Organic Cow, LLC v. Northeast Dairy Compact Com'n
| Decision Date | 02 April 1999 |
| Docket Number | No. 2:98 CV 129.,No. 2:97 CV 437.,2:98 CV 129.,2:97 CV 437. |
| Citation | 46 F.Supp.2d 298 |
| Court | U.S. District Court — District of Vermont |
| Parties | The ORGANIC COW, LLC, a Vermont Corporation, Appellant, v. The NORTHEAST DAIRY COMPACT COMMISSION, Respondent. |
Jane Osborne McKnight, Merritt & Merritt, Burlington, VT, for The Organic Cow, LLC, a Vermont Corporation, plaintiff.
Richard Thomas Cassidy, Hoff, Curtis, Pacht, Cassidy & Frame, P.C., Burlington, VT, for Northeast Dairy Compact Commission, defendant.
Before the Court is an appeal pursuant to 7 CFR § 1381.5(a) by The Organic Cow, LLC ("The Organic Cow") from a final decision of the Northeast Dairy Compact Commission (the "Commission"). The Commission denied Organic Cow's petition for an exemption from the Northeast Dairy Compact's (the "Compact") "overorder" assessment obligation.1 Also before the Court is the Commission's motion for summary judgment, urging affirmance of the Commission's decision. For the reasons set forth below the Commission's Final Decision is reversed and remanded. The Commission's motion for summary judgment is denied.
I. Factual History
The Organic Cow, located in Tunbridge Vermont, is a company engaged in the handling, processing, marketing and sales of organic milk, organic butter, and organic cheese. The Organic Cow is a "handler" within the meaning of the Northeast Dairy Compact. It is also an organic dairy founded by Peter and Bunny Flint ("the Flints") who are owners and operators of a 400 acre organic dairy farm in Chelsea, Vermont. Peter Flint converted to organic farming in 1989.
The Organic Cow's producers use no pesticides, herbicides, fungicides, or commercial fertilizers. They use organically grown feed, which is often priced at twice the cost of conventional feed. These producers practice rotational grazing, requiring pasture changes twice a day. They do not use bovine growth hormones (rGBH or BST) on their cows, which results in lower production than the chemically enhanced cows some nonorganic farmers use in the production of conventional milk. The transition to organic dairy farming takes a minimum of three months and requires a large investment in organic grain. Farms are certified by organic farming agencies.
The Organic Cow was born out of the Flint's Tunbridge farm and rapidly expanded sales of organic milk all over New England and along the east coast. Commission Final Decision, HEP-97-006 ¶ 1 ("Final Decision"). The Organic Cow steadily increased its purchases of organic milk from organic dairy farmers located throughout New England and New York. Id. It is the dominant market outlet in New England for the production and sale of organic milk. Id. In 1997, the year on which the Commission's final decision is based, the Organic Cow was contractually committed by output contracts to pay its producers of certified organic milk $18.00 in Vermont, New York, and Massachusetts. Id. at ¶ 6. It must pay $18.25 per hundredweight to Maine producers of certified organic milk. Id. Premiums for quality and butterfat, which average $1.36 per hundredweight, and all transportation expenses, which can amount to an additional $1.20 per hundredweight of milk, are also paid by Organic Cow. Organic Cow's contracts are output contracts which require it to purchase all the milk produced pursuant to the producer's contracts, regardless of market conditions or consumer demand.
The Commission recognized that, as a result of the Flints' toil, organic farmers receive a "pronounced benefit." Id. at 6. The organic farmers who contracted with The Organic Cow Id. (emphasis added).
The producers which supply The Organic Cow are typically small family farms. In Re Organic Cow, HEP-97-006, Jan. 15, 1998 Hearing Tr. at 18-20 ("Record"). Testifying before the Commission, Peter Flint explained that approximately sixty farms produced and supplied organic milk to Organic Cow. Id. Of these sixty, approximately 45 are in Vermont, Maine and Massachusetts; the rest are in New York. Id. These producers average 150 acres per farm and approximately 40-45 cows. They are family farms, some of which "may have an employee." Id.
To determine the price paid to the small family farms which supply it organic milk, Organic Cow sought the help of the Vermont Department of Agriculture. Record at 25-26. After researching Organic Cow's plan, the Department of Agriculture recommended a price "between $17 and $19 per [cwt]." Id. Organic Cow chose to pay $18 per cwt. as "the middle ground." Id.
Organic Cow was in significant financial distress during the relevant July 1997 - December 1997 period when the Compact over-order price regulation was in effect. During that period, Organic Cow suffered substantial operating losses. H.P. Hood, Inc. has a 70% interest in Organic Cow, and despite the fact that under Organic Cow's Articles of Incorporation Hood was not liable for such debts, it loaned Organic Cow more than one million dollars during this period to cover on-going operating expenses.
As put forth in the Compact's statement of purpose:
The mission of the commission is to take such steps as are necessary to assure the continued viability of dairy farming in the northeast, and to assure consumers of an adequate, local supply of pure and wholesome milk.... Dairy farms, and associated suppliers, marketers, processors and retailers, are an integral component of the region's economy. Their ability to provide a stable, local supply of pure, wholesome milk is a matter of great importance to the health and welfare of the region .... the participating states affirm that their ability to regulate the price which northeast dairy farmers receive for their product is essential to the public interest. Assurance of a fair and equitable price for dairy farmers ensures their ability to provide milk to the market and the vitality of the northeast dairy industry, with all the associated benefits.
S.J. Res. 28, 104th Cong., art. 1 § 1 (emphasis added).2 As the Compact states, the benefits flow directly from a "fair and equitable" price paid to dairy farmers. The Compact is to be construed liberally in order to achieve the purposes and intent enunciated in section one. Id. Art. II § (3)(b).
In order to perform its stated purpose, the Commission has authority to adopt an over-order price regulation ("over-order regulation" or "over-order price"). The over-order price is a minimum price producers are required to be paid for milk. The over-order price is established by the Commission and is above the price established in federal marketing orders or by state farm price regulation in the regulated area. In determining the over-order price, the Commission must look at
... the costs of production including, but not limited to the price of feed, the cost of labor including the reasonable value of the producer's own labor and management, machinery expense, ... and the price necessary to yield a reasonable return to the producer and distributor.
Id. at Art. IV § 9(e). Over-order pricing is then set by the Commission in accordance with regulations set forth in 7 C.F.R. §§ 1300.1-1305.1 and 1306.3.
An over-order assessment obligation is then computed monthly from the difference between the over-order price and the federal price for milk. 7 C.F.R. § 1305.1. Processors multiply their total fluid milk sales by the difference between the two amounts and pay that sum to the Commission, which in turn redistributes the proceeds of the payments to the handlers for disbursement to the farmers. The effect is to achieve an increased and stabilized price for milk in the region.
The Commission adopted the over-order regulation effective July 1, 1997. As of July 1, 1998, the over-order price was $16.94 per hundredweight of milk disposed in the New England Compact region. The Commission does not currently recognize any difference in economics and market conditions between conventionally and organically produced milk. Conventional and organic "handlers" alike must pay a "one size fits all" over-order assessment. Therefore the monthly assessment to the Commission required by the over-order price regulation is the same for a handler which pays $14.00 per hundredweight and Organic Cow, which pays over $20.00 per hundredweight. The Commission thus requires Organic Cow to pay an over-order assessment in addition to the premium price it already pays its organic producers.
As of July 1, 1998, Organic Cow had been charged by the Commission with a start up assessment of $749.99, administrative assessments of $2,924.11 and a total unpaid over-order price obligation of $149,033.92.
The Organic Cow alleges that in order to develop a network of organic producers in New England, it was required to guarantee an outlet for organic milk. Farmers, according to the Organic Cow, would not make the transition to organic dairy production without a guaranteed outlet. The Organic Cow further alleges that it must pay its producers substantially in excess of the $16.94 over-order price established by the Commission due to the economics of organic dairy farming.
The Organic Cow also argues that the Commission's insistence on applying the conventional milk over-order obligation to organic milk is irrational. The Commission does not recognize any difference, in either market conditions or economics, between organic and conventional milk handlers relative to the over-order price regulation. As a result, Organic Cow claims that the over-order price assessments threaten its financial viability; and if it ceases to function, many of its organic producers, i.e., small...
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