DAIRY ECONOMICS

No \/

Sam /O^

Agriculture Handbook No. 13 8 U. S. Department of Agriculture Federal Extension Service
PREFACE

This handbook is intended as a "tool" for leaders

who influence thinking and contribute to better understanding of the dairy industry.

Several factors peculiar to the industry were responsible for development of the handbook. Milk is a

bulky perishable raw material used daily in almost

every home. Many regulations affect milk throughout

the production and marketing process. The influences

of supply and demand and pricing procedures may be

difficult to understand. Recent technological developments have accentuated the cost-price squeeze for producers, processors, and distributors.

Another problem is that of keeping up with the large

amount of information already available, and new information as it is issued. A number of selected references are given. Five areas of subject matter of

concern to many are covered. The purpose is to

(1) bring about a better understanding of the industry, (2) develop better understanding of the function of price, (3) increase awareness of Government's

role, (4) consider current beliefs on production response to changes in price, and (5) suggest a layman's

approach to forecasting.

This subject matter should lend itself to many educational topics—marketing, public affairs, adjustments

arising from technological developments, forecasting,

and current developments. It is hoped this information will be useful in projecting Extension programs,

especially where an analysis of the dairy situation is

desired; also in helping people make decisions, develop fiolicies, and take action in the long time public

interest, based on economically sound facts.

CONTENTS

Page

Parti. The dairy industry—a bird's-eye view. 4

Importance of the dairy industry 4

Regulations to safeguard consumers 4

Where milk and its products come from 5

Utilization of the milk supply 6

Foreign trade in dairy products 12

Adjustments in the dairy industry due to technological developments 13

Part 2. Pricing in the dairy industry 16

The pricing system resembles the nervous

system 16

Economic principles help tell us what to expect 16

Producer responses to price affect supply.... 19

Consumer responses to price affect demand. . 20

Classified pricing and pooling 20

Page

Seasonal and base rating plans 23

Formula pricing 24

Part 3. The role of Government in the dairy

industry 27

Federal milk marketing orders 28

State milk controls 29

The price support program 31

Food distribution programs 32

Part 4. Producer response to price changes... 34

A hypothetical adjustment 37

Part 5. Forecasting the demand for and supply

ofmUk 38

How people make forecasts 38

An example of forecasting 39

Glossary of terms 42

References 44

ACKNOWLEDGMENTS

The authors wish fo express their appreciation for the senerous

assistance of others. Special thanks are due Herbert C. Kriesel,

Head, Dairy and Poultry Section, Statistical and Historical Research Branch, Agricultural Economics Division, Agricultural Marketing Service, who not only contributed a section on production

response to price, but provided a number of ideas that hove been

used in the manuscript. Dr. L F. Herrmann, Head, Dairy Section,

Market Organization and Costs Branch, Market Research Division,

AMS, made a number of helpful suggestions. Anthony S. Rojko,

Agricultural Economic Statistician, Statistical and Historical Research Branch, Agricultural Economics Division, AMS, and Dr. C. W.

Pierce, Department of Agricultural Economics, Pennsylvania State

University, mode important contributions to the part dealing with

the application of price theory.

Others provided data pertaining to research, governmental programs, and related information. Credit is due members of the

staff in Agricultural Marketing Service, Agricultural Research

Service, and Foreign Agricultural Service who have responsibilities

that pertain to the dairy industry. They have contributed substantially to this manuscript.

Hinds, Max Kenyon, 1912- Dairy economics handbook [by Max K. Hinds and William F.

Johnstone. Washington] U. S. Dept. of Agriculture, Federal Extension Service [1958]. 44

p. illus., maps. 26 cm. (U. S. Dept. of Agriculture. Agriculture handbook no. 138).

Cover title. "References" : p. 44. Bibliographical footnotes. 1. Dairy products—U. S.

[1. Dairy industry and trade—U. S.] i. Johnstone, William F., 1920- Joint author.

II. Title. (Series) HD9275.U6H5 338.1771 Agr 58-291.
DAIRY ECONOMICS HANDBOOK

Max K. Hinds, Extension Economist, Dairy Marketing

Federal Extension Service

and

William F. Johnstone, Extension Economist

Pennsylvania State University, University Park, Pa.

The use of cows for milk goes far back in history.

The dairy industry as we know it today has changed

drastically from its beginning. More changes have

occurred in the past 75 or 100 years than in all

previous centuries.

Change . . . is it a mark of progress ?

With its roots firmly implanted on the eastern seaboard the dairy industry moved westward as population shifted inland. During this period the growing

young industry felt the impact of changing transportation, new machinery, advancing research and organizations, and the dynamic leadership of certain of its

members.

More change . . .

Like other branches of agriculture, dairying tended

to specialize in various parts of the country. Around

big cities the market milk industry developed. More

people and bigger cities brought about the expansion

of milksheds from which supplies were drawn. About

1840 milk began to be shipped by railroad. This

enabled more distant farmers to share in the market

milk business. Some of the more distant dairymen

had advantages of lower production costs. Later,

trucks came and accelerated the expansion.

And more change . . .

Further away from the urban markets processing

plants developed for manufacturing dairy products,

butter, cheese, canned milk, and more lately powdered

milk. Advancing technology left its impression in the

manufacturing areas, too,—fewer but larger plants,

mechanization and labor-saving devices, more competition, bigger organizations, to name but a few of the

consequences of progress.

Still more change . . .

One of the major contributing factors to the everchanging dairy industry has been the consumer. The

effect of consumer decisions is clear. The shift from

butter to margarine is an example. During the 1940's

total milk production did not change much, although

population was increasing. Milk needs for the increasing population were met without a proportional

increase in total milk supply. This was done by diverting a portion of the milk supply that had formerly been

used for.butter to other uses such as fluid, cheese, ice

cream and dried milk.

Farmers have changed their method of marketing

milk. They shifted from selling farm-separated cream

to whole milk. This increased the supply of nonfat

solids for human use. In the 1930's only about half

of the nonfat solids was used for food, the rest was

fed to animals or wasted. Today over three-fourths of

this portion of the milk supply is being used by people.

BN 548B

November 1958
Change . . . change . . . change . . .

More recently the dairy industry has been affected

by the Second World War. Increased production of

milk was encouraged by subsidies for nearly 3 years

during the war. At the same time price ceilings held

down the cost to consumers. Through these means

both production and consumption were encouraged.

Most of the important changes mentioned here took

place within a framework of relatively free or unregulated economic forces. It is generally accepted that

some degree of industry regulation is in the best interest of all groups. However, it also seems generally

accepted that regulations should not interfere with adjustments that will be to the long-run advantage of the

dairy industry. Lack of flexibility can impede changes

which so far have been a mark of progress.

PART !. THE DAIRY INDUSTRY—A BIRD'S-EYE VIEW

Importance of the Dairy Industry

• Dairy products furnish essential food nutrients in

almost every home daily.

• Out of every dollar the average consumer spends

for food for home use, about 17 cents goes for dairy

products.

• About 1.5 million farmers sold some milk or dairy

products in 1955.

• About 20 cents out of each dollar of cash receipts

from farm marketings in 1956 came from dairying in

the United States. (Table 1.)

Regulations to Safeguard Consumers

Milk is highly perishable, bulky (87 percent water),

easily contaminated, and a favorable medium for

bacterial growth. Fluid milk is one of our most important foods, both for health and in quantity consumed. Milk has become subject to many laws and

regulations of local. State, and National governments.

This stems mainly from the need for strict sanitary

practices in production and distribution. Also wide

use of the product by consumers has further contributed to acceptance of legal requirements of many

kinds.

The earliest milk regulations were primarily concerned with protection against fraud and adulteration.

Regulations were later broadened to cover other factors

affecting health and sanitation. The obligation of the

municipal authority to protect consumers by milk

ordinances was stated in 1914 in a decision of the Illinois Supreme Court, as follows:

"There is no article of food in more general use than milk,

none whose impurity or unwholesomeness may more quickly,

more widely, and more seriously affect the health of those

who use it. The regulation of its sale is an imperative duty

that has been universally recognized."

The courts have continued to uphold the legality of

milk ordinances to protect the public health. This is

especially true in those instances where the provisions

were reasonable and not discriminatory. However, the

trend is toward a broader interpretation of ordinances

TABLE 1.—Source of cash receipts from farm marketings in aie United States, 1956

Commodity

Cattle and calves

Dairy products

Hogs

Eggs

Broilers

Turkeys

Sheep and lambs

Chickens and other poultry

Wool.

Other livestock and products

Total livestock and products..

Cotton lint and seed

Fruits, nuts, and related products. .. . Wheat

Com

Tobacco

Truck crops, vegetables

Soybeans

Potatoes

Hay

Barley

Rice

All other crops ,

Total, all crops

Total, all commodities

Value

Millions

> $5,307

4,478

2,610

1,789

840

339

330

250

114

193

16,250

2,518

2,348

1,779

1,589

1,163

1,235

924

458

322

240

239

1,307

14,122

30,372

Percentage

of total

17.47

14.74

8.59

5.89

2.77

1.12

1.09

.82

.37

.64

53.50

8.29

7.73

5.86

5.23

3.83

4.07

3.04

1.51

1.06

.79

.79

4.30

46.50

100.00

> About 28 percent ($1,486 million) of the value of all cattle

and calves comes from cattle that farmers say are kept

primarily for milk. This amounts to 4.89 percent of the total

cash receipts, or 19.63 percent for dairy products and value of

dairy animals sold for slaughter.

The Farm Income Situation, Agricultural Marketing Service, U. S. Department of Agriculture, July 1957.

Agrieultun Handbook No. 138, U. S. Department of Agriculture
when it appears that they interfere with trade beyond

the requirements of health and sanitation. A recent

example is the case of the Dean Milk Co. vs. City of

Madison. Here the United States Supreme Court reversed the decision of the Wisconsin Supreme Court.

The original ordinance imposed a 5-mile limit on the

location of pasteurization plants selling milk in Madison. It was pointed out that Madison consumers would

be adequately safeguarded if the city had relied on

the provisions of Section 11 of the U. S. Public Health

Service Model Milk Ordinance.

The marketing of milk and its products now is subject to Federal, State, and local food, drug, and related

laws and ordinances. Dairy products entering interstate commerce are subject to the Federal Food, Drug,

and Cosmetic Act and regulations issued thereunder.

Milk for consumption as fresh milk is subject to sanitary regulation by State and local authorities. The

U. S. Public Health Service sets standards for milk

served on carriers in interstate commerce.

Where Milk and Its Products

Come From

Milk is produced in nearly every county in the

Nation. According to the 1954 census of agriculture

2.9 million farmers were milking at least 1 cow each.

Of this number about 1.5 million were producing dairy

products for sale, and the others were apparently milking cows for family use.

Although milk is produced throughout the country,

production is highly concentrated in certain States.

The 10 States listed in table 2 produced 61 percent of

the Nation's milk supply in 1956. Note that Wisconsin produced nearly twice as much milk as New York,

its nearest competitor, and 4 times as much as Missouri, which ranked 10th in production.

Half of the butter was produced in the West North

Central States with Minnesota leading. The East

Where our dairy products come from

PN 5469

November 7958
North Central States produced 58 percent of the cheese,

and Wisconsin produced three-fourths of that amount.

Because of bulk and refrigeration requirements,

frozen dairy products are produced near the point of

consumption ; therefore production is heaviest in Pennsylvania, New York, and California.

Utilization of the Milk Supply

Since 1940 a greater proportion of the total milk

supply has been going into fluid use, cheese, and frozen

dairy products, as shown in figure 1 and table 3. The

use of butter has declined substantially. During the

Second World War, production of evaporated, condensed, and dry whole milk expanded to meet military

and civilian demands and has since leveled off at about

the prewar percentage. In recent years about threefourths of the Nation's milk production has gone into

two major uses. About half of the total supply has

been used in fluid form and about 25 percent for

butter. The remaining one-fourth has been used for

cheese, evaporated, condensed, and dry whole milk,

and fed to calves.

Per Capita Consumption of Milk in All Forms

Taking the whole milk equivalent of all forms of

dairy products, per capita consumption has shown a

TABLE 3.—Major uses of milk in the United States,

1940 and 1956

Major uses of milk

Fluid milk and cream—off the

farm

Consumed on farms as milk

and cream

Creamery butter

Used for farm butter

Cheese

Frozen dairy products

Evaporated, condensed, and

dry whole

Fed to calves, and other uses.

Total milk production.

1940

Bit.

lbs.

30.1

13.6

36.8

8.1

7.9

3.8

6.1

5.1

111.5

Percent

27.0

12.2

33.0

7.3

7.0

3.4

5.5

4.6

100.0

1956

Bil.

lbs.

49.7

10.0

28.0

3.0

13.8

8.5

7.1

5.6

125.7

Per.

cent

39.5

8.0

22.3

2.4

11.0

6.8

5.6

4.4

100.0

downtrend since 1940 (fig. 2). Spread over the total

period this decline has been about 6 pounds a year per

person. The downtrend leveled off recently with a

slight increase in consumption per capita beginning

in 1954. Part of this recent upturn has been the result

of increased supplies furnished from the Commodity

Credit Corporation stocks or from supplies bought

wholly or in part with Government funds. The special

school milk program has been especially important

during this latter period.

TABLE 2.-^Milk production and manufacture of selected dairy products by Regions and for the 10 leading States,

1956

Total milk produced

Factory production

Region or State

Butter Cheese ' Evaporated NFDMS 2 Frozen

products

North Atlantic

BU. lbs.

22.2

37.3

27.6

9.2

14.6

14.8

Percent

17.7

29.7

21.9

7.3

11.6

11.8

3.1

29.2

54.1

.8

4.9

7.9

9.4

58.3

15.4

.4

10.4

6.1

Percent

2.8

37.4

10.9

8.1

21.8

19.0

13.4

40.6

34.6

1.2

1.5

8.7

26.1

East North Central 21.9

West North Central 10.1

12.0

South Central 14.4

Western 15.5

United States 125.7 100.0 100.0 100.0 100.0 100.0 100.0

Wisconsin

New York

16.9

9.9

9.4

7.3

6.5

6.3

5.8

5.5

5.2

4.2

13.4

7.9

7.5

5.8

5.2

5.0

4.6

4.4

4.1

3.3

17.5

2.0

21.7

1.6

.9

13.6

3.6

3.0

3.4

4.2

43.4

7.4

Î:?

.8

2.1

2.8

2.5

6.3

7.1

15.9

(')

P)

10.2

(»)

(')

10.2

3.8

5.9

5.4

31.0

9.6

24.8

3.1

2.2

5.1

3.6

3.3

1.2

2.6

4.5

13.0

Minnesota 3.7

14.0

14.3

2.8

Ohio

Michigan

9.4

6.8

Illinois 8.6

4.4

Total—10 States 77.0 61.2 71.5 78.5 '51.4 86.5 81.5

' Does not include full skim American or cottage cheese.

2 Nonfat dry milk solids.

' Not shown for States when made by less than 3 plants.

* Total includes only 6 States.

Agriculture Handbook No. 138, U. S. Department of Agriculture
PERCENT

1940 1945 1950 1955

Figure 1.—Percentage of United States milk production going into major uses, 1940-56.

The significance of the longtime decline in per capita

consumption is important. The 1940-56 decline in per

person usage represents the disapearance of a market

that would have consumed the 1956 production of

Wisconsin, the leading dairy State.

Utilization of Milk Fat

The use of milk fat in all forms is shown in figure

3. Milk fat has always been worth more per pound

than solids-not-fat. Consumption of milk fat per per800

700

600

rOTAt MILK EQUIVALENT

CONSUMED IN ALL FORMS

1940 1945 1950 1955

BN 5471

Figure 2.—Milk consumption per capita in all forms, 1940-56.

35-

30

25

1940 1945 1950 1955

BN 5472

Figure 3.—Per capita consumption of milk fat, 1940-56.

November 7958
son declined from a high of 32.8 pounds in 1942 to a

low in 1953 of 26.4 pounds. The amount consumed

through different dairy products shifted far more than

the figures indicate. Except for about 3 percent fed to

calves all the milk fat produced is used for human

food.

Utilization of Milk Soiids-Not-Fat

Per capita consumption on a solids-not-fat basis

(fig. 4) increased at the rate of about one-half pound

per year. Until recently a substantial proportion of

the solids-not-fat has been unavailable for human use.

Much of it was retained on farms and therefore did

not enter commercial channels. A substantial increase

has occurred in the proportion of this component of

milk marketed. Nearly 80 percent has been used for

food in recent years, as compared with 50 percent two

decades earlier. While the use of milk fat has been

declining, the use of most dairy products containing

solids-not-fat has been increasing.

1940 1945 1950 1955

BN 5473

Fig. 4.—Per capita consumption of milk solids-not-fat, 1940-56.

On the average, whole milk as produced contains

about 2^ pounds of solids-not-fat for each pound of

milk fat. On this basis milk testing 4 percent butterfat

would contain 9 pounds of solids-not-fat, or a total of

13 pounds of solids per hundredweight. At the per

capita rate of consumption in 1956 for every pound of

milk fat consumed, the average consumption of solidsnot-fat was 1.8 pounds.

Consumption of Fluid Milk and Cream

As shown in figure 1 there has been a substantial

increase in the total consumption of fluid milk and

cream (whole milk equivalent basis). During the

period referred to this increase has averaged almost

a billion pounds a year.

1940 1945 1950 1955

BN 5474

Figure 5.—Per capita consumption of fluid milk and cream,

Per capita consumption of fluid milk and cream

(fig. 5) increased sharply during the early 1940's.

During the war milk was fairly plentiful as compared

with other consumer items. Incomes were high, and

milk prices were under ceilings during the emergency.

Lack of other consumer goods encouraged even more

sales of milk and cream. This resulted in a peak of

399 pounds per capita in 1945. Although per capita

consumption of fluid milk and cream dropped sharply

after the war, it held some of the wartime gains and

stayed well above the average consumption of 330

pounds per person in the period 1935-39. After a

3-year postwar decline consumption leveled off at

about 350 pounds. The postwar decline in per capita

use has been much sharper for fluid cream. In the

decade between the 1945 peak and 1955, the use of

fluid cream dropped 26 percent, as compared with a

9 percent decline for milk.

1940 1945 1950 1955

BN 5475

Fig. 6.—Per capita consumption of butter and margarine,

1940-56.

8 Agriculture Handbook No. 138, U. S. Department of Agriculture
Utilization of Butter

Total production of butter in the United States

began to decline in the mid 1930's, dropping sharply

during the Second World War and has leveled off

slightly below the war-end level. Butter now takes

about 25 percent of the milk fat produced in the

United States as compared with 45 percent in the

1930's.

Per capita consumption of butter has dropped nearly

one-half from its peak in the 1930's and 7.9 pounds

since 1940 (fig. 6), while consumption of margarine

has more than doubled. During the latter part of the

Second World War when the domestic supply of fats

was short and some fats were rationed, consumers in

certain areas demanded removal of restrictions against

colored margarine. Between 1944 and 1953, the sale

of yellow margarine was legalized in 26 States. Only

Wisconsin and Minnesota now prohibit the sale of

colored margarine. Also, the Federal excise tax of 10

cents a pound on yellow margarine was removed in

1950. Today combined consumption of butter and

margarine per capita is no greater than the consumption of butter alone in earlier years.

The price relationship between butter and margarine has undoubtedly been a strong factor in the

shift in use of the two products. The price of margarine has given it a substantial advantage over butter,

as shown in figure 7.

Utilization of Cheese

Eleven percent of the total milk supply was used for

cheese in 1956. This was double the quantity used

25 years ago. The trend in cheese consumption per

capita has been upward for the last half century, from

about 4 pounds in 1910 to 6.3 just before the Second

World War. Consumption dropped during the war

and has since risen to a record high of 7.8 pounds in

1954, which has been continued through 1956 (fig. 8).

Although our exports of cheese before the Second

World War were negligible, during the war they

reached record levels as high as 29 percent of United

States production. After the war exports of all dairy

CONSUMERS COULD CHOOSE

FOR THE SAME AMOUNT OF MONEY

THEY COULD BUY

BUTTER

1930

1940

1950

1956

i-ib.

i-ib.

i-ib.

i-ib.

MARGARINE

\

1.8 lb. uncolored

2.3 lb. uncolored

2.2 lb. colored

2.5 lb. colored

Figure 7.—Price relationship between butter and margarine for specified periods.

November 7958
1940 1945 1950 1955

BN 5477

Figure 8.—Per capita consumption of all cheese except cottage,

1940-56.

products dropped back to a low level (fig. 13, p. 13).

Since the Second World War import restrictions on

certain dairy products have been in effect (page 13),

and imports have not exceeded the whole milk equivalent of 1 percent of our production during the last quarter century. During the period 1951—55 the average

annual exports of cheese were 23.5 million pounds, as

compared with average annual imports of 52 million

pounds for the same period. Since 1954 our exports

of cheese have been increased through Government

programs aimed at developing foreign markets and

through other programs directed toward reducing

stocks held by the Commodity Credit Corporation.

A number of varieties of cheese are made in this

country but the most important is the Cheddar type

as shown in table 4.

TABLE 4.—Recent trends in cheese production by

varieties

Kind

Percentage of

United States

production,

1956

Change in 1956

from—

1950-54 1955

American ' .... 72.2

8.7

3.5

.3

5.7

.7

6.7

.7

1.5

Percent

+8

+ 17

+41

-20

+ 13

+77

+46

+ 16

-8

Percent

0

Swiss

Brick and Munster

Limburger

Cream

Neufchatel

Italian

+3

+ 14

-5

+6

+69

+9

0

All other varieties 0

Total, all cheese.... 100.0 + 11 +2

Utilization of Frozen Dairy Products

Frozen dairy products utilized nearly 7 percent of

the Nation's milk supply in 1956. This is double the

proportion used in 1940. Higher postwar incomes, intensified merchandising, increased home freezer space,

a wider variety of flavors and packages, and convenience in serving, have been incentives for increasing

sales for home use. The many types of stores and the

widespread development of drive-in type retail establishments, especially during the summer, have all contributed to the increased availability of frozen desserts.

The increase in per capita consumption of frozen dairy

products is shown in figure 9.

LB. (NET MILK EQUIVALENT USED)

1940 1945 1950 1955

' Whole milk cheese including Cheddar, Colby, Washed

Curd, Jack, Monterey, and Granular.

BN 5478

Figure 9.—Per capita consumption of frozen dairy products,

1940-56.

The present emphasis by many consumers on reducing the intake of fats has helped to stimulate the

use of low-fat frozen desserts. The production of ice

milk has increased more than tenfold since 1944.

There has been a substantial increase in the number of

establishments producing ice milk. For example, between 1954 and 1955 there was an increase of 1,700,

mostly roadside stands. Other frozen dairy products

include sherbet and soft-frozen products. Production

of mellorine (made with fats and oils other than milkfat) has tripled since 1952, and in 1956 was produced

in 12 States as compared with only 4 in 1952.

Utilization of Evaporated, Condensed, and

Dry Whole Milk

The three uses, evaporated, condensed, and dry

whole milk, took slightly less than 6 percent of the

total milk supply in 1956. This is about the same as

for 1940; however, the proportion was greater during

the war when about one-third of the evaporated and

condensed milk and about three-fourths of the dry

10 Agriculture Handbook No. 138, U. S. Department of Agriculture
whole milk was exported during the peak period. The

trend in per capita use of evaporated milk which utilizes about 85 percent of the total milk going into these

three uses is shown in figure 10.

1940 1945 1950 1955

BN 5479

Figure 10.—Per capita consumption of evaporated milk,

1940-56.

Utilization of Nonfat Dry Milk Solids

On a solids-not-fat basis about 13 percent of the

total milk supply was utilized for the manufacture of

nonfat dry milk solids in 1956. The trend in total

production of nonfat dry milk solids is shown in figure

11. Emphasis during the Second World War on in1940 1945 1950 1955

BN 5480

Figure 11.—United States production of nonfat dry milk solids,

1940-56.

creased production of nonfat dry milk for human use

resulted in an estimated quarter million dairy farmers

shifting from marketing farm separated cream to whole

milk. Plant capacity for manufacturing nonfat dry milk

increased 60 percent. More than half of the increase

occurred in Minnesota and Wisconsin. National outNovember 1958

462620 0—58 2

put doubled during the war period, going from 322

million pounds in 1940 to 643 million pounds in 1946,

yet civilian use during 1943-45 was less than before

the war. The increase went to military and foreign

uses. After the war, production continued to increase

but foreign outlets took decreasing amounts, and domestic use did not increase as fast as production.

The trend of per capita consumption is shown in

figure 12. During the period 1940-56 the rate of

production of nonfat dry milk solids increased fivefold, while the rate of consumption only doubled.

Most of the surplus production in excess of consumption was purchased by the Government. Purchases for

price support operations during 1953-56 amounted

to nearly half (46 percent) of the total production

in the 4-year period.

Although still small in relation to the total supplies

of nonfat dry milk solids, commercial exports have

risen from practically none before 1954 to more than

80 million pounds each year in 1955 and 1956, including substantial quantities sold at less than domestic

support prices. Donations of nonfat dry milk solids to

foreign countries were also substantial, 365 million

pounds in 1955 and 400 million in 1956.

The increasing rate of production of nonfat dry

milk solids as related to both domestic and foreign

commercial outlets has contributed to the problem of

surplus dairy products. Apparently the returns to

producers from that portion of the milk supply used

for nonfat dry milk solids at prevailing prices of

recent years have been sufficient to bring about continued increase in production. The trend makes it of

interest to consider what the potential production

would be if all the milk-solids-not-fat that are still kept

on farms as skim milk were made into nonfat dry

milk solids.

We observed in figure 1 (p. 7) the pattern of how the

total milk supply has been used, but the illustration does

not give us a good perspective of the proportion of

the total milk supply used for nonfat dry milk solids.

11
1940

-J I L. J_ ±

1945 1950 1955

BN 5482

Figure 12.—Per capita consumption of nonfat dry milk solids,

1940-56.

In many dairy processing plants butter and nonfat dry

milk solids are joint products. For that reason it appears that the major source of milk for nonfat dry

milk solids comes from the same milk supply that

furnishes part of the creamery butter supply. In 1956

the whole milk equivalent of the farm-separated cream

was 13.8 billion pounds. If all the solids-not-fat in

that portion of the milk supply had been made into

nonfat dry milk solids it would have amounted to 1

billion pounds in addition to the 1.5 billion pounds

of actual production.

Commercial Uses of Nonfat Dry Milk

Major commercial uses of nonfat dry milk solids

are shown in table 5. Note that home use of nonfat

dry milk solids has risen from a low-use category in

1948 to third place in 1956, that use in dry mixes

has tripled during recent years, and use in dairies

has doubled. Although total commercial use has

nearly doubled since 1948, because production has

been increasing at a faster rate the proportion of total

production used commercially has fallen in recent

years.

Foreign Trade in Dairy Products

The United States leads the world in the volume of

milk produced. In 1956 it produced nearly 126 billion pounds, or more than the coihbined milk production of the next four leading countries. Other countries that lead in the production of milk are: France,

Republic of Germany, United Kingdom, Italy, Canada,

Australia, Netherlands, New Zealand, and Denmark,

in that order, based on estimated production in 1956.

Except during wartime or more recently because of

special governmental programs, foreign trade in dairy

products by the United States has historically been

only a small part of the domestic production. During

much of the time in the last quarter century United

States foreign trade in dairy products has been less

than 1 percent, when measured in terms of whole milk

equivalent (fig. 13).

Exports

Exceptions to the historical pattern occurred during and following both the First and Second World

Wars when large quantities of dairy products, particularly cheese and processed milks moved abroad. However, even at the peak of the movement during the

Second World War in 1944, only the equivalent of

about 6 percent of total domestic production was exported. Peacetime shipments abroad increased to approximately 5 percent in 1956 under the stimulus of

special governmental programs. The five most important products exported during 1951-55 were as follows (with their share of total value of all dairy

products exported) : Dry whole milk, 27 percent;

TABLE 5.—Domestic nongovernment use of nonfat dry milk solids, 1948-56

Use 1948 1949 1950 1951 1952 1953 1954 1955 1956

Millions of pounds

306

89

36

2

15

11

18

282

100

34

6

13

6

24

292

106

58

30

20

10

34

262

149

59

59

19

17

29

275

160

88

85

30

15

37

263

126

64

96

42

12

23

276

146

68

142

48

17

22

299

184

81

137

50

15

27

272

Dairy 163

]V{eat processing ....

84

Packaged for home use 154

37

16

All other uses 21

Total domestic nongovernment use 477

70

465

50

550

62

594

85

690

80

626

52

719

51

793

56

747

Percentage of total production in nongovernment uses 50

Annual Census of Dry Milk Distribution and Production Trends, The American Dry Milk Institute, Inc., Chicago, 111.

12 Agriculture Handbook No. 138, U. S. Department of Agriculture
evaporated milk, 23 percent; nonfat dry milk, 16 percent ; cheese, 9 percent ; and butter, 3 percent.

Imports

For the years 1953-55 more than 95 percent of the

total value of dairy imports was represented in cheese

and casein. Cheese made about two-thirds and casein

one-third of that share. Because of the difference between the United States price and world prices of dairy

products, the duties charged on imports have in many

cases not been very effective in restricting shipments

into this country. Imports of most dairy products by

the United States have been limited by quotas for the

different dairy products. For fiscal year 1956 import

quotas of fixed quantities were in effect for butter,

malted milk, nonfat dry milk, Italian cows' milk

cheese, Cheddar, Edam, Gouda, Blue Mold, dry whole

milk, dry buttermilk, dried cream. More recently

butter oil and butter substititutes have been placed

under quota. Restrictions established during the Second World War have been lifted on casein, Pecorine

and Roquefort (variety cheeses made from sheep's

milk), Swiss, Gruyere process, Bryndza, Goya, and

Stilton cheese.

% OF U. S. PRODUCTION

3 -

''"*"N / \

1925 1930 1935 1940 1945 1950 1955

BN 5483

Figure 13.—Comparison of U. S. exports and imports with production, 1925-56. (Whole milk equivalent.)

Adjustments in the Dairy Industry

Due to Technological Developments

In the introduction it was indicated that change

might well be the mark of progress. Although we have

witnessed a century of far-reaching changes in the

dairy industry we still seem to be in the midst of many.

Adjustments in Production

The need for adjusting to changing conditions is

not new for dairy farmers. In an effort to produce

milk more efficiently, one of the adjustments dairymen

have made is to increase the size of the dairy enterprise. Improved arrangement of work space and work

methods have permitted the increase in size of herd

without additional labor requirements and even a possible reduction. The feed supply for the enlarged herd

may come from the same acreage but with improved

cropping and pasture practices and from new crop

varieties, the use of fertilizer, and improved methods

of management.

Among other technological developments artificial

breeding has made its contribution in at least two

ways. Its major contribution was to step up production in next generation animals through the use of

better sires and at the same time permitting wider

influence than when limited to a single herd. Also

it released barn space which on many farms is now

being used for additional milk cows. Contributions

to work load and methods have come from such developments as loose housing, parlor milking, pipelines

that can be cleaned in place, barn cleaners, mechanical

feeders, and field choppers. The new insecticides for

control of flies and other pests have contributed

through greater comfort to animals and reducing opportunities for contamination and spread of disease.

Improvements in refrigeration together with availability of electricity have done much to improve the

quality of milk.

Bulk handling of milk has reduced labor and in

many instances improved quality. Producer-dealer relations may also have been improved, because farmers

like selling milk on the betsis of quantity and test at the

farm. When complete conversion is possible in an

area, the receiving operation at the plant may be

greatly reduced, and much of the equipment, such as

scales, can washer, conveyor, and some labor, can

be done away with. With bulk handling these functions have merely been moved to the farm. Some of

the disadvantages of bulk handling are the heavy

initial investment by producers, the increased costs

during the changeover, resulting from a dual system

of both can and bulk, and more responsibility on the

truck driver for measuring milk, rejecting it if necessary, and taking a sample.

Adjustments in Processing

A similar adjustment by the manufacturing segment

of the dairy industry parallels the increase in size of

the dairy enterprise on farms. The number of plants

manufacturing dairy products has substantially declined, and at the same time output per plant has increased (table 6). These changes in the number of

November 1958 13
plants have resulted from : ( 1 ) Improvements in transportation; (2) fuller use of plant capacity; and (3)

replacement of small plants with large plants.

TABLE 6.—Changes in number and output of plants

in United States manufacturing dairy products

between 1940 and 1955.

Product manufactured

Butter

American cheese

Evaporated milk

Nonfat dry milk solids.

Number Average

of plants volume

per plant

Percent Percent

-49 + 51

-43 + 187

-34 +58

+69 + 159

Source: Dairy Statistics Branch, Agricultural Estimates

Division, Agricultural Marketing Service, U. S. Department

of Agriculture.

The opportunity to reduce costs of operation by

increasing the output of a plant up to the level at which

unit costs are at a minimum provides a strong incentive for attempting to draw milk and cream from rival

plants. Furthermore, firms that own more than one

plant, often find it profitable to discontinue production

in certain plants. Generally the plants that close are

among the smaller ones. Many firms that operated

small plants replaced them with a single large plant.

Some of the advantages of larger plants are: (1)

Increased output per man; (2) generally in a position

to employ a more competent manager; (3) generally

easier to standardize and improve products; and (4)

possible utilization of byproducts more efficiently.

These advantages are probably offset to some extent

by higher costs of hauling milk and cream.

In addition to changes in size and number of plants

an important change has taken place through new and

improved processing equipment, improvements in

handling materials within plants, packaging, plant

management and personnel management, laboratory

controls of product quality, and many similar developments. In many plants the receipt of bulk milk has

eliminated completely the can conveyor, can receiving

room, can washer, and other space and equipment no

longer needed as well as the labor required to operate

it.

Adjustments in Milk Distribution

Distribution of a bulky perishable product like milk

is a relatively costly operation. Efforts to reduce this

cost have included a shift from daily delivery to homes

to a general practice of every other day delivery or even

less frequent. In some markets the distribution

through stores now makes up 80 percent or more of

total market sales. Other innovations have been

changes in containers, bulk dispensing, automatic

vendors, and concentration of the product.

Paper cartons.—The paper carton for milk has

revolutionized milk distribution. Where formerly the

area in which a distributor operated was small, it is

now possible to transport larger loads of milk long

distances at lower unit costs. This is possible in part because of two factors, the lighter weight of the containers

as compared with glass bottles, and the elimination

of handling returned empty bottles. Resulting economies have made it possible to extend marketing areas.

Some milk in paper cartons now travel several hundred

miles before it reaches the consumer. A larger volume operation is necessary to cover additional plant

expenses involved in paper packaging. Many small

distributors have given up their bottling operation

because they did not have the necessary capital or

sufficient volume to warrant converting to a paper

bottling operation.

Gallon jugs.—Use of the gallon jug has been

adopted in a number of markets in an effort to reduce

milk prices and increase consumption.

Bulk milk dispensers.—Bulk milk dispensers have

increased as a means of distributing milk in eating

places, institutions, and for in-plant feeding such as

company- or employee-owned cafeterias. Some users

report increased sales, better milk flavor, less refuse

from cartons, or elimination of empty bottles. Some

of the other considerations are health requirements

14 Agriculture Handbook No. 138, U. S. Department of Agriculture
relating to their use, the size of glass used for serving—one too small results in spilling; one too large

gives the consumer the idea of "being shorted." Some

milk distributors have been reluctant to service bulk

dispensers because of the nuisance at first when volume

was small and considerable extra cost and effort were

involved.

Milk vending machines.—Milk vending machines

have increased rapidly. There are three main types,

coin operated, that vend milk in a closed container.

(1) A vendor of small units (half pint, third pint, or

pint) for immediate consumption may be found in

such places as factories, office buildings, schools, military installations, hospitals, and transportation terminals. (2) An apartment house type that vends quarts

for taking home has been introduced in densely populated areas where there may be up to 100 families in

one building. (3) Outdoor milk vending stations are

designed for cash and "carry home" use and can vend

half-gallon paper cartons of milk as well as quart size.

Some of the advantages reported for vending machines: Lower milk prices where price differentials

under home delivery are not prohibited; 24-hour service, which leads to impulse sales—particularly through

the small-unit type for immediate consumption ; reduction of distribution costs; elimination of credit accounts and collection problems with consumers. A

disadvantage as compared with the vending of some

products is the perishability of milk. A vending machine must be serviced frequently enough to insure

that only fresh milk is vended.

Concentrated milk.—In 1951 there was a widespread

development in a number of markets of removing

sufficient water from milk to reduce the volume to

about one-third. Among the factors contributing to

this development were efforts to reduce transportation

cost, reduce storage space, and package costs. Experience proved the possibility of realizing these objectives. However, several offsetting factors hindered the

adoption of this method of marketing milk. The main

reason was the lack of sufficient saving to the consumer

to compensate for the bother of recombining the concentrated milk with water. In most markets the price

was nearly the same as for fresh fluid milk. Another

problem was that of satisfactory water to add to the

concentrate. Where water was treated with chemicals

the taste often carried over into the recombined milk.

Also in hot weather the space in the home refrigerator

saved by the concentrate was often used to chill water

to add to the concentrate.

Efforts to develop a market for concentrated milk

still continue in some markets. Distribution of concentrated milk to farm people was started at Iowa State

College in 1951 on an experimental basis. Five routes

were established. Each one extends about 100 miles

and serves 75 farm customers once a week with concentrated milk, ice cream, cottage cheese, and several

other dairy items.

Dry milk in consumer packages.—An important

development of the dairy industry since the war has

been the increased emphasis on packaged nonfat dry

milk for home use. Utilization for this purpose has

increased many times (table 5, p. 12).

November 7958

46:¡620 O—58 3

15
PART 2. PRICING IN THE DAIRY INDUSTRY

In our free enterprise economy, economic forces cause a certain amount of expansion. This will always

operate through the pricing system and thus guide pro- be so. In a social science we learn that people have

duction and use of goods and services. a tendency to react in a certain way to a given situation but we can't expect a definite fixed response every

The Pricing System Resembles the time. There are some who just don't respond in the

TVT c . » usual or expected manner. INervous ¡System ^ , , , .1 > . i

'' In order to develop some principles which can be

It is difficult to find a good analogy for the pricing used in understanding pricing, economists have desystem as it operates in a free economy. Our pricing veloped what is called a schedule of supply and a

system resembles the governor on a tractor or a therm- schedule of demand. They are simply lists of various

ostat in a house, but these regulators always produce amounts of items people will sell or buy at different

a positive mechanical action. We need an example prices. The schedules are based on the normal or

that will illustrate a range of responses—from an im- usual expectation of people's response. Studies of

mediate response to a delayed response or none at all. certain items in selected markets for specified time

The nervous system in our bodies comes close to illu- periods have given quite reliable measures of expectatrating how our pricing system works. tion. From this information schedules of supply and

When a part of the body is stimulated a message demand have been developed. Of course, people in

is carried through the nervous system to the brain for the market do not actually draw up schedules of this

a decision. Likewise in a free enterprise economy the kind. Nevertheless even though the schedules are

price mechanism provides the media for transmitting assumed, they make it easier to understand what takes

economic stimuli to people that influence them to make place in the determination of price,

decisions. The decisions may be to produce more, less, For example, let's assume a small town where cusor the same; or to raise or lower the selling price or tomers are willing to buy the following quantities of

leave it unchanged. The same factors that cause one milk at different prices. This is their demand schedule,

person to decide on a particular action may cause an- ^^^^^^ customer, are

other to decide to do just the opposite. This possibility willing to buy Cents

of opposite responses to the same situation which 94 34

appears to be similar makes it difficult to understand ^

our economy. ,^ ' "" jg

Although these analogies are imperfect they help us

to better understand the influences of supply and de- assume also that dairymen near this small town are

mand. Supply and demand are important in the de- ^^"^"8 *» '^^^ ^^^ following quantities of milk at differ-

, . X li • • 1 5, • • ^1 rru ent prices. This is their supply schedule, velopment of principles in economic theory, these ^ '^'^ '

principles serve as guides in economic analysis. Quarts farmers are

willing to sell Cents

Economic Principles Help Tell Us JQ2 " " " '""""""!] 28

What to Expect 98 22

"^ 94 16

The pricing of milk for fluid use is complicated. ^^^ j^^^ ¿^ ^j^^^ ^^^ ^^^^p^ ^^ p^^pl^ ^^j^^U^l^

But that need not prevent us from understanding it. ^ ^^-^^^ „ ^^ examine the two schedules we find that

In many respects we live in a complicated world and somewhere between 22 and 28 cents, the market could

our generation understands and takes for granted be cleared. By clearing it is meant that at a particular

many things that were unheard of by our parents. price, all the milk offered at that price would be sold.

Pricing comes under the study of economics which Figure 17 shows this to be 25 cents per quart for a

is a social science, that is, it deals with people in con- quantity of 100 quarts. This is often called the equitrast to a physical science which deals with things. librium price. It is the point where supply and dePhysical science tells us that raising the temperature mand are equal. Most prices hover around this point,

of a particular metal a given number of degrees will because there is a tendency for prices to move toward

16 Agriculture Handbook No. 138, U. S. Departmenf of Agriculture
equilibrium. With a higher price, buyers would refuse

to buy as many quarts as are offered for sale at

that price; if prices were lower, sellers would refuse

to place as many quarts on the market as people are

willing to take at that price. This assumes that farmers

vary their sales according to price. But the perishability of milk causes a farmer to sell all his milk on

any given day. However a supply schedule of the

type described would exist when time is allowed for

dairymen to adjust production. The nature of the

dairy business makes it possible for consumers to

decrease purchases abruptly, but production adjustments are usually slow.

It should be kept in mind that the supply and

demand schedules are a useful description only for a

particular time and place. Over a period of time

buyers and sellers may develop an entirely new set of

price-quantity relationships.

To sum up these statements for a "rule of thumb"

guide we can express them another way:

A rising price encourages production but discourages

consumption.

A falling price discourages production but encourages consumption.

These observations are based on the fact that it is just

human nature for sellers to want a high price and

buyers to want a low price.

The following examples will illustrate price determination graphically. Suppose we put on a chart the

amounts people will buy as shown on the demand

< PER QT.

94 98 102

NUMBER OF QUARTS

106

94 98 102

NUMBER OF QUARTS

106

DN 5489

Figure 15.—Amount of milk that would be sold at different

prices.

schedule. This gives us the picture as shown in figure

14. Then when we do the same thing for the amounts

dairymen will sell, as taken from the supply schedule,

we get the picture shown in figure 15.

If we put both schedules on the same chart we get

the information shown in figure 16. Next we can draw

a line through the points representing quantities and

prices. Then drop a vertical line from the point where

the supply and demand curves intersect. It falls on

Ç P ER QT.

34 - • • -

28 - • •

22 - • • - -

16 _ • • -

.-^^^^ 1 r^^ U L-^

94 98 102

NUMBER OF QUARTS

106

' BN 5488

Figure 14.—Amount of milk that would be purchased at

different prices.

BN 5490

Figure 16.—^The amount of milk that would be purchased and

sold at different prices.

November 7958 17
o 94 98 102 106

NUMBER OF QUARTS

BN 5491

Figure 17.—The equilibrium price and quantity of milk

purchased and sold in a hypothetical market.

100 quarts which would be the quantity of milk bought

and sold. A line drawn horizontally from the intersection hits the 25-cent point and indicates the equilibrium price shown in figure 17.

Competition in a Free Enterprise Economy

If all the tendencies just described worked perfectly

under our capitalistic system, the result would be complete economic equilibrium on the basis of price

relationships. In practice, however, there are many

obstacles to the attainment of full equilibrium. Competition is an important element in the system. It is

what keeps buyers and sellers "on their toes."

In theory "perfect competition" exists when the following conditions are present: (1) There are enough

buyers and sellers so that the action of any one alone

has no perceptible influence in the market; (2) the

product exchanged is homogenous, that is, one unit is

interchangeable with all other units of the same description; (3) there is complete knowledge on the part of

all buyers and sellers, that is, with respect to quantity, quality, location, prices in other markets, and other

facts that would be useful in bargaining; and (4) there

is mobility of resources, that is, dairymen can shift

to grain farming or beef cattle or other uses of their

land, labor and capital.

Seldom do we find conditions in milk marketing that

fit this description of perfect competition. There are

many producers and few handlers and processors.

Trade barriers exist. There is lack of complete information about prices. But even these recognized

imperfections do not remove the basic workings of

supply and demand in the determination of price.

Developments in the Procedure for Milk Price

Determination

We may feel that the laws of supply and demand do

not work under modern marketing conditions. An

individual producer may feel that he has no influence

on price determination—likewise an individual consumer may feel the same way. Yet when we look behind

the complex marketing mechanism that exists today,

we see the influences of the sum total of the individual

actions that have just been described.

When producers sold milk directly to consumers it

was easy for them to communicate. If the consumer

did not like the quality or the price it was easy to tell

the producer. But producers and consumers became

18 Agriculture Handbook No. 138, U. S. Department of Agriculture
separated when the distribution function became more

specialized and was handled by milk dealers. This

made it more difficult for producers and consumers to

communicate with each other. The communication

process has been made still more difficult through such

developments as sanitary requirements, formula pricing, price fixing by States, minimum pricing under a

Federal order, and the hearing procedure. However,

none of these have changed human nature from producers wanting a high price and consumers a low price.

But the ways in which they can express these desires

have gone through great change.

Instead of individual producers and consumers deciding on the quality of milk for each transaction it

has been determined by group action and expressed

through some level of government and all producers

and consumers in a market use the same minimum

standard.

Formula pricing has been developed to reflect the

conditions that exist in a market. The conditions

which the formula is designed to reflect are the result

of a large group of individual supply and demand schedules expressed collectively, either in a specific market

or nationally. The Department Store Sales Index

would be an example of collective consumer demand

schedules for purchases made in department stores.

Under collective bargaining producers try to do as

a group what the individual producer formerly did

directly with his consuming customer. Instead of dealing with the consumers as a group the producer group

deals with an intermediary group, the milk dealers.

But the dealers are conscious of the sum total of consumer demand schedules. If sales of milk drop or increase on a route with the same customers and no

change in price, the dealer knows that a change has

taken place in their demand schedules.

The hearing process is another modification of the

bargaining process. It provides for a particular level

of government to participate in the price making process as an observer or umpire to represent the public

interest. But neither does this change the influences

based on human nature that are the bases for the laws

of supply and demand. It is a further modification of

the rules that have been developed for determining

milk prices.

Producer Responses to Price Afifect

Supply

The price may be high enough that certain producers will decide to increase their production. This

of course affects supply. But it may take a long time

November 1958 19
for a dairyman to actually place additional quantities

of milk on the market. He may be able to get a limited

increase in a short period by heavier feeding, better

pasture, reduced culling or by purchasing additional

cows.

The purchase of additional cows would increase

production for the purchaser, but would decrease production for the seller. Thus a transfer of this kind

would not affect total farm milk output. However, it

might affect the amount in a particular market if cows

were sold from one market to another. On the other

hand, if the dairyman decided to expand by keeping

more heifer calves, it could take up to 2 years to be

selling milk from a calf born this morning.

Reducing production could be accomplished much

faster—he could sell some cows, feed them less, or

could sell out completely in a relatively short time.

If he sells to other producers he has merely transferred

ownership of productive resources. If he sells his herd

for slaughter then production has unquestionably been

stopped !

Consumer Responses to Price AflFect

Demand

Consumers have many choices in how to spend their

money. The amount spent for milk and its products

affects the demand. Changes in the price have less

effect on fluid milk purchases than on manufactured

dairy products. In the case of manufactured products

there is more opportunity for substitution—cheese

competes with other protein foods, butter with other

fats and spreads, ice cream with other desserts.

Consumption is affected by retail prices. However,

because retail prices of milk are often associated with

changes in other economic conditions and seasons of

the year, it has been difficult to isolate and measure

the effects of price upon per capita rates of milk

consumption.

It takes a relatively large change in price to have

much effect on the amount of milk consumed. When

a large change in price is required to bring a small

change in demand we have what is known as

"inelastic" demand. Most individual agricultural

products have inelastic demand.

For fluid milk, studies show that with a 10 percent

change in the retail price, a change of about 3 to 4

percent in the opposite direction can be expected in

purchases. The demand for milk is more elastic for

low-income families than for high-income families.

We must recognize that most studies refer to a particular market and cover a relatively short period of

time. Consumers are usually slow to change their food

habits. Knowledge is limited about the response which

consumers make after a given price has been in effect

for months or even years.

Classified Pricing and Pooling

Pricing Milk According to Use

Regardless of whether market milk is sold for fluid

use or for manufacturing, farmers usually sell it by

some prearranged pricing procedure. In general, milk

does not lend itself to dealing on an "offer and acceptance" basis. Administered pricing by State milk

control agencies and/or Federal milk marketing orders

is important in many markets. Negotiations between

dealers and individual farmers are practiced in small

markets; in other markets farmer cooperatives negotiate with handlers for the price.

Classified pricing of milk is an outgrowth of early

experiences. This method of pricing was first started

by a few cooperatives in the early 1900's. This contrasts with the "flat price" method where a single

price was announced by the handler. All milk received

from a producer was paid for at a uniform rate. Allowance was usually made for manufacturing use by

keeping the price low enough to compensate for the

lower value use.

Classified Pricing

Classified pricing of milk simply means pricing

according to use—one price for the proportion used as

bottled milk, and another for the part used in manufactured dairy products. Class I milk is almost exclusively distributed and consumed as fresh fluid milk,

including milk drinks. It usually brings a higher

price, substantially above the Class II price. Milk

used in various manufactured products is usually classified as Class II. Prices for Class II milk are based on

various measures of value of milk for manufactured

purposes. Some markets have more than two classes.

Factors which gave rise to classified pricing of milk

include perishability, sanitary requirements, bulkiness,

and the seasonality of production. The value of these

factors is greater for fluid use than for manufacturing

use. The demand for most fluid milk products is quite

separate from the demand for manufactured products.

Sales of fluid milk are fairly even the year around,

while production is seasonally higher in the spring

than in the fall. Seasonal surpluses of milk must be

diverted into manufactured dairy products at lower

returns.

20 Agriculture Handbook No. 138, U. S. Department of Agriculture
Rigid sanitary measures must be maintained to insure purity and reduce perishability of fluid milk.

Costs may be lower in the production of milk intended

only for manufacturing. The processing of manufactured products destroys bacteria and reduces the

need for sanitary requirements as strict as for fluid

milk.

Bulkiness is reduced in the manufacture of dairy

products, but fluid milk is as bulky when delivered to

the consumer as when it leaves the milking machine.

This means that transportation costs will be higher for

fluid milk than for the more concentrated manufactured products as shown in table 7.

TABLE 7.—Costs of shipping products made from 100

pounds of milk to New York City from Shawano,

Wis., March 1954.

Products

Fluid milk (in tank cars)

Evaporated milk (in cases of 48

cans)

American cheese

Dried skim milk

Butter

tall

Freight cost per 100

pounds of milk

equivalent to New

York City from

Shawano, Wis.

81. 600

.4S6

.133

.087

.058

Source: Milk Control Programs in the Northeastern States,

Part I, by Leland Spencer and S. Kent Christiansen, Bulletin

909, Cornell University Agricultural Experiment Station,

Ithaca, N. Y. November 1954, p. 37.

Pricing Milk for Fluid Use

Under classified pricing the procedure for determining the price of milk for fluid use varies between

markets. The general principle to keep in mind is

the use of a base figure with provision for adjusting

it.

Some markets use as a base the price of fluid milk

at some time in the past when it was considered to

reflect fairly accurately a balance between supply and

demand. Usually a formula is used to adjust this base

figure to reflect present market conditions in establishing the current price for fluid milk.

In other markets the base figure is the price of

manufacturing milk. Because manufactured products

compete for the national market, their prices are considered to more accurately reflect influences of supply

and demand in the market. Then a differential is

added to the manufacturing milk price that is generally

considered necessary to attract a suflicient quantity of

milk for fluid use to satisfy the demand in the market.

The differential to be added to the base figure may be

calculated by formula, or arrived at by negotiation

or hearing.

Pricing Milk for Manufacturing Purposes

Because manufactured dairy products are not as

perishable as fluid milk most of them can be sold on

an "offer and acceptance" basis. This permits the

forces of competition to operate much more freely.

Where competition exists it generally assures that the

price of a product will stay in line with the costs

involved. The butter market is a good example. If

the New York butter price exceeds the Chicago price

by more than the cost of moving the butter, traders

will move the product from Chicago to New York.

Because manufactured products compete nationwide,

milk going into these products must be priced so they

can compete with similar products from other areas.

Competition between products operates in the same

way. Milk used in manufactured products can be

shifted from one use to another. Dairy plant managers can make this shift within a diversified plant, or

milk can be shifted between plants making different

products. Note that in 1956, the average price per

pound of milk fat for the uses shown in table 8 fluctuated within a narrow range.

TABLE 8.—Average United States prices paidproducers

for each pound of milk fat used by manufacturing

plants in specified dairy products in 1956.

Month

January..,

February.,

March. . . . April

Nlay

June

July

August. . .

September

October...

November

December.

Butter

and byproducts

Evaporated

milk

All

cheese

American

cheese

Swiss

cheese

Dollars

.84 .84 .84 .83

.84 .84 .84 .83

.84 .83 .83 .82

.84 .83 .84 .83

.84 .82 .84 .83

.85 .83 .84 .83

.85 .82 .84 .83

.85 .82 .84 .83

.85 .83 .84 .83

.86 .84 .85 .84

.88 .86 .86 .84

.87 .87 .87 .85

.87

.87

.87

.87

.89

.89

.89

.89

.90

.89

.90

.90

If demand for one of the manufactured dairy products increased enough to enable a manufacturer to

raise his selling price, he would be able to increase

his paying price to producers enough to induce some

of them to shift their sales to him from other buyers.

November 1958 21
This opportunity for producers to shift sales of milk

between buyers for different uses according to prices

received keeps prices of milk for different uses in

equilibrium.

Price supports.—Although a price support program

does not prevent prices from going above the announced level, its purpose is to prevent prices from

going below that level. Under the program as it operated in 1956, prices to producers of butterfat in farm

separated cream and manufacturing milk were supported. The support was accomplished by removing,

in the form of butter, Cheddar cheese and nonfat dry

milk, the milk which could not be sold commercially

at prices corresponding to the support level.

Under this type of program the general levels of

prices of milk and butterfat are supported but not

necessarily every transaction. The prices paid in particular areas or by particular plants are also influenced

by such factors as location, quality, use, and competition. The program does not change this situation.

Although returns to individual producers are partly

determined by these and other factors, this type of program continues to support the general levels of prices

at the announced levels.

The price support programs bring into the market

place an additional type of buyer—the Government—

a potential buyer with relatively unlimited financial

resources. This additional buyer stands ready to give

assistance to producers through prices that are announced in advance. The objective of this buyer, unlike that of commercial buyers, is to stabilize prices

received by farmers rather than make a profit.

Pooling of Milk

Classified pricing plans indicate the prices handlers

will pay for milk going into the various uses. Pooling

is a method of determining how these funds will be

distributed among producers supplying the milk.

Farmers receive a blend or uniform price when milk

is pooled. The two methods of pooling returns to

producers that are commonly used are (1) the individual handler pool, and (2) the marketwide pool.

When the individual handler pool is used each

handler pays his producers in accordance to the way

in which he utilizes the milk for the various products.

The handler whose milk goes principally for Class I

use will pay a higher blend price than handlers using

a large proportion for Class II or manufactured uses.

Here is an example of how two handlers arrive at

a blend price under an individual handler system:

Dealer A

Use classification

Class I (milk for fluid use)

Class II (milk for manufacturing).

Total

Blend or uniform price

Price

per

cwt.

$5.00

3.00

Quantity

cwt.

800

200

Class

values

$4,000

600

. ... 1,000 $4,600

$4,600

1,000 =$4.60

Dealer B

Use classification

Price

per

cwt.

Quan

tity

cwt.

Classvalues

Class I (milk for fluid use)

Class II (milk for manufacturing)

$5.00

3.00

500

500

$2, 500

1,500

Total 1 non ii;4_ non

$4,

1,

»««-S4.00

aoo '

In the illustration dealer A paid $4.60 per hundredweight to his producers, dealer B paid $4.00 to his.

In practice there would be allowances for butterfat and

other specified differentails. Note that each handler

paid a blend price in accordance to the use made of

the milk.

Under a marketwide pool all the producers within

the market would have received the same uniform

price. If the two handlers used in the illustrations

above had been the only two handlers in a marketwide

pool, the blend price would have been figured for all

the producers shipping into the market as shown

below :

Use classification Price per

cwt.

Quantity

cwt.

Class

values

Class I (milk for fluid use)

Class II (milk for manufacturing).

Total

Blend or uniform price

$5.00

3.00

Dealer A.

Dealer B.

Dealer A.

Dealer B.

800

500

200

500

$4,000

2,500

600

1,500

2,000 8,600

8,600

2,000 cwt.

= $4.30

22 Agriculture Handbook No. 138, U. S. Department of Agriculture
Equalization Fund

Each handler would pay his producers the uniform

price of $4.30. Dealer A in the marketwide pool actually utilized milk valued at $4,600. His total payments to producers at the uniform price were $4,300.

He turns the excess $300 into an equalization fund.

Meanwhile handler B also pays his producers $4,300.

This is $300 in excess of the value of milk he used.

The $300 excess paid into the equalization fund by

dealer A is used to offset the $300 deficit created by

dealer B.

Under both types of pools the total value of milk in

the market was $8,600. If a marketwide pool had been

used all producers would have received a calculated

blend price of $4.30. If the individual handler pool

had been used one group of producers would have

received a price of $4.60 and another group $4.00.

As in the case of farmers selling to manufacturing

plants (page 21), farmers would also try to shift sales

among dealers if prices paid by them were substantially

different.

For example, under the method of pooling just described for a marketwide pool, all producers receive

the average market price for all their milk regardless

of the amount and needs of the market. Excess milk

beyond the requirements for fluid use brings a lower

price. An increasing amount of excess milk at a lower

price when blended with the fluid price pulls down

the average (blend) price in a market. Since all producers receive the same price under marketwide pooling there is no penalty for additional contributions to

the surplus other than a slight price reduction which

is shared by all producers.

The blend price may induce producers already in

the market to increase their production even though

they would not do so if they could get only the manufacturing price. Furthermore, the blend price may

be high enough to induce producers to shift from manufacturing outlets. This brings about a further excess

of milk supplies.

Seasonal and Base Rating Plans

In the introduction to this discussion on pricing it

was pointed out that prices guide production and use

of goods and services. This assumes that prices are

free to signal through the pricing system when too much

or too little of a product is being placed on the market.

When the system is modified for various reasons sometimes the result may not be exactly as intended.

Although pooling was developed to equalize payments to producers for milk sold in a market, it brought

with it some problems. It may interfere with the role

of price in balancing milk supplies with market needs.

The normal pattern of milk production is one of

relatively higher production in the spring months of

April, May, and June and lower production during

the fall months of October, November, and December.

The demand for milk does not fluctuate as much as

production, therefore, it is usually felt that more efficient marketing can be accomplished by bringing production more nearly into line with consumer demand.

To achieve this goal many markets have introduced

methods which provide incentives to producers to adjust their production to a more level pattern.

The classified price plan itself provides some incentive, since Class I sales usually represent a higher

proportion of total volume in the fall than in the

spring. There are other devices aimed at providing a

higher price to the producer who furnishes the market

a uniform supply, than one whose supply fluctuates

widely. They may be referred to as "base-rating,"

"base-surplus," or "base-excess" plans. Also there are

"fall premium" plans.

Let us see where base rating fits into classified pricing. Classified pricing and pooling were developed

as an improvement over the old flat price method.

Some of the limitations of pooling as a means of distributing returns for milk among producers were discussed above. Base rating is a means of helping the

pricing system reflect the time of year and amount of

milk for different uses that are desired in a particular

market. In addition, it is a means of rewarding producers who supply milk more nearly in line with the

needs of the market.

Under a base rating plan the price received by producers is made up of two parts. The higher price is

the "base" price while the lower is the "excess" price.

Each producer is assigned a base in accordance with

his daily deliveries during a specified base period.

The base period is usually the short-supply fall months.

During the subsequent period, which is specified

under the plan in use, a producer receives the "base

price" for a quantity of milk equal to his base. He receives the "excess price" on all milk delivered in excess

of the base. The base price is usually the fluid milk

price—the excess price is usually the price for manufacturing milk.

Normally the total bases of all producers will about

equal the fluid milk sales in the market plus the necessary reserve.

The most common type of base plan is one where

new or adjusted bases are formed each year. Other

types require a longer period for base forming. Some

November 7958 23
types are partially or fully closed. Closed base types

are those formed during a specified base forming

period and remain closed for a number of years. The

partially closed bases are adjusted each year by averaging the current year's production with that of the

earlier base forming period.

Among some of the problems of base rating plans

are the additional cost of administration necessitated

by the extra work in making computations—establishment of bases for new producers—resentment to frequent revision by those who have already made adjustments in production in line with previous provisions—rules for transferring bases—and landlord and

tenant interests.

A "fall premium plan" sometimes called the "take

out and pay back plan" is practiced in some markets.

It is also referred to as the "Louisville Plan" after the

market that originally put the idea into effect.

Fall premium plans involve withholding a portion

of money from all producers in the spring months.

These funds are placed in trust with a responsible

custodian. The following fall months the fund is disbursed among producers on the basis of their daily

deliveries.

Formula Pricing

As pricing procedures developed, formulas were

substituted for negotiated prices. Experience has

shown that market milk prices move up and down in a

fairly predictable relationship to certain other prices.

Prices that are closely related can often be combined

into statistical formulas that are useful for milk pricing. When formulas are used prices to farmers move

up and down automatically in relation to the formula

components.

Formulas for pricing Class I milk are of two general

types, (1) economic formulas, and (2) manufacturing

milk formulas. "Economic formulas" relate fluid milk

prices to selected economic factors. Factors included

in a formula that cause prices to move up or down are

often called "movers." Some of the movers in economic formulas include the wholesale price index, feed

costs, volume of fluid milk sales, and similar items.

Economic formulas are used predominantly in eastern

and southern markets.

Manufacturing milk formulas are based on the value

of milk when converted into certain manufactured milk

products. "Butter-powder" or "butter-cheese" formulas are examples. They take into consideration the

price of these products in determining the farm price

of market milk. Specified amounts are usually added

to this basic price to account for the increased value

of milk for fluid use. These formulas are predominantly used in the Midwest.

With the use of formulas, fewer price conferences

and hearings are needed. This saves time and expense.

Formulas have the advantage of being automatic and

timely. It should be recognized, however, that it is

impossible to design a perfect formula for pricing

milk. Even the best require review and appraisal—

and they are useful only to the extent that competent

indicators are used in their development.

The following two illustrations of calculating the

price of Class I milk use an economic formula and a

manufacturing formula :

Pricing Class I Milk Under the Boston Federal

Order'

The Boston market uses an historical base as a

starting point which is brought up to date by use of

a formula. As a result of a hearing in 1952 the Class

I price formula was revised to replace the years

1925-29 as the base period. The new base price was

established at $5.61, which was the average price for

1951. It was considered at that time that the price

was about right to maintain a normal supply. For

the future it was intended that the adjustment feature

of the formula would raise or lower prices to maintain

a normal supply in the market.

It was indicated earlier that in formular pricing there

are "movers" which affect the calculated price when

a sufficient change occurs in market conditions to affect

the "movers." In the Boston formula there are three

such "movers:" (1) An average of three economic factors; (2) a supply-demand adjustment; and (3) a

seasonal adjustment. The market uses a marketwide,

monthly pool, without base rating or fall premium plan.

The following economic factors are used in the

formula :

1. Prices of commodities at wholesale in the United

States as collected monthly by the United States Government—to measure changes in the general economic

conditions in the whole country.

2. The incomes of consumers in New England after

payment of withholding taxes—to measure how much

people have to spend.

3. Prices of feed and the wages paid to hired labor

in New England—to partially measure the changes in

the cost of producing milk in the area.

Supply-demand adjustment.—If the Boston market is

' What Makes the Price of Milk, Thurston M. Adams, University of Vermont and State Agricultural College, Burlington,

Vt., Circular 124, January 1957.

24 Agr'icuHure Handbook No. 138, U. S. Department of Agr'icullure
to have enough milk, a reserve supply of 15 to 20 percent over and above fluid milk needs is considered

necessary in November, usually the month of lowest

production. The reserve supply would be greater than

this in the other months as production increased seasonally. So, based on past records of production and

sales, a normal supply is determined for each month

of the year. If the actual supply is greater than this,

then it is considered that the market is more than adequately supplied and something should be deducted

from the price. On the other hand, if the supply is

below normal, the price should be increased. It is

worked out in percentages as shown below. The adjustment that would result with a $5.50 Class I price

under the three economic factors is used.

Supply above normal Taken from price

{Percent) (Cents)

12 66

8 44

4 22

0 0

Supply below normal Added to price

(Percent) (Cents)

5 22

7 44

9 66

Seasonal adjustment.—This mover is used to raise

the Class I price in the short production months, and to

lower it during the months of flush production. Yearly

average milk prices are not much different because of

this adjustment, but those who supply a larger proportion of their milk in the months of short supply are rewarded. Again the adjustment is worked out on a percentage basis. Prices are designed to move in 22-cent

intervals—about one-half cent a quart. If the annual

average of Class I price is $5.50, the following adjustments would occur:

Cents

January . -h22

February -f22

March 0

April ^ —44

May —66

June —66

July -22

August 0

September 4-22

October +44

November +44

December +44

Average 0

Using November 1956 as an example for determining

the Class I price the adjustment resulting from the economic factors would be :

Percent change

from 1951

Wholesale prices in the United States +1

Consumer incomes in New England +20

Grain and labor prices in New England +7

Average of 3 factors 28-H3= +9

At this point in the calculation the price would be 9

percent above the basic formula price of $5.61 or $6.11

($5.61 X.09 = .50).

But there was a 4 percent above normal supply of

milk in the market, so, according to the supply-demand

schedule above that would amount to a deduction of

22 cents per hundred for the month.

We may observe how some factors raise the price and

other factors lower the price. If we look at the seasonal adjustment schedule above it will be noted that

44 cents is to be added to the price in November because

it is normally a month of low supply.

Now when the effect of the movers in the formula are

applied to the basic formula price we get :

Basic formula price $5.61

Economic factor adjustment +.50

Supply and demand adjustment —.22

Seasonal adjustment +.44

Class I price calculated for November 1956 $6.33

Class I prices in the Boston market are designed to

move in 22-cent intervals-^about one-half cent a quart.

Any time the calculations come out between $6.20 and

$6.42, the Class I price is $6.31—the midpoint in this

range. So the actual price in the Boston market for

November 1956 was $6.31. This pricing adjustment is

called "bracketing" and in the Boston market is designed to keep prices from changing in amounts smaller

than one-half cent per quart. Brackets have been developed for price ranges above and below the one described here.

Pricing Class I Milk Under the Kansas City

Federal Order

The Kansas City market uses a basic formula price

derived by using the higher of the following alternative

uses of milk for manufacturing :

1. Average of prices paid for 3.5 percent milk received from farmers during the month at specified

Midwest condenseries adjusted to 3.8 percent butterfat by dividing by 3.5 and multiplying by 3.8.

2. Chicago price of 92-score butter X 1.2X3.8, plus

Chicago-area spray-roller-powder price — 5.5^ X 7.

(The 1.2 factor times the butter price allows for most

of the overrun in butter which contains about 80 perNovember 7958 25
cent butterfat. The butterfat value is then multiplied

by 3.8, the number of pounds of butterfat in 100

pounds of milk testing 3.8 percent. The factor 7 is

a little under the normal yield of nonfat dry milk from

100 pounds of milk after the cream has been removed

for use in butter. The understated overrun and yield

factors together with the 5.5 cents subtracted from the

powder price, represent the margin for processing and

marketing butter and nonfat dry milk).

This market uses a marketwide, monthly pool with

base rating plan, but no fall premium plan.

The Class I differential with seasonal adjustment to

be added to the base price is :

April through July 11.15

All other months 1.45

The supply-demand adjustment, not to exceed 45

cents, is calculated as follows:

A "current utilization percentage" is computed from

the percentage which the total volume of producer receipts are of the total gross volume of Class I sales for

the first and second preceding months.

Determination is then made of the amount by which

such "current utilization percentage" exceeds the higher

figure, or is less than the lower figure, of the appropriate "base utilization range" in the schedule at the

top of the next column.

The resulting "net deviation percentage" determines

the specific price adjustment according to the rates

listed. The deviation percentage is to measure the degree that normal market needs for Class I milk are

being met.

The rates are established on a sliding scale basis

so as to allow for nominal but progressive rate of adMonth to which

price applies

Base utilization

range

Month to which

price applies

Base utilization

range

January

February

March . .

122-128

124-130

125-131

127-134

130-137

144-153

July 150-160

August

September

October

November

December

146-154

138-146

127-133

^lay

June

117-123

120-126

justment based on variations which persist in a like

direction for two or three consecutive 2-month periods:

1. One cent for each percentage deviation, plus,

2. One cent for each such percentage deviation for

which a percentage point of deviation of like

direction was computed for the preceding delivery

period, plus,

3. One cent for each percentage deviation for which

percentage points of net deviation in like direction were computed for each of the first and

second delivery periods immediately preceding.

The provision for a progressive rate of adjustment is

to multiply or compound the degree of adjustment

when the need for it persists over several months. For

example, a 1-cent adjustment the first month could

become a 3-cent adjustment in a period of 3 months.

Determination of November 1956 Class I price:

Basic formula price $3. 4906

(the higher of the condensery or butter powder price)

Class I differential +1.45

(schedule above)

Supply-demand adjustment —.07

(calculated below)

Class I price $4. 8706

Computation of supply-demand adjustment

Sept. 1956

(July-Aug.)

Oct. 1956

(Aug.-Sept.)

Nov.

(Sept.

1956

-Oct.)

Producer receipts (1 )

Total Class I sales (2)

(1)-!-(2) X100= Current utilization percentage

Standard of utilization (See table above)

Minus or plus deviation (From base utilization range)

Rate of adjustment under item 1

Rate of adjustment under item 2

Rate of adjustment under item 3

Supply-demand adjustment for November 1956

70,157,654

50,328,274

139

138-146

0

70,403,830

53, 736,471

131

127-133

0

0

74,903,978

57,445,086

130

117-123

+ 7

-7(i

-7Í

26 AgricuHure Handbook No. 138, U. S. Department of Agr'iculture
PART 3. THE ROLE OF GOVERNMENT IN THE

DAIRY INDUSTRY

Beginning in the early 1930's State and Federal Governments began to play an increasingly important role

in the dairy industry. Among major activities of the

Federal Government are the Federal milk marketing

order program, the price support program, and the

food distribution program. State governments are

concerned mostly with price regulation and sanitary

enforcement.

The Federal order program affects most of the milk

associated with the larger fluid milk markets. The

price support program affects the entire dairy industry.

It affects the manufacturing segment directly through

purchase of manufactured products. It affects the fluid

milk segment indirectly by establishing a floor under

prices of manufactured dairy products which serve as

a base for determining fluid milk prices.

The more important governmental developments

came during periods of national stress or emergency,

such as the depression of the early 1930's, the Second

World War, and the postwar adjustment period. A

review of these developments should be helpful in

understanding the current situation.

Background

Before 1933 activities of the Government were devoted largely to research in efficient milk production

on farms, efficient handling in plants, and the dissemination of production and marketing statistics. Also

there were programs to eradicate bovine tuberculosis,

develop inspection and grading services, and protect

consumers against fraud and adulteration.

A recent governmental activity has placed renewed

emphasis on suppressing and eradicating brucellosis

in cattle. The Secretary of Agriculture was authorized

to use $15 million during each of fiscal years 1955 and

1956 to further the eradication program. This authority was later extended to include fiscal years 1957 and

1958 and the funds increased to $20 million annually.

In the early days when farmers delivered milk

directly to homes "price" was the result of simple

agreements between farmers and their customers. As

marketing methods became more specialized dealers

took over the job of distributing milk. Then pricing

involved more people and became complex. The effect

of this change was to put farmers in a less favorable

bargaining position.

As early as 1900 erratic and widely fluctuating prices

had become a serious and characteristic problem of

fluid milk markets. Following the First World War,

many farmers formed cooperatives in an effort to stabilize price through collective bargaining. But these

bargaining arrangements frequently were disrupted by

a minority of dairy farmers and dealers who continued

to trade in milk without regard to the bargaining

agreements entered into by the majority.

Conditions Leading to Governmental

Intervention

Under a situation of price instability, farmers in

many markets during the early 1930's found themselves

virtually powerless to prevent unreasonable price manipulation. Dealers, driven by sharply competitive

conditions often engaged in "price wars." Losses were

often passed back to farmers in the form of lower prices.

In an effort to combat these difficulties farmers established milk depots and roadside stands; milk peddlers

and cutrate stores appeared in great numbers. Some

stores began to use milk as a "loss leader." Milk strikes

broke out, with trucks stopped and the milk dumped.

These conditions led to the enactment of laws authorizing public regulation of milk prices by a number of

States as well as the Federal Government.

Recent writing on increased governmental activity in

times of emergency raises the question whether the conditions actually brought about this governmental activity. Possibly the times provided the setting for dealing

with deep-seated problems that had not previously come

to the surface. This idea is discussed by authorities on

agricultural conditions as follows: ^

. . . These facts do not explain fully why public

intervention in the dairy marketing process has

^ Murray R. Benedict and Oscar C. Stine, The Agricultural

Commodity Programs, Twentieth Century Fund, 1956, p. 443.

November 7958 27
taken the form it has or why it has continued after

the period of acute emergency has passed. The

depression did not create the underlying need for

economic regulation of the fluid milk markets. It

did create pressures that revealed inherent structural weaknesses in the organization of the industry. In some markets, the strain was greater than

the marketing machinery could stand and it broke

down. However, the basic reason for increasing

resort to public regulation lies in the nature of the

demand for fluid milk, the conditions under which

milk is produced and sold, and the characteristics

of milk itself.

. . . The principal controversies have centered

on the methods of control, the policies to be followed and the governmental level at which controls will be established, that is State or National.

... It seems likely that public regulation of some

kind, in the fluid milk markets, would have developed long before 1933 had it not been for the deep

and general aversion to public participation in economic activities during that period . . . Once the

idea of classified prices has been accepted, there is

equally evident need for some agency, public or

private, to do the auditing and accounting that is

necessary for maintaining a suitable balance between the interests of the producers, the dealers

and the general public.

Federal Milk Marketing Orders^

Federal authority to regulate the handling of milk

was first provided in the Agricultural Act of 1933.

The Federal orders of today, however, are based on

the Agricultural Marketing Agreement Act of 1937, as

amended, which sets out in detail the authority granted

earlier.

In September 1956 there were 67 marketing areas

in the United States, in which minimum prices paid to

farmers for milk were regulated by Federal milk marketing orders. About one-third of the milk sold wholesale by farmers in 1956 was marketed under provisions

of these orders.

Federal orders define the terms under which dairymen sell their milk to handlers. The purpose is to

maintain marketing conditions that will assure con-

' For more complete information see "Federal Milk Marketing Orders, Their Establishment, Terms, and Operation," Misc.

Publication 732, Agricultural Marketing Service, USDA, October 1956, When provisions of a particular order are of interest,

the order itself should be studied.

sumers a dependable supply of pure and wholesome

milk and be in the public interest.

Orderly marketing is sought by spelling out in advance the terms for both buyers and sellers. These

terms are developed largely through public hearings

where producers, handlers and consumers have an opportunity to participate. Once an order is in effect,

information about supply and demand is collected and

made available to all interested parties.

A Federal milk marketing order applies to a specified

marketing area. This area is defined in each order.

Geographically the market area usually includes that

area in which major distributors are competing with

each other for sales. Such an area usually includes

a principal city and its suburbs.

Handlers within the market area are the only persons regulated. Handlers are usually defined as anyone who purchases "approved milk" from farmers

for selling in the market area. A handler must pay the

minimum price, make accurate weights and tests, and

account for the way milk is used. Farmers receive

their checks once or twice monthly, generally from the

milk handlers. Legal action can be taken against

handlers who fail to comply. In practice, rather few

legal actions have been necessary to enforce compliance

with orders.

Under a Federal order handlers pay for milk in accordance with a classified pricing plan. Proceeds of

milk sales are distributed among producers by a pooling arrangement specified in the order. Some markets

have base rating or other seasonal plans. The order

price is a minimum price and dealers sometimes pay

a premium to producers.

Federal orders do not substitute for producer cooperatives. Cooperatives represent their members at

hearings and carry on many other marketing functions

outside the scope of a marketing order.

Each order is administered by a market administrator, appointed by the Secretary of Agriculture. Since

only milk handlers are regulated, the market administrator's principal duty is to be certain that handlers

are accounting for their milk receipts and making

payments to producers in accordance with the order.

The market administrator's staff audits handlers'

records to be sure that full payments are made to

producers. - -

The costs of operating a Federal order are defrayed

by assessments on the milk received by dealers. Each

order provides the rate of assessment which varies

among markets. This usually ranges from 2 to 5 cents

per hundredweight depending on the volume of milk in

28 Agriculture Handbook No. 138, U. S. Department of Agriculture
the market, and services provided by the milk market

administrator's office.

Frequently people have misconceptions as to the

scope of Federal orders. Some of the more common

limitations of Federal orders are the following:

Federal milk marketing orders:

Do not guarantee a given price level—prices

are determined to reflect supply and demand conditions and assure an adecjuate

supply of pure and wholesome milk, and

be in the public interest.

Do not set resale prices—only minimum

prices paid by handlers for milk going into

various uses. In the absence of resale

price fixing by a State agency, resale prices

are established by the milk dealers.

Do not guarantee farmers a buyer—handlers

are not required to purchase milk from a

particular farmer.

Do not control production or prohibit the

marketing of milk from any production

area in any area of consumption.

Do not establish or enforce sanitary standards—this is handled by local authorities.

Procedure for Developing Federal Orders

A number of steps are taken to obtain a Federal

order within a market. Several months or more may

be required to complete the process. This is the procedure followed :

1. Some group, usually a milk marketing cooperative, requests an order. This is done through a petition to the Secretary of Agriculture. Usually a proposed order is submitted at the same time.

2. An investigation is made by a representative of

the Department of Agriculture to determine if need

exists for an order.

3. If it is decided to proceed, a notice of public

hearing and the proposed order is placed in the Federal

Register. At the same time local publicity is given

to the proposed order and the time and place of the

hearing.

4. A public hearing is held in the area where the

order will apply. Here all interested parties, including

producers, milk handlers, and consumers, are given

an opportunity to present testimony relative to any

order that might be issued.

5. Based on this hearing record, a Recommended

Decision and Order is developed. These documents

are published in the Federal Register.

6. A period of time, up to 20 days, is allowed for

interested parties to examine the proposal. They can

file exceptions to any part of it.

7. The opinions expressed in these exceptions are

considered. Changes in the original proposal are made

as deemed necessary in view of the exceptions.

8. The Final Decision and Final Order are issued.

Publication is made in the Federal Register.

9. The order becomes effective at a date specified

by the Secretary of Agriculture. Approval must have

been expressed by at least two-thirds of the producers

voting in a referendum conducted by the Department

of Agriculture. (If the order provides for individual

handler pools, by three-fourths of the producers.)

Orders usually are amended or changed by following

the same steps outlined above. To cope with emergency situations, orders are sometimes suspended, in

whole or in part. An order must be terminated if requested by a majority of the producers supplying more

than half of the milk in the market. It may also be

terminated by the Secretary of Agriculture if he finds

it no longer accomplishes the purposes of the Act.

State Milk Controls

State milk control laws grew out of the same conditions which gave rise to the Federal order programs.

In early 1932 some States had legislation under way

to permit milk price controls. Between 1933 and 1940

at least 26 States passed milk control laws. Most of

this legislation was passed on an emergency basis. In

the meantime many States appear to have accepted

these laws as a part of their recognized governmental

activity.

In September 1956, the following 16 States had laws

which authorized the establishment of prices for milk:

Maine, New Hampshire, Vermont, Massachusetts,

Rhode Island, Connecticut, New York, New Jersey,

Pennsylvania, Virginia, Georgia, Florida, Alabama,

North Carolina, Montana, and California. Note that

most States with milk control are eastern seaboard

States, plus California and Montana.

The laws authorizing respective State milk control

vary greatly among the States. The agencies designated to administer the laws also differ widely. Some

function under direction of a single officer, while others

are administered by boards or commission.

No single method of financing appears to predominate. Funds come from legislative appropriations,

license fees and assessments, or various combinations

of the three methods. State expenditures for milk

control range from about $5,000 for a small State like

Vermont to over $500,000 for a State like New York.

November 1958 29
GEOGRAPHY OF FLUID MILK PRICE

REGULATIONS

t';";':":";1 Minimum prices to producers

V//A Minimum prices, all levels

tjj88il Minimum, maximum, or fixed, all levels

CLASSIflCAllON Of STATES IN MOST CASES BASED

ON AUTHORITY PROVIDED IN THE lAWS; AUTHOKITY NOT EXERCISED TO SAME DEGREE IN ALL STATES

U. S. DEPARTMENT OF AGRICULTURE

CITIES NAMED HAVE FEDERAL MIIK MARKEriNG ORDERS

WHICH ESTABLISH MINIMUM PRODUCER CLASS-PRICES

NEC, 622A-56(8) AGRICULTURAL MARKETING SERVICE

Here is a summary of the general powers granted

to State milk control programs by State legislatures;

1. Licensing of dealers is prescribed by all State

milk control laws.

2. Bonding of dealers to protect producer payments is frequently required.

3. All State milk control laws require records and

periodic reports from handlers.

4. Auditing or inspecting of dealer's records is

authorized in all State milk control laws.

5. Fixing the minimum producer prices is authorized in all States with State milk control.

6. Fixing of resale prices is provided for in 12

States.

7. Regulation of milk weighing and testing (checking dealer's milk samples) is frequently

authorized.

8. Some States regulate trade practices: Premiums, bottle deposits, and frequency of

delivery.

All State milk controls provide for pricing milk on

a classified-use plan. Most States are divided into

various marketing areas for purposes of price regulation. Some of the smaller States, however, have one

price effective for the entire State.

Standards and objectives of pricing are specified by

the laws. More emphasis is placed on cost of production by State milk control bodies than in the case of

Federal orders. In some States cost of production

predominates the hearing testimony. In resale price

fixing dealer's cost of distribution is given heavy

consideration.

While pooling is involved in all State regulation,

most use is made of the individual handler type of

pool. Some markets, however, have marketwide pools

as part of their regulatory machinery. Seasonal pricing of various sorts is practiced by State milk control

agencies.

The problems encountered under State milk control

in establishing producer prices are similar to those

under Federal milk marketing orders. One important

difference is that the power of a State to establish prices

stops at its borders.

30 Agricvlfure Handbook No. 138, U. S. Department of Agriculture
The Price Support Program

Paradoxically, some of the price-support activities

pertaining to surpluses since the Second World War

had their foundation in wartime programs aimed at

increasing production. At the outbreak of the war

the national problem suddenly shifted from dealing

with surpluses to one of assuring adequate supplies of

milk.

Wartime wages not only increased the demand for

dairy foods, but enticed some dairy farmers, as well

as their help, to seek industrial employment. At the

same time production costs moved upward faster than

prices received for milk.

Adequate milk supplies were considered essential

to the war effort. Subsidies were provided during the

war years to encourage dairy production. The

Steagall Amendment was passed in 1941. Under this

law the Secretary of Agriculture could support any

nonbasic agricultural commodity to encourage increased production at not less than 85 percent of parity.

This was later increased to 90 percent of parity to continue for 2 years after the cessation of hostilities.

Following the Second World War, the demand for

dairy products for military and foreign use declined

sharply. It appeared desirable to extend Government

assistance through price supports. The Agricultural

Act of 1948 extended the price support authorization

at 90 percent of parity for milk and butterfat (which

was due to expire at the end of 1948) until January

1, 1950. The following year the Agricultural Act of

1949 authorized and directed the Secretary of Agriculture to support prices to producers of milk and

butterfat at such level between 75 and 90 percent of

parity as would assure an adequate supply of milk.

In several of the postwar years it was necessary to

make substantial purchases of dairy products to support prices at the announced levels. In 1951 and 1952

Government purchases were minor as prices to producers were above support levels. During most of

1951 and 1952 the Government had no inventories

of butter and cheese and relatively low inventories

of nonfat dry milk. As milk production increased at

the end of 1952 the Government resumed heavy buying.

Inventories mounted in 1953 and 1954. See table 9.

Sizable amounts of dairy products were donated

to charitable institutions. Orphanages, homes for the

aged, mental hospitals, nonprofit school lunch programs, and other eligible outlets received donations.

In addition, donations were made to private (nonpublic) welfare agencies for distribution to needy persons in foreign countries. Also dairy products were

sold to the United Nations' Children's Fund and to

foreign governments at reduced prices for welfare use.

In 1954 several steps were taken to halt the buildup

of Government stocks of dairy products: ( 1 ) The price

support level was reduced from 90 to 75 percent of

parity; (2) the special school milk program authorized

under the Agricultural Act of 1954 was begun to divert milk into direct consumption. It was felt that

this was milk that might otherwise be used for

products that end up in Government stocks; (3) the

Agricultural Act of 1954 also opened up additional

opportunities for utilizing Government stocks; and (4)

The Agricultural Trade Development and Assistance

Act of 1954 (Public Law 480) was passed.

The latter act was designed to encourage foreign

sales by making it possible for countries unable to

pay for surplus agricultural commodities in dollars

or other "hard" currency to make other arrangements

for purchasing. Relatively minor amounts of dairy

products have been utilized under Public Law 480.

The major foreign utilization has been through

donations.

During 1954, 578 million pounds, or the equivalent

of half the previous year's production of nonfat dry

milk solids, was utilized in mixed animal feed at a time

when protein feeds were in tight supply. Under the

broadened authority provided by the Agricultural Act

TABLE 9.—Dairy price support purchases of butter, cheddar cheese, and nonfat dry milk solids, 1949-56

Item 1949 1950 1951 1952 1953 1954 1955 1956

Butter

Cheddar cheese

Nonfat dry milk

Million

pounds

114.3

25.5

325.5

Million

pounds

127.9

108.9

351.6

Million

pounds

0.2

0.8

53.6

Million

pounds

16.1

2.8

51.5

Million

pounds

358.9

291.0

587.4

Million

pounds

1 319. 7

1 275. 1

650.6

Million

pounds

162.4

150.0

555.7

Million

pounds

164.7

187.9

754.1

' Excludes quantities of butter and cheese sold to Commodity Credit Corporation in March 1954 but contracted for

repurchase by private firms after April 1, 1954. Quantities excluded: Butter, 5.1 million pounds; cheese, 86.6 million pounds.

Dairy Situation, No. 259, March 29, 1957, p. 21, Agricultural Marketing Service, U. S. Department of Agriculture.

November 7958 31
TABLE 10.—Percentage of totalproduction oj each specified dairyproductpurchasedfor price support, 1949-56

Item 1949 1950 1951 1952 1953 1954 1955 1956

Creamery butter

Percent

8.1

2.7

34.8

Percent

9.2

12.2

39.9

Percent Percent

1.4

0.3

6.0

Percent

25.4

28.5

48.4

Percent

22.1

26.3

46.4

Percent

11.7

14.9

39.4

Percent

11.7

18.6

50.9

Cheddar cheese

Nonfat dry milk 7.6

The rapid increase in production of nonfat dry milk relative to the rate of consumption discussed on page 11

is reflected in the stepped-up Government purchases of dry milk in recent years.

of 1954 substantial quantities of dairy products have

been transferred for increased consumption by military

personnel and veteran's hospital patients. Also, a

special program has been adopted under which Commodity Credit Corporation has paid part of the cost

of increased milk consumption by the military personnel and veteran's hospital patients. In 1956 the men

in the Army, Navy, Marine Corps, and Air Force consumed 65 percent more milk than their normal consumption as a result of this program.

Frequently information pertaining to the amounts

of dairy products purchased for price support, the

proportion of national production so acquired, and

the cost to the Government is desired. A summary of

price support activities for the post war period is

shown in tables 9, 10, 11, and 12.

During 1956 for the first time since late in 1952 the

stocks of butter held by Government were depleted

and stocks of nonfat dry milk were relatively small.

Dispositions of butter and nonfat dry milk acquired

through price support operations were being made

about as fast as acquisitions. Although Government

stocks of cheese were still substantial, dispositions were

being made at a faster rate than acquisitions, thus

reducing the inventory of cheese.

Food Distribution Programs

Food distribution programs are designed to expand

agricultural markets by improving food consumption

levels and by finding outlets for food available in surplus supply. They began in 1935 with the donation

of surplus foods acquired by the Department of Agriculture to low income groups. This program, called

Direct Distribution, is still in operation. However, increasing emphasis under these programs has been designed to expand the purchase of dairy products from

regular suppliers.

Section 32 of the Act of August 24, 1935 provides

the Department of Agriculture with an annual appro

priation (equal to 30 percent of the annual custom re

ceipts) to expand markets for agricultural commodities

Surplus-removal operations, under which the Govern

ment purchases a portion of the market supply to re

lieve distress conditions, are financed with these funds

The supplies so purchased are donated to States for

use in nonprofit school lunch programs, and to the

needy in charitable institutions and family units.

The volume of foods donated under this program

varies each year, depending upon purchases required

to stabilize the market. Large quantities were distributed between 1935 and 1941. During the Second

World War only limited donations were made. The

volume has increased in recent years.

The Penny School Milk Program was established

in 1940. Because whole milk could not be handled

under a Government purchase and donation program,

this program operated under a system of cash assistance payments, utilizing normal trade channels. Participating schools purchased milk from local dairies.

TABLE 11.—Percentage of total milk production purchasedfor price support on a milk fat basis and solids-not-fat

basis, 1949-56

Item 1949 1950 1951 1952 1953 1954 1955 1956

Milk fat ...

Percent

2.2

3.0

Percent

3.0

3.5

Percent

0)

0.5

Percent

0.3

0.5

Percent

8.2

6.0

Percent

7.3

6.5

Percent

3.8

5.2

Percent

4 0

Sotids-not-fat 6.9

' Less than 0.05 percent.

Dairy Situation, No. 259, March 29, 1957, p. 21, Agricultural Marketing Service, U. S. Department of Agriculture.

32 Agriculture Handbook No. 138, U. S. Department of Agriculture
TABLE 12.—All dairy products: Sales proceeds and costsfrom price-support purchases and related programs, year

beginning July, 1948-56

Total cost to

Government

and to

Commodity

Credit

Corporation

Financial outcome from disposition of product

Year beginning July and item Commodity Credit Corporation Total Government

Sales proceeds Net expenditures

Sales proceeds Net expenditures

Total dispositions:

1948

Million dollars

0.9

50.1

231.8

9.5

27.7

257.8

478.9

490.9

344.1

Million dollars

1.0

30.3

121.1

8.4

22.5

127.0

65.1

94.1

130.0

Million dollars

•0.1

19.8

110.7

1.1

5.2

130.8

413.8

396.8

214.1

Million dollars

1.0

13.7

122.0

3.2

3.6

56.7

26.8

71.0

19.6

Million dollars

10.1

1949 36.4

1950 109.8

1951 6.3

1952 24.1

1953 201.1

1954 452.1

1955 419.9

1956 324.5

Total 1,891. 7 599.5 1,292.2 317.6 1,574.1

Direct purchases (for Sec. 32) : ^

1949 1.0

3.0

7.7

1.8

11.4

1.0

3.0

7.7

1.8

11.4

0

0

0

0

0

0

0

0

0

0

1.0

1950 3.0

1951 7.7

1952 1.8

1953 11.4

Total 24.9 24.9 0 0 24.9

• Credit.

^ Sec. 32 of Pub. Law No. 320, 74th Cong., passed in 1935, provides the Department of Agriculture with funds, equal to

30 percent of the annual custom receipts, for the general purpose of expanding domestic and export markets for agricultural

commodities.

Compilation made by Commodity Stabilization Service.

Section 32 funds were used to reimburse schools for

the difference between the selling price to children

and the cost of milk to the school.

In 1943 the Department of Agriculture established

the school lunch cash food assistance program, including milk and other dairy products. The Penny

School Milk Program was merged with this new program. Donations of surplus commodities continued,

although the large wartime demand for food had

greatly reduced the volume of purchases under Section

32.

The National School Lunch Act was passed in 1946.

It authorized the continuance of food assistance both

in the form of cash payments and donations of Section 32 commodities. Under Section 6 of the Act,

the Department of Agriculture also was authorized

to use a portion (approximately 15 percent) of the

annual school lunch appropriation to make large-volume purchases of foods for the program.

The Plentiful Foods Program, developed in 1947,

is another distribution activity which operates through

normal trade channels. It is designed to enlist the

cooperation of food distributors and informational

media in trade merchandising and promotion campaigns. Through these efforts, consumer attention is

focussed on those foods available in plentiful supply, in

an effort to stimulate sales. Each year, under this program, the Department supports the industry "June

Dairy Month" campaign.

Section 416 of the Agricultural Act of 1949, provided authority to the Department to donate foods acquired under the price support program to nonprofit

school lunch programs in this country and to needy

persons both in this country and abroad. This was the

first authority provided to the Department to donate

surplus foods to the needy overseas. The Act required

these foreign donations to be accomplished through

United States private welfare agencies.

The Agricultural Trade Development and Assistance

Act of 1954 further extended this donation authority

by making intergovernmental groups, such as United

Nations International Children's Emergency Fund,

eligible to receive such donations.

The Agricultural Act of 1954 authorized the use

of up to $50 million of Commodity Credit Corporation

funds in 1954-55 and 1955-56 to increase the conNovember 7 958 33
sumption of fluid milk by children in nonprofit schools

of high school grade and under. The Special Milk

Program was established under this authority.

The Special Milk Program was increased to a maximum of $75 million a year for fiscal years 1957 and

1958. Many more children became eligible by extension of the program to nursery schools, settlement

houses, summer camps, and similar nonprofit child-care

institutions.

During the school year ending in June 1956, more

than 62,000 schools took part in the program, a gain

of more than 50 percent over the previous year. A

total of 1.4 billion half pints of milk was consumed in

schools under the program for that school year. This

amount of milk was about the equivalent of 0.6 percent

of total United States milk production for 1956. This

was in addition to the 1.7 billion half pints of nulk

consumed by children under the National School Lunch

Program.

In the 1955-56 school year, the number of children

participating in the National School Lunch Program

totaled 10.5 million and the number eating complete

lunches with milk increased to about 9.6 million, a 10

percent gain over the previous year. Funds available

for this program were increased from $83.2 million

in 1955-56 to $100 million for the 1956-57 fiscal year.

In addition to using almost $115 million worth of

donated foods in 1956, participating schools made local

purchases of food valued at $367 million. The Federal

contribution financed $67 million worth of these local

purchases; funds from State and local sources financed

the remainder.

PART 4. PRODUCER RESPONSE TO PRICE CHANGES

In the earlier discussion of price theory, page 17, it

was pointed out that changes in prices are a result of

the interaction of supply and demand, and that in our

free enterprise economy prices influence both production and consumption. In the absence of a price support program, when our population wants to consume

more milk and is willing and able to pay for it, it is

said that demand is increased. Stronger demand

brings about an increase in prices and encourages production. Conversely when less milk is demanded this

situation is reflected by a lower price in the market

place. A weaker demand reflected through lower

prices discourages production.

In recent years, there has been considerable interest

in association between milk prices and milk production.

A number of relevant factors in this complex relationship are discussed in the following statement: ^

From 1952 to 1953, milk production showed a

record increase for a single year's time—rising

114.7 billion pounds to 120.2 billion in 1953.

Increases have occurred in each year since 1953,

but at only from 1 to 2 billion pounds per year.

In fact, the entire increase from 1953 to 1956 (3

years) was just equal to the 5.5 billion pound

increase between 1952 and 1953 ( 1 year). Another increase of about a billion pounds took place

in 1957.

The impact of the 1952-53 increase in supplies

led to downward pressure on prices and heavy

sales to CCC under the support program. The

' From preliminary draft of statement prepared by Herbert

C. Kriesel, Agricultural Marketing Service, U. S. Department

of Agriculture, Washington, D. C.

support level was adjusted downward in 1953,

but thereafter prices rose slightly, through 1957.

In considering the interrelationship between

milk prices and milk production it is easy to overlook the fact that there were declines in some other

relevant prices also after 1953. Greater declines

in prices for hogs, beef cattle and calves, than

for milk from 1953 to 1954 and 1955 enhanced

the competitive position of dairying relative to

these other enterprises, in areeis where these are

produced. It is recognized, of course, that cash

receipts from all these items declined when prices

dropped.

There were other offsets to the initial price drop.

These changes, combined with some other developments since 1954, indicate that the response of

dairy farmers to price fluctuations the last several years was entirely normal.

Now, how did all this happen? How much

did actual prices decline?

The average 1953 price for all milk was $4.32

per 100 pounds, compared with the record $4.85

in 1952—a drop of 53 cents. From 1953 to 1954,

the decline was an additional 35 cents. This

makes a total decline of 88 cents, or 18 percent,

over the 2 year period.

Milk prices showed a slight increase from 1954

to 1955. Moreover, dairy prices became favorable relative to feed prices, as support levels on

feed grains were lowered relatively more than

support prices on milk, and large harvests kept

grain prices at support levels.

34 Agriculture Handbook No. 138, U. S. Departmertt of Agriculture
Relatively few farmers now sell both hogs and/

or beef cattle and dairy products. So consequently relatively few farmers realize there are

partial offsets to the lower dairy prices. All

dairymen, of course, purchase at least some feed,

and benefit from lower feed prices. Despite these

offsets, of whatever magnitude they may have

been, the reduction from 1952 to 1954—averaging 18 percent for the United States as a whole—

was sizable.

Such a sharp price reduction could be expected

to affect a farmer in either or both of two ways.

First, it might call to a dairyman's attention certain inefficiencies of his organization. Second, it

might compel him to make some permanent improvements he had been planning, anyhow.

It's frequently said that farmers affected by the

second are those who would have no alternative

but to work longer days and sacrifice their leisure

in order to increase the milk flow and meet their

fixed expenses. Probably this explanation fits

comparatively few actual situations. In any case,

a farmer making such an adjustment presumably

would plan to continue his new work rate only for

a short time, that is until prices improve or until

he could revamp his farm organization.

With or without the price drop for an inducement, many farmers have made fundamental

changes in their farm organization. In most

cases, these changes tend to increase production

per farm. New techniques also are being constantly devised, techniques which will have a

tendency to increase milk production, regiirdless

of price relationships.

While dairy prices fell sharply from 1952 to

1954, the decline halted more quickly than declines for a number of other farm commodities.

For example, prices for hogs and beef cattle did

not begin to rise again until the autumn of 1955.

In the past 2 years, dairy prices have been gradually advancing. They moved from a United

States average of $3.97 in 1954 to $4.02 in 1955.

and $4.13 in 1956. Moreover, a few cents were

added in 1957. Thus, in much of the period that

milk production has been increasing, milk prices

have been showing some actual advances, though

still continuing substantially below the 1952-53

level.

For much of 1955 and 1956, moreover, dairy

prices were equal to or above average relative to

prices for beef cattle and hogs. Also, the milkfeed price ratio in this period reached the most

favorable level on records going back to 1910.

In summary, therefore, it appears that dairymen have responded to changed economic conditions of the past 3 years about as could be

expected.

The spurt in milk flow in 1953 and early 1954

must be attributed to delayed effects of earlier

technological changes and to price support levels

braking the price declines. In some instances,

individual producers probably increased output in

order to meet fixed expenses. Frequently, however, this expansion may have been planned anyhow, in order to take advantage of newer techniques.

Changing the physical structure of a dairy farm

to take advantage of improved methods frequently

requires substantial capital investment, though

perhaps less than it would cost to replace some

of the existing structures.

Some farmers are deciding they would rather

discontinue dairying than to embark on such an

expansion. As a result, for several years there

has been a reduction of between 4 and 5 percent

per year in number of farms with milk cows. In

some States and market areas the reduction has

been substantially greater.

The farms remaining in production, however,

are increasing their scale fast enough to limit to

about 1 percent per year the drop in total number of milk cows for the country as a whole.

Reference was made in the preceding statement to

technological developments and adjustments to changes

in economic conditions, see also page 14. Let us consider some forces or factors that determine changes in

milk production.

Number of milk cows.—The number of milk cows

would be a major factor in changing milk production.

In the short run, 1 to 2 years, the level of milk production would not be expected to change much because

cow numbers change rather slowly except in unusual

circumstances such as widespread drought. If a large

number of cows were disposed of the production of

milk could be sharply curtailed, but the biologic na

ture of dairying makes a sudden and tremendous in

crease in milk production from this factor unlikely

Over the longer term, 3 to 5 years or more, the pro'

duction of milk could be increased very substantially

Cost of production.—One of the principles of ecO'

nomics states that in the long run unless producers re

ceive cost of production they will cease production

So long as the price remains equal to or above the

November 1958 35
cost of production, farmers will be expected to produce milk—taking into account, of course, alternative

enterprises. But the cost of production is not the same

for all producers. For example, reports from one

State show milk production costs in a particular market ranging from $4.83 per hundredweight in the lowcost herds to $6.79 in the high-cost herds. Farm management studies in another State show this range from

$3.50 to $9.50. Most States can furnish similar data.

Since dairymen are in competition with each other

for the consumer milk market, there is continuous shifting among farmers into and out of dairying. When

shifts take place that are not entirely offset by those

in an opposite direction the result is a trend. There

has been a longtime trend toward fewer farms with

milk cows, and another trend of larger herds where

milk cows are kept. The 1954 Census of Agriculture

shows less than 3 million farms with milk cows compared with 3.6 million in 1950 and 4.6 million in 1940.

The average number of cows per farm was 6.9 in 1954,

about 20 percent higher than 1950 and 30 percent

above 1940. Undoubtedly, among the factors that influence farmers to make such changes are the cost of

production and the opportunity to shift to other farm

enterprises or nonfarm pursuits.

Alternative enterprises.—A very important factor to

consider in deciding whether to produce more or less

milk, or whether to produce it at all, is the comparative advantage or disadvantage of other farm products.

For example, take the following simple comparisons

between the value of milk and other products.

The first comparison indicates the number of pounds

of feed that was equivalent in value to one pound of

wholesale milk for the years specified. The figures in

the percentage column are calculated to show the

change since 1940. Note that in 1945 a pound of

milk was equal to 10 percent more feed than in 1940

and in 1954 it was equal to 8 percent less.

One Pound of Milk Buys How Much Feed?

Year

Pound of

milk is

worth

Percentage

change since

1940

1940

Pounds of

feed

1.29

1.42

1.24

1.29

1.28

1.25

1.19

1.28

1.36

1945 + 10

1950 . . . — 4

1951

1952 — 1

1953 — 3

1954 — 8

1955 -1

1956 +5

The next example compares condensary milk and

hogs. Note that by 1954 hogs had become twice as

good an alternative as they had been in 1940, because

the same amount of milk was equal to only 50 percent

as many hogs. This comparison points up the importance of selecting a base year. In 1940 the relationship between hogs and condensary milk was the most

favorable for milk during the past quarter century.

One Pound of Condensary Milk Buys How Many

Pounds of Hogs?

Year

Pound of

milk is

worth

Percentage

change since

1940

1940

Lbs. of hogs

!l9

.16

.18

.21

.14

.13

.19

.20

1945 —27

1950

1951

1952

1953

1954

1955

-38

-31

-19

-46

-50

— ?7

1956 -23

Likewise note that in 1945 a pound of condensary

milk was equal to 17 percent more beef than in 1940,

and in 1953 to 6 percent more; but in 1950 and 1951

a pound of milk was equal to only two-thirds as much

beef as it had been in 1940.

One Pound of Condensary Milk Buys How Many

Pounds of Beef Cattle?

Year

Pound of

milk is

worth

Percentage

change since

1940

1940

Lbs. of beef

cattle

.18

.21

.12

.12

.15

.19

.18

.18

.20

1Q45 + 17

1950 —33

1951 —33

1952 -17

1953 +6

19.54

1955 . .

19.56 + 11

These comparisons show how the relative values of

the different commodities change over time and thus

affect farmers' management decisions.

The opportunity for some farmers to shift from one

enterprise to another tends to keep the returns from

various enterprises in equilibrium. This is similar to

the example on page 21 showing how opportunities to

shift milk to different manufactured uses tends to keep

milk prices in equilibrium.

36 Agriculture Handbook No. 138, U. S. Department of Agriculture
A Hypothetical Adjustment

Finally, in our examination of the effect of price

changes on production, let us consider a hypothetical

case. Take for example, a farm with a dairy enterprise of 25 cows at the end of the Second World War.

Let us assume further that technological developments

since that time have made it possible to increase the

herd to 30 cows without building additional barn

space; that new methods of managing and fertilizing

pastures and new varieties of crops and forage handled with modern machines under improved management have made it possible to produce on the same

farm the additional feed required by the five extra

cows added to the herd ; also that with improved work

methods and labor-saving devices it is possible to care

for and milk the five cows with the same amount of

labor as formerly; and that artificial breeding has

added animals to the herd that are more efficient converters of feed into milk so that the present level of

milk production relative to feed inputs is higher than

formerly. For many readers this situation will be

sufficiently "real" that it could hardly be termed

"hypothetical."

Which of the two—changing prices or changing technology—contributed most to these changes? If you

were this dairyman what would you have done? First

of all, the increased supply of feed must have encouraged the addition of animals to utilize the extra feed.

Secondly, the possibility of adding to the herd size

without any major construction of buildings by utilizing bullpen or old horse stalls, shifting to parlor milking, or making other adjustments was a factor contributing to the increase in herd size. Third, more efficient use of the same labor supply was also a positive

influence. Improved breeding made it possible to increase the supply of milk from replacement cows as

well as from the additional cows. All of these adjustments tended to add to the volume of milk produced relative to production inputs. If the price of

milk went down, the additional volume brought a

larger gross income than would have been the case

with the previous production. Theoretically, the

larger volume would have been produced at lower per

unit cost for many of the production items due to the

economy of scale—that is at a certain cost figure the

more units produced—the lower the cost of each unit.

In the example above the building cost was assumed to

remain the same, therefore it was divisible by the production of 30 cows now compared with the production

of 25 earlier. The higher yields of pasture and crops

did not add to real estate taxes and interest on the

investment in land or mortgage interest, whichever the

case may be. Labor costs would also be divisible by

the increased units produced.

If the price of milk had risen, then it seems that

production would have been encouraged to increase income still more. Therefore under the assumed circumstances it seems that production would have increased

whether prices increased or decreased, within reasonable limits.

This brings us to a point where the nature and extent

of the change may be an important factor in the minds

of dairymen as they analyze their business. If we assume that the changes made to increase the herd size

in the example from 25 to 30 can be attributed largely

to technological developments and there seems to be

good reason to do so, then it seems logical to assume

that the dairy enterprise as increased might now be at

the optimum operating level—that of using barn space

at optimum capacity, using labor at its optimum level,

and utilization of home grown feed at the desired point.

Continuing with this assumption it would mean that

to provide more barn space would require an addition

to the barn; that to handle more cows would require

additional labor, rather than using present labor more

efficiently as was possible in the previous adjustment;

and that more feed would have to be obtained either

from additional land or purchased. It will be seen

readily that the two stages of adjustment are decidedly

different, and that the latter might cost more than the

additional revenue from increased milk production

would bring.

Let us reexamine the belief that a decline in milk

prices brings about increased production. It appears

that under some conditions farmers may increase milk

production during a period when milk prices are declining. But this needs to be examined. Were relative prices such as the milk-grain price ratio also declining? (Actually farmers are more interested in

price-cost relationships than in absolute prices.) If

relative prices were declining it is possible that the

price effects were overbalanced by farmers actions in

taking advantage of new technology. In other words,

if milk production increases as relative milk prices

decrease, with due allowances for lags in response, the

increase in production probably is in spite of the price

change and not because of it.

November 7958 37
PART 5. FORECASTING THE DEMAND FOR AND

SUPPLY OF MILK

Thus far in this handbook the emphasis has been

on description, explanation, and analysis. In parts 1

and 3 which are mostly descriptive, you were given a

bird's-eye view of the dairy industry and the role of

Government. Part 2 was devoted to an explanation

of the workings (theory) of the price mechanism.

Part 4 dealt with an analysis of recent developments.

Now we come to forecasting in which we will make

use of these three areas of subject matter. It is the purpose here to suggest a procedure which can be used

in developing information that should be useful in making decisions about the dairy industry.

The following questions illustrate some of the decisions that are of concern to the dairy industry:

Producers.—Shall I produce milk? Where shall I

produce it? At what price? For what kind of a

market—fluid or manufacturing? How much shall I

produce? What quality? With bulk tanks or cans?

Processors or handlers.—^Where will a milk supply

come from? What amount? What quality? Will

it be received in bulk or cans? What products shall

I make, and how much of each? Shall I deliver milk

to homes or stores or both? What price shall I

charge? What kind of package? Should I expand

my distribution area ?

Consumers.—Shall I use milk and dairy products?

What is the cost? Are there satisfactory substitutes?

How much shall I purchase? Shall I have it delivered

at home or buy it at the store? What kind of

containers ?

In a dynamic economy such as ours, management decisions are frequent and complex. They pertain to the

use of productive factors such as land, livestock, machinery, equipment, labor, and to pricing, demand,

uses, distribution, and many others. Difficulties of

making sound decisions are great because of the uncertainty of the future.

Yet, we can't act without making an estimate or prediction of the future. We are continually making

choices or decisions, most of which are based on some

estimate of the future. These choices may concern

the next few minutes, the next few months or years.

These decisions involve choosing among various alternatives—which garment to wear, what foods to eat,

what profession to follow, where to live, and so on.

Every decision is based on some forecast—and action based on a forecast developed from a sound and

careful analysis should have a much greater chance

of success.

How People Make Forecasts

People have different ways of making their forecasts

of the future. The less informed may depend entirely

on a hunch or intuition for his prediction; the highly

skilled forecaster will rely on complex economic and

statistical analyses. If these analyses have been highly

accurate in the past in forecasting future events, their

results may be used directly as a forecasting formula.

This formula may range from simple arithmetic to

highly complex mathematical formulations. Frequently, however, such analyses may be inadequate due

to lack of data or other considerations. Here it is

necessary for the analyst to adjust the formula-based

forecast, blending in his personal judgment in making

the predictions.

Let us take the first question that was posed above—

shall I produce milk? This might be decided by flipping a coin, or by custom if the questioner's father

had been a dairyman. But to go beyond this point

involves some estimate of what the future may bring

as a dairyman versus other alternatives. The "to be"

or "not to be" dairyman may take a poll by asking

several of his friends what they think the future of

dairying may be. This method offers an opportunity

to broaden the base for his own forecast.

Since the prospective dairyman realizes that he

would be only one producer along with millions of

others competing for milk markets he feels it important to consider what the aggregate or total situation

in the Nation might be. Price will be an important

determinant in his decision. Knowing more about the

future demand for and supply of milk would be helpful in his analysis.

Furthermore, he knows that there are many factors

that affect supply and demand that in turn influence

price. To measure the effect of some of the important

factors he might develop some formulas based on historical trends and market developments and make a calculation of probable supply and demand for a selected

future date. A projection might be made by using

graphic analysis in which the historical trend for selected factors would be extended into the future (also

called extrapolation). An economic model might be

used. Or one of the most modern devices to assist

in forecasting—the electronic computer.

38 Agriculture Handbook No. ?38, U. S. Department of Agriculture
From among all the various approaches to forecasting that have been considered we will need to use a

means that is simple and practical. We might think

of ourselves as being in somewhat the same situation

as a pilot of a small plane who flies occasionally. He

is not a professional pilot—neither are we professional

forecasters. If he wants to get his bearings without

the use of instruments he probably looks for known

landmarks such as a town or city, river, crossroad,

hill or mountain, or lake. That is essentially what we

will be doing—looking for landmarks to help us discover what the likely demand and supply of milk will

be in the future.

All Example of Forecasting

In order to demonstrate a procedure to use in making a forecast—let us assume that we want to make the

best estimate we can of the demand for and supply

of milk in 1965. One of the tools discussed earlier

should be helpful, namely, the projection of historical

trends. We can refer to part 1 of this handbook for

a number of historical trends, and the references, listed

at the back, should provide us with additional ones.

Projection of Historical Trends

This approach is simple and practical. When

coupled with good judgment it can be fairly reliable.

It involves extending observed trends into the future

with adjustments based on certain influences that might

affect the projection. The idea is illustrated in

figure 18.

POUNIDS

HISTORICAL TREND

-

^ PROJECTED TREND

800

~

/ ^-^

Rever smg_the_tll"Ü

700 / ^"^C-íí-s,,^

Totol milk equivalent consumed ^ -iî-w?

in all forms per capita X: -

600

1 1 1

¡. -.----.'- .^■■.'>.^~^¿~-~-.y----.j^^

1940 1945 1950 1955 1960 1965 1970

BN 5495

Figure 18.—An illustration of projecting an historical trend.

This demonstration will involve four main steps:

1. Decide as precisely as possible what we want

to know.

2. Obtain information that will help to answer the

question.

3. Analyze the information.

4. Develop our estimate of the future.

Step 1

We previously stated what we want to know—

namely, the best estimate possible of the demand for

and supply of milk for 1965.

Step 2

The kind of information needed for this step is illustrated in part 1 of the handbook and in the suggested references (page 44).

Step 3

Before proceeding with the analysis and interpretation we need to make some basic assumptions. They

will provide the broad general setting for developing

the more specific information. Again we can use the

pilot for an example. Before he takes off he will have

checked on the direction and speed of the wind so he

can allow for side drifting or head wind ; he will know

about how long he will be flying at a given speed

before he reaches his first important landmark; he

will estimate his fuel needs; and other preparatory

steps that are part of his forecast of the anticipated

flight. Likewise in our projection we will need to consider such things as the number of people, consumer

preferences, purchasing power, alternative farm enterprises, pertinent production factors, technological developments, competition, substitutes, and other factors

that may have a bearing on our estimate of the future.

In a sense historical data become landmarks for us.

The basic assumptions are that between now and

1965:

a. There will not be war, but a condition of competitive coexistence will continue that will not encourage

reduction in the defense program.

b. The United States pricing system will continue to

be the major force in allocating resources to various

segments of our society.

c. There will be continuous advance in technology

and education.

d. There will be 190 million people by 1965.

e. Unemployment will not be more than 5 percent

of the labor force.

f. Disposable income of consumers will increase

gradually.

Other assumptions could be added to this list. The

assumptions help us draw a mental picture of the state

of affairs and level of economic activity that will exist

in the future into which we want to project an estimate of the dairy industry.

November 1958 39
STEP 1:

The Question

STEP 2;

Information

Needed

STEP 3:

Analysis

and

Interpretation

STEP 4:

The Answer

The demand for and supply of milk in 1965

Demand Supply

No. of people Per capita

consumplion No. of cows

Production

per cow

Factors;*

Number now

• Rale of

increase

• War

• Disease

_1_

Factors:

• Price

• Consumer

preferences

• Availability

• Purchasing

power

Factors; *

• Alternative

enterprises

• Heifer calves

kept for milk

• Slaughter value

of culls

Factors: *

• Wider use of

improved sires

• Feeding

• Management

\

\

/

190 X 723 = 137.4 billion lbs.

needed for calves = 3 0

20 million x 7,000 lbs

140.4 billion lbs. of milk in 1965

^ These are examples. There will be other factors to be considered.

B

Figure 19.—An illustration of a method for forecasting milk demand and supply.

40 Agriculture Handbook No. 138, U. S. Department of Agriculture
To provide an overall perspective of what we will

be doing as we proceed with the steps outlined, the

method is shown schematically in figure 19.

The diagram indicates that the demand for milk

would be derived from the number of people in the

United States times the consumption per capita. Since

a projection of probable population for 1965 had been

made, our main concern is to estimate probable per

capita consumption. Figure 18 should give us a point

of departure. It shows the total amount of milk consumed per capita and the historical trend.

For the illustration we will start with the latest

known figure and then go through a "plus and minus"

operation to adjust for factors that may affect the

outcome.

In analyzing the demand for milk, we may find it

a help to get a perspective of the proportion going into

different uses so that we can give emphasis to the

projection accordingly. For a number of recent years

about three-fourths of the Nation's milk production has

gone into two major uses: (1) Fluid for bottling

(about 50 percent), and (2) butter (about 25 percent). The remaining one-fourth has been used for

cheese, ice cream, evaporated, condensed, dry whole,

and calves.

It may be helpful also to separate the different uses

of milk in making our estimate to allow for offsetting trends. Since fluid milk is the largest single use

let's start with it.

Fluid milk.—The average fresh whole milk consumption per person for the 10-year period 1947-56 was

303 pounds. On the basis of 4 glasses per quart, this

was 1.53 glasses daily. The increase in per capita

consumption from a recent low of 295 pounds in 1948

to 307 in 1956 amounted to 13 pounds. In view of

the recommended daily allowance for good health and

the effort directed toward increased consumption, it

seems reasonable for this illustration to estimate a further increase of 5 pounds per capita for 1965.

Butter.—Butter is still the second largest user of our

milk supply. Between 1935 and 1945 the average per

capita consumption declined 6.5 pounds, and between

1945 and 1955 the decline was 1.9 pounds. For the

last 5 years butter consumption per capita has remained practically unchanged, see page 9. Competition from margarine with a price advantage of more

than 2 to 1 is being met currently by improved quality

of butter, better merchandising, and increased promotion. For this example let us assume that the present

level of per capita consumption will prevail.

Cheese.—The per capita consumption of cheese has

November 1958

increased 1 pound each decade during the last 30

years, but consumption is well below that of some

foreign countries. Considerable emphasis on improvement in merchandising and increased promotion has

occurred in recent years; however, the rate of increase

has slowed down. A one-half pound increase per capita in the next decade seems reasonable and would

require an additional 5 pounds of milk per capita,

see page 9.

Ice cream and frozen desserts.—Consumption of ice

cream and frozen desserts doubled during the last two

decades, see page 10. The net milk used per capita

for ice cream in 1955 was 48.2 pounds and in 1945

was 37 pounds, or an increase of 11.2 pounds. This

is calculated on a fat solids equivalent basis. The

present trend is toward lower fat content in frozen

desserts. Since the trend in per capita consumption

has been upward let us assume an additional increase

of 5 pounds of milk for this use.

Step 4

Illustration of a procedure for developing a projection of milk

consumption for 1965

Pounds per person

Total milk equivalent, all uses, 1956 (fat solids basis) 708

Fliud use, fresh whole milk, assumed changed +5

Butter (no change assumed)

Cheese, assumed change -|-5

Ice cream and frozen desserts, assumed change -|-5

Other uses (no change assumed) -\-

Total per capita 723

Billion pounds

Estimated human consumption 723 pounds times 190

million people 1 137. 4

Amount needed for calves 3.0

Assumed total milk needed in 1956 140. 4

Let us turn now to an estimate of the potential supply of milk in 1965. This would involve a similar

use of the four steps.

Average annual production of milk per cow has increased about 1,000 pounds during the last decade.

The annual average production per cow of 6,000

pounds for 1956 is well below the average of 9,500

pounds for DHIA herds which is within the realm of

expectation for many dairymen. The rate might increase faster now. The increased "know-how" of

dairymen brings about better breeding and management. The trend toward larger and fewer herds will

result in better managed units.

Projecting the same trend in the next decade as in

the last would result in an annual rate of production

of 7,000 pounds per cow by 1965. It seems reasonable

41
to expect this rate to continue at least until then.

Seven States already have averages above that figure,

and the average in California is 8,550 pounds per cow.

The number of milk cows in the United States in

1956 of 21 million head producing at the projected

future rate of 7,000 pounds per cow by 1965 would

produce a total milk supply of 147 billion pounds of

140.4 billion lbs. of milk

7,000 lbs. (rate of production per

One of the basic assumptions, page 39, was that the

pricing system would continue to be the major force

in allocating resources to various segments of our society. Throughout this handbook in describing and

explaining the economics of the dairy industry, a main

objective has been to bring about a better understanding of the role of price and the function it serves in

a free enterprise economy. To be consistent with this

approach we have assumed that historically milk production has been guided by the demand for milk; furthermore in the absence of ceilings or supports that

the demand was reflected through price which encouraged production through a rising price and discouraged production through a declining price.

Therefore it appears that under free pricing resources would be allocated to the dairy enterprise on

enough farms to provide the amount of milk that will

be needed in 1965—and that where too many resources

are allocated in the long run they would be shifted to

other uses. This would lead us to conclude that a

reasonable estimate of supply for 1965 would be the

same as that estimated for the demand.

cow)

milk (actual production for 1956 was 125.7 billion

pounds).

Another approach would be to estimate the number

of cows needed to produce the amount of milk we

assumed as needed in 1965 for human consumption in

the United States using the new rate of production

per cow. This would give us the following:

=20 million head of milk cows

In the estimate developed in the foregoing paragraphs no allowance was made for price support programs or for exports at prices below the domestic price

level. Programs such as these involve agricultural

and national policy and do not lend themselves to

future projection to the same extent as the factors

used in the estimate.

A final word of counsel may be appropriate. Any

projection based on past trends and interpreted in

the light of present knowledge involving the responses

of millions of people who are influenced by attitudes,

customs, income, prices, substitutes, and other factors

that enter into their decisions, will at best be only an

approximation. Therefore it seems that the method

used, factors considered, and assumptions made are

more important than the final figure. Because forecasting is a continuous process, familiarity with the

procedure will enable you to adjust the projection

where passage of time brings additional information

that will cause a change in assumptions, or in weighting

of factors, or in changes in the procedure.

GLOSSARY OF TERMS

Market milk.—Milk produced and handled under

conditions which qualify it for fluid use in an organized marketing area; milk which meets the sanitary

requirepients of a city or State health department for

sale or distribution as milk.

Manufacturing milk.—Milk intended for use in the

production of a processed manufactured dairy product

such as butter, cheese, and evaporated milk, and not

qualified for fluid use by any health department.

Fluid milk.—That part of the market milk actually

sold to consumers for those uses which require the

milk to qualify for human use as fresh whole milk

and related products such as fluid skim milk, buttermilk, and flavored milk.

Surplus milk.—That part of the market milk supply

not used as fluid milk, and diverted to cream, ice

cream, and other manufacturing uses not requiring

the same health department supervision as fluid milk.

Use classification.—A pricing plan by which handlers are charged for market milk. The milk is placed

in various classes depending upon the products in

which the milk is used. The Class I price is always

the highest price. This class includes fluid milk,

usually includes milk drinks, and may include fluid

cream.

Flat price plan.—The type of transaction which exists between producers and a dealer in the absence of

a classification price plan. The dealer pays one price

or a flat price for all of his milk regardless of how

it is used.

Blend price.—The price paid to producers for market milk when dealers buy according to classification

prices. The blend is an average of class prices

weighted by the volume of milk in each class. Usually

42 Agriculture Handbook No. 138, U. S. Department of Agriculture
quoted at a specific point and for a specific test of

milk.

Uniform price.—Similar meaning as blend price.

Although the two terms are used frequently as having the same meaning, the term "uniform price" is

more likely to be used to refer to the average price

for a market while the term "blend price" is more

likely to refer to the price paid by any one handler.

Btise rating plan.—A means for providing the seasonally uniform producer of milk a higher price than

is paid to producers whose production varies widely

seasonally. The price received by milk producers is

made up of two parts, a higher (base) price and a

lower (excess) price. Each producer is assigned a

base (an average of his deliveries during a specified

period). During subsequent specified periods he receives the base price on a quantity of milk equal to

his base and the excess price on all the milk delivered

in excess of the base.

Base surplus plan.—This is often used synonymously

with base rating plan.

Milk market.—A milk market consists of two parts,

a production area known as a milkshed and a consuming area known as a marketing area.

Marketing area.—Each Federal and State order defines a marketing area and regulates the handling of

milk by distributors within that area. Such an area

usually includes one or more principal cities and their

surrounding suburban areas.

Milkshed.—A milkshed is the area where producers

are located who supply the primary and secondary

markets with practically all of the milk used for fluid

purposes.

Primary market.—A primary market is one which

influences the prices which dealers pay for milk and

which farmers receive for milk over its entire milkshed.

Secondary market.—A secondary market is a market located within the boundaries of the milkshed of

a primary market. A secondary market usually small

in population has its own milkshed but the prices in

that milkshed are largely determined by the price paid

in the milkshed of the primary market.

Butterfat differential.—A butterfat differential is an

amount added to or subtracted from the quoted price

for milk of a given fat content. It is applied on the

basis of so many cents, usually from 5 to 12 cents

for each 0.1 percent fat. Butterfat differentials usually

differ for each class of milk with one differential being

applied in paying producers for milk.

Location differential.—A location differential is an

amount that is deducted from the quoted price at the

city plant in determining the price to be paid at country plants. Prices in most markets are quoted for

milk received at city plants. In many of the larger

markets milk also is received at country plants some

at considerable distance from the marketing area.

Pool, dealer.—A dealer pool, or individual handler

pool, as it is sometimes known, is when all producers

of one distributor receive the same blend price for

milk of the same quality at the same delivery point, regardless of how the milk of any one producer is used.

Pool, market.—A market pool is when the producers

supplying a certain market receive a blend or uniform price calculated on the basis of the use of all of

the milk received by all distributors in the market.

Most of the Federal orders use a market pool and

the uniform price is calculated by the market administrator. The market administrator maintains an

equalization fund from which some distributors (whose

uses of milk are valued lower than the average) receive money and into which other distributors (whose

uses average a higher value) pay money. By means

of the equalization fund, all producers receive the

same price and yet the cost of milk to each distributor is determined by his own utilization.

Pool, cooperative.—A cooperative pool is one where

the producers belonging to a cooperative all receive

a blend price calculated on the basis of the use of

all of the milk purchased by distributors buying from

the cooperative.

Federal order.—A Federal order is a form of milk

marketing regulation issued by the Secretary of Agriculture under the terms of the Agricultural Marketing Agreement Act of 1937.

State order.—A State order is a form of marketing

regulation issued by a State milk control agency.

Bargaining cooperative.—An association of producers whose major function is to negotiate prices for

producer members. If the association operates marketing facilities at all, this activity is usually a minor

phase of the business.

Operating cooperative.—This is an association of

milk producers who own and operate certain marketing facilities.

Necessary surplus.—Because sales of bottled milk

and cream vary from day to day and because receipts

from producers also vary, it is impossible for receipts

from producers and fluid milk sales to be exactly equal.

A surplus is necessary to take care of the fluctuations in

sales and production. This quantity of surplus is referred to as a necessary surplus. In most markets

it is considered necessary to have a surplus in the

November 1958 43
month when production is lowest relative to sales equal

to 15 to 20 percent of the average daily Class I sales.

Seasonal surplus.—In most markets, receipts of milk

from producers vary rather widely seasonally because

production reaches its peak during the spring months

of the year. Fluid milk sales are rather constant from

one month to another. The extra milk received from

producers during the spring and summer months is

referred to as seasonal surplus.

Steady or periodic surplus.—The amount of surplus in a market in any one month normally varies

from year to year. This extra surplus which is neither

due to seasonal variations in production nor necessary

to service the market, frequently is referred to as

steady or periodic surplus.

Compensatory payments.—In certain Federal orders

these are payments which milk distributors must make

on the fluid milk they buy from unregulated plants.

REFERENCES

The Dairy Situation,' published bimonthly, is desipned to provide current information pertaining to the dairy industry.

For a quick grasp of the overall situation read the dairy

situation at a glance which appears inside the front cover,

and the summary which precedes the main report.

Milk Production,' published monthly, includes production and

related information, together with selected special summaries

for those interested primarily in dairy statistics.

Fluid Milk and Cream Report,' published monthly.

Evaporated, Condensed, and Dry Milk Report,' published

monthly.

Production of Manufactured Dairy Products,' published annually, usually in October with statistics for the previous

year.

Milk Production on Farms and Statistics of Dairy Plant Products,' published annually, usually in February.

Milk, Farm Production, Disposition and Income,' published

annually, usually in April.

Dairy Statistics,' Statistical Bulletin No. 218, October 1957.

This publication supersedes an earlier series entitled "Dairy

Statistics and Related Series." The magnitude of this publication is a most ambitious undertaking, consequently it is

anticipated that it will be published as soon as possible after

each 5-year census revision. In the intervening years, a

briefer edition will be published, which will keep the present

series current. The data in this bulletin are designed to

help farmers, agricultural agents, research workers, and

others in the dairy industry in interpreting current changes

and in appraising future prospects in the light of past experiences for the several aspects of the dairy industry. It

contains some 300 tables of National and State data pertaining to the dairy industry.

Milk Distributors Sales and Costs,' published quarterly. It

includes information obtained through a cost comparison

service to which distributors of fluid milk and cream products subscribe. Tabular data are furnished to the United

States Department of Agriculture for analysis. Data reported

include: Costs and quantities of raw milk and other rawmaterials; prices and quantities of products sold; and operating costs. The firms selected are considered to be typical in the following characteristics: Privately owned, moderate size, and chiefly single plant firms. Very small firms.

' These publications are available from the Marketing Information Division, Agricultural Marketing Service, United States

Department of Agriculture, Washington 25, D. C.

national chains, and producer-distributors are not included.

The Demand and Price Structure for Dairy Products,^ Technical Bulletin No. 1168, May 1957. This bulletin describes

the major economic influences that affect the demand for all

milk, and for fluid milk and manufactured dairy products.

It includes a substantial amount of background material and

summarizes a number of statistical analyses in this general

field, with particular reference to the pricing and marketing

structure for milk and dairy products. It is designed to aid

in understanding the important and complex factors that affect prices and consumption of milk and dairy products, and

to help in understanding the general price-making influences

in the marketing system and relationships among prices at

different marketing levels. Emphasis is placed on quantifying demand relations and the interrelationships among

prices, and between different marketing levels and, regionally, among products. There are 191 pieces of literature

cited from which certain ones may be selected for further

study of some aspect of the subject. Since this publication

deals with demand, it is planned that an analysis of influences affecting supply and utilization of milk at the farm

and local market level will be presented in a later bulletin.

Federal Milk Marketing Orders, Their Establishment, Terms

and Operation,' Miscellaneous Publication No. 732, October

1956.

Regulations Affecting the Movement and Merchandising of

Milk.' A study of the impact of sanitary requirements.

Federal orders, State milk control laws, and truck laws on

price, supply, and consumption. Mktg. Res. Rept. 98, 124

pp., illus., June 1955.

The National Food Situation,' published quarterly.

The Marketing and Transportation Situation,' published quarterly. Foreign Agriculture Circular (on dairy) published

several times a year by the Foreign Agricultural Service,

United States Department of Agriculture, Washington 25,

D. C.

Pricing Milk According to Use. United States Department

of Agriculture, Farmer Cooperative Service Bulletin 6,

June 1955.

Marketing, The Yearbook of Agriculture, 1954, United States

Department of Agriculture. For .sale from the Superintendent of Documents, U. .S. Government Printing Office, Washington 25, D. C, at $1.75 a copy.

Census of Dry Milk Distribution and Production Trends, published annually by the American Dry Milk Institute, Inc.,

221 North LaSalle Street, Chicago 1, 111.

Cooperative Extension Work: United States Department of Agriculture and State Land-Grant Colleses and Universities Cooperating

U. S. GOVERNMENT PRINTING OFFICE : 1958 O - 462620

For sale by tlie Superintendent of Documents, U. S. Government Printing Office, Washington 26, D. C. - Price 30 cents

44 Agriculture Handbook No. 138, U. S. Departmenf of Agriculture