IN RE SEPTEMBER 28, 2006 ORDER OF DIRECTOR DIVISION OF MARKETING AND DEVELOPMENT, NEW JERSEY DEPARTMENT OF AGRICULTURE

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0827-06T10827-06T1

IN RE SEPTEMBER 28, 2006 ORDER

OF DIRECTOR OF THE DIVISION OF

MARKETING AND DEVELOPMENT, NEW

JERSEY DEPARTMENT OF AGRICULTURE

_______________________________________

 

Argued December 12, 2006 - Decided December 27, 2006

Before Judges Lisa, Holston, Jr. and Grall.

On appeal from the New Jersey Department of

Agriculture.

Charles M. English, Jr. (Thelen Reid & Priest) of the District of Columbia bar, admitted pro hac vice, argued the cause for appellant New York State Dairy Foods, Inc. (Thelen Reid & Priest, attorneys; Michael J. Connolly, Mr. English and Wendy M. Yoviene, of the District of Columbia bar, admitted pro hac vice, on the brief).

Kristen D. Heinzerling, Deputy Attorney General, argued the cause for

respondent Director of the Division of Marketing & Development, New Jersey Department of Agriculture (Stuart Rabner, Attorney General, attorney; Michael J. Haas, Assistant Attorney General, of counsel; Ms. Heinzerling and Christine Piatek, Deputy Attorney General, on the brief).

Marvin Beshore, of the Pennsylvania bar, admitted pro hac vice, argued the cause for intervenors/respondents Association of Dairy Cooperatives in the Northeast and Dairy Marketing Services (McTighe & McTighe, Mr. Beshore, attorneys; Arthur A. McTighe and Mr. Beshore, on the brief).

PER CURIAM

This appeal is from an order fixing milk prices issued by the Director of the Division of Marketing and Development (Director) of the Department of Agriculture (Department) pursuant to N.J.S.A. 4:12A-22 and N.J.S.A. 4:12A-23. The order imposes two surcharges. The first is a "fuel adjustment add-on" based on the increased price of diesel fuel; for every hundredweight (one hundred pounds or "cwt.") of raw milk, a purchaser will pay a premium equivalent to $.03 for every $.10 that the price for diesel fuel during the prior month exceeds the 2002 price of diesel fuel. The second is a premium for milk that is "rBST-free"; that charge is $.76 per hundredweight for milk from cows that are not given an artificial growth hormone.

The appellant is New York State Dairy Foods, Inc. (NYSDF), which is a trade association of businesses that purchase and process milk from farmers in this State and elsewhere. NYSDF is "directly affected" by the order and its appeal is authorized by N.J.S.A. 4:1-34. The respondents are the Department, the Association of Dairy Cooperatives in the Northeast (ASDCNE) and Dairy Marketing Services, LLC (DMS). ASDCNE and DMS are milk marketing agents for dairy farmers in New Jersey, and we granted their joint application to intervene.

NYSDF argues that the Director gave inadequate notice, chilled participation by failing to ensure processors and distributors that they would not be required to disclose confidential information, and issued an order that is arbitrary, capricious, unsupported by the evidence and likely to produce "disastrous effects." We conclude that the $.76 premium for "rBST-free" milk is not supported by sufficient credible evidence in the record and invalidate that premium, but we reject NYSDF's procedural and substantive challenges to the fuel surcharge, which is supported by the evidence and neither arbitrary nor capricious.

In July 2006 the Boards of Agriculture of Gloucester, Salem and Sussex Counties and the Sussex County Co-operative Milk Producers Association advised the Department that dairy farming in New Jersey was in jeopardy due to the increased costs of producing raw milk and the decreased prices paid for the product. They asked the Department to schedule hearings and consider whether to impose a mandatory "over-order premium," which is a state-ordered premium that is added to the minimum price set by federal "order."

The Director, who is authorized to fix milk prices after a public hearing on the merits, N.J.S.A. 4:12A-19 to -23, responded to the requests for a hearing. On July 14, 2006, the Director published notice that he would conduct a hearing on July 24, 2006, at the request of New Jersey dairy farmers who claimed that "decline in revenues [and] increased costs of production such as increased energy costs, elevated feed prices and extreme weather conditions" required "emergency price relief" "to keep [New Jersey's] remaining dairy farmers in production." The Director's notice advised that the primary purpose of the hearing was to take testimony on whether "emergency action," including fixing "a minimum milk price above the federal order minimum prices," should be taken and "the appropriate formula for fixing the price."

Farmers, processors and distributors, and an expert in animal nutrition employed by Rutgers University were among those who testified at the July 24 hearing. There was no dispute about the difficulty of the circumstances confronting dairy farmers in the northeastern section of the United States and in New Jersey in particular. Since 2001 New Jersey has lost thirty-six percent of its dairy operations. Currently, there are, at most, 115 milk producers, dairy farmers. The number of milk processors has also declined. In June 2006 the consumer was paying $3.49 for a gallon of milk and the producer was receiving $1.07 per gallon, which was down from an all time high price of $1.70 per gallon in May 2004.

While the price that producers receive for milk has declined, the cost of producing milk has increased. The price of energy needed to produce a hundredweight of milk, "fuel, lube and electricity," was up by twenty-two percent from June 2005. In one year, fertilizer prices were up by eight and seven-tenths percent, and the cost of agricultural chemicals had risen by nine and nine-tenths percent. The cost of feed had increased by sixteen percent since 1996. Increased property taxes and labor costs were also cited as contributing to the economic difficulties of dairy farmers in New Jersey. One Sussex County producer estimated that the average dairy farmer in New Jersey is losing about $45,000 per year under current circumstances. Two farmers mentioned that recent demands from processors for "rBST-free" milk, would further reduce their income. Others testified that large processors had recently reduced or eliminated voluntary premiums previously paid for higher quality milk and shifted hauling costs to the farmer.

No witness presented a specific proposal to address the situation. There was general discussion of the need for the Director to impose a premium over "federal order minimum prices." The farmers, regulators and processors also discussed the possibility that an over-order premium would cause large scale processors, who purchase approximately ninety-five percent of the milk produced on New Jersey farms, to buy milk from producers in other states and leave New Jersey producers without an accessible market. Witnesses also suggested a tax or increased licensing fees.

On August 8, 2006, the Director issued a fourteen-page report summarizing his findings and concluding that the evidence established an immediate need for a minimum price but was not sufficient to "properly establish a formula for setting [that] minimum price." The Director explained that he would hold a second hearing to consider additional evidence and issues, including price gouging, voluntary premiums and hauling costs.

On August 14, 2006, the Director issued a notice that the second hearing would be held on August 29, 2006. The notice states that "[t]he primary purpose . . . is to receive testimony regarding whether emergency action should be taken by the Director to:"

(1) establish minimum prices throughout the entire milk marketing system, and if so the appropriate formula to be applied; (2) promulgate an anti-price gouging regulation and if so, the appropriate formula to be applied; (3) promulgate rules to regulate the manner in which hauling charges are assessed to producers; and (4) promulgate rules to regulate the manner in which premiums are paid to producers.

The notice also advised witnesses to be prepared to present testimony on the following: assessment of hauling charges; payment of voluntary premiums; costs of production, processing, procurement, packaging, distribution and retailing; and wholesale and retail prices.

Producers, processors and distributors attended the second hearing. Producers testified to marked differences between revenues for the first six months of 2006 and revenues for the same period in 2005. One reported a decrease of $13,547.49, another a decrease of $23,500. The producers were operating at a loss. Current production costs were between $15 and $15.70 per hundredweight, but producers were only receiving between $12.26 and $12.36 per hundredweight. Processors presented evidence that producers in other states were reporting lower production costs.

A premium to adjust for rising fuel costs was discussed. DMS proposed a fuel energy adjustment program, similar to the one adopted by the Pennsylvania Milk Marketing Board, which would be applied without credit for voluntary premiums. DMS and ASDCNE are currently working with regulators in other states in the northeast to develop similar programs. DMS's formula is based on $1.40, which was the price for diesel fuel in the Atlantic region of the country in 2002 as reported by the United States Department of Energy. DMS uses that base price to adjust fees it pays to haulers. The proposed adjustment fluctuates with the cost of diesel fuel during the prior month, $.03 for every $.10 above $1.40; $.01 for transportation costs and $.02 for "fuel-driven farm costs related to planting and harvesting, . . . utilit[ies] and fertilizer" that were discussed by the expert from Rutgers. Based on the price of diesel fuel in July 2006, the fuel adjustment for August 2006 would have been $.45 per hundredweight.

A premium for "rBST-free" milk was suggested by a farmer who described himself as one of four who refused to agree to a processor's demand for such milk until they agreed on a premium. A second farmer explained that cows that are given Posilac, an FDA-approved growth hormone manufactured by Monsanto, produce an additional ten pounds of milk per day and increase the farm's overall production and profitability. She also explained that consumer demand for milk without rBST has led processors to demand "rBST-free" milk.

The farmer read from and introduced into evidence a pamphlet she received from Monsanto. The pamphlet provides a formula for calculating the "opportunity cost" lost by a farmer who produces "rBST-free" milk. The pamphlet illustrates application of the formula using a hypothetical milk price, hypothetical costs and a hypothetical herd of 100 cows. the hypothetical result is an "opportunity cost" of $.76 per hundredweight.

A representative of a large dairy processor addressed the question of premiums for "rBST-free" milk. He explained the processor's position as follows:

There has been some discussion that there should be a premium for rBST-free milk as it demands a premium in the marketplace. We do not price our Farmland or Welsh branded products any higher when we make an rBST-free claim. There should not be any additional premium for rBST-free milk or it would cause unfair and an unjust additional cost.

A farmer challenged the processor's testimony and stated that the same processor was paying him a premium voluntarily. The processor confirmed that premiums were being paid but contended that his company should not be paying premiums. While some producers successfully negotiated voluntary premiums, others were unable to reach an agreement.

Representatives of the industry presented testimony from an economist and an accountant. The experts discussed premiums, farming costs, market conditions and the complexities of the federal pricing system. Their testimony was based on industry averages. The experts urged caution in adjusting prices and education that would increase efficiency on the farm.

At the conclusion of the testimony on August 29, the Director adjourned the second hearing until August 31 in order to give participants one day to review the exhibits that had been introduced or proposed for introduction.

On August 31 the Director entertained and ruled upon objections to the exhibits. No additional testimony was taken, and no one asked to reopen the hearing. The Director issued his final decision on September 28, 2006.

In part pertinent to the "fuel adjustment add-on," the Director found that producers were operating at a loss due to increases in operating costs related to fuel and feed and decreases in milk prices. He found that the producers bargaining power was diminished because there were fewer processors and those processors were able to procure milk from other states. The Director concluded that a six-month fuel adjustment program was needed "for the benefit of the New Jersey producers, who currently have no mechanism to recover[] their increased fuel costs." The Director found it "reasonable to utilize a formula [for that fuel adjustment] currently being utilized by other members of the dairy industry." He adopted the formula presented by DMS.

The Director made the following findings relevant to the premium for "rBST-free" milk: Posilac results in increased milk production; the processors demand "rBST-free" milk; negotiations over premiums for "rBST-free" milk were difficult; and "rBST-free" milk is a value-added product. The Director concluded that a processor demanding "rBST-free" milk "should be obligated at least to cover the costs of production." He imposed a premium of $.76 per hundredweight, to be effective on the filing of an emergency rule for a period of six months.

The principles that govern our review of the Director's exercise of authority are well-established. Garden State Farms, Inc. v. Mathis, 61 N.J. 406 (1972). The "business of producing and distributing milk is affected with a public interest and subject to governmental regulation, including price-fixing, provided, of course, the particular regulation is substantially related to a legitimate end sought to be attained." Id. at 422.

The law "was designed and intended to be a permanent measure authorizing regulation of all aspects of the industry as the agency might determine from time to time to be necessary or advisable for the benefit of all interested in the production, distribution, sale or consumption of milk." Id. at 423. "A current emergency may be different in kind from that existing at the time of enactment . . . ." Id. at 424. And, the Director has the authority to adjust prices to address circumstances, conditions and practices that "'are likely to result in the demoralization of agricultural interest in this State engaged in the production of milk . . . .'" Ibid. (quoting N.J.S.A. 4:12A-21).

In this case, there is no question that the severe problems confronting New Jersey milk producers are supported by sufficient credible evidence. The record leaves no room to question the existence of circumstances adequate to permit the Director to act in furtherance of his statutory obligation to ensure the continued production of milk on farms in New Jersey. It is equally clear from the record that the actions were taken for a purpose "substantially related to [that] legitimate end." See id. at 422, 425.

The Supreme Court has determined that the Director may exercise his authority to fix prices to ensure a reasonable return and may provide relief where federal marketing orders are inadequate. Id. at 426. The Court has recognized that market forces such as increased hauling prices and heavy price-cutting elsewhere may require such action. Id. at 426-27.

The Director's price-fixing orders are "'quasi-judicial' in character." Id. at 427. We must "determine whether the findings made could reasonably have been reached on sufficient credible evidence present in the record, considering the proofs as a whole, with due regard to the opportunity of the one who heard the witnesses to judge of their credibility . . . and . . . with due regard also to the agency's expertise where such expertise is a pertinent factor." Ibid. (internal quotations omitted) (alterations in original). "'[T]he Legislature expected the reviewing court to do more than merely express an abiding faith in the agency's expertise; . . . it wished the court to see to it that price fixing rests upon evidence rather than upon a conclusional assertion of what the Director and his staff know or fear.'" Id. at 427-28 (quoting Garden State Farms, Inc. v. Hoffman, 46 N.J. 595, 599-600 (1966)).

The Director's decision to act to provide immediate relief for producers is well-supported. The more difficult question is whether the premiums imposed are adequately supported by the record. See id. at 428 (noting that review requires consideration of the "figures").

The producers testified about the decline in volume of milk that is associated with production of "rBST-free" milk. Their testimony was adequate to support some action to avoid further decline in revenues. Their testimony about increasingly difficult negotiations over voluntary premiums further supports the Director's conclusion that a mandatory premium is essential.

The problem posed by this record is that the Director received no credible evidence that supports $.76 per hundredweight premium for "rBST-free" milk. The only evidence about the "opportunity cost" lost by a farmer who produces that milk was hearsay. While the Director is not bound by the formal rules of evidence, there must be some competent evidence to support a finding. See R.K. v. Dep't of Human Servs., 215 N.J. Super. 342, 347-48 (App. Div. 1987).

Even if the Monsanto pamphlet were deemed reliable, the Director did not provide findings to explain how or why he concluded that the proper measure of the "opportunity cost" in New Jersey was the same as the "opportunity cost" of the hypothetical farm used in the pamphlet. The $.76 figure, which is the estimated lost revenue for the hypothetical farm, is based upon a specific milk price, feed cost and herd size. The Director did not explain how the predicate facts related to farms in New Jersey. The hypothetical average milk price used in the pamphlet is not the average price of milk in New Jersey as found by the Director. The Director did not explain why it is appropriate to calculate the "opportunity cost" based on a 100-cow herd. Without an explanation, we can only conclude that the $.76 premium is arbitrary. A "conclusional assertion" that this $.76 premium is necessary and proper is inadequate. Garden State Farms, supra, 61 N.J. at 428.

NYSDF raises an additional objection to the "rBST-free" premium. NYSDF argues that the Director did not give adequate notice that he would consider a premium for "rBST-free" milk and, as a consequence, members of the industry were not in a position to address the issue. Because we have concluded that the "rBST-free" premium is not supported by substantial credible evidence in the record, we need not consider this objection. However, because the Director relies upon this court's decision in In re Port Murray Dairy Co., 6 N.J. Super. 285 (App. Div. 1950), we note that its precedential value is less than clear. In that case we focused on the legislative nature of milk price-fixing hearings and concluded that notice need not be as specific as notice required for a "quasi-judicial" hearing. Id. at 294-95. Subsequent decisions of the Supreme Court have described the Director's price-fixing hearings as "'quasi-judicial' in character." Garden State Farms, supra, 61 N.J. at 427 (citing Hoffman, supra, 46 N.J. at 599-600; Abbotts Dairies v. Armstrong, 14 N.J. 319, 331-33 (1954)).

In contrast, NYSDF received adequate notice of the "fuel adjustment add-on" and the formula. The Director's intention to address the impact of rising fuel prices by fixing prices was clearly indicated in both the public notices and the decision the Director issued after the first hearing. DMS described the formula and its use in detail. NYSDF did not present or ask for an opportunity to present conflicting evidence. The fuel-adjustment order is also sufficiently supported by the record, and the Director explained his reasons for adopting that formula. Where there is ample support in a record developed after a hearing on adequate notice, "[t]he element of agency expertise enters heavily into evaluation of [that] order" and "due regard must be accorded [the Director's] expertise." Garden State Farms, supra, 61 N.J. at 429.

NYSDF also contends that the Director violated regulations that recognize the confidentiality of proprietary information. Specifically, NYSDF alleges that the Director chilled the presentation of evidence by failing to give a blanket assurance that he would permit witnesses to invoke a privilege of confidentiality and by threatening to invoke his subpoena power. The record does not support these allegations.

Two witnesses testified on behalf of NYSDF and other processors. In advance of their testimony, the Director ruled that both witnesses could base their testimony on industry averages and decline to disclose confidential information about particular processors. No other witness asked to invoke a privilege.

Furthermore, the Director did not threaten to use his subpoena in a manner that could have chilled testimony. An attorney representing processors acknowledged that she was advised, prior to the hearing, that the Director would not subpoena witnesses. When the attorney raised the issue at the hearing, the Director informed her that he could exercise his subpoena power at a later date. The attorney acknowledged that any person subpoenaed by the Director at a later date would have an adequate opportunity to challenge the subpoena in court. Our review of the record convinces us that the Director made no statement or ruling that would cause any reasonable business person to fear that the Director would compel public disclosure of confidential information. The argument lacks sufficient merit to warrant further discussion. See R. 2:11-3(e)(1)(E).

In summary, we reverse that portion of the order that establishes a premium of $.76 per hundredweight for "rBST-free" milk and affirm that portion of the order that imposes a "fuel adjustment add-on," which the Director intends to implement by emergency rule, pursuant to N.J.S.A. 52:14B-4 and N.J.A.C. 1:30-6.5.

 

This price-fixing order, which was to take effect on October 16, 2006, was automatically stayed by the filing of this appeal on October 10, 2006. N.J.S.A. 4:1-35. We denied the Department's motion to vacate the statutory stay on October 31, 2006, accelerated the appeal, issued a briefing schedule and heard oral argument on December 12, 2006.

The federal order price varies with the grade of the raw milk and whether it is sold for use as fluid milk or to make dairy products such as butter and cheese. The history and operation of the federal "orders" that set minimum prices for milk for separate geographic areas of the country and the relationship between state and federal laws regulating milk are discussed in Cloverland-Green Spring Diaries, Inc. v. Pennsylvania Milk Mktg. Bd., 462 F.3d 249, 252-57 (3d Cir. 2006). Several states including New York, Pennsylvania and New Jersey have laws that permit additional regulation of milk prices. See id. at 256. In addition, producers and processors may agree to additional voluntary premiums based on the quality of the milk or the volume of sales.

Initially, the Act vested various powers in a Milk Control Board and a Director of Milk Control. These entities were abolished. N.J.S.A. 4:1-29. Currently, the Director exercises the authority granted by N.J.S.A. 4:12A-1 to -71. See N.J.S.A. 4:1-32; N.J.S.A. 4:12A-1; Reorganization Plan No. 003-1995; N.J.S.A. 4:1-17; N.J.S.A. 4:1-24; Reorganization Plan No. 003-2002.

Nothing in this opinion is intended to preclude the Director from conducting additional hearings on a premium for "rBST-free" milk.

NYSDF's appendix includes affidavits in support of this claim that were not offered below. NYSDF's brief refers to the documents. The State has moved to strike the materials that are not part of the record and the references to those materials. We grant that motion.

(continued)

(continued)

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A-0827-06T1

December 27, 2006