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TABLE 10.-Changes in retail milk prices1 in 39 cities, distributed according to prices at beginning of period

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In order to explore the forces which make retail milk prices, it is necessary to follow the movement of milk from the farmer to the processor and on to the retailer. Raw milk is, of course, the predominant ingredient cost of fluid milk. Moreover, changes in raw milk prices have a great influence on the retail price. Thus, it is informative to review changes in demand-supply conditions at the farm level and the relationship between resulting farm prices for milk and processor and retailer margins. First, we shall examine raw milk price changes.

For 35 cities for which we have data both on the cost of raw milk and on retail milk prices as of August 1966, the average cost of milk per half gallon to processors was 26.2 cents (table 11). This represented over half (50.7 percent) of the average retail price of milk per half gallon sold in the same cities (table 13).

Between August 1965 and August 1966, the average price for raw milk in the 35 cities rose from 23.6 to 26.2 cents per half gallon, an increase of 11 percent (table 11). There was, of course, considerable diversity among these cities, both in the absolute level of raw milk prices and in the increases over the past year. A number of factors influence the level of raw milk prices but most important are the demand-supply conditions in the various producing areas.

TABLE 11.-Changes in raw milk prices in 35 cities, August 1965 to August 1966

ACCORDING TO PERCENT OF TOTAL SUPPLY USED FOR FLUID MILK

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1 Farmers' prices in cents per half gallon of milk processed into fluid milk. Price based on the butterfat content of fluid milk most commonly sold in the market.

Source: U.S. Department of Agriculture.

Generally speaking, raw milk prices are lowest in the principal milk-surplus areas. Dairy manufacturing industries producing butter, cheese, etc., have located in these areas in response to the lower prices of raw milk. Table 11 shows the relationship between the extent to which a State is a surplus producing State and the average price for raw milk in the State. The percent of milk used as fluid milk functions as a proxy indicator of the degree to which a State is a surplus State.

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The proportion of milk used for fluid milk purposes in the regions where the 35 cities are located varies significantly (table 11). In 12 of the 35 cities located in regions where less than half of the milk goes into fluid milk use, the average price of raw milk in August 1965 was 20 cents, compared with 23.7 cents for the 11 cities where 50 to 90 percent of the supply went to bottled milk, and 27.2 cents for the remaining 12 cities where 90 percent or more went to fluid milk.

During the past year, the greatest price increases occurred in the milk surplus areas: 3.5 cents, or 17.5 percent, in cities located in States where less than half of all milk produced was consumed as fluid milk, compared with 1.6 cents, or 5.9 percent, in States where over 90 percent was consumed as fluid milk. Thus the price increases narrowed the differential between surplus and nonsurplus areas.

Also shown in table 11 is the relationship between the previous level of raw milk prices and the increases that have occurred during the year among the 35 cities. This shows that the nine cities which

1 This grouping is based on the proportion of milk used as fluid in the region as a whole rather than for individual cities.

had the lowest prices in August 1965 registered an increase from an average price of 19.3 to 23.2 cents per half gallon-3.9 cents, or 20.2 percent. This was a substantially greater increase both in unit price and in percentage than in all the other groups. At the upper end of the distribution, five cities which had the highest prices a year ago showed the least increase, only 0.9 cent per half gallon, or 3 percent. These price changes reflect recent changes in the supply of fluid milk. Throughout the 1950's and the early 1960's there was a strong downward pressure from excess supplies on price.

A recently published technical study of the National Commission on Food Marketing summarized these developments as follows:

Dairy farmers found that although milk prices declined or remained relatively steady, the price of many items they purchased continued to increase. Meanwhile, farmers were adopting laborsaving techniques. Farmers who first adopted new techniques and thereby lowered production costs often realized increased income which more than offset the added investment, but adoption of the techniques by more farmers increased total production and added to the downward pressure on price. As new technology was created and adopted, the process was repeated. Dairy farmers, like many other farmers, found they were on a tread-. mill, where the only way to get ahead was to adopt new methods, usually outputincreasing ones, faster than other farmers adopted them.2

As a result, dairy farmers' income was held below that of other types of farming as well as below income of workers in manufacturing industries.

The Food Commission report concluded on this point:

In 1964, the hourly return in five dairy farming areas ranged from 30 cents an hour among grade B dairy farmers in western Wisconsin to 84 cents an hour among grade A farmers in eastern Wisconsin. The highest farm return was on cash grain farms in the Corn Belt, $2.13 an hour. In 1964, hourly earnings of dairy plant employees ranged from $2.20 to $3.84. For all manufacturing in

dustries, the hourly earnings of employees averaged $2.53.3

TABLE 12.-Total milk production, by geographic regions, 1964 and 1965

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Source: "Organization and Competition in the Dairy Industry," Technical Study No. 3, National Commission on Food Marketing, June 1966, p. 29.

* "Organization and Competition in the Dairy Industry," Technical Study No. 3, National Commission on Food Marketing, June 1966, p. 30.

* Ibid., pp. 30-31.

As a result of these low incomes, increasing numbers of dairy farmers left farming or changed to other types of farming. By 1965, the exodus became so great that total milk production declined. Total U.S. production for the first 7 months of 1966 was 4.2 percent below 1965. The greatest declines occurred in the traditional surplus States of the Midwest (table 12).

The Food Commission report observed that, "Many dairy products were in short supply, and some overseas commitments were in danger of curtailment. A temporary increase in the import quota on cheese was ordered. The Government-held surpluses of recent years had almost completely disappeared." 4

The recent changes in supply explain why raw milk prices have risen and why they have increased most in the "surplus" States. It seems unlikely that raw milk prices will decline in the near future. Although the recent increases have raised dairy farmer incomes, they are still well below those of many other areas of agriculture. The recent price increases may therefore be viewed as essential to maintaining an adequate supply of milk in the future, and to bringing incomes of dairy farmers in closer balance with those of other segments of the economy.

PROCESSOR-RETAILER MARGINS

As was shown by figure 10, retail milk prices rose an average 4.1 cents per gallon in 39 cities between August 1965 and August 1966. Most of this increase has occurred since January 1966 (table 13). The Commission therefore undertook to analyze in more detail the increases which occurred between January and August 1966.

As a first step in this analysis information was developed to show where the price increases had occurred and to isolate in a general way the amount which could be attributed to increased farm prices and that which resulted because of increases in processor-distributor margins. Table 13 shows for 35 cities the retail price, farm price, and processor-retailer margins.5

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Between early January and early August 1966, processor-retailer margins on the average rose from 23.6 cents to 25.2 cents per half gallon in the 35 cities studied. Thus processors and retailers added an additional 1.6 cents to the 2.1 cents increase in raw milk prices.

The change in processor-retailer margins among the cities was mixed, varying from an actual decline of 1.7 cents in Hartford, Conn., to an increase of 5.5 cents in Cleveland, Ohio. In only two cities, however, did the combined processor-retailer margin actually decline. This means, of course, that in all other cities retail prices increased by more than the amount by which farm milk prices had risen.

This then raises the question of how the increases in the processorretailer margins were distributed among processors and retailers. To answer this question the Commission obtained price information from leading dairy processors and food chains in 27 cities. Sufficient information was obtained for 24 of these cities to make the necessary breakdown between processor and retailer margins.

Ibid., pp. 31-33.

Information was developed for all cities for which the Bureau of Labor Statistics gathers price informa tion and for which raw milk price information is available.

The Bureau of Labor Statistics collects price information for the first complete week of each month. 7 See appendix B for a list of these cities.

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