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Full text of "Problems in the basic-surplus plan in the Philadelphia milk shed"

Author: Andes, James 

Title: Problems in the basic-surplus plan in the Philadelphia 

milk shed 

Place of Publication: Philadelphia 

Copyright Date: 1937 

Master Negative Storage Number: MNS# PSt SNPaAg047.6 



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James Andes. 
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300 166p. $bmap. $c23cm. 

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PROBLEMS IN THE BASIC-SURPLUS PLAN 
IN THE PHILADELPHIA MILK SHED 



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1 



THE PENNSYLVANIA 

STATE COLLEGE 

LIBRARY 



A DISSERTATION 

IN POLITICAL SCIENCE 

PRESENTED TO THE FACULTY OP THE GRADUATE SCHOOL OP THE 

UNIVERSITY OF PENNSYLVANIA IN PARTIAL FULFILLMENT 

OP THE REQUIREMENTS FOR THE DEGREE 

OF DOCTOR OF PHILOSOPHY 



n^^ 



-* 



JAMES ANDES 



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PHILADELPHIA 



1937 



338./ 



Copyright Appued For 



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The author wishes to adknowledgje indebtedness to Dr. Clyde L. 
King, Oliairman of the Political Science Department of the Uni- 
versity of Pennsylvania, for guidance and encouragement 
throughout the study; to Mr. Ilarold B. Bowe, Member of the 
Staff of the Brookings Institution, for helpful suggestions re- 
lating to the economic analysis; and to Mr. H. D. Allehaeh, 
former President of the Inter-State Milk Producers Association, 
for permission to copy the records used. 



193292 



TABLE OF CONTENTS 



Chapter 
I. 

n. 
m. 

IV. 



V. 



VI. 



Introduction 

Factors Determining the Price of Milk 

Milk Price Plans 

The Development and Operation of the 
Philadelphia Plan 

1. Methods of Establishing Quantities 

2. The Operation of the Philadelphia Plan 
and Market Price 

3. Other Factors Affecting the Philadel- 
phia Plan 

4. Disturbance Within the Producers 
Association 

Minority Objections to the Philadelphia 
Control Plan 

Conclusions 

Bibliography 



Page 
7 
11 
31 

53 

58 

78 
92 
98 

105 
145 
162 



i 



Chapter I. 
INTRODUCTION. 



In the enactment of a great deal of the legislation during 
the past three years the public has become keenly aware of 
the relationship that politics and economics hold to each 
other in the process of law making. The nature of this 
politico-economic relationship is seen even more clearly in the 
use made of the ordinance power in administering that legis- 
lation. Economics has always been burdened with the task 
of adjusting business relationships to political objectives but 
"New Deal" administration has demonstrated impressively 
that contending forces rather than political and economic 
theories determined the nature and substance of much recent 
public regulation. 

In the industrial field, under former NRA codes, in bank- 
ing, in public relief, and especially in agricultural relief, under 
the AAA, these contending forces have been shaping legisla- 
tion. In each of these fields we have seen every group of 
citizens who have been affected by proposed regulation come 
and offer the solution that was to its own interest and try to 
prove, naturally enough, that its interest was also for the 
best interest of the public. Nowhere has this idea of solving 
our difficulties through the open foriun of debate or public 
hearings, rather than through pre-determined and convincing 
economic theories, been more manifest than in public regula- 
tion of the dairy industry. 

There may not be a question as to the instructive value 
of these public hearings. At least, they should be sources 
of valuable information. But there is the question of this 
technique resulting in wise regulation rather than in a type 
of control that results from the stalemate of contending 
forces or from the strength of one faction. If these regula- 
tory measures are simply the outcome of a desire to satisfy 
conflicting interests or to further political objectives without 
full consideration for their economic consequences, the re- 
sult must be a further burdening of economics. For, regard- 
less of the political pattern cut out for industry, society does 



8 Basic-Surplus Problems in the Philadelphia Milk Shed 

have economic foundations which must be reckoned with 
ultimately. 

On the other hand, it is equally true that the problem of 
puttmg sound economic or political theory into practice re- 
qmres an astute knowledge of public opinion. Often the pub- 
lic objects to theories advocated by technicians because these 
have not been made fully comprehensible or because their 
practical applications are considered invalid and unfair. 
Qmte often sound economic theory has been condemned sole- 
ly because of unwise administration of the theory in practice 
Economic controls, and especially novel and drastic ones* 
must always meet the test of public approval before they can 
be operated effectively. 

These difficulties of adjusting political forces to economic 
laws, or of adjusting economic factors to conform with poli- 
tical realism, are responsible for much of the dissension 
created by various control measures in the past few years 
In no other field, perhaps, has more opposition come forth 
than m the field of agriculture. Production control measures 
of the Triple A^ of local public agencies, and of cooperative 
agricultural groups have created large and in some instances 
powerful minorities opposing these regulatory orders An 
analysis of the regulations, of the interests of the contending 
forces, and of the economic factors involved in any one of 
these production adaptation programs ought to indicate 
some of the causes o/f dissatisfaction and may sueeest 
methods for reducing minority elements opposed to it. 

The desire to ascertain the effects of production control 
measures on the farmers concerned, with special considera- 
tion for the conflicting forces, in an effort to discover the 
causes and consequences of minority reactions, has led to the 
pr^ent study. In considering only one of the various aeri- 
cultural commodities now subject to production regulation it 
IS with the realization that a complete study of the forces 
creating discontent and minority problems cannot be made 
Yet there are factors and objections common to each of these 



Basic-Surplus Problems in the Philadelphia Milk Shed 9 

programs and an analysis of any one should afford some sug- 
gestions applicable to the others. 

In selecting the dairy industry for study several considera- 
tions determined the choice. In the first place, milk control 
measures have aroused a great deal of public interest and 
they enlist the concern of more citizens than those dealing 
with other agricultural commodities. Due to its universality, 
milk, its supply and price, interests nearly every consumer 
and the fact that dairy products accoimt for about one-fourth 
of the gross income of farmers indicates the interest of our 
agricultural population in any phase of milk regulation. A 
further proof of public interest in milk is the attention given 
to it by city, state, and national governments in the form of 
regulation and control laws. 

In the second place, by choosing the dairy industry our 
problem becomes more simplified than would be the case with 
cotton, wheat, or other agricultural products. This is true 
not only because international aspects need not be considered, 
as dairy exports and imports have been almost negligible, but 
also because the problem of milk production control can be 
limited largely to one market supply area and studied 
through operations in that territory. For milk control 
schemes have been essentially local in scope and, although the 
factors infiuencing regulation vary markedly from one mar- 
ket area to another, the underlying principles involved are 
common to all. 

Finally, attempts to adapt milk supply to demand through 
artificial control plans have been conducted over a longer 
period than is the case of any other farm commodity. The 
nature of the product creates marketing problems which 
clearly indicated to many dairymen the value of controlled 
production. As a consequence, plans for regulating milk 
supply were in operation in many markets years before the 
'Triple A^' program was initiated. A study of milk produc- 
tion control, therefore, gives the advantages that come from 
a relatively long testing period. 



10 Basic-Surplus Problems in the Philadelphia Milk Shed 

While limiting the study to problems of milk producers 
withm the Philadelphia supply area, a knowledge of the milk 

^^^ .^x..c4xc a.xxci ux nuw uie suppiy areas tor the various 

dairy products are constructed is essential to any discussion 
of niilk control plans. Therefore, the problem is approached 
by first analyzing the factors that determine the price of 
milk under unrestricted competitive processes in order that 
the need and reasons for artificial controls over production 
may be fully appreciated. With these forces clearly demon- 
strated, the chapter on the nature of artificial price plans 
indicates attempts made to more fully adjust milk marketing 
to these competitive processes. Then the history and opera- 
tion of the Philadelphia milk control plan is considered with 
the aid of our economic background, and marketing problems 
and the attempts to solve them are discussed This is fol 
lowed by an analysis of the various criticisms against these 
solutions offered by one minority group or another. All con- 
clusions are based on the economic analysis with which the 
^^^^^Jf^^"^^ ^^ ^^^ assumption that all political measures, 
all artificial regulations, must square themselves with sound 
economic theory if they are to be permanently effective 



Chapter II. 
FACrrORS DETERMINING THE PRICE OF MILK. 



is utilized in different forms and the use to be made 
of it determines its price. Milk consumed in fluid form 
brings a higher price than milk going into cream uses, and 
milk for butter and other manufactured products receives a 
still lower price than milk for cream purposes. An imder- 
standing of the relationship between prices for these various 
classes of dairy products at the market receiving point will 
explain the structure of prices and the sizes of fluid milk, 
cream and butter zones in the producing area tributory to 
that market. 

First, it should be clear that the market receiving point 
must be a primary market, one large enough to dominate the 
price of milk paid to dairymen in the producing regions 
thereto. All other sales areas located within the producing 
region of a primary market are secondary markets and the 
territory supplying most, if not all, of the fluid milk con- 
sumed by that primary market and its secondary sales areas 
is called a milk shed. 

Dairymen supplying fluid milk and cream for the primary 
and secondary markets of a milk shed always receive a high- 
er price for their product than do milk producers selling all 
of their supply for manufacturing purposes. This would not 
be the case if all milk were brought to a central market in 
fluid form and possessed a uniform quality when it arrived. 
Because of the interchangeability of the supply, prices would 
be the same for each imit of the product whether that unit 
was used as fluid milk, as cream or in some manufactured 
dairy product. Differences in consumers* prices for various 
classes of dairy products caused by variations in costs of 
processing and handling would not alter this situation, nor 
would differences in consumer demand between uses cause 
one unit of milk to command a higher price than another, as 
the price at the market would still be the same for each unit. 

But all milk will not be shipped to the market in fluid form 
because dairymen will market their product in the form 



12 Basic-Surplus Problems in the Philadelphia Milk Shed 

which will net them the highest price at the farm. As the 
amount of fluid milk consumed by any market is rather con- 
— ... „..^^ ^c i;uot ui i-ransportmg mnerent dairy products 
varies with the product, distance becomes a factor ki deter- 
mmmg the price. Fluid milk is a bulky commodity. Its value 
m comparison to weight being fairly low, a limitation is 
thereby placed on the proportion of the consumers' price 
which may be paid for transportation. Cream being less 
bu^^ky, and butter stiU less so, farmers far from the market 
will receive a higher return by shipping their milk in one of 
these concentrated forms as transportation charges will be 

T^ *!^"-,^°^ ^"'^ ™"^- °^^«^ ^^^t°^ ^'^^luded, the price 
of fluid milk m any market will be high enough to draw to the 
market sufficient fluid milk for consumption requirements but 
W enough to prevent a larger quantity from entering it 
Price mil determine the limits of the milk shed, those dairy-' 
men mthm the shed finding it more profitable to ship milk in 
fluid form than in any other, while those beyond its 
boundaries will receive less for their product in fluid form 
tiian they will gam by sellmg cream, because less will be sub- 
tracted from the latter for transportation costs. At the 
bomidary of the milk shed it wfll, of course, be optional wSh 
the producer as to whether he ships fluid milk or sends cream, 
for milk m either form will net him the same price 

Differences m the cost of delivery to the market is, then 
an important factor m explaining the higher price for flufd 

TtheTh W ^'"/'^ T^'^''"- ^ "^^ P"«« transportation 
is the chief cost item due to distance, but not the only one 

greater Mifk if. '''"■ f ^r ' '^'"^ '""^ ^^'^'' ^ecLes 
Stir;. ^ '' a perishable, as well as a bulky, commodity, 
a^d the sanitary and refrigerative measures necessary to pro- 
tect Its quahty mcrease as the distance from the market 
widens. Additional apparatus for cooling may be re^rel 
and more handlmg is usually necessary the more remot^the 
dairy farms are from the place of consumption. Se costs 

butZloT^ r? "^^^"""^ ^^^^^^"^ ^t-«-« i« attri! 
butable to this distance factor for otherwise all fluid milk 

could be cooled and processed at the central market pS 



t 

1 



Basic-Surplus Problems in the Philadelphia Milk Shed 13 
with the savings associated with large-scale operations. 

Til* r>.t^o. -Crs y^4- A«%M 4-1* #« 4- ^ Ji Ji m-^ ^ .^ ^ 4.— XT „;^- XI, ^ :f A 

xiicoc xdv^Luio mat <iuu inure tu Liie price a» uie uisiance 

from the market widens not only aid in determining price by 
equating demand with the costs of securing an adequate 
supply, but, other forces being absent, they also fix the 
boundaries of the milk shed rather definitely. This is true 
only when the milk shed is sufficiently large to permit eco- 
nomies through the establishment of a dairy manufacturing 
plant outside the market to take care of excess milk, milk 
not used in fluid form. If the shed is so small that the mar- 
ket proves to be the central point at which suflftcient excess 
milk can be received to operate a manufacturing plant effi- 
ciently, all milk will be transported to this central place in 
fluid form regardless of the use made of it. We would then 
have the condition, formerly mentioned, of all milk bringing 
the same price because of the interchangeability of each unit. 
Only when a saving results from manufacturing dairy pro- 
ducts at a distance and shipping them to market in a more 
concentrated form than fluid milk will a differential in price 
result because of different transportation costs and other 
charges due to distance from the market. This does not 
necessarily mean the establishment of a manufacturing busi- 
ness outside the city market. If producers find that they re- 
ceive a higher price for cream, after apparatus and labor 
costs have been deducted, than for shipping a like amount of 
fluid milk, the conditions necessary for the price differential 
have been met. 

Another situation may enter in to affect the differential 
caused by the distance from the market. Just beyond the 
boundary of the fluid milk zone, or between the territorial 
limits of two milk sheds, may be a supply of milk insufficient 
in quantity to permit a dairy manufacturing plant to be oper- 
ated profitably. It may be cheaper to ship this excess milk 
to the market in fluid form and manufacture it there than to 
convert it into other dairy products at the source of the 
supply. If distributors accept this milk at the market and 
use it in manufactured dairy products, the fluid milk price 



Ill 



i 

1" 



14 Basic-Surplus Problems in the Philadelphia Milk Shed 

"t^^l^f^Z'!^''^} "^^^^^ fl"id ™ilk and the product manu- 

7nZr Krnnl!r, ^r^ "^^ ^^^"^^^ ^^^Wmg the excess 
fT^L ^ unlikely, however, that distributors will assume 

Icc'ottf r"""".?' '^'"°^ "P '^^ ^P^'-^^^ -«^ complicated 
accounts required to accomplish this, especially if the amount 

lof trartlf «.';t*"^'^ ^™^"- ^^^^^ ^«' ^reate^re! 
S L "^^"^ ^''P^"^^ °^ ^^n^^i'ig this excess milk 

wm become a part of the total operating expenses of the 

h S"o mv'thf .?/?''7''"^ '^ lowered an?Sl producers 
help to pay the additional costs, thus lowering the receipts 

feteLtTbv cor" "'*^"^^ '""^ "°™^' P"- ^^^-S 
determined by costs mcreasmg with the distance from the 

wfdened.'' ""' ''^^ '^' '^'"""^^^ ^^ *^« '""l^ «^ed is 

disVfnce f roTthP ""' ''w T''^"''^ ""^^ ''^^^^ "^^^ *« the 
aistance from the market, attempting to show how th^^^P 

charges create a differential between fluid rZ IZeTZl 

prices for other dairy products. Another cost fou^d in pra" 

tically every milk shed today, results from san^t on and 

health requirements for fluid milk and cream. The^ ree^i" 

tions have been set up by local or state public auStiefil' 

though some states have certain requirements for butter and 

other dairy products, these are not as stringent and tLr. 

fore, not as costly as those relating to fluid m^5k and cream 

»HH^^'*^"f ° f ** ^^^"^^ regulations create only a part of the 
added costs of producing milk for fluid uses rathi Jhan for 
o her dairy products. Supplying milk for consump^l ^' 
fluid form means, as a rule, more equipment in thTw« v Z 
cans, strainers and towels; the expenseTof pr^/cooW 
such as a milk house and an adequate water system Ind 
usually additional labor costs It i<, ^iffi^„u ^ ''^^^m, and 
expenditures into distoiTcftegor i it i U .''''"n '^^'^ 
sort for cooling is a necessarf naS' nf ti, "^^ ^^ ^""^ 

thP tvnp r.f ™ni u "pessary part of the equipment, while 
the type of milk house required and its distance from th! 
bam come under sanitation and health requirements AU of 



Basic-Surplus Problems in the Philadelphia Milk Shed 15 
these costs, however, are additional expenses to the dairy- 



man r»T»r»Hiir*incr millr ifr>T» flnirl nao yofVir^y fVio»^ frw* />4-V»4-k*» /^oi*»xr 

*.A.M.%ji,*.A. k^A v^xA«.««.«AAA^ AAA.Ajt.jka. A.VjrA. AAt^jvA vlKJVy A tAiCAAV/A 1/XXC4;XX JLKJX. WCXXVxX \ACtAX V 

commodities, and as such they increase the size of the price 
differential created by costs due to the distance from the 
market. As every producer within the milk shed is selling 
milk for fluid use these costs are uniform throughout as 
they will be determined by the additional expenditure to the 
marginal producer. The price, therefore, will be increased 
by this additional outlay throughout the shed, otherwise it 
might be advantageous for some dairymen to turn their pro- 
duct into other uses and fluid milk demands could not be met 
until a higher price caused them to return to the fluid milk 
market. In short, the increased costs of production because 
of these regulations must be covered by the price or supply 
will be reduced over a period of time. 

Let us suppose for the moment that there were no price 
differential due to **distance-from-the-market'' costs. In that 
case all milk would be shipped to the market in fluid form 
and every unit would have to be of the same quality or nature 
as every other unit. If sanitation and health regulations 
were required for milk used in fluid form, it would appear 
that all milk would have to meet these requirements, causing 
each unit to bring the same price, although a higher value 
than in the absence of sanitation and health requirement 
costs. If this were true, costs due to the nature of the prod- 
uct or its use could not create a price differential within the 
milk shed; these could only increase the size of the differ- 
ential created by such factors as different transportation 
charges. 

It must be noted, however, that the cost of meeting health 
and sanitation requirements will not be the same for each 
unit of milk produced by every dairyman. There is a rela- 
tionship between the intensity of dairy production and the 
cost of meeting sanitary regulations. Up to a certain point 
at least, the larger the dairy the smaller should be the ad- 
ditional cost placed on each unit of the product, for the cost 



16 Basic-Surplus Problems in the Philadelphia Milk Shed 

of equipment wiU be spread over a larger volume of milk 
Large dairies can ordinarily utilize equipment more economi- 
cally tnan smaller ones. Also, the nature of dairying sug- 
gests that large dairy farms, economically managed, have a 
certain amount of equipment anyway, so that additional 
initial expenditures due to health requirements are likely to 
be smaller per cow or unit of milk than with smaller dairies 
In a competitive market these savings give an advantage to 
such producers since the size of the spread caused by health 
and sanitation regulations must be sufficient to take care of 
the marginal producer required to supply the market. This 
explains the efforts of large milk producers to have inspec- 
tion requirements raised. Such rules increase their competi- 
tive position by forcing out of the fluid milk market th^se 
who cannot economically make the changes necessary to 
meet these higher regulations. If this happens, the 
boundaries of the fluid milk shed must be altered, the terri! 
tory being reduced because producers operating advan- 
tageously m respect to sanitation requirement costs increase 
their production sufficiently to fulfill market demand, or new 
producers from outside the fluid zone enter because thei^ 
more favorable position under the new restrictions enables 
them to overcome the larger differential caused by their dis- 
tance from the market. If one or both of these changes fails 
to materialize, pnce will be increased to the point nJessary 
to J,^:^^«™^r dairymen return to the fluid milk market, or 
supply. consumption decreases to the lowered 

This ability of some dairymen to meet health and sanita- 
tion requirements at lower costs than others suggesTthe 
possibility of a price differential developing becaul^of tho^ 
requirements, even though a transportation dilferentSl weS 
absent. Although all milk were shipped to the maSetT 
ceiving point in fluid form, those daVrymen able to mit 
health and sanitation standards at a relat^ly low cost woSl 
be able to produce for fluid uses at less costs thin maSI 
producers. Thus, these shippers operating adva^t^geSsIy 



Basic-Surplus Problems in the Philadelphia Milk Shed 17 

with respect to meeting the regulations would receive a dif- 
ferential over the others even though there were no trans- 
portation differential and would, therefore, tend to secure a 
relatively larger share of the fluid milk market. Should 
these health and sanitation standards be of such a nature as 
to restrict the distance from which milk could be shipped to 
the market for fluid uses, those dairymen within this restrict- 
ed territory, having relatively low costs with respect to 
health regulations, would receive a differential advantage. 

Inspection requirements may be drawn in a manner that 
forces a modification of the boundaries of the milk shed. A 
contraction of the fluid milk zone is likely to result, for 
example, if the regulations are of such a character that they 
increase as the distance from the market enlarges. The ef- 
fect of these requirements wiU then be the same as that re- 
suiting from transportation or other "distance-from-the- 
market'^ costs, and a new differential is set up or added to the 
transportation spread. And the original milk shed will re- 
main intact only if consumption is not decreased by the high- 
er market price, or if producers close to the market fail to 
expand their production as a result of their higher price ad- 
vantage. 

Even more drastic results can be reahzed through inspec- 
tion laws. Through health and sanitation requirements an 
artificial fluid milk area may be created. This can be done 
by requiring milk to be delivered to the consumer within a 
given number of hours from the time it is produced. This 
automatically determines the size of the fluid milk zone by 
setting a maximum distance over which the supply can be 
transported. Should this requirement reduce the fluid milk 
territory, one of two alternatives, or both, must follow. 
Either the price of the commodity will increase until con- 
sumption is reduced to the diminished supply or production 
will increase within this smaller zone to the point of market 
demand. Regardless of the remedy, the price differential 
between fluid milk and milk going into other uses will be 
enhanced. 



18 Basic-Surplus Problems in the Philadelphia Milk Shed 



Whatever may be the nature of health and sanitation 
regulations they will, as we have observed, increase the 
spread between fluid milk prices and prices for dairy products 
meeting lower inspection laws, or none at all. Thus, we have 
discussed two essential factors that help determine fluid milk 
prices in any market : one, costs that increase as the distance 
from the market widens, setting up a price differential be- 
tween fluid milk and milk going into other uses, and limiting 
the size of the fluid milk shed; the other, costs due to the 
nature of the product, which increase the size of the spread 
among the various classes of dairy products. Other in- 
fluences, it is true, do exert som . force within this set-up but 
they are of lesser importance than the two described. For 
instance, differences between dairy farms can be a qualif jdng 
factor in deciding for which use farmers will produce milk. 
The nature of the land, the size of the farm, the condition of 
the herd, the type of equipment, the labor supply, and even 
personal preference may be deciding factors, and these be- 
come relatively more important as the class differential 
diminishes nearer the boundaries of the milk shed, making 
the shed limits more irregular than they would be otherwise. 
To this point in our discussion of the economic factors de- 
termining price in a fluid milk shed we have assumed that 
production and consumption were uniform throughout. This, 
of course, is not the true condition in any milk zone. In fact! 
there are three distinct types of variation associated with 
milk supply and demand, and consideration of the first two of 
these fluctuations will affect our previous analysis ma- 
terially. One is a long term variation resulting from mark- 
ed shifts into and out of the dairy enterprise, conditioned 
largely by changes in the relative profitableness of different 
enterprises. To state in another way, these variations are 
caused by changes in opportunity costs relative to dairying 
which may be called cyclical shifts in supply and are not 
necessarily associated with changes in demand. 

Seasonal variation in production is another type. These 
changes in supply from month to month occur largely be- 



Basic-Surplus Problems in the Philadelphia Milk Shed 19 
cause of the freshening period of cows, the size of the farm 

ture, and feeding practices. Usually these seasonal swings 
in supply are not closely associated with changes in demand. 
Under natural conditions production is relatively low in the 
winter months when consumption requirements remain 
rather constant, while the higher summer output comes dur- 
ing the vacation season of many consumers. Also, the height 
of the ice cream season is in July and August which comes 
too late to take care of the excess supply during the spring 
months. 

The third type of fluctuations is those in daily sales of fluid 
milk and cream. Causes of this variation are higher market 
requirements on some days of the week than on others, 
abrupt changes in weather, holidays, and similar factors. 
These changes call for the carrying of an operating reserve, 
in addition to actual sales, sufficient to meet daily fluctua- 
tions in sales. 

Considering first long term variations in production and 
sales, let us suppose that the net price of milk increases rela- 
tively to other farm commodities and that this situation be- 
comes more or less permanent, while consumption remains 
fairly constant. It is realized that a somewhat permanent 
decrease in consumption with the supply curve remaining in- 
tact would also permit the following analysis; but this, it 

must be admitted, is less likely to happen than the variation 
in production. 

With opportunity earnings greater in dairying than in 
other farm enterprises more and more farmers within the 
milk shed will turn to dairying and a greater quantity of 
fluid milk will be produced than the market consumes. The 
tendency will be for the fluid milk shed to accommodate it- 
self to a size commensurate with the demand, but certain 
forces will retard this development. Distributors having re- 
ceiving stations beyond this new zone will hesitate to close 
them until they are convinced that the savings from costs in- 



20 Basic-Surplus Problems in the Philadelphia Milk Shed 

creasing with the distance from the market are as large or 
larger, than the loss due to unused receiving stations Even 
then they may continue these more remote stations if 'they 
are m doubt as to the permanency of the shift, for the costs 
of re-establishing transportation lines and acquiring new 
producers may be greater than any short time savings which 
result from a contracted shed. Also, producers located be- 
tween the old and the new boundary lines of the fluid milk 
zone, already equipped for producing milk for fluid use, will 
contmue to produce for this purpose until their equipment is 
worn out The final result, however, will be a price which 
will equalize production to market needs. 

The above description shows only in a simple way what 
occurs when long range variations in production take place, 
the demand remaining constant. To analyze the movement 
more fully we must recall that milk is produced for different 
uses, fluid milk, cream, butter and other dairy products As 
we have observed, the price differential resulting from costs 
increasing as the distance from the market widens requires 
that milk for fluid purposes be produced nearer the market 
than milk for other uses. Beyond the boundaries that price 
sets for this fluid milk zone will be the cream territory, as a 
quantity of milk in the form of cream can be shipped to the 
market more cheaply than an equal volume of fluid milk. As 
butter IS still less bulky than cream, the price will place the 
butter zone beyond that for cream. 

Butter, especially has always been a determining factor in 
making the price of milk within any milk shed; as nearly 
one-half of the annual production of milk is used in butter 
manufacture And the price for milk made into butter must 
be determined by the returns that can be secured for that 
butter in a national market. Data collected in more than one 
primary market show the difiiculty in maintaining the level 
of milk aiid cream prices during a period of declining butter 
values. Only a relatively short period of price disparity is 
necessary before milk begins to flow from butter producing 
channels into fluid milk uses, forcing fluid milk and butter 



Basic-Surplus Problems in the Philadelphia Milk Shed 21 
prices into alignment, although artificial factors may pre- 






R. W. Bartlett of the University of lUinois in his Pamphlet 
L 6, issued in March, 1932, makes a comparison of butter and 
milk prices in the New York market from 1868 to 1931 which 
shows how closely milk prices follow butter values. Sum- 
marized briefly it shows : * 

1 Year When butter was 51c, 3.70% milk was $3.24, giving a ratio 

of 6.4 times one pound of butter for 100 pounds of milk. 
(Ratio obtained by dividing $3.24 toy 51c equals 6.4). 

3 Years When butter was 18.7c, milk was $1.11, with a ratio of 5.9. 

2 Years When ibutter was 61c, milk was $3.505,, with a ratio of 5.7. 

19 Years When butter was 26.6c, milk was $1,412, with the lowest 
ratio of 5.3. 

64 Years When the average price of butter was 31.7c, milk was $1,736, 
with a ratio of 5.5. 



This same milk-butter price relationship can be observed 
m the Philadelphia market. According to Mr. Henry N. 
Woolman, Vice-President of the Supplee-Wills-Jones Milk 
Company, the price scheme in operation there has attempted 
to give due weight to the significance of butter values in de- 
termining fluid milk prices. The plan, he says, aims to in- 
crease the fluid milk price (Basic price) when it is within 46 
cents of the butter value of milk (Surplus price) and to re- 
duce the basic price when it is more than 92 cents above the 

*Bartlett, R. W.: "Price Policies in Organized Milk Markets", Uni- 
versity of Illinois Agricultural Experimental Station, Pamphlet L 6 
Unbana, 111., March, 1932; p. 5. r- . 



(I 



22 Basic-Surplus Problems in the Philadelphia Milk Shed 

butter surplus price.* The following table shows how well 
this plan has worked in operation. 



Date 



Oct. 17, 
July 1, 
Nov. 3, 
Jan. 7, 
Felb. 5, 
Ajpr. 1, 
Sept. 1, 
Oct. 14, 
Feb. 21, 
Aujg. 1, 
Aug. 1, 
Dec. 1, 
May 18, 
Oct. 1, 
May 1, 
Oct. 31, 
Sept. 16, 
Sept. 16, 
Dec. 20, 
Dec. 15, 
Sept. 1, 
Feb. 16, 
July 1, 
Nov. 1, 



1936 

1917 

1917 

1918 

1918 

1918 

1918 

1918 

1919 

1910 

1920X 

1920 

1921 

1922 

1923X 

1923 

1926 

1929X 

1929 

1930 

1931 

1932 

1932 

1932 





Table I. •• 






51.60 Mile Zone Butter 


Difference New York Butter 


100 lbs. 4% 


Milk Surplus 




At Date Price 
Was Changed 


$2.20 


$1.68 


$0.52 


$0.35 


2.72 


1.87 


.85 


.39 


3.10 


2.21 


.89 


.46 


3.78 


2.49 


1.29 


.52 


3.56 


2.40 


1.16 


.50 


3.10 


2.01 


1.09 


.42 


3.38 


2.69 


.69 


.56 


3.81 


2.83 


.98 


.59 


3.38 


2.49 


.89 


.52 


3.61 


2.64 


.97 


.55 


4.07 


2.64 


1.43 


.55 


3.08 


2.64 


.44 


.55 


2.27 


1.53 


.74 


.32 


2.77 


2.21 


.56 


.46 


3.13 


2.01 


1.12 


.42 


2.79 


2.30 


.49 


.48 


3.14 


2.11 


1.03 


.44 


3.39 


2.21 


1.18 


.46 


3.14 


1.97 


1.17 


.41 


2.74 


1.53 


1.21 


.32 


2.41 


1.56 


.85 


.325 


2.07 


1.08 


.99 


.225 


1.93 


.98 


.95 


.20 


1.68 


.77 


.91 


.193 



An analysis of the above table shows that the price for 
fluid milk fluctuated directly with the butter value until 
August 1, 1920. On that date the fluid milk price was raised 
while the butter value remained constant at 55 cents, with 
the result that within four months the basic price had fallen 
to a low er figure than it had been before the August increase, 

*Woolman, H. N.: "Fundamentals in Determininff Milk Price Rela- 
tionships- , Paper presented at the 25th Annual Convention of tol foter 
national Association of Milk Dealers at Detroit, Mich , O^. 18, ml; 

tion*shipsVp"'8*^" ^'^ "^"•^^«°'^als in Determining Milk Price Rela- 



Basic-Surplus Problems in the Philadelphia Milk Shed 23 
butter still remammg at the same price level. The next at- 



3 J. _ 



^amnw^ o^i^ i r» r» i»oq ain or •fVip* 'nnill^ t^wrxrs «*'rC4-'U ^..i. — _, *. _ . .^ 

«,x/AAA^w M>w AAAvy«. K^Miw^AAx^ w*aC axxxaa. pxxoc WILXIUUL ICgitl'U. \AJ DULter 

values was on May 1, 1923, when fluid milk was raised to 
$3.13 although butter was falling in price. Within six months 
the milk price was lower in spite of an increase in the value 
of butter. Again, on September 16, 1929, milk responded to 
a two cent increase in butter price but it could not be held at 
this high figure, continuing to fall steadily as butter values 
declined during the next three years. 

Thus, we see that fluid milk prices vary directly with up- 
ward and downward fluctuations in butter values. With 
respect to long range variations in production, the first reac- 
tion to any favorable change in milk earnings relative to 
other agricultural commodities will be a shift of farmers from 
other products to producing milk for butter uses. The initial 
costs of changing from other types of farming to dairying 
will be less for producing milk for butter than for cream or 
fluid milk uses. Furthermore, under our assumption that 
demand remains constant, the fluid milk and cream markets 
are already supplied fully and any additional production with- 
in these zor^s must be used in making butter or other manu- 
factured dairy products. 

This increased production will find its way into butter, the 
supply will increase relative to demand, and butter prices 
will fall. This price reduction will lower the price for cream, 
else those dairymen outside the cream zone will equip their 
farms for cream production. Likewise, the fluid milk price 
must fall commensurately or cream producers will avert their 
lowered cream price by making the changes necessary to 
realize on the higher fluid milk price. Unless the price drop 
is equal to the added costs of becoming fluid milk producers, 
farmers in the cream belt will be encouraged to enter the 
fluid milk market. Thus, the change in butter prices must 
be reflected throughout the entire dairy industry if zone 
boundaries are to remain intact. Should artificial forces at- 
tempt to hold present cream and fluid milk prices in the face 



m 



:« 



I 



■ 



24 Basic-Surplus Problems in the Philadelphia Milk Shed 

of falling butter values, the whole price structure must break 
down in time. Under such a oc\r\r\Wr\Y> iVio o*.rv«^ «i,«^ ...^n 

.-■^ ^ -.-.»-K*w*w*.* wxAV/ v/x ^cni.1 OllCUL Will 

enlarge through additional producers equipping themselves 
to come into a higher class market. Once in, these dairymen 
will not shift back to butter production until the differential 
covering the additional expenditures for producing cream has 
been removed entirely. Even then they may continue pro- 
duction in the belief or hope that the price change is tempor- 
ary. A Hke result will follow should the fluid milk price re- 
main steady during a period of falling cream values. 

Reversing the order, we can readily see the effects of a 
shift from dairying to other farm production, with increased 
butter prices resulting. Under these circumstances cream 
prices also must rise or in time the cream zone will be con- 
tracted through producers turning to butter production. Like- 
wise, the fluid milk price will increase or dairymen will give 
up producing for the higher class market in favor of cream 
production. Again, butter prices will hold other dairy values 
in line and keep the zones intact, although price changes may 
respond more slowly because of the hesitancy of farmers to 
cease producing for the higher use products. 

Should we start with the demand side, assuming a de- 
cline in the consumption of fluid milk and a constant supply, 
the decrease in fluid milk prices that must f oUow will lower 
the whole price structure. Otherwise, the fluid milk zone 
will contract and producers near its boundaries, with a lower 
differential than those nearer the market, will turn to pro- 
duction for cream uses. The change will be slow because 
these farmers will not shift into the lower use class at any 
price below that which they can secure for fluid milk until 
the additional costs of producing it over cream are entirely 
wiped out. When this equipment is worn out and must be 
replaced the shift will occur, unless they are convinced that 
the situation is only temporary. 

The price relationship between butter and fluid milk may 
work in the opposite direction, the butter price being affected 



I 



Basic-Surplus Problems in the Philadelphia Milk Shed 25 

by large quantities of milk going into fluid uses. A higher 
price for fluid rnilk brought about by increased consumption 
will cause the whole price structure to respond to this price 
increase. If not, the various zones would again change but 
the shifts will not occur as rapidly as the price differentials 
might indicate. Cream producers will hesitate to make the 
additional costs necessary to enter the fluid milk field until 
they are sure the change is a permanent one. However, it 
appears that farmers are less likely to use forethought in 
taking advantage of price gains which may be temporary in 
nature than they are in changing back to a former status to 
avoid losses. 

We have observed the effects of long term shifts in pro- 
duction or consumption in a competitive market. Will short 
time changes or seasonal variations create similar results? 
Here, too, we find some of the same forces at work as in the 
more permanent shifts but with somewhat different results. 
Seasonal variations in sales will cause a close relationship 
between prices, the supplies of each product coming on the 
market, and changes in territorial limits of zones in which 
each product is produced, if we assume that the seasonal 
variation of output and prices of each class of milk products 
is directly proportional to the changes of production and 
prices in all other classes. 

However, it is the supply factor in price that is likely to 
exert the more influence in these short time variations. Con- 
sumption of fluid milk and cream varies relatively little with 
the season but milk production, on the other hand, shows 
large seasonal fluctuation under natural conditions. Under 
these natural conditions it is obvious that the boundaries of 
the various production areas must shift with seasonal varia- 
tions in output as the quantities produced in each zone will 
not exactly equal market requirements for the corresponding 
class of milk throughout the year. This means that in the 
fall months, the season of low production, the fluid milk shed 
will expand in order to take care of market needs and in the 



iflJII 



I 



l«( i 



I 



26 Basic-Surplus Problems in the Philadelphia Milk Shed 

spring months of heavy production it will contract because of 
the larger supply of milk produced nearer the market B"^ 
other supply factors will enter into the situation tJ curtail 
the magnitude of zone alterations. Since it costs more to 
transport milk from beyond the normal fluid milk zone than 
from within, the price will increase in periods of short pro- 
duction, stimulating near-by producers to increase output 
and thereby retarding the enlargement of the fluid milk ter- 
ritory. Likewise, in seasons of excess production the result- 
ant lower price will tend to discourage heavy supplies, es- 
pecially for dairymen near the boundaries of the shed where 
any price cut lessens the differential between fluid milk and 
milk for other uses. Competitive processes, therefore, tend 
to mitigate seasonal expansion and contraction of the various 
milk zones by establishing a price structure which makes it 
profitable for producers in the upper price zones to produce 
milk m conformity with consumption demands. 

Although the effects of seasonal variations in production 
appear to cause similar types of changes as those resulting 
from more permanent production shifts, important distinc- 
tions make the former less drastic in their effect. 

In the first place, these short time variations are more 
easily predictable than the more permanent ones and prepa- 
rations can be made to counteract them; also, their relatively 
short duration makes for less market disturbance. During 
the season of declining production zones will not be expanded 
immediately because dairymen will hesitate to make the ad- 
ditional expenditures necessary to shift into the production 
of a higher use product. As this additional cost is one pri- 
marily of new equipment and improvement of dairies it rep- 
resents a fixed cost rather than an outlay which is variable 
with each unit of milk produced. Considered, therefore, as 
annual costs the price advance must be sufilciently large to 
cover those expenditures for the entire year before they will 
be induced to shift production. In the meantime producers 
nearer the market will have increased output through the 



Basic-Surplus Problems in the Philadelphia Milk Shed 27 

stimulus of the steadily increasing price, and supply and de- 
mand may become equated before it is profitable for the out- 
side dairyman to prepare for the higher class production. 
Only under the circumstance which finds during the short 
production period an available supply of milk in lower class 
territories which meet health and sanitation requirements, or 
where those requirements are the same for all classes, will 
an increase in price due to seasonal variation bring about an 
immediate widening of the fluid milk shed. 

Another fact of significance tending to make less drastic 
shifts into and out of various production classes is the short 
time involved in seasonal variations. Although the lower 
class producer may hesitate to make the additional expendi- 
tures required for a higher class product, once in the new 
zone he is likely to remain. For, the following period of high 
production with its tendency to reduce the size of the fluid 
milk belt is not long enough to completely wipe out the added 
expense of meeting health and sanitation standards. Al- 
though this part of the differential would be lost while supply 
was increasing and zones contracting, appreciable readjust- 
ment would not occur before the period of declining produc- 
tion set in. Therefore, both the enlarging and the contract- 
ing of various zones will not follow as swiftly as the inequali- 
ties in market supply and demand relationships might indi- 
cate at a glance. 

As suggested above, there are many factors operating to 
check seasonal fluctuations in prices for milk products. Per- 
haps the most significant of these is the advantage of pro- 
ducers located near the market. Any shift, whether in pro- 
duction or consumption, is more favorable to them than to 
the more remote dairymen in the shed. Lower transporta- 
tion costs give them an advantage at the outset and they 
can usually meet inspection requirements more economically 
than farmers farther from the market. These gains encour- 
age a more intensive system of herd management which in 
turn tends to make the seasonal difference in cost smaller. 



iilil 



>il 



I 



m 



« 



28 Basic-Surplus Problems in the Philadelphia Milk Shed 

Since economical management requires high production per 
cow at all seasons of the vear. thesp famK^ra aro y^+^p,. .ui. 
to take advantage of any upward price change, and find it 
profitable to increase output in the short period thereby 
holding prices more constant than otherwise would result 
And this tendency operates throughout the zone until sea- 
sonal fluctuations in price are reduced to the point where no 
further adjustment is profitable. At least, production should 
tend to become more uniform the nearer the producer is 
situated to the market. 

Furthermore, during periods of low production distribu- 
tors will find it more economical to pay prices high enough 
to cause the required volume of milk to be produced within 
the same area, rather than having to enlarge their range of 
operations at these low output intervals. In fact, they will 
be willmg to stimulate quantity production by a price in- 
crease equal to the additional transportation costs necessary 
to tap new territory, plus the expense involved in adding 
new producers. 

Finally, the ultimate check to price increase due to sea- 
sonal shortages will be a change in consumer demand Even 
though that demand is relatively inelastic, consumption will 
be curtailed before the high price required to cause a large 
mcrease in the size of the milk shed becomes effective. 

Through lower prices, also, many of the tendencies lead- 
ing to a contraction of the fluid milk shed in seasons of heavv 
production will be checked. As with short production, dairy- 
men near the market are in a better position than those at a 
distance. The price drop accompanying excess supplies will 
take away first the differential necessary for those at the 
zone border to produce profitably, and tend to force them 
into a lower class output. We have noticed that these farm- 
ers near the boundary line will continue to produce milk for 
fluid use until the sanitation requirement differential is en- 
tirely abolished, and perhaps longer. Moreover, it is pos- 



Basic- Surplus Problems in the Philadelphia Milk Shed 29 

sible that these dairymen may be in a better position during 
the season of heavy production than those close to the mai> 
ket. Because of lower feed costs their production expenses 
may be much less as more remote producers usually possess 
large pastures, while dairymen nearer the market, with less 
pasture, may have higher feed costs. The difference in this 
feed item between the distant and near-by producer may be 
more than sufficient to overcome the differential in which 
case dairymen near the market will be forced to reduce out- 
put, or they will find that the low returns on their excess 
milk make their composite prices insufficient for operating 
expenses. Furthermore, the distributor, knowing the cost 
of discontinuing purchases from farmers distant from the 
market, may attempt to keep the price fairly stable, especial- 
ly as he expects to need the supply of these producers during 
seasons of short production. 

The third type of variations, daily fluctuations in sales, 
does not affect our analysis of the price structure in a truly 
competitive market. It is necessary that a larger volume 
of fluid milk be shipped to the market than is consumed be- 
cause of the inability to forecast the amount needed each 
day. This reserve, returned from the route milk wagons, is 
usually converted into manufactured dairy products. That it 
must be directed to lower price uses does not alter the fact 
that it must arrive at the market in fluid form and, therefore, 
must be a part of the supply determining price in the fluid 
milk market. 

Such are the major forces determining the price of milk 
in a competitive milk market. These economic factors cannot 
be disregarded in studying the milk problems of any market, 
but they can be and are modified by artificial infiuences in 
every community. Free competitive conditions cannot exist 
because man is attempting constantly to alter them either in 
his own interest or in the interest of the larger community. 
The changes that have occurred in our economic life have 
created marketing conditions and practices of such a nature 



30 Basic-Surplus Problems in the Philadelphia Milk Shed 

that they need some measure of artificial control. What are 
the obiectives and nature of these man-marl^ niona or^/^ «r>,2^ 
fundamental principles do they involve in their operation? 
These questions must be answered before any attempt can 
be made to estimate the validity of the criticisms of the milk 
control plan in any market. 



>- i,i 



Chapter III. 
MILK PRICE PLANS. 

In the evolution of milk marketing many changes have 
occurred to interfere with the operation of competitive forces 
described in the preceding chapter. In the early days of the 
producer-distributor serving his small group of customers 
with no thought of health ordinances, milk prices were de- 
termined mainly by free competitive processes. The develop- 
ment of modern institutions, such as large urban centers and 
present day transportation facilities, has brought changes in 
the operation of the competitive system. Not the least of 
these institutionalizing forces has been the creation of large 
milk distributing corporations resulting from economies in 
processing and distribution that large scale operations en- 
courage. Yet these large dealers encountered marketing 
problems of greater magnitude than the small producer-dis- 
tributor, due chiefly to the relationship of milk supply to de- 
mand. Whereas the small distributor could adjust supply to 
demand at all seasons of the year without great difficulty, 

these larger buyers, requiring the production of hundreds of 
farmers, found it a more difficult task to make this adjust- 
ment. 

In order to insure a sufficient supply during periods of 
low production these dealers found it necessary to handle 
more milk than could be sold in fluid form at other seasons. 
This surplus necessitated additional handling facilities and 
created the problem of disposing of it in competition with 
manufacturers of dairy products. Thus the large distribu- 
tors assumed the risk of selling this excess supply at what- 
ever prices they could receive for it, sometimes disposing of 
it at a loss. As a result they protected themselves against 
losses by paying farmers prices low enough to insure a net 
profit on total sales. Because of their size and the large 
number of dairymen dependent upon them for a market, the 



32 



Basic-Surplus Problems in the Philadelphia Milk Shed 



bargaining power of the large distributors was enhanced, 
giving them an advantage in trading relations wifh +bp i^ ' 
dividual producer who could rarely afford the loss of his 
market. The producer often found it impossible to secure a 
more advantageous market because of limited transportation 
facilities, and the costs of meeting the regulations of city 
health ordinances precluded competition with large dealers 
by distributing his own milk. Furthermore, these conditions 
tended to reduce unrestricted competition among buyers and 
often caused prices to be influenced more or less by artificial 
manipulations, which not only placed shippers at a further 
disadvantage in price bargainings but proved detrimental to 
the interests of some distributors as well. 

t 

As a result of these marketing conditions, dairymen 
were encouraged to cooperate in efforts to increase their bar- 
gaining power, for as long as farmers remained unorganized 
it was impossible to formulate plans for securing prices for 
their product that free competitive processes warrant. In 
order to free dairy prices from the injurious effects resulting 
from institutionalizing forces, producer cooperatives realized 
that measures for restoring more unrestricted competition 
were essential. To be effective such plans should enable 
producers to secure from distributors prices for milk based 
upon its value in different uses, as determined by truly com- 
petitive processes. As seasonal variation in production, 
causing excess supplies at one season and a shortage at an- 
other period, was largely responsible for low prices any plan 
for encouraging uniform output would increase returns to 
dairymen. Although efforts can be made to effect seasonal 
coordination of production to consumption through raising 
and lowering prices, any plan that would result in a distribu- 
tion of payments, based upon each producer's contribution 
of value proportionate to the total value of the milk sold 
would be more likely to encourage uniform and economic pro- 
duction and marketing of milk. 

Building up workable price plans has been slow and 



I 



Basic-Surplus Problems in the Philadelphia Milk Shed 33 

difficult, largely due to the nature of the product itself. Aljlk 
in fluid form is perhaps the most highly perishable com- 
modity used in large quantities. The greater the perishability 
of a product, the more variations exist as to quality and 
marketing methods, and the greater is the difficulty encount- 
ered in putting organized price plans into effect. 

It should be clear that in the absence of any artificial 
price plan all fluid milk entering the market sells at the same 
price regardless of the use made of it. This single price for 
all milk irrespective of the use is generally called a Flat 
Price. Milk used in fluid form, separated for cream, or con- 
verted into manufactured products at the market is paid for 
at a flat price. This price may be an average one, based upon 
values of milk as utilized in the market but there is no dis- 
tinction made as to what percentage of milk is used in each 
form. The distributor buys the milk at a given price and 
sells all that he can for fluid use, manufacturing or disposing 
of the remainder as profitably as possible. This usually 
means that the buyer must integrate by-product enterprises, 
butter, cheese, etc., with his major business of distributing 
fluid milk and sell these by-products in competition with 
manufacturers who specialize in the production of these com- 
modities. Not being specialized in the manufacture of these 
by-products, the fluid milk dealer runs the risk of losing on 
his sales because of this competition with other manufactur- 
ers having lower costs. Since he takes whatever risk is in- 
volved in having to dispose of this part of the milk supply at 
a price lower than the fluid milk price, his flat price is estab- 
lished so low that the average price of all the milk sold in all 
forms will compensate him for any risk involved. As it is 
not generally known by the dairymen just how much is neces- 
sary to compensate the distributor for the risk taken, it is 
possible for the latter to take a larger proportion of the price 
than is justified. 

This marketing practice not only fails to protect pro- 
ducers as it gives them no assurance that they will receive 



Pfj 

iii 



34 BasiC'Surplm Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 35 



the higher price for all their milk going into fluid uses, but it 






xiic uaoLiiuutur 



using a relatively large proportion of his product in lower 
class forms objects to paying the same flat price as the deal- 
er who sells a greater portion of his milk for fluid consump- 
tion, because a larger volume of the former's milk has a mar- 
ket value below the average on which the flat price is based. 

Therefore, producers championed any control plan that 
would guarantee them the same differential on all their milk 
sold in each class as they would receive imder free competi- 
tive processes, and those distributors using a relatively large 
proportion of their milk in lower price products favored any 
plan that would not require them to pay a higher differential 
than truly competitive conditions warranted. The result was 
the adoption in many markets of the Classification or Use 
Plan of marketing milk. As the name suggests, it is a 
method for selling milk to distributors according to the use 
to which it is put. The milk dealers show the producers the 
exact quantities sold for the different uses, fluid milk, cream, 
etc., and a basis for payment according to the various 
amounts sold in each use is arranged between the cooperative 
and the distributors. Milk sold in fluid form is usually 
designated as Qass I milk and all excess milk as Class II, al- 
though a cream class is sometimes inserted between the two 
making the excess milk Class III. 

The plan is based on the theory that milk in fluid form 
is worth a higher price than in other forms and therefore 
should command a premium over the price of butter and 
other manufactured dairy products. From our previous 
analysis the economic justification for that assumption was 
made clear. The differential in transportation and other 
costs enlarging with the increase in distance from the market 
is the basis of this higher fluid milk price. Added to it is the 
further cost of higher health and sanitation requirements for 
fluid milk which increases the spread, especially when sea- 
sonal variation in production and sales is taken into accoimt. 



For, the uncertainty of a year-the-round market for all the 
miiK iiiaiv.e» uic ttuciiLiuiia.1 iiAtju uusls ui iiieetiiig these inspec- 
tion standards a greater factor in the price differential than 
otherwise would be. 

Since these factors create a differential between fluid 
milk prices and those of other dairy products, the classifica- 
tion price plan attempts to release the higher fluid milk 
values from the depressing effects of its former close rela- 
tionship to excess milk, which goes into lower price uses. This 
attempt to guarantee the value of all milk as determined by 
the use made of it is the most significant feature of the Use 
plan, but it does not control one of the fundamental factors 
causing instability in milk marketing. This factor is the 
seasonal variation in production, not closely associated with 
demand, which results in excess production at certain periods 
and a shortage of fluid milk at other seasons. As fluid milk 
is highly perishable and bulky and must be sold quickly after 
it reaches the market or processed into manufactured 
products, any adjustment of supply and demand of the fluid 
commodity through storage is impossible. 

Our analysis has shown the effects of this seasonal vari- 
ation on price and how competitive processes tend to lessen 
seasonal expansion and contraction of the various zones by 
establishing a price structure which makes it profitable for 
producers in the higher price zones to produce milk in con- 
formity with consumption demands. Institutional forces, 
however, have interfered with this operation in ways that the 
Use plan can not remedy effectively. In the first place, dis- 
tributors finding it necessary to enlarge the fluid milk zone in 
periods of low production may continue to operate in this en- 
larged territory throughout the year. It may be more econom- 
ical for them to hold these additional producers permanent- 
ly than to add new shippers and re-establish transportation 
lines at intervals of low supply. Or, the distributors may 
use the enlarged shed as a weapon in bargaining, citing the 
heavy supply as a reason for lower prices, and lower prices 



36 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic- Surplus Problems in the Philadelphia Milk Shed 37 



will eventually lower production, which may cause another 
expansion of the fluid milk belt when the season of low mif . 
put arrives. 

Again, we have seen that the distributor assumes the 
task of disposing of all excess milk in the form of by-products 
and that he runs the risk of losing on his sales because he 
must compete with manufacturers who may have lower costs 
because they specialize in the manufacture of these com- 
modities. As the dealer takes whatever risk is involved in 
having to dispose of this part of the milk supply at a price 
lower than the fluid milk price, the larger the excess over 
fluid uses the lower may be the composite price received by 
the dairyman. Although the Use plan will show the in- 
dividual producer the percentage of his milk consumed in 
fluid form in any month, it is a rather weak indicator of the 
value of his milk for the following month. 

This practical difficulty of securing a close adjustment 
of output to demand for fluid milk was the stimulus for in- 
augurating some plan whereby the proceeds from the sale of 
milk might be distributed in a manner that would tend to 
discourage seasonal variations in production. This plan 
would have to create an incentive for evening up production 
which, we have observed, is the tendency anyway under un- 
restricted competition when the market has high inspection 
requirements for fluid milk. 

There is little doubt that dairymen near the market 
formed the nucleus for early cooperatives fostering price 
schemes that benefit the producer who evens up his produc- 
tion. We explained previously that the near-by milk farmer 
has an economic advantage because of transportation and 
other costs increasing with the distance from the market. 
He has the further advantage of making contacts with dis- 
tributors more easily and gaining information on the market 
situation. GeneraUy speaking, he has usually adjusted his 
production to market demands, having less seasonal varia- 
tion in supply than the more remote farmer. For this rea- 



son, the small dealer, especially, can afford to pay this close- 

cost him less in the end. Moreover, dairies that have been 
producing milk for the fluid market for years in most cases 
show far less seasonal fluctuation than those who have been 
shipping for a shorter period. Thus, as the distance from the 
market widens, seasonal variation tends to increase, for the 
more distant producer was probably selling his output for 
lower class dairy products a short time before. All of these 
factors enable the shipper near the market to secure a rela- 
tively higher net price than the farmer farther out. 

In spite of their advantage, it can readily be seen that in 
seasons of heavy production these dairymen will have their 
earnings forced down by uneven producers who market a 
large proportion of their product during this season when 
much milk is turned into low price products. It was these 
former shippers, usually close to the market and receiving 
the highest differential under normal supply and demand 
conditions, who saw their proflts threatened by the uneven 
production of those dairymen located farther from market. 
These near-by producers had attempted, in many cases, to 
keep the fluid milk zone from enlarging by supplying a uni- 
form production throughout the year, because they received 
a larger share of the high price in periods of low production 
and a higher composite price in the season of heavy produc- 
tion. They were the first to argue that dairymen attempting 
to stabilize the market through evened production should be 
protected against price declines caused by farmers who 
flooded the market during the season of excess output. 

The plan for controlling this seasonal variation in pro- 
duction is the Base-Surplus or Base-Rating Plan. Hereafter, 
in this chapter we shall call it the base-rating plan as the 
term "surplus'* gives the implication that there is more milk 
than the market needs, which is not true; it really means 
that there is more milk than the market needs in fluid form 
and that the so-called surplus is the excess supply over fluid 



38 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 39 



consumption which is used in lower price products. 



A? 



ine oasse-raLing plan is one aisiriDuung to proaucers the 
proceeds from the sale of milk to buyers at various prices 
according to the market value of the milk contributed by 
each producer. The dairymen are paid in a manner that re- 
wards the shipper who supplies milk throughout the year in 
close conformance to seasonal market needs, while the farm- 
er who produces a volume that varies greatly from month to 
month receives a relatively smaller portion of the fluid milk 
market. Part of this reward for even production results 
from the minimizing of the distributors' risk from carrying 
excess milk. The more even the supply, the less excess 
milk distributors will have to dispose of, sometimes at a loss 
which is subtracted from the fluid milk price. Or, stated an- 
other way, the dealers' savings through more efficient opera- 
tion, because of a more uniform supply, can be passed back to 
the producer in the form of a higher price for Class I milk. 
Furthermore, with the price of milk in each use the same to 
every distributor in the market, milk can be transferred 
from one buyer to another so that it can be put to the most 
profitable use. 

Under the base-rating plan each producer's share of the 
fluid milk market is determined in a manner which attempts 
to relate his production to the Class I needs of the market. 
Although there are various ways of deciding what this share 
or base, as it is called, shall be, the most common method of 
determining original bases has been to take the the average 
production of each dairyman for the fall months (usually 
October, November and December) , as his base for the fol- 
lowing year because this period is under normal conditions 
the time of least excess, or greatest shortage, in the market. 
Since market demand for fluid milk is relatively uniform, this 
method is justified on the grounds that minimum production 
for fluid uses should be measured by total output during the 
period of least excess and that additional supplies in any 
other period must necessarily be considered as excess. 



Other methods of determining basics have been used in 
various markets. The Connecticut plan permitted each pro- 
ducer to specify the quantity of milk that should constitute 
his basic volume for the ensuing year with penalties for pro- 
duction over or under this amount. Another idea followed 
in some markets is the granting to each dairyman as his base 
amount the volume included within a certain percentage 
range from his average monthly production for the year. 
None of these methods, or any other, can exactly equate 
production and market demand but each attempts to reward 
the producer according to the value of his product on the 
market. 

The merits of any price plan should be determined by its 
degree of success in maintaining the most economical supply 
for the market and, at the same time, in creating the mini- 
mum of discontent among the various groups concerned, 
producers, distributors, and consumers. The principles of 
determining prices according to the different values of milk 
in different uses and of prorating the fluid milk market 
among producers according to their year round ability to 
supply that market are in themselves fundamentally sound. 
The use plan and the base-rating plan are more likely to work 
in practice than any other control programs that have been 
tried. One alternative, the attempt at exchanging fluid milk 
and cream between markets drawing their supplies from 
areas in which the seasonality of production differs has 
usually failed because of the inability to prevent those sup- 
plies continuing when they are no longer needed. There is 
also the tendency for all markets to be short at the same 
time. Another method of maintaining supply is having an 
area, usually near the fluid milk zone border, equipped for 
the production of fluid milk but taking the milk in this form 
only when needed. But this practice becomes less economical 
as higher sanitation requirements or other fixed costs are 
added to the production of milk for fluid uses, and the dif- 
ficulty of keeping this supply from the market at other than 



40 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 41 



the short season is great. Although certain circumstances, 
such as the character of health and sanitation resrulationa. 
may cause any one or a combination of these various methods 
to be the most economical, the use plan combined with the 
base-rating plan is usually more satisfactory than the others. 

In turning to a consideration of these two plans in oper- 
ation, we find great variety in methods of administering 
them. The base-rating scheme, especially, has been modi- 
fied in some markets to meet their own peculiar conditions 
and in many markets the two plans have been combined in 
one form or another. We have noticed that the main object 
of the base-rating plan is minimizing market instability 
caused by seasonal variations in production. Before con- 
sidering these seasonal changes, let us ask what effect either 
plan may have on the more permanent variations within the 
milk industry. 

It appears that the use plan has no significant influence 
on long term changes. The factors creating these long 
time shifts in production will function whether milk is sold 
at a flat price or according to use. If the opportunity costs 
of producing milk become relatively more favorable the 
classiflcation price plan will not discourage a shift to the 
upper class supply because every producer will receive his 
proportionate share of the fluid milk market as under a flat 
price. Likewise, a more permanent shift out of milk pro- 
duction will not be retarded as the use scheme cannot pre- 
vent a fall in price due to continued excess production. As the 
amount of fluid milk entering the market increases, the per- 
centage going into Class I will decrease until the point is 
reached where it will be more profitable for dairymen to shift 
to production for other uses. 

The base-rating plan, on the other hand, probably has an 
indirect influence on these more permanent shifts into and 
out of production. On account of his base the fluid milk pro- 
ducer has a sort of vested interest in the Qass I market 
which may have some effects on his reaction to price changes. 



A shift out of production may be retarded by this hold on the 

morlrpf Qiinnlv TTn(i<P^l^ orHinay^r /»irmnna+Qnnoa f>>p /^oir^r, 

man may sell part of his herd in a period of falling prices, 
figuring that he can return to his present production volume 
when opportimity costs become more favorable. Yet, realiz- 
ing the difficulty of regaining his base imder the control plan 
and uncertain as to the length of the falling price period, he 
may keep his herd intact, protecting his base, with the hope 
that a more favorable market will soon return. 

Again, a period of relatively increasing prices may affect 
the shift into production for fluid use. Bases are often de- 
termined from long time production records, sometimes ex- 
tending over several years, making it easier for the producer 
already in the market to increase his basic than for the new 
producer to establish one. This practice enables the old 
shipper to receive a larger share of the gain from a long 
range price rise and may cause him to increase rapidly his 
herd at the same time that others are entering the market 
for the first time. This same factor may retard the entrance 
into the market of the nev/ producer if the fiuid milk price is 
such that his composite price will not equal his present re- 
turns for a lower use product under present production 
methods. In other words, the additional costs of shifting 
high output to the base forming period may more than offset 
the gain to be received under the prevailing method of es- 
tablishing basics, considering his present seasonal variation 
in production. 

The effect of the base-rating plan on the more perman- 
ent changes in the milk industry may be, therefore, un- 
economical in so far as it retards shifts out of production for 
the fiuid milk market and further repressing the price on the 
one hand, and, on the other hand, as it increases the price by 
delaying the entrance of new producers into the market when 
the shift into production takes place. 

Regarding daily variation in sales these artificial price 
schemes have no effect upon supply and demand factors. 



42 Basic-Surplus Problems in the Philadelphia Milk Shed 
Thiis necessary market reserve is distributed among pro- 



portion of their product. Its only influence is to raise the 
price of the basic quantity or Class I milk to a point where 
the composite price for all milk required to be shipped to the 
market in fluid form equals the price for fluid milk shipped 
in under free competitive processes. The only way that pro- 
ducers can free the Class I price from the effects of this 
daily operating excess is for them to service distributors in 
accordance with their needs, which would relieve the dealers 
from any burden with respect to their supply of milk and 
take care of the excess. To do this the producers' market- 
ing association must control all the milk that comes on the 
market, a rare occurrence in any market. Otherwise dis- 
tributors cooperating with the association might be placed at 
a disadvantage in competition with buyers securing their 
supplies elsewhere and the plan would break down, imless the 
association's price for assuming this added risk of servicing 
dealers is lower than the distributors' costs of buying outside 
the cooperative and disposing of the normal reserve them- 
selves. This is doubtful considering the present organization 
of the dairy industry in most markets. 

Another danger in producers servicing distributors re- 
sults from the weak bargaining position in which the buyers 
are placed by this operation. Having complete control over 
the supply, the producers' group may attempt to force deal- 
ers in price matters by establishing an artificial price level for 
milk. It is true that artificial price levels have been main- 
tained for periods through the operation of control schemes 
as indicated by Table I * which lists Class I prices in the 
Philadelphia market under the base-surplus plan. But these 
periods were of short duration and followed in each instance 
by a sharp drop in price, and it is doubtful if any artificially 
high price level could be maintained for long. At least dis- 



*p. 22. 



Basic-Surplus Problems in the Philadelphia Milk Shed 43 
tributors would make every effort to avoid these artificial 

piiuco wjr vit vv/xv/pxAA^ ctxxvA ACt&pixxg v^pfcii ixcTw ouuiccra \JL supuiy, 

thereby increasing the size of the milk shed with the con- 
sequent threat to the whole price structure. Only through 
complete control over supplies and the maintenance of a price 
that competitive processes warranted could producers service 
distributors effectively, and these conditions would be affect- 
ed by the existing plants established by distributors to handle 
excess supplies. 

Another method of approaching this daily reserve prob- 
lem is through measures which attempt to force distributors 
to keep these reserves at a minimum. Artificial price plans 
cannot accomplish this but it has been tried through laws 
granting producers' associations the right to audit the ac- 
counts of distributors and to require accurate reports on 
supply and on sales according to uses. However, to date, at- 
tempts along this line have not been satisfactory because of 
the difficulty of securing fully reliable reports from distribu- 
tors even when disinterested parties inspect their records. 
Yet, it is doubtless true that buyers in some markets have 
used this reserve milk at times to beat down the prices dairy- 
men receive for their Class I milk. This can be done be- 
cause, in most markets, the producers' organization would 
find it very difficult to combat excessive reserves through pro- 
cessing even a small quantity of the supply; and even if it did 
succeed in turning it into manufactured products the effect 
of this shift upon those dairy products would be to lower 
their price, thereby tending to check the shift. However, if 
a more stable equalibrium would result from producer con- 
trol of any part of their excess production it would be re- 
flected in a higher fluid milk price, which would offset any 
drop in the price of manufactured dairy commodities. Any 
plan that can be devised to free fluid milk prices from other 
than a normal relationship to excess prices will benefit the 
producer. 

The base-rating plan may be administered in such a man- 



I 1 . . 



t « 

c > 






Hill 



c 



« ff * 



# ' « 



4 



44 Basic-Surplus Problems in the Philadelphia Milk Shed 

ner as to minimize the disadvantage caused by distance from 
fb<^ Tviarkpt Tf thrniiffh his base each producer is allotted a 
definite portion of the fluid milk market, regardless of the 
economies which give the near-by dairyman a price differ- 
ential over the more remote shipper, such actions will pre- 
vent a contraction of the Class I zone when distance differ- 
entials are most pronounced. In so far as the plan gives a 
premium for evening up production the near-by producers' 
disadvantage from the effects of excess supplies may be re- 
moved, but his ease of making contact with distributors may 
still enable him to make a more profitable bargain than par- 
ticipation in a pool with distant producers. Thus, the pro- 
ducers' association experiences the difficulty of trying to give 
equal consideration to all shippers without causing near-by 
dairymen to become dissatisfied with a plan that does not 
compensate them for their natural advantages. In fact, the 
adoption of this feature in some base-rating plans has per- 
haps caused more dissatisfaction with, protest against, and 
evasion of these plans than any other factor. 

This distance factor may have another effect on the 
practical workings of the base-rating plan. Not only does 
the relatively lower differential provide less incentive for 
farmers to produce evenly as their distance from the mar- 
ket increases, but also the method of computing transporta- 
tion charges on the different classes of milk may discourage 
even production. Transportation costs, we know, enter into 
supply-costs and under the plan these are placed mainly on 

the basic quantity of milk, for these costs are subtracted 
from the basic price in each freight zone, while the same 
excess price prevails in all zones. Therefore, the difference 
between basic and excess milk prices is less for dairymen at 
the outer edge of the zone than for those nearer the market, 
making the excess price a higher percentage of the basic 
price for these distant shippers than for near-by milk farm- 
ers. Lininger illustrates how this feature works to stimulate 



Basic-Surplus Problems in the Philadelphia Milk Shed 45 
close to the market producers to increase their basic amounts 

"In June, 1926, a producer In the 41 to 50 mile zone, who was pro- 
ducing no surplus and seUing 10,000 libs, of milk, would have received 
$214. If he had produced 4000 libs, of ''basic' and 6000 IJbs. of surplus, 
he would have received only $170.20, a difference of $43.50, or 20.5 per 
cent redluction. With sianilar changes in the basic amounts, however, 
the difference would have been only $28.20, or only 15.0 iper cent reduc- 
tion for the producer in the 291 to 300 mile zone. In order to have a 
deduction of but 15 per cent the producer in the 41 to 50 mile zone 
would have to have a basic of approximately 5000 libs., instead of 4000 
lbs." 

Artificial price plans, which tend to separate somewhat 
the otherwise close relationship between fluid milk and milk 
going into lower class uses, sometimes lead producers' asso- 
ciations to believe that prices for Class I milk are freer from 
economic laws than formerly. This belief has often brought 
about unstable marketing conditions by encouraging associa- 
tion officers to attempt to maintain an artificially high price 
for milk going into fluid uses. The result is often greater in- 
stability. If fluid milk prices are too high during the season 
of greatest supply, price cutting by unorganized competitor 
dealers results, bringing down the price to organized pro- 
ducers. The ability of the price-cutter to operate depends 
upon the size of the spread between Class I and the com- 
posite price. As the margin between Class I and the net 
composite price is determined primarily by the difference be- 
tween Class I fluid price and Class II excess price, the greater 
the difference the higher the spread, which makes price cut- 
ting possible by new and unorganized distributors. This 
results in a lowered fluid price but not before increased sup- 
plies have come on the market or the organized producers 
have had their bargaining power weakened through the de- 
sertion of members. Furthermore, these price-cutters seldom 

*Lininger, F. F. and Weaver, F. P.: **How to Adjust Milk Production 
to the Philadelphia Marketing Plan", Pa. State College Agricultural 
Circular 123, March, 1929; P. 7. 



46 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 47 



i\ 



m 



:il 



carry their proportionate share of the excess fluid milk and 

DV selling mure cii 'Lncii cjuppnco <xo v/ictoo x nxxxxv cxxoj cixc 

able to cut the price still lower. A high fluid milk price 
during the season of greatest supply also encourages a great- 
er production at that season and thus defeats the very aim 
that these price plans set out to achieve, a more even sea- 
sonal production. 

To prevent the breakdown of their artificially high price 
structure, some markets have attempted to control supply in 
a manner that will prevent price-cutting. The most common 
method used is the exclusion of outside producers through 
rather drastic health and sanitation requirements. The re- 
sult is the expansion of production by dairymen within the 
closed zone, stimulated by the high price. Even though the 
boundaries of the zone are arbitrarily fixed by such regula- 
tions, the tendency is for producers nearest the market to 
secure most of the gain resulting from the high price until 
dairymen at the edge of the belt receive no higher price than 
they would without the restriction on the zone. And, even 
when the attempt is made to control production on individual 
farms through a rating plan providing for a closed base, 
producers close to the market can gain a disproportionate 
share of this high price by distributing their own milk. In 
any case, it is difficult for the producers' cooperative to main- 
tain for long this monopoly price without creating discontent 
among the more distant producers. 

Another method of price adjustment attempted in some 
markets is a low cream price permitting dealers large 
margins on cream sales in the belief that producers will be 
more than compensated through increased Class I sales. As 
consumer interest is centered mainly on Class I price, this 
device gives the appearance that consumers are paying a 
reasonable price for fluid milk judged by competitive stand- 
ards, while the nature and various classes of cream make it 
difficult to determine what the distributors' margins on 
cream should be. Under restricted competitive processes 



high margins on cream sales will enable dealers to lower 
their margin on fluid milk sales and consumption of Class I 
milk will increase, since consumers will purchase milk in- 
stead of cream. But the result of this manipulation is to 
lower total consumption while enlarging the zone of fluid 
milk production. In the end it will reduce the total returns 
to dairymen for all classes of milk, unless market cream re- 
quirements are being supplied from sources outside the milk 
shed. 

Our analysis has shown that any artificial price, whether 
too high or too low, will produce market instability after a 
time. Since the quantity of milk produced responds rather 
quickly and markedly to changes in the relative price of milk, 
while demand is only slightly affected by moderate changes 
in price, a price either too low or too high may cause produc- 
tion to adjust itself to the new price level long before what is 
taking place is definitely realized. If the price is too high the 
most immediate response will be the bringing of new terri- 
tory into the milk shed, which will result in time in an excess 
over the volume required for consumption in fluid form with 
price-cutting, a widening of the fluid milk zone, and general 
instability, which must finally result in a lower price. If the 
price is too low, production will soon fall off until it is not 
sufficient for fluid requirements. In that case, prices must 
be advanced Which will stimulate production again and, if 
consumption is not reduced, other areas must be drawn upon 
to make up the deficit. If distributors continue to receive 
milk from outside areas after the regular producers have 
had time to respond to the price increase, or when output in- 
creases seasonally, the market will be called upon to absorb 
more milk ; in the end this must result in a lower price. 

The higher Class I price is above the price of milk used 
in manufactured dairy products, the greater will be the 
quantity of milk in any milk shed in excess of that needed for 
fluid purposes. Because of this extra supply that might be 
used for fluid consumption, every dairyman within the milk 



48 Basic- Surplus Problems in the Philadelphia Milk Shed 

shed is a potential fluid milk producer. Therefore, the differ- 
ence in prices for Class I milk and milk for manufacturing* 
purposes can only be a little above what the increased care in 
producing milk for the fluid market costs the producer. If 
the spread between these is wide it is impossible to keep dis- 
tributors from purchasing this excess milk at lower prices 
and underselling their competitors. Milk for cream purposes 
in such an area must also be sold at practically the same 
price as that sold for manufactured products. The average 
selling price which the distributors receive for milk must 
necessarily determine an upper limit on fluid milk prices. 

Often the price of milk is raised although too large a 
quantity is already being received at the market, because 
producers contend that they are not securing the cost of pro- 
duction. Under such circumstances there is no economic 
justification for raising the price merely because the average 
cost of production is high. If there are excess supplies, a 
higher price will produce more instability and value will fall 
even below its former level in time. K prices are to be 
stabilized production must be relatively uniform and a higher 
price in a period of excess output will not bring stability. 

The degree of success of the base-rating plan, when ad- 
ministered so as to attempt to control the supply, depends a 
great deal upon conditions within the particular milk shed. 
If the boundaries of the shed are well defined and production 
is not greatly in excess of fluid milk requirements a reason- 
able control of supply through bases may not be difficult. In 
a shed where large quantities of milk are free from this con- 
trol or where much natural pasture land enables many dairy- 
men to produce more cheaply a varying amount rather than 
a constant volume, the plan is less likely to succeed. There 
is no doubt that a base-rating plan operating with a "closed" 
base system is, in many respects, more difficult to operate 
successfully than the use control measure. The weakness of 
the latter arises from the difficulty of securing adequate and 
reliable reports on Class I sales of milk from all distributors. 



Basic-Surplus Problems in the Philadelphia Milk Shed 49 

On the other hand, the use plan is inherently more self-ad- 
iiiatine and reauires If^aa maninnlsitinn fVion o Koqp-vofi*>»> 

scheme which attempts through artificial means to prevent 
distributors from obtaining large quantities of excess milk. 
For that very reason it results in higher prices to farmers 
than the use plan, if it can be operated successfully. 

A criticism of the base-rating plan may arise from the 
fact that the distributors' excess over fluid sales differs from 
the producers* excess over basic volumes, since buyers do not 
pay each producer prices corresponding to the potential 
values of milk based upon its uses. Rather, the dealers as- 
sume the risk that basic purchases may exceed Class I sales 
while they receive whatever benefit may accrue from using 
excess milk for fluid purposes. If one portion of a buyers' 
producers ship excess milk at one season and less than their 
basics at another period, while a second group of dairymen 
are reversing this order, the distributor may benefit through 
using some lower price milk as Class I. For this arrangement 
may work so that the total basic purchases of the dealer will 
always be less than total fluid sales while some producers will 
be shipping excess milk at every season. At least, there is a 
tendency for the dealer carrjang a high excess of fluid milk 
to gain an advantage over the low excess distributor, as the 
former will be more likely to gain from using this milk for 
fluid purposes while the latter may be forced to pay higher 
prices for fluid milk in times of shortage. However, it is 
probable that gains and losses will approximately equalize 
each other, if bases are determined on the basis of average 
yearly sales. 

As the base-rating plan usually exacts no penalty for 
production under the basic quantity it may fail to eliminate 
seasonal variations in the end. The producer may try to 
make his basic period the time of peak production with the 
result that he may establish a quota in excess of the average 
volume he can, or expects to, produce throughout the year. 
If the majority of dairymen adopt this practice the result 



50 Basic-Surplus Problems in the Philadelphia Milk Shed 

may be simply to shift the period of excess output from one 
season to another. Of course, this can be averted through 
various methods of determining yearly bases or by the re- 
duction of basics if the producer fails to deliver a volume of 
milk at least approximately equal to his quota. 

The successful operation of the base-rating plan is in 
direct proportion to the percentage of total market supply 
controlled by it. The higher the quantity of milk controlled, 
the more successful the price plan, while complete control 
over total supplies permits a price that insures the full value 
warranted by competitive conditions, but it also creates the 
mcentive to establish the most arbitrary price level. It is 
obvious that the greater the quantity of milk in the market 
free from price regulations, the greater is the opportunity 
for price-cutting which is the real threat to the maintenance 
of any price scheme. 

As cooperative associations fostering these artificial 
price plans have never had complete control of the supply in 
any market, the use of artificial price levels as a means of 
controlling production has decided limitations. The mainte- 
nance of any such scheme has required that it be operated in 
such a fashion that it will encourage an increase in member- 
ship in order to bring a larger proportion of the total supply 
under the contract terms designated by the plan. This very 
fact makes it extremely difficult for any association to exer- 
cise very marked control over the total volume of the milk 
that it handles. 

With respect to the base-rating plan, this limited control 
over supply precludes the use of the device as a supply re- 
strictive measure, since it is obviously not to the best in- 
terests of association members to restrict their output while 
more or less of the supply is contributed by non-members 
and is not under their control. This circumstance also places 
lunitations on the use of fixed bases for controlling seasonal 
variations. In any shed there are some association members 



Basic-Surplus Problems in the Philadelphia Milk Shed 51 
so situated that they are able to expand production profit- 

tation measures. To adopt such a policy results in dissatis- 
faction on the part of these members. Since cooperative as- 
sociations must necessarily allow resignations, at least at 
certain specified intervals, such procedure is likely to result 
in the loss of membership and, therefore, in the volume con- 
trolled. Moreover, as the bargaining strength of any co- 
operative depends chiefly on its size, the association is com- 
pelled to maintain its position, if not to better it, by gaining 
new members. This means that its restriction program can- 
not be so drastic as to discourage membership, and it also 
means an increase in the volume that must be taken care of 
through the basic allotment plan. 

This problem of increasing the membership and, at the 
same time, satisfying old members has been a thorny one to 
associations, especially when consumption remains fairly 
constant or is decreasing. It means, of course, the distribut- 
ing of the total basic quantity among a larger number of 
producers with the resultant decrease in the individual basics 
of old producers. Due to the pressure of those already in 
control, the tendency is usually to make it difficult for new 
producers to gain at once a share of the fluid milk market 
proportionate to their annual volumes. This is done through 
various methods of determining the basics of new members, 
often by giving them a very low percentage of the amount 
produced as their basic quantities. The degree to which this 
program can be carried out successfully depends on market 
conditions. Unless the association controls a very high per- 
centage of the total market supply there is grave danger of 
these new or non-member producers breaking the price 
level by selling their milk for a lower price. 

These illustrations show how difficult it is to use the 
base-rating plan to restrict total market supplies or even to 
eliminate seasonal variations in production, since the bar- 
gaining power of cooperatives depends on factors that tend 



m 



52 Basic-Surplus Problems in the Philadelphia Milk Shed 



Chapter IV. 



to increase rather than lower the total volume of milk at- 
tracted to the market* 

The foregoing discussion leads us to conclude that the 
principles to be followed in establishing the price for fluid 
milk in any market must follow economic laws. This does 
not mean, however, that artificial factors are insignificant. 
Although supply and demand forces must determine milk 
prices in the long run, there are many influences which help 
to determine how quickly the price will adjust itself to these 
forces. Not only must the general price level of all com- 
modities, the level of milk prices as compared with costs, 
and the volume of excess production over that consumed in 
fluid form be considered in establishing a price for Qass I 
milk, but due regard must be given to such man-made fac- 
tors as sanitation restrictions, customs of the trade, and types 
of buying plans. Every one of these artificial forces aids or 
hinders the operation of fundamental economic principles. If 
these man-made tools are used in accordance with economic 
laws, prices may be determined in a fashion that will benefit 
the producer, but attempts to use them to further more and 
more monopolistic control are likely to work against the in- 
terests of the dairyman in the long run. Because of the 
intricate and delicate manner in which economic principles 
and artificial forces in marketing are interwoven, the success 
or failure of any control plan must be judged by its results in 
operation and we shall consider the Philadelphia Basic- 
Surplus plan by noting what its accomplishments have been. 



THE DEVELOPMENT AND OPERATION OF THE 



P-WTT A TMTT t>TJT A T>T A TVT 



The present plan of controlling milk production in the 
Philadelphia milk shed is the continuation of an experiment 
which was initiated more than fifteen years ago. Because 
of the activities of our federal government along this line we 
hear a great deal today about planned production, but among 
the first plans for controlling the output of an agricultural 
commodity were those set up in the milk industry immedi- 
ately after the World War when Baltimore and Philadelphia 
cooperatives inaugurated schemes for controlling seasonal 
variations in milk production. 

The desire to secure the full differentials for their milk, 
as used in the various classes, that unrestricted competitive 
processes warrant was the chief incentive for the creation of 
the Philadelphia Basic-Surplus Plan, which was the outcome 
of the formation of the Inter-State Milk Producers Associa- 
tion within the Philadelphia milk shed, for without some 
organization of milk producers no practical control plan can 
be adopted. Such unstable marketing conditions as having 
milk refused or returned by distributors at certain periods, 
uncertain milk checks, and complete ignorance as to the 
value of the milk shipped until payment for it was made, 
were additional factors stimulating the creation of the pro- 
ducers* organization. 

It is often difficult to pick out any one factor as the im- 
mediate cause of a new movement, or of a sudden change or 
of a reform. Such a practice is dangerous because most of 
these movements are developments resulting from many 
factors which finally culminate in a definite plan of action. 
To give any one reason as the principal explanation for the 
Philadelphia cooperative coming into being invites criticism 
but the Tri-State Milk Commission appointed jointly by the 
governors of Pennsylvania, Delaware, and Maryland in 1916 
may be considered as a significant factor in its formation. 



54 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 55 



This investigating committee was the immediate outcome of 
a Dublic protest asrainst increasing* the retail nrice of milk 
from eight to nine cents in the Philadelphia market. When 
later in the year, the Commission through its chairman, Dr. 
Clyde L. King, presented its report it included this state- 
ment: 

'^Dut the real solution of the surplus problem is to get rid 
of it entirely iby maMng- production more .uniform throuighout 
the year iby seeing that a larger proportion of cows freshen in 
and around August, Sejptemlber and Octolber. To aid in this 
the dairymen must receive a much higher price relatively in 
October, Novemlber and Decemlber than in May, Jtme and July. 
This same end can Ibe accomplished by contracts paying to the 
dairymen a steady price throughout tibe year for that amoimt 
of milk delivered during the season of scarcity." * 

The above analysis caused many dairy farmers and some 
milk distributors to realize that a plan could be formulated 
to overcome the most distressing element of instability in 
milk marketing, namely, large surpluses caused by seasonal 
variations in production. The practice of paying a high 
price in winter when milk was scarce and a low price when 
cows were turned out to pasture had failed to bring about a 
uniform flow of milk. Something more was needed and the 
Commission's suggestion that "a steady price throughout 
the year for that amount of milk delivered during the season 
of scarcity" appeared to offer a solution. As we shall see, this 
idea was to become the fundamental principle of the Phila- 
delphia price plan. 

The following year, 1917, the Inter-State Milk Producers 
Association was incorporated in the State of Delaware as a 
dairymen's cooperative association. Its certificate of incor- 
poration contains an imposing list of objectives or proposed 
activities, some of which have never been undertaken. The 



association has always rendered the usual services of a dairy 

PAnnpratiVP. suoh as harcyjiininp" uritVi Hiafrihnfnra in ^afob- 

lishing prices, aiding the producer to secure a market, and 
check-testing and weighing of milk. 

The Inter-State draws its membership from producers 
within the Philadelphia milk shed which includes in its ter- 
ritory the southeastern portion of Pennsylvania, all of Dela- 
ware, the southern half of New Jersey, eastern and north 
central Maryland, and the corner section of northeastern 
West Virginia, as indicated on the map below. 

Areas of the Interstate Territory. 




♦'^Report of the Governors' TrinState Milk Commission;" Penna. 
Deipt. of Agriculture Bulletin No. 2S7, Harrislburg. Pa., 1&17; p. 51. 



The association has approximately 22,000 members pro- 
ducing 80 per cent of the milk output within the shed. It 
has a contract with its members giving it exclusive right to 



56 Basic- Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 57 



sell all of the milk produced by them and the stock certifi- 
cate whir»b Pflf»b mATYiHpr hnlrls p«f ahli«ViAS q Hirpw^f r*:*lQ+irkn- 

ship between the association and the members individually. 
Also, groups of stockholders in the various communities may 
form local units for the purpose of discussing and acting 
upon local questions. Such community gproups are called 
"Locals", of which there are 224 at present. Although these 
Locals are unincorporated, having no actual power of them- 
selves, they are important avenues for ascertaining market- 
ing information in the secondary markets of the milk shed. 

Qosely associated with the work of the Inter-State is 
the Philadelphia Inter-State Dairy Council, a non-profit cor- 
poration organized and existing under the laws of the State 
of Pennsylvania and controlled jointly by the producers and 
the distributors. Educational services, quality improvement 
and other measures leading to an increased consumption of 
milk are the principal functions of the Dairy Council. 

Although prices paid producers for their milk, together 
with a steady market and regularly paid milk checks, were 
of primary interest to the dairymen forming the Inter-State 
association in 1917, it was not until 1920 that the suggestion 
of the Tri-State Milk Commission was put into effect. In 
that year the Philadelphia Basic^Surplus Plan was establish- 
ed, past experience having indicated that the individual pro- 
ducer could be induced to change his methods of production 
only if his price would not be reduced by an excess of milk 
that he did not cause. 

Another factor stimulating dairymen and producers to 
create the Philadelphia plan was the failure of price changes 
to cause a more even production in the near-by New York 
milk shed. They had observed that winter production with- 
in the New York shed was relatively lower than within the 
Philadelphia territory, although producers for the New 
York market received a higher price for milk going into fluid 
uses at that season than dairymen in the Philadelphia area 



were paid. In like manner, the New York milk shed had a 

price for fluid milk in the former market. Therefore, since the 
higher New York price did not increase production in winter 
and the lower summer price did not decrease output at that 
season within the New York milk shed, Philadelphia dealers 
and producers reasoned that something more than seasonal 
price changes was necessary to control seasonal production 
within their milk area. 

It should be noted, however, that conditions existing 
within the New York shed, somewhat different from those 
within the Philadelphia zone, explain this disparity between 
these two milk producing territories. Unlike Philadelphia, 
the New York district included several large plants manu- 
facturing condensed and evaporated miik and operating 
principally during the summer months when supplies are 
plentiful. As these manufacturing plants paid a higher than 
butter price for milk not used in fluid form the majority of 
farmers within the New York milk shed, stimulated by the 
relatively high composite price in summer, continued their 
large seasonal production rather than breed their cows for 
higher winter output. In the absence of such an influence 
within their territory Philadelphia dairymen, disturbed by 
the relatively low composite price for their summer milk, 
were anxious to try any plan that promised to encourage a 
more even production the year round. 

The Inter-State and the individual distributors drew up 
the plan and changes in its operation are decided by officers 
of the producers association and the dealers in conference. 
As the Inter-State has no contract with the dealers, smooth 
operation of the plan is dependent on the good faith of the 
interested parties. 

As stated previously, the basic-surplus or base-rating 
plan is one which distributes to producers the proceeds from 
the sale of milk at various prices according to the market 



58 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 59 




value of the milk contributed by each dairyman. In order to 
make such a distribution of producer sales a classification of 
milk according to use is necessary and the Philadelphia plan 
recognized two classes as the outset : Basic or Qass I, repre- 
senting all milk and cream going into fluid uses, and Qass 
II, which included all excess production, or surplus as it was 
called in the plan, going into manufactured products. Later 
a second surplus class was added, commanding a lower price 
than Class II. However, these various classes were not ar- 
ranged on a strictly use basis as determined by distributors' 
sales but the volume of milk allotted to each class was de- 
cided annually by the Inter-State and the dealers in confer- 
ence. 

I Methods of Establishing Basic Quantities. 

The operation of this plan necessarily requires an estab- 
lished Class I quantity for each producer if all are to be re- 
warded for keeping their production within the fluid milk 
needs of the market, as determined by sales in a previous 
period. The original plan, following the idea set forth by the 
report of the Tri-State Commission, used the method of fixed 
basic months for determining individual producer basic 
quantities. Because October, November and December had 
been the months of greatest shortage in the market in the 
past, or the period when the likelihood of any excess had 
been least, the average production of each dairyman during 
these three months determined his basic volume during the 
following nine months. All milk shipped by each producer 
in any month during the succeeding nine in excess of his 
average shipment during those three fall months received 
the lower Class II price, although an additional percentage of 
these shipments received the higher price during the three 
summer months in the early years of the plan. 

The economic justification for this control plan was 
based on data showing that all milk shipped during the fall 
months of previous years had been sold in fluid form. All 



production during these months, therefore, could be con- 
sidered as basic and should receive Class I price-, and the 
average of these three months' production should be sold as 
Class I throughout the year, unless consumption declined 
during this period. All milk in excess of this total basic 
amount would receive the lower Class II price as it would be 
consumed in lower price uses. However, it can be seen that 
this plan only roughly equated basics and Class I sales, as it 
was not based on the actual quantities going into fluid use 
during the fall months. As long as total fall supplies did 
not exceed fluid milk sales during these months, all the milk 
would be basic, yet additional supplies might be needed to 
take care of consumption requirements. And total basic 
quantities might not be sufficient to supply the Class I mar- 
ket in other months of the year. This was true in the early 
years of the plan as additional amounts were paid Class I 
price in July, August and September. 

This method of establishing basics gradually brought 
about a change in production in the milk shed, and especially 
in seasonal output. Although it took two years before any 
real change occurred, the percentage of May and June pro- 
duction was reduced from 128 per cent in 1921-22 to 112 per 
cent in 1924-25, and the output in October, November and 
December was increased from 92 per cent in 1921-22 to 104 
per cent in 1924-25. This plan continued to change the sea- 
sonal shipments so rapidly that the incentives to prepare for 
fall production by paying basic price for 110 per cent of basic 
quantity in July and August and 115 per cent in September 
were removed in 1926. 

The gradual increase in supply during the basic months 
reached the point where it became suflftcient to meet the mar- 
ket demand and, by 1926, threatened to exceed the demand. 
Production had become much more uniform, variation in out- 
put being reduced from a range of 54 per cent in 1921 to a 
range of 23 per cent in 1925. This does not mean necessarily 
that all, or even the majority, of producers had reacted to 



60 Basic-Surplus Problems in the Philadelphia Milk Shed 

the plan in the manner intended. The large Philadelphia 
.....K ^^^y^^ X.1V1UUCO many dmerent types or tarms and farm 
operations and there is little doubt that different groups re- 
acted differently to the plan, but in such a way that they 
complemented each other, resulting in a large degree of uni- 
formity in total monthly production for the market as a 
whole. As no artificial check was placed on raising basic 
quantities during these years any price increase provided 
greater stimulation for higher production on the part of 
shippers near the market than for remote dairymen, whose 
pass I differential was less the more distant their location 
from the market. 

Because of the progressive increase in fall production 
modifications in the period used for establishing basic 
volumes were required to prevent excess supply during the 
basic months. As long as Qass I price was received for all 
milk shipped during the faU months there was no check on 
higher and higher production during these months, other 

th^ ou?.^ '^^^^- ^^ ^ ^^"^"y ""^ Pl^" ^as not a part of 
the Philadelphia scheme, difficulty was encountered when fall 
supplies threatened to exceed consumption for fluid uses 
Under truly competitive conditions a contraction of the milk 
shed would result, but the PhUadelphia plan discouraged 
this by guaranteeing each producer a share in the Qass I 
market. Furthermore, there were shipping stations beyond 

^nnnlf H .°'^ T?^'""^ ""^"^ *^" ^asic-Surplus plan, which 
supphed distnbutors with some of their milk, a portion of 
which was utilized as Qass I and accounted for in the aver- 
age pnce paid. Even though production within the shed 
was approaching consumption for fluid needs, dealers con- 

lrnHnrt»,'^''''\'''PP"'' ^'"^ ^^^^ ^""yi'^? districts, 
Sf 5 T ^ '^^'' '"^ *^" ^^«« ^ '"^^'^^t. This practice 
would have been impossible under the classification price 
plan, unless production within the Qass I zone faUed to equal 
consumption, for the Class I market would be divided en- 

SlsTi^u's piT " ^^'^" '""^ ^^"^ °p^^^*-^ -<^- 1^« 



Basic-Surplus Problems in the Philadelphia Milk Shed 61 

Of course, changes in Qass I price were often a factor 
in bringing about changes in output. When it seemed ap- 
parent that the Ck;tober production of 1926 would be much 
higher than that of the previous October, due to an increase 
in price on September 16, 1926, it was announced that no new 
bases would be established for 1927. However, prior to 
January 1, 1927, the market indicated no over-supply and 
the higher of either the 1925 or 1926 base was granted for 
the following year. 

Thus, the year 1927 saw the first significant change in 
the method of determining basics. Before that time each 
producer had been permitted to set his own base each year 
and he could enlarge it through increased production during 
the fall months. In this way each dairyman could raise his 
basic quantity as high as he wanted without regard to the de- 
mands of the fluid milk market. That many shippers took 
advantage of this opportunity made it necessary to alter the 
method of acquiring bases in order to have trends in the 
volume of production steady rather than rapidly fluctuating 
upward or downward. As long as there was no excess out- 
put in the fall months this fluctuation could be permitted 
without great danger to the plan but after 1927 the problem 
of excess fall supplies had to be faced in the determination of 
basics in the Philadelphia milk shed. The correctives used 
can be observed from the table below : 

TaMe n. 
Method of Determining: Bajses in the Philadelphia Milk Shed. 

1921 Monthly base was average production of CkJt., Nov. and Dec., 

1920. Was increased 10% in J/uly and Augrust, 1921. 

1922 Monthly base was averag^e production of Oct., Nov. and Dec., 

1921. Was increased 10% in Jiily and August, and 15% in Sep- 
tember, 1922. 

1923 Monthly base was average production of Oct., Nov. and Dec, 

1922. Was increased 10% in July and August, and 15% in Sep- 
tember, 1923. 



I 



62 Basic-Surplus Problems in the Philadelphia Milk Shed 

1924 Monthly ibase was average production a£ Oct., Nov. and Dec 

1923. Was increased 10% in July and Septemlben 1924. 

1925 Monthly base was averagre production of Oct., Nov and Dec 

1924. Was increased 10% in July and Augmt, and 15% in Sen"' 
temlber, 1925. ^ 

1926 Monthly ibase was avera^-e production of Oct., Nov and Dec 
1925 Was increased 10% in July and August, and 15% in Sep*^ 
temiber, 1926. ^ 

1927 Monthly ibase was hagrher of 1925 or 1926 average production of 
Oct., Nov. £ind Dec. 

1928 Monthly .base was average production of Oct., Nov and Dec 

1927, plus 1927 base, divided toy 2. Herds TT* during 1927 oaid 
on 1926 base, if higher. ^ ^ 

1929 Monthly base was avera^re production of Oct., Nov. and Dec 

1928, plus average production of Oct., Nov. and Dec., 1927, plus 
1927 'base, divided by 3. Herds TT during 1928 paid on 1926 
Ibase, if higher. 

1930 Monthly base was average production of Oct., Nov and Dec 

1929, plus 1929 and 1928 bases, divided by 3. 

1931 Monthly base was average production of Oct., Nov. and Dec 

1930, plus 1930 and 1929 bases, divided by 3. 

1932 Monthly base as in 1931. 

'^'' S?d'L**r '"^ '^^ *'*'"• P'"^ production of Oct., 1932, 
divided toy 2; or average of 1931 and 1932 toases. if higher. 

1934 Monthly toase was 1933 Ibase, plus average production of July and 
Noven^er 1933 <livided toy 3. No toase w^ increased mo^f tS^ 
15% over 1933 totise. 

^dTiC^ ^^ *^"*^' "^ ""'^'^^^'y ^^'^^ ^^''■S 1932 and 1933 
^1^ ^a^ were 20% lower than 1932 base, one-half of this 
TZT^ ^^/dded to 1933 toa^ for computing the average, or 
present toase (for Penna. producers only after April 1, 19347 

friSs Hf'"? rr to"" P'-«'"«"o« from June 1, 1932, to May 
31, 1933, divided by 12-(for New Jereey producers only) 



♦Tuberculosis tested. 



Basic-Surplus Problems in the Philadelphia Milk Shed 63 

1935 Monthly toase was 1934 base, or average monthly delivery (ram 
*, — ^^, vv, .c^i*g. ox, xdo-x, iL niigner. jj total toases ot all pro- 
ducers selling to any dealer be increased by this method, new 
base of each producer is reduced by same percentage that deal- 
er's total bases have been increased by new bases. 
Monthly norm was 1934 norm, or average monthly production of 
1932-33 and 1933-34 (June to July). No norm could be increased 
more than 10% over 1934 norm (for New Jersey producers only). 

The average of two years, 1927 base and 1927 faU pro- 
duction, was used for the 1928 base, and a three year average 
was taken for determining basic quantities in 1929, 30 and 
31. No new basics were established in 1932, the former ones 
being held over for another year. In determining the 1933 
Class I quantities the plan of taking the average production 
of October, 1932, plus the old base, divided by two, was 
adopted. This was the first time that producers were not 
informed in advance of the method for forming their future 
basics. Only one day^s notice was given, the agreement hav- 
ing been reached on September 29, 1932, but this fact evi- 
dently did not cause a lowering of the 1933 bases for the Oc- 
tober supply was unusually high. 

Although decreasing consumption was reflected in lower 
prices beginning in 1930, the percentage of basic quantities 
receiving Qass I price fell recessively lower. As a result, ef- 
forts were made to keep total basics from increasing and in 
a manner that would enable old producers to retain their pro- 
portionate shares in the Qass I market. The base-surplus 
plan protected the quotas of the more remote dairymen dur- 
ing this period of falling consumption for under truly com- 
petitive processes shippers nearer the market would have 
supplied a greater portion of the Qass I market, causing a 
contraction of the milk shed. 

The establishment of basics for 1934 was affected by the 
entrance of the Federal Government and later the states of 
New Jersey and Pennsylvania into the Philadelphia milk 
marketing situation. Under the Agricultural Adjustment 
Act of May 12, 1933, the Secretary of Agriculture approved 



64 Basic-Surplus Problems in the Philadelphia Milk Shed 

PhiTr"v ^ a milk marketing agreement and license for the 
Philadelphia milk shed on August 21. 1933. Bv thp t«.-o Z 
tnis agreement the 1934 bases of aU producers' wi'thiTthe 
shed were determined by adding the established monthly 
basic for 1933, the July 1933 production, and the November 
1933 output, and dividing this total by three. But, r,TZ 

t^llSo K '' "^""^ ^^ '""''^^'^ "^°re than 15 per c;nt over 
the 1933 basic quantity. 

On January 17, 1934, Secretary WaUace gave notice of 

tiionTTJr;' '" '''''^ "^"^ agreement/with the pro 
vision that the license of distributors would remain in effect 

until further notice. Although it was stated that this actfon 

lishment of new agreements under a new policy, no further 
action was taken in the Philadelphia market, ^e Hceifse 
also, was cancelled later. "cense, 

Uf»Jn *^/ ™!f"tinie the State of New Jersey provided for a 
Milk Control Board which was organized on May 2TS33 to 
be contmued until June 30, 1935. In 1934 the New JeL' 

yir^ X'lr '"^t -,-ntinuing biU for two addftS 
jears The act gave the board power to supervise and re^, 
late the entire milk industry of the state of iJTw Jersey T 
eluding the production, transportation, impor^rtion manu" 
facture storage, distribution, delivery and sa^^ ;f Tilk 
products in the State. ™"^ 

One of the first acts of the board wn« f« ^c* uv u 
method of datennintag the ba^ o^^^^^'UtM of 

each New Jersey nrodiippr i^Vii« ^ » ^ ii- vvcij> caiiea, or 

average producZtTe ^^"ZTC 31 1933^"^'^ 
By taking the average production of the preceding year 



Basic-Surplus Problems in the Philadelphia Milk Shed 65 

for the basic amount, this New Jersey ruling favored ship- 
pers who had not held down supply to Qass I market re- 
quirements. 

For 1935 the board ruled that each producer be given 
the higher of the two following quantities: his present norm 
or the average of the past two years calculated by taking his 
production from June 1. 1933 to May 31. 1934, dividing this 
amount by twelve, adding this quantity to his present norm 
and dividing the result by two. This average could not exceed 
the 1932-33 norm by more than 10 per cent. This rule not 
only favored shippers who had increased output during the 
preceding year but also protected those who had failed to " 
average their norms against any decrease in the Qass I 
market. 

At a later date another board ruling required any deal- 
er to pay New Jersey producers the fluid or norm price for 
each grade of milk as specified in the monthly ordere of the 
board, if during that month the distributor's sales in New 
Jersey exceeded purchases from New Jersey dairymen. The 
result of this order was the paying to New Jersey shippers 
supplying Philadelphia dealers who sold as much mUk in Jer- 
sey as they received from these producers. Qass I prices for 
a 1 their fluid milk up to the norm quantities at the same time 
other shippers to this distributor might be receiving the high- 
er fluid price for only a percentage of their bases. The effect 
was to stimulate production in southern Jersey and to de- 
crease the percentage of basics receiving Class I price for 
other shippers to that distributor. 

On January 3, 1934, the State of Pennsylvania set up a 
mUk control board with wide powers, to be continued until 
April 30, 1935. The next legislature provided for a two year 
extension. The first general order of the board, issued on 
March 30, 1934, changed the method of computing basics for 



66 Basic-Surplus Problems in the Philadelphia Milk Shed 
the remainder of the year in the Philadelphia area as follows: 

"The basic quantity of fluid milk whicb a producer may seU 

shall be an amount equal to the average monthly quantity of 

fluid milk which was produced by his herd, and was sold in 

fluid form during the two calendar years previous to January 

1, 1»34. If, however, a producer can show that his estaJblished 

base was at least 20% lower the second year of this period 

then he may add one-half of this difference to a second base 

year for computing his basic quantity of milk to be governed 

•by this order." • 

This method of base computation copied the New Jersey 
plan of averaging annual production and favored the pro- 
ducer who had not lowered his output. The Inter-State pro- 
tested against this rule, claiming it was unfair to dairymen 
who had been producing uniformly and selling only according 
to the needs of the market. It pointed out, from a study of 
Its records, that a penalty of 547,712 pounds of milk per 
month had been levied against 2983 Pennsylvania milk ship- 
pers by the board ruling that their basics must be determined 
according to the monthly average of their sales during 1932 
and 1933, smce this average was 3.9 per cent under the aver- 
age of the established basic quantities of those same pro- 
l^l\t^y^^ beginning of the year, 1933. The Association 
asked that mstead of the two year average of 1932 and 1933 
which was the practical effect of the rule, that producers b^ 
given the higher of the method contained in the control board 
order or their present established base. This request was 
granted in May 1934, and meant an increase in thetotal bSc 
tT.^;!^f ^ ^' "° ^^;PP«^'« ^^ was lowered whUe some had 
fr. .J "^ *^' ^'^'^ ^ '"^^^"^ increased. With consump- 
tion rather constant, the result was a decrease in the per- 
centage of the total basic volume receiving Qass I prices. 

This method of fixing 1934 basics applied only to Penn- 
sj^a producers in the PhUadelphia mUk shed aJthe State 

MaTc^rmr ''"'' '^'^'^' ^""'^ 0^<»- No. 6. Harrisburg. Pa., 



Basic-Surplus Problems in the Philadelphia Milk Shed 67 

board had no authority outside its bordera. As New Jersey 

"^T !,''^°^"i'*''' "'^^ ^'■°™ ^^« remainder of the territor^ 
included m the shed was being bought under the schediJe 
set up m the A. A. A. license and the bases of Inter-StSe 
members and non-members generally followed the Pennsyl- 
vama rule, excej)t for New Jersey dairymen. 

• 5"rif ^ i?' ^^^*' *^^ P^^n'^ylvania Milk Control Board 
issued Order Number 13 which, among other features pr^ 

R'ferrin'. n'.rr'''' abandonment of production cont'd. 
Referring to the basic-surplus plan the order declared that it 
has been operated to the detriment of dairy fanners lilg 
withm a radius of 270 miles from Philadelphia and to hf 
financial advantage of large distributing companies buying 
under the plan . . That the basic surplus plan controls pro 

rl^ ^ ^^"^ '^^ '^°*'' °^ wbich they have been 

.^ci^s^dr tLTLT.-^.^ ' --''- ^^ '-' ^-'--- ^- 

diatefv Xr fV^^ ^'°''^. P""**"^* ^^ich followed imme- 
diately after the issuance of this measure it was cancelled 
just one month later by Order Number 16 which in effect 
restored the basics that had been in use previous to JulylSth 

On October 1, 1934, Order Number 17 of the control 
board gave the method for determining 1935 basics for Penn- 
TL I P'""^^'^^^ ^bipping to the Philadelphia market. This 
order allowed each dairyman the higher of his 1934 base or 
the average production during the first eight months of 1934 
It was agreed by the Philadelphia distributors buying milk in 
Delaware and Maryland that they would establish basics for 
producers in those states on the same basis as in Pennsyl- 
vania, these quotas to carry through the year 1935. A fur- 

aZur'^'^Tf ^^^ '^""^ ^'^^'^ "*^*^^ ^bat if total basic 
quantities of all producers seUing to any dealer were in- 

July Is"!^^*^ ^"'^ ''°°*™' ^°*"-<^ 0^<J*^ No. 13, Harrisburg, Pa.. 



68 Basic-Surplus Problems in the Philadelphia Milk Shed 

creased by this method the new basic amount for each ship- 
Ti^- ai»— 'i'^ h#* ^c^^^n^xA \\\r Hip flpmp nercentaee that the deal- 
er's total basic volume had been increased by the new 
basics, so that the total bases of all producers seUing to any 
distributor would not be increased thereby. In other words, 
if the combined basics of any dealer should be raised under 
this new method, then each dairyman shipping to that dis- 
tributor would have his base reduced on a percentage basis 
in order that the total of all quotas would be the same as 
previously. 

Not only does the above ruling give every producer a 
readjusted share in the Qass I market but it is unique in that 
it is the first time since 1926 that a dairyman need not be 
handicapped by the low production of previous years in 
establishing his basic quantity. It will be realized, however, 
that former basics had some influence on the formation of 
the new ones and more especially since this plan was not an- 
nounced until October 1, 1934, after the eight month period 
of production used for determining new bases had passed. 
Yet, this regulation did give the shipper who had complained 
of a small quota a chance to make a new one if his output 
justified it during the first eight months of the year. The 
effect was to give the producer who had shipped more milk in 
1934 than previously, or who had continually produced his 
basic quantity, a proportionately larger share of the total 
basic price, and to reduce the proportionate share of dairy- 
men who had high basic amounts in 1934 but who did not 
ship their full quotas. It also affected adversely the even 
producer by making him share the Class I market with those 
who had not kept supply as low as their basic quantities. In 
fact, everyone of those orders by the New Jersey and Penn- 
sylvania control boards, by favoring those shippers having 
relatively heavy production, with the consequent decrease in 
the percentage of basics receiving Class I price, caused the 
near-by producers with uniform production to lose some of 
their differential advantage. 



Basic-Surplus Problems in the Philadelphia Milk Shed 69 

Beginning in 1930 retail sales began to decrease and the 
distributors from that time to the present have paid Qass I 
nrices for that portion of producers' bases that tneir saies 
warranted. In some months that percentage was as low as 
68 per cent of the established basic quantities. Until 1933 the 
PhUadelphia dealers were not following the use plan for 
classifying milk as basics were determined accordmg to the 
methods described above and these amounts were paid for at 
Class I prices until 1930. When the dealers forecast the 
danger of future basics being greater in volume than average 
yearly sales, they and the Association officers would work out 
a schedule for establishing bases which they believed would 
hold total production down to total sales in the fall period. 
The distributors consistently maintained that a sales report- 
ing plan for determining basics and Class I prices, whereby 
the dealer only pays Class I price for the milk he sells in fluid 
form, makes him careless as to the exact needs of his market. 
They contended that the distributor, as the middleman, can 
more quickly gauge both production trends and the con- 
sumption trends. And, if he is not responsible for any sur- 
plus amount of basic milk he will be sure to have enough 
Qass I milk for his sales at all times and he will become care- 
less, take on new producers, and open up new receiving sta- 
tions. This wfll result in creating a surplus supply in the 
milk shed and ultimately will cause price decline. 

It must be noted that this theory does not fit in well with 
another contention made by distributors to the effect that 
they often sell their excess milk at a loss because they can- 
not compete successfully with makers of manufactured dairy 
products. If this is true, the danger of sustaining losses on 
excess supplies should be sufficient incentive to make every 
dealer careful as to the exact needs of his market at all 
times. 

However, when sales decreased markedly during the de- 
pression years it was necessary to cut basics or pay Class I 
price on only a percentage of these bases. As stated, the lat- 



70 Basic- Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 71 



ter method was adopted and each month the dealers col- 
lectively reported the percentage of the total basic quantities 
their sales would warrant and paid Class I price for that 
amount. This continued imtil the Federal Marketing Agree- 
ment became effective in 1933. This agreement provided for 
the Use plan of payment. From that time the distributors 
have been reporting their monthly sales and paying the Class 
I price for that percentage of basics that their fluid milk 
sales totalled, using the average sales for the entire market. 

When the Pennsylvania control board issued its first 
order in April, 1934, it retained the Use plan but stated that, 
"payment in full to producers shall be made at least month- 
ly, not later than the fifteenth day of each month, for all 
milk delivered the previous month.'* The distributors con- 
strued this to mean that each dealer was compelled to pay 
according to his own sales instead of paying the percentage 
of basics resulting from the combined sales of all distri- 
butors. The dealers have followed this plan since the issu- 
ance of the order. This has caused variation, sometimes 
wide variation, in the percentages paid by the different deal- 
ers as can be observed in the following table : 

Table HI. 
Percentage of Basics Paid for at Class I Price, July-December, 1934. 

(Four largest Philadelphia distributors) 

July Aug. Sept. Oct. Nov. Dec. 



Dealer A — 
Pa., Dela., My. 
N. J. 

Dealer B — 
Pa., My. 
N. J. 

Dealer C — 
Pa., Dela., My. 
N. J. 

Dealer D — 
All States 



82% 
96 

100 
100 

94 
100 



78 
93 

98 
98 

93 

100 



78 
100 

93 
93 

94 
100 



84 
100 

97 
97 

105 

All 



87 
100 

97 
97 

105 

All 



lOOk^. 100 



80 

100 

89 

103 

All 

100 



This table also shows that those producers fortunate 



enough to ship to Dealer C who buys a higher percentage at 
Class I prices than the others, receive a higher composite 
price for the same quantity of milk than the other dairymen, 
although their basics may be the same or even lower. This 
gives these fortunate producers an artificial differential over 
the others, encouraging the former to increase their output 
and secure a larger proportion of the total basic volume. A 
continuation of this practice will result in Dealer C paying 
Class I prices for a lower percentage of these basic quantities 
and the other dairymen will receive a higher percentage on 
their lowered basics. This plan would also cause shippers to 
switch from distributors buying lower percentages to the 
dealer buying the highest percentage at Class I prices, if 
transportation facilities did not usually prevent such a prac- 
tice. 

The higher New Jersey percentages in Table II are of 
the Norms, established by the State control board, and are 
the result of the ruling that each dealer must pay Class I 
prices for all production up to the Norm of his New Jersey 
shippers unless the amount of fluid sales in that State was 
less than these total Norms. The table indicates that Dealer 
C, selling more milk in Jersey than he bought there in some 
months, paid these producers the fluid milk price for their 
total shipments although the sum of the individual quotas 
may have been much lower. No records are available for 
Dealer D until October, 1934. 

Relief milk had a significant effect on the determination 
of 1935 basic quantities and on Class I percentages paid to 
producers in 1934 and 1935. The original policy of granting 
milk orders to families on relief increased substantially the 
volume of Qass I sales as 40,000 families were on relief in 
Philadelphia County in 1934. The survey of milk consump- 
tion made in Philadelphia in June, 1934, by the Pennsylvania 
State College and the United States Department of Agricul- 
ture showed that families on relief were consuming about 
2.12 quarts per family each week, while those who were re- 



72 Basic-Surplus Problems in the Philadelphia Milk Shed 



Bosk-Surplus Problems in the Philadelphia Milk Shed 73 



ceiving a very low income but not on relief were using sub- 
stantially less than that amount of milk.* 

This increase in consumption resulting from the order 
system for relief milk raised the percentages of basics re- 
ceiving Oass I price. Consequently, the higher composite 
prices received by dairymen encouraged production, or pre- 
vented output from falling as low as would have been the 
case in the absence of orders for relief milk, thereby enabling 
many producers to demand higher basics for 1935. 

Beginning November 11, 1934, the cash systems of 
issuing checks to families on relief was substituted for the 
former milk orders. This change permitted families on re- 
lief to spend their relief money for any purposes they desired. 
Consequently, there was a large reduction in the volume of 
relief milk sales as pointed out by Mr. C. I. Cohee, Secretary 
of the Philadelphia Inter-State Dairy Council. He writes: 

"The Philadieliphia County Relief Board states that there 
were 40,000 families in Philadelphia receiving: milk orders prior 
to the change to casb. Records were obtained from dealers 
book on 83,069 of these 40,000 fajnilies. These 33,069 families 
purchased 365,963 quarts of milk a week prior to the change 
to cash. During the week the change was made, the amount 
dropped but inasmuch as some were still on orders and others 
purchasing on their cash allowances, this week was disregard- 
ed. The following week all the families were receiving cash 
and during this week they purchased 283,751 quarts of milk, 
a decline of 82,212 quarts among the families actually studied. 

"Since there were 40,000 families on relief who received 
milk orders, and only 33,069 of that number were studied, if 
the same ratio of decline held true in the remaining 6,931 
families, the total decline would be 109,388 quarts weekly, or a 
drop of 22% in milk consumption in the first week of cash 
relief. 



*Cowden, T. K. & Sturges, A. : "The Consumption of Fluid Milk and 
other Dairy Products in Philadelphia, Pa., June, 1934"; Technical Paper 
No. 659, Pennsylvania Agricultural Experiment Station, July, 1934. 



*Maiiy people have thought that families who left the 
milk dealer would purchase milk at the stores, as some stores 
in Fhiladelphia are selling at one cent below the wag^on price. 
A study was made of 3,154 stores, which is approximately 95 
to 97% of the stores in Philadelphia which sell milk. In these 
stores the total sales of milk increased only 7,069 quarts — less 
than two quarts per store per week. Since this is only the 
natural week to week variation that occurs because of weather 
or other factors, it is safe to say that consumption of milk in 
relief families declined 22%, or a total of 109,388 quarts 
weekly."* 

The above statement reveals the large falling off in 
Class I sales resulting from the change in the method of ad- 
ministering relief. A later report of the Dairy Council an- 
nounced that milk purchases by families receiving relief 
dropped 29.6 per cent in five weeks time, — ^from November 
5-11 on milk order relief to December 11-16, 1934, on cash 
relief. Also, that during this five week period 17.3 per cent 
of the 31,851 relief families studied stopped buying fresh 
milk altogether. One large Philadelphia distributor report- 
ed that its relief sales dropped more than 50 per cent within 
two weeks after cash payments for relief began. 

This rather sudden drop in fluid milk sales was reflected 
in a lower percentage of basics receiving Class I prices and, 
therefore, in a lower composite price than formerly. With 
almost 11 per cent of milk sales going to families on relief 
before the change in relief methods, the cash system meant 
a reduction of three per cent in Class I sales, with the excess 
amount going into Class II or Class III milk with its corres- 
pondingly lower price. As the relief policy stimulated milk 
production at its initiation, increasing the 1935 bases of 
many producers, while later it curtailed consumption with 
the consequent reduction in the composite prices of these 
dairymen, it was responsible for many farmers demanding a 
higher price in order to maintain composite returns. 



*Letter of C. I. Cohee, Sec. of Philadelphia Inter-State Dairy Council, 
to the Contributors of the Inter-State Dairy Council, Dec. 18, 1934. 



74 Basic-Surplus Problems in the Philadelphia Milk Shed 



As the Basic-Surplus plan attempts to divide the Class 
I market among its producers according to their ability to 
produce a relatively uniform flow of milk throughout the 
year, the plan must contain some provision for taking care 
of new shippers within the mUk shed. Although the rate of 
increase or decrease in the number of dairy farmers within 
the shed is not rapid under ordinary circumstances, changes 
into and out of the dairy business are always taking place, as 
well as transfers of herds and farms, and temporary de- 
creases in production because of tuberculosis tests and other 
diseases. All of these varying forces must be considered in 
operating a control plan successfully, with a minimum of dis- 
satisfaction on the part of those producers affected directly 
by them. 

Concerning the transfer of basics the Philadelphia plan 
has always adhered to the principle that the basic goes with 
the herd. A tenant producer with an established base and 
renting a farm, for example, may transfer his individual 
base from farm to farm, provided that he sells his milk in 
the same market as theretofore, and a landlord is entitled to 
the entire base to the exclusion of the tenant, if the landlord 
owns the entire herd on such farms. Where cattle are owned 
jointly, the quota is divided between the joint owners accord- 
ing to the ownership of the cattle. Bases may be combined by 
any dairyman acquiring a herd or herds that possess basics 
Where a producer's ability to maintain his basic quantity has 
been impairied through a tuberculosis test the usual adjust- 
ment has been to give him the option of retaining his old base 
for the following year or accepting the provisions governing 
other old shippers. 

The provisions controlling the entrance of new shippers 
mto the Qass I market have varied from year to year and 
apply to producers according to the season they^commence 
to ship to the market. The most outstanding of these rules 
wiU be considered, while the exact changes from year to year 
are included in the following table : 



Basic-Surplus Problems in the Philadelphia Milk Shed 75 



Table IV. 
Year Date of First Shipment Method of EstabUshing Base 



1921 During any of first 9 
-25 months of 1922 



1926 Oct. 1, 1925— Jan. 1, 1926 
Jan. 1, 1926--Sept. 16, 1926 
After Sept. 16, 1926 
After Jan. 1, 1927 



1928 After Oct. 1, 1927 

After Jan. 1, 1927 and hav- 
ing less than 70% on or 
after Oct. 1, 1927 
After Jan. 1, 1928 

1929 After Jan. 1, 1928 
After Oct. 1, 1928 
During first 9 months of 
1929 

1930 During fall of 1927 



Jan. 1, 1929— Sept. 30, 
1929, having 50% of first 
30 days, or any base not 
over 70% of same 
Oct. 1, 1929— X)ec. 31, 1929 
After Jan. 1, 1930 

1931 Starting during fall of 1928 
and having 1929 base 



One-half of daily average pro- 
duction during first 30 days and 
thereafter counting it as base 
during remaining months. 
1922 base established same as old 
shipper. 

Allowed option of using base 
85% of 1926 fall production. 
70% of fall production. 
One-half of daily average pro- 
duction during first 30 days and 
counted as base during remain- 
ing months. 

70% of 1927 fall production 
1927 fall production plus 70% of 
full production for that period, 
divided by 2. 
Base according to agreement. 

70% of 1928 fall production 
70% of 1928 fall production 
One-half of daily average pro- 
duction during first 30 days. 

1927 fall production plus 1929 
base plus 1929 fall production, 
divided by 3. 
70% of 1929 faU production. 



70% of 1929 fall production. 
70% of first 30 days shipment 

Average daily production times 
30 made in Oct., Nov. and Dec, 
1928, plus 1930 base, plus 1930 
fall production, divided by 3 



76 Bosk-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 77 



Old sbipper without 1929 
ibase and having 1930 base 

Jan. 1, 1930— iSept. 30, 1930 
Oct. 1, 1930-^Dec. 31, 1930 
After Jan. 1, 1931 

1932 Jan. 1, 1931— ^Sept. 30, 1931 
Oct. 1, 1931— Oec. 31, 19ai 

1933 Jan. 1, 1932— ^Sept. 30, 1932 



After Oct. 1, 1932 



1934 Any time 



1935 Any time 



1930 base plus fall production, 
1929, plus fall production, 1930, 
divided by 3 

70% of 1930 fall production 
70% of 1930 fall production 
70% of first 30 days shipment 

70% of 1931 fall production 
60% of 1931 fall production 

50% of first 30 days shipment 
plus Oct., 1932, production, di- 
vided by 2 

70% of average daily production 
during Oct., 1932. 

Certificate of necessity — 
70% of average daily production 
for such part of 90 days falling 
witbin July 1 to April 30 and 
60% of the 90 days falling with- 
in May 1 to June 30. 

Authorization of Penna. Milk 
CJontrol Board 

Permission of New Jersey Milk 
Control Board 



From the beginning of the plan until 1926, a five year 
period, any new shipper could establish a base during the fall 
months on the same basis as old shippers. If his shipments 
began during the first nine months of the year he would re- 
ceive, until the following October, a base equal to one-half of 
his average daily production during the first thirty days. At 
most, a new producer had to wait only nine months before 
being placed on an equal basis with old shippers. This ruling, 
in effect, carried through until 1929 when a new shipper was 
granted only 70% of his 1928 fall production as his basic for 
the foUowing year. From 1929 to 1933 the most a^ew ship- 
per could receive, according to the rules, was a 70-30 basis of 
his fall output. As basics were being determined on a three 
year average this handicap could not be entirely overcome 
until the end of the first three full years of shipments. 



In 1935 more limited control was placed on the new 
shipper when he was permitted to establish a quota equal to 
only 50 per cent of his first thirty days shipment plus his 
October output divided by two, unless he began to ship after 
October 1, 1932, in which case his base would be 70 per cent 
of his average daily production during the month of October. 

By the beginning of 1933 distributors were taking on 
few new dairymen as the market excess was moimting. Many 
of the dealers refused to add more shippers to their lists and 
the largest distributor, having for a time attempted to absorb 
all excess production, finally followed the exclusion example 
of the others, with a few exceptions. The Federal Marketing 
Agreement of 1933 required a new producer to first obtain a 
certificate of necessity from the Philadelphia Inter-State 
Dairy Council before he could establish a basic quantity and 
sell milk on the basis of such established volume. In the event 
that a certificate of necessity was issued to the new producer 
his base could equal slightly more than two-thirds of his 
average daily production for a ninety day period. No certifi- 
cates were ever issued, however. Indeed, the original reason 
for requiring certificates of necessity was not to protect old 
shippers from the entrance of new producers into the mar- 
ket. Rather it was to protect the licensing feature of the 
Federal Milk Marketing Agreement from the legal side by 
permitting new producers to enter the market upon proof of 
the need for their supplies. 

The excess milk problem was also recognized in those 
provisions of the Marketing Agreement which required any 
dairyman dispersing his herd without a transfer of its base 
to replace the herd within sixty days if he wished to retain 
his established base, and which destroyed the base of any 
producer who voluntarily ceased to market fluid milk in the 
Philadelphia sales area for a period of more than sixty days. 
Also, a penalty provision for low shipments was provided for 
the first time. Any producer whose average daily produc- 
tion for any three consecutive months was less than 70 per 



I 
I 



r 



t 



m 



I 



78 Basic-Surplus Problems in the Philadelphia Milk Shed 
cent of his established base was given a new quota equal to 

his avprap^p dailv oiitmit. 

Perhaps this penalty innovation should have been a fea- 
ture of the plan from the outset. A plan that protects the 
Class I market for old producers and makes it difficult for 
new dairymen to enter it ought to provide against shippers 
retaining a higher share in that market than they can or do 
supply, except perhaps during a few months out of the year. 
This practice of retaining a higher quota than production 
warrants is made more difficult when basics are determined 
by average monthly supply. However, in periods of falling 
consumption penalty provisions may aid in keeping produc- 
tion higher than it might be otherwise, because dairymen 
may feel that the condition is temporary and that it will be 
to their best interests to retain their full quotas. 

When the Pennsylvania Milk Control Board came into 
existence it retained the essential features of the Federal 
Agreement regarding new producers and required any dairy- 
men entering the market for the first time to obtain authori- 
zation from it before selling milk in fluid form within the 
Commonwealth. Nor could a distributor of fluid milk accept 
the product from a new producer without first obtaining 
written authorization to do so from the board. The New 
Jersey board passed a similar ruling in reference to new ship- 
pers within that State. 

It is evident that the methods of establishing basics 
within the Philadelphia Milk shed have tended increasingly to 
limit the expansion of milk production for the fluid milk mar- 
ket by reserving for old shippers the greater portion of the 
market and by preventing the new producer from entering it 
on a par with them. 

n. THE OPERATION OF THE PHILADELPHIA PLAN 

AND MARKET PRICE 
Any plan for regulating seasonal production, no matter 
how rigid it may be, cannot for long ignore competitive 



Basic-Surplus Problems in the Philadelphia Milk Shed 79 

factors which aid in determining price. The validity or un- 
nracticability of any artificial control scheme will be reflected 
through changes in the market price and the degree of suc- 
cess of the plan will depend, in a large measure, upon the 
ability of the planners to foresee relative changes in the 
many variable factors influencing price, and to adjust price 
in a manner that will cause the plan to work successfully. 

Our price analysis of the Philadelphia plan must be 
based almost entirely on available records of the four largest 
distributors in the Philadelphia market, who retail about 85 
per cent of the fluid milk and cream sold in that area. Com- 
plete records of production and purchases by these dealers 
are available for the period between January 1, 1925, and 
December 1, 1933. 

We have noticed that the first five years of the base- 
surplus plan brought aBout more imiform production by de- 
creasing the high seasonal output in the spring months and 
by increasing the fall supply. Yet, it took all of this period to 
bring fall production up to sales, so that the problem of ex- 
cess supplies in the normally short season did not present it- 
self. Consequently, in the period from 1920 to 1925 prices of 
Class I milk moved, on the whole, to stimulate the increase of 
fall production, although the depression year of 1921 caused 
a drop in price in June of that year from $3.48 to $2.67 per 
hundredweight. After remaining stationary for more than a 
year, decreasing production and increased demand caused a 
fifty cent increase in October, 1923, in an effort to stimulate 
fall production. During the following year prices moved 
upward again, in May and in July, with the result that ex- 
cess volume appeared, causing drops in the price in the nor- 
mally short months of October and November. From that 
date until late in 1925 the Class I price remained steady at 
$3.14. 

In 1925 production records show that about 90 per cent 
of the milk shipped was paid for at Class I price during the 



i '9 



^K^ 



% 



80 Basic-Surplus Problems in the Philadelphia Milk Shed 
first three quarters of the year, except in May when nearly 

- - - - - - ^^^, — - - - — 



f\^t, V/\^XXU VV MrO \^4 



'C/kTM AXA.LAXX* \^Kj\^\JKr^^X, V/ V4.WK/C4.W, V^AA VAAV/ Vi/ l/XA'CX 

hand, was short and a twenty-three cent price increase for 
November and December resulted. The last three months of 
1925 was the final period that the market consumed the total 
supply in fluid form. In fact, the following January brought 
a drop to the former price of $3.14 when only 90 per cent of 
the shipments received Class I prices. So large did the excess 
become in May and June, being about one-sixth of the total 
production, that a further price drop followed. July saw a 
return to the former price level, as excess supply had been 
cut in half, and in September, 1926, an additional increase to 
$3.49 was made. This price remained unchanged for a 
period of three years, until September, 1929. During that 
time Qass I purchases averaged over 88 per cent of the total 
supplies, with the excess running as high as 20 per cent in 
the spring months. However, in November and December, 
1928, nearly 100 per cent of the production was marketed as 
Class I milk, indicating an increase in demand. Consumption 
was higher during these months than it had ever been at 
this season of the year. 

In spite of the fact that the following May, 1929, brought 
forth the largest excess production up to that time, amount- 
ing to nearly 22 per cent, the price was changed in Septem- 
ber for the first time in three years, an upward change, for 
fear that fall production would not equal the increasing mar- 
ket demand. Although this price increase had the desired ef- 
fect, with a production more than six million pounds higher 
than in the previous month, practically all of it was marketed 
in fluid form. But, continuing high production and a large 
falling off in sales caused large excess quantities in Novem- 
ber and December, and the artificially high Class I price 
could not be maintained, a drop to the former price of $3.49 
occurring in December, 1929. This price remained through- 
out 1930, the year when the largest volume of fluid milk was 
marketed, with a yearly average of more than 87 per cent of 



Basic-Surplus Problems in the Philadelphia Milk Shed 81 

the total production going into fluid uses. Yet, for seven 
months of the year, from February to September, all excess 
milk was bought at the low second surplus price making the 
composite price lower than it had been during the three pre- 
vious years. 

In 1931 total Class I purchases fell to the 1928 figure, 
with about the same percentage of production going into the 
highest price milk. This decrease in demand with output 
remaining fairly constant caused a drop in price in December, 
1930, and another in September, 1931, to $2.76. From that 
time until June, 1933, when the new price plan stimulated by 
the A. A. A. came into effect, there was a steady decrease in 
the percentage of production sold in fluid form, reaching the 
low mark of less than 68 per cent in October, 1932, and again 
in May, 1933. One price drop followed another until the low 
of $1.98 in November,- 1932, which remained until the Jime, 

1933, price of $2.27 when an upward swing began. In an ef- 
fort to improve the situation caused by falling prices, an at- 
tempt was made to better the composite price by establish- 
ing an additional 10 per cent of Class I purchases as a cream 
price, higher than the first surplus. This plan was initiated 
in June, 1932, and continued under the Federal Marketing 
Agreement and afterward. 

The weighted average price for all milk shipped to the 
Philadelphia market increased from $3,106 in 1925 to $3,440 
in 1929, after which there were downward trends imtil June, 

1934. The weighted average price for all milk, 3.5 per cent 
test, from 1928 to 1932 inclusive, declined 39.20 per cent. At 
the same time the percentage of milk marketed as base or 
Class I declined 11.88 per cent. As the percentage of excess 
milk increased only from 11.84 per cent in 1928 to 12.06 per 
cent in 1931, while it reached the high figure of 21.84 per 
cent in 1932, most of the decline in the composite price per- 
centage for this five year period was due to the large volume 
purchased at the low excess price in the final year of 1932. 



82 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 83 



^ 



During this same period the average of monthly butter 
prices, 92 score New York butter, declined 55.71 per cent, yet 
the average price received for a pound of butterf at in the 
Philadelphia market declined only 39.20 per cent. And while 
the price paid for excess or Class II milk in this market de- 
clined 55 per cent, the price paid for basic or Class I milk, 3.5 
per cent test, fell but 34.38 per cent. 

This comparison of the trends of Class I prices in the 
Philadelphia market with butter values indicates that fluid 
milk prices were higher than competitive factors warranted, 
especially in 1931 and 1932. Although consumption declined 
during this period, the fact that there was a steady decrease 
in the percentage of production sold for fluid use, reaching 
less than 70 per cent in some months, implies that Class I 
prices kept supplies from falling rapidly or lowered consump- 
tion, or both. The following table, showing the fluctuations 
in the relationship between butter prices and those for fluid 
milk in Philadelphia, points to the above conclusion: 

Table V. ♦ 

Compaiison of Basic Prices and Butter Values in Philadielphia Market 

Year Pounds Butter to Equal BMic Price Period (Months) 

1920 5.68 6i 

1920 6.76 4 

1921 6.16 5 

1921 5.84 17 

1922 5.56 7 

1923 7.44 6 
1924-25-26 6.36 36J 
1926-27-28-29 6.60 35J 
1929 7.52 3J 

1929 8.44 12 

1930 ! 9.80 8i 

1931 8.40 5 

1932 9.44 8 

Although this table gives evidence of a gradual increase 



in the value of milk sold in fluid form over that sold for but- 

t6l I ^'L •L'^^ WXAC:; xx%jLi.xxKf\^JL v/x |JO ucixviis yjx. Ktvu^x^KyX K^y^xxxy olx\^xxk, wv/ a.\/v/ 

pounds of milk, it also indicates the danger in setting the 
basic price too high above butter values. This tabulation 
points out that during the six year period, 1924-1929, with an 
average of six and one-half pounds of butter, the producers* 
price did not change for 72 months. In 1921 with a low 
average of 5.84 pounds of butter purchasable with 100 
pounds of milk the price remained for 17 months. On the 
other hand, when the pounds of butter purchasable increased 
to seven and one-half pounds in 1929, the price held only- 
three and one-half months. After 1929 the price of butter 
declined much more rapidly than the milk price and the price 
changes were also rapid as shov/n by the low number of 
months each price lasted. 

Although a forty cent drop in Class I price occurred in 
December, 1930, it was not equivalent to the sharp decline in 
butter values. As a result of this attempt to hold fluid milk 
price higher than competitive processes warranted a further 
break was necessary nine months later, although butter was 
slightly higher in value. This Class I price remained imtil 
the following February when falling butter prices caused an- 
other drop of thirty-four cents. But again the decline in 
fluid milk values had not been sufficient and in July, 1932, 
another decrease slightly larger than the fall in butter values 
resulted. Finally, in November, 1932, another price drop 
brought the Class I price more in line with butter values 
where it remained until the Federal Agreement brought 
about an increase in fluid milk prices. * 

During this same five year period the dealers' spread 
per hundredweight on Class I milk was $2.35 in 1928 and 
$2.12 in 1932. The range was from the high $2.58 in 1929 to 
the low $2.12 in 1932. At these periods the producers were 
receiving $3.74 and $2.34, respectively. 



♦Woolman, H. N.: "Fundamentals in Determining Milk Price Rela- 
tionsliiips;" p. 11 A. 



'Table I, sp. 22. 



I'D- 






84 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 85 



Comparing the prices received by producers in the Phila- 

delnhJR milk shpH with nrndiiopr nnVps in nfhpr InrcxA mQ»». 

kets, we find that dairymen supplying the Philadelphia area 
with milk have fared better than those producing for many 
of the other markets. Table VI, summarized from a bulletin 
issued by the United States Department of Agriculture shows 
that Class I prices paid to Philadelphia producers from 1920 
to 1928, inclusively, have been relatively higher than those 
in the other five markets listed, and that the cost to consum- 
ers has been lower than in the markets compared with it. 
This is proof that Philadelphia distributors have taken a nar- 
rower margin on Class I milk sold off wagons than the deal- 
ers in the other markets listed. 



Table VI. ♦ 
Producer and Cansumier Prices in Six Primary Markets, 1920-1928. 



Market 

Philadeljphia 

Baltimore 

Pittatourgh 

New York 

Boston 

CJincinnati 



Weighted Ave. Price, 4% Milk 
F. O. B. aty, to Producer 
7.29c -per quart 
7.26c 
7.22kJ 
7.05c 
6.82c 
6.29c 



Ave. Retail Wagon 
Price to Consumer 
12.4c iper quart 
13.5c 
14.2c 
15.1c 
14.7c 
ia.3c 



From a report issued by the Farm Credit Administra- 
tion at Washington in 1933 covering the dairy industry in 
eastern markets the following table is presented. It lists the 
average producer and consumer prices for the 28 month 
period from January, 1931, to April, 1933 : 



Prcxiucer Received 


Consiuner Paid 


cents per quart 


cents per quart 


4.28 


10.57 


3.37 


11.44 


4.68 


11.79 


5.26 


12.50 


2.90 


12.87 


€.07 


13.60 



*Met2^er, H.: "Co-operative Marketing of Fluid Milk;" U S Dept 
of Agric. Technical BuDetin No. 179, May, 1930; p. 7. ' ' ' "^ ' 



TaWe Vn. • 
Producer and OiMisuiiier Prices in Kastem Market^, 1981-1933= 

Market 

Philadelphia 

Boston 

Baltimore 

Richonond 

New York 

Washington 

Table VII shows that Philadelphia consumers received 
standard grade milk at the lowest price of any market 
studied and that producers in this market area received a 
larger portion of every dollar the consumer spent than did 
the dairymen in the New York, Boston or Baltimore sheds. 

This report also brought out the fact that surplus milk 
sales for the six markets amounted to 56 per cent of the total 
receipts, while the surplus milk sent to market by Inter- 
State members during the same period was only 17 per cent 
of the total, indicating a significant cause of the relatively 
favorable price to the producers withm the Philadelphia milk 
shed. This low surplus percentage for Philadelphia means 
that dairymen in that shed sent a relatively small amount of 
excess milk during this period, unless there was a wider dif- 
ference between Qass I and surplus prices in the Philadelphia 
market than in other cities, which does not appear to be the 
case. 

In an analysis made by the National Cooperative Milk 
Producers Federation covering prices for January, 1935, in 
the thirty-four cities in which members of the Federation 
operate, the Philadelphia market compares favorably with 

♦Compiled by H. E. Jamison, Assistant Secretary of the Inter-State 
Milk Producers Association from the "Report on tbe Survey of Aiilk 
Marketing in Northeastern States;" Farm Credit Administration in co- 
operation with National Cooperative Milk Producers Federation and 
u. S. Bept. of Agriculture, Washington. D. C, July, 1933; pp. 87, 80, 
w and 91. ^ » x^ » t 



86 Basic-Surplus Problems in the Philadelphia Milk Shed 

the others.* The Qass I price to dealers, F. O. B., city, 3.5 
per cent milk for 100 pounds, was $2.56 for Philadf-lnhia T>iiQ 
amount was sixth highest and when this price was adjusted 
to the butterfat content of the quart of milk sold, it ranked 
tenth from the top with $2.64 per 100 pounds. This made 
the dealers* price per quart of milk sold 5.675 cents, the tenth 
highest of the 34 cities, but in only one of these ten, Pitts- 
burgh, was the dealers' selling price per quart as low as in 
Philadelphia, both being eleven cents. 

It is interestmg to note that, in this comparison, there 
were only three of the 34 markets in which the producer re- 
ceived a higher percentage of the retail price of mUk sold off 
the wagon, the Philadelphia dealers' percentage being lower 
than that of 28 other cities. But, on quarts retailed through 
stores, whUe the share going to the jproducer remained the 
same as in off the wagon sales, six other markets gave their 
producers a larger percentage, and the distributors of 19 
other markets received a lower percentage of store sales than 
the Philadelphia dealers. This means, of course, that Phila- 
delphia stores retailing milk received a smaU percentage of 
the retail price, lower than that received in 29 of the cities. 
As a result of this difference in the distribution of the off the 
wagon price and the retail store price only three of the listed 
markets gave the producer a larger percentage of the con- 
sumer price than Philadelphia, but that city's distributors 
took a higher percentage of the retail price than did the deal- 
ers of from 10 to 15 other markets. 

While this comparison indicates that dairymen in the 
Philadelphia milk shed are receiving a relatively high pro- 
portion of the retaU price of fluid milk, undue weight should 
not be given to comparative costs in determining the value of 
any price plan. In the first place, a much larger percentage 
of fluid milk is sold at the lower wholesale price in some mar- 

NoTMar^T^r''^ ^"^ "^'"^^'^'^ Federation Service Bulletin 



BasioSurplus Problems in the Philadelphia Milk Shed 87 

kets than in others, and it is the average of retail and whole- 
sale prices that must form the basics for determin- 
ing prices to producers. It should be recognized, also 
that distributors' margins cannot be constant for all 
markets. Although operating with equal efficiency variation 
in distribution costs in different markets may result from 
differences in labor and transportation charges. The general 
wage scale, the degree of unionization of labor, the size of the 
city, and the location of milk terminals, all influence these 
factors. The relatively low margin of dealers in one market 
does not necessarily imply that distributors in another mar- 
ket must operate on that spread in order to be efficient. It is 
probably true, however, that the low distributor margin on 
milk sold off the wagon in the Philadelphia territory is the re- 
sult of a relatively high efficiency in distribution and that 
much of the saving resulting therefrom is reflected in higher 
producer prices. 

The foregoing analysis dealt with fluid milk and cream 
prices in the Philadelphia market and did not include prices 
for cream going into ice cream and other manufactured 
products. Although exact proof is lacking it appears that the 
price plan as operated in this market tended to have this 
cream come largely from without the milkshed, at least until 
1934. Behind the plan seems to have been the belief that the 
Philadelphia shed could not supply its cream requirements 
and to encourage its production thru price would endanger 
the fundamental idea of the plan, which was a high price for 
fluid milk. Consequently, the cream price was usually set 
at a flgure to encourage dealers to import the cheaper west- 
em cream, rather than to stimulate a large excess of milk 
within the shed which could be turned into cream. Table 
VIII, giving the source of dairy products for Philadelphia for 
the year 1931, indicates the situation described above. 

Prom this table we find that only 30.88 per cent of the 
cream requirements of the Philadelphia market was supplied 
by the milk region which produced 98.53 per cent of its fluid 



88 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 89 



milk. Nearly two-thirds of the total cream supplies came 
from states west of Pennsylvania and more than one-fourth 
of it was shipped from points west of Chicago. Indiana, 
supplying 28 per cent, and Wisconsin, shipping in 21.88 per 

Table Vni ♦ 

Source of Milk and Oeam lor Philadelphia 
(For the fiscal year ending Oct. 1, 19S1) 



Cream 



Amount 
Receiv€d 
(40 qt. cans) 

East of Pa. — Ohio line — 



Pennsylvania 
Maryland 
New Jersey 
Delaware 
New York 
Suib-Total 



44,575 

30,829 

2,088 

6,097 

20,857 

104,446 



Pa. — Ohio line to Chicjugo — 



Ohio 
Indiana 
Michigan 
Illinois 
iSuib-Total 



21,860 

94,736 

5,486 

1,781 

123,863 



West of Chicago — 
Wisconsin 
Minnesota 
Missouri 
Sub-Total 



74,030 
3,008 
8,497 

85,535 

South-East and West — 



Virginia 
Arkansas 
W. Virginia 
Kentucky 
Tennessee 
Sub-Total 
Grand Total 



12,311 

406 

7,626 

1,000 

2,155 

24,442 

338,287 



Per cent 
of Total 
Receipts 

13.18 
9.11 
0.62 
1.80 
6.17 

30.88 

6.46 
28.00 

1.62 

0.53 
36.61 

21.88 

0,89 

2.51 
25.28 

3.64 
0.12 
2.25 
0.30 
0.64 
7.23 
100.00 



Milk 

Amount 
Received 
(1000 libs.) 

454,267** 

75,474** 

44,825* ♦ 

43,847** 
259** 
618,672 



88 



59 



59 



3,214 
5,821** 



9,035 
627,854 



**Within the Philadelphia Milk Shed. 

•Oata Pufblished by U. S. Department of Agriculture, 1932. 



Per cent 
of Total 
Receipts 

72.35 

12.02 

7.14 

6.98 

0.04 

98.53 

0.02 



0.02 
0.01 

0.01 

0.51 
0.93 



1.44 
100.00 



cent, accounted for almost half of the Philadelphia cream re- 
quireraents. 

The theory that a high price for fluid milk can be main- 
tained by a cream price that encourages distributors to use 
cheaper cream from distant territories is one of dubious 
economic validity. According to our previous analysis the 
cream zone, under imrestricted competitive processes, will be 
located immediately beyond and adjacent to the fluid milk 
zone, and beyond this cream territory milk will be used in 
butter production. If the cream price is artificially high so 
that distributors can buy cream more cheaply from sections 
farther out in spite of the transportation differential, pro- 
ducers in the immediate cream belt must produce either for 
fluid milk use or for butter. Since the butter market is na- 
tional in scope these dairymen will not receive the full ad- 
vantage due to location in producing for butter. On the other 
hand, the high price of fluid milk in the nearest market will 
encourage them to make the additional expenditures neces- 
sary to produce for the Class I market. Furthermore, the 
base-surplus plan enables them to secure a share in this Qass 
I market and guarantees its continuance, within certain 
limits. At the same time, excess over Class I sales of pro- 
ducers within the milk shed receives the low surplus price, 
resulting in a lower composite price than would be the case 
were distributors encouraged to meet cream requirements 
from the shed and territories adjacent thereto. The result 
is a widening of the fluid milk zone, discontent on the part of 
the shippers near the market, and a lower price for all of 
their milk in the end. 

Again, it is probable that this artificially high cream 
price will be passed on to the consumers, causing them to 
purchase milk instead of cream. This will result in a reduc- 
tion of total consumption and reduce total returns to dairy- 
men. 

As the milk excess mounted in the Philadelphia market, 
the fallacy of this practice became apparent and steps were 



90 Basic- Surplus Problems in the Philadelphia Milk Shed 
taken to use this excess for cream purposes. As previously 

r»/>'f/irl o qo-r*QT»Qf/i nr»c^tkrY\ rmo'*"Q Amial to 10 ripr f»pnt f>f fVio 

Class I quantities purchased by distributors, and paying a 
higher than surplus price, was initiated in February, 1932. 
Although this change increased slightly the volume of cream 
supplied by local producers it was not until 1934 that a lower 
cream price plan was instituted, making it profitable for deal- 
ers to purchase local cream and to separate more of their 
cream supplies from excess milk, rather than to buy western 
cream. A comparison of the 1933 and 1934 receipts of cream 
by the states of origin shows the effects of this new policy: 





Table IX. 


* 






Receipts of Cream and Milk at Philadelphia by States 


o<f Origin, 




1933 and 1934. 






State 


Cream 


Milk 




40 quart units 


40 quart units 




1933 


1934 


1933 


1934 


Delaware 


3.178 


2,556 


517,018 


451,705 


D. of Columibia 


150 


690 






Illinois 


2,263 


1,821 






Indiana 


44.434 


20.538 


340 




Maryland 


34,202 


20,634 


847,706 


849,866 


Michigan, 


1,400 


600 






Minnesota i 


5,925 


1,990 






Missouri 


4,009 


3,506 






New Jersey 


2,032 


260 


562.933 


595,528 


New York 


2,121 


17,902 






Ohio 


8,940 


9,257 






Pennsylvania 


69,497 


104,757 


4,844,597 


5,078,585 


Texas 


200 








Virginia 


4,434 


246 






W. Virginia 


2,620 


1,385 


9,367 


23,084 


Wisconsin 


83,172 


76,470 


122 




Total 


268,577 


262,612 


6.787.631 


6,998,768 



Table DC shows that whereas only 41 per cent of the cream 
received at the Philadelphia market in 1933 came from terri- 

*U. S. Dept. of Agric, Bureau of Agric. Economics, Division of Dairy 
ajwl Poultry Production. 



Basic-Surplus Problems in the Philadelphia Milk Shed 91 



tories within or adjacent to the Philadelphia milk shed, in 
1934 this percentage had been increased to 56. While less 
than 26 per cent came from Pennsylvania in 1933 nearly 40 
per cent was produced within that state the following year. 
Excepting New York and Ohio, every state outside the shed 
reduced its cream shipments to this city in 1934, and the 
state supplying one-sixth of the total volume of cream in 
1933, Indiana, reduced its shipments more than half. The 
new cream price probably attracted more cream from the 
neighboring state of New York while the same factor may 
explain the slight increase from Ohio. New Jersey's reduced 
cream shipments are explained by the milk totals for the two 
years, the 1934 volume being much larger. This was due to 
the order of the New Jersey control board requiring Phila- 
delphia distributors to purchase more fluid milk in 1934 than 
previously. 

Much of this increase in cream production occurred in 
the latter part of 1934. The first orders issued by the Penn- 
sylvania control board set prices for Qass II (cream) milk 
out of line with competitive conditions. As a result there was 
heavy buying of cream from points far distant. Later orders, 
and especially Order Nimiber 17, effective Oct. 1, 1934, re- 
duced the price of cream to farmers to a level which gave no 
advantage to dealers in buying from distant areas, thus in- 
suring local producers a market for their entire production. 
It also made it possible for several more dairies to fimd out- 
lets for their production within the Philadelphia market. 

As an illustration of this trend we find that there was 
11.4 per cent more milk, or the equivalent of milk in cream 
and condensed milk, shipped to Philadelphia from the local 
cream zone during August, 1934, than during the correspond- 
ing period in 1933. Cream receipts were 26 per cent higher 
in August, 1934, than a year earlier. In the same period re- 
ceipts of condensed milk from the same area increased 19 per 
cent over those of 1933. On the other hand, western cream 
receipts dropped 33 per cent and condensed milk from the 



92 Bask' Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 93. 



west 13 per cent under the 1933 shipments. Local producers* 
cream began to crowd out a large proportion of the western 
cream in the fall of 1934 because of the lower surplus price 
within the Philadelphia milk shed. This rather sudden 
change in the cream supply is evidence of the artificial cream 
price in that market before 1934. 

in. OTHEHl FACTORS AFFECTING THE PHILADEL- 
PHIA PLAN 

Not only price but also inspection laws have been used in 
attempting to deal with the cream problem in the Philadel- 
phia market. As city health and sanitation requirements 
did not keep out western cream the State Health Department 
endeavored to restrict the entrance of western cream into 
Philadelphia through the use of its inspection procedures. 
This was first tried by refusing to inspect creameries outside 
the milk shed, as all milk and cream coming into the state 
were subject to Pennsylvania health laws and standards. This 
plan did not prove to be very successful. Because of the 
protest of one of the leading distributors, who shipped milk 
into the market from two large plants in Wisconsin, the head 
of the state inspection service, believing the protest justified, 
agreed to allow cream from these Wisconsin plants to enter 
after they had been inspected and found to meet the Penn- 
sylvania requirements in every respect. 

Still finding it difficult to curtail other western cream 
shipments the state health department succeeded in having 
a law passed which required two and one-half pounds of salt 
or sugar to be added to each one hundred pounds of milk and 
milk products used in cream, coming into the state from un- 
approved sources, hoping to detect and curb interstate ship- 
ments by this means. Before this law was fully tested as to 
its practicality a change in leadership in the state milk in- 
spection service took place. This new official advocated the 
program of definitely defining and limiting the Philadelphia 
milk shed, together with the creation of certain additional 



areas through inspection procedures but for emergency uses 
only. Having definitely limited the milk shed, inspection 
efforts could be concentrated against all who attempted to 
ship milk or cream into the market from without these areas. 

While the new head of the health inspection service did 
not succeed in carrying out the above ideas he immediately 
concentrated upon dairy inspection within the city*s milk 
shed. Although threatening to keep out western cream, he 
did not force this issue, but sought rather to have inspection 
within the shed carried on by methods different from those 
of the past. For years this work had been conducted by the 
Quality Control Department of the Philadelphia Inter-State 
Dairy Coimcil, which was financed by a check-off from all co- 
operating producers as well as from the distributors. The 
Federal Milk Marketing Agreement had made the Dairy 
Council the agency for allocating among the contracting dis- 
tributors certain producers for the purpose of equalizing the 
percentage of purchases of Class I milk by the dealers. This 
agreement also authorized the payment to the council of two 
cents for each one hundred pounds of milk purchased by the 
distributors for the carrying on of its functions. 

Invoking a Pennsylvania law which stated that the cost 
of inspecting a dairy farm must be borne by the buyer of the 
milk, the state health department issued an order in August 
1934, instructing all distributors to refuse to recognize any 
inspections by an inspector employed by the Dairy Council 
unless the dealers specifically paid for the service. Although 
this order was soon withdrawn, state inspectors were sent 
into Maryland, Delaware, and New Jersey areas which supply 
Philadelphia with milk. After reviewing a cross-section of 
every receiving station area in these districts and finding 
them unsatisfactory the distributors operating these stations 
were called together and given the alternative of sending out 
their own inspectors to correct the faulty conditions found 
there by the state men within thirty days, or having this milk 
kept out of Pennsylvania. The outcome was that each deal- 



94 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 95 



i 












er was forced to do his own inspecting rather than use the 
Dairy Council for this purpose as before. Whether or not tbio 
change has any effect on the normal milk supply for the 
Philadelphia market depends largely on the attitude of the 
new inspectors and upon the surveillance of the state inspec- 
tion department. 

If health inspection within the Philadelphia milk shed is 
lax, as the above description suggests, it means that those 
dairymen allowed to neglect these health and sanitation 
regulations are receiving a price differential over producers 
who strictly obey these requirements. And if lax enforce- 
ment of inspection laws is found in districts remote from the 
market whHe producers nearer this point have made the 
necessary improvements, the latter^s advantage due to prox- 
imity will be counteracted by the health and sanitation dif- 
ferential enjoyed by the former. Such preference will result 
in a widening of the fluid milk zone until the additional 
transportation costs are equal to the larger inspection ex- 
penditures of the shipper near the market. 

The Pennsylvania inspection movement also gives some 
indication of attempts to limit the milk shed through health 
regulations. When this means of control is used to maintain 
an artificially high price for Oass I milk, the result is in- 
creased production within the fluid milk zone. Also, this 
artiflcially determined zone together with a Qass I price held 
above the competitive level, enables the producers near the 
market over a period of time to secure most of this gain for 
themselves until the dairymen at the zone boundary receive 
no higher price than they would without the restriction on 
the size of the zone. Of course, the base-surplus plan, by 
assigning each individual producer a definite portion of' the 
Qass I market, protects the more remote dairymen, yet the 
near-by shipper can still acquire a disproportionate share of 
this monopoly gain by distributing his own milk or by selling 
to price-cutting dealers on a flat basis. 



Transportation and receiving station charges in the 

l^niiaCieipilia' UUUtV OUCTU. XlCtVC? CU.WCtjrO IL^C^JJI pCtXVA MJf \JU.O\,JLXKfVH,KJXiiJ 

and subtracted from the price to producers. Transportation 
zone rates have been based on railroad rates and receiving 
station charges have been determined by the dealers' cost ac- 
counting systems. Although these various charges have 
fluctuated somewhat with changes in transportation rates 
and other cost factors, they have remained, on the whole, 
fairly stable. The Federal Marketing Agreement allowed 
distributors a handling charge of six cents per one hundred 
pounds, known as a terminal handling charge, to be subtract- 
ed from producer price. It fixed transportation rates for the 
various zones and permitted the higher rates charged by the 
railroads for less than car lots from the country point to the 
terminal. The receiving station charges were placed at 2? 
cents per one hundred pounds. All of these deductions as 
well as the four cents going to the Inter-State association 
and the Dairy Council were subtracted from the price to the 
producer. Many points of disagreement have arisen between 
the producers association and the distributors over these 
various charges. The Inter-State has advocated the elimina- 
tion of terminal handling charges, the reduction of receiving 
station charges, and the deduction of carload rates from the 
price of milk shipped from receiving stations to terminal 
markets in place of the higher less than car lot rates. It has 
also contended that trucking expenses rather than railroad 
rates should determine the transportation deductions in 
areas where the milk is hauled by truck. 

Any reduction of receiving station charges and transpor- 
tation rates as well as the elimination of terminal handling 
charges may increase returns to dairymen slightly but its 
principal effect will be to penalize nearby shippers and to 
benefit producers at the outer boundaries of the Class I zone 
through reductions in the distance from the market dif- 
ferential. 

If it is true, as contended by some nearby producers and 



96 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 97 



by the report of the Federal Trade Commission on the Phila- 
■>^^^^^..^K^ ^M.M.xA,M. ^,.'^K,y WA.J.C4.W \A.x%j\,x *.Kf%jn,\jLi3 vic^Aivc dii a>u.uj. tiuii<ii train 
from milk shipped by rail and from receiving station charges, 
they may desire a larger milk shed than competitive pro- 
cesses warrant. Such a practice enables dealers to receive 
a higher margin on milk shipped from a distance than from 
milk transported by trucks from near-by points. And, of 
course, producers near the market lose by having to share 
the Class I market with those who under free competitive 
conditions would be supplying cream instead of milk for fluid 
use. Such a condition could not exist for long unless the 
Qass I price were artificially high, for otherwise returns to 
these remote dairymen, after the transportation charges 
were deducted, would not be sufficient to mduce them to pro- 
duce for fluid uses. 

Within the last two years the Philadelphia base-surplus 
plan has been widened in its operations by the inclusion of 
several additional receiving stations located farther west in 
Pennsylvania than the other stations. Although these sta- 
tions have been established for several years, the distributors 
untU 1934 bought the milk at a flat price. Any portion of 
this supply used as fluid milk or cream was paid for at Class 
I price, the flat price then becoming a composite one. This 
scheme enabled the dealers owning these receiving stations 
to protect themselves against a shortage of fluid milk in 
times of low production. 

Under the influence of the Pennsylvania control board 
these stations were included in the base-surplus plan in 1934, 
the producers supplying them establishing basics and receiv- 
mg their proportionate shares of the Class I market. This 
action widened the normal milk shed and by additions to the 
total basic quantities tended to decrease the percentage of 
mdividual bases receiving the fluid price each month. One 
large distributor having receiving stations in West Virginia 
contmued on the old plan of paying these producers on a flat 
basis. 



Some of the Philadelphia dealers have followed the prac- 



'trc-o 



age or minimum sales. In times of low production these dis- 
tributors meet additional sales by bujdng milk from outside 
sources. This practice has been encouraged by the presence 
within the milk shed of the Hershey Creamery Company, a 
large dairy manufacturing concern which buys from pro- 
ducers on a flat basis. As this lower price milk meets the 
market requirements for fluid milk and cream, it is possible 
for Philadelphia distributors to rely upon this supply rather 
than to build up their own reserve as a protection against 
shortages. If these dealers are able to acquire this outside 
supply in periods of shortage at or below Class I prices, their 
spread will be larger than the distributors who handle the 
excess supply, sometimes at a loss. 

There is also within the milk shed, and within a short 
distance of the market, milk supplies that are shipped to the 
New York market. The territories in which these supplies 
are produced were formerly included in the base-surplus plan 
but for one reason or another, among which was producer 
objection to tuberculosis testing, these farmers became 
alienated from their natural market and found buyers in New 
York. These sources of supply within the Philadelphia milk 
shed, and in some cases quite close to the market, are a con- 
stant threat to the smooth operation of the base-surplus sys- 
tem. This is especially true since the distributors to whom 
they seU have recently compelled these farmers to meet 
standards as high as those demanded in the Philadelphia 
market. Should this large output of milk enter Philadelphia 
it would have to be taken into the base-surplus system or 
that control measures would fail, or at best find its 
efficiency greatly impaired. The inclusion of this supply 
would result in a drastic contraction of the present fluid 
milk zone, under free competitive processes, while former 
producers for fluid uses excluded from the Class I market by 
this action, would supply the cream now coming from more 



98 Basic- Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 99 



distant points. However, these dairymen in the new cream 
zone would hesitate to give up producing for fluid uses until 
their equipment for that purpose is worn out. Under any 
circumstances the economic waste resulting from an imused 
supply of milk near the market meeting health and sanita- 
tion requirements must be paid for by producers supplying 
that market or by consumers, or both. 

IV. DISTURBANCES WITHIN THE PRODUCERS 

ASSOCIATION 

During the past five years discontented producers have 
voiced a great deal of criticism against dairy cooperatives in 
many of our large milk sheds. No doubt the reductions in 
prices received by dairymen during the depression period 
have been a fundamental cause of this agitation. In times of 
falling prices producers extend a more sympathetic ear to 
complaints and charges against the activities of their co- 
operative associations than they do when milk values are 
higher, or when they remain fairly steady over a period of 
time. Nevertheless, it is at such times that members take 
the most interest in their organizations and it is then that 
activities displeasing to them individually, or as minority 
groups of individuals, are brought to the attention of the 
public. Perhaps, the principal cause for minority protests 
against the officers of their cooperatives arises out of the 
operations of control plans. These protestants have stress- 
ed grievances arising from conditions similar to those that 
have been pointed out in the history of the operation of the 
Philadelphia base-surplus plan. 

This agitation has led, in some markets, to a contest for 
control of the association on the part of the discontented 
members, or even non-members, against those in power. The 
Inter-State Milk Producers Association not only experienced 
one of these contests but also was confronted by investiga- 
tions and by changes ordered by public authorities during 
this period. Although some of the forces affecting the 



Philadelphia milk industry have been referred to already in 
the discussion on the operation of the base-surnlus nlan. a 
short review of the happenings in the past few years is es- 
sential to an understanding of the problems that the pro- 
ducers* cooperative has faced, and is facing, in the Philadel- 
phia milk shed. 

We have observed that falling milk prices from 1930 to 
1933 were checked in June, 1933, by an increase in price in 
the Philadelphia market, brought about by a tentative agree- 
ment between the Inter-State and distributors in the area in 
view of the aid that they expected to secure through the 
Agricultural Adjustment Act. This agreement, with minor 
changes, was agreed to by the Secretary of Agriculture in 
August, 1933, and it confirmed the June price increase. How- 
ever, the discontent that had been developing for some time 
had achieved sufficient effectiveness to cause an organized 
protest against the proposed marketing agreement at the 
hearing held in Washington by the United States Department 
of Agriculture in June, 1933. Complaints were registered 
against the organization and management of the Inter-State, 
the production control plan in operation, and the operations 
of the Philadelphia milk industry in general. 

In spite of their failure to keep the agreement from be- 
coming effective the discontented groups continued to oppose 
it vigorously. When, in September, the Secretary of Agri- 
culture called a re-hearing on the operation of the Philadel- 
phia Marketing Agreement these dissatisfied elements pre- 
sented a still more vigorous protest against the agreement, 
the Inter-State and the Philadelphia milk distributors. 

In the meantime the cooperative association asked for 
changes in the agreement as its operation had suggested 
ways of improving it in a manner more favorable to pro- 
ducers. Perhaps, some of the changes desired were the re- 
sult of criticisms offered to the agreement by the opposing 
producers. At any rate, the A. A. A. announced amend- 
ments to this agreement late in October, 1933, which amend- 



100 Basic-Surplus Problems in the Philadelphia Milk Shed 



ments had to receive the approval of all parties to the con- 
tract before becomins' effective. As the ampnHTYipnts wat»p 
substantially those suggested by the Inter-State and favored 
producers, the Association ratified them immediately but the 
contracting distributors failed to do so, leaving the situation 
as it was before. 

As time went on the discontented groups become more 
vocal. On October 9, 1933, a committee of four stockholders 
of the Inter-State, through their attorney, published a broad- 
side of accusations of mismanagement, misappropriation and 
incompetence against officers and directors of the producers 
association. Through their agents these stockholders made 
an inspection of the stock records of the organization and 
this was followed by two stockholders filing complaints with 
the court, claiming illegalities in stock membership and mis- 
appropriation of stock funds. This claim resulted in an in- 
junction issued by the court temporarily restraining the 
Association from holding its annual meeting for the election 
of directors, in order that the court might investigate to see 
whether the charges were true or without foundation. 

Largely through the holding of protest meetings the dis- 
satisfied dairymen, and others directly or indirectly interest- 
ed in their cause, created an organization which came to be 
known as the Allied Dairy Farmers Association, although it 
was not incorporated until October 29, 1934. 

At the beginning of the year 1934 rapid changes 
took place in the dairy situation in Pennsylvania. On Decem- 
ber 23, 1933, a milk drivers' strike had been called in Phila- 
delphia. It was generally considered as a sjonpathy strike 
along with a walkout of certain other teamsters unions in 
sympathy with the taxicab drivers' strike which was taking 
place at the time. One week later, appealed to by the Na- 
tional Labor Board, most all drivers returned to work. On 
January 2, 1934, the union voted to arbitrate all their dif- 
ferences, dealing directly with the individual companies. 
Aside from the hardship on dairymen who lost several days 



Basic-Surplus Problems in the Philadelphia Milk Shed 101 



milk sales because of it, the strike served to add to the dis- 
content already engendered. Receiving whole-hearted sup- 
port from one Philadelphia daily newspaper the Allied group 
renewed their attack on the Inter-State and made charges of 
collusion with the milk dealers. One small group of pro- 
ducers attempted to open a milk store on a cash-and-carry 
basis in cooperation with striking drivers but the plan failed 
when city officials ruled that only pasteurized and properly 
inspected milk could be distributed. 

On January 3, 1934, the Pennsylvania Milk Control 
Board came into existence and two weeks later Secretary 
Wallace announced the termination of the Federal Marketing 
Agreement, leaving the Pennsylvania and New Jersey boards 
to deal with the situation in the Philadelphia milk shed. On 
the same day that this agreement was cancelled, Mr. H. D. 
Allebach, who had served as president of the Inter-State 
since 1922, resigned from that office to devote all his atten- 
tion to his work as sales manager, a position to which he had 
been appointed by the Inter-State Board of Directors in 1920, 
and which he had occupied continuously since that date.* 

At their January meeting the Association's directors 
took initial steps toward reorganizing their association when 
they accepted the report of a **middle ground committee" 
recommending changes in the By-Laws which aimed at recti- 
fying certain objections made to the method of control with- 
in the organization. After giving its report this committee 
continued to function and attempted to persuade the Allied 
Dairy Farmers Association to appoint members to serve on 
a new committee to draft revisions of the Inter-State By- 
Laws but that group refused to cooperate in this matter. 
Finally, at the regular bi-monthly meeting of the Inter-State 
directors in March a committee was appointed to revise the 
By-Laws. 

During the middle of February, 1934, the newly created 

♦Resigned as Sales Manager, effective July 1, 1935. 



102 Basic-Su7i>lus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 103 



control board held a hearing in Philadelphia prior to setting 
up regulations for the dairy industry within the state. At 
this hearing the Inter-State defended the Philadelphia mar- 
keting plan while members from the Allied group opposed it. 
Finding that the A. A. A., which had indicated previously 
that it was preparing a new agreement for the milk shed, 
had decided not to work in any market in which a control 
board was active, the Pennsylvania board took control of the 
situation, issuing its first order in April. This order set milk 
prices and stated production control methods. 

Throughout all of this activity the postponed annual 
meeting of the producers association had not taken place. A 
Philadelphia County Court had appointed Mr. Thomas F. 
Gain as Master to investigate and report on the jurisdiction 
of the court in the matter. If the court had jurisdiction he 
was to investigate the stock records, report his findings to 
the court, and then supervise the election of directors when 
held by orders of the court. The Master having decided 
that the court had jurisdiction and having proceeded with 
the inspection of stock records, the court ordered the election 
to take place on June 4 and 5, 1934. This election resulted in 
Inter-State nominated directors being chosen by a vote of 
6510 to 3365. 

At the September meeting of the newly elected board 
the amendments to the By-Laws drawn up by the committee 
appointed in March were adopted. The principal changes were 
in requirements for stock ownership and in the method of 
nominating directors, the new law requiring nominations for 
directors to be made by the various Locals and each director 
to represent a certain district within the milk shed. 

On May 4, 1934, at Harrisburg, a Philadelphia milk mar- 
keting committee to operate in cooperation with the control 
board was selected by producers supplying milk to the Phila- 
delphia market. Although candidates from the Allied as- 
sociation were placed in nomination the three producer mem- 
bers elected were Inter-State men. 



In May, 1934, Mr. Robert Brinton, a former director of 
the Inter-State, resigned his position as head of the milk in- 
spection service of the State Health Department and Gover- 
nor Pinchot appointed Mr. W. K. Moffett, a leader in the 
Allied organization, to the office. Mr. Moffett's asserted be- 
lief that the Inter-State was playing into the hands of the 
Philadelphia Milk Exchange, a non-profit corporation of 
Philadelphia milk distributors, led him to adopt milk inspec- 
tion measures designed to overcome any such practice. These 
measures are described elsewhere.* 

Because of Order Number 13, issued by the Control 
Board in July, which abolished the basic-surplus plan for the 
Philadelphia area the producers association and many in- 
dividual dairymen united in protesting against this order. 
The result was the rescinding of the order and the resigna- 
tion of one of the three board members. Dr. H. C. Reynolds, 
on July 27, 1934.** Dr. Reynolds appeared to be out of 
sympathy with the Philadelphia control plan. 

The final act in connection with the whole controversy 
that caused so many changes in the Philadelphia milk situa- 
tion was the Federal Trade Commission's investigation, hear- 
ing, and report to Congress. After a brief inspection of 
Inter-State records near the end of 1933 the Commission 
stated that it found no reason to investigate the work and 
activity of the association and that it, therefore, considered 
the files closed. This statement was made in January, 1934. 

In the last session of the 73rd Congress a resolution was 
passed on June 15, 1934, directing the Federal Trade Com- 
mission to inquire into conditions with respect to the sale 
and distribution of milk and other dairy products and to re- 
port their findings to Congress. This resolution was based 
on a demand for an investigation which followed the pre- 
liminary audit of dealers' books. The incomplete study had 



*p. 92 and 93. 
♦♦Reappointed July 2, 1935. 



104 Basic-Surplus Problems in the Philadelphia Milk Shed 



indicated large profits for the period preceding the first 
federal milk marketing licenses. The resolution also called 
for a show-down on the oft repeated charges that some dairy 
cooperatives are run by the distributors. 

After spending several weeks studying conditions in the 
Connecticut milk markets, and having made a preliminary 
study in the Boston area, the Commission began an investiga- 
tion in Philadelphia on October 1, 1934. As the outcome of 
several weeks work there it called a public hearing on the 
milk industry in Philadelphia for February 5, 1935. The 
hearing lasted for several days and much of the information 
brought out had been presented at the two hearings in con- 
nection with the Federal Milk Marketing Agreement for 
Philadelphia in 1933. On April 5, 1935, the Commission pre- 
sented to Congress a joint report on the Connecticut and 
Philadelphia markets in which it made several charges 
against the milk industries in each of the two markets, point- 
ing out instances in which producers had been placed at a 
serious disadvantage and declaring that practices of distri- 
butors had substantially lessened competition. Congress to 
date has taken no action on the Commission's findings other 
than to provide additional funds for further investigations. 



Chapter V. 

MINORITY OBJECTIONS TO THE PHILADELPHIA 

CONTROL PLAN 

The success of any milk control plan may be measured 
by the extent to which it aids in maintaining the most eco- 
nomical supply for the market. We have presented the forces 
that determine supply under unrestricted competitive pro- 
cesses with the belief that any artificial control which most 
nearly approached these competitive conditions would be the 
most economical one. In the previous chapter describing 
the development of the base-surplus plan in the Philadelphia 
market attempts were made to analyze its salient features in 
operation from this viewpoint. 

The only valid method for ascertaining the success or 
failure of the Philadelphia plan, or any other similar device, 
is by the results attained. One of the outstanding objectives 
of the base-surplus plan has been to minimize seasonal varia- 
tions in production by offering an inducement to dairymen to 
produce uniformly throughout the year. The economic justifi- 
cation for this program has been set forth revealing that it 
is essential to the maintenance of an economical supply for 
any market. The history of its operation points to the con- 
clusion that the Philadelphia plan has been highly successful 
in this respect when success is measured by comparisons 
with other markets attempting to control the seasonal varia- 
tion of their producers. Dairymen within the Philadelphia 
milk shed as a group have delivered a more uniform supply 
over a period of years than have the shippers within the pro- 
ducing region of any other metropolitan market. 

Comparison, however, is not an entirely satisfactory 
measurement. There remain the questions : Was this adjust- 
ment achieved in a manner that provides the most economical 
supply, and might not further adjustment have been practi- 
cal? Answers to these questions ought to confirm or deny 



#1 



106 Basic-Surplus Problems in the Philadelphia Milk Shed 

the excellence of any criticisms made against the Philadel- 
phia control measure and its operation. 

In our description of the Philadelphia base-surplus plan 
certain features of its operation indicated that the methods 
of determining basic quantities and price adjustments did 
not always result in fulfilling the needs of the market in the 
most economical manner. Had the classification price plan 
of reporting sales according to use been followed in the form- 
ative years of the plan, it may be that the fluid milk zone 
would be smaller than it now is, resulting in a more economi- 
cal supply, less excess milk, and less dissatisfaction on the 
part of producers located near the market. Combined with 
this factor was a Class I price too high at certain periods 
when measured by butter values, which encouraged the ex- 
pansion rather than the contraction of the fluid milk zone. 
This situation was aggravated by a high cream price forcing 
an extension of the Class I territory and causing producers 
to receive butter prices for most of their excess during part 
of this period, as distributors purchased the cheaper west- 
em cream. 

As to methods of determining individual basic quantities 
we observed that at times these favored dairymen producing 
large excess supplies thereby discouraging uniform produc- 
tion, which is the principal aim of the plan. When each distri- 
butor began to pay Class I prices for the percentages of basic 
quantities that his sales warranted an artificial differential 
was set up that encouraged producers shipping to some dis- 
tributors to increase output and discontent among dairymen 
supplying other dealers. This uneconomical practice was 
augmented by rules favoring producers within their terri- 
tories made by different state milk control boards within the 
Philadelphia milk shed. Base making rules usually favored 
old shippers to the extent of protecting their shares in the 
Class I market when their production did not warrant it, as 
no penalty was exacted for shipments lower than established 
quotas in other than base forming months. And there are 



Basic-Surplus Problems in the Philadelphia Milk Shed 107 

charges that both in transportation rates and in the enforce- 
ment of health and sanitation inspections the more remote 
producer was favored to the disadvantage, of course, of 
near-by dairymen. 

As these conditions could not exist under truly competi- 
tive processes because they hinder the securing of the mar- 
ket's milk supply in the most economical manner they en- 
danger the permanent success of the base-surplus plan. 
Some of these have been remedied and no doubt further im- 
provements are taking place. Yet it is these factors pri- 
marily that have created discontent among certain produc- 
ers causing them to criticize the Philadelphia plan, although 
they have been more prone to criticize the officers operating 
the control policy than to point out economic fallacies in the 
theories put into practice. That the Philadelphia plan has 
its severe critics was made clear in the previous chapter. Not 
only have the Allied Dairy Farmers Association and other 
individual dairymen opposed the base-surplus plan but they 
also have denounced the organization and management of 
the producers cooperative, as well as certain practices of the 
distributors. Various charges against the devices used by 
the Inter-State and the Milk Exchange have been made by 
these minority producers. These have been crystallized, to 
some extent at least, in the hearing and re-hearing on the 
Federal Milk Marketing Agreement, the hearings before the 
Pennsylvania Milk Control Board and, finally, in the hearing 
conducted by the Federal Trade Commission. To examine 
these charges with the aid of available data and to interpret 
them with respect to our previous analysis ought to clarify 
still further the operations and merits of the Philadelphia 
control plan. 

Perhaps more criticism has been leveled against the 
principles of the base-surplus plan and the methods of oper- 
ating it in the milk shed than against any other phase of the 
Philadelphia milk industry. The objections presented against 
this plan and its practical workings at the several hearings 



108 Basic-Surplus Problems in the Philadelphia Milk Shed 

or by leaders of minority groups are many and varied. They 
make an imposing list which includes the following : 

The base-surplus plan has not controlled production. It 
has neither evened-up production nor discouraged over-pro- 
duction. 

Producers are required to ship their surplus to market, 
and at a loss. 

Producers receive so little as basic that they have to in- 
crease their surplus in order to raise their basics to a point 
at which production is profitable. 

Basics when first granted were too high. 

The base-surplus plan causes new producers to over- 
produce the first year in order to overcome the handicap in 
establishing a base equal to their average yearly production. 

Farmers artificially boost production during the basic 
periods. 

When dairymen produce below their basic amounts new 
and lower basics must be established. 

The base-surplus plan benefits old producers to the dis- 
advantage of the newer ones. 

The new producer cannot get a basic or at best a very 
low basic. 

Basics are arbitrarily fixed by the organized distributors 
and the representatives of the producers association. 

The base-surplus plan works to the disadvantage of the 
producer near the market. 

The base-surplus plan enables the dealers to make 
exorbitant cream profits. 

The production control scheme has increased the cost of 
producing milk. 

The base-surplus plan does not take the cost of produc- 
tion into consideration. 



Basic-Surplus Problems in the Philadelphia Milk Shed 109 

Under the plan producers cannot determine whether or 
n«t thev are receiving: fair anH pmiitahl^ frAofm/i^nf fy^m fVi 






purchasers of their milk. 

It should be observed that most of the above criticisms 
apply to the practical application of the Philadelphia base- 
surplus plan rather than to the theory of controlling produc- 
tion by means of basic ratings. 

In an effort to determine the validity of these various 
charges a study was made of available production records of 
individual dairymen shipping supplies to three of the four 
largest distributors in the Philadelphia market. These three 
dealers, distributing about 75 per cent of the fluid milk sold 
in the Philadelphia area, permitted a study of the records of 
their producers as tabulated by the Inter-State Milk Produc- 
ers Association. The production record of every tenth 
dairyman on file was analyzed, 772 cards in all out of a total 
of almost 8000. Much of the data presented in connection 
with the following discussion is the result of that analysis. 

The period included in these records was from 1925 to 
1933, inclusively. Before 1929, however, the records are in- 
complete as it was not until that year that all monthly pro- 
duction figures were tabulated. Therefore, the five year 
period between 1929 and 1933, inclusively, is used for our 
survey. Monthly production records for both the year 1931 
and the year 1933 were totaUed in order to find out how near 
the producers came to supplying one-tenth of the total ship- 
ments to the three distributors. In 1931 the annual output of 
these shippers was much lower than one-tenth of the total 
supplies, representing slightly more than 75 per cent of that 
volume, but these secondary records failed to include any of 
the production from several receiving stations paid on a fiat 
basis at that time. For 1933 the total production of these 
dairymen was more than 98 per cent of the annual supply of 
these distributors, divided by ten. 

Considering the first charge that the base-surplus plan 
has not controlled production in the PhUadelphia milk shed 



^m 



110 Basic- Surplus Problems in the Philadelphia Milk Shed 

for it has neither evened-up production nor discouraged out- 
put in excess of fluid milk requirements, the following data 
are available. From 1921 to 1925, the first five years the 
plan was in operation, the range in seasonal variation for 
milk purchased under the base-surplus system was reduced 
from 54 to 23 per cent.* Also, within this territory during 
1922-1926, inclusively, farmers selling under the base-surplus 
plan produced 10 per cent more milk per cow in October, 
November and December and 5 per cent less per cow in April, 
May and June than dairymen in the territory who did not sell 
imder the plan.** 



Chart I. 



A«^r^^< 






^wvcmfC iX»J- ^oJuoUo^i 



•o IW- T*»e Yujr ) 







bBft*,ec,7 MoaIK Of 



A chart prepared by the Inter-State in 1935 giving the 
percentage variation between the month of high and the 

*Liiiiiiiger, F. P. : 'The Relation of the BaaiCnSurplus Marketm? Plan 
to Milk Production in the Philadelphia Milk Shed:" Pa. State College 
Bulletin 21, 1928; p. 3. 

•*Lininger, F. F. & Weaver, F. P. : "How to Adjust Milk Production 

iQQQ^® Philadelphia Marketing Plan;" Pa. State College Circular 123, 
1{7^U; p. 3. 



Basic-Surplus Problems in the Philadelphia Milk Shed 111 



month of low production from 1920, the year the plan was 
initiated to 1935 shows that the range is from 53 per cent in 
1921 to 22 per cent in 1934. This variation was reduced 
every year from the beginning of the plan until it reached 19 
per cent in 1925. In 1926 it rose to 22 per cent and in 1928 
to the high 37 per cent. From 1928 through 1934 it never 
equalled more than 25 per cent, falling to 16 and 15 per cent 
in 1931 and 1933, respectively. 

As to excess production in no year between 1925 and 
1931 did it equal as much as 13 per cent of the total produc- 
tion for the year. The large falling off in sales in 1932 and 
1933 caused the surplus to mount to more than 20 per cent 
in those years. 

Considering the matter of excess production our analy- 
sis shows the basics to be higher than the total monthly 
shipments, divided by twelve, of the 772 producers for both 
1931 and 1933, the two years for which all monthly produc- 
tion records were totaled. Their total shipments for 1931 
and 1933 were 37,073,561 lbs. and 39,767,885 lbs., respective- 
ly, while their monthly established basic quantities multiplied 
by twelve added to 37,628,885 lbs., for 1931 and 41,801,616 
lbs. for 1933. 

Continuing our analysis for the five year period in which 
the records are complete, we discover from Taxle X that one- 
fifth (21.5%) of these producers did not average their basic 
quantities in any year, and more than one-half (52^^^) failed 
to average their basics in the majority of the years during 
this period. A small number of these dairymen, not more 
than one or two per cent in any year, may have their low 
averages in one of these years attributed largely to a de- 
crease in the size of herds because of tuberculin tests. On 
the other hand, slightly less than one-fifth (18.6%) of the 
producers averaged their quotas every year and 44.3 per 
cent shipped more than their basic quantities, multiplied by 
twelve, in a majority of the years. As these samples include 
shippers from every territory within the Philadelphia milk 



112 Basic- Surplus Problems in the Philadelphia Milk Shed 

shed the data indicate that any excess was not due to high 
production throughout the year by a majority of the dairy- 
men but must have been the result of excess output at cer- 
tain seasons, or have been caused by a minority of farmers 
producing far above their basic quantities. 



Table X. 

Comparison of Annual Milk Shipments With Basic Quantities. 

Period: 1929-1933 Distributors Total 



Averaged Base Every Year 15.4% 

Averaged Base Majority of Years 35.9 

Average Below Base Every Year 29.9 

Average Below Base Majority of Years 58.1 
Even- Average Below and Above Bases 6.0 



B C 

27.7% 17.5% 18.6% 
48.2 44.8 44.3 



16.9 
46.2 



5.6 



21.2 



53.2 
2.0 



21.5 
52.0 



3.7 



This table also suggests that another charge made 
against the operation of the base-surplus plan is untrue, 
namely, that producers are required to ship excess produc- 
tion to distributors. If more than one-fifth of the dairy- 
men shipped less than their basic quantities, multipUed by 
twelve, in every one of these five years and more than a half 
of them did not average their bases in at least three of these 
years, it would appear that no pressure was exerted to make 
them ship more than their allotted quotas. On the contrary, 
in the latter part of this period with lowering consumption 
and with only a percentage of basic quantities receiving Qass 
I prices, the distributors should have benefited through these 
smaller shipments. Table XI gives more evidence to dis- 
count this criticism of compulsory shipments of excess pro- 
duction. 



Basic- Surplus Problems in the Philadelphia Milk Shed 113 



Table XI. 
Comparison of Monthly Shipments \^th Basics. 

Period: 1929-1933 Distributors 



12.8 



A 

Below Base Every Month in One Year 34.7% 
Aibove Base Every Month in One Year 12.7 
Number of Years Shipments were Be- 
low Bases Every Month 
Number of Years Shipments were Be- 
low Bases 11 Months or More 
Number of Years Shipments were Be- 
low Bases 9 Months or More 
Number of Years Shipments were Be- 
low Bases 6 Months or More 



B 
20.8% 
16.2 

6.9 



21.0 12,8 



C 

26.7% 
21.7 

8.8 

16.4 



35.9 



49.9 



26.0 32.0 



53.0 58.3 



Total 

26.4% 
18.7 

8.9 

16.1 

31.0 

54.8 



The percentages in Table XI are based on a total of 3114 
years, representing the number of producers multiplied by 
the number of years each one shipped to the market. As 
some of these drirymen became shippers after 1929 the total 
number of years does not amount to 3660, the number of 
producers, (772^ multiplied by five. In more than one-half 
(54.8%) of thes 3114 years the monthly shipments were be- 
low the establisLed basics of the producers in at least six 
months out of the year. Monthly shipments were lower than 
basic quantities in nine or more months in nearly one-third 
(31%) of these years, and for more than one-sixth (16.1%) 
of the time the supplies did not equal basics in at least eleven 
months of the year. In 8.9 per cent of the years the ship- 
ments did not come up to the allotted quotas in any month of 
the year. 

I^ss than one-sixth (18.7%) of the shippers more than 
equaled their bases throughout the entire twelve months of 
one or more years, while slightly more than one-fourth 
(26.4%) were below their established quotas during every 
month of one or more years. Surely, the matter of shipping 
milk in excess of basics did not worry the majority of these 
dairymen during most of this five year period nor during the 
majority of the months of any year. Rather, their problem 
appears to have been one of producing up to their quotas. 



114 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic- Surplus Problems in the Philadelphia Milk Shed 115 



We must remember, however, that after 1930 these produc- 
ers were not paid Class I prices for their entire established 
basics but for the percentages only that fluid milk sales war- 
ranted. This practice was no doubt influential in keeping 
production lower than basic quantities in many individual 
cases. Table XII gives further proof of this fact. 

Table XII. 

Number of Producers FaUing^ to Average Basics. 

Did not average Basics in 1929 1930 1931 1932 1933 

Dealer A 35 46 70 72 79 

Dealer B 61 88 96 94 96 

Dealer C 119 154 194 212 224 

Total 215 288 360 378 399 

Here we notice an increase each year in the number of 
producers failing to average their established basic quanti- 
ties. The number of shippers in the milk shed became greater 
each year, it is true, but the increase in the percentage of 
dairymen not averaging their basics is much larger than the 
percentage increase in new producers for each year during 
the period. 

The foregoing statistics indicate a lowering of produc- 
tion as total purchases of the distributors also show. The 
base-surplus plan, with its two or three class price schedule, 
appears to have discouraged excess supplies as well as tend- 
ed to even up production. In this period of falling prices the 
majority of dairymen, desiring to avoid low surplus prices, 
limited their production to a point that did not cause large 
excess supplies during most, if any, months of the year. 
These figures refute the statement made by a leader of the 
Allied group to the effect that producers receive basic price 
for such small quantities that they are forced to increase 
their surplus production in order to raise their basics to a 
point which makes production profitable. After all, Qass I 
payments are determined by sales and the only way any 
shipper can benefit through increased output is through the 
failure of other dairymen to keep their quotas intact. 



The failure of so many producers to keep production as 
high as their basics suggests our examining another criticism 
against the operation of the base-surplus plan. It is that 
basics, when first granted, were too high, giving the oldest 
shippers in point of time an advantage that has handicapped 
new producers. It must be recognized, of course, that any 
such handicap to new producers would have lost most of its 
effect years ago as dairymen would continue to build up 
their basic quantities until their totals equaled Qass I sales 
regardless of the advantage of high bases at the outset. As 
farmers in the early years of the plan were permitted to set 
their own quotas it may be that they were too optimistic 
about their ability to supply given quantities of milk through- 
out the year, for there are no available records for that 
period, yet, if this were true all traces of this practice had 
been eliminated by 1929 as the following table discloses. 

TABLE Xm. 

Year in Whlcsh Basic Was Highest. 



Highest Base in 


1929 


1930 


1931 


1932 


1933 


1934 


Dealer A 


7 


17 


27 


5 


29 


32 


Dealer B 


39 


30 


24 


1 


42 


60 


Dealer C 


65 


51 


49 


6 


79 


132 


Total 


111 


98 


100 


12 


150 


224 



Although the number of dairymen with highest estab- 
lished quantities in 1929 is greater than the number for any 
of the following three years, this table shows highest basics 
concentrated largely in 1933 and 1934. And, there are ex- 
planations for the lower figures during the other three years. 
In 1932 no new basics were to be established, the 1931 quotas 
holding over for the following year. Beginning in 1929 a 
three year average was used for the first time in establishing 
bases and new shippers were allowed only 70 per cent of their 
fall production as basic for the ensuing year. These rulings 
tended to cut down quotas in 1930 and 1931 and this is 
especially true since many new producers are recorded be- 
tween 1929 and 1932, while there are few for 1933 and 1934. 



!-i )• 



116 Basic-Surplus Problems in the Philadelphia Milk Shed 



There were no established bases for New Jersey dairymen in 
1934, nor in 1929 for New Jersey producers shipping to one 
of the distributors, and these omissions may have affected 
our analysis somewhat. Also, some 75 shippers are not in- 
cluded in the table because they did not enter the base-sur- 
plus system imtil 1933 or 1934. 

Table XIV verifies the facts brought out in Table XIII 
by showing the upward trend of basics, in spite of a de- 
creasing total production. 



Period: 1929-19S4 



Table XIV. 
Movements of Basics. 

Distributors 



Increasing Since 1929 
Decreasing Since 1929 
Increasing Since 1932 
Decreasing Since 1932 
Increasing To 1934 
Decreasing To 1934 
Highest Base In First Year 
Highest Base In Last Year 



A 
13.1% 

6.5 
28.2 
38.2 
16.4 

0.9 
14.5 
28.1 



B 

16.3% 

13.6 

38.3 

29.6 

10.5 

2.5 

5.6 
35.7 



C 

11.6% 

8.1 
29.9 
28.0 
11.9 

6.8 

2.9 
35.1 



Total 

13.3% 

9.5 
31.7 
30.1 
12.3 

4.6 

5.6 
34.3 



Although nearly as many shippers decreased their 
quotas after 1932 (30.1%) as increased them since that date 
(31.7*^^), more than one-third (34.3%) had their highest 
basics in the last year (1934 for most of them and 1933 for 
New Jersey shippers) . The percentage of shippers increas- 
ing their allotted quotas to 1934 and then allowing them to 
drop is only 12.3. A higher percentage continued to in- 
crease their basics since 1929 than were lowered recessively 
since that year. Only a few (4.6%) increased their estab- 
lished quantities in 1934 after permitting them to fall every 
year previous to that date. The small number (5.6%) hav- 
ing their highest base in the first year of full shipments leads 
to the conclusion that few new shippers attempt to over- 
come the handicap of establishing a high base at the be- 
ginning by unusually high production the first year. Further- 
more, most of the dairymen with the high first year basics 



Basic-Surplus Problems in the Philadelphia Milk Shed 117 

ship to the same distributor and it might be observed that 
the highest percentage of dairymen decreasing their quotas 
since 1932 ship to this same dealer. 

Table XV. 
1985 Basics As Determined By the Eig^ht Months Average. 

Distributor Total 

ABC 
1935 Basics Higher 45.9% 62.7% 41.6% 48.3% 

1935 Basics Lower 54.1 37.3 58.4 51.7 

From Table XV, representing 1935 basics if they are 
determined by the first eight months averaged production as 
provided in the Pennsylvania control board order, we find 
that slightly more than one-half (51.7%) would be lowered. 
Reviewing our data shov/ing the failure on the part of the 
majority of producers to keep shipments steadily up to 
basics, we might expect the 1935 method for establishing 
these quantities to lower many of them. This downward shift 
would be still more pronoimced if producers shipping to dis- 
tributor B did not show the opposite trend. It might be 
noted that a higher percentage of the dairymen shipping to 
this dealer have increased their quotas since 1932 than those 
producing for the other distributors, and that these farmers 
received Class I prices for almost 100 per cent of their basic 
quantities in July and August, 1934. This fact seems to con- 
firm a previous statement that the practice of each dis- 
tributor in paying Class I prices each month on that per- 
centage of basics that his sales warrant creates an artificial 
differential favorable to the producers of the dealer paying 
the highest percentages and this differential encourages these 
dairymen to increase their production, enabling them to 
secure a larger proportion of the total basic quantities. 

The fact that total production has been decreasing 
while our data indicate a high percentage of increasing 
basics in 1933 and 1934 seems to support the charge that 
farmers artificially boost production during basic periods. 
This was quite evident in the formation of 1933 quotas when 



118 Basic- Surplus Problems in the Philadelphia Milk Shed 



an unusually high volume was shipped during October, 1932, 
the only month in which production counted in base making. 
It has been claimed that producers borrow cows from those 
on a flat price basis during the base making period, that 
many cows are bought immediately preceding the base period, 
and that feed bills are much higher during that time. If 
these methods are used generally to build up high output 
during basic months, it would be much better to determine 
basics on a yearly average basis and the 1934 quotas follow 
this plan in part in using an eight months average. However, 
if the foregoing practices are general and if cows with a 
basic do bring a much higher price when sold than non-basic 
herds, as contended, it is an indication that Class I prices are 
too high. For, otherwise, it would not be profitable for dairy- 
men to adopt these costly practices. Yet, Table XVI implies 
that the majority of farmers do not f oUow these practices. 

Table XVI. 

Distribution of Production by Quarterly Periods. 

Periods: 1929-1933 Distrifbutors 

ABC 
Highest Production in First Quarter in 
Most Years 21.3% 

Hig-hest Production in Second Quarter 
in Most Years 19.7 

Highest Production in Third Quarter 
in Most Years 2.6 

Highest Production in Fourth Quarter 
in Most Years 29.1 

Highest Production Varies Among 
Quarters 27.3 

Gained by 1931 Base Remaining for 
1932 75.0 

Lost by 1931 Base Remaining for 
1932 25.0 

From the above data we see that the largest group 
(30.1%) had their highest shipments during the second 
quarter of the year when the surplus price is usually lowest. 
The group producing highest quantities in the fourth quarter, 



Total 



8.7% 


6.7% 


9.9% 


30.8 


33.2 


30.1 


15.9 


9.3 


10.0 


19.0 


22.9 


22.8 


25.6 


27.9 


27.2 


64.2 


65.0 


66.4 


35.8 


35.0 


33.6 



Basic- Surplus Problems in the Philadelphia Milk Shed 119 



in which basic forming months were included most often, 
comprised less than one-fourth (22.8%) of the total number. 
Among distributors there is a wide range in the number of 
producers sending their highest volumes during the four dif- 
ferent periods but this variation may be due largely to the 
nature of the farm land in the different territories from 
which the dealers collect their supplies. Distributor C, for 
example, receives much milk from sections where large 
pastures are prevalent, therefore, producers in these districts 
might be expected to ship more milk in the second three 
months of the year than in any other similar period. This 
table also shows that two-thirds of the shippers gained by 
having their 1931 basics remain for 1932, on the basis of their 
fall production for 1931. It indicates that these producers 
made no special effort to keep production high in the fall 
months of 1931 as no new quotas could be made for the fol- 
lowing year. 

As to the criticism that dairymen producing below their 
basic amounts must accept new and lower quotas, the fore- 
going analysis gives evidence to the contrary. Although more 
than one-half of the producers in this study did not average 
their basic quantities during the majority of these five years, 
it did not necessarily mean that their basics were lowered for 
the year following one of low production. Only when they 
failed to keep production as high as their quotas during the 
basic establishing months were their bases lowered. As 
every dairyman knew in advance what months were to be 
used in determining his basic for the following year any in- 
crease or decrease in that volume was his own individual 
problem. It was not until the change in the method for 
establishing basics for 1935 that new ones depended on aver- 
age production over a series of months. For 1935 an eight 
month's average was used although this plan was not an- 
nounced until October 1, 1934, after the base forming period 
was past. Yet, in this case the producer was given the option 
of retaining his old quota for 1935, although it might be 



120 Basic-Surplus Problems in the Philadelphia Milk Shed 



Basic-Surplus Problems in the Philadelphia Milk Shed 121 



lowered slightly because of a redistribution of the total basic 
volume, in order to permit those with high output during this 
eight month's period their larger proportionate share of the 
total established basic quantities. This plan penalized the 
dairymen with uniform production held down to their basic 
amounts in order to favor shippers with large excess produc- 
tion during this eight months' period. 

The base-surplus plan as operated in the Philadelphia 
milk shed with respect to the creation of basics has tended 
to favor old producers to the disadvantage, of course, of the 
newer dairymen. The absence of penalties, imtil 1933, for 
production below basic amounts was a significant phase of 
this favoritism. This discrimination was not present during 
the early years of the plan when old and new shippers were 
placed on the same basis with respect to Class I quantities. 
It was not until 1927 that the new producer was not per- 
mitted to establish a base for the following year equal to the 
average of his total fall production and that old shippers had 
their basics determined in part by quotas for previous years. 
Beginning in 1929 the methods for establishing basic quanti- 
ties tended increasingly to favor old producers, first by using 
three year averages for determining quotas and finally by 
granting no opportunity to increase basic volumes in 1932. 
At the same time dairymen entering into the base-surplus 
system received only a percentage of their basic forming 
production as their established bases. 

The reason advanced for this protection granted to old 
shippers was the danger of market instability resulting from 
excess production. As old producers had assumed the addi- 
tional expenditures for meeting health and sanitation require- 
ments necessary to market Class I milk, and as these were 
fixed costs, it was only reasonable that these dairymen 
should receive the benefits. Prices were relatively low, even 
for Class I milk, and it would not be economical to allow new 
producers to share this market on the same basis as old ship- 
pers when the latter were already able to supply market 



needs. Furthermore, the reasoning continued, many, per- 
haps most, of these old shippers had made the additional out- 
lay for evening-up production in order to gain the price 
benefit resulting from uniformity of supply and they should 
be rewarded by a sort of vested interest in the Class I mar- 
ket. 

However, beginning in 1933 part of this advantage of 
old producers was removed when the practice of using a 
three year average was discontinued in determining quotas. 
Nevertheless, as no new basics had been granted in 1932, the 
1933 bases, in effect, did depend to a marked degree on pro- 
duction as far distant as 1929. And, since the 1934 quotas 
were attached in part to those of 1933 this dependence on 
output of previous years continued. Also, during these two 
years new producers found difficulty in securing a market 
for their milk in fluid form. Therefore, it can be said that 
the plan for establishing 1935 basics, for the first time in 
several years, offered the new shipper an opportunity to 
secure a proportionate share of the market supply. Even 
then the concession was more apparent than real. First, be- 
cause it was still difficult for the new producer to enter the 
Class I market, and also because the plan was not an- 
nounced in time for him to take advantage of the opportu- 
nity. On the whole, the new method benefited old shippers 
with high excess production rather than the new producer. 

The above description confirms the charge that the new 
producer cannot get a basic at all, or at best a very low one. 

This protection for old shippers is an indication that 
Class I price is higher than a truly competitive one. Other- 
wise, no protection would be necessary for new producers 
could not afford to make the expenditures necessary to pro- 
duce for fluid uses, unless they were in favorable positions 
enabling them to take advantage of the price differentials. 
But an artificially high price together with a closed base sys- 
tem encourages an artificially large Class I zone. Were the 
price reduced to the competitive level producers at the outer 



122 Basic-Surplus Problems in the Philadelphia Milk Shed 



boundary of the Class I zone and other marginal shippers 
would gradually turn from production for fluid uses and any 
gap left in the supply of Class I milk would be filled by new 
producers in a favorable position with respect to the trans- 
portation differential or the differential caused by health and 
sanitation requirements, or both. It is true that closed bases 
together with any economy resulting from a relatively uni- 
form production would retard this shift but it would not pre- 
vent the transition. However, discriminatory inspections 
and monopoly transportation rates might prevent it. 

Another criticism is that basics are arbitrarily fixed by 
the organized distributors and the representatives of the 
producers association. It is true that the methods for estab- 
lishing these quotas have been the result of interpreting 
future marketing conditions by the dealers and the associa- 
tion representatives in conference. That these decisions have 
been determined arbitrarily, without study and reflection and 
with no regard for producer interests would be difficult to 
prove. Just as it is advantageous for distributors to receive 
a steady, adequate supply so is it beneficial for association 
members to have basics established in a manner that will 
guarantee that supply with the smallest excess possible. In 
arriving at this method it may not be possible, it is no doubt 
impractical, to adopt a plan that will affect equally all pro- 
ducers ; the nature of milk production and of milk marketing 
precluded it. There is little doubt, however, that the methods 
adopted have benefited the majority of producers and the 
majority, of course, are old shippers. 

With respect to the individual producer it is true that 
distributors have made special arrangements in specific 
cases, but on the whole they have followed the rulings of the 
Association regarding the establishment of basics. It is dif- 
ficult to make an iron-clad rule in this matter and one of the 
duties of a producers association is the hearing of complaints 
concerning basics and attempting to adjust grievances. It 
can be said, I believe, that officers of the Inter-State have 



Basic-Surplus Problems in the Philadelphia Milk Shed 123 



gone more than half-way in their efforts to persuade dealers 
to adjust individual quotas in a manner favorable to the dis- 
satisfied member. 

In the interpretation of production records it was found 
that no one rule for the establishment of first basics of new 
shippers was followed exclusively in any of the years but a 
tendency to follow the stated rule was the practice. For 
1929, 24 out of 45 new producers received a base equal to 70 
per cent of their fall production, according to the Inter-State 
ruling. Fifteen, and all of them shipping to the same dealer, 
received basics equal to 100 per cent of their fall output. This 
was discrimination in favor of these shippers but there was 
no discrimination between individual dairymen supplying the 
same distributor. In fact, this same dealer also granted 
basics equal to 100 per cent of their fall supplies to 37 of his 
old shippers. Of the remaining six new producers, two began 
shipping too late in the year to have the rule apply but re- 
ceived 70 per cent of their first thirty days' shipment instead. 
The other four basics varied from 60 to 200 per cent of fall 
production records. 

For 1930, 40 of the 54 new shippers were granted quotas 
according to the rule, while the one distributor continued to 
grant 100 per cent of their averaged fall production to his 
five new producers. The remaining 9 each received a basic 
quantity higher than the rule allowed. In 1931, out of 41 new 
dairymen 33 basics were estimated according to the rule 
while the dealer mentioned above still continued to allow five 
of his new producers quotas equal to 100 per cent of their 
averaged fall output, and 80 per cent to the remaining three. 
Fifteen new shippers received their allotted basic quantities 
in 1932 while the one dealer continued to vary from the rule 
by granting a higher base to each of his three new shippers. 
For 1933 the 19 new producers were all added by one dis- 
tributor and there was a great deal of variance in the 
methods of estimating their quotas, depending on the dates 
the shippers entered the market. Only two new farmers were 



124 BasiC'Surplus Problems in the Philadelphia Milk Shed 

added in 1934. These cases bear out the statement made by 
an officer of one large milk company that the distributor may 
make an agreement with a whole group of dairymen or with 
an individual who desires to enter the market, but that the 
dealers do not necessarily follow Inter-State rulings regard- 
ing basics of new producers. It can be said, however, that 
the dealers rarely allow less than the amount provided for by 
the rules of the Association. 

By applying the rules for establishing basics of old ship- 
pers the following were found to be out of line with the rules 
for the various years: 



Basics too low 
Basics too high 



1929 1930 1931 1932 1933 1934 

20 14 13 3 12 1 

49 57 49 21 10 4 



In some instances the records showed that adjustments 
had been made and sometimes the reasons for the changes 
were stated. Also, these records, being secondary ones, some- 
times failed to include allowances for days in which no ship- 
ments were made for one reason or another. This omission 
would render invalid any mathematical check for determining 
how closely the rules were followed. In a few cases, however, 
and especially in reference to the shippers of one dealer, sev- 
eral higher bases for 1932 when no new quotas were to be 
established appeared to be warranted only on the basis of 
high average monthly shipments. Again, many increases in 
some years were in the basics of producers from some one 
territory for which special arrangements had been made be- 
tween distributors and shippers. In one instance at least 
such an arrangement resulted in higher basics than the rules 
specified in one year, but the following year these producers 
received slightly lower quotas than permitted by the rule. It 
is true, of course, that special consideration g^ven to any pro- 
ducer or group of producers in the granting of basic amounts 
penalizes all other dairymen in so far as it lessens their pro- 
portionate share in the fluid milk market, causing them to 



Basic-Surplus Problems in the Philadelphia Milk Shed 125 

receive Class I prices on a smaller percentage of the total 
basic volume. 

To investigate the charge that the Philadelphia base- 
surplus plan operates to the disadvantage of dairymen near 
the market involves the consideration of several factors. Any 
base-rating plan aims to protect the Qass I market against 
seasonal fluctuations in production for which the more re- 
mote farmers are usually more responsible, on the whole, 
than near-by shippers. No matter how large this seasonal 
excess may be the near-by dairyman can be certain that his 
uniform supply, if regulated by his basic, will command Qass 
1 prices as long as the total basics are kept within the volume 
of Class I sales. As the producer close to the market often 
has high feed costs and the additional expense of producing 
uniformly he expects this protection from the plan. 

On the other side is the fact that a base-rating plan may 
be administered in a way that takes away some of the natural 
advantage possessed by the near-by dairyman because of his 
location. Under such a scheme he may be forced to share 
the market with other producers regardless of his ability to 
produce and market fluid milk more advantageously than 
dairymen at the outer boundary of the Qass I zone. In 
periods of expanding sales this natural advantage that should 
aid him, ordinarily, in securing an additional portion of the 
market supply may be curtailed by the operation of a plan 
that distributes this additional fluid milk throughout the 
zone or among new producers. And in periods of decreasing 
sales the low Class I price may not enable him to meet feed 
costs while the more remote farmer with large pasture may 
keep on producing more than his allotted share of the Qass 
I market. It is in these seasons of large excess production, 
when Qass I prices are relatively low and these prices are 
paid on a smaller and smaller percentage of his basic, that 
the near-by producer begins to object to a plan supporting 
a larger milk shed than consumption for fluid uses requires. 
It was at such a time that some shippers close to the Phila- 



120 Basic-Surplus Problems in the Philadelphia Milk Shed 



lowered slightly because of a redistribution of the total basic 
volume, in order to permit those with high output during this 
eight month's period their larger proportionate share of the 
total established basic quantities. This plan penalized the 
dairymen with uniform production held down to their basic 
amounts in order to favor shippers with large excess produc- 
tion during this eight months' period. 

The base-surplus plan as operated in the Philadelphia 
milk shed with respect to the creation of basics has tended 
to favor old producers to the disadvantage, of course, of the 
newer dairymen. The absence of penalties, until 1933, for 
production below basic amounts was a significant phase of 
this favoritism. This discrimination was not present during 
the early years of the plan when old and new shippers were 
placed on the same basis with respect to Class I quantities. 
It was not until 1927 that the new producer was not per- 
mitted to establish a base for the following year equal to the 
average of his total fall production and that old shippers had 
their basics determined in part by quotas for previous years. 
Beginning in 1929 the methods for establishing basic quanti- 
ties tended increasingly to favor old producers, first by using 
three year averages for determining quotas and finally by 
granting no opportunity to increase basic volumes in 1932. 
At the same time dairymen entering into the base-surplus 
system received only a percentage of their basic forming 
production as their established bases. 

The reason advanced for this protection granted to old 
shippers was the danger of market instability resulting from 
excess production. As old producers had assumed the addi- 
tional expenditures for meeting health and sanitation require- 
ments necessary to market Class I milk, and as these were 
fixed costs, it was only reasonable that these dairymen 
should receive the benefits. Prices were relatively low, even 
for Class I milk, and it would not be economical to allow new 
producers to share this market on the same basis as old ship- 
pers when the latter were already able to supply market 



Basic-Surplus Problemst m Ar 



Shed 121 



needs. Furthermore, tiLe ,.. 
haps most, of these old 



^iXii 



lay for evening-up producticn: in 

benefit resulting from umfL ^ 

be rewarded by a sort af 
ket. 



iilMlilir^* 



many, per- 
additional out- 
to gBin the price 
^^. and they ^ould 
in the Class I mar- 




■;i,5; 



However, beginning in * 
old producers was remu 
three year average was 
Nevertheless, as no new baacs 
1933 bases, in eifect. ^d. 
duction as far distant a:s ^.^^. 
were attached in pajrt to 
output of previous yeaai 
years new producers fomni 
for their milk in fluid form, 
the plan for establishing 
several years, offered the --.^w 
secure a proportionate shar^ cf 
then the concession was mr 
cause it was stiU difficult *.>.^ ..nt 
Class I market, and also ^eeaas* 
nounced in time for him 
nity. On the whole, tite „-.-^. 

with high excess produetici: V'- -JhiJ!: the new producer. 

The above descriptiQn : : ^ _:.^ .jiarge that the new 

producer cannot get a basic i: iZ. rr tt "best a very low one. 

This protection for ci. -i*^^^ ^^ indication that 

Class 1 price is higher tham m tnitF onqpctztzv^ one. Other- 
wise, no protection would Bife ■w^SEry tmt ■pw producers 
could not afford to make tie ti^psi?^ . . : necessary to pro- 
duce for fluid uses, unli^& uitiiy \wsre a fiworable positions 
enabling them to take aAnHiiide if ttie price differentials. 
But an artificially high pr ^j !!■ j ijnxh a closed base sj- s- 
tem encourages an artiffciaHy Ikrjc Cbes I zone. Were the 
price reduced to the com^edlDBi^ieifdliBwiacers at the outer 



TJi-r: :/f this advantigc of 
T'f Tiractice of using a 
determining quotas, 
granted in 1932, the 
m MHti^sied d^ree on pro- 
tiie 1934 quotas 
dependence on 
_ these two 
roilly m Wbcwrmg a market 
3t can be said that 
the first time in 
>f:: Bn opportunity to 
mi-rket supply. E\"en 
MfiJ\ real. First, be- 
'^nducer to enter the 
plan was not an- 
r of the opportu- 
r.-fited did shippers 



4-Iit' 



'«— ^'i.^ 



122 BasiC'Surplus Problems in the Philadelphia Milk Shed 

boundary of the Class I zone and other marginal shippers 
would graduaUy turn from production for fluid uses and any 
gapTlefTin the'supply of Qass I milk would be filled by new 
producers in a favorable position with respect to the trans- 
portation differential or the differential caused by health and 
sanitation requirements, or both. It is true that closed bases 
together with any economy resulting from a relatively uni- 
form production would retard this shift but it would not pre- 
vent the transition. However, discriminatory inspections 
and monopoly transportation rates might prevent it. 

Another criticism is that basics are arbitrarily fixed by 
the organized distributors and the representatives of the 
producers association. It is true that the methods for estab- 
lishing these quotas have been the result of interpreting 
future marketing conditions by the dealers and the associa- 
tion representatives in conference. That these decisions have 
been determined arbitrarily, without study and reflection and 
with no regard for producer interests would be difficult to 
prove. Just as it is advantageous for distributors to receive 
a steady, adequate supply so is it beneficial for association 
members to have basics established in a manner that will 
guarantee that supply with the smallest excess possible. In 
arriving at this method it may not be possible, it is no doubt 
impractical, to adopt a plan that will affect equally all pro- 
ducers ; the nature of milk production and of milk marketing 
precluded it. There is little doubt, however, that the methods 
adopted have benefited the majority of producers and the 
majority, of course, are old shippers. 

With respect to the individual producer it is true that 
distributors have made special arrangements in specific 
cases, but on the whole they have followed the rulings of the 
Association regarding the establishment of basics. It is dif- 
ficult to make an iron-clad rule in this matter and one of the 
duties of a producers association is the hearing of complaints 
concerning basics and attempting to adjust grievances. It 
can be said, I believe, that officers of the Inter-State have 



Basic-Surplus Problems in itie Philade' 



liBB 






gone more than half-way in their effiirte 
to adjust individual quotas in a manner ^" 
satisfied member. 

In the interpretation of production rrts 
that no one rule for the establishment Ji ii*acc: 
shippers was followed exclusively in: an^ Tf *ii^ ^isks 
tendency to follow the stated rule ihk ':n& mmatmt. 
1929, 24 out of 45 new producers received i MBit iapnl ix 
per cent of their fall production, aceortfing: 'xt :iitt Irmr ^^ 
ruling. Fifteen, and all of them shippBff m ditt jbzk 
received basics equal to 100 per cent of thmr obI i mrm: 
was discrimination in favor of th^e ^ipr*^^^ mc :aifi3!t 
no discrimination between individual ta. i 

same distributor. In fact, this same leajisr 
basics equal to 100 per cent of ther fall sinniifig^ :n: ST m 
old shippers. Of the remaining six ngwr grq ihn:fflfm .a»in 
shipping too late in the year to have th& tu& wpo^ 
ceived 70 per cent of their first thirt3r{fBiy:^ 
The other four basics varied from 60 2III iiht ::^2n: ic 
production records. 

For 1930, 40 of the 54 new shipp 
according to the rule, while the one iiscr*auiiar snaxmaei. 
grant 100 per cent of their aver^pi iiul irrg^bimmm : 
five new producers. The remaining ? iacii :«■■■»£ m 
quantity higher than the rule alio wed. Iil — ^ mn u: ^ 
dairymen 33 basics were estimated ^saatuSaai^ :ii 
while the dealer mentioned above stiil .-onliHttst "rr 
of his new producers quotas equal nj liill iisr 
averaged fail output, and 80 per ceaat ta cto j twrnimng^ 
Fifteen new shippers received their aiIon3«L 
in 1932 while the one dealer continued, oa -ttb:^ innn 
by granting a higher base to each of Ms ' 
For 1933 the 19 new producers were jA sSobsl vxr 
tributor and there was a great iei^ _. aaHnst m 
methods of estimating their quotrts, 
the shippers entered the market. Oniy 






iU«iU4titl«» 



in 



Basic'Surplus Prvblems in the Philadelphia Milk Shed 



added in 1934. These cases bear out the statement made by 

^ ^ 1^,.^^ ^\^^r ^oTviT^QTiv that the distributor may 

make an agreement with a whole group of dairymen or with 
an individual who desires to enter the market, but that the 
dealers do not necessarily follow Inter-State rulings regard- 
ing basics of new producers. It can be said, however, that 
the dealers rarely allow less than the amount provided for by 
the rules of the Association. 

By applying the rules for establishing basics of old ship- 
pers the following were found to be out of line with the rules 
for the various years : 



Basics too low 
Basics too high 



1929 1930 1931 1932 1933 1934 
20 14 13 3 12 1 

49 57 49 21 10 4 



In some instances the records showed that adjustments 
had been made and sometimes the reasons for the changes 
were stated. Also, these records, being secondary ones, some- 
times f aUed to include allowances for days in which no ship- 
ments were made for one reason or another. This omission 
would render invalid any mathematical check for determining 
how closely the rules were followed. In a few cases, however, 
and especially in reference to the shippers of one dealer, sev- 
eral higher bases for 1932 when no new quotas were to be 
established appeared to be warranted only on the basis of 
high average monthly shipments. Again, many increases in 
some years were in the basics of producers from some one 
territory for which special arrangements had been made be- 
tween distributors and shippers. In one instance at least 
such an arrangement resulted in higher basics than the rules 
specified in one year, but the following year these producers 
received slightly lower quotas than permitted by the rule. It 
is true, of course, that special consideration given to any pro- 
ducer or group of producers in the granting of basic amounts 
penalizes all other dairymen in so far as it lessens their pro- 
portionate share in the fluid milk market, causing them to 



Basic-Surplus Problems in the Philadelphia Milk Shed 125 

receive Class I prices on a smaller percentage of the total 
basic volume. 

To investigate the charge that the Philadelphia base- 
surplus plan operates to the disadvantage of dairymen near 
the market involves the consideration of several factors. Any 
base-rating plan aims to protect the Qass I market against 
seasonal fluctuations in production for which the more re- 
mote farmers are usually more responsible, on the whole, 
than near-by shippers. No matter how large this seasonal 
excess may be the near-by dairyman can be certain that his 
uniform supply, if regulated by his basic, will command Qass 
I prices as long ks the total basics are kept within the volume 
of Class I sales. As the producer close to the market often 
has high feed costs and the additional expense of producing 
uniformly he expects this protection from the plan. 

On the other side is the fact that a base-rating plan may 
be administered in a way that takes away some of the natural 
advantage possessed by the near-by dairyman because of his 
location. Under such a scheme he may be forced to share 
the market with other producers regardless of his ability to 
produce and market fluid milk more advantageously than 
dairymen at the outer boundary of the Class I zone. In 
periods of expanding sales this natural advantage that should 
aid him, ordinarily, in securing an additional portion of the 
market supply may be curtailed by the operation of a plan 
that distributes this additional fluid milk throughout the 
zone or among new producers. And in periods of decreasing 
sales the low Class I price may not enable him to meet feed 
costs while the more remote farmer with large pasture may 
keep on producing more than his allotted share of the Qass 
I market. It is in these seasons of large excess production, 
when Class I prices are relatively low and these prices are 
paid on a smaller and smaller percentage of his basic, that 
the near-by producer begins to object to a plan supporting 
a larger milk shed than consumption for fluid uses requires. 
It was at such a time that some shippers close to the Phila- 



126 Basic-Surplus Problems in the Philadelphia Milk Shed 
delphia market began to question mUk transportation rates 



.._. ^,^^ n>ioy<r^a hpliPviTiff that ill these lay the 

and receiving oKiiav/x* v.*ac**o^'-» ~ — - - o 



. .rmm «<r4-r» 4-1^^V> 



reason for distributors continuing to receive milk from the 
border zone producers, not realizing perhaps that any dis- 
crimination in these matters is not necessarily the fault of 
the base-surplus plan. That this device does provide for a 
marketing system that may be detrimental to the near-by 
producer in a time of lowering consumption is true. The dif- 
ficulty of redistributing basic quantities, the expense of re- 
arranging transportation faciUties, the accounting and other 
costs of shifting sources of supply, all are factors causing the 
distributors to continue the fluid mUk zone intact. Nor are 
the officers of producers associations likely to enjoy the dis- 
satisfaction among distant producers and the loss of mem- 
bership that a contraction of the Qass I zone would cause. 
There is also the argument that a reduction in the size of the 
zone would permit the supply to become more and more con- 
centrated and, therefore, more susceptible to contagious 
diseases among cows and other unforeseen calamities which 
might affect a particular district as a whole which, although 
true, is scarcely sufficient reason in itself for maintaining a 
large milk shed. However, it must be repeated that if Qass 
I prices are held close to the level that unrestricted competi- 
tive conditions warrant and there are no discriminations in 
enforcing inspection laws or in transportation rates, and no 
special considerations granted in establishing basics, the 
near-by producer will retain much of his natural advantage 
even under the base-surplus plan. 

When we use the data collected in investigating this 
charge we find no conclusive evidence supporting it, although 
some of the indicators point to increased benefits to the 
more remote producers. By dividing our sampUng of pro- 
ducers into four groups according to their distance from the 
market we arrive at the comparison found in Table XVII : 



Basic-Surplus Problems in the Philadelphia Milk Shed 127 

Table XVn. 
Comparison of Production Records of Near-By and More Remote 



^1 Ouiic^rs* 



Period: 1929-1»33 



Group I 

0-50 
miles 

Averaged Bases EJvery Year 17.1% 

Averaged Bases in Majority 

of Years 

Below Bases Every Year 

Below Bases in Majority of 

Years 

Increasing Bases since 1932 

Decreasing Bases since 1932 

Highest Base in Last Year 

1935 Base Higher 

1935 Base Lower 

Highest Production in Fourth 

Quarter in Majority of Years 18.8 

Highest Production in Second 

Quarter in Majority of Years 39.9 



Group n Group ni Group IV 

50-100 1-200 2-300 

miles miles miles 

15.8% 13.6% 25.4% 



25.2 
21.4 

25.6 
14.1 
16.7 
30.8 
48.1 
47.1 



20.9 
22.6 

28.8 
18.1 
19.2 
34.5 
48.6 
49.2 

26.0 

19.8 



20.4 
18.8 

33.5 
19.9 
20.4 
31.9 
35.6 
62.8 

17.8 

23.8 



30.3 
14.8 

24.5 
11.8 
16.0 
37.0 
48.7 
49.6 

24.4 

26.9 



This table shows that 25.4 per cent of Group IV, repre- 
senting the most remote producers, averaged their monthly 
basics in each of the five years (1929-1933), while the high- 
est percentage of dairymen in any of the three groups nearer 
the market producing as much as, or more than, their quotas 
each year was only 17.1. We find that a substantially larger 
number of Group IV than of the other three groups averaged 
their monthly bases in a majority of these years, the per- 
centage being 30,3. Also, a smaller number of these most 
distant shippers failed to produce their quotas in any of the 
five years, and fewer of them fell below their basics in pro- 
duction in the majority of the years, than was true of dairy- 
men nearer the market. These percentages indicate that the 
most remote producers, on the whole, kept their average pro- 
duction at a higher point in relation to established basic 
quantities than the less distant farmers did, although prices 
were falling during the greater portion of this period. 



128 Basic-Surplus ProbUms in the Philadelphia Milk Shed 

While a smaller proportion of Group IV increased their 
basics progressively since ly^^ Liiau pru^uv^e^s ... ...^ ^^^.e. 

classes this group also had less dairymen decreasing their 
ZT^ie^^^^ 'ear since 1932. The 37.0 per cent of Group IV 
having their highest bases in their last year of shipment 
(1934) tops aU other groups. Thus, these most remote ship- 
pers received a larger share of the total basic quantities m 
1934 than they did in 1932, which suggests increased produc- 
tion on the part of these farmers near the boundaries of the 

shed. 

Of those who would receive higher basics in 1935 on the 
basis of their average production for the first eight months 
of 1934 Group IV includes a slightly larger number than the 
others ' Yet, the 49.6 per cent of that group to receive lower 
quotas, according to the above measurement, is higner than 
the 47 1 per cent and the 49.2 per cent of Groups I and II, 
respectively. The unusually high percentage (62.8) of Group 
III to receive lower quotas in 1935 can be explained m part 
by the decreasing production, in relation to bases, of many 
of them since 1931. Although nearly one-third (31.9) of 
these Group III shippers had their highest basics in 1934 it 
was found that the vast majority of them gained by the 1931 
quotas holding over for 1932, which would indicate a lower- 
ing of production in the fourth quarter of 1931, at least. 
Then, too, more of that group failed to average their basics 
in at least three of the five years than in the other classes 
and these *^elow basic^' years were in 1933 and 1934 for the 
majority of them. Consequently, an eight months averaged 
production for determining 1935 basics would result m lower 
quotas for many of these dairymen. No complete explana- 
tion can be given for the III Group including the highest 
proportion of shippers both increasing and decreasing their 
bases since 1932. 

If we attempt to determine whether the relative advant- 
age of the most distant group of producers in maintaining or 
increasing basics up to 1935 was due to their regulating pro- 



BasiC'Surplus Problems in the Philadelphia Milk Shed 129 

duction to the best advantage or to high average output, the 
data favor the latter explanation. As high fall production 
was most advantageous, on the whole, for increasing quotas 
during this five year period we notice that the 24.4 per cent 
of Group IV having their highest production in the fourth 
quarter of the year in the majority of the five was topped by 
the 26.0 per cent of Group II. For the second three months, 
the period of high shipments under natural conditions, more 
of the producers nearest the market. Group I, shipped their 
highest amounts in this period in the majority of the five 
years than was found in Group IV. The difference among 
the four groups of shippers in regard to quarterly periods of 
output varies a great deal, with no decided trends. Rather, 
it appears that the ability of these most distant dairymen to 
maintain or increase basic quantities has been because of 
their relatively high average output in relation to their basics 
and not due, in many cases, to heavy production during 
base-making periods. The data also lead to the conclusion 
that more of the near-by producers held their production 
within their basic amounts during this five year period than 
shippers near the boundaries of the milk shed. Yet, without 
more complete data it can hardly be said that the Philadel- 
phia plan operates in a manner to take away most or all of 
the natural advantages of the near-by producer. 

The claim that the Philadelphia basic-surplus plan 
enables distributors to make exorbitant cream profits is dififi- 
cult to substantiate as there are no reliable figures from 
which dealers' margins on the various classes of cream can 
be determined. High cream profits can result from a classi- 
fication price plan or from a flat price ; such a practice is not 
peculiar to the base-surplus plan. When the price of milk 
for fluid uses is placed above that sanctioned by the competi- 
tive price level cream prices are likely to be depressed, and 
the result will be a lower composite price if producers are 
paid on a flat basis, or according to the use plan. The base- 
surplus plan, by stressing uniform production for fluid uses, 



130 Basic-Surplus Problems in the Philadelphia Milk Shed 

mav encourage the practice of high cream margins, especial- 
may eiii-uu 6 r .^^. „s„aiiv desirous of main- 

1v since proaucerB aoauv-ia."""- . 

taiS a high aass I price. Because of this desire for a 
hS fluid milk price they may conclude that a low cream 
nrle is desirable, protecting the basic quantities against the 
Production of large volumes of excess mUk. mUk to be used 
?of "ream purposes, that might come into the market and 
mpair the Qass I price. Also, paying a relatively low 
cream price and thereby permitting dealers to make a high 
nrofiTon cream sales, will enable the distributors to pay a 
Correspondingly higher price for basic milk. And m a mar- 
ket where orly a portion of the cream requirements are de- 
rSed from basic producers, these dairymen will gam by the 
higher aass I price which that disparity makes possible. 

This price plan attempts to stimulate production through 
a hieli aass I price on the one hand and, on the other hand, 
to tocourage excess production through ^l°';/=ream price 
But the two forces may not counteract each other In the 
first place, this artificially high price for Qass I milk will re- 
sult in excess supplies because of efforts of old Producers to 
raise basics, especially those with a favorable differential, 
Tnd of new producers to enter the Oass I market, thereby 
defeating the purpose of the artificiaUy low cream price. In 
the second place, dairymen may receive a lower composite 
price than under unrestricted competition because total con- 
sumption may be reduced. 

The large purchases of cream from western states by 
Philadelphia distributors at the same time that local pro- 
ducers were receiving the cream price for only a portion of 
their excess output (10 per cent of their basic purchases) in- 
dicates that the Philadelphia cream price was artificially 
high If this is true, producers were receiving a lower compos- 
ite price than competitive conditions warranted, for much 
of their excess output was receiving the low surplus pnce 
instead of the higher cream value, while dealers were buying 
cream elsewhere. The effects would be somwhat the same 



Basic-Surplus Problems in the Philadelphia Milk Shed 131 

as those resulting from an artificially low cream price, the 
dealers taking relatively high margms on cream in both 



* i * 



instances and the dairymen relatively low composite p 
The difference is one of degree. The dealers' cream margins 
although artificially high, would probably be less than under 
a low cream price, whUe the producers' composite price 
would probably be lower than their returns from an artifi- 
cially low cream price. 

In connection with the importation of cream from other 
producing areas the Federal Trade Commission report, re- 
leased April 5, 1935, referring to the PhDadelphia milk shed 
said: 

"evidence was developed indicating that . . . much of this im- 
portation is in the form of fluid cream, and is sold as such. 
Some has been converted back into fluid milk and so sold. 
Thfse importations have at times tended to create a surplus, 
which results not only in local producers receiving a lower 
price on the quantity of their production so displaced, but is 
taken into consideration in the fixing of prices, and to that ex- 
tent tends to depress prices to local producers."* 

Substantial evidence to the effect that distributors were 
converting western cream back to fluid milk and marketing 
it at the aass I price is not given in the report. In connec- 
tion with the charge that these supplies from other areas 
tend to depress prices to local producers the report cites the 
following letter from Mr. Schilling, a member of the Federal 
Farm Board, to H. D. Allebach, president of the Inter-State 
at that time : 

"You are receiving for your surplus milk less than but- 
terfat prices for the same . . . farmers in Minnesota and Wis- 
consin are receiving more for sweet cream at the present time 
than you are charging dealers for their butterfat in your sur- 
plus milk. It will be hard to justify this position with your 
members when organizations you are selling to are paying 

♦Federal Trade Commission's Report on Milk Inquiry, April 5, 1935; 
p. 9. 



132 Basic-Surplus Problems in the Philadelphia Milk Shed 

farmers In Wlaconsin for the same proiiuct more than they 
.^... _,wp ii„o armmrt Philadelphia and who miist pay a 
great deal more for their feed."** 

Althou<-li the date of this letter is not given in the Com- 
mission's report the Philadelphia schedule of prices oyer a 
Considerable period does not substantiate Mr. SchUhngs 
statement that Philadelphia producers received less than the 
butterfat prices for their surplus milk. Nevertheless, as this 
letter suggests, the policy in the Philadelphia market, at that 
time probably was to grant a low cream quota, paying an 
artificiaUy low price for aU excess production over that 
amount with the idea of maintaining the Qass I price by dis- 
couraging excess output. Unless the cream price was above 
the competitive price it would appear that distributors would 
have preferred the enlargement of Qass II (cream) quotas 
rather than to buy western cream at a higher figure than the 
Class III price. That this excess production (Uass III) was 
receiving Uttle or no more than butter value is no doubt the 
result of efforts to maintain Qass I and Qass II prices above 
the competitive level. As stated before, this practice re- 
duces consumption and enlarges the fluid milk zone, result- 
ing in lower returns to all producers. 

The Federal Trade Commission report also charges 
"that dealer companies have paid producers 'surplus' prices 
for considerable quantities of mUk which they have resold in 
fluid form to consumers at the highest prevailing prices. 
The only attempt made to substantiate this charge in the re- 
port is a listing of underpayments to producers that have re- 
sulted from certain practices by distributors. The data from 
which these underpayments are determined are not given but 
for most of the companies the following compUations were 
made for October, 1934, and for the other corporations, Sep- 
tember, 1934: 



Basic-Surplus Problems in the Philadelphia Milk Shed 133 

Underpayments on MUk Within Philadelphia MUk Shed for One Month. 

Underpayments on Milk sold under utilization basis $ ^?'^!1S 

Underpayments oy aeaaer» uuy^^s ^^ «- ""•»- k qRf> j^v.^ 

Underpayments on milk sold a^ Class I oaa^oZ 

Profit on hauling producers' milk to city processing stations 24,412.30 

Total for one month 



Yearly basis 

"In addition to the foregoing, there 



44,386.28 
532,635.36 

are estimated to be 



several thousand dollars per month additional underpay- 
ments at country and city processing plants. These 
have not been included in the tabulation because the dealers 
involved claimed they had oral permission from the Pennsyl- 
vania Board of MUk Control to pay lower prices."* 

These figures would have more weight if the methods of 
arriving at them were included in the report. Distributors 
have admitted that under the base-surplus plan and before 
the use plan was adopted in 1933 they gained at times by 
ability to use some surplus as fluid milk, while at other times 
they had to sell some basic milk at surplus prices. In the 
totals submitted to Dr. Clyde L. King, as Federal Milk Mar- 
keting Administrator, by the four largest dealers from Oc- 
tober 1 1932, to April 30, 1933, these distributors purchased 
more milk at Qass I prices than they sold in bottled form: 



Bottled Milk Sales 

Milk Purchased at Basic Price 

Excess Purchases of Basic Milk 



109,540,322 quarts 

111,385,604 quarts 

1,845,282 quarts 



♦♦Federal Trade Commission's Report on Milk Inquiry, April 5, 1935; 
p. 53. 



These figures do not include fluid milk sales not in 
bottles. However, this omission should not affect the result 
materially as wholesale purchases of fluid milk usually did 
not exceed more than five per cent of total fluid milk sales 
during that period. The compilation made by the Commis- 
sion is for October or September, 1934, when Philadelphia 
dealers were supposedly paying for Class I milk on a strictly 

♦Federal Trade Commission's Report on Milk Inquiry, April 5. 1935; 
p. 16. 



I 



134 Basic.SurplusProbUms.in the Philadelphia Milk Shed 

use basis and any using of surplus as basic milk after 
use oasiB, 1"" _ J ,, ". .._ <;„iao «»r>r,T+inp' on the oart of 
August 25, 1933, wouia raeau iaiS*> *>-i> e -*- 

the distributors adopting this practice. 

That the basic-surplus plan has increased the cost of 
nroducing milk is generally conceded. A Pennsylvania State 
Stge re^rt states that the plan probably adds six cents 
ir hmSweight to the cost of production. Yet the very 
mnSe of the plan is to give the uniform producer a higher 
Sy average price for his supply than he could realize 
Sroueh selling an uneven amount, and it was understood at 
^beintg of the scheme that dairymen would be reward- 
ed for this increased cost of producing milk uniforndy 
throughout the year as distributors would gam through the 

more even supply. . , • i,, A^d,. 

Furthermore, while uniform production is highly desir- 
able to the distributor, it may not be to every producer, nor 
does the successful operation of the plan require it It is 
essentTat that producers, as a group, supplying a market ad- 
just production to aass I sales but it is not essential that 
each individual shipper produce in accordance with ^he mar- 
ket demand. Farmers who have large amounts of pasture 
relative to tiUage crop land, cannot, as a rule, profitably 
utilize all this pasture and produce an even flow of milk 
throughout the year. It is more economical for these dairy- 
men to sell part of their supply at surplus prices than to get 
no returns from a portion of their pasture land. Adjustment 
to the base-surplus plan of selling milk is ^ore adaptable ^ 
farms with little pasture and to crop farms, although there 
are probably few dairyff.en who should attempt to have no 
excess milk at any time during the year. Since producers 
near the outer boundary of the fluid milk zone receive the 
same net price for excess milk as the near-by dairymen and 
since the former are more likely to have an abundance of 
pasture, they continue to produce more surplus milk than 
those near the market. Therefore, establishing basics on 
the basis of average yearly production with no penalties tor 



Basic-Surplus Problems in the Philadelphia Milk Shed 135 

shipments over or under these quotas may give these more 
remote dairymen k larger share in the Qass I market than 
they can supply in a majority of the months of the year. 

Of course, the base-surplus plan does not benefit the 
producer who, by special effort involving additional expendi- 
tures, raises his basic amount to a point that he cannot main- 
tain throughout the year. Whenever the costs of increasing 
the basic quantity is greater than the gain obtained by hav- 
ing this higher base, the adjustment has gone too far to be 
economical. It is doubtful if the practice of increasmg quotas 
by buying cows during the base forming period and seUmg 
them immediately afterward is advantageous to many farm- 
ers This "artificial" raising of quotas at additional expense 
is generally done with the expectation that higher returns 
will be realized during the following months. But milk prices 
depend on a variety of factors the effects of which cannot be 
predicted in advance with a marked degree of accuracy and 
dairymen under the base-surplus plan must assume the risk 
of predicting market conditions correctly. No control plan 
can solve production problems for each individual producer. 
To the charge that the base-surplus plan does not take 
the cost of production into consideration the answer is that 
no control plan can do that for individual dairymen. As long 
as dairymen continue to produce large excess supplies, as 
has been the practice of many in the Philadelphia mUk shed 
during the past four years, any attempt to increase prices 
because shippers are not receiving the cost of producmg 
their Class I milk is a dangerous practice. The increased price 
will not cause these dairymen to produce less milk. If the 
costs of producing milk for fluid uses could be detemmed 
the price would be such that only the relatively most efficient 
would produce the supply. This is what would happen any- 
way were there no monopoly elements present, and the base- 
surplus plan to be successful must attempt to regulate price 
and distribute the proceeds from the sale of milk in a man- 
ner that will reduce these monopoly elements to a minimum. 



136 Basic-Surplus Problems in the Philadelphia Milk Shed 

Lastly, is the criticism that producers, under the base- 
surplus plan, cannot determine whether or not they are re- 
ceiving fair and equitable treatment from the purchasers of 
their milk. This criticism might be made against any con- 
trol plan, and, indeed, in the absence of any artificial control 
scheme, for only through an audit of distributors' records 
could an attempt be made to find out if this charge were 
valid. In the first place, "fair and equitable treatment^' is an 
elusive phrase, so indefinite as to be almost meaningless. 
Surely, equitable treatment does not mean that all producers 
ought \o be treated alike for that would abolish the dif- 
ferentials and so disrupt the milk industry that further con- 
trol would be inevitable. If the dairyman who produces uni- 
formly according to market demands is to receive the same 
consideration as the producer who does not, all shippers will 
soon be receiving less for their supply than they now do. We 
may say that "fair treatment" means reasonable treatment 
but how shall we define "reasonable?" What may appear 
reasonable to one producer may not seem so to another. Will 
all farmers agree that it is reasonable for the near-by pro- 
ducer to receive the differential advantage to which his posi- 
tion would entitle him were competition unrestricted ? 

However, by considering further statements by those 
who offer this criticism we receive some idea of what they 
mean by this objection to the base-surplus plan. Two farm- 
ers, they say, in illustrating their point, may live on adjoin- 
ing farms and produce throughout the year approximately 
the same amount of milk, but if their milk is not produced 
in the same quantities at the same time of the year, they re- 
ceive different prices. We can readily understand how this 
can be true. One farmer may produce a uniform supply 
equal to his basic amount and receive a higher composite 
price than the other who has a lower basic but is supplying 
a yearly volume equal to his neighbor's output. Moreover, 
the same results could occur if the milk were paid for at a 
flat price. The criticism that under the base-surplus plan no 



Basic-Surplus Problems in the Philadelphia Milk Shed 137 

dairyman can tell until he receives his check what he is going 
to get for his milk is true no matter what plan of payment 

;« nAr^-r\^r^A "Diif "fVir* ViQ ao-am*nl iiQ avafprn Annhlps him tO 

foretell his future prices more accurately than a flat price 
plan of payment will. Prices are sensitive to the changing 
factors affecting supply and demand and no control plan yet 
devised can continue to compensate dairymen for failure to 
adjust output to market needs. 

With respect to other charges made against milk mar- 
keting practices in Philadelphia, they can be dismissed in a 
summary manner either because they arise out of the base- 
surplus control plan and are the result of factors already 
discussed, or because there is no substantial evidence to sup- 
port them. 

One objection is to the three cents deduction from each 
100 pounds of milk shipped by producers. This check-off 
was made mandatory by the Federal Milk Marketing Agree- 
ment and continued under the Pennsylvania Milk Control 
Board's supervision. Of this amount (two cents on every 
100 lbs.) was to be deducted by the contracting dis- 
tributors and paid on behalf of its members to the Inter- 
State Milk Producers Association, as had been the practice 
theretofore. The amount subtracted from non-members was 
to be paid to the Dairy Council as was an additional 
cent per 100 pounds from both members and non-members 
alike. The council was to use one-half of these payments 
for its general purposes and the other portion was to be 
expended for the purpose of securing to non-member pro- 
ducers check testing, weighing, and other benefits similar to 
those received by members of the Inter-State. 

Critics of this plan argue that it penalizes other farm 
associations in Pennsylvania selling milk for their members 
and, therefore, the three cents check-off should be voluntary. 
However, there is no other association selling members' milk 
within the Philadelphia milk shed. They also contend that 
the farmer-dealer who produces his own milk on his farm 



138 Basic-Surplus Problems in the Philadelphia Milk Shed 

and retails it in the immediate community of his home should 
be relieved of paying money into the Dairy Council for ad- 
vertising and other similar purposes. This contention seems 
justified but its importance is minimized by the fact that less 
than one per cent of the fluid milk distributed in the Phila- 
delphia market is sold by producer-dealers. Finally, there is 
the criticism that no attempt has been made to determine i ne 
income that either of these organizations would have f lom 
the check-off, or would need. This objection brings up the 
question as to what functions these associations should per- 
form and at what costs, which involves such matters as 
salaries to be paid to officers and other employees. There is 
no scientific method for measuring these costs, so the matter 
should be left to the decisions of the majority of the pro- 
ducers involved, and as the Inter-State advocated these pay- 
ments it was assumed that the majority of the dairymen 
sanctioned them. 

There remains the question of whether these deductions 
ought to be made on the physical unit basis as in the Phila- 
delphia milk shed or on a value basis. Deductions on a quan- 
tity basis tend to make those who produce a large amount 
of milk during the spring months when prices are likely to be 
relatively low, and a small volume in the fall season when 
prices are higher, pay a relatively larger amount to the asso- 
ciation in proportion to their returns than do dairymen who 
have more uniform production. On the other hand, deduc- 
tions on a value basis make the latter pay more. As an even 
production throughout the year is desirable and as pay- 
ments on a value basis tend to discourage quality improve- 
ment which is reflected in price, deductions on the quantity 
produced appears to be the more beneficial to the association 
as a whole. 

Other criticisms refer to mismanagement on the part of 
officers of the producers association and the Dairy Council, 
and to monopoly practices of the largest distributors. An 
audit of the stock records of the Inter-State, previously re- 



BasiC'Surplus Problems in the Philadelphia Milk Shed 139 



ferred to,* showed a few irregularities in stock issues but 
these were errors that might easily occur in any similar 

^•>^oi>«^v^irrofi<nkn o^irl TirOT*0 of TIO POTI apnilPriPf* ITl deOldingf thC 

personnel in control of the Association. At the next annual 
election, supervised by the courts, the stock holders voted by 
a substantial majority to continue under the same manage- 
ment. Included among the production record cards analyzed 
in our study there were several belonging to directors of the 
Inter-State and these contained no proof of the charge that 
directors of the Association had higher basic quantities than 
the production of their herds warranted. 

The objections to the Dairy Council center around the 
fact that one-half of its members are chosen in accordance 
with the contributions of the milk distributors, every dealer 
having at least one member, although each member has but 
one vote in electing directors to the council. As the federal 
agreement gave this council arbitrary power, subject to ap- 
peal to the Secretary of Agriculture, to allocate producers 
among the contracting distributors for the purpose of equal- 
izing the percentage of purchases of Class I milk by the deal- 
ers, this council controlled in part at least by the largest dis- 
tributors, might wreck or cripple any distributor out of 
favor with them. So far as is known the Dairy Council 
never exercised this function and there were no complaints 
by producers regarding involuntary shifts to new dealers. 

The Federal Trade Commission report says that the lack 
of a written contract with the dealers to whom the Inter- 
State sells its members' milk and the lack of any contract 
requiring dealers to permit the auditing of their books to 
determine whether producers are receiving proper pay for 
their milk or not have been serious disadvantages to the 
producers. While there no doubt is some advantage in these 
contracts the auditing of distributors' books has not proved 
to be a satisfactory means for determining the accuracy of 
producers' milk checks. Audits in other markets have not 

*p. 100. 



140 Basic-Surplus Problems in the Philadelphia Milk Shed 

disclosed the exact amounts purchased and sold in the 
v»nm,a classes by the dealers. Nor does a written contract 
with distributors" covering the sale of members' mUk place a 
powerful weapon in the hands of the cooperative, for no con- 
tract can set prices over a long period of time as these must 
be governed by varying marketing factors which are sensi- 
tive to the slightest changes in supply or demand. 

The Commission's report also claims that the large deal- 
er companies, by the acquisition of the principal independent 
distributors, have been able to substantially lessen competi- 
tion As proof it cites that rates of return on total mUk in- 
vestment for a group of Philadelphia distributors ranged 
from 13.27 per cent in 1932, down to 5.22 per cent m 1934. 
The smaller companies in this group showed a loss for the 
last two years. During the six years, 1929 to 1934 inclusive, 
the National Dairy Products Corporation received from its 
two subsidiaries in the Philadelphia area approximately 
$27 500 000 in dividends, representing more than 70 per cent 
of its investment in the two PhUadelphia companies ac- 

quired.* 

Whether or not the reduction in the number of distri- 
butors in the Philadelphia market has lessened competition is 
not easy to determine. After all, there can be just as many 
milk dealers as the spread between producers and consumers 
prices allows. Keeping down the spread means a small num- 
ber of distributors and that in turn holds down the costs of 
distribution which may result in higher margins for distri- 
butors or in higher prices to producers. At any rate dealers 
margins should be held at a point that will constantiy in- 
crease the sales of reliable distributors by driving out un- 
reliable dealers, and yet these margins should not be so low 
as to force a monopoly in distribution. Therefore, it is diffi- 
cult to determine the degree of monopoly element or of com- 



•Federal Trade Commission's Report on MWV. Inquiry, April 5, 1935; 



p. 8. 



Basic-Surplus Problems in the Philadelphia Milk Shed 141 

petition in the Philadelphia market. The Commission's 
statement that the gross margin to the dealers on milk for 
a..:j ..~_e"^^^irr> h""? T-omoinprt aiihatATitiallv the Same over 
a number of years, whereas prices received by producers and 
paid by consumers have fluctuated widely, does not neces- 
sarily indicate that margins have been high.* It may be 
that distribution costs have remained rather constant for a 
long period and, therefore, any changes in producer price 
must be reflected in prices paid by consumers. Also, distri- 
butor profits should be determined on actual investment and 
not on the amount of capital stock, for dealers may be under- 
capitalized or over-capitalized. One large Philadelphia dis- 
tributor has consistently shown large profits on his capital 
stock, yet his business is under-capitalized, while another 
corporation, showing no profits a few years ago, had a 
capitalization in excess of investment. 

Concerning the number of dealers that any market 
should possess in order to guarantee competition, it has been 
at the experience of cooperatives, operating under control 
plans, that it is easier to obtain the approval and cooperation 
of a few distributors handling a large proportion of supplies, 
than it is to convince dealers when the market is divided 
among a larger number of them. This is because a great 
many small dealers probably results in no one of them 
handling a large surplus. It may be that some of these buyers 
of small quantities carry little or no excess supplies and 
would, therefore, receive no benefits from a production con- 
trol plan. Others may have a relatively low surplus and a 
control plan may affect the advantage they possess over com- 
petitors who carry larger excess amounts. Under the flat 
price system the former may be able to cut prices and still 
make a profit. A few large distributors, on the other hand, 
receiving large excess supplies benefit from a use plan of 
payment and from one that encourages uniform production. 

♦Federal Trade Commission's Report on Milk Inquiry, April 5, 1935; 
p. 2. 



142 Basic-Surplus Problems in the Philadelphia Milk Shed 

This is especially true in a market that handles large excess 
quantities. The large buyers, desiring to protect their in- 
fprpfits ujiite in cooperating: with the producers association 
against excess output from outside producers as long as 
prices are held at the point justified by current market con- 
ditions. 

Having reveiwed the objections to the Philadelphia 
basic-surplus plan made by leaders of the several minority 
groups of producers, as listed on pages one-hundred seven, 
and one-himdred eight, our analyses based on all available 
information leads to the following conclusions : 

(1) The Philadelphia plan has been successful in con- 
trolling seasonal production of milk when success is meas- 
ured by comparing seasonal output in the Philadelphia milk 
shed before the plan was adopted with monthly shipments 
since 1920, and also by comparing seasonal production in the 
Philadelphia shed with that of other metropolitan milk areas. 
Our data give definite evidence of the more even produc- 
tion and the desire to avoid large surplus output on the part 
of the majority of shippers within the milk shed since the 
inauguration of the basic-surplus plan. 

(2) The charge that producers are required to ship 
their surplus to distributors is not substantiated by the pro- 
duction records of individual dairymen. 

(3) Available evidence refutes the claim that pro- 
ducers are forced to increase their surplus output in order to 
raise their basics to a point which makes production profit- 
able. 

(4) No reliable information was available for deter- 
mining whether or not basics were too high when first grant- 
ed, other than data showing discrimination in favor of some 
new shippers receiving their initial quotas from certain deal- 
ers in certain years. On the other hand, the percentage of 
producers receiving their highest basics in their last year of 
shipments (1934) suggests that since 1929, first year quotas, 



Basic-Surplus Problems in the Philadelphia Milk Shed 143 

on the whole, have not been higher than production records 
warranted. 

(K\ Tihf^ \r^A^%T^^^^€k^ nrnrliipfioD records examined deny 
the charge that the basic-surplus plan causes any consider- 
able nimiber of new shippers to over-produce the first year 
in order to overcome the handicap in establishing a base 
equal to average yearly output. 

(6) While the records indicate that some farmers 
artificially boost production during basic periods, they also 
show that a large majority of the dairymen do not follow 
this practice regularly. 

(7) The charge that dairymen producing below their 
basic amounts must establish new and lower quotas is un- 
true. Only when they failed to keep production as high as 
their bases during basic establishing months were mdividual 
basics lowered. 

(8) Until 1927 new producers were not discriminated 
against in the establishment of basic quantities but, begin- 
ning with that year, the basic-surplus plan was operated in 
a manner that benefitted old shippers to the disadvantage of 
the newer ones. 

(9) Some new producers were imable to enter the 
basic-surplus plan, beginning with the year 1933, because 
dealers refused to accept their milk as excess supplies were 
increasing. Those new shippers taken into the plan received 
only a percentage of their fall or average production as 
basics. 

(10) While there is evidence of some distributors mak- 
ing special arrangement with individual producers in regard 
to the establishment of basic quantities, the data do not sup- 
port the claim that basics are arbitrarily fixed by organized 
distributors and representatives of the Inter-State associa- 
tion. 



144 Basic-Surplus Problems in the Philadelphia Milk Shed 

(11) The charge that the basic-surplus plan works to 
the disadvantage of the producer near the market is neither 
proved nor disproved conclusively, but the records show that 
the most remote shippers, as a group, have been receiving an 
increasingly larger share of the Class I market. 

(12) The evidence does not support, nor deny, the alle- 
gation that the basic-surplus plan enables dealers to make 
exorbitant cream profits, but does indicate that the Phila- 
delphia cream price has at times been artificially high, re- 
sulting in a lower composite price to producers than com- 
petitive conditions warranted. 

(13) The accusation that directors of the producers' 
association received higher basic quantities than the produc- 
tion of their herds warranted was not supported by the 
records examined. 

(14) Nothing was brought out in our analyses to sub- 
stantiate the assertion that it is more difficult for producers 
to determine whether or not they are receiving what they be- 
lieve to be fair and equitable treatment under the basic-sur- 
plus plan than under a flat price plan of payment. 



Chapter VI. 
CONCLUSIONS. 
The history of its operation reveals that the Philadel- 

r>U;« ^^illr o/>*>fw>l T%lrin rl/->oa nof rkl^QCSA nil nrndu<^er5l wltJlln 

the milk shed. In fact, there is no price plan yet devised for 
allocating surplus among farmers in a manner to please 
every dairyman. At best, any method of prorating the fluid 
milk market among shippers is likely to appear arbitrarily 
discriminating and in some measure unfair to certain classes 
of producers. Since the effects of such plans are to dif- 
ferentiate among farmers according to their ability to supply 
the milk market in such a manner as to cause considerable 
variation in their proceeds from the sale of milk, the prac- 
ticability of a particular buying plan must be judged by the 
degree to which dairymen regard it as valid and fair. 

Under such circumstances, realizing that any buying 
plan can scarcely be regarded as a complete solution for all 
milk marketing problems, what classes of producers are pro- 
testing against the Philadelphia price plan and what are the 
features of this plan in operation that they believe are dis- 
criminatory? If the beliefs of this minority regarding the 
entire scheme or any particular phases of it are justified and 
can be corrected, then any constructive measures will lessen 
dissatisfaction, reduce the minority opposition, and be a dis- 
tinct gain to the whole milk industry. 

In most instances, the minority opposing the present 
marketing mechanism has been so dissatisfied with the 
operation of the base-surplus plan that it has advocated a 
return to the former flat price system of payments. Now, 
this minority opposition, as our study has demonstrated, has 
been composed largely of those dairymen who receive rela- 
tively low returns under existing arrangements or of those 
producers, located near the market, who believe that the 
base-surplus plan as operated does not give them the con- 
sideration that their position deserves. 

No doubt the farmers receiving relatively low returns 
believe that any control plan should return uniform prices 



146 Basic-Surplus Problems in the Philadelphia Milk Shed 



to all dairyTnen, at least after allowing for quality and loca- 
tion. It is difficult for them to understand that any plan im- 
nnsinor uniform biiving- nrices based uDon distributors use 
classification of milk, results in wide discrepancies in returns 
to dairymen, even to those in the same locality. They do not 
seem to realize that their low receipts are mainly the result 
of their imeven and excess production, and that no price 
plan can in equity or imder any practical economy distribute 
this excess volume as a uniform burden over the whole mar- 
ket. Not only has no control measure been devised that 
causes this excess supply to be borne by all alike, but every 
plan has also differentiated among dairymen as market sup- 
pliers in such a way as to cause considerable variation in 
their returns from the sale of milk. Every plan results in in- 
creasing the proceeds and improving the market relations of 
those shippers who produce a uniform output and it is likely 
to lower the returns to those supplying an uneven quantity. 

A flat price system will not change this situation and 
bring higher returns to these uneven producers. Their 
present low milk checks are the result of selling to distri- 
butors large quantities of surplus milk, milk that cannot be 
sold as Class I because of the relatively high degree of sea- 
sonal fluctuation in their production. Were these farmers to 
return to the flat price system the distributors to whom they 
sell would have relatively low Class I utilization with a high 
percentage of excess milk, caused by the uneven production 
of these very dairymen. As a result they would receive 
lower composite returns for their milk than other dairymen 
who produce uniformly. The latter receive higher rewards 
because they are giving their dealers a more convenient and 
satisfactory source of supply for the milk trade than are the 
former. Most flat price distributors tend to gauge their 
prices by their excess and to have with their producers some 
understanding reflected in price with respect to the evenness 
or unevenness of deliveries. 

Therefore, these farmers opposing the base-surplus plan 



Basic-Surplus Problems in the Philadelphia Milk Shed 147 

because of the low returns they receive for their milk will be 
dissatisfied with any price plan until they can be made to 
understand that they must change their methods of produc- 
tion before they can secure higher rewards, rnese dairymen 
must come to reahze that excess output, although unavoid- 
able and perhaps inevitable, cannot be distributed uniformly 
among all producers. Our analyses of the economic factors 
affecting milk prices demonstrate clearly the value of uni- 
form production. When shippers learn to fully appreciate this 
fact and realize that prices are determined largely by the 
changing forces of supply and demand there will be less op- 
position to any control scheme based on, and operated ac- 
cording to, sound economic principles. Knowing that changes 
in prices are the result of collective bargaining and negotia- 
tions between organized producers and distributors, who 
must interpret these changing forces of supply and demand, 
they will perhaps insist upon more systematic and painstak- 
ing observations and analyses of changing market conditions 
on the part of the officers of their association. 

The other significant minority element is composed of 
those producers, located near the market and usually having 
uniform production, who believe that the Philadelphia ba^e- 
surplus plan takes away part of their differential advantages 
that should result from unrestricted competition. That these 
farmers under freely competitive conditions are f avored^y a 
differential determined by their closeness to the market and 
usually by a differential due to the nature of their product, 
has been demonstrated. It is also true that the Philadelphia 
plan, by guaranteeing every producer within the milk shed a 
definite share in the Qass I market regardless of his ability 
to supply that portion more economically than another, 
takes away part of the natural advantage of the near-by 
dairymen. Control plans have usually been set up in a way 
that does not permit them to overcome this feature without 
diminishing, in part at least, the advantage gained from uni- 
form production. A flat price will restore a portion of this 
advantage to the near-by shipper but he will lose any precise 



148 Basic-Surplus Problems in the Philadelphia Milk Shed 



gain that comes from the definite incentive to produce imi- 
formly which the base-surplus plan creates, and he will be 
threatened by a diminished control over the size of the milk 
shed. If prices are sensitive to the changing forces of supply 
and demand the close-by dairyman will retain much of his 
differential but an artificially high price under a "closed 
base** system enables the Qass I zone to expand beyond the 
limits set by competitive processes; then, in periods of low 
consumption or of heavy production the near-by producer 
finds Class I prices being paid on a lower percentage of his 
base because shippers beyond the ordinary limits of the zone 
have acquired a share in the Class I market. Operations in 
the Philadelphia market indicate that the near-by dairyman 
has had a real grievance, during certain periods, with respect 
to the effects that prices for Class I milk and for cream 
have had on the volume produced and on the size of the milk 
shed. At least, there are indications that the relatively high 
Class I prices received for his basic production have not al- 
ways offset the lowered returns resulting from the loss of 
his differential due to natural advantage and uniform output. 
In other words, this close-by producer, because of differential 
advantages, would have gained more through a lower price 
under the flat price system than he has from the higher 
Class I price under the base-surplus plan. 

In this connection the matter of transportation rates 
and inspections are significant. Both the Federal Trade Com- 
mission report and these minority producers have claimed 
that Philadelphia distributors have made a profit from 
transportation charges deducted by the dealers from their 
prices to producers. Any such gains affect adversely the re- 
turns to near«by shippers in so far as they cause distributors 
to support an enlarged fluid milk zone. There are three 
methods of protection against enlargement of the milk shed 
through excessive transportation charges by dealers. These 
are: (1) An artificial limitation of the market supply, 
usually accomplished through inspection procediu^es. This 
inflexible method of controlling the size of the shed is 



Basic-Surplus Problems in the Philadelphia Milk Shed 149 

dangerous, as has been pointed out elsewhere.* (2) To hold 
transportation rates too low for distributors to gam there- 
from, but this is a difficult task as reports on the Philadel- 
phia milk shed indicate. (3) Producers to transport their 
own milk. This last method is the best because control of 
transportation by the producers association is essential to 
orderiy marketing. Since the dairymens* organization seUs its 
milk delivered at the city platform of distributors, complete 
control of its transportation from the farm to the platform 
should be in its hands. This method best serves the interest 
of the producer, not only in respect to reducing transporta- 
tion costs and services, but also in respect to the amount of 
milk offered to the market for sale, the price which is re- 
ceived for it, the cooperation of the buyer and the knowledge 
of market procedure. EspeciaUy, do proper adjustments in 
transportation charges make for compactness of the mUk 
shed and these adjustments can be made in a manner that 
will cause most of the milk used for manufacturing purposes 
to be left at outlying points, to the advantage of all pro- 
ducers and the market in general. 

Inspection procedures can also reduce the differential of 
shippers close to the market if discriminations are made in 
favor of outlying producers, as has been contended. A pro- 
ducers association, desiring satisfied members and depending 
upon numbers for its bargaining power, may hesitate to force 
unwilling members to meet health and sanitation require- 
ments, especially when those dairymen live far from the 
market where farm conditions are less likely to be observed 
by consumers than elsewhere. Distributors, also, are seldom 
concerned if the supply meets their plant inspection require- 
ments Therefore, it is believed that inspections should be 
conducted by a public body rather than by the Dairy Council, 
which is controlled by the producer and distributor organiza- 
tions. Placing this work under the proper governmental 
authority would have the additional advantage of represent- 



*i 



p. 94. 



150 Basic-Surplus Problems in the Philadelphia Milk Shed 



ing consumer interests. The costs of these inspections could 
continue to be met by a check-off from producer prices in 
ofd^r that dairvmpn will RDDreciate fullv the necessity for 
quality improvements. 

Regarding the establishment of basics, the Philadelphia 
base-surplus plan, by favoring old producers, has tended on 
the whole to benefit near-by dairymen for most of these have 
been producing in accord with the plan since its beginning. 
Yet, producers have a point in claiming that the methods for 
establishing basics have not always made due allowance for 
relatively uniform production. It has been possible for ship- 
pers to build up large bases without producing uniformly and 
with no penalties attached for not maintaining these quotas 
throughout the year. At the same time more even producers 
might have supplied this difference in volume between basic 
quantities and actual production, and at a relatively low cost. 
Indeed, the methods during most of this period have en- 
couraged some farmers to have their highest output during 
the base forming period, with a consequent supply below 
their basics during the remainder of the year. As more of the 
near-by dairymen have relatively uniform production than 
those farther out, for reasons given elsewhere,* most of the 
dissatisfaction with, this policy has been voiced by them. And 
their irritation has been increased by the attempt made to 
remedy this very condition. The plan of using the average 
production of the first eight months of 1934 for determining 
1935 basics penalizes these uniform shippers who have held 
their supply to basic amounts, or even to the approximate 
percentages receiving Class I prices, in favor of imeven 
dairymen producing large excesses, especially during the 
summer months. 

This problem of discovering a method for allocating 
basics in a manner that will satisfy both close-by dairymen 
and the more remote shippers is a difficult one. Using the 
average of annual shipments will undoubtedly mean larger 



'p. 36. 



Basic-Surplus Problems in the Philadelphia Milk Shed 151 

quotas for some remote producers with much natural pas- 
turage and imeven production than they can supply in every 
month of the year. Unless a penalty provision for produc- 
tion imder their bases is included in the plan, these remote 
farmers receive a larger proportion of the total basic volume 
than their ability as market suppliers v/arrants, when the 
matter of sharing the burden of excess supply is taken into 
consideration. If certain months are used in establishing 
quotas the same results can occur, unless penalties are im- 
posed for uneven output. Otherwise, the near-by shipper with 
uniform production again sees a greater proportion of total 
basic amounts going to those with high but uneven produc- 
tion. If more of the close-by dairymen produce uniformly and 
in accord with market demand it appears that any method 
for determining bases satisfactory to them must include 
penalties for the uneven and high supply of other farmers. 
Otherwise, differentials of these uniform producers are low- 
ered, which would also be the case if basics were manipulated 
in favor of the more distant producers. Although it may be 
true that these near-by producers will always desire to ex- 
ploit their differential advantages to the full, the validity of 
any control plan must be judged by its ability to provide an 
economical supply for the market. Therefore, any plan that 
discriminates against near-by farmers in base forming 
methods, or by its price system, encourages a larger fluid 
milk zone than competitive processes require, and will 
create discontent among some producers located near the 
market. 

The present practice by which each distributor pays 
Class I price for that percentage of total basic quantities 
that his sales warrant will not allay this dissatisfaction. It 
will probably increase the size of the minority element. The 
fact that one distributor pays Qass I prices for more than 
100 per cent of his total basic volume while another dealer 
finds that his fluid milk sales are equal to only 80 per cent of 
the total bases of his producers, will not reward f uHy a ship- 
per to the latter distributor for his uniform production. At 



152 Basic-Surplus Problems in the Philadelphia Milk Shed 

the same time his neighbor may be receiving Qass I prices 
for his entire output because he is fortunate enough to ship 
A^ i-i,^ Arsr.-ye^^ i>Q^riricy fViia ypipfivplv hic^h utilization. Althousrh 
these variations in percentage payments as between distri- 
butors will tend to become smaller over a period, the harm 
done through producer unrest cannot be measured and the 
practice also encourages excess production on the part of 
some, rather than to reveal to all dairymen the effects of ex- 
cess supplies upon milk prices. These effects are made more 
drastic, not only because the lack of transportation facilities 
would often make it impossible for a shipper to transfer to a 
distributor paying Qass I prices for a relatively higher per- 
centage of bases, but also because it is not possible for a pro- 
ducer to change to another dealer, even though he may be 
dissatisfied, without the permission of that distributor. 

Because some dealers have taken on more shippers than 
their Class I sales require and therefore pay fluid milk prices 
on a relatively low percentage of quotas is not sufficient rea- 
son for penalizing all dairymen shipping to these distributors. 
Usually these dealers have increased their supplies because 
they are now, or once were, convinced that all production 
within the milk shed must be brought into the control system 
if its price plan is to be protected. Therefore, all dairymen 
should pay for this protection by receiving the same percent- 
ages of basics as Class I until increased consumption or de- 
creased supply brings sales and basics into line with one an- 
other. 

It is sometimes difficult for producers to understand 
such a policy and especially to appreciate why, under state 
control board orders setting prices for the milk which the 
distributor pays, two dealers should return widely different 
average prices. The reason, of course, is that one distributor 
handles a greater proportion of his supply in manufacturing 
classes than the other. The Philadelphia plan might be im- 
proved in this respect by classifying dealers with regard to 
their fluid milk requirements, having those who accept sur- 
plus only because they must do so in order to cover fluid 



Basic-Surplus Problems in the Philadelphia Milk Shed 153 

trade requirements, account for it at prices in accord with 
earnings. In other words, permit such distributors to fol- 
low the practice of deducting losses on surplus from a 
standard price for fluid milk. Such a practice would place 
dealers on a uniform cost basis respecting their fluid milk 
needs which the inevitable gains and losses on surplus tend 
to defeat when they are required to account for this excess at 
fixed prices. 

Another factor causing producer unrest is the outcome 
of inter-state control over milk production which makes imi- 
form operation of the Philadelphia base-surplus plan impos- 
sible. The New Jersey Milk Control Board by its order re- 
quiring distributors to pay Class I prices for all milk pur- 
chased up to norm quantities from Jersey producers in any 
month that sales in that state exceed norms has given these 
dairymen an artificial differential over other Inter-State ship- 
pers. As the ratio of supplies to sales in New Jersey of some 
Philadelphia distributors has been relatively low this ruling 
favors their Jersey producers, stimulating them to increase 
output and thereby forcing Pennsylvania, Delaware and 
Maryland dairymen to lower production. To a lesser degree, 
different laws and regulations governing the sanitation con- 
ditions under which milk is produced and marketed by the 
five states supplying milk to the Philadelphia market have 
worked hardships on producers. Municipal and other local 
health and sanitation requirements have added to this 
burden. These have meant duplication of inspection by dif- 
ferent agencies and the necessity of meeting the different 
interpretations of the varying regulations, all of which add 
to the cost of producing milk and to the creation of an arti- 
ficial differential for those who escape this additional ex- 
penditure. Not until some one inter-state agency is given 
complete control over these regulations and inspections in 
the entire Philadelphia milk shed will these sources of irrita- 
tion be abolished. 

These real causes of dissatisfaction with the Philadel- 
phia marketing system have naturally led the minority ele- 



154 Basic-Surplus Problems in the Philadelphia Milk Shed 

ment to attack the officers of the producers association, ac- 
cusing them of incompetence and mismanagement and even 

<- ^ • X n^^ I,-, /4;ei-«-^Vviifr>T*a T^oHe**a nf this pxruin. 

of Demg UOIltruiicu. vjy vAiocxAfc^tiwvn.^. jfc-.x^****^* « v ~-a — o r-* 

whatever may have been their motives, pointed out real 
grievances and then added fancied ones. State milk control 
boards have aided these minority movements. The very for- 
mation of these boards has encouraged the development of 
loosely organized cooperative groups representing a minority 
of dairymen, for the purpose of securing marketing agree- 
ments satisfactory to them and presenting evidence at hear- 
ings. These groups may have little financial responsibility, 
few obligations to their members and render few services, 
but may be represented to be a major group of dairymen in 
hearings and other testimonials that go before these control 
boards. Quite often these minority cooperative associations 
develop points of friction and split apart a community of 
farmers rather than unite the producers into one strong 
minority movement. 

The brief history of state milk control boards leaves 
much to be desired. Being political appointees, in most in- 
stances, the members of these boards are not likely to be 
experts in milk marketing economics nor to have a thorough 
training in general economics. They may be motivated by the 
desire to remedy existing defects in milk marketing but their 
lack of expert knowledge makes them susceptible to pleas of 
discontented minorities who suggest remedies that may aid 
the few temporarily but which may also create greater mar- 
ket instability in the end. 

Attempts by federal and state authorities to regulate 
milk marketing within the Philadelphia shed have left much 
to be desired when measured by success either in providing 
the most economical supply for the market or in satisfying 
minority producers. The brief period of actual regulation by 
the federal government ended with many marketing problems 
still unsolved and subsequent control by state agencies has 
increased marketing instability and producer discontent. 



Basic-Surplus Problems in the Philadelphia Milk Shed 155 



The failure of any one state milk control board to solve 
producer problems is apparent. Although one Supreme Court 
decision upheld the rigfht of a state to fix prices paid its farm- 
ers,* a later decision prohibits any state from fixing the 
price of milk from other states, not even by subterfuges such 
as local inspections.** 

Can more effective control result from some form of in- 
ter-state cooperation? There remains the possibility of 
regulation through a compact among the states within the 
milk shed, with the consent of Congress. However, the orders 
of the New Jersey Milk Control Board favoring its own ship- 
pers and attempting to secure a larger share of the market 
for dairymen within the state suggests the impracticability 
of mutual agreements as a solution. Each state is primarily 
concerned with bettering the relative position of its own 
farmers. 

Activities of state milk control boards, together with the 
problems of milk marketing economics, leads to the con- 
clusion that the sphere of public regulation of the milk in- 
dustry should be limited to health and sanitation measures 
and inspection services. There is no indication that public 
agencies can bring about effective and economical milk mar- 
keting. 

It is believed that too little consideration has been given 
to long range factors in the past and the tendency of control 
boards to adopt short term programs without full regard for 
fundamental factors operating over a wide period of time is 
clearly observed in many cases. These newly created boards 
often feel that they must justify immediately their existence 
through positive action, not realizing, perhaps, that a false 
step in the artificial control of an intricate economic matter 
like milk marketing may appear to be harmless or even 
beneficial for many months and yet it may ultimately bring 
repercussions of such a nature as to cause great market in- 



*Ne'bbia v. New York, March 5, 1934. 
**Baldiwin v. Sweelig. 



156 Basic-Surplus Problems in the Philadelphia Milk Shed 



stability for years to come. 

Furthermore, in large milk sheds like Philadelphia, 
which transcend state Dounaanes, uuu i.rui waxv* iv^g,^.. — .^ 
may result in much confusion as these rules can apply fully 
to producers within the one state only. And where two or 
more state supervisory bodies are operating within the same 
shed this confusion wUl probably be increased. 

Perhaps, the charge of collusion between Inter-State 
officers and large distributors should be expected. Aside from 
the fact that producer and distributor interests should be 
the same in the operation of any economical control plan, it 
is not surprising that there might be a remarkable degree of 
unanimity between large dealers and the officers of the Asso- 
ciation. Excess supplies are a problem to both the large 
dealers and the producers association. The former have the 
problem of disposing of this surplus without loss and the 
latter realize the threat to the price system that excess pro- 
duction may cause. The small, independent distributors, on 
the other hand, may not need the use or base-surplus plans 
as they can adjust supply to demand for fluid uses much 
more readily than the large distributing companies. Since 
they do not handle their proportionate share of the surplus, 
these small dealers may be able to cut prices and still make 
a profit. As price-cutting endangers the established price 
system and the margins of large distributors, these dealers 
and the dairymen's cooperative unite in an effort to protect a 
plan that is of mutual benefit. Therefore, it is only natural 
that the Inter-State should find these large dealers more 
willing to cooperate than the small ones in the use plan of 
marketing and in upholding the idea of established basic 
quantities as an incentive for uniform production. 

There is also little wonder if Association officials become 
tinged with distributor philosophy. In the carrying out of 
their program these officers are more closely associated with 
dealers than with members. They meet with the distri- 
butors at short intervals to discuss price and market condi- 
tions and it may be that they tend to become too conscious 



Basic-Surplus Problems in the Philadelphia Milk Shed 157 

of the problems of dealers and, perhaps, allow them too much 
weight in price negotiations. It may be, for example, that 
distributors are prone to exaggerate the power of price- 
cutters in the market and to over-emphasize the dangers 
from price-cutting in their price negotiations with represen- 
tatives of the producers. Since the strength of the Associa- 
tion depends mainly on its policy of a uniform price for all 
mUk used in each class those in control of the cooperative 
are naturally sensitive to such pleas. 

Yet, these officials realize that the distributors sitting in 
conference with them are also fighting against the outstand- 
ing practice making for demoralization in the milk mdustry. 
They know that these dealers are upholding a policy which, 
whatever its faults, has nevertheless revealed more clearly 
to dairymen the effect and importance of excess supplies 
upon milk prices, and at the same time has placed these dis- 
tributors on a fairer basis with respect to procurement than 
the flat price plan. It is this ever present and to some extent 
necessary excess portion of the mUk supply that introduces 
a complicated and uncertain element in price negotiations. 
Small wonder, therefore, that Association officers may tend 
to be quite conscious of problems which dealers, with their 
practical knowledge of marketing conditions, insist are strik- 
ing at the success of the base-surplus plan. 

It has been the practice of the minority to stress more 
complete regulation of distributors' operations, but it may 
well be that progress in milk marketing in the Philadelphia 
area depends quite as much upon stimulating the initiative of 
the dairymen themselves. Unless the marketing plan is well 
miderstood by the producers and they take responsibility for 
as much of the actual conduct of the program as possible, 
non-compliance tends to become a serious problem and all 
efforts absorbed with such problems which, after all, are only 
negative aspects of the program. Dairymen must be induced 
to develop and perfect their technique of marketing and this 
requires a knowledge of the part played by surplus mUk and 
of the allowance to be made for it in payment to producers. 



158 Basic-Surplus Problems in the Philadelphia Milk Shed 

which control plans with their emphasis on use classification 
and the regularity of supplies attempt to instUl. There is lit- 

.... . ji. - , i.i_~ ,-,•? r\w\t^aa nrmilH talrp f*arp of itself. 

tie douDt tnat me niitR-ing ux t/x.v^.^ ..- — 

to a large extent, if all dairymen, and distributors as weU, 
were prepared and disposed to function properly in the mar- 
keting process. 

In all price determinations in milk markets there is 
probably too little factual information available and too little 
impartial analysis made even of facts that are available. In 
their dealing with bulk quantities, producers associations have 
often taken for stability and tranquility what was in fact a 
bulk of opposing forces neutralized by their oppositive direc- 
tion These associations owe it to their membership to study 
in detail exactly how each differential imposed operates, and 
this is possible only through records that reveal how the 
individual producer reacts to the differential in question. Any 
price plan must remove both the incentive of producers to 
exploit the market and the incentive of distributors to de- 
velop unwarranted supplies. The producers association must 
curb the distinct tendency for members to demand price in- 
creases which will stimulate production beyond market re- 
quirements and create a surplus. The bargaining strength of 
organized dairymen can obtain prices that represent the full 
value of the milk but it cannot increase the actual value with- 
out dangerous repercussions in the end ; only a plan that in- 
duces intelligent adjustment of production to demand can do 

that. 

It may be the nature of farmers not to be interested in 
the price of milk five years hence, but associations must en- 
courage their members to develop a prospective in regard to 
dairying. Farmers attempt to adjust production to demand 
as reflected to them through price, but current price may en- 
courage heavy output in the face of permanent changes tak- 
ing place that will soon lower milk values. For example, 
present indications point to more land being used for hay and 
pasture in the future. Also, an increasing need of legume 
crops to restore organic matter and prevent depletion of the 



^^si^ju^A^S^iMgjtfMllittillJiiHiH 



Basic-Surplus Problems in the Philadelphia Milk Shed 159 

soil is leading to the introduction of highly productive legume 
crops such as sweet clover, which may be utilized incidentally 
as very productive pasture. As butter values are reflected m 
fluid milk prices, this more or less permanent change may in- 
fluence marketing in every milk shed, and it may cause dairy- 
men in our eastern metropolitan market areas to adjust pro- 
duction more closely to demands for Qass I nulk. 

On the other hand, the recent economic upturn in gen- 
eral may result in an increase in milk consumption. Although 
the demand for fluid mUk is relatively inelastic withm ordi- 
nary limits, recent studies indicate that reactions to price 
materially reduce consumption when the incomes of a large 
proportion of consumers have been greatly lowered, as they 
have been during the past five years. A return of incomes 
to a higher level may, therefore, increase substantially the 
consumption of fluid mUk in all markets. Whatever future 
trends may be, dairymen should make every effort to collect 
and analyze data having a significant bearing on the future 
of the milk industry in their areas. 

Finally it must be admitted that the use plan, however 
imperfect in its operations, is far better than no plan at all. 
Individual farmers in the absence of a well recogmzed pnce 
plan can hardly avoid selling their milk more or less blindly, 
that is without much knowledge of actual demand prices. 
Prices offered by different distributors may vary widely, de- 
pending upon competitive conditions, with the result that in- 
dividual dairymen are scarcely in a position to formulate 
much of a judgment as to whether or not they are receivmg 
as much as they might reasonably demand. The reasons 
for this situation should be obvious. They are due to the 
character of the commodity itself, its high penshability and 
also its elusive quality character, which taken in conjunction 
with the nature of the demand gives rise to the phenomenon 
of excess supplies. Also, individual farmers lack much power 
to assert their right to full market prices even when their 
judgments concerning them are well founded. Each one 
represents so little business that dealers may pay little heed 



160 BastC'durpms 




to his grievariL 
sources of suppiy « 
But the lose 
shipper is a 
able, and 
the scales are \ 
trading rdiations 

The ua& pTanr .& 
the fiat prare 
pressing pro 
uniform prodnctiaB: jbt 

in supply. T - 

put producers 
sumption 
will give if 
economical :iurr 
include the fojLuu 

(1) 

petitive one. 
quantities juol^L 
shipments are oeiQw 
lations of 
to sales for 
with all prodiictars 
with the mitrL ^^^ 
ditions vsrarrant* J: 
these eariy 
price, whicit will 
mately CIslsb l 

(2) 
ket recemng^ 
the coopoatEwai 
market and 
f erennais r 

(3) 
tions should ae 



Bosk-Surplus Problems in the Philadelphia Milk Shed 161 

__^tion service ought to be conducted by a pubUc agency 
which would protect the mterests of consumers. 

Since some form of artificial control is necessary if pro- 
ducere are to receive prices lor tnwr nuxn c..«. T ^ZZ^ 
conditions require, the above suggestions, if put ^to opera- 
tkm wiU enable distributors to procure milk at uniform 
prices based upon a use classification, and farmers to re- 
ceive payment not only in accordance with their relative loca- 
tion S^ quality, but also with reference to the regulanty 

dependability of their supplies. 



I 



y 



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