FEDERAL ORDER CLASS I PRICES AND RECONSTITUTED MILK

y FOR THE 1990 FARM BILL FEDERAL ORDER CLASS I PRICES AND RECONSTITUTED MILK Robert Cropp, University o/wisconsin-platteville Critics of differences in federal milk marketing order Class I and blend prices across regions have suggested that the use of reconstituted fluid milk products would narrow these differences and improve equity across farms. Their use in this country is very limited due to restrictive or prohibitive product standards in many states and federal milk marketing order pricing provisions that make the sale of reconstituted fluid milk economically impractical. What is Reconstituted Milk? Reconstituted milk is a fluid milk product produced by adding water to condensed or dried milk components. Usually, fat and nonfat components are separated prior to condensing or drying. Reconstitutable ingredients include dry whole milk, nonfat dry milk, reverse-osmosis concentrated skim milk, cream, anhydrous milkfat and unsalted butter. This should not be confused with "filled milk" which is made from skim milk and some type of vegetable oil. Reconstituted milk also refers to fluid milk blends consisting of whole milk:, water and condensed or dried milk components. For example, a 2% lowfat reconstituted milk blend may consist of whole milk, water and nonfat dry milk:. The water and nonfat solids would be added in sufficient volume to reduce the natural butterfat content to 2% while maintaining the nonfat solid content of the blended product at about the level of standard 2% milk. Indeed, this sort of product is the norm in California. That state's minimum milk solids requirements for lowfat milk compels processors to fortify a high proportion of their low fat milk with skim solids. Because lowfat fluid products now account for the majority of fluid milk sales in the United States, blends represent the major potential market for reconstituted milk. Reconstituted milk is neither a new nor untested technology. Both fluid and manufactured dairy products made from dry or concentrated milk ingredients are common in many parts of the world, and there is considerable technical experience with alternative products and processes. Reconstitution is especially common in MiddIe- and Far-Eastern countries where fresh whole milk supplies are limited and expensive because of physical conditions. Reconstituted blended products have also, from time to time, been sold in the continental United States. Why the Renewed Interest in Reconstituted Milk? Federal order pricing provisions regarding reconstituted milk were attacked without success in the early 1980s. Recently, the reconstituted milk controversy has taken on a regional flavor. It is charged that higher Class I differentials mandated under the 1985 Food Security Act disproportionately benefited Southern and Southeastern regions relative to the Upper Midwest by widening regional differences in fluid milk prices. Higher prices in the South, it is charged, have led to greater levels of production, which reduce or eliminate the desirability of obtaining supplies from alternative sources. High transportation costs for whole milk effectively prevent Upper Midwestern dairy farmers from taking advantage of the higher prices in distant markets, but condensed or dried milk ingredients for reconstitution could be profitably shipped. An historical objective of federal milk marketing orders is to guarantee consumers an adequate supply of fresh whole milk. It has been taken for granted that the best source of milk would be local supplies. Local production is encouraged by pricing fluid milk to fluid milk handlers according to distance from the Upper Midwest. Specifically, minimum Class I, or fluid milk prices increase with distance from Eau Claire, Wisconsin, at the rate of about 20 cents per hundredweight per hundred miles. Prior to the mandated Class I increase, the increase was about 15 /cwt per 100 miles. For example, the Class I differential is $1.04/cwt at Eau Claire and $1.40 at Chicago, but $3.28 at Dallas and $4.18 at Miami. The higher Class I differentials and Class I utilizations result in a producer (blend) price that also increases with distance from Eau Claire. This increase is to encourage local production of fluid milk, but also to move Grade A reserve milk from the Upper Midwest to distant fluid markets when they run short of local supplies. (See Leaflet 16 for a more complete discussion of classified pricing and regional differences.) The Upper Midwest views these higher Class I differentials and resulting producer prices as a major factor stimulating fluid milk production in excess of Class I needs in some of the southern and southeastern markets. Increased production not matched by greater fluid sales needs to be converted into manufactured milk products. These manufactured products are either sold in competition with the Upper Midwest or to the CCC, contributing to possible further price support cuts. The Upper Midwest views reconstituted milk as a more economical means of shipping milk solids than the shipping of whole or skim milk to distant fluid markets when they run short of locally produced fluid milk. The Upper Midwest this lower transportation cost as a means of reducing Class I This paper is part of a series entitled "Dairy Policy Issues and Options for the 1990 Farm Bill," a project of the Cornell Program on Dairy Markets and Policy in conjunction with the National Institute for Livestock and Dairy Policy.

differentials and thereby making producer prices more equal across regions of the United States. How is Reconstituted Milk Restricted? Little reconstituted milk is sold in the United States for two reasons. First, federal milk marketing orders contain pricing provisions that make it more expensive for a proc~ssor to produce reconstituted milk products than the same milk products made from whole milk. S~~md, man.y states.have laws and regulations that either prohibil reconstituted milk or impose restrictions. Pricing provisions in federal milk marketing ord~rs restrict reconstituted milk in two major ways. Federal milk marketing orders use a classified pricing system to pri~e producer milk. Most orders use three classes. I IS milk utilized for hard manufactured products (cheese, butter and nonfat dry milk) and receives the lowest price, the current month's Minnesota-Wisconsin (M-W) price. is milk utilized for soft manufactured products. The price is established by a formula and is normally about 10 cents above the I price. Class I is milk utilized for beverage purposes and receives the highest price, determined by adding a Class I differential, which varies by order, to the M-W price of two months previous. This difference in the price of milk used for Class I as compared to I, particularly in those orders with relatively high Class I differentials, underlies the justification for the pricing provisions that restrict reconstituted milk, namely "down allocation" and "compensatory payments." These provisions eliminate any economic gain to a handler who either manufactures nonfat dry milk or purchases nonfat dry milk from another source (in both cases a lower-priced I product) and later reconstitutes it as an equivalent Class I product. An explanation as to how pricing provisions economically restrict reconstituted milk follows. Producers supplying the local market are given first priority on higher-priced Class I sales. Dry milk or milk concentrate utilized for reconstitution, whether purchased locally or from other federal order markets or from unregulated sources, are all designated "other source milk," and are subject to both down allocation and compensatory payments. Down allocation is illustrated in Table 1. A milk handler purchases 1,000,000 pounds of milk from local producers. In addition, dry milk or concentrated milk--"other source milk"--is purchased from another federal order or from an unregulated source to reconstitute the equivalent of pounds of Class I milk. Total receipts to the handler is now 1, pounds. The actual utilization of the 1, pounds is as follows: 800,000 pounds as Class I, (700,000 pounds of local producer milk + pounds of reconstituted milk), pounds as and pounds as I. However, the classificalion of local producer milk would be as follows: 800,000 pounds as Class I, pounds as and pounds as I. In this situation, pounds of local producer milk used as I was up allocaled to the higher priced Class I use and the pounds of reconstituted milk was down allocaled to the lower priced I use. The handler's obligation to local producers (pool obligation) is determined by multiplying the respective class prices times the above utilization of local producer milk. The result is $133,140 for 1,000,000 pounds of producer milk. The handler's blend price (weighted average price for local producer milk) is $13.314 per hundredweight. By down allocating the pounds of reconstituted milk and up allocating the equivalent amount of local producer milk from I the handler paid the difference between the Class I price of $13.67 and the I price of $1l.26 for the pounds of reconstituted product. The local producers received a higher blend price since pounds of their milk used as I was up allocated to Class I thereby maximizing their share of the Class I market. Compensatory payments are illustrated in Table 2. In instances where a handler has no lower-class usage of milk, or has less lower-class usage than the volume of reconstituted milk, it is not possible to down allocale the entire volume of reconstituted milk. In these cases, compensalory paymenls serve as a second line of defense to down-allocation in protecting local producers. As in the previous example, a handler receives 1,000,000 pounds of local producer milk. In addition, dry milk or milk concentrate is purchased to reconstitute an equivalent of Table 1. Down Allocation Illustrated in Federal Milk Marketing Orders in Regard to Reconstituted Milk. Prices ($/cwt, 3.5%): Class I $13.67 $12.52 ClassliI $11.26 Receipts (Ibs.): Producer Milk Other Source - nonfat dry milk reused in CI ass I Total Receipts Utilization: Class I 700,000 producer milk + 400,000 other source Class ill Classification of Producer Mille Less Other Source Allocated Producer Milk Class I 800,000 800,000 1,000,000 100.000 1, 1, 1,400,000 I Handler's Pool Obligation: Receipts Price/cwt Value Class I 800,000 $13.67 $109,360 Class IT 12.52 12,520 Class ill 11.26 11,260 Total Lbs. & Net Oblig. 1,000,000 $133,140 Handler's Blend Price = $133,140-1,000 cwts = $13.314 2

400,000 pounds of Class I milk resulting in total receipts of 1,400,000 pounds. Of this 1,400,000 pounds, 1, is used as Class I (700,000 pounds of local producer milk + 400,000 pounds of reconstituted milk), as and pounds as I. However, the 1,000,000 pounds of local producer milk is now entirely classified as Class I milk by up allocating pounds of I and pounds of milk. But there is insufficient volume of I and Ciass II milk to up allocate and replace all the reconstituted milk--l00,ooo pounds remains. This is where compensatory payments come in, which is the difference between the Class I and I price, $2.41 ($13.67 - $11.26). The $2.41 per hundredweight difference is multiplied times the pounds of other source milk and this value of $2,410 is added to the $136,700 of local producer milk value (all Class I). The handler's total obligation to the pool is now $139,110 yielding a local producer price of $13.91 per hundredweight. The combination of up allocating 300,000 pounds of local producer milk and paying a compensatory payment on the remaining pounds of reconstituted milk again reserves the Class I market for local producers and nets them a higher blend price. Table 2. Compensatory Payments Illustrated in Federal Milk Marketing Orders in Regard to Reconstituted Milk. ~: Class I $13.67 $12.52 1 $11.26 Receipts: Producer Milk Other Source - nonfat dry milk reused in Class I Total Receipts Utj!jzation: Class I 700,000 producer milk + 400,000 other source I Classification of Producer Milk: Less Other Source Allocated Producer Milk Class I 1, 1,000,000 100.000-0- Handler's Pool Obligation: Receipts Price/cwt Class I 1,000,000 $13.67-0- 12.52 I -0-11.26 Other Source lbs. x ($13.67-$11.26) Total Lbs. & Net Pool Oblig. 1.000,000 Pounds 1,000,000 400,000 1,400,000 1, 200.000 1,400,000 Class ill -0- Value $136,700 Handler's Blend Price = $139,110-1,000 cwts = $13.911 2.410 $139,110 In summary, down allocation and compensatory payments have similar effects on the cost of reconstituted milk and serve as economic disincentives for handlers to reconstitute milk. The down allocation procedure is used unless a handler's volume of I plus local producer milk does not make complete down allocation possible. When this happens compensatory payments are used. Both down allocation and compensatory payments have the effect of requiring handlers to pay the difference between the Class I and I price on reconstituted milk. With the cost of reconstitution added to this difference, reconstituted milk is more expensive to the handler than local producer milk utilized as Class I. Thus, current federal order provisions make it uneconomical to reconstitute milk. Why are federal orders written this way? If one follows the initial premise that consumers should be served by local milk supplies--that local milk supplies should be encouraged and protected--then some sort of mechanism to make nonlocal supplies more costly than local supplies makes sense. Critics of this system are basically saying that the initial premise about preferring local supplies is wrong. State Restrictions Even if federal milk marketing orders are amended to make reconstituted milk more feasible, state regulations may restrict its use. State restrictions fall primarily into two categories: the direct prohibition of manufacturing and selling of reconstituted milk; and Grade A milk standards that prevent reconstituted milk from meeting acceptable product standards. The Grade A milk standards restriction primarily concerns the source of fat in the reconstituted product. Currently, there are specifications for Grade A nonfat dry milk. Grade A NDM must be manufactured from Grade A milk. However, no standards require Grade AA or Grade A butter to be made from Grade A milk. Thus, butter or butteroil used as a source of fat in the reconstituted product could pose a problem. A careful review of state milk regulations is required before a complete assessment of reconstituted milk can be made. In addition to state restrictions, federal standards of identity or fluid (beverage) milk may pose a problem for reconstituted milk. Existing federal standards of identity prevents the labeling of reconstituted milk as "milk." The words "reconstituted milk" or words to that effect would be required on the package label. How such labeling would impact on consumer purchases of a reconstituted beverage product is unknown. Reconstituted Milk Options Three primary options have been proposed to remove the disincentives to reconstitution of fluid (beverage) milk under federal milk marketing orders: nonfat dry milk priced at I; nonfat dry milk priced the same as bulk skim milk shipments between federal order markets; and reverse osmosis concentrated skim priced the same as bulk skim milk shipments between federal order markets. The first option would allow nonfat dry milk priced as a I product to be reconstituted as a beverage milk 3

product and sold in competition with local Class I milk products. This option would involve the greatest change and could undermine the classified pricing system under federal milk marketing orders. For most federal order markets the costs associated with manufacturing nonfat dry milk and reconstitution would be less than the difference between Class I and I prices. As a result, the reconstituted fluid milk product would be cheaper than the equivalent Class I product. Reconstitution would enable milk handlers to avoid paying the higher Class I price for fluid milk products. This would make it difficult to maintain the classified pricing system of higher Class I prices in these markets. Fear of jeopardizing the classified pricing system under federal milk orders occurred in the fall of 1980 when the Washington-based Community Nutrition Institute (CNI), a fluid milk processor, and three individual consumers requested that a public hearing be held on the regulatory treatment of reconstituted milk. Their proposal was to move reconstituted fluid milk products from the Class I pricing provisions of all federal milk marketing orders to reclassify such products in the lowest class) USDA denied the hearing. In turn the CN! and others brought suit to require USDA to grant their petition to hold a hearing. In September 1981 the U.S. District Court for the District of Columbia dismissed the suit.2 In dismissing the suit, the judge ruled that the consumer petitioners were not entitled to sue the Government on this issue, and that the consumer groups had not shown any injury. The judge also held that the processor had legal standing but failed to exhaust administrative remedies before going to court. The en! and the others appealed. In 1983, the U.S. Court of Appeals for the District of Columbia reversed part of the U.S. District Court's decision, saying that the consumers are entitled to sue. On June 4, 1984 the U.S. Supreme Court ruled 8 to 0 that consumers do D..Q1 have standing to bring a suit against USDA to invalidate marketing orders established under the Agricultural Marketing Agreement Act of 1937, as amended) Because of the threat to federal milk marketing orders generally, the option of allowing the reconstitution of fluid milk products from dry milk priced as a I product is not being advocated by producers or handlers, not even among those in the Upper Midwest. However, more recent proposals include the other two mentioned options, both of which would handje the pricing of reconstituted nonfat dry milk or a skim concentrate similar to the pricing of shipments of bulk skim between federal orders. Shipments of bulk skim milk between federal order markets are classified by use at either the receiving handler's plant or receiving market, whichever classification is lower, and that use classification is passed back to the shipping (source) market; that is, the receiving handler pays the respective class prices of the source market plus transportation costs. Whether the use classification of the receiving 1 Federal Register, Vol. 45, No. 223, November 17, 1980. 2USDA, ERS, Dairy. Outlook and Situation, March 1983, p.19. 3USDA, ERS, Dairv. Outlook and Situation, June 1984, p.ll. handler's plant or the receiving market is passed back to the source market depends upon which has the highest combined and I utilization, thereby protecting the local Class I utilization. For example, if the use classification of the receiving plant is 60% Class I versus the market utilization of 80% Class I, the utilization passed back to the source market would be 60% Class I and 40% I. Note that the combined and I in the receiving market is all passed back as I in the Shipping market. The Class I and I prices of the source market would accordingly be paid by the receiving handler for that milk. If the above class utilizations were reversed between the receiving handier's plant and the market, the market class utilization would have been passed back to the source market. Under current provisions of federal order markets, reconstituted milk is always subject to down allocation and compensatory payment provisions regardless of the adequacy of local milk supplies for Class I needs. Reconstitution options two and three mentioned above suggest that reconstituted milk be priced in a way similar to that of imported bulk skim milk. That is, pass back the class utilization from the receiving handler's plant or receiving market to the source market and pay the respective class prices of the source market plus transportation costs. Under this proposal the only advantage to reconstitution over bulk milk shipments would be savings in transportation costs. The option of using nonfat dry milk for reconstitution would have the greatest savings in transportation cost. Only 47 bags (l00 lbs. each) of nonfat dry milk would be required to equal the volume of a 50,000 pound tanker of skim milk. Nonfat dry milk could also be made during the spring flush, stored and used later for reconstitution during the fall when fluid milk is short in deficit Southern and Southeastern markets. The manufacturing operations, particularly of Upper Midwestern cheese plants, would not be disrupted during the fall by diverting bulk milk from manufacturing plants to deficit fluid markets for Class I use. Nevertheless, the handling of nonfat dry milk manufactured in the spring and used three or four months later as a fluid product could pose a complicated milk utilization accounting problem for federal market administrators. In addition, producer prices could actually be reduced. Currently, when Grade A fluid milk is shipped to deficit fluid markets, competition for milk supplies from Wisconsin and Minnesota manufacturing milk plants increases the Minnesoi.a-Wisconsin price. In addition, these manufacturing plants are reluctant to sell Grade A milk to deficit fluid areas unless they receive a "give-up charge." Nonfat dry milk taken out of storage for use in reconstituted fluid products would not put the same upward pressure on manufacturing milk supplies and prices. The third option, allowing fresh concentrated skim milk through reverse osmosis technology to be reconstituted, probably would be the most technically acceptable alternative. Reverse osmosis filtration, like evaporation, removes water from milk. Unlike evaporation, reverse osmosis requires no heat; thus the final composition and taste of the reconstituted milk is more likely to be similar to regular milk. Also, class use identity would be easy to retain with a 4

fresh concentrated product. In addition, there may be fewer labeling hassles than with a reconstituted fluid milk product made from nonfat dry milk. Transportation cost savings would still be substantial--half the cost of bulk milk shipments, assuming 50% of the water is removed under reverse osmosis. Also, the competition for milk supplies among Wisconsin and Minnesota manufacturing milk plants and upward pressure on the Minnesota-Wisconsin price and plant "give-up charges" would be no different than the situation where fluid milk is shipped to deficit fluid markets. Reverse Osmosis Technology and Intra-Order Movement of Milk The cost of transporting raw milk in tankers is between 35 and 40 cents per hundredweight for each 100 miles. However, location differentials for most federal milk marketing orders are considerably less than this. Distant milk plants are not fully compensated for moving fluid milk to meet the needs of the market. Over-order premiums are required in order to cover the ful! cost of Iran sporting milk in a given order. Unless local buyers offer over-order premiums, distant selling plants do not have an economic incentive to ship Grade A milk to meet the fluid needs of the order. Reverse osmosis technology would reduce the cost of transporting milk proportionate to the level of concentration. Buying plants could obtain distant milk at a lower cost. Selling plants in distant markets would be able to sell more milk in desirable fluid markets. Federal milk marketing orders may be able to meet their objective of assuring an adequate supply of Class I fluid milk to consumers at a lower cost. Reverse osmosis could also alleviate an inadequate supply of milk for needs in some orders. In order to accommodate reverse osmosis technology for moving fluid milk, the down allocation and compensatory payment provisions in the order system would need to be removed. Consumer Acceptance of Reconstituted Milk A common argument against reconstituted milk is that it would not taste as good as fresh milk or have inconsistent flavor quality and jeopardize consumers' image of beverage milk quality. There is little commercial experience with reconstituted milks, especially those produced with new technologies; hence, there is no definitive answer. However, numerous taste panel tests have demonstrated that consumers are generally indifferent to any difference between lowfat and flavored low fat blended reconstituted products and their conventional counterparts. Experience in other countries has mirrored these taste panel results. However, more research is needed to determine the most cost-effective means of concentrating and reconstituting milk and how these relate to consumer acceptance. In addition, a minimum solids level on reconstituted milk products at levels of existing commercially marketed fresh fluid products may need to be established in order to maintain the same nutritional quality. The current federal minimum standard for fluid milk products is 8.25% solids-not-fat. The average solids-not-fat content of commercially marketed fluid milk products is considerably higher, about 8.6%. One issue would be whether processors of reconstituted milk products should only meet the minimum federal standards. Impact of Reconstituted Milk Allowing reconstituted milk to be priced similar to shipments of bulk milk between federal order markets would likely benefit the Upper Midwest at the expense of other markets, particularly southern markets having relatively high Class I differentials. The potential benefit to the Upper Midwest is not likely to be from expanded fluid milk sales to distant fluid markets. In fact, the elimination of current pricing restrictions on reconstituted milk mayor may not increase fluid milk sales from the Upper Midwest or other current or potential shipping markets. If priced like bulk milk shipments between federal orders, the effect on Class I utilization and blend prices in shipping markets would be no more than that of moving bulk milk into markets. The benefits, if any, to the Upper Midwest of eliminating restrictions on reconstitution would be long run and related to improving the competitiveness of Upper Midwestern producers in relation to their Southern counterparts. If reconstitution was a viable option for handlers, Class I prices higher than the cost of using reconstituted blends would not be economically supportable. Class I differentials could be reduced to less than the levels present before the increases mandated by the Food Security Act of 1985 took effect in 1986. Ultimately, eliminating pricing restrictions on reconstituted milk and the resulting lower Class I differentials and blend prices would lessen the incentive for producers in markets distant from the Upper Midwest to expand milk production. This could benefit Upper Midwestern producers in the long run by enabling them to compete with other areas on the basis of cost of production. Milk production would be encouraged in the more cost efficient areas, rather than in areas with relatively high Class I prices. Two studies support this regional impact of reconstituted milk. A March 1988 Report by the U.S. General Accounting Office, concluded that allowing for reconstituted milk would benefit regions with low fluid use, such as the Upper Midwest.4 Increased inter-order transportation of concentrated milk solids from these regions would lead to lower federal order blend prices in receiving markets. On the other hand, producers in orders that would be supplying concentrated milk solids to other markets would receive a somewhat higher price for their milk. As a result, in the long run, Southern markets would likely experience a reduction in milk production, which would be offset to some extent by increases in production in the Upper Midwest. A second study by USDA quantified these changes. The study assumed that reverse osmosis technology would be used to develop a 50% concentrate, which would cut transportation costs by about half while incurring a cost of 35 /cwt for concentration and recombination. Regional minimum Class I differentials existing in 1985 were assumed to remain in effect. As a result, interregional milk shipments increased 4U.S. General Accounting Office, Report to Congress. Milk Marketing Orders, Options for Changes. March 1988, pp.42-44. 5

33%. Shipments from the Lake States to the Southern deficit regions increased. Shipments from the Mid-Atlantic region to the Northeast decline as the Mid-Atlantic region becomes a supplier to the Southeast. California producers would receive some economic incentive to become suppliers to the Southwest. National producer revenues, consumer expenditures and Commodity Credit Corporation expenditures would change lillie from the 1985 base. However, effective blend prices (minimum blend prices plus over-order premiums) and producer revenues changed regionally. Effective blend prices increased 59 /cwt in the Lake States, Corn Belt, Kentucky-Tennessee and the Southeast. Effective blend prices increased 19 cents to 35 /cwt for Florida, Mid-Atlantic and the Deep South. Decreases of 19 /cwt occurred in the Northern and Southern Plains. Effective blend prices changed less than 8 /cwt in other regions. Producer revenues increased 5% in the Lake States and 2 to 3% in Kentucky Tennessee and the Southern deficit regions. The two studies clearly indicate that the removal of federal order restrictions on reconstituted milk would put downward pressure on Class I differentials in markets distant from Wisconsin. Differences in effective blend prices between regions would be reduced. As a result, there would be less interest in replacing the current single basing point for Class I differentials at Eau Claire, Wisconsin, with multiple basing points. (See Leaflet 16 for a discussion of multiple basing points.) Another impact of changing reconstituted milk provisions is that of prices paid to producers. Purchase of milk on a concentrated and condensed solids basis along with minimum solids standards for fluid products could be the catalyst that would change the basis on which milk is sold to pounds of buuerfat and pounds of nonfat solids. The incorporation of multiple component pricing in federal milk marketing orders might actually be hastened with the allowance for reconstituted milk. Advantages And Disadvantages of Reconstituted Milk The advantages and disadvantages of reconstituted milk are discussed under the assumption that reconstituted milk would be priced similarly to bulk shipments of fluid milk between federal milk marketing orders. There are two particularly strong advantages to the adoption of reconstituted milk. It is a more economical means of moving milk to deficit fluid markets when needed. It would slow the expansion of milk production and put downward pressure on current Class I differentials in federal milk marketing orders distant from the Upper Midwest. Some in the Upper Midwest view these lower Class I prices and resulting lower blend prices as an advantage. They claim that lower Class I prices may reduce the Southern markets' expansion in milk production in excess of Class I needs. Milk in excess of Class I needs now must be channeled into manufactured milk products. These manufactured products either compete with similar products from the Upper Midwest or are sold to the CCC possibly resulting in further cuts in the dairy support price. Reconstitution also has its drawbacks. One disadvantage to reconstitution is that it could mean lower quality fluid milk products. Most producer milk tests at about 8.6 to 8.7% solids-not-fat. However, the FDA Standard of Identity for fluid milk products only requires a minimum of 8.25% solids-not-fat. If reconstitution was practiced, it could mean that reconstituted milk would be closer to the minimum 8.25% solids-not-fat content than to the prevailing standard. A second disadvantage is that the adoption of reconstitution could add to the milk supply. One hundred pounds of raw milk will produce almost 9 pounds of nonfat dry milk. However, with minimum FDA standards for solids-not-fat in beverage milk at 8.25%, 9 pounds of nonfat dry milk could actually be reconstituted into almost 110 pounds of fluid milk products. In periods of surplus, this adds to the problem. Finally, Federal order accounting would be complicated by reconstitution. If nonfat dry milk was used as the reconstituted product, proper accounting for milk use under federal milk marketing orders would be more difficult. For example, if nonfat dry milk was manufactured in April and used for a Class I reconstituted product in September, it would be difficult to account for the appropriate milk value. In April the nonfat dry milk would have been assigned a I value, but in September it would be assigned the September Class I value. Allocating this increased value back to appropriate producers could be difficult. 6