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DEPARTMENT OF AGRICULTURE, FOOD AND RURAL RESOURCES MAINE MILK COMMISSION

Chapter 29: DEALER MARGINS

I.

BACKGROUND AND STATUTORY FRAMEWORK The Maine Milk Commission is responsible for setting minimum wholesale and retail milk prices. (See Appendix A for an explanation of milk pricing by the Maine Milk Commission). Minimum wholesale prices paid to processors (dairies) are set to reflect the lowest price at which milk purchased from Maine producers can be received, processed, packaged, and distributed to retailers within the state at a just and reasonable return. To arrive at the dairy-processing price, also known as the dealer margin, the Maine Milk Commission conducts a cost study for the operation of a model milk processing plant. Using the model and current price data for supplies, labor, electricity, trucking, etc., a lowest achievable price is calculated, which is the theoretical price at which a Maine dairy should be able to process milk from raw product to finished product and distribute it to retailers. The Commission uses the price generated by the model plant as a base, and then adjusts it to take into account Maine conditions, such as plant size and transportation costs, to arrive at a dealer margin. The Commission conducts a public hearing on the proposed dealer margin. After considering the input of processors, any other interested parties, and the public, the Commission adopts a rule establishing the dealer margin. This margin is the minimum return that processors are guaranteed until a new study is completed. Processors may obtain a higher price for a gallon of milk from retailers, but the price paid by retailers cannot be below the minimum dealer margin. By statute a cost study is required every three years. 7 M.R.S.A. §2954 is the statutory framework that establishes the considerations the Maine Milk Commission must address when it issues an order setting a new dealer margin for each regulated milk container. Law Court decisions in 1977 and 1981 identified the procedure the Commission must follow in developing a new order. The procedure includes both independent investigation and public hearing. This is the tenth major pricing order the Commission has set, and embodies continued improvement and refinement over earlier orders. With each new order the model plant, the data, and the information made available and reviewed by the Commission has become more detailed and specific.

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In July 2006, the Commission contracted with the University of Maine to develop new dairy processing plant models to be used as the basis for setting new dealer margins. The Commission received input from interveners, processors, and milk producers. On April 23, 2007 the Commission held a public hearing to receive comments on the proposed dealer margin and announced a written comment period ending May 3, 2007. Comments are addressed in the basis for adoption statement at the end of this rule. In March 2008, the University of Maine made revisions to the dealer models by adjusting for fuel and resin costs and provided this information to the Commission. On May 23, 2008, the Commission held a public hearing to receive testimony on these costs and announced a written comment period ending June 3, 2008. As result of this action, new dealer margins were adopted June 6, 2008 and are set forth in Table 9. Comments are addressed in the basis for adoption statement at the end of this rule.

II.

MODEL PROCESSING PLANTS Two model processing plants were developed and presented to the Commission: a 430,000 gallon per week plant that includes blow molding of plastic containers and a 325,000 gallon per week plant without blow molding. The Commission selected the 430,000-gallon per week model plant as the basis for setting the dealer margin in this Order and selected the 325,000-gallon model to determine Maine conditions. (Spreadsheets detailing the costs associated with the operation of both model plants are included in Appendix B). The 430,000-gallon model plant was structured to represent a modern dairy processing plant in the Westbrook Industrial Park, near Portland, Maine. The plant’s handling capacity is 430,000 gallons per week of white milk. The model is similar in many aspects to the one used for the 2004 order. The 2007 model plant varies from the 2004 model in some important ways:           Modification of capital equipment to reflect current information technology and security needs, Minor equipment changes were made to the 2007 model plant, Plastic container costs increased, Fuel oil and gas prices increased, Water, sewer, and electricity costs increased, Cost for operating capital is lower due to decrease in the lending rate, Wages have increased, Land cost per acre increased, Transportation capital (i.e. trucks and trailers) costs increased, and Distribution routes costs increased.

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III.

DISTRIBUTION MODEL The University modeled three possible delivery routes in the 2007 study to establish the theoretical cost of distributing milk from a dairy to retail outlets: 1) tractor trailer with a metro drop route, 2) straight long body with a metro (urban) route, and 3) straight long body with a non-metro (rural) route. This model was updated to reflect current conditions and is considered to be reflective of the marketplace. A fleet of trucks is required to make possible the distribution of products. Maine milk processors provided information on the size and number of trucks used to deliver cases of milk. Two truck classes are used: long tractor-trailer and long straight body. (See: Table 1). Milk processors provided information as to the percent of cases distributed by each type of truck. Using this information and “Cases per Load”, the proper truck size for each route was determined. The number of trucks required in the distribution fleet was calculated using an estimate of peak day shipping demand.

TABLE - 1 FLEET CHARACTERISTICS Tractor Trailer Percent of Total Cases Number of Trucks 50% 15 Straight Long Body Metro Non-Metro 16% 34% 9 26

Note: The target average and peak loads are used to make initial fleet size. Once the fleet is estimated, the actual peak and actual average per load cases can be calculated.

TABLE - 2 DISTRIBUTION COSTS PER DAY Tractor Trailer Vehicle Fuel & Service Driver Overhead Per Route Total Cost Cost per Case Cost per Gallon $111.44 $147.64 $314.56 $55.14 $628.79 $0.8121 $0.2030 Straight Long Body Metro $90.44 $95.58 $319.04 $33.09 $538.14 $1.3033 $0.3258 Non-Metro $90.44 $123.35 $322.11 $55.14 $591.04 $1.9459 $0.4865

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Distribution costs were based predominately on the information in Table -2. Most of the costs apply directly to a particular route (ex: driver wage, truck cost, fuel, etc.). Other costs, however, (land and building, utilities, service equipment, etc.) could not be allocated directly and are referred to as overhead costs. An indirect allocation of total overhead costs was made to the whole distribution fleet through total fleet mileage. The bottom line in Table - 2 represents the theoretical cost per gallon to distribute milk from a Maine dairy to retailers in metro and non-metro areas using two delivery techniques (tractor-trailer and straight long body). Table - 3 shows the dollar change in distribution costs from 2004 to 2007.

TABLE - 3 DISTRIBUTION COSTS FROM 2000 TO 2007 Distribution Costs Gallon 1/2 Gallon 2000 $0.1477 $0.0656 2004 $0.1864 $0.0828 % Change between 2000-2004 26% 26% 2007 $0.2030 $0.0902 % Change between 2004-2007 8.9% 8.9%

IV.

THEORETICAL PROCESSING AND DISTRIBUTION COSTS In Table - 4 the total computation (bottom line) shows the processing costs generated by the 430,000-gallon model plant for various containers. In Table - 5 the total computation (bottom line) shows the distribution costs generated by the 430,000-gallon model plant. In Table - 6 the total computation (bottom line) shows the combined processing and distribution costs (combined total computations from Tables - 4 and 5). The total computation in Table - 6 represents the theoretically lowest achievable price for processing and distributing various containers of milk in Maine.

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TABLE - 4 430,000 GALLONS PER WEEK MODEL WITH BLOW MOLDING Weekly Production Direct Cost Receive & Process Blow Molding Dry Storage Filling & Packing Case Clean & Storage Cold Storage Volume Direct1 Total Direct Cost Per Container Overhead & Corporate Off. Total Processing Cost Per Container2 Plastic Gallon Plastic ½ Gallon Paper ½ Gallon Plastic Quart Paper Quart 20 Quart Bulk

$0.0599 $0.1311 $0.0028 $0.0323 $0.0214 $0.0850 $0.0262 $0.3587 $0.1568 $0.5155

$0.0300 $0.1311 $0.0032 $0.0187 $0.0095 $0.0378 $0.0131 $0.2433 $0.1064 $0.3497

$0.0150 $0.0209 $0.0043 $0.1172 $0.0053 $0.0213 $0.0065 $0.1905 $0.0833 $0.2737

$0.2995 $0.0000 $0.1192 $1.3291 $0.0856 $0.3400 $0.1308 $2.3043 $1.0076 $3.3119

1 Costs attributable to a particular container based on volume of milk (such as piping, product loss, etc.). 2 These prices are adopted as the Commission’s Theoretically Lowest Achievable Prices for model plant processing costs. It is to this base that the Commission makes adjustments for Maine conditions.

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TABLE - 5 430,000 GALLONS PER WEEK DISTRIBUTION MODEL WITH BLOW MOLDING COST PER GALLON Tractor Trailer Total Cost Per Case Total Cost Per Gallon $0.8121 $0.2030 Straight Long Body Metro Non-Metro $1.3033 $1.9459 $0.3258 $0.4865

TABLE - 6 430,000 GALLONS PER WEEK MODEL WITH BLOW MOLDING COST PER GALLON Plastic Gallon 4 $0.5287 $0.2030 $0.7318 Plastic ½ Gallon 9 $0.3586 $0.0902 $0.4489 Paper ½ Gallon 9 Plastic Quart 16 $0.2986 $0.0508 $0.3494 Paper Quart 16 20 Quart Bulk 1 $3.5137 $0.8121 $4.3259

Unit/Case Total Processing Cost per Container Delivery Case Cost per Container1 Total Processing & Distribution Cost Per Container 1 For Metro Drop Shipment

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V.

CONSIDERATIONS USED IN MAKING ADJUSTMENTS FOR MAINE CONDITIONS The Commission first used the theoretical processing plant and distribution costs derived from the model to generate the theoretically lowest achievable dealer price. Using this price as a base, the Commission then considers adjustments to account for Maine conditions to derive the new dealer margin. In the 2007 model the adjustments for Maine conditions were made in two major areas: processing costs and distribution costs. A. PLANT COSTS ADJUSTMENT FOR MAINE CONDITIONS (1) Blow Molding and Volume The Commission considers the actual volume processed by Maine plants to determine the model plant size that best reflects current conditions. In 2007, the Maine plant with the highest volume represents 105.5% of the 430,000-gallon model plant. The other two largest processors represent volumes of 101.9%, and 42.9% of the model plant. In the 2004 model, blow molding technology was included in the 430,000 plant because two of Maine’s milk-processing plants used blow molding to form plastic containers on site. Blow molding technology is also a part of costs associated with milk processing in 2007. In the 2004, two Maine processing plants were near the 430,000-gallon model while the other two represented lesser volumes. The Commission considered processing volume and adopted adjustments that reflect current Maine conditions. The methodology utilized was the following: 325,000 gallon plant costs for processing a gallon of milk minus 430,000 gallon plant processing costs. The same technique was utilized for the 2007 volume adjustment for Maine conditions.

TABLE - 7 VOLUME PROCESSING COST DIFFERENTIAL BETWEEN 400,000 AND 325,000-GALLON MODEL PLANTS Gallon ½ Gallon $0.1413 $0.0532 Quart 20-Quart $0.0199 $0.2387

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B.

DISTRIBUTION COSTS ADJUSTMENT FOR MAINE CONDITIONS Distributing the finished product is the second largest operational expense. Below are the distribution costs for the three distribution methods. The theoretically lowest achievable price for distributing milk was the tractor trailer metro drop. The model distribution costs per gallon are: $0.2030/gallon for Tractor Trailer Metro Drop; $0.3258/gallon for Straight Long Body Metro and; $0.4865/gallon for Straight Long Body Non-Metro. Based on the most recent information available, 55% of the milk is being distributed by tractor-trailer. Taking this into consideration, an adjustment for Maine conditions was made by the Commission. This was done by taking a weighted average of each distribution category. TABLE - 8 DISTRIBUTION COST ADJUSTMENT

Gallon ½ Gallon Plastic

$0.1160 $0.0516

Plastic Quart 20-Quart

$0.0290 $0.4641

C.

MISCELLANEOUS ADJUSTMENTS 1. Half-Gallon and Quart Containers The 2007 study did not determine costs for the half-gallon and quart paper containers, so the half-gallon and quart plastic container costs and will be the basis for setting minimum wholesale and retail prices for these two paper containers. 2. Rounding In the Pricing Formula all numerical figures used to calculate the final producer, wholesale, and retail prices are rounded to four places. Final wholesale and retail prices are rounded to two places. 3. 2 ½ Gallon Container The 2-½ gallon (10-quart) container has been eliminated from the model because it is in limited use. When this container is used, it will take half the price of the 20-quart bulk container.

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4.

3 Quart Container In 2001, the 3-quart container was eliminated from the model because of limited use. During the intervening years, when that container size was used, the margin was assigned the value estimated in the 1997 model and reflected no adjustments for changing costs or container utilization. The Commission believes that when not explicitly modeled, the margin for the 3quart container should be tied to the margin of an approximately equivalent container size that has been estimated within the most current model to capture changing conditions. The Commission believes that the appropriate container size is the gallon and that the 3-quart margin should mirror the margin for the gallon container. The 3-quart container, while smaller, would move through the processing system at approximately the same speed as the gallon containers. Any economies from the smaller container size would likely be off-set by diseconomies of a relatively small number of containers filled.

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TABLE - 9 DEALER MARGINS Plastic Gallon Plastic ½ Gal Plastic Qt 20-Qt Bulk Paper ½ Gal Paper Qt

Base model = 430 plant with blow molding
Model Costs

Processing cost Delivery cost (drop-metro) Total processing and delivery
Adjustments for Maine conditions

$0.57078 $0.39929 $0.29823 3.49392 $0.39929 $0.29823 $0.22187 $0.09861 $0.05547 $0.88747 $0.09861 $0.05547 $0.79265 $0.49790 $0.35369 $4.38139 $0.49790 $0.35369

Volume adjustment Delivery adjustment (blended distribution cost)
Total adjustments for Maine conditions

$0.11988 $0.02606 $0.02323 $0.27705 $0.02606 $0.12419 $0.05519 $0.03105 $0.49674 $0.05519

0.02323 0.03105

$0.24407 $0.08125 $0.05428 $0.77379 $0.08125 $0.05428

2007 Commission fee adjustment 2008 Dealer Margin Sensitivity Analysis Including Adjustments for Maine Conditions

$0.0022

$0.0011

$0.0005

$0.0108

$0.0011

$0.0005

$1.03887 $0.58022 $0.40851 $5.16593 $0.58022 $0.40851

Prices in the computation row (bottom line) of Table - 9 are the new dealer margins for various containers.

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Table - 10 shows the costs predicted by the new model relative to the costs in the 1993, 1997 and 2000, and 2004 models including adjustment for Maine conditions.

TABLE - 10 PROCESS & DISTRIBUTION COST COMPARISON (values include volume and distribution adjustments for Maine conditions) 2007 Model Plant with 2008 Adjustments $1.03887 $0.58022 See Misc. Notes $1.03887a

Container Size

1993 Model Plant

1997 Model Plant

2000 Model Plant

2004 Model Plant

Gallon ½ Gallon Plastic ½ Gallon Paper

$0.3935 $0.2615 $0.2974

$0.6244 $0.3606 $0.3606

$0.7205 $0.4120 See Misc. Notes $0.8572

$0.8467 0.4679 See Misc. Notes $0.8572

3 Quart Container Plastic Quart Paper Quart

-

$0.8572

$0.1671 $0.1671

$0.2477 $0.2477

$0.3080 See Misc. Notes

$0.3418 See Misc. Notes

$0.40851 See Misc. Notes

$2.5109 $3.5025 $4.3805 $5.4764 $5.16593b 20-Quart Bulk a See miscellaneous notes. b Processing and distribution costs for the 20-quart bulk container are not directly comparable to the 2004 model. An adjustment was made in the model to reflect current storage conditions or needs given the production mix, as processors in 2007 report a lower level of production going to the 20-quart container and slightly higher levels of container purchases versus on-site blow molding.

The container prices for various products such as whole, low fat, and skim products will be determined using the dealer margins set forth in Table 9. The monthly changes for raw product costs, butterfat cost, any special premiums, processor assessments, etc. when added will determine minimum wholesale prices (See: Appendix C – Pricing Schedule). Commission minimum wholesale and retail prices become effective on the Sunday closest to the first day of the month.

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Appendixes:

A. B. C.

Milk Pricing by the Milk Commission 430,000 Gallon and 325,000 Gallon Model Plant Spreadsheets Pricing Schedule Example

Note: Retail margins are not set by this order. Retail margins are subject to change by Commission rulemaking.

STATUTORY AUTHORITY 7 M.R.S.A. §2954 EFFECTIVE DATE: August 15, 1994 (Order 94-8 DM) REPEALED AND REPLACED: July 19, 1997 (Order 97-08 DM) April 3, 2001 (Order 01-015 DM) May 10, 2003 (Order 06-03 DM) June 18, 2004 (Order 07-04 DM), filing 2004-212 AMENDED: February 11, 2005 – filing 2005-47 November 18, 2005 – filing 2005-460 May 18, 2007 – filing 2007-185 June 20, 2008 – filing 2008-255


								
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