6559 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 October 3, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 6560 1 A P P E A R A N C E S: 2 FOR THE USDA ORDER FORMULATION AND ENFORCEMENT DIVISION, USDA-AMS DAIRY PROGRAM: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 FOR THE AMERICAN FARM BUREAU FEDERATION: 6 Roger Cryan 7 FOR THE MILK INNOVATION GROUP: 8 Ashley Vulin (Remotely) 9 Charles "Chip" English Grace Bulger 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 20 ---o0o--- 21 22 (Please note: Appearances for all parties are subject to 23 change daily, and may not be reported or listed on 24 subsequent days' transcripts.) 25 26 ---o0o--- 27 28 6561 1 M A S T E R I N D E X 2 SESSIONS 3 TUESDAY, OCTOBER 3, 2023 PAGE 4 MORNING SESSION 6564 AFTERNOON SESSION 6680 5 6 ---o0o--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6562 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Dr. Marin Bozic: 5 Cross-Examination by Mr. Miltner 6564 Cross-Examination by Dr. Cryan 6588 6 Cross-Examination by Mr. Rosenbaum 6595 Cross-Examination by Ms. Taylor 6598 7 Cross-Examination by Mr. Wilson 6623 Redirect Examination by Mr. Sjostrom 6631 8 Dr. Roger Cryan: 9 Statement Read 6643 10 Cross-Examination by Dr. Bozic 6680 Cross-Examination by Mr. English 6689 11 Cross-Examination by Mr. Rosenbaum 6708 Cross-Examination by Mr. Miltner 6720 12 Cross-Examination by Mr. Sjostrom 6735 Cross-Examination by Ms. Taylor 6736 13 Cross-Examination by Mr. Rosenbaum 6743 14 Lucas Sjostrom: 15 Statement Read 6751 16 Calvin Covington: 17 Direct Examination by Ms. Hancock 6760 18 Cross-Examination by Dr. Bozic 6773 Cross-Examination by Mr. Miltner 6790 19 Cross-Examination by Dr. Cryan 6798 Cross-Examination by Ms. Taylor 6800 20 21 ---o0o--- 22 23 24 25 26 27 28 6563 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. 5 289 Edge-6 6639 6 290 Edge-15 6639 7 292 AFBF-4 6642 6744 8 293 AFBF-4A 6642 6744 9 294 AFBF-4B 6643 6744 10 295 Edge-14 6749 11 296 Testimony of 6759 6804 Calvin Covington 12 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6564 1 TUESDAY, OCTOBER 3, 2023 - - MORNING SESSION 2 THE COURT: Please come to order. 3 Let's go on record. 4 We're back on record at 8:20 in the morning on 5 October 3, 2023. 6 I apologize to all for my being late. I have no 7 interesting story. I have been in awe of the 8 indestructibility of all of you, and I thought I was like 9 that, but -- there's nothing unusual. All right. 10 All right. Good. We have a witness in the stand. 11 Dr. Bozic, would you again state your name? 12 DR. BOZIC: Marin Bozic, M-A-R-I-N, B-O-Z-I-C. 13 THE COURT: Thank you. 14 MARIN BOZIC, 15 Having been previously sworn, was examined 16 and testified as follows: 17 THE COURT: And who will next question the 18 witness? 19 Mr. Miltner? 20 CROSS-EXAMINATION 21 BY MR. MILTNER: 22 Q. I'm Ryan Miltner. I represent Select Milk 23 Producers. 24 Good morning, Dr. Bozic. 25 A. Good morning, Ryan. 26 Q. I wanted to start with your first statement, 27 Exhibit 289, and I'm looking at page 4, it's the first 28 paragraph under your numbered paragraphs there, two-thirds 6565 1 of the way down. And you -- you say that: "Class III 2 Plus includes provisions that both producers and 3 processors don't like," which I like that 4 characterization, I suppose. 5 And when it comes to the producer side, you 6 testified that dairy producers may prefer the higher-of 7 without advanced prices as their top choice, as it 8 increases the odds of realtime maximal income from Class I 9 sales. 10 I wondered if, in your opinion, there were any 11 other benefits to the higher-of from the producer 12 perspective that you think are meritorious or worthy of 13 keeping in consideration? 14 A. Well, I hope you can help me with the 15 cross-examination to tease that out. 16 But one thing that I believe we have heard from 17 multiple witnesses, the one that comes to mind is 18 Mr. Schlangen from AMPI, who said that, well, it seems to 19 him that higher-of worked well. 20 And I think that in light of the last four years 21 which maybe perceived as an experiment by dairy producers, 22 trying out again something new may make them sensitive to, 23 like, what is it that we don't know now? We didn't know 24 about the asymmetric risk before; are we missing something 25 new now? The Rumsfeld's famous unknown unknown. 26 Whereas, the higher-of with advanced pricing could 27 be perceived as the -- you know, the devil you know, like 28 the old system tried and tested for 20 years, which is -- 6566 1 whose -- whose behavior is well understood, both in its 2 limitations as well. So that's not to be easily 3 discarded. 4 I -- I don't mean to portray the world as black 5 and white, my proposal good, everything else bad. In 6 fact, Edge did come in with Proposal 17, which is the 7 higher-of with a twist, just removal of advanced pricing, 8 to recognize the producers' desire for -- for the 9 higher-of approach. 10 But if you can maybe help me with some -- some 11 questions, I can try to answer further on what you may 12 have in mind. 13 Q. Yeah. I really didn't have anything in mind. I 14 really was more interested in -- in your thoughts as 15 someone who has dealt with these questions for your 16 clients and with Edge about what you may have seen from 17 producers or heard from producers about why the higher-of 18 is appealing. 19 And, you know, if I had to characterize what I 20 have heard, there is that issue of the devil you know 21 versus the devil you don't. 22 A. Right. 23 Q. But I -- further, from an economic perspective, I 24 wondered if there was anything that -- that producers 25 might see or maybe not fully understand about a benefit 26 to -- 27 A. Oh, we can -- we can quickly analyze some of the 28 other arguments that were put forward. One of them is the 6567 1 market signals, that it produced -- that it, like, 2 provides for more timely market signals. I don't find 3 that argument very compelling because there are other 4 instruments that have been put in force over the last four 5 years, three and a half years that serve to provide more 6 pointed market signals. Those are base/excess plans. 7 So, you know, you can have higher-of increase the 8 price of Class I in a particular month, but really, you 9 know, we don't need more fluid milk that month, you know, 10 the sales have not grown higher of fluid milk, we don't 11 need more milk in general that month. And most producers 12 can't even increase because they are at 99 or 100% of 13 their base. So the market signals' argument I don't think 14 is -- is very compelling here. 15 You know, when you want to send a signal, you send 16 it at the margin, and margin is the excess pricing. Like 17 the -- if you cross this threshold of, you know, say 100 18 units of your milk -- just standardizing now -- then we 19 are going to pay you $3 less per hundredweight. That's a 20 strong incentive. You know, higher-of versus average-of 21 provides very diffused market signal, if we can even call 22 it signal, to producers in the short-term, month-to-month 23 changes. 24 The other argument we've heard was regarding 25 the -- what I can maybe rephrase as maybe 26 intergenerational equity. That, you know, if we have some 27 variation of average-of, returning funds to producers 28 after a year or two, that those same producers wouldn't be 6568 1 in business anymore. 2 And the exception I take to that argument is that 3 it stands at odds with the practices of its proponents and 4 the proposals put forward. For example, Make Allowances, 5 according to National Milk, would hit the markets 6 January 1, 2025, whereas the increase in standard milk 7 composition would be delayed to 2026. 8 Well, what about producers that are likely to exit 9 the business in 2025? Higher Make Allowances would 10 presumably, according to its proponents, lead to better 11 maintained plants and further investments in processing 12 capacity. If you are going to exit the business in the 13 next one or two years, you don't need more processing 14 capacity, you just want your milk checks to be as high as 15 possible right now. 16 So as I see that internal contradictions in what 17 proponents are advocating for on one topic versus another, 18 so I find the argument challenging from that perspective. 19 The third is regarding the impact on depooling, 20 and I think we have covered that exhaustively yesterday. 21 But to the extent that there may be some small, you know, 22 third level down in terms of priorities effect on 23 depooling, we have to keep in mind that, you know, arguing 24 from principles, we have -- the key question to ask is, 25 does the pricing system for Class I milk ensure sufficient 26 availability of reserve supply for Class I needs? Any of 27 those proposals do. 28 When you have less than a third of -- of milk 6569 1 pooled that goes to Class I, to talk in the shipping 2 percentages that are ever declining, you know, to try to 3 make an argument that, you know, in some periods, in some 4 months, like in some circumstances, we will not have 5 sufficient supply for fluid, I just find it very thin. 6 So, you know, all things considered, you know, I 7 can understand why producers prefer higher-of, at least 8 many of them, but that doesn't mean that it is the best 9 long-term system for our industry, especially if we don't 10 remove advanced pricing. 11 Q. So you -- there were three things in your answer 12 there I'd like to ask a little more about. 13 So in terms of base/excess plans, your 14 understanding is that they are implemented at the 15 cooperative level, correct? 16 A. Cooperative and private handlers as well. 17 Q. And is your understanding that those base/excess 18 plans allow a producer to market up to a certain quantity 19 of milk at a price, and if they exceed that amount, they 20 receive a much lower price for their milk? 21 A. That is a short-term aspect of those programs. 22 The long-term aspect is that you are not even -- you are 23 effectively precluded from increasing the size of your 24 operation, even when such capital expenditure may be 25 necessary in order to bring the next generation into the 26 family business. If you don't have a letter from your 27 milk buyer that they will be willing to buy milk for that 28 additional 400 or 800 or 1,000 cows, lenders will be much 6570 1 more hesitant to extend the credit needed to expand the 2 barn and the parlor, etcetera. So that's a long-term 3 effect of this, that we may -- we may in the short-term 4 have stabilized milk prices somewhat, but in the long-term 5 it may lead to more severe consolidation of the industry. 6 Q. So I want to talk about this in the context of a 7 cooperative. If you have a cooperative with a base/excess 8 plan that caps your base milk, you would assume that that 9 was done so because that cooperative only has a market for 10 a certain amount of milk produced, correct? 11 A. Yes. 12 Q. And so at a small economic scale, that's a matter 13 of that cooperative balancing its supplies with its 14 demands, correct? 15 A. Yeah. And I -- yes. And I do support that 16 approach. I didn't -- if I came across as critical, I 17 don't mean that as blanket criticism. 18 Q. No, it's not a criticism. I'm trying to lead up 19 to my next question -- 20 A. Sure. 21 Q. -- which is, while that may solve for the price 22 signals that that cooperative needs, that doesn't 23 necessarily transmit a price signal to producers that 24 aligns with the national market, does it? 25 A. In the sense that there may be some other 26 competitor who does not have base/excess plans. 27 Q. Well, in the sense that -- yes, that's part of 28 it -- but also in the sense that perhaps the market is 6571 1 telling producers to put milk into cheese manufacturing 2 because there's an excess demand for that product, but a 3 cooperative may not have a contract to supply a cheese 4 manufacturer and may not need more milk for that -- 5 A. Sure. 6 Q. -- for that outlet? 7 A. Yeah. 8 Q. And so in that sense, does a base/excess plan 9 provide a market signal to producers about the general 10 market? 11 A. Well, the base/excess plans are not the only way 12 in which producers receive signals, right? They also 13 receive signals through the announced prices from AMS. 14 They also receive signals through the feed costs that they 15 have to pay, labor costs that they face, fuel costs that 16 they face. Those are all signals. Base/excess plan is 17 just part of that information -- informational process 18 that should guide their decision-making. 19 Q. So if you could set aside the base/excess plan for 20 a moment, and acknowledging that USDA has, in the past, 21 indicated that the higher-of does send a price signal to 22 the market in its opinion, is that price signal a 23 sufficient impetus to keep the higher-of over the other 24 alternatives you have discussed? 25 A. So we have to go back and ask what is the purpose 26 of the signal? What is the signal trying to, well, 27 signal? And it's trying to signal that we may need, you 28 know, more milk for Class I. You know, so then the 6572 1 question can be rephrased as, does a particular pricing 2 regime have -- induce a danger that there will be 3 insufficient supply of reserve milk for Class I? And from 4 that perspective, I don't think that higher-of provides 5 that must-have signal that would -- such that it's the 6 only way to achieve the objective. 7 I don't think that's a strong enough reason to go 8 back to higher-of. 9 Q. Thank you. 10 As you were finishing your statement before about 11 some reasons why producers might -- might still like the 12 higher-of, you talked about depooling, and you said that 13 that can be addressed, especially if we address advanced 14 pricing. 15 In your opinion, if we do not address the issue of 16 advanced pricing, can USDA effectively manage the problems 17 caused by depooling? 18 A. Well, with grim -- I'm going to have to make an 19 assumption regarding what you mean by problems caused by 20 depooling. But, you know, to the extent that we have some 21 shared understanding of that, the sad truth is that 22 higher-of can barely help versus average-of. But it's 23 also sad truth that removing advanced pricing would only 24 do so much. It would help. It would not solve the 25 problem fully. 26 The core problem, Mr. Miltner, is that we have a 27 system designed for a world in which 60% or more of milk 28 is Class I, and we live in a world in which less than 6573 1 30% of pooled milk is Class I. And in the world in which 2 we live, we are ever so -- ever more frequently asking the 3 cheese makers to subsidize powder makers, or the other way 4 around. And whenever they have that request come to them, 5 they say, "I'm not going to be pooled that month." 6 Unless we solve for the cross-class subsidization 7 that happens because of the uniform price provisions, we 8 will not be able to solve depooling in any market in which 9 the fluid milk utilization percentage is -- is a 10 minority -- is a distinct minority. So think about 11 Central, Mideast, Pacific Northwest, California, 12 Southwest, Upper Midwest, all of these orders are 13 problematic in terms of depooling. 14 Northeast still has sufficiently high Class I 15 utilization that they can provide strong disincentives for 16 depooling, and -- and I -- I envy them in some sense 17 coming from Upper Midwest. And of course, Southeast, and 18 Florida, and Arizona are predominantly Class I order, so 19 they don't have those problems. 20 Q. You mentioned those high Class I utilization 21 orders. For a -- an order that is either milk deficit or 22 extremely high in Class I utilization, does your analysis 23 about which mover is best differ when you are looking at 24 an order with 70% Class I versus 20% Class I? 25 A. I think that the -- there are other topics in this 26 hearing that are more appropriate for addressing the 27 potential milk deficiencies in those orders. That would 28 be Topic 1 on standard milk composition, and where Edge 6574 1 agrees with National Milk on the need to increase the 2 standard components, and we just added butterfat for risk 3 management purposes. 4 As well as Topic 5, Class I surface, that needs to 5 provide for sufficient gradient between Class I 6 differentials to induce the milk to move from surplus to 7 deficit areas. 8 The Class I mover is not the top of the list 9 there. I -- I don't want to say with 100% confidence that 10 it bears absolutely no impact, but if there is any impact, 11 it would be a third order impact. And we have yet to see 12 quantitative evidence that would be convincing that the 13 higher-of would perform any better than average-of in that 14 respect -- average-of or Class III Plus. 15 Q. On page 6 of your statement at the very bottom -- 16 A. Is that Exhibit 29? 17 Q. Yes, the same exhibit. Sorry. 18 A. Uh-huh. 19 Q. You stated: "In our opinion, CME Group hesitated 20 to create a Class I futures contract in the past, as there 21 would be no clear arbitrage relationship between Class I 22 and Class III and IV futures contracts." 23 When you are saying "in our opinion," is that 24 Edge's opinion or Dr. Bozic's opinion? 25 A. Sometimes I address myself in plural. I should 26 have said "in my opinion." I apologize. 27 Q. I just wanted to make -- 28 A. Sometimes I have multiple opinions, so -- 6575 1 Q. You are a good academic. 2 Now, when you say that CME Group hesitated to 3 create a Class I futures contract, was that a hesitation 4 based on pre-2019 or based on the current mover? 5 A. So I do want to stress, Mr. Miltner, I'm not privy 6 to any internal discussions that may or may have not taken 7 place within the CME Group. But what I do observe is that 8 we are in 2023 and there is no Class I contract. So from 9 that, I can only deduce that neither higher-of nor the 10 average-of with advanced pricing met the standards that 11 CME would consider as sufficient for creating a new 12 contract. 13 Q. And there's been questions asked or statements 14 made about the CME perhaps introducing a contract on 15 Class I throughout the hearing. 16 Are you aware of any plans by the CME to develop 17 or introduce such a contract? 18 A. No, I'm not at this point, I'm not aware. And in 19 general, CME tends to be -- tends to keep their cards 20 close to their chest until they have fully made the 21 decision to pursue a particular course of action. 22 Q. In any of your research or projects, have you ever 23 dug into what it would take to create that type of 24 instrument? 25 A. I don't recall my full body of research at this 26 point in time, I apologize. But in our recent -- in my 27 recent thinking, as I was preparing for this hearing, it 28 was my -- I was -- I arrived at a conclusion that removal 6576 1 of advanced pricing would be the single biggest change 2 needed to substantially increase the probability that CME 3 would consider the introduction of such a contract. 4 Q. In your opinion, if there -- if advanced pricing 5 were eliminated but the mover was the higher-of, could CME 6 develop an effective Class I contract? 7 A. How would you define effective? 8 Q. Whatever a good economist would find to be 9 effective. 10 A. It is possible. It is possible. But we should 11 understand that there are risks to that. I mean, take a 12 look at the block cheese contract. We had it for a few 13 years now. It did not really rise to stardom. It's not 14 heavily used. The volume is thin. 15 A lot of -- and it's not the only one. Like, in 16 the pork cutout was another recent introduction among the 17 agriculture futures. It was greeted with much enthusiasm. 18 Does not really get used a lot. A lot of new 19 introductions, a lot of new contracts. 20 And this is not just true of CME. It's not like 21 they have bad product development team. This is true of 22 all exchanges in all times throughout history. Most new 23 futures contracts fail, and what we observe today are the 24 survivors, like those contracts that have withstood the 25 test of time and -- and have -- and if you just look at 26 the changes in the dairy complex since the year 2000, at 27 one point in time we had deliverable -- I think that we 28 had deliverable nonfat dry milk powder and maybe butter as 6577 1 well. I could be wrong about that. And then over time 2 all of those contracts changed to cash-settled contracts. 3 So, yes, they may introduce it. Nobody can 4 guarantee that the product would indeed succeed. And the 5 history would warn us that there are -- that the odds 6 would be against it, not in favor of it, that we should 7 start with the premise that -- we should start with the 8 assumption that it will fail, not that it will succeed. 9 Q. When such products fail, do they fail because of 10 lack of demand or because of they failed to achieve their 11 purpose? 12 A. Lack of demand, which, again, is related to lack 13 of necessity for achieving the purpose. 14 Now, what would work really well in favor of such 15 a contract is that if we do remove advanced pricing and go 16 back to higher-of, the Class I handlers would really need 17 that contract. The profit margins are not large in the 18 HTST sector in particular, and they would need to engage 19 in strategies to know with certainty their input costs 20 before the start of the month in which they sell the milk. 21 They would no longer be able to do that solely based on 22 the AMS report, so they would have to combine whatever AMS 23 does, such as the indicative Class I price report I 24 introduced yesterday, with a hedging strategy. 25 Q. You stated that the margins are thin for HTST 26 processors. 27 What do you consider thin? 28 A. I would prefer not to quantify. I would prefer 6578 1 not to offer any numbers because I am not sufficiently 2 familiar with the sector to, you know, opine as an expert 3 on that topic. 4 Q. Now, you testified that an OTC swap to cover that 5 risk would be about $0.30 per hundredweight. 6 How can you state that that is expensive if you 7 can't quantify the margin? 8 A. I can quantify the margin to the extent that that 9 would anticipate that $0.30 per hundredweight would be a 10 large share of that margin. I would prefer not to insert 11 into evidence one number that can be so easily abused 12 later if -- if -- because people focus on the point 13 estimate, not the variance around that -- around the 14 estimate. So I'm just trying not to create noise by being 15 more specific than is appropriate. 16 Q. So assuming that it is $0.30 hundredweight to 17 create a swap -- 18 A. Uh-huh. 19 Q. -- that's about $0.026 a gallon? 20 A. Yes. 21 Q. And I think the retail price averages two to three 22 times the raw milk cost. 23 Do you still think that that price per gallon to 24 lock in a fixed price and hedge your risk is still -- is 25 still high? 26 A. I do, and here is why. You can have a very 27 expensive final product, but if you don't have a 28 differentiation strategy, if you don't have a way to 6579 1 separate yourself from competition, if we are only talking 2 about a commodity product, then the profit margins will be 3 thin. 4 Corn can be $7 per bushel, but if you're an 5 elevator in an area in which local farmers have four other 6 elevators that they can ship to, your profit margin on 7 handling that grain can be just pennies per bushel. 8 Q. If you were to look at getting Dairy Revenue 9 Protection in the state of Minnesota on class pricing 10 covering 95% coverage for about three quarters out, what 11 would be a reasonable premium for that coverage? 12 A. Can I use my laptop? 13 Q. I'm using mine. If you would like to, that's 14 fine? 15 THE WITNESS: Would it be okay? 16 THE COURT: Certainly. 17 THE WITNESS: I don't need to guess then. I will 18 just need a minute. 19 I need to go through a very extensive 20 authentication process to access my system, so I apologize 21 that it is taking a bit. 22 Okay. So you are looking at yesterday's quotes 23 for the state of Minnesota, three quarters out, that would 24 be -- at this point in time, that would be July through 25 September 2024. 26 Did you want Class III or Class IV offers? 27 Let's go with Class III. That would be what 28 Minnesotans would typically use. 6580 1 BY MR. MILTNER: 2 Q. Okay. 3 A. Protection factor 10, coverage level 95%, and on 4 the class side, after subsidies, we are looking at $0.36, 5 $0.3655 per hundredweight. 6 Q. Good. Because I have $0.37 here, so that -- 7 Now, what's Class IV? 8 A. Class IV is -- 9 THE COURT: Hold on, Mr. Miltner. 10 MR. MILTNER: Same parameters. 11 THE COURT: How long did it take you to calculate 12 that? 13 MR. MILTNER: Less than Dr. Bozic, but it's just 14 a -- it's not a form. I didn't calculate anything, so -- 15 I relied on software to do the work. 16 THE WITNESS: So the Class IV, same parameters 17 yesterday for Minnesota, July/September 2024, is $0.52, 18 $0.53. 19 BY MR. MILTNER: 20 Q. Okay. That's what I have. 21 A. That's what you have as well? 22 Q. Yes. 23 A. I'm glad my quarter is working. 24 THE COURT: Say again, Mr. Miltner? 25 MR. MILTNER: Yes, I found the same numbers. 26 BY MR. MILTNER: 27 Q. Now, when you described a Class I handler having 28 to pay $0.30 to hedge their costs, you described that as 6581 1 paying through the nose. 2 A. Yes. 3 Q. Producers, to cover the same type of risk, are 4 going to pay more than a Class I handler? 5 A. We are comparing apples to pineapples, not even 6 oranges. 7 Q. Please explain. 8 A. We are -- in the context of a swap, we are looking 9 at a contract that removes all of the upside, as well as 10 all of the downside, completely removes risk. 11 Dairy Revenue Protection is an option. It sets 12 the floor but keeps the upside open. So this cost is not 13 comparable with that. This cost is a cost of optionality, 14 the cost of, like, you know, removing the downside 15 pressure while keeping the upside open. If we were 16 looking at a dairy producer's coverage that is an 17 equivalent to a swap. That would be -- the closest would 18 be a forward contract through their cooperative. And 19 cooperatives, to my understanding, charge most $0.10 for 20 that, $0.10 per hundredweight. 21 Q. Is that universally available? 22 A. Through major co-ops it is. It wouldn't be 23 quarterly, it would be monthly typically. 24 Q. And they pay $0.10 per month? 25 A. $0.10 per hundredweight. 26 Q. Per hundredweight. 27 But they buy it on a monthly contract, not a 28 quarterly contract? 6582 1 A. That's my understanding. And I understand that 2 Mr. Gallagher is somewhere in Carmel, so he may be 3 available for further cross-examination later this week. 4 And, you know, he runs these programs for Dairy Farmers of 5 America. 6 Q. If they are paying $0.10, would you have to triple 7 that premium to then correlate with the coverage that's 8 available through DRP? Because you are covering a 9 quarter's worth of milk under DRP. 10 A. No, no, you don't -- you don't need to -- in fact, 11 you would probably -- this is going to sound 12 counterintuitive -- you would probably reduce it a little 13 bit. 14 The -- whenever -- this is one of the reasons why 15 some producers actually do not like Dairy Revenue 16 Protection. Dairy Revenue Protection is designed to cover 17 against major crisis. If you have a price fall in one 18 month and then recover in the next month, you can cover 19 that through your liquid assets. You know, you don't need 20 an insurance policy for that. There is no reason why 21 taxpayers would need to subsidize that. 22 The -- because it's a $0.10 per hundredweight, if 23 you were to create a quarterly price, and the quarterly 24 price would only -- would manage the average of three 25 months as opposed to a single month, you may actually have 26 some savings there. Not actually sure in the case of 27 contract that locks in a price -- in case of a forward 28 contract, I'm not sure that's the case, but in case of an 6583 1 option, that would definitely be the case. 2 The longer the period over which you are 3 averaging, the less attractive the option is. 4 Q. And is the option you just described available 5 through a cooperative? 6 A. So there are some cooperatives that have licensed 7 livestock insurance agents that offer Dairy Revenue 8 Protection, if that's an answer to your question. 9 They also -- I'm not sure whether they are also 10 licensed introducing brokers, so I'm not sure whether they 11 can offer regular puts and -- put and calls options that 12 are normally traded on the Chicago Mercantile Exchange. 13 Q. Thank you. 14 On page 4 of your second statement -- 15 A. That's 290? 16 Q. Yes. 17 A. Exhibit 290? Okay. 18 Q. And you have a table -- or a -- yeah, I guess it's 19 a table, comparing various proposals. And you -- you 20 identify that Proposal 16 addresses the three risks you 21 have listed there. 22 Would it be correct that even though Proposals 14 23 and 15 do not, in and of themselves, eliminate the 24 advanced prices risk, if they were adopted in combination 25 with the elimination of advanced prices, that they would 26 eliminate all the same risks as Proposal 16? 27 A. That is true. That is correct. 28 Q. In that instance, what makes Proposal 16 superior 6584 1 to the others? 2 A. By "others," I assume you are referring to 14 and 3 15? 4 Q. Yes. 5 A. The -- one of the principal reasons why we wanted 6 to offer an alternative to higher-of -- well, several 7 reasons. One of them is so that the good people at AMS 8 would have a larger choice to choose from as they are 9 preparing the recommended decision. 10 Second, for the reasons that I have listed 11 yesterday in my Exhibit 820 -- 289, I apologize. If you 12 look at the page 4, the -- under the Class III Plus 13 proposal, if there is a demand shock, Class III would -- 14 I'm summarizing -- 15 Q. Sure. 16 A. -- Class III would likely be higher than Class IV; 17 therefore, Class III Plus proposal would mimic higher-of 18 more faithfully than the average-of. 19 If there is an inversion, Class IV higher than 20 Class III, it's likely that you are in a profitable year, 21 so pricing it off of Class III would have the benefits to 22 producers of moving some of that revenue to -- to a low 23 income year, which, you know, means that they reduce their 24 tax liability in the high profitable year and -- and 25 the -- and it's easier to hedge. 26 If you look at the -- from a fluid milk 27 processors' perspective, Class IV futures contracts are 28 much less liquid than Class III contracts. 6585 1 Now, if -- if processors were to come back and 2 say, we don't really care about the liquidity of Class III 3 being better than Class IV, we still want the average, 4 then, you know, there's no reason for me to further push 5 the point number three. 6 But from a producer's perspective, I still believe 7 that, you know, that we are -- that producers would be 8 better off with a Class III Plus than average-of. 9 Q. Okay. On page 6 of the same testimony -- 10 A. 289 again? 11 Q. No, I'm sorry, 290. 12 A. Okay. 13 Q. Yep. 14 This is where you begin summarizing with -- with 15 charts, the various impacts on the PPD. 16 A. Uh-huh. 17 Q. And if you said this during your testimony, I 18 missed it, and I apologize. 19 What does the baseline PPD column represent, and 20 how is that derived? 21 A. Thank you for your question. That is a 22 model-based result where we -- by "we" I mean Professor 23 Wolf and myself -- where we assumed utilization 24 percentages by class as they were in 2010. We assumed the 25 component tests, so protein tests, other solids tests, 26 butterfat tests, as they were in -- I think it was either 27 2010 or the average 2009, 2010 -- and we assumed that 28 the -- that the prices, the announced prices are at their 6586 1 average, and I believe it was 2010 through 2019 average. 2 So that's like the closest we can get to a normal 3 situation, as it -- as it existed ten years ago in terms 4 of how much Class I sales we had in the order and what 5 producers were -- you know, the composition of milk. 6 The reason to choose that as a baseline, 7 Mr. Miltner, is to be able to quantify the impact of 8 rising component tests and reduction in fluid sales on PPD 9 before we even start talking about any month-to-month 10 changes. 11 Q. Thank you. I appreciate that explanation. 12 Would it be fair to summarize your testimony on 13 the impacts of the average-of on PPDs and, therefore, 14 depooling, that while the average-of might not have caused 15 depooling, it generally increased the magnitude of 16 negative PPDs and, therefore, the economic impact of 17 depooling when it occurred? 18 A. I'm not sure about the amplification of the 19 depooling effect, but I think it is -- and when I say I'm 20 not sure, I'm not trying to be nice and say I disagree. I 21 just don't know. I would need to examine that. 22 But I think it's fair to say that the average-of 23 in -- in months when -- because negative PPDs tended to 24 happen in months when the spread between III and IV was 25 large -- I'm talking now about 2020 -- those were the same 26 months where the average-of would have resulted in a lower 27 price than higher-of and, therefore, average-of did lower 28 the PPD further. So the magnitude, the absolute value was 6587 1 higher and the sign tended to be negative. 2 Q. So it did increase the magnitude of the negative 3 PPD. 4 A. Yes. Yes. It did increase the magnitude of 5 negative PPDs. And we can count it in the months here. 6 So if we look at just quickly through months. 7 In March, PPD's positive contribution -- in March, 8 PPD's positive; contribution of the reform is positive. 9 In April, PPD is positive; contribution is still 10 positive. 11 In May, the contribution is negative $0.06; PPD is 12 still positive. 13 And then in June the contribution is still 14 virtually zero. It's $0.12 positive. 15 Then in July we start having $0.84 negative, and 16 the PPD is negative. 17 In August we have $1.57 per hundredweight negative 18 of Class I reform, and the PPD is negative. 19 In September we have negative 1.52 for Class I 20 reform, and the PPD remains negative. 21 In October, $0.36 negative for Class I reform; PPD 22 is also negative. 23 November, negative 1.14 for Class I reform; PPD is 24 also negative. 25 And December, Class I negative 1.72; actual PPD is 26 positive in that respect. 27 So, you know, most of the months when PPD was 28 negative, the Class I reform made it more negative. 6588 1 Q. I'm curious if you did a similar analysis for any 2 of the months in 2021 or 2022? 3 A. I did not at this time. I -- that would have been 4 something that before I knew better about the rules of 5 this hearing -- and thank you, Mrs. Hancock, on that -- 6 that we are not supposed to introduce further evidence in 7 post-hearing brief. But that would be something that I 8 would need more time to calculate. 9 Q. I think this is my last question then. 10 Can -- can any combination of the proposals 11 related to advanced pricing or the Class I mover in this 12 hearing eliminate the risk of depooling caused by a large 13 Class III and IV spread? 14 A. No. 15 MR. MILTNER: That's all. Thank you. 16 THE WITNESS: Thank you, Mr. Miltner. 17 CROSS-EXAMINATION 18 BY DR. CRYAN: 19 Q. Good morning. 20 A. Good morning. 21 Q. I'm Roger Cryan from the American Farm Bureau 22 Federation. Nice to see you. 23 So your paper, the paper you did with Dr. Wolf, I 24 think did a very nice job showing a striking variation in 25 the PPDs, and then the very considerable variation in its 26 elements. 27 Would -- would you describe in plain terms the 28 impact that advanced pricing has on the differential, the 6589 1 two different differentials, the differential between the 2 uniform price and the Class III price, and the 3 differential between the uniform price and the Class IV 4 price? 5 A. In plain words, huh? 6 Q. Please. 7 A. The differential -- the difference between the 8 uniform price and the Class III price is mathematically 9 equal to producer price differential. 10 Advanced prices, over the long-term, if there is 11 no upward or downward trend in announced prices, the 12 advanced prices, then, would not tend to either increase 13 or decrease that long-term, the PPDs. However, they would 14 add to the PPD variability, or changes, month to month. 15 Sometimes they will make producer price differential 16 higher than it would be than in the -- in the case if the 17 advanced prices were not used; sometimes it will make 18 producer price differential more negative. 19 The impact on producers, however, is not symmetric 20 and depends on the utilization rates in a particular 21 order. If, for example, advanced prices make producer 22 price differential more positive in the order, like Upper 23 Midwest has mostly Class III and barely any Class IV, then 24 the increase in the PPD will be small. 25 However, when advanced prices contribute to 26 negative PPD, the moment you switch from positive to 27 negative PPD, at least 20% of Class III milk will depool, 28 and potentially much more than that depending on the 6590 1 expected spread between uniform and Class III futures. 2 Q. I think that's the amplification that Mr. Miltner 3 was getting at. 4 A. Okay. 5 Q. Yeah. 6 A. I -- I can't vouch for that, but I -- I accept 7 your -- 8 Q. That's my interpretation. 9 A. That's your interpretation, huh? 10 Yeah. So that -- that -- that would be the impact 11 of advanced pricing on the spread between uniform price 12 and the Class III price. 13 The impact on -- on the difference between 14 uniform -- so first let's take a step back. 15 The reason why one would be interested in the 16 difference between the uniform price and the Class IV 17 price is to examine incentives of Class IV handlers to 18 remain in the pool or to depool. And the effect is, we 19 won't call it PPD, but otherwise, the mechanism is the 20 same. 21 In some months, that spread can be amplified 22 higher; in some months it can be amplified lower. And if 23 you have an order in which Class IV is a substantial part 24 of utilization mix and advanced prices makes the uniform 25 price fall below the Class IV price, that will send the 26 signals to Class IV handlers to depool. So it's trouble 27 either way. 28 Q. So the issue with Class IV is analogous to the 6591 1 issue with Class III, it just gets less attention because 2 it doesn't show up in the published PPD every month, 3 right? 4 A. That's right. Yes. Yes. 5 Q. So would you -- would you agree that those are the 6 relationships that -- that generally lead to depooling? 7 That is to say, you are describing relationships, price 8 relationships, specific price relationships that 9 incentivize or don't incentivize handlers to depool? 10 A. Yes. So the existence of advanced pricing 11 amplifi- -- or introduces incentives to depool that would 12 otherwise not exist, occasionally. 13 Q. Your -- in your analysis with Dr. Wolf you talked 14 about some of those impacts that you separated out in your 15 econometric estimation. They can be related, right? 16 There are -- sometimes it's not that easy to tease out 17 which -- when things are correlated, it's hard to tease it 18 out. The statistical methods basically make a sort of 19 decision for you, but that doesn't always mean that that's 20 exactly the allocation of impact; is that correct? 21 A. Yeah, that is fair to say. And in some sense, the 22 analysis suffers from the composition effect. If we 23 analyze some other effects first, and then the spread, 24 maybe the chart would show that they have a bigger effect 25 than the spread. 26 But, you know, in -- we followed this 27 composition -- and just to reiterate, we -- we decided on 28 this composition before -- years before we knew that that 6592 1 paper would be considered in a Federal Order hearing like 2 this, so it's a strategic tactical move, if you will. But 3 we thought it would be most appropriate to start with the 4 trends, because those are, in some sense, hardest to 5 address, especially the decline in Class I. 6 And then the Class III order -- the Class III 7 versus IV spread we chose as the second effect, because 8 even if you abolish the Class I reform, even if you 9 abolish advanced prices, you can't abolish Class III/IV 10 spread, so you are still stuck with that. 11 And then to the extent advanced prices preceded 12 temporally, preceded the introduction of the Class I 13 reform, it made sense to maybe introduce that before we 14 add on that final change between the higher-of -- from 15 higher-of to average-of. 16 Q. Okay. And in the econometric estimation, how you 17 order the variables has an impact on which one has a 18 bigger impact? 19 A. Dr. Cryan, that's actually -- only parts of this 20 are econometric, the rest is just accounting exercise, if 21 you will. 22 Q. I understand the monthly analyses were an 23 accounting exercise -- not an exercise but a -- 24 A. Yes. So the part that is an econometric analysis 25 here is the estimation of utilization trends, so 26 utilization percentages by class, and the estimation of 27 the trends in component tests. 28 Q. Okay. Okay. Thank you. 6593 1 Regarding the success or failure of futures and 2 options markets, a Class I futures and options complex on 3 the CME would presumably be cash settled. 4 Would you agree with that? 5 A. Most definitely. 6 Q. Would you also say that cash-settled contracts 7 have a lower bar for success than the delivery-settled 8 contracts? 9 A. I think that's fair to say. There is one -- one 10 source of basis risk is removed. As long as the 11 settlement price corresponds to the price at which people 12 transact, which would be most definitely the case in the 13 case of Class I futures contract. 14 Q. And you brought up the block contract. 15 Would you say that cheddar -- the cheddar block 16 contract? 17 A. Yes. 18 Q. Would you say that in the case of a complex of 19 contracts, like the CME's complex of cash-settled 20 contracts would all relate to prices announced by USDA, 21 that there is a value to maintaining certain things like 22 the whey contract and the block contract that complete the 23 complex for the benefit of customers? 24 A. No. That's absolutely the case. So before 2007 25 when the dry whey -- excuse me -- before 2010 when the 26 cheese contract was introduced, we did not have the full 27 non-arbitrage relationship between the components or the 28 products and the milk on the other side. 6594 1 Once the cheese contract was introduced, then an 2 arbitrager could provide liquidity to a cheese buyer on 3 one side, take a position in whey and butter contracts as 4 well, and then provide a liquidity to a dairy producer on 5 the other side who wants to sell a Class III futures 6 contract. So that was a very important link between the 7 markets. 8 Q. All right. 9 A. Which we may lose if we are not careful about 10 Make Allowances and how we reform them. 11 Starting to sound as a broken record. 12 Q. So success -- there are other aspects -- there are 13 other things that can define a contract as successful than 14 the -- than the isolated volume of the contract, like, in 15 the case of the whey contract, just like you described? 16 A. So -- so I think what you are trying to say, and 17 correct me if I'm wrong, is that, you know, the Class I 18 futures may be more likely to succeed because it is tied 19 back -- it is in some sense a redundant contract, it can 20 be replicated by Class III and Class IV contracts, at 21 least on a, you know, short time period. 22 Is that where you are going with it? 23 Q. Or because as it relates -- because it would -- in 24 the case, for example, if we went to the higher-of, that 25 it would fill a need in the larger dairy complex. 26 A. Oh, yes. That would be hedging demand for it. 27 The -- the challenge is that there would be no obvious 28 hedging demand for the other side of that. You know, 6595 1 the -- that would, to a large extent, have to be met by 2 the arbitragers who would take a short position on Class I 3 futures and then a long position in either Class III or 4 Class IV futures, whichever one was the higher for that 5 day. 6 DR. CRYAN: That's it. Thank you very much. 7 THE WITNESS: Thank you, Dr. Cryan. 8 CROSS-EXAMINATION 9 BY MR. ROSENBAUM: 10 Q. Steve Rosenbaum for the International Dairy Foods 11 Association. 12 Dr. Bozic, you, on page 13 of -- I guess this 13 became part of the entire Hearing Exhibit 290, the various 14 tables; is that right? So it's -- 15 A. Yes. 16 Q. -- it's labeled as Edge-15B, page 13. 17 That's where you start to do your month-to-month 18 PPD decomposition, correct? 19 A. That's correct. 20 Q. Which you talked about yesterday and then again 21 today. 22 I just want to clarify perhaps a little bit for 23 the record what you mean when you are discussing what you 24 labeled as Class I reform, correct? Okay. And I'm going 25 to ask you a question. 26 A. Sure. 27 Q. Which is, am I correct that in this context, 28 Class I reform means the system under which, rather than 6596 1 pricing on higher-of, the pricing is the average-of 2 Advanced Class III and Class IV plus $0.74? Is that what 3 you mean by that? 4 A. Just -- just the opposite. The change from 5 higher-of as it existed prior to 2019 to the average-of 6 plus $0.74. 7 Q. And -- and I think you implicitly answered this 8 question, but I'll just make it explicit. 9 This is not attempting to capture the -- for 10 example, the IDFA proposal, which would replace the 11 average-of plus $0.74 with a system that instead was the 12 average-of plus either $0.74 or a higher amount to the 13 extent that farmers during the two-year lookback period 14 would have received more under the higher-of versus the 15 average-of plus $0.74, correct? 16 A. This chart was produced using an Excel file that 17 was last modified on March 31st, 2021, so that would be 18 almost two years -- or about two years -- more than two 19 years before IDFA formulated their proposal for Class I 20 mover. 21 Q. Certainly not suggesting this is a criticism. I'm 22 only trying to -- 23 A. Yeah. No, no -- 24 Q. -- identify what it is you are saying -- 25 A. Just trying to answer precisely. 26 Q. And the fact that the IDFA proposal has a $0.74 27 floor which it cannot go below, but it has an add-back 28 that has no cap, is it fair to say that inherently the 6597 1 impact of the IDFA proposal would be less on PPD 2 decomposition than is shown in your -- in your tables, 3 correct? 4 A. I think it would be more precise to say that the 5 numbers provided here provide a lower pound. In other 6 words, the effect of such reform as compared to the 7 higher-of, could only be more positive, I guess. So if, 8 for example, March says $0.10, it would be either $0.10 or 9 better impact on PPD. And so even in months where the 10 impact is negative, it would be, at most, as -- as 11 negative, but it could be perhaps less negative. 12 MR. ROSENBAUM: Thank you very much. 13 THE WITNESS: You're welcome. 14 THE COURT: Does anyone else have questions before 15 I turn to Agricultural Marketing Service for their 16 questions? 17 No. 18 MS. TAYLOR: It may be a good idea to have a 19 break. 20 THE COURT: I think a break is excellent. Would 21 you like five minutes or ten? 22 MS. TAYLOR: Ten-minute morning break. 23 THE COURT: Ten-minute morning break. All right. 24 Let's come back at 9:30. We go off record at 25 9:18. 26 (Whereupon, a break was taken.) 27 THE COURT: Let's go back on record. 28 We're back on record. It's 9:30. 6598 1 CROSS-EXAMINATION 2 BY MS. TAYLOR: 3 Q. Good morning. 4 A. Good morning. 5 Q. I'd like to start with your Exhibit 289, your 6 statement in support of 16 and 17. And I first want to 7 turn to page 4. And on that list of -- under the header 8 "Proposal Number 16," your list of three reasons that you 9 are advocating for Proposal 16. I think what I heard -- 10 you clarified that a little bit with maybe Dr. Ryan -- 11 Dr. Cryan's questions. 12 But number one, is what you are saying, if 13 there's -- I just want to make sure we're clear -- if 14 there's a demand shock, it will probably happen and 15 Class III will be higher? 16 A. That's right. 17 Q. And so at least under your proposal, you think it 18 would be better than if under any other proposals in that 19 situation? 20 A. To the extent that we are looking for a solution 21 that would mimic higher-of in a year like 2020, the 22 Class III Plus is superior to average-of solutions. 23 Q. Okay. And then in the second bullet, I think what 24 you clarified and what you are saying there, if there is 25 an inversion, that typically indicates that it is actually 26 a profitable year. Class IV is higher, Class III is 27 probably high, too. So you would be moving some of that 28 revenue from that high profitable year to a lower year, 6599 1 where a later year that was probably not going to be as 2 profitable? 3 A. That is correct. 4 Q. And when you mentioned revenue shortfall in that 5 second line of that bullet. We had a question on what 6 you -- if you could clarify what you are talking about 7 there. 8 A. In the context of this topic, revenue shortfall is 9 a jargon often used to describe or to capture the -- 10 denote the difference between the higher-of system as it 11 existed before 2019, and the alternatives being 12 contemplated, either average-of, or in this case -- in 13 this case, the Class III Plus. 14 Q. Okay. And that's kind of playing out to the 15 moving revenue layer on to a later year. 16 A. That is correct, yes. 17 Q. Okay. On page 5, that first paragraph when you 18 are talking about advanced pricing, and my takeaway from 19 that is, you all support getting rid of advanced pricing 20 as a way to force -- and force might be the wrong word -- 21 but encourage fluid plants to actually make the leap and 22 do risk management. 23 Would that be correct? 24 A. That is one of the benefits that we see. The 25 other benefit is that their profit margins would not be as 26 easy to -- well, their cost of production would not be as 27 easy to calculate by -- or estimate by the buyers of their 28 products, and the opacity in the cost of production would 6600 1 give them the opportunity to increase their profit 2 margins. So we hope that it would ultimately lead to 3 invigoration of that sector, more innovation, more 4 competition. 5 Q. And if I could make sure I'm clear on that. 6 When you say: "Their cost of production wouldn't 7 be easily calculated to their buyers," if I'm getting that 8 right, so what you are indicating is, then the buyer can't 9 kind of try to eek out every penny from them as possible? 10 A. Exactly. Yes. 11 Q. Okay. And then on the second paragraph, I wonder 12 if you could go into more detail kind of what you are 13 talking about there. You have this, "We would publish an 14 indicative Class I skim milk price." 15 So if you could just kind of explain that 16 paragraph, what you think AMS would need to publish, and 17 what it would be used for. 18 A. Sure. Would you like an example as well? 19 Q. Examples are always beneficial, yes. 20 A. Would anyone object to it? 21 The way I would do that is by pulling out my 22 laptop, pulling the prices for -- pulling the October 23 futures contract prices as they existed in mid-September, 24 and showing exactly how the number would be calculated. 25 I'm happy to submit that file for the record 26 later. 27 THE COURT: Okay. Let me start by when I asked 28 you yesterday to close your laptop, that was a -- a 6601 1 peculiar situation. 2 THE WITNESS: Sure. 3 THE COURT: And I wanted you just to rely on 4 your -- your own knowledge without looking at somebody 5 else's statement. That's unusual. Normally I want you to 6 use that laptop. 7 THE WITNESS: Sure. 8 THE COURT: And I don't think you have to 9 identify -- I don't think you have to make an exhibit of 10 everything that you use to inform us in your testimony. 11 All you need to do is tell us during your testimony where 12 you found it and how others can look at it. You do not 13 have to reproduce it. 14 THE WITNESS: Okay. 15 BY MS. TAYLOR: 16 Q. Well, let me ask a few questions maybe, and lead 17 us to where I hope we -- to get some clarity. 18 You talk about, "If there's a need for some form 19 of coordination mechanism, that can be solved with this 20 publish of this price." 21 So what do you mean there by "coordination 22 mechanism"? 23 A. So as we will hear, I think, later today from 24 Mr. Covington, that their exhibit is already published, 25 you know, so I cannot speak on his behalf. But my 26 understanding of what we are to expected to hear is that a 27 rebuttal argument will center on, well, we have to know 28 our costs before the month starts because we have to 6602 1 provide a price to our buyers before the month starts. 2 And if AMS is not publishing any prices, then what prices 3 do we give them? 4 And if there is an indicative Class I milk price, 5 as described in this paragraph, that becomes the natural 6 starting point for such discussions between Class I 7 handlers and their buyers. Here is an indicative Class I 8 milk price; would you like to pay at that price? No, I 9 would prefer to pay at something else. 10 But that's a starting point to any discussion. 11 It's not a binding price in any sense, but it's a focal 12 point from which the discussions would further emanate. 13 Q. And so I think as I'm reading this, your 14 indicative Class I skim milk price would be kind of like 15 our advanced price now? 16 A. "Like" is a dangerous word there, because advanced 17 price has enforcement mechanisms behind it that is -- 18 becomes your handler obligation to the pool. Indicative 19 Class I price would be more similar to Dairy Market News. 20 Here is what we observe in the market. You know, here is 21 what the Upper Midwest Class III basis is, or what the 22 spot market price is, etcetera. It's a news rather than 23 an enforced -- an enforced price. 24 Q. Sure. 25 And so how would one -- how would the Agency 26 collect the information you would like published for that 27 price? 28 A. The futures prices for our -- from CME are 6603 1 publicly available at no cost, and they are used by your 2 colleagues in risk management agency. 3 Q. You are talking about III/IV futures? 4 A. Yes. 5 Q. Okay. 6 A. In the context of Class III Plus, you would only 7 need Class III futures. In the context of -- if you were 8 to choose to implement average-of without advanced 9 pricing, then you would also -- and if you were to choose 10 to publish such report, you would also need Class IV 11 futures prices. 12 Q. So if I'm a fluid HTST plant -- 13 A. Uh-huh. 14 Q. -- and -- I guess I'm trying to figure out how 15 this would work. 16 A. Sure. 17 Q. My buyer comes to me and says, this is the 18 Class III futures price, or this is the indicative skim 19 milk price. That would be, what, the Class III futures 20 price for -- 21 A. So you would publish the indicative base Class I 22 skim milk price, just like you do today. 23 Q. So we would publish that. 24 Let's -- let's use an example. We're in October. 25 We would have published that price at the end of September 26 sometime -- 27 A. Yes, that's correct. 28 Q. -- or after -- and we would use what -- we would 6604 1 use what futures prices? 2 A. You would use the October contract month. In the 3 context of Class III Plus, you would use only Class III 4 milk futures. 5 Q. For October 2023. 6 A. For October 2023. 7 As they were settled on each of the calendar days 8 that fall within the current two-week window that is used 9 for measuring advanced prices. 10 Q. Okay. 11 A. That's a 14-day window. 12 You may be curious to know that a very similar 13 mechanism is used by risk management agency to set the 14 expected price for, for example, corn. They measure daily 15 settlements of futures prices for corn for December 16 contract. They measure it through the month of February. 17 And then that becomes the price used for crop insurance 18 contracts in corn that must be bound by March 15th. So 19 this may be new to AMS, but it is not precedential for 20 USDA overall. 21 Q. Okay. And so Class III futures are announced at 22 3.5; is that correct? 23 A. That's correct. 24 Q. So Class I milk is priced on skim fat? 25 A. That's correct. 26 Q. So how would one go about -- 27 A. Yes. So every day, at the end of the day, you 28 would observe the butter futures. From the butter 6605 1 futures, you would derive an implied butterfat price. 2 Once you have the Class III price and the butterfat price, 3 you could back out what the skim, Class III skim price 4 would be. And then you would average that over two weeks. 5 The full detail is included -- the full detail of 6 a similar exercise in the context of evaluating hedge 7 effectiveness is included in the Appendix to the 8 Exhibit 290. If you -- let's see where that is. Oh, it 9 didn't get printed. Oh, no, it did get printed. Okay. 10 If you look at the page 13 of the Exhibit 290 with 11 the -- in the interest of time, we didn't go through this 12 yesterday, but it is part of the record as I understand 13 it. 14 So if you look at the step 3 on page 14, in the 15 context of evaluating hedge effectiveness, we needed to 16 calculate the futures implied expected base Class I milk 17 price. So we take the butter futures, subtract the 18 current Make Allowance, multiply the difference by the 19 manufacturing yield. That results in the expected 20 butterfat price. That's in the step 3.1. 21 Did you -- do you see that? 22 Q. Uh-huh. 23 A. And then, you know, I -- even in that summary, I 24 provide a reference to a cell, H155 on tab "Analysis" of 25 the Excel spreadsheet that is included for the record, so 26 you can trace back and you can see the full calculations 27 there. 28 So once we have the expected butterfat price, then 6606 1 knowing the composition of the Class III futures, 2 currently it's 3.5 and -- but down the road it may be 3 something different. As long as the market has full 4 information as to the competition -- excuse me, not as to 5 the -- as to the composition, you can use an equivalent 6 formula to what is presented here in step 3.2. 7 So Class III milk futures minus 3.5 times the 8 expected butterfat price, and then that difference must be 9 divided by 0.965 to derive the expected Class III skim 10 milk price. 11 And, again, the -- the appendix contains the 12 reference to cell I155 for expected Class III skim milk 13 price, and J155 for expected Class IV skim milk price. 14 You would do that for each of the trading days 15 that -- that fall within the two-week window to derive 16 essentially a 14-day average of the projected prices for 17 skim for the month of October. 18 The reason I would recommend that you do it over 19 the same two-week window is, first, that will be perceived 20 as close to what we are doing currently; and second, to 21 the extent that the Class I handlers want to hedge, they 22 would probably want to place those hedges incrementally 23 over a two-week period so as not to move the market now. 24 A valid objection, going back to what Ms. Hancock 25 was asking me yesterday, could be that if we spread it 26 over a two-week window, then we are essentially saying 27 that in each of those days, you know, you have to have 28 volume large enough to be able to buy at least one 6607 1 contract. 2 But that's where the, you know, industry input 3 should come in as you -- that's why we have a difference 4 between recommended and Final Decision, so that people can 5 see what you are thinking and provide input on that. 6 I'm not saying that -- that -- that I have 7 everything figured out here to the point that nobody 8 else's input can improve it. 9 Q. So it leads me to another question. 10 You know, we have heard discussion about why it's 11 important to have advanced pricing for HTST plants still. 12 And I understand the desire to kind of push them to go 13 into hedging. 14 But what about the small processors that don't 15 have -- that already operate on small margins and might 16 not have the financial capability to involve themselves in 17 hedging? 18 A. So Mr. Turner, who was here two weeks ago, I 19 believe you asked him whether he qualifies as a small 20 business, and his answer was yes. So could we use him as 21 an example as a small processor to that question? 22 Q. Well, I think the range of small varies, and he's 23 just one example of that. 24 A. Yeah. So -- so in his example, you know, I don't 25 believe that -- you know, he may not find it pleasant the 26 first month, but, you know, give him a month or two, and I 27 think that he can fully master this without any issues. 28 Not to steal Lucas' thunder, but, you know, we do 6608 1 have testimony coming up later today that tries to offer 2 you more choices for you to consider as you -- as you make 3 your recommended decision. That may be something that 4 could make you more comfortable from that perspective that 5 you just asked. 6 Q. Okay. On page 6, I was wondering if you could 7 just -- 8 A. I'm sorry, Ms. Taylor, page 6 of which exhibit? 9 Q. I'm sorry, of Exhibit 289. 10 I wonder if you could review again, what this 11 graph is showing us. 12 A. This is really an eyesight test. 13 Q. It is. I would agree. 14 A. I apologize for that. It was a -- it was just an 15 image transplant from a different paper. 16 So what we wanted to illustrate -- this is an 17 excerpt from the Exhibit 76. You can find that larger 18 version of that image on page 435 of the Exhibit 76. 19 Q. Okay. 20 A. So those are exactly the same images. It might be 21 easier to look there. 22 So what we wanted to -- in real world you have 23 many things moving all at once. The spread is changing, 24 advanced prices are changing versus announced. The 25 component tests are changing. There's -- utilization 26 rates are changing because of depooling. So it's very 27 hard to disentangle the impact of one force on, for 28 example, PPD. 6609 1 In this paper, co-authored with Dr. Wolf, we tried 2 to do that. We tried to keep everything else constant, 3 move one thing and see how that influences PPD. So that 4 is -- that's what this chart is attempting to do. It is 5 looking at the difference between the announced cheese 6 price, so it's a final price, and the advanced cheese 7 price, that would be used for advanced pricing. 8 So when -- on the horizontal axis, as you move to 9 the right, that means that there was a rally after the 10 prices, after the advanced prices have been released. As 11 you move to the left on the horizontal axis, that means 12 that the prices have dropped after the advanced prices 13 have been released. So far so good. 14 Q. Yes. 15 A. Okay. So now on the vertical axis, what we wanted 16 to do is we wanted to keep the utilization into the pool 17 as we believe it would have been were it no depooling. So 18 we tried to, you know, stipulate what the utilization by 19 class would have been based on historical trends, and we 20 tried to -- and we ignored the 2019 Class I reform. So 21 this is under the higher-of system. 22 So under those two assumptions, which are modeling 23 assumptions, we have to recognize, we can see a more -- a 24 clearer relationship or clearer impact on rallies in the 25 market after the advanced prices have been released on the 26 PPD, on what we project the PPD would have been. We don't 27 know for sure what the PPD would have been because this is 28 a modeling exercise. 6610 1 So if there was no depooling, if there was this 2 Class I reform, what do we project, based on our 3 understanding of trends in component tests and our 4 understanding of trends in utilization rates, what would 5 we project would be the PPD in this context in the 6 Order 126, the Southwest order? 7 And as you can see, as the -- as market -- if 8 markets rally, the PPDs drop. If markets -- if the prices 9 go down after the advanced prices are released, then the 10 PPD increases, tends to be higher. That is -- that was 11 what explains this about 45-degree negative line there. 12 There is some noise, but the relationship is fairly strong 13 there. 14 In the real world, if you tried to plug this, if 15 you were to take last ten years of data, or 15 years of 16 data for Southwest Order, and you were to plot their PPD 17 against the difference between the advanced and the 18 announced -- excuse me -- announced and the advanced 19 cheese price, it would be more hairy. It would be more 20 dispersed around. And the reason that is the case is 21 because, well, primarily we do have depooling. 22 So -- so that would perhaps make it more 23 non-linear, if you will. I would expect that this line 24 would have a deeper slope than 45 degrees negative, as the 25 spread between the announced and the advanced cheese price 26 rises. 27 Q. So -- so if I can summarize -- 28 THE COURT: Let's go off record just a minute at 6611 1 9:52. We need help with the battery for the Agricultural 2 Marketing Service. 3 (An off-the-record discussion took place.) 4 THE COURT: All right. Let's go back on record. 5 We're back on record at 9:53. 6 BY MS. TAYLOR: 7 Q. So if I could summarize. What this graph is 8 showing us is generally if -- if the time between the 9 advanced and the announced, the market rallies, generally 10 PPDs go down? 11 A. Yes. 12 Q. And the inverse is true? 13 A. That's correct. 14 Q. Okay. 15 A. And it is providing you some sense of magnitude. 16 Q. Correct. 17 A. In this case, in the Order 126. 18 Q. Okay. Got it. 19 I wanted to -- I want to talk just sticking on 20 Proposal 16, and I wanted to talk order language, which is 21 always a fun discussion. But since your exhibit didn't 22 cover that, we want to make sure we understand how it is 23 supposed to operate. 24 So I want to turn to Exhibit 13, which I will 25 bring you up a copy, but it is USDA-13 on the website if 26 anybody is wanting to look at that. And I want to turn to 27 page -- well, 19 is where -- 20 is where Proposal 16 28 starts. 6612 1 A. Yes, ma'am. 2 Q. All right. So we want to make sure we understand 3 how this would work. 4 So in the first -- in Section 50, paragraph B, 5 it's essentially saying the Class I skim milk price is the 6 Class III price plus the adjustment computed in Q3. 7 A. That's correct. 8 Q. And so I want to -- that's simple enough. 9 I want to turn to Q3, which starts at the bottom 10 of page 21. 11 So what we read here is -- I want to figure out -- 12 I think I know the A -- you know, the adjustment is the 13 difference between A and B, theoretically, and I want to 14 define what A and B is. 15 A. Uh-huh. 16 Q. Okay. So A is the higher-of either the Advanced 17 Class III and the Advanced Class IV, so whatever one is 18 higher; and B is the Class III skim milk price, the 19 announced Class III skim milk price. 20 A. That's correct. Yes. 21 Q. So you put those each in a column and you take the 22 difference? 23 A. That's correct. 24 Q. And then you do that for every month? 25 A. That's correct. 26 Q. And then you take a 36-month average from August 27 of the four years prior to July of the year prior, I 28 guess? 6613 1 A. That's correct. 2 Q. Okay. And round that to the nearest cent. 3 That's the adjuster? 4 A. That's correct. 5 Q. The question is, when is that implemented? 6 A. September. 7 Q. For how long? 8 A. So -- so that would be implemented annually in 9 September -- no. For example, you could publish that in 10 September as a formal announcement that would be enforced 11 from January of the forthcoming year. 12 Q. So let's take an example. In 2023, we would have 13 gone back four years, computed the 36-month average up 14 until July of this current year? 15 A. That's correct. 16 Q. Whatever that adjuster is, we would announce, 17 let's say in September -- 18 A. That's correct. 19 Q. -- and you would have it implemented in 2020- -- 20 January 1 of 2024? 21 A. That's correct. Yes. 22 Q. Okay. So I think I'm off a year. When you are 23 talking about hedging and you need to know these things in 24 advance, that only gives you less than six months advance 25 notice of that. I'm not sure how that works for you. 26 A. So as I said yesterday, you know, Edge did come to 27 this hearing not just to -- for you to hear some foreign 28 accents, but also to listen, learn from others, try to see 6614 1 if we can find common ground where possible, provide 2 common sense solutions. I think we owe it to the U.S. 3 taxpayer to try to do that. 4 One of the learnings for me, personally, and for 5 Edge, was the rolling nature of some of the institutional 6 contracts and other, you know, commercial contracts, for 7 example, that I think that's best exemplified by 8 Mr. Doelman's testimony from Fairlife. 9 Having heard that, Edge would not object if you 10 were to implement Class III Plus with the adjuster of the 11 style that -- that MIG proposed. 12 Q. A rolling adjuster. 13 A. A rolling adjuster, yes. 14 We would also not -- the other assumption that we 15 had when we were designing this proposal is that we have 16 to stick to revenue neutrality, because that was the 17 former deal between IDFA and National Milk. 18 We did not have the privilege of knowing what is 19 now known as proposal, I believe, 15, the IDFA's proposal, 20 with a floor of $0.74. We would not object if AMS were to 21 set the floor to Class III Plus in a similar way. 22 That's -- you know, that would be in line with the floor 23 of $0.74. 24 So there -- we are not writing a Bible here, we 25 are writing regulation. Regulation needs to be based on 26 all of the evidence heard, not just what we all knew in 27 mid-June of 2023 when we were putting these proposals in. 28 So we are quite flexible. Edge is quite flexible 6615 1 on those details in the -- in the regulation. The core 2 principles are, let's get rid of advanced prices, we don't 3 need them anymore; and then the choice is whether you 4 would like to do it as an average-of or tie it just to 5 Class III. But even that is a second order priority for 6 Edge versus getting rid of advanced pricing. 7 Q. So but back to -- I'm trying to understand Edge's 8 proposal. 9 A. Sure. 10 Q. And your, you know, testimony about the importance 11 of hedging and the importance of knowing things in 12 advance. 13 A. Yes. 14 Q. So for that purpose -- 15 A. I guess -- 16 Q. -- what kind of -- you know, you can -- we can 17 think about the rolling, we can think about 36 months, or 18 24 months. You know, those are all -- the big picture, 19 how much lag time is Edge seeking to implement whatever 20 the adjuster is, however it's calculated should that be 21 recommended, for you to meet your hedging objective in 22 proposing this? 23 A. Yes. Ms. Taylor, I apologize, I didn't -- I just 24 realized I didn't directly answer your question. 25 When we were designing this proposal, we worked 26 off the assumption that folks don't really start hedging 27 the next year until they set the budgets for the next 28 year, and the budgets are set in September. So from that 6616 1 sense, some of the months have higher lag than others. 2 January would have the smallest lag and the December would 3 have the highest lag. 4 Having heard the testimonies, we revised our 5 assumptions. 6 Q. Okay. I had another question. You know, you want 7 to get rid of advanced pricing, but your proposal still 8 has us using advanced pricing to calculate the adjuster. 9 And I'm curious why that's being proposed, and if we're 10 looking 36 months back and we know what the announced was, 11 why not just use the announced? Why are we looking at the 12 advanced at all? 13 A. The only reason why we drafted the language as we 14 did is to come across as not trying to tilt the scale to 15 producers or processors to maintain strict revenue 16 neutrality. To the extent that we would be all happy with 17 an approximate revenue neutrality, it would be perfectly 18 fine to just use announced Class III skim and Class IV 19 skim over the previous 36 months. 20 Q. Okay. 21 A. Certainly would mean less paperwork for you, one 22 less report to track. 23 Q. Okay. I think I'm good with that. 24 I want to turn to your next exhibit, 290. And in 25 preparation for that, I am going to have some questions 26 looking at Exhibit 76 that we -- 27 THE COURT: May I stop you? 28 MS. TAYLOR: Yes. 6617 1 THE COURT: I have a record exhibit here -- 2 MS. TAYLOR: Yeah, we'll get it back at the end. 3 THE COURT: I would like to give it -- 4 MS. TAYLOR: Well, we can get it now, if you would 5 like. 6 THE COURT: I would like you to take it away from 7 me. 8 THE WITNESS: I might also lose it. 9 Ms. Taylor, which exhibit are we on? 10 MS. TAYLOR: 76, I'm going to reference that one. 11 And, Judge, I have a copy for you if you would 12 like to look at it. 13 THE COURT: I do like to look at it during the 14 testimony and then give it back immediately. 15 MS. TAYLOR: Okay. 16 BY MS. TAYLOR: 17 Q. I want to turn first to page 3. 18 A. And would it be -- are we talking about 19 Exhibit 76? 20 Q. 290, I'm sorry. 21 A. Okay. 22 Q. So many papers. So many exhibits. 23 Okay. So on Exhibit 290, page 3, and this is 24 where you are talking about the three risks, listing the 25 three risks that you are trying to -- 26 A. Sure. Basis risk, yeah? 27 Q. Yeah. This last one, bid-ask risk or risk 28 premium. And I want you to, if you could, explain again 6618 1 what that is. And when I first read it, I thought that 2 this risk is assuming that there's a CME base Class I milk 3 futures contract -- 4 A. That is correct. 5 Q. -- in existence, which actually doesn't exist 6 right now. 7 A. That is correct as it does not exist today. This 8 contemplates a potential risk that would emerge were AMS 9 to go with Proposal 17 or 18 and CME were to create a 10 Class I contract either for Class I price or Class I skim 11 price. 12 Q. Okay. So that's just if all those stars align, 13 using that risk to do this? 14 A. Yes. I think if -- you know, given our experience 15 with the asymmetric risk under average-of, I do think we 16 need to contemplate such scenarios. 17 Q. Okay. And then I want to turn to page 6, and I 18 then, at the same time, on page 76 want to turn to page -- 19 Exhibit 76, turn to page 437, because I think what you -- 20 what you put in this Exhibit 290 was kind of a summary of 21 your paper in Exhibit 76. 22 A. It was, did you say page 437? 23 Q. Yes. 24 A. Okay. The table, I assume. 25 Q. Table 5. That's what I want to talk about. 26 A. Yes. 27 Q. Yep. 28 So we were trying to look at kind of the 6619 1 categories you have in Exhibit 290 -- 2 A. Oh, I see. 3 Q. -- and match them with the columns that you have 4 in Exhibit 76, and they don't match identically. 5 And if I could just further explain. Trying to 6 figure out, I mean, what goes into trends, in particular. 7 And you said in some text yesterday, trends are the change 8 in utilization rates between the classes, and there might 9 be a different factor, I missed writing down when you were 10 saying that. So I was trying to match these things up. 11 A. Sure. So the -- in the Exhibit 290, the bar that 12 is named "trend" would be the sum of what in Table 5 is 13 Step 1 and Step 2, utilization rates and component tests. 14 And I believe I -- I answered a question or two in 15 today's cross-examination, that trends -- I think it was 16 from Mr. Miltner -- that the trends capture changes in 17 utilization trends and the growth in protein tests and 18 other solids, butterfat -- well, butterfat wouldn't matter 19 for PPD but -- 20 THE COURT: Say that last part again. 21 THE WITNESS: Butterfat wouldn't matter for PPD so 22 it would be the changes in protein and other solids test 23 that would matter for this. 24 BY MS. TAYLOR: 25 Q. I think I had missed that second piece. That's 26 where I was stuck. 27 A. And then the Step 3 in Table 5, actual announced 28 prices, that would correspond to what we are calling in 6620 1 the -- in the waterfall chart as a Class III/IV spread. 2 Q. Okay. 3 A. Step 4, advanced prices matches it one-to-one with 4 the bar, with the legend advanced prices. 5 Step 5, Class I pricing reform matches with the 6 bar with the label Class I reform. 7 And Step 6, depooling and structure changes 8 matches what I was just referring as depooling here. 9 I did preface yesterday as I was introducing the 10 waterfall charts, I did say that the depooling bar also 11 captures any deviations -- any deviations in utilization 12 rates from what we have modeled them to be. It's not 13 necessary -- so, for example, if our model suggests that 14 the order should have 40% utilization in Class IV, but 15 even in the best of months when nobody depools they really 16 have 37, or 43, then that would show up in this last 17 residual column, depooling. 18 So depooling is everything that we cannot explain. 19 Most of the time it really is truly depooling, but it does 20 capture -- capture everything else that just the analysis 21 did not properly address through linear trends in -- 22 changes in utilization rates and component tests. Linear 23 and seasonal in case of component tests. I think. Yeah. 24 Q. And where would -- or does your model take into 25 account production increases, milk production increases? 26 A. Implicitly? The production increases without -- 27 in the absence of higher Class I sales, higher milk 28 production, which is pooled, would lead to increasing 6621 1 utilization rates for manufacturing classes. 2 Q. And does your model account for limits in pooling 3 provisions, whether they are, you know, the repooling 4 limits that exist, for example, or in the Northeast, there 5 are dairy farmers further markets provisions? 6 A. It doesn't need to. If the provisions are such 7 that it's more difficult to depool, or that it's less 8 lucrative to depool I should say, then the bar depooling 9 would simply be smaller. 10 As you can see, for example, in the -- in the 11 Northeast order, in the Table 5, page 437 of Exhibit 76, 12 Table 5, Step 6, depooling and structure changes under 13 Northeast, in 2020, depooling was only $0.05, and it was 14 actually positive. That clearly means that there was -- 15 maybe this was, you know, more yogurt made than we 16 accounted for. Over years we did not maybe anticipate 17 precisely the increase in Class II or -- or we anticipated 18 that Class I would drop more than it really did, so -- but 19 you can see that in that order where it is more difficult 20 to depool, we have a smaller unexplained residual. We are 21 right on the money almost. 22 It would be so much fun if academic conferences 23 were organized this way, you present the paper and you 24 were cross-examined on it. 25 Q. Let me see. In your proposal submission, back a 26 long time ago, if I remember, you had something about how 27 the adjuster couldn't be non-negative, something like 28 that. 6622 1 Does that ring a bell? 2 A. We were probably wrong about it. I believe that 3 one of the other testifiers, it could have been 4 Ms. Dorland, calculated in the amount of years it would 5 have been some $0.20 negative or so. That is indeed 6 correct. 7 Q. Okay. 8 A. But in -- just to add, in that particular year, 9 where the adjuster was indeed negative, the Class III Plus 10 result with a Class I price that is within $0.10 of what 11 the higher-of system would result as well. 12 Q. Okay. 13 A. We would not object if AMS were to floor it at 14 zero. 15 Q. I'll ask you a similar question I think I asked 16 the IDFA witness. 17 If you are all about market price singles and not 18 muting some of those, doesn't a floor do that? 19 A. I believe that it was the National Milk that 20 complained about muting market signals. As I testified 21 this morning in one of the cross-examinations, I think 22 that the core principle here, core -- set of core 23 principles here are: 24 Does the proposal provide for sufficient reserve 25 supply of milk for fluid needs? Yes, it does. 26 Does the proposal allow the manufacturers of 27 beverage milk to provide for stability to producers as is 28 listed as objective 4 of the enabling legislation? Yes, 6623 1 it does. 2 Does the proposal, over time, provide for a 3 relationship that Class I milk is more valuable on average 4 than manufacturing classes? Yes, it does. 5 So I think we check all the boxes of the core 6 principles. The market signal is a -- is one of those 7 terms, like, you know, social capitalist. Like, it 8 doesn't -- it can mean a lot of things to different 9 people. And I don't believe that dairy producers should 10 be rushing to the barns and start playing Mozart to their 11 cows just because the Class I, you know, price is a little 12 bit higher so they need extra milk that afternoon. 13 Q. Okay. But from your perspective, you don't have a 14 problem setting the floor -- or Edge -- you are speaking 15 on behalf of Edge -- so Edge is not opposed to some floor? 16 A. We are not opposed to the floor. 17 MS. TAYLOR: I think Mr. Wilson has a few more 18 questions. 19 CROSS-EXAMINATION 20 BY MR. WILSON: 21 Q. Good morning, Dr. Bozic. 22 A. Good morning, Mr. Wilson. 23 Q. On your -- continue on page 6 of the Exhibit 290, 24 the baseline PPD, that, as I understand it, would be the 25 average PPD for the year 2010 for Federal Order 33? 26 A. A little about bit more complicated. That would 27 be the PPD in March 2020 had the prices in March 2020 been 28 as they were on average between 2010 and 2019, the 6624 1 announced prices, and the components in March 2020 were as 2 they averaged in 2010, and utilization rates by class in 3 March 2020 were as they were in 2010. 4 Q. So when I compare that PPD, that would be -- 5 A. Uh-huh. 6 Q. -- to Exhibit 76 PPD for Federal Order 33, it's 7 very different. Exhibit 76 has the Mideast Order at a 8 $0.98 baseline positive, and you have it at 1.65. 9 A. That's a good question. I will need to do some 10 research later this morning, and I'm happy to jump back on 11 the stage for a few minutes to clarify. I don't have the 12 answer for you this moment. 13 Q. So with that in mind, you used the same model 14 parameters from Exhibit 76 over to Table 290, page 6. 15 A. I believe so, yes. 16 Q. So do the rest of the steps, do they correspond, 17 do you -- 18 A. I believe so. But I think that, you know, given 19 the obvious discrepancy regarding the baseline, I think it 20 would be prudent if we allow for an hour so I can do some 21 forensics and I'll be happy to report back. 22 Q. So as I understand Exhibit 76, the Table 5, that's 23 a yearlong look? 24 A. Yes. 25 Q. And all the graphs in Exhibit 290 is a 26 month-to-month look? 27 A. That's correct. 28 Q. That's probably -- that's the difference probably 6625 1 in some of them. Okay. 2 The bottom of page 12 -- well, Exhibit 290, it's 3 actually the top of page 12. 4 A. Excuse me, page 12? 5 Q. Page 12. 6 You indicate the primary driver, you indicate 7 that, and then you cite -- the next sentence you cite the 8 second most important factor. 9 Are those -- is that description a quantitative 10 description -- the primary driver, what would be -- what 11 would we be looking at in our graphs that you provided us 12 to understand your description of "primary driver"? 13 A. So in the context of -- thank you for your 14 question -- the context of the spread between III and IV, 15 if you were to look at, well, any month here, the 16 parameter of depooling -- I think that we would have to 17 consider that to be an expert opinion rather than just a 18 reading of any chart. 19 Q. Yeah. 20 A. Because we -- we can logically conclude that the 21 more negative the PPD before depooling, the stronger to -- 22 the incentive to depool, but that does not follow 23 arithmetically from these charts. That is a conclusion 24 that requires prior knowledge of incentives with Federal 25 Orders. So from -- for those reasons, I would submit that 26 those sentences are my opinion rather than a number that 27 you can read off a chart. 28 Q. Okay. So it's not like the sum of all of the 6626 1 III/IV spread values, summing them together to get the 2 biggest number? 3 A. If the sentence said the primary driver of 4 negative PPDs prior to depooling, then we could do that. 5 Right? But if we are making a claim about depooling, then 6 we have to complement the numbers with the -- with the 7 opinion about the numbers. 8 Q. I'm just trying to understand your sentence. 9 A. Yes. Yeah. So that's why I'm saying, like, if -- 10 you know, you cannot just sum them up, no. I mean, in 11 most conversations you could and it would be admissible, 12 but here we are creating a formal record, so I want to be 13 really precise about that. 14 Q. Okay. And then the last bucket that you have, you 15 label as depooling. You have said that it's -- it's more 16 than just that, it's things that the model can't predict 17 and things like that. 18 Depooling's been a big topic in this hearing. Is 19 there -- would you have an opinion about how much, as a -- 20 as a -- as handlers make decisions about what to pool and 21 what not to pool based on alignments and things, how much 22 of that decision is related in your model for these 23 graphs? 24 A. I would say all of the -- most of the relevant 25 factors are. There could be some truly idiosyncratic 26 local reasons that are not captured. Maybe someone needs 27 to pool for -- I can't even provide you with a good 28 example. But the spreads, advanced prices, are the main 6627 1 drivers of the incentives to depool, like, just financial 2 incentives to depool. In terms of, like, your 3 equalization payments, that's driven by those two factors, 4 first and foremost. 5 The third one driving is the -- you know, the 6 difference between the higher-of and the average-of. 7 The -- what is in question is the marginal effect on your 8 decision to depool. 9 For example, as you well know, Mr. Wilson, in the 10 Order 30 -- and I'm not an expert on depooling provisions 11 in other orders -- but in Order 30, if you depool some 12 amount of milk, you can pool again next month, I believe, 13 125% of what you pooled previous month. Which means that 14 the moment we switch from positive to negative PPD, you 15 would immediately want to depool at least 20% of your 16 milk, because next month you can repool the entire milk 17 that you have -- I'm ignoring seasonality and milk 18 production and all that now. 19 So the small change from $0.01 positive to $0.01 20 negative -- and, again, I'm ignoring, I guess, the 21 administrator fees here as well, the -- because 22 presumably, if the -- if you are not pooled -- I don't 23 know, I'm not actually sure how that works. I assume that 24 they don't have to pay the administrative fees to the 25 Market Administrator if they are not pooled -- or on the 26 milk that's not pooled. So if the administrator -- if 27 that's correct, if the administrative fees are $0.05, then 28 as soon as your draws drop below $0.05, so you're net 6628 1 financially negative on milk pooled, maybe you would want 2 to depool at least 20%. I'm thinking on the fly here. I 3 apologize if there's an error in the logic. You would 4 want to depool at least 20% because you can -- you 5 preserve full optionality for potentially pooling all of 6 your milk in the next month. 7 Now, if you -- if the -- if the negative PPDs are 8 really large, let's say $4, now you must be think -- now 9 you are thinking, okay, do I depool only 20% or do I take 10 it one step further and depool another 20%? Do I really 11 care that I won't be able to pool everything next month 12 when I'm losing so much money in this month? Why would I 13 want to preserve the option to maybe get $0.15 positive 14 two months down the road if I'm losing $4 today? So from 15 that perspective, you depool a lot if the current month 16 PPD is negative. 17 And in that context, should my statement be 18 understood that even if the Class I reform dampened or 19 made the PPD more negative, it may have no effect on 20 further depooling decisions. You would have done as much 21 anyway. Once you get down to -- at one point we had, I 22 think, like, single digits, you know, percentage of the 23 total Class III milk that was typically pooled in the 24 Upper Midwest Order. Once you're that low, you just don't 25 go any lower. 26 Q. So on the first month that you have listed here, 27 March '20, 2020, you have a minus $0.25 attributed to 28 depooling. 6629 1 Am I understanding your testimony to say that 2 future -- future months, that you don't know how much it's 3 going to be negative for however long, could impact your 4 decision rather than just the immediate disparity of -- 5 A. Yes. 6 Q. -- what their draw is -- 7 A. Yes. 8 Q. -- today, and so there could be some future 9 aspects to looking at one month of change, so to speak? 10 A. Yes. That's absolutely correct. 11 Q. All right. 12 A. So the -- so the -- again, the chart -- the chart 13 describes the PPD, right? Like, the chart describes how 14 did we arrive at the current month PPD, and the amount 15 that is depooled will be a reflection of the previous 16 three bars in that. Like, so the current month spread, 17 advanced pricing, potentially Class I reform, but will 18 have a strong lookout for up to -- in the context of 19 Order 30 where you can bring back all your months after 20 six months, as I understand it, you would look up -- up to 21 six months out when making a depooling decision. 22 Which, actually -- and I didn't want to go too 23 much into that yesterday because it's complicated enough 24 anyway, that is even a stronger argument why Class I 25 reform likely did not have a material impact in 2020. 26 In 2020, if you were looking at a term structure 27 of the spread between Class III and IV for the next 28 12 months, it was deeply negative. It was deeply 6630 1 negative. People -- markets did not anticipate those two 2 prices to converge for a long while. So from, you know, 3 making such a dynamic programming, if you will, depooling 4 decision, that would have been a strong influence, even in 5 the absence of any reform. 6 MR. WILSON: Thank you, Dr. Bozic. That's all I 7 have. 8 THE COURT: Mr. Wilson, do you want him to do any 9 report-back after spending an hour analyzing? 10 MR. WILSON: No. Thank you. No, thank you. 11 THE WITNESS: But can I ask, Your Honor, is the 12 validity of my evidence in any way reduced if I don't 13 submit that correction? No? It's not? Okay. 14 THE COURT: How confident are you that the 15 difference is, in fact, in comparing a year to a month? 16 THE WITNESS: I prefer not to answer before doing 17 more forensic analysis on these numbers, but, you know, if 18 the evidence will be considered just as strong, you know, 19 without submitting further analysis, I'd rather sleep a 20 little bit. 21 THE COURT: You know, I -- I would like to invite 22 him to clarify, just because this is such an important 23 issue. 24 THE WITNESS: Sure. 25 THE COURT: Okay. 26 THE WITNESS: Yeah. I -- I would be happy to. 27 THE COURT: You are invited to return to clarify 28 that. 6631 1 THE WITNESS: Yes. I mean, who cares about sleep? 2 THE COURT: And I would like to return my 3 Exhibit 76, because it's the record copy. All right. 4 Redirect. 5 MR. SJOSTROM: Yes. Lucas Sjostrom for Edge Dairy 6 Farmer Cooperative. 7 THE WITNESS: Your Honor, didn't we have to ask 8 for any further cross-examination before redirect? 9 THE COURT: Well, I try to let Agricultural 10 Marketing Service be the last, and sometimes they do 11 prompt more questions, but I didn't see anyone squirming, 12 so I'd like to keep moving. 13 MR. SJOSTROM: What more do you want? All right. 14 REDIRECT EXAMINATION 15 BY MR. SJOSTROM: 16 Q. First, Dr. Bozic, a couple of questions on OTC. 17 Well, really one question. In your past work, and 18 I think you mentioned this yesterday, but I just wanted to 19 clarify because I think it was maybe trailing off. 20 But in your past work, what data sources have you 21 used to draw conclusions related to over-the-counter 22 trading? 23 A. The only data source that I have relied upon to 24 form my conclusions was the data source cited, I believe 25 it was Footnote 6 in the 2019 paper co-authored with Matt 26 Gould, that would have been the OTC report published by 27 Rice Dairy. 28 Q. All right. And briefly, and I know that might be 6632 1 difficult, but briefly, I don't know that we ever put into 2 the record the difference between a -- like, what a 3 cash-settled trade versus a delivery-settled trade was, 4 and we had several questions about it this morning. 5 So depending on who is reading this, I just wanted 6 you to be able to clarify what is the difference between 7 those two objects? 8 A. Yes. In the -- so corn contract would be an 9 example of a physically-settled contract. If you do not 10 exit your hedge position on a corn futures, you will have 11 to deliver some corn or you will have to accept delivery 12 of some corn somewhere on the Illinois River. There is 13 no -- there are no butter or cheese or dry whey trucks 14 going around the country to settle anybody's position on 15 dairy futures. 16 Dairy futures contracts are all cash settled, 17 which means that your position, your gains or losses on 18 your hedge position on the last day, are simply settled as 19 a difference of the prior day of futures price and the 20 announced price published by AMS. 21 Q. Thank you. I just thought we should get that in. 22 Next, so if we build a new structure -- and that's 23 what we're here to do -- of the Federal Order, and as 24 implausible as it is, we do all this and no one uses any 25 hedging instruments, no one hedges anything in any of the 26 classes in any phases, are we -- at the farmer level, 27 cooperative level, processor level, retailer level, at 28 least in price discovery, are -- are we any worse off in a 6633 1 non-hedging environment than we are today as we think 2 about price discovery? 3 A. Over the long-term, Class I prices would have been 4 actually equivalent under any of the proposals currently 5 on the table, from 13 to 18. So there will be no material 6 difference to dairy producers. 7 Q. So, in other words, it would be fair to say that 8 we do not need hedging as much as we have talked about it 9 the past few weeks? We do not need hedging for these 10 instruments to operate properly? 11 A. That question is rather vague. I don't know, you 12 know, how to answer it. Like, people use hedging because 13 they want to stabilize their revenue or they want to 14 stabilize their input costs, and the purpose of these 15 proposals is to facilitate effective use of hedging. 16 Q. Thank you. I'll move on to advanced pricing. 17 We have heard that HTST milk, or at least maybe 18 milk that has no desire to be hedged, ranges from 70% to 19 90% of the market. Obviously, this is a perishable 20 product sold often within 72 hours or less at retail of it 21 being produced on the farm. Proponents say -- may say 22 that we need to know these prices ahead of time. 23 And we have covered this, but just to go back, do 24 you believe that's the case? Do we need to know these 25 prices ahead of time? 26 A. If you'd first allow me to just slightly correct 27 your question. Those products may not be sold to final 28 consumer within 72 hours. They will be available for 6634 1 purchase by final consumer within 72 hours. They will be 2 available in the retail store. 3 Is that what you meant? 4 Q. Yes. 5 A. Now, could you please repeat your question? 6 Q. So they are highly perishable, as you restated. 7 A. Yeah. 8 Q. But talking about those products, and proponents 9 may say, we need to know these prices ahead of time. 10 With that available delivery so quick after raw 11 milk production, do you believe that that needs to be the 12 case? 13 A. Four out of six proposals that were noticed on 14 this hearing would allow that. The only proposals that -- 15 well, actually, six out of six proposals out of -- on 16 this -- on the notice for this hearing would allow that. 17 Three of the proposals noticed for the hearing do that 18 through advanced pricing; the other three proposals do 19 that through the ability to lock in the input costs 20 without basis risk, or at least without basis risk that is 21 not due to the risk premium, the third potential effect in 22 the Exhibit 290. 23 Q. Thank you. 24 As we're thinking about that, if you were a 25 cooperative, as the fluid milk processor, would you have 26 any advantages in a higher-of system with advanced pricing 27 over a proprietary plant? 28 A. Yeah. So it's -- before I answer, I just want to 6635 1 preface that I'm not implying or alleging that this is 2 actually happening. We are just looking at the incentives 3 or what may transpire. 4 If -- in a system in which the hedging is 5 strongly -- is complicated by the pricing regulations, it 6 is easier for a cooperatively-owned Class I handler to 7 offer fixed price contracts to the buyers than it is for 8 private handlers. The reason is that the private handler 9 would have to pay to the producer and to the pool at least 10 a minimum regulated price, whereas the cooperative can 11 essentially reblend any materialized basis risk. 12 Q. Thank you. 13 I think in some of the testimony we talked about 14 true-ups. For example, you might negotiate a January 15 price in late December, and then not be paid for it until 16 March. 17 Without advanced pricing, how would you see the 18 market changing without true-ups? Would the market still 19 be able to operate in that true-up environment? 20 A. To the extent that a buyer and a seller may agree 21 to postpone the payment of the invoice for whichever 22 reason they may be, perhaps related to tax liability, 23 nothing in any of the proposals would really stop that. 24 Q. Do you believe it's bad for fluid milk processors 25 to lose pre-knowledge of their prices versus dairy farmers 26 who have none? Is there a distinct difference? 27 A. First of all, I would challenge the assumption 28 that they are losing the knowledge of their input cost. 6636 1 They would be given the choice to know their input costs 2 before the start of the month in which the milk is 3 marketed, or after the end of the month, that the choice 4 is exercised by choosing whether to hedge or not, but if 5 they choose to hedge, they would know their costs. 6 Second, you know, as I have noticed -- as I have 7 written in my testimonies, dairy producers in general must 8 take on risk in order to operate their dairy farms. They 9 have to know their -- you know, their situation is 10 inverse. Like, in the case of Class I handler, they know 11 their revenue, and we are talking about should they know 12 their input cost and how. In the case of a dairy farmer, 13 they know their input cost, sometimes not very far in 14 advance, in the case of feed, but they wouldn't know their 15 revenue. 16 So -- so it's really not uncommon for market 17 participants to face risk. You know, it is really -- it 18 really is uncommon to be, you know, as insulated from risk 19 as Class I handlers have been over the previous two 20 decades. 21 Q. Thank you. 22 So since this proposal -- or since your 23 submission, our submission, of the regulatory language 24 this spring, would you personally consider or entertain 25 studying modifications of Proposal 16? Is there anything 26 you have considered through the course of this hearing or 27 through the summer that haven't been even reviewed by our 28 Board of Directors that may get at some of the biggest 6637 1 criticisms you have heard here? 2 A. I just want to preface my answer. I'm not 3 answering on behalf of Edge. To your question now, I'm 4 answering on behalf of just myself. Correct? 5 Q. Wonderful. 6 A. Yes. So things that we have learned in this 7 hearing: First, we have learned that revenue -- strict 8 revenue neutrality is not a requirement requested by IDFA. 9 If that's the case, then we have more degrees of freedom 10 of how to design these programs to properly compensate 11 dairy producers for the asymmetric risk that has been 12 well-established by National Milk. One way to do that is 13 to set the floor on the mover. 14 Second, to the extent that one may not need to 15 follow the strict revenue neutrality, we can further 16 simplify the day-to-day work by Ms. Taylor and her team. 17 There is no reason to use advanced pricing in calculation 18 of moving adjuster for Class III Plus. 19 Third learning was the -- what we have heard from 20 MIG's witnesses about the rolling nature of school milk 21 contracts and other sales. From that perspective, some 22 sort of rolling adjuster might make more sense than an 23 annual adjuster, which was designed anticipating that 24 folks like to set the budgets before they initiate hedging 25 strategies for the forthcoming calendar year. 26 And then, finally, to the extent that we learned 27 that HTST -- that a lot of HTST grocery sales really don't 28 care about hedging as much as preserving their natural 6638 1 hedge that they have currently through the advanced 2 pricing, I think it behooves all of us to look at some 3 hybrid solutions that allow the growing part of the 4 Class I sector, the ESL, the aseptic, some of the 5 innovative HTST products, institutional sales, to pursue 6 hedging strategies while letting the old traditional HTST 7 perhaps function in a way that it does today, or maybe 8 even return back to what producers have been looking for. 9 We discussed that over the last few days, and my 10 understanding is that you will actually be formalizing 11 those thoughts into an analogous proposal that we will 12 hear soon today. 13 Q. Thank you. 14 Anything I missed or comments you would like to 15 share? 16 A. Oh, plenty, but I've been here a day and a half, 17 so let's wrap it up. 18 MR. SJOSTROM: Your Honor, I would like to move 19 Exhibits 289 and 290 into the record. I believe USDA is 20 going to continue to object to 244. We have no attachment 21 to any extra paper, so -- 22 THE WITNESS: Or 291, right? Like, this was -- 23 this is still marked as 291, the Stephenson/Novakovic? 24 Yes. 25 THE COURT: That's Mr. English's project. I'll 26 hear from him later. 27 MR. SJOSTROM: We'll move 289 and 290, please, 28 Your Honor. 6639 1 THE COURT: All right. Now, I have lost track. 2 Okay -- good. 3 Is there any objection to the admission into 4 evidence of Exhibit 289? 5 There is none. Exhibit 289 is admitted into 6 evidence. 7 (Exhibit Number 289 was received into 8 evidence.) 9 THE COURT: Is there any objection to the 10 admission into evidence of Exhibit 290, which includes the 11 online versions of Edge-15, Edge-15A, and Edge-15B? 12 There is no objection. Exhibit 290 and all its 13 forms, as mentioned, is admitted into evidence. 14 (Exhibit Number 290 was received into 15 evidence.) 16 MR. SJOSTROM: Thank you, Your Honor. 17 MR. ENGLISH: Your Honor, Chip English for the 18 Milk Innovation Group. 19 So I am not Edge's attorney, and so since they 20 themselves do not want to put Exhibit 244 into evidence, 21 I'm not going to speak to it, although I have strong 22 arguments under the rules. 23 As to 291, we did pre-submit it -- well, not 24 pre-submit it -- we submitted it yesterday as you 25 requested. 26 In an attempt to move the hearing along, while 27 I -- you know, I'm not going to stand on principle today. 28 The reason I'm not is because Dr. Stephenson's going to 6640 1 come, and that should resolve the objections of OGC, I 2 hope, once he identifies them. 3 THE COURT: May I mention? 4 MR. ENGLISH: Yes. 5 THE COURT: I love the way you solve problems, and 6 I appreciate it. 7 MR. ENGLISH: So I just want for the record to 8 state that given the fact that Edge is not going to move 9 admission of 244, I had a statement on that, I won't give 10 it. 11 And given the fact that Dr. Stephenson will be 12 here at some point in the future after October 11th, while 13 I think 291 could be admitted, I'm going to stand down for 14 today and just note for the record that I think it could 15 be admitted. But I'm not going to push the point, so we 16 can move along today. 17 THE COURT: On behalf of all of us, I thank you. 18 All right. 19 I believe we can let this witness stand down, and 20 I encourage you to ask to be invited back to clarify that 21 one point when you are ready. 22 THE WITNESS: Thank you, Your Honor. I will 23 probably need a few minutes just to take all my stuff 24 here. Maybe it's a good time for a little break? 25 MS. TAYLOR: Yeah. 26 THE COURT: Oh, good. All right. Let's see. 27 This is a ten-minute break, right? 28 Please be back and ready to go at 10:55. 6641 1 We go off record at 10:42. 2 (Whereupon, a break was taken.) 3 THE COURT: Let's go back on record. 4 We're back on record. It's 10:55. 5 I would like the witness to identify himself, 6 please. 7 DR. CRYAN: All right. Beg your pardon. Did you 8 just ask me to identify myself? 9 THE COURT: I did. 10 DR. CRYAN: In case no one knows it, I am Roger 11 Cryan with the American Farm Bureau Federation, and I have 12 been sworn. It's up to you whether you want to do it 13 again. 14 THE COURT: No, once is enough. But I want you to 15 spell your name into the record. 16 DR. CRYAN: The first name is Roger, R-O-G-E-R. 17 The last name is Cryan, C-R-Y-A-N, just like Ryan with a C 18 in front of it. 19 ROGER CRYAN, 20 Having been previously sworn, was examined 21 and testified as follows: 22 THE COURT: And if I might inquire, what kind of 23 doctorate do you hold? 24 THE WITNESS: I hold a Ph.D. in food and resource 25 economics from the University of Florida. I have 26 been recog- -- go Gators -- I have been recognized 27 previously in this proceeding and in previous proceedings 28 as an expert on Federal Milk Marketing Orders and dairy 6642 1 economics. 2 THE COURT: Thank you. 3 You do remain sworn, and you may proceed. 4 Oh, wait, I don't have a copy of -- 5 USDA REPRESENTATIVE: I have it. I was just 6 waiting for the numbers. 7 THE COURT: Oh, all right. 8 Let's -- you have distributed your statement; is 9 that correct? 10 THE WITNESS: I have distributed a statement, 11 distributed copies to the public and -- that was here, and 12 I provided 15 copies to the -- to the -- I guess the 13 clerk, the -- officially the clerk of the hearing 14 proceeding, to Emily, otherwise known as Emily. She has 15 15 copies single-sided, as requested by USDA, of three 16 documents. The first one is marked AFBF-4. 17 THE COURT: All right. Let's deal with that one. 18 Let's call that one Exhibit 292. 19 (Exhibit Number 292 was marked for 20 identification.) 21 THE WITNESS: I have another document identified 22 as AFBF-4A. 23 THE COURT: We will call that one 293. 24 (Exhibit Number 293 was marked for 25 identification.) 26 THE WITNESS: Finally, an exhibit marked AFBF-4B. 27 THE COURT: We will call that 294. 28 (Exhibit Number 294 was marked for 6643 1 identification.) 2 THE WITNESS: Thank you, Your Honor. 3 THE COURT: All right. And now you may proceed. 4 THE WITNESS: Thank you. 5 I thank you, Your Honor, and I thank USDA and -- 6 for the opportunity to be here to testify. Everything I 7 present here has been presented -- has been prepared by 8 Danny Munch or myself as joint -- joint product from the 9 -- by the AFBF economics team. And all of it is based on 10 the policy of our members. 11 The American Farm Bureau Federation has nearly 12 6 million members in all 50 states and Puerto Rico, 13 including many thousands of cooperative and independent 14 dairy farmers. Most of these dairy farmers are directly 15 affected by the pricing provisions of the Federal Milk 16 Marketing Orders. These dairy farmers play a crucial role 17 in the development of AFBF dairy policy. Every Farm 18 Bureau position and proposal is based explicitly on that 19 policy developed through a grassroots process in which 20 farmers make the decisions every step of the way. 21 AFBF submitted nine proposals for consideration in 22 this hearing, and appreciates the opportunity to address 23 the four that were accepted by USDA, as well as the clear 24 direction on what may be needed to advance the rest. 25 The fundamental focus of AFBF's proposals is the 26 reduction or elimination of negative producer price 27 differentials and the depooling that they cause. We 28 believe that an orderly pool is the key to orderly 6644 1 marketing and ensuring Federal Milk Marketing Orders 2 continue to benefit farmers, cooperatives, processors, and 3 consumers. The key to an orderly pool, in turn, is above 4 all, the proper alignment of the four class prices. 5 In addition to our own proposals, AFBF largely 6 supports four of the five proposals submitted by the 7 National Milk Producers Federation. These are Proposals 8 1, 3, 13, and 19. 9 And I'll move on from the procedural stuff. 10 AFBF also supports Edge Dairy Farmer Cooperative 11 Proposal 17 in principal, which basically combines NMPF's 12 Proposal 13, the switchback to the higher-of, and the AFBF 13 Proposal 18, using announced prices instead of advanced, 14 which we will be testifying on today. 15 This statement covers AFBF Proposal 18 under 16 Category 4. 17 Proposal 18: AFBF proposes to end the advanced 18 pricing of Class II skim milk and components and Class I 19 milk and components. 20 In AFBF Proposal 18, the Class II skim milk price 21 would be equal to the Class IV skim milk price plus the 22 Class II differential. The Class II nonfat solids price 23 would be equal to the Class IV nonfat solids price, plus 24 1/100th of the Class I -- II differential. The Class I 25 skim milk price would be the higher-of the Class III or 26 Class IV skim milk price plus the Class I differential. 27 And the Class I butterfat price would be equal to the 28 butterfat price plus 1/100th of the Class I differential. 6645 1 Under classified pricing, handlers participating 2 in an order have an obligation to the pooling function of 3 Federal Orders based on how the milk is used in class 4 price. In seven of the 11 Federal Orders, dairy farmers 5 are paid based on the component content of their milk by 6 multiple component pricing. 7 In this process, the producer value of milk is 8 determined monthly based on the cheese milk (Class III) 9 component levels of fat, protein, and other solids. The 10 difference between the total pooled value of what handlers 11 pay for their allocated class price values and the 12 component value worth of producers' milk is denoted as the 13 producer price differential. 14 When the component value of milk in the pool is 15 higher than the revenue pooled from paid class prices, 16 deductions are applied to farmers' checks in the form of a 17 negative producer price differential to represent the gap 18 in pool value. Dairy farmers suffered negative PPDs 19 during 2020 and 2021, with average all-market PPDs 20 reaching below negative $7 per hundredweight, showing up 21 as a massive reduction on milk checks. 22 According to the Journal of Dairy Science 23 peer-reviewed article titled "Negative Producer Price 24 Differentials in Federal Milk Marketing Orders: 25 Explanations, Implications, and Policy Options," the most 26 common factors that contribute to the existence of 27 negative PPDs are Class II milk value rising above the 28 butter powder, changes in utilization rates of milk due to 6646 1 production changes in an order, the advanced prices for 2 Class II skim and Class I milk lagging behind rising 3 Class III component values, and changes in utilization due 4 to depooling by handlers deciding to not pool milk in 5 order for one or more months -- in an order, I'm sorry -- 6 in an order for one or more months by which depooling 7 leads to more depooling. 8 AFBF's proposals and support for proposals from 9 other stakeholders are intended to reduce the prevalence 10 of PPDs -- of negative PPDs that should say -- by reducing 11 the frequency of the previously-listed occurrences, which 12 in many cases have been found to contribute to disorderly 13 marketing. 14 I'll make a note there that, on the record, this 15 should say negative PPDs. 16 THE COURT: When you say "make a note," you want 17 to change it at the end of your testimony on this exhibit? 18 THE WITNESS: However Your Honor believes we best 19 clean up the record is fine with me. 20 THE COURT: All right. Let's do it now. 21 THE WITNESS: Okay. 22 THE COURT: Call our attention to exactly what you 23 want to change on page 2 of Exhibit 292. 24 THE WITNESS: In the first full paragraph, in the 25 second to last line it says, "prevalence of PPDs." That 26 should say "prevalence of negative PPDs." There's always 27 a PPD, but we want fewer negative PPDs. 28 THE COURT: We'll take a moment to make that 6647 1 change on the record copy. We're inserting one word, 2 "negative," before the "PPDs" that is found in the next to 3 the last sentence of the first full paragraph. Done. 4 Thank you. 5 THE WITNESS: Thank you, Your Honor. 6 Currently, the classified prices for each month 7 are announced at two different times. First, the advanced 8 prices are announced by the 23rd day of the preceding 9 month. For example, September's advanced prices are 10 announced on or before August 23rd. Advanced minimum 11 prices are announced for Class I, Class I skim, Class I 12 butterfat, and Class II skim. 13 By the fifth day of the following month, the 14 Class II, Class II butterfat, Class III, Class III skim, 15 Class III butterfat, Class IV, Class IV skim, and Class IV 16 butterfat prices are announced. These prices for 17 September are announced on or before October 5th. 18 This arrangement creates a long lag between when 19 the advanced prices and current prices are announced for 20 that month. That means that the advanced prices, Class II 21 skim and components, and Class I skim milk and butterfat, 22 can be based on weekly data that is 25 to 40 days older on 23 average than the basis for the current prices, the 24 Class II butterfat and all Class III and IV prices. 25 This means when market prices rally announced -- 26 that is, final prices -- can be much higher than the 27 advanced prices leading to low and negative PPDs. This 28 creates an incentive to depool milk from the order, to 6648 1 benefit the non-pooled -- to benefit from the non-pooled 2 value of the recently-elevated prices without sharing that 3 value with the pool, which further depresses the PPD and 4 undermines the FMMO principle of uniform pricing. 5 The impact of advanced pricing on orderly 6 marketing of milk is not new to the Federal Milk Marketing 7 Order discussions -- to Federal Milk Marketing 8 discussions. In fact, USDA has acknowledged the impact of 9 lagged fluid in manufacturing class pricing on orderly 10 marketing of milk. 11 I would like to present several quotes from the 12 proposed rule published in Federal Register Volume 64, 13 Number 63, released on April 2nd, 1999. 14 On page 16,102, USDA states: 15 "Since Class I handlers must compete with 16 manufacturing plants for supply of milk, the Class I price 17 must be related to the price of milk used for 18 manufacturing. 19 "It is apparent from the price patterns of a large 20 part of 1998, that the current two-month lag between 21 manufacturing and fluid pricing does not establish as 22 close a relationship between the two price levels as is 23 desirable. Indeed, from an analysis of the differences 24 between prices generated by a six-month declining average 25 and the current pricing system, it is clear that the 26 current two-month lag does not accomplish any closer 27 relationship between manufacturing and fluid prices than 28 would the six-month declining average. 6649 1 "When manufactured dairy product prices are 2 relatively stable, the advanced pricing of Class I milk 3 works quite well. However, since 1988, the volatility in 4 the manufactured dairy product market has caused problems 5 with the advanced pricing of Class I milk. 6 "The first problem is readily evident in class 7 price relationships during the latter part of 1998. The 8 frequent occurrence of price inversions during that period 9 indicates that some alteration to both proposed and 10 current methods of computing and announcing Class I prices 11 may be necessary. Class price inversion occurs when a 12 market's regulated price for milk used in manufacturing 13 exceeds the Class I fluid milk price in a given month and 14 causes serious competitive inequities among dairy farmers 15 and regulated handlers. Advanced pricing of Class I milk 16 actually causes this situation when manufactured product 17 prices are increasing rapidly. 18 "Since the Class I price is announced in advance, 19 in a rapidly changing market, the Class I price may not 20 reflect the value needed to compete for the necessary raw 21 milk supply, or the Class I price may be overvalued 22 relative to the raw milk price. Undervaluing class milk 23 is a particular problem since it reduces producer pay 24 prices at a time when producers should be receiving a 25 positive price signal." 26 And I would -- 27 THE COURT: Dr. Cryan, just read that last 28 sentence again, please. 6650 1 THE WITNESS: "Undervaluing Class I milk is a 2 particular problem since it reduces producer pay prices at 3 a time when the producers should be receiving a positive 4 price signal." 5 That's the end of the quote from the USDA's 6 decision in order reform. And I would note here -- this 7 is not in the text -- I would note that this is a USDA 8 decision. The US- -- this is -- this was the basis for 9 USDA choosing the higher-of 20 years ago. The markets 10 have only gotten more volatile. 11 The conditions -- back to my text -- the 12 conditions USDA refers to from over 20 years ago related 13 to price inversions, rapidly changing markets, and 14 resulting competitive inequalities among dairy farmers 15 have continued. A range in a price series provides 16 insights on how volatile a price is. Larger ranges in 17 price indicate high volatility, while a smaller range 18 would indicate lower volatility. 19 As displayed in Figure 1, the range in class 20 prices within a year has exceeded $4 per hundredweight 21 frequently since 2012. For example, the annual range in 22 Class I prices has exceeded $4 per hundredweight in six of 23 the past 12 years. The annual range in Class II prices 24 has exceeded $4 per hundredweight in five of the past 12 25 years. The annual range in Class III prices has exceeded 26 $4 per hundredweight in seven of the past 12 years. And 27 the average range in Class IV prices has exceeded $4 per 28 hundredweight in four of the past 12 years. 6651 1 The average annual range of prices has exceeded 2 20% of the annual final class price for all classes in 3 milk, with Class III ranges exceeding 28% of the average 4 final Class III price since 2012. Dairy farmers have had 5 to deal with wide and rapid spreads in prices that have 6 contributed to income uncertainty and disruptions in their 7 ability to manage risk. 8 THE COURT: I need to stop you. I should have 9 stopped you a little sooner, but you -- you are rolling. 10 I want you to go to the middle of that paragraph 11 and begin with the sentence "the annual range in Class II 12 prices" and just read from there, more slowly, please. 13 THE WITNESS: The annual range in Class II prices 14 has exceeded $4 per hundredweight in five of the past 15 12 years. The annual range in Class III prices has 16 exceeded $4 per hundredweight in seven of the past 17 12 years. And the annual range in Class IV prices has 18 exceeded $4 per hundredweight in four of the past 19 12 years. The average annual range in prices has exceeded 20 20% of the average final class price for all classes of 21 milk, with Class III ranges exceeding 20% of the average 22 final Class III price since 2012. 23 THE COURT: Now, what percent is that? 24 THE WITNESS: 28%. 25 THE COURT: Okay. Just read that part with 26 Class III ranges, pick it up from there. 27 THE WITNESS: With Class III ranges exceeding 28 28% of the average final Class III price since 2012. 6652 1 THE COURT: Thank you. 2 THE WITNESS: You're welcome. 3 Dairy farmers have had to deal with wide and rapid 4 spreads in prices that have contributed to income 5 uncertainty and disruptions in their ability to manage 6 risk. 7 USDA continues in the same -- well, there's -- and 8 there's a graph that demonstrates the phenomena I just 9 read out in the text about the range and how the range 10 in -- in class prices has been very substantial. It's an 11 indicator of the volatility. The volatility is what has 12 made the current advanced class pricing -- Class I and 13 Class II skim pricing problematic. 14 USDA continues in the same section on the issue of 15 depooling. And remember, this is from 1999. This is from 16 USDA in 1999: 17 "Milk used in Class I in Federal Order Markets 18 must be pooled, but milk for manufacturing is pooled 19 voluntarily and will not be pooled if the returns for 20 manufacturing exceed the blend price of the marketwide 21 pool. Thus, an inequitable situation has developed where 22 milk from manufacturing is pooled only when associating it 23 with a marketwide pool increase in returns. Illustrative 24 of the worsening class price inversion problem are the 25 growing volumes of milk that, while normally associated 26 with Federal Milk Orders, are not being pooled due to 27 price inversion problems." 28 Over the past 20 years, the percentage of depooled 6653 1 milk has increased. Based on data from USDA Exhibit 30, 2 between -- between 2007 and 2012, the average monthly 3 price -- the average monthly percent of eligible milk that 4 was depooled across all orders was 5.7%; between 2013 and 5 2018, this percentage increased to 9.5%; between 2018 and 6 2023, this figure nearly doubled to an average of 18.9% of 7 eligible milk being depooled each month. Handlers are 8 depooling milk at higher volumes more frequently. 9 And Figure 2 demonstrates that. You can see the 10 trend towards greater depooling. 11 The increase in depooling has been correlated with 12 the volatility in class prices at varying levels, with a 13 highly positive correlation between wider Class I and 14 Class III ranges and higher rates of depooling. More 15 frequent depooling has also been positively correlated 16 with lower and negative producer price differentials. 17 These interactions are displayed on Table 1 -- in Table 1. 18 Based on AMS' final class pricing data from 19 May 2012 to July 2023, the range of class prices -- 20 calculated by subtracting minimum class price -- the 21 lowest class price from the highest class price -- for 22 each year was compared to the average monthly percentage 23 of milk depooled that year using Excel's correlation 24 function -- CORREL is the -- is the term, the abbreviation 25 that's used in the formula, in the Excel function, but 26 it's a correlation function -- which determines the 27 correlation coefficient between two variables. 28 The same was done comparing month-to-month 6654 1 percentages of pooled milk with the average all-order 2 producer price differential. A positive correlation 3 between zero and 1 indicates varying strengths of positive 4 linear relationships between the two variables, while a 5 negative correlation is reflected in the value between 6 zero and negative 1. 7 For instance -- for instance, the correlation 8 coefficient of the annual range in Class I prices compared 9 to range -- to rates of average annual rates of depooling 10 is 0.62, indicating as the range of Class I prices was 11 higher, the rate of depooling was higher. 12 Similarly -- similarly, the correlation 13 coefficient of the monthly all-market combined PPD and 14 monthly percent of pooled milk was also 0.62, indicating 15 as the PPD increased, the percent of monthly pooled milk 16 also increased. 17 The inequitable situation -- and there's a table 18 there that demonstrates the substantial correlation 19 between essentially the price volatility and the depooling 20 of milk, and a relationship between the volatility of all 21 four classes and the depooling of milk, which of course 22 there's a correlation among those prices and the 23 volatility of those prices, but they are -- they all are 24 related. 25 The inequitable situation that USDA described over 26 20 years ago has become increasingly present in today's 27 dairy markets. Eligible processors pool milk when 28 marketwide pool returns are expected to be positive 6655 1 compared to current manufacturing class prices, but are 2 likely to depool milk otherwise. This causes serious 3 competitive inequities among dairy farmers, contrary to 4 the Federal Order principle of uniform prices. 5 This Figure 3 is a -- sort of a simplified way of 6 demonstrating the relationship between large changes in 7 Class III prices and depooling by showing the average 8 percent of eligible milk depooled on a monthly basis 9 related to the positive change in Class III. Month to 10 month, as the Class III price has a big increase, there's 11 more depooling because it incentivizes depooling. On the 12 other end, when there's a large negative change, there's 13 less depooling, and when it's in between, it's in between. 14 Figure 4 -- I will go back to the text in 15 between -- but Figure 4 I would note should say -- is -- 16 should -- is a similar demonstration of the relationship 17 between class price changes and -- the manufacturing class 18 price change and depooling. 19 In this case, there is a typo, there is a 20 duplicate typo on this. The -- the labels -- the labels 21 at the bottom of each column should talk about the change 22 in Class IV month to month, and those -- instead they say 23 change in Class I, they should say change in Class IV. 24 Both of those should say change in Class IV. 25 THE COURT: All right. Let me stop you, 26 Dr. Cryan. We'll make those changes now. 27 THE WITNESS: Okay. 28 There's another change. There's -- in the third 6656 1 column it says "change" twice. The second "change" should 2 be deleted. 3 THE COURT: Okay. That last thing you just told 4 me, direct me to where I find that again on page 5 of -- 5 THE WITNESS: In Figure 4. 6 THE COURT: In Exhibit 292. 7 THE WITNESS: In the third set of columns where it 8 says "Below 5% Change in Class IV Change Month to Month," 9 it should just say, "Below 5% Change in Class IV Month to 10 Month." 11 THE COURT: So all we have to do there in Table -- 12 Figure 4 is strike the word "change," the second word 13 "change"? 14 THE WITNESS: That's for that correction. 15 But the same table, the same figure, Figure 4 is 16 where "Class I" should be changed to read "Class IV" in 17 two places, under each of the first two sets of the 18 columns. 19 THE COURT: All right. So in Figure 4, and I look 20 at the words below the columns, we need to change 21 "Class I," all we have to change is the Roman numeral "I" 22 to a Roman numeral "IV"? 23 THE WITNESS: Correct. 24 THE COURT: We're doing that, showing the "Above 25 5% Positive Change," and then next to that, the two 26 columns, we're doing the same thing with the "Above 5% 27 Negative Change," all we're changing is the Roman numeral 28 "I" to the Roman numeral "IV" so that that accurately 6657 1 reflects the title of the graph, which is talking about 2 the magnitude of change in Class IV. 3 THE WITNESS: That's correct. Thank you, Your 4 Honor. 5 THE COURT: Those changes have been made, 6 Dr. Cryan. Thank you. 7 THE WITNESS: Thank you. So I'll read the text 8 then in between the two figures. 9 Large ranges and rapid increases in class prices 10 contribute to, or at least are associated with, higher 11 rates of depooling. Figures 2 and 3 compare the average 12 percent of milk depooled across all markets within three 13 different identified timeframes. The timeframe isolates 14 months in which the Class III price for Figure 3 and the 15 Class IV price for Figure 4 rose positively more than 5%. 16 The second timeframe, or set of months, isolates months in 17 which the corresponding class price declined more than 18 5% -- declined more than 5%. The third timeframe isolates 19 months in which the corresponding class price -- the 20 change in the corresponding class price, was below 5%. 21 Both the average and -- 22 THE COURT: Do we need to insert a word there? 23 THE WITNESS: That would probably be -- be 24 clarifying. The third timeframe isolates months in which 25 the change in -- change in the corresponding class price 26 was below 5%. 27 THE COURT: All right. And that is in line 5 of 28 the paragraph between the two charts. 6658 1 THE WITNESS: That's correct. 2 THE COURT: And we're adding two words before the 3 word "corresponding." 4 THE WITNESS: Three words. 5 THE COURT: Okay. And tell me again? 6 THE WITNESS: Between "which" and "the" where 7 we're changing "the change in." So it reads, "The third 8 timeframe isolates months in which the change in the 9 corresponding class price was below 5%." 10 THE COURT: So adding the words "change in the" 11 before the word "corresponding"? 12 THE WITNESS: That works also. 13 THE COURT: All right. Thank you. 14 You may proceed, Dr. Ryan -- Cryan. 15 THE WITNESS: Thank you. I put that in your mind 16 when I said Cryan is spelled like Ryan with a C in front 17 of it. I have been addressed as Ryan by so many people, I 18 can't even count it. 19 THE COURT: You are being confused with the other 20 Ryan. People have begun to call him Dr. Ryan. 21 Anyway, go ahead. 22 THE WITNESS: Thank you. 23 Both the average and median percent of eligible 24 milk depooled are displayed for the three different 25 timeframes. For months where Class III prices increase 26 more than 5%, the amount of depooled milk from the market 27 averages 19.9%, while the percentage of milk depooled in 28 months with -- with more than a 5% decline or lower -- 6659 1 than or lower than a 5% change averaged 13% and 13.3%, 2 respectively. 3 Likewise, for months where Class IV prices 4 increased more than 5%, the average amount of depooled 5 milk from the market averaged 19.5%, while the percent of 6 milk depooled in months with more than a 5% decline or 7 lower than a 5% change averaged 13% and 13.9%, 8 respectively. 9 It is important to note that these values are 10 averages across orders. The impact of stricter pooling 11 rules in certain orders is not accounted for since 12 existing pooling rules limit the rate at which milk could 13 be repooled it is likely the full magnitude of price 14 changes on depooling is more extreme than presented. 15 As mentioned previously, when market prices rally, 16 announced or final prices can be much higher than advanced 17 prices, leading to low and negative PPDs. This creates an 18 opportunity to depool milk from the order to benefit from 19 the non-pooled value of the recently elevated prices 20 reflected in available market information, further 21 depressing the PPD. 22 Producers who incur the additional costs of 23 consistently servicing the Class I needs of the market 24 receive a lower return than they would otherwise have 25 received if they did not continue to service the Class I 26 market. Prices received by dairy farmers who supplied the 27 other milk needs of the market are not known. However, as 28 USDA affirmed, it is reasonable to conclude that prices 6660 1 received by dairy farmers were not equitable or uniform. 2 In their in-depth discussion, USDA ultimately 3 decided to reduce the time lag between advanced and 4 announced prices by 18 days, with the intention that price 5 inversions and associated depooling behavior would be 6 avoided. USDA defended their decision with several 7 important points. 8 Firstly, the NDPSR -- which is the National Dairy 9 Product Sales Report, the survey by which dairy product 10 prices are collected and used for the purposes of Federal 11 Milk Marketing Orders prices -- the NDPSR, which includes 12 statistics and pricing information used in the first step 13 of establishing a minimum pay price, are announced 14 publicly every week. Therefore, as USDA puts it, 15 "handlers can update formulas on a weekly basis to 16 estimate what the Class I price will be before the price 17 is announced." 18 Let's read through a quick example. 19 Announced in late May, the Class I price for 20 June 20th was $14.24 -- 21 THE COURT: I'm sorry, stop. The Class I price 22 for? 23 THE WITNESS: June 2020. 24 THE COURT: Thank you. 25 THE WITNESS: Did I not say that? 26 THE COURT: You probably did, but I just want to 27 make sure. 28 THE WITNESS: Okay. 6661 1 -- was $14.24 per hundredweight. During June 2 there were five NDPSR releases: June 4th, June 10th, 3 June 17th, and June 23rd -- 24th, which is actually four. 4 Per these reports, the prices of the following 5 products changed by the corresponding amounts between the 6 first report and the last report: 7 40-pound cheddar blocks increased from $1.17 to 8 $1.37, which was a 17% increase; 9 500-pound cheddar barrels increased from $1.13 to 10 $1.45, a 28% increase; 11 Butter increased from $1.13 to $1.43, which is 12 another 28% increase; 13 Whey increased from $0.378 per pound to $0.384 per 14 pound, which is a small 1.7% increase; 15 And the nonfat dry milk price decreased from $0.86 16 per pound to $0.859 per pound, is a 0.2% decrease. 17 Announced in early July, the Class III price for 18 June 2020 was $21.04. There were five releases of the 19 NDPSR in July: July 1st, July 8th, July 15th, July 22nd, 20 and July 29th. 21 Per these reports, the prices of the following 22 products changed by the corresponding amounts between the 23 first report and the last report: 24 The 40-pound cheddar blocks increased from $1.61 25 to $2.53. That's a 57% increase -- 26 (Court Reporter clarification.) 27 THE WITNESS: Certainly. 28 500-pound cheddar barrels increased from $1.74 per 6662 1 pound to $2.50 per pound, which is a 44% increase; 2 Butter increased from $1.56 per pound to $1.82 per 3 pound, a 17% increase; 4 Whey decreased from $0.382 per pound to $0.365 per 5 pound, a 4.4% decrease; 6 Nonfat dry milk increased from $0.846 per pound to 7 $0.959 per pound, which is a 13% increase. 8 The Class IV price formula does not include the 9 commodity values of cheese in its calculation, instead 10 relying on nonfat dry milk prices and butter prices in its 11 formula. Given the above per pound values, the spread 12 between the Class III and IV price could be inferred 13 before the announcement of monthly prices pooled 14 manufacturers would have to pay are reported. This 15 differs from the advanced price announced for Class I and 16 II, which are based on different previous values. 17 This available information means that processors 18 have enough information and enough time to depool milk 19 when prices change -- when prices -- price changes are 20 clear and rapid. The presence and frequency of published 21 commodity pricing data allow handlers to estimate price 22 changes regardless of when a price is announced. 23 Additionally, as more products are offered on the Chicago 24 Mercantile Exchange, handlers will continue to have access 25 to the information needed to hedge and manage risk. 26 USDA agreed on this matter in their 1999 27 decisions, stating: 28 "Also, as more NASS product price survey 6663 1 observations become available, basis differences from 2 earlier traded/issued product price surveys such as those 3 from the Chicago Mercantile Exchange or Dairy Market News 4 will be more predictable and, therefore, should provide 5 for more accurate predictions of future price levels. In 6 addition, futures markets have been established for the 7 four dairy products in the NASS price surveys. While 8 trading to date in these contracts has not been large, 9 interest in these markets may increase as the industry 10 learns to use them as effective hedges to the component 11 values to determined under this Final Decision. These 12 markets also will assist handlers in estimating the 13 Class I price." 14 Additionally, AFBF is supportive of and engaged in 15 the development of a Class I futures and options complex 16 that's at the CME Group to further assist fluid handlers 17 in managing risk. 18 In conclusion, AFBF believes that disorderly 19 marketing conditions are present when producers do not 20 receive uniform prices because of frequent depooling. 21 AFBF also believes the current system of advanced pricing 22 contributes to the frequency and magnitude of depooling. 23 Given the growing number of resources for data and market 24 information, AFBF proposes a structure of announcing class 25 prices -- all class prices at the same time. 26 And below is the language that would implement 27 that. It is simple as I stated in the first paragraph. 28 That is our original proposal testimony submitted 6664 1 according to the September 8th deadline. I would -- you 2 know, in the interest of moving things along, I would 3 offer our rebuttal testimony which includes a few 4 additional notes, and then -- and then move on to some 5 analysis I did for this. 6 So reading from Exhibit 293, the first -- the 7 first section is essentially -- repeats what I said at the 8 beginning of the previous statement. And this -- again, 9 this context, I'll briefly summarize AFBF's Proposal 18, 10 including some comments based on the hearing record to 11 date, in addition to offering our response to proposals -- 12 to the other proposals, 13 through 17. 13 Regarding Proposal 18: AFBF proposes to end the 14 advanced pricing of Class I skim milk and components -- 15 (Court Reporter clarification.) 16 THE WITNESS: Sorry. I'll slow down. 17 AFBF proposes to end the advanced pricing of 18 Class II skim milk and components and Class II milk and 19 components. 20 THE COURT: Read the heading again, please. 21 THE WITNESS: Proposal 18: AFBF proposes to end 22 the advanced pricing of Class II skim milk and components 23 and Class I milk and components. 24 THE COURT: Thank you. 25 THE WITNESS: You're very welcome. 26 In AFBF Proposal 18, the Class II skim milk price 27 would be equal to the Class IV skim milk price plus the 28 Class II differential. The Class II nonfat solids price 6665 1 would be equal to the Class IV nonfat solids price, plus 2 1/100th of the Class II differential. The Class I skim 3 milk price would be the higher-of the Class III or 4 Class IV skim milk price, plus the Class I differential. 5 And the Class I butterfat price would be equal to the 6 butterfat price plus 1/100th of the Class I differential. 7 Advanced pricing and the average-of Class I price 8 formula are two of the largest contributors to class price 9 misalignments in Federal Order markets leading to negative 10 producer price differentials (PPDs) and milk being 11 depooled when a manufacturer faces Class III or IV prices 12 that are higher than the market's uniform price. 13 The lag between the announcement of Class I skim 14 milk and butterfat prices and Class II skim milk prices 15 for a month being announced just after the middle of the 16 previous month, and the announcement of the other class 17 prices for a month -- for the same month at the beginning 18 of the following month, can create wild divergence between 19 advanced and announced prices in today's volatile dairy 20 markets, as rapid upper swings of Class III or IV prices 21 can put them far above the Class I price. 22 Numerous witnesses have acknowledged that 23 eliminating advanced pricing would help realign class 24 prices and have opposed it just because the industry is 25 accustomed to the practice. 26 Class II advanced pricing serves no purpose today. 27 Eliminating advanced pricing of Class II skim milk would 28 create a perfect hedge with zero basis risk for Class II 6666 1 buyers and sellers using Class IV and butterfat contracts. 2 Class II milk buyers are "used" to advanced pricing, as we 3 have heard many times during this proceeding, but many are 4 as capable of handling end-of-the-month pricing as 5 Class III handlers, as they have been, regarding butterfat 6 pricing for the last 23 years. 7 This proposal is, fundamentally, a simplification 8 of the system to better preserve the system. Bringing 9 Class I and II prices into temporal alignment with 10 Class III and IV prices will go hand in hand with the 11 return to the higher-of formula to eliminate most class 12 price misalignments. 13 Testimony by multiple witnesses, including from 14 the CME Group, suggests that the exchange would be likely 15 to institute Class I futures and options once a need and 16 likely volume is made clear, as the adoption of the 17 higher-of proposal alone would do. 18 This is one more reason that this is an 19 appropriate time to eliminate advanced pricing in 20 connection with other changes to Class I pricing. AFBF is 21 supportive of and engaged in the development of Class I 22 futures and options -- of a Class I futures and options 23 complex at the CME Group to further assist fluid handlers 24 in managing risk. This would be the most convenient 25 outcome for dairy market participants. However, other 26 exchanges could offer these contracts, as CME does not 27 have a monopoly on agricultural derivatives clearing. 28 I would note in connection with the elimination of 6667 1 advanced pricing that the introduction of class -- of a 2 Class III/IV spread options contracts in combination with 3 Class III or Class IV futures would also provide a means 4 for hedging Class I milk. That's a technical note that is 5 of -- of probably, you know, significant but minor 6 interest for this proceeding. 7 AFBF believes that disorderly marketing conditions 8 are present when producers do not receive uniform prices 9 because of frequent depooling. The current system of 10 advanced pricing continues to the frequent -- contributes 11 to the frequency and magnitude of depooling. Given the 12 information and risk management resources available today, 13 AFBF supports announcing prices for all four classes of 14 milk at the end of the month for which they apply. 15 The American Farm Bureau Federation response to 16 Proposals 13 through 17. 17 Regarding Proposal 13: AFBF supports NMPF's 18 proposal to return Class I base pricing to the higher-of 19 the Class III and Class IV pricing formulas. 20 As NMPF has outlined, the Class I mover based on 21 the average-of Class III or IV has had terrible impacts on 22 dairy farmers and dairy markets when the Class I -- I'm 23 sorry -- when the Class III and Class IV prices have 24 substantially diverged, leading to inverted Class I, 25 Class III price relationships and resulting in large 26 negative producer price differentials (PPDs) and heavy 27 depooling. 28 We believe that changes in the market could lead 6668 1 to similar price misalignments between Class I and 2 Class IV in the near future, as cheese capacity grows and 3 cheese prices fall. For these reasons, we believe that a 4 return to the higher-of formula will be important to 5 maintaining reasonable price alignments and avoiding the 6 chaos of negative draws for Class III and Class IV milk 7 and subsequent depooling the future. 8 However reasonable it seemed at the time, the 9 mandate to change Class I pricing from the higher-of 10 Class III and Class IV formulas pricing formulas has 11 turned out to be: 12 1) bad for producer revenue, generating Class I 13 prices that were substantially lower than they would have 14 been without the change; and 15 2) bad for the stability of Federal Order pooling, 16 increasing the incidence of Class III and IV prices 17 getting out of line with the Class I and uniform prices 18 and leading to unpredictable relationships among class and 19 uniform prices, depooling, and an undermining of the 20 principle of uniform pricing. 21 We believe the Class I futures and options 22 contracts will be instituted by CME Group or another 23 exchange, if necessary, providing the hedging 24 opportunities which processor representatives have 25 insisted make the continuation of the average-of formula 26 necessary. 27 We also believe that NMPF has demonstrated the 28 degree to which the average-of formula has put the greater 6669 1 downside risk on the farmer side of price pooling, and 2 another critical reason to return -- another critical 3 reason to return to the higher-of. 4 THE COURT: Dr. Cryan, please re-read that last 5 paragraph. 6 THE WITNESS: We also believe that NMPF has 7 demonstrated the degree to which the average-of formula 8 has put the greater downside price risk on the farmer side 9 of milk pricing, another critical reason to return to the 10 higher-of. 11 THE COURT: Thank you. 12 THE WITNESS: You're very welcome. 13 Regarding Proposals 14 and 15: AFBF opposes IDFA 14 and MIG's proposals to retain average-of class price -- 15 Class I pricing with a complicated formula to adjust for 16 losses relative to the higher-of. 17 Both of these proposals are unnecessary -- both of 18 these proposals are unnecessarily complicated and do 19 nothing to address the issue of class price misalignment, 20 which is so important to solve. They are so complicated 21 that they almost seem designed to put the Federal Order 22 system itself into an absurd light. 23 The focus of testimony by the proprietary 24 processor groups was on the importance of hedging for 25 which they justified these Rube Goldberg proposals. 26 Again, we believe that Class I futures and options (or, 27 again, a Class III/IV spread option) would be available in 28 reasonably short order, especially if the industry united 6670 1 in urging CME Group to offer such proposals. 2 THE COURT: To offer such? 3 THE WITNESS: Products. I apologize. To offer 4 such products. 5 Proposal -- regarding Proposal 16: AFBF opposes 6 the Edge proposal to use the Class III price plus an 7 adjuster as the Class I price mover. 8 This is another proposal designed to maintain the 9 opportunity to hedge Class I using existing contracts. It 10 is well-intended and seemed to make sense a few years ago 11 when Class III promised to be the higher milk price for 12 the indefinite future, as it has been for many years, and 13 as the four-class system anticipated it to be. 14 However, the supposedly inadequate current cheese 15 Make Allowances have not apparently discouraged cheese 16 plant construction, as has been clear from prior 17 testimony. As a result, there appears to be sufficient 18 American cheese, which has limited export opportunities -- 19 that is to say the cheese has limited export opp- -- there 20 are limited export opportunities for cheese on the market 21 so that Class IV, which has an easier export outlet for 22 its products, may tend to be the higher price for quite 23 some time. 24 In that case, a Class I price tied to the 25 Class III price could operate like a lower-of formula. 26 The adjuster, which would provide future 27 compensation to the pool for current losses relative to 28 the higher-of formula, is another Rube Goldberg design 6671 1 that delays payment to farmers and does not contribute to 2 proper alignment of class prices. 3 We believe, as Dr. Bozic himself has testified, 4 that the class -- that the CME Group will introduce 5 Class I futures and options if advanced pricing has ended, 6 and we believe they will also be responsive to the 7 industry's desire to hedge Class I. 8 Regarding Proposal 17: AFBF supports the Edge 9 proposal to both return the Class I mover to the use of 10 the higher-of in the Class III and IV price formulas and 11 to eliminate advanced pricing. 12 AFBF fully supports Proposal 17, which is 13 effectively identical to AFBF's Proposal 18, in 14 combination with NMPF's Proposal 13, which AFBF also 15 supports, excepting that the -- I don't believe they make 16 any note of eliminating advanced pricing for Class II. 17 Okay. That's -- that's my -- that concludes 18 Exhibit 293. And I would now go into -- whoops, go to the 19 slides. 20 Thank you very much. 21 I had hoped through the entire proceeding that 22 someone would do an analysis along these lines, that -- 23 that has been suggested by few people they would, and -- 24 and there has not been any sort of analysis of the -- of 25 the elimination of advanced pricing of the sort of simple 26 historical comparison that I had in mind. 27 I appreciate that Dr. Bozic's paper with Dr. Wolf 28 indicates -- does indicate the problems with advanced 6672 1 pricing to some degree, but I thought another approach 2 would perhaps simplify the demonstration of that. 3 So -- so I'll start with -- with some graphs, 4 which are essentially graphs that Danny Munch created. I 5 have perhaps simplified these or laid these out a little 6 differently than he has. 7 But this -- in each case, each of these will show 8 the four class prices under different scenarios. In this 9 case, I have added -- in all of these cases, as 10 Dr. Brown -- as Mr. Brown did in his analysis, I have 11 added $1.60, which is the minimum Class I differential to 12 the Class I mover in order to provide a more accurate 13 context for this. 14 And so in this case -- 15 THE COURT: Dr. Cryan, would you spell Danny 16 Munch? 17 THE WITNESS: Danny Munch is D-A-N-N-Y, and Munch 18 is M-U-N-C-H. 19 THE COURT: Thank you. 20 THE WITNESS: Mr. Munch appeared to present our 21 testimony on a previous proposal, so he's -- he's on 22 the -- he's been here. But I appreciate the benefit to 23 the audience of getting the clarity again. 24 So the first graph, Table 1, which is really 25 Figure 1, says -- shows the current price formulas. And 26 you can see the extent to which the Class I price is not 27 consistently the highest price as was intended by the 28 orders in their original design. And to the extent to 6673 1 which volatility in the Class III price, in particular in 2 2020, created difficulties, and you can also see the 3 extent to which, at times, Class II has become the higher 4 price, and there's been even higher than the Class I with 5 the $1.60 minimum differential. So these price 6 misalignments, I think it -- it -- looking at those, it 7 may -- it ought to be clear from the discussions from 8 previous witnesses that these price misalignments tend to 9 create chaotic situations. 10 This is Proposal 13, the return to the higher-of 11 presented by National Milk. This demonstrates the extent 12 to which the Class I price tends to be higher than -- than 13 the other classes, but it also demonstrates the 14 misalignment associated with the advanced pricing. 15 You can see the times, especially in 2020, which 16 is a very clear, in-your-face example of how these things 17 line up. You can see the ups and down of the Class III 18 price were trailed by the ups and downs of the Class I 19 price, so that there were months where the Class III price 20 was substantially above even -- even the Class I mover 21 with the $1.60 minimum Class I differential. 22 The Table 13 is the -- 23 THE COURT: Wait. Table 3? 24 THE WITNESS: I'm sorry, Table 3 represents 25 Proposal 17, which is -- 26 THE COURT: Wait. I'm sorry. I -- I maybe didn't 27 catch up with you. Okay. 28 So what we have done -- 6674 1 THE WITNESS: No, you were right. You were right. 2 I said Table 13 because I was already -- I was still 3 looking at the thing that said Proposal 13. You are 4 correct. Table 3. 5 We have gone over Table 2, and Table 3 now is -- 6 reflects Proposal 17, the Edge proposal, which is very 7 similar to Farm Bureau's proposals, to eliminate the 8 higher-of and to eliminate -- or to return to the 9 higher-of -- I apologize -- to return to the higher-of and 10 to eliminate advanced pricing. And you can see how the 11 elimination of advanced pricing ensures that the Class I 12 price does stay above the Class III and IV prices. 13 And, again, it is my understanding that the Edge 14 proposal did not address advanced pricing of Class II, so 15 I have left the advanced pricing of Class II in this 16 graph. And you can see the Class II is the highest price 17 under the scenario in -- in the summer of 2022, as it was 18 in the current regime. 19 Table 4 combines AFBF Proposal 18 and 21, just for 20 clarification. That table -- Proposal 21, which we will 21 present when we get to Category 5, is to -- is for the 22 Class II differential to be $1.56 rather than $0.70. 23 Lowering that green line by the difference would -- would 24 represent the same thing, with simply eliminating advanced 25 pricing of Class II. 26 This incorporates the return to the higher-of, the 27 elimination of advanced pricing, eliminating the advanced 28 pricing of Class II, and a Class II differential of $1.56. 6675 1 It does not account for changes in composition, which we 2 support. It does not account for a number of other things 3 that would have an impact on this. But it does address 4 some of the changes, most relevant, I think, to 5 Category 4. 6 And you can see that there is a more -- much more 7 consistent alignment. You can see that the Class IV is 8 al- -- Class I price is always the highest price at the 9 minimum Class I differential, which is slightly above the 10 $1.56 that we are proposing for the Class II differential. 11 And then lastly, I will offer -- I went -- I did a 12 very basic analysis of the pools under three scenarios, 13 one using a status quo, and this uses data from USDA from 14 April 2012, which is when the NDPSR began to be used in 15 class pricing, through April 2023, because that was the 16 spreadsheet I had. 17 And I looked at the four class prices under each 18 of these scenarios. I used the utilization rates, the 19 class utilization rates for the -- for the ten orders -- 20 the nine orders that existed in June 2018. June 2018 was 21 a month with -- it's the second lowest depooling. Since 22 that time, the lowest was the following month, July, but 23 I -- I -- my sense is that USDA tends to think of -- I'm 24 sorry -- USDA tends -- I didn't show you that one either, 25 but y'all had enough paper in front of you, so -- USDA 26 tends to think of spring months as more representative 27 than summer months, so I used June instead of July. 28 I used those -- those class utilization percents 6676 1 for all nine markets that existed at that point, or ten -- 2 ten markets that existed at that point, and applied those 3 utilization rates to the class prices. I looked at the 4 gap between that estimate and the actual uniform prices in 5 June 2018, and applied that difference to all months, and 6 found that it was a relatively good match. As I 7 spot-checked it through some months, it was a relatively 8 good match, but I recognize it was somewhat crude. 9 I would -- the results I found, though, was that 10 the status quo -- under the status quo, the Class III 11 price rose above the crudely estimated uniform price 104 12 times out of the 1320 order months that I had. 1320 is 13 the number of orders times the number of months I looked 14 at. And out of 1320 order months, there were 104 times, 15 or 7.9% percent of the time, the Class III price rose 16 above the uniform price. 4% of the time, 53 times, which 17 was 4% of the time, the Class IV price rose above the 18 uniform price. 19 And this, again, is a uniform price -- a sort of 20 hypothetical uniform price, with full pooling, without 21 depooling. That's the -- the idea is once you go 22 negative, then -- then things tail off, but it is a kind 23 of a benchmark. A full pooling uniform price is sort of a 24 benchmark of what -- what -- you know, what the price 25 relationship is. We have had a lot of depooling because 26 of these relationships. And going back and using the 27 utilization rates from those months that are depooled, 28 where the things are depooled, it makes it complicated. 6677 1 The uniform prices are also further changed. So this is 2 an assessment of -- of what a normal pool compared to the 3 Class III and Class IV prices would look like. 4 Under Proposal 13, which is strictly the return to 5 the higher-of, the number of times that the Class III 6 price is higher than the uniform price is reduced to 88, 7 or 6.7%, and the number of times the Class IV price is 8 higher than the uniform price is reduced to 46, or 3.5%. 9 And under Proposal 18, it is reduced to 61 times, 10 or 4.6%, for the Class III price being above the uniform 11 price, and 38 times or 2.9% for the Class IV price to be 12 above the uniform price. 13 And for the purpose of this, I would ask that 14 notice be taken of -- of -- in addition to USDA exhibits, 15 which this data is -- all came from USDA, the June 2018 16 information that I -- that I tied this to was based on the 17 market -- Dairy Market News from July 20th to 27th, 2018, 18 and I ask that notice be taken of that USDA publication. 19 THE COURT: Now, you said July 20. Your 20 explanation says July 23? 21 THE WITNESS: July -- 22 THE COURT: For Dairy Market News? 23 THE WITNESS: July -- July 23rd through 27th, 24 2018. 25 THE COURT: Thank you. 26 THE WITNESS: Certainly. 27 There is a -- that's -- I don't have a page 28 number. I think it's page 12. There's a table that 6678 1 showed both the uniform prices in each market for June, as 2 well as the utilization percentages -- estimated 3 utilization percentages -- the final utilization 4 percentages for each market. 5 I would also point out -- make a note -- I would 6 like to point out that USDA, in their analysis of the 7 California Federal Order, did some modeling of depooling, 8 which I thought was very useful, and it turned out to be 9 very predictive of manufacturers depooling once the 10 California order was implemented, and I would encourage 11 the department to take a look at that. 12 It just went -- tell me now at zero. I'm doing 13 rebuttal. I'm slowing down at request. I'm done. 14 THE COURT: Well done, sir. 15 THE WITNESS: Thank you. I mean, I -- if I 16 understand correctly, I could have done rebuttal later and 17 started all over again. 18 THE COURT: I know, and had an hour for it. 19 THE WITNESS: I was trying to -- trying to put 20 things all together. 21 THE COURT: Do we need a break before we begin 22 cross-examination? 23 MS. TAYLOR: We need lunch. 24 THE COURT: Oh, really? Oh, you know, when you 25 come late -- 26 MR. HILL: You are telling on yourself. Don't do 27 that. 28 THE COURT: All right. Please be back and ready 6679 1 to go at 1:05 p.m. We go off record at 12:01. 2 (Whereupon, the lunch recess was taken.) 3 ---o0o--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6680 1 TUESDAY, OCTOBER 3, 2023 - - AFTERNOON SESSION 2 THE COURT: Let's go back on record. 3 We're back on record at 1:06 p.m. 4 DR. CRYAN: Your Honor, I would like to thank the 5 gentleman helping us with audio/visual stuff, Sean. He's 6 been doing a really wonderful job. He is -- (applause). 7 Yeah. Thank you. 8 As well as -- I would like to add my voice to the 9 chorus praising our court reporter as well. So, thank 10 you. 11 THE COURT: She is amazing, and you almost stopped 12 amusing her. 13 DR. CRYAN: I'm trying. 14 THE COURT: It's so hard to slow down. These 15 things are so familiar to you. 16 DR. CRYAN: And when the clock's running, 17 Mr. Wilson's ready to jump on you as soon as -- 18 DR. BOZIC: Marin Bozic for -- 19 DR. CRYAN: I offer myself for cross-examination. 20 CROSS-EXAMINATION 21 BY DR. BOZIC: 22 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 23 Dr. Cryan, are you a Farm Bureau member? 24 A. I am. 25 Are you? 26 Q. If you can help me figure out how to become one, I 27 would love to. 28 A. Just call the Minnesota Farm Bureau, send them a 6681 1 check. 2 Q. Okay. I thought I had to own land or something. 3 A. That'll work, too. 4 Q. Thank you for your presentation this morning. I 5 don't have a lot of questions, but one issue that keeps 6 coming up with the removal of advanced pricing is that 7 handlers will not know what price to quote to their 8 buyers. 9 In your opinion, how should that problem be 10 resolved? 11 A. It's -- I would not presume to tell folks how to 12 do that, but there are a wide range of ways that things 13 are priced in the market for things that don't have 14 official government prices added to them. And with 15 opportunities to hedge, they can -- they can -- they could 16 potentially become a practice. 17 And I don't -- I don't represent any handlers, so 18 I can say things like this, they could all kind of 19 coalesce around issuing prices based on the futures as of 20 the 23rd of the previous month. 21 Q. And you said that there are other examples from 22 other commodities that don't have government prices. 23 Do you find any of those examples particularly 24 useful that -- you know, anything that you would like to 25 add to the record that -- as a useful analogy or -- 26 A. Could you repeat the question? 27 Q. As I understood you, you mentioned that in some 28 other commodities where advanced prices are not published 6682 1 by the government, there were other arrangements made in 2 order to provide for appropriate timing of prices to the 3 buyers. So I was wondering if you have any examples that 4 you would like to add to the record. 5 A. I -- I don't really have firsthand knowledge of a 6 lot of that. I know a lot of large -- I believe a lot of 7 large retailers get companies to lock in prices for months 8 at a time. I -- it's my general understanding. But I 9 don't have any specific knowledge, so I won't go into 10 detail. 11 Q. And following up with the example, illustration 12 you did provide where the futures prices on the 23rd of 13 the prior month is used. I note that we are a little bit 14 belaboring the point here, but maybe in a minute or two, 15 could you describe how that solves the problem for both 16 the buyer and the handler and pool integrity? 17 Pool integrity from the perspective that they will 18 get the full payment that is due; buyer from the 19 perspective of knowing the price before the start of the 20 month; and the Class I handler from the perspective of 21 having their margins presumably stable as they have today. 22 A. Well, if they have the opportunity to go to the -- 23 to an exchange and hedge on the -- with a Class I 24 contract, then they could -- they can lock that it in. 25 I mean, you -- you went through -- somebody -- 26 some witness went through great detail on how a hedge 27 works. I mean, they can hedge -- they can offer their 28 customer a fixed price, and -- and the pool can be kept 6683 1 whole. I mean, that's all been gone over by other 2 witnesses. I think it's relatively straightforward. 3 Q. Thank you for your answer. 4 In the Exhibit 294, which is your PowerPoint, on 5 the last page -- and I don't see that there is a number on 6 this page -- on the last page of that exhibit with the 7 title "Manufacturing - Uniform Price Misalignments," you 8 compare the status quo, Proposal 13, and Proposal 18. 9 Is there a reason why you did not also tabulate 10 the percentages for Proposals 14 through 17? 11 A. I think Mr. Brown did a lot of the calculations on 12 those. It's not exactly the same thing but -- and they're 13 a little more complicated to manage. I was really hoping 14 he would have done an analysis like he did for the other 15 scenarios on Proposal 18, 17/18, and he did not. 16 So I felt like I had to do something to compare 17 this at least to the -- the status quo and the -- and the 18 simple higher-of with advanced pricing. 19 Q. And to make sure that I understand, you are not 20 providing for the record any evidence that Proposal 16, 21 which is the Class III Plus, has higher percentages of 22 misalignment in either of these two columns than 23 Proposal 18; is that correct? 24 A. I did not look at it, so I'm not making an 25 assertion about it one way or the other. 26 Q. Okay. Thank you very much. That's all I have. 27 A. Although, I would say, as I said in the testimony, 28 that there's -- if -- if the markets are moving the way 6684 1 they seem to be, which is for Class IV to be a dominant 2 class, you know, we have got so much cheese production 3 capacity now that the Class III price may be the lower 4 price for quite some time. And if that's the case, then 5 the Class III, by extension of the class -- looking 6 forward rather than backwards, the Class III Plus could 7 end up being problematic and depending very heavily on 8 your adjuster calculation. 9 Q. Okay. Thank you for that clarification. 10 Also, you have not provided the Excel spreadsheet 11 that accompanies the Exhibit 294; is that correct? 12 A. It doesn't accompany it, but as a courtesy, at 13 your request, I can send it out to everybody and we can -- 14 I'm not offering it as an exhibit, but if somebody else 15 wants to, they can. 16 Q. I don't believe anybody else has the privilege to 17 offer that as an exhibit because you created it. 18 DR. BOZIC: Is that correct, Your Honor? 19 THE COURT: I don't know. Now, this Excel 20 spreadsheet -- 21 THE WITNESS: It's not a spreadsheet, it's a 22 workbook. But it's four spreadsheets, and it -- it 23 basically is a calculation of how I got to this page. And 24 it also is the -- it's the -- the -- it doesn't have each 25 of these graphs in it -- oh, it does have each of these 26 graphs in it. So there's a sheet with each of these 27 graphs. 28 So it's just a verification of how the numbers 6685 1 were put together without really asserting anything new. 2 THE COURT: So that is in addition to the 3 electronic version of 294 that you have also submitted? 4 THE WITNESS: Right. 5 THE COURT: I would have to agree that no one else 6 really has the foundation to offer that into evidence, 7 because you didn't do the work. Unless you want to take 8 that spreadsheet and prove it to yourself and then say 9 it's valid. 10 BY DR. BOZIC: 11 Q. Dr. Cryan, would you please consider submitting 12 the Excel spreadsheet for the evidence so that we can 13 cross-examine based on that? 14 A. I don't want to spend three hours going through 15 spreadsheet cell by cell, so, no, I won't. 16 I provided it so anybody can check it, verify it. 17 If there's a problem with it, they can bring it up. 18 Q. Dr. Cryan, do you understand that we cannot 19 provide any claims for the record on any errors we may 20 find unless you submit that spreadsheet for the record? 21 A. As the judge said, you can. If you find some 22 issue, if there's something you want to bring up, you 23 can -- 24 Q. In order for me to do that, Dr. Cryan, I have to 25 vouch for your work. 26 A. I -- I'm not going to sit here with a spreadsheet 27 in front of me and spend hours going through cell by cell 28 what it all means. I have provided it as a courtesy so 6686 1 anybody that wants to check that it -- that what I -- what 2 I said I did here is what I did, can check it. But it's 3 not -- it's not worth the time. It's a very simple, 4 relatively crude analysis, and all -- I only provided it 5 to help folks be assured that there's no -- no tricks, 6 that it's just what it is. It is what it is. 7 Q. Dr. Cryan, the part that I don't understand here, 8 is that your list that you are using actual June 2018 9 uniform prices is just one month, and then you list these 10 various percentages, and you are calling it simulated 11 uniform prices. 12 So what is simulated if you are using actual 13 June 2018 uniform prices? The questions can multiply on 14 and on. They can be very quickly resolved if we had the 15 ability to offer questions on that spreadsheet in the -- 16 on the record. 17 I'm not sure -- I can -- I can commit that I will 18 not ask you to go cell by cell and spend hours on the 19 stand. I would think we broke enough records on that 20 earlier this week. 21 A. Yeah. I decline to offer it as an exhibit. 22 Q. Can you please explain how can you have the actual 23 2018 uniform prices and still calculate some percentages 24 on this page? 25 THE COURT: Which page? 26 DR. BOZIC: The pages are not numbered. 27 MR. HILL: Title? 28 THE COURT: The last page of 294? 6687 1 DR. BOZIC: That's correct. 2 THE WITNESS: Sure. I'm happy to explain again 3 what I did. 4 What I -- what I -- I had was -- and Danny did a 5 bunch of this work to basically establish calculations of 6 what the Class I movers would be under the various 7 scenarios. We also offered a -- we calculated, without 8 much difficulty, what the Class II price would be under 9 our Proposal 21. We lined those all up. 10 Looked at the -- as I said in the earlier 11 testimony, I looked at the months -- the depooling by 12 month over the last five or six years, and had to kind of 13 go back to June and July of 2018 to find kind of the first 14 time going back that -- the most recent months going back 15 that the pooling was relatively small. And, again, 16 choosing June instead of July, because, you know, May, 17 June are typically seen as more representative than July. 18 I took -- I looked at the actual utilization 19 percentages in the, I think, ten existing markets at the 20 time, so California was not in there. 21 And I -- and I used those utilization percentages, 22 and the class prices under each of three scenarios to 23 roughly calculate a blend price, and I compared that blend 24 price -- the price that was generated in June of 2018 to 25 the actual uniform price, in June of 2018, I used the 26 difference as an -- as an additional factor, as an add-on, 27 as a truing up factor in the entire spreadsheet. 28 It's crude, but it's a way to kind of line things 6688 1 up together. And if it's crude, it's crude. I just 2 thought it was important that something be -- some 3 analysis be offered to at least introduce the concept of 4 looking at how these -- how these different scenarios 5 affect the number of months that are depooling. 6 And, again, I would have been very happy if 7 Mr. Brown had included Proposal 17 or 18 in his analysis. 8 He did not, so I felt I had to do something along those 9 lines. 10 BY DR. BOZIC: 11 Q. I must admit, I still don't understand the last 12 page of this exhibit. I'm going to try again. 13 When you say that Class III is higher than 14 uniform, does that refer to the simulated uniform price? 15 A. Yes. 16 Q. Okay. So that table -- or the middle part of the 17 page that resembles a table, none of those numbers there 18 in any way use the actual June 2018 uniform prices? 19 A. Except in the way that I described, that's right. 20 Q. The way you described I didn't previously 21 understand. That's why I was asking for clarifications. 22 A. I used the difference between the blended 23 calculation and the -- and the actual uniform prices for 24 each market as a way to true up the simulated results to 25 better resemble actual results. 26 It's not -- it's not sophisticated, and you can -- 27 anybody can say whatever they want about it. But I wanted 28 to put something on the record that reflected the -- the 6689 1 difference, you know, in negative -- in the changes -- in 2 the price relationships that incentivize depooling, both 3 by Class III and Class IV handlers. 4 And these -- again, these simulated uniform prices 5 are designed to represent what a uniform price would look 6 like with full pooling, without -- you know, without -- 7 with minimal depooling so that you can say this is -- this 8 is essentially what the handlers are considering when they 9 are deciding to depool. 10 Now, there's been so much depooling in the last 11 five years that it's hard to say what normal is, but that 12 was an effort to define a fully-pooled normal. And if the 13 prices are better aligned, then potentially we will get 14 back to that, we'll have more pooling, we'll have more 15 milk in the pool, and more consistent relationships. 16 Q. Thank you, Dr. Cryan. There's only so much that 17 we can do with this last page without seeing the 18 spreadsheet. 19 DR. BOZIC: So I have no further questions. 20 THE COURT: Thank you, Dr. Bozic. 21 Next? Who has questions for Dr. Cryan? 22 CROSS-EXAMINATION 23 BY MR. ENGLISH: 24 Q. Chip English with the Milk Innovation Group. So I 25 really don't want to dwell on it much longer, since my 26 head already hurts. 27 But Exhibit 294, the last page, when you say based 28 on utilization rates and 2018 actual uniform prices, first 6690 1 I think I heard you say that you excluded California; is 2 that correct? 3 A. I -- I didn't exclude California. California did 4 not have an order -- 5 Q. Right. 6 A. -- in June of 2018, so -- 7 Q. I -- 8 (Court Reporter clarification.) 9 THE COURT: Mr. English, ask your question again. 10 BY MR. ENGLISH: 11 Q. So the question was, as I understand it, because 12 you used June 2018, which was several months before the 13 California Federal Order came into effect, California is 14 not included in this analysis; is that correct? 15 A. That's correct. 16 Q. Okay. So what kind of -- how did you average 17 utilization rates across the orders that existed at that 18 time? 19 A. I applied the utilization rate to each of the -- 20 each of the orders that was there. I calculated a -- a 21 simulated -- essentially a crudely simulated uniform price 22 based on full pooling, what I assumed to be approximating 23 full pooling as represented by the utilization rates in 24 June of 2018. Because depooling was very limited in June 25 of 2018, I -- I used the utilization rates, the four class 26 utilization rates, to -- to essentially calculate a 27 crudely estimated uniform price for each -- each of the 28 ten markets before California. And then I -- and then I 6691 1 compared those prices to the Class III and Class IV prices 2 on a month-by-month basis and counted the number of times 3 that the -- that the Class III or Class IV prices were 4 higher than the fully-pooled uniform price. 5 So it does not -- it is not comparable to the 6 actual results of depooling. 7 Q. I understand that. 8 But, for instance, let me try to simplify it 9 greatly. If in a given month five of the orders the 10 Class III price was above the uniform, and five of the 11 orders it wasn't, did that count for five, say, for the 12 column of number? 13 A. It essentially counted for five out of ten. Yeah. 14 Q. Okay. But if it's five out often, how does 15 that -- is that reflected in the column that is "number"? 16 A. It's the number of order months. So each month -- 17 each month that each order had a negative relationship 18 counts as one. So the month -- the example you give of a 19 month where five markets, it's a negative relationship, 20 that counts for five. It -- it -- out of ten that month, 21 and there were -- as I said in the earlier testimony, 22 there were 1320 order months, which was ten markets times 23 132 months. 24 Q. Okay. All right. I really have no further 25 questions on that. 26 So a number of times, but in particular on page 7 27 of 7 of AFBF-4, which is, I believe 292 -- do I have that 28 right? 6692 1 MR. HILL: Yes. 2 BY MR. ENGLISH: 3 Q. You discuss the Chicago Mercantile Exchange. 4 What precisely has the American Farm Bureau done 5 with the respect to the Chicago Mercantile Exchange to 6 create or urge them to create a Class I hedge product? 7 A. We have -- we have had a phone call or two. And 8 we have -- it's -- this may overstate a little bit how far 9 we have taken that, but we have explored it. It's -- 10 there's been a lot of turnover over there and -- but we 11 have gotten in touch with folks and expressed the 12 interest. 13 But we also understand that they have -- at one 14 time they had a dairy advisory committee that was pretty 15 diverse from across the industry. At the moment, I 16 understand they have an advisory committee that is -- as I 17 understand it, this is what I was told -- is that they're 18 dealing with an advisory committee that's essentially 19 provided to them by IDFA. 20 So I don't know how -- how amenable that committee 21 is at the moment to -- to positioning the CME to -- to 22 make unnecessary some of the -- the average-of. So I -- 23 I -- we concluded that we'd keep going, but that's where 24 we're at right now. 25 Q. So two things from that. 26 First, you don't have any reason to -- you have no 27 knowledge about whether IDFA is or is not trying to push 28 that, correct? 6693 1 A. No, I don't know. 2 Q. So on page 3 of 3 of page 293, in the second 3 paragraph, where you say, "We believe the Class I futures 4 and option contracts will be instituted by the CME Group 5 or another exchange, if necessary," you know, I happen to 6 believe every morning I wake up here that the hearing is 7 going to move faster than it does, okay, and I have no 8 evidence to show that. 9 What evidence do you have beyond a hope or belief 10 that that's what will happen? 11 A. What I have is the -- is the experience that the 12 CME has taken steps to, for example, add the whey contract 13 to fill out the complex of products and prices that the 14 Federal Orders rely on. The fact that they responded to 15 cheese makers' concerns by implementing a block contract 16 in order to provide for that -- that spread to allow the 17 industry to do the risk management that they wanted to do. 18 And I believe if the Federal Order -- if USDA moves ahead 19 with going back to the higher-of, I believe that the 20 industry will see a clear need and the CME will respond. 21 Q. But other than that belief, you don't have any 22 evidence, you know, actual evidence -- you, yourself, said 23 in the very -- to answer the first question, you may have 24 overstated what Farm Bureau has done. 25 A. I believe -- I overstated -- it seems to overstate 26 how far we have gone with things, but I -- I don't believe 27 I'm overstating my faith in the CME as an institution to 28 serve the needs of their customers. 6694 1 Q. Has American Farm Bureau discussed this proposal 2 change to eliminate advanced pricing with any customers of 3 fluid milk processors, like retailers? 4 A. No. Maybe I have talked with -- no. I mean, I 5 might have talked with Mike Brown before he went from 6 Kroger to IDFA. But other than that, no. 7 Q. Has National Milk -- I'm sorry. I apologize. 8 Typo in my thing. 9 Has American Farm Bureau done any study of whether 10 removing advanced pricing will make it easier for fluid 11 milk processors to sell HTST milk? 12 A. We have not. 13 Q. Has American Farm Bureau done any study of whether 14 removing advanced pricing will make it harder for fluid 15 milk processors to sell HTST milk? 16 A. We have not done a study in the way that you mean 17 a study by peer-reviewed research and so forth. 18 Q. Okay. That doesn't have to be peer-reviewed 19 research. 20 Have you done any research into whether it will 21 either help or hurt the sales of HTST milk? 22 A. We have not explored with anyone outside of the 23 organization. 24 Q. So in the weeks now that we have been on Issue 4, 25 have you heard the testimony, both of National Milk and 26 Milk Innovation Group witnesses selling HTST milk, that 27 their customers demand advanced pricing? 28 A. I don't know if I have heard anybody say "demand." 6695 1 No, I don't think I have heard that word. I think expect 2 it a reasonable description of what I have heard. 3 Q. I will -- I will accept your clarification and 4 correction, you have heard that -- 5 THE COURT: So ask the question with "expect" in 6 it, please. 7 MR. ENGLISH: Okay. 8 BY MR. ENGLISH: 9 Q. Have you heard the testimony by both National Milk 10 Producers Federation and Milk Innovation Group witnesses 11 selling HTST milk, that their customers expect advanced 12 pricing? 13 A. Yes. But that's because the regime has provided 14 for it automatically for years. 15 Q. Given declining Class I utilization and retailer 16 market power, doesn't your proposal further risk reducing 17 Class I sales? 18 A. I don't believe so. 19 Q. Or reduce the likelihood of fluid milk processors 20 being able to recover fluid increases for the marketplace? 21 A. No. I don't have any reason to believe that. 22 Q. So if there was a rapid price increase that was 23 announced on the 4th of the month following that sold the 24 milk, how are HTST processors going to recover that from 25 their retailers? 26 A. They will have used risk management tools like 27 futures and -- and hedge that price ahead of time so that 28 they can recover that. 6696 1 Q. Did you hear the testimony last week from at least 2 one fluid milk processor that even if they sell milk on 3 long-term contracts, if they need to raise prices, those 4 are "very difficult conversations to have with customers"? 5 A. I think that's true in any industry. Yes. I 6 heard that, and I think that's true in any industry. 7 Q. So as opposed to a hope or a belief, given what 8 you know about the dairy industry, do you have evidence to 9 offer this record that elimination of advanced pricing 10 will not harm fluid milk processors financially? 11 A. Do I have evidence that something won't happen? 12 No. 13 Q. With respect to Class II, has American Farm Bureau 14 Federation done any analysis of whether removing advanced 15 pricing on Class II skim could lead to additional 16 depooling of Class II milk? 17 A. No. There was some potential for that for those 18 handlers that are -- that are exclusively Class II, but an 19 awful lot of Class II is undertaken at Class I plants. 20 Q. And wouldn't that, then, put those plants that are 21 standalone Class II plants at an advantage over Class II 22 plants that are part of Class I? 23 A. Say that again? Oh, I see what you are saying. 24 Potentially. But if the prices are aligned and if 25 we eliminate advanced pricing, that would reduce that. 26 Q. Wouldn't it also, with respect to Class II, 27 further risk the use of solids in lieu of fluid skim milk 28 in order to avoid that price risk when products are sold? 6697 1 A. Let me back up. The eliminating advanced pricing 2 of Class II will actually reduce the likelihood of 3 Class II plants depooling, because things will line up 4 better. We see in the -- in Exhibit 294, you can see the 5 extent -- you can see that Class II has become the highest 6 price under our current -- it's become higher than the 7 Class I at 1.60 -- the 1.60 differential. And it's the 8 elimination of advanced pricing that prevents Class II 9 from becoming higher than -- than the Class I price. 10 So I think that while there would continue to be 11 the risk of Class II depooling as there is today, I think 12 it would be reduced by the elimination of advanced pricing 13 for Class II. 14 Q. I was asking a different question, which is the 15 actual loss of advanced, so Class II sellers of product 16 would not know what the price of their product was at the 17 time they sell it? 18 A. That was a follow-up question you asked. So go 19 ahead and ask me that again so I can understand it. 20 Q. Okay. Given the fact that Class II handlers, 21 especially those who are -- well, only those who are 22 standalone in operations, would no longer know what the 23 price of their product was of milk before they sold it as 24 Class II products, wouldn't that incentivize them to say, 25 since I don't know what it is under the pool, I think I'm 26 better off not pooling it? 27 A. I think the Class II handlers being -- with the 28 elimination of advanced pricing for Class II, Class II 6698 1 handlers are in a better position to hedge that price 2 because they are -- the Class I -- the Class II prices 3 would line up perfectly with the Class IV prices. They 4 would have a perfect hedge against the Class IV contract. 5 They could lock in whatever price they want. They could 6 lock in the price on the market whenever they want: In 7 the middle of the month, before the month, a month far 8 ahead of time. I think they actually are advantaged by 9 that. 10 Q. Have you talked to Class II processors about that? 11 A. I have not. 12 Q. Have you heard any Class II processor who wants 13 that? 14 A. What I heard repeatedly during this proceeding was 15 Class II processors said they want it because they are 16 used to it. I did not really hear any good arguments 17 through six weeks or seven weeks of testimony that -- that 18 there's a fundamental reason for Class II advanced pricing 19 to continue. And I appreciate you bringing it up. 20 Q. So let me turn to Figure 2 on page 4 of 7 of 292. 21 So let me start -- 22 A. You are on page 4? 23 Q. Page 4, yes. It's Figure 2, your average percent 24 of monthly milk depooled. 25 A. Okay. 26 Q. So am I correct that for Table 1 you started with 27 May 2012 and ran through July 2023 in order to create 28 Table 1? Is that what you did? 6699 1 A. Right. 2 Q. So you -- you excluded the time period before 3 that. 4 Let me go back for a moment to 2003 and 2004, a 5 time period shortly after Federal Order reform, correct? 6 A. 2003, shortly after Federal Order reform. 7 Q. Yes. 8 A. I thought you said before. 9 Q. No. Shortly after. 10 A. Yes. 11 Q. And you agree that it was, you know, within three 12 years or four years of order reform, correct? 13 A. Yes. 14 Q. And you note that the percentages from 2002 into 15 2003 went up, and the percentages from 2003 to 2004 went 16 up, correct? Of depooled milk, correct? 17 A. Sure. Yeah. Yeah. 18 Q. And then it drops down significantly in 2005, 19 correct? 20 A. Uh-huh. Yes. 21 Q. Where were you back in 2003 and 2004? 22 A. I was working for National Milk. 23 Q. Okay. And did members of National Milk, along 24 with members of IDFA, back in the 2002 to 2004 timeframe, 25 seek regulatory changes from USDA post-Federal Order 26 reform to tighten performance standards? 27 A. I don't -- I don't really recall. That was an 28 issue that was generally considered a market-specific 6700 1 issue, and I don't believe National Milk got involved 2 in -- in pooling standards because it wasn't considered a 3 national issue. 4 Q. I'll agree it was not national. 5 My question was, are you aware that members of 6 National Milk and members of International Dairy Foods 7 Association submitted requests to tighten performance 8 standards and have hearings at that time? 9 A. I remember requests of that sort for over -- over 10 many years. I don't remember that specifically. 11 Q. Okay. 12 A. But if you -- if you say so, I'll -- I'll accept 13 it. 14 Q. Do you know for a fact that USDA did adopt, after 15 a series of hearings, a number of changes that tightened 16 pooling performance standards? 17 A. I know over the years that they have done that. I 18 don't -- I don't recall that being specifically associated 19 with 2003 and 2004. But if the record says so, I'll 20 accept that. 21 Q. Would you agree with me that -- that it -- that we 22 haven't had such a hearing since 2010? 23 A. We have not had a hearing since 2010, that's 24 correct. 25 Q. And whether regional or federal, other than the 26 California hearing, correct? 27 A. There have been a few -- there have been a few 28 hearings on some -- 6701 1 Q. Southeast -- 2 A. -- issues -- 3 Q. -- issues, but not performance standards, correct? 4 (Court Reporter clarification.) 5 MR. ENGLISH: The Southeast issues, not 6 performance standards. 7 THE COURT: Let's first hear the witness's answer. 8 And you are talking about hearings other than the 9 California one, and you began to describe what might have 10 happened. 11 THE WITNESS: There have been a few hearings on 12 things like the Class I differentials in the Southeast, 13 and some -- some other plant qualification standards, a 14 handful of things. But there have been a -- there have 15 been few, and this is, I think, the first national hearing 16 since -- in at least -- at least 15 years, I think. 17 MR. ENGLISH: I asked before I started for a 18 couple of exhibits -- or one exhibit. This is Exhibit 39. 19 Your Honor, may I approach and hand -- 20 THE COURT: If you have enough -- 21 MR. ENGLISH: Well, everybody else has it already, 22 39. There's one for you and one for the witness. 23 THE COURT: Excellent. Thank you. 24 These are record copies; we give them back. 25 THE WITNESS: Yes, ma'am. 26 MR. ENGLISH: It is USDA Exhibit 39 on the 27 website. It was also admitted as Exhibit 39. 28 MS. TAYLOR: Right. 6702 1 BY MR. ENGLISH: 2 Q. This hearing -- this exhibit was admitted either 3 the first or second day of the hearing. I no longer 4 recall. This is entitled "Adjustments to Federal Order 5 Performance Standards: Shipping Requirements and Diversion 6 Limits, 2010 to Current." 7 Did you review this when USDA put it in, 8 Dr. Cryan? 9 A. I noted that they did, but I didn't pay particular 10 attention to it. 11 Q. Did you hear any of the discussion about this 12 issue back in week one or two when we were talking about 13 Issue 1? 14 A. I don't recall discussion about shipping 15 requirements and diversion limits, no. 16 Q. From this document one would conclude that since 17 2010, in a number of orders, there have either been no 18 adjustments or adjustments to performance standards have 19 been lowered, correct? 20 A. I see a number of them have been lowered 21 seasonally, which is provided for in the orders. And a 22 few that have been lowered until further notice. But 23 that's the request. The request is to reduce them, right? 24 This -- this -- this shows the request to reduce -- 25 Q. These are actual adjustments. These are not 26 requests. These are actually adjustments that the Market 27 Administrator granted. 28 A. Right. But when they revert, they don't show up. 6703 1 Q. Do you see any that have reverted? 2 A. Well, it shows the reduction from April -- for 3 Order 30, from April 2017 to April 2019, from 8 -- from 10 4 to 8, and then -- I see, then it continues. 5 Q. So -- so it continues. So August 2022 to the 6 current time has -- has been even lower, correct? 7 A. I see that. I see that, yep. 8 Q. So when you did your correlation analysis on the 9 bottom the page 4 -- 10 A. Uh-huh. 11 Q. -- did you take into consideration these kinds of 12 reductions in performance standards as they may have 13 affected depooling? 14 A. No, that wasn't really the point of the analysis. 15 The point of the analysis was to see what the blends would 16 look like in a -- in what we presumed to be -- what I 17 presumed to be a fully-pooled market. 18 Q. But wouldn't that affect, as a variable, your 19 annual range in Class I prices versus the annual 20 percentage of depooled milk? 21 A. It would. I didn't use any actual -- I didn't use 22 the actual uniform prices. I used uniform prices 23 simulated for a fully-pooled market. 24 Q. Okay. So I'm sorry, I misunderstood. 25 So the Table 1 on 292 is also a simulated market; 26 is that correct? 27 A. 292? 28 Q. I'm looking at 292, Table 1. I did not understand 6704 1 that to be a simulated market. 2 A. No, no, that's not. 3 Q. And so -- 4 A. So what's the question? 5 Q. Yeah. So the question is, did you consider as a 6 variable, the differences in performance standards as an 7 impact on depooling? 8 A. I did not. 9 Q. So you already testified with respect to 294 that 10 you -- by using June 2018, you excluded California, 11 because by definition California had not become a Federal 12 Order, correct? 13 A. And now you are going back to the other -- the 14 other analysis? 15 Q. No, I'm staying on page 4. I was merely 16 predicating by saying that we earlier discussed 294, and 17 you said that you used June 2018, which is before there 18 was a Federal Order, California Federal Order, correct? 19 A. Right. 20 Q. So looking back at Figure 2, did you, in looking 21 at your correlation coefficient, include California in 22 those average percents of monthly milk depooled from when 23 you look at the end of 2018, 2019, 2020, 2021, 2022, and 24 2023? 25 A. I believe so. 26 Q. You included California, correct? 27 A. For the months -- for the months that it existed. 28 For the months that there was a Federal Order in 6705 1 California. 2 Q. So when you did your analysis and correlation, we 3 have six years and ten months where California wasn't 4 there, and the remainder California was there, correct? 5 A. Yes. 6 MR. ENGLISH: Before I forget, I would like to get 7 Exhibit 39 back to USDA, if I may. 8 THE COURT: Agreed. Thank you. 9 THE WITNESS: I would -- I would refer USDA to 10 look at the details of their own depooling data in order 11 to evaluate whether or not the addition of California to 12 the system sufficiently -- substantially affects those 13 results or not. I -- I don't propose to do that sitting 14 here right now. 15 MR. ENGLISH: So just a couple more questions -- 16 maybe just one. 17 THE COURT: You're -- 18 MR. ENGLISH: I'm sorry, a couple more questions, 19 maybe just one. 20 BY MR. ENGLISH: 21 Q. When you, on page 2 of 7 of Exhibit 292, at the 22 top of the page you used the word "deductions are applied 23 to farmers' checks in the form of a negative producer 24 price differential." 25 Do you see that? 26 A. Yeah. That is certainly the perception that 27 farmers have. That was -- the point of that paragraph is 28 that the extent to which these negative PPDs are perceived 6706 1 by farmers as a loss. 2 Q. And I just want to be clear, because you used the 3 word "deductions." 4 And you have worked at USDA AMS, correct? 5 A. I have. 6 Q. Isn't the term "deductions" for pooled milk a 7 term -- not just of art, but a defined term in each order 8 under Section 73(a), authorized deductions, in writing? 9 A. Tell me the citation? 10 Q. So pick any order. I'm on 1032. So 11 order Order 32, 73, under (a)(1), for instance? 12 A. So you are on 1032.73(a)(1)? 13 Q. (a)(1). 14 A. Uh-huh. 15 Q. The last part, very last phrase: "Less proper 16 deductions authorized in writing by the producer." 17 Do you see that language? 18 A. I see that, but that doesn't mean that's the only 19 way that "deduction" can be used in the English language. 20 Q. Okay. But I want it to be clear for the record -- 21 A. Uh-huh. 22 Q. -- that when you are using it, you are not using 23 it as used by the order -- 24 A. As a deduction by the handler? No. 25 Q. Yes. 26 A. No. But it does appear to farmers as a deduction 27 in their check, when they are told that their milk has the 28 value of those components, and then there's a subtraction 6707 1 for negative PPD. 2 Q. But you know, in fact, that's not what it is, 3 correct? 4 A. Mathematically, that's exactly what it is. 5 Q. But that's not how USDA explains it, is it? 6 A. USDA presents a component value that can -- that 7 farmers take as meaning that their components have that 8 full value, and then the -- then there's a deduction based 9 on how the uniform price works out. It's a problem. 10 Q. Is it a problem in how handlers have explained it 11 to their farmers, or is it a problem? 12 A. It is -- it is a problem that the accounting for 13 their milk check is -- is presented in a way that they 14 appear to be losing money because of the Federal Order. 15 There are too -- a lot of farmers believe that the Federal 16 Orders are taking money away from them because of the way 17 the accounting is done. 18 A system that lines things up so there's less of 19 these negative PPDs would be very helpful in maintaining 20 the integrity and support for the system. 21 Q. We're back to talking about belief. 22 Is it the case, sir, especially since you worked 23 at USDA shortly after Federal Order reform, that producer 24 price differentials are, in fact, a deduction as opposed 25 to a representation of the value of the milk compared to 26 uniform price and Class III? 27 A. The negative PPD is a deduction from the Class III 28 component value to reflect the gap between the Class III 6708 1 value and the actual value in the pool. So I mean, how 2 you -- how you say that as a matter of semantics, we don't 3 disagree on the facts, we only disagree on the semantics. 4 MR. ENGLISH: I have no further questions, and 5 thank you. 6 THE WITNESS: Thank you. 7 CROSS-EXAMINATION 8 BY MR. ROSENBAUM: 9 Q. Steve Rosenbaum for the International Dairy Foods 10 Association. 11 Dr. Cryan, you spend some of your written 12 testimony and some of your oral testimony relating certain 13 materials from the 1999 USDA decision in order reform, 14 correct? 15 A. That's correct. 16 Q. And specifically, some of them relating to the 17 question of advanced pricing, correct? 18 A. That's correct. 19 Q. I would like to just talk about that for a minute. 20 So at the time of order reform, the Class I price 21 in a given month was based upon the manufacturing price 22 two months earlier, correct? 23 A. That's correct. 24 Q. So just to give a specific example, since we're in 25 the month of October right now, under the system as it 26 existed then, the October Class I price was the August 27 manufacturing price plus the Class I differential, 28 correct? 6709 1 A. Before order reform, that's correct. Before order 2 reform, that's correct, that's how it was done. The 3 BFP -- 4 Q. And -- 5 A. -- plus two months. 6 Q. And so every time that you're commenting or -- 7 strike that. 8 Every time that you are quoting from USDA 9 regarding their views about advanced pricing and whether 10 that should be changed, that's the system they were 11 commenting upon, correct? 12 A. That's correct. 13 Q. And ultimately what they adopted was the system 14 that's now in effect and has been since 2000, which is 15 that the Class I price is based upon the manufacturing 16 price during the two-week period closest to the 24th day 17 of the prior month, correct? 18 A. State that question again, please. 19 Q. Yes. 20 Now, the Class I price is based upon the 21 manufacturing price as reported in the two most recent 22 price surveys, weekly price surveys, prior to the 24th of 23 the prior month, correct? 24 A. Yeah. They have gone essentially from two months 25 before to the little less than a month and a half before. 26 Q. Well, no, they have gone to two weeks before, 27 haven't they? 28 A. No. No. If the August price has been used to 6710 1 price October, and that's a two-month gap, then using the 2 first two weeks of September to price October is the 3 essentially a month-and-a-half gap, a month and a week. 4 Q. You are using -- the data that sets the price that 5 goes into effect October 1 is September data, correct? 6 A. It's essentially the first two weeks of September. 7 Q. Well, it's whatever two weeks has most -- has been 8 reported prior to -- 9 A. No, the surveys -- the surveys are reported on a 10 Wednesday for the week ending the previous Saturday. So 11 the latest that that data is relevant to is -- that that 12 data is reporting is for the 19th. 13 Q. Right. And -- okay. And that's -- that takes you 14 to the two weeks -- you are describing the two weeks of 15 data that's closest -- reported data that's closest to the 16 24th of the previous month, correct? 17 A. I'm describing what are essentially the first two 18 weeks -- or almost the first two weeks of the previous 19 month. So instead of a two-month lag, you have an 20 over-a-month lag, because if you are using the September 21 price, the full September price for October, that will be 22 a one-month lag. If you are using the first half of 23 September, then it's a month-and-a-week lag on average. 24 Q. I mean, previously you went back all the way to 25 data from August 1st. 26 A. Through August 30th. 27 Q. Correct? 28 A. 31st. 6711 1 Q. And now you're using data that is more than a 2 month fresher, right? 3 A. No, it's not more than a month fresher. On 4 average, it's about three weeks fresher. You are going 5 from essentially a nine-week lag to a six-and-a-half-week 6 lag. 7 Q. And you are calculating that six weeks by looking 8 at what the last -- 9 A. The midpoint. 10 Q. -- date -- the last date -- 11 A. The midpoint. The midpoint. 12 THE COURT: Let him ask his question. 13 THE WITNESS: Okay. Go ahead and ask your 14 question. 15 THE COURT: Ask your question again. 16 BY MR. ROSENBAUM: 17 Q. How are you calculating that, six weeks? 18 A. The midpoint of the two-month lag is -- is you're 19 using September, the middle of September is the middle of 20 September, back to the -- to -- well, October. If you are 21 using -- pricing October, to use your example, August -- 22 the August BFP would -- the midpoint of that would have 23 been the middle of August, right, using to price October. 24 The middle of October is the middle of October. So it's a 25 two-month lag. 26 If you are using the new pricing, the -- you are 27 using the first two weeks of the month, so you're 28 basically looking at about September 8th or 9th or 10th is 6712 1 the midpoint, to October 15th or so is the midpoint for 2 the next one. So you are -- you are talking about a 3 six-week -- six-week lag. 4 Q. And didn't USDA explicitly address whether that 5 provided a proper balance between getting current pricing 6 and the need for processors to have advanced pricing? 7 Didn't they address that specifically? 8 A. They hoped that the use of technology to 9 accelerate the collection -- the process of collecting the 10 data was -- was going to provide a closer relationship 11 between the advanced pricing and the current pricing, and 12 what -- you know, and I think they were reluctant to 13 overturn the thing all at once to see how far they could 14 take it. 15 But the fact is that dairy prices have become more 16 volatile over time, and as a result, that gap becomes 17 more -- more problematic with respect to keeping advanced 18 prices and current prices in some reasonable alignment. 19 And, therefore, we believe it's time to cut the Gordian 20 Knot and just get rid of advanced pricing, let the -- let 21 technology and -- including financial technology -- the 22 opportunity to hedge and use risk management tools that 23 are out there, and that should be out there, to -- to 24 allow that to -- advanced price. If you want advanced 25 price, do it in the market, not by government dictate. 26 Q. So let me quote to you from page 16,102 of the 27 decision that you quoted other things from. 28 Quote -- this is USDA, of course -- quote, 6713 1 "Marketers of Class I products support some degree of 2 forward pricing requiring processors of Class I products 3 to know the Class I price in advance," end quote. 4 Are you familiar with that conclusion that USDA 5 reached at that time? 6 A. I think that's what I just said, yeah. They 7 didn't want to turn it over. They didn't want to upset 8 things all at once. They tried to tighten it up. It 9 didn't go far enough. 10 Q. Well, I think what they were saying was that the 11 customers, grocery stores, for example, the marketers of 12 Class I products, supported some degree of forward pricing 13 requiring processors of Class I products to know the 14 Class I price in advance. 15 Is that the way you interpret that sentence? 16 A. And they asked for it because they could, because 17 the system provided for it. There's all kinds of things 18 we get stuck in ruts, because the system is provided for 19 it and people are upset about overturning it. Sometimes 20 you have got to break a few legs. 21 Q. And under your approach, there would be no 22 advanced pricing at all, correct? 23 A. That's correct. 24 Q. And there would be -- 25 A. Except through the market. Except for the use of 26 the futures and other forward -- forward pricing 27 mechanisms. 28 Q. Well, there would -- I'm using the term advanced 6714 1 pricing in the sense that it currently exists under the 2 orders, namely, there would no longer be a system in which 3 USDA announced in advance of the month, what the Class I 4 price was going to be for that month? 5 A. That's what our proposal states, that's correct. 6 Q. Your proposal would do away with that obviously, 7 correct? 8 A. It would. For Class I and Class II. 9 Q. And then in addition to doing that, your proposal 10 would do away with using the average-of to set the Class I 11 mover, correct? 12 A. That's right. That we adopt that -- we accept -- 13 we support the National Milk proposal to do that, and we 14 adopt that in our presentation of other elements. 15 Q. But National Milk does not support you on doing 16 both, correct? 17 A. That's correct. 18 Q. Okay. Because, I mean, you -- you have heard 19 testimony from Nestle, for example, about how they 20 couldn't engage in hedging until the average-of system 21 went in place, correct? Were you here for that testimony? 22 A. I did. I heard that. 23 Q. Okay. And others have opined on this subject, 24 you -- and -- but you would obviously -- I mean, to the 25 extent that any of those people are right, that you can't 26 hedge absent an average-of Class I mover, you -- your 27 proposals leave processors naked, don't they? They can't 28 know in advance what the Class I price is going to be, as 6715 1 they can now, and they can't, if the Nestles of the world 2 are right, engage in affordable Class I hedging. You have 3 just, if you will, kicked all the supports out from 4 underneath my clients, haven't you? 5 A. They can go to the CME and work to get a Class I 6 futures contract, then they get the same hedging forward 7 pricing opportunities that other manufacturers have. 8 Q. Well, you have now moved on to my next topic. I 9 mean, what you seem to offer up as consolation for my 10 clients is the theoretical possibility that the CME may 11 adopt one of two hedging opportunities, namely a Class I 12 hedge or a Class III versus Class IV hedge, whatever you 13 call that, that don't exist today, correct? 14 A. They do not exist today. 15 Q. And you were obviously here this morning when 16 Dr. Bozic told us that most new futures offerings fail, 17 correct? 18 A. I heard him say that. 19 Q. And when we don't even know whether CME would be 20 willing to offer this, correct? 21 A. CME came here and testified they are open to 22 considering it. They have also shown a commitment to 23 their dairy customers over the years that, I believe, 24 would be manifested into a Class I futures contract if 25 USDA made the decision to eliminate advanced pricing and 26 adopt the higher-of. 27 Q. I mean, don't you -- I mean, right now Class I 28 handlers can hedge using the combination of Class III and 6716 1 Class IV futures, correct? 2 A. Who can? 3 Q. Class I handlers. 4 A. I don't know whether they can do that under the -- 5 to some degree they can. 6 Q. That's what Nestle is doing for 100% of its 7 Class I milk supply, correct? 8 A. Well, right now with the current formula, yes. 9 Q. That's what I'm talking about. 10 A. Right. 11 Q. Yes. Okay. And, you know, one -- one benefit of 12 that, perhaps to farmers, is that farmers themselves use 13 Class III and Class IV hedging, not for Class I milk 14 necessarily, but for -- because that's what most of their 15 milk ends up being used for, correct? 16 A. Most of the milk ends up -- 17 Q. Let me just ask you point blank rather than my 18 speculating as to what exactly their motivation is. 19 Do dairy farmers or their cooperatives use 20 Class III and Class IV futures as part of their -- 21 A. I believe so. I believe we have heard that 22 testimony in this hearing. 23 Q. Right. 24 And so -- and we have also heard that liquidity is 25 really important to the success of futures in general? 26 A. Yes, liquidity is very important. And as was 27 suggested by my questions of Dr. Bozic earlier, the 28 nice -- one of the very nice things about the dairy 6717 1 contracts is that they are cash settled against prices, 2 regulated prices, in fact, prices that are typically used 3 as benchmarks in the dairy industry. 4 So whether or not there's a big liquid market, 5 which is kind of necessary to settle out a 6 delivery-settled contract like cattle or corn, you know, 7 in the -- in the cash -- in these cash-settled contracts, 8 the CME does not require step downs. They allow anybody 9 to hold these contracts to settlement because there's no 10 reason to make them -- to reduce their positions ahead of 11 time like is required for -- for delivery-based contracts. 12 There's a wide range of reasons why the Federal Milk 13 Marketing Orders and the pricing systems in the Federal 14 Milk Marketing Orders has provided an almost ideal 15 scenario for the establishment of cash-settled contracts 16 on a range of dairy products and milk types for the 17 relatively low risk. 18 And I -- and I do believe that the CME is 19 responsive to its customers, and I do believe that they 20 will institute a Class I futures contract if -- if the 21 regulations change in such a way that that becomes 22 necessary. 23 Q. The current participation by Class I handlers in 24 the Class III and IV futures markets under the average-of 25 approach, which is now in effect, I mean, that would -- 26 that would disappear from those futures if, in fact, we 27 went back to higher-of, right? 28 A. Is the question whether Class I handlers would 6718 1 stop using III and IV futures? 2 Q. If -- well if -- if it -- I mean, according to 3 Nestle the answer is yes. 4 So I'm asking you is that your view as well? 5 A. We -- we heard testimony from a lot of -- from a 6 very small number of Class I handlers that they are -- 7 that they are forward pricing their milk. What we heard 8 from more was we would like to, some day we will, but we 9 haven't yet. That seemed to be the result -- that seemed 10 to be the result of the move towards the average-of, that 11 there was a lot of expectation that this would become 12 widespread, the use would become widespread among Class I 13 handlers. And the evidence from this proceeding seems to 14 be that it is been rather limited. It has, perhaps, been 15 large enough to spur enough folks to go back to the CME 16 and say we want to keep doing this, so let's get a Class I 17 contract on the board. That would be the hope. That 18 would be the expectation. 19 Q. You are saying that's actually happened? 20 A. No, I'm saying if there's an appropriate 21 regulatory change, then I believe some of those customers 22 who have become accustomed to using Class III and IV 23 contracts will go to the CME and say, we would like a 24 Class I contract. 25 One of your witnesses, or perhaps one of 26 Mr. English's witnesses, when I asked him, would you like 27 to see a Class I futures contract, said that would be very 28 interesting. I think a lot of those folks doing risk 6719 1 management on Class I would just as soon see a Class I 2 contract as a III and IV contract. I think they would be 3 just as satisfied with that. 4 Q. Didn't that witness say something like, some time 5 in the distant future that would make sense? 6 A. He said he would like to see the market, he would 7 like to know that it's a liquid market. 8 Q. But -- 9 A. I don't think he said in the distant future. If 10 he -- perhaps he did, but I don't -- I don't recall that. 11 Q. But right now they have a liquid market, right? 12 The Class III and IV futures contract -- 13 A. They do. 14 Q. -- correct? 15 A. And they are facing basis risk because of advanced 16 pricing. If you eliminate advanced pricing, then their 17 basis risk goes away. I think that would be very good for 18 the risk management of -- by -- of Class I handlers. 19 Q. Okay. And I'm addressing here whether you are 20 killing the futures market for those people? 21 A. I don't believe so. 22 Q. Because you hope that something new might be put 23 in place? 24 A. I don't believe that they are that large a share 25 of the market that they are -- that they are contributing 26 that much to the liquidity of the Class III and IV futures 27 markets. 28 MR. ROSENBAUM: That's all I have. Thank you. 6720 1 THE WITNESS: You're welcome. 2 CROSS-EXAMINATION 3 BY MR. MILTNER: 4 Q. Good afternoon, Dr. Cryan. 5 A. Good afternoon. 6 Q. Ryan Miltner representing Select Milk. 7 So in your cross-examination you talked a lot 8 about the PPD and whether it's a deduction or not a 9 deduction, or what you meant by deduction. 10 Would you agree with me that the PPD is simply an 11 accounting measure that -- that relates the uniform price 12 to the price that a producer receives? 13 A. Yeah. It is an accounting measure, but it's not 14 that simple because it's not -- because of the -- because 15 of the perception, it has -- it has substantial 16 ramifications. The way it's presented is -- becomes 17 problematic at times. 18 But I think what's more important is recognizing 19 that when that goes negative, it means that something's 20 out of whack. It means that the system is not operating 21 the way it was designed to operate at its origin, and that 22 it's -- that it -- that the result is -- well, the -- that 23 means that it's -- it behooves us to find ways to avoid 24 negative PPDs. 25 Q. In my experience, when a producer has asked who is 26 taking the money out of my check because there's a 27 negative PPD, I have suggested that if you sell your corn 28 for $4 minus a local adjustment of $0.10, that doesn't 6721 1 mean someone is taking money out of your corn. I've found 2 that doesn't always resonate. 3 Have you had a similar experience in trying to 4 explain this to producers? 5 A. I have -- I have had the conversations with 6 National Milk, at USDA, at Farm Bureau. It's a -- it's 7 a -- it's -- you know, you want to explain the accounting, 8 but at the same time, when that PPD is negative, it raises 9 some real questions about whether some -- what's working 10 and what isn't working. 11 And I do often -- you know, and the fact is at 12 times depooling means -- to those producers that are in 13 the pool, it means somebody is taking their money, that 14 somebody is taking the -- the -- what would otherwise be a 15 pooled value and -- and redistributing it. 16 So the principle of uniform pricing is compromised 17 by -- by those types of outcomes. 18 Q. I wanted to ask a couple of questions about 19 Exhibit 294 on the last page. And I hope I'm not 20 repeating what's already been asked, but there's a risk I 21 will do so. 22 Where you state in the third line on there, 23 "uniform prices under various regimes." 24 By "various regimes," you mean you're comparing 25 the status quo, Proposal 13, and Proposal 18; is that 26 correct? 27 A. Yeah. And by "status quo," I mean the current, 28 the current regulation applied to the entire history. 6722 1 Q. Okay. Now, when I looked into your courtesy 2 spreadsheet, it appears to me that you have taken this 3 period of 13 years, April 2012 to April '23 -- 4 A. Well, 11 years I guess, yeah. 5 Q. Yes, thank you, 11 years -- for each of the 6 orders, and you have, whatever that multiplies out to be, 7 I think 1320 observations or so? 8 A. Correct. 1320. 9 Q. You have a monthly observation for each individual 10 order? 11 A. Right. 12 Q. And so where you now have a count under your 13 number column, that is the number of individual 14 observations where Class III was greater than the uniform 15 price as you calculated it, correct? 16 A. Right. 17 Q. And so if I look at Class III, the "number" 18 column, and the Proposal 18 row, there are 61 instances 19 where that occurs. 20 And so it could be that of those 61 observations, 21 I mean, theoretically 10 of them could be in one 22 particular calendar month, but it happened in every order, 23 correct? 24 A. 10 of them, yeah, could -- right. It could be, 25 yeah. 26 Q. Right. Okay. 27 A. And I should say that these -- these numbers were 28 higher than I expected. The -- the advanced -- 6723 1 eliminating advanced pricing has a significant impact, but 2 not as large as I expected. 3 Q. Okay. 4 A. It's -- I think it still is important to squaring 5 up the system and making it work better. And I think, in 6 combination with some of the other things, it would also 7 help. And perhaps a more detailed analysis would show 8 more but -- 9 Q. And so this -- this particular depooling trigger 10 that you have analyzed is the one that results primarily 11 when the delta between Class III and Class IV is 12 particularly large, correct? 13 A. This is when the -- when the Class III or Class IV 14 price is above what a fully-pooled uniform price would 15 look like. 16 So, for example, if you think about the uniform 17 price in the terms of the way California's state system 18 operated, where everybody has to participate, or everybody 19 who normally participates, participates, then you have a 20 fully pooled uniform price. 21 If the class -- if the Class III or IV price stays 22 below that, they don't -- they are not -- they don't 23 really have an incentive to depool. If it goes above 24 that, then they -- then they can have an incentive to 25 depool. And then -- and then there's a downward slide as 26 depooling leads to lower uniform prices, which leads to 27 lower sort of equilibrium of depooling. 28 Q. So if you were to eliminate advanced pricing, 6724 1 would that -- would that occur when the gap between III 2 and IV gets particularly large? 3 A. Ask the question again, please? 4 Q. Sure. 5 Proposal 18 assumes the elimination of advanced 6 pricing, correct? 7 A. Uh-huh. 8 Q. Okay. So that eliminates depooling when you would 9 have an -- otherwise have a class inversion, correct? 10 A. Right. 11 Q. So where you identify these instances, is that -- 12 would that have to be triggered by a large gap between 13 Class III and Class IV? 14 A. I think, generally speaking, yeah. I mean, if you 15 have precluded price inversions of Class I and other 16 classes, then necessarily it's something else bringing 17 down the uniform price to the point where the -- there's 18 now an incentive to depool. 19 So, yes, a big spread between III and IV in either 20 direction can -- can lead to a uniform price low enough 21 that III or IV exceeds that. 22 Q. And I think Dr. Bozic suggested that there is no 23 combination of proposals in this hearing that would avoid 24 that type of depooling incentive. 25 Would you agree with that? 26 A. I think -- I think the higher-of reduces it. 27 There are months when the higher-of and the advanced 28 would -- would stop specific instances, but it does not -- 6725 1 it does not make it impossible to continue to happen. 2 And I think your assessment is correct that 3 probably most of these, most of these scenarios in here 4 where the -- the manufacturing price rises above the 5 uniform price are scenarios where there's a big gap 6 between III and IV. 7 Q. Thank you. 8 Okay. Mr. English asked you some questions about 9 the CME's Class I futures and options and the status of 10 development of that. I don't want to repeat those 11 questions, but there is one that I don't believe he asked. 12 Have you, in your role with Farm Bureau or 13 otherwise, attempted to figure out what the mechanism for 14 such an instrument might look like under a higher-of 15 mover? 16 A. What the mechanism would look like? 17 Q. Yes. 18 A. I -- I can only expect it to be a cash settled set 19 of futures and options contract like those for the 20 Class III and Class IV. Is that -- does that answer the 21 question? I'm not sure I -- 22 Q. Maybe but -- but maybe not. 23 We have heard testimony that using the higher-of, 24 it's much more difficult to hedge the price risk for a 25 Class I handler. 26 A. Uh-huh. 27 Q. Correct? 28 A. Right. 6726 1 Q. We have heard testimony that it can be done with 2 over-the-counter products. 3 A. Right. 4 Q. And I think it was also suggested that some sort 5 of creative combination of existing futures and options 6 could construct something that would work. 7 Would you agree with that? 8 A. I -- I don't believe there are -- there's a 9 combination of -- I have tried to figure it out, and I 10 think probably other folks who know much more about this 11 than I do have tried to figure it out, how to -- how to 12 construct a hedge using futures and options on the -- that 13 exist. And I -- I haven't seen it in my -- I think either 14 of Class I futures contract or a Class III/IV spread 15 option which doesn't exist, neither one of those exists, 16 could -- could accomplish that. You know, the option -- 17 the spread option in combination with the Class III or 18 Class IV contract could accomplish that, but it doesn't 19 exist. So I don't believe there's any combination of 20 current instruments that -- that -- on the exchange, that 21 can do that. But -- right? Swaps and over-the-counter 22 trading can do it. 23 And there are other exchanges other than the CME. 24 I think it would be -- as I said -- as I attempted to say, 25 I don't know if it was presented very clearly, it would be 26 much more convenient for the industry if the CME had -- 27 had the Class I futures contracts, but others could as 28 well. I mean, another clearing -- clearing body could do 6727 1 that as well. 2 Q. If the CME were to offer an instrument like that, 3 do you imagine that it would have to be some sort of 4 complex derivative of existing tools that is packaged as a 5 Class I offset, or would it be a completely unique product 6 where someone else is voluntarily accepting the risk that 7 is being shifted? 8 A. Right. Just a brand new contract. It would look 9 just like -- I think it would look just like the Class III 10 and Class IV contracts. 11 Q. Okay. And in your discussions with the CME, 12 has -- has that -- have the discussions advanced to any 13 level like that? 14 A. No. I mean beyond I think the basic discussion of 15 the assumption that the contract would look like other 16 contracts. 17 Q. Okay. So have you heard the testimony from -- 18 from -- yeah, from HTST processors, and that they -- those 19 that have testified, they have almost uniformly asked for 20 the average-of mover to be maintained for the purposes of 21 their own risk management? 22 A. No. I mean, we have had co-ops come and present, 23 who are HTST processors, and they have asked -- that they 24 have supported National Milk's position. 25 Q. That's a very good clarification. 26 Those proprietary HTST handlers that have 27 testified? 28 A. Those people who came here to support the IDFA and 6728 1 MIG proposals, yes, they have asked to keep the 2 average-of. They have asked to avoid going to the 3 higher-of. 4 Q. Okay. So if counsel for those processors asked 5 you if you agreed that those same handlers said their 6 customers absolutely would not accept a fixed price, did 7 you -- do you recall that question? 8 A. The fixed price? 9 Q. Yes. 10 A. I heard a lot of folks talk about their customers' 11 expectation that they get the price ahead of the month, 12 but I'm not sure what you mean about the fixed price. 13 Q. Well, I assume that's -- yes. That's a more 14 accurate statement, that they need to have the price in 15 advance. 16 A. And actually, I think I understand a lot of 17 retailers -- I think I did hear at least one of the 18 witnesses say that they would like to have fixed prices 19 instead of having to adjust it every month. So, you know, 20 that's all a matter of -- of using -- using hedging in the 21 market to be able to do that, to lock something in over a 22 longer period of time. That's what the -- the ESL 23 processors were talking about, using those tools in order 24 to lock prices in over time. If there's a Class I futures 25 contract, they can do the same thing. 26 Q. I think that's -- that's what I was going to drive 27 at next, was if a -- to your understanding, if an HTST 28 processor can actually hedge their costs, wouldn't they 6729 1 necessarily be able to know those costs to communicate to 2 their customers before the month occurs? 3 A. Say it again? 4 Q. Sure. 5 If an HTST processor is able to adequately hedge 6 their raw milk costs, wouldn't that necessarily mean they 7 could provide their price to their customers in advance? 8 A. Sure. 9 Q. Just one last couple of questions. 10 What is -- for Farm Bureau's members, what's the 11 main reason for them supporting a return to the higher-of 12 over all their options? 13 A. The higher-of. There was a lot of lost Class I 14 revenue in the -- during the COVID years and since. There 15 was a lot of -- there's -- there was a lot of negative 16 PPDs, partly because of that. It's felt like there was a 17 lot of chaos, and that the processors benefitted at the 18 expense of farmers, that -- that they want to go back to 19 what they had before. They felt like it was -- it was -- 20 it turned out to be a bad deal. I think there's a general 21 agreement on the -- on the producers' side that it turned 22 out to be a bad deal. 23 Q. Am I correct that the process for AFBF to 24 establish a policy position is that each individual local 25 Farm Bureau group is solicited their opinions, and those 26 opinions are fed up to a county, and then a state level, 27 and eventually to the national level where it's voted on 28 at the national convention? 6730 1 A. That's close. They are not -- nobody's soliciting 2 the county farm bureaus to come up with something. Nobody 3 goes and stirs them up and says, give us your opinion 4 about this. They make the -- you know, AFBF and the State 5 Farm Bureaus and the local farm bureaus in some states, 6 they have staff and offices in some states. They are much 7 more shoestring. 8 They -- they react. They respond to farmers 9 offering resolutions. A farmer comes to a county farm 10 bureau meeting and says, I think this ought to change, and 11 the voting -- voting membership of the farm bureau is 12 generally tied to being a farmer, or very closely tied to 13 agriculture. So farmers vote at a county level. They 14 look at a resolution at the county level, and if it's 15 approved, it gets -- it gets passed on to the state, and 16 then there's a resolution process at the state. 17 So everything is initiated by -- by farmers -- 18 farmer members at the local level, occasionally through a 19 state committee. But when a -- state committees are 20 reluctant to submit formal resolutions. More typically 21 they will -- they will refer it back to -- to somebody at 22 the county level, where there's a discussion at that 23 grassroots unit, and things move up through the process. 24 And at every step of the way, it's a farmer decision. 25 It's farmer-initiated, farmer-driven, and farmer-decided. 26 Q. And so the proposals from Farm Bureau here are 27 exactly that: Farmer-driven, farmer-voted on, 28 farmer-approved? 6731 1 A. Right. They are all -- they are all either -- 2 they are all either -- they all either represent a 3 specific farmer-driven policy or they are founded on a 4 farmer-driven policy. 5 Q. And I'm not asking you to agree that this is, in 6 fact, the case, but hypothetically, if at this hearing, 7 you, as an expert dairy economist, said, "I think there's 8 another combination of options that would work as well or 9 better to address farmer income, the impacts of depooling, 10 and better risk management for the producer," am I correct 11 that you personally would not be able to change the 12 position that Farm Bureau has on that? 13 A. There's -- there's two parts to that. Two parts 14 to my answer. 15 Part one is that, you know, there are -- some of 16 our policies are -- are -- some of the policies are 17 more -- some of the policies are more specific and other 18 policies are more sort of aspirational, they say this is 19 the outcome we want. And when it's about the outcome, if 20 there is a -- if there is a better way to achieve the 21 outcome, then we can talk -- we can talk about it. 22 The second part of the answer is that the thing 23 that's -- that has really struck me about going to work at 24 Farm Bureau is the extent to which our policy process 25 generates sound coherent policy. I came into it kind of 26 expecting to be a little more -- to have the policy book 27 to be a little more chaotic, and I am struck by how -- how 28 coherent the policies generated by that kind of 6732 1 grassroots, bit-by-bit development, turns out to be. And 2 I think our dairy policies are -- are very sound and very 3 coherent. 4 Q. If there were a combination of proposals that 5 would better address, in your opinion, the concerns of 6 Farm Bureau members, how would you be able to change Farm 7 Bureau's position, or -- or how would Farm Bureau, then, 8 be able to get to a point where it may endorse something 9 different? 10 A. Our members are -- are reasonable and open minded, 11 and there's been a lot of evolution of some of the policy. 12 We have a dairy working group that -- that went through 13 some iterations and arrived at some recommendations, some 14 of which became policy through the grassroots process and 15 some of which didn't. We have an ongoing discussion about 16 these things. We are more involved in Federal Order 17 policy through the involvement of our members than we have 18 been really ever before. In the last four or five years 19 we have been more involved than we ever have been, and our 20 members are appreciative of it, and they are involved and 21 there's an ongoing discussion. 22 They -- they are interested in good policy. 23 They -- we had the forum in Kansas City last October where 24 there was a very good discussion, and a lot of members 25 listened to folks like Chris Herlache and Mike Brown to 26 understand the balancing that has to be done between the 27 interest of processors and producers. And we -- you know, 28 that's how we came to the position that we accept that 6733 1 Make Allowances may need to be changed, but that they 2 should be based on the audited mandatory data. I mean, 3 there's -- our members are -- are more engaged than ever, 4 and they are actively engaged in the discussion. 5 Nothing -- if something we have -- something in 6 our policy book is not sound, they will figure it out and 7 it will be -- it will be improved upon. 8 Q. And -- 9 A. And I haven't really heard anything that I think 10 is more sound than what we are offering. 11 Q. You will get my question anyway on it. 12 A. Okay. 13 Q. And Select, for the record, doesn't have a set 14 position on the mover yet, either. We're trying to weigh 15 all of the evidence and testimony. 16 But would the IDFA, despite your statement that 17 it's Rube Goldbergian, would the IDFA proposal, over time, 18 return as much money to producers as the higher-of? 19 A. I haven't looked at it in detail, but if it 20 returns it over time and not now, it could -- it's not 21 necessarily helping everybody. And I -- and I -- I 22 guess -- I guess I would say that, you know, to refer 23 to -- to both -- to some of these things as Rube Goldberg 24 devices is -- is perhaps harsh, but it's -- and it's -- I 25 also believe there's a -- there's good intention and 26 there's adjustments. 27 But there comes a time -- and I learned that when 28 I was at USDA, as folks would say, "Well, how do we fix 6734 1 this?" And I would say, "Oh, let's do this, that, and the 2 other thing, let's build this." And they would say, "No, 3 that's not really going to fly." 4 And there's a time when you just have to kind of 5 simplify things, because the -- the layer after layer of 6 complication really raises questions. It causes problems, 7 like people not -- not understanding why they have a 8 negative PPD that's a deduction from their check. It -- 9 you know, whether it is or it isn't, it certainly looks 10 like it. And it's, I think, you know, simplification. 11 Farmers are always talking about, how do we 12 simplify the orders? How can I understand how this thing 13 works? That's what they -- over and over again they talk 14 about simplifying the orders, and -- and -- and we got to 15 start somewhere. So that's -- that's what our proposals 16 are about. 17 MR. MILTNER: I'll stop my questioning there. 18 Thank you. 19 THE WITNESS: Okay. You're welcome. 20 MR. HILL: Your Honor, I think this might be a 21 good time to take our first break for the afternoon. 22 THE COURT: I think so, too. Please be back and 23 ready to go at 2:50. That's 2:50. 24 We go off record at 2:38. 25 (Whereupon, a break was taken.) 26 THE COURT: Let's go back on record. 27 We're back on record. It is 2:50. 28 How would you like to proceed? 6735 1 MR. SJOSTROM: Your Honor, I would like to ask 2 this witness a question. 3 THE COURT: Excellent. 4 CROSS-EXAMINATION 5 BY MR. SJOSTROM: 6 Q. Lucas Sjostrom, Edge Dairy Farmer Cooperative. 7 Good afternoon, Roger. 8 A. Good afternoon, Lucas. 9 Q. As you were providing your written testimony, 10 Exhibit 293, the bottom of page 3, Edge believes you wrote 11 correctly how we wanted Proposal 17 and 18 portrayed, that 12 they're -- I think in meaning identical of each other. 13 You did -- you did add verbally that you believe they are 14 different in terms of Class II. 15 So as you were giving testimony, we were 16 scrambling to figure out where we screwed up. As we 17 looked through it, we do not believe we screwed up, and 18 they are identical. So I would ask that you withdraw 19 Table 3, Proposal 17, on Exhibit AFBF-4B which is 294, if 20 that's the case. 21 If it's not the case, we'll look -- keep looking 22 for that error. But we do believe that Proposals 17 and 23 18 are indeed identical in intent and in purpose, so I 24 would ask that you make that -- 25 A. I -- I'm not going to withdraw the table, but I'm 26 happy to correct on the record that my understanding based 27 on the summary that was in the -- in the Federal Register 28 was incomplete, that, in fact, you guys didn't remember, 6736 1 because I -- when I said that, I looked to see -- to get a 2 signal from you guys whether you had it in or not, and you 3 weren't sure. 4 So I -- I acknowledge that the proposal from Edge, 5 Proposal 17, does include the elimination of advanced 6 pricing for Class II, and I think that's a very sound 7 policy choice. And again, I'm happy to acknowledge that. 8 And I don't think we're -- withdrawing the table 9 accomplishes anything. But it's on the record, and I 10 appreciate that. I appreciate you letting me know. 11 Q. Thank you, Dr. Cryan. 12 MR. SJOSTROM: Thank you, Your Honor. 13 THE WITNESS: Thank you. 14 THE COURT: Are there other questions of Dr. Cryan 15 before I ask to hear from the Agricultural Marketing 16 Service? 17 There are not. The Agricultural Marketing Service 18 may proceed. 19 CROSS-EXAMINATION 20 BY MS. TAYLOR: 21 Q. Good afternoon. 22 A. Good afternoon. 23 Q. I have a couple of questions. You talked a few 24 times, it's in your testimony, you talked a few times 25 about how Class I contracts, the CME could do something 26 with that, or it could be found on other exchanges. 27 Just wondering for the record if you could 28 elaborate on what other exchanges could do that, because 6737 1 basically all the testimony has been around the CME. 2 A. Yeah, I think that it's important to recognize 3 that there are other exchanges. There's the ICE -- 4 Q. Don't use acronyms. 5 A. I think that may be their name now. 6 Q. Okay. 7 A. I forget what it used to stand for, but there's 8 quite a few other agricultural commodity exchanges. 9 There's been a lot of consolidation, and I don't have a 10 list of them. But there are several other substantial 11 agricultural commodity exchanges that could -- if, you 12 know, so induced to offer something like this. 13 Cash-settled contracts are much simpler to implement than 14 delivery-based contracts. 15 And the -- under the Dodd-Frank rules, there's 16 such a demand for clearing organizations, that I think 17 there's been some proliferation of those, so -- 18 Q. Okay. I want to turn to your Exhibit 292, on 19 page 3. 20 A. I'm sort of making a note, and I'm thinking that 21 the next -- that the next time I testify I should have 22 more information for you about other exchanges. Okay. 23 What are we looking at? 24 Q. Exhibit 292. 25 A. Yes, ma'am. 26 Q. Page 3. 27 A. Page 3. 28 Q. Figure 1. There's a footnote for 2012 that's only 6738 1 May through December. I'm curious what happened to 2 January through April. 3 A. This was -- a lot of this stuff was -- was 4 developed using the data from AMS. The data from AMS, 5 based on the DPS -- the NDPSR, sorry -- I should know 6 that. Of all people, I should know that. 7 Q. You should definitely know that. 8 A. Yeah. The NDPSR was implemented in April of 2012. 9 And of course, if you are looking at year-over-year 10 changes, then you need to start with May. So that's -- 11 that's what it is based on the data. 12 Q. Okay. 13 A. The light was better. 14 Q. That's helpful. 15 A. That's not where I lost my keys, but the light was 16 better over here. 17 Q. Okay. If we can turn to page 5, and I want to 18 talk Figure 3. So most -- most of our questions, I think, 19 have been answered. I won't -- I'm trying not to be 20 repetitive. 21 But as I read through and listened to you read 22 through the text on that page, and tried to follow that on 23 the graphs, the figures on that page, I got a little lost 24 on the middle set of -- the middle figures where it says 25 above 5% negative. It seems like a double something. 26 A. Yeah. I think the idea is -- and probably these 27 columns should be reversed, the last two. The last column 28 should be the one in the middle, because it really 6739 1 represents the middle. Yeah, it represents the limited 2 change, and the negative -- the larger negative change is 3 the more extreme in the other direction. So they are a 4 little under -- you know, they are a little disordered, 5 but the basic concept is actually, I thought -- this was 6 Danny's concept, and it's a pretty good way to kind of 7 break it out in a way that makes it relatively easy to 8 understand, we had hoped. That the rising Class III and 9 rising Class IV prices had a big impact on depooling, and 10 that that is pretty specifically associated with advanced 11 pricing. 12 Q. And I -- I'm kind of clear on that concept. But 13 since this is -- this is our only opportunity to 14 understand the figure with you here and ask questions, 15 so -- 16 A. Sure. 17 Q. -- I understand that the columns on the left are 18 depooling when there's a positive change in the Class III 19 price greater than 5%. 20 A. Right. And the one in the middle -- I understand. 21 You want to clarify for the record what this is actually 22 saying. So -- 23 Q. That would be helpful. 24 A. Yes. So what the one in the middle is saying, 25 it's a larger -- larger than 5% decline in the Class III 26 price, that middle one. And the last, the third column is 27 less than 5% change in either direction from month to 28 month in Class III. 6740 1 Does that clarify it? And then the same thing 2 with the lower, with the Figure 4 for Class IV. 3 I appreciate that. I understand that you are just 4 trying to understand. You are trying to make the record 5 clear. 6 Q. Right. We don't get to call you later and ask, so 7 this is it. 8 A. I'm reading too much into it. I apologize. 9 THE COURT: If I could just ask, just now noticed, 10 Dr. Cryan, that the blue are showing us an average and the 11 orange are showing us a median. Is that correct on every 12 one of these columns in Figure 3 and in Figure 4? 13 THE WITNESS: Right. 14 THE COURT: And I'm surprised they are so close to 15 each other. I thought there would be a bigger difference 16 between average and median. Could you explain that, what 17 those are? 18 THE WITNESS: I mean, the median is just if you 19 take those months, the average is the -- the mean is 20 the -- the average is the mean average. When you add them 21 all up and then divide them by the number, and that's the 22 average, so that's the average size of the depooling 23 volume. 24 And the median is, you line them all up in order, 25 and the one in the middle of the line is the median. So 26 that's what -- you know, sometimes they are both -- I 27 mean, mathematicians refer to both of them as types of 28 average, a median average and a mean average. In popular 6741 1 vernacular, we typically think of the mean average as the 2 average, and the median has to be defined specifically. 3 Sometimes they are -- sometimes those can be 4 different, but in this case they are -- they are similar. 5 It's not that unusual for medians to end up similar if you 6 have got a relatively straight line -- straight line 7 distribution. 8 THE COURT: Thank you. 9 THE WITNESS: You're welcome. 10 MS. TAYLOR: Okay. 11 BY MS. TAYLOR: 12 Q. If we can turn to 294, and this might have gone to 13 Mr. Sjostrom's point, but I was reading, so I might not 14 have caught all of what he was talking about earlier. 15 Table 3 on Proposal 17, which is the Class III 16 Plus proposal. And you say that the red line shows 17 basically what the Class I price would be under their 18 proposal, which would be the announced higher -- well, no. 19 That doesn't make any sense. 20 Can you tell me what this is showing me? 21 A. That is more or less -- 22 Q. I should state that the thought in my head didn't 23 make any sense. I was not commenting. 24 A. Right. This was my understanding, and I 25 identified it as Proposal 17 because I had understood from 26 the summary of Edge's Proposal Number 17 that they did not 27 address advanced pricing on Class II, so I had simply left 28 that as is with that, with the advanced pricing. 6742 1 Marin and Lucas clarified for me that, well, when 2 they went back to look, they clarified -- they confirmed 3 that they did, in fact, propose the elimination, so that 4 in effect, Proposal 17 and Proposal 18 are identical. 5 So Class II in this table should look like 6 Class II -- well, it shouldn't look like Class II in 7 Table 4. Table 4 we have also added the $1.56 instead of 8 the $0.70 on the differential. 9 I'm sorry, I forgot the question. 10 Q. Well, I think I made my own mistake since there's 11 two Edge proposals on the subject, that 16 is a Class III 12 price plus -- 13 A. Right. 14 Q. -- and 17 is their higher-of, and I had confused 15 it in my head. Because I was wondering why the red line 16 said announced higher-of, and that didn't make sense to 17 me, but I was thinking about the wrong proposal. 18 A. 17, as clarified by the folks from Edge, 17 is 19 completely consistent with Farm Bureau policy, but it's -- 20 but the Class II on this graph does not reflect that. 21 Q. Got it. Thank you. 22 One last question. I know you had some back and 23 forth with Mr. Rosenbaum on the impact to some Class I 24 handlers who currently are able to hedge but, you know, 25 wouldn't under your proposal, and he brought up a few of 26 his members. 27 But I'm curious your thoughts on the impact to 28 smaller Class I processors, not the big guys, but the 6743 1 smaller guys who don't have that ability to just -- and 2 the resources to do hedging. 3 A. Uh-huh. 4 Q. If you get rid of announced pricing, kind of, the 5 impact to them and how should we be thinking about that as 6 we make a decision? 7 A. I mean, okay. Farmers -- a large farmer is really 8 a small business for the most part. Most farmers -- the 9 cutoffs for agriculture, you know, for the small business 10 definition are ridiculously small, and -- and farmers go 11 out and they manage their risk. Farmers use all kinds of 12 risk management tools to manage their crop risks and their 13 monthly delivery price risks for delivery of milk. 14 I don't think there's -- I don't think it's beyond 15 the small processor to make use of these tools as they 16 develop. Farm -- I mean, farmers are -- farmers are 17 constantly doing this kind of thing, and so I -- I believe 18 that processors are capable as well. 19 MS. TAYLOR: I think that's it for AMS. Thank 20 you. 21 THE COURT: Mr. Rosenbaum. 22 CROSS-EXAMINATION 23 BY MR. ROSENBAUM: 24 Q. Mr. Cryan, is it correct that the only exchange in 25 the United States currently handling any dairy futures of 26 any kind is the CME? 27 A. Today, yes. 28 MR. ROSENBAUM: That's all I have. 6744 1 THE COURT: Dr. Cryan, do you want to -- 2 THE WITNESS: I'd like to move, yes, I would like 3 to move -- I would like to -- I have no other redirect. I 4 think I have said my piece. 5 I would like to move the -- whatever the term is. 6 THE COURT: Into evidence. 7 THE WITNESS: The admission of these three 8 exhibits into evidence, please. 9 THE COURT: Is there any objection to Exhibit 292 10 being admitted into evidence? 11 There is none. Exhibit 292 is admitted into 12 evidence. 13 (Exhibit Number 292 was received into 14 evidence.) 15 THE COURT: Is there any objection to Exhibit 293 16 being admitted into evidence? 17 There is none. Exhibit 293 is admitted into 18 evidence. 19 (Exhibit Number 293 was received into 20 evidence.) 21 THE COURT: Is there any objection to the 22 Exhibit 294 being admitted into evidence? 23 There is none. Exhibit 294 is admitted into 24 evidence, with our thanks. 25 (Exhibit Number 294 was received into 26 evidence.) 27 THE COURT: Thank you, Dr. Cryan. 28 I'd like to go off record at 3:07 while a 6745 1 statement is being distributed. 2 (An off-the-record discussion took place.) 3 THE COURT: We're back on record at 3:08 p.m. 4 Ms. Hancock. 5 MS. HANCOCK: Your Honor, Mr. Sjostrom is 6 intending to present some testimony on Edge-14, and 7 National Milk has an objection to this testimony being 8 outside the scope of this hearing. 9 I don't know if it's something you would like to 10 take up before he reads his testimony in or if after, and 11 so I guess I'm just alerting you so that we can maybe make 12 the decision before we get too far down the road. 13 THE COURT: All right. You are willing to have 14 him read it so that I'll know what to do with the 15 objection. Is that partly it, since I have no idea? 16 MS. HANCOCK: I think it's fair to say that 17 everyone would stipulate that this is a compromise -- or 18 an offer by Edge of being a proposal that is different 19 than the proposals that were originally articulated by the 20 Hearing Notice. 21 DR. BOZIC: May I speak, Your Honor? 22 THE COURT: Yes. 23 DR. BOZIC: Your Honor, this is -- 24 THE COURT: Go ahead and say who you are. 25 DR. BOZIC: Marin Bozic, Edge Dairy Farmer 26 Cooperative. 27 The testimony that Mr. Sjostrom was about to read, 28 or is about to read depending on your decision, is a 6746 1 simple combination of Proposals 13 and Proposal 16. And 2 the reason for this testimony is to offer a choice to AMS 3 that incorporates all of the evidence that has been heard 4 on this topic over the previous two weeks. 5 We are not introducing anything new. We are just 6 saying you don't have to choose between the proposals, you 7 can adopt multiple proposals as one proposal. 8 MR. HILL: Your Honor? Brian Hill, OGC. 9 Yeah, Ms. Hancock beat me to the punch. So I was 10 having the same conversation here as to whether I should 11 say something before or after this was introduced. 12 It seems the -- well, first, the Hearing Notice 13 mentions that -- let me see if I can find this real 14 quickly. 15 The summary is: A national public hearing is 16 being held to consider and take evidence on proposals to 17 amend the pricing formulas in the 11 Federal Milk 18 Marketing Orders. And that's essentially 7 CFR 1000.50. 19 And also -- let me find this real quickly -- 1052, the 20 Class I differentials. 21 It appears that this proposal would instead be 22 looking at changing the classification of uti- -- classes 23 of utilization, which is in 1000.40, which would make this 24 outside of the scope of this hearing. And so I'm not sure 25 what you want to do with that, but the Secretary has 26 already determined that anything outside of 1000.50 or 27 1000.52 will not be considered in any decision. 28 THE COURT: Give me the cite for the section that 6747 1 this would fall in that is not noticed. 2 MR. HILL: 1000.40, classes of utilization. 3 That's what it appears. If they tell me something 4 different, I would like to hear it. 5 THE COURT: Dr. Bozic -- oh, let me hear from 6 Mr. English first. 7 MR. ENGLISH: So I think before we get into the 8 weeds on this, whether it's an offer of proof or 9 otherwise, I think unless Your Honor has read the 10 statement or wants to take a break and read the statement 11 and then rule, which I think is -- would be faster to 12 allow the witness to put it in. 13 I have a rather complex comment to make, partly 14 because Your Honor has been maybe fortunate enough not to 15 have been here for the entire hearing, and may or may not 16 be aware that there was an objection made on Day 1 -- not 17 an objection but a -- well, yeah, it was an objection -- 18 objection made on Day 1 by both National All-Jersey and 19 the Milk Innovation Group about the scope of the hearing. 20 I'd rather -- I think, from my perspective, we 21 can -- I think you need to know what the statement is 22 before you can make a decision anyway. So the question 23 is, do you let him make an offer of proof and then rule? 24 Do you take the time to read it and rule without his doing 25 that? It seems to me we save more time by letting him do 26 it. I think the objection can still stand. I think it 27 would be reserved, and I just think that we can move more 28 quickly trying to do that today. 6748 1 If we allow him to make the statement with the 2 recognition that you may rule ultimately that it's not 3 evidence, but give you an opportunity to listen to it to 4 be able to make your ruling. And I think you are going to 5 hear a fair amount of argument afterwards about what 6 happened back on Day 1 and how it might relate to this and 7 everything else. 8 So I think that would be an efficient way to move, 9 recognizing that both OGC and National Milk can reserve 10 their objection, so if that's okay with people -- the 11 alternative is to let the Judge read it while we take a 12 break. 13 THE COURT: No. 14 MS. HANCOCK: I can present another alternative. 15 We have Mr. Covington prepared to go on the stand today, 16 and so we could let you consider this overnight -- not to 17 use up your evening time -- but we could let you consider 18 this overnight by reading it. 19 My concern is, is how do we unring the bell if we 20 put it into the record? I mean, obviously, we have 21 preserved our objection by making it, but, you know, in an 22 effort to try and save time, it would be great not to have 23 to even use record time for it. 24 THE COURT: Now, we have plenty of time to do both 25 Mr. Sjostrom and Mr. Covington before 5:00. 26 MS. HANCOCK: We do, but we have other witnesses 27 that are prepared to go today as well, like Dr. Vitaliano, 28 if we had -- if we were going to be able to save us one 6749 1 witness slot. 2 THE COURT: Well, let me ask about that. I'd like 3 to get Mr. Covington in if he wants to go back to his farm 4 and bring in his hay. And so he would actually be my 5 preferred next witness. And perhaps if we did that -- 6 take a five-minute break, change the order of things, let 7 Mr. Covington testify, we could finish him today, and then 8 we can decide what to do next. 9 DR. BOZIC: Your Honor, I'm not sure whether 10 Mr. Covington is planning to be here tomorrow. I do know 11 that Mr. Sjostrom needs to leave tonight. 12 THE COURT: You have to leave tonight? I thought 13 this was your life. 14 MR. SJOSTROM: No. I have a few hats, as you may 15 have remembered. 16 THE COURT: Then, that's important. Yes. Okay. 17 Let's keep going. I'm going to need a break soon, 18 but let's get started with how we're going to proceed. 19 I'm going to mark this document as an exhibit so 20 we know what to call it. This is going to be 295. And I 21 note that the name of it is "Testimony in Support of 22 Logical Outgrowth of Proposals Number 13, Number 14, 23 Number 15, Number 16, Number 17, and Number 18." 24 Now, up at the top it's called Edge-14. 25 (Exhibit Number 295 was marked for 26 identification.) 27 THE COURT: The reason I'm intrigued by this 28 document is we have already told Dr. Bozic that the 6750 1 hearing is where you present evidence, and if you fail to 2 present it at the hearing, you cannot expect that if you 3 mention brilliant things, even if supported by 4 documentation in a brief, they are not evidence, they are 5 argument. 6 So if, in fact, people have a proposal that takes 7 into account the dynamics of what's been happening here in 8 the hearing, I think that's a wonderful thing. So I love 9 that this was going to combine all those proposals. But 10 if it's really about Edge-14, which has been objected to 11 from the beginning, that's different. 12 So the only way I can decide what to do is to look 13 at Exhibit 295 and accept Mr. Sjostrom's testimony that 14 I'm about to take as an offer of proof as to why what he's 15 going to tell me and why Exhibit 295 should be admitted 16 into evidence. And if I reject that, reject that offer of 17 proof, the fact that I gave it a number does not mean that 18 it's evidence. However, it would be part of the record of 19 rejected documents, as is done. Things that are offered 20 but either accepted -- I'm sorry -- offered and either 21 accepted or rejected are part of the record. 22 So that's what I would propose to do. 23 Let me ask Dr. Bozic, is that something you want 24 me to go forward with, and if not, why? 25 DR. BOZIC: Your Honor, I fully agree with your 26 approach. I share Mr. Hill's concern that this hearing 27 needs to stay within the bounds of what was originally 28 noticed for a hearing. But unless we are going to tear 6751 1 the baby apart to decide that each alleged mother, you 2 know, should have it, we need to find a Solomonian 3 solution, and this is what Mr. Sjostrom is here to 4 present. 5 THE COURT: So is he King Solomon or am I? 6 DR. BOZIC: You would be Queen Solomona, I guess. 7 THE COURT: All right. Very good. Thank you. We 8 will proceed on that basis. 9 Would you state and spell your name, please? 10 MR. SJOSTROM: Lucas Sjostrom, L-U-C-A-S, 11 S-J-O-S-T-R-O-M. 12 THE COURT: Have you previously testified in this 13 proceeding? 14 MR. SJOSTROM: Yes. 15 THE COURT: You remain sworn. 16 MR. SJOSTROM: Thank you. 17 LUCAS SJOSTROM, 18 Having been previously sworn, was examined 19 and testified as follows: 20 THE COURT: You may -- you may read Exhibit 295, 21 you may testify apart from what is in 295, in whatever 22 order you would like. 23 THE WITNESS: Thank you, Your Honor. And my 24 counsel has left me, but I did prepare this myself, so -- 25 I have given an introduction to myself, but I'm just going 26 to read this into the record. 27 Edge participates -- and as fast and as slow as I 28 can. 6752 1 Edge participates in this proceeding, not just to 2 advocate for the proposals we have filed, but also to 3 learn from other participants, challenge, and draw the 4 best out of all witnesses, and contribute to finding a 5 solution that will work well for producers, processors, 6 and consumers of dairy products. In that spirit, we 7 previously suggested slight modifications to National Milk 8 Producers Federation's Proposal Number 1 on standard milk 9 composition, and a proposal that would reduce, but not 10 eliminate, the role of barrel cheese in determining the 11 value of protein. 12 This week the topic before us is base Class I skim 13 milk price. In various testimonies this week and weeks 14 before, we heard the need for hedging raw milk input costs 15 by manufacturers of extended shelf life, or ESL, and 16 aseptic milk products, who typically offer their buyers a 17 fixed price, for example, a price that does not change 18 from month to month. 19 In contrast, most manufacturers of the traditional 20 high temperature short time products have no need to 21 hedge, as they simply pass through any month-to-month 22 changes in Class I milk price to buyers of their products. 23 Exceptions to this would be sales to schools, government, 24 and foodservice. 25 The difference in marketing practices among 26 Class I handlers creates a situation where a subset of 27 fluid milk product manufacturers is pleading with the USDA 28 not to take away their ability to hedge so that they may 6753 1 continue to provide a flat price to their customers and 2 effectively manage their Class I price risk. Others in 3 the HTST space are protesting any proposals under which 4 they would need to start hedging if advanced prices were 5 abandoned. 6 Having heard all the evidence presented so far, 7 Edge would like to invite all participants at this 8 hearing, trade associations, producers and processors, and 9 particularly USDA, to think "outside the box." We believe 10 it is possible to find a pricing method for base Class I 11 skim milk price that would meet everyone's needs -- 12 there's an "S" for correction there on the paper -- in 13 line with the policy objective set in the Section 2, 14 Part 4, of the Agricultural Marketing Agreement Act, to 15 look for solutions that avoid unreasonable fluctuations in 16 price. 17 To that end, Edge would like to introduce a 18 logical outgrowth proposal based on submitted proposals 19 and evidence heard thus far. Our objective is to preserve 20 the ability to hedge by those Class I companies that do 21 hedge, while at the same time, return to the higher-of 22 approach of pricing fluid milk where hedging is not used 23 or needed. 24 Essentially, this proposal combines Proposal 25 Number 13 by the National Milk Producers Federation and 26 Proposal Number 16 by Edge Dairy Farmer Cooperative. It 27 also combines discussions found in testimonies and 28 cross-examination from proponents of all six proposals 6754 1 noted -- noticed -- excuse me -- for this section. 2 Proposal 13 stipulates a reversal to higher-of as 3 existed prior to 2019, which would decimate nascent 4 hedging programs by Class I handlers. In contrast, 5 Proposal 16 abolishes advanced prices and pushes the 6 sector further towards hedging, even beyond the current 7 average-of regime. 8 How can these two be reconciled? We propose that 9 AMS consider splitting Class I milk into two subclasses: 10 Traditional Class I available to HTST manufacturers, and 11 utilizing the National Milk Producers Federation's 12 Proposal 13 to price the Class I milk. 13 A new subclass, I-H -- H for "hedgeable" -- all 14 milk processed as extended shelf life or aseptic would 15 automatically be classified to Class I-H, and others can 16 elect it if they can demonstrate to the Market 17 Administrator's satisfaction that they are regularly 18 offering their product on a forward price basis and are 19 currently hedging, or wish to start utilizing hedging 20 tools to manage their price exposure. 21 The milk in Class I-H would be priced per 22 Proposal 16, Class III Plus with no advanced prices. To 23 prevent adverse selection, the switch between subclasses 24 should be difficult to make, with a very long lead time. 25 We suggest a lead time of at least 24 months. 26 We anticipate that providing specific targeted 27 pricing incentives that facilitate hedging could spur 28 further growth of the extended shelf life and aseptic 6755 1 fluid milk sector, adding innovation into the fluid milk 2 category. Extended shelf life and aseptic milk continues 3 to be a growth area for dairy. Since 2019, nearly 30 HTST 4 plants have been shuttered and 11 new ESL/A plants have 5 been opened. This trend, if continued, would imply an 6 ever rising share of Class I milk that is priced on 7 Class III Plus, both a gradual transition towards our 8 Edge's preferred solution. 9 At the present time, we anticipate that -- and 10 this is a correction we have made in listening to 11 testimony -- we anticipate that 10 to 30% of Class I milk 12 is hedged or offered on flat price basis and would qualify 13 for sub-Class I-H. 14 THE COURT: Let me stop you -- 15 THE WITNESS: Yes. 16 THE COURT: -- and we'll make that correction. 17 So on the record copy, I'm looking at page 2 of 18 this, we'll call it proffered Exhibit 295, and the next to 19 the last full paragraph, fourth line down, currently shows 20 "10-20%." The witness has just said the "20" should be 21 "30." 22 Can you find that on this document? 23 So if you would strike -- now, am I correct, 24 Mr. Sjostrom? 25 THE WITNESS: Yes. And, Your Honor, by doing 26 math, two lines down the "80" will become "70." 27 THE COURT: Ah, all right. 28 THE WITNESS: Thank you. 6756 1 THE COURT: So we will just strike "20" and insert 2 "30," and two lines below that we will strike "80" and 3 insert "70." Done. Thank you. 4 THE WITNESS: Thank you. 5 I'll re-read at the beginning of that sentence. 6 At the present time, we anticipate that 10 to 7 30% of Class I milk is hedged or offered on a flat price 8 basis and would qualify for sub-Class I-H. Those dairy 9 producers anxious to return to higher-of pricing would see 10 70 to 90% of Class I milk priced, again, using the formula 11 they understand and trust. 12 Edge members, and all U.S. dairy farmers, have 13 repeatedly asked for more innovation in the fluid milk 14 sector. One way to lower risk and allow more opportunity 15 for innovation is to lengthen the shelf life of the 16 product and manage the risk associated with the flat price 17 contracts for inventory value. 18 Finally, dairy farmers want to see the best price 19 discovery possible. While the regular Class I and the 20 sub-Class I-H are both fluid products with mandatory 21 pooling, they do deserve separate pricing solutions and 22 the accompanying risk management tools to go along with 23 them. 24 Per Proposal Number 22, AMS is authorized to make 25 such changes as may be necessary to make the respective 26 Marketing Orders confirm with any amendments thereto that 27 may result from this hearing. We strongly believe that 28 the proposal we are submitting today is a logical 6757 1 outgrowth of the discussion heard so far, and respectfully 2 request that USDA rule before the end of the in-person 3 hearing proceedings whether they would find this proposal 4 and other outgrowth proposals submitted by Edge thus far 5 as admissible. 6 Such ruling is not pre-judicial, i.e., does not 7 indicate that USDA prefers those proposals over others, 8 but would provide incentive to all parties to offer their 9 substantive comments in post-hearing briefs in favor or 10 against such outgrowth proposals, or deepen the ideas 11 presented thus far with detailed suggestions for 12 implementation. These changes create a pathway towards 13 solution by utilizing the combined wisdom shared 14 throughout this important process. 15 THE COURT: Do you have anything to add to that 16 before you are asked any questions? 17 THE WITNESS: No. 18 THE COURT: All right. 19 Dr. Bozic, you may come to the witness stand. I'm 20 about to rule. What were you about to do? 21 DR. BOZIC: Just be at your availability. 22 THE COURT: Thank you. Good. 23 I remember, Dr. Bozic, when you had a brilliant 24 answer, Mr. Miltner asked you your opinion on something, I 25 believe it was Mr. Miltner, and your opinion was, "It's 26 worth considering." 27 And this is worth considering, but you can't do it 28 as this hearing's been noticed. You know, it's a great 6758 1 idea to have USDA decide to change horses midstream, but 2 they can't. Legally they can't. 3 So I'm going to reject Exhibit 295 as evidence in 4 the case. It will be part of the record. It is thought 5 provoking, and there are pieces of it that can be utilized 6 without getting into classes of utilization. There are 7 pieces of it that are ideas that people will benefit from 8 having found here. 9 But I'll agree with Mr. Hill that we -- we cannot, 10 in this hearing -- which can't do all things, and I hope 11 there's another Federal Order hearing soon -- but this one 12 will have to stay between the lines and be consistent. It 13 would be unfair to everyone who's already been here -- 14 well, to everyone who's already submitted a proposal under 15 the rules to change the rules now. 16 DR. BOZIC: Thank you, Your Honor. 17 THE COURT: Thank you both. 18 Now, is Mr. Sjostrom free to leave knowing that he 19 won't be here tomorrow? Is everyone in agreement with 20 there's nothing left over that you want him to stay for or 21 be around for later today? 22 All right. I'm going to take that as a yes, 23 because no one leaped up. 24 All right. So I am marking my copy that I'm using 25 that I have rejected, Exhibit 295, for the reason that the 26 proposal that we create an additional classification was 27 not noticed, that category of classes of utilization was 28 not noticed. And as Mr. Hill provided, that's in 6759 1 Section 1000.40. 2 All right. Mr. Covington, you may approach and be 3 seated in the witness stand, and I would like to take a 4 five-minute break while his documents are being 5 distributed. So please be back and ready to go at 3:40. 6 It's now 15:34. We're going off record. 7 (An off-the-record discussion took place.) 8 THE COURT: Let's go back on record. 9 We're back on record at 3:41. 10 First I would like the witness to state and spell 11 his name. 12 MR. COVINGTON: Calvin Covington. That's 13 C-A-L-V-I-N; Covington, C-O-V-I-N-G-T-O-N. 14 THE COURT: Thank you. 15 I'm being handed your statement, and it's already 16 marked as 296. 17 (Exhibit Number 296 was marked for 18 identification.) 19 THE COURT: 296. 20 And, Mr. Covington, you have previously testified? 21 MR. COVINGTON: Yes, ma'am. 22 THE COURT: You remain sworn. 23 MR. COVINGTON: Yes, ma'am. 24 CALVIN COVINGTON, 25 Having been previously sworn, was examined 26 and testified as follows: 27 THE COURT: Ms. Hancock, you may identify yourself 28 and proceed. 6760 1 MS. HANCOCK: Thank you, Your Honor. 2 DIRECT EXAMINATION 3 BY MS. HANCOCK: 4 Q. Good afternoon, Mr. Covington. Welcome back to 5 the stand. 6 Did you prepare Exhibit NMPF-104 in support of 7 your testimony today? 8 A. Yes, ma'am, I did. 9 Q. And we have marked that as Exhibit 296. If you 10 would proceed with your testimony, please. 11 A. All right. Thank you. 12 This testimony is presented in opposition to the 13 portions of Proposals 16, 17, and 18, which eliminate 14 advanced pricing. This testimony is presented on behalf 15 of Southeast Milk, Incorporated, with the support of 16 National Milk Producers Federation. 17 And, Your Honor, I'm going to skip over the rest 18 of the first page since it's been presented before and 19 start with page 2. 20 My testimony will provide seven reasons for 21 opposing the elimination of advanced pricing. 22 Number 1: The nature of packaged fluid milk. I 23 estimate about 90% of packaged fluid milk sales is 24 considered conventional and processed using high 25 temperature-short time (HTST) pasteurization. 26 Conventional packaged fluid milk is the most perishable 27 dairy product in the dairy case. In practical terms, 28 packaged fluid milk is marketed using just-in-time 6761 1 strategies. Most buyers of packaged fluid milk, 2 especially large retail grocers, receive fluid milk 3 deliveries multiple times per week. It is common for 4 retail grocers to refresh their dairy cases with packaged 5 fluid milk frequently throughout the day. There's no 6 practical method to store HTST packaged fluid milk for 7 more than what would represent a few days of a retailer's 8 needs. This is unlike many Class III and Class IV retail 9 products, such as butter and cheese, which can be stored 10 for longer periods. 11 Grade A farm milk delivered to pool distributing 12 plants marketing conventional HTST packaged fluid milk is 13 processed, packaged, distributed, and sold in a relatively 14 short time period. It just makes good economic and 15 business sense to know at the time of purchase, the price 16 of the product with a relatively short shelf life, 17 especially compared to other dairy products. Federal Milk 18 Marketing Order advanced pricing in Class I milk provides 19 this price. Without advanced pricing, this pricing goes 20 away. Waiting until most of the product is already 21 distributed, and much of it consumed before knowing the 22 price, is not a prudent business practice. 23 Reason number 2: Pricing of packaged fluid milk. 24 Most HTST packaged fluid milk, especially private label 25 sales and institutional sales (schools), is priced by 26 fluid processors to its customers monthly based on some 27 type of pricing formula. In simple terms, the formula has 28 as its base the raw milk cost. The raw milk cost is 6762 1 significant and the highest single item cost of the total 2 expense to process and package a unit of conventional HTST 3 fluid milk. 4 The monthly Federal Milk Marketing Order Class I 5 price is used to determine the base raw milk cost in the 6 pricing formula. Most dairy plants manufacturing cheese 7 or butter base their selling price, generally, off Chicago 8 Mercantile Exchange (CME) daily cash prices. Fluid milk 9 plants marketing excess cream use the CME butter price to 10 establish the base selling price. A buyer of cheddar 11 cheese or even cream can look at CME prices and know the 12 base price they will expect to pay for a truckload of 13 block cheddar cheese or a load of cream. Fluid milk has 14 no daily price basis such as the CME. The base price is 15 the announced Federal Milk Marketing Order Class I price. 16 To further explain packaged fluid milk pricing and 17 the need for advanced pricing, I provide the following 18 example: 19 Assume I own a group of grocery stores. I 20 contract with a fluid milk processor for gallon jugs of 21 private label packaged conventional white fluid milk for 22 my stores. My monthly price for the packaged fluid milk 23 is based on the formula negotiated with the fluid milk 24 processor. The formula is the monthly Federal Milk 25 Marketing Order Class I price at the location of the fluid 26 plant, packaging costs, the resin used to make the jug, 27 the cap and label, and any added ingredient cost, plus a 28 tolling fee. In this formula, assume the cost of raw milk 6763 1 represents 75% or more of my total cost of a gallon of 2 whole milk at the fluid milk's plant dock. 3 Using the month of September 2023 as an example, I 4 knew on August 23 of the prior month the price for the 5 packaged milk I would purchase from the fluid processor 6 during the month of September. How did I know the price? 7 Federal Milk Marketing Orders announced the September 8 Class I price in advance on August 23. This advanced 9 price notice enabled me to set my retail store milk prices 10 in September, prior to the beginning of the month. 11 Knowing my package milk cost in advance allowed me 12 to consider any milk promotion plans. Announced Federal 13 Milk Marketing Order Class I pricing allowed me as a 14 retailer to know the packaged milk price in advance. 15 Advanced pricing allowed the fluid milk processor to know 16 the price the plant would receive for the packaged fluid 17 milk prior to the raw milk being processed, packaged, and 18 sold. 19 Now, look at my situation as a retail grocer under 20 Proposals 16, 17, and 18, which eliminate advanced 21 pricing. For the packaged fluid milk I purchased in 22 September, I will not know the cost until the afternoon of 23 October 4. Why? Without advanced Class I pricing, it 24 would be October 4 before the September Class I price is 25 announced. Again, the price of the raw milk represents at 26 least 75% of my packaged milk cost. Most of the packaged 27 fluid milk I purchase in September has been sold before 28 the price I paid for the product is known. From a retail 6764 1 grocer's perspective, this is not orderly marketing of 2 fluid milk. 3 History tells us there can be significant 4 month-to-month price increases in the Class I milk price. 5 Advanced pricing telling us what the next month's milk 6 price will be and plans can be made accordingly. Without 7 advanced pricing, the actual announced Federal Milk 8 Marketing Order Class I price would not be known until the 9 following month, after most of the product has already 10 been distributed and sold. 11 When there is a significant monthly increase in 12 the Class I price, I see the possibility of retailers 13 going back to their fluid milk processor, and the fluid 14 milk processor going back to the dairy farmer cooperatives 15 supplying them with milk seeking price relief when there's 16 a large month-to-month price increase. This is not 17 orderly marketing. It opens the potential of fluid milk 18 processors in the same marketing area not having equitable 19 raw milk cost and the potential producers in the same 20 marketing area not having uniform pricing. 21 Reason number 3: Additional burden on fluid milk 22 processors and cooperatives. If the sections of 23 Proposals 16, 17, and 18, which eliminate advanced pricing 24 were adopted, it would be unrealistic to think many retail 25 grocers would not seek some type of continued advanced 26 pricing on Class I products. This due to the example just 27 given and the tradition of advanced Class I pricing, fluid 28 milk processors and cooperatives that supply raw milk to 6765 1 fluid processors would be asked to respond to that 2 request. 3 To meet the request, fluid processors and/or 4 cooperatives would need to calculate an estimated advance 5 Class I milk price. An estimated Advanced Class I price 6 would require later true-ups to the final announced 7 Federal Milk Marketing Order Class I price. Doing this 8 would require additional accounting and recordkeeping, 9 plus there is the potential true-ups could be upside 10 limited. This means fluid milk processors and/or their 11 milk suppliers take the hit when prices rise faster than 12 forecast as indicated above. 13 On past occasions cooperatives were asked by fluid 14 processors to develop Class I price estimates in advance 15 of the Federal Milk Marketing Order Class I price 16 announcement with a promise to true-up later. Let me 17 share with you an actual example. 18 It was December, and the January Class I price 19 announcement date was just a few days before Christmas 20 that year. Some fluid milk processors and their customers 21 want to get a jump start on Christmas. They wanted to 22 have their January milk price announcements out of the way 23 several days before Christmas. Fluid processors asked 24 their supplying milk cooperatives to estimate the January 25 Class I mover and announce the cooperatives' Class I price 26 several days before the actual Class I announcement. 27 Desirous to meet the request of its customers, the 28 cooperatives agreed, including a future true-up. The 6766 1 true-up is the difference between the estimated Class I 2 price and final Class I price, up or down. The true-up is 3 carried over to the February price announcement. The 4 cooperative does not receive the final settlement for 5 February milk until March. The true-up would not be 6 reflected in the dairy farmers milk check until the check 7 received in March for February milk. 8 If all of this sounds complicated, it was. 9 Personally, I can tell you when this was done, it was one 10 big mess. It met the definition of disorderly marketing. 11 I regretted agreeing to do it and departing from the 12 Federal Milk Marketing Order advanced price schedule. It 13 was not done again. The scenario just described is for a 14 one-off pricing date accommodation. Imagine how complex 15 this could get if these estimations and true-ups occur 16 monthly. 17 Adding to the market disorder created by true-ups 18 there is a possibility of notably different Class I raw 19 milk costs across competing Class I milk buyers. These 20 would not be due to differences in prices based on plant 21 location, but rather variations in effective prices due 22 purely to differences in the forecast of Class I prices. 23 Unequal pricing for the same product is disorderly and 24 should be avoided. 25 Reason number 4: Institutional buyers of fluid 26 milk products. School systems and other public 27 institutions such as military bases and prisons are large 28 buyers of packaged fluid milk. Most schools and public 6767 1 institutions purchase packaged fluid milk based on a 2 pricing formula similar to what I used in my earlier 3 example. These pricing formulas are known for their being 4 rigid and strict, with the only change being monthly 5 changes in the raw milk cost. 6 Advanced Class I prices allow schools and other 7 public institutions to know in advance their monthly milk 8 cost and plan accordingly. It would be a challenge to 9 have a true-up program with a school, a military 10 commissary, and explain to them why they could not know 11 the milk price prior to purchase and why they needed to 12 true-up beyond what they already pay for milk. 13 Reason 5: The Class I price. Fluid milk 14 processors pay the highest regulated raw milk price. The 15 Class I price is higher than Class II, III, or IV. 16 Eliminating Class I advanced pricing creates a one-sided 17 change. Dairy farmers retain the economic benefits of a 18 higher Class I price, but fluid milk processors lose the 19 pre-knowledge of their raw product cost. 20 Reason 6: Dairy farmer benefits. Advanced 21 pricing benefits dairy farmers by providing a mild buffer 22 to blend price fluctuations. When Class III and IV milk 23 prices are falling, advanced class prices are the last to 24 be impacted. This buffers the inevitable declines in the 25 blend price. Depending upon Class I utilization, this 26 buffering can be a little or a lot, but it is nonetheless 27 present and important. 28 The one place in Federal Milk Marketing Order 6768 1 pricing where the industry, and in particular dairy 2 farmers, get a peek over the fence at what prices may be 3 coming at them are advanced class prices. Advanced prices 4 provide a realtime look forward for milk pricing trends. 5 They are the first regulated prices to signal what is 6 coming. Elimination of advanced pricing removes this 7 market signal. 8 With advanced pricing, there is no doubt when 9 dairy product prices increase, there is a lag period 10 before the Class I price increases. On the other hand, 11 when dairy product prices decline, there's a lag period 12 before the Class I price declines. Over the years, dairy 13 farmers have regularly expressed to me that they want to 14 know as far in advance as possible the direction milk 15 prices are moving. Advanced pricing helps provide a look 16 forward for the milk price direction. 17 Reason number 7: Little benefit. Reducing the 18 potential of price inversions is the justification 19 provided for eliminating advanced pricing. There's no 20 argument eliminating advanced pricing helps reduce price 21 inversions. NMPF, and its member cooperatives, recognize 22 the need to reduce price inversions. Adoption of NMPF 23 Proposals 1, 13, and 19 would help do so. 24 The marginal benefit from eliminating advanced 25 pricing does not exceed the marginal cost. As the old 26 saying goes, do not let the cure be worse than the 27 disease. Advanced pricing provides benefits to all 28 involved in the fluid milk food chain from dairy farmers 6769 1 to consumers. Advanced pricing should not be eliminated 2 just in order to help solve a single challenge. 3 Federal Milk Marketing Orders do not establish or 4 regulate the retail price of packaged fluid milk. 5 However, some acknowledgement of Federal Milk Marketing 6 Orders and its impacts on retail marketing of Class I 7 fluid milk is appropriate. It is helpful to retail 8 grocers and institutional buyers to know the cost of 9 packaged fluid milk in advance. The current system of 10 Federal Milk Marketing Order advanced Class I pricing 11 addresses this need. Advanced pricing allows retailers to 12 better implement their marketing strategies and allows 13 institutional buyers easier budgeting. 14 Advanced pricing has served the fluid dairy 15 industry well for many years. This hearing shows there 16 are Federal Milk Marketing Order provisions where 17 processors and producers have differences of opinion. 18 Advanced pricing is one Federal Milk Marketing Order 19 provision that most fluid milk processors, and those 20 cooperatives who supply fluid milk to these processors, 21 largely agree on. 22 We strongly encourage the Secretary of Agriculture 23 to retain the advanced pricing provisions in all Federal 24 Milk Marketing Orders. 25 Respectfully submitted. 26 Q. Thank you, Mr. Covington. Just a couple of 27 questions I want to follow up on. 28 We have heard various lines of questions 6770 1 arounding -- around depooling and -- and how advanced 2 pricing also will help either eliminate or reduce the 3 instances of depooling. And I'm wondering what your 4 thoughts are with respect to that. 5 A. Well, as I mentioned in my testimony, you know, 6 other proposals of National Milk Producers Federation have 7 been proposed, does address that to some extent. But I'm 8 just going to give you my personal opinion. This is not 9 opinion of Southeast Milk, and this is not opinion of 10 National Milk Producers Federation, and it is outside the 11 scope of this hearing. 12 Each Federal Milk Marketing Order, each Federal 13 Milk Marketing Order has pooling standards, or what I call 14 performance standards. And those standards are standards 15 in regards to what we call touch-day provisions, the 16 number of days that producer milk must be delivered to a 17 pool or supply distributing plant, how much milk that 18 could be diverted and still receive the -- be a part of 19 the pool and still receive the uniform price, and also 20 some Federal Orders have requirements about once you get 21 depooled, a percent or how long you have got to stay out 22 before you can get back in. But all those performance 23 standards are -- each one is different for each individual 24 order. 25 And so my personal opinion, that progress could be 26 made on trying to slow down eliminating depooling if each 27 individual order would look about what changes they could 28 make to their individual order performance standards to 6771 1 tighten them up. To tighten them up. Again, that's 2 outside the scope of this hearing, and it's on a regional 3 basis or each order basis. 4 But there's such a variation in performance 5 standards for pooling standards from order to order. The 6 order that I represent, the Florida order, has the 7 tightest standards of any Federal Milk Marketing Order. 8 And, again, there's no supply plants in that order, only 9 pool distributing plants. But for a producer's milk to be 10 pooled on that order, it has to be -- one-day's production 11 has to be delivered ten days each month to be a part of 12 that Federal Order, and the diversion limit -- diversion 13 requirements are very tight. They vary seasonally. 14 From June to November only 10% of the milk can be 15 diverted to a non-pool plant and still participate in that 16 order. Then it goes up to 15%. Then we get March, April 17 and May, it kicks up to 20%. But if you go to some other 18 orders -- and again, I'm not as familiar with those 19 without looking them up -- diversion requirements could be 20 70, 80, 90%, and maybe only 10% has to be delivered, and 21 touch base might only be once a month or not that 22 frequently. 23 But personally, my opinion is to look -- for each 24 order to look at individual performance standards in their 25 orders if they want to make more progress on the issue of 26 price inversions. 27 Q. And you participated on the task force for 28 National Milk and spent a considerable amount of time 6772 1 getting ready for this hearing, and then even for the 2 amount of effort that you put into this hearing, why not 3 have it at a national hearing and have the decision made 4 once and for all right here for everyone across the 5 country? 6 A. There's a reason we have 11 different milk 7 marketing orders, not one big one. There's such a wide 8 variation in the way milk is utilized in this country, and 9 those performance standards need to recognize that. 10 What's good for Florida might not be good for California, 11 or Washington, or Wisconsin. 12 And so that's the reason it needs to be looked at 13 on a local basis, or an order basis, not on a national 14 basis. One shoe doesn't fit all sizes when it comes to 15 performance standards. 16 Q. So it's fair to say that -- that some of the 17 decisions or some of the factors that go into the decision 18 about what -- when there should be limits placed on 19 depooling, those are regional in nature? 20 A. In my opinion, they should be left up to each 21 individual order. 22 Q. And what kind of factors go into making a decision 23 that are more regional in nature? 24 A. Well, I'll go back and give the example from the 25 Florida order. Okay. And, in fact, I can't remember the 26 exact year, I know there's been questions here at this 27 hearing and been information presented, has there ever 28 been any time when pooling standards were tightened? 6773 1 Well, it was 2004, '05, '06 -- don't hold me to that -- 2 that the Southeast Milk actually made a request in the 3 Florida order to the Market Administrator to tighten them. 4 The Market Administrator in some orders has got a 5 leeway. So we did request they were tightened, there was 6 no opposition, and the Market Administrator granted that. 7 In making that decision, we tried to look at what 8 was most economical for that order for the producers 9 supplying that market and do what was the best to make 10 sure that we -- that the pool distributing plants were 11 supplied with the adequate volume of Class I. 12 So in other orders, I'm not quite as familiar with 13 those. You got to look at the Class I needs, the producer 14 milk volume, what you need for reserve is several factors. 15 And those decisions, in my opinion, can best be made at 16 the individual order level. 17 Q. Thank you, Mr. Covington. 18 MS. HANCOCK: Your Honor, we'd make him available 19 for cross-examination at this time. 20 CROSS-EXAMINATION 21 BY DR. BOZIC: 22 Q. Marin Bozic for Edge Dairy Farmer Cooperative. 23 Good afternoon, Cal. 24 A. Good afternoon. 25 Q. On page 4 of the -- did we assign the exhibit 26 number for the -- 27 THE COURT: Yes, this is 296. 28 /// 6774 1 BY DR. BOZIC: 2 Q. On page 4 of the Exhibit 296, last paragraph, last 3 sentence of the last paragraph, you state: "Unequal 4 pricing for the same product is disorderly and should be 5 avoided." 6 I would like you to imagine Mr. Michael Dykes 7 saying this sentence in his chairman's lecture of the 8 Dairy Forum in 2023. Michael -- I'm not going to try to 9 mimic his accent. His accent would be similar to yours. 10 But do you think that if a government official 11 would be in the room, that they could find his statements 12 that unequal pricing for the same product is disorderly 13 and should be avoided, in violation of the Sherman Act? 14 A. Well, I can't tell Michael Dykes what to say or 15 not to say. I'm assuming -- well, there's an IDFA lawyer 16 here, and I'm assuming -- I don't know, you need to ask 17 the IDFA lawyer, you know, what advice he would give him. 18 I am not going to tell somebody else what to say or what 19 not to say. 20 Q. Can you see how this sentence in any other setting 21 other than this quite unique world of Federal Milk 22 Marketing Order regulation could be seen as 23 anti-competitive, that unequal pricing for the same 24 product is disorderly and should be avoided? 25 A. Well, this testimony was written for this hearing. 26 And there's two purposes of Federal Milk Marketing Orders: 27 That is to ensure that we supply the Class I market and 28 promote orderly marketing of milk. And this is the third 6775 1 testimony that I have presented so far at this hearing. I 2 have got one more to come. And I have tried to write all 3 of them trying to keep those two things in mind. 4 And we -- and, again, one of the reasons why I 5 wrote what I wrote, and opposing the elimination of 6 advanced pricing, because there is the potential if we 7 eliminate advanced pricing, as I have testified to, it 8 could create disorderly marketing. And one of the things 9 that causes disorderly marketing is not having equal raw 10 product cost for Class I milk. 11 Again, if you go back and read the Agricultural 12 Marketing Agreement Act of 1937, it talks about ensuring 13 equal raw product cost for handlers within the same 14 marketing area. 15 Q. Thank you. 16 On page 5 of the Exhibit 296 under point 6, dairy 17 farmer benefits, you elaborate how advanced pricing tends 18 to stabilize mailbox prices. 19 Would it be a fair restatement of your paragraph 20 that advanced pricing tends to stabilize milk mailbox 21 prices from month to month? 22 A. No. I -- I would -- I would disagree with that 23 statement, because there's other things that impact the 24 mailbox price. 25 Q. No, I'm not saying that it's the only factor. But 26 you are saying that advanced pricing benefits dairy 27 farmers by providing a mild buffer to blend price 28 fluctuations. So whether we call it mailbox price or 6776 1 strawberry fields, the fact is that dairy farmers take 2 home some amount of money that is more stable from one 3 month to the next because of advanced pricing. 4 Is that a fair statement, according to you? 5 A. Well, I'm going to answer that by -- by -- it 6 might help, if I'm getting your question right, for me to 7 explain what I mean by what I wrote there, especially with 8 buffering. 9 Q. Sure. 10 A. We only have advanced pricing on Class I and 11 Class II skim. In even in a Federal Milk Marketing Order 12 like Florida, we still got some Class II fat and Class III 13 and Class IV. Those prices are going to be announced 14 later after the end of the month. And what I mean by 15 buffering is that, you know, as -- again, as you 16 testified, those prices react quicker to what's happening 17 in the marketplace. 18 So if Class III -- butter and cheese are going 19 down, Class III and IV is going down, Class II is going 20 down, producers still have a little -- have some advantage 21 from the higher Class I when prices were up. And what I 22 mean by that paragraph and that buffering, they don't get 23 the full blunt as that price goes down. Yeah, they are 24 going to get part of it based upon the utilization of how 25 much Class II butterfat and III and IV of that month. 26 Q. So the month-to-month changes in the producer pay 27 prices would not be as steep when the market is in a 28 nosedive because they receive part of their income from 6777 1 the previous months' advanced prices? 2 A. Again, that's what I meant there by buffer. 3 Because you are going to have one price calculated based 4 upon what dairy product prices were during in one period 5 of time and the other classes on a different period of 6 time. 7 Q. Right. 8 So, therefore, their pay prices would be higher 9 with the advanced pricing than without advanced pricing 10 when the market starts going down. That shouldn't be 11 controversial. I'm just trying to -- 12 A. That is correct. And then the same thing, the 13 opposite when prices go back up. And, again, I think I 14 have that included in my testimony, yes. 15 Q. So would it also then imply that given that this 16 is a national policy, not a regional issue, advanced 17 pricing is applied throughout the nation, that because of 18 the advanced pricing, when the markets are falling, the 19 all-milk price will not drop as much, National all-milk 20 price? 21 A. Boy, I got to think about that one a little bit. 22 You talk about the national all-milk price. Well, first 23 thing that comes to my mind, if you take an individual 24 state like Florida with a high Class I utilization, yes, 25 that all-milk price is not going to drop as quick as 26 somewhere like in your state in Minnesota. You probably 27 need to ask somebody from -- because I know this has come 28 up before -- ask somebody from the Agriculture Statistic 6778 1 Service who does all that, you know, about the weight they 2 give. 3 But, you know, I have to admit, Florida is a small 4 volume of milk. So even if those doesn't drop, I would 5 say -- and you're a lot more -- a whole lot more about 6 statistics than I'll ever know -- I'm sure if you did the 7 calculation on that, probably by Florida's not falling 8 that month, it's probably not going to make a whole lot of 9 difference in the all-milk, national all-milk price. 10 Q. Can we agree it's going to make a little bit of 11 difference? 12 A. Oh, yeah, it would be a little bit of difference, 13 but I can't see how it can make a significant difference. 14 Q. And, no, I understand that. But -- but we would 15 have to have a debate on what significant means. 16 But Florida is not the only Class I market. In 17 fact, three-quarters of all Class I milk is in the 18 multiple-component orders, Northeast, Central, Midwest. 19 In fact, the Midwest order has, in some months this year, 20 higher Class I utilization than Florida. 21 So could we agree that the national all-milk price 22 would not drop as much? We can disagree on the magnitude, 23 but at least in a direction, could we agree that the 24 national all-milk price will not drop as much if we keep 25 advanced prices as opposed to if we eliminate it? 26 A. What I would agree with you on is that, yes, 27 advanced pricing would have some impact on the all-milk 28 price going down or going back up. 6779 1 Q. Right, right, right. I wasn't -- I wasn't 2 implying anything about the long-term average, just in a 3 particular month when the markets are on the -- on the 4 downslide, right? 5 So if we can agree that in a -- in a downward 6 market the all-milk price drops less precipitously because 7 of advanced pricing, then let's examine the full 8 consequence on the dairy farming. 9 Are you familiar with the program called Dairy 10 Margin Coverage? 11 A. I am. 12 Q. And are you familiar with, at least conceptually, 13 with the formula used by Dairy Margin Coverage to 14 determine the monthly payments? 15 A. I know the main components that go in it. 16 Q. And you are familiar that one of the main 17 components is the national all-milk price? 18 A. Yes. 19 Q. And, therefore, the further the all-milk price 20 drops, the bigger would be the payments to the farmers, 21 correct? 22 A. It depends upon what the feed cost is, too. You 23 have to have both of them. 24 Q. Thank you for your correction. I was being a 25 little sloppy in my question. 26 If the margin is already at or below $9.50, then 27 keeping feed costs constant, any reduction in the all-milk 28 price would one-for-one translate to the indemnity or 6780 1 payment to the dairy producers on their eligible enrolled 2 hundredweight? 3 A. If the feed cost stays the same, you know, the 4 change in all-milk price up our down is going to -- going 5 to impact. 6 Again, what I would say, you know, the impact of 7 the advanced pricing, I know you presented testimony here 8 and you have done a whole lot of calculations. I'm sure 9 you could calculate that and come up with exact cents per 10 hundredweight that advanced pricing impacts it. But, 11 again, a layman like me, over time it would average out. 12 Q. No, no. I understand that the national 13 all-milk -- and I agree with you that the national 14 all-milk price over time would be about the same whether 15 we use advanced prices or not. 16 However, I assert -- and please tell me whether 17 you agree or disagree -- that over time, the volatility, 18 standard deviation, of the national all-milk price is 19 going to be bigger if we remove advance prices. If we 20 keep the advanced prices, then the volatility of the 21 national milk price would be smaller. 22 Would that be a statement that you would agree or 23 disagree with? 24 A. I want to make sure I understood you there, first. 25 So what you are saying, that if we keep advanced 26 pricing, if I heard you say, the volatility would be less? 27 Q. Yes. 28 A. If we keep advanced pricing -- if we keep advanced 6781 1 pricing, we're going to keep doing it the way we have been 2 doing it ever since Dairy Margin -- 3 Q. That's correct. 4 A. -- Coverage Program's been in place. 5 Q. That's correct. Yes. 6 So under that scenario would the -- maybe I can 7 ask the question a more intuitive way. 8 If we remove advanced pricing because the status 9 quo says that we have that, if we remove advanced pricing, 10 would you anticipate that volatility of the all-milk price 11 would increase? 12 A. I'm just not enough statistician to answer that 13 question. You -- you need to talk to somebody that's -- 14 it's been years since I took statistics and -- 15 Q. Okay. Maybe -- 16 A. I'm just going to be honest with you. 17 Q. Sure. But I don't -- I don't think it's that 18 hard. 19 If -- if the advanced pricing provides buffer to 20 blend price fluctuations, then advanced pricing provides 21 buffer to month-to-month changes in all-milk prices. If 22 there is no buffer, then the all-milk price is more 23 volatile. 24 Anything you see wrong so far in that reasoning? 25 A. That's not what my testimony was. 26 Q. But, sir, your testimony is regarding dairy farmer 27 benefits. 28 What I'm driving with this is that in the presence 6782 1 of subsidized safety net, some of those benefits are lost 2 because they reduce the potential payments that the 3 farmers would otherwise receive from the 4 government-provided safety net, in this context, Dairy 5 Margin Coverage. 6 A. Well, I could tell you for the dairy farmers that 7 I represent, since the Dairy Margin Coverage Program 8 covers a relatively small volume of milk, it's not going 9 to make a whole lot of difference because they are so far 10 over that cap. 11 And I want to go back, because I didn't finish 12 answering the question before you started with another 13 question, the question before. 14 Q. I apologize. 15 A. But what I mean by -- by buffering here is that 16 especially in a high Class I market of the dairy farmers 17 that I represent, if milk prices are falling, and since 18 advanced pricing use dairy product prices from a different 19 time period than what you do for Class II fat, Class III, 20 and IV, they don't get all that loss at the same time. 21 They know it's coming, but it slows it down a little. 22 Likewise, when it goes back up, we have the opposite 23 occur. 24 Q. Just in the interest of time, I propose that we 25 move on to the next point. 26 On the same Exhibit 296, page 5, point 7, and the 27 little benefit. You mention price inversions. 28 Could you please define precisely what do you mean 6783 1 by price inversion? What is inverted -- 2 A. My definition -- and I probably use a little 3 different terms because I'm probably a little older school 4 than some people -- what I mean by a price inversion would 5 be when the Class II price, Class III price, or Class IV 6 price is higher than the particular Federal Order's 7 uniform price. 8 Q. And to -- in your opinion, there is no argument -- 9 there's no argument, so you agree, that eliminating 10 advanced pricing helps reduce price inversions, just to 11 make sure I understand that? 12 A. That's what I wrote there, yes, sir. 13 Q. Okay. So -- but then in your direct questioning 14 by Ms. Hancock, you also followed up that addressing 15 depooling should be done regionally. 16 Would you venture a guess why a market order such 17 as Order 30 in the Upper Midwest, which has single-digit 18 utilization percentage of Class I, why they have depooling 19 provisions that are less strict or more permissive, if you 20 will, than, for example, Order 1 in the Northeast? 21 A. You would need to go to ask the dairy farmers or 22 their cooperatives in their particular order, because it's 23 dairy farmers who have the final vote on provisions. 24 Somewhere if you go back in time, you probably could read 25 a reco- -- a Final Decision, would give you the reasons 26 why they wanted those particular performance standards. 27 It's -- again, it is -- as I was emphasizing 28 before, it's the decision of the people in that particular 6784 1 marketing area. 2 Q. But you wouldn't venture your own guess as to why 3 that is the case? 4 A. No, I wouldn't want to guess. I'll go back, you 5 know, as I answered earlier to Ms. Hancock, and I just 6 gave my own personal opinion about performance standards. 7 And I do strongly believe, you know, if you tighten 8 performance standards, you make it harder to get in and 9 out of the pool. That eliminates some of it. 10 Q. Could it follow that if you eliminate in and out 11 of the pool, that you just create a whole class of 12 processors that are just out of the pool for good? 13 A. And, again, those are the type of things that when 14 you have a Federal Order Hearing, you would hear both 15 sides of it and debate it. 16 Q. But to the extent that the inversion happens for a 17 reasons not -- to -- also happens for reasons other than 18 the advanced pricing, eliminating advanced pricing does 19 not eliminate price inversions, correct? 20 A. You know, again, I said just reduce it. That was 21 the word I used, reduce. 22 Q. Okay. I think we agree on that. I just wanted to 23 make sure that we are on the same page there. 24 So if the price inversions would still potentially 25 be present even if we eliminate advanced pricing, then 26 tightening pooling requirements could result in the 27 benefits from remaining pooled being lower than the cost 28 of an occasional price inversion. 6785 1 Would you agree with that? 2 A. You're going to have to repeat that again and just 3 a little slower for me, if you don't mind. 4 Q. It's 2020, Order 30. Even if advanced pricing 5 does not contribute to price inversion, we have Class III 6 skyrocket relative to Class IV, suddenly we have a price 7 inversion as you define it. 8 Even if the pooling requirements are much tighter 9 and you have to stay in a pool for -- you have to wait to 10 come back to the pool for 12 months, or even 24 months. 11 If your current -- if your present period negative PPD is 12 $4 and your expected benefit per month is $0.15, that's a 13 lot of months over which you would have to have positive 14 benefit in order to compensate for a single month cost of 15 participating in such pool. 16 I know this is barely a question, let alone, you 17 know, a short one. 18 So do you understand that under such 19 circumstances, tightening pooling requirements would not 20 be able -- would not be an instrument that can result in a 21 uniform price paid to all producers in an order because 22 some producers would be permanently depooled from the 23 order? 24 A. Again, go back to when I responded to the question 25 initially. I didn't say that, you know, strengthening 26 pooling requirements would eliminate it. 27 And we got to think about also -- and I don't want 28 to get into what's already been talked about so many times 6786 1 here at this hearing, but if we've got a period of time 2 when cheese prices are rapidly going up, and I don't know 3 how many times I have stood before producer meetings when 4 I have got some questions about negative producer price 5 differentials. I said, Well, you're going to get negative 6 producer price differentials when prices are rapidly going 7 up, and that's not necessarily bad. 8 Q. I would like you to come give a speech in 9 Minnesota, see how that goes with that statement. Joking 10 aside. 11 I just want to -- and I won't take much of the 12 hearing's time here. It's 4:25. You don't use the word 13 hedging anywhere in your testimony, and there's a six-page 14 testimony. I don't believe that hedging was used there. 15 If it is, I apologize for not reading it that closely. 16 Why is that? 17 A. There was no need for me to put the word "hedging" 18 in there. I didn't see why I needed to put it in there. 19 I didn't -- you know, I didn't think this hearing was a 20 hearing about hedging. That's one of the reasons I didn't 21 include it in there. And I don't consider myself any risk 22 management, you know, expert. 23 Q. Would you say that you have no familiarity with 24 hedging? 25 A. No, I wouldn't say that. 26 Q. Based on your current familiarity with hedging, do 27 you believe that it would be possible, through some 28 proactive actions, of a buyer of fluid milk product to 6787 1 lock in their input costs before the start of the month in 2 which they are going to receive milk? 3 A. If I understand your question correctly, you are 4 saying that a milk buyer can lock in all its milk costs, 5 all of its milk cost prior to receiving it by using 6 hedging. Is that what you are saying? 7 Q. The world "all" can be a got-you there, so I want 8 to be careful how I answer. 9 But can either cover all or vast majority of its 10 input costs before the start of the month? 11 A. Well, just like you said the word "all," I would 12 say also the word "vast" can have a wide definition. 13 Let me answer it this way. Again, I told you I'm 14 no expert in hedging. There's other -- other experts 15 here. But, yes, a buyer of milk could use the futures 16 market to lock in a portion of their anticipated milk 17 cost, or to hedge a portion of their milk cost. 18 Q. Which portion can they not hedge? 19 A. Well, now you are getting deeper more than 20 probably what I know about risk management, starting to 21 get a little dangerous here now with me. 22 Q. Don't worry. It's only going on the record. 23 But you used a phrase "only a portion," so 24 something led you to the conclusion that a portion cannot 25 be locked in, so -- 26 A. Well, again, I'm a layman when it comes to risk 27 management, but I know the futures market just has 28 Class III and IV, and it's at 3.5% fat. And it's also -- 6788 1 I go back to my testimony on Proposal 1 -- at a -- you 2 know, a lower component level. 3 Well, if I'm a cheese maker and I am buying Jersey 4 milk that's 5% fat and 4% protein, if you're just buying 5 Class III, the higher cost of my butterfat, the higher 6 cost of my protein, I don't know of a futures market where 7 I can lock that in at. 8 Q. Well, Mr. Covington, we are in the Class I 9 discussion. Like, I don't know that a Jersey example 10 helps with this. 11 If you are a Class I buyer, could we please -- 12 please -- I apologize for interrupting, but -- 13 THE COURT: He's talking about a Class I. 14 DR. BOZIC: No, ma'am, he was talking about a 15 cheese maker, which is Class III. 16 THE COURT: All right. 17 THE WITNESS: Okay. I'll talk about a Class I. 18 But, again, you know, Class I can still buy Jersey milk. 19 There have been a number of Class I buyers I have helped 20 over the years to buy Jersey milk. 21 But anyhow, if I'm a Class I buyer and if I'm 22 buying milk from a cooperative, again, I'm probably going 23 to get milk that's above that 3.5, so I can't buy that. 24 It depends upon what I have negotiated with my 25 cooperative. There could be an over-order premium that I 26 have to pay, and I can't lock -- lock that in. 27 And, again, from my limited knowledge of using the 28 futures market, you buy the contracts in so many pounds of 6789 1 milk, and I'm guessing the pounds of milk won't exactly 2 equal the milk I need for that particular period of time, 3 so if I got to buy more than that, I cannot lock that in. 4 And there are times running the fluid milk plant 5 that I just don't take in the same volume of milk every 6 day, seven days a week, or the same month. Something 7 could happen or whatever, and I have to call my 8 cooperative up, and if I have an agreement with them for 9 just so much milk, if I have to buy extra milk, I can't 10 lock that in. 11 BY DR. BOZIC: 12 Q. You just described basis risk. And I will not 13 contest it because, you know, that is true. 14 The question is, how high is the basis risk 15 relative to the profit margin of either the seller of 16 Class I or the buyer of Class I milk in that area? 17 THE COURT: Was there -- is that true? Or do you 18 agree? Or is there any kind of a question? Or just -- 19 DR. BOZIC: I think in the interest of the 20 hearing, I think it's best if I stop here and give others 21 a chance. Thank you very much. 22 Thank you, Mr. Covington. 23 THE WITNESS: Yes, sir. 24 THE COURT: Dr. Bozic is the ultimate teacher. 25 Did you notice? 26 THE WITNESS: And he's probably got a tough 27 student to deal with, too. 28 /// 6790 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. I can't do it even nonchalantly anymore. 4 Ryan Miltner representing Select Milk. 5 Good afternoon, Mr. Covington. 6 A. Good afternoon, sir. 7 Q. Okay. So on page 3, I'm going to -- let's do this 8 a little differently. Here's the issue that I'm going to 9 ask questions about. 10 I'm really trying to figure out, for my client, 11 whether reverting to the higher-of or maintaining some 12 average-of is the most beneficial outcome for them, and 13 where the elimination of advanced pricing plays into that, 14 and the goals are to try to figure out what's the best way 15 to allow producers to fully manage their risks, including 16 those that result from depooling, as well as preserving 17 some risk management for Class I handlers. And so my 18 questions are aimed at those issues. Okay? 19 A. Yes, sir. 20 Q. So on page 3 of your testimony, you're -- in the 21 second paragraph, you're explaining how advanced pricing 22 allows a Class I handler to know the cost of their raw 23 milk before they have to sell it, correct? 24 A. Yes, sir. 25 Q. Okay. So if a Class I handler were able to 26 adequately hedge their raw milk costs and fix a price, 27 they would have that same result, wouldn't they? They 28 would be able to know their raw milk cost before they sell 6791 1 it, correct? 2 A. No, sir, not -- not entirely. And I'm going to go 3 back a little bit to the previous person questioning, and 4 he ended up talking about basis. And again, I'll tell 5 you, when it comes to hedging, whatever, I probably know 6 enough to be dangerous. 7 Q. That makes two of us. 8 A. There's no instrument out there I know where a 9 Class I handler can hedge the exact price they are going 10 to pay for the milk. We only have III and -- Class III 11 and Class IV that they can use. And again, that's at 3.5 12 butterfat. Maybe they could use butterfat to hedge or 13 whatever, but, you know, generally you're going to buy 14 milk higher than that 3.5 butterfat. And generally, if 15 you are buying from a cooperative, you can have some 16 handling fees or whatever to pay over that. 17 And, again, as I understand using the futures 18 market -- again, I'm no expert, I got to be careful, I 19 don't want to go more than what I know -- they're fixed 20 volumes, and all the fluid plants I have ever dealt with, 21 that volume fluctuates from month to month. So you are 22 not going to be able to hedge 100% of it. 23 Q. Okay. Acknowledge you will not be able to hit 24 exactly the pounds and components for any particular 25 plant. 26 But for butterfat over 3.5, they could look to the 27 butter market for any overage, correct? 28 A. Again, just what I have heard here, there are 6792 1 futures contracts out there for butter. 2 Q. Okay. And your cooperative handling fees are 3 independent of the milk price usually, correct? 4 A. The cooperative fees, anything they charge above 5 the Class I price, that's between the buyer and the 6 seller. It's not mandated by the Federal Order. 7 Q. Okay. It's usually amount per hundredweight, 8 correct. 9 A. Yes, sir, it's on a per hundredweight basis. 10 Q. And as far as the volumes, I believe that the CME 11 contracts are 100,000-pound contracts, I could be wrong on 12 that, but that's -- and in-plant terms, two loads of milk, 13 right? 14 A. Yes, sir. 15 Q. And so a plant generally has an idea how many 16 loads of milk it's going to take in a month, with certain 17 fluctuations for seasonality, correct? 18 A. In my experience, when I was full-time in Florida, 19 and we did some of this, and we were handling quite a bit 20 of milk, from what a plant anticipated on the first day of 21 the month to what they ended up taking, it was always off. 22 Things changed. 23 Q. They do. I would agree. I would agree with that. 24 Did Southeast Milk own an ESL plant at one point? 25 A. Yes, sir. 26 Q. And am I correct that they no longer own that 27 plant? 28 A. No longer own it. 6793 1 Q. Was that a plant that they owned while you were 2 the CEO of that cooperative? 3 A. When I was CEO, it was a conventional milk plant. 4 Q. Okay. That eliminates my need to ask a few more 5 questions then on that point. 6 We have heard some testimony from ESL 7 manufacturers about their use of risk management tool 8 hedging to fix their price, and they have asserted that 9 that is a benefit to their customers. 10 Southeast Milk is a significant supplier of raw 11 milk to HTST plants. I wonder if, in your experience, you 12 have an opinion about whether SMI's customers would find a 13 value in obtaining milk at a more stable price? 14 A. It's been approximately a year now since I had 15 regular contact with Southeast Milk customers, the pool 16 distributing plants. In those contacts I had, there never 17 was an interest. Never was an interest. One of the 18 Southeast Milk's major customers is a retail grocer, and 19 retail grocers have their -- this retail grocer had its 20 own fluid processing plant, and a high percent of the milk 21 in the Southeast is processed by retail grocers who have 22 their own plants. 23 And conversations I have had with one we supplied, 24 and also good friends with the buyer of another one, there 25 just was no -- wasn't any interest there. They looked at 26 things a little different. So they can control a little 27 more from their plant to the end user there, or the 28 consumer on the shelf. 6794 1 We also supplied other plants. And, again, 2 conversations I had was no interest. They always -- the 3 biggest thing was, "Calvin, you just make sure we don't 4 have to pay any more for milk than what our competitor is 5 paying." That was their big interest. And most those 6 others, non-retailers, were private label, and formulas 7 just like what I mentioned here in my example. 8 Then we have had one processor who was big on 9 schools. And, again, because of some history of legal 10 issues with schools in Florida, I can't tell you how rigid 11 and strict it is, and they just adhered to that monthly 12 price change. It had to come from our office. 13 In anticipation of a question like yours at this 14 hearing, I talked with the people at Southeast Milk over 15 the last -- since this hearing started, who have regular 16 contact with customers, and I says, in your conversations, 17 has it changed? And they told me it has not changed. 18 Q. So the stories you are hearing from those HTST 19 processors are different than the stories we have heard 20 from some of the other HTST processors who testified here, 21 that they maintain an interest in -- in hedging their raw 22 milk costs? 23 A. Yes, sir. I was not here for all of them. I 24 don't know what volumes those other processors had. Just 25 on personal knowledge -- I don't mean this in a negative 26 way -- but they are with not some real, real large -- 27 large processors. The ones I'm talking -- you know, what 28 I have talked with, the SMI customers, other than ones -- 6795 1 you know, we got a couple small ones, take a pretty 2 significant amount of milk in in a monthly basis. 3 Q. And my understanding would be that if -- if 4 Class I were easily hedgeable, those processors that 5 wanted to know that they were paying the same price as 6 their competitors could still purchase on a regulated 7 price, but they would also have the ability to try to 8 hedge that risk. 9 Would that be your understanding as well? 10 A. It's my understanding, if they wanted to hedge, 11 under the Federal Order, they are still required to pay 12 that minimum Federal Order price. And whatever they might 13 gain, plus or minus, by using the futures market, that is 14 their own thing on gain or loss. 15 Q. That actually takes me to another question I had, 16 so I'm going to jump ahead to that, because it seems to 17 make sense here. 18 On the next page under item 3, you're describing 19 an example about truing up milk. And you say it was 20 January -- or December into January when this occurred. 21 Was this -- well, let me rephrase my question. 22 How does that work when you have a regulated 23 minimum price? 24 A. Again, that was one of the reasons why it was a 25 mess. At that time, again, we did have an over-order 26 premium, and the plant's still going to be responsible to 27 the order for that federal minimum over-order price. 28 And so, again, I'm going back on history, this 6796 1 happened 15 to 20 years ago, but some things still stick 2 out in your mind. And so we had to estimate on both 3 butterfat and -- and skim of what we thought the price was 4 going to be. And as you expect, we were off. We were 5 off. But the amount we were off, if I remember, was 6 significant, but it still fell within the range where 7 they're still going to pay the over-order premium -- I 8 mean, excuse me -- still going to pay the minimum price. 9 But, again, trying to explain, we -- it -- they 10 had to explain to their customers about why -- especially 11 on schools, what happened to a carton of 2% milk, why that 12 being off was as much as a whole milk carton. We got 13 involved with military bases on the same thing. And then 14 we got involved, some customers, when we had to true up, 15 put it on the February price announcement, some wanted to 16 include it with the over-order premium, some wanted a 17 separate line item. It -- and I think we might have been 18 on through almost summer before we ever got it cleaned up. 19 Q. So it was -- that true-up was a true-up against 20 the over-order premium, not against the regulated price? 21 A. Well, that's what we had to work with because the 22 plant, regardless, still had to pay the minimum price. 23 Q. Okay. Very good. 24 Okay. Now, on to page 5 of your testimony, and 25 item 5, and you state that eliminating Class I advanced 26 pricing creates a one-sided change. Dairy farmers retain 27 the economic benefits of the higher Class I price, but 28 fluid milk processors lose the pre-knowledge of their raw 6797 1 product cost. 2 Wouldn't the elimination of advanced pricing, when 3 coupled with the ability to manage risk, provide some 4 benefit to some Class I handlers at least? 5 A. Well, again, as I understand this hearing, we're 6 just dealing with Federal Order provisions. And no 7 Federal Order provisions I know of have anything to -- you 8 know, any provisions related to risk management. 9 And the statement I am making here, Class I price 10 is the highest, we recognize that. And, again, the 11 product they are making as Class I processors, you know, 12 the raw milk cost, that's the highest single cost. The 13 number I used was 75%. Back when I was at Southeast Milk, 14 some of our -- it was -- it was greater -- greater than 15 that. 16 So in my opinion, that's a fair -- you know, fair 17 tradeoff on advanced pricing if we can have the highest 18 classified price. 19 Q. Even if doing so creates more opportunities for 20 some farmers to be hurt by opportunistic depooling? 21 A. Well, again, in the market I am, there's no 22 depooling. I mean, if you are depooling, you are off -- 23 you have messed up big time, and so forth, nobody would 24 take your milk. 25 And, again, I go back, you know, I use the term 26 price inversions instead of depooling. I'll go back to my 27 question from Ms. Hancock -- again, this is personally -- 28 I think there's other things we can look at, too, also to 6798 1 help slow down or reduce the risk of price inversions. 2 Q. In your next paragraph when you talked about the 3 buffering effect when prices are falling. I would think 4 that the flip side would be that you also buffer the 5 benefits of rising markets on the upside, correct? 6 A. Yes. But you know what's coming. 7 Q. I don't think I have any other questions. 8 MR. MILTNER: Thank you very much, Mr. Covington. 9 THE WITNESS: Thank you, sir. 10 CROSS-EXAMINATION 11 BY DR. CRYAN: 12 Q. Hello, Calvin. 13 A. Good afternoon. 14 Q. I already know you're a Farm Bureau member, so I 15 won't ask that question. 16 A. I was hoping you would. 17 Q. Well, would you? Would you like me to ask? 18 Are you a Farm Bureau member, Calvin? 19 A. Yes, sir, I am a Farm Bureau member. 20 Q. Yes, sir. I appreciate that. And you are pretty 21 active down there in North Carolina. 22 A. Since you ask, I'm on the County Farm Bureau -- 23 Board of Directors of our County Farm Bureau. And, in 24 fact, to be here at this hearing, I'm missing our annual 25 meeting tonight. 26 Q. Oh, okay. 27 A. So I won't be able to participate in that process 28 that you talked about of giving resolutions and so forth 6799 1 that work their way up. 2 And then also, I'm on the State -- North Carolina 3 State Farm Bureau Dairy Committee. 4 Q. Fantastic. 5 And I saw you last year at the North Carolina 6 annual meeting. 7 A. Where I was a delegate. 8 Q. Fantastic. Well, I'm sorry you are missing that. 9 I'm sorry that we couldn't do something different. But 10 here you are, and thank you. 11 So I think I only have one question. 12 Would you -- would you propose advanced pricing 13 for all the classes? 14 A. Personally, I wouldn't. But I'm just giving you 15 my personal opinion. 16 Q. Personally you would? 17 A. I said personally I would not, but I'm just giving 18 you my personal opinion. 19 Q. Okay. 20 A. I would -- again, what I testified, is to keep 21 advanced pricing for what we have now. 22 Q. And you think that those are different -- those 23 are substantially different from the -- from the classes 24 that are -- that are -- 25 A. Well, again, I go back to my testimony. You know, 26 Class I is a different product than Class III and IV. 27 Q. Okay. What about Class II? 28 A. Well, the Class II is mixed. We have advanced 6800 1 pricing for Class II skim, but we do not have advanced 2 pricing for Class II butterfat. 3 Q. That's true. Thank you, Calvin. Have a great 4 day. 5 DR. CRYAN: Thank you very much. 6 THE COURT: Are there are questions before I ask 7 the Agricultural Marketing Service? 8 I see none. The Agricultural Marketing Service 9 may proceed. 10 CROSS-EXAMINATION 11 BY MS. TAYLOR: 12 Q. Good afternoon. 13 A. Good afternoon. 14 Q. I think most of our questions have been asked and 15 answered already, so I only have a couple. 16 I was wondering if you might -- what your response 17 is to some of the arguments we have heard about if we got 18 rid of advanced, then that would just push the HTST plants 19 to start hedging. 20 A. Well, it -- I guess, you know, I hate to put the 21 cart in front of the horse. Okay? I know there's been 22 testimony here about, well, if we don't have advanced 23 pricing, CME will come up with something and so forth. 24 But I guess I'm one that wants to go with what we have, 25 what we are sure of. 26 The current system has worked. Again, the 27 processors that I work with, they are comfortable with 28 advanced pricing. As I have answered questions before, 6801 1 there has not been a whole lot of interest in it. And I 2 just would have a challenge of making it mandatory to push 3 them in to use the futures market. If they want to do it, 4 they can do it now, voluntary basis. 5 But I'm just hesitant, and that's the reason I'm a 6 strong supporter of keeping what we have now on advanced 7 pricing. 8 Q. Okay. You use a term in your statement that I 9 don't think's been used yet in this six and a half weeks, 10 so if you could define for the record what a tolling fee 11 is. 12 A. Okay. A tolling fee -- again, this was when I was 13 at Southeast Milk, and we had processing plants, and most 14 of the milk that our processing plants -- packaged milk, 15 was private label. 16 So -- so basically, you know, I say -- the price 17 of raw milk, the packaging, and so forth, and then we 18 would negotiate with our customer -- think of a tolling 19 fee similar to a Make Allowance. We had to have a fee 20 that covers our cost of running that plant, paying the 21 labor, paying the light bill, our return on investment. 22 And, again, we would negotiate that. You know, if you 23 were doing all gallon jugs, that would be lower than if 24 you were doing pints or half-pints. You know, somebody 25 that was taking several truckloads of milk a day is 26 different than somebody only taking a half a truckload. 27 Q. Okay. On your page 5, top of -- top of the page, 28 you are talking about -- this is your -- the institutional 6802 1 buyers of fluid milk products. There's schools, prisons, 2 etcetera. And we have heard an earlier testimony that 3 schools set their budgets for the year, and so some people 4 argue they would prefer to have some kind of set price so 5 they could budget better. 6 But from the paragraph I read of what you have 7 written, your opinion is slightly different that -- if I 8 can summarize, basically, they know how to deal with the 9 monthly milk price fluctuation, so they are just fine. 10 And I just want to see if you can expand on that a 11 little bit more since it is different than what we have 12 heard from others. 13 A. Yes. One of the Southeast Milk's customer is a 14 major provider of school milk, not only in Florida, but 15 goes out of Florida. And so I get a lot of feedback from 16 him with schools. And also, as I have mentioned earlier, 17 because of what happened back in the late '80s with school 18 milk and the big federal issue down there, legal issue, 19 everybody's real careful when it comes to school milk in 20 Florida, both the processor and the people buying -- the 21 school people buying it. 22 And so they have become very, very comfortable. 23 The formula is very strict. In fact, had a number of 24 school systems that Southeast Milk had to send our pricing 25 announcement directly to them. And so they -- they 26 understand the monthly fluctuations. And also had some of 27 that same thing with military bases, large military bases 28 in Florida. So they were comfortable with that, with that 6803 1 change. 2 And I think it would be a challenge just to -- 3 with some of them, to explain it to them to go back. It's 4 working. 5 Q. Okay. My last question is just kind of a 6 step-back question. And there's been a lot of talk about 7 various changes in the base Class I skim price formula to 8 allow for hedging and facilitating price risk management. 9 So I want to give you the opportunity to respond to what 10 you think big picture-wise, because risk management, 11 hedging is not in the -- in the Agricultural Marketing 12 Agreement Act. 13 So how do you think Federal Orders should 14 prioritize that versus the other provisions in the Act 15 that is explicit that they should provide for? 16 A. It's obvious that just in my -- think about the 17 last ten years, the use of risk management, hedging, 18 futures market by dairy farmers has grown quite a bit. In 19 fact, if you look at USDA programs, Dairy Revenue Program, 20 Livestock Gross Margin, you know, even USDA's involved in 21 it. 22 But in my -- this is just giving my opinion, so 23 far all these programs have been voluntary. A dairy 24 farmer can choose if he wants to be involved in it. If a 25 plant wants to use it, they can be involved in it. And I 26 would prefer to see it remain on a voluntary basis, that 27 the Federal Milk Marketing Orders continue to do what they 28 have done, in my opinion, so well for a number of years, 6804 1 set minimum prices, enforce payment, pool, and so forth. 2 MS. TAYLOR: I think that's it from AMS. Thank 3 you. 4 MS. HANCOCK: Your Honor, I think that's all we 5 have at this time. We would move for admission of 6 Exhibit 296. 7 THE COURT: Is there any objection to Exhibit 296 8 being admitted into evidence? 9 There is none. Exhibit 296 is admitted into 10 evidence. 11 (Exhibit Number 296 was received into 12 evidence.) 13 THE COURT: I love listening to Mr. Covington. 14 I'm glad he's coming back. 15 THE WITNESS: Well, thank you, ma'am. 16 THE COURT: You're welcome. 17 Dr. Bozic is ready to come to the podium. Let me 18 see what he's got on his mind. 19 DR. BOZIC: Marin Bozic for Edge Dairy Farmer 20 Cooperative. 21 Your Honor, upon your urging, I did the forensics 22 on the Exhibit 290 to reconcile. I have the results, and 23 will submit them overnight. And just out of abundance of 24 caution so that nobody can say that the evidence should 25 somehow be discounted later, I would like to make myself 26 available for examination tomorrow, hoping that nobody has 27 any questions. 28 THE COURT: Wonderful. Good for you. 6805 1 DR. BOZIC: Thank you, Your Honor. 2 THE COURT: Thank you. 3 MS. TAYLOR: I just wanted to say, the only person 4 I have left on my list that had something to go up is 5 Sally Keefe, I think with a short -- and I don't know what 6 short means anymore -- statement. 7 MR. ENGLISH: Well, I know it's a couple of 8 minutes before 5:00. It is the submission of an exhibit 9 in response to Mr. Wilson's questions back from the second 10 week on 5B, and a very short statement about MIG's 11 position on advanced pricing. 12 Now, my view of the world is, in a normal world, 13 that could be done in four minutes. 14 MS. TAYLOR: We don't live there anymore. 15 MR. ENGLISH: If the view is that we can't do it 16 tonight because it's couple minutes to 5:00, Ms. Hancock 17 was nice enough, if it was going today, to agree. If it's 18 going to interfere with tomorrow, she can with -- we would 19 like to just kind of clean it up. 20 And if you want to do it tomorrow because it's 21 close enough to 5:00 and you don't believe me that it can 22 be done in four minutes -- 23 MS. TAYLOR: We don't. On the record, I do not 24 believe you. 25 MR. ENGLISH: I said in a normal world, so I will 26 stand down. 27 MS. TAYLOR: As long as Ms. Keefe had already 28 planned to be here tomorrow, I don't want her staying 6806 1 overnight for just this. 2 MR. ENGLISH: Unfortunately for Ms. Keefe, I think 3 that that's -- the reality is that she's here for longer 4 than she wishes. 5 MS. TAYLOR: Okay. So I would think we could 6 start with her in the morning. 7 And then I'm not sure who is on National Milk's 8 list. 9 THE COURT: Yeah, let's find out if that's fine 10 with whomever she's replacing. 11 Ms. Hancock, what's your lineup? 12 MS. HANCOCK: And, Your Honor, that's completely 13 fine for us if Ms. Keefe wants to go first. 14 MR. ENGLISH: She doesn't have to. 15 MS. HANCOCK: We have Dr. Peter Vitaliano, then we 16 have Dr. Chuck Nicholson, and then we have Jeff Sims, and 17 we believe that would take us through the end of the day. 18 Just to give a little bit of advance, we have 19 Dr. Stephen Koontz, who will need to go on on Thursday. 20 And then -- K-O-O-N-T-Z -- and then we have a dairy farmer 21 who will be appearing in person on Friday, in addition to 22 what we will have -- whoever signs up online. 23 THE COURT: Say that last part. Your voice 24 dropped off. 25 MS. HANCOCK: Oh. Just in addition to whoever 26 signs up online, the dairy farmers who will appear by 27 Zoom. 28 MS. TAYLOR: And, Dr. Bozic, are you going to be 6807 1 here all week or are you going to leave tomorrow? 2 DR. BOZIC: I am leaving tomorrow afternoon, 4:39 3 flight, and I'm probably not coming back until the -- 4 MS. TAYLOR: Maybe I would propose we do Ms. Keefe 5 and then Dr. Bozic and then -- 6 MR. ENGLISH: And just to be clear, as short as it 7 is, we are prepared Ms. Keefe to go another time, because 8 we understand where the thing is. So if people don't 9 think it's going to be that short, Ms. Keefe is flexible. 10 I say that. Part of the context that I talk about 11 looking ahead, I talked to Ms. Hancock earlier this week, 12 that there is a witness on the earlier issue, 3, about 13 butterfat recovery, an expert named Dean Sommer, who will 14 be here Thursday. It's a relatively short statement. We 15 will get it posted as soon as we can. 16 I'll also share it with Mr. Miltner as soon as I 17 can. My understanding is we can try to get him on 18 Thursday. 19 And therefore, since Ms. Keefe is flexible, and 20 since no one believes we're in a normal world, if that 21 means not -- maybe if a slot opens up tomorrow at some 22 point, we can do it. She can be flexible. I want to 23 emphasize that because I'm trying to move this along, too. 24 MS. HANCOCK: So all of that sounds fine with me. 25 Dr. Vitaliano does have to finish tomorrow, so that's my 26 only asterisk on the witnesses. 27 I felt reasonably confident, but given how things 28 have gone, I thought I'd better say it out loud. 6808 1 THE COURT: So is the thought that we would take 2 Dr. Bozic first? Is everyone fine with that? We'll take 3 Dr. Bozic first, and then is the next thing Dr. Vitaliano, 4 or is it Sally Keefe? 5 MS. TAYLOR: I would propose Dr. Vitaliano so he 6 can be done tomorrow for sure. 7 THE COURT: Okay. Yep, that's fine with me. I 8 know the first two, and then there's lunch. 9 Thank you all. I know how hard you worked, and I 10 really appreciate it. 11 For those who are leaving, you will be missed. 12 You have contributed greatly. I thank you. 13 We go off record at 5:03. 14 (Whereupon, the proceedings concluded.) 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 6809 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 21, 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