Schepps Dairy, Inc. v. Bergland, 77-1881

• Decision Date: 25 February 1980
• Docket Number: No. 77-1881,77-1881
• Citation: 202 U.S.App.D.C. 11,628 F.2d 11
• Parties: SCHEPPS DAIRY, INC., a corporation, Appellant, v. Bob BERGLAND, Secretary, Department of Agriculture.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 11

628 F.2d 11

202 U.S.App.D.C. 11

SCHEPPS DAIRY, INC., a corporation, Appellant, v. Bob BERGLAND, Secretary, Department of Agriculture.

No. 77-1881.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 3, 1978.

Decided Nov. 19, 1979.

As amended an Denied of Rehearing Feb. 25, 1980.

Appeal from the United States District Court for the District of Columbia (D.C.Civil Action No. 76-1984).

Carlyle C. Ring, Jr., Washington, D. C., with whom Lawrence D. Hollman, Washington, D. C., was on the brief, for appellant.

John H. Vetne, Washington, D. C., a member of the bar of the Supreme Court of Michigan, pro hac vice, by special leave of court, with whom Earl J. Silbert, U. S. Atty., Washington, D. C., at the time the brief was filed, William Kanter, Atty., Dept. of Justice, James Michael Kelly and Raymond W. Fullerton, Asst. Gen. Counsel, U. S. Dept. of Agriculture, Washington, D. C., were on the brief, for appellees. Barbara Allen Babcock, Asst. Atty. Gen., U. S. Dept. of Justice, Washington, D. C., also entered an appearance for appellee.

Before ROBINSON and WILKEY, Circuit Judges, and HAROLD H. GREENE, ^* United States District Judge for the District of Columbia.

Opinion for the Court filed by Circuit Judge SPOTTSWOOD W. ROBINSON, III.

Dissenting Opinion filed by Circuit Judge WILKEY.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

Schepps Dairy, Inc. (Schepps), a regulated "handler" ¹ of milk with a processing plant in Dallas, Texas, brought suit in the District Court challenging certain features of the Secretary of Agriculture's 1975 decision promulgating a pricing order for the Texas milk-marketing area. ² The District Court sustained the Secretary's motion for summary judgment, ³ and Schepps tenders three issues for our review.

First, and of foremost importance to the administration of federal milk-pricing orders, is whether Section 8c(5)(A) of the Agricultural Marketing Agreement Act of 1937 ⁴ requires the Secretary to modify uniform minimum prices payable to milk producers by regulated handlers through "location adjustments" that are precisely reflective of differences in the costs of transporting milk from producing areas to the respective processing plants of the various handlers. Second is the related question whether location adjustments taking into account less than the full transportation cost differentials create trade barriers prohibited by Section 8c(5)(G). ⁵ Third is a challenge to the Secretary's designation in the Texas order of a one-month "current marketing period" for purposes of terminating regulation pursuant to Section 8c(16)(B). ⁶ We affirm.

I. HISTORICAL AND ADMINISTRATIVE BACKGROUND

A. Federal Milk-Marketing Orders

For nearly a half-century, the Secretary of Agriculture has pursued a broad and vital role in the establishment of the prices that many handlers pay many producers of milk. The methodology of federal milk price-fixing has roots extending even deeper in our national economic history. As may readily be expected, a brief sketch of the genesis and evolution of federal milk-marketing orders will serve this appeal by placing the legal issues in proper social as well as regulatory perspective. ⁷

As everybody knows, raw milk is a highly perishable commodity. Without refrigeration, it is storable for only very brief periods and transportable for only very short distances. In the early 1900's, dairy farmers "producers" ⁸ usually were thus compelled to deal with the one or the very few local milk processors available, who accordingly exercised some degree of monopsony power. ⁹ Moreover, the milk industry was characterized by seasonal overproduction; as the Supreme Court has explained,

(i)n order to meet fluid demand which is relatively constant, sufficiently large herds must be maintained to supply winter needs. The result is oversupply in the more fruitful months. The historical tendency prior to regulation was for milk distributors, 'handlers,' to take advantage of this surplus to obtain bargains during glut periods. ¹⁰

To correct this discrepancy in bargaining power, Congress enacted legislation enabling dairy farmers to form cooperatives to pool their milk and eliminate overproduction. ¹¹ These cooperatives established classified pricing schemes based on the use to be made of the milk. They priced milk destined for fluid consumption class I milk higher than milk slated for manufacture into dairy products such as cheese class II milk. Though a small part of the price differential might represent cost differences, the bulk was attributable simply to a desire to exploit the relatively inelastic demand for fluid milk without unduly inhibiting the demand for manufactured milk products. ¹² To spread the benefits of this pricing strategy among their members, cooperatives would multiply class I prices by the amount of fluid milk sold, and class II prices by the amount of manufactured milk sold, and divide the sum of these products by the total quantity of milk sold to arrive at the "blend price" its members would receive for delivered milk. ¹³

The profitability of this system encouraged dairy farmers to increase their output. It also invited farmers selling a higher percentage of their milk for fluid purposes than the cooperative generally to abandon the pooling arrangement and deal individually, and in this manner to realize more than the blend price. This in turn germinated disputes among cooperatives and handlers who dealt with free-lance farmers, and as a consequence, milk markets became highly unstable during the late 1920's. ¹⁴ During the Great Depression, demand for fluid milk fell, prices declined drastically and the entire cooperative system collapsed, to the farmers' severe detriment. ¹⁵

Congress reacted by passing the Agricultural Adjustment Act of 1933, which established a licensing system designed to "reestablish prices to farmers at a level that will give agricultural commodities a purchasing power . . . equivalent to the purchasing power of agricultural commodities in the base period," which extended from August, 1909, to July, 1914. ¹⁶ To supplement the provisions of that legislation, and to confine the Secretary of Agriculture's authority within the constitutional limits that very recently had been driven home by the Supreme Court, ¹⁷ Congress amended the Agricultural Adjustment Act in 1935. ¹⁸ The 1935 amendments to Section 8(3) of the 1933 Act were basically carried over into Section 8c of the new Agricultural Marketing Agreement Act of 1937, ¹⁹ which largely controls the instant dispute.

The present statutory provisions can be seen as a shoring, with the power of the Federal Government, of the classified pricing scheme initiated by the cooperatives. Not all of the milk industry is federally regulated, however. ²⁰ Only if producers and handlers so agree, or if two-thirds of the producers or the producers of two-thirds of the output in the area wish, are federal price controls imposed. ²¹ In each regulated milk-marketing area, class I and II minimum prices are established. No maximum prices are set; producers are free to bargain with handlers for better deals. ²²

Producers are largely indifferent to whether their milk is used for class I or II purposes, for they receive a blend price. On the other hand, processors must pay at least the minimum class I and II prices. The variance among handlers in the percentages of milk assigned to fluid and manufacturing purposes means that a handler may pay more or less than the producer from whom he is purchasing receives. Any handler who uses more than the average percentage of class I milk must pay the difference over the blend price into a "producers-settlement fund," from which a handler who uses less than the average percentage of class I milk is compensated. ²³

Minimum class I prices, however, are not necessarily uniform across the entire area covered by a milk-marketing order. The requirement of uniform prices is statutorily subject to adjustments "which compensate or reward the producer for providing an economic service or benefit to the handler." ²⁴ Milk-producing regions covered by an order are often distant from consuming centers, and chief among the adjustments enumerated in the Act is one for "the locations at which delivery of . . . milk . . . is made to . . . handlers." ²⁵ The location adjustment honors the fact that a handler who receives milk near consuming centers has a more valuable commodity than a handler who takes in milk in an area further out where it is produced cheaply, but who must undertake the burden of transporting the processed product to consumer markets. ²⁶ It is the nature of the location adjustment that is the focus of this case.

B. The Texas Marketing Order

In 1973, an association of milk producers proposed that the six then-existing Texas orders be merged. The Secretary solicited comments and additional recommendations from interested parties. Schepps, a handler with a processing plant in Dallas, advocated that the intra-market location adjustment be increased from 1.5 cents per hundredweight (cwt.) of milk per ten miles of transportation to 2.2 cents per cwt. for every ten miles thereof.

In 1975, the Secretary determined that the separate Texas orders should indeed be consolidated. ²⁷ He also decided that the base class I minimum price for the Texas area should continue to be set by the same methodology utilized before. ²⁸ The base Texas class I price, like base class I prices throughout the Nation, is a function of the current price of manufacturing milk in Minnesota and Wisconsin, ²⁹ the most fertile and efficient milk-producing region in the United States. Producers in the northern parts of those states find it profitable to remain unregulated, and the price their manufacturing milk commands is known as the "M-W price." ³⁰ To insure that class I prices are aligned across the country, class I prices in a particular order approximate the sum of the...