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OAK TREE FARM DAIRY, INC. v. BUTZ

February 18, 1975

OAK TREE FARM DAIRY, INC., Plaintiff,
v.
EARL L. BUTZ, Secretary of Agriculture of the United States, Defendant



The opinion of the court was delivered by: NEAHER

NEAHER, District Judge.

 Plaintiff, Oak Tree Farm Dairy, Inc. ("Oak Tree"), brought this action pursuant to the Agricultural Marketing Agreement Act of 1937, as amended ("the Act"), 7 U.S.C. § 601 et seq., seeking review under § 608c(15) (B) of a final decision of the defendant Secretary of Agriculture ("the Secretary") which upheld the validity of a portion of Milk Marketing Order No. 2 ("Order 2"), 7 C.F.R. 1002, promulgated under 7 U.S.C. § 608c(1). Defendant has moved for summary judgment and plaintiff has similarly cross-moved, both parties agreeing there are no material issues of fact.

 I.

 Oak Tree is a licensed milk handler *fn1" conducting business in the New York-New Jersey marketing area, the area subject to Order 2. On June 29, 1970, Oak Tree petitioned the Secretary for a hearing, seeking a review of the validity of § 1002.42 of Order 2. *fn2" Following a hearing, the departmental judicial officer finally dismissed the petition, finding the challenged order to be fully in accord with the Secretary's authority under the Act. He further found that plaintiff had failed to overcome the presumption of the existence of facts which justify § 1002.42. On October 3, 1972, plaintiff's request for reconsideration was denied. This action was timely filed thereafter and subsequently oral argument was heard on the respective motions for summary judgment now before the court.

 The legislative scheme of the Act under which Order 2 was made is too complex to be set forth at length here, and has been adequately treated in Zuber v. Allen, 396 U.S. 168, 177, 24 L. Ed. 2d 345, 90 S. Ct. 314 (1969); Lehigh Valley Coop. Farmers, Inc. v. United States, 370 U.S. 76, 78, 82 S. Ct. 1168, 8 L. Ed. 2d 345 (1962); and United States v. Rock Royal Co-Operative, Inc., 307 U.S. 533, 542-48, 83 L. Ed. 1446, 59 S. Ct. 993 (1939).

 In brief, the Act provides a method for fixing a uniform, average blend price which must be paid to all producers *fn3" regardless of the actual use to which their milk is put. In general, milk used in its fluid state is placed in Class I, while milk used in the manufacture of other dairy products, such as butter and cheese, is placed in Class II. Because of the lower processing costs incurred by a handler dealing in fluid milk, producers on an unregulated market would command a higher price for milk used as Class I than for milk earmarked for Class II use, even though the products sold to the handlers are otherwise indistinguishable. It was to prevent cutthroat competition among farmers for the Class I market, and to counter the effects upon the consumer of seasonal fluctuations in supply, that the Act was passed. Under the present scheme, since the handlers of Class I milk ordinarily receive their milk supply at a blended price below its use value and Class II milk handlers, although paying the same blended price, may have to pay more than the Class II use value, the handlers make corresponding payments to and withdrawals from an equalization pool -- the Producer Settlement Fund -- to maintain the uniform blended price to the producers. See Dairylea Cooperative, Inc. v. Butz, 504 F.2d 80, 84-85 (2 Cir. 1974).

 Order 2, like other milk marketing orders, classifies milk according to its ultimate use by the handler as either Class I or Class II milk. Oak Tree is almost exclusively a Class I milk handler. Section 1002.42 of Order 2, about which Oak Tree complains, deals, however, with the classification of "shrinkage." Shrinkage refers to plant loss of milk by reason of adhesion, evaporation, and spillage occurring during transportation, processing, and laboratory sampling. It is a handler's loss that need not be borne by producers because considered an incident "of the business of receiving and processing milk receipts into the forms in which they are sold or disposed of from the handler's plant [and is] directly related thereto." *fn4"

 The classification in which shrinkage is accounted for determines the amount a handler must pay for that lost milk. Section 1002.42 provides the following classification scheme:

 
"Shrinkage shall be classified at each plant or unit as follows:
 
"(a) Compute the total shrinkage of skim milk and butterfat respectively at each plant or unit.
 
"(b) Such shrinkage shall be assigned pro rata to classes of use in accordance with the respective volumes of skim milk and butterfat actually accounted for in each class: Provided, That shrinkage assigned to Class II shall not exceed 2 percent of the skim milk and butterfat, respectively, in such class actually accounted for and any excess thereof shall be classified as Class I-A." *fn5"

 Since Oak Tree handles Class I milk almost exclusively, under Order 2 it must account for almost all shrinkage loss experienced in its operations at the Class I level. Having already paid the producer the uniform blended price for the milk lost through shrinkage, this means that in accounting for shrinkage Oak Tree will almost always be making payments to, rather than receiving proceeds from, the equalization pool.

 The Secretary has promulgated 74 Marketing Orders for particular milk marketing areas, Dairylea Cooperative, supra, 504 F.2d at 84, and readily admits that the shrinkage classification provided in Order 2 for the New York-New Jersey marketing area is unique. In all other marketing areas, a stated percentage, e.g., 2%, of the monthly inventory, is fixed as an upper limit of shrinkage which may be classified as Class II, regardless of use, and excess shrinkage, if any, is normally classified as Class I, regardless of use. In the New York-New Jersey marketing area, the 2% upper limit on Class II shrinkage still applies, but that 2% must represent shrinkage of milk actually used in Class II. As in other areas, excess shrinkage is classified as Class I regardless of use.

 Because shrinkage in any reasonably efficient operation would appear not to exceed 2%, 33 F.R. 7194 (May 15, 1968), the regulatory scheme boils down to a simple economic fact for Oak Tree. Since it is exclusively a fluid milk processor in the New York-New Jersey marketing area, Oak Tree's plant loss cost is proportionately and markedly greater than it would be in any other marketing area. It ...


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