AN ANALYSIS OF THE BASE-SURPLUS PLAN USED IN SELECTED VIRGINIA MILK MARKETS By Carl Jefferson Arnold AN ABSTRACT Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics Year Anm-nv^ 1958 J f . ABSTRACT Overproduction relative to fluid milk requirements is a problem of major consequence in many fluid milk markets. The use of an allot­ ment or quota plan offers a means of reducing the incentive to over­ produce. The purpose of this study was to investigate some of the more important economic and institutional aspects of one specific allotment plan— a base-surplus plan— as it has operated in certain Virginia milk markets under the state milk control law. A theoretical analysis was developed to indicate the nature of producer supply response under different types of producer payment plans. Data were collected from the Virginia Milk Commission on milk deliveries to plants, fluid milk sales, individual producer base allot­ ments, the transfer of allotments over time and other related items for three Virginia milk markets— Roanoke, Harrisonburg and Newport News. These data were analyzed to test certain hypotheses dealing with the effect of the Virginia base-surplus plan on seasonal variations in milk supply, total milk supply relative to fluid milk sales, prices returned to producers for milk and producer base growth over time. Attention was given also to producers* attitudes and opinions about the plan as expressed in a mail questionnaire. In 1955, total annual deliveries of milk were 12 percent, 23 per­ cent and 5 percent greater than total assigned base allotments in Roanoke, Harrisonburg and Newport News, respectively; and the base allotments were closely aligned with fluid milk sales. The relative success of market equalization and production control efforts was re­ flected in the average price paid to producers for their milk. Average base growth over time was small, especially where no additional base had been purchased. Limited growth was particularly evident in Roanoke where moderate year-to-year increases in fluid milk sales were coupled with relatively rigid enforcement of the base regu­ lation pertaining to the allotting of additional base. Examination of the 1956 base situation indicated that approximately 50 percent of the producers in the three selected markets had base allotments of 15,000 pounds per month or less. The producers shipping to each of the selected markets in 1956 gave strong support to the continuance of the base-surplus plan in its present form. Slightly less than 20 percent of those producers answer­ ing the questionnaire indicated that they felt definite changes should be made. The analytical results obtained in this study appear to support the following conclusions: (l) the Virginia base-surplus plan has achieved its objective of maintaining supplies of milk in relative balance with fluid milk needs in the markets selected for study; (2) there appears to be no particular reason why other milk markets with similar market characteristics could not achieve a similar degree of success by using a base plan of the type described in this study; (3) some definite producer growth problems arose from the methods used to achieve the above objective. Achievement of price and market stability appeared to necessitate rather definite "freezing” of size except where allotments were purchased from other producers. AN ANALYSIS OF THE BASE-SURPLUS PLAN USED IN SELECTED VIRGINIA MILK MARKETS By Carl Jefferson Arnold A THESIS Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1958 ProQuest Number: 10008602 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. uest. ProQuest 10008602 Published by ProQuest LLC (2016). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code Microform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106 - 1346 /'/4 - L ? -rv^ ACKNOWLEDGEMENTS The author wishes to express his gratitude and appreciation to all who have helped with the completion of this study and the prep­ aration of the manuscript. Thanks are expressed to the Virginia Milk Commission and its staff for excellent cooperation and assistance in providing the pri­ mary data for this study. Special thanks are extended to Mr. T. M. Ragland and Mr. John W. Owen of the Commission,s staff. The assis­ tance of those dairy farmers who returned the mail questionnaire is gratefully acknowledged. Special thanks are extended by the author to his major professor, Dr. Gerald G. Quackenbush, for the guidance, inspiration and encourage­ ment which he has provided throughout the course of the authorfs graduate study. The author is indebted to Dr. Maynard C. Conner of the Virginia Polytechnic Institute for his counsel and assistance during the course of this investigation. Thanks are extended to Mrs. Judy Smith, Mrs. Rose Zebrowski and Mrs. Betty Morie for their capable assistance with the statistical computations and preparation of the manuscript. Lastly, the author is grateful to his wife and daughter for their patience and forebearance during the preparation of this thesis. TABLE OF CONTENTS Page ACKNOWLEDGEMENTS........................................... ii LIST OF TABLES............................................ vi LIST OF ILLUSTRATIONS..................................... ix Chapter I. INTRODUCTION....................................... Objectives of Study ............................ Scope of Study. ................ Review of Literature............................ Definitions................................... General Research Procedure......... ........................ Sources of data Questionnaire data........................ . Choice of markets.......................... Choice of time periods...................... Analytical procedure........................ II. III. 1 2 3 5 17 19 19 20 21 23 24 STUDY SETTING..................................... 26 Virginia Dairy Background ...................... Milk Market Regulation in Virginia............... The Virginia Base-Surplus Plan.................. Similarities between markets................. Differences between markets ................. The 110 percent rule illustrated............. Major changes since adoptionof plan.......... 26 31 34 34 35 38 40 SOME THEORETICAL CONSIDERATIONS . ................... 43 Base Objectives............................... Sharing of Surplus.............................. Price discrimination........................ •Payment on the blend price system . . . . . . . \ Possibilities offered by a base plan. . . . . . Some Welfare Implications ................. Resource use efficiency .................... Income redistribution ...................... 43 44 46 48 51 57 57 63 iii TABLE OF CONTENTS (Continued) Chapter IV. V. Page SUPPLY-DEMAND SITUATION ............................ 66 Seasonality of supply......... Market situation............................ Distributor situation ...................... Equalization of Milk Deliveries and Sales....... Utilization................................ Fluid milk sales-to-base ratio............... Annual Production Control . . . . . ......... . . Individual producers........................ Relationship over time...................... Markets................................... Evaluation and Implications .................... 66 66 70 71 73 77 80 82 82 84 86 PRICES PAID TO PRODUCERS............................ 88 Market Average Prices............ Individual Producer Prices. .... ..... . . . . . . Factors that affect individual producer prices. Theoretical price incentives. .. ....... . . Actual price differences.................... Deliveries-to-base ratio. .. ......... . . . Evaluation and Implications ..... VI. VII. PRODUCER GROWTH AND BASE TRANSFERS.................. 88 93 93 95 110 114 117 118 Growth Over Time................ General scope of base transfers . . . . . . . . 1956 Base Situation...................... Size of production units. . . . . . . . . . . . Gross income from milk sales................. Additional base needed...................... Willingness to purchase base. . . . . . . . . . Evaluation and Implications . .................. 119 125 128 128 129 130 132 134 PRODUCER REACTIONS TO PLAN.......................... 136 Sale and Transfer of B a s e ...................... Entry of New Producers.......................... Assignment to Distributors............ Allotting Additional Base ...................... Continuance of the Base-Surplus Plan............ Evaluation and Implications . . . . ............. 136 142 146 149 154 156 iv TABLE OF CONTENTS (Continued) Chapter VIII. Page SUMMARYAND CONCLUSIONS.............................. Findings..................................... Conclusions................................... Limitations to Study .................. BIBLIOGRAPHY................................................ 158 159 162 164 166 APPENDIX A. MAIL QUESTIONNAIRE........................... 170 APPENDIX B. BASE REGULATIONS, ROANOKEMARKET, 1955 . . . . . . 174 APPENDIX C. BASE PAY-OFF PROCEDURE,VIRGINIA MILK COMMISSION MARKETS, 1955........................................... APPENDIX D. SPECIAL NOTES................................. v 180 183 LIST OF TABLES Table Page 1. Response to mail questionnaire. 2. Cow numbers5 milk production, milk receipts at plants and blend prices for Virginia, 1940-56.................... 28 Selected characteristics of markets chosen for detailed study, 1955 ................................. 29 Seasonality of milk deliveries and fluid milk sales, several Virginia milk markets, selected years ......... 68 Seasonality of delivery of milk, individual distributors, Roanoke, Harrisonburg and Newport News, selected years. . 72 Percentage of deliveries utilized in fluid sales, individual distributors, Roanoke, Harrisonburg and Newport News, selected years. • ............. . . . . . 75 Ratio of fluid milk sales-to-base, individual distributors, Roanoke, Harrisonburg and Newport News, selected years....................................... 79 Annual deliveries-to-base. ratio, several Virginia milk markets, selected years .............................. 85 Comparison of Class I prices and average prices paid to producers, selected Virginia milk markets, 1955 ....... 90 Differences between Class I prices and average prices paid to producers, selected Virginia milk markets, Richmond and Washington, D. C., 1955.................. 92 Class I and Class II prices for 4 percent butterfat milk, selected Virginia milk markets, 1955.................. 98 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. .............. 21 Average price paid to producers for 4 percent butterfat milk, selected Virginia milk markets, 1955. . . . . . . . 100 Average annual prices received by producers with specified seasonal milk delivery patterns under two methods of payment, selected Virginia milk markets, 1955. 103 vi LIST OF TABLES (Continued) Table 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Page Producers classified by seasonality of delivery and the price differences between categories, selected Virginia ...................... milk markets, 1955. 112 Producers classified by high quarter of delivery, selected Virginia milk markets, 1955................... 114 Average annual prices received by producers in various deliveries-to-base ratio classifications, selected ................... Virginia milk markets, 1955 115 Regression analysis of the relationship between deliveries-to-base ratio and average annual prices received by individual producers, selected Virginia milk markets, 1955 ......................... 116 Average base growth, specified groups of producers, selected Virginia milk markets, 1947-56 . . . . . . . . . 120 Average base growth by 1947 base size groups, Roanoke, 1947-56 ............................................ 124 Comparison of base growth between producers purchasing and those not purchasing base, Roanoke, 1936-56 . . . . . 124 Transfer of monthly base allotments, selected Virginia milk markets, 1947-56 126 Price producers would pay for additional monthly base, selected Virginia milk markets, 1957............... . . 128 Number of producers in several base size classifications, selected Virginia milk markets, 1956....... . . . . . . 129 Producers classified according to gross income from milk sales, selected Virginia milk markets, 1955 ........... 130 Size of 1956 base relative to individual producers needs, selected Virginia milk markets ................. 131 Producers who needed additional base classified according to their "capacity" ratio, selected Virginia milk markets, 1956 ......... 132 Producer response with respect to the sale of base allotments, selected Virginia milk markets, 1957....... 137 vii LIST OF TABLES (Continued) Table 28. Page Producer response with respect to how base should be sold, selected Virginia milk markets, 1957............. 139 29. Producer response with respect to selling cows when base is transferred, selected Virginia milk markets, 1957. • . 141 30. Producer response to admitting new producers on their market, selected Virginia milk markets, 1957......... . 142 Producer response with respect to how entry of new producers should be allowed, selected Virginia milk markets, 1957 ....................................... 144 32. Producer response to entry of new producers by dairy experience classifications, selected Virginia milk markets, 1957 ....................................... 145 33. Producer response to assignment to specific distributors, selected Virginia milk markets, 1957................... 147 31. 34. 35. Producer response as to how additional base should be allotted, selected Virginia milk markets, 1957......... 150 Producer response to continuance of base-surplus plan in its present form, selected Virginia milk markets, 1957. . 154 viii LIST OF ILLUSTRATIONS Figure 1. Page Geographical location of markets and milk production areas, selected Virginia milk markets, 1955........... 30 Price discrimination and producer supply response to blend price payment of proceeds from discrimination. . . 47 Typical producer supply response under a base payment plan and a blend price payment plan.................. 53 4. Allocation of resources under output restrictions. . . . 62 5. Seasonal pattern of milk deliveries and fluid milk sales, Roanoke, 1955 ............................... 69 Relationship between individual producer base allotments and the fluid milk sales credited to each producer, Roanoke, 1955....................................... 81 Relationship between individual producer base allotments and the milk deliveries credited to each producer, Roanoke, 1955....................................... 83 2. 3. 6. 7. 8. Theoretical milk delivery patterns .................. 101 9. Average annual prices— under a base-surplus payment plan and a blend price payment plan, Newport News, 1955. 105 Theoretical milk delivery patterns, semi-closed base plan, Roanoke, 1955................................. 107 10. 11. Average annual prices— under six months and twelve months usage of the base-surplus plan, Roanoke, 1955 . . 109 ix AN ANALYSIS OF THE BASE-SURPLUS PLAN USED IN SELECTED VIRGINIA MILK MARKETS CHAPTER I INTRODUCTION Many fluid milk markets are confronted with supplies of milk in excess of their fluid needs* The principal economic effect of this oversupply is a depression of the price received by producers relative to the price established for fluid milk under classified pricing schemes* This problem is of special concern to the administrators of milk price control programs since they are under considerable pressure to assure reasonable returns to producers without unduly manipulating \ resale prices to consumers* Overproduction appears to receive its greatest stimulus from the method used to pay producers for their milk* The distribution of pro­ ceeds from the sale of milk often takes the form of a blend price paid to all producers for the total amount of product which they contribute* This blend price represents the average value per hundredweight of all the miljc shipped to a specific distributor or market* A blend price makes no distinction between the value of milk sold for fluid milk pur­ poses and that sold for manufacturing purposes, even though the basic idea of classified pricing is to make such a distinction. Under a blend price payment plan, there is little or no incentive for an individual producer to restrict his production, especially in the short run, since he will receive ttye same price for all the milk he delivers at any given time* -2- Can a classified price plan be implemented by some type of pro­ ducer payment arrangement which discourages excessive overproduction? Allotment or quota plans appear to offer possibilities for restricting production to fluid milk needs by establishing a share of the market's fluid milk sales for each producer and paying only the manufacturing price for milk delivered in excess of fluid milk needs. The purpose of this study is to investigate some of the more im­ portant economic and institutional aspects of one specific allotment plan— a base-surplus plan— as it has operated in certain Virginia milk markets. An analysis of the experience of these markets with their own particular variation of the base-surplus plan should be of value to other markets with similar problems as well as to the Virginia mar­ kets themselves. Objectives of study Within the context of the purpose outlined above, this study has three primary objectives: (1) to describe the base-surplus plan as used in specified Virginia milk markets with particular emphasis on its production con­ trol features. (2) to quantify and/or describe some of the more important economic and institutional characteristics of this plan. (3) to determine the implications of these characteristics both for the continued operation of the base-surplus plan in these Virginia markets and for its possible adoption in whole or in modified form in other milk markets. -3 - Several hypotheses are considered during the course of this in­ vestigation, On the basis of the data available, some are subject to direct empirical verification while others are not. It is hypothesized that the base-surplus plan as used in selected Virginia markets has: (1) tended to retard production adjustments between farms and thus perpetuated many uneconomical and inefficient production units. (2) maintained the average price paid to producers at a high level relative to the Class I price set by the Virginia Milk Commission. (3) provided substantial price incentives to producers with even production patterns. (4) maintained total milk receipts in balance with fluid milk sales and has allocated these receipts among individual distributors according to their fluid milk sales patterns. (5) resulted in a reasonably even seasonal pattern of delivery to market. (6) not had a uniform effect on the three markets selected for detailed study with regard to the hypotheses enumerated above. In other words, each market situation must be considered separately since the effects of the base-surplus plan may be expected to differ from market to market. Scope of Study The dairy industry in Virginia has long operated within an intri­ cate framework of regulation, both with regard to price and to most of the remaining marketing functions. This investigation is concerned with -4- only one aspect of these regulations— that dealing with the method used to prorate proceeds from fluid milk sales to distributors among indi­ vidual producers supplying given markets** This method of proration is commonly referred to as the base-surplus plan* Three markets are singled out for individual detailed analysis*^ They are Roanoke, Harrisonburg and Newport News, respectively* The choice of individual markets limits the generalizations which can be drawn for the state as a whole* However, some generalizations are made in which cases the attendant assumptions are made explicit* The time periods involved in this investigation vary with the type of data, the segment of the industry and the particular relationship being analyzed* The primary producer data pertain to the year 1955 with certain related information for the period 1947-1956* On one par­ ticular group of producers, certain data are analyzed for the years 1936, 1939, 1947 and 1955* years 1951, 1953 and 1955.^ The main distributor data pertain to the Certain aspects of market relationships are analyzed from distributor data for markets other than those selected for detailed study* In the main, this study attempts to assess some of the more impor­ tant effects of the base-surplus plan on market deliveries-sales bal­ ances, prices paid to producers, seasonality of delivery and producer * No other seasonal plans or production control plans were con­ sidered in this study* ^ An explanation of the choice of these particular markets may be found on page 21. 3 An explanation of the choice of time periods may be found on page 23* -5- growth and adjustment in the market. Consideration is given to the industry's reactions to the plan. Special emphasis is given to the market equalization and annual production control aspects of the Virginia plan since its uniqueness is derived largely from these features# It is recognized that some aspects of the problem do not lend themselves to empirical quantifi­ cation. In these cases an attempt is made to discuss their general economic implications# Review of Literature During the past three decades a number of research studies invol­ ving the description and use of base-surplus plans have been conducted# In addition to the studies conducted, some general writing on the sub­ ject is available. These studies appear to have two major limitations with regard to the problem under study in this investigation. In the first instance they deal primarily with descriptive aspects of these plans rather than with attempts to analyze effects of the operation of the plans. Secondly, where analytical procedures were used and re­ ported, their scope was usually limited to the seasonal leveling of production aspects with little attention given to the market equali­ zation or production control aspects of such plans. A brief review of a sample of the studies and general statements dealing with this subject is presented below. Discussions of the production control features of these plans, where mentioned, are given special attention. The reports are reviewed in chronological order of publication rather than by any rank of the relative importance of the individual contributions. -6- * One of the earliest studies which involved the description and evaluation of a base-surplus plan was reported by Horner in 1928.^ This study concerned itself with an analysis of the early efforts in Detroit to meet seasonal production problems. Early attempts to set bases which would reflect producers* deliveries during the base-making period without regard to market fluid sales conditions resulted in heavy surpluses of milk. "Call" plan. As a result, provisions were made for the Under this plan, distributors notified producers at the beginning of each month the percentage of base production they thought could be sold as fluid milk and subsequently they issued a '•call" for that percentage of base production. The percentage was applied equally to each producer*s base production. Distributors agreed to pay the fluid milk price for the predetermined percentage and the surplus price for anything over that amount. The principal defect of the "Call'* plan was that there was a penalty for overproduction only. Producers would deliver only the quantity "called” and paid for at the fluid price. Consequently, distributors were often short of milk since some operat­ ing surplus was necessary. The inability of distributors to determine accurately their needs under the "Call" system also was a source of friction. in 1927. The plan herein described began in 1923 and was discontinued Another plan was begun in 1928 and has continued to the pre­ sent time. Attention is directed to this plan in a later section of this review. * J. T. Horner, The Detroit Milk Market. Michigan Agricultural Experiment Station Special Bulletin 170, March, 1928. -7- Another report was published in 1928 by Lininger.* He reported that during the first five years in which the basic-surplus plan was in operation in the Philadelphia milkshed it "evened up" seasonal pro­ duction, In 1925, the seasonal variation was found to be 31 percent less than in 1921, Many individual producers attempted to adjust pro­ duction so that they would have little or no surplus. Three common methods of adjusting production to sales were practiced: buying and selling cows at the beginning and ending of the basic period, respect­ ively; increasing grain feeding during the basic period; and increas­ ing the proportion of fall freshening cows in the herd. ments might be uneconomical on many farms. Such adjust­ It was found that "boosting" production during the basic period was frequently an expensive opera­ tion, and that an individual incurred a risk in making a quota under such circumstances since he might not be able always to produce enough to make his quota during the quota payment period. In the main, this study was limited to certain milk production problems arising from the use of the basic-surplus plan. In 1934, Jensen reported the establishment of a base-rating plan under the Federal Milk Marketing Order effective for the Boston milk market in March 1934. base-rating plan: Four objectives were cited with regard to the (l) assurance to a producer of a definite and fair share of the fluid milk sales of the market; (2) protection for him 1 F. F. Lininger, The Relation of the Basic-Surplus Marketing Plan to Milk Production in the Philadelphia Milk Shed. Pennsylvania Agricul­ tural Experiment Station Bulletin 231, August, 1928. 2 Einar Jensen, The Boston Milk License. Market Administrator, 80 Federal Street, Boston, Massachusetts, August, 1934. -8- against losing a portion of his fluid milk sales through increases in production by other producers; (3) establishment of greater independence of any particular distributor; and (4) advance knowledge of the approxi­ mate price he would receive for his milk. Under this particular plan producers were not required to deliver milk in excess of their base allotment. The opinion was expressed that this feature would operate naturally to control total production and hold it in line with fluid sales. Under this plan new base ratings were not established each year. Provisions were made to the effect that the originally established bases would hold until market sales had increased to a point where all pro­ ducer bases could be increased by a definite percentage. Further, it was stipulated that an individual producer would not have to deliver any excess milk to qualify for such increases. Some modifications also were made for producers with very low initial base ratings. On January of each year each producer would be entitled to a new base equal to 61% of his average daily deliveries of milk during the past year, if such a base would be larger than his present one. Black, writing in 1935, made the point that the base-rating plan was invented originally as a method of encouraging uneven producers to even out their production and thus reduce the quantity of seasonal sur­ plus coming to market.* Later it was recognized primarily as a method of paying more regular producers equitably for their share of the sur­ plus milk. It then accomplishes its objective of evening out production by paying only what the surplus production is worth. It was pointed out * John D. Black, The Dairy Industry and the AAA. Brookings Insti­ tution, Washington, D. C., 1935. -9- that year-to-year revisions of bases scarcely can avoid increasing the bases and expanding total production at the same time. This problem is the same one which has confronted all administered proposals con­ cerning the division of production and sale of products among individ­ uals. Dr. Black was concerned that there be a path always open for new producers to enter a market and he discusses the limitations incur­ red when trying to control production and at the same time permit relatively free access to the market. With regard to the problem of production control, Cassels was one of the first to indicate the monopoly aspects of bases or quotas.1 Co­ operatives could be expected to have particular interests in restrain­ ing expansion of production. A large surplus means lower blend prices with the attendant difficulty in holding producers as members. Maximi­ zation of returns to all producers within the cooperative would require restriction of output to some given level. All milk produced over this amount likely would cost more to produce than it would return. In 1937, Gaumnitz and Reed attempted to examine the effects on seasonality of delivery of a closed versus an open base-surplus plan.2 Data from the Baltimore market were used. had an open ratings system. closed. Prior to 1924 this market After 1924 the ratings were more or less Analysis of the data indicated that there had been a marked reduction in seasonality under the open ratings plan, but that once the * John M. Cassels, A Study of Fluid Milk Prices.. Harvard Univer­ sity, Harvard University Press, 1937. 2 E. W. Gaumnitz and 0. M. Reed, Some Problems Involved in Estab­ lishing Fluid Milk Prices. United States Department of Agriculture, Agricultural Adjustment Administration, September, 1937. -10- ratings were closed the producers tended to slip back into their old seasonal patterns. It was concluded that when the incentive to in­ crease fall production and make a higher rating each year is removed by closing the ratings, there would appear to be little reason to ex­ pect significant seasonal responses to price incentives under the quota plan. Evidence was presented that this had occurred to some extent when such a change was made in the Baltimore market. Welden and Stitts, reporting on the use of the base-surplus plan in selected Ohio markets, indicate some interesting findings from a study of producers* reactions to the use of quota plans.1 On the aver­ age the producers interviewed were split evenly as to approval or dis­ approval of the plan. proval. A slight majority, 58 percent, registered ap­ Cross-classification of these replies by size of herd and years the producers had been cooperative members indicated that the number indicating approval was higher for those with larger herds than the average, and that the same relationship held with regard to length of membership. It was reasoned that such a relationship might have been expected due to the fact that older and larger producers would appreciate more the purpose and value of the plan. Another reason might have been that they probably would suffer less under the system. In 1938, Stitts and Gaumnitz analyzed returns to producers under various types of milk pools.2 The Boston market was selected as the 1 W. C. Welden and T. G. Stitts, Milk Cooperatives in Four Ohio Markets. Farm Credit Administration Bulletin 16, April, 1937. 2 T. G. Stitts and E. W. Gaumnitz, Relative Prices to Producers Under Selected Types of Milk Pools. Farm Credit Administration Bulletin 25, June, 1938. -11- market for study. Individual handler, association and market pools were considered with and without base-rating schemes. comparisons are of special significance. Two particular These concern a market pool with base ratings established on a broad basis and much larger than the volume of fluid milk sales, as contrasted to a market pool with base ratings established according to the producers* low quarter of delivery in 1934 and somewhat more in line with the total volume of fluid sales. Analyses of the two types of pools indicated that those producers previously designated as "even" producers gained more under the latter pool since they had higher base deliveries in terms of total shipments than did other producers. Conversely, the "most uneven" group lost the heaviest under the low quarter ratings. It was found also that in all cases the dealer pools and each of the two base-rating plans materially increased the average price received by "even" pro­ ducers as compared with their price under a straight market pool. "Even" producers received a higher price than "uneven" producers in all cases. In 1940, Welden and Herrmann attempted to summarize in nonempirical form experience with base-surplus or quota plans prior to that date.1 This report is of particular significance for this investigation since it quantifies the extent of the usage of such plans prior to 1940 and describes in some detail a number of the more important variations as used in actual practice. It was indicated that in 1940, of the 162 1 W. C. Welden and L. F. Herrmann, Base Allotment or Quota Plans tlspd bv Farmers* Cooperative Milk Associations. Farm Credit Adminis­ tration Miscellaneous Report 23, May, 1940. -12- markets on which data were available, 101 of the markets were using some form of a base plan. In 31 more of the markets the plan had been used at one time or another. A cross-classification on the basis of State or Federal control and no control at all revealed that of 27 Federal markets 14 were using bases, 44 out of 62 State markets were doing likewise and that 47 out of 79 noncontrolled markets surveyed also were using some type of base plan. Discussion was presented concerning the plans used in a number of selected markets. Two of these plans are discussed in this portion of this review because of their particular relevance to this investigation. The plans discussed are those used in Chicago prior to 1940 and in Con­ necticut markets during the same period. Bases were used first in the Chicago market in 1929. The plan as used in this market was characterized by semi-closed bases, the right to transfer base by direct purchase and sale, local committee base ad­ justment procedures and a market adjustment fund operated by the domi­ nant cooperative to pay for that base milk for which no dealer outlets could be found. underdelivery. Penalties were provided for a specified degree of The amount of base so taken away from an individual pro­ ducer was given to the local base committee to be redistributed among other producers in that local area. Redistribution was done on the basis of a specified payment per pound of daily base by those who wished to purchase. In 1935, a uniform price of one dollar per daily pound was established. Ninety-five cents of this was returned to the producer who had lost the base. In 1936, anyone who so desired was allowed to sell up to 25 percent of his base to the cooperative at 95 cents per pound -13- for resale at one dollar per pound. New producers were required to accept surplus prices for their first three months' deliveries and after this time were given some established percentage of their deliveries during this period as their base. They also were permitted to purchase a base if they so chose. In the early years of the Connecticut quota plan, producers were allowed to name their own quotas each year. Quotas were measured in terms of quarts per month and penalties were provided for over and under delivery. A separate penalty pool was operated and distributions were made each month in proportion to the total payment already received for quota milk. Beginning in 1935, quotas were assigned each year with the quota-forming period extending from July through November and the quotapayment period extending from February through June. The extent of any yearly increases in quotas was limited by the size of the aggregate of quotas lost by other producers, the quantity given up by producers go­ ing out of business and by the changes in market fluid sales. As will be seen later, the present Virginia base-surplus plan utilizes some ap­ proaches which are similar to both the Chicago and Connecticut plans. In part, as a follow-up to their original study, Herrmann and Welden reported in 1942 the results of a modification of the old Chicago base plan as used in some of the outer-markets in that area.*- The Janesville, Wisconsin, market was singled out for special attention. The new plan specified that the base-making period would be longer than * L. F. Herrmann and W. C. Welden, Use of the Level Production Plan in Milk Marketing. Farm Credit Administration Miscellaneous Report 57, August, 1942. -14- previously had been the case. It was thought that a longer length of period would discourage attempts to build excessively high fall bases since it would be more expensive to do so. In addition, payments on a quota basis were not made for the entire year. It was reasoned that the "truly even" producer still would receive a premium for his efforts. Analysis of the data indicated that even producers received 1.6 cents less than fall producers but 4.8 cents more than spring producers. All told, 41 out of 65 producers had a higher income under the new base plan than they would have had on a year round blend-price basis. A sampling of producers* opinions indicated that they felt the new plan was definitely more satisfactory than the old Chicago plan. In sum­ mary, this report reaffirmed the idea presented earlier in this review that the closer a base plan comes to being "closed" the less effect it will have in reducing the seasonality of delivery. In March, 1949, Hirsch and Hedges reported on a quota plan used in an important southern market.* In the Memphis market the plan was oper­ ated by the local cooperative which had 100 percent supply contracts with the market's distributors. At any time when local milk was not sufficient to meet dealers* requirements, the cooperative had to import milk to take care of the undersupply* The quota plan used required penalties for underproduction with arrangements whereby the cost of milk imports was borne by those producers who underdelivered their quo­ tas and thus necessitated the imports in the first place. No penalties * H. G. Hirsch and I. R. Hedges, An Analysis of the Base-Quota Plan in the Memphis Milkshed. Farm Credit Administration Miscellaneous Report 131, March, 1949. -15- were assessed for underproduction when no imports were needed. Quotas were established equal to each producer's average daily deliveries from September through February. A sample of 94 producers' penalty records showed that 86 of them had incurred some penalties during the period September 1947 to March 1948. The average penalty amounted to 1.59 percent of net receipts and in no case was the penalty more than 11 percent of net receipts. The effect of this plan was to shift the cost of imported milk from the dealers to the producers whose underdelivery was responsible for the imports. At the same time, it provided a po­ tentially greater source of revenue for that group of producers who fulfilled their obligations by leveling production in that extra revenue was available to them— revenue that would have otherwise gone to outside interests. Quackenbush and Homme reported that the base plan used in the Detroit market had returned a greater price incentive to the even pro­ ducer than could be obtained with the use of a seasonal differential or take-off and pay-back plan.* The plan was used for producer pay-offs throughout the entire year in the market. It was found that reducing the number of months used would reduce the price incentive to even pro­ ducers. The point also is made that the wider the spread between base and surplus prices, the greater the seasonal price incentive offered by the base plan. An attempt was made to relate producers' supply re­ sponses to the seasonal price incentives achieved. It was concluded 1 G. G. Quackenbush and H. A. Homme, Seasonal Price Incentives of the Base and Excess Plan in the Detroit Milk Market. Michigan Agri­ cultural Experiment Station Technical Bulletin 228, March, 1952. -16- that the relationships which could be determined were too few to pro­ vide conclusive evidence of the rate and degree of response* There was some evidence that producer response was lagged at least four years. In 1955, Spencer indicated that a quota plan might offer some pos­ sibilities for heavily surplused New York markets in combatting their overproduction problems** He indicated that prices fixed under regu­ latory measures may be higher than are necessary to call forth adequate milk supplies* In such situations, counterbalancing measures may be necessary either to even out the price stimulus over the entire year or actually to retard total annual production* This point particularly is significant since such a large percentage of fluid milk is produced under some type of price regulation* The free transfer of bases among producers was favored on the grounds that such transfers would facili­ tate the building of more economically and efficiently sized quotas by those who remain in the market* This may not take into account the inability of many producers to provide the wherewithal to purchase such bases, particularly if the price is unusually high* For the purposes of this investigation, this review of literature has revealed the following general informations (l) most studies in­ vestigating the seasonality relationship indicate that base plans, particularly those of an open nature, tend to reduce seasonal vari­ ations in deliveries; (2) even producers are rewarded by higher price incentives than are uneven producers in most cases; and (3) very little * Leland Spencer, "Quota Plans to Regulate Milk Supplies", Talk presented at Farm and Home Week, Cornell University, March 23, 1955, (mimeographed)• -17- work, if any, has been done to explore any other effects of base plans other than those mentioned above. The present investigation attempts to delve somewhat deeper into the previously described seasonality relationships and at the same time to explore the effects of base plans on market delivery-sales balances and the transfer, growth and production adjustment aspects of base-surplus or quota plans. IM ihifciana Some of the terms used in this investigation have specialized meaning. Those most frequently used are defined below: Base - refers to an individual producer's established share of a market's fluid milk sales. Open base - means provision for establishment of an entirely new base each year usually on the basis of average deliveries during some specified period. Closed base - refers to the freezing of existing bases with little or no opportunities for increasing any given base. Semi-closed base - means that minor adjustments may be made from year to year but new bases are usually linked to old bases in some manner. Purchase and sale of base among producers usually is permitted. Base transfer - refers to exchange of base from one production unit to another usually for some monetary consideration. Bona fide proof of sale must be presented to the proper authorities and cows must accompany the base in the ratio of milking herd to base. -18- Base assignment - refers to the assignment of individual producers to specific distributors by the Virginia Milk Commission. Deliveries - refers to that quantity of milk which an individual producer delivered to a distributor. Conversely, it may also refer to the total quantity received by distributors from individual producers. Seasonality - refersto the degree to which deliveries to plants vary from their low point to high point during the year. Even producer - is one whose degree of seasonal variation in de­ livery is small relative to other producers* Uneven producer - is one whose degree of seasonal variation in de­ livery is large relative to other producers. Surplus producer - is one who received a large amount of his total delivery as surplus sales. Utilization - refersto the relationship between total deliveries and fluid milk sales. It is found by expressing fluid sales as a per­ cent of total deliveries. Base^aumlus blend .price - is the average price received by an individual producer as payment per hundred pounds of milk under the base-surplus plan. Straight M e n d - refers to the average price paid by dis­ tributors and received by individual producers if computed on a straight utilization basis. Classified pricing - refers to method whereby distributors pay specified prices for the milk which they receive in accordance with the manner in which they use it. Higher prices are set for milk used in fluid form than for milk used in surplus or manufacturing usages. -19- Class I price - refers to the price paid by distributors for milk sold for fluid purposes. Class II price - refers to the price paid by distributors in Virginia markets for milk used for manufacturing purposes. General Research Procedure There are two basic methodological approaches which may be em­ ployed to analyze the problem. These are* (l) analysis of actual empirical data which are used to describe the problem under investi­ gation; and (2) the synthesizing of data to represent actual operating conditions under specified assumptions. on the first of these approaches. This study relies primarily In a few instances, the second ap­ proach is employed. Sources of Data The sources of data for this investigation are several in number. The base, deliveries and fluid milk sales information for Virginia Milk Commission markets were obtained from records filed in the Com­ mission* s Richmond office. Base transfer data were also obtained from the Commission's records. The above data form the main body of analy­ sis. Certain supplementary information was obtained from this source.^ In addition, the Commission and its staff were consulted with regard to numerous matters of interpretation of data and the historical as­ pects of the base plan development in markets under their jurisdiction. * Such as classified price schedules, milk use classifications and other scattered bits of information relevant to this study. -2 0 - Mail questionnaires provide the remaining primary data used in this investigation. These questionnaires were sent to producers in each of the Milk Commission markets selected for detailed study. Questionnaire Data Mail questionnaires were sent to all producers shipping milk to the Roanoke, Harrisonburg and Newport News markets.'*' Using a pretested questionnaire in which the letter explaining the purpose of the study formed an integral part, the following mailing procedure was used: (1) each producer was mailed a questionnaire on February 14, 1957; (2) five days later each producer was mailed a postcard reminder con­ cerning the original questionnaire; (3) ten days later all those pro­ ducers who had not returned the original questionnaire were sent an­ other copy of the questionnaire with an accompanying letter further explaining the need for the data. In all cases, a self-addressed stamped envelope was included with each questionnaire. An attempt was made to obtain brief, concise answers to certain relevant questions which could be answered only by the producers themselves and not from records obtainable from some other source. ducer response to the questionnaire was very good. Pro­ The following tabulation indicates the response to the original and follow-up * Producers shipping as of September 1956 as determined from lists maintained in the Commission's Richmond office. The questions asked dealt primarily with the individual pro­ ducer's opinions and feeling with regard to the internal structure, rules and regulations and administration of the base-surplus plan. Supplemental information on individual farms was also obtained via the questionnaire. A copy of the complete questionnaire is included in Appendix A. -21- questionnaires in each market: Table 1. Response to mail questionnaire Market Roanoke Original question­ naires mailed Original question­ naires returned Follow-up question­ naires mailed Follow-up question­ naires returned Total question­ naires returned 189 131 58 22 153 Harrisonburg 45 18 27 11 29 Newport News 136 96 40 13 109 370 245 125 46 291 Total This tabulation indicates that usable questionnaires were obtain­ ed from 81 percent, 64 percent and 80 percent of the producers in the Roanoke, Harrisonburg and Newport News markets, respectively, with the over all total response approximating 79 percent.1 Choice of Markets There is always a certain amount of judgment and perhaps arbi­ trariness involved in the selection of information for analysis in an investigation of the type reported in this study. The selection of particular groups or strata to be considered presented a major problem. Time and expense were the principal limiting factors. In the formu­ lation of this study, it was decided that the picking of "representative" 1 It will be noted that the number of original questionnaires mailed is larger than the number of producers given on page 29. This occurs since some producers had entered the markets after the original deliveries and sales data were obtained. It was felt that the reactions of this new group should also be included. -22- markets would permit a more detailed analysis of such markets and would provide a better basis for analyzing the effects of the base plan under heterogeneous conditions.1 The ultimate selection of the Roanoke, Harrisonburg and Newport News markets for detailed study was based on a deliberate attempt to choose markets which were: (l) widely scattered geographically; (2) surplus and nonsurplus; (3) generally stable or unstable with re­ gard to producer-distributor. relationships; (4) generally stable or unstable with regard to competitive conditions among distributors; (5) large or small in numbers of producers and milk consuming popu­ lation; and (6) other related factors.2 The Roanoke market was char­ acterized as: (l) large in number of producers and market consuming population; (2) nonsurplus in terms of recent deliveries-sales in­ formation; (3) relatively stable in terms of producer-distributor re­ lationships and competitive distributor relationships; and (4) probably the most "ideal" single market in the State.'* Harrisonburg was con­ sidered to be: (l) relatively small in number of producers and market consuming population; (2) a surplus market in terms of recent deliveries- 1 The obvious alternative would have been to sample information taken from all Milk Commission markets using the base-surplus plan. This choice would have limited greatly the detail of analysis although it might have permitted more generalizations of results. 2 In the predetermination of these market characteristics, the writer drew on his experience as extension dairy marketing specialist in Virginia, consultation with the Milk Commission and its staff and relevant market information which this agency had in its files. 3 "Ideal" in the sense that location disadvantages would be the only deterrent to large numbers of producers being attracted to the market if in fact such entry were allowed. -23- sales information; and (3) somewhere between Roanoke and Newport News with regard to producer-distributor relationships and competitive dis­ tributor conditions. Newport News was characterized by: (l) a rapidly expanding market population; (2) a nonsurplus situation in terms of recent deliveries-sales information; (3) a medium-size group of pro­ ducers in terms of numbers; and (4) relatively poor producer-distribu­ tor relationships and extremely competitive distributor relationships. The presence of sizeable federal military installations in the Tide­ water area, of which Newport News was a part, provides many opportuni­ ties for discounts, rebates and related unstabilizing marketing practices. The choice of these particular markets provided a real test of the base-surplus plan's ability to attain its objectives under vary­ ing market circumstances. Choice of Time Periods The time periods for which data were obtained were previously mentioned on page 4. The selection of these time intervals was con­ ditioned by the availability of accurate and reliable data, the need for historical data to determine specified relationships and the cost of obtaining additional data relative to its expected contribution to the proposed analysis. Deliveries to plants and fluid milk sales for the selected Virginia Milk Commission markets were available for 1951 through 1955 from the Milk Commission's files.1 Consideration was given to obtaining 1 Approximately one year prior to the collection of data for this study, records for a number of earlier years were destroyed. -24- records on individual producers for all five of the available years or perhaps every other year during the five-year period* The decision was reached to obtain individual producer data for the one year 1955 on the basis of the following considerations** (l) in at least three of the five years for which data were available a certain amount of abnormality may have existed as a result of the wartime conditions that prevailed; (2) many of the impacts of a program in operation for 20 years may be analyzed nearly as well from one-year data as from data for several recent years; (3) detailed information could be ob­ tained for the one year while the cost of getting such information for additional years probably would have been greater than its contribution to the analysis of the problem under consideration; and (4) distributor data were collected for the years 1951, 1953 and 1955 providing data for the market analyses and reflecting to some extent the actions of producers in the aggregate, thereby reducing the need for individual producer data in other years. The base transfer data were available as far back as 1947. Since the primary objective of this portion of the analysis was to show change over time for which historical data were considered necessary, data for the entire period were obtained. Analytical Procedure No special or unique analytical techniques were used in this in­ vestigation. IBM sorting and tabulation was used to process much of 1 See note one, Appendix D. -25- the data. The results of various analyses within the study are pre­ sented in tabular, graphic or equation form, depending upon the nature of the particular analysis and its adaptability to expression in these forms. Statistical tests of various types were used where deemed desirable and necessary. Specific computational procedures are dis­ cussed at the point of their use rather than in this introductory chapter. CHAPTER II STUDY SETTING In order to appraise properly the analysis which follows in later chapters, it is necessary that attention be given to the setting in which the base-surplus plan operates in the selected Virginia markets. This chapter deals with an effort to define the importance of dairying in the State, to briefly examine the over all regulatory framework and to examine in detail the principal component parts of the particular plan under analysis. Virginia Dairy Background The most recent figures available indicate that dairying is Vir­ ginia’s third largest source of agricultural income. It accounted for approximately 16 percent of cash farm receipts in 1956.’*' In that same year, Virginia ranked seventeenth among all states in total production of milk on farms, eighteenth in number of cows on farms and thirty-first in production per cow. o According to the 1954 Census of Agriculture, 3 there were 17,821 farms in the State selling milk. The most reliable estimates available indicate that this total figure was composed of Dairy Situation. Agricultural Marketing Service, U. S. Depart­ ment of Agriculture, August, 1957, p. 18. 2 Ibid., p. 18. 3 1954 Census of Agriculture. U. S. Department of Commerce, Bureau of the Census, Vol. 1, part 15, 1956, p. 110. -2 6 - -27- approximately 3,800 Grade A producers with the remaining farms pro­ ducing milk for cream or manufacture.^ Table 2 presents, in summary form, the changes which have occurred in a few of the measurable characteristics of Virginians dairy industry* This tabulation indi­ cates that over the State as a whole milk production has increased 35 percent in the past 16 years; that the number of cows has first increased and then gradually declined; and that production per cow has steadily increased* It also shows that Grade A milk deliveries have doubled during the past 16 years* These data indicate that Virginia's dairy industry has undergone considerable change during the time the base-surplus plan has been in use* More specific information on the markets selected for detailed study is shown in Table 3 and Figure 1. Table 3 is largely self- explanatory, but at least two accompanying considerations must be mentioned* These are cooperative functioning and pooling plans, respectively. Each of these markets has at least one producers' co­ operative supplying it* In the case of Newport News, producers from three different cooperatives serve the market. The cooperatives ser­ ving these markets are relatively small and their ability to perform services for their members is severely limited by their lack of volume and in some instances by the lack of a felt need for more constructive action. In all three markets individual handler pools are used in which producers share only in the fluid sales of the distributor to whom their base is assigned. There is no repooling of net proceeds by the cooperatives serving these markets. 1 Estimate made by M. W. Jefferson, Virginia Department of Agri­ culture, Richmond, Virginia, January, 1955. prices for Virginia, 1940-56 -28- "*c: m H TJ O 4) *H «H »rt 0s*0 £ 3 P JO O P (0 O P cMcoco^j-'sr'a-^io NO m m m NO NO in m• in• •h o as a; 0) 73 M (fl4 H o s at plants and •ht-v • as J 3 s rH •X C H O •H *rt E JO (0 JO E P .2 as ' o -p o o P h 'O O O' I H• O (O CM H CO O' O i 0' M, M D o i n o o i O \ o v O i n H \ o I OhO'HvOOO'COhMOOCOhO' sr^rco'a-^riniovof^f^ooaoo'o' •H (0 o numbers, 3 JO •H OS P • •H P as •> E •H •H C M O C M v O C M O i O l O ' O ’O v O P ' O O ' C M O v O HO'CMCMf'CMCOOONM'f'HO'HOO'CO if) if) O VO vO N t ^ > 0 0 O'O'O'CO O O O ' © H rH i—4 H H H H H «—I H «H H rH (N CM r—I CM E a c • o c < P o »P O m as us • as 3 73 5 S I P O O o • P O O Q •H a p as a OS 0 as P as > < p a) ■I (0 H 3» rH O r—N • a) .o •h •— <• o • (0 ja P* (0 (I) 3 • as O a: p JO • E p Q •* hp»- h - r ~ t ^ - c ^ t ^ r - t ^ r - i > o o o o o o o o o o o o o ^— < O ■—rHr C H o o r- o no rr oCOo c o c o c o c o ' t ^ ^ ^ ' t ^ f ’Tt'a-'d-^-inin p~ CO o in rp- ON CM CM NO M- CO NO CO o Nf• • • • • • • • • • • • • • • • • sr CO ■sf •Sf P~ CO O' n ur> in NO O' o o rH in • CM CM CM CM CM CM CM CO CO CO '0- •sp in in as (0 P O P • r l as E a o as c Q o o as • us x p .£ us as (TS C P »H p p 3 P as rH rH p 3 *H as (_> p >•H P c p os o o < (0 c us p p p O P o pas pc aas •H as as p J3 E P rH P (TS Os (TS P C a c •H as as -a Q a£s H3 O w a X o a as •rH 3 p (0 p • •H (TS jC as P p CO o .C P OS •H (0 c «H CO P a NO 3 CO in 73 •H ON US c •H 3 o o p as o p p 3 o I p p p «s as p c X) M E 73 3 0) O CD to <0 P o OS > CD C P o p«o < (0 3 O .C p rH «H CO NO Q o o co nO CO O P- O nO 00 00 o cm o rH CM CO CO CM CM CM CO ^P CM CM CM rH ON ON ■sp •Sp nO-■M" •o- ^P CO CO "O’ no^ 'O’ •rH £ OhhC E O 3 5 C as os (0 p as > < 2. Cow p (0 p p as p p > c P Table I >• o a. (0 •H c rH p (TS as >• o CMC0^!'if)vOt''-CQO'OiHCMC0,tfin\0 O' O' O' O' O' O' O' O' O' O' O' O' O' O' O' O' O' ■4 H H rH H H rH as u p 3 O CO (TS P o p 73 as p as 3 ■(-> TJ (0 C o c *> p o p 3 -Q •H P P as •h 73 >. hQ 73 •H (TJ a. p £ (0 rH a • XI • o • p as os •H P a 73 £ as rH •Q rH as § £ as • as as e 0> 3 (TJ "H P E as as > p so a as p rH as Q.JC E P •H O CO p x o p us as p • £ as £ •H E •rH H as p Q. O -29- 0 73 •H 0 3 rH 0 H 0 73 P 0 C 3 rH X4 O 0 rH a P •H O a H oo t-in 0 P 0 (X) 00 m 00 00 C M c 0 3 I P 0» H 0 O P P 3 -P O TJ 0 -P O .H 3 P 73 XJ a m in O' >. s 0 iO lO O' 0 I 0 N 3X J 'H J5 C H -o <0 73 0) p 00 M 0 «H 3 0 P O 3 e 0 0 0 +> a c o >0 C T)p 0 -H• 0 P O O P < O P r00 so 0 73 C 3 O a Ws P O P c S P 0 •H P 0) -p o C M CO c rH 3 e X 0 73 0 p o e s— 0 P o •H CL P 73 P *rt If) lO 00 a O O CM 0 I XJ p p O 0 a o P o 3 Z p 0 •X P 0 p 0 x: o s 73 0) o 0 rt 0 1 0 c 3 O CL*rl O P CL 0 i— 1 00 t'1—1 CM o o o*v o O CM O' Tf i—J CM CM rH o o oA in o~ rH p C T > p 00 0 1-1 xj 0 H p 0 s P 3 C O 0 •H P P 0 XJ 0 -X c 0 o c 0 o OS •X X 0 £ 0 Z P P o Q £ 0 z 1 x: 0 o p ■§ c p 0 o o p p 0 0 P 0 0 C 0 •H P O 0 0 0 0 0 P 0 c 0 P •rl rH o a o p p 0 2 0 0 >> -p • rH 0 0 a >N P 0 3 C 0 •3 XJ p 0 p 0 i-l w o p 0 P 0 C O 0 X 0 0 •rl I XJ 73 0 O 0 0 0 p 1 0 CO C/J 0 P 0 O P 2 0 O O 0 0 00 P »H 0 0 P P XJ P P O e o 0 p 3 -H 3 Z TJ XJ p p 0 00 «v O 0 •H 0 a c fH 0 •s O O •H 0 0 P X4 0 0 P 0 73 1 w a O' p 3 0 9s 0 > 0 o (0 03 •rH 0 iD r— I 0 0 XS o * ■sr o P 0 p 0 0 0 P O P ® XJ 6 3 Z x: 73 CO 00 P 73 •rl P 3 c 0 P 0 x: p a> c •rl P 3 73 P 0 -V P 0 a • 73 0 C *H 0 p -C XJ o o 0 0 0 p C 0 •H £ 0 0 p 0 0 O 73 3 73 0 O 0 P rH CL 0 0 XJ 73 p rH • 0 P P 0 O J* P P 0 73 a C 0 0 X 0 p N •H 0 •H c P O P 3 X) •H p p 0 •H 73 0 P O P 3 X •rl P P 0 •H 73 0 O' O 0 £ P P 0 > Sk < rH C O o •rH 0 3 rH P 0 £ p Figure 1« Geographical location of markets and milk production selected Virginia milk markets, 1955 areas Y-i:^ Ext. Form 16 -31- Milk-Market Regulation in Virginia During the depression years dairy farmers, in company with many others, were faced with extreme economic pressures. The price of milk tumbled to a very low level and marketing conditions in general in the dairy industry were disorderly and often termed chaotic. In this setting the Milk and Cream Act of 1934 was passed in the Virginia General Assembly on March 20. It created the Virginia Milk Commission and gave it broad regulatory powers over the Virginia dairy industry. The avowed purpose of this regulation was to correct the disorderly conditions which then prevailed; to protect the well-being of the people of Virginia; and to promote the public welfare, public health and public peace. The regulatory body authorized by the above legislation is com­ posed of three members: one producer representative, one distributor and one consumer representative who must have no financial connection with either segment of the industry. Each commissioner is appointed by the Governor and serves at his pleasure. The chairmanship of the Commission is rotated among the members annually. Present compen­ sation for service on the Commission is at the rate of ten dollars per day of actual conduct of Commission business plus necessary expenses incurred in performance of official duties. To assist the commissioners there was at the time of this study a fully paid staff of twelve people, all headquartered at the Commission's offices in Richmond. This staff was composed of five field auditors, two inspectors, three secretaries, one head auditor and assistant commission secretary and the Commission Secretary. -32- In addition to creating the Virginia Milk Commission) the Milk and Cream Act also provided for the establishment of local milk boards in each market area* These local boards serve as the Commissions rep­ resentative in the local market and exercise only such powers as the Commission has seen fit to delegate to them. All rulings of these local boards may be appealed to the Commission. are composed of five members: These local boards two producers, two distributors and one consumer representative who is automatically designated as chairman of the local board. The Milk and Cream Act provides for the financing of the Commis­ sion and local milk boards operations by assessments on both producers and distributors. The local boards are permitted to assess producers up to two cents per hundredweight on all milk delivered and to assess distributors also up to two cents per hundredweight on all milk handled* The Commission is empowered to collect from the local boards that por­ tion of the resulting funds necessary for its own operation. Regu­ lations promulgated by the Commission have set the local board's maxi­ mum usage at two cents of the four cents per hundredweight maximum assessment. The scope of the Commission's regulatory power is best expressed by the opening paragraph of the preamble to the Milk and Cream Act. It reads as follows: "An Act to provide for the supervision, regulation and control of ihfi. production, processing. .S.tQJr aae. distribution, and sale af milk JLDSi £I£§m; to create a Milk Commission and local milk boards and to define and pro­ vide for the functions, duties and powers thereof; to provide for the appointment, suspension, removal, compensation, -3 3 - costs, and expenses of such commission and boards and the members, officers, agents and employees thereof; to pro­ vide for licensing processors, bottlers, wholesalers, distributors and retailers of milk and cream, or either; to provide for the raising of funds for the administration of this act and to provide for the disposition of revenue collected hereunder and to impose penalties for violations of the provisions of this act."l The Commission has interpreted the powers so enacted to include the authority to fix prices at both the producer and resale level as well as the regulation of trade practices. The latter includes such diverse items as certain forms of advertising and merchandising and other related marketing functions. The Commission has been in the courts a number of times since its creation. The constitutionality of the Act has never been successfully challenged, but on several occasions the Commission has been directed to amend or change some of its own regulations and orders. In summary, the regulatory powers of the Commission are rather broad and inclusive. These powers enable the Commission generally to determine who may engage in either the production or marketing of milk for fluid consumption as well as the prices of milk at various stages of the marketing process. About the only limitation to its authority is that imposed by judicial interpretation requiring that orders adopted by the Commission must be relevant to the accomplishment of the purposes of the Milk and Cream Act. While some seventeen states regulate the marketing of milk, only one state— North Carolina— out of six states bordering Virginia has state milk control regulation. 1 Virginia Milk Commission Law, published by Virginia Milk Com­ mission, Richmond, Virginia, November, 1956, p. 3. Underscoring by the author. -3 4 - In addition to the state regulation discussed above, two Federal Milk Marketing Orders covering the Bristol and Bluefield markets, re­ spectively, were operating in Virginia in 1956. With the Washington, D. C. metropolitan area in the process of developing an order, it seems likely that a third area in the State will be under federal regu­ lation soon. Xhe Virginia Base-Surplus Plan The base-surplus plan has been subject to many adaptations to local conditions in its employment across the country. For this reason, it seems desirable that the essential features of the base-surplus plan as used by the regulatory agency in Virginia be briefly summarized. Since there is some variation within the markets selected for study, the main characteristics are grouped according to whether they are simi­ lar or dissimilar for the markets under study.'*' These divisions will hold generally for other regulated markets in the State. Similarities Between Markets Those features of the base-surplus plan which are similar for the three markets include the following: (l) The Commission and local milk boards exercise the author­ ity to assign individual producers and their accompanying base allot­ ments to specific distributors. Once assigned, producers cannot change distributors without the prior consent of the regulatory body. 1 The main elements of the plan as presented were condensed from numerous orders and regulations issued by the Virginia Milk Commission. See Appendix B for the base regulation in Roanoke in its entirety. -35- (2) No producer can have more than one base allotment for a given production unit* An individuals base cannot be split between distributors. (3) Milk cannot be purchased and delivered for the purpose of increasing the bases of individuals and/or groups. (4) Provisions are made for base adjustments by the regula­ tory body in hardship cases. (5) Bases are not transferrable between markets. (6) New producers desiring to enter the market byearning a base allotment must demonstrate first the need for additionalmilk in the particular market they wish to enter. (7) Distributors must accept all milk delivered to them by their assigned base-holding producers so long as it is of marketable quality. Differences Between Markets The base-surplus plan as used in the three markets studied varies slightly with regard to three essential parts: (l) base transfer con­ ditions, (2) base-making period requirements and (3) the regulation of producers* deliveries to plants. Each of these is presented market by market to illustrate the differences. Base transfers Roanoke - A renter or tenant may retain his base or any percentage of a base which he may have in the event he moves from one farm to an­ other within ih£ market*s production £££&. The owner of a base and herd may sell or transfer subject to the approval of the Commission -36- any part or all of his herd and base* All such transfers must be accompanied by a bona fide bill of sale and the sale of base must be accompanied by the purchase of the cows responsible for the production represented by the amount of base transferred* For transfer purposes the base is considered to go with the herd rather than the farm* The Roanoke regulation further specifies that if a producer, who failed by a certain amount to maintain his base at a previous base-making period, should sell his entire base, or a part of his base; he may sell and transfer only his current base and may not transfer to the buyer any of his privilege of regaining base lost at the previous base-making period* Harrisonburg - In this market no ruling is provided with regard to transferring the privilege of regaining lost base. In all other respects the base transfer provision in the Harrisonburg regulation is identical to Roanoke* Newport News - Identical to Harrisonburg. Base-makina period requirements. Roanoke - The base is in effect on a calendar year basis and is determined with reference to average monthly deliveries during the months of September, October and November of the preceding calendar year* Adjustments to be made in the existing base each year thereafter are as follows: (l) If the average monthly delivery of milk during any base- making period is less than the base then in effect, then the producer shall be given a temporary base equal to his average monthly deliveries -37- of milk for the last base-making period, but he shall be allowed to recover his former base if his average monthly deliveries of milk for either of the next two regular base-making periods are sufficient to cover the original base. If, however, he shall fail three successive attempts to maintain his former base, he shall be assigned a new base equal to his average monthly deliveries of milk for the last regular base-making period without any recourse. (2) If the average monthly delivery of milk by a producer is in excess of 110 percent of his base, that part in excess of 110 per­ cent shall be eligible for additional base if any is to be allotted. However, if he shall sell a part of his base, then he shall not be eligible for any increase in base under the 110 percent rule until he has purchased as much as he sold. (3) The aggregate bases of all producers shall not exceed the average monthly sales of fluid milk and cream by distributors for the previous twelve months by more than 5 percent. Harrisonburg - The 110 percent and 5 percent provisions described above also apply to the Harrisonburg market. However, no provision is made for regaining lost base nor is there any requirement on repur­ chasing base previously sold to qualify. Newport News - This market's provisions are the same as those for Harrisonburg with regard to base-making period requirements. Producers' deliveries to plants Roanoke - Producers are required to deliver to their assigned dis­ tributors all milk they produce up to but not over 110 percent of their -38- assigned base. They are allowed to subtract out milk used for home consumption. HflXr1S. Qflbnr.Q. — Producers are required to deliver all the milk they produce except that used for home consumption. ftteWPPXt,Ngw.S - Producers are required to deliver all the milk they produce except that used for home consumption. If, however, it is mutually agreeable to all parties concerned, producers are not required to deliver regularly to their distributors milk produced by them in ex­ cess of their established allotments. The 110 Percent Rule Illustrated The following example serves to illustrate the 110 percent and 5 percent rules which coupled with restriction of entry form the central core of the production control feature of the plan. Assume there are four producers, A, B, C and D, shipping to a given market. The follow­ ing tabulation might represent the results of a set of base calculations: Current base Average deliveries Amount deliver­ ies are in excess of 110 percent of current base Base loss Additional base allotted New base (pounds) A 10,000 12,000 1,000 0 930 10,930 B 15,000 15,000 0 0 0 15,000 C 20,000 19,000 0 0 19,000 D 5,000 6,000 500 465 5,465 1,000 0 It is assumed that the previous twelve months market sales averaged 48,000 pounds per month. One hundred five percent of this figure equals -39- 50.400 pounds. Current base adjusted for base loss equals 49,000 pounds (50,000 pounds minus 1,000 pounds). Therefore, total addi­ tional base available to be allotted equals 1,400 pounds (50,400 pounds minus 49,000 p o u n d s ) T h e total amount of milk delivered in excess of 110 percent of current base is 1,500 pounds. Dividing 1.400 pounds by 1,500 pounds gives a percentage of 93. Applying this percentage to the 1,000 pounds delivered in excess of 110 percent of his current base by A and to the 500 pounds delivered in excess of 110 percent of his current base by D, it is found that A and D would receive 930 pounds and 465 pounds of additional base, respectively. This example illustrates two other important aspects of the basesurplus plan used in these markets. First, producer B's base remains the same since his average deliveries are exactly the same as his cur­ rent base. So long as a producer at least delivers his current base during any base-making period no other producers can take any of his share of the fluid sales from him through increased production. By contrast, under an open base system such a producer may lose some por­ tion of his previous share of the market's fluid milk sales. Secondly, note that producer C*s new base is his average delivery since he failed to deliver at least his current base. In computing additional base to be allotted his failure to deliver his current base is taken into ac­ count and the amount of his loss is made available to other producers in the market. If he had been a Roanoke producer, he would have been given an opportunity to regain the loss which he incurred during the 1 The tabulated total is 1,395 pounds due to rounding. -40- succeeding base-making periods. In the Harrisonburg and Newport News markets this would not have been true. Major Changes Since Adoption of Plan Preceding paragraphs have discussed the more important mechanical features of the base-surplus plan as currently used in the markets selected for detailed study. It also seems desirable to review briefly some of the major changes which have occurred since the adoption of the plan in each of the markets. Such a review indicates the nature of the changes deemed necessary in forging the plan into its present form. The base plan was used first in the Roanoke market in June, 1934. A number of important changes have occurred since that time. Prior to 1938 producers were allowed to have split bases, that is, a portion of their base with one distributor and the rest with another distributor. They also were allowed to shift from distributor to distributor without first getting the approval of the local milk board and the Commission. It was found that such movements made it difficult for the Commission to use the base as a means of market equalization and such privileges were discontinued. In the early years of the Roanoke market penalties were provided for underdelivery of a certain percentage of base for three consecutive months during any part of the year. Apparently the local board was em­ powered with the authority to determine what readjustments were to be made in such cases. The local milk board also was empowered at one time with the authority to determine the manner in which bases were to be prorated among producers and was given discretionary authority as to -41- the entry of new producers* The Commission found that such an exten­ sion of its own authority was not in the best interests of all con­ cerned and it soon set up definite procedures for computing bases and undertook to review all applications for entry on the market* It has continued this practice until the present time* Several other changes are worthy of mention* Prior to 1938, no concrete evidence was required as proof of sale in cases involving base transfers* Since that time a bona fide bill of sale has been required as evidence of sale. In earlier years producer-distributors were allow­ ed to hold bases with other distributors. 1941. This was discontinued in Finally, the special provisions dealing with base-making period requirements as discussed on page 36 were put into the regulation since 1950. These dealt with the failure to maintain current base and the denial of the right to sell to a purchaser the privilege to make any base lost before the transfer transaction. The base-surplus plan was begun in the Harrisonburg market in 1934. The changes in the base plan in this market closely parallel those discussed for Roanoke with the exception that no changes have been made recently with regard to the base-making period requirements as mentioned above. The Newport News market also began its base plan in 1934. Changes since that time closely parallel those described for Roanoke with three major exceptions. First, the Newport News market, like Harrisonburg, has had no recent changes with regard to base-making period require­ ments. Secondly, producers at one time were allowed to sell milk to other distributors after having first delivered their base allotment -42- to their assigned distributor. to have this privilege restored. Some producers serving the area desire Thirdly, distributors at one time were permitted to reject all milk delivered over and above assigned base allotments. CHAPTER III SOME THEORETICAL CONSIDERATIONS In Chapter II, the nature of the regulatory framework within which the base-surplus plan operates in selected Virginia markets was indi­ cated and the principal features of the plan described in some detail. The purpose of the current chapter is to consider the objectives of the base-surplus plan as used in Virginia and to discuss the implications of its production control features, B9.se. PMegfrj.YS? Bases or quotas in fluid milk marketing may be employed in any one or all of three distinct capacities: (l) to adjust seasonal vari­ ations in milk deliveries; (2) to equalize market utilization so that all distributors have enough milk to meet their needs, while at the same time, milk supplies are directed to the highest value outlets; and (3) to control total annual production coming to market. In the Vir­ ginia markets selected for study, the base-surplus plan attempts to perform all three functions with the latter two functions receiving the greatest emphasis. a spmi —closed base plan. As such, the Virginia plan may be described as The functioning of the base-surplus plan in the manner described might be expected to facilitate the attainment of certain predetermined objectives. One also might expect to find some disadvantages to the operation of a plan with a threefold function -43- -44- inasmuch as designing it to accomplish one goal may restrict its effectiveness for other purposes* The Virginia base-surplus plan attempts to accomplish the fol­ lowing objectives: (l) to return high average prices to those pro­ ducers holding bases: (2) to assure distributors of adequate supplies of milk by assigning definite production potential to each; (3) to prevent the market from becoming unduly overbalanced on supply relative to the demand for fluid milk; and (4) to afford "old11 producers some means of insulation against the competitive inroads of individuals not presently in the market as well as against those presently in the market who may be in a position to take competitive advantage of other "old" producers. The objectives enumerated above would be considered advantageous from the viewpoint of those producers and distributors presently in the various markets. If one were "on the outside looking in," he might view the situation somewhat differently. Sharing of Surplus The underlying principle of a base or quota plan for milk is that each producer should be made to bear the full consequences of his own surplus production; that is, he should have to accept the surplus price for all the milk he produces, over his "recognized share" of the mar­ ket's fluid milk sales.1 A rigidly enforced base plan would be expected 1 Open base plans such as the type used in most Federal Order markets are concerned primarily with seasonal surplus response, while semi-closed base plans such as the type used in the selected Virginia markets attempt to influence both seasonal and annual production with primary emphasis being given to the annual aspect. -45- to pay individual producers only the manufacturing or surplus price for milk in excess of their individual bases rather than a straight blend price on all milk they deliver* Where the straight blend price is paid, an individual producer, under atomistic supply conditions, is paid more than the manufacturing price for that portion of his milk going into surplus uses.^ It therefore may be argued that there is no inducement for an individual to restrict total production, but instead there is an inducement to expand production.3 Such a condition may also offer inducements for new producers to enter the market, particu­ larly manufacturing milk producers* Under the straight blend price system of payment the price received by an individual producer is a function of the total market surplus in a market pool or the total distributor^ surplus on an individual dealer pool rather than a func­ tion of his own contribution to that surplus* Cooperative leaders and others in a number of the "surplus" eastern and midwestern markets feel that this problem presents an important threat to market development and stability.3 The diagram presented in Figure 2 may be used to * Assume the following market situation: Class I price is $6*00/ cwt*, Class II price is $3*00/cwt*, market blend price is $5*50/cwt* A given producer ships 10,000 pounds of milk, 8,000 pounds of which are used in fluid uses and 2,000 pounds in surplus uses. If he were paid the straight market blend price, he would receive $550 ($5.50 x 100 cwt.) for his milk. He would receive $5.50/cwt. for the 2,000 pounds of sur­ plus milk. This milk was worth only $3.00/cwt. See note two, Appendix D. ^ This, of course, has its limiting factor in that continued in­ crements of surplus gradually lower the blend price and some producers will find continued expansion unprofitable. 3 A. L. McWilliams, Manager of the Pure Milk Producers Association, serving the Chicago market, addressed himself to this point in a quote taken from Pure Milk News by Dairy Record, Vol. LVIII, No. 15, September 18, 1957, p. 5. -46- illustrate the nature of price discrimination in pricing milk and dairy products and the expected producer supply response when a straight blend price is used as the method of payment under the price discrimi­ nation scheme.* v Price Discrimination \ Classified pricing or pricing according to use simply means that higher prices are paid for milk going into fluid use than for milk used in surplus outlets. The relative inelasticity of demand for fluid milk at the consumer level and the market for relative elasticity of demand for a local manufactured dairy products provides anexcellent opportunity for price discrimination. The classified price plan is designed to take advantage of this opportunity.2 In Figure 2, OY is the price axis and OX the quantity axis. Qjrve DD represents the net demand at the farm level for milk for fluid con­ sumption in relation to the OY and OX axes. The line dd represents the demand for manufactured dairy products axes. dashed line dd* is the marginal revenue curve derived from dd. The and relatesto the AY* and AX Assume the total quantity of milk in the market is fixed at OB. The equilibrium price in the absence of price discrimination will be BPq. Now assume the introduction of a price discrimination scheme * A similar form of diagramatic analysis was first made by Cassels. The present discussion attempts to extend Cassels* analogy somewhat further, particularly with respect to producer response under the blend price and base systems of payment. See John M. Cassels, A Study of Fluid Milk Prices. Harvard University Press, 1937, pp. 51-55. 2 As in any price discrimination scheme, increased returns are achieved by charging the higher price in the inelastic portion of the market and the lower price in the elastic segment of the market. -47- O •P c 0) s ■>. <0 a a> o •H M a c 0 3 a T3 c a> i—l o +> a> (0 c o a 0> fH >r—4 (X a 3 (0 a> o 3 •a o c o a •rH 4-> ■a (0 fO •H c •o •rl s •H fH c 0 3 o 6 o S-t o m (0 •H (0 -o 'D 0> a> a> o o •H o M a. a • CM a) H 3 CD •H PL, * 3JJd -48- (classified pricing). to APj.* The price of milk for fluid use is raised The quantity which can be sold at this price will be OA. The remainder of the original fixed supply, the quantity AB, will be sold at the manufacturing price BP2» Since the area under rec­ tangle H is greater than the area under rectangle J, such a move will result in greater returns than can be obtained without classification at the original price BP0. Payment on the Blend Price System The use of the price discrimination scheme raises the question as to how producers should be paid for their milk in light of their contribution to the quantities which can be sold in each class.2 One approach to the problem is to pay all producers a blend price derived from the average value of all milk in the market. In Figure 2 the curve SS represents the aggregate supply curve of all producers in the market.^ The dashed curve PjG represents the market blend prices which can be obtained from the sale of various amounts of milk with OA quantity This price is not set at a level which will equate the marginal revenues in both markets. It is set at a level which will bring greater returns (but not maximum returns) than could be realized in the absence of discrimination. 2 The assumption of fixed supply, OB, is relaxed at this point. ^ The lateral summation of their marginal cost curves above average variable cost. -49- being sold as fluid rnilk.^" In this situation, it is clear that the blend price received when the quantity OB is marketed is more than sufficient to call forth this supply. In fact, the supply will have to be increased to OC before an equilibrium point is attained at price 06. Remembering that only OA is sold in fluid form and that the re­ maining quantity AC is sold in surplus outlets, it is evident that the price paid for AC is substantially above the value of such milk as expressed by the marginal revenue curve dd*. The explanation for an increase in production (all of which will go into surplus usage) rather than a contraction, which would have actually been necessary for maximum discriminatory gains, may be found by considering individual producer responses. The line P^G is the average revenue curve for the market under the blend price payment system. However, at any given quantity of production, a horizontal line drawn through the corresponding point on PjG is the marginal reve­ nue curve for each individual producer. Under atomistic supply con­ ditions and blend price payment, the production of an individual pro­ ducer does not affect his price; consequently, his own marginal revenue curve is horizontal. He will receive the same price for all the milk The derivation of this curve is illustrated below. Assume OA a* 1000 cwt., Class I price * $6/cwt., Class II price = $3/cwt. When the following quantities are delivered these prices will be obtained: Deliveries (cwt.) Computation__ PriceAwt. (AR) 1000 1000x6/1000 $6.00 1100 1000x6+100x3/1100 5.73 1200 1000x6+200x3/1200 5.50 1300 1000x6+300x3/1300 5.31 1400 1000x6+400x3/1400 5.14 1500 1000x6+500x3/1500 5.00 p G would level off just above the manufacturing price (curve dd) at in­ finity and would approach the Y axis as quantity approached zero. -50- he contributes to the market's total quantity at any given time. Furthermore, the marginal revenue curve of each producer will be hori­ zontal since each receives the same price at any given time. The mar­ ginal cost curves of individual producers will differ according to their own particular cost structure. An example of an individual pro­ ducer's reaction may be seen by drawing horizontal lines through the points £, F and G on PjG and extending these lines (marginal revenue curves facing each producer for varying amounts of total market pro­ duction) to the right hand side of Figure 2 where the average and marginal cost curves of two producers are shown. The cost curves of the two producers relate to the LM and MN axes, respectively. Producer one, for example, will produce the quantities MT, MV and MW at points G, F and E, respectively. The supply curve SS represents the aggregate response of the above individual producers and all other producers in the market. Since the marginal revenue curves passing through points E, F and G are the same for all producers, total production will ultimately settle at OC where a horizontal line passing through point G will intersect the SS curve.* Before this equilibrium is reached, the total supply probably will have been even larger than OC since at points E, F and all other points be­ tween Pi and G the marginal revenue curves of all producers will have been above the SS curve. The combined increases of all producers (but 1 The wider the differential between the Class I and Class II prices the farther production would have to increase before an equilib­ rium point is reached. -51- not the increase of any one individual) will eventually reduce the price to point G and an equilibrium will be reached.^The crucial point in the overproduction analogy under the blend price payment system is the fact that an individual producer cannot effect the price he receives at any given time by the amount of milk he produces (or adds to the surplus in the market)• Acting rationally, each individual will adjust his production to the point where his mar­ ginal revenue and marginal cost curves intersect. The collective actions of each producer result in a similar adjustment for the market. To counteract this adjustment some way must be found to make each pro­ ducers price dependent upon his own production response and, conse­ quently, to make his marginal revenue curve change its shape when he makes significant increases in production. The use of a base plan offers a means of doing this. Possibilities Offered by a Base Plan Under a base plan an individual producer's price received is af­ fected only by his own production response. continuous marginal revenue curve. He is faced with a dis­ If he restricts his production to his assigned base, he will receive the same price (Class I) for each hundredweight delivered up to the total amount of his base. If he delivers any quantity in excess of his base, his marginal revenue curve will drop perpendicularly to the surplus price point and become horizontal again at that point. He will receive the same surplus price 1 This situation would be similar to that illustrated by the con­ verging phase of the cobweb theorem. -52- regardless of the amount of excess quantity he delivers. Under a blend price payment system as discussed in the preceding illustration, his marginal revenue curve will be a horizontal line located at some point between the Class I and surplus price. The difference between the marginal revenue situations facing him under the base payment plan and the blend price payment plan and his probable production response to each situation is illustrated in Figure 3. situation under a base plan. Section A shows the The quantity OQ represents his assigned base. The line AB is his marginal revenue curve for OQ quantity of milk. The line CD is his marginal revenue curve for any quantity he delivers over his base. CD is horizontal at the surplus price. Thus, his complete marginal revenue curve ABCD is a discontinuous curve. With the given marginal cost curve shown in section A, he will produce only the quantity OQ (his assigned base) since his marginal cost curve intersects the marginal revenue curve ABCD at point E. Any additional production beyond this point is valued at less than its cost. In section B of Figure 3 the same producer's response is shown under a blend price plan. His marginal revenue curve will be a hori­ zontal line (for reasons given in the prior blend price discussion) at some price higher than the surplus price but lower than the Class I price. The price chosen for illustrative purposes is $5.00 per hundred­ weight and the appropriate marginal revenue curve is MN. The same mar­ ginal cost curve as before is assumed to show his cost structure. He will produce the quantity 0*Q', for at this level he will equate mar­ ginal revenue and marginal cost* When the quantity OQ in section A is compared to O'Q* in section B, the latter is clearly the larger quantity. -53- (D c! <0 C w CD .? o 6> '~ 2 c/> 75 c 3 I (0 rH a +> c 0) £ (0 a a> u> a> XI u a a 3 fH 3 05 •H Uh tft m6i3Mpajpun[_| j e j a o u j blend price payment plan c 3 a> u> c o a u> Q) -54- He will produce less under the base system than under the blend price system** The reactions of other producers in the market will take a similar form with the actual amount of production difference between the two systems of payment being determined by the marginal cost structures of the individual producers*2 Payment on a base system rather than a blend price system makes each individual producer "responsible" for his own production actions. In Figure 3 a specified cost structure is assumed* His production re­ sponse under a base payment system depends upon the actual shape of his marginal cost curve* If the base assigned to him were of sufficient size to enable him to equate marginal cost and marginal revenue, he will deliver only the amount of his base* If, however, his allotted share of the market*s fluid sales is not of such magnitude, he may be expected to deliver some quantity in excess of his base. The producer in Figure 3, section A, will deliver only his assigned base. if his marginal cost curve had been lowerso that some However, portion of it cut the curve CD, he would have produced some quantity in excess of OQ, the exact amount being dependent upon the point of intersection* It is important to recognize that a base plan may be less than ^ See page 55 for certain qualifications of this statement with respect to time periods and type of base plan. 2 The marginal cost curve used in Figure 3 might have taken any number of other shapes. It might have been higher or lower, further to the right or left or flatter or steeper. The particular curve shown in Figure 3 indicates that no portion of the curve is below the surplus price. This situation is believed to be typical of the situ­ ation facing most Virginia producers. Regardless of the shape of the marginal cost curve the proportionate amount of milk produced under the base system would be less than that produced under the blend system if the cost curve is the same in both cases. -55- completely effective in controlling production when assigned bases are materially smaller than the most efficient operating levels of a large number of the producers concerned* However, a base plan will retard the excess of production over fluid needs to a greater degree than will a blend price payment plan when either is superimposed on the same production conditions. At this point, it is necessary to make a differentiation between open and closed base plans in terms of their expected adherence to the analysis shown in Figure 3. The time period to which the analysis in section A of Figure 3 is applicable will depend upon the type of base payment plan used.1 If a closed or semi-closed plan is used, section A is applicable to both short run and long run periods. Under an open base plan, however, the analysis of production response in section A will apply only to the short run (between successive basemaking periods). Under an open base plan, an individual producer will likely attempt to increase the size of his base by increasing production during the base-making period.2 The long run effect of an open base plan (where base is established only in relation to deliveries during a specified period) may be to in­ crease the excess of milk over fluid needs in much the same manner as 1 The question of time period and type of base plan has been pur­ posely delayed until this point to avoid confusion in the major part of the discussion— that related to the difference in marginal revenue situations under the base and blend price plans. 2 He may do this even at the expense of disregarding the marginal cost-marginal revenue relationship during the base-making period. After his new base is established, the analysis of section A will be applicable until the beginning of the next base-making period. -56- that anticipated under a blend price plan. In such a situation, each individual acts as though his individual action toward increasing base will not be duplicated by all other producers in the market.* Unless all other producers do in fact duplicate his action, he will be able to increase his proportionate share of the market's fluid milk sales. If large numbers of producers take similar actions, the total supply of milk in the market will increase relative to the fluid milk needs of the market. Under a closed or semi-closed base plan, one producer cannot take fluid sales from another in the above described manner; consequently, the incentive to increase production is greatly modified. The preceding analysis has important implications for the design and administration of base plans. The degree of effectiveness in con­ trolling production (if this is a desired objective) may be determined by: (l) the setting of bases which accurately reflect market fluid milk sales (plus necessary operating reserves) and the periodic adjust­ ment of such bases as sales change up or down and (2) the establishment, as nearly as possible, of bases which permit efficient levels of pro­ duction by the producers concerned.2 These requirements are relative in nature and do not lend themselves to precise attainment. Neverthe­ less, the success of a base plan designed to control production will vary in direct proportion to the degree of attainment achieved. * This situation is analogous to an individual producer's estimate of the effect of his production on the price he will receive at any given time under a blend price plan. 2 This would rule out an open base plan as an effective means of controlling production. -57- £ome. Welfare Implications Unless one accepts the thesis that economics and economic analy­ sis should be devoid of welfare considerations, each program and/or policy should be appraised in terms of its probable impact on the welfare of those whom it affects* Thus, it seems both necessary and appropriate to give consideration to the welfare implications of the semi-closed base plan as it operates in Virginia milk markets. In the discussion which follows, no attempt is made to specify what the wel­ fare goal or goals of Virginia's economy should be. Only the probable effects of the semi-closed base plan on general welfare are considered. The ultimate decision on policies to be followed must be made through the democratic (legislative) process. The use of a semi-closed base plan has definite implications for: (l) the efficiency with which resources are used in the production of milk and other goods and services and (2) the redistribution of income between some milk producers and other segments of Virginia's economy. Allied to these two general areas of reference are considerations of uncertainty, technological advance and other related factors. Resource Use Efficiency With a given income distribution and a given set of resources to be allocated among competing uses, optimum allocation of these resources will be achieved when the marginal rate of substitution between factor and product, between factors and between products is the same for all firms, resource owners and consumers.* Such a condition is automatically * This implies the equating of the marginal physical productivities of factors to their price ratios and the marginal utilities of consumers to product price ratios. -58- encouraged by the price mechanism under perfect competition. However, the question of resource allocation must be viewed in terms of those conditions which actually exist— some form of imperfect competition. In appraising the possible effect of a semi-closed base plan on re­ source allocation or resource use efficiency, the relevant consideration is not a comparison between that which would be achieved under perfect competition as against that under a semi-closed base plan; but rather it should be a comparison between resource allocation under one form of imperfect competition (without such a production control plan) and another form of imperfect competition (that which includes a produc­ tion control plan)• There appear to be two primary ways in which a semi-closed base plan can affect the efficiency of resource use. In the first instance, there is the question of how the possible stability (price and income) to be offered by the plan will influence individual firms to increase the efficiency of their operations. Secondly, there is the consider­ ation of how the restrictions (allotments) placed on those best able and most willing to produce may effect productive efficiency. Consideration is given first to the effect of price and income stability. Uncertainty as to future returns is a prime cause of mis- allocation of resources. It may result in individual resources being used at less than their maximum marginal productivities, and/or cause too much or too little of some products to be produced. Operating under uncertainty, farmers are faced with both an internal and external capital rationing problem. This problem appears to be especially acute in the case of dairy farming, where size of investment is large and -59- where fixed costs are often a higher proportion of total costs than is true in the production of many other agricultural commodities* Any increase in the relative certainty of price and income derived from the use of a semi-closed base plan could be expected to mitigate the capital rationing problem facing some dairymen* On the other hand* a control program that is effective in providing stability by the use of production restrictions (base allotments) may tend to "freeze" the size of individual production units and thus limit the benefits to be obtained from the reduction in capital rationing.* The actual impact of the control effort may be such that only the larger firms receive the benefits of the reduction in capital rationing.2 Small firms still are likely to find themselves faced with a severe limitation on borrowable funds (at least for growth purposes)• To pursue the point further, there is no a priori basis for saying that all producers (even the larger ones) will necessarily take full advantage of the possible reduction in uncertainty*^ On the contrary, the reduction of uncertainty and subsequent insulation from competitive * A major administrative problem arises as the control agency at­ tempts to reduce uncertainty and at the same time permit resource ad­ justments* 2 Paradoxically, these firms may need additional allotments more than they need additional cash* 3 Considerable contact with producers in D.H.I.A., supposedly the "cream of the crop," indicates that even these producers fall short of utilizing currently known and proven practices. Research on some other controlled commodities has indicated a strong influence toward pro­ ductive efficiency exerted by reduction of uncertainty. Most of these commodities were controlled on an acreage allotment basis, providing a powerful incentive to grow as much product as possible from that acre­ age. If bases were allotted in terms of cows rather than pounds of milk, a similar stimulus might be present. -60- forces joaay, just as easily perpetuate inefficiency as eliminate it* The preceding comments are in no sense an indictment of the beneficial effects of reducing uncertainty* They do, however, raise a question as to whether or not the particular method discussed (the semi-closed base plan) is the best method available for securing productive ef­ ficiency* Consider now the effect on resource use emanating from the re­ strictions (allotments) placed on those best able and most willing to produce milk* The restriction of output requires the use of some yard­ stick (allotment) to limit the quantity which each producer is allowed to contribute to the total quantity of fluid milk to be marketed* Un­ less these allotments are apportioned among individual production units in accordance with the potential productivity of the resources control­ led by each unit, optimum resource allocation cannot occur. From a practical administrative standpoint, such an allocation of allotments seems unlikely. Consequently, a misallocation of resources will be the rule rather than the exception* This is not to say that misallo­ cation would not occur in the absence of output restrictions. It is to say that the use of fixed allotments tends to preclude adjustments that will likely take place in the absence of output restrictions. When a misallocation of resources is present, a reorganization can be affected either to produce more milk from the same amount of labor and capital or the same amount of milk from fewer units of those re­ sources. Such a reorganization will change the output of some firms. With the use of a semi-closed base plan, however, output is apportioned rather arbitrarily among individual production units and is relatively -61- fixed. Figure 4 illustrates the problem involved. OD and 0*C are production functions for firms A and B, respectively. The total out­ put obtainable from the resources controlled by these two firms will not be at a maximum until the marginal rate of transformation of input into product is the same for both firms. Assume these two firms con­ trol enough resources to permit attainment of point H (where the mar­ ginal rate of transformation of input into product is the same for both firms)• At point K (the point defining current output for both firms), the marginal productivity of capital and labor is much greater for firm A than for firm B. Additional milk can be obtained from the given set of resources available to the two firms by transferring some inputs (equal to the quantity S*R*) from firm B to firm A. If an allotment plan is operating so that OT and 0*T* are the allotments (outputs) assigned to A and B, respectively, the transfer of inputs necessary to attain point H likely will not materialize since the output which each firm can sell at the fluid price is fixed (OT for A and 0*T* for B).1 On balance, the effect of a semi-closed base plan on resource use efficiency and hence on maximum welfare appears to be as follows: the reduction in uncertainty which may be offered by such a plan will stimulate some productive efficiencies that would probably not be otherwise obtained (especially in the short run). However, the use of output restrictions to provide that stability will make it difficult * The point H can be reached if firm B sells the L*T* portion of its allotment to firm A. The likelihood of such a transfer of allotment being made between these two firms, and between all other firms in the market encountering similar problems, is not very great. -62- Firm B Input (C a p ito l a n d L a b o r) Firm A Firm B ' Ou t p u t Output (Milk) (Milk) T Firm A Input (C a p ita l a n d L a b o r) Figure 4. Allocation of resources under output restrictions' -63- to attain optimum resource allocation regardless of the possible in­ centives provided by the reduction in uncertainty. Income Redistribution In view of the relatively inelastic demand for fluid milk, the use of discriminatory pricing implemented by restriction of output results in a redistribution of income from other segments of the econ­ omy to those milk producers who hold base allotments.^ The distri­ bution of the income so transferred is not equal among all milk pro­ ducers but instead is prorated among them in accordance with the allot­ ments which they hold. Since welfare economics does not permit inter­ personal comparisons of utility, it is not possible to say whether the increase in welfare of producers is enough to more than offset the loss O in welfare of consumers. In either event, the use of the above method to redistribute income has the undesirable effect on the efficiency of resource use previously discussed. If the value system of society in­ dicates that the income of milk producers should be increased relative to other segments of the economy (the continued existence of the milk control program would seem to indicate this is so), there are other means of accomplishing such an objective without interfering with re­ source use. Direct taxation of non-milk producers and subsequent 1 Discriminatory pricing results in the initial transfer of in­ come from consumers; restriction of output provides the means for pass­ ing it on to producers. There is also a redistribution of income be­ tween those producers who hold allotments and those producers who are completely excluded from the market. 2 If such utility comparisons could be made and it were found that the increase in welfare of producers was large enough to compensate consumers for their loss and still leave something additional for pro­ ducers, total welfare would be increased. -64- subsidization of milk producers through direct payments is an example of a possible alternative.* An important aspect of the income transfer question is the dis­ tribution of benefits derived from technological innovations. To the extent that such innovations are output-increasing (rather than costdecreasing) in the face of an inelastic demand, benefits normally will be passed on to consumers and/or middlemen.^ Restriction of output, however, permits producers of the raw product to retain the bulk of such benefits. This may raise a question as to the justification for using public tax monies for research and education in the dairy field if all (including milk producers) who supply such funds are not benefitted.^ In summary, no claim is made that efficiency and general welfare are synonymous concepts. of general welfare. More properly, efficiency is but one aspect In this discussion it is reasoned that the use of a semi-closed base plan to restrict output (and the attendant parcel­ ing of the quantity to be marketed among individual producers) impedes the efficiency with which resources can be used for the production of 1 There may, of course, be strong objections to direct payments on other grounds. However, from the resource utilization viewpoint, they appear to be superior to the present method of income transfer. 2 In the aggregate, all innovations are output-increasing in the sense that even cost-reducing innovations release resources for use in other production. 3 This is not to say that agriculture is not a proper area for public support of research. On the contrary, primary industries such as agriculture would seem to be the logical place for such support since resources released by innovations can be used to produce more "luxury" goods rather than subsistence goods. Furthermore, most agri­ cultural firms are too small to conduct their own research activities. -65- milk and other goods. Society must make the choice as to whether or not income should continue to be transferred from consumers to milk producers, and if so, whether or not the probable effect of the semi­ closed base plan on efficiency is more or less desirable than the possible side effects of other methods available for transferring income. CHAPTER IV SUPPLY-DEMAND SITUATION Two of the hypotheses presented in Chapter I dealt with the supply-demand aspects of the Virginia base-surplus plan. In the first instance, it was stated that this plan has resulted in a reasonably even seasonal pattern of delivery of milk to market. Secondly, this plan has maintained total milk receipts in balance with fluid milk sales and has allocated these receipts among individual distributors according to their fluid milk sales patterns. This chapter presents the analysis of data relevant to these two hypotheses. Consideration is given to the seasonality of supply, the equalization of milk re­ ceipts and sales and the annual production control aspects of the basesurplus plan used in selected Virginia milk markets. §j£^.&Qna.]JL1tx-af..SjyuaBly. The first test of any producer payment plan is its ability to counteract the natural tendency of most dairymen to deliver large quantities of milk during the spring and early summer months and rela­ tively small quantities during the remaining months of the year. How successful has the Virginia base-surplus plan been in leveling or even­ ing out seasonal variations in the supply of milk coming to market? Market Situation Data on market deliveries and fluid milk sales were analyzed for -66- -67- several Virginia milk markets with regard to seasonal variations. Table 4 summarizes the seasonal characteristics of these markets.^ The range between markets in seasonality of delivery in 1951 was 114 percent to 148 percent; 114 percent to 133 percent in 1953; and 113 percent to 127 percent in 1955. The Roanoke market had the smallest variation in the low-to-high-month ratio in all three years. The observed low-month-to-high-month variations in average daily milk de­ liveries were comparatively small in all these markets.2 There is some limit beyond which seasonal variations in supply cannot be reduced. Some of the markets studied appeared to be ap­ proaching this limit. The real objective in evening out seasonal de­ livery variations is to shift production emphasis from spring to fall in such a manner that adequate supplies are available in the fall and to match seasonal delivery variations with corresponding seasonal vari­ ations in fluid milk sales. The plotting of seasonal variations in fluid milk sales in the three selected markets for 1955 indicated that sales were relatively even from January through May; declined during June, July and August; and increased to a high point during September, October and November. Delivery patterns in all three markets exhibited similar seasonal characteristics. Figure 5 shows the relationship 1 Seasonality of delivery was computed by expressing average daily deliveries in the high month as a percentage of average daily deliveries in the low month. Seasonality of fluid milk sales was computed in a similar manner using sales data. 2 Testing by analysis of variance indicated that the observed dif­ ferences between markets within a given year were not statistically significant. The calculated F value was 1.63 as compared to the tabu­ lar values of 3.18 and 2.26 at the 1 percent and 5 percent levels, re­ spectively, with 11 and 22 degrees of freedom. f o • o w e •H ID 3 H £ h # a It, W X CO rH rH CM CM rH P» rH rH CO CM rH o rH X CM o c o rH O' ao O' rCM rH rH rH CM CM rH rH rH rH M3 CM rH rH rH rH in * rH rH O CM O' 00 CM in 00 rH rH rH CM CM rH o O' CO rH rH rH CM CM rH rH rH CO rH rH rH CM rH rH rH CM 'O CM rH rH t'' CM rH rH if) to O' w ® (1 > -d, ^S •H 0 rH *r“ ®x Q CO ® r—l rH in C O CM rH CM rH •—I CM rH rH CO CM rH CO rH rH rH CM rH CO CrHO rH CO rH rH rH CO C*—1 O rH rH CO CM 00 CM CM CO rH 1—i o • o • O W •rH Q. CO in O' <0 0) ♦H p O e o ® •>H dO CM O' rH rH CM rH rH rH rH rH CM a) x Q o • o E X o $ o X rH • O W E •rH Cl) 3 rH h n) It, W •rH O' o rH O' rH rH o CM rH CM i—I rH CM CM 00 in rH i—i rH ^r CM CO i—i CrHO m rH rH rH i— i CO CO cCM m O' rH w 0) •rH « o 0) E >X •rH o rH •H a> X p rH •—1 rH 00 rH CM CM rH rH rH i—1 rH rH rH rH i—1 i—1 rH rH rH 0) s 0) a 0 x 1 a cn P 3 X o > P -P 0) Table 4. .H * o E 2 o H P (0 s a) 3 O' w rH <0 p s Xw rH O' 3 < D c 0) o H-> i-H •H 3 w Xw •H p X c p W w p H o •H O •H 0) X •-rPi 0) <0 c p a > TJ o > c P -p rH a) p 2 c a ; k 1 0 a > 3 p o (0 re i t , X 2 cu CU cc Q X X tf) P c o c 3 (0 -p -p CO o p p Q> o -P W X w a) a> X c o >N c (0 •H s s cu -P ro Pulaski-Montgomery-Giles Seasonality years of milk deliveries and fluid milk sales, several Virginia milk markets, selected -6 8 - Figure 5. S e a so n a l Index Milk D eliveries Fluid Milk S a le s >s o> Seasonal pattern of milk deliveries Roanoke, 1955 and fluid milk sales -69- between fluid milk sales and deliveries for Roanoke for that year.* The Roanoke delivery pattern follows closely the corresponding sales pattern for that market, particularly with respect to the summer de­ cline and fall increase. Its form suggests that the base plan exerted a relatively strong influence on deliveries since the months of Septem­ ber, October and November comprised the base-making period. The plot­ ting of delivery variations for 1951 and 1955 did not indicate this pattern held true for all three years. However, these plottings did indicate a definite trend toward the 1955 pattern.^ A distinct similarity was observed between the seasonal delivery patterns in each market. This suggests that the effect of the base plan was somewhat uniform in all three markets in 1955 with regard to market seasonality of delivery. Plotting of the 1951 and 1953 data indicated a similar relationship existed in those two years. From the market standpoint at least, the base plan used in the selected markets appeared to have successfully minimized seasonal de­ livery variations and to have correlated the remaining variations with seasonal changes in sales. Distributor Situation The market data presented above might be expected to conceal * Plotting was done on the basis of a seasonal index constructed by expressing average daily deliveries for each month as a percentage of average daily deliveries on a monthly basis for the year. 2 The 1951 and 1953 delivery patterns reflected wartime abnormal­ ities wherein the base plan was somewhat ineffective since practically all milk was sold for fluid purposes. Data for earlier years on the Roanoke market indicated similar abnormalities during World War II. After each such external interruption, a certain amount of time must elapse before the base plan can again exert its influence. -71- differences among individual distributors. Examination of individual distributor data indicated that such was the case. The range of the variation in seasonality of receipts between individual distributors in the three selected markets is shown in Table 5. The differences were a direct reflection of the seasonal patterns of the individual producers assigned to each distributor.* For the most part, the smaller operators in each market had the wider seasonal receipts variations. Since each one had only a few producers assigned to him, the pattern of each producer asserted itself more fully than where there were large numbers of producers whose patterns tended to counter­ balance each other. Since high seasonality of receipts was confined to the smaller distributors, it was not a problem of major consequence insofar as total market receipts were concerned. It was, of course, a serious problem to the small distributors themselves. Equalization of Milk Deliveries and Sales The base-surplus plan used in Virginia milk markets attempts to allocate receipts of milk among individual distributors in accordance with their individual fluid milk sales requirements. The chief means used to accomplish this objective is the assignment of individual pro­ ducers and their corresponding production to specific distributors with the stipulation that no shifts can be made without prior approval of * This statement is more applicable in the case of Roanoke than it is for Newport News despite the fact that the variations in Newport News appear to be wider than those for Roanoke. The calculated F values for between distributors within a given year were 1.29 and 7.73 for Newport News and Roanoke, respectively. The Newport News F value was not significant at either the 1 percent or the 5 percent level. The Roanoke F value was significant at the 5 percent level. -72- •H I CD ffl 3 CD 3 X G O] ■ O H •H P > X P O •H « P E X] CO CO O *3 *iH P *Hi—I % CO OX CD PH 2 X X C CO x -P A CO co O cc X rH P rH C X O X PH -P co P O x c CD O P CD a § rH l "sf H CM I X CM -t-> 3 X •rH -p p Pi cd d e P ^ x CO •rH X CO O HE rH JC co 3 X •H x c CD o p CD a 1^CM > X C •rH rH I CO 3 3 X X rH rH P CD O' C O co e p > -P rCl ■H CO CO D TJ rH P rH C X O X PH -P x o <1) CO > CO •h P x d CD s Pi i —i co p CD 0) X >, >, o 0) rH CD CO CO CO CD CO CO 5 CD 2 o «* A CO O S *H X x CD X +-> •rH rH CO C (0 H Pi P cO rH rH CO X CD CD co p CD > CO c s a X CD X c CD O P CD a x c CD O P 00 X i-l 00 i X i-H rH rH rH 00 rH r~pi-H i CM CM CM CM i—I CD a 3 o rH >r CD X X X X CD X C rH a CO CD o a •H P CO CD co > 3 rH rH >* CD P X CD > >rH i—i rH •H CD CO X X 3 S X o I P rH CO CD P P ja rH rH CD X cr> • C rH X CO X CO CD o P rH e'­ o p en 3 XX 3 X -P CD JQ O' I P rH CD P X X X e o co 3 -H 2 X •H CD i-H X O' •H X c rH P P CO 2 in X X c o e CD Jh X I P -H CO CD P p J 3 P - P O E O ffl-P 3 *H 3 •H x O CO CO i CD Pi O c CO o cc c o CO rH P P CO 2 CD 2 X P o & 3 CD 2 CD O' (0 >. P CD X rH > rH CO CO c X o o to CO CD CD CO CO X a> <0 c CD O P CD a -73- the regulatory agency* In addition, the entry of new producers to each market is restricted* Thus, the plan attempts to provide all distributors with adequate supplies of milk at all times and to allo­ cate the total supply of milk between distributors in such a manner as to realize the highest use value possible* dable task* This is indeed a formi­ Two principal measures were used to evaluate the degree to which equalization efforts have been successful* These were uti­ lization and the annual fluid milk sales-to-base ratio. Utilization Utilization measures two closely related yet separate market characteristics.* In the first instance, it indicates the extent to which individual distributors are either long or short on milk supplies. o If the utilization percentage plus a percentage for operating reserves is greater than 100 percent for any given distributor, it means that he is short of milk* Conversely, a percentage less than 100 percent means he is long with respect to his fluid milk needs. Secondly, the utilization percentage measures the extent to which pro­ ducer deliveries are directed to the highest value outlets. Adequacy of. sups Ie Attempts to control production may result in too fine a line be­ ing drawn between the sales of individual distributors and the production * Utilization as used in this thesis has a specialized meaning. It refers to the percentage of baseholder deliveries sold by distribu­ tors in fluid form. It was computed by dividing fluid sales for any specified period by deliveries during that same period. 2 After some figure is added for necessary operating reserves. -74- assigned to them. The extent to which selected market distributors were undersupplied and oversupplied is shown in Table 6.* Only one Roanoke distributor was undersupplied on an annual average basis in 1951. None were undersupplied on that basis in 1953 and two were undersupplied in 1955. Close cooperation between Roanoke distribu­ tors minimized this problem. Historically, that market has operated on a low operating reserve margin. In contrast, all Newport News distributors except two were under­ supplied both annually and seasonally in 1951 and 1953. In 1955, "the situation was considerably improved with only two distributors under­ supplied on an annual average basis. The Harrisonburg market was substantially oversupplied until a new distributor was added in 1955. This new distributor was under­ supplied both annually and seasonally in 1955. The undersupply problem in Newport News was largely the result of: (l) a very rapidly expanding population; (2) relatively poor dis- tributor-distributor relations; and (3) the inability of the regula­ tory agency to correct certain marketing practices which tended to o nullify the effectiveness of the base-surplus plan. 1 The actual utilization figures are shown in this tabulation in order that the same table can beused in discussing the direction of milk to the highest value outlets. An operating reserve figure must be added to the above figures toreflect the adequacy of supply situation. In the discussion onthis point, an operating reserve of 10 percent is assumed. 2 The presence of large federal military installations in the Newport News area and the contract bidding for milk supplies to these installations is a never-ending threat to market stability in that market. 0) cn c CO 1 to •H *• fH fH P o W -p •rH 3 T5 XI i-H 05 3 C C < •H fH P •rH r-H fH ■rH 05 P e 3 C o •rH P CO N cc in m O' i-H 1 p o -p 3 to 0) •H1 m O' fH P c H-> o 05 <0 -p CC •rH 3 TS X> 1 CO 1— I •iH 05 fH O' 3 P i-H C W c •H < XS in i-H 05 3 C G < 05 CO c 05 cc i-H i-H 05 O' 3 i-H C c < in i— l 05 1 C •H o i-H to •rH 05 p a> 3 to C> H N 00 0 O H O f H fH 1 I I I 00 .-Ht'- Nt C o •rH 4J 05 N O CM H ifiO N O O N C M iO O N C MO n Q n O N h O n O' CM t" O C M C M O C O C O O O i-h OOOOlOvONOOOt^OO ii CO 00 oo oo f" co ^ o i-H On o H i NOO ON 00 O ' O ' O ' On i—Hi —IH i i ii i i i On O C M M ' iO M ' I s - 0 0 O O O n C ~ C ^ C M O n OOOO CM ON CO ON O ' <3- C O C O •H P OS N CO O r-H ON fH i— I 1 1 1 I Nt 00 O CO i > r- CO CO 00 r - ON s r ON 1 1 co i-H i-H rH 1 1 1 1 1 1 0 0 NO C M O CM 00 NO O i-H i-H 1 r- 00 MO o r— o on O n CO ON 00 00 CO in CM 1—1 1—( 1 1 ON O NO O 0 r—I 0 ON 1 ON NO P P 1 QJ •H i-H P •H 05 P s 3 C O •H P <0 N J4 P o p 3 X3 P O P 3 X! •rH i-H •rH P 3 p x H CM COM ’ iO v O f'O O 3 Utilization refers to the percentage of baseholder deliveries used in fluid form. To deter­ mine the adequacy of supply for individual distributors, an operating reserve of 10 percent must be added to the above figures. Thus, any figure in the above table higher than 90 percent is indicative of undersupply. Table 6, Percentage of deliveries utilized in fluid milk sales, individual Harrisonburg and Newport News, selected years3 distributors, Roanoke -75- ( -76- The principal point of emphasis in this section is the extent of undersupply resulting from a deliberate attempt to maintain a close balance between milk receipts and sales* Data for the Roanoke and Harrisonburg markets indicate that undersupply was not a problem in these two markets* In Newport News, a definite undersupply problem did exist in 1951 and 1953, and to a lesser extent in 1 9 5 5 . The Newport News problem cannot be attributed entirely to the base-surplus plan* However, it seems likely that the problem could have been alleviated somewhat, had the plan been tailored more specifically to that market's needs. For example, producers could have been given more encouragement to increase the size of their operation by permitting them to gain sub­ stantial increases in base during successive base-making periods* Highest value usage Table 6, viewed in a slightly different respect, indicates also the extent to which milk was allocated among distributors so as to achieve the highest value outlets and a uniform utilization among dis­ tributors. This is an important aspect of equalization* Annual dis­ tributor utilization appeared to be the best measure to use* The Roanoke market was better balanced than either of the other two mar­ kets in 1955* The maximum difference between distributors in annual * Nine markets other than Roanoke, Harrisonburg and Newport News were examined on an annual utilization basis. Three of these markets were undersupplied on an annual basis in 1955. Examination of similar information for 1951 and 1953 indicated that in the same group of mar­ kets four were short in 1951 and three in 1953. Two of these markets, Winchester and Martinsville, were short in all three years. This analysis does not take into account the possibility that some of these markets may be able to operate on less than a 10 percent reserve. -77- utilization in Roanoke was 4 percent as compared to 16 percent in Harrisonburg and 53 percent in Newport News. In 1951 and 1953 there was an even greater difference between the within-market variation for Roanoke and the Newport News market. However, most Newport News pro­ ducers were not adversely affected since they received the Class I price for practically all milk delivered during those years. Conversely, the utilization percentage indicates also the propor­ tion of producer deliveries going into surplus usage. The amount of milk used in surplus form was comparatively small in all three markets, both seasonally and annually.^ The results observed indicate that the equalization of milk sup­ plies and sales in terms of utilization was not uniformly successful in all three selected markets. This problem is discussed further in Chapter V. Fluid Milk Sales-to-Base Ratio A second important measure of equalization is the relationship between annual fluid milk sales and annual base allotments. lationship is expressed in ratio form. This re­ The ratio measures the extent to which bases are established in proper proportion to fluid milk sales and held in balance with sales by shifting producers between distribu­ tors as the need arises.^ 1 As compared to the "surplus" situation in some eastern and midwestern areas. 2 The prior measure, utilization, described the relationship be­ tween actual deliveries and fluid milk sales. The present measure describes the relationship between fluid milk sales and base, not actual deliveries. It was calculated by dividing annual fluid milk sales by annual base allotments and expressing the result as a ratio of fluid milk sales-to-base. -78- JDLslributor situation Table 7 shows the fluid milk sales-to-base ratio for selected market distributors and the market average ratio for each market* Variations from *95 indicate the degree to which individual dis­ tributors were underbased or overbased in each year.^ Harrisonburg had less variation from the *95 ratio than either of the other two markets* The variation which was present in Roanoke was in the under­ base direction.2 in Newport News, the variations were both in the underbase and overbase directions. Any evaluation of the fluid milk sales-to-base ratio must take the variability of sales into account. Considering this factor, it appears that a close relationship was established and held between fluid milk sales and assigned base in the selected markets in 1955* 3 A lesser degree of success was achieved in 1951 and 1953. The ratio of fluid milk sales-to-base was analyzed also for mar­ kets other than the selected markets on an annual market basis only. The ratio ranged from a low of .87 to a high of 1.20. This indicates that a similar degree of success was achieved in these markets as compared to the selected markets. * A lsl ratio means that base allotments are exactly equal to fluid milk sales. The Milk Commission attempts to set total base assigned at 105 percent of fluid milk sales so that a ratio of .95:1 will be the more accurate test from its point of view. ^ Since fluid milk sales were greater than assigned base. 3 The obvious exceptions were distributors three, four and five in Newport News in 1955. The major criticism may actually be directed toward too conservative an approach to increasing base since several of the distributors were underbased. -79- Table 7. Ratio of fluid milk sales-to-base, individual distributors, Roanoke, Harrisonburg and Newport News, selected years3 1951 Ratio fluid milk sales-to-base 1953 Ratio fluid milk sales-to-base 1955 Ratio fluid milk sales-to-base .97 .99 1.03 1 2 3 4 1.00 .78 1.09 .98 1.00 .94 1.13 .99 1.06 .99 1.14 1.00 Harrisonburg 1.02 .95 1.00 1 2 — 1.02 .95 1.04 .99 Newport News 1.10 1.04 .96 1 2 3 4 5 6 7 8 2.03 1.22 .92 1.30 — 1.06 1.00 .96 1.69 1.01 .90 1.13 — .95 1.28 .85 1.10 1.00 .71 .73 1.32 .96 .93 .91 Market and distributor Roanoke — 3 Ratio computed by dividing annual fluid milk sales by annual base allotments assigned. Producer relationship Mention was made earlier of the advantage offered by a base plan in terms of providing individual producers with prior knowledge of the approximate quantity of milk for which they could expect to receive the Class I price. Possession of such knowledge should enable them to bet­ ter plan their farm operation. The relationship between individual producer base allotments and the fluid milk sales credited to each in 1955 was plotted and then examined by means of regression analysis. -80- The dot chart, Figure 6, illustrates the observed relationship for Roanoke* Relatively high correlation coefficients were obtained in all three markets.^* Variation in size of individual producer base allotments accounted for 69 percent, 97 percent and 98 percent of the variation in fluid milk sales credited to each individual producer in the Roanoke, Harrisonburg and Newport News markets, respectively. There was a close relationship between base allotments and fluid milk sales credited to individual producers in the Harrisonburg and Newport News markets. From a predictive standpoint, the relationship in Roanoke was not as close. In that market, on the average, producer base allot­ ments understated the amount of fluid milk sales credited to each pro­ ducer. The relationship observed suggests that an individual's base allot­ ment was a good estimate of the amount of fluid milk sales he could expect. jjjan»al,,PxoduQtio,n_ContxQl Control of production is a major objective of the base-surplus plan used in Virginia milk markets. The establishment of a base for each producer, which represents a proportionate share of the market's fluid milksales and for which the Class I price will be paid, is the method by whichcontrol is attempted.2 The success of such a method is directly * The correlation coefficients and simple regression equations where X = 1955 annual base allotment in pounds and Y = 1955 annual fluid milk sales were: Roanoke coefficient (.83), Y » 18168 + .9525X Harrisonburg - coefficient (.98), Y = 3496 + .9915X Newport News - coefficient (.99), Y — -14739 + 1.0032X 2 Proportionate share means a proportionate percentage of all fluid milk sales in the market. If this percentage is 5 percent for a given producer he will receive 5 percent of the market's fluid milk sales. -81- 550 450 400 350 250 Milk 150 Fluid 200 100 Annual Sales Credited To Individual (Thousands of P o u n d s ) Producer 500 50 50 100 150 200 250 300 350 400 450 500 Individual P r o d u c e r Annual B a s e A llo tm e nts ( T h o u s a n d s of Pou nds ) Figure 6. Relationship between individual producer base allotments and the fluid milk sales credited to each producer, Roanoke, 1955 -82- dependent upon the response of individual producers to their assigned base quantities. Individual Producers The relationship between individual producer base allotments and their corresponding deliveries of milk in 1955 was plotted and then examined by regression procedures. was observed.^ market in 1955. A relatively close relationship Figure 7 illustrates the relationship in the Roanoke The relationship between individual producer base allotments and their milk deliveries can also be expressed in terms of a ratio of deliveries-to-base.^ producer. Such a ratio was calculated for each All producers were divided into groups delivering less than their base allotments and more than their base allotments on an annual basis. Approximately 20 percent of all producers delivered some quanti­ ty less than their assigned base. Comparable percentages for individual markets were 13 percent, 14 percent and 31 percent for Roanoke, Harrison­ burg and Newport News, respectively. Thus, the majority of the pro­ ducers overdelivered their assigned bases to some degree. Relationship over Time Data on base allotments and milk deliveries were available on 41 * The correlation coefficients and simple regression equations where X » 1955 annual base allotment and Y = 1955 annual milk deliveries were as follows: Roanoke - coefficient (.84), Y = 54837 + .8195X Harrisonburg - coefficient (.88), Y =*19358 + 1.1214X Newport News - coefficient (.99), Y = -10684 + 1.0982X ^ The ratio was computed by dividing annual deliveries by each individual producer by their corresponding annual base allotments. -83- 550 500 In divi dual Producer Annual D e li v e r ie s (Thousands of Pounds) 450 400 350 300 - 250 200 150 100 50 50 100 150 200 250 300 350 400 450 500 I n d i v i d u a l P r o d u c e r Annual B a s e Allotment ( T h o u s a n d s of P o u n d s ) Figure 7. Relationship between individual producer base allotments and the milk deliveries credited to each producer, Roanoke, 1955 -84- producers in the Roanoke market for the years 1939, 1947 and 1955.1 These data were examined to determine the extent to which the relation­ ship between an individual producer's base allotment and his production response could be expected to remain consistent over time. The results obtained indicate that in the Roanoke market at least there was a con­ sistent relationship during the years examined.^ This suggests that the regression equation obtained for all producers in 1955 would be a reasonably good predictor of future deliveries which Roanoke producers could be expected to make. Markets The deliveries-to-base ratio for several markets is shown in Table 8. The relatively close relationship previously noted for individual producers was reflected in the selected market ratios as well as in most of the other markets. There was, however, considerable variation in the ratio between markets.^ * The data for 1939 and 1947 were obtained from unpublished data collected by the Department of Agricultural Economics, Virginia Poly­ technic Institute, Blacksburg, Virginia. ^ The individual simple regression equations for each year where X = annual base allotment in pounds and Y = annual deliveries in pounds were as follows: 1939 - Y=b 31956 + .9170X 1947 - Y » 8972+ .9668X 1955 - Y a 27723+ .9564X Sums of squares due to regression were tested by analysis of variance to determine whether the slopes in the individual equations were signi­ ficantly different. The F value obtained was 1.451 compared to the tabular value of 3.94 with 1 and 120 degrees of freedom, respectively. The difference between slopes was not significant. The raw data were then pooled and one equation secured to describe the relationship. That equation was Y = 24302 + .9452X. ^ Analysis of variance testing indicated that the differences were statistically significant. The calculated F value for between markets within a given year was 4.61 compared to the tabular value of 3.18 at the 1 percent level. -85- Table 8. Annual deliveries-to-base ratio, several Virginia milk markets, selected years3 Market Annual deliveries-to-base ratio 1955 1953 1951 Roanoke 1.09 1.11 1.12 Harrisonburg 1.19 1.16 1.23 Newport News 1.12 1.09 1.05 Danville 1.09 1.10 1.08 Fredericksburg 1.09 1.11 1.13 Lynchburg 1.15 1.29 1.31 Martinsville 1.03 1.16 1.16 Petersburg*3 1.09 1.10 1.08 Pulaski0 1.13 1.10 1.11 Staunton 1.08 1.30 1.23 Waynesboro 1.18 1.28 1.21 Winchester 1.11 1.08 1.10 3 Ratio computed by dividing annual milk deliveries by annual assigned base allotments for each market. k Petersburg-Hopewell c Pulaski-Montgomery-Giles The base-surplus plan's effort to control annual production of milk by means of individual producer base allotments appears to have been highly successful in most of the markets analyzed in this study. A large number of individual producers did overdeliver their assigned -8 6 - base allotments, but the quantities of excess delivery were not large. This demonstration of control is impressive.1 Evaluation and Implications The analysis presented in this chapter appears to substantiate the two hypotheses stated on page 66. The bulk of the milk moving to market was delivered on a relatively even seasonal basis and the total amount of delivery was not excessive with respect to each market's fluid milk needs. Total receipts of milk were relatively well allo­ cated among individual distributors. The degree of success in achiev­ ing these objectives was relative in nature with the most success achieved in Roanoke and the least in Harrisonburg. The evidence avail­ able indicates that the base-surplus plan exerted a major influence upon the maintenance of an appropriate supply for the needs of the markets. These results do not imply that the semi-closed base plan used in these selected markets would necessarily exert the same influence in all other milk markets. The differences observed between the mar­ kets examined give evidence of this. However, they do suggest that 1 Particularly in light of the fact that many producers were known to have small base allotments. The size of allotments is dis­ cussed in Chapter VI. 2 Historically, the southern region of the United States has been slow to develop as a dairying area. It might be argued that this slow development helps to account for smaller amounts of surplus than found in other areas. It is believed that while this may have been a factor in Virginia markets, its contribution has been small. The base plan has been in effect over a long period of years. All available evidence suggests that it has been the most important factor in holding supplies in relative balance with fluid milk sales. -87- effective control of supply is possible where marketing quotas are employed. The effects of production control on prices returned to producers and on producer growth problems are discussed in succeeding chapters. CHAPTER V PRICES PAID TO PRODUCERS The ultimate objective of the base-surplus plan is to return to producers prices for their milk which are consistent with established Class I price levels* Efforts toward equalization of supply and pro­ duction control are means to this end. Chapter IV presented data on the effectiveness of Virginia's administrative efforts to even out seasonal supply patterns, to equalize milk receipts among distributors and to control production. In the present chapter, the effect of these efforts on prices paid to producers from a market average standpoint is considered. The relationships between prices received by individual producers and their seasonal delivery characteristics as well as other related characteristics are considered also. Data are presented re­ lative to two of the hypotheses stated in Chapter I. These ares (l) that the base-surplus plan used in the selected Virginia markets has maintained average prices to producers at a high level relative to established Class I prices and (2) that this plan has provided a sub­ stantial price incentives to producers with even delivery patterns. Market Average Prices Most milk markets use some form of classified pricing to deter­ mine how distributors must pay for the milk which they receive from producers. These price plans always set the fluid milk price at a -8 8 - -89- higher level than the price paid for milk used in manufactured dairy products. The consensus is that State price control regulations have generally attempted to fix fluid prices at higher levels than have other types of regulation. of milk. This may encourage inter-market movement Even if there are institutional barriers to such movement, there remains an element of danger in this procedure since high con­ sumer prices may adversely effect consumption. If most of the higher price can be returned to producers, the risk may be worthwhile from the producer*s viewpoint. However, if production is substantially in excess of fluid milk requirements, prices returned to producers will be materially below the Class I price.1 ation which exists in some markets. This is the untenable situ­ A semi-closed base plan offers a means of alleviating this problem. Prior discussion has described the fluid milk deliveries and sales situation in the selected markets. The observed supply-demand char­ acteristics together with the fixed class prices determine the average price paid to producers in each market. The relationship between Class I prices and market average prices paid to producers is shown in Table 9. As might have been anticipated from the previous supply analysis, the differences between Class I prices and average prices paid pro­ ducers were the smallest in Roanoke and the highest in Harrisonburg. The Harrisonburg market had the highest seasonality of delivery, the 1 Historically, producers have attempted to combat low prices re­ sulting from low utilization by demanding higher Class I prices. It is difficult to materially raise prices to producers by increasing Class I prices when utilization is already low and total supply is not effectively controlled. Generally speaking, such a move merely aggra­ vates the problem. 1 P 0) CD o P P c •H CD « o 3 a CD z pa> cn CD O pF- AC C P O P CD•PH c CO > § >2 <0 o. vO M0 in in in in inm in in in i -f-•h• 000 • 00o •0 • in i t'*• *o •000 •0 • in • in » i vOM3 M0M0MO MO MO M0M0NO MOMO i i i 1 p p a > CD X p o O' p c . •H CD S> P 733 o fCD C P cD n Xs P ■ c CD (0 CD Co o P O (A P CD•H x3 •H ( 0> P (H 2 <0 a p P CD ffl PC a 3C CD (A (A o p CA*PH pC HO (0 rH a *H o o i i p c so o p ON 00 • in xo <0 00M3 M0 00 pH ■SfNfrO' f'-MO pH m *H •00 * O' * *M0*oo *O•O' »O* • o•o* O' pH pH pH pH CM 00» 00 in in O'MO NO rH 00 •srO' in CM • o* ONi * CM *pH* •n *00 *iH * CM *pH* CM • pH i n i n i n nO nO in in in in in in in 00 • in rH o o o o o o o o o •s* rMT • CM * CM • srC * MC *M *CM •M •CM •CM» * CMC mo M3 MOM0MO NO NOMO nO M>MO MO in CM * MO pH pH 1 ' r- in O' 1 CM 00CO O' OOM 0O CM. H \rm o*00 1 iH* 3-o • •H •CM•pH• * • * * • * 1 1 1 1 1 1 1 " rHoo m pH 1 00MO CM CM pH M0 t 00O O' 1 00 CO O•pH• pH *00 • * CM0 • 0»CM • • • • • 1 1 MOM3 M0M0 inNO M0 M0MOMONOM0 1 1 1 1 O i o O 1 o O On O O o O O O in in in i 1 • in • m• •n • in « in•in • in •in 1 * • •0 1 M3MO M0M NO MOM0 M0 M0M0 MO M0 1 1 P CD P P >N >N P X P CD CD CDX p CO pCA £ CDXI £ XC pH 6D CO 3 xo • H a> S. 3 P po CD O 3 P > C X p P c pH cn a (0 CD CO a co 3 3 3 CD o O CD n P s < 2 n<-><0 < 7C3 D P xO' •H CD 2 pH TO s CD73CD C o pH CDp as P P p> CD H o in * NO 73 i H C D cpD C O P c *H CD P <1) 0) M P DUO CD o a> 0 a c AC ( P ct P 0)•H c CO > p a; 2 CO a PCCO CD CA O CA•H CO P H a o p P CO CD CD e p X P P XO p73H e CO o CD P p O p c _l M0• a o pH CD <0 73 • p AC 10 p O 73 rH C pH p 3 £ p (0 pH CD P D P rH P 7C3 P P E CO 3 O op P X (I) p O P o c •H D CD 73 C p C D 3 O 1 P a. P r—CO CD 3 c a > a o £ •rH o pH CA o CO CO P o pH CD O p p p cn D o C 3 CD c X pH u 3 •H •H 73 s p£ H 73 C O 73 CDpH C P 73 C O CO O0) >p 73 •H X C D £ P P o p a 73CD CD CDP pH> 73 Oi COiH pH A pH PCO C0 CO•H xo CD o CO CD £ p 0> P X O o CDH £ •H M CO P » p CO a pH £ C <0 oP • pH w OO CD PO * <0 CA (0 O -H a x O li, o <0 X) o •H p £ p H a > (0 •V (0 p V o 733 O P a o p • aC •r <0 a (0 C OOCO •H lO P lO ao i—c 0) cn « «o • Po 0) >O Q• C 73 * C C CO -OP cn cn a) c O «H •H A P CO a co i—c35 73 CO C ( 0 CO CO 1-173 O C O c a < (u 0xo: 3 *H -0P ) o; A c» o CO -p <0 0) o -*5 C P CO z c0 CO f(HU cn a> p o •rHJ33 P C D C oO C—c♦H p CO p CO C O COX iH a ja *> o c 10 ao: 1 I 1 1 1 1 1 1 1 1 I 1 1 1 1 1 1 1 1 1 1 1 1 1 -p A •cHn V 733 a> p 73 c 3 A P 0) a CO p HCO i—C o 73 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 cM'sriOvof'^r'^r^j-tncO'Ho iDNCMvO'l’vOO'vOCOO'OCO oO'OHOffl^t^'Oinooco CJOO^iOO'COHOIOWOCM inior'oooohiovovovoin^ vO OD\O^OOOH'4',tO'f'vO'HiO H•r t•^•' o o o•'•o o•o•' o•'•o • o•o • 00 o \o O' in 0 M" CO 00 O' ^ c CM H H M1if)v CO CO CO H CM H CM • • • • • • • • • • • • • • * • • CM a> cn co P 0) > CD x p: c o 2 >, >N P p co f fl 3 £ H d m o .h o> >. P (U f-4 f-4 A P <0 © P e 0)A A » » J3 S S 3 p o .CHO'a4J>o *->h,s < s *->'-> A P Mi O CO a> 3O C CO •H >1 i — A P C o e s o Mph c MCD CO P < P0 0) 3 • cm to -o c cpnf —nc c X •H • AcoO• CO 3= • 7C3 Q•X CO c 7C3 -op cn O c •H ££ x O C: O cc 3CO •X •cH < Q 7 •3 HC 3O CO a *> C < 2O c0 o< o •H •X Pp a o p CD Q cn co COos p CO e > CO O < C p CO o 7C3 CO -93- These data do not prove that the Roanoke market, for example, would have experienced greater differences between the Class I price and the average price paid to producers, had that market operated on a straight blend price system rather than the base-surplus plan. However, the data do support a presumption in that direction. The important point of emphasis is the relative size of the price differences in the selected markets compared to those in the blend price markets. While the method of payment to producers was not the only factor contributing to the size of the price differences, it ap­ pears to have played an important role in the creation of the observed differences.* Individual Pro_ducer Prices. Factors That Affect Individual Producer Prices Under the Virginia base-surplus plan, there are at least five major factors which affect the average annual price which an indi­ vidual producer receives for his milk. These ares (l) his seasonal pattern of delivery; (2) the utilization pattern of his distributor; (3) the level of the Class I and II prices; (4) the size of his base in relation to his actual deliveries of milk; and (5) the extent to which any deliveries over base which he may make are matched with under-base deliveries by other producers. Highly seasonal producers can expect to have sizeable portions of their total deliveries paid for at the surplus price simply because 1 The use of a market-wide pool in Richmond and an association pool in Washington may have exerted some influence toward widening the differences in those two markets. -94- market fluid milk sales cannot absorb their excess production during their peak period. Seasonal producers whose peak period occurs during the fall months usually do not encounter as severe a price penalty as do seasonal producers whose peak period occurs during other seasons of the year. In similar fashion, the manner in which a given distributor uti­ lizes his milk and the prices which he is required to pay for each type of usage determines the total value of all milk received from his producers. If distributors are not able to use relatively high percentages of their total receipts from producers in Class I, prices returned to producers will be lowered accordingly. The fourth and fifth factors listed above are closely tied to­ gether. Under the pay-off procedure used in the selected markets, each individual producer usually will receive the Class I price for the full amount of his base and the surplus price for milk delivered in excess of that amount. The exact amount received in each class de­ pends upon the percentage of his total assigned base that his distribu­ tor uses in the various classifications. If a distributor uses 100 percent of his assigned base in Class I, then all his producers are eligible to receive all of their base in Class I. If he uses 90 or 110 percent of his assigned base in Class I, individual producers will have the same percentages applied to their individual base quantities. In the event an individual producer does not deliver enough milk to cover the full amount of the Class I sales he is eligible to receive, the difference between the amount he is eligible to receive and the amount he actually delivers is prorated among other producers according -95- to the amount of base they hold rather than to the amount of surplus milk which they may deliver.^- This method of prorating "unused" base among remaining producers is distinctly different from the procedure followed under most other base-surplus plans wherein the "unused" base is prorated among producers according to their excess production rather than to their base quantity. Several of the previously discussed factors affecting producer prices for milk are beyond the control of any individual producer. However, both his seasonal pattern of delivery and the actual quantity which he delivers during any specific time period are subject to some degree of control by the individual. If certain assumptions are made regarding those factors not under his direct control, it is possible to indicate the effect of varying the conditions of those factors under his control on the average annual price he receives. The theo­ retical price incentives between different seasonal production patterns under specified assumptions can be computed and compared with the actual price differences prevailing in 1955. Theoretical Price Incentives Theoretical price incentives were computed to illustrate three specific situations: (l) where producers are free to increase their bases substantially each new base-making period; (2) where producers are not able to increase their bases by production to any appreciable degree and (3) where producers are paid on a straight blend price plan. 1 Complete instructions on the pay-off procedure are included in Appendix C. -9 6 - The first two situations illustrate the price incentives that are available theoretically for leveling production under the Virginia base-surplus plan both as an open system and as a semi-closed base system. Method used Price incentives for various seasonal delivery patterns can be determined if the following information is known: (l) the seasonal delivery pattern itself, (2) monthly level of Class I and II prices, and (3) the size of an individual producer's base. With such in­ formation at hand and additional assumptions made regarding utili­ zation and butterfat test, average annual prices received can be computed for producers with different seasonal delivery patterns. The same method was used to determine the theoretically possible in­ centives under both the open and semi-closed systems. The technique employed can be summarized as follows:* (l) de­ termine a set of theoretical seasonal delivery patterns which might represent the various types of seasonal producers found in the select­ ed markets; (2) specify some total amount of milk delivered by each type of producer annually, and, using the predetermined delivery pat­ tern, calculate the amount of milk delivered each month; (3) determine the average monthly deliveries during September, October and November for each specific delivery pattern and establish this average as the 1 Quackenbush and Homme used the general technique described below in their study. See G. G. Quackenbush and H. A. Homme, Seasonal Price Incentives of the Base and Excess Plan in the Detroit Milk Market. Michigan Agricultural Experiment Station Technical Bulletin 228, March, 1952. -97- base for the respective types of producers; and (4) multiply the amount of the base delivery in each month by the Class I price and the amount of the surplus delivery each month by the Class II price for each delivery pattern. Sum the total value of milk for each month and divide by the total amount of milk shipped during the year. gives an average annual price per hundredweight. This In determining the price incentives which follow, the actual Class I and II prices which prevailed in each of the selected markets during 1955 were applied to the theoretical delivery patterns. Two assumptions were made: (l) Class I sales of distributors are identical to their assigned bases and (2) the butterfat test of milk delivered is 4 percent. The price incentives which would have resulted from payment on a straight blend price basis were similarly computed by substituting market blend prices for Class I and Class II prices in the above de­ scribed computational technique. Incentives thus obtained were com­ pared with those obtained under thebase-surplus system to ascertain which method of payment offered the greatest incentive for even de­ livery throughout the year. Relevant price information The calculation of average annual prices paid to producers neces­ sitated prior knowledge of the monthly level of Class I and Class II prices. Table 11 summarizes these prices for each of the selected markets for 1955. Under the Virginia Milk Commission's regulatory framework, the Class II price is determined by formula. This price -9 8 - Table 11. Month Class I and Class II prices for 4 percent butterfat milk, selected Virginia milk markets, 1955 ______________________ Market_________________________ _____ Roanoke Harrisonburg Newport News.__ Class I Class II Class I Class II Class I Class II dollars per hundredweight January 6.50 3.08 6.41 3.08 6.76 3.08 February 6.50 3.07 6.41 3.07 6.76 3.07 March 6.50 3.07 6.41 3.07 6.76 3.07 April 6.50 2.32 6.20 2.32 6.35 2.32 May 6.50 2.31 6.20 2.31 6.35 2.31 June 6.50 2.31 6.20 2.31 6.35 2.31 July 6.50 2.31 6.20 2.31 6.35 2.31 August 6.50 2.33 6.20 2.33 6.35 2.33 September 6.50 2.36 6.20 2.36 6.35 2.36 October 6.50 3.09 6.20 3.09 6.55 3.09 November 6.50 3.08 6.20 3.08 6.55 3.08 December 6.50 3.10 6.20 3.10 6.55 3.10 varies from month to month as specified by the formula.* On the other hand, the Class I price is a fixed price which does not fluctuate from month to month. Its level is determined on the basis of testimony pre­ sented at public hearings. Once a price is set in this manner, it re­ mains in effect until another hearing is held. It may, however, change * The formula in effect during 1955 contained the following speci­ fications: to determine the Class II price for any month multiply the average New York 92 Score butter price for that month by the percent butterfat in the milk and add 75 cents except for the months of April through September. In these months the 75 cents was not added. For example, the price for May, 1955 was determined as follows: 57.85 cents x 4 = $2.31. -99- seasonally from spring to fall either as the result of a provision in the order or of a public hearing called for that purpose* Orders for the Newport News and Harrisonburg markets contained a provision for seasonal changes in the Class I price. The average price paid to producers must also be known in order to compute the price incentives which would have occurred had pro­ ducers been paid on a straight blend price basis rather than on the base-surplus plan* for 1955. Table 12 summarizes these prices for each market These prices were computed by dividing the total value of milk in each market each month by the total deliveries to the market expressed in hundredweights. The resultant figure was adjusted for butterfat test to 4 percent. Basic data for the computation of all price information were taken from the records of the Virginia Milk Commission. Situation one - open base incentives Six different seasonal delivery patterns were constructed to measure the incentives available between different seasonal patterns. These patterns are portrayed graphically in Figure 8. They are simi­ lar in nature to individual patterns actually existing in the selected markets. They range from a perfectly even pattern FF to a highly seasonal pattern EE, in which deliveries during September are only one fourth as large as deliveries during May. Pattern AA represents the actual average market pattern previously observed (Figure 5), while pattern BB is constructed to represent the exact opposite of AA. Patterns CC and DD represent the delivery of two-thirds as much milk -100- Table 12. Month Average price paid to producers for 4 percent butterfat milk, selected Virginia milk markets, 1955 Market Harrisonburg Roanoke Newport News -- dollars per hundredweight January 6.38 6.23 6.24 February 6.36 6.05 6.18 March 6.32 5,95 6,02 April 6.02 5.57 5.50 May 5.91 5.39 5.46 June 6.06 5.16 5.62 July 6.17 5.26 5.84 August 6.14 5.11 5.73 September 6.21 5.13 5.75 October 6.33 5.24 5.92 November 6.25 5.29 6.05 December 6.31 5.15 6.13 in September as in May and the delivery of 50 percent more milk in September than in May, respectively. In applying the relevant price information to these seasonal pat­ terns by the technique previously described, it was assumed that each producer delivered a total of 1200 hundredweight of milk during the year. This total amount was divided between months in accordance with the patterns portrayed in Figure 8. The bases established under the various patterns are of different sizes. Any other assumed amount of total delivery by each producer would yield the same average annual prices. Figure 8. Theoretical milk delivery patterns -101- « .£ ^ •n _* •_ “ 50. m\ MIIlN i 0 H 6!3MP AJPu n H -102- Table 13 summarizes the average annual prices which would have been paid to producers with the specified delivery patterns shown in Figure 8 under both an open base-surplus plan of payment and the straight blend price system of payment. It is apparent that in all three markets an open base-surplus plan would have offered substantial incentives for evening out seasonal delivery patterns. A producer with the completely even pattern FF would have received $1.79 hundred­ weight, $1.68 per hundredweight and $1.79 per hundredweight more in the Roanoke, Harrisonburg and Newport News markets, respectively, than a producer whose pattern was the most seasonal, EE. Likewise, a re­ duction in seasonality illustrated by a change from EE to CC would have increased an individual producer*s average annual price by $1.19 per hundredweight, $1.12 per hundredweight and $1.20 per hundredweight in Roanoke, Harrisonburg and Newport News, respectively. Table 13 illustrates also the fact that a seasonal production pattern having its peak in the base^making period will return a higher price than a seasonal pattern which results in a peak at a time other than the base-making period. DD with pattern CC. This may be observed by comparing pattern The price difference in favor of DD was 58 cents per hundredweight, 54 cents per hundredweight and 57 cents per hundred­ weight in Roanoke, Harrisonburg and Newport News, respectively. Examination of the average annual prices that would result from the blend price system of payment indicated that this method offers very little incentive for reducing seasonality. The biggest single difference between prices received by producers with the seasonal pat­ terns presented in Figure 8 would have been 8 cents per hundredweight -103- a> o x: p a> rH X3 •h m vO 00 • m 00 00 • in 00 • m h00 • m u fn ■p a co W 3 rH a xs fH o M3 • vO in O' CM • M3 rH O' • m CO 13• vO rH r• TI­ CS m • x> a) lO O' fn 0) > W 13 re o rH £ X3 P h (0 e O' £ s O' 0) •§ •H O re 19 *H fH fH fH X) c p a 3 CO 43 •H s <0 •H c •H O' re > a. -a fH o 73 a> m ■sf in r-ti• in $ in I in CM in in M3 re p S co in c re fH re £ re p rH p o a> £ (U a re fH re c 0) £ > . re a P o » 73 O Si P re 6 § p fn a> •a 73 C 73 re O rH 43 43 P re P £ 43 O' re •rH o re re •H M fH fH o P a c CO re o cc re 3 i—l a 73 fH o 3 -C CO p 1 re re £ 3 CM CM • vO lO 0 • M3 O' vO • in CO CM • vO r- in • in tO fH <0 re O' re to p fH 73 c re fH r e> •H o •rH fH «—I < Si < p re re r a 73 P o r"“l CM • M3 CM CM • M3 i—1 CM • M3 CM CM • M3 O' rH • M3 P >S o m re p £ tx re p p. •rH re (0 C o •rt fH a re a CO e o re •rH 00 CM • M3 O O' • in 00 Tt• M3 rH fr • M* O n • M3 p a a re re co co p Tl• M3 fH re X3 E o re re re 73 co * re c o re re re re re >s fH O ' H re CO P > • fH O •H «H si re re rH i-H O ' > x re re •rH < 03 Q Q 33 I I I I I ffl U Q W 03 O Q 03 re > <0 a n £ re fH fH x; re re re CM CM • vO C re -h p o p >-«o H c re CM • M3 03 P 0 1 O' re re re re c 3 P si re o re +-> fH •H H -> o ■a *—( re x: •H C p fH H3 fH •H • Jk >. (0 si re •H re I—I 73 p O 0> fn Table • re < 03 03 o o UL) 03 0h 0h even deliveries specified Average annual prices received by producers with in o 00 00 • 09 »H p 13, vO 00 • £ 6 a> re FF - Perfectly seasonal milk delivery patterns 'O c *0 -104- in Harrisonburg between patterns DD and EE. Under the price and de­ livery conditions stipulated for these markets during 1955, the blend price system of payment actually would have returned the highly sea­ sonal producer a higher price than the base-surplus plan. The dif­ ference in the incentives offered by the two types of payment plans for Newport News is graphically portrayed in Figure 9. The difference between the incentives which would be offered by each method is very much in evidence. The rather- wide spread between Class X and Class II prices in the selected markets is an important factor affecting the size of the price incentives which would be offered by an open base plan for even­ ing out seasonal deliveries of milk. On a simple average basis, the ' spread was $3.80 per hundredweight in Roanoke, $3.55 per hundredweight in Harrisonburg and $3.80 per hundredweight in Newport News. Assume for illustrative purposes that the spread in the Roanoke market had only been $2.00 per hundredweight rather than $3.80 per hundredweight. The price incentive offered to the highly seasonal producer EE to lower his seasonal variation to that of pattern CC would have been 64 cents per hundredweight in Roanoke rather than the $1.19 per hundredweight available under the actual $3.80 spread. Situation two - semi-closed base incentives Under the semi-closed base plan actually operating in the selected markets, individual producers probably would not make the seasonal shifts indicated in the previous discussion unless they purchased some -105- 6.00 5.75 5.25 Annual Per Blend P rice Payment 5.50 ve ra g e B a s e - S u r p l u s Payment 6.25 Price H undredw eight 6.50 5.00 4.75 4.50 4.25 J________I________ I________I________I________ I EE CC BB AA DD FF T h e o r e t i c a l Delivery P a t t e r n s Figure 9. Average annual prices— under a base-surplus payment plan and a blend price payment plan, Newport News, 1955 -106- additional base from other producers.^- Under the semi-closed plan year-to-year base changes are quite small; consequently, the only price incentive available is that offered by delivery of a given quantity of base (whatever the size) on an even monthly basis. Figure 10 illustrates three delivery patterns— all with the same size base in the Roanoke market* A producer with seasonal delivery pat­ tern AB or AC would receive $6.22 per hundredweight average annual price compared to $6.50 for a producer with pattern AD, cents could be obtained by leveling production. Thus, 28 This price incentive is much smaller than those indicated under the open base-surplus plan when both types of plans are superimposed on the same Class I and II price conditions. Six months base plan At various times in recent years, consideration has been given to the possibility of paying producers on the base-surplus plan only dur­ ing certain months of the year and paying on a straight blend price basis during the remaining months. One such proposal was that pro­ ducers be paid on the base-surplus plan during the period March through August inclusive and on a blend price basis the remaining months,2 ^ Under the semi-closed plan, base increases by increased pro­ duction are very small from year to year. It would not be possible to make the substantial shifts assumed under the open base system un­ less additional base was purchased, 2 Fred J. Saunders, Jr., "First Aid for the Base-Surplus Plan in Virginia Controlled Markets", Virginia Farm Economics. Department of Agricultural Economics, Virginia Polytechnic Institute, Blacksburg, Virginia, No. 132, August,1952, pp. 30-33. -107- mGU 9\ c CO iH a a) co CO -Q 73 a> o 0) H o I •rH s> a CA •V (A c (H cd h-> -p CO a co > •H r—1 0) 73 M Lu rH •H e lO in i i O' i (0 o •• •rH H-> CD •H IX — Free movement 61 23 60 144 Assigned 87 5 48 140 5 1 1 7 153 29 109 291 No response Total Comparison of the proportion of producers favoring assignment versus free movement in the three markets indicated that there was a significant difference between markets.1 In the Roanoke market pro­ ducers expressed a significant preference for assignment while the 1 The adjusted value of chi-square was 15.998 compared with a tabular value of 5.991 at the 5 percent level with 2 degrees of freedom. -148- Harrisonburg producers expressed a significant preference for free movement.1 Newport News producers did not express a significant pre­ ference for either method.^ It is believed that the response of Roanoke producers was indicative of their clearer understanding of the function of assignment coupled with the absence of any sizeable degree of friction between individual producers and distributors in that market. Conversely, the absence of a clear understanding of the purpose of assignment plus the fact that nearly all of the market's surplus was with one distributor may explain the reaction of Harrison­ burg producers. The most unexpected response to the assignment question was that of Newport News producers. It was known that there was a considerable amount of friction between certain producers and certain distributors in that market.'1 In such circumstances producers might be expected to value freedom to shift very highly. Apparently this factor was not as important as previously thought. The possible effect of years in dairying was considered in regard to producer response to the assignment question. No significant 1 The adjusted chi-square values were 5.632 and 10.320 for Roanoke and Harrisonburg, respectively, as compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. ^ The adjusted chi-square value was 1.120 compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. 3 One particular distributor was continually as much as 45 to 60 days behind in payment to producers for milk. He was the largest dis­ tributor on the market. Another distributor was known to have been constantly accused by producers of being dishonest in regard to butterfat tests and the reporting of Class I sales. Both of these distribu­ tors have been fined at one time or another by the Milk Commission for violation of various regulations. -149- difference was found between dairy experience groups in any of the three markets.1 Likewise, the assignment question was examined with respect to the possible effect of the size of a producer, as measured by his 1956 base, on his response to the question. examined. They were: Three size groups were 10,900 pounds and under per month, 11,GOO- 21, 900 pounds per month and 22,000 pounds per month and over. The only significant difference found between size groups with respect to their preference for assignment versus free movement was in the Harrisonburg market where producers in the 11,000-21,900 pound group definitely favored free movement in deference to specific assignment.2 Allotting Additional Base It was pointed out in earlier chapters that the base-surplus plan used in the selected markets is a semi-closed base plan. The base which each producer makes in each successive base-making period is de­ pendent on the market’s fluid milk sales situation and the size of his previous base as well as his average deliveries during the base-making period in question. The rather strong dependence on fluid milk sales changes is the principal key to the plan’s semi-closed feature. Those markets which use an open base system establish bases from deliveries during the base-making period by taking the average daily deliveries 1 The adjusted chi-square values were 1.161, 5.262 and 1.229 for Roanoke, Harrisonburg and Newport News, respectively. These compare with the tabular value of 5.991 at the 5 percent level with 2 degrees of freedom. 2 The adjusted chi-square value for this group was 4.084 compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. -150- or some percentage of this average corresponding to Class I utili­ zation. Selected market producers were asked how they thought additional base should be allotted when producers want to increase production. Table 34 summarizes their response in four categories: (l) according to increased production alone; (2) according to market fluid milk sales and increased production; (3) by purchase of base; and (4) by a combination of increases in market fluid milk sales and purchase. Each of these categories represents a different degree of flexibility in the base plan ranging from an open base system where the base is increased according to production alone to a closed system in which bases can be increased only through purchase. The major distinction which the question attempted to establish was the choice between al­ lotting additional base on the basis of increased production alone or on increased production relative to market fluid milk sales. Approxi­ mately 81 percent of the producers answering did specify one of these two possibilities. Table 34. Producer response as to how additional base should be allotted, selected Virginia milk markets, 1957 Method of allotting base Roanoke Market Harrisonburg nuiiiwji Newport News Total ui pruuuueib To production increase 42 14 32 88 To sales changes 79 12 53 144 To purchase of base 12 2 5 19 To purchase and sales 17 1 16 34 3 0 3 6 153 29 109 291 No response Total -151- No significant difference was found between markets in the pro­ portion of producers favoring the various methods when all methods were considered simultaneously.^" However, it is more meaningful to examine each market separately with respect to each method. Compari­ sons were made between the following combinations in each market: (l) production alone versus fluid milk sales; (2) purchase versus purchase plus fluid milk sales: (3) production alone versus purchase; and (4) production alone versus purchase plus fluid milk sales. The results obtained in each market showed a reasonable degree of consis­ tency although they were by no means standard. Producers in both the Roanoke and Newport News markets favored allocation on the basis of production and fluid milk sales rather than on production alone.2 Harrisonburg producers were evenly split on that particular combination. Producers in all three markets favored production alone over purchase alone when compared on that particular basis. 3 When the last three methods were grouped together and compared to the production alone method, a strong preference over all was indicated for closed or semi-closed methods of allotting additional base. Such a grouping included 69 percent of all producers answering the question in the three markets together and 72 percent, 52 percent and 70 percent 1 The adjusted chi-square value was 4.813 compared to the tabular value of 12.592 at the 5 percent level with 6 degrees of freedom. 2 The adjusted values of chi-square were 10.710 and 4.706 for Roanoke and Newport News, respectively, as compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. 3 The adjusted values of chi-square were 15.574, 7.462 and 18.270 for Roanoke, Harrisonburg and Newport News, respectively. -152- in Roanoke, Harrisonburg and Newport News, respectively, considering each market individually. This response tends to indicate general acceptance of the semi-closed type over the open type base plan, re­ gardless of the disadvantages of the semi-closed type discussed in Chapter VI. Experience in dairying was again considered as a factor which might influence response to the question of how additional base should be allotted. With respect to production alone versus the fluid milk sales and production combination, it was found that producers in the 10 year and under group favored the fluid milk sales and production combination over production alone in both the Roanoke and Newport News markets.^ None of the other dairy experience groups in these two markets indicated any particular preference for either method. Aside from the relationship just noted, dairy experience had little influence on producer response as to choice of method for allotting additional base. In a similar manner, the response on allotting additional base was examined on the basis of the seasonality of delivery of those pro­ ducers responding. Three seasonality categories were used: cent or less; 151-186 percent; and 187 percent and over. 150 per­ It was reasoned that producers with relatively small seasonal fluctuations would favor the production and fluid milk sales combination over pro­ duction alone while highly seasonal producers would favor allotting 1 The adjusted chi-square values were 7,758 and 9.188 for Roanoke and Newport News, respectively, as compared with the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. -153- additional base on the basis of production alone, particularly if their seasonal peak occurred during the base-making period* Consider­ ing all three markets together, it was found that producers in both the 150 percent or less group and those in the 151-186 percent group favored the production and fluid milk sales combination over production alone.^ above. This result follows along the line of reasoning set forth However, when the 187 percent and over group was examined, no significant preference was expressed for either method.2 A check on individual markets indicated that a strong preference in Roanoke for production and fluid milk sales over production alone was mostly re­ sponsible for the results obtained in each seasonality of delivery category. Finally, response to base allocation methods was considered from the standpoint of producer size as measured by each producer's assigned quantity of monthly base in 1956. Size of base was found to be a factor affecting response only in the case of the medium size group, 11,GOO21,900 pounds, in the Roanoke market. This group definitely favored 1 The adjusted value of chi-square was 4.624 and 8.678 for the 150 percent or lessand 151-186 percent groups, respectively, as com­ pared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. 2 The adjusted chi-square value was 0.720 compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. 3 The adjusted values of chi-square were 5.114 and 8.888 for the 150 percent or less and 151-186 percent groups, respectively,in Roanoke. Comparable Newport News values were .516 and 3.116. All values compare with the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. -154- the fluid milk sales and production combination over production alone.1 It was thought that producers in the small size base group would favor allocation on the basis of production alone since such a method would enable them to grow more rapidly. The absence of such a response may indicate that they felt large producers would be in a position to take advantage of them since such producers probably would have the capital and facilities necessary for expansion. Continuance of the Base-Surplus Plan Finally, selected market producers were queried as to whether the base surplus plan should be continued in its present form; and if not, what types of changes they would suggest* Their response is summarized in Table 35. Table 35. Producer response to continuance of base-surplus plan in its present form, selected Virginia milk markets, 1957 Should the basesurplus plan be continued in its present form? Yes No Don*t know Total Roanoke Market Harrisonburg Newport News Total 133 18 80 231 19 9 28 56 1 2 1 4 153 29 109 291 1 The adjusted value of chi-square was 12.568 compared to the tabular value of 3.841 at the 5 percent level with 1 degree of freedom. -155- There was a significant difference between markets with respect to the proportion of producers favoring the retention of the plan in its present form* A majority of the producers in all three markets favored retention, but the expression of approval was not as strong in Harrisonburg as it was in the other two markets. This response was in line with the previously noted failure of the plan to hold pro­ duction and fluid milk sales in proper balance in Harrisonburg relative to the balance achieved in the other two markets. Approximately four-fifths of the producers in all three markets considered together favored continuing the base-surplus plan in its present form.2 The remaining one-fifth of the producers in the com­ bined markets indicated a variety of possible changes which they thought should be made. Those most often mentioned included: (l) some means whereby "old” producers could be allowed to grow to more efficient size before "new” producers are taken on; and (2) the guar­ anteed payment of the Class I price for all base rather than using the distributors* Class I sales as a percentage of his assigned base as the payment criteria. The first suggestion relates to the producer growth retarding aspect of the base as discussed in Chapter VI. A number of other producers commented on the questionnaire that their operation was too small, but they apparently did not feel that this disadvantage was strong enough to suggest any changes in the base— 1 The adjusted value of chi-square was 10.084 as compared to the tabular value of 5.991 at the 5 percent level with 2 degrees of freedom. 2 This result is similar to that obtained by M. C. Conner in a survey conducted in 1951 in the Roanoke, Lynchburg and Norfolk markets. -156- surplus plan. The second suggestion probably stems from the fact that some producers did not fully understand the payment procedure. The response to the question asked concerning base-surplus plan continuance did not indicate complete, unqualified approval of the present plan. However, it did indicate that, in the main, selected market producers were satisfied with the present form of the plan. This feeling was more pronounced in Roanoke than in either of the other two markets.1 This reaction might have been anticipated to some extent since previous analysis indicated that the plan apparently has enjoyed greater success in Roanoke than in either of the other two markets. Evaluation and Implications This analysis of producer reactions to the base-surplus plan in­ dicated that selected market producers: (l) in general gave strong support to continuance of the plan; (2) did differ somewhat from mar­ ket to market in their attitude toward specific provisions of the base regulations; (3) gave general support to the semi-closed aspect of the base plan as used in their markets; (4) gave emphatic approval to the right to sell and transfer base between producers, but were somewhat divided as to the manner in which such transfers should be handled; and (5) were evenly split on whether new producers should be granted market entry. 1 No less than a dozen Roanoke the Roanoke version of the plan was would not like to see anyone tamper that these producers were among the producers indicated that they felt most satisfactory and that they with it. Cross-checking indicated larger base holders on the market. -157- These responses imply over all approval of the base-surplus plan as administered in the three selected markets. At the same time they seem to argue that the producers concerned feel a need for greater flexibility in the plan to meet the varying production and marketing conditions prevalent in each market. Each market should be considered in the light of its own particular characteristics and the general features of the base-surplus plan tailored to fit the characteristics.^- 1 Base plans are complex mechanisms with many possibilities for varying their component parts. The timing and length of the basemaking period, methods of base transfer, operating reserve allowance necessary and other related factors can vary. So long as the essential feature of making the individual producer responsible for his pro­ duction actions is retained, other features can be made flexible enough to fit minor variations in market characteristics. For example, Roanoke producers might be allowed to sell base without selling cows or more new producers allowed to enter the Roanoke and Newport News markets. The statement in the text to which this footnote is applic­ able was intended primarily to emphasize the continuing need for flexibility. CHAPTER VIII SUMMARY AND CONCLUSIONS Overproduction relative to fluid milk requirements is a problem of major consequence in many fluid milk markets* This problem mani­ fests itself in prices paid to producers that are inconsistent with prices established for fluid milk under classified The chief stimulus for pricing schemes* overproduction appears to come blend price system of payment to producers for their milk. fromthe Under this system of payment, all producers are paid the same price (average value of all milk in the market) for all the milk they deliverat any specific time. limit production as There is no incentive for them to long as marginal revenue is greater than marginal cost. payment plan, the output of all producers together may greatly exceed the quantity of milk which can be sold in fluid form. Undersuch a The use of an allotment or quota plan offers a means of alleviating the overpro­ duction problem by establishing a share of the market*s fluid milk sales for each producer andpaying only the manufacturing price for milk delivered in excess of that amount. The purpose of this study was to investigate some of the more important economic and institutional aspects of one specific allotment plan— a base-surplus plan— as it has operated in certain Virginia milk markets. -158- -159- A theoretical analysis was developed to illustrate the probable supply response under both a base plan and the blend price method of payment. Consideration was given also to the possible effect of a base plan on general welfare. Data were collected from the Virginia Milk Commission and other secondary sources on milk deliveries to plants, fluid milk sales, individual producer base allotments, the transfer of allotments among producers over time and other related items for the three Virginia milk markets— Roanoke, Harrisonburg and Newport News.* These markets were chosen on the basis of predetermined market differences so as to permit examination of the operation of the plan under heterogeneous conditions. Certain primary data were obtained by mail questionnaire and personal visitation. These data were processed and analyzed to test certain hypotheses dealing with the effect of the Virginia basesurplus plan on seasonal variations in milk supply, total milk supply relative to fluid milk sales, prices returned to producers for milk and producer base growth over time. An analysis also was made with respect to producer attitudes and opinions about the plan. Fintiima2 In 1955, the greatest seasonal variation in supply in any market examined (including all markets for which milk delivery data were ob­ tained) was 127 percent (high month of delivery was 27 percent greater 1 In addition, certain information on market base allotments, milk deliveries and fluid milk sales was also collected and analyzed for nine other Virginia milk markets using the base-surplus plan. 2 See note four, Appendix D. -160- than low month). Similar seasonal supply variations for Roanoke, Harrisonburg and Newport News were 113 percent, 125 percent and 123 percent, respectively. A comparative analysis of both milk deliveries and fluid milk sales variations indicated that the seasonal variations in deliveries were closely aligned with seasonal variations in sales. From the annual production control standpoint, producers were encouraged to limit the excess of deliveries over established base allotments to rather small percentages. Total annual deliveries of milk were 12 percent, 23 percent and 5 percent greater than total assigned base allotments in Roanoke, Harrisonburg and Newport News, respectively, in 1955. In terms of utilization, 92 percent, 81 percent and 91 percent of base-holding producers* deliveries went into fluid usage in 1955 in Roanoke, Harrisonburg and Newport News, respectively. The relative success of market equalization and production control efforts was reflected in the average price paid to producers for their milk. The weighted average annual price paid per hundredweight in 1955 was $6.23, $5.43 and $5.89 in Roanoke, Harrisonburg and Newport News, respectively. The Class I price (fluid price) in these same markets was $6.50, $6.25 and $6.50, respectively. The difference be­ tween the Class I price and the average price paid to producers was relatively small for Roanoke and Newport News. ducers did not fare quite as well. Harrisonburg pro­ A comparison of the three selected markets with other contiguous markets using a straight blend price system indicated that the difference between the Class I price and the average price paid to producers was greater in the markets using the -161- straight blend price system of payment* The Virginia base-surplus plan was found to offer relatively small price incentives for leveling production* Consequently, indi­ vidual producers were found to vary greatly in their high month-tolow month deliveries* However, the high months were scattered re­ markably well throughout the year. There was reason to believe that the timing of the base-making period had considerable influence on the time of peak delivery* The results obtained suggest that even though an open base plan offers much greater price incentives for evening out production (this was demonstrated analytically), the ob­ jective of reasonably even market supply can be achieved by a semi­ closed base plan (as exemplified by the Virginia base-surplus plan) if the internal provisions of the plan are properly designed. Individual base allotments over time were examined to determine the extent of growth* Average base growth was small, especially where no additional base had been purchased* Limited growth was particularly evident in Roanoke where moderate year-to-year increases in fluid milk sales were coupled with relatively rigid enforcement of the base regu­ lation pertaining to the allotting of additional base. In the Roanoke market, there was some evidence that since 1947 smaller producers had grown relative to producers with larger beginning base allotments. However, the growth was not very pronounced* Those producers who were in the smaller size group in 1947 were for the most part still in the smaller size group in 1956. Examination of the 1956 base situation indicated that approxi­ mately 50 percent of the producers in the three selected markets had base allotments of 15,000 pounds per month or less* The potential net returns on such units appear to be limited irrespective of the level of efficiency attained in producing the assigned allotment. Approximately two-thirds of the producers who answered the mail ques­ tionnaire indicated a need for additional base in order to fully utilize the resources at their disposal. Just under two-thirds of those same producers indicated they would be willing to purchase additional base from other producers if it were offered for sale. A considerable number of producers did make purchases to increase the size of their allotments during the 1947-56 period. The producers shipping milk to each of the selected markets in 1956 gave strong support to the continuance of the base-surplus plan in its present form. Slightly less than 20 percent of those producers answering the questionnaire indicated that they felt definite changes should be made. Emphatic approval was given to the right of individual producers to sell and transfer base. There was much less agreement on the question of whether or not new producers should be allowed to enter the respective markets. Hypothetically, a strong reaction against mar­ ket entry by new producers might have been expected. However, such a reaction was not evident. Conclusions The analytical results obtained in this study appear to support the following conclusions within the time periods examined: (l) The Virginia base-surplus plan generally has achieved its objective of maintaining supplies of milk in relative balance with fluid -163- milk needs; and subsequently, has maintained prices paid to producers consistent with established Class I prices in the markets selected for study* There was a positive relationship between the degree of success and the rigidity of enforcement of base regulations (Roanoke)• (2) If the necessary administrative machinery is available or can be made available, there appears to be no particular reason why other milk markets with .similar market characteristics could not achieve a similar degree of success in meeting their overproduction problems by using a base plan of the type described in this study**(3) Some definite producer growth problems arose as a result of the use of the methods necessary for achieving the above objective* Achievement of price and market stability (as in Roanoke for example) appeared to necessitate rather definite "freezing” of size (except where allotments were purchased from other producers). Adjusting pro­ duction to maximize returns under changing cost relationships and/or technological developments becomes extremely difficult under such con­ ditions* In terms of welfare and efficiency, the Virginia base-surplus plan appears to have: (1) facilitated the transfer of income from milk consumers to those milk producers who held base allotments* (2) provided some productive efficiencies emanating from re­ duction of price and income uncertainty. These efficiencies may have been offset wholly or in part by the loss of that productive efficiency attainable by freeing those best able and most willing to produce milk 1 See note five, Appendix D -164- under unrestricted conditions. (3) reinforced the classified pricing plan in increasing the bargaining power of producers. (4) sacrificed some freedom and initiative on the part of the more progressive and capable managers. (5) not passed on to consumers the benefits of technological advance in a manner consistent with public tax monies expended in the development of technological innovations. Final judgment of the relative merits of these procedures and results must be expressed through the legislative process in terms of the value system of those affected by the program. Ifimi-t9.-tl.gns.. .to..,?.tu.dy There appear to be two important limitations to the work reported in this study: (l) no detailed analysis was made of the impact of the semi-closed base plan on enterprise combination and related factors on individual farms (although plans have been initiated for future work along these lines) and (2) it would have been helpful to have had more specific information over the entire twenty-two years of operation of the plan. BIBLIOGRAPHY BIBLIOGRAPHY Bartlett, W. R. Price Plans for Marketing Milk. Illinois Agricultural Experiment Station Circular 358, Urbanna, Illinois, July, 1930. Black, John D. The Dairy Industry and the AAA. The Brookings Insti­ tution, Washington, D. C., 1935. Burns, D. J. and G. M. Beal, Farm Practices Affecting Seasonal Milk Production in the Baltimore Milkshed. Maryland Agricultural Experiment Station Bulletin A-58, College Park, Maryland, October, 1950. Cassels, John M. A Study of Fluid Milk Prices. Harvard University, Harvard University Press, Cambridge, Massachusetts, 1937. Cohen, Ruth L. The History of Milk Prices. The Agricultural Economics Research Institute, Oxford, England, 1936. Conner, M. C. The Milk Market Control Law in Virginia. Virginia Agri­ cultural Experiment Station Bulletin 444, Blacksburg, Virginia, June, 1951. Gaumnitz, E. W. and 0. M. Reed. Some Problems Involved in Establishing Milk Prices. Agricultural Adjustment Administration Marketing Information Series, U. S. Department of Agriculture, Washington, D. C., September, 1937. Hirsch, Hans G. and Irwin R. Hedges. An Analysis of the Base-Quota Plan in the Memphis Milkshed. Farm Credit Administration Misc. Report 131, U. S. Department of Agriculture, Washington, D, C., March, 1949. Horner, J. T. The Detroit Milk Market, Michigan Agricultural Experi­ ment Station Special Bulletin 170, East Lansing, Michigan, March, 1928, Jensen, Einar. The Boston Milk License.. Market Administrators Office, Boston, Massachusetts, August, 1934. Johnson, Glenn L. Burlev Tobacco Control Programs. Kentucky Agri­ cultural Experiment Station Bulletin 580, Lexington, Kentucky, February, 1952. -166- -167- Lininger, F. F. Relation of the Basic-Surplus Marketing Plan to E lA. k Pyo. dMctlPh m the Philadelphia Milk Shed. Pennsylvania Agricultural Experiment Station Bulletin 231, State College, Pennsylvania, August, 1928. Metzger, Hutzel. Cooperative Marketing of Fluid Milk. U. S. Depart­ ment of Agriculture Technical Bulletin 179, Washington, D. C., May, 1930. Moffett, Woodson W., Jr., and Warren E. Collins, et. al. The Effect M..Methods, of Paving Farmers for Milk on Seasonality of Production .LO Selected Southern Markets. The Agricultural Experiment Sta­ tions of Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Texas, and the Agri­ cultural Marketing Service, U. S. Department of Agriculture co­ operating, Southern Cooperative Series, Bulletin No. 37, June, 1954. Morgan, Ben F., Jr. "Virginia*s Milk Pricing System." Virginia Farm Economics No. 120, Department of Agricultural Economics, Virginia Polytechnic Institute, Blacksburg, Virginia, August, 1949. Peterson, E. E. Timing Milk Production for Highest Profit in the Detroit Milkshed. Michigan Agricultural Experiment Station Special Bulletin 386, East Lansing, Michigan, October, 1953. Pollard, Anson J. Seasonal Variation in Production in the New York Milkshed. and Its Relation to Production-Adiustment Plans. Cornell University Agricultural Experiment Station Bulletin 783, Ithaca, New York, June, 1942. Pritchard, Norris T. Fall Premium Milk Pricing Plans. Farm Credit Administration Circular 147, U. S. Department of Agriculture, Washington, D. C., September, 1952. Quackenbush, G, G. and H. A. Homme. Seasonal Price Incentives of the Base and Excess Plan in the Detroit Milk Market. Michigan Agri­ cultural Experiment Station Technical Bulletin 228, East Lansing, Michigan, March, 1952. Roberts, John B. The Louisville Fall-Premium Plan for Seasonal Milk Pricing. Kentucky Agricultural Experiment Station Bulletin 510, Lexington, Kentucky, November, 1947. Schoenfeld, William A. Some Economic Aspects of the Marketing of Milk and Cream in New England. U. S. Department of Agriculture Circular 16, Washington, D. C., October, 1927. Schuh, George E. The Supply of Fluid Milk in the Detroit Milkshed...a_s Affected by Cost of Production. Michigan Agricultural Experiment Station Technical Bulletin 259, April, 1957. -168- Spencer, Leland. "Quota Plans to Regulate Milk Supplies." Talk pre­ sented at Farm and Home Week, Cornell University, Ithaca, New York, March, 1955. Stitts, T. G. and E. W. Gaumnitz. Relative Prices to Producers Under .Selected Types of Milk Pools. Farm Credit Administration Bulletin 25, U. S. Department of Agriculture, Washington, D. C., June, 1938. Stocker, Noel G. and Irwin R. Hedges. Base-Surplus Plan in the Madison. Wisconsin Milk Market. Farm Credit Administration Misc. Report 136, U. S. Department of Agriculture, Washington, D. C., December, 1949. Underwood, F. L. An Economic Study of Dairy Farming in the Roanoke Area in 1939-1940. Virginia Agricultural Experiment Station Technical Bulletin 88, Blacksburg, Virginia, July, 1943. Welden, W. C. and L. F. Herrmann. Base Allotment or Quota Plans Used bv Farmers1 Cooperative Milk Associations. Farm Credit Admin­ istration Misc. Report 23, U. S. Department of Agriculture, Washington, D. C., May, 1940. Welden, W. C. and L. F. Herrmann. Use of the Level Production Plan in Milk Marketing. Farm Credit Administration Misc. Report 57, U. S. Department of Agriculture, Washington, D. C., August, 1942. Welden, W. C. and T. G. Stitts. Economic Analysis of Bargaining. Problems of Milk Cooperatives. Farm Credit Administration Cir­ cular 104, U. 5. Department of Agriculture, Washington, D. C., April, 1937. Welden, W. C. and T. G. Stitts. Milk Cooperatives in Four Ohio Markets. Farm Credit Administration Bulletin 16, U. S. Department of Agri­ culture, Washington, D. C., April, 1937* Welden, W. C. and T. G. Stitts. Cooperative Milk Marketing in Lp.uisz ville and Other Nearby Cities. Farm Credit Administration Bulletin 32, U. S. Department of Agriculture, Washington, D. C., April, 1939. APPENDIX A MAIL QUESTIONNAIRE COPY - MAIL QUESTIONNAIRE - COPY VIRGINIA AGRICULTURAL EXPERIMENT STATION BASE SYSTEM STUDY Dear____________ : Many farmers ask questions about our Virginia base-surplus plan* How should bases be determined each year? Should all producers share equally in the fluid sales of a given market? Are present bases too small to permit efficient operation of Virginia dairy farms? As a service to the dairy industry, we here at V.P.I. are attempting to obtain answers to these and other questions* The answers to these questions can only be gotten through your assistance* Doubtless, you would also be interested in the answers yourself. By filling in the questionnaire below and returning it in the enclosed self-addressed envelope, you will be helping yourself and others. We will send you a copy of the findings of this study. Your reply will be greatly ap­ preciated and will be kept strictly confidential. Sincerely yours, /s/ Carl J. Arnold Carl J. Arnold Dairy Marketing Specialist A. BASE-SURPLUS INFORMATION 1, (a) Should a producer have the right to sell his base? Yes No___ (b) If yes, should he be allowed to sell only part of it_____ or should he be required to sell all of it at one time______ ? (check one) (c) Do you feel that producers should be required to sell their cows when they sell base? Yes .. No___ Turn Page for Questions on the Inside -170- (a) Was your 1956 base allotment large enough to allow you to pro­ duce all the milk you could efficiently with the resources of your farm? Yes No__ (b) If not, approximately how much additional base did you need? __________ pounds (a) Under present marketing conditions, should any new producers be allowed to come on your market? Yes No__ (b) If yes, should they be allowed to make new bases or should they be required to purchase existing base from an old producer or producers________ ? (check one) (a) If sufficient base were available, would you be willing to pur­ chase any? Yes No__ (b) If no, why not?_____________________________________________ (c) If you would be willing to purchase some base, how much would you be willing to pay per 1,000 pounds?______ dollars/l ,000# Do you feel that a dairyman should be: (check one) (a) Free to change distributors at any time or (b) Assigned to a specific distributor by acontrol agency Setting original base allotments is relatively simple. It is a matter of dividing market fluid sales at the time among producers according to their production. Problems arise when someone wants to increase production. What would you suggest be done if any in­ dividual desires to increase his production? (check one) (a) (b) Increase his base in proportion to his increased production Increase his base only if there were an increase in market fluid sales ______ (c) Increase his base only if he bought additional base (a) Do you feel that the base-surplus plan should be continued in its present form in your market? Yes No__ (b) If no, what changes do you think are desirable?_______________ -172- B. GENERAL INFORMATION 9en«aigin?o™a?ionrriPtl0n °f Y°Ur fa™ * the *oll«rtng 1. How many dairy cows do you have in your herd? 2. How many dairy heifers of all ages do you usually carry? __ _Jieifers 3. Are you a member of D.H.I.A.? 4. How long have you been shipping to your present market? Yes___ No____ 5. How many years have you been in dairvina? 6. Is dairying your major source of farm income? 7. cows years v^r-a Yes No Do you have enough labor and/or equipment to handle more milk than you are currently producing? Yes___No___ 8. How much longer do you expect to continue to farm? 9. How many beef cattle of all ages do you usually carrv? head 10. How many acres of open land are you presently farmina? acres 11. How much of the above acreage do you usually have in crops___acres 12. How many acres do you usually have in hav? 13. How much of your hay acreage do you usually have in alfalfa hay? acres 14. How many acres do you normally have in silaae? 15. How much of your silage acreage is corn silaae? 16. Approximately what percent of your grain concentrates are purchased? vpars acres acres acres % 17. Is your pasture land mostly native or seeded ? (check one) Thanks Very Much for Your Contribution Note: If you have any additional comments you would like to make, space is provided below APPENDIX B BASE REGULATIONS, ROANOKE MARKET, 1955 BASE REGULATIONS, ROANOKE MARKET, 1955 Each distributor in the established sales area, upon obtaining his initial license, shall file with the Local Milk Board within ten days after being licensed by the Commission to handle milk, the base of each producer delivering milk to him. No distributor shall take on a producer or in any way accept milk from a baseholding producer assigned to the plant of another dis­ tributor without first having obtained the written consent of the Commission. A producer-distributor who discontinues distributing milk or cream and becomes a wholesale producer of milk shall have his base established and assigned to a distributor by the Local Milk Board and approved by the Commission on an equitable basis with all other producers. New producers shall be taken on the market in order of their ap­ plications, upon the presentation to the Commission of satisfactory evidence showing the need of additional milk and cream in the mar­ ket. A new producer shall receive for his total deliveries, during his first four full delivery periods, the lowest price paid by his distributor for milk. After that time his base shall be set up by the Commission on a basis equitable with other producers having bases previously established. Bases to be in effect for each calendar year, shall be determined with reference to the average monthly deliveries of milk during -175- the months of September, October and November of the preceding calendar year, and adjustments to be made in existing bases each year thereafter, as follows: 1* If the average monthly delivery of milk is less than the base then in effect, then the producer shall be given a temporary base equal to his average monthly deliveries of milk for this last base-making period, but shall be allow­ ed to recover his former base if his average monthly de­ liveries of milk for either of the next two regular basemaking periods shall be sufficient. If, however, he shall fail three successive attempts to maintain his former base, then he shall be assigned a new base equal to his average monthly deliveries of milk for the last regular basemaking period, without any recourse. 2. If the average monthly delivery of milk by a producer is in excess of 110 percent of his base, that part in excess of 110 percent shall be eligible for additional base, if any is to be allotted. However, if he shall sell a part of his base, then he shall not be eligible for any in­ crease in base under the 110 percent rule until he has purchased as much as he has sold. 3. However, the total aggregate bases of all producers shall not exceed the average monthly sales of fluid milk and fluid cream by distributors for the previous twelve months by more than 5 percent. F. A renter or tenant, provided he is the owner of the entire herd, 176- who is a producer holding a base on the market, may retain his base in the event he moves from one farm to another, in this pro­ duction area, and he may retain a percentage of the base in pro­ portion to his ownership of a jointly owned herd and base. An owner of a base and herd, or a part thereof, may sell and transfer, subject to the approval of the Commission, his base and herd, or his part thereof, to any producer, or person desiring to become a producer, provided however, that any application for the sale and transfer of a base must be accompanied by satisfactory evidence, produced before the Commission showing a bona fide sale of the entire herd and base, or his entire part of such herd and base, and that the approval of such sale by the Commission will promote the best interest of the entire milk market. Further, that if a producer who failed by a certain amount to maintain his base at the previous base-making period shall sell his entire base, or a part of his base, he can sell and transfer only his current base and cannot transfer to the buyer any of his privilege under Regu­ lation No. 5 of regaining base lost at the previous base-making period. G. Producers shall at all times deliver regularly to their distribu­ tors all milk produced by them except such milk as may be needed for home consumption, provided, however, producers shall not be required to deliver regularly milk produced by them in excess of 110 percent of their base allotment. No producer shall have a base in more than one market. No producer, or association of producers, shall buy or obtain -177- otherwise any additional milk, from any source whatsoever, and deliver it to his, or its, distributor for the purpose of retain­ ing or increasing his or its members* base or bases. No producer shall have a base for a given production unit, in more than one market, nor shall more than one base be assigned to the owner, or owners, of one production unit. H. On and after the effective date of this Regulation, no new base shall be established at the plant of another distributor, for any licensee operating as a producer-distributor, nor shall any baseholding producer be granted a license to distribute milk, unless and until he has surrendered the base held by him at the plant of another distributor. This Regulation shall not prohibit, however, persons who have heretofore been licensed to distribute milk and who have also been given a base at the plant of another distribu­ tor, from continuing to operate in this dual capacity until such time as he shall voluntarily discontinue to so operate. I. Should a producer fail to deliver to his distributor the quantity of milk for which he has a base due to the effects of disease in his herd, fire, or other unavoidable cause, the Commission, may, in its discretion, adjust his base upon fair and reasonable prin­ ciples, provided he shall, within thirty days after the cause or causes of his failure shall have occurred, notify the Chairman or Secretary of the Local Milk Board and the Secretary of the Milk Commission of the cause or causes for which he seeks a readjustment of his base, and shall accompany his request for adjustment with proof of the cause or causes of his failure to make deliveries* -178- J. A producer having a base on the market, approved by the Commission, shall have the right to continue to ship all of his milk and/or cream to the distributor at whose plant such base is established. The milk delivered by such producer shall not be rejected by the distributor so long as the milk and/or cream is delivered regularly, is merchantable, and meets all requirements of the Local and State Health Laws and Regulations. No producer having a base, established in the market, and as­ signed to a distributing plant by the Commission, can transfer his base and deliveries to another distributing plant, without having first obtained the written approval of the Local Milk Board. The decision of the Local Milk Board in all such transfers shall be subject to an appeal to the Milk Commission. K. Notwithstanding other provisions of this Regulation covering the establishment or adjustment of bases, the Commission, may in its discretion, adopt other formulas for the fixing or adjustment of bases whenever in its judgment conditions exist requiring the use of other methods for the establishment or adjustment of bases, necessary to meet conditions of the market. L. The Commission may suspend or revoke a base held by a producer, upon due notice to the producer, and after a hearing where the Commission is convinced from the evidence that such base-holding producer has knowingly violated any of the provisions of these Regulations. APPENDIX C BASE PAY-OFF PROCEDURE VIRGINIA MILK COMMISSION MARKETS, 1955 BASE PAY-OFF PROCEDURE VIRGINIA MILK COMMISSION MARKETS, 1955 The following method of payment by distributors to producers is required in each market. To determine the payment of breed or certified milk that is de­ livered by one or more producers, for which the premium price is paid, the amount sold as such shall be deducted from his or their bases and the remaining bases will be used to determine the equitable distribu­ tion for the remaining amount of milk with other producers. When the breed or certified milk has been determined, the remaining milk shall be apportioned as follows: Producer Bases Deliveries Class I Class II Class III A B C D 10,000 5,000 3,000 2,000 9,000 4,750 1,000 2,250 7,647 3,824 1,000 1,529 1,000 500 353 426 200 521 1,700 14,000 1,300 10% 70% 76.47% The total Class I sales are divided by the total bases to get the Class I percentage. EX, 14000 ■-** 20000 = 70% This percentage is to be applied to each individual base. Producer C did not deliver the 70% of his base (2100 pounds), which he is allowed in Class I. Therefore, he is given all of his deliveries in Class I and a new percentage must be obtained so that the remainder of his base (1100 pounds) may be divided between the other producers. This is ob­ tained by subtracting the pounds C is given in Class I from the total Class I sales. EX. 14000 - 1000 = 13000 pounds The base belonging to C is subtracted from the totalbases inthe same manner. EX. 20000 - 3000 = 17000 pounds The new percentage is obtained by dividing the newClass I total by the new base total. EX. 13000 17000 = 76.47% 20,000 17,000 -180- -181- This percentage shall be multiplied by each individual base. The poundage obtained is given each producer in Class I as his Class I sales. EXo A 10000 x 76.47% =s 7,647 pounds B 5000 x 76.47% = 3,824 pounds C Already obtained 1,000 pounds D 2000 x 76.47% = 1,529 pounds This should total 14,000 pounds Total Class I The total Class II sales are divided by the last aggregate bases ob­ tained in working Class I. EX. 1700 + 17000 - 10% Each of the individual bases is multiplied by the 10% and the amount obtained is the amount put in Class II. EX. A 10000 x 10% * 1000 pounds B 5000 x 10% = 500 pounds C D 2000 x 10% = 200 pounds This should total 1700 pounds Total Class II * XX X XX XXX xx-xx-xxxxxxxxxxxxx Class III is made up by subtracting from each producers deliveries his Class I and Class II pounds. The remainder goes into Class III including purchases of milk and/or cream from sources other than from base-holding producers. xxxxxx X X X X X X X X X X X X X X X X X X XX A producer who fails to deliver milk that meets the State and Local Health requirements for fluid milk and fluid cream in each market, shall have his base reduced by one-thirtieth (l/30) for each day of the failure. APPENDIX D SPECIAL NOTES SPECIAL NOTES Note One Some of the reasons for the choice of 1955 as the year for securing detailed data on individttfrl lined in the text* sales and deliveries have been out­ Some additional comment seems appropriate* As is discussed in the text, a maximum of five years data (1951-1955) were available (records for all prior years had been destroyed). Since the individual producer sales and delivery analysis constituted only one part of the entire analysis (as contrasted to the market analysis done for 1951, 1953 and 1955 and the chapter on individual producer base growth done over the period 1947-1956), 1955 was chosen as being the most recent year available at the time the data were obtained. It was considered to be the least abnormal year of the five years for which data were available. It is difficult to ascertain with any precise accuracy just what defines a "normal" year. As far as the author is able to determine, 1955 was a "normal" or "typical" year. It was a year in which both Grade A receipts at plants and fluid milk sales continued their long time upward trend in the markets selected for detailed study as well as most other Virginia markets. Nineteen fifty-five was a relatively drought free year in Virginia with pasture conditions about the same percentage of normal as the average of the past five years. The average milk-feed ratio for Virginia for 1955 was 1.33 compared to 1.29 for 1954 -183- -184- and the 1949-1953 average of 1.32. The Class IX price (surplus price) was approximately 30-35 cents lower in 1955 than the 1950-1954 average. The Class I price in 1955 for Roanoke and Harrisonburg was higher than the 1951 price but lower than the 1953 price (about 30 cents difference each way in both mar­ kets) • The Class I price in Newport News in 1955 was the same as in 1951 but lower than 1953 (by approximately 30 cents). The differences in the surplus and Class I prices for 1955 as compared to the other years probably had some effect on 1955 production. However data pro­ vided on the delivery-to-base rati© on page 85 do not indicate signifi­ cant differences in the ratios between the three years for most of the markets examined. There were provisions for seasonal changes in the Class I price in Newport News and Harrisonburg during 1953-1955. sonal pricing in Roanoke. There was no sea­ The seasonal price movements in Newport News and Harrisonburg were not related by formula to changes in Class I sales. The semi-permanent nature of dairying (as compared to the relative ease with which one can shift in and out of hog and beef production) and its relatively fixed production patterns (at least in the short run as contrasted to the ease of expansion or contraction in some other types of agricultural production) appear to render it less susceptible to dramatic fluctuations in supply from year to year. The choice of 1955, which was at least as "normal" as any of the years available, seemed to be the best of the limited alternative choices which could be made. -185- Note Two The term atomistic, as used in this study, does not apply to the entire dairy marketing system nor is it used to describe any segment of the Virginia dairy industry operating under State price control regulations. No contention is made that the supply response under the base-surplus plan is atomistic. Atomistic as used in this study is not meant to infer that a perfect market exists. It refers only to the supply response of individual producers where a blend price payment system is used. The purpose of the theoretical discussion is to examine what the conditions are in markets where blend prices are paid (not the Virginia markets) and how the use of a semi-closed base plan could pos­ sibly help the situation. Atomistic infers that each individual pro­ ducer* s production is small relative to the total production of the market and consequently his own production decisions will have a rela­ tively small effect on the market average price. The production de­ cisions of all producers together will have an effect on the market average price (but not the action of any one individual)• Used in this context, atomistic supply conditions do not conflict with the price bargaining operations of cooperatives which may approach a monop­ oly position. Atomistic supply response refers to actions taken by individual producers after the various class prices have been estab­ lished either by collective bargaining or by some regulatory agency. It is felt that the term atomistic accurately characterizes the supply response of individual producers in markets where the number of producers is relatively large, each producers production is small -186- relative to the market total and where jig. arrangement exists for limitlBa Jtfafi. . KTPtiUCtioin M individual producers either bv cooperatives ox bv governmental regulation. This does not rule out the presence of co­ operatives and/or price regulations which may influence the prices paid for various classes of milk* Again it is emphasised that atomistic supply response by individual producers may exist side by side with monopolistic or oligopolistic pricing. The problem is one of reflect­ ing to the producer any gains from such pricing. Note Three Mention is made of restriction of entry to each market at various stages of this report. The question arises as to what extent sanitary regulations may act as barriers to entry. There is considerable vari­ ation between markets in the sanitary requirements which must be met by producers serving those markets. This situation is not unlike the situ­ ation in most other states with respect to differences in sanitary re­ quirements between individual markets. To the extent that there are differences between markets, producers attempting to change from one market to another would have to change their operation in accordance with the specific requirements of the new market they desire to enter. As far as the writer has been able to determine, sanitary requirements have not been used to reinforce the restriction of producer entry under the base-surplus plan. The Virginia Milk Commission is not charged with any responsibility for sanitary regulations; nor does it have any power to determine who is or is not properly qualified to produce milk in terms of sanitary -187- standards. The Commission does require that each applicant for a base on any of its controlled markets must first secure a Grade A health permit before it (the Commission) will accept his application and/or give him any consideration. Restriction of entry as used in this study refers primarily to the Commission's policy of requiring prospective producers to substantiate the need for their milk on the market they desire to enter. Sanitary regulations are not considered to be of any special significance in this respect. Note Four In the absence of the development (either by this study or by other studies) of any satisfactory criteria for measuring the minimum seasonal variation feasible under varying production conditions and the maximum Class I utilization attainable under varying market conditions, a com­ parison of the magnitude of these variables for several other markets provides a means of appraising the effectiveness of the base-surplus plan. This note is designed to indicate the magnitude of these vari­ ables in some other milk markets as a basis for such a comparison. A study published in 1957 provides some comparative data on the New York, Boston, Philadelphia, Baltimore and Washington, D. C. markets for 1954.1 The seasonality of delivery (high month as a percentage of low month) was as follows* New York (165 percent); Boston (156 percent); 1 Arthur D. Jeffrey, The Production-Consumption Balance of Milk in the Northeast Region. Northeast Regional Publication No. 29, Cornell University Agricultural Experiment Station, Ithaca, New York, June, 1957. -188- Philadelphia (130 percent); Washington, D. C. (123 percent) and Balti­ more (124 percent). The Class I utilization for these markets was as follows; New York (64 percent); Boston (71 percent); Philadelphia (79 percent); Washington, D. C. (72 percent) and Baltimore (67 percent). The average annual difference between the Class I price and the average price received by producers was; New York ($1.59/cwt.); Boston (88 cents/cwt.); Philadelphia (62 cents/cwt.); Washington ($1.36/cwt.) and Baltimore ($l.ll/cwt.). With respect to seasonality of delivery, Jeffrey indicates that a high month to low month ratio of 130 percent or less is considered to be indicative of uniform or even deliveries to plants.1 Quackenbush and Homme also indicate that a high to low variation of 30 percent achieved in the Detroit market is a commendable and enviable record.2 A random sample of ten Federal Order markets was selected from markets reported in the Fluid Milk and Cream Report for 1955. Computation of the high month to low month delivery variations yielded the following percentages; Cleveland (143), Chicago (142), Milwaukee (129), St. Louis (140), Springfield, Mass. (137), Nashville (125), New Orleans (118), North Texas (124), Wichita, Kansas (122), and Puget Sound, Wash. (140). With respect to Class I utilization, fifteen Federal Order markets were selected at random and the Class I utilization as a percentage of 1 Ibid.. p. 7. 2 G. G. Quackenbush and H. A. Homme, Seasonal Price Incentives of the Base and Excess Plan in.the Detroit Milk Market. Michigan Agri­ cultural Experiment Station Technical Bulletin 228, March, 1952, pp. 4 and 32. total receipts secured for the period 1951 through 1956.1 These per­ centages are shown in the following tabulation: Class I utilization as a percentage of total purchases, fifteen Federal Order markets, 1951-1956. __________________ Year Market 1951 1952 1953 1954 1955 1956 percent Cleveland 76 68 66 65 69 72 Detroit 85 74 71 70 73 71 Toledo 83 85 82 84 85 89 Columbus 74 75 72 71 73 74 Springfield, Mass. 83 83 79 77 77 75 Milwaukee 79 77 73 77 81 79 Chicago 55 53 47 47 52 49 Minneapolis 62 63 59 62 74 67 St. Louis 88 89 82 79 82 79 Wichita, Kansas 78 77 66 70 75 69 Louisville 78 78 74 72 73 69 Nashville 83 86 76 77 80 75 New Orleans 81 80 77 72 70 68 North Texas 98 90 81 82 83 78 Puget Sound, Washington 80 74 66 62 60 60 By way of comparison to the differences between the Class I price and average price paid to producers in the selected Virginia markets for 1 Da^rv Statistics. Statistical Bulletin No. 218, Agricultural Mar­ keting Service, Department of Agriculture, Washington, D. C., October, 1957, p. 354. -190- 1955, the same information for 1951 and 1953 is shown in the following tabulation* Market Class I Drice 1951 1953 Average price to producers 1951 1953 Daid Difference 1951 1953 -------------- Roanoke 6.20 6.85 6.01 6.50 .19 .35 Harrisonburg 5.85 6.51 5.60 5.92 .25 .59 Newport News 6.50 6.82 6.40 6.49 .10 .33 Examination of these data indicates that there was less difference between the Class I price and average price paid to producers in Harri­ sonburg and Newport News in 1951 and 1953 than there was in 1955. At least a portion of this difference can be ascribed to "abnormal" Class I demand associated with the Korean War. The comparison of the data included in this note with the data included in the text suggests that the base-surplus plan was successful in attaining its objectives in a relative sense (relative to other mar­ kets not using a production control plan )• This is the context in which the term successful is used in the text* It is not used to infer success in any absolute context. Note Five Attention has been given to the competitive structure within which the base-surplus plan operates in Virginia Milk Commission mar­ kets. A brief resume is offered at this point as a basis for indi­ cating the prerequisite conditions for successful operation of the -191- base-surplus plan in other markets* In the markets selected for study, the authority of the Milk Commission is used as the basis for restrict­ ing the entry of new producers on each market, for assigning specific producers to specific distributors, for promulgating certain specific regulatory provisions for allotting of new base and the sale and trans­ fer of base among producers, and in general to determine who may pro­ duce and sell fluid milk and how much they may sell* The general ef­ fect of the use of such authority on competition is to insulate each individual producer on the market from the competitive actions of other producers in the market as well as from the competitive actions of po­ tential producers not currently on the market* The necessary market characteristics or conditions for successful operation of the base-surplus plan in other markets appear to include the following: (1) Some type of administrative machinery which can either restrict or retard market entry of new producers as well as equalize market deliveries and sales by shifting production when sales change. This would seem to suggest that some type of State control regulation would be necessary since the present regulations governing Federal Milk Marketing Orders do not permit closed or semi-closed base systems. This does not rule out the possibility that a cooperative could operate a semi-closed base plan itself without any type of control at all. How­ ever, the effectiveness of such an operation would hinge on how much control the cooperative had over total market deliveries. (2) Some provision should be made for local boards or com­ mittees to oversee the operation of the plan in each locality. This -192- would be especially true if the market were large or if one agency were supervising several markets. (3) The availability of alternative markets to relieve the pressure of potential base-seekers is of considerable importance (the Washington, D* C. and Bristol markets help out the Virginia markets studied in this respect). (4) Some protection from inter-state milk flows is also im­ portant. (5) There should be a steady increase in fluid milk sales from year to year to alleviate the otherwise strong pressure on indi­ vidual producer growth and to permit the addition of a few new pro­ ducers periodically. (6) There appears to be no particular limit as to the size of market (in terms of producer numbers) for successful operation of a semi-closed base plan. However, very large markets may encounter considerable administrative problems with respect to enforcement of the necessary regulations. Some other general observations might include the following: (1) The particular base plan discussed in this study (with­ in the administrative machinery set up) could operate in the complete absence of any cooperative action on the part of producers and mention has been made of the fact that the cooperatives serving the markets studied are relatively weak. However, this does not infer that a strong cooperative would be a deterrent to the plan*s successful functioning. (2) Although the base-surplus plan described herein has been -193- operated on an individual handler pool basis, there appears to be no particular reason why it could not also operate under a market-wide pool.