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Author: Andes, James

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

milk shed

Place of Publication: Philadelphia

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

— ^

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

■ » »

1 ■ . I

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L.i-'A 5 ']fl J," .'/ "• ' -J

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PHILADELPHIA

1937

338./

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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.

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

78
92
98

105
145
162

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

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

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- .

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

1918

1919

1910

1920X

1920

1921

1922

1923X

1923

1926

1929X

1929

1930

1931

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 lower 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

:«

■

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

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

l«( 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

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

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.

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

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.

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

« ff *

# ' «

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

: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

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.

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

100

78
100

93
93

94
100

84
100

97
97

105

All

87
100

97
97

105

All

lOOk^. 100

100

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

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

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

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

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

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

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

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

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

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

Dealer B

Dealer C

132

Total

111

100

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

16.3%

13.6

38.3

29.6

10.5

2.5

5.6
35.7

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

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.

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.

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 imrm:
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 grqihn: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 jtwrnimng^
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«»

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.

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-

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.

BIBLIOGRAPHY

Primary Sources:

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Basic-Surplus Problems in the Philadelphia Milk Shed 163

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\-^f ■ ' X- ifcicS.jitf jaJrtihM*^hiaB5tfi.JfcaBift

■^■,.,^^.^W^ .^.^.JMi.aa.AtiariM

Basic-Surplus Problems in the Philadelphia Milk Shed 165

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iwMaiwaftiaMifawJBrtMlll lirilii1iiifMJttMhi<"**'***=*'^'*i(Mill

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