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TABLE 13.-Retail prices out-of-store, farmer prices, and processor-retailer margins, January and August 1966, 35 cities

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1 Cities are arrayed by their January 1966 processor-retailer margins. City-average price reported by Bureau of Labor Statistics.

Farmer's price based on the butterfat content of milk most commonly sold in the market. and August 1966 Fluid Milk and Cream Reports, SRS, Crop Reporting Board, USDA.

• Farmer's price was obtained from FTC survey.

See January

BLS price for February 1966. However, FTC survey data show no price changes in Portland, Oreg., between January and February 1966.

Source: Bureau of Labor Statistics and U.S. Department of Agriculture.

PROCESSOR MARGINS

In the 24 cities studied by the Commission, processors increased their gross margins by 0.9 cent per half gallon between January 15 and August 15, 1966. The pattern of change in processor margins was mixed among the 24 cities. There was a strong tendency, however, for processor margins to increase most in those cities where margins were lowest in January (table 14). The eight cities which had processor margins of less than 13 cents per half gallon in January enjoyed an average increase of 1.3 cents by August 15. This was over three times the average increase in gross margins in cities where processor margins averaged 18 cents and over in January. Thus, it appears the largest increases in processor margins occurred in those cities where margins were low and probably deflated prior to recent.

This is an average of both packer label and the chain label milk purchased from processors. In the 12 markets where both were purchased, the margin generally was higher for the processor on milk packaged under his own label.

price increases. Preliminary findings of some of the Commission's in-depth studies suggest that in some markets where processor margins increased most, they had been experiencing abnormally low margins.

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RETAILER MARGINS

In the above 24 cities, retailers passed on the average increase in wholesale prices of 2.8 cents and added an additional 1 cent to the retail margin. When the cities are arrayed by the size of wholesale price increases, it is apparent that retailers increased their own margins most in cities where their wholesale prices increased most (table 15). Where wholesale prices increased 2 cents or less per half gallon, retailer gross margins increased an average of only 0.4 cent per half gallon. In these cities retailer margins increased 0.6 of a percentage point. On the other hand, where wholesale prices increased from 2 to 4 cents, retailers not only passed on the wholesale price increases but added 1.4 cents to their margin and gained 1 full percentage point in their percentage of the retail price. As a result, in these markets retailers increased both their absolute and percentage margins.

TABLE 14.-Average processor margins for half gallons of fluid milk, 24 cities, Jan. 15, 1966, and Aug. 15, 1966

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TABLE 15.- Changes in prices paid and gross margins of large grocery chains, Jan. 15-Aug. 15, 1966, in 24 cities

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The retailer margin is an average of both packer and private-labeled milk purchased from processors. On the average, in the 12 markets where both were purchased, the retailer margin was higher on milk purchased under his own label. During the January 15 to August 15 period, the margin on private-label milk increased slightly relative to that purchased under the processor's label."

TABLE 16.-Change in gross profit margins for milk sold by large grocery chains, Jan. 15-Aug. 15, 1966, in 24 cities

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The increases in retailer margins do not bear any significant relationship to their previous level (table 16). In fact, their absolute margins increased least in low margin markets. In 18 markets where gross profits averaged less than 11.1 cents per half gallon in January, both the absolute and percentage margins of chains increased. Only in the highest margin group (11.1 to 13 cents per half gallon) did the chain. percentage margin drop, from 24.8 to 24.5 percent. However, the absolute increase was the same as the average for all markets.

SUMMARY OF PRICE CHANGES

Between January 15 and August 15, 1966, retail milk prices rose an average of 3.9 cents 10 per half gallon, or 8.0 percent, in 24 cities studied by the Commission. On the average, farmers accounted for 2 cents of this increase; processors, 0.9 cent; and food retailers, 1.0

There was considerable variation among cities, however. The greatest increases occurred in the midwestern cities where raw fluid milk prices were the lowest in the beginning of the period.

Figure 11 subdivides the 24 cities according to the magnitude of recent farm price increases. The first bar shows the distribution of the increase in the nine cities where raw fluid milk prices to processors rose by over 2.5 cents per half gallon. In these markets farmers received an additional 3.1 cents; processors, an additional 1.2 cents; and retailer gross profit margins rose an additional 1.6 cents. As a result, retail prices in these cities rose by 5.9 cents per half gallon.

In the second group of cities, where farm prices rose 1.1 cents to 2.4 cents, the respective shares in the increase were: farmers, 2 cents; processors, 1.3 cents; and retailers, 0.8 cent. In the group of cities where farm prices rose by less than 1 cent per half gallon, the combined processor and retailer share grew by only 0.4 cent.

This summary reflects the point developed previously; namely, that retailers tend to pyramid price increases, raising their margins roughly proportional to the increase in their purchase prices. Processor margins did not show a similar pattern of pyramiding. They enjoyed about the same increase in the first two groups of cities and practically no increase in the third. As explained above, it

10 This figure differs from that in table 13 primarily because of differences in the cities covered and the time period covered. The latter difference is important because some price increases occurred between the first week in August (the period which BLS used to measure August retail prices) and August 15 (the date used by the Federal Trade Commission).

Figure 11

DISTRIBUTION OF RETAIL MILK PRICE INCREASES TO FARM,
PROCESSOR AND RETAIL LEVELS, JANUARY-AUGUST 1966
BY SIZE OF RAW MILK PRICE INCREASES, TWENTY-FOUR CITIES

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appears that a major determinant of the amount by which processor margins rose over the period was the size of their margin at the beginning of the period. Hence, many milk processors, like some wholesale bakers, appeared to use the recent price increases as an occasion to adjust upward what had been abnormally low margins.

APPENDIXES

APPENDIX A.-CORRESPONDENCE BETWEEN THE SECRETARY OF AGRICULTURE AND THE CHAIRMAN OF THE FEDERAL TRADE COM

MISSION

DEPARTMENT OF AGRICULTURE,
OFFICE OF THE SECRETARY,
Washington, August 4, 1966.

Hon. PAUL RAND DIXON,
Chairman, Federal Trade Commission,
Washington, D.C.

DEAR MR. CHAIRMAN: Higher food prices in recent weeks have been a subject of deep concern to many people. I have received many letters asking why food prices, particularly for bread and milk, have been going up. In addition, several Members and committees of the Congress have asked for studies to find the causes of these increases.

One essential task facing all Americans today is to maintain a stable and healthy economy. To discharge this responsibility, we must all work together to avoid price increases other than those necessary to protect against shortages. I believe the public interest will be served best if the facts in this current situation are developed by an independent agency. Thus, I am asking the Federal Trade Commission to review immediately the pricing policies and actions for bread and fluid m lk, including recent price changes of these food items and their relation to all factors affecting costs and the conditions of competition. I hope the Commission can undertake such a study, and will make its findings available as soon as possible.

Sincerely yours,

ORVILLE L. FREEMAN.

FEDERAL TRADE COMMISSION,
Washington, D.C., August 4, 1966.

Hon. ORVILLE L. FREEMAN,

Secretary of Agriculture, Washington, D.C.

DEAR MR. FREEMAN: In accordance with your request of August 4, the Federal Trade Commission will immediately undertake to study the pricing of bread and fluid milk, including recent price changes of these food items and the relationship of recent changes to cost factors and the conditions of competition.

The Federal Trade Commission has also received reports of bread and fluid milk price increases from various parts of the country. We believe that a study of the situation is in order because unfortunately there does not appear to be sufficient definitive information at this time as to how widespread these increases have been and the extent to which they may have been brought about by cost increases, or whether they have been responsive to normal competitive pressures. We hope that we can make the results of our study available to you in the very near future.

By direction of the Commission.

Sincerely yours,

PAUL RAND DIXON, Chairman.

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