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  February 18, 2010

After eight hours of testimony and debate during an open hearing Tuesday, Feb. 16, the PMMB is expected to make a decision in April about a proposed change to the over order premium formula for in-state milk plants that sell milk in-state and source milk from farms both in and out of the state.

The proposed formula change, if approved, would simply require those plants to pay the full over order premium (collected from consumers) either on the pounds of milk purchased from in-state farms or the pounds of milk sold to in-state retailers -- whichever quantity is smaller.

This formula change was proposed by the PMMB staff and is supported by the PA Dept. of Agriculture and the Governor's office. It is aimed at closing the current loophole whereby in-state bottlers can use out-of-state milk to dilute their over order premium obligation to their in-state shippers and thereby pocket the difference.

The PMMB staff testified that this change would recover an estimated $392,000 per month (nearly $5 million per year) in over order premiums for Pennsylvania dairy farms. This is a fraction of the 'stranded' premiums that are paid by consumers at a current rate of 25 cents per gallon, and are intended specifically for farmers, but are disappearing in the system.

The Pennsylvania 'for-farmers' over order premium is in addition to the processor costs and 3.4% margin and it is in addition to the retailer costs and 2.5% margin, which are separately built into the minimum consumer price buildup for milk sold at retail in the state. And yet, the PA milk dealers who testified Tuesday contend that the formula change would take "money out of their pockets" and make them less competitive.

Representatives for York, PA-based Rutters Farm Stores and Dean Food Co.-Sharpsville, PA both testified they would source more out of state milk if the formula change is approved. Rutters also testified they would look into the viability of an out-of-state milk distribution center to divert PA milk before resale. "This could possibly negate my entire PA over order premium completely,' Todd Rutter testified. He added that the state should look at other ways to “figure out how to get more money to Pennsylvania’s farmers.” He suggested having the state make payments directly to farmers or to “create some special tax plan for them.”

The dealers also tried to show they are currently overpaying premiums to PA producers, but their figures were based on all dealers -- not just the dealers that would be affected by the formula change. Their numbers also included all classes of premiums, not just the premiums pertaining to Class I fluid milk.

PMMB chief enforcement officer David DeSantis used audited figures in his testimony and he used only the figures for dealers who would be affected by the proposed change. “It’s not proper to look at gross overpayment and say it is related to the payment of the over order Class I premium in Pennsylvania,” said DeSantis as he was cross-examined by the attorney for the dealers during surrebuttal testimony.

Furthermore, DeSantis confirmed that quality premiums “are absolutely included on Class I (in the over price premium). We want (the dealers) to buy quality milk and we want to reimburse them for that in the wholesale price.”

Last on the witness list, the milk cooperatives tried to testify to the need for a separate hearing to consider this formula change along with "partial pooling" of the state's over order premium. PMMB Chair Richard Kriebel said this hearing would not entertain any idea for pooling and he said the co-ops were trying to bring it in the back door. In effect, the chairman shut down any line of questioning that did not directly relate to the specific formula proposal at hand.

The PMMB will accept post-hearing briefs and replies through the month of March with a decision expected in April.





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