Lehigh Valley Cooperative Farmers, Inc v. United States, 79

• Decision Date: 04 June 1962
• Docket Number: No. 79,79
• Citation: 370 U.S. 76,82 S.Ct. 1168,8 L.Ed.2d 345
• Parties: LEHIGH VALLEY COOPERATIVE FARMERS, INC., et al., Petitioners, v. UNITED STATES et al
• Court: U.S. Supreme Court

370 U.S. 76

82 S.Ct. 1168

8 L.Ed.2d 345

LEHIGH VALLEY COOPERATIVE FARMERS, INC., et al., Petitioners,

v UNITED STATES et al.

No. 79.

Argued Jan. 17 and 18, 1962.

Decided June 4, 1962.

Willis F. Daniels, Harrisburg, Pa., for petitioners.

Alan S. Rosenthal, Washington, D.C., for respondents.

Mr. Justice HARLAN delivered the opinion of the Court.

Petitioners, operating milk processing plants in Pennsylvania, challenge the validity of certain 'compensatory payment' provisions included in milk marketing orders affecting the New York-New Jersey area, which were promulgated by the Secretary of Agriculture under the authority granted him by § 8c of the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 608c, 7 U.S.C.A. § 608c. That section permits the Secretary to issue regional regulations governing, in various enumerated respects, the marketing of certain agricultural commodities, among which is milk. This provision in question requires those who buy milk elsewhere and bring it into the region for sale as fluid milk to pay to the farmers who supply the region a fixed amount as a 'compensatory payment.' This amount is measured by the difference between the minimum price set by the Market Administrator for fluid milk and the minimum price for surplus milk. The judgment of the Court of Appeals for the Third Circuit, 287 F.2d 726, upholding the validity of the 'compensatory payment' provision here under attack,¹ conflicted with an earlier decision rendered by the Court of Appeals for the Second Circuit, Kass v. Brannan, 196 F.2d 791. To resolve this conflict we granted certiorari. 366 U.S. 957, 81 S.Ct. 1919, 6 L.Ed.2d 1251.

I.

The General Scheme of Milk Regulation.

The order around which the present controversy centers, now titled Milk Marketing Order No. 2, 7 CFR §§ 1002.1 et seq.,² though somewhat more complex than others, is in its general outline representative of the pattern of regulation established by the Secretary for the promotion of orderly marketing conditions in the milk industry and the preservation of minimum prices for farmers. Pursuant to the authority granted by § 8c(5)(A),³ the Order classifies milk that is sold within the New York-New Jersey marketing area 'in accordance with the form in which or the purpose for which it is used.' Milk that contains 3% to 5% butterfat—the usual proportion in ordinary liquid milk—and is sold for fluid consumption is assigned to Class I. Milk that is used for cream (sweet and sour), half and half, or milk drinks containing less than 3% or more than 5% butterfat is classified in Class II. The remainder—milk that is to be stored for a substantial period and used for dairy products such as butter and cheese—is grouped in Class III. 7 CFR § 1002.37.

This classification reflects the relative prices usually commanded by the different forms of milk. Thus, highest prices are paid for milk used for fluid consumption, and the lowest for milk which is to be processed into butter and cheese. Since the supply of milk is always greater than the demands of the fluid-milk market, the excess must be channeled to the less desirable, lower-priced outlets. It is in order to avoid destructive competition among milk producers for the premium outlets that the statute authorizes the Secretary to devise a method whereby uniform prices are paid by milk handlers to producers for all milk received, regardless of the form in which it leaves the plant and its ultimate use. Adjustments are then made among the handlers so that each eventually pays out-of-pocket an amount equal to the actual utilization value of the milk he has bought.

Under the Marketing Order here in question it is primarily the handlers whose plants are located within the marketing area and who regularly supply that area with fluid milk who are regulated. All handlers who receive or distribute milk within the area are required to submit monthly reports to the Market Administrator, listing the quantity of milk they have handled and the use for which it was sold. But only the handlers operating 'pool plants'—i.e., plants which meet certain standards set out in 7 CFR §§ 1002.25—1002.29⁴—must pay the producers from whom they buy the uniform price set by the Administrator. This price is calculated each month on the basis of the reports that are submitted. After determining the minimum prices for each use classification pursuant to formulas set out in 7 CFR § 1002.40, the Administrator computes an average price for the 'pool' milk handled during that month. This figure is reached by first multiplying the 'pool' milk disposed of in each class by the established minimum price for that class, and then adding the products to the 'compensatory payments' made for nonpool milk. After certain minor adjustments are made, this sum is divided by the total quantity of 'pool' milk sold in the market during the month. The quotient is a 'blend price.' With some adjustments to reflect transportation expenses, this uniform price must be paid to producers by all handlers maintaining 'pool' plants. 7 CFR § 1002.66.

Adjustments among handlers are made by way of a 'Producer Settlement Fund,' into which each handler contributes the excess of his 'use value'⁵ over the uniform price paid by him to his producer. Handlers whose 'use value' of the milk they purchase is less than the 'blend price' they are required to pay may withdraw the difference from the fund. The net effect is that each handler pays for his milk at the price he would have paid had it been earmarked at the outset for the use to which it was ultimately put. But the farmer who produces the milk is protected from the effects of competition for premium outlets since he is automatically allotted a proportional share of each of the different 'use' markets.

II.

The Compensatory Payment Provision.

It will thus be seen that this system of regulation contemplates economic controls only over 'pool-handler' plants since only such handlers are required to pay the 'blend price' to their producers and to account to the Producer Settlement Fund. If limited to the provisions recounted above, the regulatory scheme would not affect milk brought into the New York-New Jersey marketing area by handlers who are primarily engaged in supplying some other market and whose producers are not located within the New York-New Jersey area. Some of the regional orders now in effect do not undertake any economic regulation of 'outside' or 'other source' milk.⁶ But it is quite obvious that under certain circumstances some regulation of such milk may be necessary. Accord- ingly, § 8c(7)(D) of the Act, 7 U.S.C. § 608c(7)(D), 7 U.S.C.A. § 608c(7) (D), authorizes the Secretary to include in his regulating orders conditions that are incidental to terms expressly authorized to effectuate the other provisions of such order.'

A handler who brings outside milk into a marketing area may disrupt the regulatory scheme in at least two respects:

(1) Pool handlers in the marketing area who are required to pay the minimum class prices for their milk may find their selling prices undercut by those of nonpool handlers dealing in outside milk purchased at an unregulated price.

(2) Producers in the marketing area, whose 'blend price' depends on how much of the relatively constant fluid-milk demand they supply in a given month, may find the outside milk occupying a portion of the premium market, thus displacing the 'pool' milk and forcing it into the less rewarding surplus uses, with the ultimate effect of diminishing the 'blend price' payable to producers.

In an effort to cope with these disruptive economic forces, the Secretary devised his 'compensatory payment' plan. In essence the plan imposes special monetary exactions on handlers introducing 'outside' milk for fluid consumption into a marketing area in months when there is a substantial surplus of milk on the market.⁷

Of the 68 regional milk orders which establish marketwide pools,⁸ 64 contain 'compensatory payment' provi- sions of one kind or another. The Order now before us is typical of 23 of these orders.⁹ The Order provides that a handler who brings 'outside' milk into the New York-New Jersey area and sells it for fluid use must pay to the pool's producers, through the Producer Settlement Fund, an amount equal to the difference between the minimum prices for the highest and for the lowest use classifications prevailing in that area. In other words, for each hundredweight of non-pool milk sold for Class I use in the New York-New Jersey area, a payment equal to the difference between Class I and Class III prices must be made by the seller to the Producer Settlement Fund.

III

The Purpose and Effect of the Compensatory Payment.

After the Court of Appeals for the Second Circuit had held that compensatory payment requirement in the New York-New Jersey Milk Marketing Order (then Order No. 27) to be a 'penalty,' Kass v. Brannan, 2 Cir., 196 F.2d 791, 795, the Secretary of Agriculture conducted extensive hearings to determine whether it should be retained. His findings, which appear at 18 Fed.Reg. 8444—8454, explain this requirement as the most satisfactory means of imposing 'a suitable charge on such unpriced milk in an amount sufficient to neutralize, compensate for and eliminate the artificial economic advantage for non-pool milk which necessarily is created by the classified pricing and pooling of pool milk under the order.' Id., at 8448. There seems little doubt that an assessment equal to the Class I-Class III differential would, in all but rare instances, nullify any competitive advantage that nonpool milk could have: only if the sum of the purchase price of the outside milk and the cost of its transportation to market were less than the Class III price would a handler find it profitable to bring such milk into the marketing area. But it must be obvious that this payment is wholly or partially 'compensatory'—i.e., puts pool and nonpool milk 'on substantially...