3. Adjustment for Inflation--Determination of Specific Price Amount and
Formula
    As described earlier, the chronic insufficiency in price can be
traced to a number of sources. The Compact Commission has determined
that the single most readily identifiable basis of price insufficiency
is the failure of farm prices to adjust to inflation over time.\65\
Given this readily apparent concern from the hearing record, in the
subsequent Notice of Comment, the Compact Commission specifically
sought comment as follows:
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    \65\ The Commission here specifically notes the determination of
Professor Wackerngel's analysis regarding the significance of
inflation. Wackernagel, 1/2/97 WC at 473.

    The Commission is considering a possible Compact over-order
price regulation that will be based, at least in part, on an
adjustment for inflation to the Class I, fluid milk price, over
time. The Commission seeks comment on the advisability of such an
approach, as well as possible methodologies for determining the
impact that such an adjustment would have on the Class I, fluid milk
price, over time.\66\
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    \66\ 62 FR 12252.
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    In response, the Commission received a combined comment from Reenie
DeGeus and Bill Gillmeister, dairy economists for the Vermont and
Massachusetts Departments of Agriculture, respectively, providing a
detailed analysis on this point. They proposed a one-time adjustment of
the Class I price, (Zone 1) using 1991 as the base year for the
adjustment. They proposed using the 1990 CPI as the base index, given
that the Compact expressly uses this base year for adjusting the cap on
its regulatory authority. See Compact Section 9(b). They suggest
further using the CPI-U Boston as the appropriate, more local indicator
of the inflation factor.
    This equation yields a Class I, Zone 1 price of $16.94 per cwt. for
1997.
    The Commission accepts the recommendation of these two state
agriculture department economists. 1991 is a reasonable year to use for
the historic period; 1991 prices were markedly low, following an
historic year of high prices. This erratic fluctuation in prices was of
similar type to the recent swing of November, 1996-January, 1997, and
thus provides a recent and analogous, relevant time period for the
inflation adjustment. In addition, as the commenters note, using the
low point, 1991, of this last pricing cycle ensures that the inflation
adjustment will be appropriately limited.
    Wellington, et al. also submitted comment in response, indicating
concern with the use of an automatic inflation adjustment. They
indicated that inflation must be accounted for as a dynamic factor of
retail prices as well as farmer cost of production. They indicated that
the price regulation, including all relevant factors, should be
assessed every six to twelve months, rather than made to adjust to a
single static indicator.\67\
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    \67\ Wellington et al at 11. Another commenter expressed similar
concern. See Vetne, 12/19/96 HT at 269.
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    The Compact Commission accepts this comment, as well. The
Commission agrees that the inflation adjustment should not serve as the
single, permanent, function of price adjustment. Rather, it serves as
the initial, limited, regulatory response to the defined chronic market
problems of price insufficiency and volatility.
    The Compact Commission further agrees that the overall price
regulation adopted by this rule must be revisited after the passage of
some time rather than imposed permanently. As discussed throughout this
summary of comment, the Commission has determined that the duration of
the rule will be six months. This will allow the Commission to assess
again the broader market circumstances in the manner contemplated by
the commenters.
    Accordingly, the Compact Commission has adopted the price/inflation
adjustment presented by DeGues and Gillmeister, which accounts for this
six month duration of the rule. Given that this six month period will
be from July-December, 1997, the Commission adopts their calculation of
price, adjusted for inflation for 1997, of $16.94 (Zone 1).
    The Compact Commission recognizes that this price level, in itself,
will not be sufficient to cover the defined range of deficiency between
current farmer pay prices and cost of production. The Commission
expects instead the combined benefits of price enhancement and
stability to result in the positive impact on the region's milk supply,
as contemplated by the finding analysis under this section.
    The Commission here expressly refers to and relies upon the
analysis of Professor Wackernagel, which assessed the impact on
profitability of a Class I price of $16.89 (Zone 1) ($16.17 Zone 21).
The price analyzed is thus directly in line with that adopted by the
Commission. According to this analysis, farms operating in such a
stabilized pricing environment would remain under stress financially,
but would show some improved financial performance, able to operate at
low to modest levels of profitability.\68\
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    \68\ Wackernagel, 1/2/97 WC at 473.
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    The Commission, again, concludes that this price level is the
appropriate, initial increment to establish, for the defined period of
six months. This initial, limited duration of the regulation will allow
the Commission

[[Page 23042]]

soon to revisit again the issues raised by this finding analysis. For
that next time, The Commission's inquiry will have the benefit of the
performance of the existing price regulation. Such a record will aid
the Commission's analysis.