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VOLUME 17, NUMBER 3, WHOLE NUMBER 196 FEBRUARY 2000

Seventh Circuit upholds “Swampbuster’s”
application to isolated, intrastate wetlands
The Seventh Circuit has upheld under the Spending Clause, U.S. Const., Art. 1, § 8, the
application of the wetland conservation provisions of the Food Security Act, commonly
known as the “Swampbuster” provisions, to isolated, intrastate wetlands. United States v.
Dierckman, No. 98-4131, 2000 WL 15012 (7th Cir. Jan. 11, 2000). The court also upheld the
imposition of Swampbuster sanctions on the lessee- “operator” of the farm even though the
affected parcel’s owner actually converted the wetland. In so doing, the Seventh Circuit

INSIDE affirmed a $92,703.00 judgment against the defendant. United States v. Dierckman, 41 F.
Supp.2d 870 (S.D. Ind. 1998). The judgment amount represented the sum of the farm program
payments that the defendant had received but was ineligible to receive because of the
Swampbuster violation.
• Global treaty adopted Defendant Dierckman farmed his land and land owned by his father. In 1991, Dierckman’s
on genetically modified father completed the conversion of a wetland on the land he owned after the USDA Soil
Conservation Service had advised Dierckman that such actions would violate the Swampbuster
organisms provisions. Under Swampbuster as it was amended effective November 28, 1990, persons
are ineligible for federal farm program payments and other USDA benefits if they convert
• Status of regional a wetland so that crops could be grown on the land. Prior to this amendment, a Swampbuster
dairy compacts violation occurred only if a conversion after December 23, 1985, was followed by crop
production on the converted wetland. Under the amended statute, either action will
constitute a violation. See 16 U.S.C. § 3821.
• Grain buyer recovers After unsuccessfully appealing the determination of his ineligibility for program benefits,
landlord lien losses Dierckman was sued for the amount of the farm program payments he had received after
the conversion. Before both the district court and the Seventh Circuit, he argued that the
wetland at issue was an isolated, intrastate wetland beyond the reach of Swampbuster by
virtue of the limited reach of congressional authority under the Commerce Clause. Both
courts disagreed.
As reasoned by the Seventh Circuit, compliance with the Swampbuster provisions was
imposed by Congress on the recipients of USDA benefits as a condition of eligibility for these
Solicitation of articles: All AALA benefits. In turn, the congressional authority to provide these benefits and to impose
members are invited to submit ar- conditions on their receipt was properly founded on the Spending Clause, not the Commerce
ticles to the Update. Please include Clause. Therefore, no connection between the affected wetland and interstate commerce
copies of decisions and legislation Continued on page 2
with the article. To avoid duplica-
tion of effort, please notify the Edi- Farmers misled by FSA appeal letter
tor of your proposed article. A number of farmers appear to have been caught in a conflict between the Farm Service
Agency (FSA) and the National Appeals Division (NAD), two agencies within the USDA.
Unfortunately, it appears that the farmers were the ones injured by the agencies’ disagree-
ment, and although the agencies have now come to terms, no relief is apparently forthcoming

IN FUTURE from the USDA.
Whenever a farmer receives an “adverse decision” from the FSA, that farmer has specific
administrative appeal rights. 7 U.S.C. § 6996; see also 7 U.S.C. § 6991 (definition of “adverse

I SSUES decision”). This appeal right allows the farmer to request an evidentiary hearing before a
NAD hearing officer. 7 U.S.C. § 6996. In fact, in order for the farmer to be able to ever seek
review of the adverse decision in court, the farmer must appeal to the NAD. Failure to
exhaust this administrative appeal process renders the farmer unable to seek judicial review.
7 U.S.C. § 6912(e).
• Understanding H-2A In addition to the right to appeal directly to NAD, the farmer has a right to seek informal
review of the decision through the agency. 7 U.S.C. § 6995. This is the pre-NAD “in house”
agency appeal process that typically involves asking FSA to reconsider the decision and/or
asking a higher level within the FSA to review the decision. Id., see also 7 C.F.R. § 780.7.
Similarly, the farmer has a right to request mediation. 7 U.S.C. § 6995. These rights are clearly
in addition to the right to appeal to the NAD, and the exercise of either informal review or
mediation rights does not, in and of itself, alter the farmer’s basic right to a NAD hearing.
If neither informal review nor mediation is sought, the farmer has thirty days from notice
Continued on page 3
WETLANDS/CONTINUED FROM PAGE 1

was required. Moreover, in enacting v. Natural Resources Defense Council, 467 separate administrative unit, and produced
Swampbuster, Congress clearly intended to U.S. 837 (1984), the court upheld the little or no evidence that he tried to stop his
cover wetlands without regard to their nexus regulation’s imposition of responsibility on father from converting the wetland.
to interstate commerce or to the definition of the person who controlled the farm at the Finally, the Seventh Circuit rejected
a “wetland” under the Clean Water Act, time of the conversion. Dierckman’s substantive due process claim,
legislation which is grounded on the Com- Dierckman also contended that he was concluding that both the Swampbuster stat-
merce Clause. only the “operator” of the farm’s cropland, ute and its implementing regulations have a
Dierckman also claimed that he should not not its wetlands. It was his father, according rational basis. In this respect, the court opined:
be penalized as the lessee for acts undertaken to Dierckman, who was the “operator” of the “The owner and the operator share control of
by his father, the wetland’s owner. More wetlands. The Seventh Circuit rejected this the land, and, to the extent each is penalized
specifically, he challenged the Swampbuster claim, noting that on various forms he had for the conversion of wetlands, the purposes
regulation, 7 C.F.R. § 12.4(e), that imposed submitted to the USDA, including Form of Swampbuster will be furthered. Sanctions
liability on him as the farm’s “operator” even AD-1026 relating to highly erodible land and fall on owners and operators who could
though he had not converted the wetland. wetlands, Dierckman listed himself as the potentially benefit from agricultural conver-
The Seventh Circuit, noting that the farm’s “operator.” The court also dismissed sion of their land, thus providing both with
Swampbuster statute only renders the “per- Dierckman’s claim that he was helpless in the incentives to prevent conversion.”
son who converts the wetland” ineligible, face of his father’s actions, noting that Dierckman, 2000 WL 15012 at *10.
reasoned that Dierckman’s reading of the Dierckman continued to enroll the farm in —Christopher R. Kelley, Assistant
statute as limiting ineligibility to the actual farm programs while labeling himself as the Professor of Law, University of Arkansas,
converter was plausible, but not the only farm’s operator, failed to seek a reconstitu- Of Counsel, Vann Law Firm, Camilla, GA
plausible interpretation. To the contrary, tion of the farm to put the wetland in a
imposing liability on the “operator,” defined
in the Swampbuster regulations as the person
in control of the farm, was also reasonable,
notwithstanding its breadth relative to the Global treaty adopted on genetically
statutory language. Applying the deference
doctrine articulated in Chevron U.S.A., Inc. modified organisms
Montreal, 29 January 2000—After five years Nations Environment Programme (UNEP),
of talks, ministers and senior officials from which administers the secretariat of the Con-
over 130 governments have finalized a legally vention on Biological Diversity, under whose
binding agreement for protecting the envi- auspices the talks took place.
ronment from risks posed by the One of the most contentious issues that
transboundary transport of living modified negotiators had to resolve involved the rela-
organisms (LMOs) created by modern bio- tionship between the Protocol and other
VOL. 17, NO. 3, WHOLE NO. 196 February 2000 technology. international agreements, notably those un-
Under the Cartagena Protocol on Bio- der the World Trade Organization. While
AALA Editor..........................Linda Grim McCormick
Rt. 2, Box 292A, 2816 C.R. 163 safety, governments will signal whether or environmental agreements are premised on
Alvin, TX 77511 not they are willing to accept imports of the precautionary principle, decisions under
Phone: (281) 388-0155
FAX: (281) 388-0155
agricultural commodities that include LMOs trade law require “sufficient scientific evi-
E-mail: lgmccormick@teacher.esc4.com by communicating their decision to the world dence.” Under the new agreement, the Pro-
American Agricultural Law Association website: http:// community via an Internet-based Biosafety tocol and the WTP are to be mutually sup-
www.aglaw-assn.org
Clearning House. In addition, shipments of portive; at the same time, the Protocol is not
Contributing Editors: Christopher R. Kelley, University of these commodities that may contain LMOs to affect the rights and obligations of govern-
Arkansas; Susan A. Schneider, University of Arkansas; Ken
Bailey, Penn State University; David Barrett, Washington,
are to be clearly labeled. ments under any existing international agree-
D.C. Stricter Advanced Informed Agreement ments.
For AALA membership information, contact William P.
Babione, Office of the Executive Director, Robert A. Leflar
procedures will apply to seeds, live fish, and The meeting was attended by over 700
Law Center, University of Arkansas, Fayetteville, AR 72701. other LMOs that are to be intentionally delegates from governments as well as from
introduced into the environment. In these intergovernmental and non-governmental
Agricultural Law Update is published by the American
Agricultural Law Association, Publication office: Maynard cases, the exporter must provide detailed organizations. Over 40 ministers attended
Printing, Inc., 219 New York Ave., Des Moines, IA 50313. information to each importing country in during the final two days. The agreed text of
All rights reserved. First class postage paid at Des Moines, IA
50313. advance of the first shipment, and the im- the Biosafety Protocol will be opened for
porter must then authorize the shipment. signature at UNPE headquarters in Nairobi
This publication is designed to provide accurate and The aim is to ensure that recipient countries from 15-26 May, on the occasion of the Fifth
authoritative information in regard to the subject matter covered.
It is sold with the understanding that the publisher is not engaged have both the opportunity and the capacity to Session of the Congress of the Parties to the
in rendering legal, accounting, or other professional service. assess risks involving the products of modern Convention on Biological Diversity (COP5).
If legal advice or other expert assistance is required, the services
of a competent professional should be sought. biotechnology. The Protocol will then enter into force for its
Views expressed herein are those of the individual authors “This agreement goes a long way towards members after 50 countries have ratified it.
and should not be interpreted as statements of policy by the
American Agricultural Law Association. meeting the environmental concerns of the —Press Release, Convention on
international community,” said Klaus Biological Diversity, http://
Letters and editorial contributions are welcome and should www.biodiv.org' reprinted with permission
be directed to Linda Grim McCormick, Editor, Rt. 2, Box
Toepfer, Executive Director of the United
292A, 2816 C.R. 163, Alvin, TX 77511. from February 2000 ISB News Report.
Copyright 2000 by American Agricultural Law
Association. No part of this newsletter may be reproduced or
transmitted in any form or by any means, electronic or GM product labeling caters food for thought
mechanical, including photocopying, recording, or by any
information storage or retrieval system, without permission in
For good reason, Science magazine has desig- Union (EU), for example, has decided to suspend
writing from the publisher. nated the debate over genetically modified (GM) the introduction of new GM crops pending
foods as the “controversy of the year.” Through- legislation, which may take three years to resolve.
out the world, there have been numerous mani- Meanwhile, Japan’s health ministry recently an-
festations of the backlash against GM crops and nounced that it would not approve any more GM
food derived from GM crops. The European GM product labeling/Continued on page 6

2 AGRICULTURAL LAW UPDATE FEBRUARY 2000
FSA appeal letter/Cont. from page 1 described the results of mediation and noti- the NAD are two agencies within the same
of the adverse decision to file the appeal. 7 fied the parties that “the participant [farmer] department, and the NAD is run directly out
U.S.C. § 6996. The statute provides that [t]o has 30 calendar days from the date that the of the office of the Secretary of Agriculture.
be entitled to a hearing ... a participant shall report is mailed or otherwise made available Despite this, there are a number of issues that
request the hearing not later than 30 days to the participant to exercise any further arise, such as this issue, where the two agen-
after the date on which the participant first rights of administrative appeal.” Id. Because cies disagree. When this occurs, the farmer is
received notice of the adverse decision.” 7 mediators are not bound to follow FSA likely to be caught in the middle.
U.S.C. § 6996(b). If informal review to the directives such as this, and because it was For example, with regard to appeal notices,
agency is taken, the reviewing authority will perceived to be inappropriate for them to under the current division of labor between
issue a new decision, and the farmer then has provide this type of notice, in practice, FSA these two USDA agencies, the FSA is charged
thirty days to appeal that adverse decision. local offices took on this responsibility. These with providing farmers with notice of their
See 60 Fed. Reg. 67,298, 67,302 (Dec. 29, offices would typically send a letter to farmers appeal rights. Yet, it is the NAD that admin-
1995) (prefatory comments to interim final at the conclusion of mediation, advising the isters the appeal process. Despite the NAD’s
rules to be codified at 7 C.F.R. pt. 11 and farmer that he or she had 30 days from that affiliation with the Office of the Secretary, it
elsewhere). If the farmer requests mediation, date within which to request a NAD appeal. has been unwilling to take charge of the
however, the NAD and the FSA have dis- In a number of cases, farmers, in reliance notice process. The prefatory comments to
agreed about the time period in which the upon the advice given by the FSA, missed the NAD final rules states that, “[a]gency
farmer must file the appeal. their 30 day deadline for filing their NAD notices to participants of appeal rights are
The NAD has taken the position that in the appeal. In some cases, it has been reported beyond the scope of this final rule.” 64 Fed.
event of mediation, the date of the original that NAD hearing officers allowed the tardy Reg. 33, 367, 33,370 (1999) (prefatory com-
notice of the adverse decision starts the appeal request and afforded the farmer the ments to final rules to be codified at 7 C.F.R.
running of the 30 day period within which to right to appeal. At some point, however, pt. 11).
file the NAD appeal. 7 C.F.R. § 11.5(c)(1). NAD hearing officers were directed to deny Moreover, it appears that disagreements
While mediation tolls the running of this appeal requests that were filed after the initial between the agencies are not quickly re-
period, at the conclusion of mediation, the 30 day period had run, regardless of advice solved. The NAD expressed its interpreta-
farmer only has the balance of the 30 days given by the FSA. See, NAD APPEALS REFER- tion of the mediation time frame in its interim
within which to file the appeal with the NAD. ENCE GUIDE, N-9 (“If the appellant has not met final rule published in December of 1995. 60
Id. The NAD regulation expressly provides the deadline to file an appeal, you have no Fed. Reg. 67,298, 67,302 (1995) (prefatory
that “[i]f a participant [r]equests mediation or authority to hear the case.”). comments to interim final rules to be codified
ADR prior to filing an appeal with NAD, the Informal, but irate, farmer complaints to at 7 C.F.R. pt. 11 and elsewhere). It specifi-
participant stops the running of the 30 day the agency eventually resulted in the reversal cally discussed its interpretation in the prefa-
period during which a participant may appeal of the FSA interpretation. FSA Notice APP- tory comments to this rule, even providing an
to NAD under § 11.6(b)(1), and will have the 26 was issued on November 8, 1999 for example of the time computation when me-
balance of days remaining in that period to distribution to all state offices and for these diation is at issue. Id. It again expressed its
appeal to NAD once mediation or ADR has offices to relay to county offices. This notice interpretation in the final rules issued in June
concluded.” 7 C.F.R. § 11.5(c)(1). Because re-interpreted the mediation/NAD appeal of 1999 and again addressed the issue in its
the NAD is an agency within the office of the time frame to provide that “[i]f a participant prefatory comments, expressly rejecting the
Secretary of Agriculture, this regulation was requests mediation before filing an appeal position espoused by FSA. 64 Fed. Reg.
issued by the Office of the Secretary and with NAD, the participant stops the running 33,367, 33,370 (1999) (prefatory comments to
throughout the prefatory comments to the of the 30-day period during which a partici- final rules to be codified at 7 C.F.R. pt. 11).
regulation, it purports to represent the posi- pant may appeal to NAD. Once mediation is FSA did not “come around” to the NAD
tion of the USDA. 64 Fed. Reg. 33,367, concluded, the participant has the balance of interpretation for almost two full years after
33367-72 (1999) (prefatory comments to final days remaining in the period to appeal to the interim final rule was published, five
rules to be codified at 7 C.F.R. pt. 11). More- NAD.” Notice APP-26, Clarifying Appeal months after the final rule confirmed the
over, the prefatory comments discuss the and Mediation Procedures, USDA, Farm NAD interpretation. Presumably, all farmers
interpretation of the mediation time frame at Service Agency (Nov. 8, 1999). who exercised their mediation rights in re-
some length and expressly reject alternative From the perspective of the national FSA sponse to adverse decisions from the FSA
interpretations. Id. at 33,370. office, this notice resolved the issue. Unfor- were given erroneous advice for this entire
Despite this, the FSA developed its own tunately, this perspective is not shared by period time.
interpretation of the mediation process as it farmers who have already lost their appeal Second, this issue reveals the inherent
related to farmers’ appeal rights. It inter- rights in reliance upon the erroneous advice complexity of USDA programs. Although
preted the law as providing the farmer with a from FSA. These farmers were denied their the NAD statute was intended to create a
full thirty days after mediation within which NAD appeal and are therefore also denied an simple and straightforward appeal process
to request an appeal. According to the FSA, opportunity for judicial review. Moreover, it that farmers could utilize without the assis-
a NAD appeal could be filed any time within has been anecdotally reported that some tance of an attorney, this problem illustrates
30 days after the conclusion of mediation, local offices continued to send out the letter the procedural dangers awaiting an ill-in-
irrespective of the date that the farmer first containing the misinterpretation for some formed participant. For example, if a farmer
received notice of the adverse decision. time after the FSA Notice APP-26 was is- files a NAD appeal first, and then seeks
Despite the fact that this interpretation was sued. mediation, the appeal request is docketed
in direct conflict with the regulations pub- These farmers’ situations could be easily and his or her rights are preserved. 7 C.F.R.
lished by the Office of the Secretary of Agri- remedied. In cases where the farmer relied § 11.5(c)(2). The NAD hearing may or may
culture, the FSA persisted in it interpretation. upon the FSA letter and thus missed the not be held within thirty days following me-
Moreover, the national FSA office issued appeal deadline, the FSA could review the diation. Id. As described herein, if a farmer
this interpretation in the FSA Handbook that farmer’s case and issue a new adverse deci- seeks informal review, the time period for
was sent out to all FSA state and county sion. The farmer would then have the right to requesting a NAD appeal is extended indefi-
offices. FSA HANDBOOK, Program Appeals, appeal this decision. However, FSA officials nitely, until a new decision is reached. 7
Mediation, and Litigation (1-APP), 6-12, ¶ in Washington have refused to do so. C.F.R. § 11.5(a). The farmer, presented with
97C (Aug. 15, 1997). According to this inter- Three aspects of this situation are particu- a number of options, is expected to know
pretation, at the conclusion of mediation, the larly disturbing. First, it exemplifies a problem which to chose and when to make this choice.
mediator was supposed to issue a report that that exists within the USDA. The FSA and FSA appeal letter/Continued on page 7

FEBRUARY 2000 AGRICULTURAL LAW UPDATE 3
Status of regional dairy compacts
By Ken Bailey now used to reflect milk used to produce both facing volatile milk prices and declining fed-
butter and nonfat dry milk. eral fluid milk prices saw the compact as a
Background on milk pricing The new order reform represents a major method of gaining more control over the
Milk pricing is exceedingly complicated change in how milk is priced. The number of marketplace. Farmers in the rest of the north-
because of our discriminatory pricing system. federal orders will be consolidated from 32 to east (primarily in New York and Pennsylva-
Under this system, milk is priced according to 11. New formulas will drive class prices, and nia) wanted to join the New England Com-
how it is used. A tanker of milk going to a hence farm-gate milk prices. This will have pact, and farmers in the South (from Virginia
manufacturing plant to produce cheese will two affects. First, milk pricing at the farm- to Florida to Texas to Missouri) wanted to
be worth less under the federal order system level will be more transparent. Farmers will form a new Southern Dairy Compact. To do
than the exact same tanker going to a fluid see a direct link between the now larger that, Southerners supported the extension
bottling plant. Thus milk is allocated to the federal order their milk is sold into and their and expansion of the New England Com-
higher value uses (Class I for fluid purposes milk check. Second, milk prices will be more pact.
and Class II for soft manufactured purposes), market oriented. Under the old system there The stage was now set for tremendous
and the rest is used for lower-value manufac- was a two-month lag between changes in the strife and conflict. To the proponents of
turing purposes (Class III for hard cheese and BFP and Class I and II prices. Under the new compacts, this policy would enhance and
butter, and Class IIIa for nonfat dry milk system, when cheese prices change, for ex- stabilize the fluid portion of farmers milk
production). In theory, this system of dis- ample, farmers will see it on their milk check checks. And it would help stem the decline in
criminatory pricing results in a higher farm- the following month. There will no longer be the number of small farm families in many
gate milk price. a two-month lag in some class prices. Farmers regions of the U.S. It would also provide
Under the old milk pricing system, prior to will therefore receive clear and direct signals greater regional pricing authority. Why de-
recent federal order reform, milk prices were from the market place to either expand or pend on the federal government to set local
driven primarily by the Basic Formula Price, contract milk production. or regional milk prices?
or BFP. Each month, USDA would survey To opponents, primarily processors and
unregulated manufacturing plants in Minne- The New England Compact farmers outside of compact regions, com-
sota and Wisconsin. Those plants would The U.S. dairy industry has recently been pacts represented depression-era economics
report what they paid for milk used to pro- split over milk pricing issues. Dairy farmers in that did not jibe with a modern U.S. economy
duce primarily cheese. Since it was unregu- the Upper Midwest want to deregulate the now entering a new millennium. Besides,
lated milk, it represented a very small portion sixty-year-old system of federal milk pricing. some thought, where would it end? Would
of the nation’s milk supply. This survey infor- At the same time, some farmers, primarily in all milk produced in the U.S. someday be-
mation was used to compute the BFP. The the Northeast and South, want congres- come involved in a regional dairy compact?
BFP in turn was set equal to the Class III price, sional authority to create regional pricing
and was used in the computation of the Class authorities that will enforce minimum price What is a dairy compact?
I and II prices. floors. A dairy compact is simply an agreement
The problem with the old system was that Milk prices in the U.S. are regulated by among a group of states to regulate the price
the BFP was heavily influenced by cheese federal and state milk marketing orders. Cali- of milk used for fluid purposes. Compacts
prices and had an enormous impact on U.S. fornia, Virginia and Pennsylvania, for ex- have not been involved in the regulation of
milk prices. That small amount of milk in the ample, have state orders that coordinate manufacturing milk (i.e. milk used to make
Upper Midwest was effectively pricing milk in prices with the nearby federal orders. These butter, nonfat dry milk, cheese, etc.) since
the rest of the country due to its inclusion in orders were created back in the early 1930s in manufactured dairy products like cheese trade
the formula prices for Class I and II. order to stabilize volatile milk prices. on a national market. Fluid milk, since it is
That will change under the new federal In 1996 when Congress asked the Secre- bulky and perishable, still trades primarily in
order reforms that became effective January tary of Agriculture to revamp milk pricing, the regional markets. This, however, is changing
2000. The 1996 Farm Bill required the Secre- idea was to modernize the current national rapidly as the fluid industry is becoming more
tary of Agriculture to revamp milk pricing. system of milk pricing, make it more market consolidated, and as new technologies (i.e.
The Secretary was given wide latitude in oriented, and recognize the interstate nature reverse osmosis) allow milk to be concen-
determining a new method for determining of milk. When federal orders were first cre- trated at the farm level to make transporta-
milk prices. This process has been called ated, milk rarely moved more than 100 miles. tion to distant markets more economical.
“federal order reform.” Today, milk regularly moves 1000 miles, some- Compacts create a regional pricing author-
Under the new system, class prices are times as much as 2000 miles. Milk produced ity, called a Compact Commission, that fixes
influenced by commodity prices for cheese, in California does travel to Florida markets a minimum fluid milk price called the compact
butter, nonfat dry milk, and whey. These some months of the year. So, a modern price. Any milk sold for fluid purposes in the
commodity prices are used to compute com- system of milk pricing would do so within an New England Compact, for example, is sub-
ponent values for butterfat, protein, other interstate framework. ject to a minimum price floor of $16.94 per cwt.
solids, and nonfat solids. This new system, The 1996 Farm Bill also contained a little The federal minimum fluid price—the Class
called multiple component pricing, reflects known provision called the Northeast Inter- I price—is usually below this floor price and
the value of components in manufactured state Dairy Compact.1 I call it the New En- rises and falls each month with changing
dairy products. These component values are gland Compact since it refers to just six New market conditions. The Compact Commis-
then used to compute class prices. England states. That provision in many ways sion collects the compact premium each
The classes have also been changed slightly represents the opposite of federal order re- month—the difference between the compact
under order reform. Class III use is solely for form since it is not market oriented and price of $16.94 per cwt and the federal order
cheese production. Class IV, a new class, is provides enhanced pricing authority for a Class I price—and distributes the proceeds
select group of dairy farmers. back to farmers that participate in the Com-
The creation of the New England Com- pact.
Ken Bailey is an Associate Professor of Dairy pact had the impact of creating a ground swell Compacts effectively disrupt the interstate
Markets and Policy at Penn State University, of popular support among many dairy farm- nature of milk pricing since they create pricing
University Park, Pennsylvania. ers that supplied the fluid market. Farmers authorities that set their own milk prices.

4 AGRICULTURAL LAW UPDATE FEBRUARY 2000
They must derive their authority from the cheese prices have a direct impact on their the nation for average milk sales per cow at
U.S. Congress since only Congress is autho- milk check. The Bailey and Gamboa study 11,921 pounds, has spearheaded the organi-
rized to create interstate compacts under the showed that a Southern and Northern dairy zation for a new Southern Dairy Compact.5
Compact Clause (Article 1, Section 10, Clause compact would lower farm-gate milk prices in Clearly this figure reflects variances in com-
3) of the U.S. Constitution. Interstate trade Wisconsin by about $0.21 per cwt. It would petitiveness between states.
in goods and services has been the hallmark also lower farm milk income in that state by Another big trend in the U.S. dairy indus-
of U.S. commerce since the founding of the 64 million (2.3 percent) per year. try is that of small versus large operations.
Union. Historically, compacts were created These economic implications explain part Typically, it is the larger dairy operations
for interstate ambulance services, port au- of the controversial nature of interstate dairy (3,000 cows and up) that are either new
thorities, nuclear waste disposal, etc. Until compacts. Processors are fighting the prolif- startups or expanding. They are increasingly
recently, they have not been created to price eration of regional dairy compacts through competing in a national marketplace with
a commodity. their trade association, the International Dairy more traditional dairy farms that are milking
Most farmers in New England support the Foods Association. Their members are con- 50-100 dairy cows. Often the smaller dairy
compact since it protects them from rapidly cerned about lost sales and feel threatened by farms are very diverse in terms of numbers of
changing market conditions. For example, regional pricing authorities. enterprises, and many have a lower overall
the Class I price of milk in New England fell Thus the economics of dairy compacts are return on assets when compared to the newer
from $19.86 per cwt in February 1999 to clear. They enhance farm-gate milk prices operations.
$12.79 per cwt in April 199, a drop of $6.57 per and result in more surplus milk, which has the Another dairy industry trend that should
cwt. Part of that decline, however, was offset effect of lowering dairy commodity prices. be considered is in the fluid milk market. Per
by the compact over-order premium. This negative impact of surplus milk could be capita consumption of milk has eroded over
Farmers in New England derive half of avoided, however, by implementing a supply time. Fluid milk competes with other bever-
their income from fluid milk sales. So while control program in the compact region. But ages such as soda, fruit juices, and mineral
the manufacturing portion is volatile with that would adversely affect those farmers in water. The dairy industry has not been effec-
changing cheese prices, the other half was the compact regions that are attempting to tive in competing with these other beverages.
supported at $16.94 per cwt. modernize their dairy farms via a major ex- In a recent edition of Choices Magazine,
pansion. writer Adelaja and Schilling note that
Economics of dairy compacts nutraceutical products constitute the fastest
The economic impact of interstate dairy Trends in the U.S. dairy industry growing segment of the U.S. food industry.6
compacts was first studied by the Office of The compact debate takes place during a Consumers are now buying orange juice with
Management and Budget,2 and later by Bailey time of fundamental change in the U.S. dairy twice the vitamin C and supplemented with
and Gamboa.3 Both studies showed very industry. Milk production is shifting dramati- calcium and vitamin E. That orange juice now
similar results. cally across the U.S. The West—primarily comes in an attractive package with a thick
Dairy compacts do raise the farm price of California, Idaho, New Mexico, and Ari- easy-to-use handle and colorful graphics.
milk. In the Bailey and Gamboa study, farm- zona—are expanding milk production rap- The gallon of milk in the dairy case comes in
gate milk prices in a proposed Southern Com- idly, around 5-12 percent per year. They have a thin plastic bottle, has very poor labeling
pact rose $1 per cwt, or over 6 percent with an adopted a large herd model (3,000 milking that does not capitalize on the fact that milk
effective $2 per cwt compact premium. A $1 cows and up) that is focused on the dairy contains calcium, and may suffer from a poor
compact would result in an increase of around enterprise, produces a high quality product, image.
$0.50 per cwt, or just over 3 percent. The cost and has a low unit cost of production. The What does this have to do with dairy
of the compact would be borne by consumers Northeast is expanding milk production compacts? The future of the U.S. dairy indus-
and processors in the compact region. Retail slowly, around 1-2 percent a year. In the try is in getting more competitive with other
milk prices rose $0.15 per gallon (5.1 percent) Upper Midwest, milk production is either beverages and selling more product.17 This
and per capita fluid milk consumption fell 3 stable or declining. And milk production is will not be accomplished if the industry
pounds (1.6 percent). declining everywhere else. That is primarily decides to rely on new government pricing
One could argue that the economic impact true in many Southern states like Texas, programs. These pricing programs, while well
of compacts on processors (via lower fluid Missouri, Kentucky, Tennessee, and Louisi- intentioned, can backfire if market opportu-
milk sales) and consumers (via higher retail ana. nities are lost. In the case of expanding use of
milk prices) is minimal when compared to the Part of the problem is the economics of milk dairy compacts, it may be risky to charge
positive economic impact on compact farm- production. Not every dairy farmer has the consumers more for a product like milk with-
ers. Some would argue that compacts help same average milk production per cow. Even out providing something in return. Consum-
support a local fluid milk industry. But the within a state, this number varies tremen- ers are used to a marketplace with stable to
more contentious issue is that compacts also dously. The economics are clear—the more declining prices.
have an adverse economic impact on farmers milk you produce from a given cow, the more
outside the compact region. revenue and the lower the unit cost. Eco- Conclusion
When compact farmers receive a higher nomic studies suggest that both fixed and The question of what to do with dairy
milk price, they expand production. Also, variable costs per cwt of milk produced fall compacts has been settled, at least for now.
when consumers buy less milk, that adds to with higher levels of milk production. President Clinton signed the Consolidated
a greater supply of surplus milk. Surplus milk Again, not every state has the same level of Appropriations Act of 2000 on November 29,
must be processed into storage dairy prod- milk production. In 1998, Washington ranked 1999. The Act cleared the final hurdles for
ucts such as butter, nonfat dry milk and number one in average milk sales per cow at implementation of federal order reform. The
cheese. Those additional products result in 21,476 pounds.4 Other Western states such New England Compact was to be terminated
lower dairy commodity prices. That in turn as Arizona, Colorado, New Mexico, Idaho once federal order reform was implemented.
lowers farm prices in non-compact regions and California all ranked in the top six high Thus the budget bill also extended the dead-
such as the Upper Midwest and the West. producing dairy states. But many southern line for the New England Compact for at least
The Upper Midwest has been fighting states, such as Missouri, Alabama, Missis- two more years. No mention was made of
dairy compacts primarily because about 85 sippi, Oklahoma, Arkansas, Kentucky, and adding six other northeast states to the exist-
percent of their milk is manufactured into Louisiana, ranked in the bottom ten milk ing New England Compact, nor of a South-
dairy commodities, mainly cheese. Thus producing states. Louisiana, ranked 50th in Continued on page 6

FEBRUARY 2000 AGRICULTURAL LAW UPDATE 5
Dairy Compacts/Cont. from page 5 GM product labeling/Cont. from page 2
ern Dairy Compact. foods, pending the introduction of tighter regu- acceptable for kosher and halal law. Although
Discussion of the future of dairy compacts lations next April. Even Monsanto’s caterer for animal-to-plant gene transfers could cause con-
will thus be timed with a new farm bill. That the United Kingdom banned GM food from the cern for people adhering to certain dietary restric-
should allow a full discussion of the merits of staff cafeteria. In the United States, the summer tions, the FDA has pointed out that no such
regional dairy compacts. That discussion and fall of 1999 saw an intensification of protests, products are yet marketed, and that the Agency
should take place with an understanding that including the damage of private and university would have the opportunity to consider such a
no part of the country can be effectively research plots. case if it arises.
isolated from the rest. Milk produced in one One position that various governments have The Vatican’s Pontifical Academy for Life
part of the country can have a direct impact on adopted is that GM crops and food allowed in the recently announced its decision that modifying
milk prices in the rest of the country. Thus the market must be labeled as such. GM product the genes of plant and animals is theologically
issue of how best to price milk will likely be labeling is required in Britain and Switzerland, acceptable. Nevertheless, the vice-present of the
discussed at the national level. and is under EU regulations, while Japan and Academy stated that consumers must be in-
Dairy compacts are designed to assist farm- South Korea plan to implement labeling require- formed about GM products through proper label-
ers in a particular part of the country by ments. At present, there is no mandatory require- ing. This ill-defined “right to know” is another
stabilizing and enhancing a portion of their ment for labeling GM products in the US. This is popular justification for labeling.
milk check. Many regions of the country, a situation that activists are trying to change using
particularly in the Northeast and in the South, a number of justifications, including the unsup- Labeling righteously
want a more active role in stemming the ported allegation that GM food is not safe. The During November, the U.S. House of Repre-
decline in the numbers of dairy farm families. issue of food safety falls within the purview of the sentatives introduced H.R. 3377, a bill that would
Dairy compacts attempt to limit direct Food and Drug Administration (FDA). require the following notice on foods derived
market competition for a select group of dairy from GM crops: “Genetically engineered; United
farmers. They attempt to circumvent the Labeling safety States government notice: This product contains
interstate nature of milk. Regional dairy com- Under the Federal Food, Drug, and Cosmetic genetically engineered material, or was produced
pacts do raise the price of milk to farmers that Act, the FDA has the authority to ensure the with a genetically engineered material.” The bill
ship milk into the compact region. But com- safety and wholesomeness of most foods, except suggests that qualifying food would contain as
pacts also have other direct and indirect meat and poultry. In 1992, the FDA published a low as 0.10 percent GM ingredients, a standard
impacts on consumers, processors, and non- policy statement on the regulation of foods and that is ten times more strict than the EU require-
compact dairy farmers. animal feeds derived from new plant varieties ment. Represeentative Dennis Kucinich (D-OH),
Dairy compacts also raise special challenges developed by genetic engineering techniques. An who co-sponsored the bill, explained, presumably
to members of Congress. Where does it all evaluation of the safety and nutritional compo- sincerely, that no one is suggested that GM food
end? Compact prices may have to be raised sition of food derived from GM plants relies upon is dangerous, but, “If we are what we eat, then
over time as farm production costs rise. Dairy information pertaining to the agronomic and consumers must know what they are eating.”
compacts may spread to other parts of the quality attributes of the plant, genetic analysis of One of the doctrines of the legislation is that the
country, raising retail milk prices. And farm- the modification and stabilitiy of expected ge- process of genetically engineering foods results in
ers that produce other commodities such as nomic traits, evaluation of the safety (i.e., toxicity the material change of such foods. This material
grain and hogs may ask for their own com- and allergenicity) of any newly introduced pro- change seems to be one of perception, and not
pacts. This occurs at a time when we will begin teins, and chemical analysis of important toxi- based on fact.
a new round of trade talks at the World Trade cants and nutrients. The FDA requires pre-mar- H.R. 3377 is subtitled “Genetically Engineered
Organization. Thus to members of Con- ket approval for molecules (proteins, fatty acids, Food Right to Know Act.” Yet the Federal Food,
gress, dairy compacts are becoming an ideo- carbohydrates, etc.) produced by introduced Drug, and Cosmetic Act does not require disclo-
logical issue. genes, if these molecules differ substantially in sure in labeling of information solely based on the
In conclusion, regional dairy compacts will structure and function from typical moleclues consumers’ desire to know. According to the
likely provide some farmers a higher milk found in foods. FDA’s interpretation of the Act, the agency does
price, but it will have economic consequences A basic principle in the 1992 policy is that the not even have the authority to mandate labeling
for consumers, processors, and farmers in FDA uses a science-based approach for ensuring based solely upon a consumer’s right to know the
non-compact regions. In short, dairy com- the safety of foods from new plant varieties. The method of production if the final product is
pacts are very controversial! FDA focuses its evaluation on the objective considered safe. And, despite the hoary cliché,
characteristics of the food or its components, there simply is no overriding “right to know”
1
U.S. Senate, “Joint Resolution: To Grant Consent of rather than the fact that new development meth- principle.
Congress to the Northeast Interstate Dairy Comopacts,” ods were used, at some point, to produce the A federal appellate court clearly made this point
S.J. Res. 28, 104th Congress, 1st Session, March 2, food. Accordingly, the Agency has not required in the International Dairy Foods Association
1995. labeling for other non-GM methods of plant case. Dairy manufacturers challenged the consti-
2
Office of Management and Budget, The Economic breeding, such as chemical-induced or radiation- tutionality of a Vermont statute that required
Effects of the Northeast Interstate Dairy Compact, induced mutation, somaclonal variation, or cell ientification of products that were, or might have
Washington, D.C., February 1998. culture. been, derived from dairy cows treated with re-
3
Bailey, Ken and Jose Gamboa, A Regional Eco- combinant bovine somatotropin. The appellate
nomic Analysis of Dairy Compacts: Implications for
Labeling religiously court agreed with the dairy manufacturers that
Missouri Dairy Producers, Report #CA-160, Commercial
In May 1998, the Alliance for Bio-Integrity filed the labeling law was contrary to the constitutional
Agricultural Program, January 1999.
4
Source: USDA, Milk Production, February 16, 1999. a lawsuit against the FDA seeking to institute right not to speak. Moreover, the court noted that
5
Louisiana Department of Agriculture & Forestry. mandatory labeling of all GM foods. The suit Vermont defended the statute, not on any health
Memorandum: Final Draft of the Southern Dairy Com- alleged, among other things, that current FDA or safety concerns, but on the basis of the public’s
pact.” Memorandum dated March 27, 1997. policy violates the freedom of certain religions right to know. The court found that consumer
6
Adelaja, Adesoji and Brian Schilling, Nutraceuticals: that adhere to dietry laws. Anti-GM food activists curiosity is insufficient to justify compromising
Blurring the Line Between Food and Drugs in the Twenty- often raise the religion-based issue as a justifica- protected constitutional rights, and the court
first Century, Choices, Fourth Quarter 1999, pps. 35-39. tion for labeling. This argument, however, does noted that it was unaware of any case in which
7
See Bailey, Ken, Milk Marketing in the New Millen- not seem particularly compelling. For example, consumer interest alone was sufficient to justify
nium; It Will be Different!, Choices, Fourth Quarter 1999, both Orthodox Rabbis and Muslim leaders have a requirement that is the functional equivalent of
pps. 61-63, for a more futuristic look at the dairy industry. decided that simple gene additions, which lead to a warning about a production method that has no
one or a few new components in a species, are Cooperative stock/Continued on page 7

6 AGRICULTURAL LAW UPDATE FEBRUARY 2000
FSA appeal letter/Cont. from page 3
The farmer’s decision is critical in that the
GM product labeling/Cont. from page 6
discernible impact on the final product. Grain buyer recovers
correct completion of the NAD process is
only way to preserve a right to judicial review. Labeling voluntarily landlord lien losses
Third, this issue arguably presents a dis- Agriculture Secretary Glickman told Consumer A Tennessee court on January 3, 2000 granted
turbing lack of concern for the impact of Reports, “Frankly, if the consumers demand a grain buyer’s claim for recovery of amounts
USDA decisions upon the lives of real farm- labeling—even if we think it doesn’t convey a lot paid on a statutory landlord lien.
ers. Officials at the FSA have been aware of of good stuff—we’re probably going to end up The case is significant because grain buyers
this problem for some time and are aware that with a labeling scheme.”There have been several in many states are at risk from statutory liens
there are farmers that have been denied reports that the USDA is advocating a labeling that are not covered under the federal clear
appeal rights because their FSA local office plan intended to meet demand of the European title lien law [7 U.S.C. section 1631].
gave them erroneous advice. Yet, assistance market. This plan complements the USDA’s The case involved a contracted purchase of
has been declined. Farmers are likely to see decision that a GM product would not qualify for grain by Continental Grain Co. from Floyd
this issue as simply one of fairness. If a farmer certification as “organic.” Moreover, in addition and Ann Garner, d.b.a. G&G Farms (the
provides erroneous information to the FSA, to the House’s labeling bill, Senator Tom Hayden producer). Upon delivery of the grain in 1997,
he or she may be denied program benefits. If (D-CA) recently promised to introduce legisla- Continental issued a check for $264,560.55
the FSA provides erroneous information to tion that would require labeling of GM seeds, as made payable to both the producer and a
the farmer, there appears to be no recourse for well as GM raw and processed food. It is possible, secured creditor, Delta Corp.
the farmer, and the FSA actually benefits therefore, that mandatory labeling will material- Later, Rice Farm Products (the landlord)
from the error. ize by sheer momentum. asserted a claim against Continental based
—Susan A. Schneider, Assistant Prof. While the labeling of GM food may be a matter upon a statutory lien under Tennessee law
Graduate Program in Agric.Law, of time, the manner in which this change is for rent owed by the producer. Continental
Univ. of Arkansas School of Law brought about is of consequence. The institution said it had no prior knowledge of the exist-
of mandatory labeling forces a paradigm shift on ence of unpaid rent to the landlord or the
statutory lien claim. When the producer failed
Membership directory the FDA from product-driver regulation to pro-
cess-driven regulation, and from science-based to pay the full rent due, the landlord brought
suit against Continental as the purchaser of
to appear on regulation to a regulatory system grounded in
social, political, and economic criteria. This change the grain grown on the leased land. Conti-
nental paid $50,000 to Rice Farm Products to
AALA website may well increase the consumer confusion that
labels are supposed to prevent. As the Interna- settle the statutory lien claim and took an
The AALA Board of Directors is pleased to tional Dairy Foods Association court noted, if assignment of the landlord’s rights. Conti-
announce that it recently approved the post- consumer interest alone were sufficient, then nental then sought recovery against the pro-
ing of the AALA membership directory on there would be no end to the information that ducer and Delta Corp. for the payment on the
our AALA Internet site. Initially, a listing of manufacturers could be forced to disclose on statutory landlord’s lien.
members and their practice areas will be posted labels. Testimony in the case showed that Delta
in the “members only” section of the website. The first generation of transgenic plant s had Corp. financed the producer’s operations
This is the area that can only be accessed by input traits designed to affect methods and costs and was aware that the producer rented land
members with a valid AALA website pass- of production. In contrast, the next generation of from Rice Farm Products. Further, the facts
word. transgenic plants contains output traits designed showed that Delta Corp. did not seek a
In addition, a membership directory will to alter particular properties in the final product in subordination agreement with the landlord;
eventually be posted on the general website response to consumer preferences. As an ex- nor did it notify Continental of the existence
for access to anyone who visits the site. This ample, Monsanto recently announced the devel- of the landlord’s lien. Delta Corp. received all
general listing will not include practice areas, opment of a new variety of rape seed plant that of the proceeds paid by Continental in the
thus avoiding attorney advertising restric- produces oil enriched in beta-carotene—the com- joint check.
tions. We are confident that this member- pound that the human body converts into vita- In its decision, the circuit court for Dyer
ship listing will be helpful to members and to min A. County, Tennessee (at Dyersburg) found
others with an interest in agricultural law As this new generation of GM food products that Continental, as purchaser of the producer’s
matters. We are also hopeful that it will help enters the marketplace, it is likely that manufac- grain, was liable to the landlord for unpaid
to “spread the word” about the expertise of turers will voluntarily include information about rent based upon the Tennessee statute. Since
our members, enhancing the careers of our their enhanced GM-based ingredients. Of course, the landlord’s rights were superior to Delta
members and encouraging others to join with voluntary labeling is unlikely to appease those Corp. (the secured creditor), the court found
us. anti-GM food activists who have experienced a that “any proceeds from the sale of crops
If any members wish to exclude their name funding windfall created by the GM food debate. Delta received from Continental is held in a
from the general website listing, please con- —Phillip B.C. Jones, Ph.D., J.D., Seattle, constructive trust for the payment of rent
tact Prof. Drew L. Kershen in writing at the Washington, pbcj@wolfenet.com owed [to the landlord].” In so doing, the
University of Oklahoma, 300 W. Timberdell Reprinted with permission from the ISB court found that Continental could recover
Road, Norman, OK 73072-6331; or by e-mail News Report, February 2000 from the secured creditor for the amounts
at dkershen@ou.edu by April 1, 2000. 1
Alliance for Bio-Integrity et al. v. Donna Shalala et paid by Continental to the landlord. This
All members are encouraged to explore the al.,Civil Action No. 98-1300 (D.D.C., filed May 27, 1998). finding also means that the landlord could
recent improvements to our website. The 2
Vogt, Donna U. and Parish, Mickey. 1999. Food have sought payment directly from Delta
address is http://www.aglaw-assn.org. Drew biotechnology in the United States: Science, regulation, and Corp., rather than pursuing Continental in
Kershen’s extensive agricultural law bibliog- issues. Congressional Research Service Report to Con- the first instance. Continental also was
raphy is now online in searchable format and gress. Available: http://www.usia.gov/topical/global/ granted a default judgment against the pro-
the Ag Law Update is now available to mem- biotech. ducer.
bers, also with a convenient search mecha- 3
Barnett, Antony. 1999. Vatican theologians say “pru- —David C. Barrett, Jr., Counsel for
nism. We are expanding our links with other dent yes” to GM foods. The Observer, 28 November, 13. Public Affairs, National Grain and Feed
sites and our listings with various search 4
International Dairy Foods Association et al. v. Amestoy Association, Washington, D.C.
engines. Once again, the Board thanks Drew and Graves, 93 F.3d 67 (2nd Cir. 1996). Reprinted with permission from the
for his continuing efforts to develop and 5
Seeds of Change, 1999. Consumer Reports, Septem- January 13, 2000 NGFA Newsletter,
improve our Internet presence. ber 41-46. Vol. 52, No. 1

FEBRUARY 2000 AGRICULTURAL LAW UPDATE 7
Printed membership directory
In conjunction with the AALA year 2000 membership drive, a printed membership directory will be printed. This directory will list
all current members and be organized by state. Areas of practice will be indicated. In the past, our printed directory has been a
wonderful tool for keeping members in contact with each other as well as providing a valuable referral source for members in private
practice. Please make sure that your year 2000 membership dues have been paid to ensure that you will be listed in the new directory.
And, pass the word to lapsed or potential new members that now would be an excellent time to join the AALA. Only members
that are paid up by April 1, 2000 will be listed. Contact Bill Babione with questions or for copies of an AALA application form, 501-
575-7389; bbabione@comp.uark.edu.

8 AGRICULTURAL LAW UPDATE FEBRUARY 2000