8606 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 November 29, 2023 20 21 ---o0o--- 22 23 24 25 26 Reported by: 27 MYRA A. PISH, RPR, C.S.R. Certificate No. 11613 28 8607 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 MILK INNOVATION GROUP: 7 Charles "Chip" English Grace Bulger 8 FOR THE NATIONAL MILK PRODUCERS FEDERATION: 9 Nicole Hancock 10 Brad Prowant 11 FOR SELECT MILK PRODUCERS, INC.: 12 Ryan Miltner 13 FOR INTERNATIONAL DAIRY FOODS ASSOCIATION: 14 Steve Rosenbaum 15 FOR THE AMERICAN FARM BUREAU FEDERATION: 16 Dr. Roger Cryan 17 FOR LAMERS DAIRY: 18 Mark Lamers 19 FOR DAIRY FARMERS OF AMERICA: 20 W. Todd Miller 21 ---o0o--- 22 23 (Please note: Appearances for all parties are subject to 24 change daily, and may not be reported or listed on 25 subsequent days' transcripts.) 26 27 ---o0o--- 28 8608 1 M A S T E R I N D E X 2 SESSIONS 3 WEDNESDAY, NOVEMBER 29, 2023 PAGE 4 MORNING SESSION 8611 AFTERNOON SESSION 8729 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 8609 1 M A S T E R I N D E X 2 WITNESSES IN CHRONOLOGICAL ORDER 3 WITNESSES: PAGE 4 Scott Werme: 5 (Continued) Cross-Examination by Ms. Bulger 8611 6 Cross-Examination by Mr. Lamers 8620 Cross-Examination by Ms. Taylor 8623 7 Cross-Examination by Mr. English 8626 Redirect Examination by Ms. Hancock 8628 8 Johnny Hiramoto: 9 Direct Examination by Ms. Hancock 8631 10 Cross-Examination by Mr. English 8642 Cross-Examination by Mr. Miltner 8671 11 Cross-Examination by Ms. Taylor 8674 12 Brent Butcher: 13 Direct Examination by Mr. Prowant 8691 Cross-Examination by Mr. Rosenbaum 8709 14 Cross-Examination by Mr. Miltner 8747 Cross-Examination by Ms. Taylor 8753 15 Redirect Examination by Mr. Prowant 8759 Recross-Examination by Mr. Miltner 8765 16 Dr. Roger Cryan: 17 Testimony Read into the Record 8771 18 Cross-Examination by Mr. Rosenbaum 8809 Cross-Examination by Mr. Miltner 8820 19 Cross-Examination by Mr. English 8826 20 21 ---o0o--- 22 23 24 25 26 27 28 8610 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. 5 370 NMPF-43 8630 6 373 NMPF-56 8631 8689 7 374 MIG-57 8648 8690 8 375 MIG-56 8664 8690 9 376 NMPF-46 8691 8763 10 377 IDFA-377 8715 8769 11 378 IDFA-378 8716 8769 12 379 IDFA-379 8721 13 380 IDFA-380 8728 8769 14 381 IDFA-381 8731 8769 15 382 AFBF-5 8770 16 383 AFBF-5A 8770 17 384 AFBF-5B 8770 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 8611 1 WEDNESDAY, NOVEMBER 29, 2023 -- MORNING SESSION 2 THE COURT: Let's go back on record. 3 We're back on record. It is 2023, November 29, 4 Wednesday, at approximately 8:00 in the morning. 5 We had a witness on the stand at the end of the 6 proceeding yesterday. Should that witness resume the 7 witness stand? 8 You may. Welcome back. 9 And I'd ask now that the Agricultural Marketing 10 Service return to the witness stand the record exhibits 11 that he is using, and I will give him the 301 that I have. 12 Please, again, state and spell your name. 13 THE WITNESS: Scott Werme, S-C-O-T-T, W-E-R-M-E. 14 THE COURT: You remain sworn. 15 And I have forgotten where we were. We were -- 16 ah, yes, Ms. Butcher (sic). 17 You may resume cross-examination. 18 SCOTT WERME, 19 Having been previously sworn, was examined 20 and testified as follows: 21 CROSS-EXAMINATION 22 BY MS. BULGER: 23 Q. Good morning. Grace Bulger for Milk Innovation 24 Group. 25 Good morning, Mr. Werme. 26 A. Good morning. 27 THE COURT: Now, I'm saying your last name wrong, 28 aren't I? 8612 1 MS. BULGER: It's Bulger. 2 THE COURT: Bulger. 3 MS. BULGER: B-U-L-G-E-R. 4 THE COURT: Thank you. I'm calling you by the 5 name of someone else who is going to be involved in this 6 proceeding. Bolger, B-O-L-G-E-R (sic). Thank you. 7 BY MS. BULGER: 8 Q. Mr. Werme, just to start with you, I would like to 9 start with follow-up from yesterday. We ran out of time 10 at the end of the day. 11 But I think yesterday you said that you moved two 12 to three loads out of Maine; is that correct? 13 A. Per day. 14 Q. Was that per day? 15 A. Yes. 16 Q. Yes. Thank you. 17 Where does that milk go? 18 A. It generally goes -- we get some slots in the 19 Franklin plant, DFA plant in Franklin, Mass. 20 THE COURT: You are not loud and clear. Now, you 21 may not have to move your body, but I think if you come 22 toward me just a bit, you will be more aligned with the 23 microphone. Thank you. 24 BY MS. BULGER: 25 Q. Is that -- is the DFA plant in Franklin, 26 Massachusetts -- 27 A. Franklin, Mass. 28 Q. Is that a Class I plant? 8613 1 A. It is. 2 Q. Do you have Exhibit 369 in front of you? 3 A. I do. 4 Q. So if you can look at, on page 1, Row 1194. 5 Is that the -- it's -- the plant identified on 6 Row 1194; is that the plant that -- 7 A. That's correct. 8 (Court Reporter clarification.) 9 MS. BULGER: Is that the plant that the milk, the 10 two to three loads per day that -- 11 THE COURT: Two or three loads what? 12 MS. BULGER: -- per day that Agri-Mark moves out 13 of Maine goes to? 14 THE WITNESS: Correct. 15 BY MS. BULGER: 16 Q. I might return to this question. 17 You say in your testimony that "if the model 18 results were adopted unchanged, the respective 19 differentials would have incentivized Maine milk to leave 20 the state for plants in Eastern Massachusetts," correct? 21 A. That's correct. 22 Q. And you have identified that the two to three 23 loads per day that you send out of Maine go to a plant in 24 Massachusetts? 25 A. They currently do. Yes. 26 Q. How much Maine milk overall would you say leaves 27 the state for plants in Eastern Massachusetts under the 28 current differentials? 8614 1 A. I don't have the answer to that question. I can 2 only speak to Agri-Mark's supply. 3 Q. And for Agri-Mark it's two to three loads -- 4 A. Two to -- 5 Q. -- per day? 6 A. -- three today. 7 (Court Reporter clarification.) 8 THE WITNESS: It's two to three loads today -- a 9 day, correct. 10 THE COURT: So both of you just have to remember 11 to wait until the other's voice dies down before you 12 respond. 13 BY MS. BULGER: 14 Q. So we heard testimony from Ms. Ryll yesterday that 15 DFA proposes keeping the differential in Massachusetts 16 that we just looked at on page -- or Row 1194 on 17 Exhibit 369, and they are like the same as the 18 differential -- sorry. Let me rephrase that. 19 Returning to Row 1194, the Franklin, 20 Massachusetts, plant, the current differential is $3.25, 21 correct? 22 A. I see that. 23 Q. Looking at the row above 1194 on Exhibit 369, 24 1190, the differential in Hampden County, Massachusetts, 25 is $3, correct? 26 A. It is. 27 Q. Currently. Yeah. 28 So the difference between those two counties, the 8615 1 current differential is $0.25 per hundredweight? 2 A. Yes. 3 Q. The testimony that we heard from Ms. Ryll and the 4 DFA proposes keeping that difference the same by leaving 5 the Agawam HP Hood plant county -- in Hampden, 6 Massachusetts, County, proposing to set the differential 7 at $4.85. 8 Do you see that? 9 A. I see that. 10 Q. And the differential for Norfolk County, 11 Massachusetts, where the Franklin plant is, at 5.10, 12 maintaining that $0.25 difference, correct? 13 A. It is. 14 Q. The model average for those counties, the model 15 average for Norfolk, Massachusetts, where Franklin, 16 Massachusetts, is, model output was $5.25 per 17 hundredweight, correct? 18 A. Correct. 19 Q. So that proposal moves the proposed differential 20 down, decreases from the model average result by $0.15 -- 21 A. Correct. 22 Q. -- correct? 23 Looking up at Row 1146, Cumberland, Maine, the 24 proposed differential in Proposal 19 is $4.85 per 25 hundredweight, correct? 26 A. Correct. 27 Q. That's $0.25 less than the proposed differential 28 of $5.10 in Franklin, in Norfolk County, Massachusetts? 8616 1 A. Correct. 2 Q. The model output, however, puts the Cumberland, 3 Maine, average differential at $4.50, correct? Compared 4 to the -- sorry. 5 A. Correct. 6 Q. Thank you. 7 Compared to the Franklin model average at $5.25, 8 so that's a $0.75 per hundredweight difference between the 9 model averages for the Franklin location in Norfolk 10 County, Massachusetts, and Cumberland, Maine? 11 A. Let me switch back. 12 Q. Sorry, we're looking at Row 1194 and 1146, the 13 University of Wisconsin model average. 14 A. And what did you say it was? 15 Q. So the model average for Cumberland, Maine, is 16 $4.50 per hundredweight, and for Norfolk, Massachusetts, 17 where Franklin -- Norfolk County, Massachusetts, where 18 Franklin, Massachusetts, is located, is $5.25 was the 19 average; is that correct? 20 A. I see that. 21 Q. So National Milk's proposal, as we have 22 established, then, proposes a differential in Cumberland, 23 Maine, of $4.85, and in Norfolk County, Massachusetts, of 24 $5.10. 25 So National Milk's proposal proposes raising 26 Cumberland, Maine, by $0.35, and lowers the Franklin -- 27 Franklin, Massachusetts in Norfolk County, Massachusetts, 28 by $0.15, which keeps the difference the same, correct? 8617 1 A. Correct. 2 Q. And that's -- that difference is maintained the 3 same even though hauling costs have risen? 4 A. That's correct. 5 Q. Would you say that the hauling costs, in your 6 opinion, hauling costs for moving milk out of Maine have 7 increased such that you think that the difference between 8 the differentials in Norfolk County, Massachusetts, and 9 Cumberland, Maine, should be raised? 10 A. The hauling costs have risen, but the purpose of 11 this was to flatten the -- call it the run, from Maine and 12 out to -- out of Maine, to disincentivize the movement of 13 milk. 14 So, in fact, when DFA Agri-Mark made this change 15 to the model, we made it actually cost more for us to move 16 milk out of Maine. And that's -- and we -- and we 17 understand what we did there in terms of penalizing 18 ourselves on hauling, to leave the milk and to incentivize 19 the milk to stay in Maine. And -- and the milk would -- 20 our milk, Agri-Mark milk, would either have to go to 21 Franklin, which is not our customer but DFA gives us slots 22 in there, otherwise it would have to go all the way to 23 Springfield. So -- but we want the milk to stay in Maine. 24 Q. At present, though, Agri-Mark, you said moves two 25 to three loads per day -- 26 A. At present. 27 Q. -- to Massachusetts, to Franklin, Massachusetts? 28 A. That's correct. 8618 1 Q. Wouldn't you rather the price be higher in 2 Franklin, Massachusetts, so in order to cover more of your 3 hauling costs? 4 A. But the purpose was to keep the milk in Maine, to 5 look in the future and to realize the attrition of dairy 6 farms that we're going through right now, and Agri-Mark is 7 not immune to that, and we just -- from our perspective, 8 we would share the cost of that throughout the co-op for 9 the benefit of the farmers in Maine. Which is sometimes 10 what you have to do in cooperatives, is you -- you know, 11 you have to look at the whole picture of the cooperative 12 and realize that sometimes -- it's never equal, but you 13 try and make it equitable. And so that's what we were 14 trying to do there, because our producers in Maine are 15 very important to us. And we believe those -- those two 16 fluid plants are very important to the state of Maine. 17 And so I will say that I realized the hauling 18 penalty, if you will, for this decision, but we felt that 19 the state of Maine, people of Maine, and our members in 20 Maine, superseded that additional cost that we 21 occasionally have to bear in spread throughout the co-op 22 in unrecovered hauling costs. 23 Q. So why raise the proposed differential from the 24 model average in Cumberland, Maine, from $4.50 to $4.85? 25 A. I think you have to look at the whole state. And 26 as you move from Portland, Maine, kind of northeast 27 through the state where the farms are located, also those 28 zones were increased, too, so that even bringing the milk 8619 1 from where the farms are to Portland, the incentive, the 2 recovery of hauling, we have taken that away. So we 3 wanted -- it was a true effort to keep the milk in the 4 state. 5 Q. So you would rather -- as you said, you want to 6 incentivize milk to stay in Maine, you would rather 7 Agri-Mark's milk go to a Class I plant? 8 A. The Maine milk, we would rather our Maine milk go 9 to a Class I plant in Maine, that's correct. 10 Q. In your opinion, does the National Milk proposal 11 with -- sorry, let me start over, the question. 12 If at present you are moving milk two to three 13 loads per day to Massachusetts -- 14 A. Correct. 15 Q. -- and the proposal maintains the existing 16 difference between the locations, the differentials at the 17 locations in Cumberland County, Maine, and Franklin, 18 Massachusetts, Norfolk County, Massachusetts, it maintains 19 the difference between the 25 -- 20 A. It maintains the difference, yes. 21 Q. So what -- what impact do you think that the 22 National Milk proposal maintaining that difference will 23 have on -- do you -- do you think that the proposal will 24 be successful in -- for Agri-Mark, in maintaining your 25 milk in Maine -- 26 A. We do. 27 Q. -- or increasing -- keeping your milk in Maine? 28 A. We do. 8620 1 Q. Even though it maintains the current differential? 2 A. We do. 3 Q. All right. 4 MS. BULGER: I think that's all the questions I 5 have for you today. Thank you very much for your time. 6 THE WITNESS: Thank you. 7 MS. BULGER: Thank you, Your Honor. 8 THE COURT: Thank you, Ms. Bulger. 9 Who next will cross-examine this witness? 10 Mr. Lamers. 11 MR. LAMERS: Good morning, Mr. Werme. 12 THE WITNESS: Good morning. 13 CROSS-EXAMINATION 14 BY MR. LAMERS: 15 Q. Mark Lamers, Lamers Dairy. 16 Just a couple questions for you. 17 Are you -- you stated yesterday, if I remember 18 right, that about 75% of your member milk goes to your own 19 plants? 20 A. Correct. 21 Q. Okay. Are those plants at capacity? 22 A. No. 23 Q. So they -- 24 A. Two of the cheese plants are. One cheese plant 25 and the culture plant is not at capacity. And West 26 Springfield is balancing, so it changes from day to day. 27 Q. Okay. So then the other 25% you've stated goes to 28 some Class I plants? 8621 1 A. It goes to some Class I plants. 2 Q. Okay. The majority of that 25%? 3 A. I don't know that off the top of my head. We 4 have -- we service three Class I customers, and the rest 5 of them are IIs and IIIs and a IV. 6 Q. Okay. Do you pay your members over-order 7 premiums? 8 A. We do not. 9 Q. You do not. 10 The milk that goes to the Class I market, do you 11 charge over-order premiums for that milk? 12 A. When we can, something. It depends on the 13 customer. It depends on the location. It depends on how 14 far the milk goes. 15 Q. Are those -- 16 A. The -- 17 Q. -- Class I -- oh, I'm sorry. 18 A. The competitive environment at that location, too. 19 Q. Are those Class I plants dependent of your milk? 20 A. I would say, yes, they are. 21 Q. So wouldn't that enable you to command, for lack 22 of a better word, an over-order premium for that milk? 23 A. There are currently ser- -- we call them service 24 charges. There are currently some service charges in 25 place. 26 Q. Okay. One of the purposes of the AMAA, 27 Agricultural Marketing Agreement Act, is to ensure an 28 adequate supply of fluid milk to the consuming public, 8622 1 correct? 2 A. Correct. 3 Q. When I look back at Federal Order 1 for last 4 month, I just took this off their website, it's pretty 5 even for the most part, about 30% across all classes, the 6 main classes of milk: 30% Class I, about 26% Class II, 7 and 30% Class III. 8 So looking at the volume of milk produced in the 9 Northeast, would you say that there's an adequate supply 10 of milk for the fluid market? 11 A. In the entire Northeast? 12 Q. Correct. 13 A. I would say the Class I plants are supplied. 14 Q. Then why do we need to increase Class I 15 differentials? 16 A. Because of the cost, the increased cost it takes 17 to service a lot of these Class I plants, and the demands 18 that they put on us to -- to -- for example, PI counts, 19 lower somatic cell counts. And I believe PI counts aren't 20 even in the PMO in terms of -- in terms of a regulation. 21 But we're under constant demand to lower PI counts, 22 shuffle milk out of loads. They are reviewing loads on 23 a -- on a pretty much a daily basis. They are regularly 24 looking at our FARM program for animal welfare and 25 wellbeing. All that has a cost. 26 And we do service a couple of Class I plants 27 that -- that don't take milk -- one of them doesn't take 28 milk on a weekend, so -- well, a Friday/Saturday, they 8623 1 start taking again on Sunday but -- so there's additional 2 costs that have happened over the years to service these 3 Class I plants. 4 Q. Wouldn't it be better to handle those costs on an 5 individual basis rather than -- again, lack of a better 6 term -- taxing the entire order? 7 A. Well, we can't pick and choose between which farms 8 that we -- that we manage this to, because a lot of times 9 we're -- you know, these loads are all blended, and it's 10 hard to isolate and traffic milk with particular farms on 11 the loads into particular plants. That's a very 12 complicated thing for us. I mean, we have 550 farms over 13 seven states of a variety of sizes, from 10 cows to 4,000 14 cows. So it's -- it's very difficult to do that. 15 Q. Uh-huh. Okay. 16 MR. LAMERS: Thank you. No further questions. 17 THE WITNESS: Thank you. 18 THE COURT: Are there other questions for 19 Mr. Werme before I invite the Agricultural Marketing 20 Service questions? 21 I see none. I invite Agricultural Marketing 22 Service to question Mr. Werme. 23 CROSS-EXAMINATION 24 BY MS. TAYLOR: 25 Q. Good morning. 26 A. Good morning. 27 Q. Thank you for being here today. 28 A. Thank you for having me. 8624 1 Q. Just a couple questions. 2 Let's start with Maine. You said numerous times 3 it's important that the milk stays in Maine. I wonder if 4 you could elaborate why Agri-Mark finds that important. 5 A. Well, having -- since I returned to the membership 6 department in 2015, I have probably made a dozen visits to 7 the state to -- to speak in front of our members up there, 8 and it -- it -- it's very important to our members up 9 there to service their population. The population in 10 Maine, we feel, wants to see the agricultural community 11 exist and do well. They actually have a state order 12 premium up there. And so realizing that farmers are 13 exiting the business pretty regularly these days, and just 14 trying to look forward, Agri-Mark feels that it's better, 15 it's a benefit to the entire co-op to have that state be 16 in balance with its -- the plants that are currently 17 there. We hope they stay there. 18 Q. And I would guess since the state is a peninsula 19 up there that -- since the state is a peninsula basically 20 up there, right? 21 A. Yes. 22 Q. So can you speak to the difficulty if the milk 23 leaves the state, trying to find other milk to come in and 24 service consumers? 25 A. That would be extremely difficult. 26 Q. Okay. The two plants in Maine -- so Maine's not 27 in the Federal Order area? 28 A. Correct. 8625 1 Q. So are the two plants in Maine pooled? 2 A. I don't know the answer to that. 3 Q. Do you know if the milk receipts of those plants 4 are pooled? 5 A. Don't know the answer to that either. 6 Q. And how about the loads that Agri-Mark ships into 7 Federal Order 1, do you know, is that milk pooled? 8 A. Yes, it is. 9 Q. Okay. On Vermont, you mentioned you reduced the 10 differentials in Northeast Vermont to encourage milk to 11 move to Eastern -- into Massachusetts, basically. 12 A. It's -- I don't know if I would call encourage. 13 It is what it is. We move a lot of milk south. 14 Q. You state in this region there are no significant 15 delivery points. 16 So I was wondering if you could just explain what 17 you define that as? 18 A. Well, so there were a couple of larger plants up 19 in very Northern Vermont a couple of decades ago, and 20 those are no longer in existence. We have the Middlebury 21 plant in more Central Vermont. Cabot is up there. And I 22 think I mentioned yesterday that they are working probably 23 on an average of six days a week. 24 And so when we can roll the milk through those 25 areas, we do. But we currently, right now, have a lot of 26 our milk going from the very north of Vermont to West 27 Springfield. And if it can roll through Middlebury Cabot, 28 depending on how long it takes to assemble the load, if 8626 1 it's -- if they are picking up six or seven farms, you 2 know, we'll roll it through and send -- and assign a 3 Middlebury load to go south or a Cabot load to go south. 4 But if they just pick up one farm or two farms, that -- 5 that hauler's got to drive to Springfield because there's 6 nowhere else to go. We try and keep the Middlebury milk 7 in the Middlebury area just because it's the most 8 efficient thing to do. 9 Q. So the -- making a greater slope in that area 10 helps pay for some of the hauling -- 11 A. Helps offset some of the hauling cost -- 12 Q. Okay. 13 A. -- that's correct. 14 Q. And then -- 15 THE COURT: Be sure to wait until her question is 16 finished. Thank you. 17 BY MS. TAYLOR: 18 Q. And then it seems it was basically the same 19 situation in Northern New York? 20 A. That's correct. 21 MS. TAYLOR: That's it from AMS. Thank you. 22 THE COURT: Mr. English. 23 CROSS-EXAMINATION 24 BY MR. ENGLISH: 25 Q. Good morning, Mr. Werme. 26 My name is Chip English for the Milk Innovation 27 Group. 28 A. Good morning, Mr. English. 8627 1 Q. I want to follow up directly on the questions 2 asked by Ms. Taylor for Agricultural Marketing Service. 3 Do you still have Exhibit 369 in front of you? 4 A. Yes. 5 Q. And understanding the comment yesterday from 6 Ms. Hancock, nonetheless, if you look at that document on 7 the fourth line for Row 1146, and do you see that under 8 the next column, pool distributing and supply plants, both 9 DFA Oakhurst and Portland, and HP Hood in Portland, are 10 listed as supply plants -- Your Honor, I'm sorry -- pool 11 distributing plants, under that fourth line, fourth row, 12 1146? 13 A. I see the fourth row. 14 Q. Yes. 15 A. Yep. I see that fourth row. 16 Q. So assuming that MIG has correctly taken from 17 Order 1's data that those plants are pool distributing 18 plants, that would indicate that they are both fully 19 regulated on Order 1, correct? 20 A. Correct. 21 Q. Okay. And in order to be fully regulated under 22 Order 1, they would have to have at least 25% of the route 23 disposition in the marketing area, correct? 24 A. I don't have that kind of knowledge -- 25 Q. Okay. 26 A. -- about milk marketing, I'm sorry. 27 Q. Okay. They would have to meet whatever the 28 definition is by USDA, correct? 8628 1 A. Again -- 2 (Court Reporter clarification.) 3 BY MR. ENGLISH: 4 Q. They would have to meet whatever the Order 1 5 requirement is in order to be a pool distributing plant 6 under Section 7 of that order, correct? 7 A. Again, I don't have that depth of knowledge. I'll 8 have to take your word for that. 9 Q. Do you know at least the -- that the marketing 10 area starts when you cross the Piscataquis River into New 11 Hampshire, from -- 12 A. Yes. 13 Q. Yes. Okay. 14 So assuming that there is a requirement that milk 15 be shipped, the minimum amount of milk be shipped into 16 Order 1, the milk would have to be shipped, you know, into 17 Portsmouth or down in Boston, correct? 18 A. Correct. 19 Q. Thank you. 20 MR. ENGLISH: That's all I have. 21 THE COURT: I love to see Mr. English in his 22 comfort zone. 23 Ms. Hancock. 24 MS. HANCOCK: Thank you. 25 REDIRECT EXAMINATION 26 BY MS. HANCOCK: 27 Q. Good morning, Mr. Werme. 28 One -- one clarification from yesterday. 8629 1 When you were talking with MIG's counsel 2 yesterday, she had asked you a question about whether the 3 model results were fully accounting for some of the 4 factors that you were discussing, and I thought I heard 5 you answer in the affirmative, and I just want to make 6 sure that your testimony is clear on the record. 7 Were you intending to say yesterday that the model 8 results fully accounted for the market conditions that 9 we're addressing in the differential proposal from 10 National Milk? 11 A. Yes. 12 Q. Okay. Let me -- were you saying that the model by 13 itself fully accounted for all of those market conditions 14 or were you saying that there were additional work that 15 had to be done in order to put those in context? 16 A. Maybe that was the confusion. There was 17 additional work that we felt needed to be done from the 18 model that the computers, if you will, gave us. 19 Q. Okay. And can you tell me, and you have talked a 20 little bit about some of the motivations for making sure 21 that milk stays in Maine, were there other factors or work 22 that you did on the team to make sure that the model 23 results were properly adjusted to reflect actual market 24 conditions? 25 A. We did. 26 Q. What kind of things did you do? 27 A. We looked at each of the areas, we looked at how 28 we, in reality, move milk around New England and New York, 8630 1 and discussed further adjustments to the model that, =the 2 three of which that I testified to. 3 Q. And in your experience in working in the industry, 4 were those modifications to the model results necessary in 5 order to properly ensure that the -- that the 6 differentials were set properly? 7 A. I believe they are. 8 Q. Okay. 9 MS. HANCOCK: Your Honor, at this time we would 10 move for the admission of Exhibit 370. 11 THE COURT: Is there any objection to the 12 admission into evidence of Exhibit 370, which is also 13 NMPF-43? 14 There is none. Exhibit 370 is admitted into 15 evidence. 16 (Thereafter, Exhibit Number 370 was received 17 into evidence.) 18 THE COURT: Mr. Werme, before you step down, I 19 would like the Agricultural Marketing Service to come to 20 you and collect their originals and my 301 to give it back 21 to me on their way back. So they are looking for 53, 58, 22 366, 368, and 369. 23 MS. HANCOCK: Thank you, Mr. Werme. 24 THE COURT: Thank you. You may step down. 25 MS. HANCOCK: Your Honor, our next witness is 26 Johnny Hiramoto. 27 THE COURT: Welcome. 28 THE WITNESS: Thank you. Good morning. 8631 1 THE COURT: Good morning. 2 Would you please state and spell your name. 3 THE WITNESS: Johnny Hiramoto, J-O-H-N-N-Y, 4 Hiramoto, H-I-R-A-M-O-T-O. 5 THE COURT: Have you previously testified in this 6 proceeding? 7 THE WITNESS: I have not. This is my first 8 testimony ever. 9 THE COURT: May you enjoy. 10 THE WITNESS: I hope so. 11 MS. HANCOCK: That sounded a little like the 12 Hunger Games. 13 THE COURT: If you raise your right hand, I'll 14 swear you in. 15 JOHNNY HIRAMOTO, 16 Being first duly sworn, was examined and 17 testified as follows: 18 MS. HANCOCK: Your Honor, if we could have the 19 next exhibit number for his testimony. 20 THE COURT: The next one is 373. 21 MS. HANCOCK: And we'll mark that on 22 Exhibit NMPF-56. 23 THE COURT: Yes. 373, Also NMPF-56. 24 (Thereafter, Exhibit Number 373 was marked 25 for identification.) 26 DIRECT EXAMINATION 27 BY MS. HANCOCK: 28 Q. Good morning, Mr. Hiramoto. 8632 1 Would you mind providing your business address for 2 the record. 3 A. Sure. 1405 North 98th Street, Kansas City, Kansas 4 66111. 5 Q. And did you prepare Exhibit 373 in support of your 6 testimony today? 7 A. I did. 8 Q. And if you wouldn't mind providing that statement 9 for us, just being mindful of your reading speed for our 10 court reporter. 11 A. I will. I'll do my best. 12 Hello. My name is Johnny Hiramoto. I'm here on 13 behalf of Dairy Farmers of America, Inc.'s (DFA) Western 14 Area. The Western Area is one of seven fluid area 15 divisions within DFA. 16 THE COURT: A little more slowly. 17 THE WITNESS: Okay. Sorry. 18 Currently, Western Area has 203 farmer-owners in 19 California and Northern Nevada producing over 600 million 20 pounds of milk per month. Currently, the majority of the 21 milk is pooled in Federal Order 51. 100% of Western's 22 member milk is transported by either a third-party hauler 23 or by the farmer-owners themselves. Milk is delivered 24 throughout the state of California and Northern Nevada. 25 DFA also operates six manufacturing facilities in 26 California and one in Northern Nevada. These facilities 27 receive raw milk, cream, and condensed skim milk, and make 28 a variety of products including, but not limited to, 8633 1 cheese, whey, HTST and ESL fluid milk and fluid products, 2 nonfat dry milk, whole milk powder, and other specialty 3 dairy products. All but one -- 4 THE COURT: Let me just ask. Right after you 5 mentioned HTST and ESL fluid milk, rather than reading 6 "and milk products" you read, you said, "and fluid 7 products." 8 THE WITNESS: I apologize. 9 THE COURT: Does it make a difference? 10 THE WITNESS: Yeah, milk products. 11 THE COURT: Milk products. All right. Thank you. 12 THE WITNESS: Okay. 13 -- nonfat dry milk, whole milk powder, and other 14 specialty dairy products. All but one of these DFA-owned 15 facilities received raw milk from our farmer-owners. 16 For almost 25 years I have had various roles in 17 DFA, mainly in California. Currently I am the director of 18 accounting and marketing information for Western Area. My 19 duties include monthly closings, financial reporting, 20 regulatory reporting, budgets, market forecasting, 21 compilation of historical data and statistics, and I act 22 as a customer, vendor, and regulatory liaison. The best 23 thing about my work is getting to know the farmer-owners 24 and their families. 25 Understanding that I -- understanding that what I 26 can positively affect these farm families -- 27 THE COURT: Start again, please. 28 THE WITNESS: Oh, sure. 8634 1 Understanding that what I do can positively affect 2 these farm families is truly rewarding. 3 I am here today in support of Proposal 19 4 submitted by the National Milk Producers Federation (NMPF) 5 to modernize the national Federal Order pricing surface in 6 Class I differentials. My testimony will focus on the 7 price surface proposal for Northern Nevada and California. 8 Below are maps that show current, proposed, and the 9 difference between proposed and current, location 10 differentials, both nationally and the regions I will be 11 focusing on. 12 Map 1, which is Current (National); Map 2, 13 Current, which is California and Nevada; Map 3 is NMPF 14 Proposed (National); Map 4, NMPF Proposed (California and 15 Nevada); Map 5, NMPF Proposed versus California -- I'm 16 sorry -- Proposed versus Current (National); and then 17 lastly, Map 6, NMPF Proposed versus Current (California 18 and Nevada). 19 In addition to supporting the testimony of 20 Mr. Vandenheuvel of California Dairies, Inc., regarding 21 California, I would first like to discuss Northern Nevada. 22 Nevada has Class I operations in and around Las Vegas, 23 Clark County, and Reno, Washoe County. DFA operates a 24 medium-sized manufacturing plant in Fallon, Churchill 25 County. 26 THE COURT: Slow down just a bit, if you will. 27 THE WITNESS: Yes, ma'am. 28 Washoe County and Churchill County are in Northern 8635 1 Nevada. Currently, Washoe and Churchill Counties have the 2 same differential as milk-producing counties directly to 3 the east in California. These counties in California have 4 a mix of Class I plants and manufacturing plants. It is 5 necessary to continue a similar price surface between 6 these plants in this bistate region to maintain 7 competitive equity for them relative to blend prices under 8 the California order. See Map 2. 9 Historically, Washoe and Churchill County, and 10 other counties in Northern Nevada, have followed the 11 pricing structure of Northern California. See Map 2. 12 These counties have strong and historical association with 13 Northern California. 14 Prior to November 2018, while California still 15 operated under a state order, Nevada had adopted the same 16 basic pricing structure in place in Northern California 17 for use in Northern Nevada. When California began 18 operating under the Federal Order system, Nevada, once 19 again, utilized California's pricing structure, adopting 20 the Federal Order 170 pricing differential -- 21 THE COURT: Now, just so that it's clear what you 22 mean by "170," would you read that number again? 23 THE WITNESS: Sorry, $1.70. 24 THE COURT: No, it's an order number -- oh -- 25 THE WITNESS: Oh. 26 THE COURT: -- oh, wait a minute, maybe -- maybe 27 you are talking about the $1. 28 THE WITNESS: Yeah. 8636 1 THE COURT: Okay. So the Federal Order that you 2 are talking about is the Federal Order that includes 3 California and Nevada? 4 THE WITNESS: Yeah, Federal Order -- yeah, the 5 Federal Order price differential. 6 THE COURT: Thank you. 7 THE WITNESS: Okay. 8 -- adopting the Federal Order $1.70 pricing 9 differential the same as Northern California. 10 Additionally, a plant in Northern Nevada has 11 consistent route distribution in Northern California. We 12 support the relationship that Northern Nevada and Northern 13 California have historically held, which continues today. 14 We believe this will continue to keep all handlers 15 competitive in both regions. The proposed value for Clark 16 County, Nevada, is $2.90 value. Other NMPF member 17 cooperative witnesses will be providing testimony about 18 this area, and DFA agrees with the $2.90 value and 19 recommends its adoption. 20 NMPF supports consolidation of California's $1.60 21 and $1.70 zones to the new $2.50 zone. Milk and route 22 distribution in both zones moves interchangeably between 23 the zones. We also agree with Mr. Vandenheuvel's 24 testimony during the 2000 Federal Order Reform, California 25 was under -- was operating under a state order and we 26 almost assuredly did not scrutinize, as we would today, 27 the differentials assigned, as they played little to no 28 role for us. 8637 1 Almost 19 years later, with California adopting a 2 Federal Order in November 2018, the differentials are not 3 suitable. 4 I did change that word, Your Honor. 5 THE COURT: From "were" to "are"? 6 THE WITNESS: Correct. 7 THE COURT: So we'll do that also on the record 8 copy. We're on page 6 of Exhibit 373, middle of the page. 9 So again, read -- that line begins with the number 10 "2018," just begin there, if you would. 11 THE WITNESS: Okay. 12 -- 2018, the differentials are not suitable. They 13 do not reflect accurately the cost of moving milk and 14 provided little incentive by themselves to route milk to 15 Class I plants, particularly in the large Northern and 16 Southern California urban areas. We scrambled to adjust, 17 adapt, and ultimately arrive at a price mechanism to 18 facilitate necessary milk movements. 19 Proposal 19 to modernize the national Federal 20 Order pricing surface and Class I differentials gives us 21 an opportunity to adjust to current times. We also feel 22 that the differentials assigned by the study fell short 23 for the Western region, especially in California. We 24 support Mr. Vandenheuvel's view of the relationship 25 between California's Central Valley and the major Upper 26 Midwest milk sheds of Wisconsin, Minnesota, and South 27 Dakota. 28 Regulation continues to challenge California dairy 8638 1 producers, such as air quality, water rights, wastewater 2 disposal, and zoning, to name a few. Costs of production 3 continues -- I added the word "to." 4 THE COURT: Ah, so we're on page 7, second line, 5 we're just putting the word "to," T-O, after "continues." 6 THE WITNESS: You want me to re-read that 7 sentence? 8 THE COURT: Yes, please. 9 THE WITNESS: Costs of production continues to 10 increase, and from what I understand, it's magnified in 11 the West. Labor, feed, insurance, and utilities costs, 12 among others, are higher in California. DFA's Western 13 Area average hauling costs have nearly doubled compared to 14 2001. I have included information from Frazer, 15 specifically for California, shown in Appendix 1 below, 16 that was previously provided into the record. 17 Even being a top milk -- I'm sorry -- even being a 18 top milk producing state, moving milk is not as simple as 19 it would seem. California geographically is a very large, 20 elongated state, containing significant mountain ranges, 21 traffic at times is horrendous, particularly in the very 22 large urban areas, but increasingly in the growing urban 23 areas of the Central Valley as well. This adds 24 significant travel time, wear and tear on equipment, and 25 places additional strain on the driver pool. 26 There are few milk producers in close proximity to 27 the large Southern and Northern California urban areas, 28 which necessitates increasing longer hauls. One of our 8639 1 contract haulers, a large milk hauling business in 2 California who has asked to remain anonymous, has provided 3 the following data, Chart 1, of the changes in its cost 4 structure. Traffic alone has increased hauler resistance, 5 and hauler rates have increased steadily for milk 6 deliveries to these plants. Also, high cost of labor, 7 insurance, and regulation among with restrictive weights 8 limits, all combine to make hauling milk demanding and 9 expensive. 10 And there's Chart 1. 11 Our farmer-owners are also dealing with increases 12 in labor costs, utilities, regulatory costs, maintenance 13 costs, feed costs, and a variety of other issues to name a 14 few. I'm sure that -- sorry -- I am sure that is probably 15 true -- and I changed the word "to" to "for." 16 THE COURT: All right. 17 THE WITNESS: F-O-R. 18 THE COURT: So we're on page 8, it's the third 19 line under the chart, and the word "to" is now "for." 20 And would you read the sentence again. 21 THE WITNESS: Okay. 22 I am sure that is probably true for farmer-owners 23 across the country, but it seems to be -- and I struck out 24 the word "a" -- apologize. 25 THE COURT: No worries. That's easy for us. 26 THE WITNESS: -- magnified in California 27 because -- and I struck out the word "of." 28 THE COURT: I see. 8640 1 THE WITNESS: -- everything costs more in 2 California. Just because California dairy producers are 3 considered to be very "efficient" does not mean that they 4 should be penalized. Federal Order 51 was modeled after 5 the Upper Midwest, but the -- but the disparity of the 6 differentials in California compared to the Upper Midwest 7 is not equitable from the recent study, let alone to the 8 rest of the country. NMPF's proposal brings back to the 9 similar relationship between California, Nevada, to the 10 Upper Midwest. 11 In conclusion, we support NMPF's proposal of the 12 Class I differentials and the testimony of 13 Mr. Vandenheuvel. Thank you for the opportunity and the 14 time to allow me to speak. 15 And the last two pages is Appendix 1 of the 16 Frazer. 17 BY MS. HANCOCK: 18 Q. Thank you, Mr. Hiramoto. 19 If we could turn to page 5 of your testimony. You 20 were talking about the differentials and the comparison 21 between Nevada and California. And in that first 22 paragraph on page 5, about halfway through, after you have 23 listed the counties there, you said that currently Washoe 24 and Churchill Counties have the same differentials as 25 milk-producing counties directly to the east in 26 California. 27 Should that be west? 28 A. West. Yes. Thank you. 8641 1 THE COURT: All right. We'll make that change 2 now. That's page 5, it's six lines down. We're going to 3 change "east" to "west." 4 And would you just read that sentence for us now. 5 THE WITNESS: Currently, Washoe and Churchill 6 Counties have the same differential as milk-producing 7 counties directly to the west in California. 8 BY MS. HANCOCK: 9 Q. And then if we turn to page 6, the last paragraph 10 on that page, you were talking about National Milk's 11 Proposal 19, and you state that, "We also feel that the 12 differentials assigned by the study fell short for the 13 Western region." 14 And I'm wondering if you could tell us what study 15 you are referring to there. 16 A. Nicholson and -- can't remember the other 17 gentleman's name, I'm sorry. 18 Q. Stephenson? 19 A. Stephenson. Yeah, Stephenson. 20 Q. Are you talking about the model results? 21 A. Correct. Yeah. 22 Q. Okay. 23 A. Both versions. 24 Q. I'm sorry? 25 A. Both versions. 26 Q. Meaning the May and the October? 27 A. Correct. 28 Q. Okay. 8642 1 MS. HANCOCK: Your Honor, at this time we would 2 make Mr. Hiramoto available for cross-examination. 3 THE COURT: Thank you. 4 MR. ENGLISH: Good morning, Your Honor. 5 CROSS-EXAMINATION 6 BY MR. ENGLISH: 7 Q. Good morning, Mr. Hiramoto. 8 A. Good morning. 9 Q. My name is Chip English for the Milk Innovation 10 Group. 11 So what is the Class I utilization in California? 12 A. What do you mean? 13 Q. What -- what percent of milk produced in 14 California is processed as Class I? 15 A. That depends. 16 Q. You mean it depends on whether all milk is pooled 17 or not? 18 A. Depends on how much milk is pooled at any 19 particular month you are referring to. 20 Q. So let's take a month when all the milk is pooled, 21 or essentially all the milk is pooled. 22 What would the Class I utilization be in 23 California? 24 A. Well, prior to Federal Order, California was 25 inclusive pooling, so I don't remember exactly what the 26 number was back in October of 2018. But I -- I don't want 27 to guess. 28 Q. Well, don't guess. 8643 1 But since you mentioned the term, and I don't 2 think it's been used yet in this Federal Order hearing, 3 what do you mean by the term "inclusive pooling"? 4 THE COURT: Uh, what -- 5 MR. ENGLISH: Inclusive pooling. 6 THE COURT: Inclusive pooling. Thank you. 7 THE WITNESS: The California state order requires 8 that all milk be pooled in the state. That's what I 9 referred to as "inclusive pooling." 10 BY MR. ENGLISH: 11 Q. Is it fair to say that at that time, Class I 12 utilization was under 20%? 13 A. I think that would be fair to say. 14 Q. Okay. Would it be fair to say that milk 15 production has continued to increase in California since 16 becoming part of the Federal Order? 17 THE COURT: Did you say "increase"? 18 MR. ENGLISH: Increased. Total milk production in 19 California has continued to increase. 20 THE WITNESS: I struggle to answer that question 21 because I would need years to compare. Currently it's 22 decreased. 23 BY MR. ENGLISH: 24 Q. Is there an adequate supply of milk for fluid use 25 in California? 26 A. I would -- I would ask you to give me what 27 "adequate use" means and "adequate supply" means. 28 Q. Are you familiar with that term as used by USDA in 8644 1 Federal Order decisions? 2 A. The reference does not come to mind. 3 Q. Do you know whether USDA has supplied, in the 4 past, or applied in the past, any reserve supply concept 5 of 25 to 30% of the milk being available for Class I? 6 A. I am not aware of that statistic, no. I 7 apologize. 8 Q. If that statistic were applied to California, 9 given at least in 2018 a less than 20% Class I 10 utilization, you would agree that there would certainly be 11 more than enough reserve supply in California, correct? 12 A. Well, being that DFA is not the largest 13 cooperative in California, without having all the numbers, 14 I cannot answer that question with -- with authority. 15 Q. All right. Thank you. 16 Nonetheless, you have 25 years of experience with 17 DFA, and mostly in California, correct? 18 A. That's correct. 19 Q. So you have testified that DFA has six 20 manufacturing facilities in California. I don't need to 21 know all the specifics, maybe just, like, by class. 22 Could you name those six facilities and which 23 class of milk they essentially produce? 24 A. I will do my best. We have two Class I plants -- 25 I'm sorry, three Class I plants in Southern California; 26 one Class II plant in Southern California; we have a 27 cheese plant in the Central Valley; and we have a -- I 28 don't know what you'd call it, it's a joint venture, fluid 8645 1 milk product in Ventura County. 2 Q. When you say three Class I plants in Southern 3 California, how do you define Southern California? 4 A. They are -- one's in Orange County, and two is in 5 L.A. County. 6 Q. And the facility in Churchill County, Nevada, is 7 that a -- what kind of plant is that? 8 A. Sorry, I got my counties kind of screwed up here. 9 Okay. That's under Fallon. That's a Class IV facility. 10 Q. And do you recall when that was built? 11 A. I want to say around 2013, 2014. 12 Q. It was built prior to there being a Federal Order 13 in California, correct? 14 A. That's correct. 15 Q. The milk that is supplied to your Class I 16 facilities, is that all milk from Dairy Farmers of 17 America? 18 A. No. 19 Q. And what about the cheese plant in the Central 20 Valley, is that 100% supplied by Dairy Farmers of America? 21 A. At most times, yes. 22 Q. When you say "at most times, yes," does that mean 23 that at some times of the year it serves as a balancing 24 facility and accepts milk from other areas, from other 25 suppliers? 26 A. I wouldn't consider that cheese plant a balancing 27 plant. There's just times where, based on milk movement, 28 that it gets supplied by a third party. 8646 1 Q. But you, in essence, consider that to be a full 2 supply plant, basically it's a dedicated supply? 3 A. In my mind, yes. 4 Q. Thank you. 5 I do not want confidential information, but an 6 approximate percentage for the Class I plants, how much 7 milk is supplied by DFA? 8 A. Well, if you don't want confidential 9 information -- 10 Q. And that's fine. If you don't even want to answer 11 generally, that's fine. 12 A. I don't. 13 Q. Fine. 14 A. Yeah. 15 Q. Sir. I think we've actually known each other for 16 a period of years -- 17 A. Yes. 18 Q. -- and I also have a reputation at these hearings, 19 I don't want my clients giving it, and I don't want you to 20 give it, so that's fine. 21 A. I appreciate that. 22 Q. Does DFA operate any plants in Arizona? 23 A. Not that I'm aware of. 24 Q. Does DFA have dairy farmer members in Arizona? 25 A. The Western Area does not, so not that I am aware 26 of. 27 Q. Okay. I think there's another witness for DFA who 28 is testifying who might cover Arizona, so -- but as far as 8647 1 you know for your area, no? 2 A. Yeah. For our -- for the Western Area of which I 3 represent, we do not have an Arizona member. 4 Q. And since you represent the Western Area, if DFA 5 had an Arizona member that shipped into California, you 6 would know about that, correct? 7 A. If it falls under our region, yes, I would. 8 Q. California is your region, right? 9 A. California -- yes, California is our region. 10 Q. So was there a red pencil -- I think there was a 11 red pencil crew for the West, correct? 12 A. I was not part of any red pencil crew. 13 Q. That's going to cover a lot of questions. 14 Did you, nonetheless, consult with 15 Mr. Vandenheuvel on the development of the California 16 position for National Milk? 17 A. Sorry, I didn't catch the beginning. 18 Q. Okay. I apologize. 19 Since you -- even though you were not on the red 20 pencil crew, did you nonetheless consult with 21 Mr. Vandenheuvel on the development of Class I 22 differentials in California? 23 A. Yes, we have had discussions. 24 Q. And what were those discussions? 25 A. Regarding the differentials that was established 26 by the -- what I will say the task force, and it was then 27 dispersed to certain areas. And Mr. Vandenheuvel was in 28 the West, represented the West. 8648 1 Q. And do you recall any specific discussions about 2 that? 3 A. I guess I would need to know what specifics you 4 are asking for. 5 Q. About why, for instance, National Milk was seeking 6 to increase Class I differentials above that of the model 7 results. 8 A. Yeah, I was in some of those discussions. 9 MR. ENGLISH: Your Honor, I would like to have 10 another exhibit marked. 11 THE COURT: Certainly. Shall we go off record for 12 a moment? 13 MR. ENGLISH: Yes. 14 THE COURT: Let's go off record at 9:07. 15 (An off-the-record discussion took place.) 16 THE COURT: Let's go back on record. 17 We're back on record at 9:09. 18 Mr. English, I have before me MIG Exhibit 19 Number 57. I have marked it as Exhibit 374. 20 (Thereafter, Exhibit Number 374 was marked 21 for identification.) 22 MR. ENGLISH: Thank you, Your Honor. 23 So what has been marked as Exhibit 374 is, again, 24 a MIG-prepared document for selected California and Nevada 25 locations. I note on the second page, the legend, to 26 provide a basis for where the information comes from. 27 And I will note ahead of time, again, that, yes, 28 MIG prepared this document. The sources are there. I'm 8649 1 perfectly content to accept ahead of time what I think 2 will be National Milk Producer Federation's attorney's 3 same concern from yesterday with respect to the Order 1 4 information. You know, we'll deal with it at the time of 5 admission. But I recognize that. But, again, this is a 6 document that has been prepared using information that is 7 already in the record, and the only differences, of 8 course, are calculations in the last columns. 9 We have, as you will note from yesterday, and now 10 going forward, we're trying to conform making everything 11 the same. In other words, we're not trying to omit 12 different columns or add new columns going forward, so 13 that there is sort of a consistency to the kind of 14 information that is presented. 15 THE COURT: Thank you. 16 BY MR. ENGLISH: 17 Q. So I guess part of my question, Mr. Hiramoto, is 18 going to be: At what point did you have the 19 conversations? 20 And I ask that because there was the model numbers 21 that came out, which are referenced in the columns May '21 22 estimates, October '21 estimates, and the University of 23 Wisconsin (UOW) Version 3 average that's sort of in the 24 middle of the page. 25 Then there were -- National Milk provided 26 information over a period of time to USDA, and they did so 27 in March of '23, which is the proposed Class I March '23. 28 Again, what was called -- labeled on what's Exhibit 300, 8650 1 new proposal May 2023, and then ultimately, a new 2 submission, which is Exhibit 301, Proposal Number 19, in 3 June 2023. 4 And there are some differences, especially from -- 5 I think the only differences really are between the model 6 and National Milk's numbers, but in terms of March to May. 7 And so one question I have is, at what point do 8 you recall getting involved? 9 A. With respect to Mr. Vandenheuvel, is that what you 10 are saying? 11 Q. With respect to Mr. Vandenheuvel, or for that 12 matter, in looking at any of these proposed Class I 13 differentials. 14 A. Time seems to run together these days. I want to 15 say late last quarter of 2022. 16 Q. Thank you. 17 And was it then that you concluded, or you 18 concluded in consultation with others, that the results 19 presented by the model were inadequate? 20 A. I don't know if the conclusions happened in 2022, 21 but we definitely felt that it fell short. 22 Q. In what ways did it fall short? 23 A. We feel that the study didn't feel like it 24 adequately captured costs of moving milk -- or just costs 25 of producing milk in the State of California. 26 Q. In what way in calculating Class I differentials 27 prior to this proceeding has the cost of processing milk 28 in an area played a role in the level of the Class I 8651 1 differential for that location? 2 A. Can you ask that a different way? 3 Q. Do you know how USDA has, in the past, calculated 4 the level of Class I differentials for a particular 5 location? 6 THE COURT: A particular -- 7 MR. ENGLISH: Location. 8 THE COURT: Location. 9 THE WITNESS: For myself, again, being new to 10 Federal Order, no, I do not know directly. I have some 11 understanding indirectly. 12 And, again, as I stated in our testimony, when we 13 went to Federal Order in November 2018, we had talked to, 14 I believe, USDA and other folks, that the differentials 15 fell short, but there was no way to get that changed 16 without a national hearing. 17 BY MR. ENGLISH: 18 Q. Do you understand that at least presently, the 19 Class I differentials are composed of a base differential 20 plus a value based upon location? 21 A. I have some understanding of that, yes. 22 Q. Do you understand that that difference in value 23 based upon location is based on the cost of moving milk 24 from where it is produced to where it is processed? 25 A. To my understanding that is a, that is a factor. 26 A piece of it. 27 Q. Where in the factor of setting, whether it's the 28 base or the differing value for location, does cost of 8652 1 production figure in? 2 A. I don't know if I can answer that question. 3 Q. Okay. If you were involved in late 2022, do you 4 know what happened between March of 2023 and May of 2023 5 such that if you look at the very last set of columns, 6 difference May '23 minus March 2023, there were changes 7 proposed in what National Milk was proposing for the 8 selected counties in California, Nevada? 9 A. I think I understand your question, but can you 10 say it a different way? 11 Q. Sure. A column in the middle of the page has 12 "Proposed Class I March '23," and the column immediately 13 to the right is "New Proposal May '23." 14 We have -- and that comes from Exhibit 300, 15 Columns O and S. 16 MIG has simply done a calculation subtracting from 17 the May number, the March number, resulting in a series of 18 numbers, none of which are zero, in that next to last 19 column labeled "Difference May '23 to March '23." 20 And I'm asking whether you have knowledge as to 21 what happened there. 22 A. What I can speak to is that it was a -- we never 23 had a final number, from my understanding. I don't know 24 about any submission of the old and new that you are 25 referring to. I just know we were working on trying to 26 get to a final number, and it was a national thing. It 27 was -- you know, it started nationally, with -- again, 28 with the task force, and then to create some -- I don't 8653 1 want to call it baseline, but to create a starting point. 2 And each area looked at their own, and we looked at the 3 West. 4 Q. Were you ever involved in conversations going 5 across groups, like, say the West and the East? 6 A. Definitely not the East. We did have a 7 conversation, and I believe you will have testimony 8 from -- I believe it's Monty for Oregon, Washington, but 9 we did have conversation, because that was part of the 10 Western group. We did have conversation that touched 11 California. 12 Q. How about conversations such with the Upper 13 Midwest? 14 A. I did not speak to anybody personally about the 15 Upper Midwest. I know I reference that in my testimony 16 because of current differentials to what the study came up 17 with. 18 Q. And compared to the Upper Midwest and what you 19 did, are you aware that, at least for Minnesota, or at 20 least parts of Minnesota, south and west of there, that 21 National Milk is proposing increases over the model 22 results? 23 A. Oh, we -- yes. Our -- I'm sorry, not "we" -- 24 National Milk's proposal is above the model for 25 California. Is that what you are asking? 26 Q. Well, actually I was going a different place. I 27 know that. 28 A. Okay. 8654 1 Q. But I was asking: Are you aware that National 2 Milk was also proposing increasing, starting just a little 3 west of the Wisconsin border with Minnesota, Minnesota, 4 then through the Dakotas, and southwest from there, that 5 National Milk is also proposing increases to the model 6 there? 7 A. I'll be honest, I didn't look at the Upper 8 Midwest. I'm very protective of California, so I -- I 9 stuck to California. 10 Q. But part of your testimony is that you were, you 11 know, believing that the model fell short in terms of 12 equity with the Upper Midwest, correct? 13 A. That's correct. 14 Q. So if National Milk raises the Upper Midwest and 15 then you say there's a concern for equity in the Upper 16 Midwest, hasn't National Milk essentially bootstrapped 17 their way into an argument for needing to increase prices 18 in the West? 19 A. So our focus was price alignment and -- and 20 basically keeping the relationship. We wanted to make 21 sure that the relationship in California and Northern 22 Nevada stayed roughly the same as to what it was going on 23 somewhat nationally. 24 And when we went to Federal Order, you know, I had 25 a lot of questions on going to Federal Order, and I kept 26 getting told, even by USDA, that it's really modeled after 27 the Upper Midwest. So we focused on the fact that if the 28 Upper Midwest was going to be X, then the Western Area 8655 1 needed to be somewhat similar to X, if that makes any 2 sense. 3 Q. When USDA said it was modeled off of the Upper 4 Midwest, were -- were they meaning in terms of results or 5 order provisions as drafted? 6 A. From my understanding, I would say just about all 7 of it. There was no order that was -- that would come as 8 close to how California marketed milk than the Upper 9 Midwest. 10 Q. And so that would make sense that order 11 provisions, for instance, something other than inclusive 12 pooling, would look like the Upper Midwest, correct? 13 A. Yes. 14 Q. But by definition, if there is a difference in the 15 Class I utilization between the Upper Midwest and 16 California, that Class I utilization by itself, whether or 17 not the Class I differentials were the same, would result 18 in a different pay price to producers, correct? 19 A. I'm not sure what you mean. 20 Q. Well, you have talked about the need to be 21 equitable in terms of pricing between the Upper Midwest 22 and California, correct? 23 A. Yes. 24 Q. Okay. How can there be -- well, how do you define 25 equity? 26 A. Well, how I would define it would be somewhat in 27 the same relationship. 28 Q. Same relationship meaning what? 8656 1 A. Meaning the current differential versus the 2 proposed. 3 Q. Why is that relevant to USDA in rulemaking? 4 A. With California being a state order for so long, I 5 feel that California kind of got overlooked in a lot of 6 different things because it didn't really relate to the 7 Federal Order. As I stated, when we went to Federal 8 Order, the differential was a pain point, and now we have 9 an opportunity to fix it. 10 Q. Have you done any study of the impacts on milk 11 production in California, Nevada, if National Milk 12 Proposal 19 is adopted? 13 A. No, I have not. 14 Q. You mentioned price alignment as being important. 15 If hauling costs have increased and milk also 16 moves longer distances, doesn't price alignment 17 necessarily negate recovery of hauling costs for milk that 18 is moving longer distances? 19 A. Well, what do you mean in your -- in your use of 20 price alignment? 21 Q. Well, what I think about price alignment doesn't 22 matter. 23 So let's ask: What do you mean by price 24 alignment? 25 A. We're -- we're basically trying to make sure that 26 the differentials for our Western Area doesn't fall so far 27 off that it's not capturing what we need. And, again, in 28 relationship to the Upper Midwest, it -- it didn't come 8657 1 close, so we were -- we were making sure that the 2 relationship stays, just as we did with California and 3 Nevada. 4 Q. Okay. So I'm glad you clarified. So maybe 5 there's two different price alignments. 6 At the moment, at least, you are referring to 7 price alignment between Class I differentials in 8 California versus the Upper Midwest, correct? 9 A. Correct. 10 Q. Is there another price alignment consideration 11 that you used, which was once you get to your market and 12 have done your price alignment within the Upper Midwest, I 13 thought you testified that you also wanted to retain price 14 alignment between locations within your area? 15 A. Between which locations? 16 Q. Well, okay, Reno, Nevada, and Sacramento. 17 A. Yes. The relationship maintained with -- with 18 what our working group did. We kept the same relationship 19 that exists today and as it's being proposed by National 20 Milk. 21 Q. And, for instance, also from the Central Valley to 22 Los Angeles you are keeping the same relationship, 23 correct? 24 A. That is correct. 25 Q. You have discussed that hauling costs have doubled 26 compared to 2001, correct? 27 A. I have discussed on our average it has doubled. 28 It's probably way more than that. 8658 1 Q. Nonetheless, your testimony for what your 2 knowledge is, is that hauling costs have doubled since 3 2001, correct? 4 A. That's correct. I can only speak to the data I 5 have. 6 Q. Okay. Do you agree that the model already 7 includes hauling and hauling increased costs in it? 8 A. From my understanding there are some hauling costs 9 in there, but from some discussions that I heard, meaning 10 I was in the room with Chuck -- I'm sorry -- 11 Mr. Nicholson, the amount of traffic and various things is 12 not accounted for in the study. 13 Q. Okay. We'll get to traffic in the Grapevine. 14 A. Or a full stop if there's snow. 15 Q. I was thinking last Wednesday when I guess a truck 16 wrecked and closed the I-5 for hours. 17 Did you read about that? 18 A. I did not. But there's always something. 19 THE COURT: Mr. English, remember where you are. 20 This would be a good time for a 15-minute break. 21 And so please come back ready to go at 9:45. 22 We go off record at 9:30. 23 (Whereupon, a break was taken.) 24 THE COURT: Let's go back on record. 25 We're back on record at 9:46. 26 Mr. English, you may resume. 27 MR. ENGLISH: Thank you. 28 BY MR. ENGLISH: 8659 1 Q. Mr. Hiramoto, before the break we were talking 2 about the model and perhaps some things that you viewed as 3 being necessary to change. 4 So what I have so far is price alignment between 5 California and the Upper Midwest, correct? 6 A. Correct. 7 Q. That is one factor. 8 And then one factor you applied was the need for, 9 in your view, price alignment within the California 10 market, also thinking about Nevada, correct? 11 A. Correct. 12 Q. And then one other factor, which we're about to 13 talk about, is deviations because of traffic, correct? 14 A. Well, depends on your question. I don't know if 15 that's correct or not. 16 Q. Okay. So we'll leave that aside for a moment. 17 So other than price alignment between California 18 and the Upper Midwest, and price alignment within the area 19 of California and the operations in Nevada, what other 20 factors were considered for making changes to the model 21 results in terms of your testimony? 22 A. Well, as I stated in my testimony, there are a lot 23 of difficulties in producing milk for our farmer-owners in 24 the state of California. Traffic is just one of them. 25 Q. Thank you. We had discussed that. 26 Are you suggesting that there aren't difficulties 27 in producing milk in other parts of the country? 28 A. No, sir. I'm suggesting -- or I'm not suggesting 8660 1 that at all. I'm just saying based on what I see, what I 2 hear from our farmer-owners, what is going on in the state 3 of California, and compared to the model's -- or the 4 study's differential, to me, to us, it doesn't quite 5 align. 6 Q. How would you describe -- how would you 7 specifically explain to USDA when it has to issue a 8 rulemaking under legal standards, how that translates into 9 actual numbers as opposed to a feeling? 10 A. Well, luckily for me that's -- that's above my pay 11 grade. 12 Q. So another way of talking about alignment is 13 slope, that is a slope in changing Class I differentials. 14 Do you understand that concept? 15 A. I have heard of the slope, yes. 16 Q. Given increases in hauling rates, how does 17 maintaining the slope in Class I differentials in 18 California, say for instance, from the Central Valley to 19 Los Angeles, reconcile with what USDA has done in the past 20 for Class I differentials? 21 A. Well, I can't speak to what USDA has done in the 22 past, that's something I just -- I don't know. So I don't 23 know how to answer your question. 24 Q. So I think, you know, certainly in answer to a 25 question I asked, you've already suggested, and I think 26 something that you stated earlier in response to a 27 question from your -- from National Milk's attorney, you 28 agree that delivering milk to Los Angeles has special 8661 1 challenges, correct? 2 A. Yes, delivering milk to Cali- -- to L.A. County, 3 you said, I'm sorry? 4 Q. Los Angeles County. 5 A. Los Angeles, yes. Yes, it does have its 6 challenges. 7 Q. What about Orange County, does that have its 8 challenges as well? 9 A. Yes, it does. 10 Q. And leaving all joking aside, by and large, the 11 best/worst way to get milk down to Los Angeles is down the 12 Grapevine, correct? 13 A. Yes, sir. 14 Q. And, you know, probably on the list of highways, 15 other than the Cross-Bronx in New York, that might be one 16 of the worst roads for reliability, correct? 17 A. I have never -- that's a Skylar question. She's 18 been in both areas. I unfortunately have not been in that 19 area in New York, so I can't answer that. 20 Q. Let me assure you, you don't want to do it. 21 But bottom line is, whether it was last Wednesday 22 with the truck accident, you know, a fire, a flood, that's 23 just a terrible route to try to travel to get, whether 24 it's milk or anything else, down to Los Angeles, correct? 25 A. Yeah. I mean, just about any type of product 26 that's being shipped by truck is going through that 27 highway up and down the state. 28 Q. So given the fact that the model, from your 8662 1 conversation with Dr. Nicholson, does not pick up traffic, 2 why wouldn't, with cost changes in 25 years, National Milk 3 say, you know what, we're going to make an adjustment and 4 have the Class I differential in Los Angeles be higher, 5 that is to say to increase the slope relative to the 6 Central Valley? 7 A. Is that what you are proposing? We'll take it. I 8 can't -- I can't answer that question. Right? It's a 9 working -- it's a working group, and we're -- we're all 10 working together. We're not trying to give an advantage 11 over one region over another. 12 Q. When selling -- so we discussed somewhat about 13 where your milk -- do you also sell milk, DFA member milk, 14 do you also sell DFA member milk to Class I operations not 15 operated by DFA? 16 A. We do. 17 Q. Have you, for such milk in California, negotiated 18 an over-order premium for the sales to that Class I 19 plant -- to those Class I plants? 20 A. We have. 21 Q. Is that pretty standard in California? 22 A. I can only speak for what crosses my desk. I 23 can't speak for Land O'Lakes or CDI. 24 Q. I am asking in your experience as to what crosses 25 your desk. 26 A. Yes. 27 Q. And how about plants in Nevada, are you also able 28 to negotiate an over-order premium for sales to plants not 8663 1 owned by DFA in Nevada? 2 A. Yes. 3 Q. Does DFA in California and Nevada have a fuel 4 surcharge within the over-order premium, or separate from 5 that? 6 A. What do you mean by "fuel surcharge"? 7 Q. A provision within the contract that says if fuel 8 prices are higher than some standard number, that there's 9 additional charge for delivering milk to Class I? 10 A. Okay. Now that I understand that, can you re-ask 11 the original question? Sorry. 12 Q. Do -- does DFA for its sales of milk to plants not 13 owned by DFA, receive, in the contract, such a fuel 14 surcharge? 15 A. Yes and no. 16 Q. Okay. Can you tell me -- if it gets to 17 confidential information, we cut it out -- but can you 18 tell me the difference between yes and no there? 19 A. Yeah. That's confidential. Proprietary. 20 Q. To the extent you have said that you receive milk 21 from other suppliers for your Class I plants, are you 22 charged an over-order premium on that milk? 23 A. Yes. 24 Q. Let's discuss Nevada. 25 A. I'm sorry? 26 Q. Discuss Nevada. 27 A. Okay. 28 MR. ENGLISH: And, Your Honor, can I ask, we've 8664 1 got another map just to help orient people. Some of us 2 have been involved with Nevada/California issues for a 3 long time, but not everybody, and it's not part of -- 4 THE COURT: So this will get the next exhibit 5 number. 6 MR. ENGLISH: Yes, please. 7 THE COURT: All right. So our last one was 374. 8 This next one will be 375. 9 Yes, you may approach. Thank you, Mr. English. 10 So I'm marking as Exhibit 375, MIG-56, that's 5-6. 11 (Thereafter, Exhibit Number 375 was marked 12 for identification.) 13 THE COURT: If you do not yet have a copy and want 14 one, please raise your hand. They are being distributed 15 here in the room. 16 You may proceed, Mr. English. 17 MR. ENGLISH: Thank you. 18 BY MR. ENGLISH: 19 Q. So let's discuss a couple pieces here. 20 First, do you understand that the state of Nevada 21 is not part of any Federal Milk Marketing order area? 22 A. Yes, I have that understanding. 23 Q. And do you understand that whatever USDA may or 24 may not do, at the moment at least, that there is a 25 federal statute that says that Nevada shall not be part of 26 any Federal Milk Marketing Order hearing? 27 A. I don't know that verbiage, so -- 28 Q. Let's start with Clark County down in the southern 8665 1 part of the state. 2 That's where Las Vegas is, correct? 3 A. That's where what, I'm sorry? 4 Q. Las Vegas is? 5 A. I believe so, yes. 6 Q. And there are two plants in Clark County, two 7 distributing plants? 8 A. I know of one. I know of one. Are you referring 9 to Anderson as the other? 10 Q. Yes. 11 A. Then, yes. Yeah, sorry. I don't know where 12 Anderson is really at, so -- 13 Q. The one you did know about, is that a DFA plant? 14 A. Yes, sir. 15 Q. And is it true that that plant has no route 16 disposition in California and, therefore, is not even 17 partially regulated? 18 A. I can't speak to that. I'm in the raw milk fluid 19 division, not in the packaged division, so I can't speak 20 to that. 21 Q. Well, wouldn't you know whether that happens, 22 because if so, that would impact pay prices to producers 23 that deliver to that plant? 24 A. Technically, yes. But when I am looking at the 25 pay prices, I -- I honestly do not go to the very last 26 page and review all the plants that is listed on the 27 statistical uniform price each month. So I don't know. 28 Q. But there's also an Anderson dairy plant in Clark 8666 1 County. I understand you don't know if it's in Clark 2 County, but will you accept my representation it's also in 3 Clark County? 4 A. Okay. 5 Q. Do you know whether its route disposition causes 6 it to be partially regulated in California? 7 A. I don't know anything about that plant. I just 8 know there is an Anderson plant. 9 Q. Do you know anything about the milk supply for 10 either of those two plants, as to where it comes from? 11 A. Definitely not Anderson. And what I know of 12 Meadow Gold in Las Vegas is not current information. So I 13 guess the answer is, no, I do not. 14 Q. So then there are two plants in Northern Nevada: 15 One is Model Dairy, and one is your manufacturing plant, 16 correct? 17 A. That's correct. 18 Q. And your manufacturing supply plant is in 19 Churchill County? 20 A. That's correct. 21 Q. Where -- and Model Dairy is in Reno? 22 A. That's correct. 23 Q. And Reno is in Washoe County? 24 A. That's correct. 25 Q. And your Class IV operation in Churchill, does 26 that receive milk only from Nevada producers? 27 A. That's correct. 28 Q. And are most of those producers located in or 8667 1 around Fallon? 2 A. Sorry, let me correct that. Our Fallon plant does 3 receive milk consistently from the Nevada producers, but 4 it may receive milk out of state. So I just want to be -- 5 I want to clarify that. 6 Q. And do you know from what jurisdictions it 7 receives milk? 8 A. Unfortunately, I do not. I -- again, I can only 9 speak to my area. So at times it has received milk from 10 California. 11 Q. And then for Model Dairy in Reno, Washoe County, 12 do you know that that plant is fully regulated under 13 California Federal Order 51? 14 A. As of October, yes. 15 Q. Does that mean there's times when it's not fully 16 regulated? 17 A. My understanding is it could change. So I ask 18 every month. 19 Q. When you said a few moments ago not your area, is 20 California area your area, and Nevada, you just know 21 something about; is that -- 22 A. That's correct. We have members in California and 23 members in Nevada, but not all Nevada. 24 Q. Are there dairy farmers -- and if you don't know, 25 I get it -- but are there dairy farmers in Nevada other 26 than in and around Clark County and in and around 27 Churchill area? 28 A. Our members are around the northern, so the 8668 1 Churchill. I want to say there is one that was outside of 2 Churchill, but it -- I think it's in Nye County. I -- 3 it's -- it's escaping my mind, but I think Mr. Stout with 4 Mountain Area can respond to whether or not they have a 5 member in Nevada. 6 THE COURT: And Nye County is N-Y-E; is that 7 correct? 8 THE WITNESS: Correct. 9 THE COURT: Thank you. 10 THE WITNESS: Sorry, I think it is Lyon County is 11 the other producer, not Nye, Lyon, L-Y-O-N. 12 MR. ENGLISH: Kind of south and west of Churchill? 13 THE WITNESS: Yeah, correct. 14 THE COURT: Thank you. 15 BY MR. ENGLISH: 16 Q. Recognizing some of the limitations you put on 17 your knowledge about Nevada, is it National Milk's 18 position that there are insufficient supplies of fluid 19 milk to serve the Nevada market? 20 A. I don't know the National Milk's position on that 21 subject. 22 Q. And your increases from the model that are 23 proposed for Nevada are based on the idea that you have 24 made the increases in California and you wish to retain 25 alignment; is that correct? 26 A. To my understanding, that is correct. 27 Q. At a time -- so back in the early 2000s, so after 28 Federal Order Reform but -- but before you built your 8669 1 plant in Churchill, are you aware that milk from Nevada 2 dairy farmers in Northern Nevada moved in raw form to 3 Model Dairy, or moved in raw form -- it was called "over 4 the hill" -- into the Sacramento area? 5 A. Yes, I am aware of that. What I can't remember is 6 when it did happen. 7 Q. So once the plant was built in Churchill, did -- 8 to the extent there was milk that moved in raw form into 9 California -- did that stop? 10 A. Yes. I don't like to add information, but I want 11 to clarify. The reason that it had struggled to move over 12 the hill was the "California Real" seal. 13 THE COURT: The California what? 14 THE WITNESS: "Real seal." A lot of the plants 15 adopted the "California Real" seal, which then plants did 16 not want milk outside of California. 17 THE COURT: So did California Real on the 18 packaging suggest that the milk was produced in 19 California? 20 THE WITNESS: That is my understanding, yes. 21 MR. ENGLISH: Thank you. 22 THE WITNESS: I was trying to avoid any further 23 questions. 24 BY MR. ENGLISH: 25 Q. It may work, it may not. 26 Nonetheless, whatever the reason, one change from 27 time of Federal Order Reform to today is that to the 28 extent milk moves into California from Northern Nevada, it 8670 1 is doing so in packaged form from Model Dairy and not in 2 raw form from Northern Nevada farmers, correct? 3 A. Did you give me a time period? 4 Q. Well, since you built the plant in Churchill. 5 A. I can't speak for Model, but in raw form, that's 6 very limited. I'm not going to say that it never happened 7 since the plant's been built. 8 Q. All right. Since the plant's happened, it may 9 have happened in a limited area, but certainly not to the 10 extent it happened prior to the plant being built, 11 correct? 12 A. That is correct. 13 MR. ENGLISH: I thank you for your time, sir. I 14 have no further questions. 15 And I move admission, Your Honor, of Exhibits 374, 16 375, acknowledging in advance the concern that was 17 expressed yesterday by Ms. Hancock with respect to the 18 information. And to the extent people want to know, there 19 will be the witness who prepared this that people can ask 20 about that at that time. But, again, the references are 21 all there in the document. 22 THE COURT: Thank you, Mr. English. 23 Who will next -- I'll deal with your motion to 24 take exhibits in a little bit later. 25 Who will next cross-examine Mr. Hiramoto? 26 Thank you, Mr. Miltner. 27 MR MILTNER: Thank you, Your Honor. 28 // 8671 1 CROSS-EXAMINATION 2 BY MR. MILTNER: 3 Q. Good morning, Mr. Hiramoto. 4 A. Good morning. 5 Q. Ryan Miltner representing Select Milk Producers. 6 So I have just a few questions, and I'd like to 7 start with your testimony on page 5. 8 And in the first paragraph on that page you 9 stated, "Washoe County and Churchill County are in 10 Northern Nevada. Currently Washoe and Churchill Counties 11 have the same differential as milk-producing counties 12 directly to the west in California," I think you made that 13 correction. 14 Which particular California counties were you 15 referring to when you came up with that sentence? 16 A. It's basically all the counties that's in the 17 Central Valley that's the 1.70 zone. 18 Q. Okay. 19 A. I'm going to struggle you asking me to list every 20 county. 21 Q. I don't need all of them. Give me just one or 22 two, if you have them off the top of your head there, that 23 are available readily. 24 A. So we have like Sierra, Lassen. L-A-S-S-E-N, 25 sorry. 26 Q. That's okay. 27 A. Plumas, P-L-U-M-A-S. 28 Q. Okay. 8672 1 A. Sierra, S-I-E-R-R-A. 2 Is that enough? 3 Q. Yeah, that's great. Thank you. 4 You mentioned that those counties were currently 5 at $1.70 zone, correct? 6 A. Correct. 7 Q. And Washoe and Churchill are currently at $1.70 8 zone, correct? 9 A. Correct. 10 Q. So if I look at what the model showed for Washoe 11 and Churchill Counties, it was $1.90 and $1.95, 12 respectively, and then Lassen and Sierra Counties were 13 $1.90 and $2. 14 So if we look just at what the model had for an 15 output for those counties, I'd like to know if that type 16 of alignment within a dime or so among those counties 17 would be -- would provide for orderly marketing, in your 18 opinion? 19 A. Well, again, if -- if those Northern Nevada and 20 the Northeast, or above Central -- slightly above Central 21 East and Northeast California counties were the same, then 22 I would say yes. But your question is a little too 23 general in the sense that you are assuming the surrounding 24 counties had no changes. 25 Q. I'm not sure I follow your -- the last part of 26 your answer. Let me rephrase mine perhaps. 27 A. Okay. 28 Q. If we focus on just the counties that you are 8673 1 referring to in your paragraph on page 5, if those 2 counties were all assigned differentials within a dime of 3 each other, would that create issues that would be of 4 concern to DFA? Would that -- would that allow you to 5 maintain competitive equity, as you stated in your 6 paragraph? 7 A. No, it would not maintain equity of a dime either 8 direction, I believe. And I want to clarify. Not 9 necessarily to DFA, but to the industry. 10 Q. Explain the distinction you have drawn there 11 between DFA and the industry. 12 A. Well, again, our work was collaborative, so it 13 wasn't what DFA wanted. That's why I want to make that 14 distinction. You asked would it -- would it -- I'm sorry, 15 you said something about DFA, so I wanted to clarify. 16 Q. Yeah. And my point of -- of referencing DFA there 17 is that you are testifying on behalf of DFA. I didn't 18 want to put you in a position to speak for anyone other in 19 your organization. 20 A. Understood. 21 Q. So -- so anything -- so unless all of those 22 counties are exactly aligned on the -- with the same 23 differential, your opinion is that would be an issue for 24 maintaining competitive equity? 25 A. In my opinion, correct. 26 Q. Okay. Why, given the geography and distance 27 across those points, would a dime in difference upset 28 competitive equity? 8674 1 A. I don't know if I have enough data with me today 2 to kind of -- to answer that question. Bottom line, it 3 comes to how milk is moved currently. And, yeah, I 4 just -- I just don't know how to answer that question. It 5 would -- it would cost -- it more than likely would cause 6 some distress. 7 Q. Can you give an example of the type of distress 8 that that would cause? 9 A. What comes to mind is basically route 10 distribution. 11 Q. Route distribution -- 12 A. Crossing state lines. 13 Q. Can you give us any more flavor than just a 14 category? 15 A. Unfortunately, I cannot. 16 Q. Okay. Thanks. 17 MR. MILTNER: I don't have anything else. 18 THE COURT: Who else has cross-examination of this 19 witness before I ask for Agricultural Marketing Service 20 questions? 21 I see none. I welcome Agricultural Marketing 22 Service to question the witness. 23 CROSS-EXAMINATION 24 BY MS. TAYLOR: 25 Q. Good morning. 26 A. Good morning. You are scaring me. 27 Q. Oh, no, I was trying to be nice. 28 A. You've got that grin. I know the grin. 8675 1 Q. Is that how my kids feel? 2 A. I can't speak to that. 3 Q. I always try to be pleasant and nice. 4 A. You are always pleasant. 5 Q. Okay. That's good to hear. I hope my boss is 6 listening. 7 Thank you for coming to testify today. I am going 8 to -- my first question, is there someone else that's 9 going to talk about Southern Nevada? I know you focused 10 on Northern Nevada. 11 A. Yes. Somebody from UDA. 12 Q. Okay. Then I will save those questions for them. 13 I want to go to page 6. You talk about -- and I'm 14 on the second full paragraph, so it starts "NMPF 15 supports." 16 A. Okay. 17 Q. And the second sentence: "Milk and route 18 disposition in both" -- "distribution in both zones" -- 19 California, a buck 60 and buck 70 -- "moves 20 interchangeably between the zones," which is why you 21 proposed just combining those into one 2.50 zone. 22 Can you just talk a little bit more about that? 23 A. Yeah. The -- with how milk moves currently and 24 servicing customers, the difference today just didn't 25 really make sense to us. 26 Q. The $0.10? 27 A. The $0.10. 28 Q. Okay. 8676 1 A. Yeah. It's because milk goes back and forth at 2 times, you know, with -- with hauling and the state trying 3 to become more green, it just -- trying to move milk the 4 right way to capture the right zone is counterproductive 5 in the industry and against how the state wants us to 6 operate. Right? 7 Q. Okay. 8 A. I mean, California, unfortunately, is not an 9 ag-friendly state, even though they may claim they are. 10 They care more about tech. 11 Q. So in California, what I'm hearing then, is 12 move -- milk often moves against the grain of the zones 13 for other reasons, for -- because of state regulation 14 or -- 15 A. Well -- sorry. 16 Q. No, I mean, I'm not -- I'm not sure how to finish 17 my sentence, but I'm just trying to get onto the record of 18 why that happens in California, so then why combining 19 those zones would be appropriate. 20 A. So there's -- there's a lot of optimization -- 21 Q. Uh-huh. 22 A. -- if you will, that we think about. But at the 23 end of the day we've got to get the farmer-owner's milk to 24 the customer. At the end of the day, we've got to get 25 milk to the customer. So we try to look at putting milk 26 in a zone to a customer, in the correct zone, and not go 27 backwards. 28 And, again, I'm a Federal Order newbie, right? 8677 1 Trying to understand all that sometimes can -- not can -- 2 it does give me a headache, but -- but we try to do the 3 right thing. 4 So after being in Federal Order for almost five 5 years, right, a little over four -- well, actually, no, 6 I'm sorry, it's now a little over five -- 7 Q. Okay. 8 A. -- that having the zone, that 1.60, 1.70 zone just 9 didn't quite make sense. 10 Q. Okay. And you talked about, it's in your 11 statement, and you talked some with Mr. English about the 12 differentials, and I -- I remember the California hearing 13 fondly, and that the discussion about differentials for 14 California, at that time, and why those weren't changed at 15 the time of the California hearing. 16 And you talk about how they are not adequate. And 17 once you implemented -- once the Federal Orders 18 implemented, the bottom sentence says, "We scrambled to 19 adjust, adapt, and ultimately arrive at price mechanisms 20 to facilitate necessary milk movements." 21 Can you expand on that? I guess, can you first 22 start with what was the problem that you found, and then 23 what was this price mechanism solution that you then 24 implemented? 25 A. So as you heard the back-and-forth with 26 Mr. English, the hauling of milk is a huge problem in 27 California. Right? We have got high gas prices. We have 28 got traffic. We have got weight limits. And on top of 8678 1 that, we have got the lowest differential. 2 So moving from state order to Federal Order, 3 moving milk from, let's say, the closest, Kern County, 4 down to L.A. County, it's not -- it doesn't nearly even -- 5 the differential doesn't nearly even cover what it costs 6 to haul, without even talking about the amount of time. 7 And then with COVID hitting -- so, sorry, this is 8 kind of a, you asked for it, so it's a longwinded 9 answer -- but -- 10 Q. Okay. 11 A. -- with COVID hitting, then hauling becomes -- 12 became a lot worse. Right? Drivers no longer want to 13 work weekends. Drivers no longer want to go over the 14 hill. 15 And then just recently we have got -- and no 16 offense to anyone, I want to make that clear -- we have 17 got fast food workers making 20 bucks an hour. Okay? So 18 haulers want a raise. Everybody wants a raise. Right? 19 So how do our farmer-owners, how are -- how are 20 our farmer-owners expected to keep producing this 21 incredible product that is healthy and helps humans 22 develop and grow and stay sustainable? I mean, they can't 23 even break even. 24 So the pricing mechanism, the industry basically 25 came together. It's not just DFA, the industry came 26 together and had to have an understanding that even, yes, 27 we went to Federal Order, handlers didn't like what was 28 being suggested by their vendors, us as one of them, but 8679 1 they came to the realization if they didn't try to at 2 least work with us, then the farmers would go out of 3 business, and, you know, we need them as much as they need 4 us. 5 So I know I'm not directly answering your 6 question, only because some of it is proprietary, so I 7 apologize. 8 But we had to come up with pricing that was -- I 9 know we've tossed this word around all day -- "equitable" 10 on both sides. Right? Our dairy farmers, our dairy 11 farmer-owners understand and knows the importance of 12 handlers, and they are not trying to put them out of 13 business. They understand they need to make a buck. 14 Well, that same respect needs to go the other way. 15 Our farmer-owners, they are not even asking to be rich, 16 they are just asking to be able to -- to at least break 17 even. 18 Q. And so can you talk about -- and I don't think 19 it's on the record yet -- prior to the Federal Order when 20 California had a state order, the provisions in the state 21 order that helped move milk that didn't get adopted in the 22 Federal Order, and kind of how that did create an issue? 23 A. Yeah, the -- and I think you are referring to the 24 transportation allowance? 25 Q. Yes. 26 A. Yeah, that was a big hole that -- that -- that 27 created issues with moving milk. So we tried to push for 28 it but -- 8680 1 Q. Can you -- I'm trying -- I want to get this on the 2 record. 3 A. Okay. 4 Q. How did that work in the state order, that it 5 provided -- that you didn't have the same problem that you 6 say you have now, or that you had when the Federal Order 7 came into effect? 8 A. Yeah, I wouldn't -- I wouldn't -- okay. So to be 9 clear, I wouldn't say we wouldn't still have somewhat of a 10 problem, but the transportation allowance at least helped 11 cover a larger portion of transportation costs. Okay? It 12 was based on miles, so it depended -- to Class I plants. 13 So depending on where the milk was coming from, as long as 14 it fell within the grid -- and, again, no offense, but if 15 there -- if the transportation allowance was lacking, 16 California -- the state of California was able to call a 17 hearing a lot quicker, and because we're regionalized, 18 than trying to get everybody together in the Federal Order 19 to call a hearing and say, hey, the pricing isn't working. 20 Q. You discussed some earlier in cross about the 21 amount of milk in California. And Mr. English asked you 22 questions about, is there a lack of milk for fluid use. 23 And I'm wondering if you could speak to whether you see 24 the differentials, do they help you? I don't know how I 25 want to say this. Does it help you decide where to 26 make -- where to allocate your milk to go? I mean, 27 there's a lot of milk in California to which you have 28 testified to, and data shows. 8681 1 A. Well, I don't believe I said anything in my 2 testimony about a lot of milk in California. 3 Q. I guess "a lot" is a relative -- 4 A. I think Mr. English said -- 5 Q. -- word. Subjective. 6 A. At the end of the day, as much as we try to 7 optimize, our hands are forced on where milk is going. I 8 mean, we'll do everything we can to try to maximize, but 9 that's -- that's easier said than done. 10 Q. When you say your "hands are forced," what does 11 that mean? 12 A. Meaning the customers are fixed, in our fixed 13 location, and our farmer-owner is at a fixed location. 14 Right? Unless you can move your dairy farms or your 15 handlers to the spot you want them to, then milk is going 16 to move the way milk needs to move. 17 Does that answer your question? I don't -- maybe 18 I'm not understanding what you are asking. 19 Q. No, it does. And what I take from that is, you 20 have to supply them -- 21 A. Yes. 22 Q. -- period? 23 A. So case in point, I think what you are asking is, 24 currently, right? You want to -- obviously, you would 25 love to take milk in the 1.60 zone and put it in the $2.10 26 zone. Okay? Well, that's a lot easier said than done. 27 First of all, you got all these miles and traffic you've 28 got to get through the 1.60 to even get to the 1.70 or the 8682 1 1.80 zone. And then go down to the Grapevine, as 2 Mr. English has even talked about, to get down to L.A. 3 County. And then -- okay, so what are you going to do, 4 spend more gas and more hauling dollars just to pass the 5 milk that's closer to go to 2.10? 6 So that's my point, is as much as you want to move 7 milk in the direction you would like, our hands are forced 8 by doing what would be more practical. 9 Does that help? 10 Q. It does. 11 And -- and I was looking at the chart, and I 12 recognize you didn't put this together, but in 13 Exhibit 374, but I do think the number differences are -- 14 are accurate. 15 So I was looking at the column -- the difference 16 between what National Milk proposed and what the model 17 said, for just California. I'm just going to stick to 18 California. And it looks like it ranges anywhere from 19 $0.45 to $0.70 more than the model, what spit out from the 20 model. And I know you went through, what, a number of 21 factors, I think, that the committee that looked at this 22 region took into account for things that you don't think 23 the model accounted for. 24 And that is why -- as I'm understanding, that 25 those are the reasons why you would like an increase over 26 what the model said; is that accurate? 27 A. That's -- I think that's fairly accurate. But, 28 again, don't discount the relationship that we try to 8683 1 maintain, the slope and the relationship between the 2 regions. Right? 3 Q. Between California and the Upper Midwest when you 4 say -- 5 A. Between California, the Upper Midwest, and the 6 surrounding areas. Because we don't want to do things -- 7 okay. I mean, California, we would love to be the 8 Southeast and have 7 and $8 differential. I mean, 9 honestly, as a newbie, my first question is, why not hit 10 that bar? Right? 11 But as we go through the committee, and as we go 12 through our discussions, we can't damage the industry by 13 doing something that has unintended consequences. So we 14 have to level set and -- and find reasonableness where 15 it's practical and it makes sense. 16 Regardless of whether you agree or not with our 17 assessment or what we worked together on, somebody -- I 18 mean, common sense would tell you, there is an issue in 19 California. There's a huge deficit in California. It's 20 not easy to get feed. Gas is -- it just came below $5, 21 while -- and I'm not trying to hurt any region -- but you 22 got mostly Texas with higher differentials and their gas 23 is 2-something? Doesn't make sense. 24 Anyway. I'll get off my soapbox. 25 Q. Well, you are on the stand. You get to have a 26 soapbox. 27 So when we look at the difference between -- or 28 the increase that National Milk has proposed in 8684 1 California, I think what I'm hearing is that 45 to $0.70, 2 depending on increase, I'm trying to kind of understand 3 why you came up with that number. And what I think I'm 4 hearing is, for that increase, it was more of alignment 5 with what they were doing in the Upper Midwest to keep 6 that aligned. 7 A. It -- yes. It was alignment, I would say, across 8 the board. Yes, we did -- we did -- and I keep saying 9 it -- and I won't throw Mr. Wilson under the bus -- but 10 when we -- during the Federal Order promulgation hearing 11 and voting in -- actually voting in Federal Order 51, 12 right? I talked to USDA, I go, "Why are we doing this, 13 you know, X, Y, and Z?" 14 Well, I kept getting told that the Upper Midwest 15 was the most similar, not exact. California is unique. 16 We are on an island, believe it or not, but it is the most 17 unique, and the Upper Midwest was the closest thing. So 18 honestly, in my mind, that stuck. 19 So every time we're looking at something related 20 to Federal Order, I kind of want to compare to the Upper 21 Midwest, if that helps. 22 But same point, the slope and the alignment has to 23 flow across or, you know, east to west, west to east, 24 Midwest to the east, Midwest to the west. I mean, it's 25 got to work. Right? 26 Q. Okay. On the next page you talked about one of 27 the reasons, one of the factors that was considered was 28 your longer hauls that you have in California. 8685 1 Can you talk about maybe what the average haul is 2 that DFA experiences in California? 3 A. What do you mean by the "longer hauls"? 4 Q. Well, you wrote, "increasingly longer hauls," so I 5 wanted to know -- 6 A. Oh. 7 Q. -- could you define -- maybe not define that, but 8 put some parameters around it. How long is that in 9 California? You kind of talked about it but -- 10 A. Yeah, I don't know if I can put a number. But to 11 kind of give you an example, more and more milk is moving 12 out of the south. The San Bernardino -- I mean, there's 13 not much milk in L.A. County at all. Right? 14 The urban population is pushing out the dairy 15 farmers. Nobody wants to live next to something that 16 smells. Right? Some of the milk we have in San Jacinto 17 County, J- -- I don't know if I'm going to spell this 18 right, but I think it's J-A-C-I-N-T-O. 19 Q. You're lucky, our court reporter is from 20 California. 21 A. Oh, great. 22 So the dairies there are also starting to dwindle. 23 Right? So milk's going to have to come over the hill. So 24 that's -- that's what I mean by longer hauls. Because 25 California has become less and less ag friendly, and 26 counties are following suit. And with regulation and 27 everything, they are forcing dairy farmers, unfortunately, 28 to kind of all group, group up in the Central Valley. And 8686 1 there's even issues starting there with, you know, water 2 issues and -- and air quality issues. 3 So there's going to be a point where, I don't 4 know, it's like watching the movie Escape from New York 5 where all the prisoners are found in New York. I feel bad 6 for farmer-owners where it seems like California wants to 7 shove them in this little corner and try to supply the 8 rest of the state. 9 Q. You also talked about hauler resistance. And I 10 wondered if you could expand on that. 11 A. Yeah, it's kind of what I mentioned with the COVID 12 issue. Haulers are being -- the drivers, and sometimes 13 the haulers -- so haulers are being picky on where they 14 want to go. They want to go to a plant that's in-and-out. 15 All right? Well, whether that's a plant that's close or 16 far, just, you know, pick up the milk and leave. 17 So on the longer distance hauls, because they 18 don't have drivers, or drivers that don't want to haul the 19 longer distance, haulers will kind of say, we don't -- we 20 don't want to do it. 21 And actually, I think we just had a hauler exit 22 California because they are just tired of it. 23 Q. Can we turn to page 8? 24 And you have a chart there. And I know this is 25 not data that you put together, so I will add that caveat 26 for you, me, and the record to reflect. 27 But I had saw a line in there. I was wondering if 28 you knew, what's the difference between a line trailer and 8687 1 a farm pickup trailer? 2 A. That's -- yeah. I don't want to -- I don't want 3 to speak incorrectly. I -- I think I have an idea, but 4 I'm not exactly sure. 5 Q. Okay. 6 A. Sorry. 7 Q. That's okay. 8 A. There's probably somebody in here that can answer 9 that. 10 Q. If we could turn to page 4 with your maps. I 11 wanted to talk a little bit about that Southern California 12 region. 13 A. Okay. 14 Q. And it looks from the map what you proposed, that 15 $3 zone -- 16 A. Yep. 17 Q. The 2.60, what county is that, in the green? 18 A. I believe that's Kern. 19 Q. Kern County. Okay. 20 So San Bernardino is the one to the right of that? 21 A. Yes. 22 Q. So in the old surface it looks like -- or the 23 current surface, I should say, San Bernardino is 1.80 24 while L.A. is 2.10. So there's $0.30 to help move some 25 milk into that region. But in what you proposed, it's a 26 flat $3 amongst that region. 27 I wonder if you could talk about why you got rid 28 of the slope there. 8688 1 A. Yeah. So $2.10, which I think there's only -- I'm 2 sorry, the $2, which I think there's only one producer 3 still, I'm not sure. But the $2.10 -- or one plant, 4 sorry -- the 2.10, $2, and the 1.80 that you are talking 5 about, it -- again, to the current state it's -- it just 6 didn't make any sense to have that segregation. It's just 7 one area, in our minds. 8 Q. Uh-huh. So it's all one area kind of like how you 9 think, how you -- you all look at the $1.70, $1.60 zones, 10 is the milk from there is considered kind of like one big 11 unit -- 12 A. Yeah. 13 Q. -- and you move it where you need to move it? 14 A. Right. 15 Q. And you don't need more money to move it into 16 L.A.? 17 A. Well, it'll take more money to move it into L.A. 18 Q. So the compromise you all came up with was -- 19 A. Thank you. Yes. 20 Q. -- to treat it as -- 21 A. Don't ever say we don't need more, we'll need 22 more. Our farmers always need more. 23 Q. I'm aware. 24 And that $3, you still move milk, though, down -- 25 am I correct, you are still moving milk down from the 26 Central Valley down into that -- 27 A. Yes. 28 Q. -- area? 8689 1 A. Yeah. 2 Q. And that slope does help get that milk down there 3 that's needed? 4 A. Yeah. We do our best to stair-step, but, yeah, it 5 still does come from the Central Valley. 6 MS. TAYLOR: I think that's it from AMS. Thank 7 you. 8 THE WITNESS: Thank you. 9 MS. HANCOCK: Thank you. 10 Your Honor, we have no more questions. We would 11 just move for the admission of Exhibit 373. 12 THE COURT: Is there any objection to the 13 admission into evidence of Exhibit 373? 14 There is none. Exhibit 373 is admitted into 15 evidence. 16 (Thereafter, Exhibit Number 373 was received 17 into evidence.) 18 THE COURT: Now I'd like to address Exhibit 374, 19 which is also MIG-57. 20 Is there any objection to the admission into 21 evidence of Exhibit 374? 22 MS. HANCOCK: Your Honor, if we could just reserve 23 the same issues that we had before, that this witness 24 didn't create the document, doesn't have firsthand 25 knowledge about where all those plants are located. But 26 with that -- with that, I guess, asterisk, I don't know 27 what to call it, but with that reservation, no other 28 objection. 8690 1 THE COURT: Thank you. 2 I see no other comments on this exhibit. I do 3 admit into evidence, with that reservation noted, 4 Exhibit 374. 5 (Thereafter, Exhibit Number 374 was received 6 into evidence.) 7 THE COURT: I think with the legend that shows 8 where the information came from, and with people's own 9 ability to do the calculations, that there's no harm in it 10 being admitted into evidence at this point, even though we 11 will welcome the future testimony about it. 12 With regard to Exhibit 375, is there any objection 13 to that being admitted into evidence? 14 There is none. Exhibit 375, which is also MIG-56, 15 is admitted into evidence. 16 (Thereafter, Exhibit Number 375 was received 17 into evidence.) 18 THE COURT: And thank you. Do you want to testify 19 often? 20 THE WITNESS: No. 21 THE COURT: Thank you. 22 Who will be the next witness. 23 MR. PROWANT: Your Honor, National Milk calls 24 Brent Butcher next. 25 THE COURT: And while Mr. Butcher is taking the 26 stand, I'm going to take a five-minute break. For all of 27 us, I'm going to check the coffee machine. 28 (Whereupon, a break was taken.) 8691 1 THE COURT: Let's go back on record. 2 We're back on record at 10:54. 3 While off record, I marked Exhibit NMPF Number 46 4 as Exhibit 376. 376. 5 (Thereafter, Exhibit Number 376 was marked 6 for identification.) 7 THE COURT: All right. Would you state and spell 8 your name for us, please. 9 THE WITNESS: Yes, Your Honor. My first name is 10 Brent, B-R-E-N-T, last name Butcher, B-U-T-C-H-E-R. 11 THE COURT: Have you previously testified in this 12 proceeding? 13 MR. WILSON: No, Your Honor. 14 THE COURT: I'd like to swear you in. 15 BRENT BUTCHER, 16 Being first duly sworn, was examined and 17 testified as follows: 18 THE COURT: Now, let's make sure the mic is 19 comfortable for the way you want to sit as you are looking 20 at your documents and all. 21 You may proceed. 22 DIRECT EXAMINATION 23 BY MR. PROWANT: 24 Q. Good morning, Mr. Butcher. 25 A. Good morning. 26 Q. Did you prepare Exhibit 378 in anticipation of 27 your testimony here today? 28 A. I did. 8692 1 THE COURT: 376? 2 MR. PROWANT: Oh, I apologize, 376. 3 THE COURT: 376. 4 MR. PROWANT: I wrote that incorrectly. 5 BY MR. PROWANT: 6 Q. Did you prepare Exhibit 376? 7 A. I did. 8 Q. Would you please go ahead and read that into the 9 record for us. 10 A. Yes. 11 The history of UDA. Here is who we are, what we 12 do, where we are. 13 Good morning, or good afternoon. My name is Brent 14 Butcher. I'm the director of fluid sales for United 15 Dairymen of Arizona. Founded on January 1st, 1960, United 16 Dairymen of Arizona is a Capper-Volstead cooperative 17 association, is qualified to market milk on the federal 18 milk market orders, is a member of NMPF, and supports the 19 Class I pricing differential adjustment. 20 In 1960, UDA consisted of 390 co-op members. 21 Today, our membership consists of only 36 members. Dairy 22 farming in Arizona presents a unique set of challenges 23 that make it a formidable and costly endeavor. The most 24 glaring obstacle is the arid desert client that dominates 25 the region, resulting in scorching temperatures and water 26 scarcity. These conditions pose a significant challenge 27 to dairy farmers who require abundant water resources to 28 sustain operations. 8693 1 Arizona is facing a severe and prolonged drought 2 that poses serious concerns about water scarcity and 3 long-term water management strategies to address the 4 crisis. These inhospitable elements test the resilience 5 of the animals, farmers, and the critical staff required 6 to operate each dairy. Yet, despite these hurdles, we 7 persist, producing a modest, but crucial supply of 8 wholesome and high-quality milk. 9 To understand the complexities and difficulties of 10 dairy farming in Arizona is to appreciate the unwavering 11 determination required to sustain this vital agricultural 12 sector in the face of adversity. 13 UDA's production output remains relatively nominal 14 with a mere 12 million pounds of milk generated daily to 15 meet the demand of our customers and consumers. To put 16 this into perspective, new dairy processing plants have 17 the capacity to single-handedly process volumes that rival 18 Arizona's entire daily production. 19 UDA is also one of the oldest dairy co-ops in 20 North America, and one of the few that still provide full 21 service to our members. Our manufacturing plant, located 22 in Tempe, Arizona, balances milk for our Class I bottlers, 23 and produces a variety of products like dairy powders, 24 cheeses, butter, powder blends, proteins, and concentrated 25 and condensed dairy products. 26 The Grand Canyon State has seen significant 27 changes over the past two decades. Most notably, Arizona 28 has seen tremendous population growth. Since 2000, 8694 1 Arizona's population has skyrocketed from 5.16 million 2 people to over 7.35 million, a 42% increase. The Metro 3 Phoenix area has seen similar growth, and urban expansion 4 creating transportation issues -- sorry -- the Metro 5 Phoenix area has seen similar growth in urban expansion 6 creating transportation issues in delivering milk to 7 bottlers. 8 Currently, Phoenix is the tenth largest city in 9 the U.S. We bear the burdens of these changes. Our land 10 is becoming more expensive, our roads more congested, and 11 competition for resources like water, energy, and labor, 12 has become tangible, everyday obstacles. All of these 13 structural changes in competition for resources has had a 14 clear impact: Above average increased costs across the 15 board. 16 More on the UDA background. UDA was a participant 17 on the NMPF task force that addressed the Class I pricing 18 surface. We participated in the discussions of the 19 Western region group, and specifically focused on FMMO 131 20 marketing area. The objectives of UDA are consistent with 21 the NMPF proposal. 22 UDA's objectives are: 23 1. Follow the guidance provided by the USDSS 24 model and make adjustments where local conditions warrant 25 a change; 26 2. Maintain the current pricing relations among 27 competing handlers, both within the market and within 28 the -- with the surrounding states; 8695 1 3. Establish a smooth transition of Class I 2 pricing from surrounding areas to maintain a consistent 3 slope of price changes. 4 We believe the NMPF proposal meets our objectives 5 and should be adopted by the USDA. 6 Below is a table that I want to highlight two 7 counties. County number one, Maricopa. The current model 8 is $2.35 -- sorry, not the current model -- the current 9 price is $2.35. The model suggests an increase to $2.40, 10 and the proposal is $3, which equates to a 27.6% increase. 11 I want to highlight Yuma County at the bottom of 12 the page. The current price is $2.10, the model suggests 13 $2.15, and the proposal, $2.90. Percent of change is 38%. 14 THE COURT: Before you go on, Mr. Butcher, on your 15 table on page 2 of Exhibit 376, are these all of the 16 counties that are within Arizona? 17 THE WITNESS: Yes, Your Honor. 18 THE COURT: Thank you. 19 THE WITNESS: There are only two counties in 20 Order 131 marketing area that have pool plants. The 21 majority are in Maricopa County, Arizona, with two 22 distributing plants located in the Yuma, Arizona. The 23 remaining counties in Arizona have no dairy plants. 24 The proposed increase in the Class I differential 25 from the current rate in Maricopa County is 27.6%. The 26 proposed increase in the Class I differential from the 27 current rate in Yuma County is 38%. And the evidence will 28 show that the current cost to service the Class I market 8696 1 has increased more than these percentages. 2 Other witnesses have discussed the USDSS model and 3 its functionality. UDA intends to highlight areas of 4 local deviations that would require an adjustment to the 5 model results to more accurately reflect the economic 6 conditions in FMMO 131, and these areas are as follows: 7 Weather and climate. We live in an arid climate. 8 That is our reality out in the desert. And, yes, we have 9 had this climate for as long as UDA has been in existence. 10 Lately, however, we have been experiencing record heat 11 amid decade-long drought conditions. With these hot, dry, 12 conditions come more challenges and different priorities 13 than other parts of the country, including how we utilize 14 water every single day. We have embraced a conservation 15 culture and understand the importance of living a 16 water-efficient life. The Colorado River Basin has been 17 in a prolonged drought. We are experiencing the driest 18 conditions in the basin in more than 100 years, and these 19 conditions are expected to continue well into the future. 20 The resulting reduced river flows are further 21 stressing the over-allocated Colorado River. The U.S. 22 Secretary of the Interior bases a shortage declaration on 23 the elevation of Lake Mead, which is dependent upon the 24 releases from Lake Powell. In fact, both Lake Powell and 25 Lake Mead are approaching critical elevations and will 26 require unprecedented management actions to protect 27 infrastructure in the lower Colorado River Basins. 28 A shortage on the Colorado River means a reduction 8697 1 in the supply available to lower Colorado River water 2 users. This also means UDA pays more for water than it 3 had in the year 2000 and more than almost any other state. 4 These increased water costs also impact our dairymen and 5 their ability to produce milk to service the market. As 6 the impacts of drought persist, there will be additional 7 reductions almost certainly beyond the currently defined 8 shortage levels. Those reductions are likely to make an 9 impact on UDA's ability to meet projected future milk 10 demand. 11 Transportation, which has been highlighted several 12 times. First, some background on UDA and the process of 13 serving our customers. The majority of UDA's customers 14 and UDA's own plants are located in Western Maricopa 15 County. The vast majority of UDA's members are located in 16 Maricopa County and the collar counties surrounding the 17 Metro Phoenix area. Milk that is produced in the eastern 18 part of the Phoenix Valley must travel farther to our 19 customers, as well as to UDA's plant. 20 The distance UDA's milk needs to move from farm to 21 customer to service the market is relatively low, with 22 most farm transportation distances within 150 miles of its 23 manufacturing destination. But with urban sprawl and 24 population growth, the amount of time it takes to deliver 25 the milk has been steadily increasing. 26 UDA uses what are commonly called super tankers 27 for about 60 to 70% of its milk deliveries. We have 35 28 super tankers which hold 76 to 78,000 pounds of milk. 8698 1 Super tankers have four axles with larger tires to absorb 2 the extra weight. UDA also has 50 regular tankers that 3 hold 48 to 49,000 pounds of milk. These super tankers 4 cost more than conventional tankers, and maintenance costs 5 can also be greater. 6 In accordance with our commitment to 7 sustainability initiatives, UDA will continue to expand 8 its fleet with the dedication to continue purchasing more 9 super tankers which reduce overall environmental impacts. 10 Since 2018, the cost of the super tanker has 11 increased by approximately 35%. Truck drivers need to 12 have heavy haul permits to transport super tankers. On 13 average, a super tanker can weigh as much as 40 to 14 44,000 pounds more than a conventional tanker. The 15 ongoing highway construction west of the Phoenix Metro 16 area has caused wait times and increased drive times 17 from -- time from the dairies. Due to population growth 18 around the Phoenix Metro area, we have seen drive times 19 continually exceed 30 minutes from 2017 drive times. 20 During rush hour traffic, we can see drive times 21 increased by one hour or more, depending on road 22 conditions. It normally takes our drivers about two and a 23 quarter to three and a quarter hours to get unloaded and 24 washed at the receiving plants. 25 However, there are times that we experience delays 26 at some of our customers due to plant construction 27 projects, labor constraints, and labor licensing 28 restrictions, lab equipment and system failures, among a 8699 1 host of other extraneous factors. 2 Plant construction projects are more and more 3 common as they expand to meet the new population demand. 4 These construction delays can add an additional one to 5 four hours to get unloaded. With UDA's own trucks, this 6 wait time is lost productivity, and time is money. 7 With some of our contract haulers we also incur 8 demurrage charges. These demurrage charges have 9 increased -- 10 THE COURT: Would you stop for just a minute to 11 spell that word? 12 THE WITNESS: Demurrage? 13 THE COURT: Yes, please. No, I think it's fine. 14 I just -- it's a word I'm not familiar with, so I'm just 15 asking you to spell it. 16 THE WITNESS: Sure. I'm just trying to find it. 17 THE COURT: So next to the last paragraph on 18 page 4, second to the last sentence -- or third to the 19 last. 20 THE WITNESS: Yes. Yes. With some of our 21 contract haulers we incurred demurrage, D-E-M-U-R-R-A-G-E. 22 THE COURT: Thank you. 23 THE WITNESS: These demurrage charges have 24 increased by over 60%. When these delays happen, the 25 drivers are forced to wait until they can be unloaded. 26 Something especially unique to Arizona is monsoon 27 season. Monsoon season typically starts in June and ends 28 in September. This unique season brings higher humidity, 8700 1 which can lead to thunderstorms, heavy rain, hail, 2 sandstorms, high winds, and increased ponding on roadways. 3 Monsoon season is problematic for our supply chain as road 4 conditions deteriorate and can cause accidents or 5 incidents. Also, the hotter weather conditions in the 6 Phoenix Metro area cause our drive, steer, and trailer 7 tires to crack and break when we see excessive continued 8 heat conditions. These damages and repairs are costly, 9 and the heat we have seen this summer has been extreme. 10 Fuel and other costs in Arizona. Since 2000, with 11 an accentuation post-COVID 19 effect, we have seen a 12 steady increase in all the peripheral costs of servicing 13 our customers. Going back to 2017, costs like insurance, 14 repairs and maintenance, special permitting, demurrage, 15 wages, et cetera, have increased 38%. Fuel costs are in 16 addition to these cost increases. 17 Statistics from the U.S. Energy Information 18 Administration show that diesel fuel costs have risen by 19 150% over the last two decades in the western part of the 20 United States. Since 2017, fuel costs have increased by 21 80%. Due to increased time in delivering milk to our 22 customers, overall fuel usage is up, increasing our costs. 23 Changes to the economics of producing Grade A 24 milk. Dr. Erba from DFA provided testimony earlier in the 25 hearing about the current cost to produce Grade A milk in 26 the Mideast. UDA would like to add to that testimony with 27 cost factors we have experienced in Arizona. 28 The additional requirement created by the FARM 8701 1 program adds cost to produce Grade A milk. Overhead to 2 meet the program guidelines and the management of such 3 compliance results in additional cost for Arizona 4 producers. 5 Even just to meet the requirements of the PMO, 6 many costs have increased. Construction costs for housing 7 of laborers, both internally and externally, to keep the 8 farm operational have increased. Construction costs for 9 the cow facility and calf barns have increased. The 10 milking parlor design and automation equipment has 11 increased. The on-farm milk storage area has become the 12 equivalent to what manufacturing plants invest in storage 13 capacity. 14 Multiple milk silos with the capacity to hold 36 15 to 48 hours of milk production is commonplace. The 16 constant cleaning and upkeep of equipment has resulted in 17 the increased use of chemicals and repair charges. 18 The availability of water, as previously noted, 19 has a profound impact on Arizona dairy operation. Surface 20 water for agricultural use as been restricted or, in some 21 instances, cut off entirely. Wells are in use, but the 22 costs of rehabbing them for adequate supply of water, 23 i.e., deeper or relocating wells, has increased. 24 Due to water availability issues, farms can no 25 longer depend on growing their own feed to supplement 26 their needs. Purchased feed is increasingly the dependent 27 option, and Arizona farmers are facing stiff competition 28 and increased prices to locate feedstuffs. Arizona feed 8702 1 mainly comes from the Midwest. All aspects of 2 transportation to deliver feed via rail and truck have 3 increased, and the dynamics of locating feed has changed 4 with the vast amount of feed being exported. Now Arizona 5 dairymen are juggling many commodity feed and byproducts 6 to produce a suitable ration, and at most times, not at 7 the best nutritional value to the cows. 8 The cost of farmland in Arizona is now ranging 9 around 30 to $40,000 per acre. The ability to expand a 10 production facility or build a new one in Arizona has 11 become increasingly difficult. New farms, if anyone is 12 willing, are now locating to more remote areas. 13 On-farm utility usage, and therefore, utility 14 costs, have also increased. Larger milk pumps are needed 15 to move the milk tonnage through the lines into storage 16 areas. Larger inline chillers are needed to keep milk 17 colder and meet the increasing demands of bottlers for 18 milk. The temperature of milk leaving UDA's farms today 19 is targeted to be 35 degrees. Milk trucks are needing to 20 be flushed out for cooling before loading. Cow comfort 21 costs have increased. Misters, fans, and constructed 22 shaded areas are an absolute necessity. 23 Dairy farming is considered a capital-intensive 24 business as compared to the full spectrum of businesses in 25 the United States. The consolidation of the banking 26 industry and increases in inflation have created a 27 difficult environment for dairymen to acquire credit. New 28 investments in current operations or new farms starting 8703 1 out are on the decline. 2 These costs identified above are more than -- more 3 than exceed the $2.25 cost that Dr. Erba identified. In 4 order to maintain a Grade A milk supply to service the 5 fluid market in Arizona, Class I prices need to increase 6 to the dairymen. 7 Below is some index information. The tables below 8 highlight the population in annual percentage change, 9 diesel price change, the long-term drought via the 10 standardized precipitation evapotranspiration index -- 11 THE COURT: And of course you know I want you to 12 spell that. 13 THE WITNESS: Evapotranspiration, 14 E-V-A-P-O-T-R-A-N-S-P-I-R-A-T-I-O-N. 15 THE COURT: Thank you. 16 THE WITNESS: Figure 1, Arizona population from 17 2000 to 2022. In 2000, we had 5.16 million people. In 18 2022, we had 7 -- or have 7.35 million people. So 42% 19 population growth in the past 20 years from the U.S. 20 Census Bureau. 21 Figure number 2, the weekly West Coast No. 2 22 diesel retail price from 2000 to 2023. We have seen 150% 23 increase in diesel cost in the past 20 years. Source is 24 the U.S. EIA Administration for Gasoline and Diesel Fuel 25 Update. 26 Figure 3, also pulled from the same data, shows 27 the weekly West Coast No. 2 diesel retail price from 2017 28 to 2023, which shows an 80% increase in diesel costs in 8704 1 the past six years. 2 This is the January through March 2023, long-term 3 drought average image. 4 THE COURT: And that's on page 8 of your 5 testimony. 6 THE WITNESS: Yes, Your Honor. 7 In conclusion. UDA implores the USDA to adopt 8 each of the NMPF proposals, with an emphasis on the 9 Class I pricing differential adjustment currently under 10 discussion. The need to affect higher prices on behalf of 11 Arizona dairymen is essential to combat the onslaught of 12 increased production costs in one of the fastest growing 13 population states in America. The adoption of this 14 proposal holds immense potential to address critical 15 challenges. It is a move that not only benefits our hard 16 working dairy farmers, but also supports the economic 17 stability of our communities and ensures a reliable supply 18 of high quality, wholesome milk for consumers at an 19 affordable price. 20 If Arizona cannot supply its own population, the 21 transportation costs from other states to do so will be 22 borne by the local customer. Further, the proposal aligns 23 with the evolving needs of the dairy industry. A 24 reduction in farmer income will assuredly put more dairy 25 farms out of business, a preventible outcome if this 26 common sense reform is adopted by the USDA. 27 In closing, I want to thank the USDA for holding 28 this hearing, for allowing me to testify on the issues 8705 1 that are so integral to sustaining Arizona's milk supply, 2 and for carefully considering the adoption of each NMPF 3 proposal. 4 And with that, I look forward to your questions. 5 BY MR. PROWANT: 6 Q. Thank you, Mr. Butcher. I just wanted to follow 7 up on a few things here before we open you up for 8 cross-exam. 9 So going first to pages, let's see, III and IV, 10 you are talking about transportation, and you are talking 11 about how fuel costs have risen. And that's actually on 12 page 5, I apologize. 13 I was wondering if you have, you know, any sort of 14 numbers you can put to that. We just heard Mr. Hiramoto 15 talk about how gas in California is $5. 16 Has Arizona experienced similar types of prices? 17 A. We pull from a very similar PADD. 18 Q. Okay. 19 A. I don't have the exact cost, but being close to 20 the West Coast, we do have a more increased diesel price 21 than other parts of the United States. 22 Q. And then continuing on page 5, you mention the 23 FARM program adds costs to produce Grade A milk. 24 I was wondering if you could just talk briefly 25 about what the FARM program is and how it adds to your 26 overhead, or your producer's overhead. 27 A. Sure. The FARM program is designed to -- to 28 really care for cow comfort and to have some sort of 8706 1 oversight on cow comfortability. A lot of our customers 2 require this, so we enact this across all of our dairy 3 farms. And there is overhead to manage these programs and 4 manage these systems and have people on staff to manage 5 our internal FARM program. 6 Q. Okay. In turning to the next page, on page 6, you 7 mentioned that the milk leaving UDA's farms today is 8 targeted to be 35 degrees, which, that's in excess of the 9 PMO standard, correct? 10 A. Yes, it is. 11 Q. And by "in excess," I mean more strict. 12 A. Correct. Yes. 13 Q. And we have heard some testimony from other 14 witnesses about somatic cell count and bacteria counts. 15 I'm wondering if UDA's producers are also having 16 to meet heightened requirements from customers? 17 A. Yes. Our customers require lower somatic cell 18 counts as well, in addition to lower temperatures, which 19 is why we target 35 degrees. And we also consider protein 20 as well a factor to watch out for. 21 But, yes, our customers are requiring us to 22 deliver milk that is considerably lower than the current 23 PMO standard on both temperature and somatic cell 24 component. 25 Q. Thank you. 26 And then just turning to some of your tables here, 27 or figures. Can you just explain for us what the 28 evapotranspiration index is showing? 8707 1 A. Yes. So this shows more the long-term drought 2 across the state of Arizona. Maricopa County is, in this 3 image, located in the middle of Arizona. I don't know how 4 to describe the county structure, but it's -- it's -- 5 there is a considerable long-term drought, and as we can 6 kind of tell in the middle of this page -- 7 THE COURT: Now, which page are you on? 8 MR. PROWANT: Mr. Butcher, I think you might be 9 talking about Figure 4 on page 8. 10 THE WITNESS: Yes. 11 BY MR. PROWANT: 12 Q. And I'm looking at Figure 1 on page 6. I 13 apologize for not being clear. There's -- it's a line 14 graph, and there's a population -- 15 A. Okay. 16 Q. -- a blue line going up showing Arizona's 17 population growth in the last 22 years. And then there's 18 a green line, which, you know, has been relatively 19 stagnant and went down in 2020. And I'm just wondering 20 what's this green line showing in this evapotranspiration 21 index. 22 A. There's -- I think there's a little confusion 23 here. 24 Q. Sure. 25 A. Is on the index information aspect, down below it 26 says, "via the Standardized Precipitation 27 Evapotranspiration Index," that is referring to the 28 long-term drought image on page 8. 8708 1 Q. Oh, understood. Okay. 2 A. But the green line, to address I think your 3 concern, is the percent of annual change in population. 4 So we can see the population increases in 2000 5 starting at 5.16. We see the blue line go up and to the 6 right, which indicates an increase in population. 7 Down below, the other, the other line -- I'm 8 colorblind, so I will take your word that it's green -- 9 shows the annual percentage change. So we can see that we 10 see a spike of almost an 8% change, and then looks like 11 continuing from 2000 to 2019 we see an annual change of 2% 12 population change. 13 Q. Okay. So the green line is just showing the 14 percentage of population change, and this isn't talking 15 about rainfall or anything? 16 A. Correct. 17 Q. The evapotranspiration, that's Figure 4, showing 18 just Arizona's long-term drought? 19 A. Yes, that's correct. 20 Q. Okay. Great. 21 MR. PROWANT: That's all the questions I have. 22 Your Honor, we'd make him available for 23 cross-exam. 24 THE COURT: Very good. Thank you. 25 So since you started to talk about page 8, you 26 were trying to help us locate Maricopa County and -- 27 THE WITNESS: Yes, Your Honor. 28 THE COURT: If you would go back to that. 8709 1 THE WITNESS: Yes, Your Honor. 2 THE COURT: I see the patches are about drought, 3 not about where the population is. So I need a little 4 help. 5 THE WITNESS: That's correct. So let's -- let's 6 focus on the southwest part of Arizona, which is Yuma 7 County. And then the southwest quadrant, we can see there 8 is -- I believe to be is red, which highlights a long-term 9 drought. If we shift our focus maybe more to the center 10 of the image, which is to the right of Yuma County, we 11 will see Maricopa County, and there is a patch of what I 12 assume is red, or yellow, that highlights a drought in the 13 middle part of Maricopa County in Arizona. 14 THE COURT: Very good. So this SPEI that's 15 indicated in this chart on page 8, that goes with the 16 Standardized Precipitation Evapotranspiration Index? 17 THE WITNESS: Yes, Your Honor. 18 THE COURT: Okay, then. Thank you. 19 Who has cross-examination questions for 20 Mr. Butcher? 21 Mr. Rosenbaum. 22 CROSS-EXAMINATION 23 BY MR. ROSENBAUM: 24 Q. Steve Rosenbaum for the International Dairy Foods 25 Association. 26 If you could turn to page 2 of your report, which 27 is Hearing Exhibit 376. 28 This is the chart on which you list the current 8710 1 Class I differentials, the Class I differentials suggested 2 or recommended by the University of Wisconsin model, and 3 the proposed Class I differentials that are part of 4 Proposal 19, correct? 5 A. Yes. 6 Q. And when you list the "model," I take it you have 7 taken the average of the two different months that were 8 covered by the University of Wisconsin model; is that 9 correct? 10 A. I'm unsure of what the -- if it took those 11 averages. I'm unsure. 12 Q. Okay. Well, they appear to, from my perspective. 13 If others see it differently, I'm sure they can correct 14 that. 15 And I think you made clear that the only counties 16 in the entire state in which there are pool plants are 17 Maricopa and Yuma Counties, correct? 18 A. Yes. 19 Q. So that the proposed Class I differentials for the 20 other counties really have no practical significance; is 21 that fair? 22 A. That is correct. Yes, sir. 23 Q. Okay. So let's just focus on Maricopa and Yuma. 24 In Maricopa, the current Class I differential is 25 $2.35. The University of Wisconsin model suggested a 26 $0.05 increase, correct? 27 A. Yes. 28 Q. By contrast, you -- your proposal is an increase 8711 1 more than ten times higher than the proposed University of 2 Wisconsin increase, correct? 3 A. Ten times higher? Or I'd say 27.6%. 4 Q. Well, that's over the current. 5 But, I mean, the University of Wisconsin is 6 suggesting that the Class I differential go up by $0.05, 7 and you are proposing that the Class I differential go up 8 by $0.65, correct? 9 A. Okay. I agree. 10 Q. So in terms of a comparison of what the University 11 of Wisconsin is suggesting is an increase, and what you 12 are suggesting as an increase, you are suggesting an 13 increase more than ten times higher, correct? 14 A. I believe that the model is what the model is. 15 It's a baseline like we have discussed. It's not the take 16 all, end all. So we have added our own regional or state, 17 really, color, and decided that we needed to increase to 18 account for a variety of cost increases. 19 Q. And I assure you, we'll be talking about that at 20 some length -- 21 A. Okay. 22 Q. -- as to your justification. 23 But I'm just trying to orient ourselves in terms 24 of magnitude of difference between what the University of 25 Wisconsin model suggested and what you have proposed. 26 And just a simple math, your $0.65 increase is, 27 indeed, 13 times the $0.05 increase that the University of 28 Wisconsin model suggests, just as a matter of simple math, 8712 1 correct? 2 A. I would also point out -- 3 THE COURT: Just a minute, do you have anything 4 just to multiply 5 times 13? I mean, do you need some 5 paper and a pen? 6 THE WITNESS: I haven't done paper math in quite 7 sometime, but I do have a phone. 8 THE COURT: Go ahead and use it. 9 THE WITNESS: Okay. 10 MR. ROSENBAUM: I think 5 times 13 is 65. 11 THE COURT: But he's entitled to make sure you are 12 not misleading him, Mr. Rosenbaum. 13 MR. ROSENBAUM: I would not intend to do that. 14 THE WITNESS: I would agree. 15 BY MR. ROSENBAUM: 16 Q. And -- okay. And the increase that you are 17 proposing in Yuma is $0.80 as compared to the University 18 of Wisconsin suggested increase of $0.05, correct? 19 A. I think we should back up just a touch, because 20 you indicated that it was my decision. I'm not sure if 21 that's an accurate representation if it was really my 22 decision. It was a group consensus. 23 Q. That's a fair correction. 24 The National Milk Producer Federation proposal is 25 one to increase the Class I differential in Yuma County by 26 $0.80, as compared to the $0.05 increase that the 27 University of Wisconsin model proposed, correct? 28 A. Yes. 8713 1 Q. Okay. And by my math, that's more than -- your -- 2 by my math, the National Milk Producer Federation proposal 3 is more than 15 times greater the increase proposed by the 4 University of Wisconsin model. Is that -- 5 THE COURT: More than or equal to 15 -- 6 MR. ROSENBAUM: More than -- 7 THE COURT: -- times? 8 MR. ROSENBAUM: -- 15. Sorry. 9 THE COURT: Right. 10 BY MR. ROSENBAUM: 11 Q. It's 15.8 to do the actual math. 12 But does that sound right to you? 13 A. It sounds -- it sounds right and reasonable. 14 But I think we should also highlight that that 15 increase still doesn't cover the cost increases -- 16 Q. Well -- 17 A. -- themselves. 18 Q. -- as I say, we'll talk about those in a minute. 19 Once again, I'm just trying to orient ourselves what you 20 are seeking versus what the University of Wisconsin model 21 indicated. 22 The -- and just to, once again, to orient 23 ourselves, there are -- all of the manufacturing plants in 24 the state are in -- are in what county? 25 A. Maricopa and Yuma County. 26 Q. Okay. And are all the Class I plants also in 27 those two counties? 28 A. Yes. 8714 1 Q. Okay. And are the -- are there two Class I plants 2 in Yuma? 3 A. I believe so. 4 Q. And are they owned by the Hettinga family? 5 A. I believe so. 6 Q. Okay. And are those plants supplied by your 7 cooperative? 8 A. On occasion we might, but we have no contractual 9 obligation to send milk down there. 10 Q. And are they -- are you the only co-op in the 11 state? 12 A. I believe we are, yes. 13 Q. Okay. So by definition, then, they -- their 14 supply -- they have a non-co-op supply? 15 A. I believe that's correct. 16 Q. Okay. All right. So let's talk a bit about dairy 17 in Arizona. 18 I have to say, your testimony might be 19 characterized as something of a tale of woe. 20 A. It's pretty desolate. And I think as I 21 highlighted, we started with 390 dairy farmers, to date 22 down to 35, so -- 23 Q. And I'm going to focus right on that to start 24 with. 25 A. Okay. Perfect. 26 Q. So you had 390 members in 1960 as you state, 27 correct? 28 A. Yes. 8715 1 Q. And now you say you are down to 36, right? 2 A. Yes. 3 Q. Okay. So let's look a bit about milk in Arizona. 4 MR. ROSENBAUM: And, Your Honor, I would have a 5 document I would like to have marked. 6 THE COURT: I'm going to mark this next one as 7 377. 8 (Thereafter, Exhibit Number 377 was marked 9 for identification.) 10 THE COURT: Thank you, Mr. Rosenbaum. And what 11 other number should I reference, if any? 12 MR. ROSENBAUM: I think the practice has been when 13 I have marked a document for the first time, we just call 14 it IDFA-377 as well. That's how -- 15 THE COURT: IDFA-377. All right. Good. 16 Now, I'm going to go off record so that we can 17 distribute this, and the witness can get a look at it. 18 And we'll go off record now at 11:37. 19 (An off-the-record discussion took place.) 20 THE COURT: Let's go back on record. 21 Back on record at 11:38. 22 And Exhibit 377 is also known as IDFA-377. 23 Mr. Rosenbaum, you may proceed. 24 BY MR. ROSENBAUM: 25 Q. If I could have you turn to the sixth page of this 26 document, please. That's -- which is Table -- and let me 27 just start by introducing the document. It's called Milk 28 Production, Publication of the U.S. Department of 8716 1 Agriculture, Agricultural Marketing Service. And this is 2 dated February 13, 1961. 3 So if we turn to page 6, which is a table, 4 contains Table 7, milk cows and milk production on the 5 farms by states by various years. I would like to focus 6 on Arizona, of course, and specifically the number of 7 millions of pounds produced in Arizona in 1960, which is 8 the year you -- that UDA was formed, and the year you 9 reference in your testimony. 10 Do you see that in that year, the state, the 11 entire state, produced 461 million pounds of milk? 12 A. Yes. 13 MR. ROSENBAUM: Your Honor, I would now like to 14 mark another exhibit, which I would ask be Exhibit 378. 15 THE COURT: Yes. Thank you, Mr. Rosenbaum. Thank 16 you for giving me this. 17 All right. The one that is now being distributed 18 will be Exhibit 378. 19 (Thereafter, Exhibit Number 378 was marked 20 for identification.) 21 THE COURT: Mr. Rosenbaum, shall I also call it 22 IDFA-378? 23 MR. ROSENBAUM: Yes, I would -- yes, Your Honor. 24 THE COURT: All right. And it's being distributed 25 here in the room. If you need a copy, please raise your 26 hand. 27 And, Mr. Rosenbaum, everyone's situated. You may 28 proceed. 8717 1 BY MR. ROSENBAUM: 2 Q. This document is -- has as the same name as the 3 previous exhibit. It's called Milk Production. Once 4 again, it's a publication of the U.S. Department of 5 Agriculture. It's now being done by the National 6 Agricultural Statistic Service. And this document is 7 dated February 22, 2023. 8 And if you would turn with me to page 7 -- excuse 9 me -- page 8, which is a document that has the heading 10 Milk Cows and Production States and United States 2021 and 11 2022. And I would like to focus on the state of Arizona, 12 of course, and the 2022 figure, which is the most recent 13 poll year figure available, obviously, since we're in 14 2023. 15 And what I see here is that in 2022, there were 16 4,772,000,000 pounds of milk produced? 17 Is that your reading as well? 18 A. Yes. 19 Q. So that milk production increased more than ten 20 times in Arizona between 1960 and 2022, rising from 21 461 million pounds to 4,800,000,000; is that correct? 22 A. Yes. 23 Q. Okay. And correct me if I'm wrong, but I believe 24 around 90% of that 4,772,000,000 pounds is UDA milk; is 25 that right? 26 A. That's probably a little high. I would probably 27 peg something closer to the 80% range. 28 Q. Well, I'll tell you how I got there. 8718 1 A. Okay. 2 Q. Because I got there just -- I took your number 3 from your statement that says, on the first page I 4 think -- yeah, UDA production is a mere 12 million pounds 5 of milk generated daily. I took 12 million and multiplied 6 it by 365 -- 7 A. Yes. 8 Q. -- and I got a number over -- a number over 9 4 billion. 10 THE COURT: Let's go off record just a moment. 11 (An off-the-record discussion took place.) 12 THE COURT: Let's go back on record. 13 We're back on record at 11:44. 14 Mr. Rosenbaum, you directed our attention to 15 Exhibit 376, page 3, and you may continue. 16 BY MR. ROSENBAUM: 17 Q. Yes. So to give you the precise numbers, I 18 multiplied 12 million, the 12 million pounds a day that 19 you referenced in your testimony, by 365, and I got 20 4,380,000,000. 21 A. Sure. We see fluctuations that range due to 22 seasonality of milk. So the 12 million is really a 23 generalized average of how much milk we typically produce. 24 However, we have to acknowledge that there are 25 fluctuations, and we see that number tick down as well. 26 Q. Okay. In any event, a large majority of the milk 27 is produced by UDA, correct? 28 A. I agree with you, yes. 8719 1 Q. Okay. And so what I'm seeing is a tenfold 2 decrease in farmers, but a tenfold increase in production, 3 correct? 4 A. Yes, off the numbers. 5 Q. Now, that would obviously suggest that your 6 members have a lot more cows than they used to back in 7 1960, correct? 8 A. We do. And there's a multiple of reasons for 9 this, as I testified, is we're not seeing many dairy 10 farmers that want to locate in Arizona. We had over 11 126 days of heat in excess of 100 degrees just in 2023. 12 Dairy farming is very hard in Arizona. 13 So what we have done, and what we see, and we 14 follow the -- you know, very similar national average, 15 we're seeing farms reduce, cow numbers increase, one -- 16 and we're seeing that a little more drastically in Arizona 17 because our farms are typically larger -- but it's really, 18 it's an act of desperation so that perhaps we can gain 19 some efficiencies of scale to survive another month, and 20 that's why we're seeing larger numbers. 21 Q. And just to compare how you are doing versus the 22 country as a whole, if we take Exhibits 377 and 378, and 23 juxtapose Table 7 in Exhibit 377 with page 8 in 24 Exhibit 378, we have already established that during that 25 timeframe Arizona milk production increased tenfold, 26 correct? 27 A. Sorry, you spoke a little quick there, so I'm not 28 entirely following which -- 8720 1 Q. I'm comparing the 461 million pounds produced in 2 1960 to the 4,472,000,000 pounds produced in 2022 in 3 Arizona, milk production in Arizona has gone up more than 4 ten times, correct? 5 A. I'd have to run -- do the math. 6 Q. Well, 461 times 10 would be 4,600,000,000, but 7 you're actually -- 8 A. So slightly over. 9 Q. 4,772,000,000. So you are a little above ten 10 times as high, correct? 11 A. Yes. 12 Q. As opposed to the national averages, if we compare 13 them, which at the bottom of Table 7 in Exhibit 377, we 14 see that total U.S. milk production in 1960 was 15 122,920,000 pounds and -- state that again, I'm off -- 16 total production in the United States in 1960 was 17 122,920,000,000 pounds, and in 2022 it was 226,462,000,000 18 pounds. 19 Do you see that? 20 A. I do. 21 Q. So that Arizona milk production increased tenfold 22 during this timeframe, whereas total U.S. milk production 23 didn't even double, correct? 24 A. It -- it appears that way. And I would also 25 probably highlight the population change as well in 26 Arizona. That could be a contributing factor. 27 MR. ROSENBAUM: Now, I would like to mark the next 28 document as Exhibit 379. 8721 1 THE COURT: I agree, 379. 2 (Thereafter, Exhibit Number 379 was marked 3 for identification.) 4 THE COURT: Thank you. 5 So I'm marking this newest one as 379, and I'm 6 marking it also as IDFA-379. 7 MR. ROSENBAUM: Now -- 8 THE COURT: Hold off just a moment. The copies 9 are being distributed within the room, Mr. Rosenbaum. 10 You are good to go, Mr. Rosenbaum. 11 BY MR. ROSENBAUM: 12 Q. Mr. Butcher, I searched for published information 13 as to how many cows the average dairy farm had back in 14 1960 in Arizona, and what I found is -- it doesn't appear 15 to be a published number. There is -- it was hidden from 16 me. 17 But I did find this recent article, which is what 18 Hearing Exhibit 379 is, which was written, published 19 December 7, 2021, and the author is the General Manager of 20 the Arizona Milk Producers, a woman named Tammy Baker. 21 Do you see that? 22 A. I do. 23 Q. And do you know Ms. Baker? 24 A. I can't recall. 25 Q. Okay. Are you familiar with the Arizona Milk 26 Producers? Is that an organization in the state? 27 A. I would assume so, but I'm not familiar with that. 28 Q. Okay. The first -- what I'm going to call your 8722 1 attention to is the first sentence, which states, I'll 2 just quote it, "Arizona's dairy industry blossomed in the 3 state with the introduction of irrigation and alfalfa in 4 the early 1990s. In fact, by 19" -- 5 THE COURT: Now, does that say 1900s? 6 MR. ROSENBAUM: I'm sorry, I misspoke. In the 7 1900s. 8 THE COURT: But isn't that interesting they are 9 talking about blossoming in the beginning of the 1900s. 10 So that -- but go ahead. 11 BY MR. ROSENBAUM: 12 Q. "In fact, by 1957, Arizona dairy was a $25 million 13 business, with 372 dairy farms and an average herd size of 14 88 cows." 15 Do you see that? 16 A. I do. 17 Q. Does that sound about right for what the size was 18 back in 1960? 19 A. I don't know. 20 Q. Okay. Okay. I mean, according to -- if you look 21 back at Hearing Exhibit 377, Table 7, if you look at cow 22 numbers in Arizona in 1960, there were 50,000. 23 Do you see that? 24 A. I do. 25 Q. And you had 390 members, correct? 26 A. Yes. That was the information that was given to 27 me, yes. 28 Q. So even if all dairy farmers were UDA members at 8723 1 that point in time -- I don't know whether they were or 2 not -- but the 50,000 cows divided by 390, that would give 3 you 128 cows per farm. 4 Do you see -- just simple math. Do you see that? 5 A. I don't dispute that. Okay. 6 Q. And to the extent that there were farmers who were 7 not DFA members, that 128 number would go down, right? 8 Because some of those cows would belong to the 9 non-members, correct? 10 A. I don't know. 11 Q. Okay. Well, just as a matter of simple math, if 12 you increase the denominator, the result is going to be 13 bigger, right? Smaller, excuse me. Increase the 14 denominator, the result is smaller, correct? 15 A. It could be. I still -- I don't -- 16 Q. Okay. 17 A. -- I don't know how to answer that. I'm sorry. 18 Q. Well, let me just -- 19 A. I mean -- 20 Q. So we're at least clear on what I'm trying to say. 21 A. Sure. 22 Q. If you take the 50,000 cows, which is what USDA 23 tells us there were in Arizona in 1960, and you divide 24 that by the 390 UDA members in 1960, that would give you 25 an average of 128 cows per member, correct? 26 A. I agree with you on that, yes. 27 Q. And if the -- 28 THE COURT: Now, I'm sorry, Mr. Rosenbaum, I'm 8724 1 trying to keep up with you. 2 MR. ROSENBAUM: Yes. 3 THE COURT: So I'm looking at the Table 7 -- 4 MR. ROSENBAUM: Yes. 5 THE COURT: -- and I'm seeing 50,000 cows. 6 MR. ROSENBAUM: 50,000 cows, exactly. 7 THE COURT: And did you say 60,000 cows? 8 MR. ROSENBAUM: No, I have always meant to say 50. 9 If I said something different, I misspoke. 10 THE COURT: Okay. Thank you. All right. Keep 11 going. 12 MR. ROSENBAUM: So -- I think I said in 1960. 13 That may be where I used the 60. But in terms of cow 14 numbers, it's 50,000. 15 BY MR. ROSENBAUM: 16 Q. And we get to 128 cows per farm by dividing the 17 50,000 cows by the 390 UDA members, okay? 18 A. Yes. 19 Q. And in that fourth grade math, 390 is the 20 denominator, correct? 21 A. I will agree with you. 22 Q. I'm not -- 23 A. It was like my teacher said, you are not going to 24 have a calculator with you all the time, but, you know, 25 now we do, so -- 26 Q. Yes, exactly. 27 So if, in fact, there were some additional dairy 28 farmers out there who were not members of UDA, they had 8725 1 dairy cows of their own, that would increase the 2 denominator, which would mean that the number of cows per 3 farm would be somewhat less than 128, correct? 4 A. I -- I would be inclined to agree with you. I 5 still haven't done that math in quite some time. 6 Q. Okay. Now, today we have, if we look at -- back 7 to Exhibit 378, as of the end of 2022, we have 197,000 8 cows in Arizona, correct? 9 THE COURT: Now, you are on page 8? 10 MR. ROSENBAUM: I'm on page 8 of Hearing 11 Exhibit 378. In the column called "Milk Cows for Arizona 12 for 2022," I see 197,000 milk cows in Arizona in that 13 column. 14 BY MR. ROSENBAUM: 15 Q. Do you agree with that? 16 A. Yes, I do. 17 Q. Okay. And then if we -- we actually do have a 18 figure in this document, on which we didn't have for 19 1960 -- 20 A. In which document, sorry? 21 Q. Same document we're on still. If you turn to 22 page 18, that's a document called -- a page called 23 Licensed Dairy Herds, and this document says there were 80 24 licensed dairy herds in Arizona in 2022. 25 Do you see that? 26 A. I do see -- yes, I do see that. 27 Q. And so if we simply divide the 197,000 dairy cows 28 in Arizona in 2022 by the 80 dairy farms, licensed dairy 8726 1 farms -- licensed dairy herds I should say, that's the 2 term used by USDA -- in 2022, then we end up with 2,462 3 dairy cows per herd. Simple math, one divided by the 4 other. 5 THE COURT: There is no such thing as simple math, 6 Mr. Rosenbaum. 7 MR. ROSENBAUM: I don't have the algebraic 8 formulas that some people are using for their testimony. 9 THE COURT: But you have a head start on us. 10 BY MR. ROSENBAUM: 11 Q. In any event, 197,000 divided by 80 would give you 12 the number, average number, of cows per herd. 13 Do you agree with that approach? 14 A. Without running my own analysis and equations, I 15 mean, that would -- would not know precisely, but I don't 16 think it's unfound what you are saying. 17 Q. And that would suggest that there are -- and 18 strike that. 19 And you don't challenge my representation as 20 seeming way off, that 197,000 cows divided by 80 herds 21 gives you an average of 2,462 cows per herd? 22 A. I don't know the exact average size herd we have 23 on each farm, but I believe it would be relatively close 24 to that number. 25 Q. Okay. And -- all right. And I mean, Arizona, 26 it's fair to say, you are home to massive dairy farms, 27 correct? 28 A. Depends on what you mean by "massive," but there 8727 1 are some pretty big farms out in West Texas and Idaho. So 2 I -- and California. I don't know what you mean by 3 "massive" though. 4 Q. Well, and I'm not suggesting those aren't massive, 5 too. They are massive, too. 6 A. Okay. 7 Q. You are at the upper edge of the -- upper end of 8 the spectrum in terms of average dairy size, right? In 9 Arizona? 10 A. My area is really -- my current specialty is 11 really focused in Arizona, so I -- I don't know how to 12 answer that question because I'm not as familiar with a 13 lot of other states. Like I said, I know there are some 14 large farms in the West Texas area and Idaho region. But 15 outside of this geographic region, I'm not an expert in -- 16 Q. And I know you have mentioned 2022 being a drought 17 year for the state particularly, a drought year for the 18 state? 19 A. I think I said a prolonged drought for 100 years. 20 Q. Okay. For 100 years. 21 A. I think that's what the testimony said, yes. 22 We're in a pretty prolonged drought with -- I mean, we can 23 see with the Lake Powell, Lake Mead elevation levels that 24 it's been problematic for some time. 25 Q. But actually, cow numbers are still growing, 26 right? In the state, the cow numbers today are higher 27 than 197,000 than they were in 2022, aren't they? 28 A. That's right. And what I said, the comments just 8728 1 a few minutes ago, it's hard to find dairy farmers in 2 Arizona. No one wants to go work in 115-degree heat. So 3 our farms are getting larger, and it's an act of 4 desperation, like I said. Urban sprawl and urban 5 population has been pushing our farms out further and 6 further away. So we have some members acquire other farms 7 to gain some efficiencies of scale and to hopefully 8 survive another month. 9 Q. But total cow numbers are up, correct? I can -- 10 let me -- there's no reason to ask you to speculate. 11 A. Okay. 12 MR. ROSENBAUM: Let me ask that the next document 13 be marked as Exhibit 380. 14 THE COURT: Yes. It will be 380. Thank you. 15 Marking this as Exhibit 380. 16 (Thereafter, Exhibit Number 380 was marked 17 for identification.) 18 THE COURT: I'm also marking it as IDFA-380. And 19 let's go off record while we distribute. 20 (An off-the-record discussion took place.) 21 THE COURT: We're back on record at 12:04. 22 Please be back and ready to go at 1:05 p.m., and 23 we will then address Exhibit 380. Mr. Rosenbaum will 24 continue his cross-examination. 25 Right now we go off record at 12:04 p.m. 26 (Whereupon, the lunch recess was taken.) 27 ---o0o--- 28 8729 1 WEDNESDAY, NOVEMBER 29, 2023 - - AFTERNOON SESSION 2 THE COURT: All right. Let's go back on record. 3 We're back on record at 1:06 p.m. 4 Mr. Rosenbaum, you may proceed. 5 MR. ROSENBAUM: Thank you. 6 BY MR. ROSENBAUM: 7 Q. When we were breaking for lunch, I was -- I had 8 just gotten through marking as Exhibit 380 a document 9 entitled "Milk Production Produced by USDA, National 10 Agricultural Statistic Service," dated October 27, 2023, 11 which is, obviously, very recent. 12 And if you turn to page 3 of this document, there 13 is a heading called "Milk Cows and Production, 24 Selected 14 States, September 2022 and 2023." 15 And calling your attention to state of Arizona, do 16 you see that this indicates that as of September 2023, 17 last month, there were -- month before last rather -- 18 there were 201,000 dairy cows in the state, correct? 19 A. Yes, sir. 20 Q. And that represents roughly a 2% increase from the 21 197,000 cows that are listed in Hearing Exhibit 378 as the 22 number of dairy cows in Arizona for 2022, correct? 23 A. Yes. 24 Q. Okay. Now, you have mentioned how population has 25 grown. 26 Has that -- that's led to a boom in land values 27 basically; is that right? 28 A. Yes, sir, I believe so. 8730 1 Q. Okay. And has that -- I mean, has that been an 2 economic boom to some of your members, they were able to 3 sell their farms if they so chose at prices substantially 4 in excess of what they had paid for the land? 5 A. I think they have that option, but we would hope 6 that they would not due to the farming situation -- the 7 dairy farming situation in Arizona. But that probably is 8 an option to them. 9 Q. Has that, in fact, been an option people have 10 exercised? 11 A. I don't know. 12 Q. Okay. Have any of them sold out areas close into 13 the major cities and then built new dairy farms further 14 out? 15 A. I believe some have, but I -- I don't know 16 precisely who has or who hasn't. But I -- it is common 17 that we are starting to see some neighborhoods with urban 18 sprawl creep next door to some of our dairy farms. 19 Q. Okay. Now, let's talk about Grade A and Grade B 20 milk for a second. All right? 21 A. Okay. 22 Q. First of all, there is zero Grade B milk in the 23 state; is that correct? 24 A. Yes. Now, we may have a -- on occasion a rejected 25 load. I don't know the final disposition of a rejected 26 load. But, yes, we should have zero Grade B. 27 Q. Okay. And -- and you have a manufacturing plant, 28 correct? 8731 1 A. Yes, we do. 2 Q. And you make a number of products there, correct? 3 A. We make a variety of different products as I 4 outlined, some powders, a little bit of cheese, different 5 types of butter, some protein products, and condensed 6 products as well. 7 Q. Okay. 8 MR. ROSENBAUM: Your Honor, I would like to mark 9 the next document as Exhibit 37- -- 10 THE COURT: 381. 381 is our next one. 11 And while we're getting those distributed, let's 12 go off record at 1:10. 13 (An off-the-record discussion took place.) 14 THE COURT: We're back on record at 1:11. 15 Mr. Rosenbaum, you may proceed. I have marked the 16 document you are about to talk about as Exhibit 381, and I 17 have also labeled it IDFA-381. 18 (Thereafter, Exhibit Number 381 was marked 19 for identification.) 20 BY MR. ROSENBAUM: 21 Q. Mr. Butcher, I downloaded this document from the 22 web, and the URL is at the -- I copied the URL into the 23 document. It's a little faint, but it's at the top middle 24 of the first page, so if anyone wants to find it there 25 they can. 26 Do you recognize the document? 27 A. I do. 28 Q. And is this a document on the website of your 8732 1 company? 2 A. I believe it is, yes. 3 Q. Okay. And the document is entitled "Product List 4 and Specifications." 5 Is this, indeed, a list of the products that your 6 company makes? 7 A. I believe this is very accurate, yes. 8 Q. So when -- let's just take as an example the -- if 9 you turn to the third page, these are not numbered, but 10 it's the third page. It says "nonfat dry milk." And then 11 underneath that product description it says, "Grade A, low 12 heat NFDM." 13 NFDM is nonfat dry milk, correct? 14 A. Yes. 15 Q. So does the term Grade A in this document indicate 16 that the milk used to make this product is from Grade A 17 certified farms? 18 A. I haven't heard Grade A certified farms, but the 19 milk it comes from would be Grade A. 20 Q. Okay. It -- when you talk about Grade A and 21 Grade B, would this be an example of a Grade A product the 22 way you use that term? 23 A. Yes, I would agree with you. 24 Q. Okay. So this is one example, we'll show some 25 more, but this is an example of a product that is not 26 obviously fluid milk, but it is -- meets Grade A 27 requirements, correct? 28 A. Yes. 8733 1 Q. Okay. And your ability to sell this product with 2 this designation is dependent upon it coming from Grade A 3 farms, correct? 4 A. I would say yes. 5 And let's also keep in mind that I'm -- my title 6 is the director of fluid sales, so I have very little 7 interaction on some of the powders, just for clarity sake. 8 Q. Okay. Now, we go on to the -- two more pages, we 9 see milk protein concentrate, and that, too, is described 10 as a Grade A product. 11 Do you see that? 12 A. Yes, I do. 13 Q. Okay. And then two more pages we have Grade A 14 buttermilk powder, another Grade A product, correct? 15 A. Yes, sir. 16 Q. And moving on a couple pages, we have Grade A 17 condensed buttermilk. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. Also, Grade A, correct? 21 A. I would believe so, yes. 22 Q. All right. And then, keeping going, flip a page, 23 we see condensed skim, also Grade A? 24 A. Yes, sir. 25 Q. So is it reasonable to say that the costs incurred 26 to maintain Grade A status is a cost that relates to 27 products that are not merely fluid milk? 28 A. Can you state that question one more time? 8734 1 Q. Yes. You sell all these product as being Grade A, 2 correct? 3 A. Yes. 4 Q. And you have identified certain costs that you say 5 are the costs of being Grade A, correct? 6 A. Yes, sir. 7 Q. And so these are costs that relate not just to 8 fluid milk products, but also to nonfluid milk products? 9 A. I would agree with you, yes. 10 Q. All right. Now -- and I mean, you -- I assume 11 your farmers have no intention of going back to being 12 Grade B? 13 A. I would also be inclined to agree with you. I 14 don't think -- I can't recall if we have had Grade B milk 15 in the past, though. 16 Q. Okay. And do you actually require your members to 17 be Grade A? Is that sort of a condition of membership? 18 A. Yes. 19 Q. Now, so you talk about a number of costs, and I'm 20 really going to ask, just so you know where I'm headed, 21 just sort of two questions relating to these costs. 22 One is, is it a cost that relates actually to 23 maintaining Grade A status; and B, whether it's a cost 24 that is only related to fluid milk. Okay? 25 A. Okay. 26 Q. So let's -- I mean, for example, you mention 27 construction costs for housing laborers, correct? 28 A. Yes, I mentioned that. 8735 1 Q. Okay. And you actually, I think, mentioned the 2 PMO in connection with that, if I'm not mistaken, on 3 page 5. You mentioned the PMO explicitly, the Pasteurized 4 Milk Ordinance. 5 (Court Reporter clarification.) 6 MR. ROSENBAUM: Sorry, the Pasteurized Milk 7 Ordinance. 8 BY MR. ROSENBAUM: 9 Q. And you see the paragraph, "Even just to meet the 10 requirements of the PMO, many costs have increased," and 11 the very first one you mention is the construction costs 12 for housing of laborers. 13 Do you see that? 14 A. I do see that. 15 Q. Okay. PMO is a somewhat lengthy document. I have 16 had the fortune, or misfortune, however, to read it 17 several times in my life. I don't recall construction 18 costs or housing for laborers being covered by the PMO. 19 Are you -- do you have a different view? 20 A. I'm not an expert in the PMO. I have glanced over 21 the PMO a few times on a variety of issues, so I can't say 22 with certainty that if it is or isn't included in the PMO. 23 Q. Now, you -- you go on to talk about feed costs, 24 correct? 25 A. Yes, I do. 26 Q. Once again, under the heading "Economics of 27 Producing Grade A Milk," correct? 28 A. I would have to find it, but, yes, I do remember 8736 1 speaking to that. 2 Q. Okay. I mean, I take it that -- I mean, do the -- 3 do feed costs relate to whether the milk is Grade A or 4 not? 5 A. I don't know if it has a direct correlation. I 6 don't know. I'm not a PMO expert. 7 Q. And -- and is there anything about feed costs that 8 are different when the milk is used for fluid milk 9 purposes versus manufactured product? 10 A. I'm not a dairy nutritionist, so I -- I -- I 11 simply don't know that answer. 12 Q. Okay. By the way, you mentioned somatic cell 13 components. 14 Do you -- and you make cheese, correct? 15 A. We make a very small quantity of cheese, very 16 small. 17 Q. Let me ask you more generally. Do you -- do you 18 export any manufacturing -- start that again. 19 Do you export any manufactured products? 20 A. When you say "export," do you mean outside of the 21 United States? 22 Q. Exactly. 23 A. We do. On the fluid side, we do not. But I 24 believe a lot of our powders are exported outside of the 25 United States. 26 Q. Do any of them go to Europe? 27 A. I don't know the exact locations of where they go. 28 Q. Okay. Do you know whether there are foreign 8737 1 countries that have set somatic cell count requirements 2 stricter than the PMO, which anyone who wants to export to 3 those countries has to meet? 4 A. Personally, I don't know. Having listened to 5 previous testimony, I have heard about it, but I -- I do 6 not know much more other than that. 7 Q. Okay. Now, another thing you mention is the -- is 8 FARM, F-A-R-M, the FARM program, correct? 9 A. Yes. 10 Q. Okay. Is that -- is compliance with that document 11 a prerequisite to being Grade A? 12 A. Grade A, I don't know, but a lot of our customers 13 require our farms to be FARM compliant. 14 Q. And do -- okay. And do those include customers of 15 your -- any of your manufactured products? 16 A. Manufactured as in the nonfat dry milk and the 17 skim milk? I don't know. 18 Q. Now, let's talk about some of the other costs you 19 mentioned. Okay. One of the -- so there are really maybe 20 two, three costs of transportation, I guess I would say. 21 One is obviously the cost of the tankers 22 themselves, correct? 23 A. Yes. 24 Q. Another is what you have to pay the driver, 25 correct? 26 A. That's one of the them, yes, sir. 27 Q. And then another would be fuel, correct? 28 A. Yes, that's an additional cost. 8738 1 Q. And maintenance, right? 2 A. Yes, another additional cost. 3 Q. Okay. Now, did you have discussions with any of 4 the -- any of the -- either of the two University of 5 Wisconsin professors who worked on the University of 6 Wisconsin project to come up with, I think, what you have 7 described as being the model? 8 A. Did I have personal conversations with any of the 9 authors? 10 Q. Yes. 11 A. No, sir, I did not. 12 Q. Are -- not necessarily one-on-one, did you 13 participate at all in any conversations with them? 14 A. No, sir, I did not. 15 Q. Okay. I mean, did -- is it your understanding 16 that their model was designed to capture those four 17 components of transportation costs? 18 A. I don't know the parameters or the data that they 19 captured, since I was not involved in -- in a lot of that. 20 But I also don't know what it didn't capture, like the 21 excessive heat that we have or, you know, the roadway 22 exceeding 140 or 150 degrees where we see tires pop. So I 23 don't know what that model did or did not capture. That's 24 why I wanted to provide a little bit of clarity around 25 costs of repairs and maintenance and permitting and 26 demurrage, because I'm not sure what that model did or did 27 not. 28 Q. Okay. You have no reason to think, for example, 8739 1 they didn't capture the cost of super tankers? 2 A. I don't know if they -- they did or didn't. 3 Q. I mean, did anyone -- is anyone reviewing the 4 model and thinking, well, you know, we're going to ask for 5 more, go back to them and say, hey, we think you must have 6 underestimated what tankers cost? Did you look at these 7 super tankers? Did anyone -- did anyone do that that you 8 are aware of? 9 A. Specifically the super tanker costs? 10 Q. I'm giving that as one example. 11 A. Okay. Since I was not actively involved in the 12 beginning of this process, it's hard to understand the 13 conversations and discussions that were had around 14 modeling and pricing. So it's -- it's difficult to 15 understand what is included in -- in them, in what they 16 modeled. 17 Q. I mean, it would have been easy just to ask them, 18 "Hey, did you know that there are these super tankers that 19 cost a lot more? Did you include those costs in 20 modeling?" 21 Did you suggest that that be done? 22 A. No, sir, I did not. 23 Q. Do you know if anyone did that? 24 A. No, sir, I do not. 25 Q. Okay. So I mean, it's fair to say that a 26 number -- well, before I move on to that, in terms of 27 fuel, does your cooperative charge its customers a fuel 28 surcharge when the price of diesel rises above some 8740 1 designated level? 2 A. I think we have to take a step back, because 3 contracts have varying lengths. We may have some 4 contracts that -- that may be as short as one, two, 5 three years, and then we may have some contracts that are 6 in excess of 20 years. So it's something that we are 7 starting to consider and adding in some of our contracts, 8 but it's very difficult to change or modify contracts when 9 we may have some long-term contracts in place. 10 Q. Do you have contracts with fuel surcharges? 11 A. We have recently reviewed this, and I can't recall 12 if it was added or amended in the contract. But it's 13 something that we are beginning to review. 14 Q. And I mean, fuel is sort of a volatile cost, 15 right? Correct? 16 A. Depends on the term "volatility." But this year I 17 would probably say fuel has actually been relatively 18 stable. We have seen WTI costs typically hover around the 19 $75 per gallon range. But historically, you know, just 20 like a lot of commodity prices, we do see some volatility. 21 Q. Over time certainly fuel costs have gone up and 22 down relatively significantly compared to other things, 23 correct? 24 A. I'm sorry, did you say they went down? 25 Q. Have gone up or down -- 26 A. Okay. 27 Q. -- over time, more frequently, more rapidly than 28 other costs; is that right? 8741 1 A. I would say that we have seen -- at least as the 2 testimony is concerned, we have seen them increase for the 3 past 20 years, so -- but I don't disagree that there are 4 times that they do come down. But historically the trend 5 line is showing that they are -- they are continuing to 6 increase. 7 Q. I mean, we have had periods recently where the 8 price of gas, of crude oil at least, we know has varied 9 between, I don't know, $70 and $130 something like that, 10 correct? 11 A. We have had that. We've also had, if we remember 12 April of 2020, when fuel went negative for the first time 13 with COVID. So we have seen -- we have seen volatility. 14 I'm definitely not disagreeing about the volatility 15 aspect. But I think on the long-term trend basis, we 16 continue to see that fuel continues to increase. 17 Q. I mean, considering how rarely we adjust our 18 differentials, the first time in many years for most of 19 the orders, isn't that the kind of cost best addressed by 20 being adjusted through contractual agreements with your 21 buyers as opposed to locking some assumption in place for 22 decades? 23 A. It's one way to consider it. I think there's a 24 multitude of ways that you can look at fuel costs. If -- 25 if the contracts allow, and you can have an addendum or an 26 amendment, I think it's something worth considering. If 27 you don't have that option, then I think, you know, we 28 probably need to address that in the Class I price 8742 1 differential, which is what we are doing today. 2 Q. Just by the way, somewhat relatedly, since you 3 talk a lot about -- a lot of your testimony is about 4 basically farmer cost of producing milk, correct? 5 A. Some of my testimony is, yes. 6 Q. I mean, have Class I differentials ever been based 7 upon that? 8 A. Sorry, been based upon what? 9 Q. Farmer cost of production. 10 A. I think the cost of production, and also when we 11 discuss the Grade A milk, I think there's a -- probably a 12 direct correlation between the cost to produce Grade A 13 milk. So I think some of those costs would probably be 14 associated. 15 Q. Other than to the extent that the cost related to 16 producing Grade A versus Grade B milk, have Class I 17 differentials ever been based upon cost of production 18 issues? 19 A. I -- I can't say. I just don't know. 20 Q. Now, you mention that sometimes because of issues 21 at your customer's plant, your drivers have to wait longer 22 than normal to unload the milk, correct? 23 A. Yes, sir, that's correct. 24 Q. Does -- do you charge your customers for that? 25 A. No. We -- I don't believe we charge our customers 26 for longer waiting time issues. There are times that UDA 27 gets charged by the hauler on that when it's -- when that 28 occurs, but I do not believe that we charge our customers 8743 1 for that. And -- sorry. 2 Q. Do you know one way or the other? I mean, is that 3 part of your responsibility? 4 A. Sorry. Could you repeat that question? 5 Q. Do you -- I -- let me ask. Are you -- are your 6 job responsibilities such that you would know? 7 A. As far as delays on our customers, unloading 8 delays? Yes, I'm made aware of that because it impacts 9 our supply chain. Typically when they have delays, 10 something has gone wrong at the plant, so that plant could 11 have labor issues, or they have a pipe issue, or some sort 12 of quality issue. There's just a variety and a multitude 13 of reasons that we can see. Or some of our customers 14 experience delays. So I am made aware of hauling delays. 15 Q. But are you personally aware of whether or not any 16 of your contracts contain clauses that would cause your 17 customer to have to pay something as a result of such a 18 delay? 19 A. I do not believe we charge our customers for 20 delays like that. We, UDA, typically incurs probably some 21 demurrage costs around that. 22 Q. Has there been a time when there was insufficient 23 milk to supply your fluid milk customers? 24 A. Specifically our fluid one -- or sorry -- Class I 25 customers? 26 Q. Yes. 27 A. We do start to get very tight in the late July, 28 August, and early September time period, where we'll start 8744 1 to see our milk deliveries delayed to some of our Class I 2 bottlers. And after those months, after we pass those, 3 you know, hotter months, we typically see our milk level 4 and time, delivery times, get back on track with a lot of 5 our customers. 6 Q. Have you ultimately been able to supply them 7 enough milk to meet their Class I needs? 8 A. That's a little bit of a tough question because 9 there are times we're delayed and they want a little more 10 milk for Class I bottling operations, and they may have to 11 wait a little more to get that milk timely. So we -- 12 there are sometimes delays of our milk production getting 13 to some Class I bottlers. It doesn't happen a lot, but it 14 does happen a few times throughout the year. 15 Q. All right. You mention water, so I have a few 16 questions about water. 17 First of all, you mention -- 18 A. On what page, sir? 19 Q. Well, I'm looking at page 3. I'm referring to 20 page 3, more accurately. And you -- you talk about a 21 reduction in supply available to lower Colorado River 22 water users. 23 Do you see that? 24 A. Which paragraph? 25 Q. That's the third paragraph under weather and 26 climate on page 3 of Hearing Exhibit 376. 27 A. Yes, sir. I see that. 28 Q. Okay. So are your farmers themselves Lower 8745 1 Colorado River water users? 2 A. I believe so. 3 Q. Okay. Do you know how much of their water they 4 get that way as opposed to from well water? 5 A. I don't know that, the exact amount, no. 6 Q. And when you say UDA pays more for water than it 7 had in 2000 and more than almost any other state, are you 8 referring to literally what UDA pays for water to operate 9 its manufacturing plant? 10 A. Yes, sir, that's what that sentence is referring 11 to. 12 Q. Okay. Now, you are not suggesting, are you, that 13 the costs of operating your manufacturing plant are 14 relevant to the appropriate size of Class I differentials, 15 are you? 16 A. Sorry. Could you repeat that question one more 17 time? 18 Q. Yes. You are not suggesting that the costs of 19 operating your manufacturing plant is relevant to what the 20 Class I differentials should be, are you? 21 A. I don't think I'm making that argument in this 22 paragraph. 23 Q. Okay. And water costs, to the extent that they do 24 relate to farms as opposed to your processing plant, 25 that's a cost of producing milk, correct? In general, not 26 specific to Class I; is that right? 27 A. Yes. Because we see a lot of our -- due to our 28 supply chain, we move milk around from various farms to 8746 1 various Class I bottling plants. 2 Q. If we can go back to the page 2 where you have 3 your proposed changes. There are -- as you discussed I 4 think at the beginning of the examination -- there are 5 Class I plants in Maricopa County and in Yuma County, 6 correct? 7 A. Yes. 8 Q. And the only -- the only Class I plants in Yuma 9 County are the two plants owned by the Hettinga family, 10 correct? 11 A. I believe that's correct. Yes. 12 Q. Which is not -- not supplied by UDA, correct? 13 Those plants are not supplied by UDA? 14 A. On occasion they will ask us for milk, but there's 15 nothing consistent that heads down there from UDA. 16 Q. Okay. So right now Yuma is at a $0.25 lower 17 Class I differential than Maricopa, correct? 18 A. Yes. 19 Q. And under the University of Wisconsin model, that 20 $0.25 difference would have been maintained, correct? 21 A. Yes. 22 Q. Under your proposal, that difference is reduced to 23 $0.10, correct? 24 A. Under the NMPF proposal, yes. 25 Q. Okay. And that -- that would mean that those 26 plants would pay more into the pool, and that would be 27 shared by your members, correct? 28 A. I don't know. 8747 1 MR. ROSENBAUM: That's all I have at this time. 2 THE COURT: Who next has cross-examination 3 questions for Mr. Butcher? 4 Thank you, Mr. Miltner. 5 MR. MILTNER: Thank you, Judge Clifton. 6 CROSS-EXAMINATION 7 BY MR. MILTNER: 8 Q. Ryan Miltner representing Select Milk Producers. 9 I wanted just to follow up on the last questions 10 that Mr. Rosenbaum asked, if I could. Actually, I want -- 11 let me ask you something before I get into that. 12 On the second page of your statement where you 13 provide a little bit of background on UDA, you state -- 14 A. Sorry, did you say in the second page or the -- 15 Q. Second page, yeah. Page 2 of Exhibit 376. 16 So you're reciting UDA's objectives, and the 17 second is to maintain the current pricing relations among 18 competing handlers, both within the market and with the 19 surrounding states. 20 Can you expand on that and just let me know 21 what -- a little more detail about what you are trying to 22 preserve there and maintain? 23 A. Sure. So I wasn't directly involved in the 24 creation of the current or the proposed Class I price 25 differentials, but I think having been brought to that 26 group a little later, the goal was to attempt to keep 27 those current pricing relations and to keep that slope 28 consistent as possible. 8748 1 Q. Okay. Now, turning to the questions Mr. Rosenbaum 2 had asked about Yuma County in particular. 3 Those two plants in Yuma, do you know where their 4 packaged sales are? 5 A. I do not, no. 6 Q. Okay. Do you know if one or both of those plants 7 move packaged milk back into the Phoenix area for retail 8 sale? 9 A. I don't know if they do or not. 10 Q. You have not seen any Sarah Farms labeled milk in 11 any stores in the Phoenix area? 12 A. I currently live just west of Fort Worth, Texas, 13 personally. 14 Q. Okay. I don't think they get to Texas. 15 A. Maybe not. 16 Q. If it does, it would come from El Paso. 17 So let me ask this. If you look at the current 18 differential relationship between Yuma County and Maricopa 19 County, Mr. Rosenbaum pointed out that that's currently 20 $0.25. 21 You agree with that? 22 A. Yes, sir, I do. 23 Q. And as proposed by National Milk, that that -- 24 that spread is narrowed to a dime, and so if there were 25 the packaged sales in Maricopa County from the plants in 26 Yuma, that really doesn't preserve that competitive 27 relationship, does it? 28 A. I don't know if it does or not. 8749 1 Q. You would expect that if that plant had $0.15 of 2 additional raw milk costs compared to its competitors in 3 Maricopa County, that would change the competitive 4 relationship, would it not? 5 A. I think there's a potential it could. 6 Q. And I believe you stated that the only other fluid 7 plants in Arizona are in Maricopa County; is that correct? 8 A. Yes, sir, that is correct. 9 Q. Do you know if a lot of packaged fluid milk comes 10 into Arizona from other states? 11 A. I don't know that. I don't know. 12 Q. So I now want to look at the differentials in 13 Arizona versus the border states in California. And if I 14 look at, say, Riverside County -- 15 A. I don't have a map or this pricing in front of me. 16 MR. MILTNER: Can we provide the witness 17 Exhibit 300, Your Honor? 18 THE COURT: Yes. Easily done. 19 MR. MILTNER: I will get my computer. 20 THE COURT: You will need the yardstick. 21 MR. MILTNER: 301, Your Honor. 22 THE COURT: You still need the yardstick. 23 MR. MILTNER: If you will bear with me a second 24 while I get that spreadsheet open on my computer. 25 THE COURT: So for those not in the room, we are 26 looking at 301, which is also labeled MIG-29. 27 BY MR. MILTNER: 28 Q. I wanted to look at Riverside County, California, 8750 1 which is Row 191. 2 Do you have that page available? 3 A. Yes, sir, I do. 4 Q. Okay. So for the purposes of our transcript, 5 let's just go across there. Riverside, California's 6 current differential is $2 in Column I. 7 Do you see that? 8 A. Yes, I do. 9 Q. And if we move over to the Wisconsin average, the 10 model average, Column L, it's $2.40, correct? 11 A. Yes. 12 Q. And then finally, the proposed differential under 13 Proposal 19 is $3. 14 Do you see that? 15 A. I do see that, yes. 16 Q. Okay. Now, Yuma County, we said earlier, was 17 $2.10 currently. So Riverside would be $0.10 less than 18 Yuma County today, correct? Did I get that reversed? 19 Yuma County is $0.10 higher than Riverside? 20 A. Yuma looks to be $0.10 higher currently. 21 Q. Okay. 22 A. Based off this exhibit that's right here. 23 Q. Okay. Now, if we look at the proposed 24 differential with Yuma proposed at $2.90 and Riverside 25 proposed at $3, it's still a $0.10 difference, but it's 26 flipped, so there's a $0.20 per hundredweight change in 27 the relationship between those two adjacent counties. 28 And I wondered if -- if you think that that 8751 1 maintains the current pricing relationship between those 2 two -- those two counties, given that they are order 3 counties between California and Arizona? 4 A. I can't say how the $0.10 difference would impact 5 either county. I would probably leave the final decision 6 up to, in this instance, to the USDA to see what they 7 would recommend. 8 Q. Do you know as -- and I would characterize that 9 personally as a $0.20 difference because it's flipping. 10 You said 10. 11 But would you agree that that's a $0.20 change 12 from current to proposed? 13 A. Let's review that, sorry, one more time. 14 Q. Sure. 15 A. Because I -- I'm seeing the proposed here at Yuma 16 County as $2.90, and then on the Riverside I'm seeing the 17 proposed as $3 per hundredweight, so I'm showing just a 18 $0.10 delta. 19 Q. It's a $0.10 delta, but it's reversed, right? So 20 I'm looking at this, and I'm seeing currently Yuma $0.10 21 higher than Riverside -- 22 A. And, sorry, what column are you looking at in 23 Riverside? 24 Q. I'm actually -- it's -- you'd have to look at -- 25 A. Is that column -- 26 Q. It would be -- yes, it would be Column I. 27 A. All right. So there's a $0.10 difference right 28 there, with Riverside being $2 per hundredweight 8752 1 currently, and Yuma being $2.10. So it's positive right 2 now, Yuma by $0.10. So in here, in this instance, the 3 proposed is $2.90 for Yuma, and we're saying Riverside is 4 $3 proposal. 5 Okay. I can see the $0.20 delta. 6 Q. Okay. So I think we're both -- in both instances 7 there's a $0.10 difference between the two, but the -- it 8 changes, right? It flips. So it's a -- the -- 9 A. Yes. 10 Q. Okay. We're on the same page, then. 11 If the -- if the goal, if UDA's objective, which 12 you state were consistent with National Milk's, was to 13 maintain current pricing relationships, what consideration 14 and what discussion was had about that particular, you 15 know, area, and not maintaining the relationship therein? 16 I wondered if that was discussed at all. 17 A. I was probably brought in after those discussions, 18 so I inherited a lot of these pricing -- pricing protocols 19 without some direct input from myself. But then I would 20 probably, once again, say I would probably rely on the 21 USDA to maybe make that final determination on what 22 that -- if that is an even slope. 23 Q. And if we were to -- if we wanted to look at, for 24 instance, San Diego County, San Bernardino County, 25 Imperial County, same answer, you probably came in later 26 in the game to be able to offer thoughts on the specifics 27 on those -- those relationships. 28 A. Yes, sir, that is correct. 8753 1 Q. All right. 2 MR. MILTNER: Thanks. That's all I have. Thank 3 you. 4 THE WITNESS: Appreciate it. 5 MR. MILTNER: Thank you. 6 THE COURT: Who next has questions for this 7 witness? 8 I see no one. I invite the Agricultural Marketing 9 Service to ask their questions. 10 CROSS-EXAMINATION 11 BY MS. TAYLOR: 12 Q. Good afternoon. 13 A. Hello. 14 Q. Thank you for coming to testify today. I just had 15 a few questions. I haven't -- let me see here. I think 16 you might have touched on this with Mr. Miltner, and I 17 apologize if I might not have heard the whole answer as we 18 were having a separate little discussion on something else 19 in your exhibits. 20 But currently, I think you were just discussing 21 the current difference in differentials between Yuma, 22 Maricopa, and what you have proposed it to be, so you are 23 going from a current difference of $0.25 to a proposed 24 difference of $0.10; is that correct? 25 A. Yes, ma'am, that's what it looks like. 26 Q. Okay. And so I was just wondering if you could 27 explain -- again, I'm sorry if you covered this before, 28 but I want to make sure I get it -- why National Milk is 8754 1 recommending that that spread be reduced? 2 A. So I was brought in after that fact, so I 3 inherited a lot of these numbers -- 4 Q. Okay. 5 A. -- so it's hard for me to opine on why some of 6 these numbers were chosen. 7 Q. Okay. I heard that answer. I guess I just didn't 8 hear the question earlier. Okay. 9 You talked some in your testimony about the super 10 tankers that I guess are becoming more prevalent in 11 Arizona. 12 A. Yes, ma'am. 13 Q. And you say they cost more. 14 And I was just wondering if you had data to put on 15 the record as to those costs that seem -- that, through 16 your testimony, seem to be unique to the Arizona region. 17 A. You know, I convened with some of the finance team 18 that we have on staff, but I don't know if I captured the 19 exact cost of the difference between a regular tanker and 20 a super tanker. I just know that they said that the cost 21 is greater to procure buy super tankers than regular 22 tankers. And that's something that we're -- I think also 23 I testified on, that we're going to continue to purchase 24 the super tankers, you know, for the foreseeable future as 25 well. 26 Q. Because they do offer you some efficiencies in 27 other areas despite the cost? 28 A. Yes. We can move more milk with less miles, and 8755 1 we also produce less CO2 emissions. So it's a part of our 2 sustainability program as well. 3 Q. Okay. And earlier in the hearing, which weeks ago 4 at this point, we had some discussion on the UW model with 5 Dr. Nicholson, and I know we're looking forward to a 6 discussion with Dr. Stephenson on the transportation 7 aspect of that model, because I think there's still 8 questions about what was or was not accounted for on the 9 transportation side of things. 10 So when it comes to these Arizona unique 11 transportation aspects that you talk about, super tankers 12 being one of them, is it your impression that those were 13 factors that were not included in the model, not accounted 14 for in the model? 15 A. I don't -- I don't know if they were or if they 16 weren't. I know there's maybe only a handful of states 17 that have super tankers, so I just don't know what was 18 included in that model. 19 Q. Okay. Well, you talked about demurrage charges. 20 And I just want you to make it clear on the record, if you 21 can explain what those are. 22 A. Sure. 23 Q. I mean, you've said the term numerous times, but I 24 don't know there's been, like, a definition. 25 A. No, great question. 26 With some of our contracted haulers we have an 27 agreement in place that states if our hauler must wait X 28 amount of hours after arriving at their final destination, 8756 1 that they have the ability to charge UDA a -- what we call 2 a detention or demurrage charge on an hourly basis. So 3 depending on how long the tanker waits to get unloaded, we 4 may see those charges from some of our contracted and spot 5 haulers as well. 6 Q. Okay. And I apologize, it might be in your 7 statement. Did you mention, does UDA only use contract 8 haulers or do you have some of your own? You mentioned 9 you purchase them. I don't know if you mean UDA will be 10 purchasing these tankers. 11 A. I believe we use all contract haulers; however, we 12 do own the assets, the tanks. 13 Q. Okay. Okay. You talk some about difficulty -- I 14 think there was a question with Mr. Rosenbaum about 15 difficulty meeting Class I demand. And you said sometimes 16 in late July through October, orders, you would be delayed 17 in fulfilling those orders. I think that's the -- how you 18 couched that; is that correct? 19 A. Yes, that's fair. We typically see our milk 20 decline, obviously, with the excessive heat that we 21 experience. So, you know, we try to keep our cows as 22 comfortable as possible, but when the temperatures are 23 exceeding 115 or 120 degrees, our milk production just 24 tends to drops during those hotter months, which means 25 we're obviously producing less milk. 26 And we have a -- I believe a year-round school 27 system in Arizona, so we start to see school milk tick up 28 in late -- you know, late June and early July, after a -- 8757 1 we call it the mid-summer break for school milk. And that 2 really taxes our supply chain because our milk numbers are 3 significantly lower in the summertime. 4 Q. Okay. 5 A. And if I can also note, we then see less milk 6 coming to our own campus because we have to supply milk 7 to, you know, our customers first. 8 Q. And you couch it as a delay in fulfilling orders 9 because of this dynamic. 10 But are there times where you just don't have the 11 milk? You call it a delay. I mean, does it roll over, or 12 eventually maybe there's just milk you aren't actually 13 able to provide? Do they have to go somewhere else? Do 14 you import milk in from outside the area? 15 A. We do not import milk from outside the area. It's 16 just a few weeks of the year we get really tight on milk, 17 so it's a very -- just a very tight timeframe of we're 18 managing our customer's demands while trying to supply 19 them with enough milk to run their plant. 20 Q. Okay. 21 A. And there's obviously some seasonality with that 22 as well. You know, I mean, so we have to look at 23 seasonality of milk and the demand of milk and kind of 24 adjust that or account for that in some of our supply 25 chain activities. 26 Q. Okay. And I did want to talk about, a little bit, 27 on the demand side of the equation. I know you talked a 28 lot with Mr. Rosenbaum over increases in milk production 8758 1 in Arizona since the '60s. And there's been -- your chart 2 talks about population increases, and I think there's, if 3 I counted correctly, six fluid plants Arizona; is that 4 correct-ish? 5 A. Sounds right. I don't know the exact number, but 6 it sounds -- sounds correct. 7 Q. Do you know how much of any of those are 8 relatively new? I'm just trying to see if, you know, 9 there's some new demand in the state -- I'm assuming yes 10 since the '60s. But how relatively new, that maybe you 11 guys are all still trying to meet on the milk production 12 side? 13 A. Yeah, we have had a significant investment in 14 Arizona several years ago, so we are seeing a lot more 15 Class I bottling or Class I demand from a very new 16 facility that's in our area. 17 Q. And so even with that growth in milk production, 18 there's still some -- as an old colleague used to call 19 it -- unmet demand perhaps? Or trying to -- I know that's 20 not a real term, so I always chuckle when I hear or need 21 to say it, but, you know, you are still trying to make 22 sure your milk production and growth in the state is able 23 to meet the new demand in the state? 24 A. Correct. I think that's fair. Yes. 25 Q. Okay. On page 6, you mention Dr. Erba's testimony 26 earlier in the hearing about other costs and how he -- he 27 quantified that as $2.25. I think there's other costs you 28 talked about maybe on the farm increases. 8759 1 Do you have any data, UDA data -- you say yours is 2 more -- I'm just wondering if you have any specific 3 numbers to put into the record? 4 A. What I did is I -- I -- I pulled and spoke with a 5 lot of our farmers to understand some of their cost pain 6 points and some of their cost structures, but I don't know 7 the -- every farm's exact cost structure. 8 MS. TAYLOR: I think that's it from AMS. Thank 9 you. 10 THE WITNESS: Thank you. 11 THE COURT: Redirect? 12 And, Counsel, would you again identify yourself. 13 MR. PROWANT: Yeah, sorry, Your Honor. Bradley 14 Prowant on behalf of National Milk. 15 REDIRECT EXAMINATION 16 BY MR. PROWANT: 17 Q. Mr. Butcher, I just want to follow up on a few of 18 the points that have been raised on cross and in questions 19 with AMS. 20 So you mentioned that you -- you supply fluid milk 21 plants as well as your manufacturing plant in Tempe. 22 Does any of UDA's raw milk leave the state of 23 Arizona? 24 A. No, it all stays within the state. 25 Q. Okay. And so you noted that supplying your fluid 26 customers can get tight in the summer months. 27 Do you do any sort of balancing, then, as a result 28 with -- at any time during the year with your 8760 1 manufacturing plant? 2 A. Yeah. So we have what we call a Class IV plant 3 where we make powder and butter, which helps balance a lot 4 of our customers, obviously within the Phoenix Metro area. 5 And so there are times where we see our powder and butter 6 manufacturing increase, but also simultaneously in the 7 summer months we see very little, if any, milk go through 8 our own plant. So -- so we are always seeing fluctuations 9 in what to expect into our own campus. 10 Q. So your manufacturing plant provides the balancing 11 for the state of Arizona; is that what you are saying 12 there? 13 A. Yes, I think that's very fair. 14 Q. Okay. So in the summer months when the fluid milk 15 is tight, your manufacturing plant, it sounds like there 16 might be times where it's not running at all; is that 17 fair? 18 A. Very, very little milk could be going through 19 there. Yes. 20 Q. Or at least what it is running, it's costing more 21 on a per unit basis than if it was running full. 22 A. Correct. You are running very less milk through 23 that balancing operation, which means your cost to 24 manufacture that product increases because of the less 25 volume going through there. 26 Q. And we heard a lot of talk about the growth in 27 dairy farms on a per cow basis since the '60s. 28 But even with that growth, it sounds like UDA is 8761 1 still barely able to meet fluid demand; is that fair? 2 A. It's definitely tighter through certain parts of 3 the year than others, especially in that heat, that 4 excessive heat that we see. It does become -- it does tax 5 our raw milk supply chain. 6 Q. Okay. There were some questions about the 7 relationship between counties in California and Yuma 8 County as it relates to the proposed differentials by 9 National Milk. You just testified that none of the milk 10 that UDA -- none of the raw milk from UDA leaves the state 11 of Arizona. 12 So in that sense, none of your milk is going to 13 Riverside County, correct? 14 A. Not that I'm aware of. So I would say no. 15 Q. Okay. So any difference in the differentials 16 isn't creating a competitive advantage with Eastern 17 California, correct? 18 A. Could be, yes. Could be. 19 Q. Go ahead. 20 A. I'm not an expert when it comes to the counties in 21 California to Arizona. I really focus just on Arizona, 22 since our milk doesn't leave the state, our raw milk 23 doesn't leave the state. 24 Q. And then just generally, your experience, you 25 know, there was a lot of talk about the difference between 26 Maricopa and Yuma and the proposed differentials. In your 27 experience with the group that was developing these 28 proposed differentials, was it your perception that anyone 8762 1 was trying to create a competitive disadvantage by use of 2 raising or changing these differentials? 3 A. So like I mentioned, I was brought on later in 4 this aspect, so I wasn't privy to a lot of the 5 conversations or the discussions that they had. But 6 having been involved in a few of those discussions, not 7 many, I think there was a clear and concise goal and a 8 collaborative effort to try and keep the transition smooth 9 all the way down to the Southeast. I think that was a -- 10 the main goal was to smooth out the Class I differentials, 11 but there was no emphasis on competitive advantages or 12 disadvantages. 13 Q. You didn't, for example, talk to someone about 14 there being plants in Yuma that UDA doesn't supply, so we 15 want to somehow try to financially harm them. 16 A. No, I did not have any of those conversations. 17 Q. Okay. And it wasn't your perception that was the 18 intent or the goal with Proposal 19? 19 A. Correct. I don't think that was the goal or the 20 intent. 21 Q. Okay. Turning to page 3, you had a question about 22 water, and you wrote here that UDA pays more for water, 23 and that was in reference to your manufacturing plant. 24 A. That's one area where we pay water -- more for 25 water. I don't know the exact farm cost, what they pay 26 for water. I just -- having had discussions with some of 27 our farmers, they said they are paying more for water -- 28 Q. Right. 8763 1 A. -- as well. 2 Q. Right. So was the point with saying that UDA pays 3 more of to its manufacturing plant just sort of an example 4 of how water in Arizona is sort of a scarce resource 5 that's becoming more expensive and that impacts people 6 such as dairymen? 7 A. Yes, that's correct. 8 Q. Okay. And those dairymen are the ones producing 9 fluid milk for use in Class I? 10 A. Yes, sir, that's correct. 11 MR. PROWANT: That's all I have. Thank you. 12 We would move for admission of Exhibit 376. 13 THE COURT: Is there any objection? 14 There is none. Exhibit 376 is admitted into 15 evidence. 16 (Thereafter, Exhibit Number 376 was received 17 into evidence.) 18 THE COURT: Mr. Rosenbaum, I'm looking at 377, 19 378, and 379, 380, and 381. 20 MR. ROSENBAUM: Yes, Your Honor. I would move all 21 of those into evidence. 22 THE COURT: Is there any objection? 23 MR. PROWANT: Your Honor, we object to 379. 24 Your Honor, recognizing that this hearing has 25 different evidentiary standards, there are still some, and 26 under 7 CFR 900.8(d)(4), in order to accept an exhibit 27 into the record, there needs to be a satisfactory showing 28 of authenticity, relevance, and materiality of the 8764 1 contents therein. 2 Mr. Butcher testified he doesn't know who this 3 author is, he's never seen this document before, he can't 4 attest to any of the contents or the authenticity of this 5 document. The proper proponent of this document would be 6 the author or someone with firsthand knowledge of the 7 contents therein. 8 So we would object to 379 on that ground. 9 THE COURT: Mr. Rosenbaum, your response? 10 MR. ROSENBAUM: Well, Your Honor, I think that the 11 document states who the author is, that it's an 12 organization, Arizona Milk Producers, discussing the facts 13 relating to milk production by Arizona Milk Producers. 14 The general manager is the author of the document, and we 15 think it would be self-authenticating on that ground. 16 THE COURT: Does anyone else want to be heard 17 before I rule? 18 Mr. Miltner. 19 MR. MILTNER: Your Honor, I had just a couple 20 quick questions for the witness given redirect from his 21 counsel. 22 THE COURT: All right. I promised someone that we 23 would take a break about now, so let me take a ten-minute 24 break, and then we'll come back and I'll hear that. 25 MR. MILTNER: Very good. Thank you. 26 THE COURT: So let's go off record around 2:13. 27 Please be back and ready to go around 2:25. 28 (Whereupon, a break was taken.) 8765 1 THE COURT: Let's go back on record. 2 We're back on record at 2:28. 3 Mr. Rosenbaum, did you want to say something 4 before Mr. Miltner asks questions? 5 MR. ROSENBAUM: Well, Your Honor, I don't believe 6 Your Honor made a ruling on my request that my exhibits be 7 entered into evidence. 8 THE COURT: You're correct. 9 MR. ROSENBAUM: So whenever you want to take that 10 up, Your Honor. 11 THE COURT: Thank you. Thank you, Mr. Rosenbaum. 12 I'm in the middle of taking that up. The only 13 objection was to Exhibit 379. 14 And, Mr. Miltner, you may ask additional questions 15 of the witness. 16 MR. MILTNER: Thank you, again, Judge Clifton. 17 RECROSS-EXAMINATION 18 BY MR. MILTNER: 19 Q. So in response to a few questions on redirect from 20 your counsel, you indicated that UDA does not move any 21 milk across into California; is that correct? 22 A. That's correct. Yes. 23 Q. And apologize, I left something at my seat. I'll 24 return in just a second. 25 I want to talk about the two plants in Yuma County 26 for just a moment. And if -- if that plant, if either of 27 those plants in Yuma County were selling packaged milk 28 into California, into -- it really doesn't matter which 8766 1 county, but we talked about Riverside County -- 2 A. Okay. 3 Q. -- and if the price relationship between those two 4 counties changes between what we have now and what is in 5 Proposal 19 -- 6 A. Between Yuma and Riverside? 7 Q. Correct. 8 -- regardless of whether UDA is supplying that 9 milk or not, it would affect the competitive relationship 10 for that handler; would you agree with that? 11 A. By $0.10? 12 Q. Whatever the difference might be. 13 A. There's going to be a difference. Since there is 14 a difference between Riverside and Yuma, there's going to 15 be a difference. I don't know how much milk is produced 16 in Riverside and where that ends up. I just don't know. 17 Q. Okay. But as to that handler, they are 18 indifferent as to where their milk comes from, correct? 19 A. I don't know where that facility that those 20 Class I bottlers get their milk from. I don't know if 21 it's Arizona, or I don't know if it's from California. I 22 don't know. 23 Q. But the regulated price to that plant is the same 24 whether they buy from UDA or someone else, correct? 25 A. Yes. 26 Q. So if the price they pay relative to a competing 27 plant in California is changed, if the relationship 28 between those two competitors is changed by Proposal 19, 8767 1 that does have a competitive effect, would it not? 2 A. I think there's going to be a potential $0.10 3 difference. I think the goal of the group, though, in 4 California and the other others in our region, was to 5 create a smooth slope as much as possible. I think that 6 was the goal. But in this particular instance of a $0.10 7 difference, it could impact it. 8 Q. Or $0.20 difference? 9 A. Depending on how you look at it. 10 Q. Okay. And I'm glad you phrased it that way 11 because I do want to point out that at least my intent in 12 asking these questions is to draw out the effect of the 13 proposal on competitive relationships without making any 14 statement as to whether that was the intent or goal of any 15 participant. 16 But regardless of how we got to what's in 17 Proposal 19, it does have effects, correct? 18 A. It is a proposal still. I don't think it's 19 written in stone. But it could have further discussions 20 and implications. 21 MR. MILTNER: That's all I have. Thank you. 22 THE COURT: Thank you, Mr. Miltner. 23 Does anyone else want to be heard on the objection 24 before I make my ruling? 25 MR. HILL: Brian Hill, USDA, Office of the General 26 Counsel. 27 Your Honor, it is no secret that the USDA has 28 objected to the admission of documents of this type 8768 1 earlier in the hearing, to the great consternation of much 2 of the parties. We're not going to break our streak here. 3 We are going to object for the same reasons we have 4 objected before and for the same reasons that NMPF has 5 stated just now. Thank you. 6 THE COURT: Thank you, Mr. Hill. 7 Does anyone else want to be heard before I rule? 8 All right. I'm ready to rule. 9 So how I would characterize Exhibit 379 is it's a 10 very interesting promotional material. If I were to admit 11 this into evidence, no one would be able to cross-examine 12 the author about, for example, the last sentence on page 1 13 which refers to "an adequate supply of milk in Arizona." 14 Now, that's not been determined, to my knowledge, 15 by testimony here. So the primary reason that I saw 16 Mr. Rosenbaum use it was to get some statistics to support 17 the proposition that the cow herd, the plentiful cow herd 18 within all of Arizona, is growing, and so is the supply of 19 milk. Now, he was able to establish that with his other 20 data. 21 I do reject, as an exhibit, Exhibit 379. My view 22 of rulings on the admissibility of exhibits is that both 23 admitted exhibits and rejected exhibits remain part of the 24 record, and that is so that whether an error has been 25 committed, can be reviewed. 26 So I reject 379 as an exhibit for the reasons 27 stated by counsel for NMPF and from the Office of the 28 General Counsel of the United States Department of 8769 1 Agriculture. And as I say, it will remain part of the 2 record and available for review, just as the admitted 3 exhibits are. 4 Now, with regard to the others, there was no 5 objection. I admit into evidence Exhibit 377, which is 6 also IDFA-377. 7 (Thereafter, Exhibit Number 377 was received 8 into evidence.) 9 THE COURT: I admit into evidence Exhibit 378, 10 which is also IDFA-378. 11 (Thereafter, Exhibit Number 378 was received 12 into evidence.) 13 THE COURT: I admit into evidence Exhibit 380, 14 which is also IDFA-380. 15 (Thereafter, Exhibit Number 380 was received 16 into evidence.) 17 THE COURT: And I admit into evidence Exhibit 381, 18 which is also IDFA-381. 19 (Thereafter, Exhibit Number 381 was received 20 into evidence.) 21 THE COURT: Mr. Butcher, thank you, and you have 22 been through quite a bit. 23 THE WITNESS: Thank you so much for having me. I 24 appreciate it. 25 THE COURT: You're welcome. It was very 26 interesting testimony, including during your 27 cross-examination, and I thank you. You may step down. 28 Dr. Cryan. 8770 1 Let's go off record. 2 (An off-the-record discussion took place.) 3 THE COURT: Let's go back on record. 4 All right. We're back on record at 2:42 p.m., and 5 while off record I labeled three exhibits. I labeled 6 AFBF-5 as Exhibit 382. 7 (Thereafter, Exhibit Number 382 was marked 8 for identification.) 9 THE COURT: AFBF-5A as Exhibit 383. 10 (Thereafter, Exhibit Number 383 was marked 11 for identification.) 12 THE COURT: And AFBF-5B, as in boy, as 13 Exhibit 384. 14 (Thereafter, Exhibit Number 384 was marked 15 for identification.) 16 THE COURT: Dr. Cryan, would you state and spell 17 your name for the record? 18 THE WITNESS: My name is Roger Cryan, R-O-G-E-R, 19 C-R-Y-A-N. I'm the chief economist for the American Farm 20 Bureau Federation, and I am here to first deliver our 21 direct testimony in support of our own proposal, 22 Proposal 22, to update the Class I differential, and then 23 to deliver direct testimony in response to Proposals 19 24 and 20. 25 THE COURT: Thank you. 26 THE WITNESS: I can begin whenever you say you are 27 ready. 28 THE COURT: All right. Very good. Have you 8771 1 testified previously in this proceeding? 2 THE WITNESS: I have. 3 THE COURT: You remain sworn. 4 ROGER CRYAN, 5 Having been previously sworn, was examined 6 and testified as follows: 7 THE COURT: Now, are you on the clock with regard 8 to Exhibit 382? 9 THE WITNESS: As I understand I have an hour to 10 deliver the three pages of 382. 11 I believe that 383 is a response to other 12 proposals, is a separate clock, but I can be corrected if 13 Mr. Wilson has another idea. 14 MS. TAYLOR: That's the way we have done it. 15 THE WITNESS: Okay. Thank you. 16 THE COURT: You may proceed. 17 THE WITNESS: This testimony was pre-submitted in 18 September. The American Farm Bureau Federation has nearly 19 6 million members in all 50 states and Puerto Rico, 20 including many thousands of cooperative and independent 21 dairy farmers. Many of these dairy farmers are directly 22 affected by the pricing provisions of the Federal Milk 23 Marketing Orders, or FMMOs. These dairy farmers play a 24 crucial rule in the development of AFBF dairy policy. 25 Every Farm Bureau position and proposal is based 26 explicitly on that policy, developed through a grassroots 27 process in which farmers make the decisions at every step 28 of the way. 8772 1 AFBF submitted nine proposals for consideration in 2 this hearing, and appreciates the opportunity to address 3 the four that were accepted by USDA, as well as the clear 4 direction on what may be needed to advance the rest. 5 The fundamental focus of AFBF's proposals is the 6 reduction or elimination of negative producer price 7 differentials and the depooling that they cause. We 8 believe that an orderly pool is the key to orderly 9 marketing and ensuring Federal Milk Marketing Orders 10 continue to benefit farmers, cooperatives, processors, and 11 consumers. The key to an orderly pool, in turn, is above 12 all, the proper alignment of the four class prices. 13 This statement covers AFBF Proposal 21 under 14 Category 5, Class I and Class II differentials. 15 Proposal 21. The American Farm Bureau Federation 16 proposes to update the Class II differential based on 17 current drying costs. The Class II differential was 18 developed during Order Reform to reflect the cost of 19 drying and rewetting milk to reflect the higher value of 20 Class II milk without incenting processors to dry and 21 rewet Class IV milk for Class II uses. The AFBF accepts 22 this logic and proposes to update the Class II 23 differential to $1.56. This cost-based element of the 24 Class II price formula is out of date and no longer meets 25 the purpose of incenting the availability -- of incenting 26 the availability of Class II milk per USDA's logic at the 27 time of order reform. 28 Some processors argue that powder is not rewetted 8773 1 for most uses so that the minimal cost of rewetting is not 2 an appropriate consideration for this calculation. For 3 this reason, to be conservative and for simplification, we 4 propose to incorporate only the cost of drying in setting 5 the Class II differential. Ideally, this would be based 6 on a recent mandatory and audited cost and yield survey. 7 In the interim, however, this could be updated using the 8 current Make Allowances for nonfat dry milk (NDM) together 9 with the current nonfat solids yield factor and updated 10 butterfat and nonfat solids tests for milk in the FMMOs. 11 The cost of drying skim milk can be calculated 12 then as $0.1678, which is the nonfat dry milk 13 Make Allowance, times .99, which is the yield factor, 14 times 9.4121, which are the average pounds of nonfat 15 solids in a hundredweight of skim milk, times the -- 16 equal -- that would equal the $1.56 for the cost of 17 drying. 18 This 9.4121 factor is based on the 2022 average 19 nonfat solids test in the FMMOs, which was 9.03%, divided 20 by the average skim milk test, which is 100%, minus 4.06%, 21 which is the average butterfat test. This relies on the 22 butterfat test for all markets and the nonfat solids test 23 for component markets. 24 Using the butterfat test for only component 25 markets would raise the differential calculation since the 26 skim butterfat markets have the lowest butterfat tests, so 27 this calculation is conservative. 28 The original $0.70 Class II differential was 8774 1 nominally based on the cost of drying condensed milk and 2 rewetting it, presumably because dried and reconstituted 3 Class IV milk substituted for Class II skim condensed milk 4 first, and the differential should not be higher than the 5 cost to convert that relatively standard Class II 6 ingredient form into a Class IV form. 7 Based on the last mandatory audited survey of 8 nonfat dry manufacturing -- dry milk manufacturing costs 9 by the California Department of Food and Agriculture, the 10 energy cost of drying skim milk were about $0.035 per 11 pound in 2016. Given that the energy costs of 12 manufacturing butter were about $0.01 per pound, we'll 13 assume that $0.025 of the NDM costs are direct energy 14 costs of the drying process. 15 Skim condensed milk contains about three times the 16 skim solids as skim milk, so producing a pound of NDM from 17 skim condensed milk may require roughly a third of the 18 direct energy. This suggests that the cost of producing a 19 pound of NDM from skim condensed milk may be roughly 0.8 20 cents per pound lower than the Make Allowance calculated 21 for drying skim milk, which would yield a Class II 22 differential of 1.49 per hundredweight. 23 THE COURT: That's $1.49 per hundredweight? 24 THE WITNESS: Exactly. $1.49 per hundredweight. 25 THE COURT: Thank you. 26 THE WITNESS: And then I have a reference to the 27 language in the rulemaking for order reform that laid out 28 the $0.70 calculation. 8775 1 However, we believe that the simple update using 2 the presumed cost of nonfat dry milk processing achieves 3 the original purpose of the Class II differential without 4 incenting uneconomic drying of Class IV milk for price 5 purposes alone. There's no logical reason not to include 6 condensing costs when assessing the cost of using Class IV 7 milk for Class II uses through drying, and even the simple 8 addition of powder to a processing vat. 9 Condensing costs would be faced by a Class II 10 processor acquiring milk and using it directly, or 11 condensing it as part of the process of drying it and 12 using it to pay the Class IV price. 13 Much of Class II use was once part of Class I, 14 based on the idea that it faced similar balancing 15 challenges as Class I. This substantial innovation when 16 Class II was created was to separate it from the location 17 element of the Class II differential. 18 THE COURT: Of the class? 19 THE WITNESS: Of the Class I differential. 20 However, there is a reasonable justification for 21 Class II differential as high as the minimum Class I 22 differential, which is now $1.60 per hundredweight, and is 23 proposed by NMPF to rise to $2.20 per hundredweight. In 24 effect, based on the historical logic of the Class II 25 differential, we would argue that the Class II 26 differential should be the lower of the minimum Class I 27 differential and the cost of drying per hundredweight. 28 The impact of the proposed change to $1.56 will be 8776 1 to increase the minimum order value of Class II milk by 2 $0.86 per hundredweight, increasing the average pool value 3 in every market and reducing the likelihood of negative 4 PPDs and attendant depooling. There were 14.2 billion 5 pounds of Class II milk pooled in 2022, so that in a 6 static analysis, the value of pooled milk would be 7 increased by $122 million. The $1.56 differential is 8 lower than the lowest Class I differential of $1.60, so 9 combined with the return to the higher-of Class I price 10 formula maintains Class I prices above Class II in every 11 month. 12 We support Proposal 19, in principle. This 13 proposal would significantly raise Class I differentials, 14 further ensuring that the Class I price should be 15 consistently above the Class II price at any location. 16 And I have a citation for milk component tests 17 from AMS and the last California Manufacturing Cost Annual 18 Survey from 2016. 19 And then the order language, which is as simple as 20 changing the -- striking "advanced" for Class IV, because 21 we have also proposed the elimination of Advanced Class I 22 and II pricing; and replacing the $0.70 differential with 23 $1.56, both for skim milk and for butterfat. 24 This change to the Class II differential should be 25 made whether or not the advanced pricing is eliminated for 26 Class II skim milk, although the changes are mutually 27 reinforcing if undertaken together. 28 Although AFBF opposes any increase in 8777 1 manufacturers' Make Allowances under the current 2 conditions, we further propose here that if such increases 3 to the nonfat dry milk manufacturing allowance or 4 adjustments to product yield and milk composition are made 5 through this proceeding, that a corresponding increase in 6 the Class II differential be made as well. 7 In addition, if automatic updates to the 8 Make Allowances for nonfat dry milk are implemented 9 through this proceeding, the Class II differential should 10 be updated in lockstep. 11 This language referencing the Make Allowance and 12 yield was with language referencing the Make Allowance in 13 yield. However, they may be incorporated into the 14 Class IV milk and nonfat solids formula language. 15 In addition, any one-time or regular updates to 16 the component value of the Class IV milk price formula 17 should be used to adjust the component test factor in the 18 equation above. 19 That is my testimony, my direct testimony on our 20 Proposal 21. And in the interest of moving things along, 21 I will move directly into testimony in response to 22 Proposals 19 and 20, if that's all right. 23 THE COURT: It is. Thank you. 24 THE WITNESS: Thank you. 25 I will not repeat what I have just said before 26 about Farm Bureau's policy process. I will say we pre- -- 27 I just testified in favor of Proposal 21. We also 28 generally support NMPF Proposal 19, which would increase 8778 1 Class I differentials across the country, and we entirely 2 oppose the Milk Innovation Group's, the MIG Proposal 20, 3 which would reduce the current base Class I differential 4 from $1.60 to zero. 5 I have a summary in the document of our 6 Proposal 21. I will not re-read that, except to read a 7 note, followed up from some other discussions earlier in 8 this proceeding after the original testimony was 9 submitted. I have a note about the impact of higher 10 Class II prices on depooling. 11 It has been suggested that higher Class II 12 prices -- well, increasing the Class II prices -- 13 THE COURT: Now, let me stop you. You are on 14 page 2. 15 THE WITNESS: I'm on page 2. 16 THE COURT: And as you have said, what you are now 17 reading is in bold, "Note about the impact of the higher 18 Class II price on depooling"? 19 THE WITNESS: That's right. 20 THE COURT: Okay. 21 THE WITNESS: Thank you, Your Honor. 22 Increasing the Class II prices in connection with 23 eliminating advanced pricing will not cause class price 24 misalignments. It could increase the likelihood of 25 depooling Class II milk when the Class II price is above 26 the uniform price, for several reasons, including most 27 specifically the fact that much Class II use is at 28 distributing plants. Class II milk is much less 8779 1 subject -- sorry -- is less subject to depooling based on 2 price relationships than other classes. Most importantly, 3 denying the full value of Class II price -- of Class II, 4 the full value of the Class II price -- let me restate 5 that. Correct that. 6 Most importantly, denying the full value in the 7 Class III -- Class II price undermines overall producer 8 value and increases the likelihood of the uniform price 9 being lower in Class III or IV, which is the larger and 10 more likely problem, by far, with respect to price 11 misalignment and depooling. 12 THE COURT: Now, let us make that correction on 13 the original. So we're in Exhibit 383, we're on page 2, 14 and we're in the last sentence of the paragraph that has 15 in bold, "Note about the impact of higher Class II price 16 on depooling." 17 So you have only changed a couple of words, but 18 point out to me, Dr. Cryan, which those are? 19 THE WITNESS: After where it says "full value of 20 Class II price," I would like to change that to "full 21 value in the Class II price." So "of" would be struck and 22 "in the" would be inserted. 23 THE COURT: Yes, it has been done. Thank you. 24 THE WITNESS: Thank you very much. Thank you, 25 Your Honor. 26 Regarding Proposal 19: AFBF supports NMPF's 27 proposal to update Class I differentials to reflect 28 changes since 1998. AFBF agrees with NMPF that Class I 8780 1 prices need to be undated. Over-order prices are 2 "ephemeral," and regulated Class I prices are more 3 durable, as Jeff Sims testified. In effect, the ebbs and 4 flows of local and regional market conditions can wash 5 away a sound long-term price relationship, which may be 6 hard to re-establish. 7 Federal Milk Marketing Orders from their earliest 8 days recognized that short-term events in market 9 conditions could lead to the destruction of long-term 10 supply and demand stability. Farm policies broadly aimed 11 at providing some certainty and stability for farmers in 12 the face of natural extreme volatility. 13 THE COURT: Now, your voice is perfect. I just 14 want to make sure the speed is perfect. 15 THE WITNESS: Okay. 16 THE COURT: You're a little fast. If you will 17 slow down. 18 THE WITNESS: The current Class I differentials 19 are largely based on a 1998 analysis of the current supply 20 and demand -- of current supply and demand volumes and 21 plant locations. Even those differentials updated for 22 Southeastern markets in 2008 were only partially 23 reflective of the conditions at that time, because they 24 had to remain aligned with the rest of the country where 25 differentials remained unchanged. 26 NMPF's proposed increases are quite moderate, 27 perhaps too moderate. The Class I differential consists 28 of two parts: A minimum element reflecting the additional 8781 1 minimum Class I value necessary to provide a hundredweight 2 of Grade A milk to the fluid market -- 3 THE COURT: Would you read that again? 4 THE WITNESS: The Class I differential consists of 5 two parts: One, a minimum element reflecting the minimum 6 additional Class I value necessary to provide a 7 hundredweight of Grade A milk to the fluid market; and 8 two, the location-specific value over and above this 9 reflecting the relative difficulty at a defined cost of 10 attracting an additional hundredweight to a particular 11 location relative to location with the lowest such cost -- 12 relative to the location with the lowest such cost. 13 THE COURT: So it should say "relative to the 14 location"? 15 THE WITNESS: I think it should actually say 16 "locations" because there's more than one county. 17 THE COURT: All right. Let's make that change. 18 We're at the bottom of page 2 of Exhibit 383. We're in 19 the last full paragraph, the last line of that paragraph. 20 And tell us again, Dr. Cryan, what to change. 21 THE WITNESS: I would change "relative to 22 location" to "relative to locations." So I would insert 23 an "S" after the last time "location" is used in that 24 sentence. 25 THE COURT: Thank you. 26 THE WITNESS: Thank you. 27 The current minimum Class I differential is $1.60 28 based on longstanding economic logic, though based on 8782 1 outdated cost assessments. This was not updated -- I'm 2 not sure that's correct. I believe it was updated at the 3 time of order reform in 1999. 4 This document has been put together over -- over 5 two months, so I -- I apologize for that. I believe that 6 is incorrect. This was updated in 1999. It's discussed 7 in more detail in our comment on Proposal 20. 8 THE COURT: So are you certain that you want to 9 strike some of these words? Do you want to say that it 10 was updated? 11 THE WITNESS: I would strike the entire sentence. 12 THE COURT: Entire sentence. All right. 13 THE WITNESS: Because this was not updated. 14 THE COURT: So the bottom of page 2, we would 15 begin with "this was not updated" and strike that entire 16 sentence which carries on over to page 3? 17 THE WITNESS: That's right. That sentence was 18 incorrect. It was updated. The minimum Class I 19 differential was $1.04 before order reform, and it was 20 $1.60 afterwards. 21 THE COURT: Now, do you want to leave the next 22 sentence in -- 23 THE WITNESS: Yes. 24 THE COURT: -- as it relates to the first sentence 25 of the paragraph? 26 THE WITNESS: Yes, I do. 27 THE COURT: All right. Good. 28 THE WITNESS: The current location-specific values 8783 1 are based on that 1998 analysis and are badly out of date 2 given general inflation, if nothing else, and shifting 3 milk supply locations. Strike "that analysis." 4 THE COURT: All right. We're going to strike just 5 two words there, "that analysis." 6 THE WITNESS: Yep. 7 It is critical to understand that the relative 8 Class I differentials also define the producer price 9 differentials so that the -- so the -- so that the 10 setting -- those words should be swapped. 11 THE COURT: All right. So we'll do that. We'll 12 swap "the" and "that." Do you see where it is? 13 THE WITNESS: Yeah. 14 THE COURT: All right. It is done. 15 THE WITNESS: So that the setting of a Class I 16 differential in any county not only defines the price of 17 Class I milk in that county relative to the rest of the 18 country, but also defines the price of producer milk 19 relative to the rest of the Federal Order market. In 20 fact, the setting of the Class I -- 21 THE COURT: Slow yourself down a bit, Dr. Cryan, 22 please. 23 THE WITNESS: In fact, the setting of the Class I 24 differential for each county with the plant receiving 25 pooled milk on an order will affect the minimum producer 26 price for every other county receiving pooled milk. 27 The new analysis by Dr. Nicholson is done with a 28 more detailed version of the model used in 1998 and is 8784 1 based on 2021 data. This provides a critical update to 2 the current Class I differentials, based on the same 3 principles applied to the development of those 4 differentials. See Exhibits 301 and 302. 5 Testimony by Stephen Zalar (Exhibit 308) and Joe 6 Brinker (Exhibit 358 -- 357) both presented clear evidence 7 of rising milk hauling costs. This is the critical cost 8 element of the Nicholson model, and this rising hauling 9 cost along with the shifting locations of milk production 10 and dairy product demand provide the critical foundation 11 for the update and increase in the relative Class I 12 differentials. Rising hauling costs are also demonstrated 13 by studies conducted by USDA. 14 And then I cite studies that have been conducted 15 over time by the Minneapolis Milk Market Administrator's 16 Office and the Seattle Milk Market Administrator's Office, 17 with links to the full history of those studies. 18 The Nicholson model's milk movement results -- the 19 Nicholson model's milk movement results represent an 20 efficiency maximizing lowest cost distribution of milk, 21 which is what an ideal market solution would produce. The 22 actual market would achieve a slightly less efficient 23 result. The model's relative milk value results represent 24 the efficiency-maximizing/lowest-cost relative costs of 25 delivering milk from current milk production areas to 26 consumption areas covering every county in the country. 27 The actual market solution will have a slightly higher 28 spread across the country, which means that the model 8785 1 results are a relatively conservative foundation for the 2 Class I price surface. This is the most reasonable and 3 scientific foundation for establishing relative milk 4 values across the country. 5 NMPF witnesses indicated, and examination of the 6 numbers confirmed, that the model results are the 7 foundation of the NMPF proposal. However, it is 8 appropriate to make some adjustments based on real-world 9 circumstances, as NMPF has attempted to do. 10 And I cite an exhibit and some cross-examination 11 of witnesses who agreed with that, that the foundation 12 was -- was the model. 13 We also question whether use of the average of May 14 and October model results was an appropriate starting 15 point rather than the October results alone, which are 16 effectively the higher of the May and October results as 17 presented in some markets such as the Southeast, and to a 18 lesser extent the Northeast. Producers and processors 19 face the greatest balancing supply challenges in the 20 summer and fall. It is arguable that this should have 21 been the foundation for setting Class I location 22 differentials. 23 AFBF proposed introduction of seasonal Class I 24 differentials. This proposal was rejected, but the 25 greater difficulty of serving some markets in the late 26 summer and fall is well demonstrated by the comparison in 27 the May and October results from the analysis by 28 Dr. Stephenson or Dr. Nicholson, whoever did it, and 8786 1 shared by NMPF. These seasonal challenges in the absence 2 of seasonal Class I pricing may be best addressed within 3 the current hearing by using the October results in 4 setting Class I differentials. 5 Again, we recognize that there should be some 6 adjustments to specific location differentials based on 7 details that better reflect fairness and efficiency than 8 the abstraction of the model. The model reflects an 9 engineering solution adopted for a centralized management 10 of the whole milk system. It is the reasonable foundation 11 for the overall analysis of efficient milk movement, but 12 this is the sort of linear optimization economics done by 13 central planners in the Soviet Union. Not that there's 14 anything wrong with that. It does not account for 15 competition -- it does not account for competition among 16 processors across the natural market, such as the 17 metropolitan area, rather it solves by allocating milk in 18 a way that fluid milk from only one plant would be 19 delivered to a particular location, and cheese from only 20 one plant would be delivered to that same location. This 21 sort of variation from the initial proposals were 22 necessary in 1999 to establish the current differentials, 23 and they are appropriate in this proceeding. 24 Some participants appear to believe that NMPF and 25 its committee have attempted to stack the deck in their 26 favor. We don't believe that that has been demonstrated. 27 But we also believe that the AMS Dairy Program has the 28 capacity to fairly evaluate these options. 8787 1 AFBF trusts that the resulting decision from USDA 2 will be based on the model results and the rest of the 3 hearing record and will define and implement Class I 4 differentials based on fair and appropriate adjustments to 5 those results, including due consideration of the proposed 6 adjustments by NMPF. 7 I'd like to go over the maps that we have shared. 8 I don't know if we do something? Is it connected? 9 THE COURT: Oh, in order to put them on the 10 screen? 11 (An off-the-record discussion took place.) 12 THE WITNESS: Wonderful. Perfect. 13 THE COURT: Now, those of us who are looking at a 14 paper copy are looking at 384, which is also AFBF-5B, like 15 boy. 16 And, Dr. Cryan, you will be looking at your 17 computer rather than the screen; is that true? 18 THE WITNESS: Well, let me restart the slide show. 19 This was -- we put these together for our own 20 benefit to understand a little bit better what was being 21 done, but we think they provide a visual perspective. We 22 are putting out a market Intel report this week, and some 23 of these slides are being used in that. 24 These are the current Class I differentials. I 25 should point out that the color scales are not the same 26 across these -- these slides, so they take a little more 27 examination to compare. These are the current Class I 28 differentials, International Milk's proposed Class I 8788 1 differentials -- 2 THE COURT: Now, before you go on, when you say 3 "these are the current Class I differentials," you are 4 looking at Figure 1. 5 THE WITNESS: Figure 1 is -- are the current 6 Class I differentials. 7 Figure 2 are National Milk's proposed Class I 8 differentials, again, with a different color scale, but it 9 shows a rela- -- a similar -- similar shape in many ways 10 to the current ones. They are -- they are essentially an 11 update. 12 The Figure 3 shows the difference between the 13 current differentials and NMPF's proposed differentials. 14 These red counties are not decreases, they are all 15 increases, but it shows the kind of -- it's a heat map 16 that kind of shows the gradation from smaller increases to 17 larger increases. And, again, we think it's -- you know, 18 the busiest parts of these maps have always been east of 19 the Mississippi, so it's not surprising that these have 20 come out this way. 21 Here's a comparison of National Milk's proposed 22 differentials with the average of the May and October 23 estimates. As you can see, every county is within between 24 $0.75 lower and $1.15 higher, so I think that's a pretty 25 good indication that the model is really very 26 fundamentally the foundation for their proposals. 27 And we also have a slide that says difference 28 between NMPF proposed differentials and May model 8789 1 estimates and -- 2 THE COURT: Now you have gone on to the next 3 slide. 4 THE WITNESS: Yeah. 5 THE COURT: I'm with you now. 6 THE WITNESS: And the fifth slide out of six, they 7 don't all have figure numbers. 8 And the last one is the difference between NMPF 9 proposed differentials and October model estimates. 10 They -- the -- they are -- they are all within our 11 reasonable range, one or the other. So we just -- we 12 thought that was useful perspective, a useful 13 visualization of the proposal. 14 Again, we -- we have no reason to argue with any 15 particular county adjustment that National Milk has made, 16 and I believe that testimony by quite a number of the 17 witnesses has demonstrated logical justifications for a 18 lot of these in particular. 19 As I said earlier, when you have a metropolitan 20 market where the engineering model would suggest that 21 market should be divided up between -- between centrally 22 managed plants. But in the real world we have 23 competition, and so the plants around a city market would 24 tend to compete in the same market, and it's a reasonable 25 thing for that metropolitan market to be smoothed out. 26 So that's the maps. I'm done with the maps. 27 Thank you, Your Honor. 28 Now I'll address Proposal 20. 8790 1 THE COURT: So now we have gone to Exhibit 383, 2 page 4, in the middle. 3 THE WITNESS: That's right. Return to page 4 in 4 the middle. 5 Proposal 20: AFBF opposes MIG's proposal to 6 reduce minimum Class I differential -- the minimum Class I 7 differential from $1.60 to zero, and suggests that it 8 should instead be increased. 9 The current Class I differential surface lays on 10 the foundation of the minimum Class I differential of 11 $1.60. That minimum should be updated up, not down. The 12 minimum $1.60 Class I differential was established on 13 sound bases during Federal Order Reform. This is 14 particularly laid out in the proposed rule issued on 15 January 30, 1998. Its underlying logic was sound and its 16 application was conservative. 17 The proposed rule laid out very effectively three 18 cost elements that justified the $1.60. However, there is 19 also a logic for its overall size, which is that the 20 Class I differential must be large enough to allow for 21 consistent hierarchy of class prices. Either or both can 22 justify the current 160 -- $1.60 minimum, or more, but not 23 less. 24 And I cite the 1998 proposed rule. 25 Since Proposal 20 opens the scope of the hearing 26 for considering the size of the minimum Class I 27 differential -- that is it technically proposes to reduce 28 it to zero, not to eliminate it -- it would propose -- we 8791 1 would propose, rather, that it be increased based on the 2 same logic upon which it was originally proposed in 1998. 3 There is justification for substantial increases 4 based on increases in all the costs that entered into the 5 original USDA cost estimate of $1.60. Increases in 6 Grade A production costs, increases in marketing and 7 hauling costs, and the greater challenges of getting 8 manufacturers, especially cheese plants, to give up milk 9 for supplemental fluid needs, all argue for a higher 10 minimum Class I differential per the original rule. And 11 then there's a citation again. 12 The same logic could have supported adding another 13 $0.60 or more to the Wisconsin model results as the 14 starting point rather than the model results based on a 15 minimum $1.60 Class I differential. 16 MIG's proposal to reduce the minimum Class I 17 differential from $1.60 to zero seems like a rhetorical 18 exercise designed to make the status quo, or Class I 19 differentials near the status quo, to appear like a 20 reasonable compromise relative to NMPF's proposal to fully 21 update and increase Class I differentials. 22 Taken on their face, the arguments to eliminate 23 the minimum $1.60 Class I differential established in the 24 1998 and 1999 Federal Order Reform decisions are rooted in 25 a dismissal of the elements of that $1.60 laid out by USDA 26 at the time. Specifically, USDA found costs associated 27 with: One, meeting the Grade A standard; two, balancing 28 supplies at bottling plants; and three, providing a basic 8792 1 incentive to supply bottling plants over and above other 2 plants. 3 MIG's proposal is fundamentally a dismissal of the 4 Federal Milk Marketing Order itself, which has been built 5 on these objectives. 6 THE COURT: Would you re-read that sentence? You 7 left out one word that I think's important. 8 THE WITNESS: Sure. 9 MIG's proposal is fundamentally a dismissal of the 10 Federal Milk Marketing Order system itself, which has been 11 built on these objectives. Each of these three elements 12 is important to the FMMO system, in addition to the fact 13 that the Class I price alignment depends fundamentally on 14 the maintenance of a substantial minimum Class I 15 differential. 16 THE COURT: Now, you read that differently from 17 the way you wrote it. 18 THE WITNESS: I did? 19 THE COURT: Yes. 20 THE WITNESS: The second time? 21 THE COURT: No, no. You've only read this last 22 sentence once. So read it again with meaning. 23 THE WITNESS: Each of these three elements is 24 important to the FMMO system, in addition to the fact that 25 class price signal -- that class price alignment depends 26 fundamentally on the maintenance of a substantial minimum 27 Class I differential. 28 THE COURT: Thank you. 8793 1 THE WITNESS: You're welcome. Thank you. 2 We will consider each of these four issues, the 3 three elements laid out by USDA in 1998 and the overall 4 issue of a sufficient Class I differential to maintain 5 basic price alignment. 6 Regarding the Grade A incentive. FMMOs have 7 provided and continue to provide a sound incentive to 8 producers to maintain Grade A status. Claiming that 9 there's no longer a need for a minimum Class I 10 differential because nearly all milk is Grade A is akin to 11 claiming there's no longer a need for stop signs and 12 traffic signals because there are few accidents at 13 intersections. The minimum Class I differentials should 14 not only be maintained, but increased in line with the 15 increased costs of meeting the Grade A standard and 16 consistent with NMPF's proposal based on the logic 17 presented by NMPF and selectively summarized in our 18 discussion of Proposal 19. 19 In the proposed rule for order reform, USDA set 20 the minimum Class I differential at $1.60 per 21 hundredweight based on several enumerated costs, beginning 22 with the cost of maintaining Grade A standards. 23 Per that decision: There are several requirements 24 for producers to convert to a Grade A dairy farm and then 25 maintain it. The Grade A dairy farm -- a Grade A farm 26 requires an approved water system (typically one of the 27 greatest conversion expenses), specific facility 28 construction and plumbing requirements, certain 8794 1 specifications on the appearance of the facilities, and 2 required equipment and facilities, and adhere to certain 3 management practices. Often this will result -- often -- 4 I'm sorry -- often this will require additional labor, 5 resource, and utility expenses. It has been estimated 6 that this value may be worth approximately $0.40 per 7 hundredweight. And that's from Federal Register, 8 Volume 63, page 4908. 9 Grade A standards have only become more exact -- 10 more exacting in the meantime through a state federal 11 process of review and revision -- through a state federal 12 process of review and revision, culminating at the 13 biannual National Interstate Milk Shippers Conference. 14 And then I cite the Grade A Pasteurized Milk 15 Ordinance, which is the output of that conference, as well 16 as the document from US -- from AMS Dairy on milk for 17 manufacturing processes and its production and processing 18 recommended requirements, all of which are useful for 19 understanding the additional costs associated with 20 maintaining Grade A standard. 21 Of course, the "labor, resource and utility 22 expenses" with dairy farmers cited above rise along with 23 those of milk processors, non-feed costs in the production 24 of milk, which are closely identified with labor, 25 resource, and utility expenses, plus the cited 26 infrastructure costs have risen by 68% between 1998 and 27 2002, according to USDA estimates. 28 THE COURT: Between 1998 and? 8795 1 THE WITNESS: 2022. 2 THE COURT: Thank you. 3 THE WITNESS: Thank you, Your Honor. 4 Based on above and applying the same 68% increase 5 to the $0.40, $0.40 per hundredweight cost of maintaining 6 Grade A supplies, AFBF conservatively estimates the 7 present costs of maintaining Grade A standards at $0.67 8 per hundredweight, an increase of $0.27 from the status 9 quo. 10 And I cite the USDA Economic Research Service Cost 11 of Production Estimates, including links for the most 12 recent estimates in the historical data. 13 Regarding the balancing incentive. 14 THE COURT: Now, just so people can keep up, we're 15 still in Exhibit 383, we're on page 6, and we have just 16 begun a new heading. 17 THE WITNESS: New heading that says "Balancing 18 Incentive." 19 Balancing incentives are a critical element of the 20 minimum Class I differential because supporting balancing 21 is a critical function of the FMMOs themselves. 22 USDA's order reform decision also stated: 23 "Traditionally, the additional portion of the Class I 24 differential reflects the marketing costs incurred in 25 supplying the Class I market. These marketing costs 26 include such things as seasonal and daily reserve 27 balancing of milk supplies, transportation to more distant 28 processing plants, shrinkage, and administrative costs, 8796 1 and opportunity or 'give-up' charges at manufacturing milk 2 plants that service the fluid Class I markets. This value 3 has typically represented approximately $0.60 per 4 hundredweight." 5 And I have the citation, again, for the proposed 6 rule. 7 Most of these are the same costs associated with 8 the operation of plants producing such products as cheese, 9 dry whey, butter, and nonfat dry milk powder. 10 The operators of cooperative supply plants often 11 sacrifice plant profitability of their manufacturing 12 operations in order to provide Class I and II milk 13 supplies. The costs of this supply rise as energy costs 14 and per-pound processing costs rise, and each cost should 15 be offset in the Class I price. 16 Shipping milk from distant sources imposes an even 17 larger cost of balancing Class I markets. Transportation 18 costs also rise with higher energy prices, as was 19 acknowledged in the 2020- -- in the 2006 tentative partial 20 decision on transportation credits in the Southeast and 21 Appalachian markets. 22 Manufacturing costs estimated from recent surveys 23 tend to reflect costs of plants running near capacity. 24 Processing costs of balancing plants are higher and should 25 be reflected in the Class I price. In addition, some part 26 of the costs of plant operation are associated with 27 maintaining certification to supply milk to Grade A fluid 28 milk plants, costs that are required of a plant before it 8797 1 may be pooled in the Federal Order system. 2 Very conservatively -- that should probably say 3 "the" same percentage increase in the cost of butter and 4 powder manufacture -- 5 THE COURT: Now, what word do we want there? 6 After "very conservatively"? 7 THE WITNESS: Instead of "rite," it should say 8 "the." 9 THE COURT: "The same percentage increase"? 10 THE WITNESS: Yes. 11 THE COURT: All right. So we're going to make 12 that change now. Page 6, what is it, I don't know, about 13 eight lines up, first word, instead of "rite" -- 14 THE WITNESS: Right. 15 THE COURT: -- it's "the." We're with you. 16 THE WITNESS: Thank you very much. 17 THE COURT: If you'd begin again with "very 18 conservatively." 19 THE WITNESS: Certainly. Certainly. 20 Very conservatively, the same percentage increase 21 in the costs of butter and powder manufacture, which is 22 the primary form of market balancing through manufacturing 23 that is applied to Class III and IV Make Allowances, 24 should also be applied to the $0.60 supply cost. 25 Increases in the Make Allowance or manufacturing cost data 26 since 1998 should already be applied to the $0.60 supply 27 cost. 28 This -- the current -- 8798 1 THE COURT: You said "should already be applied"? 2 THE WITNESS: Yeah, I probably should not have 3 said "already," because I think I'm talking about what 4 we're looking at right now, so let me not say that. 5 THE COURT: Okay. Read that sentence again. 6 THE WITNESS: I'll read the sentence again. 7 Increases in the Make Allowance or manufacturing 8 cost data, since 1998, should be applied to the $0.60 9 supply cost. The current total Make Allowance for 10 Class IV milk is $2.17 per hundredweight of milk at the 11 3.5% butterfat test. This is -- and that's based on the 12 standard test in the current formulas, not the updated 13 formulas. This is up more than 31% from the per 14 hundredweight Make Allowance at the time of order reform, 15 which was $1.65. Applying this increase to the $0.60 16 handler fluid supply cost would be an increase of $0.19. 17 Similarly, any increase in the Class IV Make Allowance 18 should be applied to this factor as well. 19 And I have the citations. 20 THE COURT: All right. And now we have gone to 21 page 7. 22 THE WITNESS: Page 7. 23 Manufacturing plants are larger and more dependent 24 on running full for profitability. This means that 25 give-up charges are higher than ever, and the cooperative 26 and the few other handlers who take on balancing 27 responsibilities are facing ever higher costs to do so. 28 In addition, shifts in milk production and 8799 1 manufacturing consolidation have led to longer hauls to 2 Class I plants. Studies by the Minneapolis Market 3 Administrator and its Chicago predecessor concluded that 4 the weighted average hauling charge in the Upper Midwest 5 market in May 1998 was $0.17, $0.176 per hundredweight, 6 and the weighted average hauling charge in the Chicago 7 regional market in May 1999, the first year for which data 8 was compiled for that market, was $0.111 per 9 hundredweight. 10 The first data for the consolidated Upper Midwest 11 market was for May 2001, and the average hauling rate was 12 $0.171 per hundredweight. 13 By May 2006, the average weighted average for the 14 consolidated Upper Midwest market was $0.235, $0.065 15 higher than five years earlier, and 6 and $0.12 higher 16 than the figures for the predecessor markets. 17 In 2022, this average hauling cost had risen to 18 $0.4153 per hundredweight, an increase of 143% from 2001, 19 or $0.24 per hundredweight. 20 Similarly, studies by the Seattle Market 21 Administrator showed average hauling rates rising from 22 $0.4339 per hundredweight in 2000 to $0.517 per 23 hundredweight in 2005, then to $0.95 per hundredweight in 24 2022, an increase of 118%, or $0.52 per hundredweight. 25 Based upon these studies, and the rest of this 26 hearing record, we would conservatively propose an 27 additional $0.25 per hundredweight in the average Class I 28 assembly costs be applied to the minimum Class I 8800 1 differential, for a total increase of 44% in the Class I 2 differential associated with the incentive to serve the 3 Class I market. 4 THE COURT: Just read again the last line of that 5 paragraph. 6 MS. TAYLOR: Your Honor, could we ask him to slow 7 down. 8 THE COURT: Oh, yes. And slow yourself down, 9 Dr. Cryan. 10 MR. HILL: Specifically on the numbers. I mean, 11 you are shooting through those numbers, and they are hard 12 to keep up with. 13 THE WITNESS: Okay. Okay. I'll read the last 14 sentence. 15 Based on these studies, and the rest of this 16 hearing record, we would conservatively propose an 17 additional $0.25 per hundredweight in average Class I 18 assembly costs to be applied to the minimum Class I 19 differential for a total increase of $0.44 in the Class I 20 differential associated with the incentive to serve the 21 Class I market. 22 And then, again, I -- I share the citations for 23 the milk hauling studies in the Upper Midwest market and 24 then the Pacific Northwest market from the Market 25 Administrator's offices. 26 The next heading is the "Incentive to Serve 27 Class I Customers." The last element of the minimum 28 Class I price, per the proposed rule, was the additional 8801 1 competitive factor, estimated at $0.60 per hundredweight, 2 based on -- based upon two price comparisons. The 3 proposed rule reported that Grade A milk received an 4 average premium above Class III in 1995 and 1996, of $0.86 5 in Minnesota and $0.89 in Wisconsin. By 2022, those 6 premiums were $0.62 and $0.84, respectively. See 7 Table 1.) His is lower than the numbers on which the 8 original $0.60 was based, but not substantially, and 9 certainly not zero. 10 These continuing premiums are indication of the 11 necessity of a minimum Class I differential to draw milk 12 to the pool to meet Class I needs, and that they meet 13 the -- and they meet the objectives of the Act. There is 14 no call to reduce this element of the minimum Class I 15 differential. 16 And then I have Table 1. Table 1 is a -- 17 essentially an updated version of Table 7 from the 18 proposed rule, the order reform. That table is on 19 page 4908, 4909 in Volume 63 of the Federal Register. And 20 I believe those numbers are comparable to those -- to the 21 numbers on Table 7. 22 Altogether, increases in the foundation for these 23 three elements justify, not a reduction of the Class I 24 differential, but an increase of approximately $0.60. 25 THE COURT: I'm going to stop you for just a 26 minute. I just want everybody to stand up and stretch for 27 two minutes, and then we'll continue on, still on page 8. 28 We'll go off record at 3:33. Just two minutes. 8802 1 (An off-the-record discussion took place.) 2 THE COURT: Let's go back on record. 3 We're back on record at 3:35. We're on page 8 of 4 Exhibit 383. 5 Dr. Cryan, do you remember where you were? 6 THE WITNESS: I do. 7 THE COURT: You may resume. 8 THE WITNESS: Regarding class price alignment and 9 pooling incentive. 10 (Court Reporter clarification.) 11 THE WITNESS: Finally, perhaps most fundamentally, 12 reducing the minimum Class I differential to zero would 13 effectively destroy the basic proposition that Class I 14 prices should be consistently higher than other class 15 prices, which is critical to the operation of Federal 16 Order milk pools. 17 In connection with the return to higher-of pricing 18 and the elimination of advanced pricing, the Class I 19 differentials are the key to encouraging pooling and 20 ensuring a pool draw for manufacturing plants who are 21 ready to serve the Class I market. 22 Milk prices and milk production costs are all up 23 substantially since 1998. The Class I and II 24 differentials are a fixed element in milk price formulas 25 that need regular updating. Basing this on three 26 additional elements is a reasonable approach; however, if 27 the traditional analysis did not support an increase, an 28 increase would still be appropriate to sustain the 8803 1 critical alignment of class prices. (See the 2 above-referenced cost -- Milk Cost of Production Data, 3 which includes all milk prices.) 4 Conclusion. The minimum $1.60 or more is a 5 critical practical element in FMMO pricing and pooling. 6 The $1.60 minimum is not only still justified, but could 7 be increased based on increased costs associated with 8 maintaining Grade A standards of hauling milk and 9 balancing weekly seasonal supplies. 10 The argument made by MIG and pre-submitted 11 testimony by Ms. Keefe that too high a Class I 12 differential will lead to overproduction is spurious. It 13 is not too high in the current market regime in which 14 manufactured milk products clear in an open international 15 market and do not back up into government stocks. 16 The purpose of the Class I differential is to 17 ensure a fluid milk supply and orderly marketing of milk 18 overall. A higher Class I differential will do that. It 19 will not cause overproduction, per se, which doesn't 20 really exist as long as processing capacity can keep up. 21 In pre-submitted testimony for MIG, Dr. Stephenson 22 claims that because of the average shadow cost for 23 manufacturing milk is higher than the average shadow cost 24 for fluid use, that the minimum Class I differential is 25 not justified. This is a misinterpretation of his own 26 model, which assumes all milk can simply move through 27 hauling and processing without any significant 28 differentiation among uses. In fact, we have higher 8804 1 prices for Class I because there are many challenges to 2 serving Class I use that isn't captured in the model, 3 including the critical need for steady supplies on a daily 4 and seasonal basis, higher quality standards, and the 5 inability to store fluid milk for significant amounts of 6 time. 7 I'm also curious as to how the fact that 8 Dr. Stephenson's plant nodes have limited capacity affect 9 these results. Fluid plants there are typically running 10 with slack capacity, while many manufacturing plants, 11 especially cheese plants, are running full, and their 12 plant capacity almost certainly puts more constraints on 13 his model for manufacturing milk, which could lead to 14 higher average shadow costs per additional hundredweight 15 of milk in many manufacturing locations, depending on how 16 he defines that value. 17 It is often suggested that fluid milk demand is 18 declining because of the Class I differential. Even in 19 Miami the Class I differential represents about $0.50 per 20 gallon. The $1.60 minimum Class I differential represents 21 less than $0.14 per gallon. 22 And in every part of the country, the Class I 23 differential is a single consistent element of the milk 24 price. If there was a demand impact, it would be a 25 one-time shift in demand, not a long-term decline. 26 Rather, fluid milk demand has been undermined by a shift 27 away from breakfast cereals and the nutrition community's 28 inappropriate and unfortunate encouragement of consumption 8805 1 of unappealing skim and lowfat milks rather than whole 2 milk. 3 Ultimately, MIG's proposal to cut the Class I 4 differentials by $1.60 across the board is a proposal to 5 overturn class price alignment, create chaos in Federal 6 Milk Marketing Order, and effectively destroy the Federal 7 Milk Marketing Order system. 8 The destruction of the FMMO system may lead 9 eventually to stable market structure, but it would be one 10 that could closely resemble that of the current broiler 11 chicken industry, which integrated processors seize tight 12 control over farmers' prices and farmers' operating 13 methods. Similar results have been seen in the United 14 Kingdom and Australia, where large retailers set the milk 15 price at the long-term detriment of farmers and consumers. 16 The FMMO system as it stands today provides a 17 framework in which farmers can control their own destiny 18 through cooperative organization, and through independent 19 reliance on the terms of trade established by the orders 20 and enforced by the Market Administrator. 21 The FMMOs create a fairer world for dairy farmers 22 in the short run and a market in which farmers are better 23 encouraged to serve American and international consumers 24 in the long run. Dr. Stephenson argues that we are 25 "shackled" to the 1937 Act. Rather, the Act provides USDA 26 and the dairy -- and the industry enormous flexibility to 27 adjust and modernize the FMMOs, as we are here to do 28 today. 8806 1 Congress has stepped in more than once to call for 2 a full overhaul in 1996, and to notably ensure the 3 sufficiency of Class I differentials in 1985 and 1999. 4 The system undoubtedly needs updating, as we have argued 5 throughout. However, proposals that would tend to 6 overthrow the entire system, such as Proposal 20, need to 7 be considered not on fine detail, but on the overall 8 impact it would have on the system. 9 I'll address some other issues based on things 10 that have come up in the course of the hearing. 11 One is regarding the cause of increased depooling. 12 In someone's earlier testimony, there was a suggestion 13 that the reason depooling is up in the Federal Milk 14 Marketing Order system is because of the addition of the 15 California market to the system. However, depooling data 16 for Federal Order 30 shows the same pattern as that in the 17 FMMO system overall. California is not causing the 18 decrease (sic) in the depooling except to the extent that 19 it's decreased the volume of milk -- 20 THE COURT: Yeah, I don't know what happened to 21 the volume. Start again. Please go to the bottom of 22 page 9 and start again with that sentence "however." 23 THE WITNESS: However, depooling data for Federal 24 Order 30 shows the same pattern as that in the FMMO system 25 overall. California is not causing the increase in 26 depooling. The rise in depooling is a result of declining 27 Class I use and the falling relative value of the Class I 28 differential relative to the underlying milk prices. 8807 1 And I will make a note now that there is an extent 2 to which California is contributing to additional 3 depooling simply because there is more milk in the system, 4 not because California is -- is subject to depooling in 5 excess to other markets. 6 And there's a graph there showing the pattern of 7 depooling in the system overall and in Order 30 alone, 8 which shows the same -- same patterns. That data is from 9 AMS. 10 Regarding exchanges. There's been a suggestion 11 that eliminating advanced higher-of Class I pricing 12 creates an unbearable loss of risk management 13 opportunities if the CME Group does not implement the 14 Class I futures and options complex. The CME Group 15 witness earlier in the hearing indicated the exchange 16 would be open to considering any new contract that would 17 serve its customers, which would be, of course, the 18 simplest and the most obvious solution to milk handlers' 19 concerns. However, if the CME Group declined to offer 20 this product, there are other exchanges that could clear 21 dairy contracts, including ICE and the Minnesota Grain 22 Exchange, or companies that could facilitate swaps such as 23 ever.ag, formerly dairy.com. 24 THE COURT: And how is ever.ag shown in your 25 testimony? 26 THE WITNESS: It is shown E-V, all -- all small 27 letters, E-V-E-R, dot, A-G. And dairy.com is all small 28 letters, D-A-I-R-Y, dot, C-O-M. 8808 1 Regarding the difficulty of Class I and Class II 2 handlers and managing price risk, dairy farmers and many 3 other farmers, despite operating on a significantly 4 smaller scale than even a "small" dairy processing 5 business, which has up to 1150 employees according to the 6 Small Business Administration, manage myriad price risks 7 for their feed purchases, their energy costs, their milk 8 sales, their crop sales, et cetera, through the use of an 9 inter- -- through their use of an interlocking collection 10 of government risk management programs, contract pricing 11 swaps, and hedging on futures and options exchanges. 12 If the CME Group, or any exchange, were to 13 establish the long overdue set of Class I milk futures and 14 options contracts, such risk management for processing 15 operations that are several times as large as a "large" 16 dairy farm are not an unreasonable expectation of doing 17 business. The price risk faced by Class I handlers is 18 much simpler than what many farmers face, and the distance 19 of Class I futures and options would make it simple to 20 solve. 21 Finally, AFBF believes that the Edge proposal to 22 create a new Class I each lies outside of the scope of 23 this hearing. 24 And that concludes my direct testimony. I have 25 no cross for myself. So I offer my -- no direct 26 examination for myself -- so I offer myself for 27 cross-examination. 28 THE COURT: Thank you, Dr. Cryan. This is 8809 1 extremely meaty, as you might know. What are the 2 limitations on your amount of time with us today? 3 THE WITNESS: I can stay all night. 4 THE COURT: Oh, dear. 5 THE WITNESS: I'll be here tomorrow. 6 THE COURT: You will? Well, that's good news. 7 All right. The only reason I say that, Dr. Cryan, is that 8 I don't want to stay all night. 9 THE WITNESS: I understand. 10 THE COURT: All right. Who would like to go first 11 with cross-examination, or do you need like five minutes 12 to move around before you start that five minutes? Yes. 13 Let's take a five-minute break. Please be back 14 ready to go at -- let's see, five minutes, 3:55 be back. 15 We go off record at 3:48. 16 (Whereupon, a break was taken.) 17 THE COURT: Let's go back on record. 18 We're back on record at 3:55. Who will be first 19 to cross-examine Dr. Cryan? 20 MR. ROSENBAUM: I will, Your Honor. 21 Steve Rosenbaum for the International Dairy Foods 22 Association. 23 THE COURT: You may proceed. 24 CROSS-EXAMINATION 25 BY MR. ROSENBAUM: 26 Q. Dr. Cryan, I have some questions relating to 27 Proposal 21, your proposal to increase the Class II 28 differential from its current $0.70 to $1.56. 8810 1 First of all, have you done any analysis as to the 2 adequacy of the current milk supply to satisfy Class II 3 needs? 4 A. No, I have not. 5 Q. Are you aware that USDA has turned to that 6 specific question in some of its past decisions addressing 7 whether or not the Class II differential should be 8 increased? 9 A. I'm not. 10 Q. So in terms of methodology, what you propose to do 11 is to set the Class II differential equal to what you 12 calculate to be the cost of drying skim milk, correct? 13 A. Yes. 14 Q. And, indeed, that's the formula that appears on 15 page 2 of your statement, which is Hearing Exhibit 382, 16 correct? 17 A. Right. 18 Q. And you acknowledge that that's not actually the 19 methodology that was used by USDA when it last raised the 20 Class II differential to $0.70, correct? 21 A. The -- that's correct. 22 Q. And it's not -- and there are two exceptions, if 23 you will. One is you have -- you're no longer going to 24 consider the cost of rewetting based upon the argument 25 that, in fact, you don't have to rewet in many cases, 26 correct? 27 A. That's correct. 28 Q. And are you aware that that represented roughly 8811 1 $0.13 of the $0.70? 2 A. That sounds about right. 3 Q. Okay. And so the other difference in methodology 4 is that, as we just covered, initially at least, you are 5 going to rely upon the cost of drying skim milk, whereas 6 back in order reform, USDA looked to the cost of drying 7 condensed milk, correct? 8 A. That's right. 9 Q. Now, you provide a calculation that suggests that 10 that difference is actually minimal, in that you assert 11 that, you use that method, you would have a differential 12 of $1.49, only $0.07 less than your $1.46, correct? 13 A. That's what I wrote. 14 Q. Okay. Do you -- are you aware that when, if you 15 look at the numbers before USDA and order reform, there 16 was actually quite a vast difference in the impact of 17 using cost of drying condensed milk versus skim milk? 18 A. I did not see that in the -- in the record. 19 Q. Okay. The -- at the time, well, let me -- I mean, 20 the cost of drying skim milk is basically the 21 Make Allowance for turning skim milk into nonfat dry milk, 22 correct? 23 A. That's right. 24 Q. Okay. And would it surprise you to learn that, in 25 fact, if you do the math, back when order reform took 26 place, the use of starting point of condensed milk 27 resulted in a Class II differential that was only 47% of 28 what the cost would have been had it used the cost to dry 8812 1 skim milk? 2 A. I would be surprised. 3 (Court Reporter clarification.) 4 BY MR. ROSENBAUM: 5 Q. You would what? 6 A. I would be -- did you ask me would I be surprised? 7 Yes, I would be surprised. 8 Q. Okay. So let's talk a bit about -- and I am not 9 going to get into a philosophical fight over whether what 10 USDA did back then was really to set the Class II 11 differential based upon these costs or there were other 12 considerations at play. We'll deal with them in our own 13 testimony. But let's just talk about the question of 14 switching from using Class II fresh milk to make Class II 15 products as opposed to substituting powder. Okay? 16 A. Okay. 17 Q. And is it -- is it your view that it would -- and 18 I think the answer is yes -- but is it your view that it 19 would be a bad thing to set the Class II differential in a 20 manner that would encourage substantial displacement of 21 Class II milk with Class IV powder? 22 A. I believe the powder plays an important balancing 23 role in the market, and if the -- if the use of powder is 24 effective with respect to product quality and -- and 25 economics of production, it's a reasonable thing. I don't 26 think it's a bad thing. I think it's a -- I think it's -- 27 it's a reasonable thing. 28 But I also think that the Class II differential, 8813 1 there wasn't really a reason not to include condensing 2 costs in the -- in the calculation of that Class II 3 differential. 4 Q. You say there's not a reason? 5 A. There was not really a reason. 6 Q. But that's what they did, right? 7 A. That's what they did. 8 Q. Okay. So I mean, I thought you were trying to set 9 the Class II differential in a way that would not be so 10 high as to encourage substitution of powder. Is that -- 11 am I mistaken about that? 12 A. The idea was to avoid encouraging uneconomical 13 substitution of skim milk for powder. 14 Q. Okay. So -- so in the real world, if you are a 15 stand alone, let's say, yogurt plant, Class II product, 16 correct? 17 A. Right. 18 Q. You are not under -- probably under any 19 circumstance actually going to be drying your own nonfat 20 dry milk, right? 21 A. I -- I'm not familiar with that. I -- I don't 22 know whether any yogurt makers have driers or not. 23 Q. Not aware that they do, correct? 24 A. I don't know that they do and I don't know that 25 they don't. 26 Q. Okay. Certainly there are many companies out 27 there, including cooperatives, of course, that do have 28 driers and they make nonfat dry milk, correct? 8814 1 A. Yes. 2 Q. So is it fair to say that if you were to be 3 concerned about substitution of powder for Class II milk 4 in making Class II products, that you would want to 5 address how a Class II handler would go about achieving 6 that substitution if it wanted to do that; is that fair? 7 A. I'm not sure I understand the question. 8 Q. Well, I mean, you know, you could say the question 9 is what's the cost of using that Class II milk versus 10 drying it. But of course, if you don't have a drier, 11 that's not actually -- that's not the real world, right, 12 for a Class II handler? What the real world is for them 13 is, do I take the fluid milk and use it, the fluid raw 14 milk, and use it for my Class II product, or do I buy 15 powder from somebody and use that instead? Isn't that the 16 real world choice for the typical Class II standalone 17 handler? 18 A. Yes. 19 Q. Okay. And do you know what the shelf life is of 20 nonfat dry milk? 21 A. It's a Grade A product. It's relatively limited. 22 Q. Months, if properly stored? 23 A. I'm not sure. A couple months probably. I don't 24 know. 25 Q. Okay. Is it -- okay. 26 Would it surprise you if it's -- that people 27 actually store it longer than that? 28 A. No. 8815 1 Q. Okay. 2 A. No. 3 Q. And so the -- and -- and it is fair to say that 4 the -- and we can look at some numbers -- but the price of 5 nonfat dry milk in the market does vary considerably over 6 the course of a year often, 10 or 15% at least? 7 A. What varies? 8 Q. Varies, yes. 9 A. What does? 10 Q. The cost of nonfat dry milk, just the market value 11 of nonfat dry milk. 12 A. And the Class II and Class IV milk move in 13 lockstep, especially if you eliminate advanced pricing of 14 Class II. 15 Q. Well, that's a second subject. We have had our 16 argument about that already. 17 But if we just look at historical records of 18 the -- just nonfat dry milk prices per pound, which is 19 obviously it's a surveyed product, it's part of the survey 20 that sets minimum milk prices, we can look at them every 21 month and -- more than once a month, for that matter -- 22 and you can see that they do vary considerably over the 23 course of a year, correct? 24 A. They do vary. 25 Q. Okay. And so the real -- in the real world, if 26 you have more than doubled the Class II differential, the 27 real world thought process for a Class II handler is going 28 to be, presumably, well, can I buy nonfat dry milk at a -- 8816 1 when the market is flush and the price is low, and how 2 does that compare to what the Class II differential would 3 be at the time I later make my yogurt or ice cream or 4 cottage cheese, and which is better for me? I mean, isn't 5 that the thought process that people would go through? 6 A. I believe they would, and I believe that a 7 manufacturer that chooses to manage their inventory and 8 their price risk through -- through stocking inventories 9 of powder is helping -- is helping balance the market in 10 ways that other processors are not, if they simply demand 11 fluid milk every day. 12 Q. I mean, that goes, I guess, to a question I asked 13 you earlier, which is maybe you don't care whether or not 14 people make Class II products from raw milk versus milk 15 powder, in which case, the substitution is not really 16 relevant. 17 Is that where you are coming from? 18 A. I believe there are products where it -- it can be 19 done without sacrificing product quality, and I think 20 there are products where it can't be done without 21 sacrificing product quality. 22 Q. And of course, there may be, of course, 23 circumstances where it can be done, and whether you are 24 going to do it is going to depend upon the price of one 25 versus the other, correct? 26 A. The price -- the price affects decisions, right. 27 Q. And you are more than double -- 28 A. Because there's some point at which price affects 8817 1 decisions. There will be some -- again, there will be 2 some products where you could raise the Class II 3 differential to $3, and they are still not going to use 4 powder. But there's -- but there's other products 5 where -- where the difference in the product, the 6 difference in the outcome is -- is negligible, and they 7 will make that decision. And, again, that -- that 8 contributes to the market balancing. 9 Q. And, obviously, the balance, the economic balance 10 of the choice will be different and more in favor of 11 substitution of powder if the Class II differential is 12 more than double, all other things being equal, correct? 13 A. For some -- for some processors, for some 14 products, yes. 15 Q. Now, I think -- I think in your discussion about 16 Proposals 19 and 20 there was some discussion of sort of a 17 relationship among the prices in the different classes; is 18 that right, as that being meaningful? You were, it's a 19 different context obviously, but you were talking about, 20 you know, the need for Class I price to be higher for the 21 reasons you articulate, correct? 22 A. Yes. 23 Q. I mean, so right now, the Class II differential is 24 less than half the lowest Class I differential, correct? 25 A. Yes. 26 Q. The minimum Class I differential being $1.60 and 27 the Class II differential being $0.70, correct? 28 A. Uh-huh. Right. 8818 1 Q. And obviously we don't know what USDA is going to 2 do with Class I differentials. We have different views as 3 to what they ought to do. But clearly to raise the 4 Class II differential to $1.56 would potentially create a 5 relationship between Class I and Class II prices that are 6 quite -- quite different than their current relationship, 7 correct? 8 A. It would be closer, but if the minimum Class I 9 price, the minimum Class I differential is $2.20, then 10 there remains a substantial space, $0.60 space between. 11 Q. On a percentage basis, they're much closer at that 12 point, correct? On an absolute basis, not so much 13 difference? 14 A. I don't know if $0.60 versus $0.90, is that -- is 15 that much closer? But, yeah, it's closer. 16 Q. Well, I'm just saying right now it is less than 17 half, and if the minimum Class I differential went up to 18 2.20, half of 2.20 is $1.10, and you are going to be at 19 $1.56, so that's quite a bit higher. 20 A. You can -- you can look at the numbers any way you 21 would like. 22 Q. Well, that's -- I won't -- I'm trying to -- yeah. 23 The way I'm looking at it is to answer the question, are 24 you maintaining historical relations between Class II 25 prices and Class I prices, and I think the answer is no. 26 A. If we eliminate advanced pricing for Class II and 27 Class I, they will be close. If we don't eliminate class 28 pricing for either, they will continue to move and be 8819 1 separated. They will continue to have a proper alignment. 2 And the -- I think it's worth noting again, I 3 probably didn't make it clear enough in my testimony, that 4 Class II was, at one time, part of Class I. Most of the 5 many products in Class II, such as cream and other -- 6 other soft perishable products, were part of Class I in 7 the early days of the Federal Orders. And the separation 8 was just in the recognition that over time Class II -- 9 many Class II products became traded on a, you know, wider 10 area, and more -- there were more and more national -- 11 nationally marketed Class II products, so there was a 12 shift to sort of a single Class II price across the whole 13 country. 14 But fundamentally, Class II was part of Class I 15 because there are similar balancing issues in Class II as 16 there are in Class I. 17 Q. Do yogurt plants not operate on a more consistent 18 basis than Class I plants? 19 A. Do they not operate? 20 Q. I think double negative. Mistake. Try again. 21 (Court Reporter clarification.) 22 BY MR. ROSENBAUM: 23 Q. Do yogurt plants tend to operate on more of a 24 seven-day a week basis than Class I plants? 25 A. I don't know, but I'm sure they operate on 26 certainly much more of a weekly basis than manufacturers 27 need to because of the perishability of the product. 28 MR. ROSENBAUM: That's all I have. Thanks. 8820 1 THE WITNESS: Thank you. 2 THE COURT: Thank you, Mr. Rosenbaum. 3 Mr. Miltner, thank you. 4 MR. MILTNER: Thank you. 5 CROSS-EXAMINATION 6 BY MR. MILTNER: 7 Q. Dr. Cryan, I think Mr. Rosenbaum covered several 8 of the questions I had to ask. I think I may have just a 9 couple. 10 As an economist, where do you draw the line 11 between what is an uneconomical substitution and an 12 economical one? 13 A. If -- if -- if the price signals are such that 14 it's profitable to do something that makes no sense just 15 on the basis of the -- of those signals, those, you know, 16 external regulated signals, that's -- that's uneconomical. 17 Q. So if we think about the yogurt producer for 18 instance -- 19 A. Uh-huh. 20 Q. -- I suppose, should the -- should Federal Order 21 pricing default or direct that processor to using fresh 22 milk or should they be ambivalent as to whether they use 23 Class II products or Class IV products to manufacture? 24 A. I think they should make the decision on the basis 25 of their demand, their product. I mean, if -- we're 26 following the same principle that was incorporated into 27 the -- into the decision in 1998 to try to have the 28 Class II price as high as it can be without -- without 8821 1 unnecessarily incentivizing substitution of powder. 2 But again, if -- if -- if the processor chooses to 3 use powder based on seasonal fluctuations in price, then 4 that contributes to the market balancing in ways that are 5 probably good for the market. Probably help address some 6 issues of volatility in supply and demand. 7 Q. Have you done any analysis, even rough analysis, 8 to determine if there's a price point or a differential 9 point at which uneconomic substitutions might be 10 incentivized? 11 A. No. I haven't looked at case studies, for 12 example, to consider the extent to which processors are 13 already buying skim condensed for -- for -- for hauling 14 advantages or so forth. I haven't looked at that. 15 (Court Reporter clarification.) 16 THE COURT: And that was, you have not looked at 17 what Mr. Miltner asked you about? 18 THE WITNESS: That's right. 19 THE COURT: Understood. 20 MR. MILTNER: Thank you. 21 BY MR. MILTNER: 22 Q. I was hoping you might elaborate a little more on 23 why you chose to propose a differential that's calculated 24 in a manner different than that which USDA used 25 previously. 26 A. In principle, in order to substitute powder for -- 27 for milk, the milk has to be dried, or condensed and 28 dried. The -- there certainly could be cases where the 8822 1 norm is already to buy condensed milk, in which case the 2 issue could be just drying. And if that is the case, 3 there's a balance to be considered, whether at -- again, 4 it's not -- for those -- some of those cases it's not 5 necessarily a problem for the market if there's some 6 balancing being done with powder. But even if -- even if 7 the condensing costs are backed out, it still justifies an 8 increase in the differential. 9 Q. And I guess maybe you partially answered what I 10 was hoping you would address. 11 Is there a reason why, when you were making a 12 determination to update the differential, that you chose 13 to look at the entire cost of drying as opposed to just 14 using -- starting with condensed? 15 A. We're just going back to first principles about 16 Class II as a class that requires balancing for fresh 17 products, similar to Class I, and that -- that $1.56 was a 18 reasonable differential based on drying costs. 19 Q. I'm not going to try to walk you through 20 arithmetic. 21 A. And I won't do arithmetic. 22 Q. So accept for a moment my math so we don't have to 23 go through the arithmetic. 24 If we -- if we merely took USDA's logic from 25 setting the current differential and you -- you 26 substituted out the Make Allowance for nonfat that was in 27 place in 1999 and used that which is current, but you did 28 so based on the drying of condensed rather than nonfat, in 8823 1 other words, you started with condensed, I figured that 2 the differential would go up to about $0.82. 3 I wondered if you have done any -- any analysis 4 about updating the differential using USDA's methodology, 5 what's articulated in the order reform decision? 6 A. I have not, but I would be happy for anybody to 7 put good evidence of condensing costs on the record so 8 that USDA can make that consideration. 9 Q. Okay. 10 A. There's still an economic logic that a processor 11 that uses powder instead of milk at some point is paying 12 for condensing. The question is, are they -- are they 13 paying for condensing anyway because it saves them money 14 on the shipment, or are they -- are they -- or is that 15 simply part of the process of drying? 16 Q. I think I asked a question like this, I hope I 17 don't repeat it identically, but is there a numerical 18 point at which you believe the differential gets to high? 19 A. I think -- I think it -- I think $1.56 is a good 20 number. I think if the -- if the Make Allowance go up, 21 then the Class II differential should go up with it. But 22 I think as long as it doesn't -- as long as it's not so 23 high that it incentivizes, that it creates a profitability 24 simply to replace Class II milk with Class IV powder, then 25 it's not too high. 26 Q. But you don't have an opinion on what -- when that 27 trigger is pulled? 28 A. We -- we propose the $1.56. 8824 1 Q. Okay. 2 A. That seems like a good number. It seems like it's 3 the principle of the original decision in 1998 was to get 4 the price as high as it could be without creating an -- 5 sort of a standalone incentive to dry instead of using -- 6 using milk directly. That's the same logic that $1.56, by 7 our figure, is the highest you could go without tipping it 8 over to where folks will just dry because they can make 9 more money simply because they are drying, that their 10 costs are reduced by using powder instead of fresh milk. 11 Q. Not to put words in your mouth, I hope, but $1.56 12 is close to that tipping point? 13 A. I mean, I -- I -- there's a -- the president of 14 the Teacher's Union will never admit that there's a bad 15 teacher, and I don't know that there's ever such a thing 16 as too high a milk price. 17 Q. You are talking to a school board president, you 18 know that? 19 A. Yeah. So, you know, maybe -- maybe if it was much 20 higher than $1.56, it would be too high. 21 Q. And on the off chance any of my teachers get ahold 22 of this transcript, they are all fine educators. 23 A. I'm sure they are. 24 Q. If -- if the highest Make Allowances that have 25 been proposed in this hearing were adopted, it would add 26 about $0.11, 10 to $0.11 to powder, which -- 27 A. Would add 10 to 11? 28 Q. Yeah -- well, no, the Make Allowance itself would 8825 1 increased by 10 to $0.11 for powder. 2 A. Per hundredweight of milk or per -- 3 Q. Per pound. 4 A. Per pound. Yeah. Yeah. Okay. That's a lot. 5 That's a lot, isn't it? 6 Q. Which would be -- which would -- at $0.11 and 7 9-point something pounds of powder per hundredweight, that 8 adds $1 to the differential under your analysis? 9 A. So be it (indicating). 10 Q. Okay. I noticed the hand shrug as well, which 11 doesn't get picked up on the transcript. 12 So that's the result, right? 13 A. I'm shrugging. 14 THE COURT: That's not a shrug. That's like -- 15 MR. MILTNER: So be it. 16 THE WITNESS: So be it, yeah. 17 THE COURT: -- so be it, yes. That's an Italian 18 thing. 19 THE WITNESS: The -- the Class II differential 20 should bear a relationship to the Make Allowance. If the 21 Class IV skim Make Allowance -- if the Make Allowance for 22 Class IV skim milk goes up, then so should the Class II 23 differential, whether we're talking about basing it on 24 full drying costs or basing it on drying condensed. 25 It's -- it still should be higher, and it still should 26 track when Make Allowances go up. 27 BY MR. MILTNER: 28 Q. And as you have proposed it, it would track the 8826 1 full drying costs, so a change in the Make Allowance is 2 essentially a -- the Class II differential would move 3 essentially one for one with the Make Allowance on powder 4 as you have proposed it? 5 A. As we have proposed it. 6 Q. Okay. Thank you, Dr. Cryan. 7 MR. MILTNER: That's all I have. 8 THE WITNESS: Thank you, Mr. Miltner. 9 CROSS-EXAMINATION 10 BY MR. ENGLISH: 11 Q. Hello. My name is Chip English with the Milk 12 Innovation Group. 13 Hello, Dr. Cryan. 14 A. Hello, Mr. English. 15 MR. ENGLISH: Could we, before we start, provide 16 him with the Exhibit 44 from -- 17 THE COURT: Did you say you need water? 18 MR. ENGLISH: I didn't say it. 19 Exhibit 44, Your Honor, was producer milk and 20 components by class and order, January 2008 through 21 April 2023. 22 THE COURT: Thank you. You may proceed. 23 MR. ENGLISH: Thank you, Your Honor. 24 And I note, I am re-organizing on the fly for two 25 reasons: First, we -- this is not a complaint, just we 26 received the testimony at 10:30 this morning, and so we're 27 scrambling to put things together; and second, two 28 preceding questioners went to Class II, I have that at the 8827 1 end, but it makes more sense for me to re-organize and put 2 it now, so I'm re-organizing and starting with Class II. 3 THE WITNESS: And I apologize for not getting that 4 in sooner, but it was -- 5 MR. ENGLISH: You know, if it had been at 6 8:00 a.m., I wouldn't have looked at it any earlier, 7 Dr. Cryan, so I understand. And, again, it was not a 8 complaint. I was just explaining why I was re-organizing, 9 and maybe that means people need to bear with me. And I 10 apologize. 11 BY MR. ENGLISH: 12 Q. I want to start where you just ended with 13 Mr. Miltner, and I think it ties together with the last 14 sentence of your testimony. 15 I think what I heard you say, in answer to the 16 question from Mr. Miltner is, if IDFA's proposal is 17 adopted, or any proposal is adopted, National Milk's or 18 IDFA's, but if IDFA's proposal is adopted to increase, for 19 instance, the Make Allowance for Class IV, that it is your 20 intent for that to have an immediate impact on your 21 proposal for Class II. 22 A. Correct. 23 Q. Is that correct? 24 A. Correct. 25 Q. So your proposal for Class II today as proposed in 26 the Hearing Notice is using the existing Make Allowance, 27 correct? 28 A. That's correct. Because it's our position there 8828 1 should be no change in the Make Allowance unless there's 2 an audited and mandatory survey of processing costs. 3 Q. And based upon that, you are proposing $1.56. 4 A. Class II differential. 5 Q. Correct. 6 A. That's correct. 7 Q. And in answer to your questions from Mr. Miltner, 8 you were saying that, well, no, if the Make Allowance 9 changes, I would expect that to increase based upon the 10 Make Allowance change, correct? 11 A. That's correct. 12 Q. And have you done a calculation based upon whether 13 if National Milk's proposal were adopted -- 14 A. No. 15 Q. -- or you have not? 16 A. No. 17 Q. But Mr. Miltner had you, I believe, using the 18 $0.11, which is the IDFA proposal, correct? 19 A. I am not familiar. I'm not sure. I have looked 20 at it all. But that was weeks ago and in a different 21 world. 22 Q. It was something, though -- it would increase this 23 $1.56 by a $1; is that correct? 24 A. That sounds about right, but I -- I -- I can't say 25 for sure. But let's say it does, let's say. 26 Q. All right. So then assuming that happens under 27 your proposal, as with the sentence at the end, rather 28 than $1.56, it would be $2.56, correct? 8829 1 A. That sounds like it hits the ballpark, yeah. 2 Q. Now, in answer to your question from 3 Mr. Rosenbaum, you said, well, it's still less than the 4 Class I, but it's going to be higher than some Class I, 5 isn't it, if it's $2.56? 6 A. Yes. 7 Q. "Yes"? 8 A. That's what the calculation would come out. I 9 don't think it's unreasonable to limit the Class II 10 differential to the minimum Class I differential. It 11 seems -- that seems like a reasonable limit in order to 12 maintain the hierarchy of prices. 13 Q. But you have now basically said under these 14 circumstances you are not going to maintain the hierarchy, 15 correct? 16 A. If -- if a full -- if the Class II differential 17 was raised above the Class I differential, you have the -- 18 you do have the risk of Class II being higher in certain 19 locations. And it does seem like a reasonable thing to 20 cap the Class II differential at the Class I differential. 21 Q. So is that a modification to your statement that 22 it would be -- that there would be a cap? 23 A. That's not a modification or a proposal, but it's 24 a consideration for USDA. Our proposal is our proposal. 25 Q. So Class II milk processors are not necessarily 26 mandatory pool participants, are they? 27 A. Say it again. 28 Q. Class II processors are not necessarily mandatory 8830 1 pool participants, are they? 2 A. Not necessarily. 3 Q. If the Class II is -- product is manufactured at a 4 Class I plant that is a regulated plant, then that 5 Class II is mandatorily regulated, correct? 6 A. In effect, yes. 7 Q. But there are standalone Class II milk processors, 8 correct? 9 A. There are. 10 Q. And those processors can pool or not pool 11 opportunistically, correct? 12 A. That's true. 13 Q. And that happens, correct? 14 A. I believe so. 15 Q. It happens today at a differential, the existing 16 differential of $0.70, correct? 17 A. It does. It happens partly because of the 18 misalignments of prices based on advanced pricing and 19 average-of, and it happens more under the current regime 20 than it would happen under our proposals. 21 Q. Well, I do not want to revisit advanced pricing 22 and go back, you know, a month or so in testimony, or 23 eight weeks. 24 But regardless of advanced pricing, if you go to 25 $1.56, with or without advanced pricing, you are going to 26 have opportunistic pooling, correct, of Class II? 27 A. Potentially if there's a big enough gap between 28 Class III and Class IV, yeah, you could. The blend price 8831 1 could fall below the Class II price. 2 On the other hand, the higher Class II price would 3 increase the value in the pool, which would tend to make 4 depooling of Class III or IV less frequent. 5 Q. Class II is enough of a percentage to have that 6 happen, in your opinion? 7 A. Beg your pardon? 8 Q. Class II provides enough volume of milk on orders 9 to provide that, in your opinion? 10 A. Some markets. 11 Q. Which markets? 12 A. I'm sure you have the numbers in front of you. 13 There are markets where Class II is 25%. 14 Q. Are you aware of order provisions in Orders 30, 15 32, 126, 131, that expressly provide for month-to-month 16 unit pooling for Class II plants with Class I plants? 17 A. More of unit pooling? When you say 18 month-to-month, are you saying that they can't drop in and 19 out every month or are you saying that they can? 20 Q. I'm saying they can drop out. 21 A. Okay. 22 Q. I'm going to go to a different order in a second. 23 But are you familiar that in Orders 30, 32, 126, 24 and 131, they can -- a Class II plant can associate with a 25 Class I plant, and as long as it announces the day before 26 the month that's following, it can, in that following 27 month, either be on the pool or off the pool? 28 A. Okay. 8832 1 Q. Are you aware of that? 2 A. I'm not aware of the specific provisions in the 3 specific orders. I'm aware of unit pooling, and it would 4 seem like a reasonable thing that in some markets it's a 5 monthly election. 6 Q. I will admit in Order 1 it's an annual election. 7 A. Okay. 8 Q. Is that -- does that resonate with you or do you 9 not know? 10 A. If you say so. 11 Q. Do you know also that there are standalone ice 12 cream facilities that routinely do not pool? 13 A. That makes sense. 14 Q. Do you know that there are standalone yogurt 15 facilities that routinely do not pool? 16 A. That the plant does not pool, or that the milk -- 17 they don't receive pooled milk? 18 Q. They do not receive pooled milk. 19 A. Okay. 20 Q. Do you know that? 21 A. I don't know that. 22 Q. You said that there are some orders with 25% 23 Class II. 24 Do you know what order that is? 25 A. Off the top of my head it seems to me the Mideast 26 order has pretty high Class II use, and Arizona has pretty 27 high Class II use. 28 Q. Would it surprise you that Order 131 doesn't 8833 1 exceed 20% Class II, 20% of Class II? 2 A. 131? 3 Q. Yes. 4 A. That's still a pretty high share. 5 Q. Now, there are, of course, as we discussed a 6 moment ago, pool distributing plants that are Class I that 7 have Class II utilization, correct? 8 A. That's correct. 9 Q. Like fluid creams, correct? 10 A. Correct. 11 Q. Such as half and half, correct? 12 A. Correct. 13 Q. Whipping cream, correct? 14 A. Presumably, yeah. 15 Q. Soft products like sour cream, correct? 16 A. Yep. 17 Q. And so any Class II utilization in those plants 18 will have a cost increase due to your proposal, correct? 19 A. Yes. Assuming there isn't already a premium. 20 Q. So Proposal 21, in addition to other proposals to 21 increase prices for Class I, will operate to squeeze even 22 more revenue from Class I plants, correct? 23 A. Sure. 24 Q. And will -- and even if the Make Allowances are 25 not increased, it will more than double the Class II 26 differential, correct? 27 A. That's the math. Two times $0.70 is $1.40. 28 That's more than $1.40. 8834 1 Q. And if it is the case that, per your proposal, if 2 the IDFA proposal is adopted, and as a result the 3 Make Allowance for Class IV goes up, and therefore the 4 Class II goes up another $1, you're really looking at 5 almost a fourfold increase in the Class II differential, 6 correct? 7 A. More than three, yeah. 8 Q. You have further justified, based upon the issue 9 of depooling, quote: "A fundamental focus of the Farm 10 Bureau's proposal is the reduction or elimination of 11 negative producer price differentials and" -- 12 THE COURT: Slow down, please. I can't even think 13 what you just said. 14 BY MR. ENGLISH: 15 Q. A fundamental focus of AFBF's proposals is the 16 reduction or elimination of the negative producer price 17 differentials and the depooling they cause. Correct? 18 A. Yes. 19 Q. Have you done any economic analysis of how your 20 proposal will impact negative PPDs? 21 A. No. If we have a hearing in January, I'll bring 22 it. 23 Q. Isn't this your time to testify on this proposal? 24 A. It is. 25 Q. Similarly, have you done any economic analysis of 26 how your proposal will impact depooling? 27 A. Same -- same answer. 28 Q. If you want to the eliminate depooling, how does 8835 1 increasing Class II keep a standalone Class II facility in 2 the pool? 3 A. It doesn't by itself. I mean, that change 4 would -- would lead, as I said in my testimony, it would 5 lead to some Class II plants depooling more, so Class II 6 milk to be depooled more frequently. It would also tend 7 to add money to the pool to discourage Class III and IV 8 depooling. 9 Q. To the extent there's a standalone plant, 10 increasing the Class II differential by more than doubling 11 it or more than tripling it would certainly lead to more 12 thinking about the depooling, correct, for those Class II 13 standalone facilities? 14 A. Would lead to more thinking about it? 15 Q. Well, you are saying you don't know whether it's 16 going to happen because of all these other issues. 17 A. And I have already said that it's going to be -- 18 it's going to -- it will lead to Class II plants depooling 19 more often. I would assume they think about it before 20 they do it. 21 Q. So let's look at Exhibit 44, which I have asked to 22 be put in front of you. 23 A. Okay. 24 Q. Let's turn to page 21. 25 A. Okay. 26 Q. And I'm just going to do a few examples. 27 But page 21, let's look at report year 2021, June, 28 Upper Midwest, and look across to the column for Class II, 8836 1 total pounds. 2 And do you agree that is 221,046,598? 3 A. Yes. 4 THE COURT: Would you give us the number again? 5 MR. ENGLISH: 211,046,598. 6 THE WITNESS: 221. 7 MR. ENGLISH: Or 221, thank you. 8 (Court Reporter clarification.) 9 BY MR. ENGLISH: 10 Q. The month of June 2021. 11 And let's look one column over to Class III -- or 12 let's look at the Class III total pounds, so three columns 13 over. 14 THE COURT: Start again. 15 BY MR. ENGLISH: 16 Q. Let's look three columns over, same line, June 17 2021, Class III total pounds, for that month, was 18 711,830,344, correct? 19 A. Class III, total pounds, 711 million, right. 20 Q. Yes. Do you see that? 21 A. Uh-huh. 22 Q. Was that a "yes"? 23 A. Yes. 24 Q. The court reporter doesn't like "uh-huhs." 25 A. Yes. 26 Q. So let's look one month down in July of 2021. 27 A. Right. 28 Q. And the same two columns, the Class II total 8837 1 pounds are now 95.9 million pounds, correct? 2 A. Yep. 3 Q. While the Class III pounds are now 1.464 million, 4 correct? 5 A. That's correct. 6 Q. So the Class II pounds have dropped more than 7 double, while the Class III pounds have increased, have 8 doubled, correct? 9 A. Uh-huh. 10 Q. "Yes"? 11 A. Yes. 12 Q. That certainly suggests to you that there was 13 depooling of Class II between the month of June and July, 14 correct? 15 A. Right. If you go down a couple more months, 16 there's massive depooling of Class IV as well. So 17 presumably these are months when the Class IV -- when the 18 Class IV price dropped -- I'm sorry, the Class IV price 19 went up relative to the Class III price, so that the real 20 issue was -- was less the Class II differential and more 21 the gap between III and IV. 22 Q. Well, but if you increase the Class II under your 23 theory, under those scenarios, you have actually increased 24 the opportunity that at the time there that Class II won't 25 want to pool, right? Because you have said, well, look, 26 you are going to have to pay even more than the Class IV, 27 the Class IV is lower than the Class III, why would you 28 bother pooling, correct? 8838 1 A. If the Class II is higher than the blend, you 2 expect it to be higher than the blend, you would not pool, 3 that's correct. But I think that's happening already 4 based on advanced pricing and the fact that we have got 5 Class II tracking on Class IV. So when -- when Class IV 6 goes up, Class II goes up, and there's incentives to 7 depool as it is. 8 I mean, you are demonstrating already there's 9 already depooling of Class II milk. 10 Q. Okay. 11 A. I don't know that it's based on the differential. 12 I think it's based on the relationship between Class III 13 and Class IV. 14 Q. But if you are going to increase the add-on to the 15 Class IV, that difference between Class III and Class IV, 16 you are -- is going to exacerbate these issues if the 17 Class II differentials go up, isn't it? 18 A. I don't know how much that's going to tip the 19 balance. I don't know how much it's going to tip the 20 balance because I don't have those price numbers in front 21 of me. I -- I can only assume from the massive depooling 22 of Class IV in the following months that it was a -- that 23 it was a shift in the Class IV jumped above Class III, and 24 in this market in particular, which is a very high 25 Class III, where the blend is based on Class III, that -- 26 that Class IV and Class II both were incentivized to 27 depool based on that Class III/Class IV relationship. 28 Q. Well, to the extent a Class I processor with 8839 1 Class II use is competing against a standalone plant, the 2 opportunity for those plants that are standalone to depool 3 will put them at a competitive advantage relative to the 4 Class I plant with that usage, correct? 5 A. Yep. Yes. 6 Q. How is that equitable or fair? 7 A. That's an issue that already exists. 8 Q. But it's about to get worse if you increase the 9 Class II differential, correct? 10 A. It's an issue that already exists. 11 Q. I spoke briefly about some other products that are 12 manufactured at Class I plants, and we agreed that fluid 13 cream is one of those products that are produced at a 14 Class I plant, correct? 15 A. Yep. Typically. 16 Q. Has American Farm Bureau Federation done any study 17 of the impact of increasing the Class II differential on 18 the ability of fluid cream products to compete against 19 nondairy fluid cream products? 20 A. No, we have not. 21 Q. Are you aware that there are a significant number 22 of fluid cream products that, you know, may be chemical 23 based, may be, you know, nondairy based, but that are 24 competing with fluid cream? 25 A. I'm not aware -- I'm not aware of the range of 26 creamers. I mean, I assume you are talking about 27 so-called nondairy creamers that are full of dairy 28 ingredients like casein. 8840 1 Q. They may have a casein in them, but they don't -- 2 the casein isn't going to be Class II, is it? 3 A. Right. No. 4 Q. Okay. So there's fluid cream products that are 5 produced at Class I plants that are subject to regulation 6 for which you would increase -- double the Class II 7 differential, and they compete against nondairy creamers, 8 correct? 9 A. I don't know how -- how close to the competition 10 there is. I don't know how close to the substitute there 11 is. I don't know whether Cremora and fresh cream are 12 really something that people switch between. 13 Q. Regardless, you haven't done -- American Farm 14 Bureau Federation has not done any study -- 15 A. We have not. 16 Q. -- on this issue, correct? 17 A. We have not. 18 Q. American Farm Bureau Federation doesn't own or 19 operate any Class II plants, does it? 20 A. Not directly, no. 21 Q. Indirectly? 22 A. Well, the Illinois Farm Bureau has a close 23 relationship with Prairie Farms, for example, and I 24 believe there's some other cooperative creameries that 25 have been supportive in their initiation -- in their 26 initial establishment by Farm Bureaus, by state Farm 27 Bureaus. 28 Q. But does Farm Bureau actually operate a plant? 8841 1 A. No, we do not. 2 Q. Do you actually sell any Class II products? 3 A. No, we do not. 4 Q. All right. Re-organizing, like I said, I just 5 thought it made sense to cover Class II since that's what 6 the two prior cross-examiners did. 7 So now I will turn to Class I. 8 THE COURT: Now, before you go there, may I return 9 that particular original -- 10 MR. ENGLISH: Yes. 11 THE COURT: -- to the Agricultural Marketing 12 Service? 13 MR. ENGLISH: Yes. Yes, Your Honor, I'll do it if 14 you would like. 15 THE COURT: All right. So let's take a moment to 16 return that Exhibit 44 to the Agricultural Marketing 17 Service. 18 Would you like to go off record or just make a 19 proposal and have Mr. English respond on record? 20 MS. TAYLOR: I don't mind either way. 21 THE COURT: Let's stay on record. 22 Okay. Let me ask you, Agricultural Marketing 23 Service, we only have ten minutes left. 24 MS. TAYLOR: Right. 25 THE COURT: Part of that we need to use to 26 determine what happens tomorrow. This would be a good 27 time for us to interrupt Mr. English, if he's willing. 28 MR. ENGLISH: I am more than willing. It makes 8842 1 sense, and I will use those extra five minutes to see if I 2 can shorten it by even more than the five minutes that we 3 are losing. 4 MS. TAYLOR: I think that would be a good 5 efficient use of our ten minutes today, and that way you 6 won't be interrupted. We'll start fresh in the morning. 7 If that's okay with Dr. Cryan. 8 THE WITNESS: Yes. 9 THE COURT: Excellent. Thank you. 10 And, Mr. English, I so appreciate your 11 perspicacity and nimbleness and willingness to make all of 12 this work. 13 MR. ENGLISH: Thank you, Your Honor. 14 THE COURT: All right. What is on the agenda for 15 tomorrow? 16 Well, Dr. Cryan, we need to finish. Does he go 17 first. 18 MS. TAYLOR: So we have Mr. Geoff Vanden Heuvel 19 who will be here tomorrow. I think he flies in this 20 evening, doesn't look like he's in the room. He will be 21 here tomorrow to go on in the morning sometime. Maybe 22 I'll chat with him when I see him in the morning, and 23 Dr. Cryan, to see if it is best to put -- I'm not sure 24 what's in his statement. I don't have it. He says it's 25 rather short. Put him on first or -- and then put on 26 Dr. Cryan. I don't know Mr. Vanden Heuvel's time 27 constraint. That's why I kind of preface that. 28 But we do have him to get on sometime tomorrow 8843 1 morning, finish Dr. Cryan's cross, and then Dr. Capps, 2 Dr. Oral Capps, is scheduled to start tomorrow afternoon. 3 And I'm sure that will take up all of tomorrow afternoon, 4 into Friday, and I'm hopeful we will finish him sometime 5 on Friday. 6 THE COURT: And how is his last name spelled? 7 MS. TAYLOR: C-A-P-P-S. 8 And then Friday would be -- depending on when he 9 finishes, we could proceed with any additional National 10 Milk witnesses that are here. So we do plan to go to 11 5 o'clock on Friday. 12 THE COURT: Yes. Now, I'm wondering which of -- 13 so who did we not get to today? We had Hiramoto. We had 14 Butcher. We haven't done Mike -- 15 MS. TAYLOR: Herting. 16 THE COURT: -- Herting. 17 MS. TAYLOR: And Brad Parks, who was on my list 18 from National Milk yesterday. 19 THE COURT: And I wrote down Kang? 20 MS. TAYLOR: Oh, see, I missed a bunch of names. 21 I'll let Ms. Hancock speak for National Milk, obviously. 22 THE COURT: Okay. So who was disappointed that 23 they didn't get on today? 24 MS. HANCOCK: I'm sure none of them were 25 disappointed. But, Your Honor, I mean, we'll have to 26 jockey some people around. But, I mean, it doesn't look 27 like we're getting to them tomorrow, so we'll just have to 28 figure it out. 8844 1 We have had some people who have had to leave, 2 some people who are here and can be available if for some 3 reason we move faster. 4 THE COURT: Great. Thank you. All right. I 5 think that's enough for the on-the-record. 6 Would anyone object if we go off record now? 7 There is no objection. I'll see you all here at 8 8 o'clock tomorrow mourning, and we go off record at 4:54. 9 (Whereupon, the proceedings were concluded.) 10 ---o0o--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8845 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: January 7, 2024 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