LEVENTHAL, Circuit Judge:
This action was brought by the appellant Fairmont Foods to obtain review of a decision of the Secretary of Agriculture upholding the validity of a location differential provision of the Federal Milk Marketing Order for the Nebraska — Western Iowa Marketing area, 7 C.F.R. § 1065.51 (1965). The District Court sustained the Secretary's motion for summary judgment. We reverse.
I. The General Regulatory Scheme
Although the mechanics of milk regulation have been described elsewhere,
The Agricultural Marketing Agreement Act of 1937 as amended 7 U.S.C. § 601 et seq. (1964), places upon the Secretary of Agriculture primary responsibility for establishing and maintaining "such orderly marketing conditions for agricultural commodities in interstate commerce as will establish, as the prices to farmers, parity prices * * *."
Section 8c(5) (A) of the Act provides for the classification of milk according to the way in which it is used, and for the establishment of minimum prices to be paid for each class of milk by handlers.
The price payable for each use classification in a particular milk order must, according to the Act, be "uniform as to all handlers."
It is the third adjustment, or "location differential," which is involved in this appeal.
II. The Marketing Order and the Secretary's Decision
On July 15, 1964, notice was given that the Department of Agriculture would hold a hearing on several proposed amendments to Milk Order No. 65, Milk in the Nebraska-Western Iowa Marketing Area.
The Department's decision and Amending Order,
The Secretary's decision was based on two factors. The first was the need to reflect "the cost of moving milk [to the Central and Western Zones] from the areas where supplemental supplies must be obtained" (i. e., from the receiving station at Grand Island, in the Eastern Zone, or from Minnesota and Wisconsin).
The second reason cited by the Secretary in support of these differentials was the need for a proper alignment of the uniform price with the prices of competing markets. The markets referred to are the Eastern Colorado and Black Hills areas, which are regulated under other Orders.
Following the promulgation hearing, Fairmont filed a petition for administrative review with the Secretary of Agriculture. The Judicial Officer to whom the Secretary delegated authority adopted verbatim the findings of fact in the 1965 Decision accompanying the Amending Order, and dismissed Fairmont's objections to the Amending Order. The opinion of the Judicial Officer expanded somewhat on the first ground of decision in the Amending Order, that relating to supply shortages in the Central and Western Zones. He viewed these deficits as part of a broader pattern, wherein milk supplies grew generally shorter as one proceeded west from the Minnesota-Wisconsin dairy complex. As a result, "milk has an increased value as it moves west from the areas of surplus production, that is, Minnesota and Wisconsin, and * * * while there are seasonal surpluses of milk in the Western and Central Zones, to some extent supplemental supplies are imported into the Central and Western Zones."
Fairmont filed a complaint in the District Court on November 3, 1967, seeking judicial review of the Department's decision, as well as injunctive, declaratory
III. The Requirement that Findings of the Secretary Justify Differentials From the Uniform Prices in Minimum Milk Price Orders By Reference to the Limited Grounds Authorized by Congress
In assessing the validity of these differentials, it is important to keep in mind the limited scope of authority that Congress delegated to the Secretary in the field of milk marketing regulations. This is not a case where the power of an agency or officer is bounded only by the broad Congressional mandate that it be exercised in the "public interest." As emphasized by recent court decisions,
On judicial review, it is the function of the court to assure that the Secretary has set forth findings and reasons which fully justify any differential from the uniform price, — and justify them on the limited grounds permitted by Congress, which allow increases in minimum prices to reflect economic service of benefit to handlers. (It may be interpolated that the orders did not preclude handlers from entering into private contracts to pay their suppliers for additional benefits through prices higher than the minimum prices required by the Government's order.) The court must invalidate orders resting on any basis other than such economic reasons, — whether the orders are ascribable to whim, which seems unlikely; or to response to the influence of major farm interests, which may be more likely; or merely bureaucratic error in supposing that the wisdom of experts as to what is needed in the public interest must be given dominance over the constraint of Congress.
The pertinent principles are appropriately developed by close attention to the Supreme Court's Zuber opinion. Zuber involved an Order requiring handlers to pay producers located at certain distances from the marketing area — "nearby farmers" — higher prices than are paid to producers located at greater distances from such areas. Having abandoned the attempt to justify these differentials as "location adjustments," which had failed in this court,
To summarize and emphasize, the regulatory scheme results in uniformity among the handlers covered by a milk marketing order, with additional economic burdens being permitted only for economic reasons, to "compensate or reward the producer for providing an economic service of benefit to the handler." Zuber, supra, at 184, 90 S.Ct. at 323. This is a sound objective of governmental regulation, and one which the courts are and should be vigilant to preserve. It is for that reason that Zuber requires the Secretary to demonstrate, as a prerequisite to imposing the burden of price differentials on handlers, that the burden is imposed for the purpose of reflecting an economic service of benefit to the handler.
IV. The Secretary's Decision and Order Do Not Justify the Additional Burdens Placed on Handlers in the Central and Western Zones of Nebraska
We conclude that the differentials at issue here fail to meet the pertinent tests. We can find no substantial evidence of record to support the Secretary's findings, either (a) as to milk deficits and movements within Nebraska, or (b) as to market disruptions in the neighboring market subject to the Colorado Order. Absent such evidence of economic service of benefit to the handler, the differentials in this Order have not been supported with justification required under the statute.
A. Contention of Justification in Terms of Deficits Within Nebraska
The first premise of Assistant Secretary Mehren for justification of these differentials was that supplemental milk is needed in the Central and Western Zones, at least in the months of short supply. He found that the differentials in the Order reflect the cost of moving supplemental milk from the Eastern Zone to the Central and Western Zone plants, and also reflect the incremental cost of these zones, over and above the Eastern Zone, in receiving imports from Minnesota and Wisconsin.
The Judicial Officer used a broader frame of reference for upholding the order, stating that the market area as a whole was a deficit market requiring imports of milk from the Minnesota-Wisconsin region, that milk has increased value as it moves westward from the surplus area of Minnesota and Wisconsin, and that while there are seasonal surpluses in the Central and Western Zones to some extent supplemental supplies are imported into these zones.
Thus the Agriculture officials painted Western and Central Nebraska as an area of short milk supply. When we study the record it becomes plain that whereas the national pattern for milk includes a volume moving west from Minnesota-Wisconsin, within the state of Nebraska the basic pattern of milk supplies is from west to east — a kind of localized cross-current that is traverse to the national movement of milk westward from Wisconsin. The Secretary may
What is involved in the Secretary's first justification of the Order before us is the movement of raw milk before it is processed, not the distribution of processed milk by the handler into the consumer market. And while raw milk is imported into Nebraska from the Minnesota-Wisconsin complex,
To the extent that milk is shipped westward from the Eastern Zone the shipments do not go to the western zones of Nebraska (except for a relatively small offset to the Central Zone), but are movements that go almost entirely to Denver. Two salient conclusions emerge. First, the Central and Western Zones are essentially areas of raw milk surplus, not deficit. The Coop found it necessary to return very little raw milk to those areas from the Grand Island station.
The Government argues that the need for supplemental milk supplies in the western zones is evident from the fact of imports of milk into Nebraska from the east. But the record shows that while 11.4 million pounds were imported into Nebraska in 1963, 7.1 million were exported to Denver, yielding a net import into Nebraska of about 4.3 million pounds for that year (Ex. 30). Assuming that all of this milk was transferred westward to the western zones, it is only one-third as great as the 12.9 million net pounds transferred in 1963 from the western zones to the Eastern Zone. The conclusion is inescapable that the imports were not needed to supply handlers in the Central and Western Zones, but rather to fill the requirements of handlers located in the Eastern Zone. This was the testimony of Fairmont's witness (Rasey, Tr. 304), it is supported by the data, and no contrary explanation appears in the testimony of any other witness.
We move from the annual data to consider the possibility that in some months of the year handlers in the western zones will run short of raw milk. We see that even in September, 1963, when net imports into Nebraska reached their monthly high of 1.2 million pounds (Ex. 30), there was still a net transfer to the Eastern Zone from the Central Zone of 395,000 pounds, and from the Western Zone of 175,000 pounds. These facts establish that imports from other states were for the benefit of handlers in the Eastern Zone, not the western zones. Although the record does not isolate demand and supply for the Eastern Zone, it is plain that month by month the handlers in the Eastern Zone require milk movements into that Zone to meet their needs, and at least part of these needs is satisfied by transfers from the western zones of Nebraska.
If there is a slight deficit in the western zones on occasion, due to the Coop's desire to take advantage of the higher Colorado prices, that does not warrant deviation from the uniform price payable by handlers, which the Act contemplates as the norm for milk marketing orders. For these exceptional situations, the Western and Central Zone handlers can pay higher prices on a private contract basis. But there is no reason to impose on these handlers a requirement to pay a higher premium price all year around, and thereby put them at a severe disadvantage vis-a-vis their competitors handling milk in the Eastern Zone, on the theory that there is a general westward milk movement in Nebraska, when in fact the predominant movement in Nebraska is eastward.
We have undertaken this rather detailed evidentiary review because it is with diffidence that we hold that the Secretary's first ground of decision is not supported by substantial evidence on the record. Yet that is the only conclusion that we think can fairly be reached on this record. The Secretary's observation that milk supplies generally move westward from Wisconsin and Minnesota does not establish that handlers in the western zones of Nebraska are dependent for their supplies of raw milk on producers in the Eastern Zone of that state. On the contrary, what this record shows is that farmers in western Nebraska are able themselves to meet the needs of handlers in western Nebraska, and if they do not do so, it is because their own Coop insists that they first ship their milk eastward to a receiving station in eastern Nebraska. While normally the court defers to administrative expertise, the record is so devoid of support for the Secretary's finding with respect to milk supplies and movements in Nebraska that the finding cannot be allowed to stand.
B. Contention of Relationship to Colorado Milk Order
This brings us to the second ground of the Secretary's decision, that price differences, when prices are compared to those set in orders for adjacent regions, necessitate the imposition of price differentials in the Nebraska order in order to avoid serious disruptions in the markets of adjoining regions. As contrasted with his first ground of decision, the Secretary here is focusing not on the distribution of raw milk to the handler, but rather the marketing of the finished product by the handler.
At the outset we observe that even if we were to uphold the Secretary's findings on the second ground, we cannot say that his error as to the first would necessarily be immaterial. It is not clear that the Secretary would have "made the same ultimate finding with the erroneous findings or inferences removed from the picture." NLRB v. Reed & Prince Mfg. Co., 205 F.2d 131, 139 (1st Cir.), cert. denied, 346 U.S. 887, 74 S.Ct. 139, 98 L.Ed. 391 (1953). See also Braniff Airways, Inc. v. CAB, 126 U.S.App.D.C. 399, 379 F.2d 453 (1967). The Secretary's decision to remedy
We need not pause long over the problem, since we find that the Secretary's second ground, like the first, is unsupported by the record. The requirement of substantial evidence supporting salient findings is particularly important here, where the Secretary has chosen a broad rather than refined remedy as a means of solving the alleged problem of market disruptions in Eastern Colorado. In seeking to handle this problem through the Nebraska-Western Iowa Order, the Secretary has imposed the burden of higher prices on all handlers receiving milk within the Central and Western Zones, whether or not they intend to market that milk in Colorado. As an alternative, the Secretary could have added to the Eastern Colorado Order a requirement that handlers pay a compensatory charge on all milk purchased from producers outside the area and marketed within it. In that case the handlers would have had to bear the burden only if and when they entered the Colorado markets.
Such a change in the Colorado Order, reflecting the handler's competitive advantage from the purchase of "outside" milk, would be valid.
In Lehigh Valley Coop. Farmers v. United States
We are not required to consider whether, as one court seems to have held,
Assuming that the Nebraska-Western Iowa Order is a proper vehicle for remedying market disruptions in the Eastern Colorado market, there must be substantial evidence of such disruption in order to justify the imposition of such price differentials for this purpose. Mere speculation is no warrant for deviating from a principle as paramount as that of uniform price structure within a single order, particularly where the Secretary has other techniques available.
We can find no basis for the Secretary's findings beyond mere speculation, and therefore conclude that his second ground of decision, like the first, must fail. The crucial fact emerging from the testimony at the promulgation hearing is that while there was very little milk sold by Nebraska handlers in Colorado, Colorado handlers accounted for a substantial share of milk marketing in western Nebraska. Mr. Grant, for example, testified that he knew of no sales by any Nebraska handlers in Colorado, except for Fairmont's small contract with the Sterling, Colorado, public schools. (Tr. 232-33). On the other hand, Mr. Grant estimated that 3 out of 10 handlers operating in the Western Zone of Nebraska, were regulated under the Eastern Colorado Order. (Tr. 52-3). Mr. Davidson, who also testified in favor of the Order, stated that Colorado handlers, specifically Beatrice, Safeway, and Borden were selling in western Nebraska. In fact he admitted that the "only area of competition * * * between eastern Colorado handlers and those regulated under the present Nebraska-Western Iowa order would be in the [Nebraska] panhandle area." (Tr. 269).
The Secretary does not deny these facts, and attempts to cope with them by arguing that he should be allowed to prevent market disruption before it actually occurs. Administrative and executive expertise certainly encompasses some powers of prediction not shared by those less familiar with the intricacies of the particular field, but such powers, like any others, must be justified by reference to objective evidence. There must be a rational basis of record for invoking the concept of a preventative remedy. We think that the Secretary failed to meet that standard. The record offers nothing but generalizations of broad westward movements, and these do not support the inference that there will be specific movements of processed milk from western Nebraska to eastern Colorado when these have not taken place in the past, and indeed the movement has gone from Colorado to western Nebraska. Assuming that intra-Order differentials may constitute a proper means of dealing with dislocations between western Nebraska and eastern Colorado, there was insufficient need in this case for their application.
There remains the problem of remedy.
As to the milk moving from the western zones to Grand Island and then to the Norfolk plant, this is definitely a move eastward (Norfolk being in the Eastern Zone, and indeed east of Grand Island).
As to the milk moving from the western zones to Grand Island and then west to Colorado, this characteristic of the months of surplus (Govt. Br. 10) does not offset the fact that during this period the movement within Nebraska is eastward. Thus, October was the peak month in 1963 of shipments from Nebraska to Colorado (2,063,470 pounds). In that same month transfers from the Central to Eastern Zone (808,232 pounds) far exceeded transfers from Eastern to Central (14,361); and transfers from the Western to Eastern Zone (147,583 pounds) were not offset by any shipments to the Western Zone.
We need not consider whether Lewes Dairy was rightly decided on its facts. We take it as obvious that at some point a handler may be so substantially, or perhaps predominantly, identified with a marketing area as to be subject to complete regulation under the order for that area.