MILK PRICING POLICY AND PROCEDURES

PART I THE MILK PRICING PROBLEM

REPORT OF THE MILK PRICING A DVISORY COMMITTEE

U.S. DEPARTMENT OF AGRIC ULTURE

March 1972

LETTER OF TRANSMITTAL

Mr. Richard E. Lyng Assistant Secretary of Agriculture Marketing and Consumer Services

March 15, 1972

I am pleased to transmit to you the first report of the Milk Pricing Advisory Committee. You established this Committee in light of proposals to change methods of pricing Class I milk and with the realization that changes are occurring in the milk industry which will likely require modifications in Federal order pricing policies and pricing procedures.

In a study of this type, the nature of the inquiry, conclusions, and recommendations often hinge on the Committee's conception of the problem. The purpose of this report is to explicitly state the Committee's findings with respect to the need for new methods of pricing under Federal orders, and the perceived constraints upon the development of such methods.

It is hoped that this report will elicit response from all segments of the industry--producers, cooperatives, handlers, dairy mar­keting experts, State officials, and the general public.

An analysis of alternative methods of pricing milk in light of the conclusions reached in this report is in progress. The results of this analysis will be reported to you later in the year.

Ronald D. Knutson Chairman, Milk Pricing

Advisory Committee - R ECSI "EO 1c - 'I

~ 0 '- l'!

fve btel'1~' ul'1 ~96n. of COOperi ~e'/U ga 'coJntY .

P.G.RiCUIJ U!l.AL 0\1I15.0N

LIST OF COMMITTEE MEMBERS

Dr. Ronald D. Knutson, Staff Economist, Agricultural Marketing Service, Chairman

Mr. Joel L. Blum, Chief, Program Analysis Branch, Dairy Division, Agricultural Marketing Service

Mr. Sidney Cohen, Chief, Program Development Branch, Livestock and Dairy Division, Agricultural Stabilization and Conservation Service

Dr. Edward H. Krebs, Analyst, Office of Planning and Evaluation

Dr. Floyd A. Lasley, Leader, Dairy Group, Marketing Economics Division, Economic Research Service

Dr. Alden C. Manchester, Chief, Animal Products Branch, Marketing Economics Division, Economic Research Service

Mr. Robert W. March, Deputy Director, Dairy Division, Agricultural Marketing Service

Dr. Howard C. Williams, Staff Assistant, Program Evaluation and Appraisal Staff, Agricultural Stabilization and Conservation Service

Dr. Jerome B. Siebert, Special Assistant to the Secretary, Ex Officio

I.

II.

III.

IV.

CONTENTS

Introduction . . . . .

Changing Conditions in Dairy Markets Scope of the Study • • . . • .

Objectives of Federal Order Price Policy .

.. . Page

1

1 3

4

Statutory Authorization and General Objectives 4 Pricing Objectives . . • . • • • . . • • . . . 6 Relation of Federal Order Policy to the Dairy Price

Support Program . . .. •... 10 Implications of Supply Control for Federal Order

Objectives • . . . . 13

Changing Market Conditions 17

Conversion to One Grade of Milk. 17 Factors Affecting Conversion. 19 Reliability of Minnesota-Wisconsin Price Series. 23 Implications for Federal Order Pricing. . . • 25 Implications for Dairy Price Support Program. 26

Changing Structure of Cooperatives • • . . • 28 Consolidation of Cooperative Activity 30 Cooperative Market Shares . . . . . . . 30 Impact of Cooperatives on Milk Pricing. 34 Size of Premiums. . • . • . . . . . . 35 Implications of Premiums for Carrying Out Federal

Order Objectives. . . • . • • . . . . • . 39 Implications of Reblending by Cooperatives. 42

The Milk Pricing Problem . .

Consequences of Establishing too High or too Low a Price. • . • • • . . . • • . . .

Interdependence of the Milk Pricing System Market Conditions Requiring Change ...•

44

44 45 46

I. INTRODUCTION

The primary task of the Federal milk order system is to promote orderly marketing by establishing a structure of prices to pro­ducers and handlers which will assure adequate supplies of milk and be in the public interest. In order to secure' a continuously adequate supply of milk it is necessary to assure producers prices which provide reasonable returns to labor, investment, and management.

The methods by which prices are established must be reviewed from time to time and modified as conditions change in the production and marketing of milk. In recent years, major changes have taken place in many aspects of the organization and operation of milk markets. These changes have created a need for a reexamination of the pricing procedures used in Federal milk orders.

CHANGING CONDITIONS IN DAIRY MARKETS

Pricing institutions in the dairy industry were built on three basic conditions: (1) the existence of two grades of milk including a large supply of manufacturing grade milk; (2) the weaker bargaining position of fluid milk producers and their cooperatives compared to that of milk handlers; and (3) the exist­ence of well-defined and economically separate local markets for fluid milk. The price support program was developed to deal directly with the price and income problems of manufacturing grade milk producers and, indirectly, to set a floor under prices to all milk producers. The Federal order program and State regulation of producer prices were developed to supervise the terms of trade in fluid milk markets so as to more nearly equalize the bargaining power of producers and their cooperatives with that of handlers.

Any analysis of milk pricing must recognize the interdependency of fluid and manufacturing segments of the industry. With a system of classified prices of the general type utilized under Federal orders, manufactured dairy products are the residual use for the milk supply. Because of the function they playas residual claimants, changes in the production and price of manufactured dairy products have provided a measure of changes in overall supply-demand conditions. Changes in the prices of manufactured dairy products are quickly reflected in the price paid for manu­facturing grade milk.

Traditionally, changes in the price for manufacturing grade milk have been used as the most convenient indicator available of changes in overall supply and demand conditions in the dairy economy, including the impact of price support actions, changes in milk production costs, alternative employment opportunities both farm and nonfarm, the demand for manufactured milk products, and the demand for fluid milk products.

The reservoir of manufacturing grade milk available to manu~ facturers is drying up as milk producers go out of business or shift to the production of Grade A milk. Competitive prices for manufacturing grade milk which provided an open-market indicator of the overall supply and demand situation for raw milk will disappear in the next decade.

At the same time, the market position of producers has improved as cooperatives have grown. The market position of handlers diminished as they were faced with strong cooperatives on the one hand and the market power of chain stores on the other.l/

Cooperative premiums exist in many markets. In these markets, the role of Federal order pricing has tended to shift from price establishment to undergirding cooperative bargaining efforts and Federal order minimum prices are no longer the actual prices handlers pay for milk. The expanding role of cooperatives raises new questions concerning the role of Federal orders and methods of establishing prices.

The regulation of fluid milk prices was built around local markets which no longer exist. In most instances, the power of the cooperatives extends far beyond the local market, in some cases over a thousand miles or more. The basic concept of the local

1/ Alden C. Manchester, Pricing Milk and Dairy Products, A. E. Report No. 207, E.R.S., U.S.D.A., August 1971. Richard F. Fallert, A Survey of Central Milk Programs in Midwestern Food Chains, Marketing Research Report No. 944, E.R.S., U.S.D.A., December 1971. Ronald D. Knutson, Cooperative Bargaining Developments in the Dairy Industry, 1960-1970, FCS Research Report No. 19, August 1971.

2

fluid milk market, which has been the basis for Federal and State regulation of prices and pooling, no longer coincides with the realities of the marketplace. Federal order marketing areas have been expanded and "regional" orders established in some areas. In addition, Federal order pricing policies have increas­ingly recognized that the market for fluid milk is becoming national in scope.

The primary focus of this study is on developing a method of adjusting the level of milk prices. This is done with the reali­zation that: (1) the primary basis for pricing in Federal orders-­competitive pay prices for manufacturing milk--will soon disappear, and (2) any pricing system that is developed must be suited to changing market conditions.

SCOPE OF THE STUDY

The study is broken down into two phases. The first phase, encompassed in this report, includes an analysis of: (1) legis­lative authority as it relates to the pricing issue; (2) market conditions indicating a need for change in pricing procedures; and (3) the industry pricing problem.

The second phase will analyze alternative methods of establishing prices in the developing industry situation. For each alternative, it is anticipated that there will be an explanation of the methods to be used in establishing price, variables to consider, sources of information, adaptation of present programs required to implement the alternative, and advantages and disadvantages. Work on the second phase has already begun.

The purpose of this report on the first phase and the report on the second phase is to obtain reactions from all segments of the milk industry concerning the analysis, reasoning, and conclusions of the Committee.

3

II. OBJECTIVES OF FEDERAL PRICE POLICY

The Agricultural Marketing Agreement Act of 1937, as amended,ll and its legislative history indicate Congressional intent and purpose as well as provide the basic authority for the establish­ment of marketing orders. An inquiry of this type cannot, however, be limited to the Act of 1937. The dual pricing standards implied in the Act of 1937, the interdependence of the milk pricing system, and the need for consistency in government policy requires con­sideration of the Agricultural Act of 1949--the authorization for the price support program.

Statutory Authorization and General Objectives

The concepts of orderly marketing, public interest, adequate supply, and parity prices permeate the statutory authorization for Federal milk marketing orders. Inherent in this 1937 authori­zation was a desire on the part of Congress: (1) to remedy a short-run condition of disruptively low milk prices and chronic surpluses, and (2) to provide a framework for long-run price and income stability for dairy farmers. It was therefore declared in Section 2(1) of the Act to be the policy of Congress for the Secretary of Agriculture " ..• to establish and maintain such orderly marketing conditions for agricultural commodities ... as will establish, as the prices to farmers, parity prices.

Orderliness, in a market context, is the opposite of chaos. It has several different dimensions. In the short-run context, order­liness implies seasonal adjustment of prices to even out milk production while avoiding large short term Class I price changes like those previously associated with seasonal swings in production relative to demand. In the long run, it implies prices which achieve a reasonable balance between production and consumption. Orderliness implies short-term protection of a market from unwarranted movement of milk supplies. At the same time, it implies adjustment of supply to least cost sources as well as to regional changes in production costs. Orderliness implies a proper relationship between fluid and surplus milk prices as well as between blend and manufacturing prices. It implies the

II Hereafter referred to as the Act.

4

"

establishment of relations between producers and handlers which facilitate fair, but not disruptive, competition among producers and handlers while encouraging the establishment of reliable channels of trade. At the same time, it implies protecting t'le rights of producers to choose their market outlet, free of coercion and unreasonable barriers to market entry.

This concept of orderly marketing is implicit in Section 2(4) of the Act where it is declared to be the policy of Congress

" . . . to establish and maintain such orderly marketing conditions •.• as will provide, in the interests of consumers and producers, an orderly flow of the supply thereof to market throughout its normal marketing season to avoid unreasonable fluctuations in supplies and prices."

It is also explicit in the objectives of the Federal milk market order system. The Nourse Committee set forth, and this Committee accepts, the following interpretation of the objectives of Federal milk marketing orders.

"1. To promote orderly marketing conditions for farmers specializing in the production of fluid milk and thereby improve their income situation at least in the long run;

"2. To administer and supervise the terms of trade in defined milk markets in such manner as to equalize the market power of buyers and sellers and attain reasonable competition but not local monopoly resulting in undue price enhancement;

"3. To assure consumers that they will have access to adequate and dependable supplies of high quality milk from the sources best suited both technologically and economically to to supply these demands;

"4. To complement the efforts of milk producers' organiza­tions to maintain economic order in their industry, and to bring about the co-ordination of price structures and market practices within and between marketing areas, between fluid and manufacturing segments of the dairy industry, and between milk production and other lines of farming;

"5. To secure equitable treatment of all parties--producers, dealers, and consumers, not only within each local or regional

5

market but throughout the system;

"6. To establish such terms of trade under the orders as will combine maximum freedom of trade with proper protection of established producers against seasonal or other loss of £jtlets that would tend to demoralize markets and farming plans.- "

The interest of the consuming public in a continuously adequate and dependable supply of high quality milk is obvious. In Section 2(2) the Secretary of Agriculture is charged with pro­tection of consumer interests by gradual correction of prices at a rate deemed to be in the public interest in light of current consumptive demand.

Pricing Objectives

Pricing objectives involve an application of general statutory language such as orderly marketing, public interest, adequate supply, parity prices, and the general statutory objectives implied therein to the problem of establishing class prices for milk. In addition, the Act provides specific guidance for the establishment of milk prices in Section 8c(18). General objectives must there­fore be interpreted in light of this more specific language.

Parity Pricing

The price target established by the declaration of policy is that of parity prices. The parity price concept was first recognized by Congress in the Agricultural Adjustment Act of 1933. This law defined parity price as one which would give a unit of a farm commodity (e.g., milk) the same purchasing power, in terms of goods and services farmers buy, that it had at a specific prior period. While legislation effective in 1950 modernized the parity formula by taking account of changing relationships among the prices of farm commodities 2/the parity concept has been continued in subsequent legislation.-

6

1/ Edwin G. Nourse et al., Report to the Secretary of Agriculture by the Federal Order Study Committee, December 1962, pp. 12-13.

2/ Monthly parity prices for milk are computed pursuant to 7 U.S.C. l30l (a) (1) •

While parity prices are established as the general goal of the Act, parity prices have never been considered an adequate standard in determining Federal order prices. Section 8c(18) recognizes this by spelling out more specific objectives for fluid milk priced under orders.

There are several reasons parity prices have not been an appro­priate measure for use in establishing Class I prices under milk orders:

1. The parity price for milk is a national parity whereas prices under milk orders pertain to various areas of the country. These different areas have vastly different production conditions and supply-demand conditions. Variation also exists in the appro­priate levels of price for different areas. In some markets the national parity price would be too high and in other markets it would be too low.

2. The structure of prices in Federal orders is a combination of class and blend prices. In establishing prices under milk orders the Secretary establishes class prices to handlers. While it is possible to calculate the parity equivalent of the various class prices, such calculations are not very useful. The parity price for milk relates prices received by farmers for milk sold to plants and dealers to prices paid by farmers. Since the class prices are not the prices which producers actually receive any attempt to relate milk order prices to parity is more meaningful in terms of blend prices.

3. Without effective means of production control, prices must be established at a level which will not generate excessive supplies of milk. Basing price on parity would, for many markets, have generated a price so high relative to cost of production that excessive resources would have been attracted to the pro­duction of milk, creating a supply-demand imbalance and a price situation which could not be considered in the public interest.

Recognizing the problems in applying the parity standard to milk pricing, Congress provided the more specific pricing guidelines set forth in Section 8(c)18.

7

The Committee Report of the House Agriculture Committee contained the following explanation with respect to the amendment to the Act which incorporated Section 8(c)18 into the Act:

"Marketing agreements and orders for milk ordinarily involve pooling and price plans, which to be effective, must continue with the ups and downs of economic factors ~.Jhich relate to price. The proposed amendment recognizes this and provides that if the Secretary provides that the national parity price for milk does not adequately reflect the price of feeds, the available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the marketing area to which the marketing agreement order relates, he shall fix such prices as will reflect such factors, insure a sufficient quaDtity of pure and wholesome milk and be in the public interest. If.lI

Implications for Pricing

Combining the general declaration of policy with specific pro­visions with respect to milk, the Committee concludes that the Act envisioned a concept of maintaining a reasonable balance between:

1. Producers' willingness and ability to produce milk at a price which gives him assurance of a reasonable return on his labor and investment;

2. Consumers' willingness and ability to pay for milk;

3. The public interest in prices which result in a reasonably efficient allocation of resources;

4. The interest of producers, handlers, and the public in an orderly flow of products from producers to consumers.

Such a reasonable balance implies pricing milk at a level ~.Jhich recognizes the sum total of forces affecting the national supply and demand for milk and establishing prices which. over time create a balance between supply and demand.

1/ House Report 468, 75th Congress, First Session.

8

When markets were local in character, considerable weight was given to local supply-demand conditions in applying the pricing standards. But as procurement and distribution areas have grown and fluid milk markets became regional in nature, more weight has been given to regional and national supply-demand factors. Increasingly, it will be necessary to give primary consideration to national supply-demand conditions in applying the pricing standard. This is not to say that adjustments of individual market prices may not be necessary from time to time to achieve proper alignment of Class I and blend prices between markets.

Ideally a pricing system should anticipate changing economic conditions by adjusting prices to minimize the disruptive effect on the industry. Such anticipation must be based, however, on an assessment of the sum total of economic forces affecting milk supplies and market needs. They are influenced by market forces which will ultimately be reflected in market supply and demand. A pricing system which perfectly anticipates changes in market supply and demand is impossible to develop because our ability to identify, measure, and predict market forces is less than perfect. People are also inclined to disagree on the implications of changes in particular market forces for milk pricing. Where anticipation is impossible, pricing decisions must await actual changes in market supplies and demands and respond to such revealed changes.

What are the alternatives to this supply-demand pr~c~ng concept and how can they be evaluated in terms of the criteria established in the Act? One frequently suggested alternative is to raise prices sufficiently to maximize or substantially enhance producer returns. The demand for fluid milk is highly inelastic. An inelastic demand means that it is possible to increase producer returns by raising prices. As prices rise by a certain percentage, consumer demand falls, but by a smaller percentage, thereby increasing producer returns.

With new legislation, substantial price enhancement could be established either as the main criteria for the establishment of Federal order Class I price levels or by providing substantial Federal order support for producer bargaining activities.

This alternative must be evaluated in light of its long-term effects and consistency with the provisions of the Act. It may be evaluated with or without supply management as well as under

9

circumstances where cooperatives voluntarily manage supplies, where supplies are managed under existing authorization, or where a modified form of supply management is enacted by Congress.

There are two primary effects of pursuing a policy of raising prices to maximize or substantially enhance producer returns. First, it reduces milk consumption and encourages the development and acceptance of substitute milk products, both as a source of nutrition and as a beverage. Despite record levels of promotion and advertising, substitutes continue to make inroads into con­sumption of dairy products. Increasing prices create further incentives for both the creation and acceptance of substitutes.

Second, establishing prices at a level which will maximize pro­ducer income also encourages producers to expand production to the point where milk surpluses become unduly burdensome. Govern­ment purchases cannot be expanded without limit. Without effective means of production control, substantial enhancement of producer returns by raising prices above the level which equates supply ana demand becomes self defeating. As excess supplies build, substantial reduction in price is required to eliminate surpluses. A built-in cyclical pattern of production and prices results. Such a pattern is inconsistent with the goal of orderly marketing. Without supply control, it provides a boom-or-bust price structure with no assurance of consistently reasonable returns. Resource misallocation results as resources move into the industry during expansion and are forced out during periods of contraction.

Relation of Federal Order Price Policy to the Dairy Price Support Program

Price support activity has bee? carried out under authority of the Agricultural Act of 1949.1 The 1949 Act directs the Secretary to support the price of milk and butterfat at a level between 75 and 90 percent of parity which will assure an adequate supply. The Act also provides that the support be carried out through loans on, or purchases of, milk and the products of milk and the products of milk and butterfat. The Agricultural Act of 1970

1/ For detailed description of this program see, "Dairy Price Support And Related Programs 1949-68," ASCS, USDA.

10

suspended from April 1, 1971, until March 31, 1974, the require­ment to support butterfat in farm-separated cream and the authority to carry out the support by loans.

The price support program has been carried out primarily by pur­chases of butter, Cheddar cheese, and nonfat dry milk at prices designed to enable manufacturers of dairy products to pay prices to producers for manufacturing milk which would result in U.S. annual average prices for such milk approximating the announced support objective.

Under the price support program, the Government stands ready to remove all surplus from the market. Part of the surplus is removed by the purchase of butter, cheese, and nonfat dry milk at announced prices. The remainder is removed by purchases, on a bid basis, of packaged butter, processed cheese, and packaged nonfat dry milk for specific program uses

Price Support Program Supports Level of All Milk Prices--Through the purchase of butter, Cheddar cheese, and nonfat dry milk the Government has effectively supported the price of milk going into other manufactured dairy products. Because of the close tie-in which has prevailed in Federal milk order markets and other fluid milk markets between Class I prices and manufacturing milk values, the price support program has also provided substantial support to Class I prices. Changes in the manufacturing milk price explain 90 percent of the changes in dealers' average buying -price for Class I milk.

Price levels under Price Supports and under Milk Orders are Presently Coordinated--At the present time, approximately 75 percent of the Nation's milk supply is Grade A and half of all milk marketed is used for fluid purposes • . Federal order receipts used as Class I represent approximately 36 percent and Federal order receipts 60 percent of total milk marketings. Thus the level of Class I prices in Federal order markets directly influ­ences the blend price received by producers of 60 percent of the total milk supply.

Under present arrangements, the Secretary of Agriculture can adjust support prices upward or downward with the knowledge that the changes will be reflected in both the fluid and manufacturing

11

segments of the dairy economy. He, therefore, is able through his decision with respect to price support levels, to effectively carry out the mandate of Congress to establish support prices which will assure an adequate supply of milk. If supply prospects indicate that a price increase is needed, action can be taken under price support to increase prices and encourage production on the part of both Grade A and Grade B shippers. Likewise, if the reverse is true, price support levels can be lowered and, by doing so,

12

price levels throughout the dairy economy are lowered. If necessary, the Secretary can, provide further upward or downward adjustments in Class I prices by adjusting Class I price levels in Federal milk orders. This can be done though only after a public hearing and approval by producers. Lacking producer approval, the order is terminated.

Consequences of lack of coordination between Class I price levels and price support level--In the absence of coordination, and if overall supplies were short, the Secretary could not take action to assure an adequate supply of milk by simply raising the support price. He would instead be required to take separate actions under the various milk orders to provide needed increases. In the case of a needed price increase, this would not present serious problems except for the additional administrative procedures involved in amending 62 separate orders.

If total milk supplies were excessive an absence of coordination would create a more serious problem. If the Secretary adjusted the support price downward the impact of the reduction would be felt by producers of only 25 percent of the milk in the country. If the price support decrease was not directly reflected in Class I prices only part of the reduction (about one-third on the average) would be reflected in fluid milk market blend prices. Under such circumstances, there would be no assurance that a corresponding reduction would occur in the price of 50 percent of the milk in the country.

As a result, the Secretary would find it more difficult to carry out the directives of the Agricultural Act of 1949 to establish prices at levels which would assure only an adequate supply of milk. While he could also take action under Federal milk orders to reduce Class I prices in order to correct the national over­supply situation, this becomes a difficult process for the Secretary and for dairy cooperatives because statutory procedures involved require producer approval of any price reduction.

If Class I price levels are not established in a way which reflects price support adjustments and conditions in manufacturing milk markets, serious problems can develop. If Class I prices under Federal milk orders reach levels which call forth additional, unneeded supplies of milk, these additional supplies of milk directly, or indirectly, end up in the hands of CCC and increase price support costs. Too high Class I prices could generate so much additional surplus that the Secretary would be required to reduce price support levels. As long as a significant manufactur­ing segment exists, the main impact of this action would fall upon manufacturing grade milk producers. Such producers returns would be reduced unfairly. Fluid grade producers should realize, at least, as great a reduction in their price.

Even under present pricing arrangements, the Department must be aware of the possibility of Class I prices reaching levels which call forth unneeded supplies, requiring a reduction in price support levels when a Class I price reduction might be more appropriate.

In summary, the Committee feels that, if the Secretary is to continue to carry out his responsibilities under both the Federal order and price support programs to assure an adequate but not excessive supply of milk, coordination between Class I price policy and price support actions is needed. This conclusion does not mean that a formula using various economic indicators could not be effectively utilized as a mover of Class I prices. It does mean that such formulas should produce prices which are con­sistent with the Secretary's objectives under the price support program.

Implications of Supply Control for Federal Order Objectives

Except for limited experience with the Class I base plan, the Federal order system has relied on price as the primary deter­minant of the quantity of resources used in milk production. When milk supplies increased as they did during the early 1960's price

13

was lowered to discourage further increases in production. During the mid-1960's, production declined and prices were increased to stabilize production.

Supply control is frequently suggested as an alternative to using an unrestrained pricing system as a means of allocating the quan­tity of resources used in producing milk. Supply control can be used to raise producer returns by overcoming the tendency of the industry to chronically generate excess supplies. If applied in a more stringent manner, it can be used to substantially enhance producer returns. The more stringently applied, the more restric­tions must be placed on the freedom of new producers to enter the industry and on the normal tendency of existing producers to respond to higher milk prices.

Class I Base Plan Legislation

The Food and Agriculture Act of 1965 provided the initial statu­tory authorization for the establishment of Class I base plans

14

in Federal order markets. This legislation was amended and extended by the Agricultural Act of 1970. The 1970 Act made it possible for existing producers to earn additional base, increased the ease of market entry, and explicitly provided for the application of base plan established under the 1965 enabling legislation did not result in effective production control. The liberalized terms of the 1970 amendments would not be expected to lead to a different conclusion.

It is important to note that the 1965 and 1970 authorizations for the establishment of Class I base plans did not include any change in the standard for the establishment of Federal order prices. Enchancement of returns under the legislation was, therefore, dependent on reducing supplies to raise the market blend price rather than affecting the Class I price. The basic responsibility of the Secretary was still one of maintaining a relative supply­demand balance at prices which assured producers reasonable returns, consumers reasonable prices, efficiency in the allocation of resources, and orderly marketing.

Cooperative Base Plans

Cooperative efforts to control production have met with variable success. To be effective, such voluntary programs require complete

control of the market. Cooperatives seldom control 100 percent of the producers in a market. Even where they do control a very substantial proportion of the volume, they have been unable to restrict entry of new producers. Within the present legislative framework, there appears to be little likelihood ,that cooperatives will, on a voluntary basis, be able to effectively control the normal production response to higher prices on a national basis.

This is not to suggest that cooperatives on an individual local market or regional basis might not have at least short or even intermediate term success in restricting production and, on that basis, raise producer returns.

Such voluntary cooperative supply control efforts must, however, be undertaken with realization that the antitrust laws and the undue price enhancement provisions of the Capper-Volstead Act impose a restraint both on the extent to which prices can be enhanced by such means and on the practices which may be used in accomplishing control and in restricting market supplies.

Implications of Effective Production Control

It is not the intent or purpose of this Committee to attempt to evaluate the desirability of an effective production control program, but only to consider its implications for pricing objec­tives and the development of a mover of milk prices. The advent of an effective governmental program to control milk production at the national level would require that greater emphasis be placed on the public interest effects of various levels of production and prices. Greater emphasis on the public interest is required because, in a market where production is unrestricted, the supply of milk adjusts automatically to reflect industry cost and profit conditions. With a base production control plan the quantity of base allocated, in combination with the price for base and excess milk, determines the level of production. This requires a much more complex system of pricing and control. Under this system a higher level of price can be maintained in the long run by sufficiently restricting production. In determining the appropriate degree of production restriction and price enhance­ment, primary consideration must be given to public interest con­siderations including the reasonableness of the level of producer returns, the consumers' ability to pay for milk, and the efficiency of resource allocation in production. In a market with production

15

control, these considerations are not automatically reflected in the pricing system. Methods of sensing, measuring, and integrating such factors into the pricing system would need to be developed.

16

III. CHANGING MARKET CONDITIONS

Since the inception of the Federal order program, a competitive market for manufacturing milk and, until recently, a relative lack of cooperative pricing power have existed. The prospectivedisap­pearance of competitive pay prices for manufacturing milk is a compelling reason requiring a change in milk pricing procedures. Such procedures must consider the changing structure and market position of cooperatives with the attendant growth of premiums and reb lending procedures--a11 directly affecting actual market prices for milk.

The job of administered prlclng is less complex than it is likely to be in the future. Competitive pay prices for manufacturing milk have provided a convenient and effective mover of Federal order prices as well as a necessary link between manufacturing, support, and Federal order prices. As producers convert to Grade A, they will desire to share in the higher returns from fluid milk and competitive pay prices will gradually disappear.

Without competitive pay prices, more complex movers of order prices which reflect economic conditions in the milk industry will need to be developed to carry out the policies prescribed in the Agricultural Marketing Agreement Act. These movers will be required to operate in an environment where the existence of pre­miums of varying magnitude means that Federal Order and market prices are not synonymous as they once were.

In the next two sections, we trace these developments and analyze their implications for Federal order pricing.

Conversion toOne Grade of Milk

The major factor influencing the need for new pricing procedures is the conversion to one grade of milk. Dairy farmers are increas­ingly converting from the production of manufacturing grade milk to the production of fluid grade milk or quitting dairying.

The importance of manufacturing grade milk to the total milk supply has declined substantially in recent years. Nationally, manufacturing grade deliveries as a percentage of total milk marketings declined from 31 percent in 1965 to 25 percent in 1970 (table 1). During the same period, the decline in Minnesota was

17

Tab l e 1 . Milk I:jarketed By Farmers , 1 9"60 ~1970 l../

I-iisl;onsin ?J l~innesota V United States Percentage of total : : Percentage of- total ':- --- - - Percenfage' Qft'ota)

Fluid Mfg. Fluid MfG' :: Fluid t-lfg. Fluid t-lfg. :: Fluid Hfg" grade grade TOtal grade grade:: grade grade Total grade g~ade " grade grade ~~ta1

million pounds

196o:: 6,334

1961 6,884

1962 :: 7,213

1963 :: 7,451,

1964:: 7,788

1965: : 7, 688

1966 : : 7,460

196"( 7,538

10,576

10,266

10,606

10,389

10,841

10,450

9,890

9,992

1968 : : 8 ,078 9,482

1969 : : 8,889

1970 :: 9,572

8,541

8 ,1 53

16,9lO

n , 110

17,819

1"1,843

18,629

18,1 38

H,350

17,530

17 ,56o

1"( ,1'30

17,725

percent

3'(

40

40

1'2

42

42

43

43

46

51

54 2/

63

60

60

58

58

58

51

5"(

54

49

46 J!

Y "Milk Production Disposition and Income," SRS.

mill ion pound s

l,5"f2

1,628

) ,450

1,1,84

1,503

1 ,466

1, 6<)0

1,818

7,11"1

7,487

'( , 676

7,659

8,34 j

8,on

7, 700

7,752

8)689

9,115

9, 126

9,lI+3

9,846

9,543

9 ,390

9,570

2 ,030 7,635 9,(,65

2,306 6,919 9 , 225

2,802 6 , 647 <; , 1+49

percent

18

18

16

16

15

15

18

19

21

25

302/

82

82

81,

84

85

85

82

81

79

""5

'(0 2/

?J Wisconsin data for 1960-65 from "Hisconsin Thliry Facts ," 19'(0 issue No. 201 -1-70, pp, 10-11 .

Y Revised, "Hisconsin Agricultura l Stati stics, " 1971 issue No. 200 - '{l .

mill.ion 1'~~~~

.. 69,631

,2,597

.. '(4, ) 51!

:: '(5,6) 3

:: -'''i , 61,o

77 , ·,. '4

:: 75,676

"'6, 591,

34,296

15, ",56

36,524

35,582

3I'i,536

34,91'2

33 ,999

32,826

103,927

1G8,35i

110. 6'(8

111,)95

111',l"i6

112 ,7)6

lC9/)75

109 ,420

:: "(6.137 32.630 108 , "(0

;9 , 31'( 29, 336 108 , 053

82 , 350 28,018 110,368

';/ ~1innesota data f or 1960 - 65 from State-Federal Crop a nd Livestock Report i ng Service, St" Paul, ~1innesota.

2/ Revised, "Hinnesota Dairy Summary," issue No. 21, '(,

Fluid Mfg" grade grade

(,7

~ . .'

67

68

68

69

69

"(0

", 0

Ti

75

percent

33

33

33

3?

32

31

3)

30

3r.

2'(

25

~ co

from 85 to 70 percent and in Wisconsin from 58 to 46 percent.

The number of manufacturing grade shippers in Minnesota decreased from 40,368 in December 1968 to 32,749 in December 1970. That some of these shippers converted to Grade A is apparent from the increase in fluid grade shippers from 5,589 to 7,143. The same situation prevails in Wisconsin where the number of manufacturing grade milk shippers dropped from 55,136 in May 1966 to 37,645 in January 1971, but the number of fluid grade shippers increased from 20,087 to 22,089 (table 2).

Factors Affecting Conversion to One Grade of Milk

Bulk tank procurement--A significant factor influencing the shift to one grade of milk was the development of bulk tank pro­curement. While the conversion from can to bulk is almost com­plete among fluid grade shippers, it now is taking place at an accelerated rate among manufacturing grade shippers. Between May 1966 and January 1971, manufacturing grade shippers with bulk tanks increased from 23 to 51 percent of all manufacturing grade shippers in Wisconsin. With prospects for the number of outlets for can deliveries shrinking, can shippers are faced with the decision as to whether to make the investment required to install a bulk tank. Those deciding to make this investment are more likely to stay in dairying. Once having installed a bulk tank, the additional investment required to qualify as a Grade A shipper is often small.

Stricter standards for manufacturing grade milk have encouraged conversion to Grade A--Quality standards for bulk tank manufac­turing grade milk in Minnesota and Wisconsin already are not far apart from those for Grade A milk. More and more frequently, the only additional requirement for a bulk tank manufacturing grade shipper to achieve Grade A status is inspection and certification by a Grade A authority. The Minnesota Milkhouse Law, which became mandatory on October 1, 1969, has influenced the rate of con­version in that State. From December 1968 to December 1969, there was an increase of 370 in the number of fluid grade shippers in Minnesota. The following year, the increase was 1,184.

The U.S. Department of Agriculture has developed and will shortly publish in the Federal Register, "Requirements For Milk For Manu­facturing Purposes And Its Production And Processing Recommended

19

December 1968 June 1969 December 1969 June 1970 December 1970

May 1966 January 1971

Table 2. Fluid grade and manufacturing grade milk producers, bulk tank and can producers, Minnesota and Wisconsin

Fluid grade Manufacturing grade Total · .

Percentage :: Fluid Manufac-Bulk Can Bulk Can bulk · . grade :turing grade: All

· . number number Eercent · . number

Minnesota J)

5,539 50 15,446 24,922 38.3 5,589 40,368 45,957 5,538 48 .. 15,204 23,529 39.3 · . 5,586 38,733 44,319 5,919 40 14,238 21,140 40.2 · . 5,959 35,378 41,337 6,607 40 .. 14,l35 20,545 40.8 · . 6,647 34,680 41,327 7,133 10 13,509 19,240 41.2 7,143 32,749 39,892

Wisconsin ])

18,793 1,294 12,502 42,634 22.7 · . 20,087 55,136 75,223 22,083 6 19,332 18,313 51.4 · . 22,089 37,645 59,734

:Percentage : fluid grade

percent

12.2 12.6 14.4 16.1 17.9

26.7 37.0

1/ "Minnesota Dairy SUJlUl1ary," Minnesota Crop and Livestock Reporting Service, Issue No. 233, June 5, 1970, and Issue No. 246, July 5, 1971.

2/ Reports of Wisconsin State Department of Agriculture, Animal Health Division on BRT Results.

N o

For Adoption By State Regulatory Agencies." The purpose of the standards is twofold: (1) to help bring about more uniformity in State regulations for manufacturing milk, and (2) to assist States in the improvement of the quality of milk for manufacturing so as to provide wholesome, high-quality dairy products for all consumers. A study conducted by the University of Minnesota on the implications of the standards concluded:

"The consequence of the new program will be to accelerate the already declining numbers of small dairy farmers in Minnesota. Others will be forced to increase herd size to maintain acceptable net income levels. In addition, this program will push the industry to one grade of milk for all uses."l.l

21

The spread between fluid grade and manufacturing grade milk prices-­The major incentive for a manufacturing grade milk producer to achieve Grade A status is the higher price received by Grade A producers. During the period 1960-70 the difference between fluid grade and manufacturing grade milk prices in Wisconsin ranged from 34 to 56 cents per hundredweight and averaged 43 cents (table 3). In Minnesota, the spread ranged from 35 to 54 cents and averaged 42 cents.

Conversion to Grade A has efficiency and other benefits to p1ants­The conversion of manufacturing grade producers to Grade A milk has had effects at the plant level not too different from those which prevailed in fluid markets when producers were converting from can to bulk pickup. Costs at dual intake plants are higher because Grade A and Grade B milk must be segregated. With one grade of milk, duplication is eliminated and procurement costs are reduced.

On the other hand, conversion creates serious problems for manu­facturing plants handling Grade B milk when their better shippers convert to Grade A and go to a plant offering a Grade A market.

1/ "Consequence of Changing Production Standards for Manufacturing Grade Milk," J. W. Hammond and B. W. Buxton, Special Report 37, Agricultural Extension Service, University of Minnesota, 1970.

Date

Table 3. Average prices received by farmers for milk sold to plants and dealers by years--1960-1970 and by months--January to November 1971.

Minnesota Wisconsin Milk eligib Ie Manufacturing Milk eligib Ie Manufacturing for fluid use grade Difference for fluid use grade Difference

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

January February March April May June July August September October November

Average

$3.60 3.66 3.62 3.52 3.54 3.60 4.19 4.38 4.59 4.81 5.03

5.15 5.14 5.11 5.15 5.18 5.10 5.12 5.27 5.41 5.24 5.22

~op~r~ £e~ ~u!:~d~eiw~i~h!. .!.o!.l.2 £.e~c~n!. ~lk

$3.06 $.54 $3.64 $3.16 3.28 .38 3.69 3.26 3.15 .47 3.57 3.08 3.11 .41 3.52 3.14 3.17 .37 3.57 3.19 3.25 .35 · . 3.62 3.28 3.79 .40 · . 4.29 3.99 4.01 .37 · . 4.47 3.97 4.18 .41 · . 4.73 4.17 4.35 .46 · . 4.95 4.49 4.56 .47 · . 5.13 4.73

· . 4.73 .42 · . 5.28 4.89 4.78 .36 5.34 4.86 4.75 .36 5.33 4.91 4.74 .41 · . 5.32 4.86 4.70 .48 · . 5.28 4.82 4.78 .32 5.25 4.82 4.82 .30 5.25 4.80 4.71 .56 5.28 4.82 4.76 .65 · . 5.40 4.85 4.76 .48 · . 5.46 4.88 4.77 .45 · . 5.46 4.92

· . · . · .

!I Converted to a 3.5 percent basis using a butterfat differential per point (1/10 of one percent) that is calculated by multiplying the average price of Grade A (92-score) butter at Chi cago by 0.120.

$.48 .43 .49 .38 .38 .34 .30 .50 .56 .46 .40

.39

.48

.42

.46

.46

.43

.45

.46

.55

.58

.54

N N

If a manufacturing plant with Grade A patrons is able to associate these producers with a Federal order pool, it can provide them with a Grade A market price. The plant also may be able to achieve a reduction in the price paid for milk used in manufactured prod­ucts if the surplus price under the order is lower.than what they have been paying. For example, in recent years cheese prices have been high relative to butter-powder prices. As a result prices paid by . cheese plants in Wisconsin have, at times, been higher than the Chicago order surplus price and lower than the Chicago order blend price. If a cheese plant qualified as a pool plant under the Chicago order, the price to patrons was increased while the price paid for milk used to make cheese was reduced.

Standby pool payments encourage conversion to Grade A--Minnesota and Wisconsin plants that are reserve supply plants in the standby pool receive payments for maintaining reserve supplies for con~ tributing member cooperatives. These payments, which amounted to 20 cents per hundredweight when the standby pool went into effect in September 1967 and have since ranged from 13 to 45 cents, can be used by the plants as incentives to hold their Grade A patrons. The opportunity for Minnesota and Wisconsin producers to participate in the standby pool also encourages Grade B pro­ducers to convert to Grade A.

One indicator of the impact of all the factors on the shift to one grade of milk is the change in the combined total of producers under the standby pool and the Chicago Regional, Minneapolis-St. Paul, and Southeastern Minnesota-Northern Iowa orders. From August 19.70 to August 1971, there was an increase of 1,103 producers .1:./

Reliability of Minnesota-Wisconsin Price Series

The Minnesota-Wisconsin price, the average of prices received by farmers for manufacturing grade milk in the two States, is widely used in Federal order pricing formulas and elsewhere throughout the dairy industry as a basic indicator of changes in milk values. Approximately one-half of the manufacturing grade milk sold in the United States is produced in Minnesota and Wisconsin. Prices

1/ "Challenge," Wisconsin Federation of Cooperatives, Volume 3, Number 3, November 1971.

23

paid farmers by manufacturing plants in the two States are par­ticularly sensitive to changes in the national milk supply-demand balance as reflected by changes in the wholesale markets for butter, nonfat dry milk, and cheese.

The announced Minnesota-Wisconsin price for a given month is derived from the estimated average price for the preceding or base month and an estimate of change from the base month. The level for the base month, which is used as a benchmark, is based on reports from over 400 plants in Minnesota and Wisconsin. The estimate of change from the base month is based primarily on reports from a sample of 110 plants distributed in the two States.l"!

Class I prices under all Federal orders move as the Minnesota­Wisconsin price changes. The minimum Class I price in 58 of the 62 orders is the Minnesota-Wisconsin price plus a fixed differ­ential specified in the orders. In the other four orders, it is a specified price plus the amount that the Minnesota-Wisconsin price exceeds $4.33.

Likewise, most Federal order surplus prices are tied to manu­facturing milk values. In 30 orders, the surplus class price is the Minnesota-Wisconsin price. In 18 other markets, it is either the Minnesota-Wisconsin price or a butter-powder formula price, whichever is lower.

Experience with series--The Minnesota-Wisconsin price has pro­vided the best measure to date of manufacturing milk values. Industry confidence in the price series generally has existed. Criticism, however, has been voiced from time to time by par­ticular interests about its realiabil~7Y' Most of the criticisms relate to its use in surplus pricing.-

1/ For a detailed description of the Minnesota-Wisconsin price series see "Prices Received by Farmers for Manufacturing Grade Milk in Minnesota and Wisconsin, 1967-1970," Pr 1-4 (September 1971), SRS, USDA.

2/ Its use in Class I pricing also has been criticized, but the criticism relates more to the use of manufacturing milk values as a mover of Class I prices than to its reliability.

24

25

Some of the criticisms that have been alleged are: the Minnesota­Wisconsin price overstates the price actually paid because of butterfat testing practices at dairy plants; the Minnesota-Wisconsin price understates the price actually paid by plants because it does not include patronage refunds or hauling subsidies; it is too low as a measure for pricing bulk tank milk in Federal orders because it includes prices paid to both can and bulk tank pro­ducers; it is not a true measure of manufacturing milk values because the Minnesota-Wisconsin sample includes dual intake plants; it can be manipulated; the butterfat differential used to convert the Minnesota-Wisconsin price at test to 3.5 ~7rcent is not representative of average differentials paid.- Questions also have been raised as to how well a current month's price could be estimated, based on a sample of plants.

These criticisms suggested the need for answers to two basic questions:

(1) Does the Minnesota-Wisconsin price represent the average of prices reported for manufacturing milk by all plants in the two States?

(2) Do the prices reported by plants represent the prices actually paid by such plants?

Studies addressing these two questions indicate that Minnesota­Wisconsin price series has provided an accurate measure of manu­facturing milk values in the two States.~/ They also indicate that the differential used in Federal orders to convert the Minnesota-Wisconsin price to 3.5 percent was an accurate measure of the average of actual differentials.

Implications for Federal Order Pricing

While the Minnesota-Wisconsin price series has performed well as a mover of Class I prices in Federal order markets and has provided

1/ The price is converted using a butterfat differential per point (one-tenth of one percent) calculated by multiplying the average price of Grade A (92-score) butter at Chicago by 0.120.

~/ "Study of Prices for Milk in Manufacturing Uses," J. W. Hammond and T. F. Graf, Agricultural Experiment Station, University of Minnesota, Station Bulletin 497, 1969.

a key link between Federal orders and support prices, it will increasingly become subject to questions of reliability as mar­ketings of manufacturing grade milk continue to decline. Forces that are influencing manufacturing grade producers to go Grade A or quit dairying are not likely to be reversed. New Grade A producers will desire to share in the higher returns for Class I milk. Within the decade, it is likely that virtually all milk

26

will be Grade A and no competitive price for manufacturing grade milk will be available for use in Federal order pricing or computing the parity equivalent price.

Even before that happens, concentration of control of milk proc­essing facilities and the influence of the standby pool will make the Minnesota-Wisconsin price less reliable as a reflector of com­petitive market conditions. These developments mean that it is essential to find another mover of Class I milk prices in Federal milk orders.

The lack of a competitive pay price will also require the use of other measures of the value of milk for manufacturing to establish surplus class prices. Competitive pay prices now are used as the basis, or alternative basis, for surplus class prices in 51 of the 62 orders (table 4).

Even in the case of butter-powder formulas, the most common alter­native technique used for determining surplus class prices, new problems will exist with the disappearance of competitive pay prices. In the past, it has been possible to design butter-powder formulas to yield a price which would approximate a competitive pay price. This could be done by establishing make allowances in butter-powder formulas at levels which would in combination with price and yield factors produce a price that bares a fairly definite relationship to some competitive pay price.

Implications for Dairy Price Support Program

While the price support program has lent support to both the fluid and manufacturing segments of the industry, its prime focus has been to support the level of price for manufacturing grade milk. Since the inception of the price support program, the Department has calculated a parity equivalent for manufacturing milk. This parity equivalent has been used in carrying out the requirement of the Agricultural Act of 1949 to support the price of milk at such levels between 75 and 90 percent of parity as will assure an adequate supply.

Table 4. Pricing factors used for surplus class prlclng in Federal order markets, October 1, 1971.

27

Number- of Number of Markets Price Factors Markets As Percent

Minnesota-Wisconsin price only

3-Product (U.S. mfg.) price only

Product price: One More than one

Minnesota-Wisconsin price in conjunction with a product price

Other competitive pay price(s) and product price(s)

Total number of Federal order markets

11 Oklahoma Metropolitan and Red River Valley.

30

11 2

21 7 11 4

18

!!:I 1

62

II Central Arizona, Corpus Christi, Duluth-Superior, Inland Empire, Lubbock-Plainview, Rio Grande Valley, and Texas Panhandle.

31 Austin-Waco, Central West Texas, North Texas, and San Antonio. il Appalachian.

48

3

11 7

29

2

100

of Total

When a competitive pay price for manufacturing grade milk disap­pears, or becomes so thin as to be unreliable; significant changes in the operation of and the philosophy of the price support program will be required. As manufacturing grade milk disappears, the parity equivalent approach for manufacturing milk will have to be discarded. The only other milk parity figure available is the parity price for all milk sold to plants and dealers. This price reflects returns on Class I sales as well as manufacturing uses.

Relating the support price to the "all milk" parity would raise several problems. The support price objective could be less clearly identified since the "all milk sold" price is a mixture reflecting both Class I and manufacturing proceeds. With the objective less clearly related to butter, cheese, and nonfat dry milk prices, the establishment of purchase prices required to achieve the objective would be more difficult. Also, it would be more difficult to ascertain whether the objective had been achieved since Class I proceeds influence the level of the all milk price.

Other more basic questions are raised once the entire milk supply is Grade A and presumably, in one way or another, shares in Class I proceeds. It is possible that under such circumstances, the role of the price support program might be altered and that more emphasis could be placed upon Class I price levels to achieve a level of returns to producers high enough to assure adequate milk supplies. Any move in this direction would have to await develop­ments in pricing and pooling arrangements which at this point are no more than a matter for conjecture.

Changing Structure of Cooperatives

Cooperatives have long been recognized as having a central role in the Federal milk order system. In fact, a central feature of Federal orders--classified pricing and pooling--was first used by cooperatives as a means of providing higher returns to producers and a more equitable sharing of the surplus.

During the early 1900's, the existence of relatively isolated milk markets resulted in the formation of individual cooperatives around such markets. Cooperatives developed classified pricing plans in an effort to stabilize marketing conditions and improve returns. The efforts of cooperatives met with varying degrees of success. Not all farmers joined cooperatives. This meant some

28

milk dealers could obtain supplies from nonmembers at a flat price lower than the competitive fluid use price but higher than the blend price paid by the cooperative. This created instability, especially in markets where substantial quantities of nonmember milk were available at lower prices. The already weak position of cooperatives in many markets deteriorated further during the depression of the early 1930's as milk prices declined to disas­trously low levels.

To remedy these conditions, cooperatives sought the assistance of State governments and the Federal Government. Congress passed the Agricultural Adjustment Act of 1933, which was amended in 1935. The Agricultural Marketing Agreement Act of 1937, which currently provides the legislative authority for Federal milk orders, evolved from these statutes. It incorporated the basic classified pricing approach developed by cooperatives and provided the machinery for enforcement of such plans by the Federal Government on a marketwide basis.

Under the Agricultural Marketing Agreement Act, cooperatives continued to adjust to changing market conditions. As market areas expanded, their role in milk procurement and surplus milk processing increased. In many markets, the cooperative became the central interface between producers and milk distributors.

In the 1950' s and 1960' s, improvements in transportation and the technology of milk processing and distribution brought a new intermarket dimension to the activities of milk cooperatives. Efforts to isolate markets by both local and State sanitary authorities were struck down by the courts. Cooperatives felt a new urgency for intermarket coordination of milk movements when the Supreme Court held invalid certain Federal order com­pensatory payment provisions which the Court concluded had the effect of impending the movement of milk from other Federal order markets and were not considered essential to maintain the integrity of the pricing system.l/

1/ Lehigh Valley Cooperative Farmers et a1. vs. U.S., 370 U.S. 76 (1962).

29

Consolidation of Cooperative Activity

The 1960's saw a major consolidation of cooperative activitYl particularly in the Central and Southeastern United States.- In 1971, cooperative bargaining activity in the Central and Southeast United States by four major cooperatives and two federations encompassed nearly 100,000 producers of 34.4 billion pounds of milk--nearly 30 percent of the Nation's milk production.

Within the area encompassed by these two federations, extensive cooperative mergers have taken place. Since 1968 , a total of over 217 local cooperatives have been merged into four regional coopera­tives involved in bargaining--Associated Milk Producers, Inc.; Dairymen, Inc.; Mid-America Dairymen, Inc.; and Milk, Inc. These cooperatives vary in size from 8,000 producers and 2.5 billion pounds of milk to 44,000 producers and 14.5 billion pounds of milk.

It is significant that this merger activity was initially con­centrated in high Class I utilization southern markets where milk from the upper Midwest surplus milk producing area threatened

30

market stability. The thrust of cooperative federation and merger activity was to attain a degree of control over the movement of these surplus milk supplies. As a result, merger activity gradually expanded to the North.

While federations and mergers of milk cooperatives have occured in other areas of the United States, they have, to date, neither cen­tralized their activities to the extent of the Midwest cooperatives, nor attained the same degree of market power. It would appear, however, that a pattern has been set for further consolidation of cooperative activities across the United States.

Cooperative Market Shares

The role played by cooperatives in milk markets is importantly influenced by the proportion of the market milk supply handled by cooperatives and, closely related, the proportion of producers belonging to individual cooperatives as well as cooperatives in total. In December 1970, 86.5 percent of the 143,000 milk

1/ A detailed description of this consolidation, the activities and general implications are contained in Ronald D. Knutson, Cooperation Bargaining Developments in the Dairy Industry, FCS Research Report No. 19, August 1971.

producers in 62 Federal order markets were members of cooperatives (table 5). A breakdown of cooperative membership by Federal order regions reveals that cooperatives have over 90 percent membership in seven of nine Federal order regions. Outside Federal orders cooperatives account for approximately 54 percent of the Grade A marketings.

31

A measure of cooperative market control over milk supplies is indicated by the proportion of producers within Federal order markets belonging to the largest cooperative (table 6). In December 1970, 70 percent or more of the producers were members of the largest cooperative in 41 of 62 Federal order markets. This is significant not only as an indication of a high degree of control over local milk supplies, but also because bloc voting under Federal order means that the largest cooperative can provide the required two-thirds vote of approval for order amendments. Within the mar­kets, other factors--the extent of milk procurement and field ser­vices by cooperatives; the extent of their surplus and fluid milk processing operations; and existing contracts between the producer and the cooperative--also play a role in the degree of cooperative control over local milk supplies.

It is important to recognize, however, that even among markets where the largest cooperative controls over 70 percent of the local milk supply, there are significant differences in the degree of cooperative control over total milk supplies available to the market from other markets. This variation results primarily from factors such as the market's proximity to other sources of supply not controlled by the cooperative; the arrangements between coop­eratives as procurement agents and suppliers of milk to processors; and the extent of market coordination among cooperatives through federation and other inter-cooperative activity.

The importance of these factors is indicated by the fact that in December 1970, premiums over Federal order prices existed in 28 of the 41 markets where the largest cooperative had over 70 percent of the producers as members and in only 7 of 21 markets where they represented less than 70 percent of the producers. These seven markets were located in areas where federation activity was exten­sive. The 41 markets where the largest cooperative had over 70 percent of the producers as members represented less than 30 percent of the total milk supply regulated under Federal orders.

Table 5. Proportion of cooperative membership by Federal order market regions, December 1970.

Federal Order Region

New England

Middle Atlantic

South Atlantic

East North Central

West North Central

East South Central

West South Central

Mountain

Pacific

All Federal order markets

Per Cent Cooperative Membership

94.7

72 .5

99.1

88.7

94.6

95.3

92.5

97.0

72.5

86.5

32

---

Table 6. Frequency distribution of markets and producer deliveries according to the percent of producers belonging to the largest cooperative serving the Federal order market, December 1970.

Members of largest Number of Federal Percentage of total

33

cooEerative order markets Federal order deliveries Cumulative Cumulative

Percent Number number Percent Eercent

100.0 9 9 2.5 2.5

90.0-99.9 12 21 8.0 10.5

80.0-89.9 11 32 10.9 21.4

70.0-79.9 9 41 7.4 28.8

60.0-69.9 4 45 9.2 38.0

50.0-59.9 7 52 13.8 51. 8

40.0-49.9 2 54 12.4 64.2

30.0-39.9 3 57 12.5 76.7

20.0-29.9 5 62 23.3 100.0

10.0-19.9 0 62 100.0

0-9.9 0 62 100.0

34

Impact of Cooperatives on Milk Pricing

Many of the changes occurring in the cooperative sector of the milk industry have given producers a degree of influence over price.

Historically, this has been a primary goal of milk cooperative activity and should not be considered a new development. Since the establishment of the Federal order system, cooperatives have been able to express their views on prices and order provisions by participation in hearings. In addition, associations of producers and cooperatives have presented the farmers' case for higher support prices as well as legislative changes.

Enhancement of ~roducer returns has been a major goal of coopera­tive activity.17 Many of the activities of cooperatives relate to the achievement of this goal--federation formation, negotiation of full supply arrangements, standby pool, bracketing, pooling practices, increased advertising, and political activity.

A principal method of enhancing producer returns has been the negotiation of premiums over Federal order prices. When discuss­ing over-order pricing, care must be taken in defining terms. The terms premiums and over-order prices can be used to describe situations where a substantial proportion of the milk is being priced above the Federal order minimum price for a particular class of milk. Over-order prices arise under two circumstances. First, they may exist because the producer price is fixed by State author­ity at a level which is higher than Federal order minimum prices. This is currently the case in three States affecting three Federal order markets. Second, they exist when cooperatives negotiate with handlers for premiums over Federal order prices. Such pre­miums are sometimes also referred to as superpool or negotiated prices.

Premiums are difficult to distinguish from service or handling charges. Premiums may be used to cover cooperative costs. Service charges may more than cover cooperative costs. Premiums generally cover a substantial proportion (over 60 percent) of the milk in a Federal order market.

In June 1971, premium payments and/or service charges were paid on Class I milk in 46 Federal order markets. Thirty-eight of

1/ Knutson, pp. 8-9

these markets reported Class I premiums ranging from $.06 to $.78 · per cwt. Service and handling charges ranging from $.03 to $.34 were reported in 19 markets. Eleven markets had both a premium and a service charge. In June 1971, premiums or service charges were paid on approximately 66 percent of producer deliveries used in Class I in the 46 markets, or 58 percent of producer deliveries used in Class I in all Federal order markets.

Size of Premiums

Prices established under Federal milk orders are minimum prices. For many years prior to 1956, marketwide premiums over these minimum prices were rare. Generally, over-order price existed prior to 1956 only in markets where State milk control agencies established prices higher than those established by a Federal order covering the same general area as a State regulation. In such circumstances, handlers generally paid the State price, if higher. The Pennsylvania Milk Commission established prices in excess of the Philadelphia Feder~l order market price for a number of years.

There were numerous instances where handlers paid premiums over minimum prices to individual producers for quality, size of ship­ment, bulk tank milk, etc. In addition to these premiums, handling charges, particularly on supply plant milk in large markets, have been paid since the inception of the program. Both premiums and handling charges have varied to some extent with changes in mar­ket conditions.

Significant premiums in the Detroit (Southern Michigan) market were negotiated in April 1956. Premiums in several other markets showed up following the suspension of seasonal price declines in Federal order markets in the spring of 1956. At this time, pre­miums were negotiated in 19 markets to maintain prices at the same seasonal relationship after July as had previously existed.

In June of 1962, 28 markets reported premiums and by June of 1968, premiums existed in 40 markets. At the end of 1971, as a result of order consolidation, the number of markets where Class I pre­miums existed declined to 38 (table 7).

There has also been a tendency for the nature of premium to change. Prior to 1970, premiums were based upon a certain amount over the

35

36 Table 7 --Frequency distribution of premiums paid on Class I milk in Federal

order markets, 1956-1971

Cents Number of markets in June per hundred- 1956 1957 1958 1959 1960 1961 1962 1963 \~eigh t

1-10 1 1 0 0 0 5 2 3 11-20 0 3 2 3 3 5 3 4 21-30 0 0 8 4 8 1 4 7 31-40 2 1 2 1 5 3 5 3 41-50 0 4 1 2 9 4 2 5 51-over: 0 3 0 2 4 6 12 8

Total no. of Fed. order mk ts. : 3 12 13 12 29 24 28 30 reporting premiums

Total no. of Fed. 68 68 74 77 80 81 83 82 order mkts.:

Percentage : of Federal : order mkts.: 4 18 18 16 36 30 34 37 reporting Eremiums

Cents Number of markets in June per hundred- 1964 1965 1966 1967 1968 1969 1970 1971 weight

1-10 2 2 5 8 2 0 2 2 11-20 4 5 8 6 2 8 1 1 21-30 4 2 8 4 9 9 6 5 31-40 2 1 1 4 2 2 9 7 41-50 5 2 1 5 23 18 10 8 51-over II II 1 3 2 3 12 15

Total no. of Fed. order mkts.: 28 23 24 30 40 40 40 38 reporting premiums

Total no. of Fed. 77 73 71 73 73 67 62 62 order mk ts. :

Percentage : of Federal : order mkts.: 36 32 34 41 55 60 65 61 reporting premiums

Federal order price (e.g., Federal order Class I price plus 50 cents). Therefore, when the Federal order price changed the negotiated price also changed. In the 1970's, negotiated prices were established in several markets at a stated level (e.g., $7.50 per cwt.) and premiums were allowed to float according to the level of Federal order price. More recently, in late 1970 and in 1971, a bracket feature was added by some cooperatives to negotiated flat prices. This bracket feature generally moves the negotiated price in 15 cent intervals when the Minnesota-Wisconsin price moves by 15 cents per cwt.

The impact of premium negotiation has not been uniform across the United States. In 1971, no premiums existed in the four Eastern and Northeastern markets.l/ Service charges existed on 50 percent or less of the milk in each of these markets. The three Florida markets had neither premiums nor service charges.l/ In the nine Western markets,l/ there were no premiums and service charges existed only in the Puget Sound and Black Hills markets.

Over-order payments were made in 35 of 46 markets stretching from Georgia to the Texas Panhandle and from the Gulf to Canada. Three additional markets had State established prices above Federal order minimums covering at least a portion of the Federal order market. Table 8 shows the weighted annual average negotiated Class I

37

price, Federal order Class I price, and premiums for a represent­ative sample of markets in the Central and Southeast United States.i/ It indicates considerable variability in both the magnitude and consistency of premium negotiation regionally and over time. A general tendency for average premiums to increase is evident from 1966 to 1968. Since 1968, premiums have been relatively stable to slightly declining. These declines can be attributed to sharp

1/ Includes Connecticut, Middle Atlantic, New York-New Jersey, and Massachusetts markets.

2/ Includes Tampa Bay, Southeastern Florida, and Upper Florida markets.

3/ Includes Black Hills, Central Arizona, Eastern Colorado, Western Colorado, Rio Grande Valley, Great Basin, Oregon­Washington, Inland Empire, and Puget Sound markets.

4/ This sample of markets represents 80 percent of the Class I utilization in the 46 Federal order market areas represented and 45 percent of the total U.S. Class I utilization in 1970.

38

Table 8. Weighted annual average Federal order Class I price, negotiated Class I price and premium by region, 1966-1971 .

Region and

Price Year J anuary-Augus t

1966 1967 1968 1969 1970 197151

North Central-V Negotiated Federal order Premium Premium range

Southwestll Negotiated Federal order Premium Premium range

Sou theas tll Negotiated Federal order Premium Premium range

Great Lakes..Y Negotiated Federal order Premium Premium range

Four Group Average Negotiated Federal order Premium

4.98 4.94

.04 .00-.08

6.03 6.02

.01 .00- .04

5.86 5.76

.12 .00-.38

5.54 5.12

.42 .00-.77

5.47 5.27

.20

(dollars per cwt.)

5.23 5.03

.20 .05-.35

6.48 6.28

.20 .17-.23

6.26 5.97

.29 .16-.66

6.29 5.44

.85 .26-1.00

5.93 5.47

. 46

5.68 5.41

.27 .00-.42

6.97 6.47

.50 .50-.50

6.53 6.25

.28 .05-.68

6.32 5.85

.47 .20-.69

6.16 5.79

.37

5.91 5.72

.19 .00-.30

7.15 6.65

.50 .50- .50

6.73 6.37

.36 .06-.66

6.41 6.10

.31 .18-.51

6.34 6.05

.29

6.10 5.97

.13 .00-.42

7.37 6.88

.49 .49-.50

7.02 6.62

.42 .03-.69

6.61 6.32

.29 .21- .43

6.55 6.29

.26

11 Includes Minneapolis-St. Paul, Des Moines, Kansas City, St. Louis, and Chicago Federal order markets.

21 Includes Oklahoma, North Texas, Central Arkansas, San Antonio, and South Texas Federal order markets.

31 Includes New Orleans, Louisville-Lexington-Evansville, Nashville, and Mississippi Federal order markets.

il Includes Southern Michigan, Eastern Ohio-Western Pennsylvania, Ohio Valley, and Indiana Federal order markets.

51 1971 includes a weighted average price for the months of January to August only.

6.39 6.11

.28 .00-.33

7.43 6.99

.44 .39- .48

7.15 6.82

. 33 .00-.67

6.80 6.48

.32 .24-.44

6.71 6.40

.31

increases in the Federal order price from a four region average of $5.79 per cwt. in 1968 to $6.40 per cwt. in the period January­Augus t 1971.

Within the area where premiums have been negotiated, the greatest solidarity in premiums has been in the Southwest region. The North Central region has had the lowest level of premiums. The lower premiums in the North Central region can be attributed to a larger number of cooperatives competing for a relatively small fluid market as well as the potential attraction of large additional volumes of Grade A milk from existing manufacturing sources if negotiated prices are raised too high. As noted previously, there are sizable areas in the Northeast and West where cooperatives have not consolidated their activities sufficiently to negotiate premiums.

Implications of Premiums in Carrying Out Federal Order Objectives

The payment of over-order prices has been viewed by some as posing a conflict with the Secretary's responsibilities under Section 8(c)18 of the Marketing Agreement Act which directs him to estab­lish prices at levels necessary to assure an adequate supply of mi1k.l/ After the Secretary has determined that a particular level of price is needed to carry out the purposes of the Act, it can be argued that any price negotiated in excess of the level is contrary to the purposes of the Act. Holding this point of view, however, ignores that the Act specifically provides for the estab­lishment of only minimum prices. This provision implies that pro­ducers, within the restrictions provided by the Capper-Volstead Act, the Agricultural Fair Practices Act, and the antitrust laws, may negotiate premiums over Federal order prices.

Late in 1957, the Department proposed to suspend pricing, pooling, and auditing provisions of the Philadelphia order effective January 1, 1958, because prices established by the State of Pennsylvania had consistently exceeded those established under the Federal order for Philadelphia. This proposed action was based on the rationale that, since Federal order prices were not effective prices being paid by handlers, the pricing, pooling, and auditing provisions of the order no longer effectuated the

1/ Nourse, pp. 30-31.

39

purposes contemplated by the Act. As a result of arguments pre­sented by producer leaders, the suspension action was stayed and a public meeting held to further consider the issue. Following the public meeting, it was announced that no suspension action ',]Quld be taken.

Since that time the Department has not considered withdrawing an order because of the existence of over-order prices. With pre­miums prevailing in a number of markets for over a decade, the negotiation of premiums has been accepted as a legitimate coopera­tive bargaining activity.

Some Effects of Premiums--If sizable premiums prevail over a long period of time, higher blend prices may attract additional pro­ducers and encourage existing producers to expand their marketings. At the same time, premiums negotiated over a long period of time may reduce consumption while receipts are increasing. In Southern Michigan sizable premiums existed in 1956 and prevailed for a number of years. Although other factors likely played a part, between 1956 and 1962, Class I utilization declined from 72 percent to 59 percent. The main factor associated with the lower Class I utilization percentage in these two markets was the significant increase in receipts relative to Class I sales. In 20 markets .nthout over-order payments, the average Class I utilization increased from 56 percent in 1956 to 57 percent in 1962.

To the extent that premiums result in increased marketings or decreased consumption, they have the effect of increasing price support removals, creating the same type of problem that exists if Class I prices are too high.

In cases where premiums are negotiated at a flat Class I price per cwt., a change in support and manufacturing milk prices may not be immediately reflected in the negotiated price. Experience has shown, however, that in such cases increases in price supports and in manufacturing milk prices tend to be quickly reflected in the negotiated price. Decreases in support levels have not occurred for a number of years but some cooperatives have adopted a bracketed system for altering negotiated prices relative to the Minnesota-Wisconsin price which applies to price decreases as well as price increases. Table 9 indicates the changes in the average negotiated price compared to changes in minimum Federal order Class I prices for a group of markets in which premiums have prevailed for several years.

40

41

Table 9 Change in weighted average Federal order Class I and negotiated prices by region, 1966- 71.1/

Region and Change in price from preceeding year

Price 1967 1968 1969 1970 1971 Jj

North Central (dollar per cwt. ) Negotiated .25 .45 .23 .19 .29 Federal order .09 .38 .31 .25 .14

Southwest Negotiated .45 .49 .18 .22 .06 Federal order .26 .19 .18 .23 .11

Southeast Negotiated .40 .27 .20 .29 .13 Federal order .21 .28 .12 .25 .20

Great Lakes Negotiated .75 .03 .09 .20 .19 Federal order .32 .41 .25 .22 .16

Four Group Average Negotiated .46 .23 .18 .21 .16 Federal order .20 .32 .26 .24 .11

1/ Derived from table 8.

2/ Includes the months of January to August only.

Premiums may also alter intermarket price relationships. These relationships may actually be improved among order markets within a regional cooperative's territory. However, substantial dis­tortion may exist with markets outside the cooperative's territory. Handlers may attempt to obtain supplies from such markets at a lower price. Handlers in an adj acent market ,,,here premiums do not exist may find that they have a competitive advantage selling packaged milk in a market where substantial premiums exist. Such situations create disorderly marketing conditions and may result in the loss of Class I markets to some producers.

In some cases, negotiated premiums are not marketwide. This tends to destroy one of the basic purposes of milk orders, that of uniformity of prices to handlers. Handlers who are able to buy milk from nonmember sources or from cooperatives who are not participating in the "super pool" obviously have a competitive advantage. This creates disorder, a situation milk orders are designed to remedy.

Implications of Reblending by Cooperatives

Producers' production decisions are influenced by the blend price received for milk. Class I prices under milk orders are estab­lished with a view to producing a blend price which will assure

42

an adequate supply of milk. Except for the influence of seasonal takeout-payback plans and seasonal or Class I base plan adjustments, blend prices to producers as announced by a market administrator are a weighted average price based on class prices and market utilization.

As pointed out in the previous section, premiums negotiated over minimum Class I prices influence the blend price received by pro­ducers. Another factor influencing the blend price received by producers is the reb lending of proceeds by cooperatives.

When cooperatives' marketing activities were limited to one, or at most a few, marketing areas, reb lending represented the blend­ing of returns for milk sold to different outlets in a limited geographic area. As cooperatives have grown to encompass a number of different marketing areas, the process of cooperative reb lend­ing has taken on multimarket dimensions. Such reb lending of returns, while authorized under the Act, has vastly different

effects than the type of reb lending of returns of sales in various outlets which existed in the past and which often covered only a limited marketing area.

Reblending of returns under a number of different orders can result in blend prices to producers that differ materially from blend prices established under the orders involved. Regardless of whether the resulting distribution of proceeds is more or less appropriate than that contemplated under the orders involved, reb lending of returns among markets can create disparties in returns among producers in the same market as well as lessen the influence of orders upon prices actually received by producers. Thus the influence of the structure of prices resulting from the Secretary's decisions may be altered, making it more difficult to achieve the objectives of the Act.

Where substantial economic justification exists for a different pattern of blend prices than exists under the orders, it would be appropriate to amend the orders to produce a more reasonable pattern of 1:>lend prices. This would make prices established under various orders more meaningful.

43

IV. THE MILK PRICING PROBLEM

In carrying out his responsibilities under the Agricultural Marketing Agreement Act of 1937 and the Agricultural Act of 1949, the Secretary of Agriculture is charged with establishing a structure of prices which will assure adequate but not excessive supplies of milk. This requires establishing and maintainlng a balance bet\veen: (1) the need for prices to producers high enough to provide a reasonable return on labor and investment; (2) consumers' willingness and ability to pay for milk; (3) the public interest in efficient allocation of resources; and (4) the overall interest of producers, handlers, and the public in the orderly flow of products from the producer to the consumer.

Such a balance requires the establishment of a structure of prices--both under the Federal order program and the price support program--at a level which recognizes the sum total of forces affecting the national supply and demand for milk and which will create a balance between supply and demand over time.

Consequences of Establishing Too High or Too Low a Price

A milk pricing formula can be developed which will produce almost any price level. Under present circumstances, establishing prices at levels higher than needed to assure an adequate supply will cause producers to expand production to the point where milk sur­pluses become burdensome. Government purchases cannot be expanded without limit. Without effective means of production control, substantial enhancement of producer returns by raising prices above the level \vhich equates supply and demand reasonably well, becomes self-defeating. As excess supplies build up substantial reduction in price is required to eliminate surpluses. A built-in cyclical pattern of production and prices results. Such a pattern is inconsistent with the goal of orderly marketing. For the producer, it provides a boom-or-bust price structure with no assurance of consistently reasonable returns. Resource misallo­cation results as resources move into the industry during expansion and are forced out during periods of contraction.

44

Establishing prices which are too low has even more serious consequences. In addition to jeopardizing the supply of milk, the financial structure of a basic industry can be undermined, and the livelihood of many family farm operations threatened. If properly utilized the Federal order and price support programs are tools which provide a basis for raising producer returns by stabilizing prices at a level which provides the producer and his family with a reasonable return on labor, capital and management. With unrestrained production, the primary method of providing for higher producer returns must involve establishing support and Federal order prices at a level which will result in . a reasonable balance between milk production and consumption. While there is room for discretion as to the level of prices to be established, the amount of discretion is limited by both the provisions of the Act and the economics of milk production and consumption.

Interdependence of the Milk Pricing System

To establish a structure of prices which recognizes the sum total

45

of forces affecting the national supply and demand for milk, inter­dependence of all parts of the milk pricing system must be recog­nized. At the present time, approximately 75 percent of the Nation's milk supply is Grade A and about half of all milk is used for fluid purposes. Federal order receipts represent about 60 percent of total milk marketings. Thus, the level of Federal order Class I prices directly influences the blend price received by producers of 60 percent of the total milk supply.

The total supply of milk depends on the prices paid Grade A and manufacturing grade producers, their expected future prices, present and expected cost of producing milk, and the alternative farm and off-farm opportunities. The demand for milk and dairy products depends on their prices, the availability and price of substitute products, consumer income, population growth, and changes in consumer tastes and preferences.

At the present time, Class I prices move up and down with changes in the average price paid for manufacturing grade -milk in Minnesota and Wisconsin. The Department has relied on the manufacturing market to reflect the impact of all supply and demand factors operating in the dairy economy. Good measures of manufacturing milk prices have been relatively easy to obtain, and have provided a sensitive measure of changes in the overall supply-demand balance in the dairy economy.

The use of manufacturing milk prices as a mover of Class I prices has also provided a needed link between the price support and milk order program. Under present arrangements, changes in sup­port price levels are directly reflected in Class I prices as well as in prices paid for milk for manufacturing. The Secretary can adjust price support levels upward or downward with knowledge that the change will be reflected throughout both the fluid and manu­facturing segments of the industry.

Close coordination under the milk order and support price programs is needed. Excessive upward movement of the Class I price, inde­pendent of support price change, can result in unneeded supplies

46

of milk which end up in the hands of the Commodity Credit Corporation and increase support program costs. In such a circumstance, the Secretary could be faced with an inconsistent policy of increasing Class I prices while reducing support prices, with the burden falling on manufacturing producers.

Achieving coordination between Federal order and support prices does not necessarily mean that formulas using various economic indicators could not be utilized. It does mean that the formula would need to contain factors which would assure needed coordination between the two programs.

Market Conditions Requiring Change

The existing set of milk pricing institutions was developed in recognition of three basic conditions: (1) the existence of a very large supply of manufacturing grade milk in the competitive market; (2) the relative lack of market power on the part of fluid milk cooperatives in dealing with handlers; and (3) the existence of well-defined local markets for fluid milk. In recent years, developments have modified significantly each of these three basic conditions.

The reservoir of manufacturing grade milk available to manufacturers is drying up as producers go out of business or shift to Grade A milk production. Competitive prices for manufacturing grade milk which have provided an open market indicator of the overall supply and demand situation for raw milk will disappear within the next decade.

The reliability of the Minnesota-Wisconsin price series will increasingly become subject to question as marketings of manufac­turing grade milk decline and large c00peratives gain control over more manufacturing plants in Minnesota and Wisconsin. A new basis for establishing milk prices under Federal orders will have to be developed. In addition, significant changes in the price support program, whose prime focus has been to support the price of manufacturing milk, will be required.

The market power of cooperatives has increased. The market power

47

of handlers has declined as they are faced with strong cooperatives on the one hand and large retailers on the other. In large sections of the country, Federal order prices are no longer effective mar­ket prices as cooperatives have negotiated premiums. To a con­siderable extent, these cooperatives control the distribution among their producers of proceeds from the sale of milk.

Regulation of fluid milk prices was built around a system of separate local markets which no longer exists. In many instances, the power of the cooperative extends far beyond the local market; in some cases extending over hundreds of miles. The basic concept of the local fluid milk market, which has been the basis for Federal and State regulation of prices and pooling, no longer coincides with the realities of the marketplace. While several Federal order markets have already been expanded and consolidated, further consolidation will be required. Increasingly more emphasis will need to be placed on pricing on a national basis.

The Federal milk order system was developed as a joint enterprise of the Federal Government and milk producers. It was designed to raise producer returns by restoring order in a disorderly marketing system and redressing an imbalance of market power between dairy farmers and handlers. Measured in these terms, this institution has provided more orderly marketing and has served the interests of the general public as well as those of producers, cooperatives, and handlers. The public interest has been served by a supply­demand pricing system which has provided an adequate supply of milk at reasonable prices from the standpoint of both producers and consumers.

If Federal orders are to continue as a viable institution, they must continue to serve the interests of all producers, cooperatives, handlers, and consumers. Cooperatives have always played a key role in the Federal order system. The Agricultural Marketing

48

Agreement Act provides a degree of flexibility within which coopera­tives may promote the particular interests of their producers. Such flexibility can and should be used to complement the objectives of the Act. Over time, this can best be realized by utilizing the Federal order system to reconcile the interests of all the parties it was designed to serve.