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Arkansas Dairy Cooperative, Inc. v. United States Dep't of Agriculture

September 19, 2008



This case was filed by a group of dairy producers and cooperatives seeking declaratory and injunctive relief from an interim final order of the U.S. Department of Agriculture ("USDA") that reduces the minimum prices dairy farmers receive under federal milk marketing orders ("FMMO").*fn1 Plaintiffs contend that they would be irreparably harmed by allegedly unlawful changes to the minimum price formulas used to determine prices paid to dairy farmers. They maintain that the interim final rule that increases the "make allowance"*fn2 factors in the formulas that establish the federal minimum milk price are unlawful and must be set aside because the regulation failed to consider factors mandated by the Food, Conservation, and Energy Act of 2008 ("FCEA"), Pub L. 110-246, § 1504, 122 Stat. 1651, 1721 (2008), codified at 7 U.S.C. § 608c(17)(G) and the Agricultural Marketing Act of 1937, as amended 7 U.S.C. §§ 602, et seq. ("AMAA"). Plaintiffs originally argued that the order was unlawful because it was scheduled to take effect only twenty-two days after it was promulgated, whereas the statute requires at least thirty days notice. After this lawsuit was filed, USDA postponed the effective date of the amendment; Plaintiffs and Defendants agree that the notice issue is now moot.

Plaintiffs further allege that USDA's decision was based on speculation, was arbitrary and capricious, and that the USDA denied them the right to participate in the hearing process when making its decision.

USDA argues that Plaintiffs are improperly attempting to set aside extensive and careful decision-making by USDA in the complex area of milk price regulation. USDA contends that Plaintiffs' motion should be denied because they have failed to make any of the required showings for such relief. USDA maintains that Plaintiffs have not accurately evaluated the harm to dairy manufacturers nationwide if their motion is granted and that the public interest strongly favors permitting the new regulations to go into effect. Intervenor-Defendant International Dairy Foods Association ("IDFA") argues that this Motion should be denied for lack of standing.

Upon consideration of the motion, the responses and replies thereto, oral argument made at the hearing, and the applicable law, the Court DENIES Plaintiffs' Motion for Preliminary Injunction.


The USDA administers and modifies FMMOs under the authority of the AMAA, which was first enacted by Congress in 1937. See 7 U.S.C. § 608c(7). USDA regulates milk prices in order to advance market stability, supply adequacy, milk cost equity between handlers, and milk price equity between producers. See 64 Fed. Reg. 16,026, 16,109 (April 2, 1999). USDA is concerned with a "more efficient pricing structure that offers cost savings in the organization of the nation's milk supply and in the transportation of milk and dairy products." Id. at 16,113.

FMMOs "provide[] a uniform blend price for sellers of raw milk while imposing non-uniform obligations on the dealers purchasing that milk." West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 189 n.1 (1994). "[S]ince Federal order prices are minimum prices, handlers may increase their pay prices in response to changing supply/demand conditions even when Federal order prices do not increase." 67 Fed. Reg. 67,905, 67,911 (Nov. 7, 2002). "The formulas are used to establish minimum prices for milk used in making particular dairy products, not for determining payments to dairy farmers." Id.

Since fluid milk commands a higher price than milk that is used in the manufacture of other dairy products, the price of milk is determined by the end use of it, even when the milk is of the same quality. See Alto Dairy v. Veneman, 336 F.3d 560, 562 (7th Cir. 2003). For the purposes of the FMMOs, however, USDA classifies milk according to its end use: Class I (for fluid milk products); Class II (for soft dairy products like yogurt and cottage cheese); Class III (for hard and spreadable cheeses); and Class IV (for butter, evaporated milk, and dried milk). See 7 C.F.R. § 1000.40.

The "make allowances" used in Class III and Class IV prices are uniform throughout the country because USDA determined that manufactured dairy products compete in a national market. See 59 Fed. Reg. 42,422 42,424 (Mar. 10, 1994). The make allowance rate remains constant even as product prices may increase or decrease substantially. Though Class I prices begin with the uniform Class III and IV calculations, Class I prices vary by milk marketing order because Class I prices are adjusted by location-specific "differentials" that account for local supply and demand. See 7 C.F.R. § 1000.52. The minimum price for milk components used to make Class II products is determined by adding seventy cents per hundredweight (100 pounds) to the Class IV price, Id. § 1000.50(e), and the minimum prices for milk components used to make Class I products is determined by adding a fixed "differential" (which varies by geographic location) to the higher of the Class III or IV price in a given month, id. §§ 1000.50(a), 1000.52.

After USDA sets make allowances, milk producers are then guaranteed to be paid a uniform minimum price for the milk they sell to handlers, regardless of the end use. This ensures that producers who sell milk to a fluid processor do not get a higher price than producers who sell to a cheese plant. See 7 U.S.C. § 608c(5)(B)(ii). Only two-thirds of milk production in the United States is subject to the orders; the other one-third is subject to state orders, or no orders. USDA issues regional milk orders that govern terms and conditions for the sale of dairy products in specific geographical regions. See § 608c(11)(C).

Under the FMMOs, a dairy plant pays, and a dairy producer receives, minimum prices in the form of federally established "component prices" for butterfat, protein, solids not fat, and other solids, or skim-fat prices that are derived from those component prices. See 7 C.F.R. § 1000.50. There are three factors that are used in the pricing formulas: (1) prices of certain dairy products surveyed by the National Agricultural Statistics Service ("NASS"); (2) a make allowance; and (3) a yield. See id. The levels of each of these factors affect the price that plants pay for raw milk and, ultimately, how much producers received for their milk. Adjustments in any of these factors will impact pricing.

The make allowance and the yield are fixed by rule; the product prices are determined weekly by NASS. See id. Every Friday morning, NASS reports the prices of certain cheeses, butter, non-fat dry milk, and dry whey. USDA then announces the advanced prices based on the weighted average of two weeks of NASS prices. Id. The make allowances represent the allowance for manufacturing raw milk into a finished product. Changes to the make allowance have an inverse relationship to the resulting changes in the minimum prices. Producers benefit from lower make allowances, and manufacturers benefit from higher make allowances. The yield factor represents the amount of a manufactured dairy product that can be produced per hundredweight (100 pounds) of milk. USDA accounts for the portion of the price of milk that is attributable to the costs of the manufacturing process through the make allowance. When the price of manufactured goods is raised, however, USDA recaptures the cost by reporting a higher price for the wholesale product prices to NASS. As a result, any increase in the selling price of manufactured goods used to produce milk will increase the price manufacturers must pay producers for raw milk. Id.

The pricing formulas are changed through formal rule-making hearings. See 7 C.F.R. §§ 900.3--900.18. After the close of the evidentiary portion of the hearing, exceptions and comments are filed by interested parties and an administrative law judge certifies the transcript to USDA. See id. §§ 900.9--900.10. Dairy Programs, a division of USDA, then prepares and submits a recommendation to USDA. The recommendation details the findings of fact, rationale, and the legal authority for its decision. See id. § 900.12. After Dairy Programs has issued its recommendation, another round of comments follow, and a referendum on the order, as amended, is held. Producers facing a referendum must choose between voting out the entire marketing order or approving the amended order. There is no vote on the amendment itself. If the referendum passes, the order is adopted and becomes a final rule. See id. §§ 900.300--311.

In the instant case, the USDA announced its original hearing to address only the proposed adjustments to the make allowances in the pricing formulas in January 2006. An on-the-record hearing was held that month and post-hearing briefs were filed. On September 6, 2006, however, USDA announced that it had insufficient evidence to issue a decision changing the make allowances. Another hearing was reconvened for September 14, 2006. USDA announced a tentative final decision on November 2, 2006 and required comments to be filed by January 22, 2007. See 71 Fed. Reg. 67,467, 67,467 (Nov. 22, 2006). On December 29, 2006, an interim order was issued. A legal challenge was launched to halt the implementation of those make allowances, see Bridgewater Dairy, LLC v. U.S. Dep't of Agric., 2007 WL 634059 (N.D. Ohio Feb. 22, 2007), and the hearing remains open, as USDA has not ruled on the comments or made a final decision.

While the hearing was pending, USDA published notice of the instant Formula Hearing on February 9, 2007. That notice included a number of modifications to the component prices of the formulas but also included proposed adjustments to the make allowances, which was the subject of the hearing that was still pending. The Formula Hearing commenced on July 11, 2007, and was held in three different cities over the course of twelve days. Thirty witnesses provided live testimony before an administrative law judge, and seventy-eight exhibits were entered into evidence. USDA took judicial notice of numerous documents, including government data on fuel and feed prices. USDA also commenced an econometric analysis of the impact of the price increase; the econometric model accounted for various factors including feed costs incurred by producers.*fn3 The comments were filed, and an administrative law judge certified the transcript on October 11, 2007.

On June 16, 2008, USDA issued a tentative partial final decision, and published the decision in the Federal Register four days later. See 73 Fed. Reg. 35,306 (June 20, 2008). USDA concluded that "current make allowance levels are not reflective of the costs manufacturers incur in processing raw milk into the finished products of cheese, butter, [non-fat dry milk], and dry whey" and that the make allowances required adjustment in order to reflect the significant increase in these costs. Id. at 35,324 n.4. Furthermore, USDA noted that while "the costs of producing milk are reflected in the supply and demand conditions for the dairy products," the increased costs incurred by manufacturing and processing that milk can only be recovered by regulatory modification of the make allowance. Id. The formula that USDA used here is the same formula that was used to calculate the make allowance adjustment in 2006. The Secretary of the Department of Agriculture ("Secretary") specifically found that the minimum price for milk reflected the prices of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk. See 73 Fed. Reg. 44,617, 44,618 (July 31, 2008). Producers, by referendum, approved the proposal by a two-thirds vote to increase the make allowances. See id.; see also 7 U.S.C. § 608c(9)(B)(i) (requiring approval of two-thirds of milk producers for milk marketing orders). USDA made a determination that an urgent need existed to increase make allowances, and after a referendum vote, the proposed rule was adopted as an interim final rule on July 31, 2008. See 73 Fed. Reg. at 44,618. But for the instant lawsuit, the Formula Rule was to take effect on an emergency basis on September 1, 2008. See id.

Plaintiffs sent Dairy Programs a letter on August 8, 2008, arguing that the Formula Rule did not comport with statutory requirements and warning that implementation of the rule on August 22, 2008 would violate USDA's rules requiring at least thirty days notice before implementation. Plaintiffs requested that USDA withdraw the Formula Rule, but the request was denied on August 14, 2008. The interim final rule was to take effect September 1, 2008. On August 15, 2008, Plaintiffs filed a motion in this court for a temporary restraining order. In response, USDA postponed the effective date of the rule by one month to allow this Court to rule on Plaintiffs' request for a preliminary injunction.

On August 19, 2008, this Court granted International Dairy Foods Association's ("IDFA") Motion to Intervene as Defendant. On August 26, 2008, this Court granted a Motion to Intervene as Defendants for Agri-Mark, Inc., Associated Milk Producers, Inc., Foremost Farms USA Cooperative, Land O' Lakes, Inc., Michigan Milk Producers Association, and Northwest Dairy Association.

II. ...

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