‘ THE MARKETING OF BUTTER Thesis for Degree of M. S. Paul Stanley Lucas 1 9 2 6 .bl .‘ .... . ‘ :.....c wk 31.01.... .I... .. «Jug». LLSFE. . .4nu..u.lum4 Unhrfhu‘r...~. nu .... . ..o§...\§.o . 4 OIL?“ I..-,n..r| '4 .‘H‘I a ...-.x .I.'\ .a . . .r .4 l [1 Ali/,7 4. , ’us‘. 4"”... 1 : - . ' Q o .3 w"' " ' kw.” . . 4" ‘ v" M- 9 {‘3 /".“' / v54 c J.“ "3 I f? s ’a x-H Jm‘uw‘ ““3 THE MARKETING OF BUTTER THE MARK?TING OF BUTTER Thesis Submitted to the Faculty of the Michigan State College in partial fulfillment of 'the requirements for the degree of Master of Science. By Paul Stanley Lucas 1926 TH F79"??? ACKNOWL?DGXFYT9 The writer desires to avail himself of this Oppor- tunity to express his sincere appreciation of the many helpful suggestions and kindly criticisms of Mr. J. T. Herner, Professor of Agricultural Economics, and of Mr. O. E. Reed, Professor of Dairy Husbandry, in the prepa- ration of this thesis. 102:75 TABLE OF COYTFVTS Introduction Market DeveIOpment Butter Production and Population Marketing Agencies Establishment of Butter Prices Cost of Marketing Butter Comparison of Butter and Other Prices Variations in Butter Prices Factors Affecting Butter Prices Quantity of Money Theory Supply and Demand Speculation and Manipulation Oleomargsrin Procuction and Butter Prices 'Internstional Trade and Butter Prices Miscellaneous Factors Summary References Page THE MARKETING OF BUTTER Just how long butter has been an article of com- merce is not accurately known. It is, however, one of the oldest articles still used in the diet, so that, un- doubtedly, it has long been a commodity for sale or bar- ter. The earliest mention of butter is in the Hindu Vedas written 2000 to 1H00 B. 0. (1) Butter was known and used by the Sythians and Greeks 14.50 B. o. and by the Persians a trifle later. The Roman historian, Strabo, is authority for the statement, that butter sas used by the Portuguese about 60 B. c. The earliest use of the prod- uct was in worship; and.by the Greeks and Romans as an ointment, hair dressing, and medicinal salve for injuries. The latter use survived in Spain until as late as the seventeenth century. In Scotland, and that portion of England contiguous to Scotland, it found use as a smear for sheep and as oil for lamps. As indicating the relation between demand and supply possession of butter has been looked upon by primitive peOple as an indication of wealth. In Chili and Darel the practice of burying butter until "ripened“ has existed to modern times. The Irish are said to have buried fir- kins of butter in bogs on the occasions of threatened in- vasions and it has 10ng been a favorite sport of newspapers to report the finding of some long forgotten firknn of the product thus hidden. The Dardistan peasants are said to _regard as a great delicacy butter one hundred years or more old. The burying of butter may have been done, also for flavor development, or to store it against times of need. The practice of the Irish in this regard was reported by an English writer, John Houghton, as early as 1695. Early butter was used in cooking rather than eaten as such. Among the early consumers may be mentioned the Arabs,. (2) who termed the product samn. This use dates to about 785 A. D. or earlier, being mentioned in Arabian Nights. As an article of commerce it was shipped from India to Red Sea ports about the beginning of the Christian Era. The early Jews also bartered with butter according to Bibi- cal authority. In the twelfth century it was transported with dried fish from Bergen, Norway by German ships to Germ- any-in exchange for wine. This traffic was discontinued by the Scandinavian king in 1186. Norway, of thirty-four coun- tries exporting to Belgium at the end of the twelfth century was the only one sending butter. Sweden was exporting but- to: in the fourteenth century. From the Scandinavian countries the methods of butter manufacture were carried to the Continent and to England and Ireland. Dairy cattle were brought early to the American colonies by the Dutch and English settlers. Rhode Island and New York, and later New Hampshire, be- came well known dairy districts. The products made were chiefly cheese and butter, and these manufactured in farm size dairies. Creameries began to flourish 1861 - 1871, the latter date marking the placing on the market of the factory size centrifugal cream separator. This period until 189%, when the De Laval farm separator was intro- duced is known as the period of whole milk creameries. Since then, with the exception of a limited.western area the gathered cream system, with its consequent poorer grade of butter, has been followed. The invention of the Babcock Test in 1890, the general use of artificial re- frigeration, and the organization in 1900 of the central- izer movement, mark the beginning of the modern era. This period has been featured and the industry stimulated by the vitamine research of several nutrition chemists. In a few score of years the primitive beginnings of the dairy industry have grown to a major agricultural enterprise. Manufacturing and production methods have been entirely revolutionized and amounts manufactured are increasing yearly. It is not surprising, therefore, that the handling and marketing of one and a quarter billion pounds butteryearly has become an exceedingly complex system in itself. MARKET DEVELOPMENT The germ of modern marketing lies in the system of trading and bartering common to the primitive races be- fore history was written. It was a system similar to the present except that prices were not stated.in terms of money. An article was valuable in preportion to its scarcity and the demand for it. Luxuries, rather than food products, made up the commerce of the ancients. Perishability and bulk of food products were well nigh insurmountable Obstacles for the inadequate systems of transportation. Market places and money exchanges are mentioned in the Bible. They were common in Arabia and early Home. Heurs were regulated and market days specified. 'In the Riddle Ages these markets were usually village markets. The need for more merchants led to the establishment of municipally controlled markets. In Antwerp was estab- lished the first world exchange, from which city the system spread in continental Europe and Great Britain. This growth has been gradual and natural. In America, exchanges began to function on March 2#, 1670, in what is now New York City. (3) The first exchange was built on Broad Street 1690-1. The struc- ture was succeeded in 1752 by a new one, the market then being called the Merchants’ Exchange. These exchanges have become numerous and specialized. Dairy products were among the commodities sold in the village markets previously mentioned. This commerce did not become notable, however, until urban pOpulation began its tremendous growth with the so-called Industrial Revo- lution. While some butter was transported by boat, it was not until the railroads cpened free land to the American farmer and thereby made markets possible, that a marketing problem was developed. Even at that date the bulk of the commerce was in cereals. With the exhaustion of soils has come the inclusion of dairying in the farming system and increase of dairy products. Butter Production and Papulation Except for the years 1880 and 1890 pOpulation in the United States has increased more rapidly than milk cow pOpulation. These exceptions were periods especially for the grain farmer. In itself such a condition might mean nothing, for the deficit might have been offset by an in- creased production per cow or by decreased per capita con- sumption. Authentic figures are available only to 1920, but this divergence was apparently to that date becoming ‘ greater. Estimates for the years 1921-23 place the ratio very near that for 1920. Table I. Showing the Relation of Population to Milk Cow Pcpulation (4) Year P0pulation Milk Cows ggisgg: 18u0 '17,069,n53 u,837,043 3.5 1850 23,191,876 6,385,094 3.6 1860 31,4u3,321 8,585,735 3.6 1870 39,818,uu9 8,935,332 a.» 1880 50,155,783 12,uu3,120 8.0 1890 62,9n7,71u 16,511,950 3.8 1900 75.99“.575 17.135.663 4-4 1910 91,972,226 20,525,u32 u.u 1920 105,710,620 23,72u,1u8 u.u 1921 107,125,729 23,594,000 4.5 1922 108,5#0,838 2#,082,000 u.u 1923 109,955,987 2u,ua9,000 u.u 192% 111,371,056 28,675,000 u.» Between the years 18#0 and 1920 pepulation has in- creased 620 per cent, and milk cows #90 per cent. Between the years 1910 and 1920 each increased 115 per cent. Dairy develOpment in that ten year period has, therefore, been commensurate with p0pu1ation increase. MICHIGAN AGRICULTURAL COLL II. I l1 ’n3 is 1 E} .. :1 hf: '6 0611's dwizalgmmmmm4hfl. ions 18. he; 115.11 r is 33¢ 1. 1 2. t. DEPARTMENT OF MATHEMATICS- Ill +4- . a ilrr' Dating from 1840 the average acreage of the individ- ual farm‘has decreased, and farm.p0pulation has not in- creased as has urban p0pulation. Greater demands are therefore being made on the dairy cow and the dairy farmer than ever before. In 1880 the ratio of urban to rural population was approximately one to three, while in 1920 it was one to one. Such a revolutionary change has been met by the farming p0pulation by as revolutionary changes in production methods. It would seem, With continued low prices for farm products that the claim of many farmers that there has been an overproduction, is true. Table II. Showing Pepulation Changes (4) I F l 1 Per cent Total Urban Rural __7' in Towns Year Population Total ‘Per TetaI' l Per of 8,000 Cent Cent or more 1880 50,155,783 14,358,167 28.6 35,797,616 71.4 22.7 1890 62,947,714 22,298,359 35.4 40,649,355 64.6 29.0 1900 75,994,575 30,380,433 40.0 45,614,142 60.0 32.9 1910 91,972,266 46,166,120 45.8 49,806,146 54.2 38.7 1920 105,710,620 54,304,603 51.4'51,406,017 48.6 43.8 These population changes have meant, of course, a larger market for farm pr oducts. With production methods unchanged and demand remaining the same price levels must inevitably have increased because of lowered supply. Such logic applies also to dairy products, for cows per capita p0pu1ation have decreased and per capita rural pepulation ratio has also decreased. (4) From Table III. it will be seen that consumption of dairy products has increased. The deficit has been met by the increased.number of cows kept by each farmer and increased production per cOW. The actual number kept per farm operator was 3.2 in 1910, and 3.7 in 1920. Approximately one fourth of the milk produced in the United States in 1920 was skimmed and the fat made into creamery butter. Thirteen per cent was made into farm butter. In 1908, there were 5,431 creameries; in 1920, 3,500. Smaller units are being absorbed by the more ef- ficient oentralizer. In 1908, each creamery manufactured an average of 115,475 pounds butter; in 1920, 194,244 pounds. The butter industry lends itself more readily to centralization than does any other branch of dairy manup facturing'because of the longer life of sour cream. Over one half of the creamery butter made in the United States is manufactured in the six middle Western states: Minnesota, Iowa, Wisconsin, Nebraska, Ohio, and Michigan. (5) These states manufactured fifty-six per cent. 0f major importance are the first three mentioned, in which forty per cent of the total is made. Minnesota makes a sweet cream butter for the most part, and its product is much sought for in the New York market, Where 10 it commands a few cents margin. Second only to the Minne- sota article is that of Iowa. Chart II shows that the manufacture of creamery butter has more than kept pace with population increase. Figures for butter production by ten year periods for 1880 to 1920 are respectively, 29,421,784; 181,284,916; 420,954,016; 627,145,865; and 863,577,000 pounds. (4) Butter consumption according to Table III, figures supplied by Mr. T. B. Pirtle, Statistician of the United States Department of Agriculture, increased until 1900, and shOWs an increase from the date of the war. Exports have increased and the amount of farm made butter has decreased. Table III. Showing Consumption of Butter in the United States. Year Pounds Year Pounds Year Pounds 1850 12.9 1890 18.9 1921 16.1 1860 14.5 1900 19.6 1922 16.5 1870 13.3 1910 17.5 1923 17.0 1880 15.2 1920 14.7 1924 17.25 Farm made butter increased until 1900, When it reached the figure of 1,071,626,056 pounds. The decrease has been fairly rapid since 1900, the amount being lowered in 1920 to 707,666,492 pounds, a reduction of thirty-four per cent. Exports as well as imports, were highest during and immedi- ll MICHIGAN AGRICULTURAL (.3.‘ I "...-Z - .- . “11 1.1.11 . 1 .1 H1. 1111 1. , . . 1111 . 11 111.: 1% ..1 11mm . u w 1.,nw11 . —” x . a. 18 1 11 . 1 . .11 1M1 .1 1. . 1 1. 31.1.11 ..111. ... 111 1111 1. 1n 111 “K . ,.. 1. 1.. 1113 . .1. Kim ..1,mv.m1.111.1n . . 1 31 m1 .11 1 . .1...1 a . _1 ..1mm 1 1 .111. ._11 . . . (VH1 11”.. m 1.1.1.. . . . . -1. . . _1_1 . -.. 1:. mm. x. . .3 . 1 v 1 - 1.. .1 1 n 1. _ 1 . _.. 1 I. .1.. .. 111. .. 1 1 u 1 .11 . 1.? 1. . 1.. 1. 1. 1 1 111 . 1 1 .u .. . 1 m . . . I...1......-rI”1.- - .. II n.l......It. LIL... . ..IIIII|L-I 3.1L . DEPARTMENT OF MATHEMATICS - ately folloWing the war period. Butter consumption in 1909 was 17.5 pounds per capita. From 1918 to l923,‘by yearly periods, it was respectively, 14.6; 14.8; 14.7; 16.1; 16.5; and 17.0 pounds. Marketing Agencies Butter When shipped must be handled by middle men, who take care of its transportation, grading, storage, financing, selling, and provide the means for the ex- change for selling. These may be the transportation com- pany, merchants, commission men, Wholesalers, jobbers, brokers, shippers, and retailers. The functions of these may be restricted or combined into two or more. In acting as an intermediary between producer and consumer the merchant performs a useful function. He is usually a skilled salesman, understands and has established a market, and saves the producer the details incident to direct marketing. In marketing through a commission mer- chant, the shipper consigns his commodity to the seller, who charges a commission for the sale. Relatively little butter is now sold in this manner. The Wholesaler and jobber perform similar functions. The former buys either from the producer or other middle- men and sells to Wholesalers or retailers or both. The Wholesaler buys outright from surplus areas and sells in the areas of deficit. He assembles butter in large quanti- 13 ties and usually makes quick sales. The Jobber usually confines his sales to retailers. His sales are for the most part in small amounts and in the city in which his place of business is located. The broker's function is to bring into business re- lations the shipper and buyer. Payment is made by buyer to shipper. He neither buys on consignment nor by out- right purchase. The shipper may be likened to the live- stock shipper; he buys near the place of production, ships the goods for sale in another market and depends for his profit on the price for Which he can sell in that market. His is a speculative occupation, inasmuch as he relieves the producer of that risk. The retailer's functions are Obvious. Except for the chain groceries, Who, for the most part, buy direct from the producer, the retailer buys principally from the wholesaler. The middleman functions in assemblying butter, dis- tributing it in sections where needed and in accordance Iith market demands. The wholesale receiver maintains o1ose relations With the individual creameries. Ordinar- ily he sells to a jobber, Who in turn sells direct to re- tailers, hotels, etc. in comparatively small quantities.. The jdbber keeps in close touch with this class of trade. The Wholesaler often performs this service also. In fact this is the rule rather than exception in cities other 14 than Philadelphia, Boston, New York, Chicago, and San Francisco. There is an Opinion among OperatOrs of small creameries that this specialization is unnecessary and expensive, but as yet, despite many attempts, it has not been bettered. The larger centralizers often distribute and sell their OWn butter direct to the retailer. Much of the farm made butter is marketed direct from producer to consumer. This may be made a profitable meth- od. much of the remainder is sold to groceries and paid for 'in trade". The quality of much of this is indiffer- ent, and that unsalable. to the retailer's trade, makes up packing stock, and is sent to a factory for renovation. Fortunately, this method of butter disposal is on the wane, there being made in 1906-7, 1909-10, and 1913-14, respectively, 63,000,000; 47,000,000; and 32,000,000 pounds renovated butter. Other than making his cream into butter, the farmer may ship his cream direct or through a cream station to a centralizer or his local creamery. Cream station prices are always lower than prices paid direct shippers because of the cost of maintaining cream stations. The local creamery can make better butter because the cream may be delivered more frequently, but the centralizer has the advantage of lower per unit cost of manufacture and more efficient marketing, because of the larger amounts handled. Besides the agencies mentioned as associated.With the marketing of butter, cold storage plays an important part. It has been of importance in stabilizing‘butter prices by maintaining’consumption and supply over periods of butter scarcity. The ammonia system of refrigeration ‘was originated in 1860, and the first cold storage plant was built in 1865 in New York. The system came into gen- eral use in 1890 and has grown rapidly in spite of the prejudice against cold storage products. Over ten per cent of the butter produced annually in the United States is stored. (8) This occurs during the months of peak pro- duction, May, June, and July. It is held until fresh butter, because of scarcity, becomes high in price, there- by creating a demand for the stored goods. The average number of months held was “.43 in 1910, but this varies according to the month the article Was stored. June butter in 1910 was stored 5.32 months; July, “.49; August, 4.15. (6) The quality of this butter, because of the season dur- ing which it was made, is often superior, when taken from storage, to the fresh butter on the market. Cold storage, being so revolutionary a method for pre- serving food, could not but arouse considerable prejudice. This is reflected in the laws enacted since 1911, regulat- ing time of storage, licensing, and dating of packages , stored. The time allowable for butter to be held in storage varies in the several states. The Federal cold storage acts were passed.in 1917-18, and required that butter held over thirty days be labeled and sold as cold storage butter. This has led to the 'rctating” of storage stocks of “short held” goods. “Long held“ butter of good quali- ty may be stored for twelve months. Ordinarily body and flavor defects begin to appear after one month's storage, even when held at the preper temperature cf ~b° to -10° F. Cold storages are usually located in the large con- suming centers. Space is leased at approximately the following rates, the rate being in terms of sixty pound tubs: Per package For package first month each month thereafter Carload lots 13¢ 8¢ Over 150 tub lots 15¢ 10¢ 75 - 150 tub lots 18¢ 12¢ 25 - 75 tub lots 20¢ 15¢ Less than 25 tubs 25¢ 18¢ The average storage cost is 2.532¢, 10.8 per cent of a the whole sale price. (l#) EQTABLISHMEVT 0F BUTTER PRICES Many producers labor under the delusion that price should cover cost of production plus a reasonable pr0fit. Such condition would place no brake whatever on preduction. The cost of production of an article, for which there is a demand, does.have an effect on price, however, because it acts as a governor of production and thereby affects supply. Supply and demand are governing factors of butter prices, as of most other commodities. To a considerable extent, also, both buyer's and seller's Opinion or What supply and demand will be, are factors. Price is fixed at that point where supply and demand are equalized. This is determined at the butter exchanges of the two principal butter markets or the country, New York and Chicago. Com- mercial agencies and the United States Bureau of Markets disseminate to the trade the butter prices quoted on the five chief butter markets. Except for transportation dif- ferences these markets closely parallel each other. The Elgin Board or Trade, discontinued by government order in 1917, made use of a butter price committee, whose quotations were based supposedly on sales not only on the exchange board, but also by dealers, inasmuch as sales on the board composed but a fraction of actual sales. The system offers such Opportunities for manipulation that the practice has been largely given over. Prices, as reported by the Bureau of Markets, are the average paid on the board, and by dealers. The system has paved the way for inspection and grading of butter, details of which are given in Service and Regulatory Announcement Number 51 of the United states Department of Agriculture. Prices are quoted in the Market iil III-Ii.‘ , I 18 NeWs Letters on 86 to 93 score butter inclusive, and on 88 to 90 score centralized butter in carload lots. The trend, and strength or weakness of the market, cold stor- age holdings, and butter receipts are given. If fraud is suspected, shippers, for a nominal fee, may have their butter scored by a government inspector. There has been difficulty in this regard by the pressure dealers may bring to bear on the inspector. 'The system, because un- prejudiced, has proved extremely valuable to the trade in general. Butter exchanges were established to provide a mar- ket place for the commodity, and to regulate its sale. The tendency has been for fewer sales to be made on the exchange, and more by individual bargaining. The exchange however, furnishes a meeting place for buyers to assemble for discussion of market tendencies. Offerings are posted on a blackboard and bids recorded. ‘When bids agree with price asked a sale is made, and a quotation established. These quotations were first published.in 1858 by Benjanun Urner, a printer in New York City. This service has been continued since then, now being controlled.by the Urner- Barry Company. It is believed by many that butter quota~ tions should be discontinued because of the difficulty of setting a single price and because of the chance of manip- ulation. Much of the latter has been eliminated by govern- 19 mental regulation and reforms made by the trade itself. Moreover, any move to abolish quotations is cpposed by the creamery interests. COST OF MARKETING BUTTER The spread between the price a farmer receives for his product and that which the consumer pays would appear to depend more upon its perishability than the number of hands through which it passes. A much smaller per cent of the selling price of truck crepe is returned to the farmer than is the case with butter or eggs, although the latter pass through more agents' hands on their Way to market. There are many reasons why the marketing of a highly perishable product is expensive. The spoilage and risk of spoilage is great and the wholesaler handling the product must be well paid to assume the risk. EXpensive precautions must be taken to hasten the product to market and waste and shrinkage lower the gross sales price. The supply of a perishable is usually highly seasonal, making marketing overhead expense high. Butter supply is fairly constant during the year and during the flush season it may be stored. This reduces, handling expense. An interesting table from Bulletin 168 of the United States Bureau of Labor Statistics, page 7, is given belowz 20 Table IV. ShOWing Butter Marketing Costs in 1911. ‘— Distribution of Sales Price Average Cents Per cent per Pound of Retail Price Price paid for fat in one ' pound butter 32.97 75.9 Creamery's margin 2.89 6.7 Freight .73 1.7 Cartage .03 .1 Wholesaler's margin 1.87 ‘ 4.3 Retailer's margin 4.92 11.3 Price paid by consumer 43.41 100.0 Total spread between farmer and consumer 10.44 24.1 Total spread between creamery and consumer 7.55 17.4 These data are supplemented by the follOWing given in field's "Marketing of Farm Products". The figures are for Munnesota creameries for 1914. 21 Table V. Showing Proportion of Minneapolis Butter Prices Received by Minnesota Farmers Distribution of Sales Price Per cent of Retail Price Received by farmer for butterfat 71.1 Creamery margin 7.8 Freight 2.2 Cartage .1 Wholesaler's margin 4.8 Retailer's margin 14.0 The tables hardly need comment, other than to call atten- tion to the creamery margin as representing manufacturing rather than marketing costs. COMPARISON OF BUTTER AND OTHER PRICES The united States Bureau of Agricultural Economics estimates that in 1922, 23.6 per cent of the total milk produced in this country was skimmed and made into cream- ery butter. Milk, cream, and butter prices must closely parallel each other or farmers would sell their product in that form netting them greatest returns. Below are given the index numbers of wholesale prices of butter, farm products, and all commodities for 1890 - 1924. The index numbers are those compiled by the United States Bureau of Labor Statistics, and are based on 1913 prices. Butter index numbers are calculated from New York prices . for 92 score butter (extras). Table VI. Showing Relation of Wholesale Butter, Farm Products, and all Commodities. Index Numbers 1890-1924 (15) Year Index Numbers Butter Farm Products All Commodities 1890 70.6 70. 81. ‘1891_ 80.2 75. 80. 1892 81.0 68. 75. 1893 83.8 71. 77. 1894 70.9 61. 69. 1895 66.3 61. 70. 1896 57.1 55. 67. 1697 58.8 59. 67. 1898 60.6 63. 7o. 1399 65.9 64. 75. 1900 69.6 70. 81. 1901 67.1 74. 79. 1902 76.9 81. 84. 1903 72.8 77. 86. 1904 67-9 81. 86. 1905 77.2 79. 86. 1906 77.2 80. 89. Table VI. (Continued). Year Indexpflnghola Butter Farm r0 uots AlI'Commodities 1907 87.8 87. 94. 1908 84.1 86. 90. 1909 90-5 97- 97- 1910 93.2 103. 101. 1911 82.6 93. 93. 1912 97.3 101. 99. 1913 100.0‘ 100. 100. 1914 92.8 103. 98. 1915 92.7 104. 101. 1916 105.7 123. 127. 1917 132.3 190. 177. 1918 160.1 218. 194. 1919 187.7 231. 206. 1920 190.4 218. 226. 1921 134.4 124. 147. 1922 125.8 133. 149. 1923. 142.1 134. 154. 1924 131.9 143.4 149.7 The figures are shown graphically in Chart III. 24 (‘l I I 3.. A L C le'llIGAN AG'RICULTUP . . . . . No.7. ,3 . , - ,1,- I .1 . ., _ f. It .. . . - - L . _ . , .1...‘ . .. .. A —, . . _, _ ., - e u. . . . _ . .7 n . . m I u n . l I I II I ll . . 7 _ . . - . . . . , . . , , , , — , _ . ; isms: iiéumbere , fining; , j-i 9, R1MENT or u—finzukrlcs Di During the years 1890-96, 1899, 1907, 1921, and 1923 the average index numbers of wholesale price of butter has exceeded that of farm products. In the thirty-five years recorded, the index numbers of butter have exceeded those of farm commodities during but eleven years. They exceeded those of all commodities in 1891 - 1894, only, a span of four years. Butter prices reached their peak in 1919 and 1920. The break was abrupt in 1921, with a further decrease in 1922, a recovery in 1923, and a further break in 1924. Prices, the past year, have been particularly interesting because the usual seasonal variations were not prevalent. The situation was peculiar, due to the decrease in exports and the stimulation given the dairy industry during the war. In the following table index numbers are those of the United States Bureau of Statistics, Department of Labor, 1913 prices being the basis. Butter prices are quotations for New York extras and the index numbers are computed from these. (16) Table VII. Showing Wholesale Prices Butter and.Index Numbers of Butter, Farm Products, and all Commodities by Months 1923 - 1924. —— — fi Year Butter Index Numbers Month Price Butter Farm Products All Commodities 1323 January 51e6 . 159s? 143.0 156e0 Table VII. (Continued) Year Butter Index Numbers Month Price Buffer Farm Products All Cemmodities February 49.8 154.2 142.0 157.0 March 49.3" 152.9 143.0 159.0 April 46.1 142.7 141.0 159.0 May 41.9 129.8 139.0 156.0 June 38.9 120.4 138.0 153.0 July 39.4 122.0 135.0 151.0 August 44.0 136.2 139.0 150.0 September 46.0 142.4 144.0 154.0 October 47.6 147.3 144.0 153.0 November 52.3 161.9 146.0 152.0 December 54.6 169.0 145.0 151.0 1924 January 52.9 163.8 144.0 151.0 February 50.5 156.4 143.0 152.0 March 46.6 143.7 137.0 150.0 April 38.5 119.2 139.0 148.0 may 38.9 120.4 136.4 146.9 June 41.5 128.2 134.0 144.6 July 40.0 123.9 140.9 147.0 August 38.4 118.8 145.3 149.7 September 37.9 117.0 143.1 148.8 October 38.7 119.8 149.2 151.9 November 42.9 132.8 149.5 152.7 December 44.8 138.7 156.7 157.0 ‘— ‘r 26 27 '.' I- .1 \ .TURAL ZUL'. {JUL GAH AGIU “CH l. . ,,. .31. r _ r r . I - b.9118: DEPARTMENT OF MATIi‘MATICI 81V 1 1 r. 1 r , . 1 .. :18. , .. _ . ._ I ,1 x .ullllllx.llr . 28 Butter prices were comparatively higher than these of farm products in March, April, and the last three months of 1923; in 1924 during the first three months of the year only. Butter index numbers are higher than those of all commodities in 1923 for January, November, and De- cember; and in 1924, during January and February. Storage stocks began to accumulate the first of the year 1924, and it is surprising the fall in price did not occur earlier. The depressing effect of large supplies may be noticed dur- ing the summer months of 1923, but it was greatly augmented during 1924, due to excellent pasturage throughout the United States, and to large Eur0pean and Colonial output. The Eur0pean and Colonial producer had begun to function again. These observations are drawn by a comparison of index numbers. There is a tendency among writers to overestimate the importance of index numbers, as well as to use the re- lationship they express to prove too many points. Index numbers merely show comparative price levels, using prices during a certain year as a basis. The year, 1913, is usual- ly selected as being typical of prewar prices. Price com- parisons, therefore, between butter, farm products, and all commodities, are comparisons made with prices prevalent in 1913. Prices in 1913 were not necessarily typical. For this reason, the Bureau of Agricultural Economics, United States Department of Agriculture uses as a basis for calcu- I lating index numbers, the five year period, 1909 - 1914. If index numbers are used to point out the greater pros- perity of one business over another, assumption must be made that prices of the commodities compared.were in equity [in the basic year. Consequently, when the statement is made that butter prices during parts of a year were in advance of prices of farm products, it is meant that this is true as compared with price levels in 1913, and for the average of all farm products. If butter, farm products, and all commodity prices were in equity in 1913, then butter prices have been favor-‘ able during the last decade. The term ”farm products” in- cludes all farm products, so that the comparison is made with the Weighted average price of the group. This condi- tion, so noticeable, has had much to do with the increas- ing deveIOpment of dairying on the American farm. VARIATIONQ IN BUTTER PRICE? Researches are being made at the present time on early prices of commodities by the Federal Bureau of Agricultural Economics. Butter prices are available since 1840, but are not perfectly comparable, due to the vary- ing systems of grading. These prices are given in Table VII. Table VIII. Showing Butter Prices leho - 192A Year Price Year Price Year Price 18u0 16.00 1869 M1.25 ~ 1898 19.5% 18k1 16.25 1870 3h.50 1899 21.26 18u2 17.50 1871 32.25 1900 22.85 18%3 1n.75 1872 29.25 1901 21.63 18kt 17.50 1873 29.75 1902 2n.80 lSflS 16.00 187k 32.75 1903 23.48 18u6 16.50 1875 30.25 190% 21.89 18%7 18.25 1876 30.75 1905 2n.89 1848 17.25 1877 27.25 1906 2h.89 18kg 17.75 1878 21.00 1907 28.30 1850 16.75 1879 29.25 1908 27.11 1851 16.75 1880 28.50 1909 29.20 1852 21.25 1881 28.25 1910 30.07 1853 21.25 1882 33.50 1911 26.65 185a 19.75 1883 28.50 1912 31.37 1855 23.00 188A 28.00 1913 32.20(17) 1856 21.25 1885 23.50 1914 29.80 1857 23.00 1886 27.25 1915 29.80 1858 19.50 1887 2n.50 1916 3u.90 1859 21.50 1888 25.00 1917 A2.70 1860 18.75 1889 23.75 1918 51.00 1861 1h.75 1890 21.75 1919 61.00 31 Table VIII. (Continued) Year Price Year Price Year Price 1862 18.50 1891 24.00 1920 61.00 1863 23.25 1892 26.12 1921 #3.30 186a 38.50 1893 27.01 1922 40.70( 4) 1 1865 39.25 189n 22.88 1923 ' 46.90 1866 Au.50 1895 21.37 192k #2.62 1867 32.75 1896 18.u1 1868 #3.25 1897 18.95 It will be seen that the notable rises in butter prices followed the Civil and World Wars. It can hardly be said these prices show curves resembling those of the much talked of price cycles. varying in relation to supply. York extras. Mbnthly butter prices show a different phenomenon, Prices quoted are for New Table IX. Showing Monthly Butter Price Changes 1919 - 1924 Year 1919 1920 1921 1922 1923 1924 Henth January 62.(19) 65. 52.5 37.615) 51.6élb)52.9 February 52. 66. 47.2 37.3 49.81 50.5 March 62. 67. 48.1 38.7 49.27 46.6 April 64. 71. 45.5 37.8 46.14 38.5 May 58. 61. 31.8 36.9 41.89 38.9 June 52. 57. 32.7 36.9 38.87 41.4 July 53. 57. 40.4 36.1 39.37 40.0 August 55. 55. 42.7 35.2 43.98 38.4 September 59. 59. 43.1 40.8 45.95 37.8 October 68. 60. 47.0 46.1 47.60 38.7 November 71. 63. 44.9 51.1 52.33 42.9 December 72. 55. 43.8 54.2 54.59 44.8 32 The seasonal tendency of these prices may be seen to bet- ter advantage by reference to Chart V. It will be noted that May, June, and July are usually months of low prices, and OctOber to January inclusive, months of high prices. The seasonal fluctuations are remarkably uniform. 33 J 1'“- 1:- _T 1. I'llll I I'll III-Icl. lll..l||llll.lllullllll.ll| .nll . . l I I as ..I-|. Ill .IIIIIIIIIII I. I I . as. CU! 114"! A ‘7'?! MI’JIh ' ’ 5;“; DEPARTMENT OF MATHEMAHL‘ Pound 8 per scene é e. .. $3.33.? 3.3 was , T, _ .r, i r. . 2: ; r .1 ., 1. . , 2 I |.Ill.n .IIII.I.III.II .Illl| I n..| . 34 Factors Affecting Butter Prices. The subject of price is one of the most subtle in agricultural economics. It has caused more than usual comment during and since the war because of radical fluc- tuations, and because the purchasing power of the indi- vidual has not kept pace with cost of commodities. Of those classes harmfully affected by price advances are producers whose production costs increase with rising prices, but whose sales price is not proportionate. An- other is the wage earner, for wages usually lag price advances. The dairy farmer has suffered.With other farm- ers in these price changes. His predicament is the re- sult of the working of economic laws, but he has advocated an assortment of impractical schemes for arbitrarily con- trolling the price of his product. There are temporary methods for relieving the condition, but none for removing the cause save regulating production in accordance with demand. The value of an article is its power in exchange. Its relative value is expressed as price. Its supply, coupled with the demand for it, determines its value. Assuming a demand for a commodity, its scarcity or abund- ance determines its value. As butter quantity, therefore, increases or decreases, or as buyers foresee a probable shortage or high production, prices rise or fall. If more goods are offered than there are “takers”, price approaches 35 zero. Excess supply weakens the seller's demand for high selling price, and strengthens the buyer's chance of se- curing the commodity at a low price. A group of factors control prices. Their effects may be measured only in a general way. Attempts have been and are being made to measure definitely the strength of these economic forces with the idea of forecasting prices, and they are successful usually, but only insofar as they in- dicate trends. Among the more important factors influencing butter prices are, 1. Quantity of Money 2. Supply and Demand 3. Speculation and Manipulation 4. Oleomargarin Production 5. EXports and Imports 6. Miscellaneous It is true that, in.a strict sense, manipulation is not an economic force; that oleomargarin production may be the re- sult rather than a cause of butter prices; and that eXports and imports are factors incident to supply and demand. Their influences, it is believed, can best be studied in the form outlined. QUANTITY OF MONEY THEORY Layton (20) has elaborated the theory of the earlier economists that, as money is plentiful, price increases, and as money becomes scarce, prices decline. Evidence is plentiful supporting the theory. America and the large part of EurOpe have a gold standard. As this metal becomes more plentiful, its value becomes less. As it depreciates in value, general price levels rise. Our monetary system is so arranged that credit money may be used in lieu of gold. This, in effect, has increased the supply of money and raised general price levels. Agricultural products price levels have been affected, but on account of large supplies, not to the extent of many other products. The effects are 30 general and subtle that the subject is bet- ter suited to a lengthy treatise. The tables given later will show in outline this relationship. Taussig (21) states the theory, "the value of money under the simplest conditions, is exactly inverse to its quantity”. Stated in another manner, the greater the amount of money in circulation, the lower the price of commodities. With a greater amount of money in circula- tion the price level would increase in prOportion. Table x. Showing Circulation of Money Per Capita, (22) July 1 Year Dollars Year Dollars 1800 n.99 1915 35.u4 18u0 10.91 1916 39.29 1861 13.98 1917 45.7u 1865 20.58 1918 50.81 1877 15.32 1919 55.14 1890 22.82 1920 57.35 1900 26.93 1921 5h.11 1910 34.33 1922 u9.17 191% 3%.35 1923 53.31 The relationship is more strikingly shown by Filley (22) in his comparison of index numbers of all commodity prices with money in circulation per capita during and following the‘war. Table XI. Showing Per Capita Circulation of Money and Price Index 191“ to 1923. Data Money per capita All Commodities Price Index July 1. 191“ 39-53 99 July 1. 1915 35-59 99 Dec. 1. 1915 38.0n ’ 105- Dec. 1, 1916 n1.73 1u6 June 1, 1917 u5.n9 181 Jan. 1, 1918 us.76 185 Apr. 1, 1918 “9.70 190 Sept.l, 1918 52.95 207 Dec. 1, 1918 56.23 206 Jan. 1, 1919 55.76 203 tab. 1, 1919 53.58 197 Apr. 1, 1919 5n.55 203 Dec. 1, 1919 55.65 238 Jan. 1, 1920 55.89 298 May 1, 1920 56.uu 272 Nov. 1, 1920 59.77 207 Dec. 1, 1921 52.19 150 June 1, 1922 #8.?6 150 June 1, 1923 52.81 153 38 39 Money in circulation data given in Tables X and XI in- cludes that held in Federal Reserve Banks. It will be noticed that prices did rise as money increased. The peak in prices came May 1, 1920, but money in circula- tion reached the peak November 1, 1920 at which time the price index of all commodities had fallen to 207 from 272. Thisis explained'by the fact that prices had reached such a high level that demand.was depressed, credit restricted, causing price to fall with accumulation of unsold goods. Rapid spending means heavy buying or increased demand. Hapidity of circulation is therefore a condition affecting the power of money in circulation in affecting price. It measures the activity of the dollar in making purchases. Increased rapidity of circulation increases prices. This is exactly what happened during the war. It is easily conceived that a country rated as wealthy may have its wealth concentrated.in the hands of the few. Such condition would greatly limit sales of a commodity as butter because it would limit individual purchasing power. Individual purchasing power is probably best measured.by the index number for wages. Assuming those of 1923 as 100 there was a depression in the major industries during May, June, July, and August 192“ amounting to ten and fifteen per cent. (23) Wages were cut ten to fifteen per cent during these months and there was from ten to twenty per cent less em- ployed. The industries listed are largely responsible for #0 the prosperity of the laboring class. It is significant that during these four months of 1924 there‘Ias 37,000,000 pounds less butter consumed than during the same months of 192}. This is in spite or the normal increase in pepulap tion, which ordinarily requires 2,000,000 pounds additional supply for each month. It is also the first time during the past five years when consumption has not been greater month cy month than during the preceding year. Purchasing power or those employed in the industries began to increase in July 1924 and August butter consumption increased over the figure for August 1923. This increase has been continued and is doubtless responsible for the reduction of the quan- tities of butter held in cold. storage during 192k. Doubt- less, also, the depressed condition of industry was respon- sible for the abnormal accumulation of butter in storage during that year. The slight break in price also aided tn the reduction. During periods of business expansion, extension of credit is general. Credit sales have the same effect on prices as cash sales, because demand is increased. When debts are paid price is lowered because the money is not available in creating new demand. In 1919 credit was made use of to a large degree and prices were correspondingly high; in 1920, when creditors demanded payment, prices fell sharply. Credit instruments, such as checks and‘bonds, and borrowing capacity made pOssible by the Federal Reserve Sys- 41 tem, have had the same effect as increase of money, be- cause they perform the same purpose as money. This serves to depreciate value of money, making its purchasing power per unit less. Its effect has been a rise in price levels. SUPPLY AND DEMAND There are three means by which the statistician may measure supply: the amounts manufactured; the amount of the product offered, as indicated by butter receipts; and by the amount held.in cold-storage, as shown by cold stor- age holdings. Records of such are issued by commercial re- porting concerns, exchanges, and the United States Bureau of.lgricultural Economics. Butter Receipts These are recorded as butter receipts at a particular market. Such reports as are available, however, are not' infallible, for the butter may be counted as received at one market, and later be shipped to one or more other mar- kets. Receipts information is released daily in the mar- ket news letter of the Federal Department of Agriculture. They are also repbrted for months by the same department. 42 mam.aam awa.m:m.~aa.aam mam.mam moo.¢ma mmw.mmm oom.oam aspoa mm1.ma mmm.ma aow.aa «mm.aa mao.oa aao.ma mma.ma nopsooon mom.aa mao.ma mao.ma amm.ma mma.oa mmm.ma mma.ma homespun mwo.aa mam.aa mmw.ma mao.aa mao.~a ma~.ma mam.ma nonopoo mmm.wa amo.ma mom.wa ama.am aam.aa omm.ma oom.ma nopsopaom mmm.om mmm.am mmo.mm amm.mm mom.wa mmm.mm omm.om poemsa mam.am owa.am maa.om mmo.am amm.am mam.mm mam.mm mash aam.mm moa.am mmm.:m mmm.am mom.om maa.mm oom.am ones amm.ma aao.am mma.¢m mmm.am mmm.ma aom.mm omm.aa as: omm.ma maa.ma mmm.ma mom.¢a mam.» mma.aa mmm.:a aauna oom.ma aam.ma mmm.ma mmm.ma mam.ma mmm.oa oma.ma nous: mmm.ma maa.ma maa.ma amo.aa aom.aa maa.ma ooa.aa anseunoa mmm.ma mam.ma ama.oa aoa.ma ama.aa mm:.ma mma.ma manages 33 RE 3mm amma mmma mmma amma omma mama mama mace: auoppaso ooov awma u mama amass: an apao ago» 3.2 as .paaooom soapsm msaeoam .aaa canny Butter receipts represent surplus butter not needed for local consumption. It is a general, not absolute, index of butter production. Nor are the receipts at the New York market necessarily an index of receipts at other mar- kets. It is reasonable to assume, however, that receipts at the various markets closely parallel each other because prices paid at the five markets closely parallel each other. For this reason prices are plotted against receipts on the New York market in Chart VI. Except for the years 1921 and 1922 these curves move in the same direction. During these years conditions incident to the war were Operative, and therefore, were not typical of normal conditions. Probably if butter receipts were not subject to the errors already referred to there would be a still closer correlation. It would appear from this correlation that butter receipts in- dicate supply and may be used to predict general trend of butter prices. In November l92h there was an unusual flare in the price of butter on the Chicago market. It illustrates nicely that butter receipts rather than cold storage holds ings have a more important effect on price of fresh butter. Until November seventeenth prices had been fluctuating be- tween 38 and 39 cents. ’7: - 32.54 -2.- ". I a; -.' ~ng ‘IlrirlI' __ 7 CK“? V11, Sh?¥:1l:3_ilz¥fl§li Q33 BILL-Lanai IniQEm A33}, g3»: .5, MIC—HIGAN AGRICULTURAL COLLEGE Ugm BmTYEli-E’TD '33:: {:13 fit“ Y3EX v- viwyrug Far: ‘ j“ ‘ y: ‘ . .__, yawn-fitter hazelpts-Eilliona of hound}: ,5 ”an utter iriOBS-tl.elu York Extras I , i ; s Z, ‘vfifi ‘e x fifixyEbnnfl‘ ‘8 u H n m -5131 m : m‘ n, t ,1: ‘13:, ID I my ‘ 03. ‘ l) ‘5: vi , a "~13 x: V “l f ,4 113nm 131535 f.- DEPARTMENT LOP MA1HEMATIC‘ 44 Table XIII. Showing*0hicago and.New York Prices and Receipts by Tubs Novemberl? to December 8, 192%. (27) Chica Newzfork Date __Frice eceipts Dirice Receipts Nov. 17 no.50 7,298 u3.0 11,302 18 u2.00 5,289 11.0 10,968 19 03.75 1,387 14.0 9,762 20 11.00 5,u05 #3.5 1,200 21 ”5.25 7.5“5 "-46 7.1“9 22 #6.25 8,950 #5.0 1,930 24 #7.75 I 9,197 15.5 9.535 25 50.25 7,213 #6.5 12,079 26 50.25 7,065 17.5 5,179 27 50.25 11,125 M7.25 11,395 29 50.00 7,293 #6.5 5,856 Dec. 1 19.50 8,171 #7.0 11,362 2 48.25 6,712 K7.0 5.030 3 £7.25 5,311 #7.0 6,098 4 #5.25 1,897 #6.0 6,106 5 £3.50 9,267 “5.0 6,6u1 6 $3.25 10,117 n5.0 8,017 8 10-50 ' 7.557 115.0 10, 223 It will be noted that during the early period of the interval under discussion there was a gradual decrease in shipments to both cities, the shortage occurring first at 1+6 Chicago. Both markets advanced, the more abrupt rise 00- currlng at Chicago, which is usually a lower market. Im- mediately butter was reshipped from New York to Chicago, in order that advantage might be taken of the price. The con- dition made possible the release of cold storage butter, and much was released. Retailers are desirous of handlnng a uniform grade of butter for obvious reasons. Once they are forced to use storage butter they are loath to change until a supply of fresh butter is available at lower prices. Consequently, the flow of butter from storage weakened the price of fresh butter because of decreased demand. With receipts of fresh butter decreasing, and cold storage stocks being drawn on, butter prices should remain stable. This set of factors with or against each other makes absolute market forecasts impossible. Trends, however, can be gauged.by the experienced with considerable accuracy. Cold Storage Holdings The cold storage plant is the granary of the butter industry; surplus stocks produced during the flush season are stored and released during*periods of scarcity. The amounts held are spoken of as 'cold storage holdings". They are looked upon by some as a measure of the abundance of butter, and therefore, as a price indicator. In a de- gree, storage holdings are an indication of supply, but of supply of storage, not fresh butter. A particular market in may demand fresh butter, as was the case during the fall of 1924, when, in spite of large quantities of storage goods, there were occasional price flares. The storage holdings in 1924 were much greater than in 1923, and seemed to have the effect of leveling the usual seasonal changes. fihile the excess of holdings in 1924 was greater than ever before it was nevertheless smaller than four per cent of ~ the annual production. The much talked of excess may be shown in another way. Assuming a p0pu1ation of 110,000,000 and the estimated cOnsumption of seventeen pounds per capita per year, there is consumed per month 155,826,000 pounds. With these facts in mind the 1924 reserves were not so great, in fact sufficient to last about one month. The quantity in storage in 1924 occasioned considerable alarm. To alleviate the situation some butter was exported and attempts made to increase domestic consumption. Retailers out very consider- ably the differential between wholesale and retail prices. During October 1924 butter was shipped to European markets and especially to England, where, incidentally, much of it met with unfavorable reception, because of poor quality. Cold storage holdings are reported by the United States Department of Agriculture, Division of Statistical and His- torical Research. These have been reported monthly since August 1915. They are given to date in the table below. Table XIV. Showing Cold Storage Holdings of Butter for 1916 - 1924 by Months (000) omitted. Ta: .y.-.» Month. 1916 1917 1918 1919 1920 January “8.977 1$6.134 50.726 43.910 53.73? February 31,139 30,474 26,618 36,777 38,359 March 15,033 16,952 18,808 24,191 22,568 Apri1 3,346 6,805 14,629 11,909 12,555 Hay 1,082 3.507 9.535 9.659 7.55“ June 7,017 9,953 12,698 29,435 12,872 July 53,863 49,982 49,140 90,158 52,526 August 102,537 88,992 88,305 123,546 101,455 September105,836 108,179 99,334 131,388 115,558 October 100,522 109,154 87,883 121,816 113,385 Nevember 85,260 100,115 80,874 100,474 101,778 December 67,292 79,928 65,111 73,654 79,750 Month 1921 1922 1923 1924 Five Year Average January 58,682 48,412 26,819 30,282 46,312 February 41,486 35,047 16,122 15,246 33,558 March 27,103 22,582 8,910 9,837 21,071 April 14,732 9,113 4,824 7,842 10,627 May 7,712 3,830 3,248 8,913 6,401 June 21,682 13,202 10,112 22,348' 17,461 July 61,991 67,410 62,768 74,184 66,971 August 82,838 103,151 101,774 134,118 102,553 49 Table XIV. (Continued) Month 1921 1922 1923 1924 Five Year Average September 92,292 112,039 102,731 156,440 110,802 October 90,116 96,680 96,117 153,494 103,623 November 77,983 73,857 76,472 135,251 86,113 December 65,129 47,773 51,508 100,832 63,563 Holdings by months for 1924 are plotted against 92 score butter prices in Chart VII. At first glance there would appear to be very little correlation between butter prices and butter held in cold storage. This especially true for the year 1924. Normally, there would undoubtedly be considerably more correlation be- tween the prices of cold storage butter and butter holdings. Storage and fresh butter prices are related but not at all times parallel to each other. When 1923 prices are compared with 1924 prices, the effect of storage holdings is quite evident. Apparently 1924 prices were not forced down, but the usual seasonal rise was prevented. Butter prices were very uniform from April to the middle of November. Quantity of butter in cold storage had become lessty that time, al- though still fifty-seven per cent above normal. Neverthe- less butter r0se in price. Dating from November 20, the E ._ -..,_,_..-._. --.. --... :' I ' ‘ MICHIGAN AGRICULTURAL COLLEG ..-—lq-a—-.—- ——y——-—-———— :, : * , : ‘ 1: :v<~ . _ ‘V .'.‘. . ,- L. .... 1 7 " .—-—sq---.... ‘Lguu I I —,p inn-‘- .4 l 83118131011 88. an 153 r— I SHEET 8111;888:5588» 88311803 11: deem w 3‘ If I... a? 1.} ~ ter" .80. a we e 70:?” ' a :21an ’58 Hi“ an: :1 cents: : TEE 5t ter nominee 7'r'861d' 4t 3211 l I .iigf , - I; 1972: : m 1. 1% \A . 19 ,fln mfiddHHHAnw mm? a 1 ,_ _ .ul urn ll'l'lull . :u,.,:.4u,,,.i ~36 me; I. 3. Darn-m hilt or uATAdiATics r d—nrH-i Goth pm m 51 rise was extremely abrupt. Cold storage holdings must be regarded as the thermometer of reserves, not the indicator of supply. Supply is measured by butter receipts and but- ter manufaoturing records. I Held (8) places the amount of butter stored yearly at ten per cent; Wilson (29), at twenty-five per cent. In view of large amounts of goods stored a portion of the pub- lic look upon the system in the light of the “cold storage trust“, an organization for artificially boosting prices. Many farmers believe that by tiding over periods of low production, average price has been beaten down. As a matter of fact, there is no cold storage trust. Most butter hold- ings are owned by creameries and individuals. If this sur- plus were sold as produced, the markets would become glutted and prices become very low. At seasons of low production prices would become excessive. It is a system of orderly marketing similar to that advocated by the promoters of co- Operative marketing. Both farmer and consumer are bene- fited by the practice. Holmes (30) states that seventy per cent of the butter stored is placed there during June, July, and.August. 'There can be no doubt of the part this plays in equalizing prices throughout the year. The Urner Barry Company has presented some interesting statistics bearing on this point. From 1880 to 1892, before the general utilization of cold storage, 52 the average price of butter during May and August was 21.9 cents, and from 1902 to 1911 during the same months, 2}.% cents. The average price of fresh butter, November to March, 1880 to 1892, was 3#.3 cents, and for the same months, 1902 to 1911, 28.9 cents. The effect is one of price stabilization throughout the year and a lower aver- age price. Quality. The grading of butter has for its purpose the sort- ing of the product in accordance with its quality. There is a greater demand for high than for low quality, hence it commands a higher price. Grades one day in 1925 for which quotations are given on the Chicago market are as follows: Score 92 Extras #2.0~¢ Score 88 - 91 Firsts 39.5 - “1.5 ¢ Score 83 - 87 Seconds - - 38.0 ¢ Score 76 - 82 Thirds - - There are quotations also on lower grades such as ladlee, packing stock, etc., but creamery butter acmmonly falls within the limits given above. The prices given above are those of Jun 10, 1925. The spread between different grades varies during the year. In general, this spread is greater during the summer than winter. There is also a spread between prices at which 53 extras are sold. Well known brands usually sell better than those not so well known. (31) SPFCULATION AVD MANIPULATION- Most of the charges of market manipulation are based on dealings in futures and with price fluctuations caused by what buyers or sellers think supply and demand will be. Steen (32) cites an extreme case as occurring on the Chica- go wheat market in the early years of the war, when a story was circulated of the Kaiser's death, and wheat drOpped. twelve cents per bushel. The same writer (32) infers that tobacco, raisin, prune, cotton, cheese, and grain prices have been manipulated. This was made possible by trade association agreement, by drugging the market in an effort to crush the cooperatives, and by control of exchange. Such motives are difficult to prove, but it is difficult to believe that selfish moves have not played a part in many fluctuations of price of all farm products. Many such price fluctuations are difficult of explanation in any other manner. The market increase of butter in November l92h, previously discussed, would arouse suspicion, as does the price of lemons in June 1925. Fortunately, the passage of recent laws has done much to discourage the practice, as has the gain in market information acquired by the farmer and consumer. Equally fortunate for the consumer that such 54 flares are usually of short duration and are more frequent_ with luxuries than necessities. It would also be extremely difficult to corner the butter market, hence there is very little chance of trade restraint. . Futures. The East and west Indies companies are credited with having first dealt in futures. The term is used.in connec- tion with the buying and selling of contracts agreeing to. deliver commodities at a later date. Its growth.and devel- Opment makes interesting but voluminous reading. It is probably sufficient to say that active dealing in futures in the United States began in Chicago in 1864 or 18c5 and in New York in the seventies. Dealings in futures has led the manufacturer and dealer to a practice known as 'hedging'. It is a system evolved - to protect him from price fluctuations. It is practiced by cotton and grain dealers, millers especially, to protect themselves from risks.they may be unable to assume. Often a contract is made to supply a stated quantity of goods at a future date at a stated price. The manufacturer has no way of determining the price of raw materials at the date of delivery.. He, therefore, buys futures to cover the amount required for the contract. In the meantime he buys on the cash market and sells futures against the contract. In this manner he escapes the speculation Otherwise required. 55 It is this devious procedure that has aroused so much controversy. The Farmer's Alliance, the Grange, the Union, the Equity, and Farm Bureau condemn dealing in futures. The reasoning has been that offerings of non existent goods may be made to beat down prices, and that prices are held down during those seasons when farmers must market their produce. Another objection is that the practice has been- termed gambling, with consequent losses to the uninitiated, and the forced toleration of it as such by a protesting public. It is charged that the costs of selling several times as much product as exists is borne by the producer in decreased price per unit. It is further charged that future trading causes a nervous, irregular market result- ing in losses to producers. A more plausible objection is the effect on the market of false rumors regarding sup- ply. This belief has gained credence because of the sta- bility of the market during the three year abolition of future trading during government control. The decline in price when future trading was resumed has meant manipula- tion to many. The more conservative antagonists of the method believe the practice might be tolerated if limited to actual rather than fictitious supply of the commodity dealt in. 56 Weld (8) defends the principle of futures in that it makes hedging possible. "It is this constant buying and selling that makes the 'continuous' market that is such a remarkable and valuable feature of grain exchanges.“ He states further that it has made possible a delicately sens- itive market, has steadied price level, has shifted risks to trained professional risk takers, thus relieving the un- trained producer and manufacturer; has aided in adjusting prices between different markets; and, has regulated com- modity flow from producing to consuming regions. He de- plores the fact that the uninitiated are permitted to trade. in the speculative market where they must rely upon luck rather than intelligence for their returns. Hibbard (3) also defends future trading and differentiates between speculation and gambling. Many objections, such as manip- ulation, he holds up to ridicule. He holds that specula- tion makes possible a continuous market, the highly valu- able system of hedging, supplies market information, acts as a steadying force on markets and does not increase mar- keting eXpense. Though expressed in more general terms, the functions of organized exchanges are also defended by Ely (33), Moulton (3h), and Macklin (35). The great advantages to future sales of grains would aPpear to be the steadying of price levels and.narrowing the spread between prices paid by elevators and On the ex- changes. These points are proven by the economists cited 57 above. The goods for which the system has been so exten- sively developed are wheat and cotton, both of which are seasonal commodities. They are, therefore, stored either by producer or dealer and sold as demand justifies. Butter is another commodity for which there is a future market, though information is exceedingly scent in the system. With the development of butter markets, the element favoring speculation began dealing in futures. This has been practiced particularly on the Chicago market, but not without opposition. “rhose defending it have based their reasoning on the fact that it permitted hedging, identical to that followed by the country grain dealer. On the but- ter market, as in the wheat pit, the speculator may 'sell short' or 'buy long'. He is a 'bull' if he tries to force butter prices upward, and s 'beer' if he is attempting to force prices downward. If the former are in prepmderenoe on the market, it is said to be 'bullish'; if the letter, 'besrish'. It has been pointed out that some crops, such as wheat, cotton, and sugar, are harvested within s few weeks end that means must be provided to keep Operators interested in them throughout the year. The speculator keeps the market con- tinuous, affording the producer a market at any time, and preventing violent price fluctuations. In this manner both producer and consumer are protected. Before the advent of 58 butter futures, butter dealers stored the product and marketed it when prices were advantageous. They were providing for future demand-and steadying prices. The practice is still followed in spite of the future con- tract. The most logical argument against butter futures is the fact that butter is, produced continuously, making it unnecessary to provide supply a year in advance. The ratio between winter and summer supply is constantly nar- rowing,due to the practice of winter dairying. Operation of futures may affect the acreage placed to wheat the fol- lowing year, but it can hardly affect quantity of butter because of the time required to grow a calf to a cow in milk. Before the United States Bureau 01' Agricultural loo- nomics began to broadcast prices, taking as their basis sales on the street as well as at the exchanges, quotations made were for the greater part by far those of the exchange. It was, therefore, comparatively easy to advance or lower the "spct'I quatation. This could be conveniently utilised to profit on any future contracts. Often there is an ade- quate supply of butter but held by a few dealers. In an effort to supply their contracts other dealers are taken advantage of by those holding butter with the result that prices soar temporarily. Such fluctuations can scarcely be steadied by future dealing. There is the further fact that futures are bought and sold in large quantities, oar 59 load lots. lost fancy butter comes from the smaller cream- eries that sell necessarily in smaller quantities. If there were a steadying influence in the practice it'would be in favor of the manufacturer of medium grade stocks. There ‘would‘be discrimination against small lots with the result that improved quality would not be encouraged. That this is the case is evidenced by the fact that frequently ninety score butter in earload lots sells at a higher price than ninety-two score butter. It is true that data are meagre with which to prove the harmful aspects of future trading in butter. Economic opinion would appear to favor the efficacy of the practice with a few other food products. With these there seems to be great possibilities for improvement through prOper regu- lation. Rith butter, the advantages seem so intangible as to cause serious doubt of the good its preponents argue. OLEOMiRGARIN PRODUCTION AND BUTTER PRICES. The long continued strife between the oleomargarin and butter interests would lead the Observer to the con- clusion that oleomargarin, by limiting butter consumption, is a considerable factor in affecting butter prices. For years its encroachments have been viewed askance by cream- erymen. Records are available from the Bureau of Internal Revenue (19) on amounts manufactured and exported. These are given in the following table. In general they are much lower than those reported by the Department of com- maroa e Table xv. Showing Olecmargarine Production and Imports 1887 - 192» Year lake Exported Consumed 1887 21,513,537 83n,57n 20.n36,198 1890 33.32*.032 2.535.925 30.787.550 1900 107,0h5,028 u,256,067 102,758,658 1905 51,987,336 7,863,16a 44,039,31n 1910 1n1,862,280 3,u18,632 138,026,520 1911 121,162,795 3,79u,939 117,590,862 1912 128,601,053 3,627,u25 12n,666,822 1913 I1¥5,227,862 2,967,582 1t1,858,629 1911; 1%, 021, 276 2, 532,821 1H1, 878, 107 1915 1&5, 810.0% 5,352,183 1m,157,551 ‘ 1916 152,509,913 5,n26,221 1t6,752,525 1917 233.170.111 5.551.257 225.523.373 1918 326,528,829 6,309,896 319,629,u07 1919 359,216,571 18,570,u00 3n1,661,307 1920 391,283,1h3 20,952,180 368,783,386 1921 281,081,514 6,219,165 276,992,980 1922 190,950,373 1,989,421 188,67u,600 1923 209,182,188 2,027,546 206,773,2n0 192k 229,031,000 903,u35 228,127,565 The amounts oleomargarin designated in Table IV are quantities made to'June 30 cf the year indicated, and in- 61 CUI.TL‘7.'.\L C" L' . III Ills lilllslall .3» R 1. Ni” MECHIG Butter 3211885" “ Gents per Paunai L, :Hafi _? -.. cfiwfl: a...!| @J|:,J:- mj o 81%.}.-. mismmuiona of“ rounds: '1‘”! ma . an . m. a DEPARTM EMT OF MATHETAATK.‘ 62 elude colored, uncolored, and nut margarines. Chart VIII shows the relation between the amount consumed.in the united States and.butter prices for I910 - 1924. The cor~ relation is remarkable. It is natural to expect consumption of butter substitutes to increase, however, as butter prices increase. There was greater consumption of margarines, therefore, during the period, 1918 - 1920, when butter prices reached their peak. The increase began with America's entry in the war, being undoubtedly increased by the food conserva- tion prOpaganda. In the prewar period there is also a relation between butter price and oleo consumption. During the war the in- crease in oleo consumption was Greater than the rise in but- ter price. Both show a higher level from 1921, with the cor- relation for 1922-23 practically identical to that for 1910 - 12. consumption of 01.6 in 1921 was thirty per cent 1... than the 1920 amount, and in 1922, thirty-two per cent less than the 1921 amount. In 1923 it had increased nine and six tenths per cent over the 1922 amount. Decreased consumption began with the fall in butter prices. Butter price levels for 1910 - 192M, it will be noticed, were more uniform than the curve of margarin consumption. It‘would.seem a safe con- clusion that purchasing power or the individual and distribu~ tion of that purchasing power affects the consumption of but- ter substitutes more than it does butter prices. 53 Oleomargarin may be said to affect butter prices indirectly. Increased margarin consumption increases available supply of butter and decreases demand. The inevitable result is lowered prices. The law is opera- tive when conditions are reversed. Low butter prices decrease oleomargarin sales. Following this logic it would be plausible to expect margarin consumption to be held comparatively low during 192# because of low butter prices, and for it to gain during 1925. Olec sales lowers demand for butter, and in this respect affects price of butter. INTERNATIONAL TRADE AND BUTTER PRICES The tariff on butter is designed to protect the pro- ducer of butterfat and the manufacturer of butter by regu- lating isports. In 192“ a commission was appointed to study cost of butterfat production in this country and Denmark, with the possibility of changing the present tar- iff. This study is the subject of a lengthy report issued by the comission. The tariff on butter and butter substi- tutes has been revised many times. By act of August 5, 1909, it was placed at six cents; by act of October 13, 1913, at two and one half cents; by act of Kay 27, 1921, at six cents; by act of September 21, 1922, at eight cents, - and on April 5, 1926 to twelve cents. The report of the tariff commission, dated llaroh ll, 1925, makes no recom- usndetion of either increase or decrease tn the present schedule. Inasmuch as America has been a‘butter export- ing country tariff has very little effect on prices over a period of years. Showing Imports and.lxports Butter lB5l-l92¢ Table XVI. Tear Imports Exports Excess of Imiorts or Exports e) (I97 1851 479.180 3.99“.5“2 (a) 3.515.362 1860 3,278,967 7,640,91u (e) #,362,217 1870 n,089,038 2,019,288 . (1) 2,069,750 1880 1”57.120 ’ 39. 236.658 (”38.7%. 533 1890 75,521 29,7u8,0u2 (6)29,672,521 1900 ' n9,791 18,266,371. (e)18,216,581 1910 1,360,2u5 3,1n0,545 (e) 1,780,300 1911 1.007.826 “.877.797 (0) 3.869.975 1912 1,025,668 6,092,235 (e) 5,066,567 1913 1.162.253 3.585. 600 M 2.423.387 191a 7,8h2,022 3,693,597 (1) n.1n8,u25 1915 3,828,227 9,850,TO# (6) 6,022,u77 1916 712,998 13,t87,481 (e)12,774,483 1917 523.573 25.835.092 (0)26.311.519 1918 1,655,u67 26,19u,h15 (6)2n,538,948 1919 9.519.368 3*.556.485 (9)25.037.117 64 65 Table XVI. (Continued.) Year Imports EXports Excess of Imports (1) or Exports (e) 1920 37,#5M,172 17.457.735 (1) 19.965ou37 1921 18,558,388 6,01n,737 (1) 10,5u3,651 1922 8,957,169 10,937,519 (8) 11,980,350 1923 2387u132u7 56545.51” (1) 17.595.733 192k 19,M0#,816 n,256,622 (i) 15,1u8,19u 1909 - 1,647,000 n.125,000 (e) 2,479,000 1913 Until 1920, America has been a tutter exporting country. Attention has been focused sharply on the situation since then because of the effects of imports on domestic butter. This has caused the demand for a higher tariff, previously referred to.. The zigzag figures of exports are extremely variable and may be said to depend.upcn supply and purchas- ing power both at home and abroad. This undoubtedly accounts for the fact that America has been largely an importer since the close of the war. There was made in the United States in 1922, 1,778,5153x0 pounds of butter. (37) Imports or exports, therefore, com- pose but a fraction of the supply. Imports have a depressing effect on price, which, in turn, leads to the query of why 66 America is not self sufficing so far as dairy products are concerned. In the first place butter is a world commodity and nations producing in excess of their own needs will sell their excess on that market offering best not returns. This will be determined by the tariff, demand, and ability of the market to pay. Secondly, the production of butterfat is variable, depending on abundance of feed,‘so that if it were possible to gauge the exact demand it would be impossible to fulfill it with neither deficit or excess. An excess of con- sumpticn must be marketed abroad and from gross receipts must be subtracted expenses incidental to shipment and sell- ing. In the course of events this lowered price must be borne by the producer of butterfat. 0n the other hand a large amount of butter unloaded on American markets depresses price in that it decreases demand for the domestic product.- As between the two, the preferable situation would appear to be in favor of the importation of a small amount of butter. A second solution would seem to be assistance in increasing the individual's purchasing power in foreign countries in order that foreign consumption might be raised. A third, is the increase of domestic consumption largely through health prepaganda. Import data show interesting information as to America's rivals in butter production. These show many changes within the last few years. Denmark has been the largest exporter of 67 butter to this country, whereas in 1913 Canada led. Den- mark's chief market prior to the war was England. War time regulations there relating to the consumption Of but- ter continued through 1920, which coupled.with Denmark's rapid return to normalcy, Opened America's butter market as a profitable outlet. It would seem plausible tO expect this situation to continue until EurOpean nations are again able to buy Or American production costs are lowered. Table XVII. Showing Amounts of Butter Exported.to the United States by Leading Nations. (37) Country 1913 1923 1924 Denmark 332,384 8,815,801 7,192,000 Canada 351,242 5,931,531 2,807,000 New Zealand 14,000 4,678,351 4,313,000 Argentina 2,000,978 3,189,000 United Kingdom 155,588 1,413,889 Netherlands 448,441 Asiatic Turkey 128,277 Australia 86,449 89,000 There are several reasons why Denmark has been able to compete so successfully with American butter manufac- turers. Her oleomargarine consumption per capita has in- 68 creased from 34.46 pounds in 1913 to 42.72 pounds in 1923; (38) cows have increased from 1,310,268 in 1914 to 1,339,357 in 1923; production per cow is unusually high, (39) averaghng 6,300 pounds Of milk containing 270 pounds butterfat. This is made possible by heavy feeding of suc- culent rations, heavy feeding of Oil cake, elimination of poor producers, and.milking three times daily. The Danish farm is small, averaging but forty acres, which with the practice of working all members of the family makes pos- sible intensive dairying at low cost. In addition, by rigid enforcement Of export regulations and inspection a very high grade product is exported. The cost Of produc- tion of a pound butterfat in 1921-2 amounted to 45.8 cents; in 1923-4, 36.3 cents. Manufacturing costs are not excess- ive. TO handle one hundred pounds milk, the average cost in 1922-3 was 15.8 cents. Since the milk averages 3.6 per; cent fat the cost per pound fat amounts to 4.4 cents. As- suming a twenty-three per cent overrun the cost per pound butter manufactured would be 3.5 cents. Production is ef- ficient because poor cows are eliminated. Over thirty per cent of Denmark's cows are enrolled in cow testing associa- tions. In America but one per cent are enrolled. Denmark, Canada, New Zealand, and Argentina have greatly increased their offerings to the American market. Most of that from the United Kingdom has come from Ireland. The Netherlands has shown a tendency to utilize the market as has Russia. Both Turkey and Australia, in the past indif- ferent shippers, have ceased to be a factor. It may be said that international trade in butter is the relief valve for production in excess of home demand. It preserves price in a measure, even when sold at a less price in a foreign market, by preventing the glutting of the home market. It may be utilized by American farmers as a criterion of production and possibilities for reason- able returns from the commodity in question. Miscellaneous Factors Any miscellaneOus factors affecting price of butter are factors affecting the three price controls, purchasing power, supply, and demand. Economic causes affecting abundance of labor, payment of labor, transportation costs, demand for commodities, distribution of wealth, affect in- dividual purchasing power. Purchasing power affects price because it makes possible effective demand. Many canditions are said to affect price that in real- ity affect available supply of butter. Other than those referred to, may be mentioned seasonal variations, crop con- ditions, number of cows, gpographical location, distance from market. While their direct effect is rather an effect on not price to the farmer, they affect prices on the exchanges in- sofar as they govern supply. Demand is increased by lower prices except for foods cOmmonly classed as necessities. Butter is not as re- garded. Attempts to so place it in the minds of the con- sumer offer greatest chance for success through judicious advertising. Improved quality will also increase demand. 70 71 SUMMARY Three factors control price; amount of money in circulation and its distribution; supply of the com- modity; and demand for the commodity. Relative balance of supply and demand regulate price. Individual purchas- ing power controls effective demand. Storage and‘butter substitutes have an effect on price of butter in that they affect available supply and demand. Permanent manipulation of butter prices is practically impossible. In normal seasons production of butter in the United States has been, since 1920, very near sufficient for home consumption. The season of 192% was especially favorable for butter production, which, with a lessened purchasing power, resulted in a production greater than needed, with consequent lower prices. A slightly lower than needed pro- duction would appear to be the best practical situation for the dairy farmer, so far as prices are concerned. The machinery for marketing butter is necessarily very complicated. Because of this very complexity, it is more often than not misunderstood by the producer. Except for a few abuses it is functioning smoothly and efficiently. If population in the United States increases in the ratio of the past two decades, and per capita consumption of butter remains at the 1923 figure, 2#,000,000 pounds ad- ditional butter each year will be required. Amount of pro- duction has decreased from the immense increases of 1920 - 22. stabilization to normalcy of EurOpean buying power will increase butter prices in this country. 72 1. b. 10. 11. 73 REFERENCES Bureau of Animal Industry Circular 56, 190%. By Harry Hayward. Pages 177-178. Arabian Nights, Burton Translation, Vol. I. Page 1%%. Marketing Agricultural Products. By B. H. Hibbard. Fourteenth Census of the United States, 1920. Vol. I, page 1%-%3. Vol. v, page 573. Government Printing Office, Dairy Products Manu- factured, 192%. By States, 1925. United States Department Circular 70, U. S. D. A. 1919. By T. R. Pirtle. United States Bureau of Agricultural Economics Estimates. The Marketing of Farm Products. By L. D. H. Weld. The Butter Industry. By 0. F. Hunziker. Bureau of Animal Industry Bulletin 8%, 1906. By C. E. Gray and G. L. McKay. Page 22. Bureau of Animal Industry Bulletin 1%, 1912. By L. A. Rogers, S. C. Thompson and J. R. Keithley. 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'4 N.- a; -. c ,_ .. e“ a» '3' 1‘ i .A‘; '. ’ " ‘ . 1 3 h. :23, ‘ : ..‘."' ‘llfid * 1 U ”1'51. ; i" O ‘1 ‘ -v<" " . '- h, _ . .' w 1: U" I a", 16 1949 ‘ Mar 2 '49 . ‘ 7; “3‘ 28 ‘35 l' . 5' ; “WE..- ‘: we“? ‘ " h 7: