VIII FEDERAL TRADE COMMISSION Paul Rand Dixon, Chairman Mary Gardiner Jones, Commissioner CONTENTS I. Nature and scope of study... II. Trends in prices, margins, and profits... Postwar price trends in bread and milk.. Relative changes in farm, processor, and retailer prices and Market characteristics_ III. Recent changes in the price of bread_. Geographic pattern of retail prices.. Recent increases in ingredient costs. The timing of price increases. Private-label bread sales by bakers... Intercity patterns in wholesale bread prices. Changes in margins of large food chains--- Private label price increases- IV. Recent changes in milk prices.-- Figure 1.-Retail price changes, 1947-66--- Figure 6.-Retail bread price changes in 39 cities, August 1965–66- Figure 7.-Changes in prices paid and gross margins of large grocery chains, Figure 9A-9D.-Retail milk price trends in selected cities, January 1964- Figure 10.-Retail milk price changes in 39 cities, August 1965-August Figure 11.-Distribution of retail milk price increases to farm, processor, and retail levels, January-August 1966, by size of raw milk price in- 70-873-66-2 TABLES Table 1.-Profits after taxes as a percent of net worth, large bakeries, dairies, food chains, and food manufacturing companies, 1948-65----. Table 2.-Changes in retail bread prices, August 1965-August 1966-- Table 3.-Cost of ingredients per pound loaf of white bread, 1961-66. Table 4.-Retail bread prices and frequency of price list increases by the 8 largest national wholesale bakers, January 1-August 15, 1966, 27 Table 5.-Average wholesale list price of a 1-pound loaf of white bread, January and August 1966, 25 cities... Table 6.-Changes in prices paid and gross margins of large grocery chains, wholesale baker brands of white bread, January-August 1966.. Table 7.-Change in gross profit margins for white baker brand bread, 9 large grocery chains, January-August 1966, 25 cities... Table 8.-Private label and baker brand retail price increases of large Table 9.-Average retail prices charged by large grocery chains for whole- sale baker brands and private labels in 23 large cities.. Table 10.-Changes in retail milk prices in 39 cities, distributed according to prices at beginning of period____ Table 11.-Changes in raw milk prices in 35 cities, August 1965-August Table 12.-Total milk production, by geographic regions, 1964 and 1965-- Table 13.-Retail prices out-of-store, farmer prices, and processor-re- tailer margins, January and August 1966, 35 cities.. Table 14.-Average processor margins for half gallons of fluid milk, 24 Table 15.-Changes in prices paid and gross margins of large grocery chains, January 15-August 15, 1966, in 24 cities.--. Table 16.-Change in gross profit margins for milk sold by large grocery Appendix A.-Correspondence between the Secretary of Agriculture and the Chairman of the Federal Trade Commission__ Appendix B.-List of cities surveyed by the Federal Trade Commission.. Appendix table 1.-Retail price changes, 1947-66--- Appendix table 2.-White pan bread: Estimated retail and wholesale prices of a 1-pound loaf, retailer's, wholesale baker's, miller's and other spreads, and estimated farm value of ingredients, years 1950–65, and months 1964-66.. Appendix table 3.-Farm and retail milk prices, 1947-66- Appendix table 4.-Gross margins of food chains, 1955-64- Appendix table 5.-Retail bread price trends in selected cities, January Appendix table 6.-Average prices of principal ingredients used in bread, Appendix table 8.-Retail milk price trends in selected cities, January Appendix table 9.-Farmer, processor, and retailer margins of milk sold by Appendix table 10.-Farmer, miller, and other ingredient processor, baker, and retailer margins on baker brand bread sold by large food 56 SUMMARY OF THE REPORT The sharp July-August-September increases in retail bread and milk prices carried bread prices to 7.5 percent and milk prices to 7.8 percent above the January 1966 level. The upward movement in retail prices in both products appeared initially in the latter part of 1965 in certain Midwest cities but spread quickly to the East, Mountain States, and Far West (figs. 5 and 9). The more recent advances were widespread, although in isolated areas no increases took place. The pattern of bread and milk price rises has been uneven from city to city, but in general the greatest advances occurred where prices were lowest a year earlier (figs. 6 and 10). Certain qualitative differences between the price behavior of milk and bread are apparent. Farm ingredients represent a relatively small proportion of the retail price of bread but a substantial share of the consumer's dollar spent on milk. Supply-demand conditions at the farmer level thus do not exert the same influence on consumer prices for the respective products. Large retailers are partially integrated into the production of both products. Most large grocery chains bake their own bread but also sell wholesaler branded bread. There is a substantial differential in the store price for retailer as compared with wholesaler brands. Some of the leading retailers are completely integrated backward into milk processing, selling only their own private brands. Others sell private brands processed for them by dairies as well as processor labeled milk. Typically, however, there is no difference in the retail price charged for processor and retailer brands sold in the same store. The recent rise in bread prices followed the increases in wheat prices in the spring of the year. The advance in wheat prices, in turn, reflected the twin facts of an expansion in export demand and a smaller than usual wheat crop. But while the subsequent rise in flour prices appeared to trigger the increase in bread prices, the pattern of price increases was very mixed. The greatest increases occurred in cities where prices were lowest in August 1965. For example, Milwaukee, which had the lowest average bread prices in August 1965, experienced an increase of 22.5 percent. At the other extreme, Los Angeles, which had the highest prices in August 1965, experienced a decline in bread prices (fig. 6). Retail bread prices rose an average of 1.7 cents between January 1, and August 15, 1966, in the 25 cities studied by the Commission. Farm ingredient costs accounted for 0.6 cent; bakers, for 0.7 cent; and retailers, 0.4 cent. There was great variation among cities, however. At one extreme, in four cities where prices rose by 3.7 cents, farm ingredient costs accounted for 0.6 cent; bakers, 2.1 cents; and retailers 1 cent. At the other extreme, in four cities where wholesale bakers absorbed the entire rise in ingredient costs, retail prices remained unchanged over the period (fig. 8). The mixed pattern in retail bread prices cannot be attributed to geographic differences in raw material costs since bakers in all parts of the country have experienced essentially the same increases in ingredient costs. On the average, the greatest price increases occurred in cities where wholesale bakers had the lowest prices in the beginning of the period. It appears that in these cities bakers used the occasion of increased flour costs in June to raise their prices substantially in excess of their increased cost of ingredients. For example, in four cities where wholesale bakers had relatively low beginning prices, they increased their prices by an amount four times greater than the rise in ingredient costs. These bakers still had prices slightly below the average of all bakers, however (table 5). Our analysis suggests that in some cities where wholesale prices rose most, bakers had been earning very low profits, or even incurring losses. Preliminary findings from our in-depth studies seem to confirm this observation. Retailers not only passed on the increases in wholesale bread prices, but added to them by expanding their own gross profit margins, both absolutely and proportionately. Where wholesale prices increased most, retailer margins registered the largest increases, irrespective of the size of their previous margins. Retailers did not, however, advance the prices of their own brands of bread commensurately with the baker brands, but this may be temporary because of the usual lag in retailer brand price increases. Retailer brands of bread, as indicated, generally sell for less at retail than baker brands. In the cities studied by the Commission the difference between the two averaged 5 cents per pound. There were wide differences among cities, however, ranging from an average of 2.6 cents in one group of five cities to an average of 7.8 cents in six other cities (table 9). In the case of milk, farm prices had been severely depressed for over a decade, particularly in the so-called "surplus" production States in the Midwest. The result was a continued exodus of dairy farmers. Until 1965, increased productivity of the remaining farmers more than kept supply in pace with the demand, but in the latter year the exodus from dairy farming became so great that total milk production fell. The resulting sharp reversal in the supply-demand situation brought rises in raw milk prices which were quickly passed on to the processors and retailers. It is not surprising, therefore, that the sharpest price increases came in the traditional "surplus" States. The three cities with the lowest retail milk prices in August 1965 experienced large gains by August 1966: Minneapolis, 18.2 percent; Cleveland, 22.7 percent; and Detroit, 19.6 percent (fig. 10). About one-half of the overall increases in milk prices may be attributed directly to higher farm prices. In 24 cities studied by the Commission out-of-store milk prices rose an average of 3.9 cents per half gallon between January and August 15, 1966. On the average, farmers accounted for 2 cents; processors, 0.9 cent; and retailers, 1 cent. There was considerable variation among cities, however. In nine cities, where prices rose an average of 5.9 cents, farmers accounted for 3.1 cents; processors, |