By CAROL RYAN DUMAS
Capital Press

National Milk Producers Federation is welcoming USDA's final decision to limit the pricing exemption enjoyed by large farmer-owned bottling operations, saying it will close an unintended loophole for the largest "producer-handler" milk bottlers.

Under rule changes, to be published this week in the Federal Register, the producer-handler definitions in all Federal Milk Marketing Orders will be amended so that only farms with bottled milk sales of 3 million pounds or less per month remain exempt from the pooling provisions.

Producer-handlers with sales more than that will be treated the same as other bottling operations that don't own farms and will have to pay Class I differentials into the shared producer revenue pool effective in their respective Federal Order regions.

The exemption provision was originally implemented to help smaller producers at a time when those bottling their own farm's milk were not big producers. In today's vertically-integrated operations, however, the exemption gives large producer-bottlers an advantage and harms all Class l producers in the pool, critics of the exemption claim.

"It's a problem that has evolved and could continue to evolve if we don't change the regulations," said Chris Galen, vice president of communications for National Milk, in an earlier interview. "It has always been our intention to help small producers sell their milk and not be regulated like a large plant. But farms have gotten bigger."

Under the previous rules, a milk bottler of any size could avoid paying into the federal order pool in its market so long as it only bottled milk it produces.

Large producer-handlers argued that they assume greater risks and costs by raising their own cows and building facilities to process and distribute their milk. They also contend that they account for only 1.5 percent of the nation's fluid milk supply.

The decision also tightens the requirements in the Arizona and Pacific Northwest Federal Order markets, which had allowed producer-handlers up to 3 million pounds of sales in separate marketing orders; the new rules allow up to 3 million pounds in total marketings.

The decision will bring some changes across the country, but it won't have much effect in the West.

"These changes are identical to the existing rules that have been in place in the Pacific Northwest Federal Order and in Arizona for about three years. So there should not be any effect in Oregon or Washington from these rules," said Jay Gordon, executive director of Washington State Dairy Federation.

In addition, Idaho, Utah and California don't participate in federal orders, and most of Idaho's milk is Class III for cheese, said Michael Marsh, executive director of Western United Dairymen.

It could have a round-about effect in California, where producer distributors are pushing legislators for a full exemption. A law passed in 1995 capped the exemption for California's five family bottling operations at their capacity at that time. As of May 2008, those producers were supplying 25.5 percent of California's Class I market.

If they received a full exemption, "essentially, producer distributors will use it to capture 100 percent of the Class I market and effectively preclude any of the other 1,700 dairy producers from participating in the Class I market," Marsh said.