MINNEAPOLIS — A federal appeals court panel Thursday upheld a Depression-era federal system under which higher prices are paid for milk the farther dairy farmers are from Eau Claire, Wis.

A three-judge panel of the 8th U.S. Circuit Court of Appeals in St. Louis reversed a ruling by U.S. District Judge David Doty of Minnesota, who had thrown out much of the milk-pricing system.

Doty ruled last November in Minneapolis that the geographical differential was unlawful and had “no rational connection” to the modern dairy industry. Dismantling of the system was delayed pending a decision on the appeal.

Under a system that dates back 60 years, fluid milk is sold under 32 marketing orders that peg the price paid to farmers by processors to how far away from Eau Claire the milk is sold. Essentially, the greater the distance, the higher the price that is set.

In reversing Doty’s ruling, the appeals court panel said U.S. Agriculture Secretary Dan Glickman may continue to enforce what is known as the Class I geographical differential. The payment makes up about 20 percent of the overall price farmers get for milk, or roughly $1 billion a year nationwide.

In its 38-page ruling, the appeals court panel said the pricing regulations are within the discretionary powers of the secretary of agriculture.

While Doty had thrown out the geographic pricing formula, he had upheld the formula for determining the base price of milk. The appeals panel Thursday let Doty’s ruling on the base price stand, rejecting an appeal by the Minnesota Milk Producers Association.

The pricing system was designed during the Depression to promote dairy farming in regions other than the Upper Midwest, which leads the nation in production, and to compensate for transportation costs when milk is shipped across the country.

During a February hearing before the appeals panel, lawyers for the U.S. Department of Agriculture argued that the differential is still necessary to keep dairy farmers outside the Midwest in business.

“We welcome the court’s decision primarily because it allows USDA to turn its full attention to fixing the national dairy program and reforming the milk marketing orders,” said Tom Amontree, an agency spokesman.

The USDA has sent proposals to reform the system out for public comment, and will have a plan completed by next April, Amontree said.

The Minnesota Milk Producers Association filed the lawsuit in 1990, challenging the system as unfair to Upper Midwest dairy farmers.

Minnesota Attorney General Hubert Humphrey III, who led a coalition of several Midwestern states in joining the milk producers’ effort to overturn the system, said he was “profoundly disappointed” by the ruling.

“The decision illustrates the difficulty of using the courts to overturn federal policy decisions, especially when Congress has, in effect, bestowed its blessing on the system under attack,” Humphrey said.

Humphrey’s office was discussing the next step with attorneys for the Minnesota dairy group. The producers’ association could petition for rehearing before the entire appeals court or immediately petition the U.S. Supreme Court to review the case, he said.