In re: MILK IN THE NEW ENGLAND   AND OTHER MARKETING AREAS,    HEARING TO CONSIDER POSSIBLE   CHANGES IN THE FEDERAL MILK MARKETING PROGRAM

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Docket No. A0-14-A64, etc.; DA-90-017

James F. Rill Assistant Attorney General Antitrust Division Charles James Deputy Assistant Attorney   General Antitrust Division

Mark C. Schechter Chief Transportation, Energy and   Agriculture Section Roger W. Fones Assistant Chief Transportation, Energy and    Agriculture Section Susan L. Edeiheit Janet R. Urban Attorneys Transportation, Energy and   Agriculture Section Antitrust Division Department of Justice 555 4th St. N.W. Washington, D.C. 20001 (202) 307-6349

May 14, 1991

In re: MILK IN THE NEW ENGLAND   AND OTHER MARKETING AREAS,    HEARING TO CONSIDER POSSIBLE   CHANGES IN THE FEDERAL MILK MARKETING PROGRAM

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Docket No. A0-14-A64, etc.; DA-90-017

The United States Department of Justice ("Department") respectfully submits this brief in reply to arguments raised in the various parties' post-hearing submissions. No party, however, has presented any facts or proffered any argument to undermine the conclusion that the Secretary of the Department of Agriculture ("USDA") can and should adopt proposals to (1) terminate the down allocation and compensatory payment provisions that effectively ban use of reconstituted milk; (2) eliminate or significantly reduce the distance differentials; and (3) eliminate or significantly reduce the Grade A differential.

Moving decisively toward a free market, rather than perpetually re-engineering the current regulatory scheme to compensate for its shortcomings and misincentives, is the most effective way to make milk marketing more efficient and to improve the welfare of American consumers.

1. The Secretary Has The Authority To Make Broad National Changes In Marketing Orders

The AMAA vests in the Secretary broad powers to make changes in marketing orders when such changes are necessary to effectuate the policy of the statute. Indeed, the Act expressly provides that the Secretary shall terminate or suspend operation of an order or a provision of an order if the Secretary finds that the order or provision "obstructs or does not tend to effectuate the declared policy of this chapter." 7 U.S.C. § 608c16(A). Nonetheless, an argument appears to have been proffered that adoption of some of the more substantive reform proposals -- where differentials are flattened or eliminated -- are beyond the scope of the powers of the Secretary of Agriculture and solely within the jurisdiction of Congress.⁽¹⁾ No legal authority is offered in support of this argument, and none exists. There are no legal barriers to the necessary reforms that have been proposed by the Department of Justice once the Secretary determines that the subject provisions do not tend to effectuate the AMAA.

The record in these hearings demonstrates that down allocation and compensatory payment provisions, and the distance and Grade A differentials, should be terminated since they are provisions that no longer effectuate the policies of the AMAA. Rather than help to assure an adequate supply of Grade A milk for the fluid market -- identified by virtually all participants in the hearing as the AMAA's primary purpose⁽²⁾ -- these provisions keep milk prices unnecessarily high and prevent reconstituted milk, a lower-cost fluid milk option, from reaching consumers in regions suffering from fluid milk deficits. These provisions obstruct the goals of the AMMA and should be removed.

2. Use of Reconstituted Milk Effectively Would Address the
   Very Concerns Raised By Other Parties

The use of reconstituted milk would allow deficit markets to secure supply at reasonable prices and would provide the most efficient way to smooth out seasonal variations. Nevertheless, some parties who oppose changes in the down allocation and compensatory payment provisions, which would allow consumers to choose reconstituted milk, raise the very concerns that would be addressed by removing these government-imposed penalties on its use. They argue that current regulation, as pervasive as it is, nonetheless fails because Southern markets in particular are not getting enough fluid milk -- either from their own production or from northern sources -- at reasonable prices. Claims also have been made that the seasonal variations in milk production that exist under current regulation are disruptive. Compounding the current regulatory intervention is a poor answer -- the concerns of deficit markets cry out for market solutions.

As a first step towards market-oriented milk marketing, the availability of reconstituted milk would offer the milk industry and consumers significant benefits. Milk produced in low-cost regions could be cheaply shipped to Southern regions, or any regions, where deficits occur. Powder can also be stored, to be reconstituted when needed, thus assuring deficit regions a stable, year-round, source of supply. Finally, in addition to enhancing industry efficiency, the availability of reconstituted milk likely would provide consumers with an important, lower-cost option.

Obtaining enough milk for fluid markets is claimed to be a particular problem in the southeast.⁽³⁾ It is ironic that some parties who complain that the order system "has failed to attract [a sufficient supply of fluid milk] to the fluid market . . ." overlook the availability of reconstituted milk as an effective solution to concerns raised in their briefs.⁽⁴⁾ Instead, they seek additional or redesigned regulation. The Upper Midwest Coalition proposed an overhaul of the Class I pricing system to redress these concerns and "promote efficiency . . . [in] the marketplace."⁽⁵⁾ They seek through costly regulation to achieve some of the marketing patterns that in a freer market would occur naturally. The Southern Coalition wants to maintain the current order system at the expense of consumers, although conceding that the high government-imposed Class I prices in the south have not been sufficient to overcome the regulatory disincentives to bringing northern milk to these deficit areas.⁽⁶⁾ Even the Southern Coalition admitted that a "geographic shift of production from south to north" would have a "redeeming economic feature" if it allowed the "over supply of milk in the north [to] be more readily available to met the deficit needs to the south at more reasonable prices."⁽⁷⁾ That is precisely what use of reconstituted milk could do: allow bountiful northern milk -- in the form of concentrate or powder -- viably to be shipped when and where it is needed.

Permitting the industry to use reconstituted milk would also effectively solve the problems caused by milk's seasonal production and demand patterns, discussed at length by a number of parties.⁽⁸⁾ Instead of instituting yet another layer of regulation in the form of a "seasonal incentive plan", the USDA should allow the industry to take advantage of an efficient, market oriented way to smooth out seasonal supply and demand variations: let milk be made into powder during the spring flush to be reconstituted into much needed fluid milk in the fall.⁽⁹⁾

There are significant benefits to be gained from removing the regulatory impediments to the use of reconstituted milk. These include less costly transportation of bulk milk, less balancing costs, more efficient use of industry capacity (with less capacity required in deficit regions), less volatility in raw milk prices, and less costs to the government for purchases of surplus dairy products under the dairy price support program.⁽¹⁰⁾ Most importantly, the industry would enjoy lower production costs from shifting production to lower-cost regions, and consumers would gain the option of a lower-cost milk product.

3. The Right of the Department of Justice Fully to Participate
   in These Proceedings Is Beyond Reasonable Dispute

Absent a theoretical and factual basis to confront the reform proposals advanced by the Department of Justice, opponents once again seek as an alternative to bar the Department's participation in these proceedings. Parties repeatedly have sought to exclude the Department, and have been repeatedly rebuffed.

No new legal contention has been raised in the posthearing briefs. The parties' desire to exclude the Department should be recognized for what it is -- a desperate attempt to silence substantive criticism of the inefficiency and cost to consumers produced by the current system. On four separate occasions -- September 19, 1990, September 28, 1990, November 14, 1990, and March 28, 1991, -- the Administrator ordered that the Department of Justice be allowed to participate fully in this proceeding. Addressing on March 28, 1991, yet another version of the same issue, the Administrator ordered that the Department is a party and that "the testimony of Dr. Kimmel and Exhibit 211 [proffered by the Department] may be addressed in any and all briefs filed in this rulemaking proceeding."

The Department urges the USDA to adopt the proposals described more fully in its Post Hearing Brief. The down allocation and compensatory payment provisions should be removed so that reconstituted milk can be made available. Use of reconstituted milk would efficiently solve the very problems that marketing orders were designed to remedy. It would lower industry costs, promote market stability and assure an adequate supply of fluid milk. The USDA should also eliminate or lower significantly the distance differentials and the Grade A differential. Differentials that are now too high encourage excess and inefficient production of all milk, and in particular of Grade A milk. Moreover, high regulated prices, coupled with the effective ban on reconstituted milk, force consumers to pay more for milk than they would pay in a free market, and deny them an important choice. Adoption of the Department's proposals would substantially improve efficiency in the dairy industry and provide significant benefits to consumers.

Respectfully submitted,

James F. Rill Assistant Attorney General Charles A. James Deputy Assistant Attorney   General

_______________"/s/"________________ Mark C. Schechter Chief _______________"/s/"________________ Roger W. Fones Assistant Chief _______________"/s/"________________ Susan L. Edelheit _______________"/s/"________________ Janet R. Urban Attorneys Department of Justice Antitrust Division 555 4th St., N.W. Washington, D.C. 20001 (202) 307-6349

May 14, 1991

CERTIFICATE OF SERVICE

I hereby certify that this 14^th day of May, 1991, a copy of the foregoing Reply Brief of the Department of Justice was served, by first class mail, postage prepaid, upon all parties on the attached service list of this proceeding.

_______________"/s/"________________ Susan L. Edelheit

Robert J. Williams 901 Moore St. Lot 28 Baraboo, WI 53913 Vincent C. Brockman Borden, Inc. 180 East Broad Street Columbus, Ohio 43215 Marvin Beshore, Esq. P.O. Box 946 126 Locust Street Harrisburg, PA 17108 David Beren Morningstar Foods 5956 Sherry Lane #1100 Dallas, Texas 75243 Sheldon Weiss, Esq. 225 Millburn Avenue Millburn, New Jersey 07041 Bill Coleman, Director Minnesota Department of Agriculture 90 West Plato Boulevard St. Paul, MN 55107 Andrew I. Schoenholtz, Esq. Covington & Burling P.O. Box 7566 1201 Pennsylvania Ave., N.W. Washington, D.C. 20044 William Tinklepaugh 888 16th Street, N.W. Washington, D.C. 20044 A. J. Ortego, Dairymen, Inc. 10140 Linn Station Rd. Louisville, Kentucky 40202 Edward T. Loughlin National Milk Producers 1840 Wilson Blvd. Arlington, VA 22201 James S. Fraher Atlantic Dairy Cooperataive 1225 Industrial Highway Southamption, PA 18966-0127 Neal R. Bjornson AMPI P.O. Box 790287 San Antonio, Texas 78279 Robert G. Thomas Thomas & Thomas 6115 Brookbank Downers Grove, IL 60515 Lynn A. Hayls Farmers' Legal Action 1301 Minnesota Bldg. 46 East Fourth Street St. Paul, Minnesota 55101 Christie L. Pittman President, Dunn Co. Farmers Union Milk Marketing Cooperative, R5 Box 96 Menomonie, Wisconsin 54751 Bruce F. Wegmueller Swiss Valley Farms 5910 Central Avenue Dubuque, Iowa 52001 Robert Wellington Agri-Mark, Inc. P.O. Box 5800 Lawrence, Massachusetts 01842 Gary Gunderson Agri News 801 34th Avenue, N. St. Cloud, Minnesota 56303 Joe E. Paris P.O. Box 419 Mountoursville, PA 17754 Rodney K. Carlson Milk Marketing Inc. P.O. Box 36050 Strongsville, Ohio 44136 P. A. Costello Rose Hill Consultants 1475 Sunrise Camp Road Minocqua, Wisconsin 54548 Bob Hall Sorrento Cheese 2375 South Park Avenue Buffalo, New York 14220 Don Huldeman Wisconsin Farm Bureau Federation P.O. Box 5550 Madison, Wisconsin 53705 Roland Morris, Esq. One Liberty Place Philadelphia, PA 19103-7396 Denis Donohue P.O. Box 1146 Manitowoc, WI 54221-1146 Virgil Roberts State Representative, Wisconsin 308 Park Lane Holmen, Wisconsin 54636 Eric Hillan W8032 Plant Road Ladysmith, Wisonsin 54848 Carol DuBard 1301 Longworth Building Washington, D.C. 20515 David Beren 9435 Hunters Creek Dallas, Texas 75243 Kenneth Ackerman, Esq. P.O. Box 4967 Syracuse, New York 13221 Edward J. Johnson, Jr. New York State Department of  Agriculture & Markets I Winners Circle Albany, New York 12110 Robert Cropp Department of Agricultural   Economy 403 Taylor Hall University of Wisconsin Madison, Wisconsin 53706 Alan Kraus State of Wisconsin -  Department of Justice D 1974 Elm Street Stratford, Wisconsin 54484 Richard A. Glandt U.S. Department of Agriculture Agricultural Marketing Service Dairy Division P.O. Box 96456 Washington, D.C. 20090-6456

Milk Marketing Inc. P.O. Box 36050 Strongsville, Ohio 44136 Donald Ommodt Cass Clay Creamery, Inc. Box 2947 Fargo, North Dakota 58108 Glen Wagner, Esq. 3858 N. Cliff Road Port Clinton, Ohio 43452 Steve Halbrook, Esq. Suite 600 888 16th St., N.W. Washington, D.C. 20006 James Purdy Borden, Inc. 180 East Broad S treet Columbus, Ohio 43215 Donald F. Copeland, Esq. One Meetinghouse Place Norristown, Pennsylvania 19401 Charles M. English, Jr., Esq. 1200 18th Street, N.W. Suite 710 Washington, D.C. 20026 George W. O'Brien Box 55 N. Truro, MA 02652 Steve Rosenbaum Covington & Burling P.O. Box 7566 1201 Pennsylvania Ave., N.W Washington, D.C. 20044 D. Paul Alagia, Esq. P.O. Box 1179 Louisville, Kentucky 40201 Joseph C. Mathis Eastern Milk Producers P.O. Box 6966 Syracuse, New York 13217 Robert Isaacson U.S. GAO 562 Federal Building Ft. Snelling, Minnesota 5511 Sue M. Taylor Sorrento Cheese 2375 South Park Avenue Buffalo, New York 14220 Dr. Ken Olson 225 Touhy Avenue Parkridge, Illinois 60068 Dairylea Cooperative Inc. P.O. Box 4844 Syracuse, New York 13221 James Kalkofen Rt. 1, Box 38 Cecil, Wisconsin 54111 John H . Vetne, Esq. Blodgett, Makechnie & Vetne P.O. Box 574 Peterborough, NH 03458 Dennis Rosen 117 West Spring Street Chippewa Falls, WI 54729 Elvin Hollon AMPI-MGF 1375 E. Woodfield #350 Schaumburg, Illinois 60173 Gary G. Latta Crowley Foods, Inc. P.O. Box 549 Binghamton, New York 13902 John Hitchell The Kroger Co. 1014 Vine Street Cincinnati, Ohio 45202 Jim Dickrell 6205 Earle Brown Drive Suite 100 Brooklyn Center, MN 55430 Sydney Berde, Esq. 2800 Minnesota World Trade St. Paul, Minnesota 55101 Gary G. Latta Crowley Foods, Inc. P.O. Box 549 Binghamton, New York 13902 William L. Oemichen 310 West Grove Road Hudson, Wisconsin 54016 Joe Hylton Farm Fresh P.O. Box 31 Mountain Grove, MO 65711 Renn Nance MID-AM Dairymen 3253 E. Chestnut Express Springfield, MO 65802-2584 Reid Marmillion Road #2, Box 223 West Cr. Road Newark Valley, New York 13811 Will Hughes, Esq. Wisconsin Department of Agric P.O. Box 8911 Madison, Wisconsin 53703 Commissioner Jim Nichols Minnesota Department of   Agriculture 90 West Plato Boulevard St. Paul, Minnesota 55107 Paul Christ Land O'Lakes P.O. Box 116 Minneapolis, MN 55440-0116 A. W. Samofal, Esq. U.S. Department of Agriculture Office of General Counsel Marketing Division Room 2014 South Building Washington, D.C. 20250

1. Post Hearing Brief, Proposed Findings and Conclusions on Behalf of CONE at 8-9.

2. See e.g., Brief of Southern Coalition of Dairy Farmers ("Southern Coalition Brief") at 26; CONE Brief at 11; Brief and Proposed Findings of Fact and Conclusions Of Law Submitted on Behalf of Anderson-Erickson Dairy Company ("Anderson-Erickson Brief") at 11; Brief and Proposed Findings of Fact and Conclusions of Law Submitted on Behalf of Marigold Foods, Inc. ("Marigold Brief") at 10.

3. Anderson-Erickson Brief at 19; Southern Coalition Brief at 47.

4. Anderson-Erickson Brief at 11, 18-22; Marigold Brief at 10, 17-21. Anderson-Erickson and Marigold propose increasing some Class I prices and institution of transportation credits to promote fluid use of milk. Anderson-Erickson Brief at 22-24; Marigold Brief at 21-23.

5. Preliminary Statement and Proposed Findings of Fact, Conclusions of Law and Supporting Brief on Behalf of the Upper Midwest Federal Order Coalition ("Upper Midwest Coalition Brief") at 3; 38-47. The Upper Midwest Coalition correctly states that shipping concentrated milk would promote efficiency and lead to substantial savings. Upper Midwest Coalition Brief at 125-130. However, they completely ignore the even greater benefits that use of dry milk powder would achieve.

6. Southern Coalition Brief at 47.

7. Southern Coalition Brief at 66.

8. Brief of United States Cheesemakers, et al. ("Cheesemakers Brief") at 7-10; Southern Coalition Brief at 30-36.

9. The Southern Coalition argues that the "seasonal fluctuations in [milk] supply and demand are not susceptible to solutions available in other industries" because "raw milk is perishable". Southern Coalition Brief at 31. The opposite is true. Post Hearing Brief of the Department of Justice at 13-16. When milk is made into powder, it is no longer perishable and can be stored for extended periods.

10. See Cheesemakers Brief at 9, discussing the benefits to be gained from smoothing out milk's seasonal production and demand patterns.