Opinion ID: 2307172
Heading Depth: 1
Heading Rank: 1

Heading: Order 69-1 and Its Background

Text: The order under review fixed minimum prices at only the one point of retail sale of fluid milk to the consumer. The same minimum was established whether the milk was sold through stores (without regard to the type of store or method of distribution) and vending machines for off-premises consumption or by home delivery routes. Contrary to earlier price-fixing orders, no minimums were prescribed for wholesale sales to dealers, subdealers, stores or at other points in the producing, processing or distributing chain. Separate minimums were set forth with respect to consumer sales in quarts, half- gallon, gallon and larger containers, but without variation as to whether the container was glass, paper or plastic or whether the quantities above a quart were packaged in a single-wall container or by banding together smaller sized containers. In prescribing only minimum resale prices at the single point of the retail sale and in arriving at those prices, the Director adopted the single minimum margin concept. The single aspect of this concept has reference to fixing a minimum price only at one point, here that of retail sale. The minimum margin aspect involves the fixing of a floor price by adding to the federal producer price a margin determined from the evidence to represent the composite costs of a number of low-cost, efficient operators (including vertically integrated jug store dealers) capable of supplying a substantial portion of the market. These costs consisted of two main segments  unit costs of processing, handling and delivery to the retail seller and a percentage of the retail price to cover in-store costs. Nothing was allowed for a return on capital investment. The design of the scheme was intended to best achieve the statutory purpose of milk pricing regulations as the Director viewed it, viz., to protect the public interest by assuring an adequate supply of fresh wholesome milk to the consumer at fair and reasonable prices through the various methods of retail distribution and sale which might be available at the choice of consumers. The theory was that most milk would sell at retail above the minimum at prices to be fixed by competitive market conditions. The Director conceived the minimum as only a floor to prevent the downward spiraling of milk prices to unreasonably low levels which he said would adversely affect the stability of the market and the industry and ultimately redound to the detriment of producers, processors and wholesale dealers, retail sellers and consumers. These minimum prices were set forth in two different schedules  one applying to North Jersey and one to South Jersey. The reason for this is found in the method by which New Jersey milk producers are now paid for their milk. Producer prices are fixed, not at the state level, but by federal marketing administrators under federal milk marketing orders pursuant to federal statutes. New Jersey is subject to two differing federal marketing orders. North Jersey is included, since 1957, in Order No. 2 covering the entire New York area; South Jersey is, since 1963, under Order No. 4 covering it and areas in adjacent states to the south and west. (Before these dates New Jersey producer prices were fixed by the state milk control agency.) Producer prices per cwt. are fixed by the federal administrators, monthly, [2] according to formulae on the basis that all producers in the marketing area receive a uniform blend price for their milk regardless of the kind of utilization by the particular processor-handler, i.e., without differentiation as to the proportion of that handler's milk used for fluid consumption (Class I, commanding a higher price in the market) or for manufacturing purposes (Class II, ice cream, butter, cheese, powder and the like). The formula differs as between the two federal orders affecting New Jersey by reason of a variance in the allocation of transportation charges from farm to processing plant as between producer and processor, so that the producer price is not the same in the two regions of the State. Since the minimum prices fixed by Order 69-1 are composed, as we have said, of an additive to the producer price, which additive consequently differs in the two sections of the state, separate minimum price schedules  in effect differing but slightly  are required for North and South Jersey. Order 69-1 also provides, by schedules, that the minimum prices shall increase or decrease monthly each time federal producer prices change at least 19 cents per cwt. (This has been a characteristic of New Jersey milk pricing orders since 1960.) The order, intended to take effect June 3, 1969, was to supersede Order 64-1, which became effective March 31, 1964. Order 64-1 was structurally similar, being based on the minimum margin concept, but it also fixed minimum prices for sales into stores, sales to subdealers and sales by home delivery and the range for change in prices to accommodate changes in federal producer prices was 23 cents per cwt. instead of 19 cents. The effect of Order 69-1 was stayed pending the outcome of these appeals, as was any upward adjustment based on increases in producer prices. The effect has been to freeze minimum prices fixed by Order 64-1 at the level of the producer price at the time of the stays in 1969. We understand this has resulted in out-of-store minimum prices having remained at 28 cents per quart, 51 cents per half-gallon and 96 cents per gallon. We also understand, since the Director denied proposals to increase the minimums over those for out-of-store sales in Order 64-1, that the minimums in Order 69-1 are substantially the same as in the prior order, although computation of the figures making up the minimum prices is involved and difficult to comprehend. It is apparent, however, that, were Order 69-1 to become effective today, the minimum retail prices would be some pennies higher as to each size container than the frozen prices above set forth by reason of fairly substantial increases in federal producer prices in the interim. It further should be noted that no interested party other than Garden State and Cumberland appealed Order 69-1 and in fact several have participated before us in support of the order. Some fairly recent history of milk distribution and regulation in this state should be in mind to put the issues before us in sharper focus. Prior to 1960 fluid milk had largely been sold to New Jersey consumers in glass quart bottles through grocery stores and home delivery, with distribution to these outlets in the hands of wholesale dealers and processors who bought from producers. Prices prescribed by the milk control agency, as they had since the original imposition of controls many years before, related to every step in this conventional distributive process  across-the-board  and were generally thought to be high and geared to the idea that the minimum prices fixed would also represent the price charged. There was a pervasive feeling that the prices fixed were intended to or had the effect of subsidizing and maintaining various components of this process, as well as restricting competition and inhibiting new methods of distribution. Beginning in 1960 the vertically integrated chain jug store dealer made his appearance, pioneered by Garden State and a few others and soon joined by Cumberland. They stressed the sale of milk in specialized stores (see footnote (1)) by the half-gallon and gallon (first in returnable glass containers requiring a deposit and in later years in nonreusable paper and plastic containers), which they claimed could be sold at retail at a profit for less than the minimum. As this method of retail milk sale achieved consumer popularity and the number of jug stores increased, supermarkets and other stores turned to selling milk in half-gallons and gallons, consumers bought their milk in such quantities when they purchased their groceries, and home delivery, which always carried a higher price, declined markedly. Today, (we speak as of the time of the remand hearings in this case) vertically integrated retailers (including one supermarket chain doing its own processing) sell something over a fifth of the milk retailed in this state and the half-gallon container has become the most popular size in all stores. The advent of the jug store increased the dissatisfaction with the across-the-board method of strict milk price regulation. The situation came to a head following Order 60-1, to be effective April 1, 1961, which raised minimum prices across-the-board on the basis of a composite profit and loss statement of 12 conventional milk wholesalers. The order was attacked by Garden State and other vertically integrated jug dealers for failure to take their lower costs into account and was twice set aside by this court on their appeals. Lampert Dairy Farm, Inc. v. Hoffman, 35 N.J. 205 (1961) ( Lampert I) and Lampert Dairy Farm, Inc. v. Hoffman, 37 N.J. 598 (1962) ( Lampert II). In the second decision we said: Order 60-4 substantially and uniformly raises price minimums. Since much of the milk delivered to homes in quart containers has been selling at more than the minimums established under Order 60-1, while much of the milk sold in stores in quarts or packaged in the larger containers has apparently been selling at those minimums, Order 60-4 is likely to further limit any economies the consumer can achieve by purchasing at stores in either quarts or larger containers. Before we can properly sanction such a result there must be evidence to support the conclusion that the method of distribution or type of container is not subsidized at the expense of another unless the record discloses the subsidy and the extent thereof is justifiable in light of the statutory objective. (37 N.J. at 605) and remanded the matter to the Director to hold further hearings and present and take evidence as to cost factors consistently associated with the various methods of distribution and container sizes. Id. Shortly after this opinion was filed, the Governor appointed a milk study commission to probe into the causes of dissatisfaction with the state's milk control program. Upon receiving the commission's report in October 1962, the agency, at the direction of the Governor, suspended all resale price control. Prices dropped considerably and evidence of disruption began to appear in the industry. Some weeks later the Legislature passed an emergency milk control law ( L. 1962, c. 182, later extended by L. 1963, c. 165) empowering the Director to establish, for a limited period, temporary resale prices without hearing, which he did. The object was to prevent destructive price wars and unfair competition pending determination of costs and appropriate future regulation in the light of current conditions in the industry. To assist in this task, Case and Company, management consultants, were employed by the Secretary of Agriculture to make cost-of-operations studies and an advisory committee of eminent agricultural economists (Professors Aplin, Carncross, Johnson, Markham and Pierce) was commissioned to study and recommend future economic regulatory programs for the industry in the state. The economists' report is a most comprehensive study of the industry, changes that had taken place, some of which we have already noted, and the resulting situation. It has present pertinency because the theory of Orders 64-1 and 69-1 was based upon it. (It was introduced in evidence at the hearings on Order 69-1 and several of the authors testified.) The unanimous conclusion of the report was that New Jersey should abandon its long-standing policy of detailed, across-the-board, fixed differential, resale price-fixing restrictive of competition, and change to a system permitting greater price competition, in all sectors of the industry beyond the producers' level, in the ultimate best interest of producers, distributors and consumers. They advised against a system of no regulation of resale prices and trade practices as disruptive of the orderly competitive process and imposing undue hardships on legitimate, efficient enterprises engaged in the processing and distribution of milk. They suggested as specific objectives for a state regulatory program: as to dairy farmers, a continued market should be provided for that milk which can be produced on New Jersey farms at a cost competitive with milk from outside the state; as to milk distributors, they should be protected from unfair competitive practices such as unreasonably low prices by any dealer, unjustifiable price discrimination and disruptive methods of competition such as the granting of hidden price cuts; and as to consumers, they should have the lower price benefit of greater efficiency in milk marketing and the development of low-cost distribution systems, which would also benefit both farmers and distributors by keeping fresh fluid milk as competitive as possible with substitutes. And any regulatory program must be capable of equitable and effective administration. The economists were not in agreement as to the method of ultimate implementation of the thesis and objectives. There was a consensus, however, that a transitional program was needed to adjust from the former restrictive across-the-board price policy to a long-run method of much freer competition. There was general agreement that during the adjustment period, certain minimum margin prices should be fixed at certain key points in the distributive chain based on the cost of raw milk plus the average cost of low-cost distributors capable of making available a significant quantity of milk at the specified point in the marketing channel. As to the ultimate method, two of the economists favored a program prohibiting sales below the least cost firm in the market, combined with a prohibition on unfair methods of competition and price discrimination. Two proposed a single minimum margin price (fixed as just described) only for whole fluid milk at the point of sale to the consumer. They rejected the sales-below-cost theory as too difficult for effective enforcement. (They were joined at the original hearing on Order 69-1 by one of the two who had first favored the approach of prohibition of sales below cost, on the ground of the favorable experience under Order 64-1). The fifth man advocated more or less indefinite continuation of the proposed transitional program of minimum margin prices at key points. All agreed that separate minimum retail prices should not be fixed for home delivery. All also agreed that the method of long-run regulation to be utilized is a matter of judgment. The promulgation of Order 64-1 shortly followed the economists' and the Case and Company reports. The order, by its language, was intended to provide the period of adjustment recommended by the economists and adopted the minimum margin concept of key-point pricing by size (but not kind) of container at the points of wholesale sales to stores, sales to subdealers and sales out-of-stores, as well as home delivery (which the economists had recommended against). The rationale, like that which undergirded the economists' report, was that the minimums were intended only as floor prices to prevent destructive price competition, that most milk would sell above the minimums at prices determined by orderly competitive conditions, that low-cost methods of distribution would not be inhibited, and that consumers would have a choice of outlets and means of obtaining their household milk supply. Order 64-1 was sustained by this court, as against the contentions then raised by Cumberland and Burlington, in Burlington Food Store, Inc. v. Hoffman, 45 N.J. 214 (1965). Order 69-1, as we view it, with its single minimum margin price at the point of sale to the consumer, represents the commencement of a long-range program of even freer competition after the period of adjustment. The evidence at the hearings preceding it and on the remand, including the testimony of two of the economists, demonstrated that the transitional program of Order 64-1 had been successful and the results had been generally as predicted. Prices to a considerable degree had been left to market forces. Only Cumberland, and sporadically a few other retailers, had sold to the consumer at the minimum. Consumers generally had enjoyed the benefit of milk prices lower than under orders prior to the lifting of all controls in 1962. Efficiencies appeared to have been adopted by processors and wholesale dealers and the low-cost vertically integrated distribution system had grown substantially. All in all, reasonably orderly and fair market conditions had been achieved. [3]