NORTHEAST DAIRY COMPACT COMMISSION

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In re Petition of Horizon Organic Dairy, Inc.) Docket Number HEP-97-009

on behalf of Farmland Dairies, Inc. )

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Final Decision of the Commission

I. Findings of Fact:

The Northeast Dairy Compact Commission, having received and considered the Original Proposed Findings of Fact, Conclusions of Law, and Decision of the Hearing Panel, Petitionerís Response of December 4, 1997, and the record developed in the proceedings, finds the following facts:

1. Farmland Dairies, Inc., is a New Jersey corporation with principal corporate offices and a milk processing plant at 520 Main Ave., Wallington, New Jersey 07050. Under an oral agreement, Farmland Dairies, Inc. processes and packages milk supplied by Horizon Organic Dairy, Inc. to Horizonís order. Farmland receives an agreed upon fee for this manufacturing service.

2. Horizon Organic Dairy, Inc. is a sales and marketing company, incorporated in Colorado on October 22, 1991, whose principal office is located at 6311 Horizon Lane, Longmont, Colorado 80503. Horizon Organic Dairy certified organic fluid milk products are processed and packaged at Farmland Dairies and sold under the Horizon Organic brand by Horizon Organic Dairy. Title to the milk remains with Horizon at all times until sold to distributors.

3. Farmland Dairies, Inc., is regulated under the Compact over-order price regulation as a partially regulated plant which is located outside of the geographical region but has sales into the region. As a partially regulated plant, pursuant to order of the Commission and the Federal District Court for Massachusetts, Farmland Dairies is currently paying into escrow its monthly over-order obligation and administrative assessment under the Compact over-order price regulation. The certified organic fluid milk processed and packaged on behalf of Horizon Organic Dairy and distributed in New England is included in milk for which Farmland is obligated to report and on which the assessment is based. A portion of Farmland Dairies Compact over-order obligation and administrative assessment which have been paid into escrow have been based on Horizon Organic Dairyís Class I milk distributed in New England.

4. For the Class I milk currently processed and packaged by Farmland Dairies and distributed for Horizon Organic Dairy in New England, Horizon Dairy is obligated to pay $21.25 per hundredweight for certified organic whole milk to producers in Wisconsin under fixed term contracts through December, 1999. Horizon Organic Dairy owns and is currently preparing a dairy farm in Maryland for certification as an organic dairy. It plans to produce organic milk on this farm and to contract for additional raw supply with organic producers in Pennsylvania to supplement its efforts to increase its share of the market in the Eastern United States.

5. The Organic Foods Production Act of 1990, 7 U.S.C. ß 6501 et. seq., establishes a certification program for producers and handlers of agricultural products, which allows a person to sell or label an agricultural product as organically produced only if such product is produced and handled in accordance standards to be promulgated under authority of the act.

    1. Regulations to administer the Organic Foods Production Act of 1990 were issued on December 15, 1997. 62 F.R. 65850 (December 16, 1997). In pertinent part, these regulations provide:

Establishing a national definition for organic would be expected to increase the supply and variety of organic products.

62 F.R. at 65855 c.1.

 

The contributions of national organic standards to increased domestic demand and to expanded international markets for organic products may provide opportunities for current organic producers to expand the scale of their operations. Increased organic production also may provide incentives for input technologies which could lower producersí costs of organic production. Input costs also may decline as a result of economies of scale being achieved in input industries producing for the organic market. Expanded markets could encourage additional farmers and handlers to enter the marketplace.

Id. c. 2-3.

 

7. Organically produced fluid milk and milk products are not differentiated from non-organic fluid milk and milk products by the U. S. Department of Agriculture under the federal Milk Market Order system for regulating milk prices. As a regulated pool plant under Market Order #2, Farmland Dairies, Inc. pays the applicable Class I price established thereby for all milk processed at its facility, including milk processed for Horizon Organic Dairy, Inc.

8. Producer-handlers are provided an exemption from operation of the Compact price regulation by express terms of the Compact. The terms of the Compact exemption align the provision with that provided by federal Milk Market Order: "Producer-handlers as defined in an applicable federal market order shall not be subject to a compact over order price." Compact Article IV. ß 9(d).

9. Other than this exemption for producer-handlers and operation of a diminimus exemption (quantities under 300 quarts per day on average), all Class I fluid milk, organic and non-organic, distributed in New England is regulated uniformly under the compact over-order price regulation.

10. The retail market for organically produced milk is currently valued at approximately $100 million per year. It has experienced a 25% growth rate for each of the past 5 years and is expected to continue to grow at at least that rate. Approximately 2% of the U.S. population is "actively buying" organically produced agricultural products. Another 8% of the U. S. population is "engaged" with the organic retail market and will purchase organic products if they are accessible. Another 22% segment of the U. S. population is "attracted" to organically produced agricultural products.

11. For the 10% of the U. S. population "engaged" and "actively buying" organically produced agricultural products, price is the least important of five values, which also include (in order or importance) food safety, environmental impacts, animal welfare, and social issues related to family farms and rural communities. Among this population, the volume of organic milk purchased is not strongly related to price.

12. Organic milk sells at retail for at a significant premium above non-organic milk.

II. Conclusions of Law

Petitioner seeks an exemption on behalf of Farmland Dairies, Inc. from the Compact over-order price regulation for the certified organic milk that it has processed and packaged at Farmland Dairies in New Jersey for distribution in New England. It seeks this exemption on behalf of Farmland Dairies, Inc., which is regulated under the Compact as a partially regulated plant.

The petitioner argues that:

1. "Organic milk is sufficiently different from non-organic milk so as to justify different regulatory treatment";

2. Horizon Organic Dairy pays a substantially higher price to dairy farmers for their milk than the $16.94 per hundredweight price for Class I milk established as the Compact over-order price and that it is unfair to require Horizon Organic Dairy to pay its premium price and the Compact over-order producer price;

3. The Compact over-order price obligation and administrative assessments will increase its costs, which increase represents a "severe economic hardship" for it and for organic dairymen and organic feed growers; and

4. The economic benefits of the Compact over-order obligation and administrative assessment would accrue to non-organic dairymen, and not at all to organic dairymen who supply the milk.

On the basis of these four arguments, petitioner claims that fairness dictates that its milk be exempted from the regulation. Under the Handler Exemption Procedures, 7 CFR Part 1381, petitioner has the burdens of production and persuasion to prove that "any order, Compact over-order price, or administrative assessment, or any provision of such order or assessment, or any obligation imposed in connection therewith is not in accordance with law". Further, the Rules require petitioner to include in its petition "[a] statement of the grounds on which the terms or provisions of the regulation, order, or administrative assessment or the interpretation or application thereof, which are complained of are challenged as not being in accordance with law."

Petitioner has not presented in support of its petition any specific allegation that the Compact over-order price regulation or its application is not in accordance with law other than its reference to the Organic Foods Production Act of 1990, and the accompanying regulations. Petitionerís primarily fact-based, fairness, arguments present an issue of substantive policy rather than interpretation or application of the law. In addressing such a matter of substantive policy, the Compact Commission is most mindful of the general preference among administrative law commentators for rulemaking over adjudication as a methodology for making deciding such policy issues.

To assess whether petitioner has met its burden, the Compact Commission must analyze the evidence presented in light of petitionerís arguments as articulated in each of the four above propositions:

1. Differentiation of Organic Milk.

Petitionerís claim that "organic milk is sufficiently different from non-organic milk so as to justify different regulatory treatment" is based on the argument that Congress, in enacting the Organic Foods Production Act of 1990, and accompanying regulations recognize organic agricultural products as distinct from other agricultural products. The Act itself authorizes the U.S. Secretary of Agriculture to establish national standards for certification of organically produced agricultural products and prohibits sale or labeling of agricultural products as organically produced unless certified under the standards. The Act establishes no express preference for organic over non-organic agricultural products, however, dairy or otherwise, and its terms therefore do not support petitionerís broad contention that organic milk is so differentiated as to require unique treatment under the Compact regulation.

More specifically, Congress did not include in the Act an exemption or other express provision for distinguishing organic milk from non-organic milk under federal milk market order regulation. Nor has the Agricultural Marketing Agreement Act of 1937 ever been amended to include such an exemption. No distinction is currently recognized under the federal Market Order system.

With regard to the absence of any express, statutory exemption for organic milk, the Compact Commission notes, by contrast, the express recognition of an exemption for producer-handlers under the federal Milk Market Order System and the parallel, express, establishment of such an exemption under the Compact.

While petitioner raises no claimed distinction based on the text of the Compact itself, milk is there defined as "the lacteal secretion of cows and includes all skim, butterfat, or other constituents obtained from separation or any other process. The term is used in its broadest sense and may be further defined by the commission for regulatory purposes." In adopting this language, neither Congress nor any of the six New England state legislatures distinguished between organic and non-organic milk for purposes of price regulation under the Compact. There is no ambiguity that the legislative intent of both the Congress and the six New England state legislatures was to subject to the regulation all Class I milk distributed in New England, organic and non-organic. The plain meaning of the Compact is to authorize price regulation of organic, as well as non-organic, Class I milk.

As further indication of legislative intent, the Compact requires the Commission to apply, adapt and develop the regulatory techniques historically associated with milk marketing. As indicated above, the federal Milk Market Order system historically has recognized no distinction between organic and non-organic milk for purposes of regulation, including after passage of the Organic Foods Production Act of 1990. The Congress and the six New England state legislatures are presumed to have known when adopting the Compact that there was no such distinction recognized in the "techniques historically associated with milk marketing" notwithstanding enactment of the Organic Foods Production Act of 1990. Because they indicated no such distinction or policy preference that would envision different treatment of organic milk in enacting the Compact enabling legislation, the Compact Commission concludes that none was intended.

2. Horizon Organic Dairy Pays Substantially More Than The Compact Over-order Price.

The petitioner argues that because it currently pays to producers substantially more than the Compact over-order price of $16.94 per hundredweight for its raw supply, it is unfair to require it to pay an additional amount. The petitioner has established by credible evidence that it is obligated to pay $21.25 per hundredweight to producers for 3.5% butterfat whole milk for a fixed term ending in December, 1999 and that it is obligated for additional quality premiums. Petitioner further argues that, since its price to producers already exceeds the Compact over-order price of $16.94 and the actual farmer pay price, it is meeting the purposes of the Compact and it is unfair to require it to pay an additional amount for the over-order obligation.

Petitioner reads the purposes of the Compact too narrowly. The mission of the Compact is "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", which is a "matter of great importance to the health and welfare of the region." To achieve that mission, the Compact authorizes the Commission to take steps to promote regulatory uniformity, simplicity, and interstate cooperation and to establish equitable farm prices. In establishing minimum prices, the Commission is required to make specific findings of fact with respect to:

"(1) Whether the public interest will be served by the establishment of minimum milk prices to dairy farmers under Article IV.

    1. What level of prices will assure that producers receive a price sufficient to cover their costs of production and will elicit an adequate supply of milk for the inhabitants of the regulated area and for manufacturing purposes.

(3) Whether the major provisions of the order, other than those fixing minimum milk prices, are in the public interest and are reasonably designed to achieve the purposes of the order."

The Compactís purposes are, therefore, broader than merely establishing equitable prices to producers. In enacting any price regulation, the Commission is also charged by the Compact with ensuring reasonable regulatory uniformity that will have a neutral effect on the milk market. The Compact over-order price established a new and higher Class I benchmark for price for all milk marketed in New England, effective July 1, 1997. The regulation is intended to have no effect on other market forces that influence the supply and demand of Class I milk for New England. The regulation does not, therefore, recognize or give credit for price premiums paid in the market by any processor, whether for organic or non-organic milk.

Contrary to this intended neutral impact, to exempt only certified organic milk would establish a preference resulting in an economic advantage for organic milk processors by exempting them from the cost of the over-order obligation. Any retail or wholesale price differentials between organic and non-organic milk that were evident in the market before July 1, 1997 should be expected to continue after July 1, 1997. The regulation should be neutral to such market-determined effects. Insofar as organic fluid milk products compete with non-organic fluid milk products in the marketplace, especially among the 22% of the U.S. population that is "attracted to" organically produced agricultural products.

3. The Compact Over-order Price Obligation and Administrative Assessments Represent a Severe Economic Hardship.

Petitioner argues that the Compact over-order price obligation and administrative assessment will increase their costs, representing a severe economic hardship for it and for organic dairymen and organic feed growers. The Compact Commission does not find petitionerís argument on this point to be persuasive.

Petitioner conceded at the hearing that it could renegotiate its current fixed price contracts with producers to include the monthly over-order producer price payout in the $21.25 per hundredweight it is currently obligated to pay. Such a provision could mitigate the increase in cost for raw supply to petitioner.

Most significantly, petitionerís own testimony establishes that any remaining increase in price attributable to the over-order obligation and administrative assessment could continue to be built into the petitionerís price structure and passed on to the wholesale and retail marketplace. While petitioner testified that the consequent increase in its price in the marketplace would limit growth of its share of the market, it also submitted evidence that price was the least important of five issues motivating buyers for the 10% of the U.S. population "engaged" in the market for organically produced agricultural products, its target market. If price is of little importance among these consumers, they can be expected to pay a higher price for certified organic milk and the volume sold by petitioner ought not be diminished.

The Compact Commission finds the evidence describing the motivations of buyers in this niche market persuasive that volume sold will be affected minimally by an increase in price. Any short-term impacts of the regulation on petitioner and its competitors in this niche market ought to moderate and equalize over time, especially as uniform treatment of organic and non-organic milk is ensured. The evidence indicates that price increases for petitionerís Class I milk attributable to the Compact over-order price can be born by the market, especially among the "engaged" population. This determination is buttressed by petitionerís characterization of the retail market as including a "significant" premium for organic over non-organic milk.

4. The Economic Benefits of The Compact Over-order Obligation and Administrative Assessment Would Accrue to Non-Organic Dairymen.

Lastly, petitioner argues that the benefits of the Compact over-order obligation and administrative assessment as imposed on organic milk would impermissibly accrue to non-organic dairy farmers, rather than solely to organic dairy farmers who supply the milk. Petitionerís assertion again presents a matter of policy more appropriately defined by statute, or at the least through a rulemaking process. Moreover, as pointed out above, the purposes of the Compact focus on the public interest in providing an adequate, local supply of pure and wholesome milk. This local supply, at a stable price over an extended period of time, will accrue to the benefit of the regionís producers, processors and consumers of both organic and non-organic fluid milk, alike. The Compact Commission, therefore, concludes that this argument is without merit.

5. Conclusions

The Compact Commission concludes that the petitioner has not demonstrated that Compact over-order price regulation and its application to organic milk is not in accordance with the law. It further concludes that regulatory uniformity and neutrality of the Compact over-order price regulation in the marketplace militates against an exemption for certified organic milk from regulation. To grant an exemption would be to recognize a preference not now recognized under the Compact for certified organic milk over non-organic milk. This preference is an issue of substantive policy that is not appropriate to be addressed in this adjudicative process.

III. Based on the above findings of fact and conclusions of law, the Compact Commission orders the following:

1. Petitionerís request on behalf of Farmland Dairies, Inc., for an exemption from the regulation of its certified organic milk processed and packaged by Farmland Dairies and distributed in New England is denied.

2. Farmland Dairies, Inc. is ordered to continue to report and pay into escrow in the Federal District Court for Massachusetts its Compact over-order obligation and administrative assessment on Horizon Organic Dairy milk pending resolution of the case of New York Dairy Foods, Inc., et. al. v. Northeast Dairy Compact Commission, et. al., Docket No. 97-11576-PBS.

Entered this _______ day of January, 1998

IT IS SO ORDERED For the Compact Commission:

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Michael A. Wiers, Chair

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