K. Issue: The Potential Impact of a Flat, Combined, Regulated Order and
Compact Over-Order Price on the Wholesale Market for Fluid Milk in the
Region

    The purpose of this most critical inquiry is to address the
potential impact on the wholesale market of price regulation.
Commenters described a number of potential concerns and potential
benefits. The benefits described were premised on the value of price
stabilization. The concerns raised related to the potential for market
distortion and competitive harm to current market participants.
    In reply comment, Berthiaume \89\ described the benefit of a
stabilized pricing as imposed by this rule. He indicated that Compact
Over-order price regulation would bring stability to the regulated
Class I price, and not merely as a floor price. ``The value of a flat
regulated minimum Class I price is that the wholesale cost of milk
would and could be anticipated.''
---------------------------------------------------------------------------

    \89\ Berthiaume, Reply comment; April 8, 1997 (RC).
---------------------------------------------------------------------------

    The Commission agrees with this statement and adopts it as a
finding with respect to this issue. As discussed above, farm prices
have been marked by persistent, erratic fluctuations which translate
directly into the wholesale price. The Commission concludes that, while
processors are currently covering their margins, minimization of such
persistent fluctuations in price can only serve as a benefit to
stability of firm participants in the wholesale market.
    Other commenters expressed concern about the potential for market
distortion which price regulation could bring. Wellington et al
expressed a concern that price regulation could distort the
traditional, market driven, pattern of raw product supply provided by
New England and New York farmers. The concern raised is that the
Compact Over-order price regulation could create an incentive for
increased milk supply from more distant portions of the milkshed in New
York. This would represent a market distortion directly contrary to the
intended purpose of the Compact.
    These commenters qualified their concern by noting that processors
``will be reluctant to disrupt their current supply sources in reaction
to a Compact program which is officially of limited duration.'' \90\ In
his testimony at the hearing, Wellington also stated his opinion that
such market change was not likely to occur as long as the Commission
did not increase the regulated Class I price above $17.00.\91\
---------------------------------------------------------------------------

    \90\ Wellington et al, AC 3/3197 at 6.
    \91\ Wellington, 12/19/97 HT, pages 50-51.
---------------------------------------------------------------------------

    Neil Marcus, President of Marcus Dairy, Inc., described other
potential market distortions that could result from price regulation.
His concerns also centered on the alignment of a market subject to
combined, Compact, and Federal Order regulation with adjoining markets
regulated only under Federal Order.\92\ The particular circumstances of
the Marcus Dairy operation heightened his concern. According to the
commenter, Marcus Dairy is located in Connecticut, on the border of New
York. The commenter described the supply of packaged dairy products
subject to price regulation under Federal Order 2 which is sold in New
England and expressed concern that this milk must not escape
regulations under the Compact. According to Marcus, such uniform
regulation is necessary to ensure that the current, market, pattern of
the supply of packaged product in the marketplace is maintained.
---------------------------------------------------------------------------

    \92\ Marcus, 12/19/96 HT at 84-98.
---------------------------------------------------------------------------

    The Commission concludes that market alignment of prices and
uniformity of regulation must be considered in establishing over-order
price regulation. Present market patterns within the region and between
the region and adjacent areas are derived from the integrated formula
of Class I pricing in the federal Market Order System, which includes
pricing under more than one federal Order. There is no doubt the
Compact will introduce a new feature of market structure by adjusting
the Class I price, in effect, for only one Order.
    At the same time, even given that the Compact will introduce a
novel feature of market structure, the Commission does not determine
that market distortion will necessarily occur. The technical provisions
of the Compact Over-order price regulation are precisely patterned upon
the underlying federal Order System in significant part. This provides
a structural basis for concluding that such distortion should not
occur.
    Nonetheless, the concerns raised by the commenters with regard to
the potential for market distortion were a central consideration in the
Commission's deliberations over price regulation. These concerns were
also a controlling factor in the Commission's fashioning of the six
months', limited duration, for the initial price regulation. The
Commission here specifically notes Wellington et al's assertion that a
``limited duration'' of price regulation will minimize the potential
for distortion of the market caused by the Compact Commission's initial
price regulation.