1.2 cents; and retailers, 1.6 cents. On the other hand, in seven cities, where prices increased an average of 0.8 cent, farmers accounted for 0.4 cent; processors, less than 0.05 cent; and retailers, 0.4 cent (fig. 11).

It appears that much of the increase in processors' margins occurred in markets where margins had been abnormally low (table 14), an inference supported by preliminary findings of our in-depth studies. On the other hand, the extent of the increases in retailers' margins appeared to be directly related to advances in the prices which they paid for milk. Where wholesale prices rose most, retailers not only passed on the increase but added to it by expanding their own margins, both absolutely and proportionately. But where wholesale prices increased only slightly, retailers did not widen their margins appreciably (table 15).

In general, it appears that the recent price increases in bread and milk were triggered by changes in the supply situation at the farm level. The actual increases in retail prices were about double the rise in the price of raw milk from farms and retail bread prices were about three times greater than the advance in farm ingredient costs to bakers. Part of the amount added by both milk and bread processors in some cities clearly represents an upward adjustment from what had been depressed margins. The increase in retailer gross profit margins, on the other hand, resulted largely because retailers pyramided prices in markets where wholesale prices rose most.

There are notable exceptions to this general pattern of price increases. For this reason, the Commission is studying in depth several markets which experienced especially sharp increases in bread and milk prices. The analysis in these cities will cover factors in addition to ingredient costs which may have contributed to increased processor costs, including wages, packaging, and other items. It will also study the level and pattern of profits in these cities.

In conclusion, this preliminary review indicates that recent price increases in bread and milk may be attributed to the following: (1) Farm prices rose because of radically changed supply-demand conditions. In milk, where the greatest farm price increases occurred, farm prices had been severely depressed for over a decade. In bread, the recent rise in wheat prices reflected a sharp reversal in the supplydemand situation with respect to the 1966 wheat crop. (2) Bread and milk processors as a group not only passed on the increases in ingredient costs but added to their own margins as well. Part of these margin increases reflect other cost increases while part may have added to profits which had previously been depressed. (3) Because of the practice of taking a fixed percentage margin, retailers tended to pyramid the price increases generated at the farm and processor levels.

At this time there is reason to believe that the upward price spiral will not be extended. Although the usual seasonal advances in milk prices in the winter months may be anticipated, it is likely that some of the recent advances in bread prices will not "stick" because of the wide differential in some markets between retailer and baker brands. For both bread and milk retailer gross margins have become so wide in some markets that effective competition may exert downward

pressures. Finally, there is growing consumer resistance to price increases which may induce retailers to intensify price competition and curtail the promotional competition which has substantially raised retail distribution costs over the past decade.

I. NATURE AND SCOPE OF STUDY

This preliminary report on bread and milk prices was undertaken by the Federal Trade Commission pursuant to a request on August 4, 1966, from the Secretary of Agriculture that the Commission "review immediately the pricing policies and actions for bread and milk, including recent price changes of these food items and their relation to all factors affecting costs and the conditions of competition." 1

In response to the request, this Commission undertook a two-phase study. The first is designed to determine the amount and pervasiveness of the price increases in various parts of the country, the extent to which they may be attributed to increases in basic ingredient costs, and the manner in which higher ingredient costs ultimately are translated into consumer prices. The second phase involves in-depth studies of a limited number of metropolitan areas to ascertain in some detail the interrelationships between changes in various cost elements in the production and distribution of these products and the prices the consumers are paying.

This preliminary report covers only the first phase of our inquiry. We are unable to report at this time on the second phase of the study because cost information from some companies is not yet available for the period covering the major price increases occurring in August. A final report will therefore be made which will analyze the cost, price, and profit movements in particular markets experiencing sharp price increases in recent months.

In order to secure the necessary factual foundation for this inquiry, the Commission undertook to gather information from two major sources: (1) the Bureau of Labor Statistics, which supplied special tabulations of unpublished data, and (2) the leading companies in each of the principal phases of the bread and milk industries; namely, the major bread bakers, milk processors, and national grocery chains, which furnished data for many of the markets they serve. For the in-depth studies additional bakers, dairies, and grocery retailers active in the particular markets selected for study were also requested to furnish certain data on prices and costs. Companies in each of these industries have cooperated fully and expeditiously in this inquiry. For the preparation of this report the Commission studied price developments in 39 cities, and secured directly from leading companies data reflecting their operations in 27 of the largest of these. Specifically, the Commission obtained wholesale price information for the 27 cities from the 9 largest fluid milk processors and the 8 largest wholesale bakers and it obtained both purchase and resale price information from 9 of the largest food store chains. The surveyed companies

The letters exchanged between Secretary of Agriculture Orville L. Freeman and Chairman Paul Rand Dixon will be found in appendix A.

* The larger number of cities is the list for which the Bureau of Labor Statistics has compiled retail price data.

represent a substantial portion of the business done in their respective fields, and they are major factors in most of the cities studied.3

Much of the retail price information covered in this report is based on the prices of leading food chains. While the prices of these companies may not portray precisely the level of retail prices, they are good indicators of the trend in prices.*

This report is concerned primarily with measuring the change in bread and milk prices and the manner in which ingredient price increases became reflected in higher wholesale and retail prices. It has not attempted to study the impact of higher costs of other items. This is not to imply that other costs may not also have risen. The extent and significance of other cost components will be dealt with in detail in the in-depth studies of individual markets.

Before turning to an analysis of the recent price developments, it is appropriate to place them in perspective. The following section therefore discusses postwar price, margin, and profit trends in the milk, bread, and food retailing industries.

3 In 1965 the eight largest wholesale bakers produced about 40 percent of all commercial bread made and the nine largest grocery chains produced an additional 9.4 percent. These companies manufactured a somewhat higher percentage of all bread sold through food stores. Two or more of the nine largest national bakers operate in all but three of the cities surveyed; four or more bakers and/or chains operated in all but four of the cities. More than two of the largest bakers or chains were represented in all but one city. The nine dairy companies surveyed, plus the major chains, account for over 30 percent of total U.S. fluid milk production. These companies represent an even larger share of fluid milk sold through grocery stores, because many of the smaller companies sell mainly through home delivery or very minor amounts through grocery stores. Wholesale price information on milk was obtained from chain retailers as well as dairy processors.

The nine food chains surveyed account for about 27 percent of total U.S. grocery store sales. In all cities covered by the Commission survey these chains did more than 10 percent of the grocery store business and in all but seven cities they did over 20 percent of the business.

4 Comparison with Bureau of Labor Statistics data indicates that the bread and milk prices of large chains average about 3 percent less than the average of all food retailers. However, BLS data show that between August 1965 and August 1966 average milk and bread prices of chains increased by about the same percent as all food stores.

II. TRENDS IN PRICES, MARGINS, AND PROFITS

POSTWAR PRICE TRENDS IN BREAD AND MILK

Some perspective regarding the long-term trends, as well as the more recent changes in bread and milk prices, may be gained by examining retail price changes over the period 1947 to date as depicted in figure 1. This chart shows the indexes of retail prices of bread, milk, food (except restaurant), and all items contained in the Consumer Price Index except food. The left panel of the chart shows the trends on an annual basis from 1947 through 1965. The panel in the righthand portion of the chart shows the monthly changes from January 1964 through September 1966. Each of the indexes shown is based on 1947-49 as 100.

Food prices in general increased rather sharply during the years 1950-51; thereafter they fluctuated somewhat, but as recently as 1960 they were only 4 points above their 1951 level. In the early 1960's they rose modestly, but beginning in 1963 an upward movement developed and the food price index crossed the 120 mark (1947-49=100) for the first time in the postwar period. Following a steady upward trend, particularly since the end of 1964, the food index rose in August 1966 to a new postwar high of 132.9-that is, nearly one-third above the base period-but declined to 132.5 in September. Nonfood items in the Consumer Price Index, however, commenced their sharp upward movement earlier, and their rise has been more precipitous. By September 1966 the all-items-less-food index reached a level 42.8 percent above the base period.

As between bread and milk, the former has risen much more sharply, not only over the long pull of the postwar years, but in recent months. Retail bread prices have experienced an uninterrupted rise (on an annual basis) in each of the 18 years, 1947 through 1965, reaching 165.7 in the latter year. In 1966 to date, moreover, the rise has been very steep. In January of this year the retail bread price index stood at 169.9. By September it had risen to 182.2.

Retail milk prices followed pretty closely the total food price index until the midfifties, but since then milk prices have generally risen faster than the average of all food items. During the past 2 years, milk and total food prices have shown the same general upward movement, and the increases in milk prices have been quite pronounced since early in 1965. In September 1966 the retail milk price index reached 134.8, a new postwar peak.

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