Alto Dairy v. Veneman

• Decision Date: 15 July 2003
• Docket Number: No. 02-3422.,02-3422.
• Parties: ALTO DAIRY, et al., Plaintiffs-Appellants, v. Ann VENEMAN, Secretary of Agriculture, Defendant-Appellee, and Continental Dairy Products, Inc., et al., Intervening Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

336 F.3d 560

ALTO DAIRY, et al., Plaintiffs-Appellants, v. Ann VENEMAN, Secretary of Agriculture, Defendant-Appellee, and Continental Dairy Products, Inc., et al., Intervening Defendants-Appellees.

No. 02-3422.

United States Court of Appeals, Seventh Circuit.

Argued May 21, 2003.

Decided July 15, 2003.

John H. Vetne (argued), Amesbury, MA, for Plaintiffs-Appellants.

Jeffrey Clair (argued), Dept. of Justice, Civ. Div., Appellate Section, Washington, DC, for Defendant-Appellee.

Benjamin F. Yale, Kristine H. Reed (argued), Waynesfield, OH, Marvin Beshore, (argued), Harrisburg, PA, Allen C. Warshaw, Klett Rooney Lieber & Schorling, Harrisburg, PA, for Intervenors-Appellees.

Before FLAUM, Chief Judge, and POSNER and MANION, Circuit Judges.

POSNER, Circuit Judge.

Dairy farmers located mainly in Wisconsin brought this suit to enjoin an amendment to the federal rules regulating the price of milk. (The amendment adopted by the Department after a formal rulemaking proceeding, is published at 7 C.F.R. § 1033.7(c)(2); and explained in Milk in the Mideast Marketing Area; Interim Order Amending the Order, 67 Fed.Reg. 48743 (July 26, 2002).) These rules are called "milk marketing orders," and so the amendment is also a milk marketing order. The district judge held that the plaintiffs lacked standing to challenge the amendment, not in the Article III sense that the plaintiffs had suffered and would suffer no harm from the amendment, or would derive no benefit from a judgment invalidating the amendment, but in the sense of having been denied by Congress a right to sue. So he dismissed the suit for lack of federal jurisdiction. But he went on to declare that, if he was wrong about jurisdiction, the suit would still have to be dismissed because the plaintiffs' challenge lacked merit. The plaintiffs have appealed, challenging the judge's ruling on standing and also arguing that if there is standing we should reach the merits and vacate the amendment because the Department of Agriculture failed to give them proper notice concerning the relief that might emerge from the rulemaking proceeding. While the Department defends the judge's ruling on standing, it has also responded to the plaintiffs' argument on the merits. The merits having thus been fully briefed, we can decide them if there is standing.

The federal scheme for regulating the price of milk pivots on the fact that milk is more highly valued by the market when it is sold for fluid consumption than when it is sold as an input into the manufacture of cheese or other dairy products. If milk were perishable, as it was in the days before refrigerated storage and transportation, dairy farmers serving urban markets (where milk is more likely to be consumed in fluid form than made into cheese or butter) would get higher prices for their output than dairy farmers remote from cities, who being unable to ship their milk a long distance would perforce sell most of it to manufacturers of cheese and other dairy products. But when refrigerated storage and transportation arrived on the scene, it became feasible for the remote dairy farmers — Wisconsin dairy farmers, for example — to ship milk to cities in other states, pushing down the price of fluid milk there and so hurting the dairy farmers who were located near those cities.

This was a natural, procompetitive development, as in other cases in which a reduction in the quality-adjusted cost of transportation enlarges geographic markets. But the federal regulatory scheme for milk, like so much economic regulation adopted during the Great Depression of the 1930s (much of it, however, since abolished as a consequence of the deregulation movement), is premised on dissatisfaction with the results of competition, polemically described as "ruinous" by those producer interests that it pinches. (For a near unintelligible description of conditions thought to render competition among dairy farmers unworkable, see Nebbia v. New York, 291 U.S. 502, 517-18, 54 S.Ct. 505, 78 L.Ed. 940 (1934).) To limit the competition between remote and proximate dairy farmers for the lucrative fluid-milk business of the cities, Congress in the Agricultural Marketing Agreement Act of 1937, 50 Stat. 246, as amended, 7 U.S.C. §§ 601 et seq., authorized the Department of Agriculture to proceed as follows. The Department fixes a minimum price for each "class" of milk, with class determined by end use: thus the price fixed for milk intended for fluid consumption is higher than the price fixed for milk intended for cheese. This "value of service" pricing, conventional in regulated industries, is actually a form of price discrimination, that is, pricing guided not by cost (the cost of producing milk is the same regardless of the use to which the milk is put by the purchaser), as under competition, but by differences across consumers in willingness to pay. Price discrimination increases sellers' profits, thus counteracting the alleged (though almost certainly spurious) tendency of dairy farmers to destroy their business by competing overvigorously. More realistically, milk price discrimination is intended to redistribute wealth from consumers to producers of milk.

Farmers of course do not sell directly to the ultimate consumer. The direct purchasers of milk from dairy farmers are referred to as "handlers." They might be owners of supply plants (of which more later), or milk distributors, cheese factories, or other intermediaries in the milk market. It is the handlers who pay the prices fixed by the federal regulators. The revenues generated by the discriminatory pricing scheme and received in the first instance by the handlers are pooled, and each dairy farmer whose sales contributed to the pool receives a share of the revenues that is equal to his percentage not of the total revenues of the pool's members but of their total physical output. By virtue of this method of dividing up the pie, each farmer receives the same price (called a "blended" price) for each unit of milk that he sells regardless of the end use of his milk. A farmer who sold all his milk to a cheese factory (in fact most milk produced in Wisconsin is used to make cheese, rather than being drunk) would receive from the pool the same price per unit of output as a farmer who sold all his milk for fluid consumption, even though the handler would have paid a much lower price for the former than for the latter milk. The result, or at least the intended result, is that the first farmer in our example, the one who sells all his milk to a cheese factory, will have no incentive to divert some of his output to the fluid market, where the price is higher, because the price that he receives for the milk he sells is independent of the use to which that milk is put. Such a diversion, what economists call "arbitrage," would undermine and, if uncontrolled, eventually destroy the scheme of discriminatory pricing and thus reduce the incomes of dairy farmers as a group. The distant farmers are "kept in their place," as it were — kept selling locally to the cheesemakers rather than trying to sell to fluid-milk distributors in the cities — by being given a share of fluid-milk revenues.

The fly in the ointment, and the cause of the present litigation, is that the Agriculture Department has divided the nation into regions and fixed different blended prices in the different regions. The blended price is higher in regions in which fluid-milk consumption is a higher fraction of total milk use, because in such regions a higher fraction of milk is sold to handlers at the high minimum price that the Agriculture Department has set for milk consumed in fluid form. The "Mideast," which comprises Indiana, Michigan, Ohio, and parts of Pennsylvania and West Virginia is one of these regions. Wisconsin, which is a large manufacturer of cheese, is not in the Mideast region and the blended price in its region is lower because of the high fraction of its milk output that goes to make cheese rather than being drunk. Naturally, therefore, Wisconsin dairy farmers would like to sell as much of their milk in the Mideast as they can (and for the further reason that the Department has fixed a higher minimum price for milk sold for consumption in fluid form in the Mideast states than in Wisconsin, see 7 C.F.R. § 1000.52) — or rather, they would like as many of their sales as possible to be pooled with the Mideast producers' sales and so be remunerated at the higher Mideast blended price. For they have no wish to incur the costs of actually shipping their milk to the Mideast; they would much rather continue to ship it to nearby cheese factories in Wisconsin, their traditional customers. To the extent that Wisconsin milk production is pooled with that of the Mideast dairy farmers, the latter will lose revenues because the Wisconsinites will be taking out revenue at the Mideast blended price while contributing to the pool the revenue generated by sales at lower prices to the cheese factories. If all their output were sold to cheese factories, the revenue they would be contributing to the pool would be their output multiplied by the low price fixed for the sale of milk destined for use as an input into the making of cheese, while the revenues they would be receiving as their share of the Mideast pool would be their output multiplied by the Mideast blended price.

To limit the type of arbitrage described in the preceding paragraph, the Agriculture Department has long required that a supply plant — a handler that buys milk from the farmer for storage and redistribution — resell 30 percent of its milk into a region in order to be eligible for the blended price fixed for that region. If it does sell 30 percent there, however, its entire output, not just the 30 percent, qualifies for the region's blended price. Moreover, the Agriculture Department also authorizes a practice called "paper pooling," which permits a supply plant in one region to "a...