, the average under the current average-of plus $0.74 4 is $11.13? 5 A. Yes. 6 Q. And if we were under MIG's proposal, it would be 7 $10.89? 8 A. Yes. 9 Q. And -- and so I want to make sure that I 10 understand how your calculation, the rolling calculation, 11 works there, so I want to pause for just a second. 12 It's -- you look back 24 months -- 13 A. Yeah. So there's a 24-month rolling adjuster that 14 has a 12-month lag, and so it would be the preceding 13 to 15 36 months. 16 Q. Okay. So in January of 2023, for example, you 17 would look back and -- 18 A. January of 2023 would be January of 2021 to 19 December of 2022. 20 Q. And then you would have the additional 12-month 21 lag, and it would be implemented in January of 2023, based 22 on the 2021 to 2022 timeframe. 23 A. Right. And then the next month in February, it 24 would start in February of 2021, and it would end in 25 January following one -- it's very hard -- 26 Q. January of 2023. 27 A. Yeah. 28 Q. So that one month drops off as the new one is 5721 1 picked up. 2 A. Yes. 3 Q. But you are always really looking back to the 4 two-year window, three years ago. 5 A. Yes. You are. 6 Q. And so -- and is it dependent on vol- -- changes 7 in volume of milk that was produced three years ago in any 8 way? 9 A. No. It's just looking at the price relationship. 10 Now, I mean, I'm not enough of -- I'm a consultant, not an 11 economist. And so like, going from, like, the impact of 12 the volume, how that circles into the price is, like, 13 that's what -- it's the price relationship from that prior 14 period, yes. 15 Q. Okay. So it's your understanding that you are 16 just taking what would have been the higher-of as averaged 17 for the month that you are looking back, or for the time, 18 the 24 months that you are looking back to, and applying 19 it in the current timeframe? 20 A. Yes. 21 Q. Okay. And so without regard, if -- if the volume 22 of milk increased or decreased, it wouldn't matter? 23 A. No, it's not weighted. It's not volume-weighted 24 or anything like that. 25 Q. And -- okay. And then if we go back to this 26 comparison in 2020, what we can see is that under that 27 kind of rolling adjuster, MIG's for 2020, the average 28 Class I price would have been $10.89 for the year? 5722 1 A. Yes. The 12-month average for the year 2020 would 2 be $10.89. 3 Q. And that would have been set based on calendar -- 4 if we looked at January in 2020, that would have been set 5 based on January of 2017 and '18, with '19 being the 6 one-year lag? 7 A. Right. 8 Q. Okay. And then -- and then if we compare that in 9 your spreadsheet under your calculation under -- under 10 National Milk's proposal, it would be $12.89 for the 11 Class I price average for calendar year 2020? 12 A. Right. Just the 12-month average of the higher-of 13 for those 12 months. 14 Q. And so for calendar year 2020, the difference 15 between the average-of what would have been paid to 16 Class I producers on hundredweight basis would have, for 17 Class I milk, would have been $2 less per hundredweight 18 under MIG's proposal than under National Milk's proposal? 19 A. Yes, that's correct. 20 Q. And then if we go to the next year, the difference 21 in comparison between MIG and National Milk is that under 22 National Milk's proposal, it would be $0.11 per 23 hundredweight difference? 24 A. Uh-huh. Yes. 25 Q. And in 2022, it would be, under National Milk's 26 proposal, $0.30 less than under MIG's proposal; is that 27 right? 28 A. Yes, for 2022. 5723 1 Q. And if the volumes had stayed the same between 2 2020, 2021, and 2022, it wouldn't have netted a 3 positive -- if we just compare all of those, it's still 4 net positive more favorable under National Milk's 5 higher-of proposal; is that right? 6 A. So those three years? 7 Q. Yeah. 8 A. Those three years together, National Milk would be 9 higher for that 36-month period. 10 Q. Okay. But at what point, where -- where did that 11 extra $2 that we -- that wasn't paid out on the higher-of 12 for 2020, who would have received that difference? Who 13 would have reaped the benefit of that difference? 14 A. Can you repeat that? 15 Q. Yeah. If we're comparing in a, if we're looking 16 at revenue neutrality, who -- who wins in that scenario 17 of, if you are trying to get to a higher-of, but under -- 18 under MIG's proposal you don't ever make up that $2 19 difference from 2020, is it the processors for Class I 20 milk that just paid less for that milk? 21 A. So because of the 12-month lag, to make up for 22 2020, you are going to have to go all the way into -- 23 because it's a 24-month rolling average, you are going to 24 have to go into 2022 and 2023, so you have to keep going. 25 Q. Okay. So what happens to the dairy farmer who 26 went out of business in the meantime? Who gets the 27 true-up from that adjuster for the milk that that dairy 28 farmer produced in order to get to revenue neutrality for 5724 1 the milk that he -- that he delivered? 2 A. Your question -- your question is there, like -- 3 to me, it's as if you are thinking about revenue 4 neutrality as like an escrow account and, like, you are 5 paying it in all the time and then you are going to pull 6 it back out. 7 And the thing with any of these price formulas is, 8 that's just it, they are the price formula. They are 9 not -- this is -- the difference wasn't paid by anybody to 10 anybody. It's -- it is a formula difference. It's -- 11 it's a -- it's a spreadsheet difference. 12 Q. Okay. So it's not that the dollars actually go 13 anywhere, they just never existed? 14 A. The dollars -- that price -- if MIG's proposal had 15 been in place, that higher-of price would not have been 16 the price that was obligated to be paid as the minimum. 17 Q. And the adjuster under MIG's proposal is not 18 designed to be revenue neutral for the dairy farmer that 19 set that price three years ago, it's only designed to set 20 the price for today; is that what you mean? 21 A. I mean that it is designed to be roughly revenue 22 neutral over time, and it's not going to be perfectly 23 revenue neutral at any instance. 24 Q. And you have been very careful, and Ms. Vulin has 25 as well, to use the word "roughly" when you are saying 26 "roughly revenue neutral." And I want to quantify that. 27 When you say "roughly revenue neutral," what is 28 the deviation that is acceptable to you to get to "roughly 5725 1 revenue neutral?" 2 A. I haven't thought about the question that way. 3 The reason why I say roughly revenue neutral is because 4 I'm trying to acknowledge that they are not equivalent, 5 that they are not exactly the same. And so I haven't 6 tried to quantify "roughly" with a number. 7 Q. Between 20- -- between 2019 and 2022, do you know 8 how many fewer dairy herds there were reported to USDA? 9 A. I don't know. I am not familiar with the herd 10 data information like that, no. 11 Q. Okay. If I told you that USDA's Exhibit 28, if I 12 calculate the difference in the dairy herds, it's over 13 6,000 fewer -- over 6,000 fewer dairy herds between 2019 14 and 2022, would that sound right to you? 15 A. It sound reasonable to me, and I would trust your 16 math on that. 17 Q. So for those 6,000 dairies that -- that went out 18 of business or stopped dairy farming during that -- that 19 time period, MIG's proposal would not ever have a way for 20 them to get to the higher-of, would they? Would it? 21 A. Dairy farms and dairy processors exit for lots of 22 different reasons. And if you -- if you exit, then you -- 23 then you're not going to be there at the time that -- that 24 MIG's members are buying Class I milk in the future. 25 Q. So is that a "yes"? 26 A. I'm trying to express that there's a lot of 27 reasons why dairy farms exit. And it's certainly price 28 and profitability are a big part of why any business would 5726 1 exit. But there -- there are a number of factors that go 2 into it, beyond just the Class I milk price. 3 And one thing that I would add, that when it comes 4 to the Class I price, you have to think about how much of 5 the milk is actually being used in Class I. Class I is 6 only about -- it's a little list than 30% of the pool 7 volume today. So you take this difference, and then you 8 put it into the pool, and you apply that, and that's going 9 to be the change on the uniform price. And so it's -- I 10 mean, we -- it is not -- it's not -- it's not quite as 11 simple as a yes or no to me. 12 Q. Okay. That's fair. 13 Is it correct to say that for those dairy farmers 14 who go out of business before they can receive the 15 higher-of amount that would be calculated under MIG's 16 adjuster, that this is -- MIG's proposal is not revenue 17 neutral with respect to those dairy farmers? 18 A. With respect to somebody who exited, it would not 19 be roughly revenue neutral. 20 Q. And for those who do stick around, you never 21 achieve revenue neutrality either, because at some point 22 when you leave the industry, whether you pass away or you 23 retire or you sell your farm, you didn't get to realize 24 that adjuster during your lifetime for the milk that you 25 have produced? 26 A. No. Because -- so the adjuster flips both ways. 27 So there are periods of time when, I mean, you could exit 28 on the high note. You could exit having been, frankly, on 5727 1 the high side of the adjuster. So it -- both things could 2 happen. I mean, there is a -- there's a timing difference 3 here. 4 Q. And I'm not talking about just profitability. All 5 I'm talking about is revenue neutrality. It's correct to 6 say that you never get -- whether it's positive or 7 negative, if the goal is revenue neutrality, it is 8 impossible for anyone to receive revenue neutrality, 9 because you never have the overlap in the exact same 10 timing between when the adjuster is -- is used and when 11 somebody's actually producing the milk? 12 A. The adjuster will always have a timing difference. 13 Q. So that means you can never have 100% revenue 14 neutrality under MIG's proposal; is that true? 15 A. And I would not claim that MIG's proposal would 16 ever be 100% equal to the higher-of. 17 Q. And is that why you characterize it as "roughly 18 revenue neutral?" 19 A. Yes, that's part of it. And -- and honestly, as 20 you can see in my testimony, that was also the way that 21 the $0.74 adjuster was characterized when -- when that 22 change was made. So it's -- it's -- no adjuster will ever 23 be equal to the higher-of. If you want it to be equal to 24 the higher-of, it has to be the higher-of. 25 Q. Okay. If we look at Exhibit 263, which is your 26 written testimony, you talked about the use of risk 27 management tools to help organic farmers. 28 Do you remember that? 5728 1 A. I -- could you remind me of where that is in my 2 testimony? 3 Q. I don't have the page number. Maybe I'll just 4 step back from your testimony then and ask it this way. 5 Do you believe that organic farmers, it is 6 important to them to utilize risk management tools? 7 A. I do actually believe it's important for organic 8 producers, for all producers, to utilize risk management 9 tools. Within organic, that tends to happen a little bit 10 differently. Within organic, it tends to be long-term 11 fixed price contracts between the producers and their 12 buyer. 13 Q. And so most of the clients that you work with that 14 are in the organic farming arena, they enter into fixed 15 price contracts to sell their milk; is that right? 16 A. Typically, yes. 17 Q. And are those 12 to 24 months, generally? 18 A. Often longer. The -- the timeline for transition 19 to organic is lengthy, and so it's very frequent to have 20 multiple-year contracts, not just 12 or 24 months. 21 Q. And do they use any other risk management tools to 22 lay off the risk of their forward fixed price contracts? 23 A. Some do. There is a lot of issues within organic 24 around the basis risk, because it's the -- you are not 25 going to be able to -- you are not going to be able to 26 hedge your feed in the same way on a conventional -- as 27 you would if you were a conventional operation, so it's -- 28 it's not the same construct. 5729 1 Q. What tools do they use, then, to lay off the risk 2 of their forward milk price contracts? 3 A. Some producers participate in the Dairy Margin 4 Coverage Program. And then the -- and then it's a modest 5 thing, but people -- you know, energy, fuel, things like 6 that. There's other -- you know, there are other things 7 besides just the milk and the feed. 8 Q. What about swaps and OTC products? 9 A. I'm not aware of people using that, but -- I'm not 10 aware. 11 Q. Okay. Futures? 12 A. Again, I'm not aware of organic producers using 13 those sorts of -- 14 Q. And I think you said that you are not an expert in 15 risk management when you were talking with Ms. Vulin; is 16 that right? 17 A. That is correct. 18 Q. Do you provide advice and counsel to your 19 customers and clients about risk management? 20 A. My advice and counsel to my customers and clients 21 around risk management is that they should do it, and that 22 they should seek the advice of an expert, who is not me. 23 Q. Fair enough. 24 But I think you testified, when you were talking 25 with Ms. Vulin, that risk management is of critical 26 importance, or very important, and that's why even when 27 MIG's proposal can sometimes show that it's not going to 28 be as financially beneficial to processors, they are still 5730 1 willing to support it in order to preserve that tool of 2 utilizing risk management; is that accurate? 3 A. Yes, that is accurate. 4 Q. Okay. And -- and I think you also said it has 5 evolved over time in a way that it is still continuing to 6 bring in more people who are willing to engage and utilize 7 risk management tools. 8 A. Yes. I think the use of risk management tools 9 throughout the industry is growing and changing 10 continuously. 11 Q. And it's fair to say that -- and we have seen some 12 of the testimony this week even, that as that liquidity 13 grows on the market and the ability -- the ability for 14 people to actually have tools available to them for risk 15 management, that grows as well? 16 A. Yes. The tools that are out there change over 17 time, I would imagine, and -- but please understand that 18 I'm not an expert in this -- that different -- different 19 products have different prices, and so the transaction 20 costs associated with something that is new, different, 21 custom, bespoke, is likely not the same as something that 22 is more run of -- 23 Q. Tried and true? 24 A. -- the mill. 25 THE COURT: I'm sorry? 26 THE WITNESS: Yes, tried and true is nice. Thank 27 you. 28 THE COURT: Okay. Thank you both. 5731 1 BY MS. HANCOCK: 2 Q. And just to be clear, risk management is its own 3 business; is that right? 4 A. Risk management is indeed its own business, and it 5 is not my business. 6 Q. Okay. But you understand that at least that it 7 comes with a price if somebody wants to engage in 8 utilizing risk management tools? 9 A. It is not free. 10 Q. And so, like, even, you know, like Dr. Bozic sells 11 products to different -- well, people in this room. 12 A. And I -- I believe we have heard from a number of 13 experts here who provide -- Dr. Bozic, Ms. Dorland -- 14 people provide these services, I do not. 15 Q. Okay. And those are the people to whom you refer 16 your clients, that when they do decide to utilize risk 17 management tools, to go find people who are like that, 18 that are experts and who can sell those products or help 19 them understand the use of those products? 20 A. I suggest that they go to experts, and I also 21 frequently recommend that they start within their own 22 financial network. Like, if you bank at Wells Fargo, go 23 talk to Wells Fargo, see what they can do to help you. 24 Q. And I think you said just a couple minutes ago 25 that these tools change with time as well, and that it's 26 an evolving industry where the products will change 27 depending on what's happening in the market? 28 A. Yes. And so staying current is another reason why 5732 1 you may seek expertise from a consultant. 2 Q. And so you would agree with me then, that even 3 between when higher-of moved to average-of with a goal of 4 allowing more hedging opportunities, that additional 5 products have come on the market that would be tools that 6 could be used even under a higher-of mover? 7 A. My understanding from our members is that the 8 higher-of formula is very difficult to construct a 9 cost-effective hedge, and so I think that it is the sort 10 of thing that is possible, but I also -- my understanding 11 that it is -- that it can be quite expensive and rather 12 risky, so... 13 Q. And new products can come on the market, like 14 there could be a Class I product that could respond to the 15 market need or the importance that the market has placed 16 on wanting to have a Class I contract? 17 A. There could be something new in the future. I'm 18 not aware of something that's out there today that is 19 addressing their concerns. If their concerns were being 20 addressed, we would not be putting this proposal forward 21 like this. 22 Q. And when there's a business out there, if somebody 23 has money to spend, there's oftentimes somebody willing to 24 try and find a product that will work; is that fair? 25 A. I would hope that somebody would come up with 26 something. It's not likely to be me. 27 Q. Okay. And yesterday you were here when Nestle -- 28 when the representative from Nestle testified? 5733 1 A. Yes, I was. 2 Q. And you recall her saying that they were one of 3 the biggest milk purchasers in the country, or maybe even 4 in the world? 5 A. Yeah. I recall her talking about it in terms of 6 the world, globally, as opposed to the country. 7 Q. Okay. And did you hear her also say that she 8 hedges -- or her company hedges 100% of the milk, the 9 Class I milk that they buy? 10 A. I believe so, but -- 11 Q. Well, let me ask the next question then, which is 12 really where I'm going. 13 And you would agree, then, that if you have the 14 biggest Class I milk purchaser in the entire world wanting 15 to hedge 100% of their milk, that that's going to create a 16 market for a product that somebody might want to sell 17 them; is that fair to assume? 18 A. I'm not sure if it's fair to assume. Because 19 nobody had created that product for them in 2018. I mean, 20 I believe things have changed. Maybe somebody's going to 21 make it for them now, but it didn't exist then. 22 Q. Did you hear her also say in 2018 they weren't 23 doing that? 24 A. I believe she said that they did not start doing 25 it until the formula change. 26 Q. Okay. 27 MS. HANCOCK: That's all I have. Thank you so 28 much. 5734 1 MS. VULIN: I think we're due for a break. 2 THE COURT: Oh, my goodness. I was oblivious. 3 Let's take ten minutes. 4 Come back at 2:52. That's 2:52. We go off record 5 at 2:42. 6 (Off the record.) 7 THE COURT: Let's go back on record. 8 We're back on record at 2:55, and I would like to 9 be advised of how we're going to proceed. 10 MS. HANCOCK: Your Honor, thanks to IDFA's 11 counsel, Ms. Vulin, she's agreed to allow us to put on our 12 dairy farmer who is here, Brittany Nickerson Thurlow, and 13 then we will resume, when she's done, we'll resume 14 Ms. Keefe's testimony. 15 THE COURT: Excellent. 16 Would you state and spell your name, please? 17 THE WITNESS: Yes, ma'am. 18 My name is Brittany Nickerson-Thurlow. That's 19 spelled, B-R-I-T-T-A-N-Y, N-I-C-K-E-R-S-O-N, hyphen, 20 T-H-U-R-L-O-W. 21 THE COURT: All right. Do it one more time for 22 me. 23 THE WITNESS: B-R-I-T-T-A-N-Y, N-I-C-K-E-R-S-O-N, 24 hyphen, T-H-U-R-L-O-W. 25 THE COURT: Thank you so much. Have you testified 26 previously in this proceeding? 27 THE WITNESS: No, ma'am. 28 THE COURT: I'd like to swear you in. 5735 1 BRITTANY NICKERSON-THURLOW, 2 Being first duly sworn, was examined and 3 testified as follows: 4 THE COURT: Thank you. 5 DIRECT EXAMINATION 6 BY MS. HANCOCK: 7 Q. Good afternoon, Ms. Nickerson-Thurlow. Thank you 8 for being here today. 9 Did you prepare what we have identified as Exhibit 10 NMPF-83 as part of your testimony? 11 A. Yes, I did. 12 MS. HANCOCK: Your Honor, I don't remember where 13 we are in the number, but if we would assign an exhibit 14 number. 15 THE COURT: So let's see. We had 265 last, and 16 this should be 266. This will be 266. 17 (Exhibit Number 266 was marked for 18 identification.) 19 BY MS. HANCOCK: 20 Q. So I'd ask you at this time to read your 21 testimony. 22 We have just asked all of our witnesses to be very 23 mindful that we have a court reporter here, so if you can 24 try and speak at a moderated pace, it will help her ensure 25 that we capture everything. 26 A. Okay. 27 Q. Thank you. 28 A. Thank you. 5736 1 Good afternoon. My name is Brittany 2 Nickerson-Thurlow, and I'm honored to be here to present 3 my testimony today on behalf of my family, my fellow 4 dairymen and women throughout the Southeast. 5 I'm a fifth generation dairy farmer from Zolfo 6 Springs, Florida, which is in the south central region of 7 our state. I farm with my dad and brother on a 8 pasture-based dairy, where we milk approximately 2,000 9 Holstein cows twice each day. We have 17 employees on our 10 team, and farm on about 1700 acres. Our farm is a member 11 of Southeast Milk, Inc., or SMI, a farmer-owned 12 cooperative of about 120 farms in the Southeastern United 13 States. 14 I have had the honor of being elected to serve as 15 the Vice President of SMI for the past year-and-a-half, 16 and I have learned a tremendous amount about our milk 17 market, our customers, and the impact proceedings like 18 today have on our businesses. 19 I also serve -- 20 Q. I'm so sorry to interrupt, but if you just can go 21 a little bit slower. 22 A. Sure. 23 Q. Okay. Thanks. 24 A. I also serve as a board member of Dairy 25 Cooperative Marketing Association, or DCMA, which is an 26 agency composed of nine dairy cooperatives primarily 27 located in the Southeast. 28 I feel the pressure of the Southeastern dairy 5737 1 industry on my shoulders today, but I hope that this 2 testimony and our story are useful to you and the 3 important decisions that you have before you, especially 4 those pertaining to the Class I mover calculation and the 5 update to the differentials, which is critical to the 6 survival of dairy farming in the Southeastern United 7 States. I truly appreciate the Secretary holding this 8 needed hearing, as it's been a long time since such a 9 hearing has occurred. 10 My story is a bit different than most dairymen. 11 While I was raised on the farm and worked on the farm from 12 childhood through college, I did not return to work 13 full-time on the farm until 2017. 14 After college, I began a career in Corporate 15 America, where I spent almost a decade as a financial 16 analyst. My husband and I returned to the farm after the 17 birth of our son because we wanted to raise our kids to 18 know the lifestyle and values the family farm provides. 19 Since my return to the farm, I have lived through 20 what has seemed like a losing battle at the farm level, 21 the cooperative level, and the industry level as a whole. 22 As a producer in the highest Class I utilization market in 23 the country, I have watched as more than half of the 110 24 Florida dairy farms that were in business when I came back 25 in 2017, shut down their farms. 26 Our family has also come face to face with this 27 question, should we keep going? And have since listed or 28 farm for sale just a few months ago. If sold, it will be 5738 1 the 61st dairy farm to close in six years, leaving only 49 2 dairies in the state of Florida. 3 I can assure you our farm is not the only one who 4 is contemplating selling or exiting the dairy business. 5 Quite frankly, the last few years have felt like an uphill 6 battle wearing rubber boots full of cement while wearing a 7 parka on a hot August day in Florida. The past seven 8 years have been difficult on our industry, to say the 9 least. 10 As a Florida producer, we market our milk in 11 Federal Order 6, or the Florida Milk Marketing area. Over 12 the ten-year period from 2013 to 2022, this Federal Order 13 has averaged an 83.8% Class I utilization rate. This 14 means that about 84% of the milk in my Federal Order is 15 used for Class I or beverage milk. 16 Our high Class I market has been the lifeblood of 17 the dairy industry in Florida and the Southeast. High 18 production costs in the Southeast have been historically 19 tolerable only because of this high-value Class I milk 20 market. 21 However, in recent years that has not been the 22 case, and instead, we have in many instances lost value 23 because of issues in the Federal Order that have brought 24 negative price implications on the Class I milk markets. 25 That is why these two important issues, the Class I mover 26 calculation and the update to differentials, are very 27 important to my family and the SMI dairy farmers, and will 28 be a major determining factor of whether the Southeastern 5739 1 dairy farm attrition rate continues or slows. 2 SMI is supporting all five of the NMPF proposals, 3 but today, I would like to specifically testify my 4 advocating for the dire need to change the Class I price 5 surface, Proposal 19, and to revert to the higher-of mover 6 calculation, Proposal 13. I'm implore USDA to adopt both 7 of these two proposals as soon as possible. 8 First I'd like to address the Class I differential 9 update. Most Federal Order Class I differentials have not 10 been updated since the Federal Order reform, with the 11 exception of the differentials in the Appalachian, 12 Florida, and the Southeastern Orders, which were only 13 modestly updated in 2008. I'm sure I'm not alone in my 14 experience that virtually nothing is the same as it was in 15 2008. 16 In 2008, my feed cost was $10.52 per 17 hundredweight. Today, my feed cost is $18.18 per 18 hundredweight. 19 THE COURT: Could you re-read that sentence? 20 THE WITNESS: Yes, ma'am. 21 In 2008, my feed cost was $10.52 per 22 hundredweight. Today, it is $18.18 per hundredweight. 23 In 2008, the Florida minimum wage was $6.55 per 24 hour. This year it will increase to $12 per hour. And 25 the cost of hauling milk has almost tripled since the 26 current Class I differentials were established. I could 27 go on and on with these comparisons, but those three, 28 feed, labor, and hauling, are the largest costs we have on 5740 1 our farm, and there is a clear disconnect between reality 2 and the economics the differentials were designed to 3 complement. 4 Next I would like to address the Class I price 5 mover calculation. This calculation, as you well know, 6 was changed this 2018. As I recall, having just come back 7 to the farm the prior year, the conversation around this 8 change that it was going to be negative -- or revenue 9 neutral to farmers and a tool to assist processors with 10 hedging on their end. 11 Unfortunately, that has not been the case. This 12 change has caused significant negative price impacts at 13 the farm level. Some of those were certainly exacerbated 14 by extraordinary events like COVID. However, even still 15 three years after the pandemic, we are still seeing 16 negative price impacts to our pay price today because of 17 this change. 18 I would like to submit my farm's case specifically 19 to give you a real life example of how big of an issue 20 this really is. I have done the math to quantify the 21 impact that this calculation change has cost us. If I 22 change -- if I compare the current calculation to the 23 previous calculation from 2019 to June of 2023, and use 24 the standardized 3.5% butterfat, my family's farm has 25 personally lost almost $600,000 over a four-year period. 26 While that may sound small in the grand scheme, that's a 27 lot of money for a family farm. 28 Furthermore, if we use the same formula to 5741 1 estimate the total impact to the Federal Order 6 market, 2 it totals nearly $43 million farmers have lost because of 3 this change. A $43 million loss is in no way revenue 4 neutral to farmers. 5 In closing, I would like to say that -- I would 6 like to summarize by saying this. This Federal Order 7 hearing will change the future of the dairy industry. I 8 encourage each of the decision-makers in this process to 9 think back to the farm first. Without our farms, there 10 are no processors, there are no checkoff organizations, 11 there are no Federal Orders, and the economic impact to 12 suppliers, employees, and rural economies is lost. The 13 farms are who feeds the supply chain from top to bottom 14 and from left to right. 15 Our farms should have the opportunity to thrive 16 just as much as anyone in that chain, but that role has 17 been reversed, or at minimum, highly compromised. The 18 Federal Order was established to provide an orderly market 19 for Class I milk. Without significant changes in the 20 dairy industry, especially in updating the pricing 21 formulas in Federal Orders, we will have more dairy farm 22 attrition. 23 Our Southeastern dairy farms have been 24 economically hindered by both the outdated Class I 25 differentials and the Class I mover calculation change. 26 If continuing to ensure an orderly market for Class I milk 27 and keeping a local food supply remain the intent of the 28 Federal Order, we need meaningful changes and we need them 5742 1 as soon as possible. 2 I want to thank you all again for the opportunity 3 to be here today to testify. Thank you all for the time 4 and effort you are allocating to our dairy industry during 5 this important Federal Order hearing. I believe I speak 6 on behalf of all U.S. dairymen and women when I tell you 7 how much it really means to us. 8 Thank you very much. 9 BY MS. HANCOCK: 10 Q. Thank you. I just want to follow up on a couple 11 of questions. 12 You talk about the high Class I utilization in 13 your market. I'm wondering if you have observed whether 14 there has been enough milk to service the Class I markets 15 where you live? 16 A. In Federal Order 6, we do import a significant 17 amount of milk into that Federal Order. There's a large 18 milk shed for sure in Georgia in that Federal Order. And 19 a lot of milk -- I would say a majority of months out of 20 the year, we are importing milk from other Federal Orders 21 into Federal Order 6. 22 Q. So as those dairies that you talked about going 23 out of business, as that occurs, does that make it more 24 difficult for you to attract the Class I milk that you 25 need in your market to service those plants? 26 A. Yes. 27 Q. What about in the -- I'm sorry. 28 A. It certainly adds to the balancing costs, for 5743 1 sure. As we lose local farm -- local farm milk 2 production, that adds to the cost that dairy farmers have 3 of balancing that market. So that means we have to go 4 source that milk from whatever other geographic area, and 5 then import it in. 6 Q. And when you say "we have to source that milk," 7 are you talking about on behalf of your cooperative? 8 A. The cooperative, yes, ma'am. 9 Q. And what about in the stores, what have you 10 observed in the stores where you live? 11 A. Well, I'm a mom in addition to a dairy farmer, so 12 I do frequent the grocery stores. In our -- especially in 13 the Central Florida area, we have a serious problem with 14 not just a shrinking dairy farm population, but we don't 15 have milk on the shelves in a lot of places. Especially 16 during -- you know, it's very bad during holidays and 17 hurricanes, those types of things. But even regular 18 day-to-day, especially in convenience store settings, 19 there's just not milk there. 20 Q. Okay. And if we had moved the Class I mover back 21 to a higher-of, do you think that that would have an 22 effect on the ability of the Southeast market being able 23 to attract Class I milk to that area? 24 A. I think you would have a stronger dairy farmer 25 population, absolutely. 26 Q. Okay. And you gave us some, what I think is 27 pretty personal information about you and your family's 28 farm and the history. And I think you say in here that 5744 1 you are a third -- third-generation dairy farmer? 2 A. Fifth generation. 3 Q. Oh, fifth. I'm sorry. 4 A. That's okay. 5 Q. Fifth-generation dairy farmer. 6 But you also talk about that you have recently put 7 your farm up for sale. Would you be willing to share some 8 of your reasoning for that? 9 A. Sure. It doesn't take long not making money for 10 you to have to start evaluating your business and whether 11 or not you should continue doing what you are doing. 12 I think that you will find most dairy farmers love 13 what they do. We love it. We are not trying to make, you 14 know, historical returns. We're not trying to, you know, 15 make boatloads of money. We just want to make return on 16 our investment and a good living. 17 And I can tell you without a doubt that since I 18 have been back to the farm, over the last seven years we 19 have barely made a return on our investment, much less a 20 reasonable return on our investment. 21 So at some point, you know, we have to look at our 22 operation and say, is our farm more valuable as real 23 estate for another use, or should we continue? And the 24 answer is absolutely not when we look at should we 25 continue dairying in the economic environment we are here 26 today. 27 Q. And you quantified if you had received the 28 higher-of for your Class I milk since 2019, you would have 5745 1 an additional $600,000 over those four years of time; is 2 that right? 3 A. Yes, ma'am. 4 Q. If those dollars had gone into your family's dairy 5 farm, would that have changed the economic analysis that 6 you did in order to decide if you wanted to sell your farm 7 or not? 8 A. Yeah. Absolutely. Because it's not just a 9 $600,000 loss in the calculation change, it's the interest 10 that I have carried on that money over all of that period, 11 because, you know, if we're not generating that cash out 12 of operating, we're borrowing it from a line of credit, 13 and that comes at a cost as well. 14 Q. And does it also impact your confidence in the 15 future about whether this is a viable option for you and 16 the next generations to come? 17 A. Yes, ma'am. I can tell you that if there's not 18 something done about the differentials -- for sure about 19 the differentials, and I would prefer the higher-of as 20 well -- there will be less dairy farms in Florida. Like I 21 said in my testimony, our farm is not the only one. There 22 is a -- probably at least another 10% of the number of 23 farms that are on the edge right now for the state of 24 Florida, which, as we all know, is, you know, one of the 25 highest population growth states in the country. We're 26 right there amongst all of the people. We should have the 27 opportunity and the ability to continue to operate and 28 service our neighbors with a fresh, local, wholesome 5746 1 product, but the economics are just not there for us to 2 continue to do that. 3 Q. I think in your testimony you said that over a 4 period of time you have observed personally that there's 5 61 fewer dairy farms in your area that have gone out of 6 business or sold. 7 A. Uh-huh. 8 Q. Is that a "yes"? 9 A. Yes, ma'am. Sorry. 10 Q. I just want to make sure our record is clear. 11 And of those farms that have gone out of business, 12 what's the primary reason that you see that they are going 13 out of business? 14 A. Lack of profitability is a driving factor. Sure, 15 you have some situations where, you know, farms have sold 16 because of, you know, high real estate opportunity, real 17 estate value opportunity. But, you know, if someone were 18 making money milking cows, they are going to sell that 19 real estate and they are going to go milk cows somewhere 20 else. That's not happening at all. 21 We also have the generational piece, where, you 22 know, we have got a more tenured farmer demographic. They 23 may not have a son or a daughter there that can take over 24 the farm. That may be by virtue of they don't have kids, 25 but in a lot of cases it's they can't afford to pay their 26 children a competitive wage to come back to the farm and 27 continue doing what the family legacy has been. 28 Q. And so then you lose that pipeline -- 5747 1 A. Yes, ma'am. 2 Q. -- of not having that next generation trained up 3 and already in the industry, ready to take over? 4 A. Yes. Yes. 5 Q. Okay. I really appreciate your willingness to 6 being able to share all of this with us. 7 MS. HANCOCK: Your Honor, at this time we would 8 make Ms. Nickerson-Thurlow available for 9 cross-examination. 10 CROSS-EXAMINATION 11 BY DR. CRYAN: 12 Q. Roger Cryan with the American Farm Bureau 13 Federation. 14 Good afternoon. 15 A. Hi there. 16 Q. It's nice to see you again. 17 A. Yes, sir. 18 Q. You were at our forum last October. 19 A. Yes, sir. 20 Q. And you are a Florida Farm Bureau member; is that 21 correct? 22 A. Yes, sir. And I'm a board member of my county 23 Farm Bureau. 24 Q. Fantastic. 25 A. Yes, sir. 26 Q. I'm very sorry about the circumstances that have 27 forced you to make the decision to put the farm up for 28 sale. I -- I went to school in Florida. And are you a 5748 1 Gator? 2 A. I'm not. 3 Q. I'm sorry. I'm sorry. 4 THE COURT: Well, ask her if she's a Seminole. I 5 mean, do something. 6 DR. CRYAN: No, no, no. 7 THE WITNESS: I'm not that, either. 8 DR. CRYAN: No, no. No, ma'am. 9 THE WITNESS: I'm a Bull. 10 DR. CRYAN: Oh, very good. Very good. 11 BY DR. CRYAN: 12 Q. So you were at the forum. And was it -- it was 13 pretty clear that farmers from across the country were 14 there; is that correct? 15 A. Absolutely. Yes. 16 Q. And there was pretty much a consensus in favor of 17 the higher-of? 18 A. Absolutely. 19 Q. This is not a Southeastern issue. 20 A. Correct. Yeah. The setting of -- or the way that 21 the tables were set up, you guys did a great job of 22 putting together farmers from different areas, different, 23 you know, markets, whether Class I, Class III whatever. 24 And so it -- no matter what the table was comprised of, I 25 think on every one of our flip charts where we listed out 26 the consensus of the group, that was certainly one for 27 sure. 28 Q. I appreciate that. 5749 1 Was there anything else you wanted to -- that you 2 took away from that in terms of producer interests or your 3 own learning? 4 A. I learned a lot, absolutely. Especially hearing 5 from fellow dairy farmers from across the country. I 6 think there was a lot of learning between all of us, you 7 know, for -- for a lot of the folks who came from other 8 market areas, they didn't really understand the situation 9 with how some of the things impacted Class I markets 10 because they -- they have such a small Class I market. 11 Federal Order 6 is so unique because we have such 12 a high utilization rate. I think that was a great 13 opportunity for them to learn about, you know, how we have 14 been impacted. And, likewise, myself for other groups, 15 where something like a Make Allowance, I don't really have 16 a lot of familiarity with that because that's not an issue 17 in my Federal Order. So I think it was a great exercise. 18 But the consensus was that dairy farms across the 19 country are struggling and we all need modernization of 20 the Federal Orders to be able to improve all of our 21 situations. 22 Q. Very good. I appreciate your -- your thoughtful 23 comment, your testimony. Appreciate you being here, 24 coming all the way to present to us. And, again, good 25 luck. 26 A. Thank you. 27 DR. CRYAN: Thank you. 28 THE COURT: Is there other examination before I 5750 1 invite the Agricultural Marketing Service to ask 2 questions? 3 I would call on the Agricultural Marketing 4 Service. 5 MS. TAYLOR: Thank you. 6 CROSS-EXAMINATION 7 BY MS. TAYLOR: 8 Q. Good afternoon. 9 A. Hi. 10 Q. Thank you for coming to testify today. You came 11 quite a long ways. 12 A. Yes, ma'am. I'm going back tonight. 13 Q. A few questions I have been asking all our dairy 14 farmer witnesses is if your farm would qualify as a small 15 business, which the official definition is one that makes 16 $3.75 million in gross revenue or less annually. 17 A. No, we would not. 18 Q. And I'd also like to express my -- sorry to hear 19 that you guys have put your farm up for sale. 20 A. Thank you. 21 Q. I did have a question in the past -- and maybe 22 currently at the moment -- is, do you all utilize any risk 23 management tools? 24 A. Yes, ma'am, we do. We utilize Dairy Margin 25 Coverage. We do produce a good bit more than the minimum 26 pounds. So that tool has certainly been useful, 27 especially this year. But to bridge the gap, we also 28 utilize Dairy Revenue Protection. 5751 1 Q. And when you use DRP, how far out do you look to 2 lock in positions? 3 A. It depends on what the numbers look like -- 4 Q. Sure. 5 A. -- right? Yeah. 6 So we just recently, in the last couple years, 7 started using DRP. The question was asked, well, why did 8 you all of a sudden start using it? Because that's when 9 we learned about it. 10 Back prior to, I want to say even prior to 2020, 11 it just wasn't something that was popularly used amongst 12 farmers in my geography. 13 But when I book out presently, typically I'm just 14 booking out to the next quarter or two, mostly because of 15 the premiums are so high as I go beyond that. Not to 16 mention, in my current circumstance, if I book out and I'm 17 no longer making milk, I still have to pay the premium. 18 Q. Right. Okay. Thank you. 19 A. Yes, ma'am. 20 THE COURT: I didn't quite catch the name of that 21 third option for protecting yourself. 22 THE WITNESS: There was just two: Dairy Revenue 23 Protection and Dairy Margin Coverage. 24 THE COURT: Okay. So the one that you started 25 using when you learned about it is the more recent one, 26 the Dairy Revenue Protection? 27 THE WITNESS: Yes, ma'am. 28 BY MS. TAYLOR: 5752 1 Q. You mentioned being in Florida. Obviously, most 2 of your milk goes to Class I. 3 About how far does your milk go to find a plant? 4 A. So I'm in Central Florida. I'm very closely 5 located to a couple of plants. My closest plant is about 6 60 miles away. The plant that I probably service second 7 most frequently is about 80, 85 miles away. Depending 8 upon the time of year, whether or not, we're -- you know, 9 Florida production is seasonal. Whenever -- in the hot 10 months we tend to shift milk south, so sometimes my milk 11 may go into that South Florida milk shed at that time of 12 year. 13 Q. Okay. And you mentioned that over the past -- 14 since the differentials were established, so is that since 15 2000? 16 A. Yes, ma'am. 17 Q. Not the '08 change, but the 2000. 18 A. Right. 19 Q. So your hauling costs have tripled. And you're a 20 member of SMI. So is it correct that SMI is charged with 21 marketing your milk, and picking it up, and moving it to 22 one of those plants? 23 A. Yes, ma'am. Southeast Milk has a transportation 24 division that hauls our milk for certain geographies. 25 Q. Okay. And you talked about in response, I think, 26 to Ms. Hancock, about how in Florida you're a deficit 27 market, so your co-op has to look to bring milk in. 28 And so I was wondering if you could talk about, 5753 1 since you're a member of the co-op and you are on the 2 board, how are those costs accounted for amongst the SMI 3 members, or are those? 4 A. Yes. So it depends on the agreement that we would 5 have with whatever supplemental supplier. Supplemental 6 supplies aren't always from far-off supplies. You know, 7 we may have an agreement with a local competitive co-op 8 where, you know, we may do a milk swap or whatever it is, 9 just to reduce the number of miles. 10 But anything that comes at the cost of importing 11 milk, that becomes a marketing expense. And typically, a 12 marketing expense is something that's taken out on a per 13 hundredweight basis from the pool prior to producers being 14 paid. So, you know, marketing expenses, whatever gross 15 revenue, minus whatever your marketing expenses are, 16 checkoffs, those types of things, and then, you know, your 17 net dollars to the farmers. 18 Q. And so is that cost for bringing in that 19 supplemental supply then, that marketing cost, is that 20 spread amongst all the members? 21 A. Yes, ma'am. 22 Q. In addition to your own cost to haul? 23 A. Yes. 24 Q. And how have you seen those marketing cost 25 deductions over the past few years, then? What do they 26 look like? 27 A. It really varies, you know, depending on what the 28 availability of local milk supply is. But, you know, 5754 1 marketing costs have been substantial over the last few 2 years. It's an initiative that our cooperative management 3 has certainly taken to reduce those marketing costs as 4 best that... 5 Q. Okay. On the second page you talk about some 6 specific feed costs and -- well, input costs: Feed, 7 labor, etcetera. And you put those on a per hundredweight 8 basis. And when you talk about, on the next page, how 9 much your farm has lost that you calculated on the mover 10 change in the last four years, that's on a total basis 11 $600,000. 12 I was just curious if you could talk, kind of put 13 one or the other on the same unit, in a way, like, 14 $600,000 accounts for what per hundredweight, whereas you 15 look at your total input cost increases, what are you 16 looking at on a year average increase in total? 17 A. They are on the same cost. Even though I gave you 18 a total number for what we have lost in the Class I mover 19 change, that's based on a monthly calculation of, if I 20 take the per hundredweight change in price, old formula 21 versus new formula, and then apply that to my monthly 22 production, then I have a monthly amount that I either 23 lost or gained based off of whatever that Class I 24 calculation was. 25 The total over that period was, I think it was 26 $580,000-something, so nearly 600,000. On a feed cost 27 side, it's the same. It's monthly. It depends on 28 whatever the feed price is, because that changes every 5755 1 15 days for us as well. So cumulatively, I mean, I would 2 have to check some P&Ls to give you a real precise answer. 3 Q. That's okay. I appreciate the -- I appreciate 4 your thoughts on it, though. 5 A. Yes, ma'am. 6 MS. TAYLOR: I think that's it from AMS. Safe 7 travels home tonight. 8 THE WITNESS: Thank you. I appreciate it. 9 THE COURT: Are there other questions before 10 redirect? 11 MS. HANCOCK: Thank you so much for your time and 12 for making the trip out here. 13 Your Honor, we would move for admission of 14 Exhibit 266 at this time. 15 THE COURT: Are there any objections? 16 Exhibit 266 is admitted into evidence. 17 (Exhibit Number 266 was received into 18 evidence.) 19 THE COURT: Ms. Nickerson-Thurlow, I -- I have 20 been fighting back tears during your entire testimony, and 21 I just wish you well. 22 THE WITNESS: Thank you. I appreciate it. 23 THE COURT: So Sally Keefe resumes? 24 MS. VULIN: Yeah, if we could maybe just go off 25 the record for a minute so she could get set up. 26 THE COURT: Certainly. 27 MS. VULIN: Thank you. 28 THE COURT: Let's take five-minute stretch break 5756 1 right here in the room. 2 MS VULIN: Thank you. 3 (An off-the-record discussion took place.) 4 THE COURT: Let's go back on record. 5 We're back on record at 3:31. 6 Where are we in the questioning? I have lost my 7 page. 8 Mr. Miltner. 9 SALLY KEEFE, 10 Having been previously sworn, was examined 11 and testified as follows: 12 CROSS-EXAMINATION 13 BY MR. MILTNER: 14 Q. Ryan Miltner representing Select Milk Producers. 15 Good afternoon, Ms. Keefe. How are you? 16 A. Good afternoon, Mr. Miltner. I'm well, thanks. 17 Q. Great. 18 So during your presentation with Ms. Vulin, you 19 made a statement that price inversions provide an 20 important signal to dairy farmers. 21 Can you elaborate on that just a bit? 22 A. I see that price inversions are a market signal. 23 So I would say that the signal is beyond just dairy 24 farmers, it's for the entire market, that the value of 25 milk for a non-fluid use would be higher than the value of 26 milk for fluid use at that moment in time. 27 Q. And does that signal get distorted at all, at 28 least to the producer, because of the timing of price 5757 1 announcements for Class I milk versus Classes III and IV? 2 A. Certainly there are a lot of things that lead to 3 depooling, and that information and research that I have 4 reviewed has suggested that advanced pricing is one of -- 5 is a contributor to depooling. 6 Q. And for the life of me I can't remember who said 7 it this week, but there was a witness who testified that 8 using an average of III and IV added to both the frequency 9 and the magnitude of negative PPDs. 10 Did you hear that testimony? 11 A. I believe somebody has said that, but who that 12 person is and when it happened is a little muddled in my 13 mind at this point. 14 Q. Do you agree with that analysis? 15 A. No. I think it's far more complicated than that. 16 The average-of is one contributor to negative PPDs. But 17 negative PPDs have a number of causes. And that's, as I 18 understand it, not even the number one cause. 19 Like, the biggest thing I believe with negative 20 PPDs is going to be just the overall -- the range, the 21 spread that's happening between III and IV is going to be 22 a very big factor, and then you are also going to have 23 just the overall utilization mix. There's a number of 24 things. And I would point you to Exhibit 76 in the 25 record. 26 Q. Okay. Do you have an opinion as to whether the 27 spread between the Class I mover -- let me rephrase that. 28 Does utilizing an average-of Class III and IV plus 5758 1 some sort of adjuster rather than the higher-of mute or 2 distort the price signals that producers should be 3 receiving from the market? 4 A. I don't think that it does. I think that most of 5 the price that we have got there is simply the average. 6 And so the bulk of what -- of the information that we're 7 being -- trying to transmit is being transmitted by that 8 average-of III and IV. 9 Q. And so, for instance, a rapidly rising cheese 10 market, which wouldn't be reflected in the mover for up to 11 36 months, you believe that with that signal would still 12 be effectively communicated to producers through their 13 prices? 14 A. I believe that the overall big picture signals 15 that we're trying to send through the price with the 16 adjuster over time will get it right over time, be roughly 17 neutral, roughly equal. 18 Q. So if we were just to think about MIG's proposal 19 for the mover versus National Milk's, is the main argument 20 for adopting the MIG proposal over the others, that it 21 allows Class I handlers to better manage their price risk? 22 A. That is its primary advantage. The nature of the 23 rolling average adjuster also provides -- does dampen some 24 volatility on the base Class I skim price. 25 Q. And are you testifying also that a secondary 26 benefit is that the customers of Class I handlers will be 27 better able to offer their products at a flat or more 28 stable price? 5759 1 A. They could. If -- but they need to -- they need 2 to utilize all the tools that are out there in the risk 3 management world to be able to take advantage to be able 4 to do that. The -- the formula facilitates it, the 5 formula doesn't make that happen. 6 Q. So you had a lot of -- you made some statements in 7 your testimony, you had some questions also from 8 Ms. Hancock about the net income to producers over time 9 under the MIG proposal versus returning to the higher-of. 10 And would you agree that over time, the MIG 11 proposal, which does not cap or floor the add-on to the 12 average, the net difference between the National Milk 13 proposal and the MIG proposal will be relatively small, 14 however we quantify that? 15 A. Yes. 16 Q. So if we looked at any particular month, so for 17 instance on your Exhibit 264, for the last month reported 18 on there, which is August of '23, the higher-of is $0.95 19 higher than MIG's Proposal 15. But if you then looked at 20 January of '23, that relationship is almost reversed, 21 right? So any individual month it's going to go one way 22 or the other, correct? 23 A. In any individual month it will go one way or the 24 other. On the average -- 25 Q. Right. 26 A. -- they are going to come together. But any 27 particular month, they are -- they are not going to be the 28 same. There might be one month out there where they are 5760 1 the same, but -- 2 Q. I wonder if -- I'm now looking at Exhibit 265, 3 page 4. And so I'm looking at the five-, ten-, 15, and 4 20-year averages, looking at the comparisons of 5 Proposal 15 and 13. 6 And I wondered if you had any thoughts about why 7 the higher-of is consistently higher than 15 over those 8 various spans? 9 A. So a little bit of it will be related to the lag 10 nature of the adjuster. The differences for 2022 will not 11 have fully rolled on to Proposal 15 yet. 12 I'd also note that they are not remarkably far 13 apart. It's -- we're talking -- it's $0.08 a 14 hundredweight. 15 Q. Right. 16 Do you happen to recall any decisions of USDA that 17 found that a $0.01 difference was meaningful? 18 A. You know, Ryan, I think I do, actually. 19 Q. Okay. I recall that as well. 20 Do you have familiarity with USDA's retail -- 21 retail price reports on gallon milk? 22 A. I'm familiar with them. I don't -- they are not 23 one that I read -- like, the uniform price announcements, 24 those I read very religiously. The gallon thing is more 25 of like a skim or a scan when I can touch down on it. 26 Q. Okay. And are you aware of Class I handlers 27 hedging their milk costs prior to the adoption of an 28 average-of mover? 5761 1 A. I am not. To the best of my knowledge, it wasn't 2 really being done. I'm sure there was somebody out there 3 doing something that I'm not aware of, but I'm not aware 4 of that. 5 Q. And I forget, you probably know better than I 6 which month that change took place. Was it May of '19? 7 A. Yes, May of 2019 is when the formula changed. 8 Q. Okay. So using USDA's data, I did some 9 comparisons. And would you be good enough to accept my 10 math for purposes of argument? 11 A. Sure. 12 Q. If for all markets, the Class I raw milk price in 13 2018 had a variance from high to low of 18%, but the 14 retail whole milk price reported by USDA had a volatility 15 of 3.2%, and in 2022 the volatility of the raw milk price 16 was 27.4%, and the volatility of the retail price was 17 15.6%, does that suggest that Class I handlers are 18 effectively hedging their costs? 19 A. To the best of my knowledge today, the number of 20 participants, there are folks within Class I who are using 21 these tools, but it -- as we have heard from other 22 witnesses, this -- this is -- this sort of risk management 23 and using -- constructing hedges to be able to collar your 24 price for retail is not -- has not been widely adopted 25 within the HTST market. And most of that price survey 26 that you are looking at is going to be the HTST market. I 27 mean, that's the bulk of what's out there for sale today. 28 Q. Is that difference in the ESL market, in your 5762 1 experience? 2 A. In my experience, the ESL market is much more 3 likely to be hedging and trying to set a more stable 4 price. 5 Q. And so the HTST market in 2020, the average 2% 6 gallon was $1.48, which is -- for a gallon, which is the 7 same price that Nestle's charging for 14 ounces of their 8 ESL product. 9 So they are very, very different markets, correct? 10 A. They are -- they are very different markets. And 11 a gallon jug is really different than a small bottle of 12 Nesquik. They are -- they are very different products. 13 Q. Right. 14 And the hedging that is done is very, very 15 different in your experience? 16 A. So in my experience with the HTST market, it's 17 much more like -- it's -- the HTST market, the terms of 18 trade, people very much rely on the advanced pricing. And 19 advanced pricing -- and there are routinized monthly price 20 changes that are going from the processors of all types, 21 so cooperative processors, fluid processors, 22 retailer-captive processor -- sorry -- cooperative fluid 23 processors, proprietary fluid processors, and the retailer 24 captives. And that monthly price change dynamic related 25 to advanced pricing is a very routinized part of the HTST 26 terms of trade today. 27 Q. I'm curious if you have an opinion about -- about 28 that HTST market and reasons why the volatility and the 5763 1 raw milk price wouldn't necessarily translate to the 2 retail price, then. 3 A. Boy, that's a big question. I mean, there's a lot 4 that goes into setting -- there's a lot that goes into 5 what the price winds up at the shelf. So you've got, you 6 know, some retailers like an everyday low price, some 7 retailers like a high/low strategy with promotions. 8 There's a lot there. And then you have the dynamic of the 9 raw milk costs changing every month and that being passed 10 through. So there's -- there are a lot of different 11 reasons why. But, you know, it -- it's important to 12 consider the retailer in that conversation and discussion, 13 too. 14 Q. So for a cooperative with members that might 15 really feel comfortable with the higher-of mechanism that 16 they are familiar with, but not certain about what the 17 future -- what the proper path for the future might be is, 18 other than risk management for the handler, what reasons 19 might you offer to them to endorse the MIG proposal? 20 A. There is also the benefit of the adjuster does 21 slightly dampen the price volatility. It would be 22 slightly more stable, but I wouldn't want to oversell it 23 as -- because you -- once you go from the HTST processor 24 to the retailer, you are going to have to get buy-in at 25 that next step along the way for your pricing strategy. 26 Q. Thanks. 27 MR. MILTNER: That's it. 28 CROSS-EXAMINATION 5764 1 BY DR. BOZIC: 2 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 3 So producers could rightfully ask, why should we 4 care about private handlers' -- mostly private handlers, 5 in your group -- ability to hedge and manage risk? So I'm 6 going to tease out the answers to that a little bit. 7 Is it correct that the witness from Nestle 8 suggested that ability to hedge increased the sales of 9 their product? 10 A. Yes, I recall her testifying that they attribute a 11 portion of that sales growth to the ability to hedge the 12 product, the raw material cost there. 13 Q. And -- and if there are more Class I sales, how 14 does that affect the relative utilization of various 15 classes within a Federal Order? 16 A. So more Class I sales will increase the Class I 17 utilization, which will ultimately increase the producer 18 uniform price or the blend, because the Class I processors 19 are the mandatory participants, they are there all the 20 time. 21 Q. So higher Class I sales ultimately lead to farmers 22 getting paid more? 23 A. Ultimately, yes. 24 Q. So therefore, does it follow that enabling private 25 handlers, private Class I handlers to hedge, leads to 26 higher dairy farmer prices long-term through the higher 27 sales of Class I products? 28 A. That's certainly the hope. 5765 1 Q. Okay. My next topic is on the HTST versus ESL 2 plants. 3 And my understanding, based on the secondhand 4 data, is that there's been a lot of HTST plants closing 5 since the higher-of started, and that we had about a 6 dozen -- just short of a dozen new ESL plants coming up. 7 Do you think I'm close with that? 8 A. Yes, I do. 9 Q. And why is that? Why are we seeing more ESL 10 plants coming up? 11 A. I think there's a number of different reasons, but 12 I think that ultimately the -- the ESL processing format 13 lends itself to products that are gaining wider consumer 14 acceptance today. There's also benefits related to 15 managing your business with, like, how you work with 16 inventories, lots of different things. But ultimately 17 it's -- the ESL products have proven themselves to be 18 better able to compete on the shelf with non-dairy 19 alternatives. 20 Q. Would you anticipate the ESL trend to continue, 21 the growth in ESL market share to continue? 22 A. I think that ESL will continue to be a growing 23 share of the market. I've -- when I started in the dairy 24 industry, I primarily worked with HTST fluid processors, 25 and -- and in the late '90s was my first experience with 26 working with an ESL plant. 27 Today, virtually none of the plants that are in 28 our -- in the Milk Innovation Group were processing ESL 5766 1 milk at that point in time when I was -- when I had first 2 started. 3 Q. Would it be fair to say that if innovation is 4 going to happen anywhere in the fluid sector, that it is 5 more likely to happen within the ESL space rather than 6 the -- when I say "ESL," I also include aseptic -- rather 7 than the HTST space? 8 A. I think that you are likely to see more innovation 9 in the ESL, the aseptic space, you know. I also think 10 that there's some cool fun stuff in HTST, too. 11 Q. Sure. Sure. I didn't mean exclusively, just more 12 likely. 13 A. Yeah. 14 Q. And is it fair to say that hedging is more 15 important to the ESL than HTST manufacturer? 16 A. Yes. And one big reason for that is that your 17 extended shelf life products, your aseptic products are 18 held in inventory by that processor for a much longer 19 period of time, and so that is another part of their risk 20 that they are looking to manage. 21 Q. That wasn't my reaction. I apologize. 22 So now putting all of this together, does it not 23 follow then that if we go back to higher-of, which is 24 unhedgeable, that that could slow down the innovation and 25 modernization of the fluid sector? 26 A. I think that it -- it -- yes, it could slow it 27 down. It -- it puts up another challenge. 28 Q. Okay. Thank you very much. 5767 1 My next topic is regarding the famous organic 2 example in Ms. Dorland's testimony. 3 And to your knowledge, is anyone among organic 4 processors wishing that they could do the kind of hedge 5 that Ms. Dorland attempted to illustrate? 6 A. I am not aware of anybody within organic that has 7 attempted to hedge their producer settlement fund 8 obligation in the way that that example was constructed. 9 Q. So can we derive from Ms. Dorland's example any 10 insights to help decide between the alternative proposals 11 for Class I mover? 12 A. I don't think so. I don't think it -- that 13 example provides a lot of -- it shows what's really hard 14 to do or what can't be done. 15 Q. Under either proposal? 16 A. Under either proposal. It's -- hedging -- trying 17 to hedge the producer settlement fund obligation is a 18 fruitless task. 19 Q. Which nobody is even wishing they could do, 20 really? 21 A. I am -- no one is wishing they could do it in 22 organic or conventional that I am aware of. That is a 23 fruitless task. 24 Q. Thank you very much. 25 My next topic is regarding advanced pricing. So 26 reading the materials from MIG that have been previously 27 submitted as exhibits, I understand that you have concerns 28 about Proposals 16 through 18, partially because they 5768 1 would remove advanced pricing; is that fair? 2 A. Yes, that's fair. 3 Q. And my understanding is that your concerns stem 4 from the fact that not all of the fluid milk members need 5 to hedge because they have a natural hedge under the 6 current policy set up; is that fair? 7 A. Yes. With the advanced pricing, like what 8 Mr. Miltner and I were talking about, the HTST processor 9 has some built-in risk management there through the 10 advanced pricing. 11 Q. But for those fluid milk handlers, mostly ESL, who 12 do hedge, would you agree that pricing based on announced 13 prices would help their hedging easier? 14 A. If you are hedging and only having one time 15 series, like, instead of the advanced with the two weeks 16 and then the other one that's every week, it would, in my 17 opinion, be easier to do it with just one series. But you 18 have to be -- for that to be effective, you have to be 19 using the tools, like -- 20 Q. In other words, if we do away from advanced 21 pricing, but we don't have, you know, an average-of or 22 something similar to that that would facilitate hedging, 23 removal of advanced pricing on its own is not going to cut 24 it, it's not going to help? 25 A. No. 26 Q. But when combined with something like average-of, 27 removal of advanced pricing for those that do hedge would 28 help? 5769 1 A. If you are hedging, it would -- it would work. 2 But you have to be doing that, like -- 3 Q. Right. Right. 4 To -- what is your understanding, would removal 5 off advanced pricing help reduce the incidence and the 6 magnitude of depooling? 7 A. Yes. I believe it would. 8 Q. And I apologize for being repetitive. I think 9 Mr. Miltner asked some of these questions. I'd like to 10 put everything in the record in one bundle, if you will. 11 A. That's okay. 12 Q. So to your understanding, and I understand this is 13 not your area of core expertise, but would removing -- 14 would not using advanced pricing help or hurt 15 producers' -- dairy producers -- ability to manage risk? 16 A. Can you repeat that one more? 17 Q. If I'm a dairy producer and I want to stabilize my 18 revenue, is it easier for me to do that if the Federal 19 Orders use advanced pricing or if the Federal Orders are 20 designed in a way that there no advanced pricing, there's 21 only announced prices? 22 A. No matter which market participant you are talking 23 about, the hedging is going to be easier with just 24 announced prices. 25 Q. Thank you for your answer. 26 Now, you represent Milk Innovators. Presumably 27 you really do care to be able to attract sufficient 28 reserve supply of milk for your members' needs? 5770 1 A. Absolutely. 2 Q. Does your proposal, in your opinion, hurt your 3 ability to attract sufficient milk? 4 A. Definitely not. If we thought that our proposal 5 would, in any way, impact our ability to attract the milk 6 we need, we would -- that would not be the proposal. 7 Q. And speaking of market signals and delayed market 8 signals, you know, how high do you believe the chances are 9 somebody may find the Class I milk price to be too high 10 and just leave a trailer overnight in front of a fluid 11 milk plant, even if you don't need that milk? 12 A. I don't think that's how the real world works. 13 Q. So there's no -- there's no -- 14 DR. BOZIC: Thank you, your Honor, for allowing me 15 to be a little facetious here. 16 BY DR. BOZIC: 17 Q. So there is no danger of having "too much milk" 18 being pushed to Class I? 19 A. I don't think so. 20 DR. BOZIC: That's all I have. 21 DR. BOZIC: Thank you very much. 22 CROSS-EXAMINATION 23 BY MR. LAMERS: 24 Q. Mark Lamers, Lamers Dairy. Just a couple things 25 for you. 26 Have you ever looked at what hedging or risk 27 management would look like if there was no depooling? 28 A. I have not, no. 5771 1 Q. Could you give us your opinion of what it might 2 look like? 3 A. I think that without depooling, the utilization 4 within the orders is easier to predict. But that is -- 5 like I said before, that's not my area of expertise. 6 Q. Potentially, it could help, though? 7 A. I would agree that it certainly has potential to 8 make it easier. 9 Q. Okay. I just want to touch on advanced pricing a 10 little bit. 11 Being a fluid handler such as ourselves, we need 12 to know what advanced pricing is going to be so we know 13 what to charge our customers, so that when we get our pool 14 bill, we don't have to wait for the money, you know, in 15 order to make that pool obligation. 16 That's correct? 17 A. Absolutely. That is correct. 18 Q. So eliminating advanced pricing would not help the 19 Class I handler? 20 A. Eliminating advanced pricing would be very 21 difficult for a lot of Class I handlers. 22 Q. Okay. Then the last thing I just want to touch 23 on. 24 Ms. Hancock had mentioned about the number of 25 producers going out of business because of potentially not 26 receiving the benefit of the higher-of. 27 Could not the same be true in the months where 28 milk is depooled because of the lower revenue farms 5772 1 receive because of that milk being depooled? 2 A. Well, it depends on -- when milk is depooled, it's 3 not like the milk wasn't sold. Someone still bought the 4 milk. The milk was still used. And the idea there is 5 that the dairy farmer should be receiving a market-based 6 price for that milk, for what it was used for. And so -- 7 Q. Correct. 8 A. -- you know, I don't know if depooling -- I don't 9 know if you can link depooling with farm exits. I'm not 10 sure about that. 11 Q. Just the same way you can't link using the 12 higher-of for a producer exiting the market? 13 A. That's correct. 14 Q. Okay. 15 MR. LAMERS: Thank you. 16 THE COURT: Are there further cross-examination 17 questions of Ms. Keefe before I invite the Agricultural 18 Marketing Service to question? 19 I do invite the Agricultural Marketing Service to 20 question. 21 MS. TAYLOR: Thank you. I accept your invitation 22 this afternoon. 23 CROSS-EXAMINATION 24 BY MS. TAYLOR: 25 Q. Good afternoon. 26 A. Good afternoon. 27 Q. I know you have testified before, and I shouldn't 28 ask you repetitive questions, but I forget. So can you 5773 1 remind me how many members there are of MIG? 2 A. Yes. MIG has ten members. Would you like me to 3 state them for the record again? 4 Q. No, that's on the record, and I will be able to 5 look that up. 6 A. Okay. 7 Q. But I did have a question about, for those ten 8 members, do you have any idea how much of the Class I 9 volume they represent? 10 A. No, I do not. 11 Q. Okay. Do you have any idea of what -- of their 12 ESL versus HTST production? 13 A. You mean do I know which are processing ESL and 14 which are processing HTST? 15 Q. Yeah. Or of them -- yeah, I mean, I don't -- you 16 know, four of them make both, two of them make just ESL. 17 You know, some kind of breakdown of that. However you 18 want to define it is fine. 19 A. So of the ten: Four are HTST only; three are 20 both; and three are nearly exclusively ESL. 21 Q. Thank you. 22 On page 3, the sentence where you have it 23 underlined, that when you compare 15 and 13, each would 24 return roughly the same amount of money to farmers. And 25 so you make that statement, and your chart below is what 26 leads you to that conclusion. 27 A. Yes. 28 Q. Okay. I have a couple questions on your rolling 5774 1 adjuster. Intuitively, I would think, a constant rolling 2 adjuster would be better for hedging, but you're proposing 3 a rolling adjuster. And granted, that's intuitively from 4 someone who doesn't do risk management, so I'm probably 5 wrong. 6 But my question is, why is that most likely wrong, 7 and how does your rolling adjuster, you know, impact the 8 ability to hedge? 9 A. So -- so MIG's members who participate in hedging 10 helped with the design of the rolling adjuster. And so 11 the first thing would be, the lag, and so you know what 12 the adjuster is when you're -- when you're putting your 13 hedge on. 14 The -- the constant rolling period allows it to 15 stay current. And there it was trying to get away from 16 the static nature of the $0.74, which is the way that we 17 have been trying to keep it roughly revenue neutral. 18 Because we recognize that that static $0.74 does not -- 19 it -- it -- it doesn't reflect the ups and downs in a way 20 that dairy producers find equitable over time, 21 particularly the ups. 22 Q. And so if we look at your rolling adjuster, if I 23 think back in terms of risk management to the risk 24 management discussions and how that works, that would be 25 the basis risk for each month. 26 Is that how one would, we should look at that? 27 A. Yeah. It is -- I believe that you would want to 28 think about it as part of the basis risk there. 5775 1 Q. And as to the lag piece, am I correct then, as 2 your members see it, since, you know that 12 months in 3 advance, and as you spoke to their goal was eventually to 4 do hedging a year in advance, they would know that number, 5 and could enter into contracts each month that they choose 6 to do that? 7 A. Yeah. 8 Q. Okay. 9 A. So they would constantly be stair-stepping 10 forward. 11 Q. Okay. And how many of your MIG members do 12 hedging? 13 A. I'm going to let them speak for themselves on 14 that, and so you are going to hear from some who are here 15 who do that. Not all of them do it, but you're about to 16 hear all about it. Let's let them speak for themselves. 17 Q. Okay. Is it a correct assumption if they do ESL 18 or do both, they probably do hedging on the ESL portion? 19 A. Yeah. Although we do have some members who are in 20 both -- in the ESL category who are organic, and their 21 primary method of managing of risk is through, like, the 22 long-term fixed price contracts that Ms. Hancock and I 23 were talking about. 24 Q. Okay. I wanted to talk a bit about Agricultural 25 Marketing Agreement Act. 26 A. Oh, boy, Erin. 27 Q. You know that's what I like to talk about. I 28 don't think there's a meeting I have had or I don't try to 5776 1 remind people about what we're here to do. 2 So at the bottom of page 4, before your header 3 "Base Class I Skim Milk Price," you write, "This reduced 4 volatility" -- from your rolling adjuster proposal -- 5 "helps support the growth of the dairy industry as a whole 6 and makes the cost of milk more stable and consistent for 7 retailers and consumers." 8 And the -- going back to the Act, the policy 9 objective is orderly marketing conditions, and we do that 10 through prices that reflect current market conditions, 11 etcetera, and uniform payments -- or prices to -- to 12 producers. 13 So I just wondered if you could just kind of touch 14 on whether consideration -- how consideration of risk 15 management should be prioritized -- or if that's the right 16 word -- or considered, in helping meet the policy 17 objective of Federal Orders? 18 A. I think that in today's world we need to consider 19 it, and I think that it is important to structure the 20 price formulas and other aspects of the orders so that 21 they don't get in the way of risk management, because risk 22 management is an important part of the market today. And 23 I do think that that is something that is very different 24 than 20 years ago, 20, 25 years ago at Order Reform, and 25 certainly really different than 1937, like, for sure. 26 And -- and fundamentally, one of the things with 27 the orders is orderly marketing, but not getting in the 28 way of the market. And I think that with risk management, 5777 1 under a non-hedgeable formula for Class I, that that's 2 getting in the way of the market. 3 Q. MIG is looking for a 12-month implementation lag, 4 and we have had other -- we have other proposals in front 5 of us with a 15 -- 15-and-a-half month lag. 6 A. Uh-huh. 7 Q. So I was just wondering if you had thoughts on 8 that additional length of time. 9 A. So MIG as a group is supportive of the 12-month 10 implementation lag. I testified about that on -- back on 11 Issue 1. And, you know, the -- if the additional 12 three-and-a-half months is important to other market 13 participants, you know, I don't think that we would have a 14 problem with that. You know, we think that 12 months is 15 adequate here. 16 I mean, quite frankly, the risk management 17 activities in Class I are honestly a bit more limited than 18 what's happening in other parts of our dairy markets, and 19 so I don't know if Class I is necessarily the best place 20 to look for the perfect right implementation timeline of 21 that aspect of the changes you are considering. I think 22 you got to -- I think that it's important to think broadly 23 about the needs of all of the market participants there. 24 Q. Okay. On page 6, that first full paragraph, 25 the -- one of the sentences reads hedging is a vital tool 26 to reduce price risk and provide stable prices to 27 customers. 28 And I think you touched on it. I mean, my 5778 1 question I wrote down is, is stable price to customers a 2 policy objective of the Federal Orders? I'm not sure. 3 So I'll ask that question. I wrote it. 4 A. So I think that it's kind of funny, because with 5 the orders, like we talk about the producers, and then we 6 talk about the consumers. And we regulate the processor, 7 and then the customer, the retailer, it's just magic. 8 Q. Tangled web. 9 A. Yeah. And so ultimately, to me, stable prices to 10 customers is related to meeting stable prices for 11 consumers and consumer needs. You know, I frequently see 12 the customer, the retailer, most often, you know, also 13 foodservice -- there's other things for Class I milk 14 besides just the grocery store, but the grocery is very 15 important for Class I. I often see that as, in some ways, 16 a bit of a proxy for the consumer. 17 Q. Okay. Later in that paragraph you talk about how 18 processors have had limited time to integrate this change 19 into their risk management efforts. I'm thinking you are 20 saying this change is the current Class I mover and the 21 ability to hedge. 22 A. Yeah. I mean we're talking about -- so Ms. Vulin 23 and I talked about that timing some. I mean, this started 24 in May of 2019, and I don't think it's unusual when you 25 hear about that organizations of different sizes and 26 scales with different resources have been able to -- have 27 been able to use the tools that the new formula 28 facilitates. 5779 1 And so it doesn't surprise me that, you know, a 2 global dairy leader like Nestle is, you know, hedging all 3 of their milk purchases in the U.S., and, you know, other 4 people that you will hear from within our group are doing 5 some of theirs. 6 And so it's -- it takes time, and it takes 7 resources. Like, you know, there is a learning curve 8 here. It is -- you know, it's not easy, like, and -- and 9 honestly, you know, like, you need help. If you haven't 10 done it before, you are not -- you're -- you have a 11 responsibility to your cooperative members, to your -- to 12 your shareholders, to your employees, to your business, 13 like -- and getting this wrong could -- could be the sort 14 of thing that could be very detrimental to your business. 15 You need to undertake a risk management program in a 16 considered and well-thought out fashion. 17 Q. How long do you think it took some of your MIG 18 members to start? 19 A. Fastest would be like months, and longest would be 20 like years. So it's a wide range with our members that 21 I'm aware of. And that would -- yeah. It's a range for 22 sure. 23 And the other thing I just hit on there, is that 24 this talk about changing the formula back has been going 25 on for a while now, and whether you undertake to do it 26 when this proceeding is open with proposals that could 27 change it, you know, is that where you are going to put 28 your resources right now? I'm not sure. 5780 1 Q. And the bottom of the paragraph there on page 6 2 you talk about the rolling adjuster continuously updates 3 and provides dynamic market signals. 4 And I think what I had heard in other 5 cross-examination was you tried to find a balance between 6 providing dynamic market signals to producers, but still 7 finding a way to allow Class I processors to hedge, and 8 that's where the 24 months -- 9 A. Yes. That's correct. 10 Q. Okay. I'm curious if you have thought about -- 11 and I know there's been some discussion of depooling, but 12 I want to ask it in a different way -- how would MIG's 13 proposal impact instances of price inversion and depooling 14 that results? 15 A. I have done some analysis of this. I haven't done 16 extensive analysis of this. 17 What I -- I agree with the research and the 18 literature that's -- that says that the average-of, an 19 average-of type of formula can -- can -- can be a 20 contributing factor on depooling and negative PPDs and the 21 like. But it's rarely -- it's not the -- it's not the top 22 of the stack in terms of the causes there. 23 And so I -- I -- I don't see it moving the needle 24 a lot, honestly. I think that I -- I think that the 25 underlying spread and the volatility in Class III and IV 26 themselves is going to be driving that bus a lot more 27 than -- than this formula. 28 Q. I want to turn to page 8, at the bottom. Oh, let 5781 1 me start in the middle. 2 You have a sentence that reads, "The fluid milk 3 industry, and especially traditional fluid milk retail 4 customers, are not yet using hedging sufficiently to 5 permit this regulatory change." 6 Which I'm guessing is to change back to the old 7 way; is that what you are talking about there? 8 A. So what I was talking about there was, was a -- 9 the regulatory change of eliminating advanced pricing, 10 which is in Proposals 16, 17, and 18. 11 Q. Okay. So are -- would you -- is there some point 12 that hedging would be prevalent enough, that you would 13 say, yeah, it might be worth looking at removing advanced 14 pricing, since many people, including yourself, have 15 discussed some of the issues they think it causes? 16 A. Yeah. I -- yes. And like you were asking me 17 about depooling, like advanced pricing is another thing 18 that contributes to depooling. And so I do think that -- 19 that there could possibly be a point in the future where 20 it could make sense to make a change like that. I don't 21 think we're there today. And -- and at this point, I 22 don't even think I necessarily know what the threshold is. 23 It feels like we're very far away from the threshold right 24 now. 25 Q. At the bottom on your paragraph, where you support 26 14 as an alternative to 15, although kind of said if USDA 27 found 15 was okay, you would be okay with that. 28 A. That's correct. 5782 1 Q. But, you said, "We believe that our proposed 2 moving average without a floor is more consistent with 3 Federal Order concerns over an adequate supply of milk for 4 fluid use and orderly marketing." 5 I was wondering if you could just expand on that 6 thought. 7 A. Sure. I'd be happy to. 8 The IDFA adjuster has a $0.74 floor, and price 9 floors can be a price distortion. And they tend to 10 enhance prices. And so if you are enhancing prices, then 11 that is going to send signals to the marketplace that more 12 milk is desired than there's truly a market for. 13 That said, the IDFA floor at $0.74 is -- it's -- 14 it's not a tremendously high floor, and so my analysis 15 does not show huge differences between Proposals 15, 14, 16 and 13. Just they are not -- it's not -- IDFA's floor is 17 not triggered very often, but when it is triggered, my 18 view is that it would be a price distortion. 19 Q. Okay. But that's a tradeoff MIG is willing to -- 20 A. It's a tradeoff. If -- if that is -- that -- and, 21 like I said, it -- it's -- it's not triggered. I'm not 22 sure if it would be triggered enough for the -- my 23 economics theoretical to really matter in the real world. 24 Q. Uh-huh. 25 I think my last question, I wrote down some notes, 26 I think you were talking to Ms. Hancock on why 24 months, 27 right? So you said, well, if you looked at stuff that was 28 less than 24 months, it seems to create more volatility, 5783 1 is what my notes say. And if you looked at a time period 2 that was more than 24 months, it doesn't transmit market 3 signals very well. 4 A. And what I mean by that is it just gets too far 5 out in time. It starts to really -- it starts muting it. 6 It starts to look a lot like the $0.74. 7 MS. TAYLOR: I think that's it from AMS. Thank 8 you. 9 THE WITNESS: You're welcome. 10 THE COURT: I have one question. 11 THE WITNESS: Yes, ma'am. 12 THE COURT: Would you turn to your Exhibit 265, 13 page 5. And I'm struck with what a tiny percentage this 14 adjuster is. It seems like a lot of calculation to get to 15 that. 16 Do you anticipate that it might be a larger 17 percentage of the price in the future? 18 THE WITNESS: No. I have actually looked at the 19 same thing over the entire 20-year period that the data is 20 there for the spreadsheet, but if I put 20 years on here, 21 you wouldn't be able to read the numbers at the bottom the 22 dates. 23 THE COURT: So the purpose for all of this is to 24 try to get to that promise of neutrality in the revenue. 25 THE WITNESS: Uh-huh. 26 THE COURT: There's just got to be a simpler way. 27 Do you have any response to my dilemma here? 28 THE WITNESS: I understand your dilemma. 5784 1 Regrettably -- regrettably the simple $0.74 adjuster 2 didn't do a good job, because even though this is a pretty 3 small percent of the price, it's enough of a difference 4 that people care. 5 And so the adjuster -- the adjuster -- we need -- 6 the adjuster is needed in order to have the average work 7 in the same way that the higher-of works. 8 You have to have an adjuster to keep them roughly 9 equivalent. 10 THE COURT: So what if it was just 11 contemporaneous, and it's -- so it's volatile, it's tiny, 12 it could be volatile. Did you -- did you consider that? 13 THE WITNESS: The -- so by contemporaneous, do you 14 mean without a lag? 15 THE COURT: Without a two-year lookback and 16 without a lag. Is there any way to just have it be known? 17 I know that that might interfere with the hedging. 18 THE WITNESS: If you just -- if we continue just 19 picking a number like the $0.74 -- and the $0.74 isn't 20 just a number that came out of thin air. The $0.74 was 21 looking at this orange line over an extended period of 22 time, and the variance, the difference between the times 23 when it's 5%, and the times when it's 15% are meaningful 24 to the participants in the market, and so that's why we 25 have it constructed this way. 26 THE COURT: Thank you. Redirect? 27 MS. VULIN: Thank you. 28 REDIRECT EXAMINATION 5785 1 BY MS. VULIN: 2 Q. Ms. Hancock had asked you a question about where 3 the money went that was the difference between the 4 higher-of and the average-of, and I would like to approach 5 that a different way to get to where I think maybe that 6 was headed. 7 Instead of asking where it went, because I believe 8 your answer was it never existed. If the higher-of had 9 been in place, you know, during that 2020 period, and the 10 base Class I skim price was $2 higher, who would have paid 11 that extra $2 per hundredweight, ultimately? 12 A. Ultimately, consumers. And before that, the 13 customer. Because the processor, if it had been the 14 formula, that's what the processor would have paid, and it 15 would have had to have been passed along. 16 Q. So when we talk about this kind of "missing 17 money," this is not money lining the pockets of processors 18 somewhere, this is money the consumers were saving during 19 that period of pandemic on their milk price? 20 A. Yes, you could look at it that way. 21 Q. And then Mr. Miltner had asked a question about 22 the adjuster that we were just talking about, and the 23 signal, and the delay that signal might be of rapidly 24 rising cheese prices and the adjuster. 25 But wouldn't the contemporaneous average-of 26 calculation that makes up the bulk of the base of the 27 Class I skim formula, wouldn't that be reflective of 28 rapidly rising cheese prices? 5786 1 A. Yes. Absolutely. The bulk of -- the bulk of the 2 base Class I skim price is the average-of III and IV. So 3 in a time when Class III prices are rising rapidly, 4 that -- that average is also going to rise. And when 5 powder prices are rising and it's driving the Class IV 6 price up, the same thing would happen. 7 Q. Okay. And we have spent a lot of time talking 8 about 2020, and that's because we saw really radical price 9 distortion in that period. But in your opinion, is 2020 a 10 good example year upon which to base policy that will be 11 in place over the course of many years? 12 A. The events of 2020 were extraordinary, and I don't 13 think it's a great example. I -- you know, I think that 14 we want to, as an industry, recognize that things can 15 happen in the future that we won't predict, like what 16 happened in 2020. But it's not a great lookback example. 17 2020 was very unusual. 18 Q. And then lastly, I wanted to ask, Ms. Hancock 19 asked you about this definition of roughly revenue 20 neutral. And I just want to make sure we all were 21 oriented to where you pointed her. 22 So if you could go to page 5 of your testimony, 23 please. 24 A. Sure. 25 Q. And you have a citation and a block quote there 26 from 84 Federal Register 8590. 27 Do you see that? 28 A. Yes. 5787 1 Q. And about halfway through that quote you -- I see 2 that phrase, can you just read the sentence that starts, 3 "thus the inclusion"? 4 A. "Thus the inclusion of the $0.74 in the 5 calculation should make the change roughly revenue 6 neutral." 7 Q. And this is USDA's language, correct? 8 A. Yes, that's correct. 9 Q. And so that -- that was how you were using the 10 phrase in your testimony in development of Proposal 15? 11 A. Yes. 12 Q. Okay. 13 MS. VULIN: Nothing further. 14 THE COURT: So there's nothing else? Somebody 15 else? 16 Mr. English? 17 MS. VULIN: Then I'll move, I just wanted to give 18 anyone a chance to follow up. 19 THE COURT: Okay. Does anybody have any more 20 questions before we just accept evidence in the form of 21 exhibits and have no further testimony? 22 I see no one. 23 MS. VULIN: Sorry, I jumped out a little quick 24 there. 25 I would move to admit Exhibits 263, 264, and 265, 26 please. 27 THE COURT: Is there any objection? 28 There is none. Exhibit 263 is admitted into 5788 1 evidence. 2 (Exhibit Number 263 was received into 3 evidence.) 4 THE COURT: Exhibit 264 is admitted into evidence. 5 (Exhibit Number 264 was received into 6 evidence.) 7 THE COURT: Exhibit 265 is admitted into evidence. 8 (Exhibit Number 265 was received into 9 evidence.) 10 THE COURT: Thank you so much. You are an 11 extremely articulate, lucid witness on very difficult 12 issues, because they are a little bit revolutionary. 13 THE WITNESS: Thank you, your Honor. 14 THE COURT: You're welcome. Thank you. 15 MS. VULIN: MIG would call next Jacob Schuelke 16 with Crystal Creamery, but if we could do just one of 17 those five-minute stretch breaks, we have a computer to 18 set up. And I know we are close to 5:00, but I'm hopeful 19 we could at least fit his direct testimony in, and maybe 20 some cross. 21 THE COURT: So we could either do five or we can 22 do ten. What does everybody want? Five's enough? 23 (An off-the-record discussion took place.) 24 THE COURT: Let's go back on record. 25 We're back on record. It's 4:41. 26 Would you state and spell your name for us? 27 THE WITNESS: My name is Jacob Schuelke. Last 28 name is S-C-H-U-E-L-K-E. 5789 1 THE COURT: Have you testified previously in this 2 proceeding? 3 THE WITNESS: No, I have not. 4 THE COURT: I would like to swear you in. 5 JACOB SCHUELKE, 6 Being first duly sworn, was examined and 7 testified as follows: 8 DIRECT EXAMINATION 9 BY MS. VULIN: 10 Q. Good afternoon, Mr. Schuelke. How are you? 11 A. Wonderful. How are you? 12 Q. Good. Thank you. This is Ashley Vulin with the 13 Milk Innovation Group. 14 We got your name on the record. 15 Could you tell us your business address, please? 16 A. We are at 529 Kansas Avenue in Modesto, 17 California. 18 Q. And, Mr. Schuelke, in front of you is a document 19 entitled MIG-Crystal 13. 20 Do you see that? 21 A. Yes. 22 Q. And that testimony, that document is your 23 testimony, your written testimony for this proceeding? 24 A. Yes. 25 Q. And then I also see you have in front of you a 26 document entitled Exhibit MIG-Crystal-13A. 27 Do you see that? 28 A. Yes. 5790 1 Q. And that's a PowerPoint you have to share with us 2 today? 3 A. Yes. 4 Q. Thank you. 5 MS. VULIN: So I'd ask that MIG-Crystal-13, the 6 written testimony, please be marked as Exhibit 267, and 7 that Exhibit MIG-Crystal-13A be marked Exhibit 268. 8 THE COURT: Those exhibits have been so marked. 9 Thank you. 10 (Exhibit Numbers 267 and 268 were marked for 11 identification.) 12 BY MS. VULIN: 13 Q. So, Mr. Schuelke, I know you have a PowerPoint. 14 Would you mind pulling that up for us, please? 15 Great. Thank you. 16 So let's start out with you, Mr. Schuelke. And I 17 see your Crystal shirt and your Crystal products, so we 18 know you are from Crystal Creamery. 19 A. We are a marketing company, so we try to sell 20 milk. So if there's a logo on there, I'm going to put it 21 on. 22 Q. Great. 23 And everyone will walk out of here with a free -- 24 no, I'm just kidding. 25 So you also -- why don't you tell us about how you 26 got into the dairy industry? 27 A. I was born into it. I grew up on a dairy farm in 28 New York State. 5791 1 Q. And what was your education post-high school? 2 A. Post-high school I went on to the local land grant 3 university, Cornell, to pursue an undergraduate degree in 4 agricultural business. Primarily focused on dairy farm 5 production economics, dairy farm management, and I did 6 research there under ag finance professor Eddie LaDue. 7 Q. And what did you do after you graduated? 8 A. I moved on to the University of Wisconsin at 9 Madison to pursue an agricultural economics degree. We 10 got a grant from USDA RMS under Professor Ed Jesse, and we 11 were to look at the new futures markets. And the 12 completion work would be in a staff paper called the 13 Effectiveness of Naive Class III Hedging Strategies, if 14 you want to read it. 15 Q. I'll go straight there after the hearing. 16 A. Still online. 17 Q. Great. And what -- 18 THE COURT: What year was that? 19 THE WITNESS: Oh, I would have graduated there in 20 2003. 20 years ago. 21 BY MS. VULIN: 22 Q. And what did you do after you graduated? 23 A. I went to work for the extension service in the 24 state of Wisconsin at first. I was the head of the 25 University of Wisconsin Dairy Price Risk Management team. 26 So me and Bob Cropp went all over the state putting on 27 seminars for farmers, how to hedge their milk checks, 28 things like that, in addition to other responsibilities. 5792 1 And then I moved on to Cornell, where I had had a 2 very similar position there putting on educational 3 workshops for dairy farmers primarily, on price risk 4 management, general farm manage principles, things like 5 that. 6 After that I moved on to private sector. 7 Q. How many years were you at the extension service? 8 A. Probably four years. 9 Q. And then after you went into the private sector? 10 A. Uh-huh. 11 Q. Where to? 12 A. I first went to Hilmar Cheese Company, where I was 13 their economist. 14 Q. And how long did you do that? 15 A. Seven years. And there, I was involved with the 16 typical things you would expect. And then they had a 17 facility in California and one in Texas as well, so 18 California Order and Federal Order. 19 Q. And what did you do after Hilmar? 20 A. I moved on to California Dairies, where I was head 21 of their milk payment and pooling division, and also risk 22 management. 23 Q. And how long were you with California Dairies? 24 A. Two-and-a-half-years, something like that. 25 Q. Where did you go from there? 26 A. From there I went on to work for Joseph Gallo 27 Company, so that was another unique operation, a true 28 vertical integration. At one time they were 30,000 dairy 5793 1 cows supplying milk to their own cheese plant, and then 2 selling it locally, primarily L.A. market. Worked there 3 for a couple years. 4 And then I had a great opportunity. A bunch of 5 dairy farmers I knew in the area decided they were going 6 to throw a bunch of money into a hat and build their own 7 greenfield powder plant. So I was hired there as employee 8 number three, and when I showed up, I worked in the 9 jobsite trailer, and we built the entire company from the 10 ground up. 11 I got Capper-Volstead certification for their 12 cooperative, all those things. It was, you know, a fun 13 experience. You will do a startup once in your life, 14 never twice. 15 And from then on had a great opportunity here with 16 the Crystal company. It was right at -- maybe within the 17 last three years. Came here to Crystal, and this would 18 have been right at the height of the Dean Foods and Borden 19 bankruptcies. So the entire market was really tough, and 20 it was just a great opportunity to go there and be part 21 the turnaround team. 22 We have done some things. We have been able to 23 make Crystal the number one branded milk in Northern 24 California. Really proud of the things that we have been 25 able to accomplish there in the past few years. 26 Q. Uh-huh. And what's your job title at Crystal? 27 A. I'm the CFO. 28 Q. And tell us a little bit about your day-to-day 5794 1 responsibilities. 2 A. So I would do all the things that you would think 3 a CFO would do with the accounting and finance 4 departments -- 5 (Court Reporter clarification.) 6 THE WITNESS: All right. 7 THE COURT: Start that sentence again. 8 BY MS. VULIN: 9 Q. I can ask you -- so tell me about your day-to-day 10 job responsibilities as CFO at Crystal. 11 A. So I would do all of the accounting and finance 12 functions that you would anticipate, but also given my 13 background in economics and also commodity manufacturing, 14 I have a much larger say in the general management of 15 those functions and addition to pricing and things like 16 that. 17 Q. And what Federal Orders have you worked within 18 before? 19 A. So I was born in Federal Order 1. That's the only 20 one I have ever milked a cow in. 21 But I went on to Wisconsin, where I did price risk 22 management, things like that. That's the Upper Midwest 23 order. 24 And then back to New York again, where I was on 25 the education side. 26 Moved on to Hilmar where we had a cheese plant in 27 the Southwest order, but its location was a stone's throw 28 from the Central Order, and then also because of needs, we 5795 1 were often in the Southeast Order supplying milk as well. 2 So there. 3 And then when California entered the Federal 4 Order, we are exclusively pooled there, and we -- when we 5 get into my pictures here, you will see I have -- to slow 6 down -- ten grams of protein on my reduced fat milk, 7 things like that. Some great monikers I would love to 8 share about you ever went to get into component 9 discussions again. 10 But we sell California standard milk there. We 11 also sell some California standard milk in Oregon, and 12 Arizona, and some -- also some Federal Order standard milk 13 in those same two orders. 14 Q. And you have had -- and just a little quick 15 reminder to go nice and slow. Almost artificially slow. 16 You have had quite extensive experience in orders 17 across the country, then? 18 A. Yes. 19 Q. And it sounds as though you have also had quite a 20 bit of experience in risk management? 21 A. Yes. 22 Q. Can you tell us a little bit about the history of 23 Crystal? 24 A. Crystal Creamery Company is the oldest brand of 25 milk in California. We celebrated our 120th anniversary 26 last year. We made a special birthday cake ice cream to 27 commemorate that, but -- 28 Q. And I see you have some products up here. 5796 1 Why don't you tell us a little bit about Crystal's 2 products? 3 A. Crystal is very unique in that we are truly the 4 only plant that's in all four classes of milk every single 5 month in the California order. 6 We are primarily a fluid plant, but we are also a 7 very significant player in the ice cream, cottage cheese, 8 all the Class II products you would think that you could 9 make. 10 We don't manufacture hard cheese onsite, but we do 11 sell a lot of condensed milk to local cheese plants. So 12 if you look at our pool reports, we'll have that Class III 13 utilization there. And we have a very large powder dryer 14 that we use to balance our own fluid milk supply. We also 15 manufacture butter there as well. 16 Other great things I would love to talk about are 17 cottage cheese we have up there. Sales of cottage cheese, 18 a lot of our places are up 20% year-over-year. Just a 19 great story I want to share with you. And if you look at 20 there, it says 13 grams of protein on the label. If you 21 ate that entire package, you would get less than 400 22 calories for lunch, over 50 grams of protein, and it would 23 be just the greatest thing you could ever buy, so -- 24 Q. Are you sure you are not in sales? You are doing 25 great. Wonderful. 26 Well, I understand that you also have a few plant 27 photos to share. Could you show us those? 28 A. Uh-huh. So, yeah, this is part again of what 5797 1 makes us really unique here. If you look at that red 2 dome, that's a large powder dryer. About a half to a 3 third of our milk, depending on the year, goes there. 4 That helps -- that helps us balance our milk supplies, 5 which is important in a number of ways. 6 We can go from manufacturing 16% fat ice cream mix 7 one day to 0% fat cottage cheese, things like that. We 8 have a multitude of products that we can make. And having 9 that onsite allows to us make whatever we want, whenever 10 we want. 11 Q. And how many employees does Crystal have? 12 A. 750. 13 Q. So is Crystal a small business as defined by the 14 SBA? 15 A. Yes. 16 Q. And if you could go to page 2 of your testimony, 17 Exhibit 267. 18 A. Okay. 19 Q. There's just a slight typo there I would like to 20 correct on the record. Halfway through you see it says, 21 "Our headquarters is in Modesto, California, and we have 22 fewer than 1,1150 employees." 23 I think there's an extra one in there; is that 24 right? 25 A. It's 750. Yes, that's a typo. 26 Q. Okay. So we'll strike one of those 1s. 27 A. And turn the other one into a 7. 28 Q. Thank you. 5798 1 How about we strike the whole thing and we replace 2 it with 750? 3 A. The court reporter is going to kill us for this. 4 THE COURT: Now, you say "fewer than"? Are you 5 telling me fewer than 750 employees? 6 THE WITNESS: That's an approximate number. 7 MS. VULIN: So how about we change that to "about 8 750 employees." 9 THE WITNESS: Yes. 10 THE COURT: All right. We will change that in the 11 exhibit. We're talking about Exhibit 267. I want to do 12 it now so we don't forget. 267, page 2, second full 13 paragraph, the second line. There's a number there of 14 employees, and we're going to change the "fewer than" that 15 number, and instead we're going to say "approximately" -- 16 THE WITNESS: Yes. 17 THE COURT: -- "750." So what we are striking is 18 "fewer than 1,1150." Thank you. 19 MS. VULIN: Thank you. 20 BY MS. VULIN: 21 Q. And how many fluid milk distributing plants does 22 Crystal have? 23 A. One. 24 Q. And did you say you're the largest in Northern 25 California? Did I hear that right? 26 A. We have the number one brand selling milk in 27 Northern California. We're -- we're big. 28 Q. And on what order is that plant regulated? 5799 1 A. California Order. 2 Q. And can you tell me a little bit about Crystal's 3 suppliers, please? 4 A. We have the most unique, diversified milk supply 5 network I have ever seen. We have a large number of 6 direct-ship farmers. Many started shipping on a handshake 7 over 30 years ago. We have a number of independents that 8 we work with, both small cooperatives and large 9 cooperatives as well. But we're primarily the pooling 10 source for the small independents, and that would also 11 include independent manufacturers who are selling milk to 12 us looking for pool access both in Class III and Class IV. 13 Q. And I think you have a couple more photos to 14 share. If you just want to spin through those for us, 15 please. 16 A. Yep. And the main things you would get here about 17 this one is we are a very, very large plant. We do a 18 number of things here, so we are not just fluid. 19 And right here is a picture of the production 20 floor. That's actually a Class II product there, 21 Bulgarian buttermilk. We make it all. 22 Q. Great. Thank you. 23 So we're at a good stopping point. 24 A. Yeah. You don't want to get into pools and 25 utilizations? 26 Q. We'll save that. Give us something to look 27 forward to tomorrow morning. 28 A. All right. 5800 1 THE COURT: Very good. We'll pause your 2 testimony. 3 Before we disband, I would like a preview of our 4 plans for tomorrow. I know we will start with this 5 witness, and then will we have the other witness that you 6 would have put on today? 7 MS. VULIN: Yes. We will also have Michael Newell 8 with HP Hood. And then tomorrow MIG also has Chuck 9 Turner, with Turner Dairies, and Tim Doelman with 10 Fairlife. 11 THE COURT: Good. 12 MS. TAYLOR: And, your Honor, we do have one 13 farmer that I'm aware of coming tomorrow morning, 14 Mr. Barlow, and he would like to go on in the morning. I 15 believe he's driving here from, I want to say Kentucky. 16 MS. VULIN: Should we plan to have him go first, 17 then? 18 MS. TAYLOR: He asked anywhere from 9:00 to 12:00, 19 so I'm not sure of his arrival time. Maybe we can finish 20 your witness first and then put him on. 21 THE COURT: Or interrupt your witness so that the 22 court reporter will be able to type more slowly for a 23 time. 24 MS. VULIN: We will be happy to accommodate. 25 THE COURT: Excellent. 26 MS. TAYLOR: I will just add, left over from my 27 list from today, but sometime this week is Dr. Bozic, 28 perhaps after we're done with our MIG witnesses. 5801 1 DR. BOZIC: Are you sure? 2 MS. TAYLOR: I'm not sure about anything anymore. 3 But you're on my list, I'm sure about that. 4 MR. ROSENBAUM: Mike Brown should be on the list 5 too and -- 6 THE COURT: What time would be preferable? 7 MR. ROSENBAUM: Well, I think we're going to have 8 to arm-wrestle Dr. Bozic on that question. 9 MS. TAYLOR: I'll let you two handle that in the 10 hallway. Because today is Wednesday; am I correct? 11 THE COURT: Yes. 12 MS. TAYLOR: So we have Thursday, and we have 13 three hours on Friday, as we will be doing our virtual 14 dairy farmer testimony from noon to 3:00 on Friday, which 15 Judge Clifton has not had to experience yet, so we'll talk 16 about that with you so you know about that. 17 THE COURT: Very good. 18 So when you say three hours, that's noon to 3:00? 19 MS. TAYLOR: Yeah, typically on Friday when we 20 have our virtual testimony, we go from 8:00 to 11:00-ish, 21 and we take our lunch break early, then we do virtual 22 testimony from noon to 3:00, and then we end on Friday at 23 3 o'clock. And that is still the plan this Friday. 24 THE COURT: Understood. 25 MS. TAYLOR: I'm talking too fast, sorry. And we 26 do have nine farmers signed up for Friday. I imagine that 27 will probably take close to all three hours has been 28 previous experience. 5802 1 THE COURT: Very good. Well -- excellent. I will 2 see you all at 8 o'clock tomorrow morning. We go off 3 record at precisely 5:00 p.m. 4 (Whereupon, the proceeding concluded.) 5 ---o0o--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5803 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 13, 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