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SMYSER v. BLOCK

February 27, 1984

SMYSER, ROBERT L., SMYSER, RODNEY R., SMYSER'S RICHLAWN FARMS, FETROW, HOWARD S., FETROW, RALPH E., BLUE-KNOLL FARMS, BESHORE, E. WAYNE, BESHORE, JED, BESHORE FARMS, PLAINTIFFS
v.
BLOCK, JOHN R., SECRETARY OF AGRICULTURE and Defendants DAIRYMEN, INC., 10140 Linn Station Road, Louisville, Kentucky 40233, Defendant-Intervenor, Inter-State Milk Producers' Co-op, Maryland & Virginia Milk Producers Ass., Middle Atlantic Div. of Dairymen, Inc., Capitol Milk Producers, Inc., Lehigh Valley Farmers, Valley of VA Cooperative, Pennmarva Dairymen's Federation, Inc., Defendant Intervenors



The opinion of the court was delivered by: CALDWELL

 The instant action has been brought by plaintiff dairy farmers to challenge the validity of two amendments to the Secretary of Agriculture's order regulating the handling of milk in the Middle Atlantic Marketing Area (7 C.F.R. § 1004.1, et seq.). Plaintiffs commenced the action by complaint and motion for a preliminary injunction filed April 27, 1983. The motion for preliminary relief was resolved by stipulation at a hearing held May 11, 1983. The parties have undertaken discovery and now before the court are motions for summary judgment filed by the plaintiffs, defendant John R. Block and the United States Department of Agriculture, as well as defendant-intervenors Dairymen, Inc., and Pennmarva Dairymen's Federation, Inc. These matters are now ripe for our decision.

 Milk is generally produced by individual dairy farmers (producers) who sell their milk either individually or through cooperatives to a milk processor or handler for transportation to a processing plant. The marketing of milk by producers and handlers is carefully controlled by statute, regulations, and order. The Agricultural Adjustment Act, at 7 U.S.C. § 608(c) empowers the Secretary of Agriculture to issue orders regulating the handling of certain agricultural commodities. At 7 U.S.C. § 608(c)(5) the Act states that

 
In the case of milk and its products, orders issued pursuant to this section shall contain one or more of the following terms and conditions, and (except as provided in subsection (7) of this section) no others.

 The subsection goes on to provide, in part pertinent to this lawsuit

 
(ii) for the payment to all producers and associations of producers delivering milk to all handlers of uniform prices for all milk so delivered, irrespective of the uses made of such milk by the individual handler to whom it is delivered subject, in either case, only to adjustments for (a) volume, market, and production differentials customarily applied by the handlers subject to such order, (b) the grade or quality of the milk delivered, (c) the locations at which delivery of such milk is made, (d) a further adjustment to encourage seasonal adjustments in the production of milk through equitable apportionment of the total value of the milk purchased by any handler, or by all handlers, among producers on the basis of their marketings of milk during a representative period of time, which need not be limited to one year; (e) a provision providing for the accumulation and disbursement of a fund to encourage seasonal adjustments in the production of milk may be included in an order; and (f) a further adjustment, equitably to apportion the total value of milk purchased by all handlers among producers on the basis of their marketings of milk, which may be adjusted to reflect the utilization of producer milk by all handlers in any use classification or classifications, during a representative period of one to three years, which will be automatically updated each year. In the event a producer holding a base allocated under this clause (f) shall reduce his marketings, such reduction shall not adversely affect his history of production and marketing for the determination of future bases, or future updating of bases, except that an order may provide that, if a producer reduces his marketings below his base allocation in any one or more use classifications designated in the order, the amount of any such reduction shall be taken into account in determining future bases, or future updating of bases. Bases allocated to producers under this clause (f) may be transferable under an order on such terms and conditions, including those which will prevent bases taking on an unreasonable value, as are prescribed in the order by the Secretary of Agriculture. Provisions shall be made in the order for the allocation of bases under this clause (f) -- (i) for the alleviation of hardship and inequity among producers;

 Pursuant to the authority granted by statute, the Secretary of Agriculture promulgated orders governing the handling of milk in various regions of the United States. The effect of these orders is to create "pooling" of milk producers with a market administrator to enforce the provisions of the order. For example, milk which is used for fluid consumption (Class I milk) commands a higher price than milk of identical quality which is used for butter and cheese (Class II and III milk). Pursuant to the act just quoted, handlers must pay uniform prices depending on the class of milk purchased (depending on the use to which the milk is put) See 7 U.S.C. § 608(c)(5)(A). Producers on the other hand receive a uniform or "blend" price for their milk regardless of the use to which it is ultimately put. See 7 U.S.C. § 608(c)(5)(B)ii. The producer blend price is based on the average value of all milk in the market. The minimum prices to handlers must also be uniform (subject only to authorized differentials) with respect to the use to which the milk is put. The Market Administrator requires all handlers to account for the use value of their milk purchases to him and to pay the blend prices to the producers or cooperatives selling to the handler. The administrator acts as trustee of a "producer-settlement fund," requiring handlers whose average use value is higher than the market average to pay into the fund, while allowing handlers with lower averages to draw from the fund in order to have sufficient funds to pay their producers the "blend" price.

 The problem which the challenged action by the Secretary attempted to address was brought about by the convergence of a nationwide trend and a seasonal event peculiar to the dairy industry. In recent years, there has been a trend toward an increase in milk production relative to demand. This, apparently, has led to the closing of a number of milk plants in the Middle Atlantic milk pooling area. The seasonal event is the springtime "freshening" of dairy cows which results in a period of increased milk production known as the "spring flush." Defendant-intervenors and others feared that the coincidence of these two factors would result in serious disruption in the milk market in the Spring of 1982 possibly causing producers to dump quantities of Class II and Class III milk which they would be unable to sell to handlers. The idea was that handlers would be unable to find a market for the milk at a pool plant within the marketing region, and would refuse to purchase because of the costs involved in transporting the milk to a distant plant.

 The amendments adopted in 1983 were identical to those in 1982 and added a new section to 7 C.F.R. § 1004.60 providing that the market administrator shall

 
(f) With respect to milk marketed on and after the effective date hereof through June, 1982, subtract the amount obtained by multiplying the pounds of bulk fluid milk products that were transferred or diverted from a pool plant to a nonpool plant and classified as Class II milk pursuant to § 1004.42(d) or § 1004.42(e)(3) by a rate for each truckload of milk so moved that is equal to 3.6 cents per hundredweight for each 10 miles or fraction thereof that the nonpool plant is located more than 200 miles (as determined by the market administrator) from the nearest of the following locations: the city hall in Philadelphia, Pennsylvania; the zero milestone in Washington, D.C.; the city hall in Baltimore, Maryland; the transferor plant; or, for diversions, the pool plant of last receipt for the major portion of milk on the load or the courthouse of the county where the major portion of the milk so diverted was produced. No credit shall apply to the total quantity of milk so moved to a given nonpool plant by a handler during the month if any portion of the milk is assigned to Class I.

 It is this amendment to the milk marketing order to which plaintiffs object. Plaintiffs' challenges are readily divisible into three major areas: 1) The transportation credits are not authorized by the Agricultural Marketing Agreement Act, 2) the procedures used in promulgating the amendment were violative of the requirements of the Administrative Procedure Act and the Rules of Procedure of the Department of Agriculture, and 3) that the Secretary abused his discretion by failing to consider available alternatives and by basing his decision on findings not supported by substantial evidence.

 We first address the question of whether the transportation credits are authorized by the Agricultural Marketing Agreement Act. The Act provides that

 
In the case of milk and its products, orders issued pursuant to this section shall contain one or more of the following terms and conditions, and (except as provided in ...

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