7057 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 5, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 7058 1 A P P E A R A N C E S: 2 FOR THE USDA ORDER FORMULATION AND ENFORCEMENT DIVISION, USDA-AMS DAIRY PROGRAM: 3 Erin Taylor 4 Todd Wilson Brian Hill 5 Michelle McMurtray 6 FOR THE AMERICAN FARM BUREAU FEDERATION: 7 Roger Cryan 8 FOR THE MILK INNOVATION GROUP: 9 Ashley Vulin (Remotely) Charles "Chip" English 10 Grace Bulger 11 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 12 Nicole Hancock Brad Prowant 13 FOR SELECT MILK PRODUCERS, INC.: 14 Ryan Miltner 15 16 FOR INTERNATIONAL DAIRY FOODS ASSOCIATION: 17 Steve Rosenbaum 18 ---o0o--- 19 20 21 22 (Please note: Appearances for all parties are subject to 23 change daily, and may not be reported or listed on 24 subsequent days' transcripts.) 25 26 ---o0o--- 27 28 7059 1 M A S T E R I N D E X 2 SESSIONS 3 THURSDAY, OCTOBER 5, 2023 PAGE 4 MORNING SESSION 7062 AFTERNOON SESSION 7182 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 7060 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Stephen Koontz: 5 Direct Examination by Ms. Hancock 7064 Cross-Examination by Mr. Rosenbaum 7093 6 Cross-Examination by Mr. Miltner 7112 Cross-Examination by Mr. English 7119 7 Cross-Examination by Ms. Taylor 7125 8 Dean Sommer: 9 Direct Examination by Mr. Rosenbaum 7134 Cross-Examination by Mr. Miltner 7151 10 Cross-Examination by Mr. English 7191 Cross-Examination by Mr. Miltner 7194 11 Cross Examination by Dr. Cryan 7196 Cross-Examination by Ms. Taylor 7197 12 Stephen Zalar: 13 Direct Examination by Ms. Hancock 7212 14 Cross-Examination by Mr. English 7228 Cross-Examination by Ms. Taylor 7232 15 Redirect Examination by Ms. Hancock 7238 16 Jeffrey Sims: 17 Direct Examination by Ms. Hancock 7241 Cross-Examination by Mr. English 7280 18 19 ---o0o--- 20 21 22 23 24 25 26 27 28 7061 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. 5 304 Testimony of 7068 7130 Stephen Koontz 6 305 Document, Quick Stats 7106 7133 7 306 Testimony of Dean Sommer 7208 8 307 Testimony of Dean Sommer 7208 9 308 Article by Dr. Lucey 7174 7211 10 309 Testimony of 7211 7239 11 Stephen Zalar 12 310 NMPF-37 7241 13 311 NMPF-37A 7241 14 312 NMPF-37B 7241 15 313 NMPF-37C 7241 16 314 NMPF-37D 7242 17 315 NMPF-37E 7242 18 316 NMPF-37F 7242 19 317 NMPF-37G 7242 20 318 NMPF-37H 7242 21 319 NMPF-37I 7242 22 23 ---o0o--- 24 25 26 27 28 7062 1 THURSDAY, OCTOBER 5, 2023 - - MORNING SESSION 2 THE COURT: Let's go back on record. 3 We're back on record at 8:00 a.m. on October 5, 4 2023. It's Thursday. I'm Jill Clifton. I have one 5 preliminary matter before we resume. 6 Most of you know that the reason I'm here is that 7 on September 22, 2023, Chief Judge Channing Strother 8 tested positive for COVID. On September 29, 2023, he 9 tested negative for COVID and has ever since. He still 10 had difficulty having the energy that he's used to having 11 and was sleeping a lot, but still doing his job from -- 12 from home, isolating. And now he's fully back. 13 Many of you have been concerned about him. His 14 residuals at this point are congestion and a cough, and 15 from talking to other people who are similarly situated, 16 apparently that is common. And it goes away, but it takes 17 time. 18 He has all through my involvement in this 19 proceeding been mindful of how you all are doing. He was 20 so hopeful that no one else that he had been closely 21 situated with also had COVID. 22 And I have assured him that I'm aware of nobody 23 else having it. I know all of you are beat up from the 24 long hours and from the difficulties, but -- but I'm very 25 pleased that everyone is healthy enough to continue. 26 He asked me for continuity to take also the 27 November segment, which is the week following the 28 Thanksgiving weekend. We're beginning at 1:00 p.m. on 7063 1 that Monday and going that full week. And I am delighted. 2 I'm the one having the fun, and so I'm appreciative. 3 I thought it might be useful for those of you who 4 may not know what the function of the presiding 5 Administrative Law Judge is in a rulemaking hearing such 6 as this. It is a limited function. It is to gather in 7 the evidence and certify for the record what that is. We 8 call it a certification of the transcript, but it's 9 actually the transcript and the exhibits. 10 So after the hearing, both judges who have been 11 witnesses, that is Chief Judge Strother and myself, both 12 of us will sign off on those documents. We each observed 13 different portions, so we will both be signing off on 14 those documents. 15 In the meantime, we're behaving separately in that 16 Chief Judge Strother indicated he's working on a ruling on 17 a matter that came up while he was presiding. He will 18 still do that. He will finish that. And I will do the 19 rulings that come before me. 20 So I just wanted to clarify we're both assigned 21 the case. He is senior. We'll both sign off on the 22 documents at the end. 23 All right. Now, are there any other preliminary 24 matters before we assume taking testimony? 25 I see none. 26 Would you state and spell your name, please. 27 THE WITNESS: My name is Stephen Koontz, 28 S-T-E-P-H-E-N, K-O-O-N-T-Z. 7064 1 THE COURT: Now, your voice is robust which is 2 good, except it wasn't quite loud enough, and it all has 3 to do with positioning. 4 I don't know, can you move closer toward me and 5 still see your laptop and your document? 6 THE WITNESS: Yes. 7 THE COURT: I think that will help. Very good. 8 Have you previously testified in this proceeding? 9 THE WITNESS: No, I have not. 10 THE COURT: I'd like to swear you in. Would you 11 raise your right hand, please. 12 STEPHEN KOONTZ, 13 Being first duly sworn, was examined and 14 testified as follows: 15 THE WITNESS: Yes. 16 THE COURT: And that was a "yes"? 17 THE WITNESS: Yes. 18 THE COURT: See, again, you know, you have to be 19 fairly close to that microphone unfortunately. It's 20 awkward when you have things in front of you. 21 Counsel. 22 MS. HANCOCK: Thank you, Your Honor. 23 DIRECT EXAMINATION 24 BY MS. HANCOCK: 25 Q. Good morning, Dr. Koontz. Thank you for being 26 here today. 27 Would you mind providing your business address for 28 the record? 7065 1 A. I'm located at Colorado State University. My 2 office is 266 Nutrien Agricultural Sciences Building, Fort 3 Collins, Colorado, 80523. 4 Q. I want to first start off by getting to know a 5 little bit more about your background. 6 Can you start by telling us about your educational 7 background? 8 A. I have a BS and MS degree from Virginia Tech in 9 agricultural economics, and I have a Ph.D. in agricultural 10 economics from the University of Illinois. 11 Q. And following your Ph.D., what have you spent your 12 time doing in your professional career? 13 A. I have been academic faculty the entire time. I 14 worked at Oklahoma State University in the Department of 15 Agricultural Economics for six years. Moved from there to 16 the Department of Agricultural Economics at Michigan State 17 University, and had an opportunity to go to Colorado State 18 University. My department there is the Department of 19 Agricultural and Resource Economics. 20 Q. Okay. The proceeding is being pushed out by Zoom, 21 as well as having a court reporter here, so we're trying 22 really hard to make sure the audience online can hear, but 23 most importantly, that our court reporter can capture 24 everything that you are saying so we have a good record. 25 A. Absolutely. If I'm not doing it right, please let 26 me know. It's not intentional. 27 Q. Yeah, yeah. And it's something that we've been -- 28 it's been a common theme for us. 7066 1 So throughout your professional career in 2 academics, you have also had some other opportunities to 3 use your experience in agricultural economics to testify 4 in front of Congress. 5 Can you tell us about that? 6 A. I have testified twice. I work -- my primary 7 research area has been in market organization and 8 performance, and it's largely on the cattle and beef 9 markets. I have worked with major cattle feeding 10 organizations and also the packing industry, beef packing 11 industry. 12 Q. And what kind of information or topics do you -- 13 do you present when you are testifying in front of 14 Congress? 15 A. The topics of lately have been price discovery, 16 and in that entire area, price reporting, price discovery. 17 And long-term, it's more along the lines of market power, 18 industry structure, and market participant conduct over 19 time. 20 Q. Okay. All related to the feed industry -- or 21 cattle feed industry? 22 A. Cattle and I have -- by working with the cattle 23 industry, I have also had to be solid in my understanding 24 of what goes on in commodity markets, primarily feed 25 markets, forage markets, things like that. 26 Q. Okay. 27 MS. HANCOCK: Your Honor, at this time we would 28 move to recognize Dr. Koontz as a commercial agricultural 7067 1 economist with cattle and beef markets and cattle feed. 2 THE COURT: Tell me again. Commercial 3 agricultural? 4 MS. HANCOCK: Economist, cattle and beef markets 5 and cattle feed. 6 THE COURT: Does anyone wish to voir dire the 7 witness with regard to his qualifications before I accept 8 him as an expert witness? 9 There is no one. I do. 10 Now, next, does anyone object to my accepting 11 Dr. Stephen Koontz as an expert as indicated? 12 There are no objections. I do accept Dr. Stephen 13 Koontz as an expert in commercial agri- -- as an expert 14 as -- in the field of commercial agricultural economics, 15 and cattle and cattle feed? Do I have it right? 16 THE WITNESS: Cattle markets and production. 17 THE COURT: Cattle markets and production, 18 including feed. All right. Good. Thank you. 19 We are very happy to have you here. Welcome. 20 THE WITNESS: Thank you. 21 THE COURT: Ms. Hancock? 22 MS. HANCOCK: He wasn't sure if you were being 23 serious. 24 BY MS. HANCOCK: 25 Q. Dr. Koontz, would you mind providing us with your 26 testimony in Exhibit 304? And as you read your testimony, 27 just be mindful of both the volume of your voice and then 28 the speed that -- make sure that it's slow enough that our 7068 1 court reporter can capture it. 2 A. Yes. Absolutely. 3 MS. HANCOCK: Your Honor, I don't know if I marked 4 this. I'm sorry. Thank you. 5 This is Exhibit NMPF-55, and I believe the next 6 exhibit number is 304. 7 (Exhibit Number 304 was marked for 8 identification.) 9 THE COURT: I have my copy now. And, yes, this is 10 Exhibit 304. 11 Dr. Koontz, you may proceed. 12 THE WITNESS: Thank you. The purpose of this 13 testimony is to comment on the proposed changes to the 14 producer milk price surface and the potential impacts on 15 milk production in the dairy industry in Colorado. 16 I'm a professor in the Department of Agricultural 17 and Resource Economics at Colorado State University. Been 18 on faculty there since 1989, prior to that at Oklahoma 19 State and Michigan State. 20 THE COURT: May I interrupt? 21 THE WITNESS: Yes, please. 22 THE COURT: Your statement says 1998. You said 23 1989. 24 THE WITNESS: I'm sorry. '89 at Oklahoma State, 25 and 1998 at Colorado State. 26 THE COURT: Ah, thank you. 27 THE WITNESS: My apologies. 28 THE COURT: No worries. 7069 1 THE WITNESS: I'm -- I was pleased to hear you 2 describe what I do for a living. I'm not sure I could 3 tell that to my parents, so I'll -- I'll have to write 4 down some of these shortcuts. They are helpful. 5 I consider myself a livestock and commodity market 6 economist. I have a three-way split. I hold an 7 extension, teaching, and research position, and over the 8 years I have worked on issues relevant to commercial 9 agriculture in Colorado. 10 I have conducted economic education with producers 11 regarding market outlook, risk management, and also policy 12 questions. I've worked with the cattle industry and the 13 USDA Agricultural Marketing Service, the Market News 14 Division, on issues related to fed cattle pricing and 15 price reporting. 16 I was engaged during the transition from voluntary 17 price reporting to the implementation of livestock 18 mandatory reporting, and have worked with the National 19 Cattleman's Beef Association in the industry effort 20 recently to improve cash market participation in fed 21 cattle trade. 22 I have testified to Congress regarding market 23 structure and conduct in cattle and beef industries, and 24 working in extension and teaching in Colorado has required 25 me to also develop a solid understanding of grain and 26 forage markets upon which livestock industries rely. 27 Agricultural in Colorado contributes approximately 28 $10 billion annually to the state economic output. 7070 1 Approximately 60% of that wealth creation is related to 2 livestock industries, cattle, cattle feeding, dairy, 3 poultry, and pork, and specialty livestock. The remaining 4 40% is from crop-related industries, specifically hay, 5 corn, corn silage, wheat, barley, a variety of fruits and 6 vegetables, and specialty crops. 7 Of the $6 billion associated with livestock, the 8 dairy production at the farm level contributes about 9 $800 million annually. And these are all roughly 10 value-added contributions. It's not double counting 11 pieces associated with the different industries. 12 Dairy production in Colorado is an important 13 contributor and has grown considerably in the last 14 20 years. As the national dairy industry has migrated 15 West and transitioned into milk production for dairy 16 product manufacturing, Colorado has participated, as have 17 many high plains and western states. There is new 18 production, considerable new production, milk production 19 for manufacturing products that comes out of Idaho, New 20 Mexico, Western Texas, Kansas, and Colorado. 21 Prior to 2000, the population of milk cows in the 22 state was less than 85,000 animals, and by January 2023 23 population was over 200,000 animals. The annual growth is 24 regularly between 3 and 10,000 animals, and the only 25 decrease in the dairy cow herd population was in 2010. 26 Prior to 2000, annual milk production in the state was 27 less than 2 billion pounds, and by 2022 the annual 28 production was almost 5.5 billion pounds. 7071 1 Dairy is the growth industry in Colorado 2 agriculture and has been since the year 2000. And that's 3 in terms of the contribution to the Colorado economy. 4 Dairy -- Colorado dairy is also a rather innovative 5 industry. Annual production per cow was below 21,000 6 pounds in 1999; peaked at modestly above 26,000 pounds per 7 animal in 2020. Production per cow is -- was the second 8 largest in the country behind Michigan in 2022. 9 The proposed changes in milk pricing that are 10 being considered by the USDA AMS have the potential to 11 make substantial impacts, specifically on milk production 12 and the dairy industry in Colorado if milk prices are 13 lowered, what I would consider substantially, a dollar to 14 $2 per hundredweight. This testimony is offered to 15 communicate details on the feed costs in Colorado versus 16 portions of the U.S. further east, and also to discuss the 17 economic environment in Colorado as it currently stands 18 and likely future conditions, and then talk about -- 19 outline some potential impacts on Colorado of the proposed 20 policy changes. 21 The National Milk Producers Federation asked me to 22 comment on the impact on the dairy -- Colorado dairy 23 farmers if the policy changes, resulted in milk 24 manufacturing Make Allowance increasing about $0.50 per 25 hundredweight, and Colorado producer price surface that 26 followed the Wisconsin models output with no adjustments. 27 Ed Gallagher at DFA, at Dairy Farmers of America, asked me 28 to consider the impact of approximately a $0.50 decrease 7072 1 in the blend price or producer price differential, the 2 values on Colorado dairy farmers, if the Wisconsin model 3 was followed with no adjustments. 4 His testimony, Ed's testimony, will cover the 5 estimated decline. According to Mr. Gallagher, the 6 combined impact would result in milk price in Colorado as 7 paid to producers decreasing by about a dollar per 8 hundredweight. 9 This change in the milk price surface has the 10 potential to be substantially negative on Colorado dairy 11 industry. I would also like to note that he's informed me 12 that there are other potential policy changes that could 13 Make Allowances (sic) substantially more, and with this 14 change alone, the decrease in milk prices paid to Colorado 15 producers would be about $1.45 per hundredweight. 16 I'm not testifying about the various 17 Make Allowance policy options, but it is clear to me that 18 any policy change that results in a decrease in Colorado 19 milk prices of a dollar or more would be rather harmful to 20 the Colorado dairy industry. 21 Colorado achieved what I consider to be a 22 competitive advantage in dairy production due to increases 23 in productivity relative to the cost of production and, in 24 particular, variable cost of production associated with 25 feed costs. 26 Colorado's a relatively high feed cost 27 environment, and I'm planning to illustrate that 28 magnitude. The USDA Farm Service Agency has a dairy 7073 1 margin management product, and the valuation of that is 2 based on national corn prices, or costs, national alfalfa 3 hay prices, and soybean meal prices for meal in Illinois. 4 Decatur, Illinois, is the U.S. hub of soybean meal 5 production, and prices across the nation are pretty 6 closely tied to prices from transactions at that 7 production point. 8 This margin calculation is the Dairy Margin 9 Coverage Program, the DMC. Dairy animal feed is 10 essentially composed of: A roughage component, hay, and 11 usually high quality hay such as alfalfa; an energy 12 component, made up usually of corn or some type of related 13 product; and a high protein component such as soybean meal 14 or another high protein meal. 15 Dairy animal rations can have a multitude of 16 components. There may be hundreds of potential inputs 17 that are considered when you are blending a ration, but 18 the multitude of elements of any given ration are priced 19 rather similar to these three main ingredients, that being 20 alfalfa hay, corn, and soybean meal. 21 So if I can, I would like to pull up Figure 1. 22 Thank you. 23 So what I'm doing in Figure 1 is demonstrating -- 24 I'm calculating the -- that USDA FSA margin, and I'm using 25 prices received by farmers from Colorado and South Dakota. 26 USDA NASS monthly prices received are used for corn and 27 alfalfa hay for each state. And I'm sticking with the 28 soybean meal price that's used by FSA in the insurance 7074 1 product, the USDA AMS price for meal in Decatur, Illinois. 2 As far as I know there's no public price data 3 that's routinely reported for soybean meal in different 4 states, but the delivery costs to Colorado from Decatur or 5 from some crush facility in the Upper Midwest, for 6 example, would be greater to Colorado than to South 7 Dakota. So that's something that this particular graph is 8 holding constant. It's just -- it's using the soybean 9 meal price, but it is not changing that across regions. 10 This variable cost margin converts corn, hay, and 11 meal prices to a variable cost associated with milk 12 production. In essence, this margin measures feed costs 13 in terms of a milk price and is in dollars per 14 hundredweight of milk. 15 The variable cost margin for Colorado across the 16 '07 to 2022 period was $10.20 a hundredweight, and for 17 South Dakota the average for the same period was $8.90 per 18 hundredweight and, again, measured per hundredweight of 19 milk. The minimum and maximum for Colorado was $6.68 and 20 $15.64 per hundredweight. Minimum and maximum for South 21 Dakota is 5.66 -- $5.66 and $15.02 per hundredweight. 22 For perspective, the average minimum and maximum 23 using the U.S. national prices and the Decatur soybean 24 meal price results in a dairy margin of $9.83, $6.61, and 25 $15.29 per hundredweight. 26 THE COURT: Dr. Koontz, would you read those 27 prices again, please? 28 THE WITNESS: Certainly. Where would you like me 7075 1 to go back to? 2 THE COURT: Start with $9.83. 3 THE WITNESS: Oh. So using, for perspective, 4 backing up and looking at the national U.S. prices, the 5 resulting dairy margin is $9.83 for an average, the 6 minimum is $6.21, and the maximum is $15.29 per 7 hundredweight. 8 THE COURT: Thank you. 9 THE WITNESS: These latter values, the national 10 values, are values that would be associated with producers 11 across the country if they used the current USDA FSA 12 product. 13 South Dakota is used for comparison because it is 14 a close dairy producing region, close to Colorado, 15 reasonably close to Colorado, where the proposed changes 16 to milk pricing are not what is to be experienced in 17 Colorado. Albeit, more recently, South Dakota is also 18 experiencing growing milk production to satisfy the milk 19 product market. South Dakota is also potentially part of 20 the national region which supplies feedstuffs into 21 Colorado and other high plains livestock producing 22 regions. 23 Other regions out -- other regions in the Upper 24 Midwest would have comparable statistics and conclusions 25 and with their comparisons with Colorado. 26 And last, I was asked by Ed Gallagher of DFA to 27 focus my facts -- focus what I'm considering comparing 28 Colorado to, to focus simply on South Dakota. That would 7076 1 be a reasonable comparison and a good reference for 2 comparison. 3 What we see in this first figure, Figure 1, in the 4 exhibit, what we see is that Colorado milk production, the 5 variable cost associated with feed were about a dollar to 6 $2 a hundredweight than those using prices from South 7 Dakota. Margins in the Central Midwestern states will be 8 lower again yet. 9 Further, the trend in feed costs is progressing 10 higher. Colorado is a corn-deficit state. Livestock 11 demand within the state is generally higher than corn 12 production within the state. Prices are higher when 13 compared to neighboring states, and corn is trans-shipped 14 from regions outside of Colorado into Colorado. 15 There's also a similar situation with respect to 16 forage, specifically alfalfa hay prices. The availability 17 of irrigation water and a semi-arid climate in Colorado 18 allows production of exceptionally high quality feed 19 alfalfa hay relative to regions further east. This hay is 20 in much demand in Colorado and is also regularly shipped 21 to Nebraska, Kansas, Texas, and New Mexico. 22 Dairy production in Colorado has grown since 2000, 23 and this is because animal productivity, the milk -- the 24 value of milk produced per cow is generally higher than 25 the cost of production, which are primarily feed costs. 26 And the feed costs are -- are reasonably low -- relatively 27 low compared to that value of that achieved milk cow 28 output. But this advantage has been pressured 7077 1 substantially since 2006. 2 In 2006 and 2007, that's a time period where the 3 feed grain market transitioned from being solely an animal 4 feed market into a market which also satisfied demand for 5 biofuels, and that biofuel is primarily that of ethanol 6 for gasoline used in gasoline blending. 7 THE COURT: Now, I want to make sure I heard what 8 you said. So the last part of that sentence, when you 9 start with -- with "transitioned from," if you would. 10 THE WITNESS: So the feed grain market 11 transitioned from being solely an animal feed market into 12 a market which also satisfies demand for biofuels, 13 primarily that being ethanol for gasoline blending. 14 THE COURT: Thank you. 15 THE WITNESS: So in Figure 1 what I'm doing is I'm 16 using the FSA formula for the dairy margin, and instead of 17 using national prices, I'm using the USDA NASS prices for 18 Colorado and for South Dakota, and the Decatur, Illinois, 19 soybean meal price. And the higher corn and hay prices in 20 Colorado demonstrate a higher variable cost feeding 21 margin. We also see the substantial jump in that margin 22 post-2006 when corn prices jumped higher -- moved to a 23 higher level due to that high demand now for corn to 24 produce ethanol. 25 THE COURT: Now, you are talking now about 26 Figure 2? 27 THE WITNESS: No, Figure 1. This is -- 28 THE COURT: Still Figure 1. 7078 1 THE WITNESS: -- putting Figure 1 in a bit of 2 context. 3 THE COURT: Very good. Thank you. 4 THE WITNESS: So Figure 2 illustrates the 5 difference between the two variable cost dairy margin 6 series from Figure 1. This is just the difference between 7 Colorado and South Dakota from the first figure. And we 8 see that difference is about 1 to $2 per hundredweight of 9 milk over time. The difference is increasing or 10 periodically stair-steps higher. The average from '07 to 11 '22 is a difference of $1.34 per hundredweight. And, 12 again, the units of this calculation are a hundredweight 13 of milk. 14 I believe this difference is also conservative. 15 It uses only different corn and alfalfa hay prices for the 16 two regions, and that if you incorporated a different 17 protein feed cost, the difference would likely increase as 18 well. 19 So digging into some more of the details. 20 My apologies, that spreadsheet has more tabs than 21 I can manage. I know the figures in the PDF file of the 22 exhibit though. 23 So Figure 3. Figure 3 illustrates the alfalfa hay 24 prices and the different prices between Colorado and South 25 Dakota. 26 THE COURT: Could we go off record just a moment? 27 (An off-the-record discussion took place.) 28 THE COURT: Let's go back on record. 7079 1 All right. We're back on record. It's 8:31. 2 All right. I was having trouble finding my PDF 3 copy of these exhibits, and now I see them. They are 4 just -- they begin on page 8 of the exhibit that we have, 5 and page 9, and now we have gone to page -- right now 6 we're on page 11. 7 All right. Thank you. 8 THE WITNESS: Certainly. 9 THE COURT: You may resume. 10 THE WITNESS: Thank you. 11 Figure 4 illustrates corn prices for the two 12 states. And what I believe the two figures shows, neither 13 of these price series is flat over time. The prices are 14 volatile and for the most part increase. And importantly, 15 there's a persistent higher cost in Colorado when compared 16 to, for example, South Dakota. Colorado is generally an 17 animal feed deficit state. Colorado is competitive in 18 cattle feeding and milk production largely because of the 19 higher productivity associated with animal performance in 20 the relatively dry and semi-arid climate in Colorado. 21 The average from 2007 to 2022 is a difference of 22 $70.50 per ton for alfalfa hay, and the average difference 23 for 2007 to 2022 is a difference of $0.35 per bushel for 24 corn. Also, observed in Figure 3 is the -- is the -- what 25 I spoke of, the increase in the biofuel demand, the 26 resulting change in feed market transition. 27 Prior to 2006, the demand for corn was primarily 28 livestock feed demand, and demand for corn to be used to 7080 1 produce ethanol for gasoline blending that emerged in 2007 2 grew considerably. And that growth rate slowed down in 3 2010 and has continued to grow modestly. Biofuel demand, 4 that biofuel demand changed to the corn market from a -- 5 what I perceive as a long-run average national corn price 6 between 3 and 3.50. It increased that to a long-run 7 average price between 4.50 and 5.50. 8 The USDA FSA dairy margin calculations convert 9 feed costs to a measure of variable costs associated with 10 feed. The resulting unit of measurement, again, is 11 dollars per hundredweight of milk produced. That gross 12 margin calculation, that variable cost margin calculation, 13 can be subtracted from a milk price to reveal a 14 contribution to fixed costs. 15 Similarly, those variable costs and an estimate of 16 fixed costs can be combined and the result subtracted from 17 the milk price to measure industry profitability. That 18 profitability or, in fact, the gross margin may not 19 represent any one or even a handful of specific dairy 20 producers, but this measure is a very reasonable summary 21 of economic conditions in the dairy industry, and it's 22 useful for comparing economic conditions through time and 23 across states. 24 My communication with dairy industry members and 25 also my reading of extension work, extension publications, 26 regarding fixed costs for dairies is that these costs are 27 reasonably between $6 a hundredweight and $8 a 28 hundredweight of milk. The average variable costs for 7081 1 production in Colorado in -- the average variable cost for 2 Colorado are $8 -- or not -- excuse me -- $10.29 for that 3 2007 to '22 time period. And that is as defined by that 4 dairy margin component. 5 A similar calculation for the whole U.S. would be 6 $9.83 per hundredweight. It's also commonly communicated 7 that dairy fixed costs are somewhere between 60 -- or 40 8 and 60% of variable costs. Of course, variable costs do 9 not change with production volumes like variable costs do, 10 and both by definition. 11 Further, producers regularly -- 12 THE COURT: I'm sorry, just read again that 13 sentence in the parentheses, please. 14 THE WITNESS: Sure. Within the parentheses: Of 15 course variable costs do not change with production 16 costs -- 17 THE COURT: Let's do that again. I think -- I 18 think you mean to start with fixed costs do not change. 19 THE WITNESS: Yes. Yes, ma'am. 20 THE COURT: Go ahead and read that again, please. 21 THE WITNESS: My apologies. I'm notorious for 22 reading what I think is there and not what's actually 23 there. 24 THE COURT: So do we all. 25 THE WITNESS: Of course, fixed costs do not change 26 with production volumes like variable costs do, and both 27 by definition. 28 Further, producers regularly and aggressively 7082 1 pursue methods to improve efficiency and thereby reduce 2 fixed costs. 3 So back to the 40 and 60% of variable costs, there 4 being -- there's also some trade-offs between variable and 5 fixed costs. High variable costs and high fixed costs we 6 don't observe. In combination, it's simply not 7 economically sustainable. 8 Further, it's likely -- but I don't consider it 9 directly here -- fixed costs are things that over time are 10 most impacted by inflation. Inflation will elevate fixed 11 costs, but variable costs I believe are -- are tracked 12 very well by feed costs, feed prices. 13 So Figure 5 is why people give economists a hard 14 time, because it doesn't look like anything, but Figure 5 15 presents this measure of industry profitability. The main 16 thing I see when I look at that is a lot of variability. 17 It's highly variable and around zero. 18 So Figure 5 presents a measure of industry 19 profitability where I'm taking the variable cost 20 associated with that feed margin and adding to it three 21 example fixed cost amounts: $6 per hundredweight, $7 per 22 hundredweight, and $8 per hundredweight. So that combined 23 fixed and variable costs are then subtracted from a 24 national Class III milk price. 25 In Colorado, when I think of milk prices, it's 26 Class III. That's largely where our products are going. 27 And USDA NASS doesn't have a continuous price series on an 28 alternative grade of milk for specific states, so this is 7083 1 the -- this is the U.S. price for Class III milk, and 2 that's -- that's what I think of when I think of what 3 Colorado producers are selling into. 4 We see that milk production profitability, so 5 dairy profitability, is highly variable and over time 6 rather modest. The profitability in this industry is not 7 substantial. The month-to-month variability and 8 profitability is both large and centers only modestly 9 above zero. 10 Milk production in my mind is an acceptable model 11 or representation of a competitive industry. Monthly 12 profits vary around zero and have persistent periods of 13 good profits. To the topside of zero would be good profit 14 periods. And then also, substantial periods of strong 15 losses. 16 The month-to-month profitability of the three 17 different fixed costs is simply different by that assumed 18 $1 per hundredweight difference in fixed costs across 19 the -- that triple. And, again, inflation's not 20 considered here. The profit barometer I believe is -- is 21 conservative without that, without considering inflation. 22 Because the month-to-month profitability doesn't 23 communicate well, it doesn't communicate that we're 24 looking to understand industry economic health and 25 well-being. And so I'll change what's -- what's looked at 26 a little bit. 27 So an alternative measure that communicates a 28 little better is to accumulate that month-to-month 7084 1 profitability. That's -- that's just a -- a simple 2 summing of the month-to-month profit on the prior figure. 3 This process measures the accumulation of income or wealth 4 from marketing 100 weight of milk in each example month in 5 this time period. 6 This measure -- therefore, you can -- you can 7 think of this -- this is selling 100 weight of milk, and 8 if you would like to scale it up to different states or 9 different regions, that is -- that's doable in that 10 context. 11 Thus, the measure can be scaled up to think about 12 impacts on an industry in a state, and of course that's 13 provided the dairy margin formula is reasonably accurate 14 and as is the assumed fixed cost amounts. 15 So Figure 6 presents the cumulative profitability 16 for the three assumed fixed costs. And, again, it's 17 taking the milk price and subtracting from that the 18 variable cost and the fixed costs and then accumulating 19 the three example -- the profitability from the three 20 different fixed cost examples. 21 Dairy profitability within Colorado was -- was 22 strongest in -- so focusing on the green line in the 23 middle, dairy profitability in Colorado was the strongest 24 in 2004, 2006, and 2007. Profitability eroded, likewise, 25 in 2009 to '13, and the profitability has been stable from 26 2015 to '22, with some growth recovery in 2014. 27 So in Figure 6, the cumulative wealth with a $7 28 per hundredweight fixed cost is pretty modest, and for 7085 1 thinking about it, it's for all purposes flat. 2 You need to use caution when you are looking at 3 cumulative profits or wealth. The starting point is very 4 important. But this is also, I believe, what is 5 experienced by producers. When producers enter into the 6 industry or when they achieve a substantial size, their 7 operating size -- ultimate operating size, that matters a 8 lot. 9 Cumulative profitability also illustrates the 10 importance of continuous improved productivity, that 11 ability for animals to produce more milk per animal over 12 time. Improved productivity with a gradual -- will 13 gradually reduce fixed costs faced by dairies. 14 And it is this improved productivity that results 15 in profitability, but the profitability in the end is not 16 substantial nor does it persist. You have to have 17 improved efficiency, that is -- improved efficiency is and 18 must be pursued continuously. 19 The $8 per hundredweight fix cost, the red line, 20 reveals issues for high cost producers. High cost 21 producers are simply not economically successful. This $1 22 increase in fixed costs from 7 to $8 per hundredweight 23 also, I believe, will represent the potential impact of 24 the proposed milk price pricing policy change. 25 Feed costs are relatively high in Colorado, and 26 improved productivity can offset some of this 27 disadvantage, but a $1 per hundredweight reduction in the 28 manufacturing milk price would have a substantially 7086 1 negative impact on dairy production in Colorado. 2 Figure 6 reveals that -- reveals the market 3 barometer moving substantially lower in this cost or price 4 environment. So if you -- again, if you reduce the milk 5 price by $1 per hundredweight, there's a substantial 6 decline in the cumulative profitability. 7 Again, this implies that Figure 6 reveals the 8 market barometer moving substantially lower in this cost 9 or price environment. This implies that the revenue from 10 milk is not covering variable feed costs and fixed 11 business costs, the fixed costs. Reducing milk price by a 12 dollar would have a substantial negative impact, that's 13 the conclusion I'm drawing from this information. 14 Similarly, a low fixed cost amount of $6 per 15 hundredweight can result in a business or regional 16 industry accumulating substantial wealth. The swings in 17 the cumulative profitability are similar, but the 18 underlying cost difference is what determines the industry 19 success. 20 The same statement can be made about the price. 21 That's -- that's important for me. Both the $1 increase 22 or the $1 decrease in cost from a base of $7 per 23 hundredweight reveal very different economic outcomes. 24 The same result would occur with a $1 change in the price 25 of milk that's sold. 26 So in summary, if the proposed policy changes are 27 adopted, then dairy production in Colorado would most 28 likely decline, and I believe the industry would have to 7087 1 transition to a composition of rather few and very large 2 extremely efficient operations. Dairy production in total 3 would decrease and the remaining businesses would have to 4 have the absolute lowest fixed costs and the highest 5 productivity. These requirements are typically only met 6 by the few largest businesses in my experience. 7 So that's focusing on the cost side, the prices of 8 corn, hay relative to milk. The next part is to back out 9 a little bit and talk some more about Colorado. 10 I believe it's important to recognize that the 11 economic climate associated with Colorado is simply not 12 overwhelmingly advantageous for agriculture, and I believe 13 that especially in the long run. So in the remaining 14 testimony, the intention is to, again, transition to a 15 more general discussion or recognition of the environment 16 that agriculture faces in the West. A portion of this 17 environment is economic related. 18 Feed that is produced in Colorado relies on 19 irrigation, and surface water irrigation specifically. In 20 contrast, to, for example, states like Nebraska, Texas, 21 and Kansas, ground water pumping from aquifers in Colorado 22 is very limited. We use surface water instead. 23 Surface water is replenished annually from 24 snowfall and snowpack. Total supplies depend upon 25 snowfall the prior winter. Spring and summer snow melts 26 result in the entire availability of surface water for 27 irrigation. This water developed Colorado agriculture, 28 but the population growth in the West and especially the 7088 1 front range of Colorado is creating very strong demands on 2 available water supplies. 3 What agriculture can pay for surface water is much 4 less than what urban and suburban use can pay for water. 5 Agriculture is at a competitive disadvantage for long-run 6 securing of water resources. In the end, water supplies 7 will be reduced for agricultural use. 8 The result is that feed production in the state 9 will likely never see reduced water costs. And it is 10 irrigated crop agriculture through its production of corn 11 silage and high quality forage that is essential for 12 livestock -- that is essential for livestock feeding and, 13 in particular, milk production. 14 There's also a general uncertainty about the 15 long-run availability of surface water. Climate change is 16 thought to most likely result in less winter snowfall and 17 less reliable snowfall. Agriculture developed water in 18 Colorado, but agriculture is likely to be the residual 19 claimant on the water that's available. 20 The value of water -- the value of water to 21 irrigated agriculture in Colorado can be seen in the 22 data -- it can be seen in data available through the USDA. 23 The National Ag Statistic Service collects and reports 24 valuation of land, and they break it out when available 25 into irrigated land, non-irrigated, pasture, and all 26 combined farmland. And you can find this for Colorado. 27 The most recent year for the survey, 2023, 28 irrigated land is valued in Colorado at $6,000 per acre, 7089 1 pasture is valued at $880 per acre, and non-irrigated land 2 at $1700 per acre. 3 THE COURT: The figure on our page 6 is different 4 on the pasture. So read again, if you will, that sentence 5 that begins "for the most recent year 2023." 6 THE WITNESS: Yes. 7 Irrigated land is valued at $6,000 per acre, 8 pasture is valued at $980 per acre, non-irrigated land is 9 valued at $1,700 per acre, and all farm land -- this 10 doesn't include building valuations -- is valued at $2,610 11 per acre. 12 Most of the farmland in Colorado is non-irrigated 13 or is dry land. Irrigated lands are much sought after and 14 are very highly valued. These valuations -- these 15 specific valuations are not transactions. This is not 16 what land trades for, but rather this is a survey of 17 reported valuations by producers. 18 The Colorado valuations contrast with farmland 19 values in Wisconsin, which report no separate irrigated 20 and non-irrigated. Land values for crop -- values for 21 crop land are $6,710 per acre, and pasture is $3,150 per 22 acre. 23 NASS reports the following for, for example, South 24 Dakota -- the irrigated land values are not reported to 25 avoid revealing specific individuals. Pasture is valued 26 at $1,340 an acre, non-irrigated crop land at $4,520 per 27 acre, all farmland is valued at $4,550 per acre. 28 We see Colorado have low overall valuations, high 7090 1 valuations for irrigated land and, therefore, a large 2 difference between the two. It is irrigation water that 3 drives how high valuations, and it is irrigated land in 4 Colorado that produces high quality and high volume feeds, 5 and it's also where most dairies operate. 6 The water availability issue is rather similar to 7 land availability issues and also other important inputs 8 such as labor. The most productive land in Colorado is in 9 the South Platte River Basin. Productivity is due to the 10 proximity to the river and availability of surface 11 irrigation water. This is the region between Fort 12 Collins, Denver, and Greeley, and it extends eastward out 13 to Sterling and Fort Morgan. 14 These are areas with the most productive 15 farmlands, the most dairies, many cattle feed lots, and 16 also the greatest urban pressures. These are the areas 17 with the most population pressures and most availability 18 of job offerings. Manual labor, construction, farm labor, 19 harvest labor are the hardest to fulfill in this area as 20 compared to areas -- other areas in Colorado and compared 21 to regions in neighboring states. 22 Farming and livestock production communities in 23 the Northeast Colorado face serious pressures with respect 24 to land availability, water availability, and labor 25 availability. Dairy production and animal feeding in the 26 states that persist in this region will have to have 27 productivity and productivity growth greater than these 28 pressures. These are difficult headwinds for agriculture. 7091 1 And more than that, these will be persistent pressures I 2 believe for the foreseeable future. 3 Commercial agriculture in Colorado that's been 4 successful is animal agriculture. Animals are productive 5 in the -- in the semi-arid and high and dry climate. Also 6 successful is irrigated crop agriculture. High quality 7 feed crops are produced, high quality and volume forages 8 are produced, but the environment is simply not just in 9 agriculture's favor. Agriculture developed because of the 10 limited alternatives and lack of human pressures, and 11 successful agriculture is that which is more efficient and 12 efficient relative to these environmental constraints. 13 In the long run, pressures on water demand, 14 pressures on the demand for land, which is also productive 15 farmland, and the relative opportunities for labor and 16 employment are simply not in favor of agriculture. 17 Improvements in productivity are needed in all animal 18 agriculture in Colorado simply to maintain that important 19 contribution to the economy and specifically to the rural 20 economy. It's difficult for me to see how the Colorado 21 dairy and milk production industry could simply adapt or 22 make other adjustments to absorb the proposed policy 23 change. 24 MS. HANCOCK: Thank you very much, Dr. Koontz. 25 Your Honor, at this time we would make Dr. Koontz 26 available for cross-examination. 27 THE COURT: Let me ask Dr. Koontz. There are two 28 spellings that if he wants me to change, we'll change on 7092 1 the record copy. 2 THE WITNESS: Okay. 3 THE COURT: The first one is on page 1, it's the 4 last line of the first paragraph. 5 THE WITNESS: Yes, ma'am. 6 THE COURT: And you read "solid understanding." 7 THE WITNESS: Yes. 8 THE COURT: And I would like for us to actually 9 make that change on the record copy. 10 THE WITNESS: Thank you. 11 THE COURT: Do you see where I am? I'm on page 1, 12 the last line of the first paragraph, first word says 13 "sold," but he read "solid," and that's what it should be, 14 "solid understanding." So we'll make the word "sold" to 15 be "solid" on the record copy. 16 And then the last one was Platte. And that is 17 very near the end here. We're on page 6, second line up 18 from the bottom. We're talking about the South Platte 19 River Basin. And it ends in "T." There are two Ts. Do 20 you agree? 21 THE WITNESS: Yes. 22 THE COURT: So that instead of reading "Plate" 23 will read "Platt," P-L-A-T-T, "Platt River Basin" (sic). 24 So -- 25 MS. TAYLOR: Your Honor, if we -- I think have one 26 more correction. If we turn to page 8, which is his first 27 chart. 28 THE WITNESS: Yes. 7093 1 MS. TAYLOR: The top of that chart in the paper 2 copy says "RMA," but what you showed, and I think is 3 correct, should say "FSA" at the very top. 4 THE WITNESS: Yes, that is correct. Thank you. 5 THE COURT: Oh, thank you. So do you see that 6 one? On page 8? So you have made all three changes? 7 Thank you. Very good. 8 All right. This is really interesting. 9 THE WITNESS: Thank you. 10 THE COURT: Thank you very much. Dense and very 11 informative. 12 Who would like to begin cross-examination? 13 CROSS-EXAMINATION 14 BY MR. ROSENBAUM: 15 Q. Good morning. I'm Steve Rosenbaum for the 16 International Dairy Foods Association. 17 Dr. Koontz, I went on your website and looked at 18 your curriculum vitae. I did not see any articles, 19 publications, etcetera, that relate to Federal Milk 20 Marketing Orders. 21 Have you ever written anything relating to Federal 22 Milk Marketing Orders? 23 A. No, I have not. 24 Q. I also looked through the publications, the 25 titles, for the word "milk." I didn't see any publication 26 that used the word "milk" in it. 27 Have you ever published something that the title 28 of which had the word "milk" in it? 7094 1 A. I have a couple of working pieces that have 2 working papers that I believe are not in the -- 3 Q. They are not, sorry? 4 A. Not in what you found in the curriculum vitae. 5 Q. And what's the topic? 6 A. I'm interested in -- I had a -- I had a student 7 that had an interest in dairy, and specifically cheese 8 markets, and so she worked for me on some forecasting 9 models for cheese prices. 10 Q. What's the other one? 11 A. The other one is looking at -- I -- I teach 12 futures and options, and I was looking at how Class III 13 milk futures prices behave over their trading horizon. 14 Q. Okay. Anything else? 15 A. No. 16 Q. Now, I also looked for the word "dairy" in your 17 list of publications, and I found one from July 2003 18 called the "Economics of the Red Meat and Dairy Industries 19 (Veterinary Clinics of North America: Food Animal 20 Practice)." 21 That is something you did, right? Is that right? 22 A. Yes. I was editor. That was a special issue of 23 that journal. I was editor of that. 24 Q. And is the -- is that journal geared toward 25 veterinarians? 26 A. Food animal veterinarians. So it's folks that 27 often have an industry -- interest in industry and what's 28 going on in industry. 7095 1 Q. Okay. So this was an article that was designed 2 with respect to veterinarians that would have an interest 3 in the industry; is that fair to say? 4 A. Not necessarily just veterinarians. Veterinarians 5 have an impact a lot on animal industries. So there are 6 quite a few people that are not vets that read those types 7 of works. 8 Q. Is there any other article -- that's -- let me 9 start that question again. 10 I only identified that article. Is there any 11 other article you've written that had the word "dairy" in 12 its title? 13 A. Not that I'm aware of, no. 14 Q. Okay. So you geared your presentation, arguably 15 your entire presentation, toward the notion of a $1 per 16 hundredweight price decrease and what its impact would be, 17 correct? 18 A. Yes. 19 Q. And so I want to explore that number, the dollar. 20 You attribute $0.50 of that to a change in the 21 Make Allowance, correct? 22 A. Correct. 23 Q. Now, your -- I mean -- okay. Are you -- your 24 article -- strike that. 25 Your testimony is geared toward Colorado, correct? 26 A. Yes. 27 Q. Now, are you aware of the fact that there's only 28 one Make Allowance for the entire country? That's how the 7096 1 system works? For each -- I mean, it is different for the 2 commodity. I mean, cheese has its Make Allowance, and 3 nonfat dry milk has its Make Allowance, etcetera. 4 But there's only one Make Allowance. Do you know 5 that? 6 A. I -- I understand the ideas behind Make Allowance, 7 but I do not know the details. 8 Q. Okay. But I mean you are not here advocating that 9 Colorado should get a special Make Allowance? 10 A. No. I specifically said that my testimony is not 11 related to the Make Allowance. 12 Q. Okay. And indeed, you don't know whether USDA has 13 historically taken the position that the Make Allowance 14 relates to the cost of transforming milk into a finished 15 product and is not itself determined at all by what the 16 costs of production are at the farm level. Do you know 17 that? 18 A. I -- I don't understand your question, sir. 19 Q. Yeah. Do you know whether the costs of producing 20 milk is part of the calculation that USDA makes in 21 determining what an appropriate Make Allowance should be? 22 A. I am -- no, I don't know. 23 Q. Okay. Now, the other 50 -- so just to orient 24 ourselves again. You are talking about the impact of a $1 25 per hundredweight price decrease, and you -- $0.50 of that 26 you say is the Make Allowance increase, which we have just 27 gone through talking about. 28 The other you say is $0.50 due to the Wisconsin 7097 1 model if there is no adjustment. I think that's the 2 term -- that's the description you use on page 2? 3 A. Yes. 4 Q. Okay. So I assume you're referring to the model 5 that the University of Wisconsin has undertaken for 6 purposes of providing information that might be used in 7 setting the Class I differential. Is that your 8 understanding? 9 A. What I -- what I understood and what I was working 10 with was in the end, there would likely be a $1 per 11 hundredweight reduction in prices paid to Colorado 12 dairies, and that was my starting place. 13 Q. Okay. So let me show you the document that was 14 marked yesterday as Hearing Exhibit 301. It's that 15 massive spreadsheet. And I have turned it for you to the 16 page 4 -- I hope I gave you page 4 -- where -- that's 17 where the information is for the state of Colorado 18 starting on line 217. 19 And I will represent to you that the testimony 20 is -- and this was from the person who created this, or at 21 least created most of the columns -- that the Column L 22 represents the output of the Wisconsin model if you 23 average the results for the months of May and the month of 24 October. So that, if you will, the result of that model, 25 say for the first county listed, which is Adams County, is 26 $2.50. 27 Do you see where I am? 28 A. Sir, I don't know what this is, and I'm not 7098 1 prepared to testify about it. 2 Q. Well -- all right. So I think others may be 3 looking at it themselves. I mean, I don't see -- what I 4 see is that for most -- strike that. Let me start again. 5 There is then in Column M a comparison of the 6 current Class I differential in each county in Colorado 7 versus the output, if you will, of the Wisconsin model, 8 and in virtually every county the Wisconsin model is 9 producing a higher number than the current differential. 10 So with that as background, do you have an 11 explanation for how that other $0.50 comes about? 12 A. Sir -- 13 MS. HANCOCK: Your Honor -- hold on one second. 14 THE COURT: Ms. Hancock? 15 MS. HANCOCK: Your Honor, this is well outside of 16 this witness's scope of testimony or any of the things 17 that he talked about. He has no knowledge about this 18 document. I think it's perfectly fine to ask him what he 19 knows about based on what his testimony is, but we're 20 going to be here forever if we don't stay on topic. 21 THE COURT: I -- Ms. Hancock, come back, please. 22 I did not understand where the two $0.50 per 23 hundredweight came from that he was asked to testify 24 about. 25 MS. HANCOCK: If that was the question, Your 26 Honor -- 27 THE COURT: That's maybe not Mr. Rosenbaum's 28 question. But -- but I would like him to explain more. 7099 1 Was he just told, argue what would happen if this changed 2 by $0.50 a hundredweight and this changed by $0.50 3 hundredweight, and that's what he did? I do not know. 4 But if -- but if he doesn't know where it came 5 from, I think it -- he might enjoy being shown what this 6 model showed about part of that information. I don't 7 know. 8 So I'm not ruling on your objection, I'm just 9 saying there is -- we need more, I believe, to know why he 10 is thinking that might happen, and I welcome 11 Mr. Rosenbaum's starting somewhere. So -- 12 MS. HANCOCK: And, Your Honor, if I could just 13 briefly. I think, in his testimony, he has described that 14 he was given some information that said, assume this 15 increase happens, please tell us the impact in your 16 market. And it was an impact based on Make Allowances, 17 not on this differential sheet. 18 THE COURT: Well, he had two different sources -- 19 MS. HANCOCK: He had -- 20 THE COURT: -- one $0.50 per hundredweight from 21 the Make Allowance, but the other $0.50 per hundredweight 22 was from -- 23 MS. HANCOCK: I think all of that is fair ground 24 if they wanted to explore that line of questioning with 25 the witness to establish how he got the base number. I 26 don't know if he knows anything more than assume it to be 27 true. 28 THE COURT: Ah. 7100 1 MS. HANCOCK: But I'm just -- my point is, he 2 doesn't know this document. He doesn't know the basis and 3 the background for how these numbers were derived. I 4 don't even know if he knows all of the other factors that 5 go into the additional considerations. I'm just trying to 6 keep us on topic so that we can make some progress in the 7 hearing. 8 THE COURT: I appreciate that. We all appreciate 9 that. 10 Mr. Rosenbaum, you may proceed in any way you 11 wish. 12 BY MR. ROSENBAUM: 13 Q. So assume with me that this exhibit which you 14 apparently are declining to look at -- 15 A. Sir, I don't know what it is. I don't know the 16 details. I have not -- not seen it before. I'm not 17 willing to testify about it. 18 Q. I mean -- 19 A. Where the -- where the Make Allowance came from 20 and the -- and the change in the -- from the Wisconsin 21 model is in my testimony, page 2, second full paragraph. 22 Q. Okay. The -- 23 A. The $0.50 -- the $1 per hundredweight that I'm 24 working with is with communications with Ed Gallagher of 25 DFA. That is where this issue was brought to my 26 attention. And my understanding is there's an 27 approximately $1 impact on what would be paid to Colorado 28 dairy producers, potentially $1 to $2 per hundredweight of 7101 1 milk. And that's where I was working with. I don't know 2 where those details come from. I am limiting my 3 discussion to what I think the impact will be on Colorado 4 dairies. 5 Q. Do you know whether hearing -- you -- just to be 6 clear, this line of questioning was entirely generated by 7 your reference to the, what would happen if the Wisconsin 8 models output was followed with no adjustments. That's 9 why I'm asking these questions. 10 Do you know whether Exhibit 301 is in fact the 11 output of the Wisconsin model in substantial part? 12 A. I -- I don't know what it is, sir. 13 Q. Okay. And if -- if I am accurate, and others can 14 look at it themselves, that this document shows for the 15 Colorado counties that the output of the Wisconsin model 16 is higher than the current Make Allowances for the vast 17 majority of counties, do you have any explanation as to 18 how that reconciles? 19 A. I -- I'm curious about the Wisconsin model, but I 20 don't know any of the details. 21 Q. Okay. Okay. So sort of sticking to that same 22 theme. You have a statement that -- on page 3, that the 23 proposed price changes in South Dakota will not be similar 24 to the changes in Colorado. You say that's on page 3. 25 You say, and I quote, "South Dakota is used for 26 comparison" -- this is your testimony, Exhibit 304 -- 27 "South Dakota is used for comparison because it is a close 28 dairy producing region where the proposed changes to milk 7102 1 pricing are not what will be experienced in Colorado." 2 Do you see that? 3 A. Yes. 4 Q. And I assume that when you talk about the proposed 5 change in milk pricing, you are referring to changes in 6 the Make Allowances and the changes in Class I 7 differentials. 8 Is that what you are referencing? 9 A. I was communicating with Ed Gallagher, like the 10 last sentence in that paragraph says. And there's a lot 11 of things you can compare Colorado to, and the focus 12 comparison was to use South Dakota. 13 Q. I'm not really focused right now on whether South 14 Dakota is a good comparison for certain purposes. I'm 15 trying to focus just specifically on this statement that 16 the proposed changes in milk pricing are not what will be 17 experienced in Colorado. That's -- that's -- on its face 18 says that the proposed changes to milk pricing in South 19 Dakota are not what will be experienced in Colorado, 20 presumably from the proposed changes there. Right? Is 21 that -- is that what that sentence is comparing, 22 specifically? 23 A. I'm -- I don't understand -- I'm sorry, I don't 24 understand your question. 25 Q. Okay. So, well, I'll just read the sentence, 26 quote: "South Dakota is used for comparison because it is 27 a close dairy producing region where the proposed changes 28 to milk pricing are not what will be experienced in 7103 1 Colorado," end quote. 2 So my questions focus on the part of that sentence 3 that has the words, quote, "where the proposed changes to 4 milk pricing are not what will be experienced in 5 Colorado," end quote. 6 And my simple question is: In what sense are the 7 proposed changes to milk pricing in South Dakota different 8 than the proposed changes in Colorado? 9 A. I -- I talked with Ed Gallagher about this, and 10 that was my understanding of what was going to happen. 11 But I don't know the details of the Wisconsin model or the 12 changes in Make Allowance. 13 The context of that paragraph is to explain why 14 South Dakota was picked. It is a milk producing region. 15 It's also a neighboring state that is involved in the 16 region where feed is moved around. Where our feed grains 17 come in, our forages go out, it is a neighboring region 18 that is relevant for a comparison. 19 And what we see when we move further east is that 20 Colorado is a high cost region. It doesn't matter how you 21 slice it. You can look at other states. But if you move 22 further east from Colorado, you have generally lower 23 forage prices and lower feed grain prices -- 24 Q. But, sir -- 25 A. -- and that results in a higher margin in 26 Colorado. That's where I was going with this discussion. 27 Q. Sir, I don't want to belabor the point, but the 28 inference of that sentence is that to the extent that 7104 1 South Dakota is a -- if you will, a competitor of 2 Colorado, that is going to be exacerbated because the 3 proposed change to milk pricing in South Dakota are not 4 what will be experienced in Colorado. 5 Do you have any basis to conclude that's the case? 6 A. Like the last sentence in the paragraph says, 7 it's -- comes from my discussions with Ed Gallagher of 8 DFA. 9 Q. All right. Now, you -- on page 3 later on you 10 talk about dairy production in Colorado has grown because 11 animal productivity was higher than the cost of 12 production, etcetera. 13 Have you -- I don't -- you do a lot of comparisons 14 between South Dakota and Colorado. I don't see something 15 anywhere where you explicitly say, at least, you know, 16 what the relative productivity is between those two 17 states, that is to say, you know, how many pounds of milk 18 are produced by -- per cow in Colorado versus South 19 Dakota. 20 Does that appear anywhere in your statement? 21 A. I don't believe so. 22 Q. Okay. Now, USDA publishes what they call an 23 annual review for each state, and it can be found -- which 24 can be found at www.nass.usda.gov. And this -- the most 25 recent year, of course, for 2022, reports that in South 26 Dakota milk production in pounds per head was 27 23,117 pounds. In Colorado, it was 25,922 pounds. Which 28 would suggest that Colorado farmers are able to produce 7105 1 roughly 10% more milk per cow than -- in Colorado than 2 South Dakota. 3 Does that comport with your general understanding 4 of those facts? 5 A. My understanding of the dairy industry in Colorado 6 is that it is an innovative industry, in that their milk 7 production per cow has improved aggressively over the 8 years, and that's the limit of my understanding. I don't 9 work a lot with the dairy industry. I work primarily with 10 the dairy industry in discussing what's going on in feed 11 and forage markets. 12 So I follow the dairy industry modestly. The 13 statistics that I have got -- all the statistics in my 14 testimony are from USDA NASS Quick Stats, the online 15 database that is the underlying data for the NASS reports, 16 and from FSA with respect to the dairy margin formula, and 17 AMS for the soybean meal prices. That's where that data 18 come from. 19 Q. And I take it you did not in preparing your 20 statement do a comparison of productivity in Colorado 21 versus South Dakota in terms of pounds produced per cow; 22 is that right? 23 A. No. 24 Q. Now, you do talk at some length about production 25 in -- milk production in Colorado, so I would like to have 26 a document marked as an exhibit on that topic. 27 THE COURT: So shall we just give this the next 28 number? We can. This document you're distributing now we 7106 1 will call Exhibit 305. 2 And what is the designation of it before it became 3 305? 4 MR. ROSENBAUM: Your Honor, the answer is it 5 doesn't have one at this point. 6 THE COURT: Does it have a title? 7 MR. ROSENBAUM: Your Honor, the -- it -- if I gave 8 it a title, it would be called Colorado Milk Production. 9 THE COURT: That's good, just so I have some 10 handle. 11 MR. ROSENBAUM: Does the government have enough -- 12 I have some extra -- I'm not sure I gave you enough 13 copies. 14 (Exhibit Number 305 was marked for 15 identification.) 16 BY MR. ROSENBAUM: 17 Q. So you referenced a minute ago Quick Stats, 18 correct -- 19 A. Yes. 20 Q. -- as one of the sources of your information? 21 So what I have provided you -- I haven't provided 22 it to you yet. 23 I have now handed the witness a copy of what's 24 been marked as Hearing Exhibit 305. You might just write 25 305 on that so when I reference 305, you will know what 26 I'm talking about. 27 So I, too, went to Quick Stats, and that's where 28 the numbers on the top come from. This is simply a cut 7107 1 and paste. And the -- the URL is listed. Obviously you 2 are familiar with Quick Stats. 3 A. Sure. 4 Q. You can look up many, many different things and 5 get that. 6 And then the bottom is a year-to-year change. 7 This is a created document by us, also from NASS 8 information, but we created this. It doesn't -- we used 9 the data to create the bar chart. It doesn't -- it's 10 not -- 11 A. I understand. 12 Q. -- it is not -- 13 A. It doesn't come out of Quick Stats. 14 Q. You wouldn't find this on Quick Stats itself, but 15 the underlying information is from NASS. 16 So what -- so -- it's -- starting with the 17 numbers at the top, I mean, the -- if you look at the 18 start date of 2012 in Colorado, and this is milk 19 production total pounds, it was about 3.2 billion pounds 20 in that year, correct? 21 A. Yes. 22 Q. And then as of the most recent reported year, 23 2022, it's grown all the way to 5.3 billion pounds, 24 correct? 25 A. Yes. 26 Q. I mean, this -- I mean, Colorado has been a -- 27 start that question again. 28 I mean, milk production has been a growth industry 7108 1 for Colorado, correct? 2 A. It is the -- the growth industry in Colorado 3 agriculture, yes. 4 Q. I mean, you make -- you know, in your statement, 5 your testimony, Hearing Exhibit 304, you make the 6 statement that -- on page 3, that Colorado's advantage in 7 terms of feed costs relative to milk output has been 8 pressured since 2006, correct? 9 A. The cost side, the margin side is much tighter 10 post the impact of ethanol on feed grain markets. 11 Q. Obviously, dairy farmers have to make the 12 decision, does it make sense to increase production, do I 13 bring in more cows, etcetera, etcetera. 14 It's fair to say that the numbers shown on here in 15 Exhibit 305, and including the bar charts in the bottom, 16 would convey the message that with a couple years' 17 exception, the most recent of which is 13 years ago, that 18 Colorado farmers have chosen to engage in the investments 19 and other efforts to increase their milk production at a 20 pretty healthy rate; isn't that right? 21 A. The -- the milk production has grown, yes. 22 Q. And I assume that farmers have chosen to put their 23 dollars into investments to make that happen; is that 24 fair? 25 A. Recently, no. I'm not aware of dairies -- in my 26 discussions with folks in the industry, I'm not aware here 27 in -- recently, especially in 2023, of dairies expanding. 28 And what I'm aware of, right now, is very severe 7109 1 profitability pressures. 2 Q. Well -- 3 A. Now, does milk production go up? Quite possibly. 4 Is there severe profitability issues or pressures in the 5 industry? Those are two different things. Those can be 6 two different things. 7 Q. I mean, as an example, the war in Ukraine has 8 caused stress to the feed market, right? 9 A. Yes. As well as drought. Probably drought more 10 important. Except for wheat. Wheat has been impacted a 11 lot by the war in Ukraine, as has the natural gas market. 12 Q. And am I correct that Colorado has been a 13 favorable location for milk production in the sense that 14 there have been a number of major dairy production 15 facilities built there over the last few years? 16 A. Over the last 15, 20, yes, for sure. That's the 17 thing -- when I moved to Colorado State University, I'm a 18 livestock economist, and that largely for me means cattle, 19 cattle and beef. And when I looked at the livestock 20 industry, the commodity industry in Colorado, what you saw 21 with respect to cattle feeding was a decline in the number 22 of cattle fed in the region. That was -- that had the 23 potential to have a serious impact on the state economy 24 and the rural economy because it's such a such big value 25 added industry. What has come in and replaced cattle 26 feeding has been dairy production. We have had growth in 27 dairy in regions where cattle feeding has been reduced. 28 Q. Okay. So I think, for example, Leprino Foods has 7110 1 major mozzarella plants in Fort Morgan and Greeley; is 2 that correct? 3 A. Greeley especially, yes. 4 THE COURT: I'm sorry, Greeley what? 5 THE WITNESS: In Greeley especially, yes. It's a 6 very large facility in Greeley. 7 BY MR. ROSENBAUM: 8 Q. Okay. And there's -- Dairy Farmers of America has 9 a -- it's a butter plant in Colorado, too? Am I right 10 about that? 11 A. I do not know. 12 Q. Okay. And then you have got fluid milk processing 13 facilities in Denver; is that right? 14 A. I -- I -- I'm not familiar with the processing 15 industry, other than you can't not know about Leprino in 16 Greeley. If you drive on that side of town, you have got 17 to drive around that facility. It's enormous. 18 Q. Okay. And we have talked about -- a bit about 19 Make Allowances. We have talked a little bit about the 20 University of Wisconsin Class I differential model. 21 Do you know whether farmer costs of production 22 play any role in that model? 23 A. I -- I'm -- I understand some of the concepts 24 behind the model. I have read a little bit about the 25 model. It's very big and complicated. I'm unfamiliar 26 with a majority of the details of that model. 27 Q. Including the one I just mentioned? Is that one 28 you are not familiar within? 7111 1 A. I -- I have not looked at the details of those 2 models. 3 Q. That's a little bit broad. I'm trying to be very 4 specific. 5 Do you know whether that model addresses as an 6 input farmer cost of production? 7 A. I'm not trying to be difficult. I don't know 8 about the model. 9 MR. ROSENBAUM: Okay. That's all I have. Thank 10 you. 11 THE COURT: Thank you, Mr. Rosenbaum. 12 I think -- this is perfect because it's 9:30. I 13 would like you to be back here at -- oh, now it is 9:31 -- 14 be back at 9:41. 15 We go off record at 9:31 for a ten-minute break. 16 (Whereupon, a break was taken.) 17 THE COURT: Let's go back on record. 18 We're back on record at 9:43. 19 Mr. Rosenbaum. 20 MR. ROSENBAUM: Your Honor, Steve Rosenbaum, 21 International Dairy Foods Association. 22 During my cross-examination I made reference to 23 figures in two official USDA publications, and so I would 24 like to ask that official notice be taken of them. One of 25 them is called the USDA/NASS 2022 State Agriculture 26 Overview for South Dakota, and the other is the USDA/NASS 27 2022 State Agriculture Overview for Colorado. Those -- 28 they are both available on the USDA/NASS website. 7112 1 THE COURT: Is there any objection to my taking 2 official notice of those two online resources? 3 There is none. I do take official notice of the 4 USDA/NASS 2022 State Agricultural Overview for South 5 Dakota, and the same for Colorado. 6 MR. ROSENBAUM: Thank you, Your Honor. 7 THE COURT: You're welcome. 8 Who next would like to cross-examine Dr. Koontz? 9 CROSS-EXAMINATION 10 BY MR. MILTNER: 11 Q. Good morning, Dr. Koontz. 12 A. Good morning. 13 Q. My name is Ryan Miltner. I represent Select Milk 14 Producers, a dairy co-op with farms in New Mexico and 15 Texas, as well as the Midwest. 16 You note in your testimony that Colorado is a 17 relatively high-cost feed cost environment. 18 I was wondering if you have done any similar 19 analysis for other states in the western part of the 20 country? 21 A. No, I have not. Not formal. I'm aware of what 22 happens in feed grain markets and forage markets, 23 primarily east of Colorado. I'm not aware of what goes 24 on, for example, in Utah or New Mexico. 25 Q. Now, you also note in your testimony that a good 26 deal of alfalfa is grown in Colorado and that it is 27 exported to New Mexico. 28 A. Correct. 7113 1 Q. Have you done any research or are you aware of any 2 the relative cost of that hay once it's delivered to New 3 Mexico versus what a Colorado farmer might pay? 4 A. I do not know. What I'm aware of in my experience 5 specifically with that is I do work with some other 6 extension economists, and we deliver programs to ag 7 lenders around the state of Colorado. One of our programs 8 is, in fact, next week in the San Luis Valley of Colorado, 9 and there is quite a bit of alfalfa, high-quality -- very 10 high-quality alfalfa hay that's grown there and shipped to 11 New Mexico. So I have talked with lenders and producers 12 in that region, and I know they ship a considerable of hay 13 to New Mexico. 14 Q. Would it be logical to conclude that a New Mexico 15 farmer, say in the Clovis Portalis area, would have a 16 higher cost of alfalfa feed than a producer from Colorado, 17 assuming that alfalfa is grown in Colorado? 18 A. Yeah. They have to pay freight, that's for sure. 19 Q. Now, in addition to alfalfa hay, the Dairy Margin 20 Coverage Program that you cite includes factors for both 21 corn and soybean meal? 22 A. Yes. 23 Q. I think what I have seen is that the corn costs in 24 Colorado are a dollar to 1.50 a bushel higher than a 25 national average. 26 Does that sound reasonable to you in your 27 experience? 28 A. Yes. 7114 1 Q. And would you expect that other states in the West 2 would see similar corn prices? 3 A. If you are -- yes, if you are railing it in 4 from -- if you are railing corn in from Nebraska, Kansas, 5 if you are railing it to the high plains or the southern 6 plains, yes, you have got to pay that freight. 7 Q. And you talk specifically about soybean meal. 8 Now, you -- you take that or you compare it to the South 9 Dakota cost. Would you expect that the price relationship 10 for other states in the West, particularly New Mexico, 11 Kansas, that area, would see a similar price relationship 12 for soybean meal? 13 A. Yes. What I have actually seen for data on that 14 would be, for example, I have seen some records, some 15 dairy records of freighting protein meal to California, 16 and that is -- that's -- you have got to pay freight to 17 get it out of the Midwest. 18 Q. And so when you look at the three feed price 19 components in that Dairy Margin Coverage Program, the 20 alfalfa, the soybean meal, and the corn, overall, do you 21 have an opinion as to what that overall feed cost would be 22 for Colorado and other states in the West compared to a 23 national average? 24 A. Yeah. The further you get from Iowa and the Upper 25 Midwest, those costs all increase. 26 Q. I wonder if in preparing your statement or 27 otherwise you had the opportunity to quantify the Colorado 28 feed cost component of the margin versus the national 7115 1 average that's used by USDA? 2 A. I'm sorry. That question again? 3 Q. Sure. And I'll break it down because that was 4 probably not the most articulate question I have asked. 5 The Dairy Margin Coverage Program calculates a 6 national feed cost, and they use that to determine the 7 margin calculation. If you were just considering the feed 8 costs for say Colorado or a similar state in the West like 9 New Mexico, you said -- I think you your answer was that 10 the western costs would be higher than the national 11 average, correct? 12 A. Yes. 13 Q. When you prepared your statement, did you have an 14 opportunity to look at what the actual number would be for 15 Colorado compared to the number that USDA calculates in 16 determining their margin? 17 A. Yes. I looked at the Colorado, and then I also 18 looked at the -- what does that margin say when you use 19 the national average price, which is not just Upper 20 Midwest, it is the whole country. I did look at those 21 differences. I didn't compare the differences, but I 22 think I have -- that's the part of my testimony where I 23 say for perspective I believe. 24 Q. Is that on page 4 toward the middle? 25 A. Yeah. That's where I'm -- 26 Q. Okay. 27 A. I believe so. 28 Q. All right. So I think I'm looking at the av- -- 7116 1 you write, "The average variable costs of production for 2 Colorado are 10.29" -- 3 A. Yes. 4 Q. -- "per hundredweight"? 5 A. Yes. Yes. For that time period. 6 Q. For that period. 7 A. And then the national is 9.83. Yes. 8 Q. Okay. So for that, were you referring to an 9 average variable cost of production that's just the feed 10 cost component for those farms; is that right? 11 A. That's -- that's calculating the margin with 12 Colorado, state, average prices received, monthly, but 13 just corn and alfalfa hay because I can't get a comparable 14 number for a protein meal. I'm using the Decatur protein 15 meal price across the board because I can't get that by 16 state. But I can get -- I can -- I can secure from Quick 17 Stats the alfalfa hay price for Colorado, the alfalfa hay 18 price for South Dakota, for the nation and -- but I 19 haven't done any of the other western states. I have just 20 done -- we -- I picked -- we picked -- in discussions with 21 Ed, I picked looking at Colorado, and then we needed some 22 reasonable reference to compare it to, and what we picked 23 was South Dakota. But I also did the math for the 24 national number. 25 Q. And the math that you did, was that the formula 26 that's used in the Dairy Margin Coverage feed price 27 component? 28 A. Yes. 7117 1 Q. Okay. Now, on the other side of that margin 2 calculation is an all-milk price, which is also a national 3 average. 4 Did you look at all at Colorado's reported 5 all-milk price in preparing your testimony? 6 A. No, I did not look at the all-milk price received. 7 I used the national Class III. In -- in my thinking and 8 following milk markets, that's -- that's what I have 9 focused on is that Class III price. 10 Q. In preparing your testimony, did you look at what 11 the calculated Dairy Margin Coverage margin was for the 12 months in 2023? 13 A. I did not. 14 Q. Okay. If the national reported margin using the 15 national averages for June of this year was $3.65, that 16 was the margin of milk income less feed costs on a 17 national average, what do you think that would mean to the 18 average dairy farm in Colorado? 19 A. Say that again? The -- what margin, $3 and how 20 much? 21 Q. If you took the all-milk price -- 22 A. Yes. 23 Q. -- and reduced the feed price calculation as 24 reported by USDA, it said there was $3.65 left over in 25 June. 26 A. So that would be for covering fixed costs. 27 Q. Before covering everything except feed -- 28 A. Okay. 7118 1 Q. -- what do you think that means to an average 2 Colorado farm? 3 A. They are losing quite a bit of money. 4 Q. And if the prices received for any state, whether 5 it's Colorado or New Mexico, were lower than the national 6 average and their feed costs were higher than the national 7 average, what do you think that would do to the farms' 8 economics? 9 A. The farms -- the dairies that persist will be very 10 efficient and the -- their potential to expand will be -- 11 it has to be in the context of maintaining that 12 efficiency. 13 Q. When you say those "that persist," I think was the 14 words that you used -- 15 A. Yeah. 16 Q. -- would be very efficient, to me that implies 17 that there will be some farms that do not persist? 18 A. Correct. 19 Q. Now, I understand from your previous 20 cross-examination from Mr. Rosenbaum that a lot of the 21 Federal Order assumptions were provided to you by 22 Mr. Gallagher? 23 A. Yes. 24 Q. Other than reporting what you believe the effects 25 of those types of impacts would be on Colorado dairies, 26 are you offering any opinion as to whether USDA should or 27 should not adopt any specific proposals in this hearing? 28 A. No. 7119 1 Q. Okay. 2 MR. MILTNER: That's all I have. Thank you very 3 much. 4 MR. ENGLISH: Good morning, Your Honor. 5 CROSS-EXAMINATION 6 BY MR. ENGLISH: 7 Q. Good morning, sir. 8 My name is Chip English for the Milk Innovation 9 Group. 10 So -- so, Dr. Koontz, you have talked about a 11 number of changes in Colorado over the last 20 years. 12 What has happened with organic dairy in Colorado 13 since Federal Order reform in the late 1990s? 14 A. My understanding, the consumer demand for organic 15 products has expanded considerably over time. You see it 16 much more prevalent now in the grocery stores, for 17 example, but I haven't done any analysis looking at the 18 exact quantities or in anything along those lines. I do 19 know it is a bigger industry than it used to be. There's 20 quite a few organic dairies that -- that impact the forage 21 market looking for organic feed sources. 22 Q. So didn't Horizon Organic Dairy get started in 23 Colorado in the late 1990s? 24 A. I believe so. 25 Q. And what about organic dairy production, has it 26 not grown significantly in Weld County over the last 20 27 years? 28 A. I -- I believe so. I -- you see the dairies, but 7120 1 I don't know the production number. 2 Q. But you would -- you know there's a large organic 3 fluid processing operation in Platteville, Colorado, 4 called Aurora Organic Dairy? 5 A. Yes, I'm aware of Aurora Dairy. 6 Q. In any of your analysis do you consider any 7 production cost variance with respect for organic dairy in 8 Colorado? 9 A. I don't have -- I would like to do that, but I 10 don't have access to that information. 11 Q. So turning away from organic and to your 12 testimony, are you saying that if -- instead of 13 Mr. Gallagher's assumptions that he provided to you, that 14 National Milk Producers Federation proposal is adopted and 15 that is, therefore, the price does not drop, that that 16 will resolve or provide reprieve for dairy farmers in 17 Colorado from all of the challenges you raised? 18 A. No. It remains a high-cost feed environment. The 19 impact of ethanol and feed grain markets is not going 20 away -- going anywhere. The forage market in Colorado is 21 very strong. So the dairy industry is in this -- has this 22 process where they have to adopt efficiency gaining 23 technology over time just to keep up with those -- those 24 limitations. 25 Q. And not just the feed, but you mentioned water 26 challenges and other challenges, all those headwinds -- 27 A. And any -- 28 Q. -- you discussed? 7121 1 A. I'm sorry for speaking -- 2 Q. No. And I'm usually the one who talks over, so -- 3 but -- 4 A. But also the inflation, the -- all the other 5 things that are behind the -- labor supply and inflation 6 and all the off-farm things that are needed to support a 7 dairy. 8 Q. That those headwinds will all pose significant 9 challenges regardless, correct? 10 A. They are not going anywhere. 11 Q. So I understand -- and probably good for your 12 sanity -- that as an economics professor you are not an 13 expert in the Federal Milk Marketing Order system. 14 But -- but nonetheless, do you understand that the 15 system for regulated prices has minimum prices, correct? 16 A. Can you offer me some more detail on that? 17 Q. So do you understand that if -- well, let me back 18 up. 19 Do you understand that what we're talking about 20 here to the extent we're talking about raising 21 Make Allowances or changing a Class I price differential, 22 is that those prices, to the extent they are regulated by 23 USDA, are minimum prices? 24 A. Yes. I understand that a little bit. But the 25 main thing that I focused my work on is what I understand 26 is $1.00 per hundredweight -- anywhere between $1.00 -- 27 $0.50, $1.00, or $2 per hundredweight impact on the milk 28 price would be pretty substantial on the dairy industry in 7122 1 Colorado, and that's -- that's really my starting place 2 is -- is working with that and not the mechanics of how 3 the milk market actually operates. 4 Q. I understand that. But if Federal Orders don't 5 set the price or a maximum price, but instead set a 6 minimum price, as a professor in economics, isn't the 7 market price going to still be the market price? 8 A. The devil is in the details on all of those 9 things, especially milk market. I am -- I really don't 10 want to venture out that direction. That's not something 11 I'm comfortable with. 12 Q. And that's fine. I mean, part of what -- what 13 we're trying to do is understand what you are comfortable 14 with and not, and I'm just trying to understand the 15 parameters. Because we are in a Federal Milk Marketing 16 Orders hearing, right? 17 A. Yes. 18 Q. You understand that? 19 A. Yeah. 20 Q. Do you understand that in addition to being 21 minimum prices under Federal Orders, that not all milk is 22 actually subject to the Federal Milk Marketing Orders? 23 A. I'm not trying to be difficult here. I'm not -- 24 Q. I'm not trying to -- 25 A. I don't understand -- I don't understand the 26 details that you are -- you're wanting me to talk about. 27 I'm not comfortable with that. 28 What I'm comfortable with is I have a strong 7123 1 understanding -- I've worked with the dairy industry 2 enough to know what -- what margins look like, what -- 3 what the pressures in the industry look like, but I -- I 4 don't understand how the -- the marketing order and how 5 prices are set, minimums, maximums, those types of things. 6 I'm not comfortable with that. 7 I do understand that individual dairies I deal 8 with, the base price is that Class III, but then there -- 9 the mailbox price usually has something in excess of that, 10 and that depends on what's going on in the fluid market. 11 Q. And to be clear, sir, I understand that, and I 12 appreciate what you are saying. I'm just trying to 13 gather, for this record, because we're in this 14 interesting -- and to my knowledge, maybe except for 15 Federal Energy Regulatory Commission -- unique proceeding 16 where the Secretary of Agriculture, with the great 17 assistance of the people here in the front row, and in the 18 next rows, and frankly, online, you know, need to have in 19 the record. 20 And so I'm just -- I'm just trying to clarify -- 21 and I understand. I think, you know, again, going back to 22 my comment a little earlier, you know, you'll probably 23 sleep better for not knowing about Federal Milk Marketing 24 Orders, but I -- as a professor, is it fair to assume that 25 there will be no secondary reactions to a change in the 26 milk price, whether up or down? 27 A. Certainly not. I mean, if -- changes in price 28 will result in changes in production, changes in behavior, 7124 1 expansions, contractions. I mean, there are -- nothing 2 ever happens in isolation. 3 Q. And so similarly, if there's a secondary reaction 4 that lower milk prices, if they happen, result in lower 5 production, then commodity prices will increase, correct? 6 A. Depending on the scope of the underlying changes. 7 What I'm concerned about is changes that result in lower 8 milk prices in Colorado, impacting the Colorado dairy 9 industry. It's an important contributor to the Colorado 10 agricultural economy and the rural economies in the state. 11 And the secondary effects are always minor compared to 12 primary effects. They certainly occur, and they are 13 offsetting to a degree, but in my experience, much less 14 so. 15 Q. And nonetheless -- I understand from the 16 discussion with Mr. Rosenbaum, so I'm not going to try to 17 go back there -- but basically, you have relied on 18 assumptions provided to you by Mr. Gallagher as to the 19 idea that milk prices would go down, correct? 20 A. Yes. Yes. That is -- that is the -- where I'm 21 starting my work is with that idea. I don't know enough 22 about milk markets to have my own estimate or opinion on 23 what's going on there. This was brought to my attention 24 and -- from the context of a change in milk price. And I 25 do know that that -- that that magnitude is -- has 26 potentially a substantial impact on the industry and my 27 state. 28 MR. ENGLISH: Thank you very much, sir, for your 7125 1 time. 2 THE COURT: Before I turn to the Agricultural 3 Marketing Service for their questions, does anyone else 4 wish to cross-examine? 5 No one. Agricultural Marketing Service may begin. 6 CROSS-EXAMINATION 7 BY MS. TAYLOR: 8 Q. Good morning. 9 A. Good morning. 10 Q. Thank you for coming to testify and participate in 11 this wonderful proceeding. 12 A. You don't have to come up to the podium; is 13 that -- 14 Q. No, we don't. We have to be here every day, and 15 that's a privilege that remains. 16 A. My apologies, but I noticed, so -- 17 Q. When you arrange how this works logistically, you 18 can put the mic in front of yourself. 19 A. You can get what you want. 20 Q. That's one of the perks. 21 I really don't have many questions. Just a couple 22 things to clarify. As Mr. English said, part of our job 23 is just to make sure we get the facts and the 24 clarifications we need on the record, so sometimes 25 questions might seem kind of elementary, but it's just to 26 make sure that that fact gets explained. 27 A. Sure. 28 Q. So as you went through looking at costs in 7126 1 Colorado, I just want to make sure I'm clear that the 2 variable -- what you used for variable cost was just feed? 3 A. Correct. It's -- it's that Dairy Margin Coverage 4 Program that is -- that's well available. 5 Q. Right. 6 A. Anybody can track down that formula and make use 7 of it. And -- and what I have done is go back through 8 time. It's an idea of converting feed inputs into milk, 9 and if you buy the feed, what's it cost you to do that. 10 Q. Right. 11 And you talked about the fixed costs. And you got 12 those numbers. You talked with various dairy industry 13 members. And so I just wondered if you could elaborate on 14 who you talked to and how you kind of pulled those numbers 15 together to make sure they are relevant. 16 A. I have talked to producers over the years, and I 17 talked to the organizations they deal with a lot. So 18 talking to brokers, talking to bankers, crop insurance 19 folks. I'm curious about my state. I'm curious about 20 understanding industries. And one of the things I do when 21 I talk to producers is I say, "It's not like I'm going to 22 go say this in a USDA testimony." 23 So, right, that was funny. Come on, now. 24 Q. I laughed. 25 A. So I would like to not give names but -- 26 Q. Right -- 27 A. -- and it's over the years -- 28 Q. -- and I'm not asking for names. 7127 1 A. -- but I have talked to dairies in northeast 2 Colorado, and the ones that come to meetings, the ones 3 that will visit with you, the ones that are on industry 4 commodity group committees, things like that. Just 5 talking to them about how their industry works, where are 6 they buying, where are they sourcing things. Everybody on 7 the dairy side wants to talk about labor, labor, labor, 8 labor, and I really like to get them off of labor because 9 I -- there's nothing I can do about that, and I don't 10 understand that market very much. 11 And lots of times when you ask them about costs 12 other than feed inputs, they don't know, but they can give 13 you a rough -- you know, if you give them a rough 14 estimate, they will say -- you can get around to -- you 15 know, there are time periods where it may be a $4 per 16 hundredweight fixed cost, but that's very, very skinny and 17 over longer periods of time, it's -- it's higher than 18 that. 19 So what I have worked with for numbers is what I 20 have heard from producers and also what I have read in 21 extension publications. So I -- I don't understand enough 22 about dairy and milk markets, so I read what I can from 23 Wisconsin, Michigan, Minnesota, about -- about cost of 24 production in that area. 25 Q. And what kind of costs would fit into the fixed 26 cost category? 27 A. It's everything that's not feed, the whole nine 28 yards. It's equipment. It's facilities. Opportunity 7128 1 costs on land. You have to -- you know, if you have an 2 operation that has a dairy and then also a cropping 3 operation, lots of times those costs get commingled, and 4 when you talk to producers, they mix things up. But if 5 you are talking to a dairy that has somebody running the 6 dairy side, somebody running the crop side, then they 7 really understand. 8 And unlike in the Upper Midwest where lots of 9 cropping operations may subsidize an animal operation, if 10 you separate those enterprises, and they do that a lot in 11 Colorado, then they can tell you what does it cost to grow 12 corn, and then they opportunity-cost the corn correctly 13 from the cropping enterprise. 14 So you've got to be careful with the -- for 15 example, the tractors and the equipment, is that a 16 cropping enterprise investment or is that really used by 17 the dairy? 18 So those are -- are where some of the things 19 are -- get very tricky. But the equipment, the fixed 20 costs, the facilities, the milking parlor, all those 21 things, if you can -- if you can tie them to the dairy, 22 that's -- those are costs that have to be covered, as well 23 as labor, and then the management associated with running 24 that operation. 25 Q. Okay. 26 A. And more and more things like genetic improvement, 27 and the person in that dairy that's interested in that and 28 researching it and trying to figure it out. And the thing 7129 1 that has cropped up lately is the beef-on-dairy and in the 2 dairy industry, producing cross-calves that are a 3 significant portion of beef animal, that's become a very 4 big revenue source for -- for that industry. 5 Q. I was wondering with your kind of vast experience 6 with livestock in dairy in Colorado, if you could talk -- 7 especially, I should mention, in the South Platte River 8 Basin, which is where a lot of the dairies in Colorado 9 exist, are you able to talk a little bit about 10 transportation pressures and changes in that area? 11 Because we have had talk in the hearing about 12 changes in transportation costs, generally, and one of 13 those -- that's one of the factors, if you will allow me 14 to explain, that is thought of to go into the Class I 15 differentials. And I know you can't speak to the 16 differential section of that, but can you just talk a 17 little bit if you have heard or observed changes in those 18 cost factors in that area? 19 A. In northeast Colorado, there's definitely more 20 urban pressures. There's more crowding. There's delays 21 in any sort of shipping. And then it's -- it's become -- 22 it's not just as simple as looking at what is -- what is 23 diesel price, what are those prices. There is -- that 24 industry was pretty skinny for a long period of time, and 25 I believe there were some assets that left the freight 26 industry, and now there has to be prices high enough to 27 attract assets back into that freight service industry. 28 And I have noticed that not just from a dairy 7130 1 side -- the main thing I'm interested in from a Colorado 2 perspective is the shipping of grain, moving wheat, corn, 3 and forages around, what does that really cost? And 4 it's -- it's hard to find secondary information that well 5 documents that. 6 I do know that when you talk to people, they will 7 tell you it's a lot bigger than just diesel cost, for 8 example. 9 MS. TAYLOR: Okay. Thank you. That's it from 10 AMS. 11 THE COURT: Ms. Hancock? 12 MS. HANCOCK: Thank you, Your Honor. I have no 13 further questions. At this time we would move to admit 14 Exhibit 304. 15 THE COURT: Is there any objection to the 16 admission into evidence of Exhibit 304? 17 There is none. Exhibit 304 is admitted into 18 evidence. 19 (Exhibit Number 304 was received into 20 evidence.) 21 THE COURT: Mr. Rosenbaum? 22 MR. ROSENBAUM: Your Honor? 23 THE COURT: Do you -- do you want your Exhibit 305 24 to be ruled upon? 25 MR. ROSENBAUM: Yes, Your Honor, thank you for 26 reminding me. I would ask that that exhibit be entered 27 into evidence. 28 THE COURT: Now, I haven't seen it yet, but I 7131 1 assume we have got an Exhibit 305 over there? That if I 2 admit them into evidence, you have them? 3 Well, I don't need to have it. I just want to 4 make sure you have it. 5 USDA REPRESENTATIVE: I have it. I am going to 6 give one to you. 7 THE COURT: Okay. Thank you. 8 Is there any objection to the admission into 9 evidence of Exhibit 305? 10 MR. HILL: I'm going to object, Your Honor. 11 THE COURT: Mr. Hill? 12 MR. HILL: I'm going to object because, in part, 13 305, at the top -- and you haven't seen the document, so 14 this is a little bit problematic -- but it's information 15 that comes directly from the AMS website. So that's 16 perfectly fine and admissible. 17 The bar graph underneath it, though, is a creation 18 of Dr. Rosenbaum's. There's -- there's no witness here to 19 verify this or to ask questions about whether this graph 20 is correct. And so I think it's inadmissible, and as such 21 I'm going to object to the entirety of the document. 22 THE COURT: Now, you referred to him as 23 Dr. Rosenbaum. 24 MR. HILL: A doctor, you know -- 25 THE COURT: Do you have a doctorate, sir? Did you 26 acquire it while here? 27 MR. ROSENBAUM: This is as close as I have ever 28 gotten. 7132 1 THE COURT: Further objections? 2 MS. HANCOCK: Your Honor, we would join in the 3 objection -- this is Nicole Hancock on behalf of National 4 Milk -- for the same reasons that Mr. Hill articulated. 5 Additionally, Your Honor, you have already taken 6 judicial notice of the website, so I think to the extent 7 there's beneficial value for the information that was 8 covered in the testimony, you have already covered that by 9 taking judicial notice of the website which contains the 10 data that we can actually verify as self-authenticating. 11 THE COURT: Mr. Rosenbaum? 12 MR. ROSENBAUM: Well, Your Honor, the websites 13 that I asked you to take judicial notice of are not where 14 the information comes from. I mean, they are both from 15 the NASS quick facts data source, but it's not located in 16 the exact same place if you go on the website. 17 Your Honor, I'd be happy just to have the -- the 18 figures at the top are a cut-and-paste from the NASS 19 website. There's nothing created. So I -- the bar chart 20 at the bottom I don't think is essential to the point I 21 was making, and I'm happy, if you will, to cross out the 22 bottom part and just leave the top part and have it come 23 in in that manner. 24 THE COURT: I like that, because I like the -- the 25 URL, that he's got the NASS location, which I think many 26 of the listeners to this program will appreciate. I 27 wasn't real sure how to spell Quick Stats, but it's like 28 you would think. But it is all one word. I did not 7133 1 realize that was part of NASS. This proves all that. So 2 it's a very -- to me, a very valuable document. 3 I'm not going to cross out the chart. I'm going 4 to admit it with the caution that beware of the chart, 5 verify it for yourself, it's the product of a quick 6 creation while on the fly in this hearing. There might 7 have been an error. People can find out for themselves. 8 They can prove it to themselves. I think it is useful as 9 an illustration, if it turns out it is accurate. 10 So I do admit into evidence, over objection, 11 Exhibit 305, and I merely caution people to verify the 12 graph for themselves. 13 MR. ROSENBAUM: Thank you, Your Honor. 14 THE COURT: You're welcome. 15 (Exhibit Number 305 was received into 16 evidence.) 17 THE COURT: All right. Now, I believe you may 18 step down, Dr. Koontz. Thank you so much. You brought a 19 perspective that is different from what we have had, and I 20 think it's very valuable. And I encourage you to follow 21 milk, it's very interesting. 22 Let's go off record for just a moment while the 23 next witness comes forward. 24 (An off-the-record discussion took place.) 25 THE COURT: We're back on record at 10:22. 26 First I would like the witness in the witness 27 chair to state and spell his name. 28 THE WITNESS: Dean Sommer, D-E-A-N, S-O-M-M-E-R. 7134 1 THE COURT: Have you previously testified in this 2 proceeding? 3 THE WITNESS: I have not. 4 THE COURT: I'd like to swear you in. 5 DEAN SOMMER, 6 Being first duly sworn, was examined and 7 testified as follows: 8 DIRECT EXAMINATION 9 BY MR. ROSENBAUM: 10 Q. Good morning, Mr. Sommer. 11 A. Good morning. 12 Q. You have before you Hearing Exhibit 306 and 13 Hearing Exhibit 307. 14 Do these constitute your written testimony today? 15 A. They do. 16 Q. Okay. Before I have you read your testimony, the 17 first sentence of Exhibit 306 says that you are a cheese 18 and food technologist and a member of the senior team at 19 the Center for Dairy Research in Madison, Wisconsin. 20 So I just would like you to tell us a little bit 21 about the Center for Dairy Research that's not otherwise 22 described in your testimony. So please tell us what that 23 Center does. 24 A. So the Center of Dairy Research is one of six 25 university-based dairy centers in the United States. What 26 we do is promote the interest of the U.S. dairy industry, 27 promoting the interest of U.S. dairy farmers, as well as 28 U.S. dairy processors through research, in looking at 7135 1 various dairy-related problems and opportunities, through 2 training. We offer short courses for people that work at 3 dairy processor companies to learn more about making 4 cheese and other types of dairy products. And we also 5 have a number of graduate students that were trained to be 6 future dairy leaders in the United States and around the 7 world. 8 Q. Okay. And this is associated -- your particular 9 center is associated with what university? 10 A. We are associated on the campus of the University 11 of Wisconsin, Madison. 12 Q. Okay. Could you please read us your testimony? 13 Let's do Hearing Exhibit 306 and then 307. 14 A. Yes. 15 My name is Dean Sommer. My current position is a 16 cheese and food technologist and a member of the senior 17 team at the Center for Dairy Research (CDR) in Madison, 18 Wisconsin. I have been at the CDR for 20 years. 19 In my capacity at CDR I work with cheese 20 manufacturers, large and small, across Wisconsin and 21 across the United States. Prior to that I worked at Alto 22 Dairy for 18 years, starting as the director of technical 23 services, progressing to Vice President of technical 24 services, and lastly as Vice President of operations. 25 When I started at Alto, it was a cheddar 26 manufacturer and the largest and newest cheese factory in 27 the United States. Alto Dairy was a cooperative with 28 ultimately two large cheese plants in Waupun, Wisconsin, 7136 1 one cheddar and one mozzarella, as well as a large aged 2 cheddar plant in Black Creek, Wisconsin. At the time I 3 left Alto we manufactured over 200 million pounds of 4 cheese per year, about half of that cheddar. I have an MS 5 degree in UW Madison in food science. 6 Fat losses in cheddar cheese manufacture. 7 Today I will be testifying on fat losses in the 8 cheddar cheese manufacturing process. I will not be 9 addressing farm-to-plant losses, but will be discussing 10 fat losses after the arrival of milk at manufacturing 11 plants. 12 History of fat loss estimation in cheddar cheese 13 manufacturing. 14 Around a century ago Van Slyke and Price estimated 15 that if cheddar cheese was manufactured and handled to 16 near perfection, fat recovery would be around 93%. This 17 work was done with the open cheese vats of the day. 18 Dr. David Barbano of Cornell University did a 19 study published in 1984 that tested fat recoveries with 20 the advent of newer and more advanced cheese making vats 21 and equipment, including some cheese factories with new 22 enclosed Double O vertical vats and some with open vats to 23 see if that 93% fat recovery still held true. 24 Surprisingly, Dr. Barbano found in four good-sized 25 cheddar cheese factories in New York State that the fat 26 recoveries were much lower than expected, coming in at 27 87.2, 86.3, 85.2, and 82.8%. 28 Newer vat designs capture more fat in the curd at 7137 1 the vat. 2 Today, almost 40 years later, with further 3 improvements in cheese vat designs, commonly called 4 horizontal cheese vats, fat retention potential in cheese 5 vats has improved. In my work at CDR with companies with 6 open vats, I have seen fat losses in whey after cutting in 7 open vats around 9 to 10%. 8 In my experience at Alto with Double O vats, I saw 9 fat losses of around 7% after cutting. In my experience 10 at Alto with horizontal cheese vats, I saw fat losses of 11 around 6% after cutting. I have heard anecdotal reports 12 of the most modern vats -- of fat losses of less than 5% 13 after cutting. 14 Please note these figures only represent fat 15 losses in the cheese vat after cutting and are not 16 considering other points of fat loss in the cheddar cheese 17 making system which I will address. 18 Double O vats and even open vats are still in 19 widespread use in the cheddar industry -- cheddar cheese 20 industry. Sorry. 21 It should be noted that while many large modern 22 plants have installed the newest and most efficient 23 horizontal vats, Double O vats, and even open vats have 24 not gone away in the cheddar industry. A number of 25 prominent large cheddar manufacturers continue to use 26 Double O vats, and inevitably, when a manufacturer 27 converts from Double O vats to horizontal vats, the 28 Double O vats don't disappear, they merely get refurbished 7138 1 and then installed in typically a smaller, older cheese 2 factory. And many small artisan cheddar cheese 3 manufacturers continue to use open vats. 4 The take-home message here is cheddar makers in 5 the U.S. continue to use an assortment of cheese vat 6 styles, while the newest, most modern plants have largely 7 gone to the most efficient horizontal vats, some large 8 factories, and many medium and small factories, continue 9 to use Double O or open cheese vats. 10 Fat losses in the vat at cutting only tell part of 11 the story of fat losses in cheddar cheese manufacturing. 12 One concept that must be considered on the topic 13 of fat retention is where fat losses occur during cheddar 14 cheese manufacturing. Most people focus solely on fat 15 losses in whey called sweet whey after cutting the 16 coagulum, and often refer to this as the only source of 17 fat loss during cheddar cheese manufacturing. Taking this 18 approach will significantly underestimate total fat losses 19 in cheddar manufacturing. 20 While cutting the coagulum is an important point 21 of fat loss, it is far from the only point. Other 22 significant points of fat loss are milk shrinkage from the 23 raw milk silos to the vat (milk residue left in silos and 24 lines; milk filter rotation and flushing; milk clarifier 25 desludging; pasteurizer startup and shut downs. 26 Collectively, this could amount to up to 1% of total milk 27 volume, thus up to 1% of total fat loss). 28 Fat losses in whey in the vats -- in the vat fails 7139 1 to account for further fat losses downstream in the 2 cheddar making process in the form of salty whey. 3 Another significant loss of fat occurs during the 4 salting process of cheddar cheese curds, resulting in 5 salty whey. This step occurs relatively late in the 6 cheese making process. Some of this salty whey occurs 7 immediately on the curd table, or salting belt, after dry 8 salt is applied. More salty whey is generated in 40-pound 9 block forming towers, or in the pressing and initial cold 10 storage of 640-pound blocks of cheese. 11 This salty whey can comprise up to 5% of the total 12 whey volume generated, with sweet whey (before salt 13 addition) comprising 95% of the total whey volume. Salty 14 way is significantly higher in fat content than sweet 15 whey. In a study by Blaschek, Wendorff, and Rankin at the 16 University of Wisconsin, where they surveyed sweet and 17 salty whey from eight commercial cheddar cheese plants, 18 they found an average fat content of salty whey of 0.6%, 19 approximately three times higher than sweet whey. 20 Taking into account the volumes of sweet and salty 21 whey as well as the typical fat contents of sweet and 22 salty whey, the calculation reveals that salty whey 23 accounts for approximately an additional 10% of the total 24 fat loss in all generated whey. This occurs late in the 25 cheese making process and is not accounted for in tests 26 for fat losses in whey sampled at the vat. 27 Cheese fines collected from the whey and not 28 returned to the body of cheese represents a significant 7140 1 source of fat loss. 2 A further significant loss of fat in cheddar 3 cheese manufacture is loss of cheese fines. In today's 4 quality and food safety conscious world, adding back 5 cheese fines recovered from the whey back to the bulk of 6 the cheese curd is largely not done anymore due to 7 concerns with coliform and other bacterial contamination 8 risks and associated cheese quality concerns. 9 In a recent conversation with a large U.S. aged 10 cheddar manufacturer, it was related to me that they lose 11 approximately 0.25 to 0.3% of their curd production to 12 cheese fines which do not go back into finished cheese. 13 This was at a factory using a matting conveyor which 14 minimizes cheese fines. Factories making stirred curd 15 cheddar on curd tables generate significantly more fines 16 due to the design of the whey drainage screens and 17 agitators on curd tables. 18 Based on my experiences at Alto, and in a recent 19 personal conversation with a large Wisconsin stirred curd 20 cheddar manufacturer, I would estimate that fines losses 21 in these systems are 0.5 to 0.6% of total cheese volume, 22 which is approximately -- approximately double that of 23 cheddar factories with matting belts. Remembering that 24 this curd contains up to 34% fat, this is a significant 25 amount of fat loss. 26 Other points of fat loss in a cheddar cheese make: 27 There are additional points of fat loss during cheddar 28 cheese manufacture. I visit dozens of cheese plants every 7141 1 year as part of my duties at CDR. Inevitably, I observe 2 when walking through a plant some cheese curds on the 3 floor. These losses are, to some extent, not preventible 4 given the design of today's automated equipment. These 5 curds are disposed of as inedible and represent further 6 losses of fat. 7 Plants producing 640-pound blocks of cheddar 8 inevitably have salt whey drippings directly from the 640s 9 when they are stacked in the coolers. This is because 10 these giant blocks are not vacuum sealed and gravity 11 forces some of the free whey in the blocks to leak out and 12 puddle on the cooler floor. 13 Occasionally vats of cheese have to be disposed of 14 due to contamination with foreign materials due to some 15 unexpected equipment breakage. This also represents a 16 loss of fat. 17 Finally, a historical benchmarking standard for 18 cheese quality has been that the very best run cheddar 19 plants can achieve a 99% at grading -- 20 And, Your Honor, there's an omission here I would 21 like to add. There's -- something didn't get copied 22 correctly. 23 It should read achieve 99% USDA Grade A standard 24 at grading. Grade A is the -- is a top grade for cheddar 25 cheese, meaning it's first quality. 26 So I'd prefer that that would read: That the very 27 best run cheddar plants can achieve 99% USDA Grade A 28 standard at grading. 7142 1 THE COURT: Thank you. We'll go off record and 2 make that change. 3 Off the record at 10:36 a.m. 4 (An off-the-record discussion took place.) 5 THE COURT: We're back on record. It is 10:37. 6 We have made that change on the record copy. 7 We're on page 5, and just after the "99%," we have 8 inserted, "USDA Grade A standard," the sentence continues, 9 "at grading." 10 So start again, if you will, and just read that 11 sentence as we now have it prepared. 12 THE WITNESS: Finally, a historical benchmarking 13 standard for cheese quality has been that the very best 14 run cheddar plants can achieve 99% USDA Grade A standard 15 at grading, with 1% of their cheese being graded as B 16 grade or under grade and needing to be sold at discount 17 prices. 18 In my current experiences few cheddar plants meet 19 these standards today and many fall far below that number. 20 A large national reputable cheese conversion and marketing 21 company that manages downgraded cheese for cheese 22 manufacturers recently related to me they estimate around 23 5% of current cheddar manufactured in the U.S. gets 24 downgraded and discounted. 25 The latest cheese vat design does not guarantee 26 optimal fat retention in the cheese. 27 Lastly, it should not be dismissed that the cheese 28 maker skill continue to play an important role in 7143 1 determining fat retention in cheese, regardless of 2 equipment design. Cheese maker practices such as general 3 make procedures, vat operation step programming, choice of 4 coagulant, method of using the coagulant, coagulant 5 firmness at cutting, cut curd size, gentleness of handling 6 the curd, proper development of curd body and texture, 7 transfer of the curd to tables or belts, and -- and more 8 will affect how much fat is retained in the finished 9 cheese. 10 The take-home message here is that cheese making 11 is still a cheese maker-driven system. I have seen many 12 instances where a cheese factory had good equipment, but 13 in the hands of inexperienced cheese makers, large fat 14 losses still occurred. 15 The addition of whey cream to milk for cheddar 16 cheese manufacturing will inevitably result in higher fat 17 losses during cheese manufacture. 18 Milk fat globules are damaged when they go through 19 the cheese making process. Thus, milk fat globules that 20 escape into whey and subsequently are recovered in whey 21 cream are damaged and are typically smaller in size than 22 milk fat globules in the original milk. 23 When whey cream is added to milk for cheese 24 making, these smaller damaged fat globules more easily 25 leak out of the curd matrix and into the whey, thus, 26 increasing losses of fat in whey during cheese making. 27 This problem worsens the more consecutive days 28 that whey cream is added back to milk for cheese making, 7144 1 as these small fat globules recycle over and over. 2 Typically cheese factories need to break the cycle by 3 periodically shipping out whey cream to remove the damaged 4 fat globules from the system. Cheese factories that 5 utilize whey cream for cheese making will not achieve 6 optimum fat recoveries. 7 Conclusions: Most fat -- most plants that I visit 8 only consider the fat loss when cutting their coagulum 9 when they talk about fat retention in their factories. 10 Taking this approach will significantly overestimate fat 11 recovery numbers in these operations. My belief is that 12 fat losses other than the fat loss at cutting the coagulum 13 represent from 25 to 50% of the total fat loss during the 14 entire cheese making process. 15 My best estimate of fat recoveries in cheddar 16 cheese manufacture, taking into account personal 17 experience, as well as recent communications with some 18 well-managed cheddar cheese factories, would be in the 19 range of 91 to 93% in well-run factories with modern 20 horizontal vats, 90 to 92% in well-run factories with 21 vertical Double O style vats, and 88 to 91% fat recovery 22 in factories with traditional open vats. 23 My esteemed colleague and distinguished scientist, 24 Dr. Mark Johnson, recently wrote me on the topic that 25 actual yield and fat recovery is normally significantly 26 less than predicted yield and fat recovery. And I quote 27 Dr. Johnson: "So fat recovery in a yield equation will 28 always be an overestimation of reality...why they are 7145 1 called a predictive yield equation." 2 Then at the bottom of this page I noted two 3 references in this -- in this testimony. One was by 4 Dr. David Barbano about the cheddar cheese yields in four 5 factories in New York. That's the Journal of Dairy 6 Science reference found on the bottom of page 7. And then 7 I also referenced in my testimony the differences between 8 salty whey and sweet whey composition, and that reference 9 by K.J. Blaschek, et al., is that Journal of Dairy Science 10 article noted there. 11 THE COURT: You have just witnessed the master 12 class in how to testify. I appreciate very much your 13 presentation. 14 THE WITNESS: Thank you, Your Honor. 15 MR. ROSENBAUM: If you could proceed to your 16 second testimony. 17 THE WITNESS: Yes, sir. 18 So my second testimony is use of whey cream in 19 cheddar cheese manufacture. 20 Background: Whey cream is the name given to the 21 fat that is lost from the curd during cheese making and is 22 subsequently recovered from the whey by running the whey 23 through a mechanical whey cream separator. In contrast, 24 sweet cream is the fat recovered from separating milk. 25 Typically both sweet cream and whey cream contain 26 around 40% fat and 60% skim, with some variation. It is 27 important to note that the skim portion of sweet cream is 28 skim milk, which contains caseins and whey proteins, while 7146 1 the skim portion of whey cream is whey, which contains no 2 caseins. 3 History of whey cream handling and use: 4 Historically, whey cream generated in cheddar 5 cheese operations was manufactured into butter. Going 6 back many decades, some cheddar cheese manufacturers had 7 their own small butter operations to churn whey cream into 8 butter right at the cheese factory, as did Alto Dairy back 9 in those years. This practice was largely abandoned in 10 favor of shipping the whey cream to large butter companies 11 that focused solely on butter manufacturing. 12 I learned well during my Alto tenure that proceeds 13 from the sale of whey cream was an important revenue 14 source for cheddar cheese manufacturers, in our case, 15 adding up to millions of dollars a year. 16 Within the last two decades in Wisconsin there has 17 been severe consolidation within the butter industry, 18 resulting in much less competition for whey cream 19 supplies. As a result, premiums, also called multipliers, 20 for whey cream fat has dropped precipitously. Formerly, 21 multipliers in the range of 1.20 were common for whey 22 cream fat. 23 But today in Wisconsin, the multipliers for whey 24 cream fat, according to my cheese plant sources, are flat, 25 at approximately 1.0, and sometimes even below, which 26 compares to typical multipliers for sweet cream of between 27 1.20 and 1.25. 28 This decline results in a significant revenue loss 7147 1 for cheese factories. Because of this loss in revenue, 2 factories are more inclined to attempt to put the whey 3 cream back into milk for cheese making in an attempt to 4 reach higher revenues for the whey cream fat by boosting 5 cheese yield from the fat from added whey cream. 6 Problems associated with utilizing whey cream in 7 cheese production: 8 The practice of adding whey cream to cheese milk 9 is fraught with potential problems. Whey cream is a 10 potent source of bacteriophage, viruses that destroy 11 bacterial cheese cultures with the resultant loss of 12 acid-producing capacity. If this happens, the result is 13 slow or dead vats, where the desired acid production is 14 significantly curtailed, resulting in off-grade or 15 undergrade cheese that must be sold at a heavy discount. 16 If whey cream is to be reused in the cheese making 17 process, the bacteriophage needs to be inactivated by 18 heating the whey cream to 185 Farenheit and holding it at 19 or above this temperature for approximately 30 minutes. 20 This practice solves one problem but can create others, 21 such as flavor defects. 22 The fat in whey cream is physically damaged due to 23 the processes employed during cheese making. The 24 protective membranes around the fat globules are eroded 25 away leaving the fat vulnerable to Lipase enzymes and 26 development of undesirable rancidity. The fat globules 27 are also shattered and reduced in size. Because of this, 28 they are less likely to be retained in the cheese during 7148 1 the cheese making process and subsequently leak right back 2 into the whey again, setting up a vicious cycle. 3 To break this cycle, cheese factories that take 4 the risk to reuse whey cream in cheese manufacturing need 5 to break that -- break the cycle by periodically, at least 6 once a week, not recycling the whey cream into cheese 7 making, but rather shipping it out to butter manufacturers 8 to rid the cheese system of an overabundance of small, 9 damaged fat globules. The recycling of whey cream into 10 cheese manufacture will also reduce the fat retention 11 efficiencies of a cheddar cheese operation, making optimum 12 fat recoveries at coagulum cutting, such as 93 to 94%, 13 unachievable. 14 Reusing whey cream in cheddar cheese manufacture 15 runs the risk of cheese off-flavor development. As 16 previously mentioned, degradation of the damaged fat due 17 to rancidity can occur. Similarly, damaged fat globules 18 are more prone to oxidative damage. Because of the severe 19 heating of the whey cream, cooked flavor notes can occur. 20 And given the myriad of steps and processes that occur in 21 the handling of milk fat from cheese making through whey 22 handling and whey cream generation and storage, 23 undesirable microbial contamination can occur, which can 24 lead to off-flavored development when used in cheese 25 manufacture. 26 Due to all of these factors, aged cheese -- aged 27 cheddar cheese manufacturers do not reutilize whey cream 28 in cheese manufacture, due to the significant risks of 7149 1 off-flavored development as their cheddar cheese age. 2 In my 18 years at Alto Dairy, we never utilized 3 any whey cream for cheese manufacture, in mild or aged 4 cheddar, due to the risks involved. So even manufacturers 5 of barrel and mild cheddar risk whey taint and other 6 flavor defects in their cheese when utilizing whey cream 7 and cheese production, which is myself and my colleagues 8 at the CDR don't advise this practice. 9 THE COURT: Would you just read that last clause 10 again? You left out the word "why." 11 THE WITNESS: Okay. 12 So even manufacturers of barrel and mild cheddar 13 risk whey taint and other flavor defects in their cheese 14 while utilizing whey cream in cheese production, which is 15 why myself and my colleagues at the CDR don't advise this 16 practice. 17 In summary, for economic reasons, some cheddar 18 manufacturers are tempted to re-utilize whey cream in 19 cheddar cheese production. However, there are tremendous 20 risks involved from bacteriophage destruction of starter 21 cultures resulting in off-grade cheese to development of 22 off flavors in the cheese, and the reuse of the damaged 23 fat in whey cream for cheese production sets up a vicious 24 cycle of damaged fat simply recycling through the system 25 and leading cheese factories to greatly overestimate the 26 value they are getting from reuse of whey cream. While 27 some cheddar manufacturers are willing to employ 28 reutilizing whey cream in cheddar cheese production and 7150 1 take these risks, others, especially aged cheddar makers 2 and makers of the highest quality cheddar cheese, are not. 3 BY MR. ROSENBAUM: 4 Q. Thank you very much for your testimony. Just a 5 couple of follow-up questions. 6 Can -- first of all, can whey cream be used to 7 produce Grade AA butter? 8 A. It cannot. No, it cannot. 9 Q. And what would be the typical use of whey cream 10 butter? 11 A. Typical use for whey cream butter is -- is for 12 foodservice applications. They will make -- there's 13 Grade A butter, which is typically made with a blend of 14 sweet and whey cream, and Grade B butter, which is made 15 with just totally whey cream. But typically those uses 16 primarily go to foodservice applications, so there's no 17 retail packaging showing the USDA Grade A symbol on them. 18 Q. Thank you. 19 MR. ROSENBAUM: The witness is available for 20 cross-examination. 21 THE COURT: Let's make one change on the last page 22 of Exhibit 307, top line. You read, "resulting in off 23 grade cheese." 24 THE WITNESS: Yeah, it should be "in." 25 THE COURT: So let's change the record copy. 26 THE WITNESS: Correct. It should be "in." 27 THE COURT: This is Exhibit 307, very last page, 28 top line. Changing the word "if" to "in." 7151 1 THE WITNESS: Correct. Thank you, Your Honor. 2 That's correct. 3 THE COURT: And I ended up with one extra copy of 4 IDFA Exhibit 51, which became Exhibit 307, and I'll allow 5 that to be used wherever. 6 Who would like to begin cross-examination of 7 Mr. Sommer? 8 MR. MILTNER: Your Honor, I would note it's ten 9 minutes to 11:00. I don't know how long I'm going to 10 take, but if -- if the court reporter would like a break 11 now, I'm happy to do that, or I can begin. 12 THE COURT: We like that, and we appreciate your 13 cognizance of our condition. 14 Let's go off record -- well, first of all, when to 15 come back. So ten minutes would be about 11:05. Come 16 back at 11:05. 17 We go off record at 10:54. 18 (An off-the-record discussion took place.) 19 THE COURT: Let's go back on record. 20 We're back on record at 11:05. 21 Mr. Miltner. 22 MR. MILTNER: Thank you, Your Honor. 23 CROSS-EXAMINATION 24 BY MR. MILTNER: 25 Q. Mr. Sommer, my name is Ryan Miltner. I represent 26 Select Milk Producers. 27 And I wanted to start by asking a little bit about 28 your background and the Cheese -- I'm sorry -- the Center 7152 1 for Dairy Research. 2 What type of services do you personally provide 3 through the Center for Dairy Research? 4 A. I personally, there's a lot of cheese plants and 5 work with their -- 6 THE COURT: Stop just a minute. Would you pull 7 that microphone just a little closer to you? 8 THE WITNESS: Sure. 9 THE COURT: Thank you. 10 THE WITNESS: I personally visit and work with a 11 lot of cheese plants, troubleshooting issues, problems 12 that they are having. I work with a lot of customers of 13 cheese plants, people that buy their -- these cheese 14 plants' cheeses, could be pizza chains and others like 15 that, trying to get the cheese to work as good as it could 16 possibly work. 17 I work with farmstead cheese makers just starting 18 up, where they're dairy farmers and they're cheese makers, 19 to give them guidance and how to go about that process. 20 I work with -- or do a lot of teaching and 21 training to people from all over the country and all over 22 the world on cheese making principles and practices, 23 cheese sensory practices. 24 What else? I mean, that's kind of like the core 25 of it, I would say. 26 Q. So on the Center's website under cheese, it says 27 that you provide troubleshooting, product development, 28 education and more. It sounds like that pretty well 7153 1 encompasses what you described. 2 A. That's what I do, yeah. That's what I do. 3 So we're -- let me say another thing. So what 4 we're -- our -- you know, my goal, and I talk about this 5 in many of the short courses, is -- is to enlarge the pie 6 for dairy farmers. So our goal is to make -- ultimately 7 make dairy farmers more profitable, which also includes 8 making dairy manufacturers more profitable, by trying to 9 take milk, the base ingredient, and getting the highest 10 value use out of every milk component that we possibly 11 can. 12 I mean, if you really encapsulate what our goal 13 is, that's our goal, to try and improve the lot of dairy 14 farmers and dairy processors by maximizing dairy product 15 quality, but also finding new, more valuable uses for 16 every component that's in raw milk. 17 Q. So that would be helping manufacturers increase 18 the value of the products they sell, correct? 19 A. Correct. 20 Q. And so -- so by increasing the returns to 21 manufacturers, your hope is that that will increase 22 returns to dairy farmers? 23 A. That's correct. And certainly, you know, with -- 24 as you well know, in the case of manufacturers, many of 25 them that we deal with are dairy cooperatives, so the 26 farmers are the manufacturers, in essence. They own -- I 27 worked for Alto Dairy. That was a cooperative. All the 28 profits went back -- ultimately went back to the 7154 1 producers, so... 2 Q. Now, you did mention your time at Alto Dairy. And 3 on the first page of your first statement, which is 4 Exhibit 306, you stated that when you started at Alto, it 5 was a cheddar manufacturer, and the largest and newest 6 cheese factory in the U.S. 7 A. Correct. 8 Q. Okay. So I have taken your fact that you have 9 been at the Center for Dairy Research for 20 years and -- 10 A. Correct. 11 Q. -- that you were at Alto for 18, I'm guessing you 12 started at Alto Dairy right around 1985? 13 A. September 1st, 1985. 14 Q. Okay. Your next sentence says that "Alto Dairy 15 was a cooperative with ultimately two large cheese 16 plants," as well as a large aged cheddar plant. 17 It says Alto was a cooperative with those plants. 18 I mean, Alto is still a cooperative to my understanding, 19 correct? 20 A. Alto Dairy no longer exists. 21 Q. Oh, it does not. Okay. That I was not aware of. 22 Okay. When did they cease operations? 23 A. They didn't cease operations. They sold to 24 Saputo. That was approx- -- that was after I left. That 25 was approximately, I'm -- I could be off by a year or two. 26 Approximately 2007 or '8, 2007 or '8, they sold to -- they 27 sold to Saputo and ceased -- ceased as an operating 28 cooperative. But the facilities are still operating. 7155 1 Q. Okay. Perhaps that's where my confusion comes 2 from because I remember folks referring to Alto plants in 3 the recent years. But they may be referring to the plants 4 now owned by Saputo then, correct? 5 A. Correct. 6 Q. On the Center's website they have a short video 7 about an APT horizontal vat. 8 Are you familiar with that vat's operations? 9 A. Quite -- I am, yes. 10 Q. And one of the -- one of the points in that video 11 they -- it talks about how that type of vat can help 12 increase cheese yields? 13 A. Correct. 14 Q. And I wondered if -- if you have any -- if you 15 have any data on how that vat compares to perhaps the 16 Double O vats you reference in your testimony? 17 A. I don't have any data on that vat. That video 18 that you -- that you looked at is of our brand new 19 facility, and it's not 100% operational yet. And we're in 20 the very beginning stages of utilizing and learning about 21 those APT horizontal vats, so we have not progressed to 22 the point of doing in-depth studies yet with those vats on 23 fat retention. We're still working through programming 24 and optimizing its operation. 25 Q. Now, that -- the vat that you have, the APT vat at 26 the Center, am I correct -- 27 A. We have two. 28 Q. Okay, two. 7156 1 And they each take 5,000 pounds of milk? 2 A. 1500. I'm sorry, 2500. 2500. 3 Q. So 5,000 -- 4 A. Total. 5 Q. -- between the two of them? 6 A. 5,000 total. 2500 each. 7 Q. And that's the type of vat that on a larger scale 8 would be installed at a new cheese plant? 9 A. Correct. 10 Q. Now, further on on your statement, Exhibit 306, 11 you start talking about Van Slyke and Price's research. 12 A. Uh-huh. 13 Q. And you make a statement that they estimated if 14 cheddar cheese was manufactured and handled to near 15 perfection, fat recovery would be around 93%? 16 A. Correct. 17 Q. I wondered where you got the phrase "handled to 18 near perfection." 19 A. That's my phrase. But what they were saying was, 20 if you are -- if you did everything -- basically what they 21 said is, if you make cheddar cheese and do everything 22 perfectly, you would achieve 93% fat recovery. 23 Q. Okay. And then you reference Dr. Barbano's study. 24 A. Correct. 25 Q. And you note that that was from 1984. 26 A. Correct. 27 Q. And you -- you make some additional observations 28 about his research. 7157 1 I assume you have reviewed that study, correct? 2 A. I have read the scientific paper which is 3 referenced in here, yes. 4 Q. Okay. Did Dr. Barbano offer any comments about 5 why the fat recoveries he observed in those cheddar 6 factories were lower than 93%? 7 A. He did. He did. 8 Q. Do you recall what those were? 9 A. To the best of my recollection, he talked about 10 the milk coming in, the casein-to-fat ratios weren't 11 optimal. Certainly in -- in those studies, I -- it's my 12 recollection, two of the plants had Double O vats; one had 13 started with open vats, and during the study converted to 14 Double O vats; and the fourth one was open vats. So they 15 saw improvements with the Double O vats, as I recall, 16 compared to the open vats. 17 But, again, to the best of my recollection, he 18 just -- he noted that just some of the curd handling 19 practices and cheese making practices weren't optimal, 20 getting back to the human element again, of how the curd 21 is made and handled that resulted in further losses of 22 fat. 23 Q. And you speak to some of those issues, I think -- 24 A. I do. 25 Q. -- later in your statement -- 26 A. I do. 27 Q. -- that -- 28 A. I do. 7158 1 THE COURT: Now, if this is going to be a master 2 class in how to provide testimony, you have to wait until 3 Mr. Miltner's voice has died away. 4 THE WITNESS: Okay. 5 BY MR. MILTNER: 6 Q. We have had to do this artificial pause thing for 7 like eight weeks now, it takes a little getting used to. 8 But you note that there are human factors involved 9 that have a significant impact on fat retention, correct? 10 A. Correct. 11 Q. And you also noted that Dr. Barbano referenced the 12 casein-to-fat ratio, which outside of a certain range can 13 also have significant impacts on fat retention and yields, 14 correct? 15 A. Correct. 16 Q. So continuing on with your statement, and I'm 17 looking at page 2 now, in the first full paragraph, toward 18 the middle of the page, you state: "In my work at CDR 19 with companies with open vats, I have seen fat losses in 20 whey after cutting in open vats around 9 to 10%." 21 My question is, is that 9 to 10% an average? Is 22 it the upper end of the fat losses you have observed? Or 23 what does that 9 to 10% represent? 24 A. I would say an average. 25 Q. And then so you have observed both lower and 26 higher retentions in open vats, then? 27 A. Yes. 28 Q. And you -- your next sentence describes your 7159 1 experience at Alto with Double O vats, and that those fat 2 losses were around 7%. 3 Am I correct that those -- all of those 4 experiences would have been in that 1985 to 2003 5 timeframe? 6 A. Yes. At Alto. 7 Q. At Alto, correct. 8 Okay. Your next sentence: "I have heard 9 anecdotal reports of the most modern vats of fat losses of 10 less than 5% after cutting." 11 Have you personally observed any -- any fat losses 12 from the most modern vats? 13 A. You are talking about horizontal vats? 14 Q. Well, you use the words "most modern vats." I 15 would interpret that as horizontal, but I'm more 16 interested in what -- 17 A. Yes. 18 Q. -- you are referring to? 19 A. The answer is yes. 20 Q. So, yes, you have personally observed those vats? 21 A. Yes. 22 Q. And did you observe fat losses of less than 5% 23 after cutting? 24 A. No. 25 Q. For those observations were you called into the 26 plant to help look at those vats and those fat losses? 27 A. No. 28 Q. Further on in your statement on the same page you 7160 1 have a heading which reads, "Double O vats and even open 2 vats are still in widespread use in the cheddar cheese 3 industry." 4 I wondered if you could give us some context 5 around what you mean by "widespread use." 6 A. So I talked to a very prominent -- recently talked 7 to a very prominent large cheddar cheese manufacturer on 8 the West Coast, and they still are using Double O vats in 9 two of their plants there. In Wisconsin, I could tick off 10 the name of between half a dozen and a dozen plants making 11 cheddar cheese that still use Double O vats, so... 12 Q. Now, the prominent manufacturer on the West Coast, 13 would you care to share who that is? 14 A. Boy. I don't know if I -- I feel uncomfortable 15 divulging their name for the same reason before, but... 16 Q. Well, Hilmar cheese built their plants in the 17 '80s, and at that point a Double O would have been state 18 of the industry, correct? 19 A. Correct. 20 Q. And that plant is in California, correct? 21 A. Correct. 22 Q. And that is a -- would you categorize that as a 23 large cheddar manufacturer? 24 A. Yes. 25 Q. Now, Hilmar has since constructed one plant in 26 Texas, and another is under construction. 27 Are you aware of that? 28 A. I am. 7161 1 Q. If you were advising them, would you advise them 2 to install Double O vats in those plants? 3 A. I would not. 4 Q. Would part of the reason for that be that 5 butterfat retention is higher in different style vats? 6 A. Yes. 7 Q. Now, you also state that when plants do upgrade 8 their vats, the -- they are not necessarily lacking in a 9 useful life, and those double O's may be repurposed, 10 correct? 11 A. Correct. 12 Q. The plants that you see those Double O vats being 13 repurposed in, do they tend to be more of a specialty 14 cheese manufacturer? 15 A. I would say -- I would not agree with "tend to 16 be." They sometimes are and sometimes are not. 17 Q. Would you consider them to be small to 18 medium-sized plants? 19 A. I would. Yes. 20 Q. And then you state that, "Many small artisan 21 cheddar cheese manufacturers continue to use open vats." 22 Would that description, "small artisan cheddar 23 cheese manufacturer," would that be -- would you consider 24 that a specialty manufacturer? 25 A. Yes. 26 Q. Okay. And then on page 3 you start describing 27 other points of fat loss, and the first is cutting the 28 coagulum. And at the end of that section your sentence 7162 1 is, "Collectively this could amount to up to 1% of total 2 milk volume, thus up to 1% of total fat loss." 3 And I'm unclear as to whether your comment there 4 is referring to the cutting or the silos or both? 5 A. That comment is taking milk once it is already in 6 the silo, up to when it's entering the cheese vat. 7 Q. So prior to cutting? 8 A. Prior to cutting. 9 Q. Okay. Now, you state that it could amount to up 10 to 1% of total milk volume. 11 Do you have a range of what a plant would 12 experience? 13 A. I -- I could give you -- my best guesstimate of 14 that range would be between 0.3 and 1.0%. 15 Q. 1%, as you stated, is the upper end of what plants 16 might realize? 17 A. Correct. 18 Q. Okay. Your next topic is about fat losses in 19 whey, and you talk about salty whey. Taking into account 20 those types of losses, I'm trying to figure out what is 21 the actual percentage of fat that's lost in that process. 22 You have a couple of different numbers. 23 What do you think the total fat loss for that 24 element is? 25 A. Total as in total fat loss in cheddar cheese 26 manufacture -- 27 Q. No. 28 A. -- is that what you are asking. 7163 1 Q. No, I'm sorry. I was imprecise once again. 2 Further fat losses downstream in the cheddar 3 making process in the form of salty whey, how much do you 4 think that accounts for? 5 A. I think -- well, as I said in here, I think it 6 accounts for 10% of all fat loss -- approximately 10% of 7 all fat that's lost in whey. But that wouldn't include 8 fat lost as milk shrinkage, which you just questioned me 9 about. It would not include fat losses in curd and fines 10 and things like that. 11 Of the fat lost in whey, I -- I would guesstimate 12 that 90% is in that, in the whey -- sweet whey after 13 cutting, and 10% of the total fat lost in whey is in the 14 salty whey. 15 Q. Would you agree that cheese makers using modern 16 vats can achieve less than 0.2% fat loss in their whey? 17 A. Total whey? 18 Q. Yes. 19 A. You mean all whey? 20 Q. Yes. 21 A. No. In cheddar? 22 Q. Yes. 23 A. No. 24 Q. What do you think that number would be? 25 A. I think it would be 0.25 minimum, if you include 26 salty whey in there. 27 Q. Okay. So that if it is 0.25, then .0025 would be 28 salty whey, one-tenth of the total amount? 7164 1 A. I don't think your math is correct. 2 Q. Okay. Your next section talks about cheese fines. 3 You state: "In a recent conversation with a large U.S. 4 aged cheddar manufacturer it was related to me that they 5 lose approximately 0.25 to 0.3% of their curd production 6 to cheese fines, which do not go back into the finished 7 cheese." 8 I'll ask again. You can decide whether to answer. 9 Care to show who that was that you spoke to? 10 THE COURT: Hardly anybody does name names. 11 THE WITNESS: Yeah. 12 MR. MILTNER: Judge, you are not supposed to help. 13 THE COURT: You are not required to. 14 THE WITNESS: Yeah, I'd prefer not to because I 15 just don't want to -- you know, they talk to me on 16 confidential terms, so I would hate to... 17 BY MR. MILTNER: 18 Q. That's perfectly fine. I understand. 19 Is there -- aged cheddar tends to be, in my 20 observation -- and I'm not -- not a cheese maker, let 21 alone a master or anything like that -- crumblier than a 22 fresher cheddar; is that accurate? 23 A. Yes. 24 Q. So would an aged cheddar manufacturer expect to 25 have a higher incidence of fines than a fresh cheddar 26 manufacturer? 27 A. No. 28 Q. No? 7165 1 Now, you are aware that aged cheddar is not 2 surveyed by USDA for purposes of Make Allowances, correct? 3 A. Yes. 4 Q. Further in that section you stated: "Factories 5 making stirred curd cheddar on curd tables generate 6 significantly more fines due to the design of the whey 7 drainage screens and agitators on curd tables." 8 For those of us that don't regularly engage in 9 cheddar manufacturing, can you help us understand what a 10 stirred curd cheddar is? 11 A. Stirred curd cheddar -- stirred curd cheddar is 12 when they don't let the curd fuse together in a solid 13 mass, like they would on a belt system, which is what most 14 aged cheddar makes, so they -- it typically goes to curd 15 tables, sometimes a curd belt. But it's continuously 16 stirred so it looks like little pieces of gravel in terms 17 of the shape. And that's stirred curd. 18 Q. Is stirred curd cheddar more common in a smaller 19 cheese operation? 20 A. No. 21 Q. Is it more common when you are making cheddar that 22 is not commodity cheddar? 23 A. No. 24 Q. So a large scale commodity manufacturer, like a 25 Glanbia or like a Hilmar, would they be using a stirred 26 cheddar process? 27 A. Generally speaking, yes. 28 Q. Okay. Now, the next element in your -- or part of 7166 1 your statement I wanted to ask about are curd tables. 2 Can you help us understand what curd tables are? 3 A. Curd tables is -- is typically part of the stirred 4 curd process. You have your vat. You make your curd in 5 the vat, and then the curd and the whey is pumped to a 6 table, which has a drain screen in the bottom to 7 ultimately drain the whey away, so -- and there's stirring 8 agitators on it. So that's -- that's what those are. 9 Q. Is a curd table always used in a stirred curd 10 cheddar process? 11 A. No, because -- historically, yes, but in today's 12 world, there are stirred curd belts as well. 13 Q. And so your statement is limited to stirred curd 14 manufacturing utilizing a curd table? 15 A. Yes. 16 Q. And you also note that if they are using a belt, 17 their losses through fines are half of those for those 18 plants using a curd table; is that correct? 19 A. A belt for -- not quite. 20 Q. Okay. 21 A. A belt for matting. A belt for matting would have 22 the least fines. A stirred curd table would have the most 23 fines. A belt for stirred curd would be somewhere in 24 between. 25 Q. Okay. So again, there's a range based on the -- 26 A. Correct. 27 Q. -- plant design? 28 A. Correct. 7167 1 Q. And if you were advising someone to construct a 2 new plant to make commodity cheddar, what would your 3 recommendations be on -- on those pieces of equipment? 4 A. For commodity cheddar what would I advise? 5 Q. Yes, sir. 6 A. I would advise tables. 7 Q. Why is that? 8 A. Because they are the most versatile and most 9 controllable and easiest to control moisture. And 10 moisture is -- is super important for yield. So those 11 operations that have tables have the most versatility and 12 the most control over cheese moisture and can most easily 13 hit their moisture targets. And stirred curd tables give 14 you by far the best salt distribution, so you can get the 15 most precise and uniform salt content of your cheese with 16 a table, versus the belt systems which are a real struggle 17 to get uniform salt distribution in the curd. 18 Q. So if I think about your answers and what you have 19 written in here, it's -- the range of losses to fines is 20 somewhere between 0.25% and 0.6%, and it's a -- it's a 21 range depending on the plants' equipment and operations; 22 would that be accurate? 23 A. Yes. Yes. 24 Q. Okay. Now, moving on to page 5. You put an 25 anecdotal statement, I guess, an observation that there's 26 always some curds on the floor. I'm curious if that's 27 ever been something that's been measured or quantified, 28 how much is lost to stuff on the floor? 7168 1 A. Yes. I would say really well-run plants regularly 2 measure that. 3 Q. Do you have information on what those measurements 4 would be? 5 A. Off the top of my head, I don't, no. 6 Q. Okay. Now, further on that paragraph, really 7 right in the middle of page 5, "Occasionally" -- you 8 state, "Occasionally, vats of cheese have to be disposed 9 of due to contamination with foreign materials due to some 10 unexpected equipment breakage." 11 A. Uh-huh. 12 Q. I would ask, I guess more of a philosophical 13 question since you are trying to help dairy farmers make 14 money, is it fair to the dairy farmer to have the yield 15 factor adjusted because of matters completely out of their 16 control? 17 A. That's not my area of expertise. That's -- that's 18 for USDA to decide. I -- I'm -- I don't know the answer 19 to that question. 20 Q. And at the end of that section you talk about a 21 large national reputable cheese conversion and marketing 22 company, and their estimate that 5% of current cheddar 23 manufactured in the U.S. gets downgraded and discounted. 24 So explain to me, if you are willing to, the name, 25 but if not, what is a cheese conversion and marketing 26 company? 27 A. Well, I don't want to divulge the name, but a 28 cheese conversion and marketing company would be -- I'll 7169 1 give you some examples of names. So that would be people 2 like Sargento Cheese, or Great Lakes Cheese, or Marathon 3 Cheese, or Master's Gallery Cheese, or Pacific Cheese. 4 They are cheese companies that don't manufacture cheese, 5 but they buy and sell cheese, both bulk, and they convert 6 it to shreds and slices and things like that. 7 Q. Would that operation be referred to in the 8 industry sometimes as a cut-and-wrap operation? 9 A. Yeah, although some of them are more than 10 cut-and-wrap. But, yes we often talk about them as 11 cut-and-wrap operations. 12 Q. Now, do you have any data about the actual price 13 impact of the amount of cheddar that gets downgraded and 14 discounted? 15 A. I do not. 16 Q. I imagine that a discount might be something very 17 slight or it could be something more significant; would 18 that be correct? 19 A. That's correct. 20 Q. Okay. The next section of your statement is 21 headed "the latest cheese vat design does not guarantee 22 optimal fat retention in the cheese." 23 And you then continue that: "It should not be 24 dismissed that the cheese maker's skills continue to play 25 an important role in determining fat retention in cheese." 26 And so ultimately at any plant within the 27 constraints of their equipment it ultimately is the 28 quality of the plants' people and operations that 7170 1 determines vat recoveries, correct? 2 A. Could you say that again? I'm -- 3 Q. Sure. It was a long question. 4 Each plant has certain limitations based upon its 5 equipment and setup about the maximum retention it might 6 achieve, correct? 7 A. Correct. 8 Q. But whether they hit that maximum is a function of 9 the people, the training, the operations at the plant, 10 correct? 11 A. Correct. 12 Q. And not to belabor the things that you enumerated, 13 but I think it is important to touch on them, the general 14 make procedures will impact butterfat retention, correct? 15 A. Correct. 16 Q. How so -- when you say "general make procedures," 17 what does that include? 18 A. How much time do you have? 19 Q. I mean apparently we have got a lot. 20 A. Okay. So -- so you -- let's say you are putting 21 the milk in the vat. So how you add the rennet, how long 22 you stir in the rennet, which is the coagulant, how firm 23 the cutness is, which -- how firm the coagulum is when you 24 cut will affect it. The cut speeds of the knives going 25 around, the agitation, the rate of acid development, which 26 affects the firmness of the curd. The type of pumps you 27 have to pump the curd to your belt or to your tables, 28 because if they are too aggressive, the curd will shatter 7171 1 and will leak fat and -- and protein and stuff. So 2 there's -- there's a lot of things in there that cheese 3 makers have control over that have to be right to maximize 4 fat retention in cheese yield. 5 Q. Earlier in this hearing Dr. Nana Farkye 6 testified -- do you know Dr. Farkye at all? 7 A. I do. 8 Q. I think he testified to some of those things, and 9 he talked about the gentleness of the cut to prevent some 10 of the -- he compared it to a healing of a wound almost. 11 Is that what you are referring to when you talk 12 about leakage in the coagulum? 13 A. That's part of it, yes. I would express it a 14 little differently, but I know what he's talking about. 15 So, yes. 16 Q. On page 7 you end up with some estimates. And you 17 say that -- I think -- I want to make sure I'm correct as 18 how I'm reading this: "Fat recoveries of 91 to 93% with 19 horizontal vats," correct? 20 A. Correct. 21 Q. And then 90 to 92% with vertical Double O vats, 22 correct? 23 A. Correct. 24 THE COURT: You know, you are not -- you are 25 missing his phrase, "well-run factories." I -- I think 26 you have to -- if you are going to ask him, I think you 27 have to use his words. 28 MR. MILTNER: Your Honor, I respect your 7172 1 intervention a lot, and I'm going to get to that, and I 2 phrased my questions particularly for a reason. And I 3 have asked him to agree to -- to my statement, and he did. 4 THE COURT: And not what he gave you in his 5 statement. You want him to agree with your statement 6 rather than his own? 7 MR. MILTNER: There's a reason I phrased it the 8 way I did, yes. 9 THE COURT: Well, I just don't think that's right. 10 MR. MILTNER: Very good. 11 BY MR. MILTNER: 12 Q. Your next statement says that 88 to 91% fat 13 recovery in factories with traditional open vats, no 14 qualification about how well it's run; is that correct? 15 A. That's what I stated, yes. 16 Q. Now, coming back to the point Her Honor mentioned. 17 On page 6 you state: "I have seen many instances 18 where a cheese factory had good equipment, but in the 19 hands of inexperienced cheese makers, large fat losses 20 still occur." 21 A. Correct. 22 Q. And so the ranges you state for butterfat recovery 23 in your conclusion, is the bottom end of that range, does 24 that include operations in the hands of inexperienced 25 cheese makers? 26 A. No. 27 Q. Overall, Mr. Sommer, what do you think is the 28 average butterfat retention or butterfat recovery for 7173 1 cheddar cheese? 2 A. 91%. 3 Q. Now, we have met before; do you recall? 4 A. I don't. 5 Q. Okay. You testified at a hearing in 2007 on this 6 very issue. 7 Do you recall that? 8 A. I know I was here, yeah. I -- 9 Q. I think we were -- 10 A. I don't know where we were. 11 Q. Okay. I had the opportunity to ask you questions 12 then as well. 13 And in your written statement you stated that you 14 believed 90% was an appropriate -- 15 A. Back then? 16 Q. Yes. 17 A. Okay. 18 Q. Is that -- so is it your experience and testimony 19 that in the intervening 16 years, or whatnot, the average 20 butterfat recovery has increased by 1%? 21 A. Yes. 22 Q. Now, in that same hearing, we had a back-and-forth 23 about cheese fines, and you said the during your time at 24 Alto, 20 years ago, that the cheese waste on the floor -- 25 I'm sorry. I misstated my question. 26 We were looking at cheese losses on the floor, 27 which I don't think necessarily includes fines, but those 28 losses at Alto at that time were about two-tenths of a 7174 1 percent. 2 Do you think that is still the a good number? 3 A. For the industry? 4 Q. Yes, sir. 5 A. It's probably pretty close. 6 MR. MILTNER: Your Honor, I have a document I 7 would like to mark as our next exhibit, if I could, 8 please. 9 THE COURT: So the next exhibit number is 308. 10 And we'll go off record. You have documents to 11 distribute? 12 MR. MILTNER: I do. 13 THE COURT: All right. Let's go off record for 14 just a moment at 11:47. 15 (An off-the-record discussion took place.) 16 THE COURT: Let's go back on record. 17 MR. MILTNER: Thank you, Your Honor. 18 THE COURT: We're back on record at 11:48. I have 19 in front of me Exhibit 308, and you have distributed 20 copies. 21 MR. MILTNER: I have, Your Honor. 22 (Exhibit Number 308 was marked for 23 identification.) 24 BY MR. MILTNER: 25 Q. And Exhibit 308 is an article from Dairy Foods, at 26 the bottom is the URL, and also the time stamp from when I 27 found it at 12:25 in the morning last night. 28 Mr. Sommer, do you know John Lucey? 7175 1 A. Yes. 2 Q. And he is the director of the Center for Dairy 3 Research? 4 A. Yes. 5 Q. Have you seen this article before, sir, by chance, 6 published in 2017? 7 A. I've seen drafts of it. I don't remember if I saw 8 the finished product. 9 Q. Okay. When you were looking at the drafts, was 10 that because you were asked to provide input on it? 11 A. I believe I was. Yes. 12 Q. I'd like to ask you to flip to the second page 13 there, where it talks about cheese yield prediction. And 14 this was an article from 2017, January of 2017, so I 15 imagine you probably saw it in 2016, somewhere in there. 16 So it's six or seven years old. 17 And is it Mr. Lucey or Dr. Lucey? 18 A. Dr. Lucey. 19 Q. And Dr. Lucey writes, in the middle of the page, 20 "Additionally, typical fat recoveries for cheddar average 21 around 92%." 22 I think you just testified that you thought the 23 number was 91. 24 A. Uh-huh. 25 Q. Do you and Dr. Lucey disagree on that point then? 26 A. Yes. 27 Q. Do you recall when you reviewed this article 28 whether you looked at that particular number? 7176 1 A. I don't. 2 Q. Okay. Further down on that page, Dr. Lucey states 3 that "by utilizing a modern enclosed vat design with 4 horizontal agitation, cheesemakers can achieve less than 5 0.2% fat in the whey." 6 I think you testified earlier that you think the 7 number is -- the floor number on that is 0.25%. 8 A. That was with salty whey. 9 Q. That was with salty whey. 10 A. Yeah. He's not talking about that here. He's 11 talking about sweet whey. That's two different things. 12 Q. Explain how those two things are different, 13 please. 14 A. He's talking about whey after cutting in the vat. 15 What you asked me before was all whey. So the salty whey 16 comes much later. So what you asked me -- or what I 17 assumed you asked me is if you combine the salty whey with 18 the sweet whey, what would the fat content be, because the 19 salty whey has a lot higher fat content. As like, you 20 know, minimum, in my opinion, .6 probably higher than 21 that, percent fat. You asked me of all the whey 22 generated, what's the base, including salty whey. 23 He's not talking about that. He's just talking 24 about sweet whey. 25 Q. Okay. 26 A. And also, by the way, he's talking about -- a lot 27 of what he's talking about there is mozzarella whey which 28 is reduced fat, because mozzarella is the number one 7177 1 cheese by volume in the U.S. Cheddar is made with whole 2 milk, and that's going to have a higher whey fat than 3 mozzarella. 4 Q. Where in this do you see a reference to mozzarella 5 cheese? 6 A. I don't, but he's just talking in general. He's 7 not -- I don't see a reference to mozzarella, but he's not 8 talking just strictly cheddar. 9 Q. I mean, in fact, in the whole article, the only 10 reference to any style of cheese I see is cheddar. 11 Do you see anything different? 12 A. No. 13 Q. Okay. 14 A. But when he talks about 0.2, he's not -- he's not 15 specifically talking cheddar. He's not specifically 16 stating cheddar. 17 Q. And -- and I'm not an expert, so from a lay 18 perspective or even somebody who has a moderate level of 19 industry knowledge, how would you determine that from what 20 you see on this page? 21 A. Well, you don't know what cheese varieties he's 22 talking about. You couldn't. 23 Q. We couldn't, but you know? 24 A. From experience, I know, yes. 25 Q. Okay. So you noted early on in your 26 cross-examination that the goal of the Center is to make 27 dairy farmers more profitable. 28 In fact, your Center is funded by both the 7178 1 Wisconsin Checkoff and DMI, correct? 2 A. Correct. 3 Q. And you are here appearing today on behalf of the 4 Center, correct? 5 A. Correct. 6 Q. And you understand that based on at least the 7 analysis from Select Milk Producers' economist, that 8 increasing the factor for butterfat retention would 9 increase producer income over a ten-year period. That's 10 the expectation. 11 Do you understand that? 12 A. Could you repeat that again, please? 13 Q. Sure. Well, let me just ask. Would you expect 14 that if the butterfat retention factor in the Class III 15 formula were increased, that that would increase the 16 Class III price? 17 A. Yes. 18 Q. And sometimes when butter and cheese get way out 19 of alignment, that may not be the case, though, but -- 20 A. Yes. 21 Q. -- in general, it would increase producer income, 22 correct? 23 A. Yes. 24 Q. And to be clear, the Checkoff funding received by 25 the Center, that's not -- that's all dairy farmer Checkoff 26 money, correct? 27 A. Correct. 28 Q. Is the purpose of your testimony today to 7179 1 influence the Department to not adopt an increase in 2 butterfat retention? 3 A. No. 4 Q. Okay. What is the purpose of your testimony then, 5 today? 6 A. My purpose is to give them the facts as best I 7 know them to make the best decision possible for the 8 health of the dairy industry. 9 Q. Did -- have you come here on your own volition 10 today? I mean, did you just decide to come to the hearing 11 and offer testimony on your own? 12 A. Oh, no. I was asked to come. 13 Q. Who asked you to come? 14 A. Some -- some representatives of IDFA. 15 Q. And you understand IDFA is opposing an increase in 16 the butterfat recoveries? 17 A. Yes. 18 Q. Did they say, "We would like to you come and offer 19 this testimony because we think that will help us in our 20 efforts to keep the butterfat recovery level below 93%"? 21 A. No. 22 Q. What did they ask for you to do, sir? 23 A. To come and give the facts as best I understand 24 them. 25 Q. Thank you. 26 MR. MILTNER: That's all I have. 27 THE WITNESS: Okay. 28 THE COURT: Don't leave. 7180 1 You may leave. Thank you, Mr. Miltner. 2 MR. MILTNER: You know what? I was quick on that 3 because I finished one statement. But he has two, doesn't 4 he? 5 THE COURT: Yes. 6 MR. MILTNER: It's noon. I'm happy to keep going 7 on the second statement or we can do it after lunch. 8 THE COURT: What I'd like to do -- you stay right 9 there for just a minute. 10 I would like to ask Agricultural Marketing Service 11 what witnesses we need to finish today, whether we want to 12 break for lunch now, but -- so that people would know 13 during their lunch break what they might need to prepare 14 for. 15 MS. TAYLOR: Thank you, Your Honor. 16 So on my list that we all agreed to yesterday, I 17 think Dr. Sommer is the only one -- 18 THE WITNESS: I'm not a doctor. 19 MS. TAYLOR: Mr. Sommer. There's been a lot of 20 doctors in front of us. 21 -- Mr. Sommer is the only one left on the list 22 that must finish today. 23 I have on my list, next would be Jeff Sims and 24 then Eric Erba. And if there's four minutes somewhere in 25 the day, Sally Keefe. I have not forgotten about her. 26 THE COURT: Now, at some point I wrote down 27 Jeffrey Sims. 28 MS. TAYLOR: Yes, that's Jeff Sims. So he would 7181 1 be next, but I'm not sure if he has to finish today or 2 not. Maybe. 3 THE COURT: Ms. Hancock? 4 MS. HANCOCK: And after we did our microphone 5 talk, I then threw in Mr. Zalar in front of Mr. Erba. We 6 don't believe -- and Mr. English prompted this as well -- 7 but we don't believe that Mr. Sims is realistically going 8 to finish today, or maybe even this week. And so we 9 thought it might be more prudent to get Mr. Zalar on first 10 before Mr. -- before Mr. Sims and Dr. Erba, so that he has 11 a chance of getting out of here this week. 12 THE COURT: Is that spelled Z -- 13 MS. HANCOCK: Z-A-L-A-R. 14 THE COURT: That sounds good. So -- and it really 15 is time to break. So when we come back, is everyone in 16 agreement that we will continue with this witness until 17 he's finished before we take the next one? Yes? 18 Thank you, Mr. Miltner. 19 MR. MILTNER: Thank you. 20 THE COURT: All right. Please be back and ready 21 to go at 1:00 p.m. 22 We go off record at 11:59 p.m. -- I mean a.m., 23 11:59 a.m. 24 (Whereupon, a luncheon break was taken.) 25 ---o0o--- 26 27 28 7182 1 THURSDAY, OCTOBER 5, 2023 - - AFTERNOON SESSION 2 THE COURT: We're back on record at 1:00 p.m. 3 Do you recall where you were, Mr. Miltner? 4 MR. MILTNER: I know right where I was. I was 5 between statement 30- -- or Exhibit 306 and 307. 6 THE COURT: Very good. You may proceed. 7 BY MR. MILTNER: 8 Q. Mr. Sommer, did you have a chance to read the 9 testimony that Dr. Farkye presented in this hearing before 10 today? 11 A. I briefly reviewed it. 12 Q. Do you recall his comments on the use of whey 13 cream in the cheese vat? 14 A. I do not. 15 Q. I believe he raised several of the same comments 16 that you do about some of the negative effects of using 17 whey cream and recycling that in the vat, but since you 18 don't recall, I won't ask specific questions on that. 19 Now, when you begin discussing the problems 20 associated with utilizing whey cream, you talk about 21 breaking the cycle by not recycling whey cream into the 22 vat. 23 Can you explain a little bit more about what you 24 mean by that and how a cheese manufacturer would break a 25 cycle? 26 A. Sure. So as I explained, once you start using 27 whey cream, because there's damaged fat in that -- more 28 fat -- some of that damaged fat is more easily leak -- 7183 1 more easily leaks out and it gets lost back -- right back 2 in the whey again, and then you separate it all in the 3 separator, and your whey cream, and we incorporate the 4 whey cream in the milk for cheese making, and it just 5 separates out again. 6 And the -- as day after day after day after day 7 goes on of doing that, that amount of damaged fat builds 8 up to ever higher levels, and your fat retention goes 9 down, and your risk of off flavors and everything else 10 negative goes up. 11 So perhaps every -- at least every week, I think 12 that's what I said in here, rather than reincorporate the 13 whey cream into the milk to make cheese, you just simply 14 ship it off to a butter maker, and then the following day 15 then they start the practice all over again. 16 Q. And so for a cheese plant that you are describing 17 there that would break that cycle once a week, how long 18 would it take them to go through one cheese making cycle? 19 In other words, if I'm going to start with a clean 20 vat, and now I have processed, I've made cheese, and I'm 21 going to put whey cream back in the vat, how long from the 22 time that I start with a vat to now I'm ready to do the 23 second vat? 24 A. I don't know what you are asking. I'm sorry. 25 Q. Okay. So let's start with the process. I -- I 26 start with -- with raw milk, and I'm going to make cheddar 27 cheese. 28 A. Okay. 7184 1 Q. And at the end of that process I have cheese 2 that's now off to be, you know, processed further or aged 3 or whatever is going to happen with it. And I have whey 4 cream, right? 5 A. At the end of the day, you'll have whey cream. 6 Q. Okay. You say at the end of the day. Is that 7 literally at the end of the day? My question is how 8 long -- 9 A. Yes. 10 Q. Okay. Great. 11 A. Literally at the end of the day. Because you save 12 that -- you save all that whey up, and you run it through 13 a separator, and it takes you the whole day to work 14 through it, and then at the end of the day you have a 15 batch of whey cream. 16 Q. That's -- that's really what I was getting at. 17 Because I thought, as an attorney, that it takes about a 18 day to run, you know, a -- to run cheese and -- but I 19 wasn't sure, so that's -- that's helpful. 20 A. Well, every plant is different, their schedules. 21 I mean, some plants run one shift, some plants run two, 22 and some run 24/7. So -- 23 Q. Okay. 24 A. -- it varies. 25 Q. Well, let's assume that we have a plant that does 26 once a day. So at the end of the day, it runs one -- what 27 do you call it? One -- one batch of cheese a day? 28 You are shaking your head? 7185 1 A. One vat -- are you saying one vat of cheese a day? 2 Q. Sure. Yes. 3 A. Every vat is a batch. 4 Q. Okay. 5 A. It's a batch system. 6 Q. Then let's assume we're going to run one vat of 7 cheese. 8 A. Okay. 9 Q. And at the end of the day, I have whey cream. 10 A. Okay. 11 Q. And tomorrow morning I'm going to do it again. 12 And I have put the whey cream now back into my vat. Okay? 13 So this is day two. 14 A. Okay. 15 Q. Do you expect that there would be noticeable 16 degradation of the cheese on day two compared to day one? 17 A. Possibly. 18 Q. Would you expect that the cheese at the end of day 19 two would nevertheless be marketable? 20 A. Yes. 21 Q. Okay. Thank you. 22 Would you expect that the cheese at the end of the 23 day three would be marketable? 24 A. You'd have to define what you say is marketable. 25 Marketable as USDA Grade A, or USDA Grade B, or 26 undergrade? 27 Q. As a 40-pound cheddar block meeting the 28 specifications of the NDPSR. 7186 1 A. Of the what? I'm sorry? 2 Q. The National Dairy Product Sales Report. Is it a 3 reportable 40-pound block? 4 A. I'm sorry, I'm not familiar with that report. I 5 don't know what their standards are to what they include 6 or don't include in that report. 7 Q. Okay. Then let's say Grade A. 8 A. Questionable. 9 Q. Okay. At the end of the day two? 10 A. I thought I said day three. 11 Q. I did. And now I'm saying, at the end of day two 12 would that make Grade A? 13 A. You are asking a hypothetical question, and that's 14 impossible to say depending on the individual cheese plant 15 and their practices. Maybe, maybe not. It's -- you -- no 16 one could possibly say yes, for sure, or no, for sure. 17 Q. So let's think about this same hypothetical plant, 18 and let's assume that they have a 90% butterfat retention 19 without using any whey cream. 20 Now, I understand from a previous report from the 21 Center that they would expect 80% of the fat in the whey 22 cream to be retained on the first pass. 23 Does that sound reasonable to you? 24 A. Sounds reasonable. 25 Q. So if I added that whey cream back and I ran that 26 again, I'm going to have a butterfat retention for -- I'm 27 going to capture 80% of that butterfat in the whey cream I 28 added in, correct? 7187 1 A. If that number is accurate, yes. 2 Q. And I'm going to capture 90% of the butterfat in 3 the new milk in the vat, correct? 4 A. Correct. 5 Q. And that's at day two. So from -- from the 6 butterfat that went in the vat on day one, I have got 90% 7 of what went through, and then I have got 80% of what was 8 in the whey cream, correct? 9 A. Correct. 10 Q. That ends up in cheese, correct? 11 A. Correct. 12 Q. Okay. And at the end of the day two, if I want 13 to, if I'm concerned about bacteriophage or other 14 breakdown, I could break the cycle then, couldn't I? 15 A. You could. You could also have a whole mess of 16 bad cheese from the first day if bacteriophage got in it. 17 Q. If that happened -- 18 A. Could -- 19 Q. -- you could? 20 A. The second day, I mean. The first day that you 21 add it back you could. 22 Q. Right. And a lot of that outcome on day two would 23 be part of the human factor that you described in your 24 first statement, right, how well trained folks are and how 25 clean they keep the plant and other factors? 26 A. Certainly that's a factor, yes. 27 Q. On page 3 of Exhibit 307 you state, in the middle 28 of the page, "Due to all of these factors, aged cheddar 7188 1 cheese manufacturers do not reutilize whey cream in cheese 2 manufacture due to the significant risks of off-flavored 3 development as their cheddar cheeses age." 4 Again, aged cheese is not part of the fat -- the 5 cheese that's surveyed by USDA for -- for sales prices, is 6 it? 7 A. I don't know the answer to that. 8 Q. Okay. Do you know if -- 9 A. Let me -- let me back up. I mean, aged cheese at 10 day one is young cheese. Aged cheese is only aged cheese 11 after you have aged it. So I don't know what USDA's 12 survey -- how they do that but -- 13 Q. Okay. 14 A. You know what I'm saying? 15 Q. Yeah. Yeah. 16 A. If I make an aged cheese at my Black Creek plant 17 where I used to work, on day one, it's not aged cheese, 18 it's mild cheddar. 19 Q. Right. Okay. I understand that. 20 Further in that same paragraph you stated, "So 21 even manufacturers of barrel and mild cheddar risk whey 22 taint and other flavor defects in their cheese when 23 utilizing whey cream in cheese production, which is why 24 myself and my colleagues at the CDR don't advise this 25 practice." 26 In your experience are there some barrel and mild 27 cheddar manufacturers that nevertheless use whey cream in 28 their processes? 7189 1 A. Yes. 2 Q. Okay. Is it more common in the manufacturing of 3 what we would call commodity cheddar cheese, rather than 4 specialty cheeses or as you note aged cheeses? 5 A. Yes. 6 Q. And in your conclusion, on page 4, I think you 7 pretty well summarize that: "Some cheddar manufacturers 8 are willing to employ reutilizing whey cream in cheddar 9 cheese production." 10 Correct? 11 A. Correct. 12 Q. Do you have any estimate as to the prevalence of 13 that practice for larger manufacturers of commodity 14 cheddar? 15 A. Could you ask me -- I heard the gist of it, but 16 the first part of that question before. 17 Q. Yeah. So for a large scale commodity cheddar 18 manufacturer, is this practice common? 19 A. The answer is -- I guess the answer is I don't 20 really know for sure. I don't know how common it is. I 21 know it happens. I don't know if it's common, because 22 people are pretty proprietary about those type of 23 practices, and they often don't tell us. 24 Q. I asked you a similar question in 2007, and here's 25 what you said. I asked: "Do you have any idea as to 26 whether it's a very common practice?" 27 Your answer was: "I really don't because that's 28 kind of one of those proprietary things that you don't -- 7190 1 especially since it is not a necessarily advisable 2 practice, people don't like to openly talk about that, so 3 I don't know." 4 Is that the same today? 5 A. Still the same. 6 Q. Okay. So with respect to whey cream, I think both 7 you and Dr. Farkye agree that there are some problems that 8 can arise from the practice, correct? 9 A. Correct. 10 Q. And -- but nevertheless, manufacturers -- some 11 commodity cheddar manufacturers utilize it, correct? 12 A. Correct. 13 Q. And -- but we don't know to what extent, correct? 14 A. I don't know, correct. 15 Q. You don't know. Very good. 16 But that if they do, they would expect to capture 17 on the first pass 80% of the butterfat in the whey cream 18 if they chose to employ that process? 19 A. I don't have personal data to back that up, but it 20 seems like a reasonable number to me. 21 MR. MILTNER: At this point, I don't think I have 22 any further questions. Thank you very much, Mr. Sommer. 23 THE WITNESS: You're very welcome. 24 THE COURT: I can't remember whether we made the 25 correction on page 4 of Exhibit 307. I think we did 26 before lunch. 27 MS. TAYLOR: We did. 28 THE COURT: We did. Okay. Good. 7191 1 All right. Next cross-examiner, please. 2 CROSS-EXAMINATION 3 BY MR. ENGLISH: 4 Q. Good afternoon. Chip English for the Milk 5 Innovation Group. 6 Hello, sir. 7 A. Hello. 8 Q. So in his examination, Mr. Miltner suggested, at 9 least what I heard, that your testimony will harm dairy 10 farmers. 11 Do you have a response? 12 A. Yeah, I do. That's certainly -- certainly not my 13 intent, and from a larger philosophical standpoint, my aim 14 is to help dairy farmers. And here's why I say that. 15 Because we are largely funded by dairy farmers, 16 I'm very, very cognizant of their welfare, and I came from 17 a dairy farm, so -- and from a cooperative, so I 18 understand to some extent, you know, their struggles. 19 But I have been in this industry for 38 years, 20 both on the cheese plant side, 18, and now 20 at the 21 Center for Dairy Research. One of the things, one really 22 big lessons I have learned is, for this industry to 23 thrive, farmers have to be profitable and healthy, 24 economically healthy, and dairy plants do, too. 25 The worth of a dairy plant without a milk supply 26 is not much. The value of milk on the farm without a 27 processor to process it is not much. The more dairy plant 28 competition we have, the higher prices dairy farmers are 7192 1 going to get for their milk. 2 So my hope is to only give the USDA folks accurate 3 information to plug into their various formula for 4 Class III prices and Make Allowances and such to make an 5 overall healthy dairy industry for the entire United 6 States, both processors and farmers equally. 7 And I know darn well that if the dairy plants 8 can't be profitable and go out of business, long-term 9 that's bad for dairy farmers. 10 Secondly, I will say, particularly from the from 11 the Center for Dairy Research standpoint and my 12 standpoint, I am -- we're more about adding total value to 13 the milk supply, so dairy farmers are economically more 14 helpful. Finding new and more higher value uses for 15 cheese, developing new cheese varieties and recipes to 16 bring higher values in the marketplace, to assist 17 processors and buyers of cheese, to make products that are 18 highly desired by the consumers so that they can get 19 maximum value for that, all in the effort to make both 20 dairy farmers and dairy processors profitable. 21 Ultimately, USDA's job is -- to me, is a bit like 22 the Biblical Solomon tale of dividing the baby up. Right? 23 I don't want to get personally involved with that, and 24 I -- that's a tough job for them, and I understand that. 25 My job at the Center for this hearing's purposes 26 is to give USDA what I consider the most accurate 27 information I can so that they can so-called divide the 28 baby up as well as they possibly can, knowing that's an 7193 1 impossible task. 2 Q. Thank you. 3 Mr. Miltner also asked you a series of questions 4 going back to -- and I'm not sure whether it was the 2006 5 or 2007 version of the hearing where he and you had a 6 conversation like this, and you testified about a 7 90% butterfat recovery. 8 Do you remember that? 9 A. Yes, I do, sir. 10 Q. And then in the article that is Exhibit 308 that 11 Dr. Lucey is the author of, he references that recovery of 12 92%. 13 A. Correct. 14 Q. Why do you say 91%? 15 A. My belief is when Dr. Lucey authored that article, 16 he was for the most part only considering the new larger 17 plants. And that 92% is in the same range that I gave for 18 those plants. I don't believe for a second that he was 19 considering older, smaller plants, open vats, even some of 20 the older Double O vats, and some of those situations. 21 So I agree with that number if you are saying, you 22 know, some of the more modern plants, and certainly the 23 larger plants and newer plants out West, and I think 24 that's what he was thinking of when he -- when he stated 25 that number. I don't believe he was looking at, you know, 26 smaller and older plants and older vats and things like 27 that. 28 Q. So, for instance, consistent with that, the last 7194 1 phrase -- there was a comma, and the last phrase in that 2 paragraph -- 3 A. Yeah, he says -- he says, "but different 4 recoveries can occur industrially due to the actual 5 processing conditions used for cheesemaking," which is 6 what I'm saying as well. 7 Q. And then -- and then finally, Mr. Miltner said, as 8 far as he could tell -- and maybe he was looking at one 9 page and not another -- that this was limited to cheddar 10 cheese, at least that's what I understood. 11 But can you look at page 3, the line up from the 12 first paragraph. And do you see a reference to a cheese 13 other than cheddar cheese? 14 A. Yeah. Dr. Lucey is talking about feta cheese. He 15 says "like feta" on the seventh line, third -- second word 16 from the end, "like feta." 17 Q. So that -- that corresponds with your view that 18 that the article may or may not have been about just 19 cheddar cheese. In fact, it clearly included feta cheese, 20 and in your view, probably mozzarella as well, correct? 21 A. Correct. 22 MR. ENGLISH: Thank you very much. I have no 23 further questions. 24 CROSS-EXAMINATION 25 BY MR. MILTNER: 26 Q. First of all, I do stand corrected. I did not see 27 feta there. I looked quickly, and a couple of times, but 28 I did not see it. I apologize for my error there. 7195 1 Mr. Sommer, in -- along the lines of Mr. English's 2 question about 92% recoveries and your response, I'll ask 3 a simpler question about what leads you to believe that 4 Mr. -- Dr. Lucey was only considering current vats? 5 Because I don't see that information in there and -- 6 A. No, it's not -- I'm sorry. 7 Q. No, go ahead. I was pretty well done. 8 A. Sorry. 9 No, I don't see that either. But just knowing 10 what he sees and how he -- you know, how he thinks, he -- 11 he's pretty much -- that's what his exposure is, to -- to 12 a lot of the newer plants with -- with newer vats and 13 newer equipment. 14 My exposure is to the breadth of the industry. I 15 worked from the smallest of the small farmstead cheese 16 makers to some of the largest cheese plants, so I see a 17 wider range of plants than he typically would deal with. 18 He typically doesn't deal nearly as much as I would, for 19 example, in some of the small and medium-sized plants. 20 Q. And so would it be that those small and 21 medium-sized plants tend to have lower butterfat 22 recoveries? 23 A. Yes. 24 Q. Is that because they tend to be the ones that are 25 still using Double O vats? 26 A. Yes. And open vats. 27 MR. MILTNER: Thank you. 28 THE COURT: Dr. Cryan. 7196 1 CROSS-EXAMINATION 2 BY DR. CRYAN: 3 Q. Hello, Dr. Sommer. 4 A. It's not doctor. It's just Mr. 5 Q. Oh, I apologize. I apologize. 6 I am Roger Cryan with the American Farm Bureau 7 Federation. It's good to see you. I have seen your work 8 over the years, and I understand you are a good and 9 well-respected scientist. 10 The numbers you have presented are essentially 11 well-informed estimates about yields and so forth, based 12 on relatively limited observations over a relatively long 13 time. They are not comprehensive data across the 14 industry; is that correct? 15 A. I believe that's accurate, yes. 16 Q. So do you think it would be wise before 17 implementing -- you know, applying yields to regulations, 18 to obtain a wider and more complete set of data for 19 processors regarding costs and yields? 20 A. That would be ideal, yes. 21 DR. CRYAN: Very good. Thank you very much. 22 I'm done. Thank you. 23 THE COURT: Does anyone else have questions before 24 I turn to the Agricultural Marketing Service for their 25 questions? 26 I see no one. The Agricultural Marketing Service 27 may proceed. 28 /// 7197 1 CROSS-EXAMINATION 2 BY MS. TAYLOR: 3 Q. Good afternoon. 4 A. Good afternoon. 5 Q. Thanks for joining us today to testify. 6 A. You're welcome. 7 Q. Let's see. A few questions. 8 In your -- I'm going to start with Exhibit 306. I 9 wrote at the top, I think you answered this to someone 10 else's question, but I want to make sure I wrote it down 11 right. But overall you think butterfat recovery in 12 cheese, in cheddar cheese, currently is around 91%. 13 Did I write that down correctly? 14 A. That's what I -- yeah, that's what I believe. If 15 you took the whole industry and put it in a hopper and 16 shook it up and figured out what it was, I -- that would 17 be my best guesstimate, 91%. 18 Q. Got you. 19 And -- 20 A. Can I say one other thing to that, that didn't 21 come out before? 22 Q. Uh-huh. 23 A. It kind of did, but -- so the good news is, for 24 fat retention, a lot of the newer, bigger plants, 25 especially out West, have newer equipment with much better 26 fat retention potential. 27 The downside of that, though, is many of those 28 newer plants, and I -- I don't want to mention names, 7198 1 have, in general, quite limited experience of their 2 employees, so their practices aren't up to speed of what 3 they ultimately hopefully will be. So they -- even though 4 that they have really great brand new equipment, they 5 don't achieve the fat retention and the cheese quality 6 that would be ideal. 7 So that -- that -- that's -- I have seen that in 8 the context of that's a drag on the fat retention story, 9 meaning a lowering effect on the fat retention story. 10 We have just had some experiences at the -- I have 11 had some experiences at the CDR just seeing some of those 12 operations and some of the struggles that they go through. 13 But -- they will get better, but right now there's a bit 14 of a drag on that system. 15 Q. On that point, what seems to be -- what's the 16 learning curve like time-wise? 17 A. Time-wise? 18 Q. Uh-huh. 19 A. Couple years. 20 Q. Okay. You talked about the Van Slyke formula, and 21 that has a 93% fat recovery assumption in it. 22 Do you know if that assumption factored in only 23 the loss from cutting the curds or it's all of the losses 24 that you talked about -- 25 A. All -- 26 Q. -- in your exhibit? 27 A. All of the losses. Doing a total mass balance of 28 fat coming in, the milk, raw milk into a factory, and fat 7199 1 leaving the factory in the cheese. 2 Q. Okay. 3 A. So all of it. 4 Q. I want to turn to the page 3 and 4 where you talk 5 about salty whey and sweet whey, and you mention salty 6 whey is significantly higher in fat than sweet whey. 7 Can you explain why that is? 8 A. I believe the reason is that when you add salt, it 9 kind of reopens the pores of the cheese structure. I 10 mean, if you looked at a piece of cheese under a super 11 powerful microscope, it would look like a sponge, and the 12 fat is -- is just trapped in the -- if you think of a 13 sponge, the holes in a sponge -- the trap is -- the fat is 14 simply just trapped in there, as is the moisture. So when 15 you add salt, it affects the proteins, and I think they 16 open up, and then they leak out fat because it kind of 17 opens up the structure. 18 Q. Okay. And you talked about how the sweet whey can 19 go back in the cheese making process if they choose to do 20 that. 21 Am I right about that? 22 A. I don't think so. 23 Q. You talked about whey -- oh, whey cream going back 24 in the cheese making process. Excuse me there. 25 A. Yeah. Whey cream can, yes. 26 Q. What happens to the salty whey? 27 A. Typically, they -- a typical cheddar plant will 28 segregate the salty whey, run that through a whey cream 7200 1 separator, separate from the sweet cream -- I'm sorry -- 2 separate from the unsalty whey separator, and now they 3 will have whey cream with salt in it. But usually they 4 just combine that whey cream with the whey cream they get 5 from the sweet whey. 6 So generally the whey creams, both streams, the -- 7 from the sweet whey and from the salty whey, although they 8 are generated separately, they are ultimately typically 9 combined. 10 Q. And go back into the cheese if the cheese maker 11 chooses? 12 A. Correct. 13 Q. Okay. You mentioned the sentence in here says -- 14 talked about both sweet and salty whey. And I think you 15 said of all the whey losses, 90% is sweet whey and 10% is 16 salty whey. 17 Am I correct there? 18 A. Correct. And that -- that -- that came from that 19 last reference that I had there that -- that was done some 20 years ago at the University of Wisconsin on survey of 21 salty and sweet whey composition from various cheese 22 plants in Wisconsin. That's where I -- that's where those 23 data came from. 24 Q. And would -- do you know or would that article 25 have what is the typical fat percentage of sweet and salty 26 whey? 27 A. That, I know exactly what the article said. The 28 article said 0.2% fat in the sweet whey and 0.6% fat in 7201 1 the salty whey. 2 Having said that, my personal belief is I think 3 they were underestimating both but... 4 Q. Okay. 5 A. But that's what that -- you asked me what the 6 article said. That's what it says -- 7 Q. Okay. 8 A. -- 0.2 and 0.6. 9 Q. Okay. And the last sentence here says, "This 10 occurs late" -- you are talking about the salty whey -- 11 "in the cheese making process and is not accounted for in 12 the test for fat losses in whey sampled at the vat." 13 I was just wondering if you could explain there 14 what you are talking about with the tests. 15 A. Yeah. So what -- what -- what a typical cheese 16 plant would do is -- so you are making -- just envision 17 for a minute, if you have been in a cheese plant, you are 18 making cheese, and you have your milk in the vat, and you 19 add your coagulant and starter and all that stuff, and you 20 cut it, cook it, and now you have curd and whey. So 21 normally it's at that point where a cheese factory would 22 take a sample of the sweet whey and analyze it for fat 23 loss. Okay? 24 But then as part of that overall process, now you 25 have got your curds and whey, now you're going to send it 26 to either a belt or a -- or a table, curd table, or a 27 matting belt, and drain off most of that sweet whey. And 28 then ultimately then after you have pretty much dried 7202 1 curd, you are going to salt the curd. So that's pretty 2 late in the process, just before putting it into a 3 40-pound block tower or something. And it's at that point 4 when you salt the whey that the salty whey comes out. 5 So when you are sampling for fat loss in the vat 6 after cutting and cooking the curd, you are not catching 7 any of that fat that's lost later in the process after you 8 salt the curd. That's what I was trying to point out, 9 probably not as eloquently as I should have. 10 Q. And that's just typical of how cheese operators 11 work? 12 A. That's right. That's how they all operate, yeah. 13 Q. Okay. 14 A. And the other thing -- let me say this, too. 15 Whatever you are sampling, whether you're sampling sweet 16 whey or salty whey, it's a moving target. We have an 17 article in our -- in our quarterly publication on that, 18 but as whey coming out of the cheese, the whey composition 19 changes. 20 Let me back up. So you cut the curd in the vat, 21 right? The fat that's lost is lost very fairly quickly. 22 But then as the curd continues to go through the system, 23 you still lose more whey liquid, mostly water whey, but 24 less of the fat. So if you take the -- what I'm trying to 25 tell you is, I -- let's say I'm making cheese, and I cut 26 the curd, I cook the curd, and now I have my curds and 27 whey. If I take a sample then, I'm going to get a fat 28 content here. 7203 1 If I wait, pump it to a table and let more whey 2 come out but less fat is coming out and analyze for fat as 3 a percentage, my fat's going to go down. 4 So I think it would be easy for you in the room to 5 think, you know, it's accurate -- it's easy and accurate 6 to get a -- a fat test on your whey, but it's not -- it's 7 not quite that simple, unfortunately. 8 Q. Okay. Thank you for that detail. 9 You talk about, on page 5, fat loss through fines. 10 And you have a specific example for 640s. I'm curious if 11 there's a difference between 640s and 40s and 500s. 12 A. There is. So 40 is a hermetically-sealed block. 13 So once you seal it, vacuum seal it, nothing can escape. 14 A 640 is -- is not a vacuum-sealed block. It's 15 got a plastic liner, but it's -- it's got seams that are 16 not sealed. So even after you put a 640 in a cooler, it 17 will continue to drip whey, and you will lose more fat, 18 and whey, and a little bit of protein, and water and 19 lactose. 20 Is that what -- I'm sorry, is that what you were 21 asking? 22 Q. It was. 23 And 500s? 24 A. 500-pound barrels? I have never made 500-pound 25 barrels. I have seen it done. But I'm pretty sure that 26 those go in a sealed -- I'm almost positive -- they go in 27 a bag and nothing can escape. So in that sense, a barrel 28 would be more similar to a 40-pound block. A 640 is a 7204 1 different animal. 2 Q. Okay. When you are talking about adding whey 3 cream back into the cheese making process, from what I 4 gather from your testimony, you deal with plants all over 5 the United States, not just in the Wisconsin area? 6 A. Correct. 7 Q. So I was wondering if the prevalence of doing that 8 is in any particular area of the country or you don't see 9 that at all? 10 A. I do see that. My -- my understanding, and what I 11 have seen, is it's more prevalent -- adding whey cream 12 back into the milk to make -- to try and incorporate it 13 back in the cheese tends to be more prevalent in the 14 western part of the country than in the Upper Midwest. 15 And historically the reason was there was more 16 outlets for whey cream in the Upper Midwest, meaning more 17 butter makers that would pay a reasonable price value for 18 the whey cream in the Upper Midwest compared to out West. 19 So my understanding is there was a lot of cheese plants in 20 the western part of the country that really didn't have 21 very good economic outlets for the whey cream, so they are 22 like, well, we got to do something, right? So we're going 23 to have -- we're just going to have to take the risks and 24 put it back in the cheese. And I totally understand that. 25 I don't particularly like it, but I totally understand 26 where they are coming from. 27 So, yeah, it's a long answer of saying, are there 28 regional differences? I have seen regional differences, 7205 1 more prevalent out West, less prevalent in the Upper 2 Midwest. 3 Q. Okay. 4 A. The other part of that is, too, I would say, the 5 Upper Midwest, I believe, has a higher proportion of aged 6 cheddar plants, whereas the West -- let's exclude maybe 7 Tillamook for now -- but the West, the Southwest, more of 8 that tends to be mild and commodity cheddar and barrel 9 cheddar. And the risks there are not nearly as great of 10 adding whey cream back as they are if you are going to do 11 it to aged cheddar. So I think that's part of that 12 factor, too. 13 Q. Okay. Are any of the other -- I know we talked 14 about the difference between 40s, 640s, 500s when it comes 15 to cheese fines. But are there any other differences that 16 you would see in the fat loss recovery between the 17 different sizes of commodity cheddar that is made? 18 A. Ask me that first part again, because I'm not sure 19 I agreed with how you stated it. But go ahead. 20 Q. We talked about when it came to losing cheese 21 fines -- 22 A. Okay. 23 Q. -- and you explained how 640s have this issue, but 24 you don't find that in 40s and 500s because of the way 25 they are packaged. 26 A. No, that's not correct. If I said that -- I hope 27 I didn't say that. I didn't mean to say -- 28 Q. That's how I -- well, that's good -- we'll clarify 7206 1 this. 2 A. Yes. 3 Q. I think I was asking, because you have an example 4 of 640s -- let me turn to the page. On page 5, you are 5 talking about losses in -- maybe I'm incorrect. This is 6 on whey, not on cheese fines. 7 A. Correct. That's whey. Whey is -- you are right. 8 Q. I apologize. So -- 9 A. Cheese fines is more about -- I'm sorry. Cheese 10 fines is more about the belts system -- the matting belt 11 system versus the stirred belt system versus the open 12 table system. 13 Q. Okay. So we have differences in the whey lost, 14 and the different sizes of commodity cheddar that's made. 15 Are there any other differences in the sizes that 16 cheddars are made that would impact that recovery? 17 A. None that come to mind. 18 Q. Okay. And my last question, at the end of your 19 statement you talk about kind of different ranges of fat 20 recovery based on how well the factories run and also 21 based on the type of cheese making equipment they have. 22 And, you know, I remember back to the '06 and '07 23 hearings when we had this discussion all those many years 24 ago. We kind of used the same terms, modern, newer 25 plants. Well, it's 15 years later. 26 So my question is, when we think about cheese 27 making equipment, what is the average lifespan out there, 28 if I want to exclude, say, some of the smaller plants that 7207 1 might get that refurbished vats, maybe they are -- and 2 they produce more of a specialty cheese. 3 But when I'm just thinking about the commodity 4 cheddar, which is what Federal Orders focus on, how old is 5 that -- you know, the lifespan of that equipment, so that 6 when we think about modern versus old, we kind of know the 7 years we're talking about? 8 A. That's a good question. That's an interesting 9 question. I can give you my opinion on that. 10 Q. Uh-huh. 11 A. I'd say I'm thinking more of things like vats and 12 stuff like that, vats and tables. I would say somewhere 13 in the neighborhood of 25 years. And sometimes they go 14 longer. 15 And it depends, too, because, you know, like when 16 I was -- when we were at Alto, we're running those vats 17 and tables 24/7/365, right? And some of those smaller 18 plants are only running one or two shifts, so that makes a 19 big difference. 20 But if you are talking about a large -- I think 21 you were talking about the big, large, 24-hour-a-day 22 plants, I would say in that neighborhood of 25 years. And 23 sometimes they refurbish them, and they can get more. But 24 in my book, a good rule of thumb would be 25 years. 25 Q. So when you talk about these modern horizontal 26 vats in a well-run factory achieving 90 to 92%, that is 27 with technology that is somewhere less than 25 years old? 28 A. Yes. Having said that, even -- we -- you know, it 7208 1 would be not totally accurate to lump all horizontal vats 2 in as just horizontal vats, because even the horizontal 3 vats have gone through a series of technical upgrades and 4 improvements over the years. Like the Tetra Pak has come 5 out with their Yieldmaster which is supposed to get the 6 very best yield, and that's like a third generation 7 horizontal vat, if you know what I'm saying. So even 8 within the horizontal vats, there are differences in their 9 fat retention abilities. 10 MS. TAYLOR: That's it for AMS. Thank you for 11 your time today. 12 THE WITNESS: You're very welcome. 13 THE COURT: Mr. Rosenbaum? 14 MR. ROSENBAUM: Your Honor, I would move Hearing 15 Exhibits 306 and 307 into evidence. 16 THE COURT: Is there any objection to the 17 admission into evidence of Exhibit 306? 18 There is none. Exhibit 306 is admitted into 19 evidence. 20 (Exhibit Number 306 was received into 21 evidence.) 22 THE COURT: Is there any objection to the 23 admission into evidence of Exhibit 307? 307? 24 There is none. Exhibit 307 is admitted into 25 evidence. 26 (Exhibit Number 307 was received into 27 evidence.) 28 THE COURT: Mr. Miltner? 7209 1 MR. MILTNER: Your Honor, I would move the 2 admission of Exhibit 308. 3 THE COURT: Is there any objection to the 4 admission into evidence of Exhibit 308? 5 MR. HILL: I have an objection, Your Honor. 6 THE COURT: I knew you would, Mr. Hill. 7 MR. HILL: So I guess I do have a couple of 8 questions maybe for Mr. Sommer before I object, if I'm 9 going to object. 10 I think you stated that you knew about this 11 article that is identified as 308? You were aware of it? 12 THE WITNESS: I was. 13 MR. HILL: And I want to say that you might have 14 hinted that you were asked to contribute to this article; 15 is that true? 16 THE WITNESS: I -- my recollection is I was asked 17 to review it and make any comments or suggestions for 18 improvements. Not to -- not to add to it, not to write 19 it, but to see if I saw anything that was way off kilter, 20 so to speak. 21 MR. HILL: All right. 22 I won't object then, Your Honor. 23 THE COURT: Are there any other objections to the 24 admission into evidence of Exhibit 308? 25 There are none. 26 Now, I wondered what I was going to do when you 27 objected, because we don't have John Lucey, Dr. Lucey, 28 here to cross-examine. 7210 1 MR. HILL: Right. There are some questions, Your 2 Honor, that I have, obviously. And it seems like from 3 what we have heard, he disputes a lot of this information, 4 and it does seem to me that he's -- it's being used for 5 the truth of what's asserted in it, and he's not here. 6 But I am not exactly sure his contribution to this and how 7 much he saw. So I -- I'm not sure how far I want to go 8 with that objection -- with objecting. 9 THE COURT: Well, I know it's a fairly recent 10 article, but 2017, he could have a different opinion now. 11 MR. HILL: I understand. 12 THE COURT: I don't love it for the truth of the 13 matter asserted, but I will admit it, because I think it 14 was very useful, the juxtaposition about what it says and 15 what this witness says, because to me, these differences 16 are so tiny, the percentages. You know, the difference 17 between, let's say 91% and 92%, or the like, and yet, I 18 understand that it makes a big difference. 19 MR. MILTNER: It does, Your Honor. 20 And I would add for our record, that Dr. Lucey is 21 the director of the Center for Dairy Research, the entity 22 on whose behalf Mr. Sommer is testifying today. And so 23 I -- with all of the, I guess I would hope that this is 24 admitted for the weight to which the Secretary chooses to 25 accord it with no other restrictions. 26 THE COURT: Excellently said. 27 MR. MILTNER: Thank you. 28 THE COURT: Exhibit 308 is admitted into evidence. 7211 1 (Exhibit Number 308 was received into 2 evidence.) 3 THE COURT: All right. Thank you so much. I 4 enjoyed your testimony so much. 5 THE WITNESS: You're very welcome, Your Honor. 6 THE COURT: That would be a good hobby, but I'm -- 7 not for me. 8 Ms. Hancock. 9 MS. HANCOCK: I was moving on, Your Honor. 10 THE COURT: Okay. Thank you so much. You may 11 step down. 12 And, Ms. Hancock. 13 MS. HANCOCK: Your Honor, our next witness would 14 be Stephen Zalar. 15 THE COURT: Is there a document to distribute? 16 MS. HANCOCK: Yes. Exhibit NMPF-49. 17 THE COURT: All right. And that will be marked 18 Exhibit 309. 19 (Exhibit Number 309 was marked for 20 identification.) 21 THE COURT: And we'll go off record while the 22 documents are circulated. 23 Off record at 1:49. 24 (An off-the-record discussion took place.) 25 THE COURT: Let's go back on record. 26 We're back on record at 1:50. 27 I'd like the witness to identify himself by 28 stating and spelling his name. 7212 1 THE WITNESS: My name is Stephen F. Zalar. That's 2 S-T-E-P-H-E-N, middle initial is F, my last name is 3 Z-A-L-A-R. 4 THE COURT: Do you ever tell people "sounds like 5 'dollar'"? 6 THE WITNESS: Your Honor, it's funny that you say 7 that. I always tell people take the D off a dollar and 8 put a Z on it. But I have been called a lot of other 9 things. 10 THE COURT: Have you testified in this proceeding? 11 THE WITNESS: I have not yet, Your Honor. 12 THE COURT: I'd like to swear you in. 13 STEPHEN F. ZALAR, 14 Being first duly sworn, was examined and 15 testified as follows: 16 DIRECT EXAMINATION 17 BY MS. HANCOCK: 18 Q. Good afternoon, Mr. Zalar. 19 Would you provide your business address for the 20 record, please? 21 A. Yeah. I work at 1035 Medina Road, Suite 300, 22 Medina, Ohio, 44256. 23 Q. And did you prepare Exhibit NMPF-49, which has 24 been marked as Exhibit 309 for this hearing? 25 A. I did. 26 Q. Okay. Would you proceed with your testimony, just 27 being mindful of reading at a moderated pace for our court 28 reporter? 7213 1 A. I will. 2 My name is Stephen F. Zalar, and I'm currently 3 employed by and represent Dairy Farmers of America. I 4 hold an associate degree in dairy science, a bachelor of 5 science degree in food science, and master of science 6 degree in agricultural economics, all from The Ohio State 7 University. My graduate thesis work involved the study 8 and publication of economic and institutional factors 9 relevant to defining Mideast Federal Order marketing 10 areas, which would become an instrumental reference for 11 Federal Milk Order reform as directed by the 1996 Farm 12 Bill. 13 My work experience within the dairy industry 14 encompasses work from the ground to the grocery store, so 15 to speak. I have spent my entire career working within 16 the dairy industry in various capacities with employers, 17 such as the Kroger companies, dairy manufacturing, 18 logistics and optimization consulting work for the dairy 19 producers of New Mexico, Dannon Yogurt, and Borden, 20 Incorporated. I also spent several years as a herdsman on 21 dairy farm operations. 22 I currently serve as a senior logistics analyst 23 and fleet manager for Dairy Farmers of America (DFA). I 24 have worked 20 years in milk logistics at DFA. I thank 25 you for this opportunity to testify today. 26 I have been asked to discuss milk hauling costs in 27 the Mideast area and how they have changed over the last 28 two decades. For anyone involved in the dairy industry, 7214 1 it is no secret that milk hauling costs have increased 2 significantly, especially since the implementation of 3 Federal Order reform in 2000. For example, taken from the 4 Mideast area from 2006 to 2023, overall costs for a 5 three-mile -- I'm sorry -- 300-mile roundtrip load of milk 6 on an Ohio based 6,200-gallon tractor-trailer increased 7 70%. And I will show you that on Table 1 here. 8 Can we see that? 9 Yes. There we go. Very good. 10 And with respect to large eight-axle 11 Michigan-based 12,000-gallon tractor-trailers, moving milk 12 on a 300-mile roundtrip run, costs have risen 69%. 13 And I'll refer that there to Table 2. Do we have 14 Table 2 up? 15 We do. Okay. Very good. 16 Okay. Some may ask what costs have increased over 17 the 17 years, i.e., have some costs increased faster than 18 others? Also, what reasons might there be that hauling 19 costs have not increased uniformly, or what has caused 20 costs to change differently? 21 Two basic considerations are miles travelled and 22 the demographics of producer farm milk routes. Milk shed 23 production volumes can greatly impact miles travelled 24 during the process of collecting milk on the milk truck, 25 commonly called milk assembly. Milk haulers will 26 structure routes with the intent of obtaining a full load 27 of milk. 28 It is simple economics driving their decision, 7215 1 i.e., more volume helps to spread fixed costs while not 2 impacting variable costs as much. Miles travelled to 3 assemble a fixed volume of milk is summarized best with a 4 calculated statistic called the miles-per-hundredweight 5 ratio. 6 Milk sheds with low milk volumes that are thin, 7 i.e., that require more stops and more miles travelled to 8 assemble a full load, would have a higher 9 miles-per-hundredweight ratio. Milk haulers operating 10 these routes will typically charge a per-load flat rate 11 instead of a per-hundredweight rate to cover added costs 12 of milk assembly. Milk haulers operating these routes 13 within DFA Mideast will also typically charge a sizeable 14 stop charge per producer, which is exactly what it sounds 15 like, i.e., a charge levied upon the farm for each time 16 the truck stops to pick up milk. The stop charge has 17 ranged anywhere from 50 to $200. This would be used 18 instead of a per-hundredweight rate to cover added costs 19 of milk assembly. 20 In contrast, milk sheds that are high volume or 21 that are flush, requiring fewer stops to assemble a full 22 load, will have lower miles-per-hundredweight ratio. 23 Haulers operating these routes can maximize or optimize 24 full load efficiencies via reduced miles and time. In 25 general, large farms that require haulers to make just one 26 stop to fill a truck can create efficiencies in milk 27 hauling costs savings for the producers. 28 Milk haulers realize when operating in a thin or 7216 1 declining milk volume milk shed that an eventual demise of 2 their milk hauling enterprise is possible or even likely. 3 Increasing producer farm hauling rates may help to 4 cover growing operating costs caused by lower milk volume 5 loads and greater distances traveled. Unfortunately, 6 higher hauling rates contribute to uncertain farm profit 7 margins on farms, which may accelerate the farm exit from 8 the dairy industry. 9 Here are some actual operational examples of 10 haulers who are currently faced with operating in a thin 11 and declining milk shed. 12 Okay. So example number 1, the bullet point 13 there, a Kentucky-based hauler in the spring of 2023 was 14 required to travel almost 200 miles to assemble just 15 33,000 pounds of milk from six farm stops. This did not 16 include miles to final delivery plant. 17 A Western Pennsylvania based hauler in the summer 18 of 2022 was required to travel over 200 miles to assemble 19 just 27,000 pounds of milk from ten farm stops. This did 20 not include miles to final delivery point. 21 Third example, a Southeastern Ohio-based hauler in 22 the summer of 2022 was required to travel over 180 miles 23 to assemble just 32,000 pounds of milk from five farms 24 stops. This did not include miles to the final plant 25 delivery. 26 And some sub-bullet points in this last example. 27 The milk hauler wanted to retire from hauling and no 28 longer had a desire to haul milk. To continue hauling 7217 1 milk, the hauler being in a strong negotiating position, 2 charged each farm 200 per stop to pick up the milk 3 regardless of the amount of milk picked up. Within the 4 first few months of the rate increase, two of the farms 5 were forced to exist the dairy business. 6 Milk hauling enterprises are dynamic in terms of 7 stability and alignment with farm numbers and 8 concentrations. The Mideast area has seen decreases in 9 hauler numbers consistent with decreases in dairy farm 10 numbers. For example, in July of 2006, DFA contracted 11 with 194 milk haulers, but today there are just 88 12 contract milk haulers being used. And during that same 13 period, DFA's milk production in the Mideast area went up 14 from 565 million pounds per month to 601 million pounds 15 per month, even as dairy farm numbers fell -- fell by over 16 70%. 17 The conundrum should be clear, fewer farms are 18 producing more milk, and there are fewer milk haulers 19 available to haul the milk to customers. A corollary to 20 this is that with fewer haulers in the Mideast area, dairy 21 producers have fewer options for finding a milk hauler. 22 Like any business enterprise, milk haulers are 23 faced with variable cost inputs. Regionality of input 24 costs such as labor and fuel are perhaps the most obvious 25 examples of regionality variable costs encountered within 26 the transportation sector. With respect to labor, wages 27 tend to be higher in the more populous metropolitan areas 28 located near the eastern and western coast of the U.S. 7218 1 There are, however, exceptions to this general 2 rule. According to the U.S. Department of Labor 3 Statistics, Lincoln, Nebraska was the top paying 4 metropolitan area for heavy tractor-trailer truck drivers, 5 paying an average of $35.10 per hour (refer to Table 3). 6 So I'm going to put up Table 3, and I hope you can 7 all see that. 8 Uh-huh. Very good. 9 Okay. So the heavily dairy region spanning from 10 LaCrosse, Wisconsin and Ayahuasca, Wisconsin, on into 11 Minnesota, ranked fourth, paying an average wage rate of 12 $30.72 per hour. 13 Rural regions where milk haulers operate are often 14 located somewhat near large metropolitan areas. This 15 means there is competition for milk haulers from employers 16 in other industries, such as manufacturing, construction, 17 and other types of transportation occupations. 18 In May of 2022, Department of Labor Statistics 19 reported a nationwide average of $21.81 per hour for 20 production workers, $25.52 per hour for heavy 21 tractor-trailer drivers, and $28.32 per hour for 22 construction workers, which is referred to in Table 4, 23 which I believe I just put up on the screen if everyone 24 can see that. 25 I believe so. Okay. 26 Over the 17-year period covered in Tables 1 and 2, 27 regardless of the variability, the cost of labor for milk 28 hauling is one of the largest percentage increases in 7219 1 comparison to any other cost input a milk hauler has 2 faced. Indirectly, cost of labor also impacts the cost to 3 maintain and to repair milk hauling equipment, which tends 4 to influence increases to maintenance input costs. 5 Again, referring to Table 1 and 2, I'll just kind 6 of glaze over those real quick again. You can see how 7 that maintenance cost has kind of risen as well in those 8 areas because we know that a big part of maintenance 9 repair involves labor. I'm sure if you have ever had 10 brake work done on your car, you know what that's all 11 about. 12 So in addition to actual labor wages paid by 13 region and by occupation, milk haulers, like other 14 commercial-for-hire transporters, must abide by the hours 15 of service -- use the acronym HOS -- administered by the 16 Federal Motor Carrier Safety Administration, also known by 17 the acronym of FMCSA. 18 The standard HOS rules require a maximum of 19 11 hours of work for a commercial truck driver, which 20 includes milk haulers. In thin milk shed regions where 21 haulers have higher miles per hundredweight ratios, the 22 HOS becomes a challenge to meet, hence a relief driver may 23 be required to complete the milk run. 24 As expected, the use of an extra driver during 25 milk assembly and milk delivery adds to a hauler's labor 26 costs. Because of the adoption of electronic driver logs, 27 milk hauling operational costs have increased as hauler 28 companies have had to recruit, train, and retain drivers 7220 1 willing to understand and to accept the use of these types 2 of technologies. Furthermore, in addition to the wage 3 difference shown in Tables 3 and 4, milk hauling companies 4 increasingly compete with other non-agricultural 5 transporters who offer drivers more appealing work, which 6 could be called no-touch freight or behind-the-wheel-only 7 work. 8 Hauling milk from farm to plant involves working 9 on weekends, holidays, and off hours. Milk haulers are 10 also expected to work in all weather conditions and to 11 tolerate substandard infrastructure on farms or at 12 receiving plants. 13 Diesel fuel, another primary variable input cost 14 in milk transportation, is variable through impacts of 15 seasonality, social economic influences, political 16 climate, and weather-related events. Since 2010, haulers 17 must also consider the added cost associated with Diesel 18 Exhaust Fluid, known as D-E-E -- D-E-F, you will hear 19 people say "DEF" -- fuel additive compliance to satisfy 20 the Environmental Protection Agency, also known as the 21 EPA, exhaust emission standards. Furthermore, according 22 to the U.S. Department of Energy Information 23 Administration, also known as EIA, on-highway diesel fuel 24 prices have wide regionality differences. 25 And I'm going to show you Table 5 shows us some of 26 the regionality there of fuel prices. And so the 27 Petroleum Administration for Defense Districts, also known 28 as PADD, P-A-D-D, defines eight regions for reporting 7221 1 purposes. I'm going to show you that PADD map here 2 momentarily. 3 Okay. Is that up? Yes, we see that. 4 Okay. However, neighboring states often reflect 5 noticeable differences in fuel prices due to differences 6 in state excise taxes along with other state taxes levied 7 on a gallon of fuel. And we're going to refer to Chart 1. 8 Okay. Very good. We see Chart 1 there. 9 Given the various state taxes applied to the final 10 cost of a gallon of diesel fuel, states bordering each 11 other can have vastly different prices. For example, 12 California is at the top in terms of both overall fuel 13 price and the proportion of state taxes and fees paid. 14 Okay. Meanwhile, the neighboring state of Oregon ranks 15 15th. And a similar scenario can be observed with some 16 neighboring states in the Mideast, for example, 17 Pennsylvania and New York. 18 Cost of tires is another variable cost input that 19 has experienced huge increases in cost for milk haulers. 20 Based on in-house DFA Mideast hauler reporting, trailer 21 tire prices increased from $300 per tire in 2006 to $475 22 per tire in 2023. Furthermore, many of the milk haulers 23 reported discontinuation of the use of cheaper recap tires 24 for virgin, or factory, tires due to longer life 25 expectancy and improved safety. Tire prices can vary in 26 price and quality, along with the type of usage, e.g., 27 weight load, local versus highway travel. An example of a 28 higher price tire would be a large super-single tire, 7222 1 which can cost around $900 each. 2 The cost of procuring equipment, such as a truck 3 and a tanker, varies among milk haulers. However, much of 4 the variation is primarily a result of the type of 5 equipment being sought in terms of new versus used, size 6 of tanker, the unit configuration, added components, 7 and/or features and accessories. The 2010 EPA exhaust 8 emissions standards have also influenced hauler purchases 9 of new equipment versus used equipment, hence, driving up 10 the cost to operate a milk hauling company. 11 It should be noted that equipment availability has 12 been compromised over the past three to four years because 13 of supply chain disruptions brought on by the COVID-19 14 pandemic. For example, as fleet manager for DFA, I 15 requested and received a quote from a vendor to purchase a 16 new 2023 cab and chassis tractor unit in April of '22. 17 The vendor bid initially came back at $193,322, but was 18 revised twice within the 30-day bid acceptance window to 19 arrive at a final bid quote of $201,811, an increase of 20 almost $8,500. 21 The vendor stated reasons for change involved 22 manufacturer to dealer notices related to the escalating 23 material costs and labor shortages. In addition to 24 multiple quote adjustments, the actual elapsed time from 25 placing the order to delivery took seven months to 26 complete due to factory production scheduling backlog. I 27 was informed during the COVID-19 pandemic that if I were 28 to order a tanker trailer, it would have been 12 to 18 7223 1 months until delivery. 2 It's also important to note that another reason 3 for the recent escalation in equipment replacement costs 4 involve the milk hauler trend of purchasing larger volume 5 tankers and tractors with more horsepower. In the 6 Mideast, we have recently seen Ohio milk haulers replace 7 6,200-gallon tankers with 8,000-gallon tankers to assemble 8 greater volumes of milk. 9 Although such larger volume loads require special, 10 and costly, load permitting, haulers feel compelled to 11 move this direction due to lack of labor resources and 12 rising equipment costs associated with running numerous 13 small volume tanker trucks. The ever growing usage of 14 larger size tankers and trucks capable of pulling larger 15 loads has played a role in the rising cost of license and 16 tax inputs. 17 And let me real quickly reference you back to 18 Table 1. You look at license and tax. And Table 2 is 19 more critical because of the eight-axle heavier trucks 20 needing extra permitting, so -- okay. 21 Because of the larger loads, tires have had to 22 change to bear the added weight, and with specialty or 23 larger weight load tires comes higher costs, as mentioned 24 earlier. You will also note in Table 2 where the costs 25 for license and tax have risen -- and I already referenced 26 that to you -- 191% from 2006 to 2023. This is due in 27 part to increased weight limit scrutiny and new 28 legislation by individual states that allow larger load 7224 1 sizes with the requirement of special permits. As such, 2 more of the these large eight-axle trailers capable of 3 hauling 108,000 pounds of milk loads are leaving Michigan. 4 Historically, eight-axle trailers were confined to 5 Michigan because neighboring states like Indiana and Ohio 6 prohibited operation of such a large load size. 7 Other variable cost inputs include interest rates 8 on loans, insurance premiums and costs associated with 9 management and overhead. With respect to interest rates, 10 borrowed money for capital expenses bears an interest cost 11 which can be highly variable among milk hauler 12 enterprises, depending on the type of loan or line of 13 credit being sought. This -- this is because so much 14 emphasis is placed on an individual or business 15 enterprise's credit score. 16 Based on in-house DFA hauler proprietary survey 17 data, interests on equipment loans paid by milk haulers 18 have ranged from zero to 12%. 19 Insurance premiums vary largely because of 20 differences in milk hauler demographics. The most 21 critical factor involves a milk hauler's history of 22 accidents and related claims along with safety violations. 23 Other considerations would be type and age of the 24 equipment in garage and terminal facilities. These types 25 of activities by a hauler are compiled in the Federal 26 Motor Carrier Safety Administration's Compliance Safety 27 Accountability, also known as their CSA score. Other 28 factors that affect a hauler's insurance premium include 7225 1 coverage amounts and scope of coverage. 2 In recent years, many of the smaller sole 3 proprietary milk hauler enterprises operating in the 4 Mideast area have conceded that they could not afford the 5 cost of large insurance liability umbrellas. Most 6 companies require 2 million of liability coverage, but 7 there's a growing trend towards 5 million in liability 8 coverage. Numerous industries are following the trend of 9 higher liability coverage due to high profile trucking 10 accidents. 11 And finally, a variation in insurance premiums 12 paid between milk haulers involves whether their business 13 resides in a state that has no-fault vehicle insurance. 14 In short, no-fault insurance escalates insurance premiums 15 considerably over those states that do not have this 16 requirement. 17 Michigan is a no-fault vehicle insurance state, 18 but it is also one of the top ten milk producing states in 19 the U.S. 20 Perhaps the most variable of cost inputs among 21 milk haulers involves management and overhead expenses. 22 Factors include operational standards or acceptance 23 thresholds, but decided on by the operators themselves. 24 This would include physical facilities such as a dedicated 25 terminal or simply a place to park equipment. 26 Other variability factors that influence costs 27 involve indirect costs such as administrative and service 28 functions. Milk haulers conducting their own in-house 7226 1 accounting, human resources management, safety and 2 equipment servicing will face a separate set of costs than 3 a hauler opting to hire out those professional services. 4 Milk haulers also face opportunity costs with 5 respect to operating milk hauling enterprise, and these 6 opportunities costs to remain in the milk hauling business 7 appear to be increasing. Other sectors of transportation 8 industry offer work environments more conducive to driver 9 employee recruitment and retention, as well as to owners 10 and family members of milk hauling enterprise. Finally, 11 these would be an improved work-life balance, better 12 wages, or healthcare retirement. Some haulers have had to 13 rely on part-time drivers who are often sourced within the 14 hauler's family or may even be recruited from the labor 15 pool at a nearby farm. 16 The likelihood of startup milk hauling businesses 17 is low. It is a capital-intensive business with multiple 18 challenges to manage. Milk hauling business owners are 19 aging, and many of the milk hauling businesses are family 20 businesses, often many generations old. However, there 21 does not appear to be much desire for the next generation 22 to take over the milk, family milk hauling business. This 23 may be because of the required expenses and continued time 24 commitment, added or sole responsibility for management, 25 capital investments with risk, added stress and overall 26 uncertainty in operating in invariably what becomes a 24/7 27 work environment. Again, the opportunity costs or return 28 on investment with other businesses are being considered. 7227 1 In closing, much of what has been covered in this 2 testimony explains why some milk marketing cooperatives 3 have already transitioned into hauling milk themselves. 4 However, in many cases this transition was done somewhat 5 reluctantly. For the most part, cooperatives have entered 6 the milk hauling business to assure that the cooperative 7 owner member's milk would be hauled and marketed. In 8 several instances, the cooperative entering the hauling 9 business was initiated due to an urgent need with little 10 advanced warning of a disruption to the milk hauling 11 logistics in a territory. This would be the result when a 12 milk hauler walks away or ceases to haul milk any longer. 13 Hence, in many areas of the U.S., milk hauling has 14 become an increasingly fragile business enterprise with 15 continued dynamics and uncertainty for the future. In the 16 past, milk hauling was taken for granted without any 17 concern for its future viability, but it has grown to an 18 area of great concern within the milk marketing channel as 19 the dynamic dairy industry continues to change and evolve. 20 MS. HANCOCK: Your Honor -- thank you, Mr. Zalar, 21 for that. 22 We would make him available for cross-examination, 23 although it might be time for a break. 24 THE COURT: That was dynamically read. Thank you. 25 THE WITNESS: Thank you, Your Honor. 26 THE COURT: And you have got so much information 27 in here, so we will need a little bit of a break. So 28 let's take ten minutes. Please be back and ready to go at 7228 1 2:30. 2 We go off record at 2:19. 3 (Whereupon, a break was taken.) 4 THE COURT: Let's go back on record. 5 We're back on record at 2:32. 6 Cross-examination. 7 MR. ENGLISH: Chip English for the Milk Innovation 8 Group. 9 Thank you, Mr. Wilson, I'll take any introduction 10 I can get. 11 CROSS-EXAMINATION 12 BY MR. ENGLISH: 13 Q. So good afternoon, Mr. Zalar. 14 A. Good afternoon. 15 Q. My name is Chip English, and I represent the Milk 16 Innovation Group, which is a group of ten proprietary milk 17 processors, some of whom operate in the Mideast. 18 So I want to start by asking, were you here 19 yesterday for the testimony of Dr. Nicholson? 20 A. I was not. I did catch a little online. I had to 21 go back to the office and get some administrative work 22 done. 23 Q. I can't imagine. 24 Okay. So you're part of the testimony in support 25 of what's called National Milk Producers Federation 26 Proposal 19, correct? 27 A. Okay. Yes. 28 Q. Well, you say "okay." I am wondering, do you know 7229 1 what Proposal 19 is for National Milk Producers 2 Federation? 3 A. Not specifically. My role here was to present on 4 the cost of trucking logistics and fleet. So that's -- 5 that's my world. That's what I know. 6 Q. Okay. So do you know whether there is already 7 testimony in the record from a model that has hauling 8 costs in it? 9 A. Not real familiar with it. I have not been 10 involved in anything like that. As I say, my role here 11 was to present on cost of fleet and logistics. 12 Q. Okay. So are you here to advocate for United 13 States Department of Agriculture to raise the Class I 14 differential to take into account the cost of hauling? 15 A. I would say I'm not. I was here to present this 16 information to the court. 17 Q. All right. When you prepared this testimony, did 18 you discuss with anybody at either DFA or National Milk 19 your use of data for 2023 as opposed to 2021? 20 A. No. I chose the datasets myself. Like I say in 21 my testimony, I have been doing this for, it's hard to 22 believe, 20 years now. 23 Q. So you wouldn't know whether National Milk 24 Producers Federation has taken the position that it's -- 25 it was going to use 2021 data, would you? 26 A. I had no knowledge or interaction for anyone 27 saying anything to that I had to use 2021 data. Again, I 28 used 2023 and some historic data. It was my choice. 7230 1 Q. Do you know how your information is going to be 2 used in the record? 3 A. I really don't, other than how I presented it. 4 And how the Final Decision makers will use it, I have no 5 idea. I wouldn't want to speculate. 6 Q. And so I'm really not going to try to belabor the 7 point. I'm just trying to understand here, so -- 8 A. I'm sorry, sir, you spoke real fast. 9 Q. I apologize. I got called out by the witness as 10 opposed to the court reporter. 11 THE COURT: An astute observation. 12 THE WITNESS: Thank you, Your Honor. 13 BY MR. ENGLISH: 14 Q. Thank you for the correction, sir. 15 So I take it you do not know what the United 16 States Dairy Simulator Program is, do you? 17 A. No, I don't. 18 Q. And you wouldn't know whether that system, that -- 19 that simulator, takes into consideration hauling costs, 20 correct? 21 A. I wouldn't know that other than what you have just 22 told me. 23 Q. Okay. Were you involved in 2022 in providing data 24 to the University of Wisconsin with respect to 2021 25 hauling costs? 26 A. No, sir. 27 Q. Is it true that Dairy Farmers of America charges 28 customers in the Mideast for fuel surcharges? 7231 1 A. Slow down again a little bit. Say that again. 2 Q. Okay. So you're involved with the logistics 3 program for DFA, correct? 4 A. Yes, I'm in the logistics department. Yes, that's 5 correct. 6 Q. And do you know whether Dairy Farmers of America 7 charges fluid milk processors a fuel surcharge in the 8 Mideast order for hauling? 9 A. Okay. Now I better understand your question. 10 I am not on the marketing side of that equation, 11 so I don't know how and if and when they charge any type 12 of fuel surcharge to the customer. 13 Q. Does anybody ever ask you for information as to 14 that information so they can make those charges to 15 customers? 16 A. You said "that information." What information? 17 Q. The information about hauling costs? 18 A. About hauling costs? 19 Q. Yes. 20 A. No. No, not really. You know, I have a direct 21 supervisor. If that information is shared and 22 distributed, I'm unaware of it. 23 Q. So turning to Table 5 and then a comment on the 24 bottom of page 6. 25 If you can turn to page 6. 26 A. Okay. 27 Q. And so are the eight regions for the Petroleum 28 Administration for Defense Districts, Map 1, the same 7232 1 districts as are on Table 5 for the U.S. Department Energy 2 Administration? 3 A. Okay. Yes. Other than the map, Table 5 splits 4 out California, I noticed that when we put it together. 5 Yeah, so -- but they are related, and the premise there 6 was to show the differences over a period of time of 7 how -- how the regionality of fuel is among the PADD 8 regions. So it was a very nice dataset that was provided 9 to us by the U.S. Department of Energy. 10 Q. Okay. So I understand about California being 11 separated out. But, for instance, the Midwest, would it 12 be your understanding that PADD 2, under Map 1, Midwest, 13 would correspond to the same region under Table 5 for the 14 Midwest? 15 A. That's the way I understand it from the 16 government. 17 Q. Let me check with one person. 18 MR. ENGLISH: I have no further questions, and I 19 thank you for your time. 20 THE WITNESS: Thank you, sir. 21 THE COURT: Are there other questions for 22 Mr. Zalar before I turn to the Agricultural Marketing 23 Service for their questions? 24 There are none. I would invite the Agricultural 25 Marketing Service to ask. 26 CROSS-EXAMINATION 27 BY MS. TAYLOR: 28 Q. Good afternoon. 7233 1 A. Good afternoon. 2 Q. Thank you for taking the time today to testify. 3 A. Thank you for having me. It's an honor. 4 Q. I'm glad you still feel that way. 5 Just a couple of questions. On the tables that 6 you have on page 2, Table 1 and Table 2, the next page 3 7 kind of is the footnote for where all that information 8 came from. 9 A. Yes. 10 Q. And in a number of places you talk about a survey 11 that was done. I'm wondering if you can just talk a 12 little bit about that survey, who -- 13 A. So, yes. 14 Q. -- all the -- kind of the details to explain how 15 that was conducted. 16 A. Yes. We -- we constantly survey our contract 17 haulers when they, you know, call in and they are asking 18 about certain things. And we have a great relationship 19 with our contract haulers. The survey information that 20 they provide us in terms of cost inputs is strictly 21 proprietary, confidential, and a lot of times haulers will 22 say, hey, I'd love to share my information with you to run 23 through your costing model that, you know, I use in 24 logistics. But you are not going to share that with my 25 competing neighbor, are you? 26 And absolutely not. That's -- we have a client 27 relationship with that person. 28 And so it's -- it's a great synergistic 7234 1 relationship. But I can't share it with you, I'm sorry. 2 Q. Oh, no. And I'm certainly not asking for 3 proprietary information. What I'm more looking at it, is 4 this information you get on a constant basis, do you do it 5 via just -- you know, we have our own programs within -- 6 where we are in AMS, where people call up other people and 7 they kind of get proprietary information as well, and then 8 they summarize it and publish that information. 9 Is that how it's done or did you actually send out 10 a survey to your haulers? 11 A. No. It's kind of done on a constant basis. You 12 know, haulers will call in, and I guess it's an honor, 13 they'll lean on us and say, I can't figure out, you know, 14 some of my cash flow or what have you. And I don't mean 15 I'm an accountant, let me make that clear. And so I'll 16 say, well, let me take a look at some of your cost inputs. 17 And, you know, with -- with my 20 years of 18 experience, although I learn something new every day, 19 sometimes I can help them and pick up on some things as a 20 consultant at no charge. But really, at the end of the 21 day, it's going to help benefit us because I work for our 22 owner members in our co-op, so I want to make sure that 23 the hauler is, you know, operationally healthy. I don't 24 get involved in the operation, let me make that clear, but 25 I'm certainly willing to -- to maybe provide some 26 guidance. 27 Q. Okay. 28 A. Does that help you out? 7235 1 Q. It does. 2 And so the costs that you have listed on here, I 3 guess I take away from that, this isn't a survey that you 4 did just for the purposes of putting together this 5 information? 6 A. Absolutely not. 7 Q. Okay. And then -- so then my second guess would 8 be, the cost represented in 2006 is not the same universe 9 of haulers that is represented in 2023, it's just -- 10 A. It's -- 11 Q. -- whatever haulers you all use during those two 12 years? 13 A. Exactly. And, again, I've been here 20 years. 14 You know, it's funny, when I put this together, I didn't 15 realize how old I was getting. 16 Q. I feel similar. 17 On the bottom of page 3 into 4 you list a couple 18 of examples, kind of like feedback I think you got from 19 your haulers. 20 And I take it these are just conversations that 21 you have had with those haulers that you are in contact 22 with? That's how you know this information? 23 A. The examples of the thin market? 24 Q. Yes. 25 A. No. And this kind of leads, dovetails into your 26 last question. We have member milk that we need to 27 market. It's our responsibility to market their milk. 28 And when we get into thin milk shed regions, the co-op 7236 1 member owner, they own us, that's the reason I'm here is 2 because of the producers who I speak -- you know, I have 3 to answer to. You know, they are saying, help me out. 4 Years ago, 20, 30 years ago, it was a very dairy 5 neighborhood, and it's not anymore. And so we try to get 6 involved for the producer to make sure that there's 7 orderly marketing of their milk. 8 The worst case scenario is it goes down the drain, 9 and that's an absolute waste. 10 Q. And so for these examples, though, I'm just 11 curious kind of where they came from. And I'm just trying 12 to get these things clear for the record about where some 13 of your information came from. 14 A. Well, I couldn't give you any names of haulers. 15 Q. I'm not asking for that. What I'm -- just 16 generally, in conversations you've had with haulers or 17 conversations you've had with your farmers and they relay 18 that information? 19 A. Part of it is really the analytical work that I 20 did that someone in membership would come to me or my 21 supervisor and say, hey, take a look at this. 22 Q. Okay. Thank you. 23 A. Uh-huh. 24 Q. Later on you talk about in July 20- -- excuse 25 me -- July 2006, DFA contracted with 194 milk haulers, but 26 today there's just 88. 27 Is that DFA wide? 28 A. I'm sorry, what page were you on? 7237 1 Q. I'm on 4. 2 A. Page 4? Thank you. 3 Q. The first full paragraph. 4 A. No, that's Mideast. 5 Q. And I think my final question is, then, in the 6 Mideast, you all still just use contract haulers. 7 Does DFA own any of its own trucks to do that? 8 A. In the Mideast, it's all contract haulers at this 9 time. We don't but... 10 MS. TAYLOR: That's it from AMS. Thank you so 11 much. 12 THE WITNESS: Okay. Yeah. Nothing about work 13 life or -- or what it is? 14 MS. TAYLOR: I don't know what work/life balance 15 is anymore. 16 THE WITNESS: Let me share an example of 17 work/life. This is -- this is something I received -- 18 yeah, it was pre-COVID. I remember I got a phone call 19 from a contract hauler, not that I talk to them on a daily 20 basis. And I can't remember what he asked me, and I said, 21 hey -- and I won't mention any names here -- I said, how 22 are you doing? 23 He goes, well, not real good. I trained a really 24 nice kid -- and he said "kid," we're getting older, so 25 we -- the term kid sticks out -- had him for about 30 26 days, and man, I couldn't be happier. And we ran into a 27 problem that the hours were too long, and he would go 28 home, and his wife, she was not really happy about it. 7238 1 And he -- he -- the hauler told me -- he kept 2 telling me about it, and he said, I tried to work around 3 that. And as it turned out, he quit. And I'll tell you, 4 here's how he quit. 5 So I guess he went to a dairy, and he got held 6 up -- not that I blame the dairy -- and he didn't get home 7 that night until late. But the problem here was, that was 8 the night that his little daughter had a dance recital, 9 and apparently his wife said, you don't dare miss that. 10 And so I guess, according what the hauler told me, 11 the next day he walked in and says, I quit. It's -- you 12 know, my family is important to me, sorry. 13 And that's -- you know, that's a fact of life with 14 I hope everybody. You know, faith and family is an 15 important thing. 16 MS. TAYLOR: And I think your statement talks 17 about the long hours and the difficulty of trying to find 18 new people to fill those hauler spots. 19 THE WITNESS: Absolutely. 20 MS. TAYLOR: Thank you very much. 21 THE WITNESS: Thank you. 22 REDIRECT EXAMINATION 23 BY MS. HANCOCK: 24 Q. Thank you very much, Mr. Zalar. 25 I just want to make one thing clear. You have on 26 the front -- on the first page you talked about the 27 information that you have shared with respect to even the 28 Mideast area. 7239 1 But you have experience and knowledge about DFA's 2 experiences with hauling costs throughout the country; is 3 that fair? 4 A. Yeah, I talked to some of my other colleagues, you 5 know, around the country within the DFA land, and so their 6 experiences are very similar to what I presented here 7 today. It's a repeating theme. Yeah. Unfortunately. 8 Q. Thank you so much. 9 MS. HANCOCK: Your Honor, at this time we would 10 move for admission of Exhibit 309. 11 THE COURT: Is there any objection? 12 There is none. Exhibit 309, which is also known 13 as Exhibit NMPF-49, is admitted into evidence. 14 (Exhibit Number 309 was received into 15 evidence.) 16 MS. HANCOCK: Thank you so much for your time, 17 Mr. Zalar. 18 THE WITNESS: Thank you. 19 Thank you, Your Honor. 20 THE COURT: Thank you so much. 21 MS. HANCOCK: Your Honor, we have Jeff Sims as our 22 next witness. He has a number of exhibits. I'm wondering 23 if we can just go off the record, mark those, and then 24 we'll just make it really streamlined when we go back on. 25 THE COURT: Yes. Now, let me ask you, we know 26 he'll be a long witness, true? 27 MS. HANCOCK: He's going to be a long one. That's 28 what they tell me. 7240 1 THE COURT: So is there anyone else that should go 2 on before he begins? 3 MS. HANCOCK: If we don't start, I will never get 4 him off the stand. 5 THE COURT: All right. Let's take ten minutes. I 6 know we just had ten, but let's take ten. So please be 7 back and ready to go at 3:01. 8 We go off record at 2:51. 9 (Whereupon, a break was taken.) 10 THE COURT: Let's go back on record. 11 We're back on record at 3:02. 12 Ms. Hancock, I see a large stack of documents. 13 MS. HANCOCK: Yes, Your Honor. 14 THE COURT: So can we begin with -- well, I should 15 begin with having the witness identify himself and so 16 forth. 17 Would you state and spell your name, please? 18 THE WITNESS: Jeffrey Sims, J-E-F-F-R-E-Y, 19 S-I-M-S. 20 THE COURT: One M only? 21 THE WITNESS: One M only. 22 THE COURT: Have you previously testified in this 23 proceeding? 24 THE WITNESS: I have not. 25 THE COURT: I would like to swear you in. 26 JEFFREY SIMS, 27 Being first duly sworn, was examined and 28 testified as follows: 7241 1 DIRECT EXAMINATION 2 BY MS. HANCOCK: 3 Q. Good afternoon, Mr. Sims. 4 Would you provide your business address for the 5 record, please? 6 A. Yes. Lone Star Milk Producers, Incorporated, 7 813 8th Street, Suite 300, Wichita Falls, Texas, 76301. 8 MS. HANCOCK: And, Your Honor, we have exhibits 9 that we'll mark from 310, starting with Exhibit NMPF-37, 10 all the way through 319 at NMPF-37I. And so I can walk 11 through those. 12 THE COURT: Would you again, just one at a time, 13 read into the record both their numbers as we're marking 14 them both. 15 MS. HANCOCK: Yes. 16 So NMPF-37 is going to be Exhibit 310. 17 (Exhibit Number 310 was marked for 18 identification.) 19 MS. HANCOCK: NMPF-37A will be 311. 20 (Exhibit Number 311 was marked for 21 identification.) 22 MS. HANCOCK: NMPF-37B will be Exhibit 312. 23 (Exhibit Number 312 was marked for 24 identification.) 25 MS. HANCOCK: NMPF-37C is going to be Exhibit 313. 26 (Exhibit Number 313 was marked for 27 identification.) 28 MS. HANCOCK: NMPF-37D, like David, will be 7242 1 Exhibit 314. 2 (Exhibit Number 314 was marked for 3 identification.) 4 MS. HANCOCK: NMPF-37E will be Exhibit 315. 5 (Exhibit Number 315 was marked for 6 identification.) 7 MS. HANCOCK: NMPF-37F will be Exhibit 316. 8 (Exhibit Number 316 was marked for 9 identification.) 10 MS. HANCOCK: NMPF-37G will be Exhibit 317. 11 (Exhibit Number 317 was marked for 12 identification.) 13 MS. HANCOCK: NMPF-37H will be Exhibit 318, and 14 that is where we will primarily spend our time with 15 Mr. Sims this afternoon. 16 (Exhibit Number 318 was marked for 17 identification.) 18 MS. HANCOCK: And NMPF-37I is going to be 19 Exhibit 319. 20 (Exhibit Number 319 was marked for 21 identification.) 22 THE COURT: Mr. Sims, you are our fourth witness 23 today, and we have left you only a couple of hours today. 24 I presume you will be back tomorrow? 25 THE WITNESS: I think that's everybody's 26 presumption. 27 THE COURT: Very fine. 28 THE WITNESS: Your Honor, we seem to have a 7243 1 technical problem. 2 THE COURT: Let's go off record for just a minute 3 at 3:06 p.m. 4 (An off-the-record discussion took place.) 5 THE COURT: Let's go back on record. 6 We're back on record at 3:07 p.m. 7 Ms. Hancock. 8 MS. HANCOCK: Thank you, Your Honor. 9 BY MS. HANCOCK: 10 Q. Mr. Sims, would you proceed with providing us with 11 your testimony. 12 You are going to walk through the PowerPoint 13 presentation, in part, that's in Exhibit 318; is that 14 right? 15 A. That's correct. 16 MS. HANCOCK: And just for your Honor's 17 information and the rest of the audience, Mr. Sims has two 18 segments in National Milk's proposal. The first one is 19 going to be kind of the general overview of the process. 20 The second part, he'll be back up later on for his 21 regional testimony. So all of that is included in this -- 22 in these exhibits, but you will see that a portion of his 23 PowerPoint we will save for a later time. 24 BY MS. HANCOCK: 25 Q. And with that, Mr. Sims, would you proceed? 26 A. Yes. 27 THE COURT: So, again, just so everybody has the 28 right exhibit, this one is NMPF-37H, Exhibit 318. 7244 1 You may proceed. 2 THE WITNESS: Yeah. Do you want me to introduce 3 myself? 4 BY MS. HANCOCK: 5 Q. Sure. 6 A. Okay. Or my history? 7 Q. Yeah. 8 A. Okay. My name is Jeffrey Sims, Jeff Sims. I 9 currently am corporate secretary and chief market analysis 10 officer with Lone Star Milk Producers, Incorporated, 11 headquartered in Wichita Falls, Texas, as you heard a 12 moment ago. I am a member of the three-person senior 13 management team at Lone Star Milk Producers, along with 14 the general manager and the Chief Financial Officer. 15 My responsibilities at Lone Star include, I manage 16 our -- all our Federal Order pricing and pooling, all 17 Federal Order issues. I manage our economics and price 18 forecasting, member communications. I maintain our -- 19 what we refer to as our milk budget, which is our forecast 20 of supplies and demands out into the future, whether we 21 are going to need milk, whether we have got milk to sell, 22 etcetera. 23 I am -- I analyze all our potential milk sales for 24 whether or not they are a good deal or not. I'm a member 25 of the National Milk Producers Board of Directors, its 26 economic policy committee, and the Federal Order task 27 force. 28 My history, I grew up on a farm in West Central 7245 1 Alabama, beef cattle and hay, principally. I went to 2 Auburn University, where I received a Bachelor's and 3 Master's degrees in agricultural economics, with my 4 Master's thesis work in dairy production economics and 5 dairy marketing. 6 Just out of graduate school, I joined the Market 7 Administrator's office, the Federal Milk Order office in 8 Atlanta, Georgia, as an agricultural economist. 9 About five years later I was promoted to the 10 position that's now known in the MA system as an Associate 11 Market Administrator. About two-and-a-half years after 12 that, I was promoted and transferred to the Louisville, 13 Kentucky Market Administrator's office in the position of 14 Assistant Market Administrator, where I had functions 15 as -- in every area of Federal Order administration. 16 In 1996 I left the Market Administrator's office 17 and began working with -- as a consultant with marketing 18 agencies in common, mostly over-order pricing agencies, 19 but then there was a stint with a full broad pricing and 20 pooling agency in the Southeast. I have also worked with 21 marketing agencies in common in other areas, but my -- 22 most of my history has been in the Southeast and 23 Southwest. 24 In 2017, I went to work full-time for Lone Star 25 Milk Producers in the position that I'm in today. 26 MS. HANCOCK: And, Your Honor, with that, we would 27 ask to have Mr. Sims qualified as an expert agricultural 28 economics as well as Federal Milk Marketing Order market 7246 1 administration. 2 THE COURT: Does anyone wish to voir dire the 3 witness with regard to his qualifications before I 4 determine whether there's any objection to his being 5 accepted as an expert witness? 6 No one does. 7 Does anyone object to my accepting Mr. Sims as an 8 expert as designated by his counsel? Not his counsel, by 9 counsel. 10 There is no objection. 11 I do accept you, Mr. Sims, as an expert in 12 agricultural economics and as an expert in Federal Milk 13 Marketing Orders marketing -- 14 MS. HANCOCK: Administration. 15 THE COURT: -- administration. 16 MS. HANCOCK: Thank you. 17 THE COURT: Thank you. 18 THE WITNESS: Good afternoon. This testimony is 19 presented in -- on behalf of National Milk Producers 20 Federation in support and explanation of Proposal 21 Number 19, which is the update of Federal Order Class I 22 differentials. 23 As we start, I think it wouldn't be a bad idea for 24 us to pause and kind of think about what Class I 25 differentials are and what they do and why we have them, 26 what purpose do they serve. 27 First -- and this is my list. I don't think you 28 are going to find it in any book or any Federal Order 7247 1 publication, but it is my list: 2 Number one, they compensate dairy farmers for the 3 additional cost of producing Grade A milk versus Grade B 4 milk; 5 They encourage milk to be delivered to Class I 6 plants, the principal objective of the Agricultural 7 Marketing Agreement Act; 8 They compensate dairy farmers for the substantial 9 cost for holding reserves of milk for the Class I 10 marketplace; 11 They establish a price gradient to encourage milk 12 to flow from reserve supply areas to areas of milk need; 13 They provide financial incentives to pool milk for 14 manufacturing uses when it's needed for Class I use; 15 They compensate dairy farmers for the considerable 16 cost of balancing the large variation in daily, weekly, 17 monthly, and seasonal Class I demand; 18 They align the class prices with the price demand 19 elasticities of the dairy products between the various 20 classes; 21 And they provide sufficient price alignment 22 between the classes to minimize class price inversions. 23 Why are we here? The need to update Class I 24 differentials. Class I differentials in most of the 25 contiguous 48 states were last updated in Federal Order 26 reform installed in January of 2000. Differentials were 27 modestly updated in the -- what we commonly refer to as 28 the Southeastern orders, Order Numbers 5, 6, and 7, in 7248 1 2008, but have remained unchanged since then. 2 Data used to establish the 2000 Order Reform 3 differentials was around from -- data from around 1998, so 4 that data is now 25 years old, basically hauling data 5 25 years old. In the intermediate -- in the intervening 6 quarter of a century, milk hauling rates have increased 7 two-and-a-half fold, fuel prices have increased three- to 8 fourfold, hauling equipment costs, trucks and trailers, 9 have at least doubled. 10 The increases in the cost of hauling milk have 11 significantly reduced the effectiveness of Class I 12 differentials and threatened the supply of milk to 13 Class I, one of the major principles of Federal Orders. 14 Just a quick graph here. This is the Cass 15 Linehaul Index. Cass Systems is a proprietary company 16 that does freight -- freight billing and invoicing. They 17 see a lot of invoices for hauling. They are a kind of -- 18 I think that the best common analogy or -- is the -- is -- 19 what is it? Automated -- ADP, Automated Data Processing, 20 who occasionally you will see in the news who reports 21 employment. They handle a lot of -- of employee payrolls, 22 and they have a good handle on what employment is doing, 23 up or down. Cass is a lot the same way. 24 What we can see here is a history from 20- -- from 25 2005 of basically almost unfettered increases in base haul 26 rates. These are base haul rates, not including fuel 27 surcharges. 28 We all have experienced the increases in fuel 7249 1 costs. This is a history of the U.S. average diesel fuel 2 price as announced by the Energy Information Act -- or 3 excuse me -- Energy Information Agency. 4 THE COURT: Every now and then, just to acquaint 5 people who may be tuning in online and just joined us -- 6 THE WITNESS: Yes. 7 THE COURT: -- every now and then tell us your 8 exhibit number and what page you are on. 9 THE WITNESS: Certainly. This is Exhibit 10 Number 318, and it is labeled Exhibit NMPF-37H. 11 And so let's talk a little bit about balancing 12 milk supplies to Class I. This is not an easy endeavor, 13 and one thing that -- one of the things that Class I 14 differentials provides systems for. 15 There is a -- a need to balance supplies to 16 Class I processing. And these costs are real. These 17 balancing activities are very real, and they exhibit 18 substantial cost. 19 There's Class I seasonality. It remains an issue 20 in supplying Class I markets, and remains an issue in 21 balancing individual Class I plants. Daily, weekly, and 22 monthly variations in Class I demand creates additional 23 balancing requirements. 24 I'm going to pause and slow down just a little to 25 describe this graph and what it's trying to say. 26 I have selected the California Order for -- for 27 display at this point in the presentation, largely because 28 the fairly short time that the Order 51 has been in place, 7250 1 so that we can kind of see the -- what we're trying to 2 describe here. Later on in the -- at the end of the 3 PowerPoint, the other ten orders are displayed and with a 4 substantially longer timeframe. 5 So the blue line, whose graph or whose scale is on 6 the left, is the daily average delivery -- or the daily 7 average Class I producer milk by month for the period of 8 when the Order 51 started, November of 2019 or 2018, 9 basically through the end of calendar year 2022. 10 Each month I just took the pounds of producer milk 11 on the Order 51 pool, divided it by the number of days in 12 the month, and that became the daily average Class I 13 producer milk. 14 And then for each calendar year I compared that 15 and found which one of those 12 months in each calendar 16 year represented the high month of Class I daily average 17 producer milk. 18 Then I compared each other month to that high 19 month, and so -- and then displayed the difference between 20 the high month and every other month. So there's one 21 month that has zero difference between the high month and 22 the high month because the high month minus the high month 23 is zero. Each other month within a 12-month period 24 represents an amount of reserve that had to be held that 25 year each month against the high month's Class I use. 26 So the bars at the bottom, if you will notice, are 27 mirror images, if you will, of the line graph on the top, 28 where you have dips in the yellow -- excuse me -- the blue 7251 1 line, you will have peaks in the bars. And so the bars 2 represent the amount of reserve each month that had to be 3 held for that year's peak Class I use. 4 In the California order, it looks like it's 5 somewhat common for somewhere around October or November 6 to be the high month. In many of the other orders it is 7 often October, sometimes January. 8 But I will point something out, too. On the 9 right-hand side, the scale for the bars is on the 10 right-hand side, and it is twice the scale of the bars of 11 the blue line. And so just like the picture on the front 12 of a box of cereal, this is -- the bars are enlarged to 13 show texture. 14 The need for reserve milk supplies. Reserve milk 15 supplies are necessary to make sure we have sufficient 16 quantity of pure and wholesome milk and ensure a 17 sufficient quantity of milk to be available for Class I. 18 The surges in demand of Class I come almost -- you 19 know, the milk that serves those surges has to come from 20 somewhere. We sometimes believe that the kind of milk 21 appears at processing plants by magic or magnetism, but in 22 truth, they must be pooled to those plants by dollars. 23 Parking milk in manufacturing while awaiting 24 Class I demand is costly. Reserve processing capacity has 25 to be maintained for those -- to hold those supplies of 26 milk, those reserve supplies, until somebody needs them. 27 And those peak needs of reserve or the peak months 28 of reserve mirror those months when Class I sales tank. 7252 1 It's very common in -- in certainly the world I live in, 2 and many other worlds, I believe, June and July are very 3 bad months for Class I sales. When schools are out, 4 Class I sales go down, and that creates a need to balance 5 those supplies for when that school milk demand comes 6 back, usually sometime around late August, early 7 September. 8 There is -- you know, some people think that, you 9 know, there's really no need anymore to balance Class I 10 plants, that they all have lots and lots of silo space, 11 you can put milk in there on Friday, and it will be, you 12 know -- and when the plants are down on Saturday and 13 Sunday, and everything's good. 14 That's not true. Most of the plants we deal with, 15 their silo capacity may be a day's processing capacity or 16 maybe just a little more. Even if you could -- even if 17 they did have substantial silo capacity to hold two or 18 three days, the health regulations won't let you do that. 19 Here's another problem, and it's a developing and 20 has been developing and continuing to develop problem. 21 Class I plants tend to be located near the people, 22 population centers in cities. Increasingly, dairy farmers 23 and milk -- and dairy farms are located distant from those 24 cities. Cows and people really don't mix very well. 25 Not -- there's not a lot of people who live in a 26 subdivision who want a dairy farm in their backyard. And 27 so the farms have moved farther from the cities, and the 28 distance between those farms and the Class I plants that 7253 1 still exist in the cities is getting longer. This is -- 2 this is a trend that's occurring pretty much everywhere. 3 They -- dairy farmers are beginning to question, 4 why are we doing this? Why are we hauling milk from our 5 farms all this way to serve these Class I plants in cities 6 when the money's not there? The difference in price 7 doesn't pay to get us there. They are just questioning 8 whether that's a sustainable system. Daily surges in the 9 ebbs in Class I demand are unpredictable, and they can 10 occur at the last minute. 11 We have had in many circumstances where you send a 12 truck toward a -- a Class I plant or toward a city where 13 the Class I plants are. That Class I plant calls and 14 says, hey, don't bring that load. Well, it's already on 15 the road. So you contact the driver, and you tell him to 16 turn around and go back. Well, he gets back up the road 17 an hour and a half, and the call comes back and says, 18 oops, we didn't really need to cut that load, turn around 19 and come back. 20 So if you think about it, that truck has gone over 21 a part of that road three times. Now, I'm not blaming the 22 plant, sometimes this isn't their fault. Plants, Class I 23 plants, deal with retailers or wholesalers sometimes who 24 don't communicate with the plant effectively. They will 25 get orders that they weren't expecting. 26 And we got to remember that Class I sales are, you 27 know, a retail item. Class I is retail, and you are -- 28 the demand for Class I on any one day is driven by 7254 1 consumer behavior. This back and forth just isn't always 2 in the -- in the control of the Class I plant, but this 3 back and forth costs money. 4 Federal Orders are tasked with what I think is a 5 straightforward, but not easy to effectuate, objective. 6 That's to make sure -- they are to insure -- the use of 7 the word insure with an "I" -- a sufficient quantity of 8 pure and wholesome milk and be in the public interest. 9 But we tend to shorten that and say, an adequate supply of 10 milk for Class I demand. 11 Orders fulfill this mission, or at least try to, 12 in a straightforward and logical way. The only way that 13 the Secretary of Agriculture can know there's enough milk 14 is if there's too much. Just like when you go on a road 15 trip in your car, you are going to make sure you got 16 enough gas, and you are going to make sure you got more 17 than enough gas. That's how the Secretary ensures that 18 there's enough milk, you have to know that there's too 19 much, which means there's always a reserve against what we 20 think the Class I might be. 21 In supplying Class I, the last hundred pounds is 22 just as important as the first hundred pounds. If 23 somebody goes short, then the market is short. 24 We need to incentivize the deliveries of Class I 25 milk. Sometimes people seem to think that the seasonal 26 demands in Class I just aren't there or that there's -- 27 you know, those are no longer a problem. But the seasonal 28 surges in Class I demand that's -- sometimes there isn't 7255 1 enough milk to go around. 2 I think you will find that some of the following 3 witnesses will probably testify that they have to ration 4 milk, particularly when schools start back up in August 5 and September. And plant operators need milk when they 6 need it, not the next day, not the next week. Just ask a 7 plant manager, a load that arrives a day late is just as 8 good as not coming as far as they are concerned. 9 Class I differentials recognize the many 10 challenges of supplying Class I by incentivizing the 11 delivery of milk to Class I, and they do it with money. 12 We can preach all we like about how we ought to supply 13 Class I, but you have to provide the proper incentives to 14 bring that milk to Class I, and the way we do that is with 15 Class I differentials. 16 Dairy farmers, as I mentioned, are simply tired of 17 hauling milk hundreds of miles for inferior returns 18 because we are all -- you know, I got to admit, I'm 19 getting long in the tooth, and I have been told my whole 20 career that Class I comes first. You serve your Class I 21 customers first, Class I comes first, serve the Class I 22 customer first, whatever you got to do, serve your Class I 23 customer. 24 I'm here to tell you that there's a generation of 25 dairy farmers that don't accept that. They are asking 26 hard economic questions about why are we moving milk 27 hundreds of miles and taking a return for that that is 28 less than we could get at a local market. And you know 7256 1 what? I'm having a hard time answering that question 2 anymore. I really am. 3 And it's -- this is an imperative. We've got to 4 straighten this out or the threat to Class I is going to 5 be real. 6 I'm going to go off the slides here and interject 7 something. We often talk about or use the phrase 8 "threaten the supply to Class I." And -- and maybe we 9 don't pause often enough and think about what that really 10 is. 11 In the practical sense, there are two threats 12 to -- to supply to Class I. The first is, if the economic 13 environment isn't conducive to milk production, the farms 14 are going to go away. The first threat to Class I is 15 actually a threat to all classes, that the farms aren't 16 going to be there. We have got to have -- you know, the 17 one thing that you got to have to have dairy is a dairy 18 farm. They don't have another way to do it. So there's 19 the first and -- and, of course, saddest threat to 20 Class I, or supplying milk to Class I. 21 The other threat to Class I is the economic 22 incentives aren't there and we take the milk someplace 23 else. If the returns are better at a cheese plant, we 24 don't bring it to Class I, there's the second threat. I 25 I'm going to even go further off script. 26 The decision to deliver milk to Plant A is almost 27 always the decision not to deliver it to Plant B. We 28 daily make decisions about where our milk needs to go. 7257 1 Sometimes you -- it's -- the decisions are made somewhat 2 for you because you have contractual relationships, but 3 long-term, if Plant A doesn't pay its way, you are going 4 to opt to go to Plant B. That's just the way it is. 5 And we have a generation of dairy farmers who are 6 saying, why are we going hundreds of miles to Class I 7 plants when we probably could do better keeping our milk 8 at home? This is an imperative. 9 Now, I want to pause a minute and talk about 10 something that we hear semi-regularly. This is a topic 11 which ebbs and flows in the milk business, and I think 12 it's on the rise. But we need to talk a little bit about 13 why over-order prices are not a substitute or an adequate 14 replacement for Federal Milk Order prices. And I have 15 lived over-order prices in the vast majority of my career, 16 and I speak from experience on every one of these. 17 There are people around who champion the idea that 18 over-order prices are a desirable and workable alternative 19 to adequate basic levels of Federal Order prices. In 20 add- -- and I -- and it's not just Class I. I said 21 Class I here, but the truth is, all order prices. And I 22 have only one word in response: Bunk. 23 In my career, I witnessed kind of two camps of 24 people that will espouse this philosophy. The first are 25 people who just don't understand the milk business. They 26 don't understand how order prices work, why we have them 27 or -- excuse me -- over-order prices, their function, 28 their benefits, and mostly their limitations. These are 7258 1 people who don't understand how over-order prices are not 2 an effective substitute. 3 Then there are a group of people who espouse 4 replacing Federal Order price regulation, or substantially 5 reducing price regulation, and substituting that with 6 over-order prices, and those are a camp of people who know 7 all too well the limitations of over-order prices. 8 We'll come back to that in a little bit because -- 9 but I want to go through a few reasons why over-order 10 prices -- they have their place, they are an important 11 part of the price structure, but they are not a substitute 12 for adequate Federal milk order prices. 13 The first, and this is the -- and actually, you 14 could almost stop with this one. I have a colleague in 15 the milk business who always kids me, I like to use the 16 word "ephemeral" when I refer to over-order prices, and we 17 can be a little less highfalutin with our term. We're 18 just going to say, they're here today, gone tomorrow. 19 Over-order prices do not have the durability of 20 federally-regulated prices. They can be swept away with 21 little or no notice, and once gone, believe me, they are 22 difficult to re-establish. I don't know what the word for 23 next to impossible is, but it gets close. It is hard work 24 to re-establish over-order prices once they are gone, and 25 they can be gone at the drop of a hat. 26 Sometime -- you know, and the reasons they crumble 27 are any number of reasons. And they have actually nothing 28 to do with the supply and demand for milk in a particular 7259 1 area. They can be destroyed from supply/demand imbalances 2 in a long way away. Over-order prices are highly 3 susceptible to what's happening in other markets. They 4 respond to what happens in other markets. There can be a 5 problem in another market, and that wave of problem sweeps 6 over big chunks of geography. 7 As I mentioned, over-order prices are not easily 8 moved, with the exception that they are very easily moved 9 down. They quickly, I have said, market participants can 10 get rid of over-order prices or reduce them substantially 11 with about three phone calls. You can change them across 12 a broad area with the threat of cheaper milk. 13 They are hard to move. There's contracts between 14 the seller -- we have heard issues at this hearing about 15 the contracts that exist between Class I processors and 16 their customers, and the fluid milk customers, and those 17 contracts usually have some sort of fixed differential. 18 One witness I believe referred to them as tolling fees, 19 and that's an apt description. You take the Federal Order 20 price, and you add -- and you convert it to a gallon price 21 or half gallon price, and you add a fixed differential, 22 and that's what the customer pays. The price moves up and 23 down with the Federal Order prices. 24 And that fixed differential, that tolling fee if 25 you want to call it that, is usually fixed for the life of 26 the contract. And it's hard to -- to get a customer -- 27 and obviously when you are -- as a Class I processor, when 28 you are trying to figure out your bid for business, one of 7260 1 the elements in that fixed tolling fee, if you will, is a 2 level of over-order price. If the plant's paying a 3 premium, some people call them, they are going to figure 4 that in to what they have to -- how they have to price out 5 that gallon or half gallon of milk. 6 And -- and you want to -- you have to be receptive 7 to your customer's issues, and you don't want to raise the 8 price on them in mid-contract, because they cannot pass on 9 that over -- increased over-order price. They recognize 10 changes in Federal Order prices, but they don't have any 11 real mechanism in their contracts, with their retail or 12 wholesale buyers, to adjust for those contracts in the 13 middle of the contract. 14 And when you are involved in over-order prices, 15 you find out soon that some processors are always in the 16 middle of their contract. They don't all run, you know, 17 January to December. They -- they are all over the place, 18 so somebody is always in the middle of their contract. So 19 that makes it difficult to move them up because of the 20 relationship between Class I processors and the packaged 21 milk retail customers. 22 And here's another biggie. And this is one that 23 if we hear it once a week, we hear it more than that: 24 Over-order prices simply do not carry the confidence from 25 processors that Federal Order prices do. This is the 26 deal. 27 The buyers of bulk milk in their package fluid 28 milk customers, they simply rely on the certainty of the 7261 1 pricing under Federal Orders. As we mentioned, those 2 contracts move up and down with the Federal Order prices, 3 and we have heard over and over and over as sellers of raw 4 milk to Class I processors, that if it's on that Federal 5 Order price announcement, we can pass it on to our 6 packaged milk customers. These fluid milk product 7 contracts recognize movement in the Federal Order prices, 8 but they don't recognize movement in over-order prices. 9 Honestly, buyers of milk, processors of milk, 10 simply don't have the confidence in over-order prices that 11 they -- that they have in Federal Order prices. 12 One of the things about orders is, you know your 13 competitor plant down the road, that other -- that next 14 fluid milk processor is paying the Federal Order price at 15 least. The orders require payment. They audit. You 16 know, those Class I processors know that the people down 17 the road who are poddling milk or manufacturing the same 18 product are subject to those minimum prices, and they 19 trust them. 20 That's not always true when it comes to over-order 21 prices. They sometimes simply don't have the faith in 22 over-order prices that they do in Federal Order prices. 23 There is always somebody out there who wonders whether 24 their competitor is getting a better deal. 25 We provide audits, we do all this work, and at the 26 end the day, wondering whether your competitor is getting 27 the same price as you is a whole lot different than 28 knowing your competitor is getting a the same price as 7262 1 you. When it comes to the Federal Order prices, they 2 know. When it comes to over-order prices, sometimes they 3 wonder. 4 Over-order prices tend to be quite flat over large 5 pieces of geography. The industry basically adopts the 6 Federal Order Class I price surface as the Class I -- as 7 the price surface. It's very difficult for over-order 8 prices to institute a slope which adds to or subtracts 9 from the Federal Order Class I price structure or the 10 Class I price slope. 11 It's hard enough to convince a customer that, you 12 know, they need to pay an over-order price. It's really 13 hard to convince them they need to pay a higher price than 14 the plant up the hill from them. Think about it, if they 15 don't trust them to start with, they are certainly not 16 going to trust them when you tell them that their price is 17 going to be different than somebody else's. 18 Over-order prices are not useful, particularly, to 19 change the slope or change the price relationship 20 geographically between plants. 21 And today, the size of these fluid product plants, 22 these Class I processing plants, they are -- they are 23 fewer and bigger, and that means each plant has a bigger 24 footprint. That means each plant interacts in competition 25 with more plants. The bigger the circle, the more circles 26 you touch. 27 And the growth of national and regional, 28 multi-regional retailers has only made that worse because 7263 1 if you have grocery stores and -- all across the country, 2 or you have, you know, you know what the over-order prices 3 are all over the country. And so it's very easy for them 4 to say, well, they are charging X over here; why are you 5 charging me Y? They want stable prices, and they want 6 over-order prices that are similar over large pieces of 7 geography. 8 So back to our question earlier, and the two camps 9 of folks who champion over-order prices as replacements 10 for Federal Order prices. First, again, the people that 11 don't understand. They don't get it. They don't 12 understand those limitations. They don't understand those 13 problems with over-order prices. They don't -- they don't 14 understand where over-order prices fit in the system. I'm 15 going to chalk that up to inexperience, or maybe, you 16 know, as economists we always tend to believe that supply 17 and demand will work things out. It doesn't. 18 The reason we have Federal Orders, the reason we 19 have Federal Milk Marketing Orders, the reason they exist 20 is that we have seen over and over that milk markets don't 21 transmit milk values equitably when price regulation is 22 absent. It's just that simple. They don't do -- they -- 23 milk markets don't function that well. 24 The other camp, those are who understand the 25 limitations of over-order prices all too well. These are 26 parties who are counting on the eventual failure or demise 27 of over-order prices. As more pricing emphasis is put on 28 unregulated prices versus regulated prices, the more these 7264 1 parties benefit when the unregulated prices crumble. So 2 you have people who are saying, parties who say, hey, we 3 need to let the market work better. We need to lower the 4 over-order prices and leave more headroom for the market 5 prices to work over net. And they will even say, the 6 over-order prices will compensate. Well, maybe they will, 7 maybe they won't. But I think, I believe, they are 8 actually counting on them failing. 9 I'm going to put this in a term I think we all can 10 understand. This is the foxes asking the Secretary of 11 Agriculture to put them in charge of the hen house. I'm 12 going to say it again. These are foxes asking the 13 Secretary of Agriculture to put them in charge of the hen 14 house. 15 The role of Class I differentials in the 16 occurrence of price inversions are limiting, minimizing 17 the occurrence of Class I -- of price -- Class I price 18 inversions. 19 Now, before I go any further, my definition of a 20 price inversion, is one of -- when one of the Class II, 21 III, our IV prices exceed the Class I price at a location. 22 I know another witness defined it as when the blend price 23 exceeds the Class I price. And that's fine. But my 24 definition is when either Class II or III or IV, or maybe 25 more than one of them, at any location, or some location, 26 exceeds the Class I price. 27 THE COURT: Because that's such a key issue, I 28 want you to identify the exhibit number and the page 7265 1 number on which you have written that. 2 THE WITNESS: Yes. Just a second, Your Honor. 3 My exhibit -- or the National Milk exhibit -- and 4 I got to be honest, I don't -- I was otherwise worried 5 about tech issues. So what's -- what's NMPF-37A? 311. 6 The data for these slides comes from NMPF -- or marked 7 311, in NMPF-37A. 8 So -- 9 THE COURT: All right. But I was just looking 10 just in the one we're in -- 11 THE WITNESS: Yep. 12 THE COURT: -- Exhibit 318 -- 13 THE WITNESS: Yes. 14 THE COURT: -- is also NMPF-37H. And on page 24 15 you say it very clearly. 16 THE WITNESS: Oh, yes. I guess I skipped -- I got 17 ahead of myself. 18 Again, this is my definition of Class I price 19 inversion and why inversions are a problem. And I 20 probably am being repetitive. I think we have heard this 21 before at this hearing, but they tend to cause unequal 22 returns to producers serving the same marketing areas. 23 When you have this -- the price inversions, that increase 24 the -- it creates the incentive to depool. Producers 25 don't get paid or don't necessarily get paid the same for 26 serving the same markets. 27 There's non-uniform prices to handlers. Some 28 handlers get to depool and actually do, indeed, get a 7266 1 benefit from that. Not every handler does. I readily 2 admit, pool distributing plants don't get to take 3 advantage of this. It creates distrust in the marketing 4 and pricing system, and that's just about as bad as it 5 gets. 6 And then of course, it puts class prices out of 7 line with their relative price demand elasticities. 8 So the incidences of Class I price inversions. I 9 did something that I guess, you know, probably needed 10 done. I counted. I went back and figured out how often 11 they occur, which class price they occur on, and their 12 frequency. And it actually is very startling and very 13 telling. 14 I ran all the way back to 2000, whatever the 15 class -- the Federal Order mover was, whether it's the new 16 form of -- the recent form of computation of the mover or 17 the old higher-of. I didn't try to make any value 18 judgment as to which one to use. I just used the one that 19 the Federal Orders announced. 20 And I ran three scenarios, and you will see -- 21 again, this is from 37A, whatever, again, that was. I 22 have since forgotten what my counsel told me that number 23 was. 24 THE COURT: That's Exhibit 311. 25 THE WITNESS: Oh, there you go. 311. Great. 26 It's a 20-some-odd page long series of numbers. And it's 27 a spreadsheet that basically counts. Okay? Counts the 28 number of inversions. 7267 1 And so -- and I did it by class, how many -- and 2 under three, in essence, Class I differential scenarios. 3 The first is with the minimum differential at 4 $1.60. That's where we are today. And then running it at 5 the minimum differential that National Milk Producers is 6 proposing in our Proposal 19, which is $2.20 per 7 hundredweight. And then I also ran it at zero. 8 And let's pause here a second and talk about what 9 a zero differential means. 10 If you are sitting -- if there's a place in this 11 country where there is an effective zero differential, the 12 Class I mover is the Class I price. If you don't have 13 anything to add to the mover, the mover becomes the 14 Class I price. 15 So I compared those three items, those three 16 scenarios, those three environments, and said, okay, what 17 happens to Class I price inversions? If you look over 18 those 282 months from January 2000 through June of 2023, a 19 Class II price inversion at the $1.60 zone occurs about 5% 20 of the time. At the $2.20 proposed minimum differential 21 zone, they occur about 2% of the time. In any zone that 22 has a zero differential, again, where the mover is the 23 Class I price, with regard to the Class II price, they 24 occur a little more than half the time. 25 For Class III -- and part of this is the obviously 26 the fixed differential on Class II of $0.70 above the 27 Class IV skim. So that's why you have something more in 28 terms of frequency on Class II. 7268 1 For Class III, same question. How many times did 2 it occur at the $1.60, at the $2.20, and at a hypothetical 3 zero, and a hypothetical $2.20 I guess we should say. 4 About 6% of the time there's a Class III inversion at the 5 current $1.60 differential, minimum differential zone; 6 about 3% of the time at -- to the proposed $2.20 zone; and 7 a little over a third of the time at a zero zone, if you 8 have a zone with a zero differential. It's a little less 9 than Class IV, which makes sense, because over time, 10 Class IV tends to be a little behind Class III, so the 11 incidence of inversions are a little less. About 3% of 12 the time in the one current $1.60; 2% of the time in a 13 $2.20; 29% of the time in a zero differential zone. 14 Now, let's just look a second at another set of 15 statistics, and these, again, are all from that same -- 16 did you say 311? Great. 311. 17 Exhibit 311. Let's just look at the zero. If we 18 have a slice of the country that has a zero differential, 19 a zero Class I differential, again, the Class I price is 20 the mover each month. 35% of the time there would have 21 been a class price inversion, in other words, one of the 22 three II, III, or IV class prices would have exceeded the 23 Class I price. 35% of the time one of them would have 24 exceeded. 24% of the time, two of the classes -- class 25 prices would have been higher than the Class I price; 12% 26 of the time, all three Class II, Class III, and Class IV 27 would be higher than the Class I price at a zero 28 differential; and 28% of the months there would be no 7269 1 class price inversion. 2 So if you look at that, in total, 72% of the time 3 at a zero differential there would be some form of class 4 price inversion, so one or more of the Class II, III, or 5 IV prices would have exceeded the Class I price at a 6 zero -- zero differential zone. I think that's 7 significant. 8 THE COURT: So for someone who is reading the 9 transcript, you are now on page 27 of Exhibit 318. 10 THE WITNESS: Yes, ma'am. And you -- you asked me 11 to do that, and you know what I haven't done? What you 12 just reminded me I was supposed to do. 13 THE COURT: I'm hesitant to stop you. You are 14 like a rolling snowball. 15 THE WITNESS: No, ma'am. I'm from Alabama, 16 snowball analogies don't work on me. 17 THE COURT: I need you to stop. We need to let 18 our court reporter stretch. This has been very intense. 19 THE WITNESS: Yes, ma'am. 20 THE COURT: Let's take ten minutes. Please be 21 back and ready to go at 3- -- no, 4:0- -- let's come back 22 at 4:05 p.m. 23 We go off record at 3:53. 24 (Whereupon, a break was taken.) 25 THE COURT: Let's go back on record. 26 We're back on record at 4:07. 27 THE WITNESS: In the interest of time I'm going to 28 skip the next four slides and move on to page 33 of 64. 7270 1 This next series of slides, quite frankly, ought 2 to scare the socks off most of us, because it scares the 3 socks off of me. 4 I call this the most insidious form of a negative 5 producer price differential. Dairy farmers haul their 6 milk hundreds of miles to Class I plants, and they net 7 less than the Class III price or the Class IV price. 8 These are based on Exhibit NMPF-37D, which is what 9 number? Anybody got a clue? 314. 10 This is a straightforward analysis. I simply look 11 at the cost of hauling from a hypothetical farm in 12 Hereford, Texas, which is considered the -- kind of the 13 epicenter, the center of milk production in the Texas 14 Panhandle, to a hypothetical Class III or Class IV located 15 in Amarillo, about 45, 48 miles from Hereford. So we have 16 a hypothetical farm, hypothetical plant in Amarillo. And 17 then the order that farm can move to a Class I pool 18 distributing plant either in Dallas or Houston. 19 Let's see what the economics are that face that 20 plant -- or that dairy farmer. This is June 2023, the 21 first one. The blend -- or the Class III price at -- oh, 22 by the way, when they sell their milk to the Class III or 23 Class IV price in Amarillo, that's all they get. They are 24 not part of the pool. They don't -- they don't want to -- 25 you know, they are not qualified. They don't get a pool 26 draw. They take the Class III price or the Class IV 27 price. We are walking away from the pool. 28 So that farm is about 48 miles from Hereford to 7271 1 Amarillo. Over, in June, that would have been about a 2 $0.41 haul. So at a 14.91 Class III price, that farmer 3 nets $14.50 for the sale to the Class III plant -- or at 4 the hypothetical Class III plant in Amarillo. 5 If that farm ships its milk to Dallas, it's a 6 little over 400 miles, in June, that would have been a 7 little over $4 hundredweight haul. They get the 8 statistical uniform price in Dallas. It was 17.25 in 9 June. And so they walk away with 13.04. They give up, 10 they lose $1.46 per hundredweight versus the Class III 11 price. Not the blend price, the Class III price at 12 Amarillo. 13 If they go all the way to Houston, it's 635 miles. 14 That's well over a $6 per hundredweight haul rate. They 15 get 17.85, which is just $0.60 more than the Dallas price, 16 and their statistical uniform price, they net $11.28. 17 That's $3.22 less than the Class III price. That's why I 18 call this an insidious form of negative producer price 19 differential. 20 Now, June of 2023 was a very high Class IV price 21 month relative to Class III. You go through the same 22 series of computations, only you just compare to the 23 Class IV price at Amarillo. 24 On Class IV, hauling their milk to Dallas, they 25 net $4.81 less than the Class IV price, the net delivered 26 Class IV price at Amarillo, or they lose 6.47. They give 27 up $6.57 a hundredweight by hauling milk to a Class I 28 plant 635 miles away. 7272 1 Now, agreed, noted, June was a bit of an anomaly 2 price month. 3 So let's look at what those prices look like from 4 June -- excuse me -- January of 2018 through June 2023, 5 the simple average of the Class III, Class IV, statistical 6 uniform prices at Dallas and Houston. 7 THE COURT: Let me just interrupt just a minute 8 for page 35. 9 THE WITNESS: Yes, Your Honor. This is 36. I'm 10 on 36 of 64 now. 11 THE COURT: Go back to 35 for just a second. 12 THE WITNESS: Yes, ma'am. 13 THE COURT: So the trip to Amarillo pays the 14 Class IV price. 15 THE WITNESS: Yes. 16 THE COURT: So the net is on a Class IV return 17 rather than Class III? 18 THE WITNESS: Correct. And -- and -- and page 35, 19 this is selling their milk at the Class IV price. Page 34 20 would have been selling it at the Class III price. 21 THE COURT: So just read me, before you get to 22 that $17.85, which is the net, should it say producer net 23 Class IV return? 24 THE WITNESS: Your Honor, you are absolutely 25 right. It should. 26 THE COURT: Okay. 27 THE WITNESS: On -- on 35, it absolutely should 28 say "Class IV" next to that 17.85. Yes, ma'am, you are 7273 1 absolutely right. 2 THE COURT: All right. I'm going to make that 3 correction on my copy. I would like the record copy to 4 show that. We're in Exhibit 318. We have turned to 5 page 35. It's a small thing. 6 THE WITNESS: But an important small thing. 7 THE COURT: We're merely changing the Roman 8 numeral "III" to the Roman numeral "IV." 9 THE WITNESS: And I wouldn't be a bit surprised if 10 we see that error again in a couple of pages. 11 THE COURT: Okay. 12 THE WITNESS: Okay. 13 So on to 36. Again, these are the average prices, 14 average Class III price in -- for the period of 15 January 2018 through June of 2023. 16 You'll notice the hauling costs are a little bit 17 less. The mileages haven't changed, but the hauling costs 18 are a little less. Hauling costs in 2023 were higher than 19 they were over the average of this, however many years 20 that is, four and a half to five and a half. 21 In this case, the hauling cost from Hereford to 22 Amarillo is $0.39 a hundredweight, the average Class III 23 price for that period of time was 17.73, so the producer's 24 net Class III delivered to a plant in Amarillo, revenue is 25 17.34. 26 If he hauls his milk to -- or her milk -- to 27 Dallas, again, that haul rate is a little bit less. I 28 used the average haul rates across those periods. The 7274 1 statistical uniform price average during that period was 2 18.03 at Dallas, for a net return of 14.71, $2.63 less 3 than the Class III price delivered to Amarillo. 4 Same story for Houston. Again, the haul rate was 5 a little lighter than it was previous -- or for this 6 period versus June only. Net return 13.45, they yield 7 $3.89 less than the Class III price hauling their milk to 8 Class I in Houston. 9 And, Your Honor, we will go ahead and acknowledge 10 that on that same line, that this one should read net 11 Class "IV" return at Amarillo. Same story. 12 Well, the title's wrong, too. Okay. Let's -- and 13 the title it should read Class IV, and in the producer net 14 Class IV return at Amarillo -- I did get the SUP right, I 15 think. So -- 16 THE COURT: Okay. 17 THE WITNESS: Co-ops worry about blends. 18 THE COURT: So only -- okay. We're -- we're on 19 page 37 -- 20 THE WITNESS: Yes, ma'am. 21 THE COURT: -- of Exhibit 318, and we merely need 22 to change Roman numeral "III" to Roman numeral "IV" in two 23 places. 24 THE WITNESS: Yes, ma'am. 25 THE COURT: Okay. And, Mr. Hill, you will make 26 sure that's done? 27 Thank you. You may resume. 28 THE WITNESS: Same story. This is Class IV. The 7275 1 net return after hauling for Class IV, Class IV, at 2 Amarillo, 16.68, 14.71 at Dallas. When you haul the milk 3 down there, you take $1.97 less from the Class IV price, 4 and you receive less than the Class IV price net in your 5 check. It's $3.23 less than the Class IV price if you go 6 all the way to Houston. 7 If you want a picture of a threat to Class I, this 8 is it. So when we talk about threats to supply -- the 9 supply of Class I, here it is. 10 Kind of a quick message. The issue of updating 11 Federal Order Class I differentials is economically, as a 12 matter of economics, no different than updating Federal 13 Order Make Allowances. The results of continued 14 insufficient Class I differentials will have the same 15 impact on dairy farmers' deliveries to milk to Class I as 16 continued insufficient Make Allowances will have on hard 17 product manufacturing plants. This is an economic fact. 18 This is what's going to happen. Again, if you want a 19 picture of a threat to Class I supply, here it is. 20 Economically Make Allowances -- Make Allowances 21 are -- reflect the cost of conversion of a raw product -- 22 and a raw product of -- to -- its raw -- the cost of 23 conversion, product utility conversion. Class I 24 differentials are another kind of utility, time and place 25 utility. They compensate dairy farmers for getting a raw 26 milk -- getting a raw product in the wrong place to a raw 27 product in the right place. 28 Updating Make Allowances and updating Class I 7276 1 differentials are two sides of the same coin. Updating 2 either one, but not both, will reek havoc on dairy product 3 markets and threatens the adequate supply of milk. 4 Now, just a quick -- we have heard some parts of 5 this already, but we're going to -- we're going to 6 introduce a topic that you will here more about later. 7 This is our Class I differential project, or the process 8 we followed, the National Project. 9 We have heard this phrase, Class I differentials, 10 or developing them, is part art, part science. We heard 11 from Dr. Nicholson yesterday on the science part. The, 12 you know, taking measurements, routing milk, how much does 13 it cost to move it, what's it worth when it gets there. 14 And as you heard from him, then, then there's 15 another step after that, and that's the art. The boots on 16 the ground knowledge, the market, you know, this is why 17 this milk moves this way, this is why this milk can't move 18 that way, applying that information and developing a 19 standard traditional Class I price surface. 20 In National Milk we had a -- we had a -- we coined 21 a name for these groups. We broke into four regional 22 groups. We called them colored pencil crews. It's a bit 23 of nostalgia. When I drew all the maps I have drawn in my 24 career, a piece of paper with blank counties, and grab a 25 stack of colored pencils and start drawing. So nostalgia, 26 we called them the colored pencil crews, although I 27 probably was the only one that used a colored pencil. 28 So our four regional committees. We -- we -- 7277 1 nobody knows how to -- how milk moves everywhere in the 2 country. So we divided up the work in order that we could 3 utilize the brainpower and knowledge of the folks whose 4 boots are on the ground in the various parts of the 5 country. 6 And, Your Honor, we're on 44 of 64. 7 And so we had four regions. The Northeast, 8 Mideast, Middle Atlantic group, kind of Orders 1 and 33, 9 plus each one of these had some unregulated. Some of 10 these kind of broke up in a little bit different way. 11 This -- but this is how we started. They kind of morphed 12 in and out a little. 13 Upper Midwest, Central Order, roughly Orders 30 14 and 32. The Southeast/Southwest committee, which I 15 chaired, that's Orders 5, 6, 7, and 126. Each one of 16 these had a chair, and several people -- many people -- I 17 think several doesn't cover it. It's many people worked 18 on these -- this project. The West, Orders 5 -- 51, 124, 19 and 131. 20 And then each area had some unregulated territory 21 to work on also. 22 The way the structure worked, we got the USDSS 23 model. That was the skeleton. And then we started 24 hanging the meat on the bones based on our knowledge of 25 anatomy. 26 And so that created the Class I price surface we 27 recommend in Proposal 19. It went through many 28 iterations. There was a lot -- again, I was probably the 7278 1 only one that used a colored pencil and the eraser, but it 2 went through a lot of those. It was a great lot of 3 discussion over the -- I'm going to say this. There 4 weren't a lot of big differences between the -- the 5 regions where we had to kind of align the prices. 6 And the reason we avoided some of that in the 7 process, price alignment between the regions, early on, I 8 believe sometime between the second and third run of the 9 model, we had a physical meeting, about a dozen of us, and 10 sat down and -- and worked through an initial 11 recommendation of prices at what we called anchor cities. 12 If you will note, most of these cities kind of -- 13 and we're on 43 of 64 -- 14 THE COURT: Actually, we should point out, in case 15 people get confused, you have got all the page numbers. 16 THE WITNESS: Yes, ma'am. 17 THE COURT: We just left page 41 and page 44, who 18 are front and back. 19 THE WITNESS: Oh, my word. 20 THE COURT: And now we have -- 21 THE WITNESS: It should -- 22 THE COURT: -- 42 and 43. 23 THE WITNESS: We've got a -- I have got a 24 typographical error there somewhere. I know what I did. 25 THE COURT: It doesn't matter. We got it all. 26 THE WITNESS: Yes, I think I may have moved a 27 slide at some point after I numbered them. 28 And you are asking me to count past 40, we -- 7279 1 we -- I can -- I know my age, and it's beyond 40. 2 THE COURT: I accepted you as an expert witness. 3 THE WITNESS: Yes, ma'am. There we go. 4 So anyway, we basically had a structure, we called 5 them anchor cities, that kind of fell across the borders 6 or along the borders of these five regions. That gave 7 each region something of a -- of a jump-off spot to -- to 8 develop their prices without -- without all four regions 9 just kind of starting out on their own. 10 So we came to some agreement about some 11 tentative -- what I would call tentative prices. They -- 12 some of them stuck through the whole thing, but some of 13 them moved a little bit. But these anchor cities were 14 important to kind of define where the -- where the lines 15 were and how the regions matched up. 16 And that -- I'm going to stop right there with 17 4:29 left to go. See, I told you I could make it. 18 Stop the clock. 19 MS. HANCOCK: Thank you, Mr. Sims. Appreciate 20 your effort in putting all this together and taking us 21 through it. 22 Your Honor, at this time we'd make him available 23 for cross-examination. 24 MR. ENGLISH: Your Honor, my name is Chip English. 25 I'm representing the Milk Innovation Group. And I am 26 reminded that the Milk Innovation Group includes nine 27 proprietary operators and one cooperative. 28 /// 7280 1 CROSS-EXAMINATION 2 BY MR. ENGLISH: 3 Q. Good afternoon, Mr. Sims. 4 A. Good afternoon, Mr. English. 5 Q. So I think at first I need to clarify something, 6 because I thought I heard your counsel at the beginning of 7 your testimony say that you were covering some materials 8 and that you would come back to talk about other 9 materials. 10 A. Yes, sir. 11 Q. And so I wanted to make sure I understood, as I 12 started this discussion, that I understood what it was you 13 did cover or intended to cover and what -- this is about 14 NMPF-37 -- what in NMPF-37 is left to be covered? 15 A. We will pick up at a later date with Part 3, which 16 begins on page 24 of 51. So this -- we're basically going 17 to stop before we get to the Southeast/Southwest regional 18 price recommendation. 19 Q. And -- 20 A. That will be handled by me a little bit later. 21 Q. Okay. So it might not come as a surprise that 22 when I prepared for your examination, I prepared for the 23 entire thing at once. So I may have to figure out my way. 24 But so that means you have basically covered 25 Parts 1 and 2 through page 24? 26 A. Yes, sir. Or a little bit on 24. 27 Q. Okay. So I will, thus -- just a second. I didn't 28 bring everything up. 7281 1 I will leave it to your counsel and USDA to talk 2 about how that happens with four minutes and 29 seconds, 3 but I am not concerned about that today. 4 What exhibits -- I think -- can we just go through 5 the exhibits and make sure that I understand -- I think 6 you perhaps covered a number of them, but I'm not sure if 7 you have all of them. 8 So obviously we talked about 310. I know you 9 talked about -- 10 A. I'm at a disadvantage. We were having an AV issue 11 when these were numbered. So if somebody could help me 12 with those again, that would be helpful. Or I use the 13 plural "we." It was I. 14 Q. Do you have the NMPF -- because I can refer to 15 them by the NMPF documents. 16 THE COURT: So we know now -- we know we went into 17 Exhibit 311. 18 THE WITNESS: Yes. 19 MR. ENGLISH: Okay. 20 THE COURT: And we know we went into another one 21 momentarily. 22 MR. ENGLISH: Well, do you have the NMPF documents 23 in front of you? 24 THE WITNESS: So the answer is no. 25 THE COURT: We talked about -- when we were on 26 page 34 of Exhibit 318, you said the basis for this is in 27 Exhibit 314. 28 THE WITNESS: Yeah. It -- would it help -- yeah. 7282 1 Can we turn that screen back on? Great. 2 Why don't we just go through these right quick. 3 You can look at -- for most of these I think -- I tried to 4 put the source -- my source exhibit. Obviously doesn't 5 have the number 300 whatever. 6 So this one is -- 7 MR. ENGLISH: Well, your counsel has handed them 8 to you, so maybe -- 9 THE WITNESS: Okay. Cool. We can do that. 10 MR. ENGLISH: Okay. So -- 11 THE WITNESS: She got them out of order, but 12 that's okay. Okay. 13 BY MR. ENGLISH: 14 Q. All right. So I don't think you actually 15 discussed Exhibit 312, which is NMPF-37B, but it looks to 16 have been included in the PowerPoint, and you skipped 17 through it; is that correct? 18 A. Let me get there, please. 312? 19 Q. 312, which is 37B. 20 A. Yes. We -- we did -- we'll discuss that one at 21 another time if you like. But it is in the PowerPoint and 22 in the Appendix at the end, I believe. 23 Q. All right. And then 313. Have you discussed 313? 24 A. We did not discuss 313. It's discussed in the -- 25 Q. Part 3? 26 A. No, I believe it's discussed in Part 1 of 310. 27 Q. Okay. 28 A. Mr. English, 312 is cited in -- 7283 1 Q. We have already covered 312. 2 A. Oh, okay. I'm sorry. 3 Q. And you have already said 313 was covered. 4 A. Yeah, it's cited in 310. 5 Q. Okay. What about 314? 6 A. It is cited in -- 7 Q. I know they are all cited in 310. 8 A. Yes. 9 Q. Okay. But the question is, are they in Parts 1 or 10 2, or Part 3? That's what I'm really getting at. 11 A. I believe they -- let me just look at these right 12 quick. I believe everything through 316 is actually cited 13 in Part 1. 14 Q. Okay. So it's 316 that's not in -- 15 A. 317, I believe, is cited in Part 3 of the 310. 16 Q. All right. So thank you. All right. 17 So you were here yesterday, correct? 18 A. I was. 19 Q. When Dr. Vitaliano testified that Dr. Nicholson 20 and Dr. Stephenson did three iterations -- 21 A. Yes. 22 Q. -- of the model. You heard that testimony, 23 correct? 24 A. I did. 25 Q. And then Dr. Nicholson was very clear that after 26 they did their runs, National Milk Producer Federation's 27 adjustments were done independently by National Milk 28 without his oversight or input, correct? 7284 1 A. Correct. 2 Q. And you didn't ever share those with them, 3 correct? 4 A. With? 5 Q. The adjustments, with Dr. Nicholson or 6 Dr. Stephenson, correct? 7 A. Not that I recall. 8 Q. And so given the fact that the iterations are -- 9 A. Let me correct that. We may have. But I -- 10 Q. Did you hear Dr. Nicholson testify yesterday that 11 he hadn't seen them before? 12 A. Well, then if he hadn't seen them, then we must 13 not have. 14 Q. So given that you had already had access to the 15 model and already three iterations, how come additional 16 adjustments were necessary? 17 A. There's -- you know, as Dr. Nicholson testified, 18 very clearly I thought, there are certain -- a model is, 19 by definition, just like the little ones you put together 20 when you are -- you know, when you are -- a battleship or 21 a car, it's a simplification of reality. It has to be. 22 You cannot model in everything that occurs in milk 23 markets. They use big data and that -- there are certain 24 things that the model doesn't know. 25 Let me give you an example. There's a pool 26 distributing plant located in Southern Indiana. Right 27 around that plant is a nice little pocket of milk. And if 28 the -- you know, the model probably recognizes that that 7285 1 milk exists, but -- and probably knowing how those models 2 work, it probably would like to take that milk and move it 3 south and pull milk from the heavier supply areas down 4 into Holland. It's Holland, Indiana, kind of in the 5 southwest corner of Indiana. 6 Well, what the model doesn't know is that those 7 are small farms, they are members of a particular 8 religious sect, and that milk just isn't practical to 9 move. It supplies that plant nicely, but it just isn't 10 available to move anywhere else. You -- it is -- they are 11 very small, extremely expensive to pick up on a single 12 route, to make a tanker load. The model doesn't 13 understand that. 14 That's the kind of information that the people 15 that worked on this understand and know and that the model 16 would never know. 17 Q. So I don't want to go down that track today, 18 because if I do, we won't get any progress. But we'll get 19 back to Holland, Indiana another time. 20 Were you here -- but -- but on page 3 of 21 Exhibit 310, you acknowledge that the original model runs 22 included the same $1.60 base Class I differential that we 23 have in place today, correct? 24 A. Yes. 25 Q. And were you here yesterday when Mr. Miltner asked 26 questions of Dr. Nicholson about Ada County, Idaho, or is 27 it Ada County, Ada County, Idaho? 28 A. I was. 7286 1 Q. Okay. And that $1.60 was the result for the 2 October run and $1.70 for the May run, correct? 3 A. Yes. 4 Q. In other words, the model results indicated there 5 was no reason to have any price associated with those 6 areas to attract milk for fluid use, correct? 7 A. I don't know that that's what the model means or 8 not. 9 Q. Did he not say that if you create another hundred 10 pounds of milk, if you put another hundred pounds of milk, 11 no one would want it at that location? 12 A. Yeah. But I don't believe that's a proper 13 interpretation to say that the milk there has no value. 14 Q. I'm not saying it has no value, but it doesn't 15 have any additional value for the purpose of Class I, 16 correct? 17 A. Again, I'm not sure I would agree with that. But 18 the model did generate -- would have generated zero cents 19 absent the 1.60? 20 Q. Yes. 21 A. One of the months, the model number, the initial 22 run would have been zero, and then the other month would 23 have been 10. 24 Q. Correct. 25 A. Absent the 1.70. 26 Q. So the marginal value of another hundred pounds of 27 milk at that location would be zero in October and $0.10 28 in May, correct? 7287 1 A. I believe that may be the interpretation. 2 Q. In other words, the model results indicated that 3 there was no reason to have a higher price associated with 4 those areas to attract milk for fluid use, correct? 5 A. Oh, I don't believe that at all, that there's 6 still a cost associated with delivering to Class I that 7 must be recognized in the Class I price. Plus, there are 8 other objectives of the Class I price which necessitates 9 its inclusion. To say that the Class I milk there is 10 worth nothing more than Class III I think is an improper 11 application of the reality of the milk business. We have 12 to have additional money on the Class I price to make it 13 worth anybody's while. Otherwise, you never -- you would 14 always opt to go to the easy places. Class III and 15 Class IV are generally easier to serve than Class I, so 16 without some additional money you are not going to do it. 17 Q. But nonetheless, the point of the model is to 18 generate the marginal -- evidence of the marginal value 19 for milk at a location, and that, along with I think a 20 county in Montana, was the lowest value, correct? 21 A. I don't recall the county in Montana, I do 22 remember Ada County being the low county, Ada County, 23 Idaho. 24 Q. So what I'm struggling with -- 25 A. I think -- I'm sorry. 26 Q. Go ahead. 27 A. I think it's both. I don't recall there being one 28 in Montana, but if there is, there is. 7288 1 Q. Okay. 2 A. But today there's 150 counties with $1.60. And 3 this -- this model returned either one or two counties 4 with those low numbers. I think that is telling in 5 itself. 6 Q. So what I'm struggling with a little bit is that 7 you know, yesterday Dr. Vitaliano said that National Milk 8 Producers Federation added $0.60 across -- 9 THE COURT: I'm sorry, you have got to be close to 10 the mic. I know it is impossible to handle that big 11 exhibit and be close to the mic, but you need to. 12 MR. ENGLISH: Thank you. Which one do you want to 13 choose, the spreadsheet or the mic? 14 THE COURT: Thank you. That will help. 15 MR. ENGLISH: All right. 16 BY MR. ENGLISH: 17 Q. I -- and if I need to show you the spreadsheets to 18 do this, I will, but if you will accept my representation 19 for the moment. I was not thinking in the 25 minutes I 20 had tonight to do that, but if we need to, I'm perfectly 21 happy to show you. But -- 22 A. Well, let's try and see what happens. 23 Q. Okay. This is Exhibit 301. 24 So you agree the base price today is $1.60, 25 correct? 26 A. First off, I prefer a designation other than base 27 price. 28 Q. Okay. 7289 1 A. The minimum -- the point where the minimum Class I 2 price over -- today, over I believe it's 150 counties or 3 thereabouts, is $1.60, yes. 4 Q. And that minimum price, National Milk proposes to 5 raise across the board to $2.20, correct? 6 A. Yes. 7 Q. Okay. Which is $0.60 higher than 1.60, correct? 8 A. 2.20 minus 1.60 is 60. 9 Q. So if I represent to you that the Ada County value 10 proposed by National Milk is actually $2.55, which is 11 $0.95 more than $1.60, can you explain how that happened? 12 A. I cannot. Those Class I differentials were -- 13 were developed by the Western Regional Group. I have no 14 specific knowledge -- I have no in-specific knowledge 15 about how milk moves, how it's delivered, what the demands 16 are in that corner of the world. Those questions are 17 going to need to be answered by the folks that developed 18 those differentials. And, again, this was a -- this was a 19 project that was divvied up amongst the regions. 20 Q. Was the adjustment from $1.60 for the minimum 21 price to $2.20 made uniformly before National Milk 22 Producers Federation made these county specific 23 adjustments? 24 A. Would you ask that question again? I think I 25 missed something. 26 Q. All right. Was the -- you made a decision to 27 increase the minimum from $1.60 to 2.20, correct? 28 A. The minimum is 2.20. 7290 1 Q. Okay. Was that minimum at 2.20 adjusted uniformly 2 in your work before National Milk Producers Federation 3 made the county specific adjustments? 4 A. Not necessarily. I believe I can speak -- I can 5 speak for the Southeast/Southwest regional committee. The 6 model run that we used as our skeleton was based on the 7 $1.60. 8 Q. Why was it not based upon 2.20? 9 A. The 2.20 was determined by that regional 10 committee, but that was necessary -- I believe you will 11 hear this answer -- that that was necessary for certain 12 price alignment. 13 Q. But I thought you just said that it was raised 14 from $1.60 to 2.20. I'm hearing you now say it wasn't 15 necessarily raised to 2.20, it was left to -- 16 A. No, no, no, no. No. 2.20 is the minimum number, 17 I agree. So all what I'm saying is that that 2.20 came 18 about by price alignment work and the colored pencil work 19 in that area. It just happens to work very well for 20 several other things. It -- but the 2.20 was the result 21 of that work. The rest -- for say the Southeast/ 22 Southwest, we were working off a model that started at a 23 buck 60. 24 Q. I'm sorry, that makes no sense to me. I mean, 25 you -- I think you just -- at least in my mind you said 26 just the opposite. 27 Did you start at 2.20 in the Southeast or did you 28 work off $1.60 in the Southeast? 7291 1 A. We worked -- the Southeast and Southwest, we 2 worked off $1.60. 3 Q. So that means it wasn't done uniformly, correct? 4 A. Well, there's -- I -- obviously it's not uniform 5 because we have different Class I differential 6 recommendations. 7 Q. But whether you call it a base or a minimum, 8 shouldn't the minimum be the same? 9 A. Same as what? 10 Q. Okay. You have testified on -- that National 11 Milk, and Dr. Vitaliano said, that you added $0.60 across 12 the board to raise the minimum price from $1.60 to 2.20. 13 A. I think Mr. -- that the -- the "across the board," 14 I would not -- that's not a phrase I would have used. 15 Q. Is it true today, in the current system 16 established by Federal Order reform, that there is a 17 minimum of $1.60 that was then added on to the price 18 surface? 19 A. I believe that may be true. 20 Q. Okay. Is it true that that is not the case in 21 National Milk Producers' results? 22 A. Some of the regions used the $1.60. The $0.60 23 that went from $1.60 to 2.20 was added as a result of the 24 regional work. 25 Q. So on page 6 of Exhibit 310, the bottom -- I 26 realize you didn't read this today -- but the last 27 paragraph: "National Milk Producer Federation's Proposal 28 Number 19 proposes Class I differentials starting at $2.20 7292 1 per hundredweight with differential increases radiating 2 from there." 3 Is that your testimony that that's what happened? 4 A. I probably would state it a little bit 5 differently. The -- the -- that does suggest something 6 that may not necessarily be exactly the way the chronology 7 worked. 8 But, in essence, if you -- you could make a case 9 that they radiate out of there. Certainly every place out 10 of there is greater than 2.20, so they radiate with 11 increases from there. So if you just simply say instead 12 of starting at a minimum of 2.20, then it's a factual 13 statement. 14 Q. But I think you are saying that in the Southeast 15 and Southwest you started at a minimum of $1.60; is that 16 correct? 17 A. Obviously not. We don't come anywhere near $1.60 18 in the Southeast/Southwest. 19 Q. No. I said you started with. 20 A. The model run we used had a $1.60 at the low spot. 21 Q. I'm sorry. 22 A. That's a very big difference than started at. 23 Q. Okay. Did you, to the model run, add $0.60 to get 24 to 2.20 before you did any of your other modifications in 25 the Southeast? 26 A. No. 27 Q. Did -- so yesterday in testimony, Dr. Vitaliano 28 said -- 7293 1 A. Who? Excuse me? 2 Q. Dr. Vitaliano. 3 A. Okay. 4 Q. -- said in Exhibit 299, since 2000, those costs 5 have risen far more than the limited increase in the base, 6 which is where I got it, base Class I differential, from 7 $1.60 to $2.20 as embedded in the NMPF proposal. 8 Is his statement incorrect? 9 A. Would you please read that to me? And I -- I 10 wonder the context. 11 Q. The Class I differential base price now represents 12 a modest nod to production costs at the producer level. 13 Since 2000, those costs have risen far more than the 14 limited increase in the base Class I differential from 15 $1.60 per hundredweight to $2.20 per hundredweight, as 16 embedded in the NMPF proposal. 17 A. I think "embedded" is a perfectly legitimate word. 18 It's included in our proposal. 19 Q. If $1.60 is, as I think you agree, the minimum or, 20 as testimony yesterday said, a base was $1.60, to which we 21 then add the price surface, does the proposal today by 22 National Milk start at 2.20 and add a price surface? 23 A. Since every spot is 2.20 or greater, then the 24 answer is obviously yes. If 2.20 is the minimum, then 25 every place outside of that is more than that. 26 Q. But you said that for the Southeast and the 27 Southwest, you used the model run, which was $1.60. 28 Did you then add $0.60 to that before you did any 7294 1 of the red pencilling? 2 A. No. 3 Q. How is that a uniform national price surface? 4 Isn't that what it is today? The base is a uniform price. 5 But you are telling me now that's not what you did. 6 A. Whoa, whoa, whoa. I didn't say that at all. I 7 did not say that at all. Our proposal, the lowest -- the 8 least per hundredweight differential is 2.20. Every place 9 increases out of that. Therefore, we have a price surface 10 which starts at 2.20 and emanates from there. 11 Q. But it emanates at different rates in different 12 parts of the country regardless of Class I milk 13 availability doesn't it, sir? 14 A. Please restate that. 15 Q. You are playing semantics, sir. You are talking 16 about -- since the minimum is 2.20, you are claiming that 17 therefore you must have somehow started there. 18 But the reality is, you have just said that for 19 the Southeast and Southwest you started at $1.60, and you 20 didn't really add -- you said you didn't add $0.60, right? 21 A. I said that the model run that we keyed off of had 22 $1.60 as the minimum number. 23 Q. So to the extent somebody somewhere in some part 24 of the country may have adopted a higher base rate or 25 minimum, in your words, from $1.60 to 2.20, since you have 26 testified about that, although not extensively today, can 27 we go into all of what went into the increase from $1.60 28 to 2.20? 7295 1 A. Yes. 2 Q. Okay. Thank you. 3 A. I mean, let me say it this way. The -- we are of 4 the opinion that the -- well, we under- -- okay. Let me 5 start this way. 6 We understand how the $1.60 was derived in the 7 order reform decision. You have to search hard between 8 the proposed rule and the final rule to get the elements 9 of the $1.60. And we started an analysis of how do we 10 mirror, for lack of a better term, the recipe which -- 11 which drove the $1.60. So we began researching how 12 much -- what's the Grade A/Grade B cost differential, for 13 example. You will hear about that with great specificity 14 with from another witness. 15 We also said, okay, what is the cost of balancing? 16 And to be honest, that one's a hard number to come up with 17 because every plant's different. Every region is 18 different. Balancing a plant in Lafayette, Louisiana is 19 probably a lot different than balancing one somewhere 20 else. 21 So -- and then I think the third one is -- the 22 third element is necessary to attract a supply or 23 something like -- I think one of the decisions says maybe 24 even uses the "give up." Well, we -- that's not a 25 particularly easy number to come to either. 26 So basically we started looking and said, how is 27 it that Class I differentials work, and what is it that 28 they are supposed to do, and what is the objective? 7296 1 And I think we get to a pretty easy answer, 2 actually, that the way you incentivize milk to move to 3 Class I is -- and it's not easy, but easy to explain -- if 4 you want to move milk to Class I or if the order program 5 wants to incentivize milk to move to Class I, the best way 6 to do that is make sure the Class I price is the highest 7 of all the classes. 8 And so the research we did on the Grade A/Grade B 9 suggests a -- something around the $2 cost for conversion 10 from Grade A to -- or Grade B to Grade A. And our tests 11 on price inversions support a 2.20. You just -- at $2.20 12 you get rid of almost all price inversions, other than the 13 very worst anomaly months. So the 2.20 minimum 14 differential provides a -- over a big chunk of the months, 15 the vast majority of them, a preponderance of the months, 16 the -- a Class I price in all places, which most months, 17 many months, the vast majority of months, will exceed the 18 other class prices. If you want to attract milk to 19 Class I, make it the highest price. 20 I think we're confusing on the $1.60 the recipe 21 with the cake. We get hung up on 40 plus 60 plus 60 equal 22 $1.60. And the real question we need to be asking is not 23 necessarily whether how much flour, how much butter, and 24 how much sugar you have, it's does the $1.60 work in its 25 composite nature. Rather than trying to find a recipe, we 26 go straight to the cake. 27 All right? Okay. But -- 28 Q. Okay. Okay. I think let's -- at some point, 7297 1 let's get to the specific questions. 2 A. The specific statement you asked, how we got to 3 the 2.20, and I'm trying to explain that. 4 Q. And -- and -- but in your testimony, on 5 Exhibit 310, you included the Grade A, and you included 6 the price inversions -- 7 THE COURT: The price what? 8 MR. ENGLISH: Price inversions issue. This is on 9 page 5 of Exhibit 310. 10 BY MR. ENGLISH: 11 Q. So since you are now talking about the cake versus 12 the recipe, I did not see anywhere in 310, and for that 13 matter in any other -- the other 15 or 16 testimonies that 14 we have coming, evidence other than general conversation 15 that you actually added today, which I'm not complaining 16 about, but I see that in 318, about balancing, as you 17 yourself said, the cost of balancing. 18 Is National Milk intending to present a cost of 19 balancing number for USDA, or are you thinking the cake is 20 enough? 21 A. We believe that the 2.20 stands on its own, that 22 it meets the objective of a Class I differential. The 23 objective -- the -- again, if you want to incentivize milk 24 to go to Class I, the best way to do that is make it the 25 highest price class. And it's preventing -- I guess it's 26 simple math, but if it's the highest price class, you have 27 prevented a Class I price inversion. 28 So whether you look at it as -- as preventing or 7298 1 limiting class price inversions or establishing a price 2 necessary -- that creates the highest price, you get to 3 the same answer. So I think we want to look at the 4 objective. 5 The objective is to get milk to Class I. The way 6 to do that is make sure the Class I price is the superior 7 price, the vast, vast majority of the time, and the 2.20 8 does that. 9 THE COURT: I hate to interrupt, but I must stop 10 you. Will you be available for the remainder of 11 cross-examination on what you have testified to today, 12 tomorrow morning? 13 THE WITNESS: Yes, ma'am. 14 THE COURT: Okay. Let's do that. 15 Let's talk about what else is tomorrow. Now, 16 tomorrow we have a little bit of a modified time table. 17 We start at 8:00, and then -- is tomorrow the day we go to 18 lunch early? 19 MS. TAYLOR: No, we're modifying that plan, too, 20 Your Honor. 21 THE COURT: Oh, okay. Well, let's talk about the 22 plan. 23 MS. TAYLOR: Yes. We will start at 8:00 a.m. 24 tomorrow. I do expect one dairy farmer to be present to 25 testify. If they are here at 8:00, I would maybe suggest 26 we get them on at 8:00 first, so we can be sure that they 27 get their time. 28 And then Mr. Sims can come back on to cross -- be 7299 1 cross-examined. 2 If we finish Mr. Sims -- I said "if" -- we will -- 3 next on my list I think is Mr. Erba; is that correct? 4 THE WITNESS: I think Mr. Erba -- Dr. Erba is -- 5 MS. TAYLOR: Dr. Erba. 6 THE WITNESS: -- is next on the list. I don't -- 7 I don't -- we have obviously had some shuffling of the -- 8 but I believe that's the plan at the moment. How's that? 9 MS. TAYLOR: That will be the plan. 10 And I don't think we have the plan beyond that, 11 because we will break for lunch at noon. 12 We will then start at 1:00 with our virtual dairy 13 farmer testimony. We have six farmers signed up to 14 testify. I would ask that if -- if any of the counsels 15 here have statements for their producers that are 16 submitted and you are bringing copies, we can get those 17 during the lunch hour so we can get that sorted out and 18 make our 1:00 time a little more efficient. I will read 19 the names in a second when I pull those up. 20 The other thing I wanted to request for tomorrow 21 is that we kind of set our agenda for Monday maybe before 22 we break for lunch, so that's kind of -- I would like to 23 do that a little bit in advance tomorrow. I just wanted 24 to give everybody a heads-up about that. 25 THE COURT: And then does our day end at 26 3:00 p.m.? 27 MS. TAYLOR: Yes, ma'am. Our day ends at 28 3:00 p.m. 7300 1 THE COURT: And the names of the dairy farmers 2 appearing remotely? 3 MS. TAYLOR: I have the list. I'm not sure this 4 will be the order that they go in, but the list is: Dave 5 Daniels from Wisconsin; Lauren Perkins from West Virginia; 6 Johnny Painter from Pennsylvania; Marty Hallock from 7 Wisconsin; George te Velde, I'm sure I pronounced that 8 wrong, my apologies, from California; and Mark McAfee, 9 also from California. 10 THE COURT: Excellent. It will be a good day. 11 All right. 12 Is there anything else before we conclude for 13 today? 14 I see no one suggesting that -- so we go off 15 record at 5:01 p.m. See you tomorrow morning at 8:00. 16 (Whereupon, the proceedings concluded.) 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 7301 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: December 3, 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