959 JULY 1960 rketing Milk under Federal Orders in Texas lBRARY tEQE 9f TEZLS STATIHN, {freq FLOYD @TLEY @7711 F0180 OROSIY IICKENS "N5 KENT umn GARZA ' WILL ' AIDIEIS 6L ASS- STU!- COcx LING SO70" ' OIILL$ OULIERSOI gang; REAGAN IRION SAIL SGNLE IONKR MQNAIO cnocxzrr MASON LLINO {Ff OAVS Sutton luplfiLt GILLESPG .\. QRKISTEI ti.‘ HARRIS (GUARD! m. venue REM. FQT IND a IANOEWK QRA lORU "mu WALD! "9"" WILSON nno AYASOOSA KW“ mum Ll SLLLE IQ i? MULLER 0"‘ __——-; North Texas Central We st Texa s 1/ Austin - Waco i San Antonio ':::':"::::::: §:::!:‘§::""' ......=...===== Corpus Christi ||||||||||| Texas Panhandle Z/ Federal milk marketing order :§:§:§:§~: Red River Valley 3/ areas in Texas. i . llncludes only cities and to-wns in this area plus the U. S. Air Force Base at Abilene. zAlso includes Beckman county, Oklahoma. 3Also includes eight counties in Oklahoma. TEXAS AGRICULTURAL EXPERIMENT STATION R. D. LEWIS. DIRECTOR, COLLEGE STATION. ‘TEXAS SUMMARY Some Texas dairy farmers have been market- ing milk under federal orders since October 1951. In December 1959, 5,270, or 68 percent of Texas producers sold milk under the seven federal or- ders. In 1959 these producers marketed more than 1.8 billion pounds of milk, which was more than 72 percent of the whole milk delivered to plants and dealers by Texas dairy farmers. Federal orders define the terms under which dairymen sell their milk to handlers. The pur- pose of the orders is to maintain marketing con- ditions which will assure consumers a dependable supply of pure and wholesome milk and which will be in the public interest. Federal orders stabilize market conditions for fluid milk and make the buying and selling of fluid milk an or- derly process on which dairy farmers, milk han- dlers and consumers can depend. They operate to assure farmers of steady, dependable markets and assure consumers of adequate milk supplies at all times. They attempt to reduce instability and needless fluctuations in prices which usually re- sult in high seasonality of milk production, un- necessarily depressed prices t'o producers that do not properly reflect supply and demand condi- tions, and jeopardizing the quality of milk and the dependability of its production. Orderly marketing is sought by defining in advance the terms for both buyers and sellers. These terms are developed largely through public hearings where producers, handlers and consum- ers have an opportunity t'o participate. Once an order is in effect, information about supply and demand is collected and made available to all in- terested parties. A federal milk marketing order applies to a specific marketing area which is defined in each order and usually includes that area in which major distributors compete with each other for sales. CONTENTS Summary . . . . . . _ . _. . 2 Prefltleel’ Settlement ‘ Introduction ..................................... .. 3 Individual-handler Peeling ------------------------------- -- f Purpose of Study ........................ .§ ------------------------------------------ _- 4 Butt%rfalg (lgdlfferentlals to Handlers ---------------------- Scope of Milk Marketing Orders in Texas ,0 1' _ We“ _ ----- -- - '7 and United sme- .......................... .. 4 geeatlonl lglfferjttllfll“ P v Limitations of Milk Marketing Orders“ __________________________ __ 5 easgna rice iustment and Base lans....... Order Provisions ______________________________________________________________ __ 6 ase-excess Payment Plan ............................. .. Marketing Areas 6 Ease gorputatmn ---- """"""""""""""""""""""""""""""""" " ase ues ' SL111‘; $5.11‘;if;113111111i;1111111111t;"j;11ijjjjijjjjjjjjjjjjjjjjjj 5,‘ Reqigremeiiis of Rgulated Handlers --------------------- .. Classified Price Plan ______________________________________________________________ __ 7 tlmpeifsattlry ayments ------------------------------ Pricing Formulas ............................................................ .. 7 figcogfidtlo“ d R t """"" " i Class Price Determination __________ ___ _______________________________ __ 8 Ad _ _ 3_ an ePQT S --------------------------------------- --‘. I _ - - - - - - - . . - . - - . - - _ ‘ - - . _ - . - - _ _ . _ _ - ‘ _ _ _ - _ _ _ _ ‘ _ _ _ . . _ . ‘ ‘ - I - - - - - - _. 8 _ ' - ' . - - - - - - ' ' - I - _ _ - _ . _ - ' ' _ ' ' ' - ' _ ' _ - - _ I ' . - ' - '7. I Class H Price 9 1 Procedure for Establishing Federal Orders ......... .. a ---------------------------------------------------------- "10 grger gqhangnes t. i ---------------------------------------------------------- -- r er ermina _ a Market-wide Pooling ............................................... ..10 Handler Recourse _____________________________________ Dlffefence Between Class I and Impact of Federal Orders _______________________________ __ Uniform Price _______________________________________________________ __10 Handlers within the market are the o regulated. Handlers usually are defined‘ firm which purchases approved milk fro ers to sell in the marketing area. A han ' pay the minimum price," make accurate A and tests and account for the way milk i » Under a federal order, handlers pay ‘ in accordance with a classified pricing pl _ ceeds of the milk sales are distributed ii». ducers by a pooling arrangement specifi order. Some orders have a base rating l; seasonal plans. The order price is a iii price and handlers may, and sometimes i‘ premium to producers. t Since only handlers are regulated, the“ administrator’s principal duty is to be i, handlers account for their milk receipts * producers in accordance with the terms order. Handlers’ records are audited market administrator’s staff to make P payments are made to producers. Follo- some of t'he more common limitations of. milk orders: i‘ They do not guarantee a given price prices are determined to reflect supply mandt conditions, assure an adequate li pure and wholesome milk and be in th interest. They do not set resale prices-only ii prices paid by. handlers for milk going into i. uses. a They do not guarantee farmers a ‘t. handlers are not required to purchase milks particular producer. They do not‘ control production or = the marketing of milk from any produc’ of consumption. ~ Acknowledgments ................................... __ _ __________________ __ MILK MARKETING agreements and or- ~ are authorized by Congress and admin- iby the U. S. Department of Agriculture. e designed t0 promote orderly marketing le of milk from producers to handlers or . ributors and to assure consumers an ade- ilk supply. asic function of this program is to estab- imum prices to be paid by handlers for F- ivered by producers. This includes class- :nd pricing milk to handlers according to f,» choosing a market-wide pool or an in- -handler pool as a basis for returning s to producers. Auditing handler’s uses emination of market information supple- e pricing function. Transportation zones established under a federal order to re- handlers and producers the value of milk ‘arket place. - Agricultural Marketing Act of 1937 r es the issuance of milk marketing orders. his Act the U. S. Secretary of Agriculture “ late the minimum price producers receive whenever he determines, from evidence " at public hearings, that existing milk jre not reasonable in view of local costs _ 1 cing milk, and other economic conditions ' 3; the market supply and demand for milk products in a marketing area. The in- uch price regulations is to provide prices cers that will tend to equate supply and after making proper allowances for sea- A d cylical fluctuations in production and tion. é is attempted by issuing federal milk - g orders which legally define the terms hich milk handlers, who engage primarily ing milk for fluid distribution in regulat- fmarkets, purchase the milk from produc- l. has unique characteristics which, in its g, often results in supressing the bar- lpower of milk producers Because milk is d perishable and, accordingly, expensive port, it usually is produced near the v consumption. It is not produced in spec- roduction areas of the nation and it is f by large numbers of farmers. Because ilk and perishability, milk must be mar- ‘mptly. It cannot be stored for market s to become more favorable, but must be 1 even when prices are unsatisfactory. l. production varies from season to season j ows respond to the favorable spring and Sociology. ' professor, Department of Agricultural Econo- MARKETING MILK UNDER FEDERAL URIJERS IN TEXAS RANDALL STELLY* early summer weather and flush growth of good pasture crops. Consumers’ demands in an urban market also vary from day to day (high on Satur- day, low on Sundays and holidays) and from season to season (high in September and October when school begins and low in July and August when vacations are taken). Since milk cannot be stored, the industry should carry supplies with reserves sufficient to meet requirements at all times. Milk has its own specialized transportation routes from the farm to the plant. When this transportation is controlled by the purchasing plant and no other route passes a pr0ducer’s farm, the producer has no alternative market. Several decades ago producers, starting in the larger eastern markets, began organizing themselves into cooperative associations to en- hance their bargaining power. The cooperative movement was given impetus by the passage of the Capper-Volstead Act in 1923 which exempted cooperative associations and their bargaining ac- tivities from the Antitrust laws. Cooperatives first bargained for a flat price to apply to all milk which was sold to handlers regardless of its use. Inevitably one handler would be carrying a larger portion of reserve supply than another handler. Some of the reasons for this situation are (1) one handler carried a portion of another handler’s reserve supply; (2) one handler’s pro- ducers showed more seasonal variation in their production than the producers of another han- dler; (3) one handler’s disposition varied more seasonally because of school contracts or other special outlets than another handler’s: (4) differ- ent procurement policies. The only way an in- dividual handler could handle his reserve supplies were to manufacture them into less bulky and less perishable products such as butter and cheese, to bottle them and attempt to sell them by cutting prices and taking business from a compe- titor, or to refuse to purchase the milk from pro- ducers. The latter alternative generally was not acceptable to producers because in most cases they had no other outlet which would yield any comparable return. The first alternative was not attractive to- handlers since it returned them less than bottled milk. If handlers chose the second alternative they expected a price conces- sion on this reserve milk. Then the handlers whose business they took sought a similar price concession on all of their milk to meet competi- tion. At this point the flat price had become com- pletely ineffective and the market was disordered. A classified price plan under which reserve supplies were sold to handlers at prices more nearly reflecting the value of milk for use in 3 manufactured dairy products was used in several 0f the larger markets about 1920. A classified pricing plan was developed by dairy producers’ cooperatives in New England and tried on a vol- untary basis in the 1920's. In the early 1930’s these cooperative associations were instrumental in getting Congress to adopt such a plan. This plan considerably overcame the weaknesses which caused the flat price system to fall so long as the entire market operated under the plan. However, when the economic depression of the early 1930’s came, the voluntary’ acceptance of the classified price plan waned and the plan fell from the same type of forces that wrecked the flat price plan. Early in the depression the U. S. Congress enacted legislation authorizing emergency aid for many segments of the economy. The Agricul- tural Adjustment Act of 1933 gave specific bene- fit to milk producers and made provisions for licensing milk handlers. The Agricultural Ad- justment Act of 1935 and the Agricultural Mar- keting Agreement Act of 1937 authorized milk marketing orders, superceding the licensing pro- visions of the 1933 law. Licenses and then milk marketing orders made the classified price plan mandatory for all handlers, established minimum prices for each class of utilization and provided for dividing the returns at minimum prices equit- ably among producers. Thus, the weaknesses of the voluntary classified price plan were overcome. Originally the purpose of licenses and orders was to increase prices from their depressed levels. This could be achieved temporarily be- cause prices were in a depressed position at the beginning of the program, and because emergency government programs in other agricultural en- terprises and in fields of economic activity other than agriculture were being pursued contempor- arily. But after a few years it became apparent that a permanent policy of increasing prices for milk could not be pursued in the absence of eco- nomic tools either to limit supply or bolster de- mand such as production controls, subsidies or production payments. Thus the milk marketing orders became, and are presently, primarily stabi- lizing influences rather than price raising i=1- fluences. They achieve orderly marketing mainly by making the classified price plan and its com- panion, pricing and pooling aspects, mandatorily market-wide. They help to assure an adequate milk supply for a market. They define terms within the authorized limits, under which han- dlers buy milk from milk producers. These terms are defined in advance for both buyers and sellers which helps to achieve orderly marketing. Han- dlers and producers and all other persons interest- ed in a local milk market can participate in the de- velopment of appropriate provisions of a milk marketing order through the public hearings and attendant public procedures for the issuance and amendments of orders. The public procedures which precede the issuance or amendment of milk marketing orders offer an opportunity for dairy industry leaders, specialists from colleges 4 i and others to take part in the shaping t vder program has come an expanding ment decisions and regulations. PURPOSE OF STUDY From its beginning in 1951 to the~ the marketing of milk in Texas pursuan marketing orders has increased greatly. more than 72 percent of the whole milk ' to plants by Texas dairyfarmers was in accordance with provisions of milk H: orders. T with this growth ih the milk mar information about milk marketing orde A most of the responsibility for initiatin marketing order and a great deal of th sibility of determining its provisions th t public hearings lie with local persons ' in the market, effective operation of the is enhanced by free, full and informed ' tion by these individuals. The specific of this bulletin is to help achieve that H Other objectives are (1) to indica i portance of federal orders in Texas and V, ed States in terms of milk volume mar the number of producers selling milk u " regulations; (2) to outline the basic and general provisions of federal orde ‘ explain the reasoning and theory for t components; (4) to show the operation tation of the basic pricing provisions f ulas; and (5) to summarize the proc, establishing or changing orders. ‘ SCOPE OF MILK MARKETING 1 ORDERS IN TEXAS AND ’ UNITED STATES Prior to 1930, the Texas dairy ind ' primarily a production-for-home-use ind 1925, about 70 percent of the milk prod used on the farms where it was produc in the form of farm-churned butter. D 1930’s the delivery of milk or cream t0 t creased consistently and in the early 19 the increased economic activity brough production and the many military instal g Texas, dairying toward a production-fo dustry hit a rapid pace. *‘ During the 1930’s and 1940’s w.“ Texas milk markets operated on a t surplus plan. Most handlers purchas volume of base milk equivalent to their , requirements. iThis total volume of A was allocated to producers either on th their current deliveries or on the basis o ies in some preceding base-making peri milk was paid for at some lower pri base-surplus plan was subject to the sa nesses as the voluntary classified price ~ In Texas the first milk marketing l, established in October 1951, for the No Milk Market. During that month 2, TABLE 1. NUMBER OF PRODUCERS DELIVERING MILK IN TEXAS FEDERAL ORDER MARKETS‘ er markets 1951 1952 1953 1954 1955 1956 1957 1958 1959 2.484 2.776 3.187 3.152 3.057 3.147 3.194 3.120 2.857 - '0 415 442 462 479 509 525 514 534 est Texas 539 599 736 752 751 654 553 510 ;- 'sti 447 386 386 428 412 , o 593 512 463 414 373 v Cndle 601 593 546 508 _' Valley 129 134 rp- arkets 2.484 3.730 4.228 4.350 5.328 5.906 5.815 5.704 5.328 arketed 38 million pounds of milk under .; of the order. Since that time, orders ' established in the San Antonio, Central as, Austin-Waco, Corpus Christi, Texas e and Red River Valley marketing areas 1r). The designated marketing areas of ten federal orders include all or parts of counties and regulated handlers obtain ,- producers located in 125 Texas coun- tin several other states. During Decem- , 5,328 or 68 percent of the 7,770 Grade ‘Queers in Texas sold milk under federal 1 lations, Table 1. y; producers selling milk under federal lations marketed slightly more than ,n pounds of milk during 1959, Table 2. 4: slightly more than 72 percent of the I pounds of Whole milk delivered to l Texas producers. i i- 1951-59 the average daily milk volume , per Texas producer under federal mar- prder regulations increased from 499 i r day to 910 pounds, or an increase of t, Table 3. From 1952-59 daily deliver- producer increased from 543 to 861 g North Texas, from 782 to 1,190 pounds y tonio and from 435 to 967 pounds in P: West Texas Market. From 1955-59 eries per producer increased from 571 a unds in. Corpus Christi and from 694 to g ds in the Austin-Waco Market. ~_nuary 1, 1959, 76 federal milk market- 1 were operating throughout the United 1 bout 40 percent of all the milk sold pumber during the year. Data analyzed as of effective date of each marketing order: J Antonio. Iuly 1. 1952.- Central West Texas, December l, 1952; Corpus Christi, Iuly 1, 1955: Austin-Waco, February I, as Panhandle, February 1, 1956.- and Red River Valley, November 1, 1958. North Texas, October 1. wholesale and more than one-half of the milk eligible for fluid consumption in the United States is marketed and priced under the terms of federal milk orders. There are approximately 190,000 producers marketing their milk through the program. In many parts of the country the pricing of most of the milk sold by producers not operating under the program is directly or indirectly related to price levels established in federal order markets. At present there are only four major milk markets in Texas that are not regulated by a fed- eral milk marketing order (North East Texas, the Greater Houston area, the Lubb0ck-Plain- view area and El Paso). However, the prices that producers receive for their milk in these areas are related indirectly to those established in adjacent federal order markets. LIMITATIONS OF MILK MARKETING ORDERS Milk marketing orders cannot guarantee any particular price level other than the level dictated by local supply and demand conditions. Although they operate to assure an adequate milk supply for a market, they do not guarantee any individ- ual producer a market for his milk or any individ- ual handler a milk supply, but they do establish minimum prices, uniform among all handlers from whatever source the milk comes. They do not prohibit milk marketing from any producing area into any other area. Milk marketing orders cannot control production. The relationship of milk supplies to demand must be considered. They do not establish sanitary standards, but TABLE 2. TOTAL MILK DELIVERED BY PRODUCERS IN TEXAS FEDERAL ORDER MARKETS‘ markets 1951 1952 1953 1954 1955 1956 1957 1958 1959 _ - — — — — — — — ——Mi1lionpounds——-————————————— 114 551 649 672 716 793 839 869 898 ~. q 60 140 147 160 179 192 202 227 't Texas 7 105 132 143 162 158 166 180 ‘.. fl 47 106 121 143 156 127 142 135 134 134 ...1e 113 120 126 137 w alley 5 37 ~- kets 114 618 894 951 1.193 1.495 1.565 1.646 1.769 oxas. December 1, 1952; Corpus Christi. Iuly 1, v- Red River Valley, November 1, 1958. I ed as oi effective date oi each marketing order: North Texas. October 1. 1951." San Antonio. Iuly 1, 1952; Cen- 1955.- Austin-Waco, February 1, 1955: Texas Panhandle, February 5 each order is constructed according to the sani- tary regulations of local governing bodies. Order Provisions Milk marketing orders are enforced by the U. S. Courts, so they should be detailed and ex- plicit about Whom and to what extent they regu- late. Marketing Areas A certain area is designated as the market- ing area for each order to determine who becomes subject to a milk marketing order. The other regulatory provisions of the order apply to the purchase of milk for disposition in this marketing area. Ideally a marketing area should include all of the territory in which milk is distributed from plants or handlers subject to full regulation under an order. When a regulated handler is selling a large percentage of his milk in an area in competition with unregulated handlers, the marketing area needs to be expanded. Improved highways and other transportation facilities, im- proved refrigeration and better quality control have made this ideal market increasingly diffi- cult to attain. Approximate uniformity of sani- tary standards within a single marketing area is desirable. Who Is Regulated Persons regulated by an order are called handlers. plants at which milk is received from producers and processed for fluid distribution in the mar- keting area are handlers. In markets where the milkshed or supply area is large, the receiving and processing functions are sometimes separat- ed in different plants with the milk being as- sembled and received from the farms in one plant (country receiving or supply plant) and then transported in large quantities to the processing (city) plant. In such cases the operators of both plants usually are handlers. A handler is subject to one of two or three types or levels of regulation under an order: (1) full regulation, (2) partial regulation, or (3) exempt. Full regulation means that all milk re- ceived by a handler from producers must be class- ified and paid for according to classes and prices TABLE 3. VOLUME OF 'MILK DELIVERED PER DAY PER PRODUCER IN TEXAS FEDERAL ORDER MAR I In general all persons who operate‘ prescribed in the order and that the subject to all terms and provisions of g Partial regulation means the applicati tain minimum payments with respect milk disposed of in the marketing ar" the requirements for reporting receipts ization of milk. Partial regulation usua 4 to handlers whose principle business ' processing of manufactured dairy pr who market only a minor portion of t fluid milk sales in the regulated market. l. handlers have no payment obligations r: order but are required to make neriodi The exempt status may include two ki erations: (1) a plant whose primary» uf are in another marketing area regulat other milk marketing order so that f .5 tion applies under that order; or (2) tions of persons who produce, process, tribute their own milk (producer-han intermittent operations which have i’ effect upon the market as a whole. To facilitate determining whether . is subject to full or partial regulati exempt, detailed standards are estab, each category. In those markets Wh or potential supply conditions may justif" receiving or supply plants, detailed g also are necessary for such plants. ’ Standards of association with a v prescribed in detail in an order and a means whereby plant operators elect _ enter the market, subject themselves pricing and other order requirements a ticipate in market pooling, or to provide: amount of milk to the market which '_ full regulation. The plant operators’, may be necessary to facilitate securi mental milk supplies at times when the ' in short supply. Unregulated plants A willing to supply an occasional shipme, if the shipment exposes their operation regulations. Under the North Texas 1. example, it has not been necessary to regulation to plants who occasionally s, volumes of bulk milk to North Texas r plants. f Class I prices within a market are. to attract an adequate and dependable Federal order markets 1951 1952 1953 1954 1955 1956 1957 1958; — — — — — — — — — — — — ——Pounds————————-——— North Texas 499 543 558 584 642 688 720 763» San Antonio 782 869 888 922 970 1,016 Central West Texas 435 480 490 490 591 661 Corpus Christi 571 756 858 Austin-Waco 694 766 829 Texas Panhandle 514 553 Red River Valley Total all markets 499 554 579 599 663 698 ' 737 ‘Data analyzed as oi effective date of each marketing order: West Texas. December 1, 1952; Corpus Christi, Iuly 1, 1955: Austin-Waco, February 1, 1955: Texas Panhandle, 1956; and Red River Valley. November 1. 1958. 6 North Texas, October 1, 1951: San Antonio, Iuly 1,11 Y ilk. To accomplish this purpose, it is " that the distribution of the higher re- 1m the sale of Class I milk be distributed airy producers who regularly supply the hich have a real association with the j. Therefore, consideration must be given gree of association between a plant and et before the plant is permitted pooling ’~ under a market-wide pool. For ex- 9 a handler distributed only 5 percent of in a marketing area as Class I milk, f ured the remainder into cheese, and was 11 to pool on such a market, he could draw amount of money from the pool. This .131 the over-all blend price to be paid _s regularly supplying the market if more 11 the market average was used in manu- .1: or for Class II products at such a plant. ia situation, the effects of the uniform 1 1 encouraging or retarding production i“ diluted. Plants ye factors usually considered in deciding V: country receiving or supply plant has jtly close association with the market are hipments of milk considered in deter- he qualifications of such plant may be o the needs of the city plant for Class I courage uneconomic movements of milk ;: of “riding the pool.” A should move from the supply plant ' ttling plant in sufficient quantities, at * the short production season, to show ociation with the market. uch supply plant should be under in- or have approval of the appropriate ‘thorities to ship milk in the marketing distribution of Grade “A” milk to con- its which qualify as supply plants and are ring the short production season when 5‘ eeded most in the market usually are 1 to participate in the market-wide pool ,1 flush production season when regular y to the bottling plant may not be need- prevents uneconomic movements of milk v ket when it is not needed Such move- uld not only incur unnecessary trans- portation costs but also might overtax the man- ufacturing facilities in the city. CLASSIFIED PRICE PLAN _ A milk marketing order contains a classified price plan. Classified pricing of milk means pricing it according to the use made of it. Pro- ducts having similar economic value are grouped together in groups or classes, with a minimum price established for each class. Relative bulki- ness and perishability of a product supplemented by any direct or indirect economic effects of the sanitary regulations is the primary cause for a product’s economic value to vary according to location. In general, Class I milk includes milk which is disposed of without any substantial con- centration by the removal of water and without being sterilized, and which usually is required by sanitary regulations to be made from Grade “A” milk. Because of its bulkiness and perishability, its value varies more according to location than the value of other farm commodities. Class I milk usually constitutes a market’s primary re- quirements. All other milk usually constitutes the reserve supplies. One or more other classes 1s provided for reserve milk supplies. These reserve supplies must be manufactured into less bulky and less perishable manufactured dairy products whose value varies less according to location than for fluid milk products. Each federal marketing order sets forth a system of minimum class prices which are adjusted according to the butterfat content of the milk. Federal orders issued for markets which receive milk from wide areas include adjustment to reflect differences in the value of the milk at different locations. The proportion of producer milk deliveries used in Class I in Texas Federal Order Markets is indicated in Table 4. Pricing Formulas Minimum prices established for milk by a milk marketing order are required by law to be at a level that will assure an adequate, but not excessive, supply to meet the demands of the market—including the necessary reserve supply —-that is, at economic values. Milk marketing history has shown that supply or demand char- acteristics, or the general level of prices can LE 4. PERCENT OF PRODUCER DELIVERIES USED IN CLASS I IN TEXAS FEDERAL ORIDER MARKETS markets 1951 1952 1959 1954 1955 1959 1957 1959 1959 97.7 90.5 91.9 91.7 92.9 77.9 79.4 79.5 70.5 99.5 99.9 99.9 99.9 95.7 95.2 97.9 90.9 “s1 Texas 99.1 90.0 90.2 91.1 92.9 99.1 99.7 99.2 1 -fi 99.5 97.5 94.0 95.0 99.1 91.9 99.1 97.7 92.9 99.9 . 41.. 99.2 99.9 99.2 99.9 z alley 91.2 95.9 97.7 91.9 94.7 95.2 97.1 99.7 99.1 99.1 90.2 "- erage of all markets, based on total deliveries and total Class I sales. change in relatively large amounts during a short period of time, dictating an appropriate rapid change in minimum prices to comply with statu- tory price standards. Many factors affect milk marketing, some of which cannot be accurately isolated and meas- ured, but there are data which have been proven to be closely related to milk prices in certain markets. To help make appropriate and timely price changes, formula pricing plans have been developed using some of these data. In formula pricing the objective is to use price series that are associated closely with changing economic conditions affecting the supply of and demand for milk. Formula pricing has been developed on a local or regional basis for one market or for a group of closely related markets to reflect the most important factors in the particular market or region and for which statistical measures are available. Class I pricing formulas are of two general types. The most common type uses as a base the highest price resulting from two or more manufacturing milk price formulas plus a Class I differential, usually varying with the season, de- signed to reflect the added costs of producing Grade “A” milk. This type of formula is based on the value of ungraded milk when converted into certain manufactured products and takes into consideration the price of these products in de- termining producer milk prices. In many markets this price also is adjusted to reflect the current relationship between supplies and sales compared to a normal or standard relationship of Class I sales to supply measured by receipts from pro- ducers. This is an adjustment factor commonly referred to as a supply-demand adjuster. The other types of Class I pricing formulas are related to economic indices or factors rather than to manufacturing milk prices. These economic in- dices, or factors, are referred to as movers and include such measures as general wholesale prices, disposable consumer incomes and cost of produc- tion items. These economic type formulas also contain supply-demand adjusters. The general types of formulas also are used to establish milk prices used in manufacturing. One method is to relate these prices to prices reportedly paid producers by plants engaged primarily in manufacturing dairy products. This method usually is referred to as the Midwest Condensery Price. The other method is to use prices in a central market, such as Chicago, for certain manufactured dairy products such as butter, nonfat dry milk and cheese and is com- monly referred to as the butter-powder or butter- powder-cheese formula. From these prices a gross value per hundredweight of milk is computed. An allowance from handling then is deducted to arrive at the value of the milk for these products. The current month’s Class I price and butter- fat differential usually are based on basic prices 8 for the preceding month, whereas the month’s price and. butterfat differenti reserve component of the supply usually :j on the current month’s price. This is announce in advance the minimum price will be required to pay for Class I prod 7 since this class accounts. for the greate of producer milk and involves the great to producers. a Class Price Determination Class I Price. In the North Texa for example, the Class I price each mo termined in three basic steps. The f0, an explanation of how the December 19 price. for that market was determined. I Step 1: Obtain a basic price v, basic formula price) by taking the hig of the following alternative prices for th: month (November 1959). . (a) Average Price Paid by 12 Mid denseries--This price is report market administrator's office at t each month and. represents the a the basic or field prices per hun a reported paid or to be paid for l, percent butterfat. Since the N0’ Order specifies that milk prices based on 4 percent butterfat, it is 4 to convert the price announced fol cent butterfat milk to a value per weight for 4.0 percent milk. price reported to the market admi office as paid by these 12 midwe, denseries for 3.5- percent milk duri » ber 1959 was $3.146. Thus the T- divided‘ by 3.5 and multiplied by yielded a 4 percent-condensery = ‘$3.595. ’ (b) Butter-powder Formula Pri butter-powder formula is compos parts: (1) the value of the butte ; pounds of 4 percent milk based '_ prices and (2) the value of the Y. of skim milk based on powder pri The method used in the North T’ to get the value of the butterfat is as _ Obtain the average Grade “A”, bulk creamery butter price per pound at Chicago and deduct 3 cents which a a processing margin per pound of o" multiply the results by 4.8 which rep 1 theoretical yield of butter in pounds ~ percent butterfat test. The average pri, by the U. S. Department of Agriculture “A” 92-score bulk creamery butter during November 1959 was $ .6393 0 Taking this price and deducting 3 cen v. tiplying the results by 4.8 yielded a b of $2.925. i The method used in getting the v3 pounds of skim milk is as follows: North Texas Order required that the 2 erage of the weighted average of car = per pound for nonfat dry milk solids, J roller process, respectively, for human _,'on, f.o.b. manufacturing plants in the area, be used as the basic prices. From f‘: average of the spray and roller prices, i is deducted (representing a processing ,~- pound of powder) with the results g by 8.5 (representing an approximate pounds of powder from 100 pounds of ér ), with the remaining results multiplied The last calculation (multiplied by 0.96) Z1 ed because there are only 96 pounds of a for which to calculate a value when i» powder. During November 1959, the j ‘average spray-powder price was 12.63 lding a simple average of 13.025 cents. _}= average price was deducted 5.5 cents p results multiplied by 8.5 and the cor- t g result multiplied by 0.96. This yielded f powder per the formula of $ .61404. ‘value of butter according to the formula ted above ($2.92464) plus the value of r formula ($ .61404) yielded a butter- ‘ormula price per hundredweight for 4 'lk of $3.539. r. ocal Manufacturing Pay Prices—The h Texas Order specified as the third ative basic price, the average of the , or field prices reported paid or to be for ungraded milk of 4 percent butter- ntent received from farmers during the h at the following plants: (1) Carnation lny, Sulphur Springs; (2) The Borden a: Mt. Pleasant; and (3) Lamar ery Company, Paris. During November , the average price per hundredweight by these three local manufacturing for 4 percent milk = $3.183. ljNorth Texas Order requires that the 'ce for December be based on the high- ' prices established pursuant to (a), (b), ve. Thus the basic formula price to be ilculating the December Class I price 12: Having obtained the highest of the ee alternative prices, which represents ("k value when used for manufacturing only, a Class I differential of $2.20 per ‘eight is added each month from July ebruary and $2.00 is added from March une each year. This Class I differential ‘l e extra or added economic value of ” milk in the North Texas Market over l‘ value of manufacturing grade milk. :- may be termed the gross Class I price. differential used for the December Class putation = $2.20. ‘oss Class I price, 4 percent milk, for 1959 = $5.795. p The next step is to adjust the gross _ ,' 'ce by the supply-demand adjustment. The theory behind this adjustment is that as producer deliveries and demand (sales) get out of balance, the price should be increased or de- creased, depending on whether the situation is one of an over supply of milk or a shortage of milk. The supply-demand adjustment for the North Texas Market is obtained on a regional basis; that is, producer deliveries and net Class I utilization are combined for the North Texas, Central West Texas, Austin-Waco, San Antonio, and Corpus Christi Federal Order Markets. The relationship of producer deliveries to net Class I utilization is compared to a previously determined representative balance between Class I utilization and producer receipts. If the current relationship is greater than the representative balance, the price is reduced; if it is less than the representa- tive balance, the price is increased. This phase of pricing is designed to adjust prices in line with current levels of production and sales within the marketing area. The supply-demand adjustment per hundred- weight, calculated for December 1959 = $ —.06. lThe net Class I price for the North Texas Market for December 1959 = $5.735. Components of the Class I price for December 1959 for the seven federal order areas in Texas are shown in Table 5. For the North Texas, Austin-Waco, San Antonio, Central West Texas, and Corpus Christi Markets, the supply-demand adjustment is calculated on the relationship be- tween total producer receipts and total Class I utilization in these five markets. Differentials above the North Texas Class I price then are allowed the other four markets by an amount approximating the cost of transporting milk from the North Texas area. Class II Price. In the North Texas Market the Class II price for April, May, and June of each year is the higher of ( 1) the butter-powder price less 20 cents (alternate price (b) previously ex- plained), or (2) the average paying price of three local manufacturing plants (alternate price (c) outlined above) for the current month. During all TABLE 5. CLASS I MILK PRICE COMPONENTS IN TEXAS FEDERAL ORDER MARKETS FOR DECEMBER 1959 Basic Fluid Supply- for mul a1 differ- demand Other‘ Classl Federal order markets ential” adjuster“ price — — Dollars per hundredweight -- - North Texas 3.595 2.20 —.06 5.735 San Antonio 3.595 2.20 ——.06 .42 5.155 Central West Texas 3.595 2.20 ——.06 .25 5.985 Corpus Christi 3.595 2.20 —.06 .78 6.515 Austin-Waco 3.595 2.20 —.06 .25 5.985 Panhandle 3.60 2.15 5.750 Red River Valley 3.595 1.95 —.l5 .15 5.545 ‘Manufacturing milk price used as base. “Amount added to manufacturing milk price. “Computed amount per formula on a five market area-wide basis except Red River Valley and Panhandle Markets. ‘Differentials over North Texas Market Class I price except Red River Valley Market which is differential over Okla- homa City Market Class I price. < other months of the year the Class II price is the higher of the (1) butter-powder formula price, or (2) the local manufacturing plants’ average pay price du.ring the current month. Thus the Class II price for December 1959 was calculated as fol- lows: (1) December 1959 butter-powder formula price per hundredweight for 4.0 percent milk calculated similar to that outlined for alter- nate price (b) (previously outlined) = $3.453. (2) December 1959 local manufacturing plants’ average pay price per hundredweight for 4.0 percent milk (alternate price (c) ) = $3.183. December 1959 Class II price per hundred- weight for 4.0 percent milk (higher of (1) or (2) above) = $3.453. One of the advantages of pricing formulas is that they are automatic and timely. However, it is impossible to construct a perfect formula to fit all situations and changing economic condi- tions. For this reason, formulas must be kept under review by interested persons so that appro- priate modification and revision can be made as required. The level of Class I price in any market gen- erally cannot exceed for a very long time the cost of buying milk in another supply area and trans- porting it to the consuming market. Handlers will change their buying arrangements if they have such an advantage. One of the most im- portant guides as to the proper level of Class I prices in a market is the cost of alternate supplies from other areas. The increasing mobility of fluid milk and wider overlapping of markets for pack- aged fluid products indicate that greater attention should be given to proper alignment of Class I prices. Pooling Provisions The classified price plan requires handlers to pay for milk on the basis of the use made of the milk and thus establishes the total amount to be paid to producers. Additional regulations are necessary to equitably apportion this money among producers. The law requires that prices to producers be made uniform by one of two methods. One method, the market-wide pool, provides for a TABLE 6. DETERMINATION OF ACCOUNT DUE PRODUCERS UNDER A lMARKET-WIDE POOL minimum uniform price payable to all pr supplying the market. The other method ‘- individual-handler pool. Market-wide Pooling. In a market-Wi the total money value of all milk delivered, producers to all handlers (pounds of milk ' class, multiplied by the minimum class pri combined in one pool. The pool is divided total amount of producer milk. All produce‘ are paid not less than this uniform or blen per hundredweight for their milk deliveri uniform price also may be adjusted for va in the butterfat content of individual pr milk and other specified differentials. In the North Texas Market, for exam ~ minimum uniform price is computed by plying the pounds of milk in each class . class prices (adjusted for butterfat conte each handler and combining the results i_ total. This total value then is divided by t_ pounds of milk delivered by producers. p sulting price represents the minimum pri i paid to each producer for all of his milk del This applies to all months except March,‘ May and June in which base and excess are computed as described later in this r‘ The following is a simplified version the minimum uniform price is calculated the actual class prices figured previouw assuming there are only three handlers market, with each having the same am receipts (1,000 pounds) but utilizing _ amounts as Class I and Class II. Th; assumption made in this example (Tabl that all of the milk in each class conta’ percent butterfat, eliminating the neces, adjusting prices to butterfat content. i Difference Between Class I and * Price. The monthly Class I prices for ~ Texas Federal Order Markets are shown i, 7. Table 8 indicates the minimum unifo I received by farmers for milk containing 4 1 butterfat in Texas Federal Order Mark Table 9 shows the difference between Cla minimum uniform prices received by fa i The average Class I price in all mar creased 50 cents per hundredweight or 8.0 ' from 1956-59 while the minimum unifo _ decreased 8.3 percent during the samej Market -' Class prices, Handler A Handler B Handler C C1555 dollars per A °f hundred- _ _ _ _ . milk weight Milk, Cost, Milk, Cost, Milk, Cost, Milk, Total cost, pounds dollars pounds dollars pounds dollars pounds dollars I $ 5.735 1,000 57.35 800 45.88 400 22.94 2.200 $ 126.17 II 3.453 200 6.90 600 20.71 800 27.61 Total‘ 1,000 57.35 1,000 52.78 1,000 43.65 3,000 $ 153.78 ‘Total value, $153.78 —1— total deliveries, 3,000 = $5.1260 (minimum uniform price due producers delivering milk --l percent butterfat). 10 fCLASS I PRICE FOR MILK CONTAINING FOUR PERCENT BUTTERFAT IN TEXAS FEDERAL ORDER MARKETS. 1951-59’ I r markets 1951 1952 1953 1954 1955 1956 1957 1958 1959 — — — — — — — — — — — Dollars per hundredweight — — — — — — — — — — — — 6.13’ 6.76 6.00 5.47 5.72 5.97 5.65 5.56 5.48 g 7.30’ 6.99 6.00 6.16 6.39 6.08 5.97 5.90 < t Texas 7.61’ 6.35 5.78 5.97 6.22 5.93 5.81 5.73 » ' 6.56’ 6.66 6.35 6.34 6.26 6.13’ 6.35 6.03 5.94 5.86 5.75’ 5.59 5.50 5.49 alley 5.29’ 5.32 markets’ 6.13 7.23 6.45 5.75 6.11 6.22 5.94 5.77 5.72 l: age ot monthly prices tor the year in each market. f ed as of effective date of each marketing order: Iver. Valley, November 1, 1958. ge of prices in all markets. , since 1953 the yearly average mini- yorm price in all markets has been below ;I price by 20 or more cents per hundred- e larger percentage decrease in the inimum uniform price reflects the lower _. of producer deliveries utilized in Class 1 ounted to 87 percent in 1955 and only i‘ in 1959. Settlement Fund ‘handlers may have mostly Class I milk value) While other handlers may have i k in the lower value classes. This is x ularly in markets where one or a few lfrequently a cooperative association) iin the handling of reserve supplies. Thus let there may be wide variations among i» the utilization value and in the aver- a producer milk. Yet the order with f» pool requires each handler to pay k. inimum uniform price to all producers. i nce between what a handler pays pro- “- the utilization value of the milk is or out of a special fund, a “producer . fund.” Handlers with higher than ilk costs pay the difference between ' and the average for the market into ent fund. This money, in turn, is paid dlers with lower than average costs. _ ; in an equalization of milk costs among a. accordance with the use made of the North Texas, October 1. 1951; San Antonio. Iuly 1. 1952; Central December 1, 1952; Corpus Christi, Iuly 1, 1955; Austin-Waco, February 1, 1955; Texas Panhandle, February 1, 1956; milk by each handler and a uniform price to all producers. Using the computations in arriving at the uniform price, Table 10 illustrates how the equalization system works. Individual-handler Pooling In some markets the use value of milk is combined for each individual handler to determine a uniform milk price received by that handler. These are known as individual-handler pools. In these pools, the same computations are made in arriving at the value of the milk of each handler and all producers delivering their milk to a par- ticular handler are paid the same minimum uni- form or blend price per hundredweight (which also are adjusted for butterfat and other differ- entials specified in the order). Under this type of pool, the proportion of milk used in the differ- ent classes varies among handlers, and producers supplying one handler will receive a minimum uniform price different than producers selling their milk to another handler. Table 11 illustrates how three handlers in a market stipulating $5.735 per hundredweight for Class I milk and $3.453 for Class II, and operating under an individual-handler pool, would arrive at the amount they pay producers for milk. Each handler pays his producers for the milk according to the Way he uses it. In this illustra- tion Handler A pays a blend price of $5.735 per 1| MUM UNIFORM PRICE RECEIVED BY FARMERS FOR MILK CONTAINING FOUR PERCENT BUTTERFAT IN r TEXAS FEDERAL ORDER MARKETS. 1951-59’ markets 1951 1952 1953 1954 1955 1956 1957 1958 1959 — — — — — — — — — — — Dollars per hundredweight — — — —_- — — — — — — — — 6.07’ 6.50 5.57 5.10 5.31 5.39 5.13 5.03 4.91 7.25’ 6.88 5.90 6.06 6.25 5.93 5.65 5.63 1' Texas -,- , g 7.39’ 6.05 5.52 5.72 5.71 5.55 5.51 5.37 ti .-_"_ " 6.51’ 6.57 6.16 6.19 6.00 I 5.93’ 6.05 5.73 5.77 5.70 5.50’ 5.38 5.26 5.28 .~ a‘! _ 5.08’ 5.03 markets’ 6.07 7.05 6.17 5.51 5.91 5.91 5.65 5.50 5.42 ige ot monthly prices tor the year in each market. "d as oi effective date of each marketing order: North Texas. October 1. 1951; San Antonio, Iuly 1, 1952; Central December 1, 1952; Corpus Christi, Iuly 1. 1955; Austin-Waco. February 1, 1955; Texas Panhandle. February 1. 1956; y r Valley. November 1. 1958. rqe ot prices in all markets. 11 TABLE 9. DIFFERENCE BETWEEN CLASS I AND MINIMUM UNIFORM PRICES RECEIVED BY FARMERS IN TEXAS it ORDER MARKETS, 1951-59‘ _ Federal order markets 1951 1952 1953 1954 1955 1956 1957 1958 l — — — — — — — — — — — Cents per hundredweight — - -- — — — - — — — i North Texas .06‘ .26 .43 .37 .41 .58 .52 .53 3 San Antonio .05’ .11 .10 .10 .14 .15 .32 ] Central West Texas .22‘ .30 .26 .25 .51 .38 .30 , Corpus Christi .05’ .09 "1 7-". .19 .15 ‘ Austin-Waco .20‘ .30 .30 .17 t Panhandle .252 .21 .24 5 Red River Valley _21’ I Average all markets“ .06 .18 .28 .24 .20 .31 .29 .27 l l ‘Simple average of monthly prices for the year in each market. ‘Data analyzed as of effective date of each marketing order: North Texas, October 1, 1951; San Antonio, Iuly 1, 1952; * West Texas, December 1, 1952; Corpus Christi, Iuly 1, 1955; Austin-Waco, February 1, 1955; Texas Panhandle, February and Red River Valley, November 1, 1958. ‘Simple average of prices in all markets. hundredweight; Handler B pays $5.278; and Handler C, $4.365. The individual-handler type pool is used in markets Where each handler handles his own re- serve milk supplies. In markets of this kind which also are short of milk supplies, this type of pool- ing helps to allocate available supplies among handlers according to their Class I needs. The handler with the highest proportion of Class I milk Would have the higher minimum uniform price for producers, which would tend to attract producers from other handlers. BUTTERFAT DIFFERENTIALS TO HANDLERS In all Texas markets the class prices are computed and announced for milk testing 4.0 percent butterfat. Since handlers normally use milk containing more or less than 4.0 percent butterfat in the various classes, it becomes neces- sary to adjust the 4.0 percent price to a price commensurate with the average test of the milk in each class. This is done by increasing the price of milk when the average butterfat test is more than 4.0 percent and decreasing the price for milk having less than 4.0 percent fat. To do this, butterfat differentials for each class of milk are computed each month. A higher differential is allowed for butterfat utilized in Class I than in Class II. In the North Texas Order, for example, the Class I butterfat differential is computed by multiplying the average Wholesale price paid per pound for 92-score bulk creamery butter at Chicago during the preceding month by 0.125. TABLE l0. EQUALIZATION THROUGH THE PRODUCER SETTLEMENT FUND It Handler Handler Handler em A B c Gross milk cost $57.35 $52.78 $43.65 Amount due producers (1,000 pounds x $5.1260) 51.26 51.26 51.26 Pays into pool‘ 6.09 1.52 Draws out of pool‘ 7-61 ‘Total amount paid out of producer settlement fund 2 $7.61. Total amount received in producer settlement fund = $7.61. Difference = 0 12 V"; Example: The average 92-score butter pri pound for November 1959 ______________________ __$‘ Multiplied by ________________________________________________ __ i The December 1959 Class I - butterfat differential .............................. ._$. The Class II butterfat differential is- puted by multiplying the average price pa pound for 92-score bulk creamery but“ Chicago during the current month by 0.110 w March, April, May and June, and by 0.115 vi, all other months of the year. A Example: Average 92-score butter price _, per pound for December 1959 ................ "$- Multiplied by ................................................ .. l December 1959 Class II ‘ butterfat differential .............................. ..$ Adjustments of the Class II price w‘ average butterfat test of Class II produce are made in the same manner as for Class 1 Handlers’ usages of milk may requir ranging in butterfat content from almost rs-‘moa f-\flvfil—hbflt%.l\fi{ TABLE ll. DETERMINATION OF AMOUNT D DUCERS BY HANDLERS OPERATING UNDER VIDUAL-HANDLER POOL Price, dollars per hundred- weight Quantity, Use classification pounds m” |—1 65H 041F595 é-hdo to .»-».s@-.._1‘q=. HANDLER A Class I $5.735 1,000 Class II 3.453 Total 1,000 Blend or uniform price = = $5.735 1 000 HANDLER B Class I $5.735 800 Class II 3.453 200 Total 1,000 i-‘lm ‘can: mascara- Blend or uniform price = = $5.278 1 0 0 HANDLER C l-‘l Class I $5.735 400 Class II 3.453 600 Total 1,000 $43.65 Blend or uniform price = z $4.365 1,000 milk to cream containing 40 to 50 percent f. ause of this wide range of fat uses, many require an accounting for skim and fat. g a cases, receipts and utilization of all milk 1 products are segregated for accounting Ionciliation purposes into skim milk and _at. Some orders require computation and cement of separate prices for skim milk " tterfat. Although an order may not pre- nnounceme-nt of separate prices for skim 1d butterfat, handlers or others frequently G refer to prices for skim milk or butterfat _us proportions. Fbutterfat differential is the difference in Vtween one-tenth of a pound of butterfat -tenth of a pound of skim milk. A hun- 'ght of milk containing 4.1 percent, or 4.1 of fat contains one-tenth of a pound more one-tenth of a pound less skim milk than a edweight of milk containing 4.0 percent, ‘I. unds, of fat. *>the dairy industry, one-tenth of 1 percent prfat usually is referred to as a “point” rfat. The butterfat differential is the ‘tint in price made for each “point” of of 4.0 percent butterfat content contains f s (or 40 one-tenths of 1 percent) of fat. st a price for 4.0 percent fat to a price 1;. milk (zero percent fat) the product of the butterfat differential is deducted 4.0 percent price. Using the examples é orth Texas December 1959 Class I price . per hundredweight for 4.0 percent fat - 1 Class I butterfat differential of $080, for Class I skim milk would be computed utterfat differential ...................... --$ .080 ints of fat in 4.0 percent milk.--- 40 tial fat value of 40 points of fat..-- 3.200 rice per hundredweight % percent milk .................................. --$5.735 V, ferential fat value of ints of fat ........................................ -_ 3.200 ‘rice per hundredweight for 7. ilk (0 percent fat) ...................... $2.535 ‘larly, a price per hundredweight of , can be computed. One hundred percent i“ would contain 1000 points of fat. Since nt milk contains 40 points of fat, the i tprice would be increased by the differ- 1960 points of fat times the butterfat ‘a1, as follows: utterfat differential .................... --$ .080 ints of fat to"~-increase ent to 100.0 percent ................ -- 960 p ial fat value of ints of fat .................................... "$76-$00 ss I price per hundredweight " percent milk ................................ -- 5.735 rice per hundredweight terfat (100 percent) .................. "$82535 i Note that the difference between the Class I price for skim milk and for butterfat is $80.00, which results as follows: Points of fat differences between skim milk and butterfat .......................... _- 1000 Class I butterfat differential .................... -.$ .080 Differential fat value of 1000 points of fat .................................... _-$80.00 To Producers The average butterfat content of milk de- livered by producers usually is more or less than 4.0 percent. Thus it becomes necessary to adjust the minimum uniform price (producer price) to reflect the average butterfat test of each pro- ducer’s milk by computing a butterfat differential for producers each month. In the North Texas Order the producer butterfat differential is com- puted by applying the average price paid per pound for Grade “A” (92-score) bulk creamery butter at Chicago during the month to the follow- ing table: Butterfat Butter price differential (cents) 20.0 to 29.99 cents 3 30.0 to 39.99 cents 4 40.0 to 49.99 cents 5 50.0 to 59.99 cents 6 60.0 to 69.99 cents 7 70.0 to 79.99 cents 8 80.0 to 89.99 cents 9 90.0 to 99.99 cents 10 $ 1.00 to $ 1.10 cents 11 The average price of Grade “A” (92-score) butter at Chicago during December 1959 was 61.87 cents per pound. Applying this price to the above table indicates a producer butterfat differ- ential of 7.0 cents for that month. This means that for each 0.1 percent the average butterfat content of producer milk is more or less than 4.0 percent, the minimum uniform price will be increased or decreased, respectively, by 7 cents per hundredweight. LOCATION DIFFERENTIALS The value of the milklocated some distance from the market is lower than its value in the market because of transportation costs involved in moving the milk to market. Milk moved a con- siderable distance to market may move directly from the farm with the producer paying the haul- ing costs. Another alternative is that a handler may build a country receiving plant or a process- ing plant near the supply area and transport the milk to the market place either in bulk or in packaged form. Sometimes such a country receiv- ing plant is built by a handler who also is a co- operative association of producers. When a plant is built near the supply area for assembling and moving milk to .a distant market, the handler operating the plant pays part of the costs of transporting the milk to market which would otherwise be borne by producers. To compensate 13 for this the federal order specifies a transporta- tion allowance to the handler on the amount of milk moved. For example, the North Texas Market Order provides for 1.5 cents per hundred- weight for each 10 miles that such plant is from the City Hall in Dallas, provided it is more than 110 miles. The transportation allowance or loca- tion differential represents the approximate cost of moving the milk to market. Generally, there must be a need in the city plant for the milk as Class I for a supply plant to obtain a location differential on milk moved to a city plant. Example: Suppose a milk plant is located 400 miles from the City Hall in Dallas, and has met all of the shipping and inspection require- ments of the North Texas Order to qualify as a supply plant. Suppose further that producer re- ceipts in that plant during the month amount to 3,000,000 pounds, of which 2,500,000 pounds moves to a pool processing and distribution plant in Dallas, with the remaining 500,000 pounds being made into condensed skim milk (Class II). Suppose also that the receiving handler has a Class I operation amounting to 4,500,000 pounds during the month and has no Class II utilization. In this situation the supply plant would re- ceive a location adjustment of minus 60 cents per hundredweight (400 + 10 >< 1.5 cents) on the 2,500,000 pounds shipped, or $15,000.00. This means that the supply plant’s net cost would be reduced by $15,000.00. The supply plant would pay his producers the Dallas blend price less 60 cents per hundredweight. Using this example in connection with the class prices and minimum uniform prices for December 1959, the following illustrates the handler’s net cost, producer pay and amount paid to the producer settlement fund. Class I milk 2,500,000 pounds @ $5.735 = $143,375.00 Class II Milk 500,000 pounds @ 3.453 = 17,265.00 Total milk pounds and value 3,000,000 pounds = $160,640.00 Less Class I location adjustment = (15,000.00) Handler’s net cost = $145,640.00 Producer payments 3,000,000 pounds ‘ @ $5.126 = $153,780.00 Less location adjustment @ 60¢ = (18,000.00) Net producer payroll value = $135,780.00 Amount to be paid to producer settlement fund = 9,860.00 By varying the above conditions to include a Class II operation in the city plant, the method by which a location differential is denied when the milk is not needed for Class I in the city plant can be demonstrated. Assume now that the city plant had 1,000,000 pounds of milk used in Class 14 II, with total receipts and utilization as follows: ' Receipts Utilization , Supply plant 2.500.000 Class I 4.50 Producers 3.000.000 Class II 1.000 Total 5.500.000 r0011 5.50‘ Under these circumstances only 5 l. (150,000 pounds) of producer milk is cons Class II milk. The remaining 850,000 poulj Class II utilization is considered supply plan with no location differential applicable. location differential of 60 cents would ap . to 1,650,000 pounds of milk for a total v $9,900.00. . SEASONAL PRICE ADJUSTMEN p AND BASE PLANS Although pooling arrangements we, veloped to equalize payments to produce, milk sold in a market, and classified pri intended as an improvement over the fla method of payment, they fall short of subst the role of price in balancing milk suppli market needs seasonally. P Since the normal pattern of milk u‘ results in a greater supply during the spri I early summer months than during the re I of the year, various seasonal pricing pl‘ used to encourage milk production on a mo ’ monthly pattern. The incentive for a mo‘ form pattern of milk production is provi in federal milk order markets by seasonal] able class prices, seasonal price adjustmen and base-excess producer payment plans. i, The Class I pricing formula may p l: schedule of month-to-month price chang ing from a low in May or June to a r November or December. ‘ In several federal order markets the plan provides for deducting from the u.‘ in certain months a portion of the paym producers for milk. Payments withheld; specified months of normally high milk tion are maintained in a special fund . market administrator for distribution , ducers during months of normally low , duction on the basis of their milk deliveri a plan is commonly referred to as a fall ~ plan. Base-excess Payment Plan In other markets, the base-excess 1 seasonal pricing plan which relates the more directly to the individual producer’s_ pattern of deliveries, is used. Frequently‘ of seasonally varying class prices is v with either the fall premium or the w‘ plan. ‘ The base-excess plan is used b0 market-wide and with individual-handl Under such a plan the producer establish , the average daily quantity of milk he Q during the months of normally 10w milk n, usually referred to as the base-form- d. During the subsequent base-paying eason of flush production) the producer the base price for milk not in excess of lished base. Deliveries in excess of base i‘ for at the lower excess price. Specific ing and base-paying periods are speci- he orders which provide for such plans. putation .North Texas Market operates under the ss plan. In that market a base is com- r each producer each year by dividing deliveries of approved milk to handlers tember through December by the number for which delivery was made. During the '1 months of March through June each is paid base prices for an amount of milk ceed his daily base times the number of the month. For all deliveries over this ' base the producer receives an excess Y is type of plan encourages milk produc- ‘ng the months of shortest production _.~ through December) and discourages ' deliveries during the flush months shrough June). fles ,e North Texas Market producers estab- w base each year. In some orders there 'ions for developing a base by producers q the market after the base-forming . some markets bases are transferrable ._ 1 oducers who purchase the milking herd pment of producers already established ‘rket. In others free transfers are per- _hile in still others, transfers can occur "ertain prescribed hardship conditions. lems created by base plans include the ‘tion of rules for transferring bases, the r cost of administration resulting from “computational work, equitable solution ction of the interests of landlords and ‘ les for transferring bases and dissatis- " old established producers who already -~ production adjustments conforming 'ous provisions to new or proposed base f- EMENTS OF REGULATED "ERS l milk marketing orders do not require ' I purchase milk from certain producers hase milk in specified quantities. How- ‘ral orders doi-impose certain require- handlers, which will be discussed in the f paragraphs. i; tory Payments . of partial regulation sometimes is 'th payments applicable to Class I milk ~ in the marketing area by handlers who are not primarily engaged in distributing milk in the marketing area. Partial regulation repre- sents freedom from full regulation but provides the minimum amount of regulation to prevent economic advantage and any resulting market disorder which might come from complete ex- emption. In some orders an option is provided for the handler involved to select either full or partial regulation. Through partial regulation some handlers who do a relatively small part of their total business in a federal order market are relieved of the obligation of paying minimum class prices on all milk they buy from producers. However, to eliminate any price advantage that these handlers might have over fully regulated handlers on milk sold within the regulated market, such handlers are required to pay a compensatory payment on the quantity of milk sold in the regu- lated market. The payment is a rate approxi- mating the difference between Class I price paid by fully regulated handlers and the value of such milk in alternative outlets outside the market. The alternative value may be the price paid for milk in manufacturing uses or a higher alterna- tivle uise value, depending upon the markets in- vo ve . There are other types of compensatory pay- ments 1n operation in federal order markets. Some orders require handlers to make a payment to the pool when nonfluid milk products are used in fluid or Class I products. The rate of such pay- ment usually is the difference between the Class I and Class II prices. Some orders also require handlers to make payments to the producer settle- ment fund when other source fluid milk products, which have not been priced as Class I in some other federal order market, are allocated to Class I when producer receipts are much higher than Class I _utilization. The rate of this payment usually 1s t_he difference between the Class I and Class II prices subject to butterfat and location adjustments. These compensatory payments are made to the equalization fund and the proceeds are dis- tributed in the uniform market price to producers who regularly deliver milk to the market. Allocation An individual producer’s milk usually is inter- mingled to become unidentifiable as soon as it reaches the plant or, since bulk tank handling of milk on the farm has become prevalent, as soon as it is removed from the producer’s storage tank. A plant may obtain milk supplies from sev- eral sources—producers, other local plants, supply plants, plants in other markets or dairy farmers who do not meet the order standards for defining a producer. If this plant does not use all of its milk supplies as Class I milk, some schedule of allocation should be provided to ascertain how much of the Class I utilization accrues to pro- ducers. Usually the allocation formula gives producers top priority on Class I milk. Each order 15 contains a detailed allocation procedure covering all sources of milk prevalent in that market. Records and Reports Another requirement imposed on handlers is that» of maintaining and retaining records and filing reports. Each fully or partially regulated handler usually is required to send a detailed report each month to the market administrator showing all receipts of milk and dairy products by sources and the utilization of such receipts. The market administrator, who is the local gov- ernment official responsible for administering the order, verifies the accuracy of these reports by examining the handler’s books and records. If errors are found, an audit adjustment statement is issued by the market administrator. The final objective of the reports and audits is to make sure that each handler accurately accounts for all of his milk and pays producers at least the minimum uniform price as announced by the market administrator. The prices estab- lished under an order are minimum prices and do not restrict handlers from paying prices in excess of these minimum prices. ADMINISTRATION EXPENSES The costs of operating a federal order are defrayed by assessments against handlers, usually based on the milk received from producers and on all other source milk allocated to Class I. Each order provides the rate of assessment which varies among markets. This usually ranges from 2 to 6 cents per hundredweight of milk handled. In addition to auditing handlers’ books and records and verifying their accuracy, the market administrator also calculates and announces the minimum prices for each class of milk and the p-roducer minimum price for the market, or for each handler, according to the formulas specified in the order. As a further protection for producers who are not members of a cooperative association, the market administrators of most orders are respon- sible for check weighing and testing for which a marketing service assessment is levied against individual producers. PROCEDURE FOR ESTABLISHING FEDERAL ORDERS Although a milk marketing order is issued by the Federal Government, it must be initiated by local industry leaders. Since the purpose of an order is to provide a market with an orderly marketing plan under government supervision and since the issuance of the order needs local producer approval, farmers through their coopera- tive associations usually start proceedings toward issuance of an order. The initiating group sub- mits a complete proposed order for consideration. This means that a great deal of study is necessary before the request is made for an order. Procedural steps taken by the U. S. Depart- ment of Agriculture in the issuance of a milk 16 ‘ marketing order include the holding of at hearing after due notice, issuance of a mended decision to which interested parti submit Written exceptions, issuance of A decision, ascertainment of producer appro issuance of the order. Before a hearing is“ scheduled on a p for initiation of an order, the U. S. Dep of Agriculture advises handlers and othe ested persons that a hearing has been req This gives all persons an opportunity to ._ proposals they would like considered hearing. To make certain sufficient study and r tion have been made to warrant the expe f of money, time and effort necessitated by ing, the following points need to be es v before a hearing is held on a new order: ’ 1. That marketing conditions in the q not orderly and that the contributo ditions can be improved by an order; 2. That facts and data about the f have been assimilated and will be p , at the hearing; i 3. That a substantial majority of prl or the group making the request, sup request; and ’ 4. That milk marketing in the propo affects interstate commerce. A Each provision of an order must be s by evidence presented at a public heari dence includes facts, data, expert opi f other information regarding the econo marketing conditions in the area. ' The public hearings usually are hel locality to which the regulation applies. must be presented by a witness under, affirmation and recorded verbatim. appear voluntarily. Anyone may testify =* one may question a Witness for clarifi a his testimony if such testimony and ques , relevant to the issues under consideratio A time immediately following the 4 set for filing written arguments or brief briefs only may present arguments and . conclusions from the evidence in the reco may not be considered to the extent t include or are based on evidence not in , ing record. I After the briefing time has elap marketing specialists in the U. S. Depa Agriculture study the hearing record f and a recommended decision is prepar proposing that an order be issued or that?) in the hearing record does not justify _ If an order is recommended, specific and ‘ terms and provisions are prepared a1 supporting reasons based on the heari . To afford local interested persons furth tunity to participate in the establishm' order, they are given a specified time . he recommended decision to file written ,s to it. The exceptions, like the briefs, J upon facts in the hearing record, but take issue with conclusions made in the nded decison by relying on evidence in u justifying a different conclusion. V, the allotted time for filing exceptions ed, the recommended decision is re- y in the light of the exceptions and a a ion is prepared. This decision is issued f retary of Agriculture and represents a position of the U.‘ S. Department of ‘re based on the hearing record and the al standards fixed by law. The order pd provisions contained in the final de- jl be issued and made effectve if approved f ers. Producers either approve or reject as contained in the final decision. They nge it at this time. This limitation =ry so that the Secretary of Agriculture T‘ authority to effectuate the “public a provisions of the law. P: two-thirds of the producers supply- “' ket approves the issuance of an order ‘on is made for market-wide pooling. If j provides for individual-handler pooling, majority is required to approve the order. Producer approval may be ascer- " a formal referendum, in which case the ~; or three-fourths requisite majorities i on the number of eligible producers ithe referendum. The law expressly pro- a cooperative association is authorized ithe approval or disapproval of an order ts members supplying the market. Thus ‘tive association whose membership in- Q less than the two-thirds or three- iuisite majority of producers supplying g s full power of approval or disapproval - er. p requires that the handlers be given E nity to enter marketing agreements ecretary of Agriculture. When a final ; issued, it also contains a proposed ' agreement with the same regulatory as the proposed order. This proposed ' is submitted to all handlers. If all Sign the marketing agreement, the a an order is not necessary. The mar- ment represents a voluntary accept- what in the nature of a contract) of regulation. If handlers of more than i but less than 100 percent of all the market sign a marketing agreement, A ing agreementgcan be made effective pandlers, and-la complementary order k ed by the Secretary of Agriculture to i remaining handlers to comply with Yons. If handlers of less than 50 per- - milk in the market refuse or fail to j 'ng agreements, no marketing agree- es effective, but an order applicable ers may be issued. Order Changes Once an order becomes effective, it operates in the same fashion until it is amended, or until all or a portion of it is suspended or terminated; amendments should be promulgated in accordance with about the same procedures through which the issuance of the original order evolved. Amend- ments may be proposed and a hearing requested on them by an interested person. In actual prac- tice amendments usually are proposed by one or more cooperative associations or by one or a group of handlers. Unless market conditions are such that consideration of the proposed amendment needs to be expedited, the U. S. Department of Agriculture, usually upon receipt of request for hearing, allows other interested persons a short time to submit any proposed amendments they want considered if a hearing is held. If all inter- ested persons constantly study the order and its adaptation to market conditions, they will have submitted or be prepared to submit any proposals on short notice and also will be ready to partici- pate in a hearing on short notice. Order Termination All or any portion of an order which ceases to perform its lawful purpose may be suspended or terminated. Suspension usually covers tempo- rary conditions and usually comes about when market conditions change quickly in a way which makes the action compelling. If time permits, oral or written views regarding a suspension are invited from interested persons. Termination of an order or any portion of it usually results from permanent changes in economic or marketing conditions which render the terminated provisions in conflict with the law. Court decisions render- ing an order or any portion of it not in accordance with law might constitute one basis for termina- tion. The law requires termination of an order at the request of a majority of producers who produce more than 50 percent of the milk supply for the market. Handler Recourse Any obligation imposed by the market ad- ministrator pursuant to the provisions of an order should be authorized by the order; any provision of an order should be supported by evidence in the hearing record and authorized by law; and the law should be authorized by the U. S. Constitution. Any handler may challenge regulations on any of these grounds. This chal- lenge first must be brought before the Secretary of Agriculture who decides, in view of the individual circumstances of the case and the intricacies of the market, whether the challenged regulation is legal. If the handler’s challenge is unsuccessful at this level, he can ask the appro- priate U. S. District Court to decide if the decision of the Secretary of Agriculture was in accord- ance with law. IMPACT OF FEDERAL ORDERS Milk marketing orders have functioned under a variety of economic and marketing conditions. 17 They originated during the economic depression with a price-raising objective when milk supplies were large. A few years later price stability replaced price enhancement as the objective. Orders operated, during World War II and the economic climate of price ceilings, rationing of some foods, production payments and short milk supplies. They have operated since that time during increasing economic activity but with a declining level of agricultural prices since the early 1950’s. In the more than 25 years of the milk marketing order program, great changes have occurred in the fluid milk industry. Production per cow and size of herds have increased greatly and the quality of products at all marketing levels have been improved. Improved transportation and refrigeration have permitted milk to be hauled farther from farm to plant and plant to consumer. Plants have grown in size but have declined in numbers. Increasing proportions of milk are distributed through retail grocery chan- nels with a corresponding decline in retail route distribution by plants. Nonreturnable and multi- quart containers largely have replaced the once- standard quart bottle. Currently bulk tank han- dling of milk on the farm is rapidly replacing the former, almost universally used, 10-gallon can. The development of milk marketing orders has been such that the impact of all of these marketing changes have been met. Public con- sideration of these marketing changes with the» participation of producers, handlers, state and college officials and government specialists has brought a higher level of confidence among in- dustry segments and resulted in improvement of marketing systems. The complete and accurate market statistics resulting from the operation of an order has provided a basis for better market- ing decisions by all segments of the industry. New marketing problems continue to arise and should be met if orders are to operate satis- factorily. Problems remain to be solved concern- 18 ing the farm bulk tank system of han ‘ Wider disposition radii of plant a operations necessitate constant study " and extent of marketing areas, the appl'_ the respective orders to a handler’s plant I of milk in two or more marketing area alignment of minimum prices between ‘a areas. Solution of these} and other exisnj lems and new problems‘ which cannot a pated now will require continuing n‘ serious study and aggressive action ' terested persons. Many of the proble 5 past which could be dealt with on the lo t level now have grown to encompass Wi tory and several markets. Satisfactor a of such problems can only be found an on an over-all basis with the partici parties from all markets involved. i The pattern of operations set by mil‘ ing orders has established a place and. bility for handlers, cooperative associa state and federal officials in meeting I problems. Each of these segments sh tinue to carry his responsibility. ACKNOWLEDGMENTS Appreciation is expressed to th administrators of the seven federal ing orders in Texas for furnishing i if on producer numbers, milk deliveries a tion of producer milk in each market ar o acknowledgment is made to the market trator of the North Texas Milk Market’ and his staff for their helpful sugg’ composing and presenting the materi bulletin. I This study was made under the T , cultural Experiment Station's State l; Project to the Southern Regional Da‘ ing Project Number SM-10, “Adopting t Structure for Milk and Dairy Products ' ing Demand of Supply Conditions in th [Blank Page in Original Bulletin] i mm srmon nu summons : nu nun unouromrs A scorn/mm; narrows Location oi field research units oi the Texas Agricultural Experiment Station and cooperating agencies ORGANIZATION OPERATION Research results are carried to Texas farmers, ranchmen and homemakers by county agents and specialists of the Texas Agricultural Ex- tens ion Service 3041a”; KedearcA .96 jommorrow; [Qrog State-wide Resear The Texas Agricultural Experiment St -i is the public agricultural research a _ oi the State oi Texas. and is one o parts oi the A6=M College oi Texas. IN THE MAIN STATION, with headquarters at College Station, are matter departments, 2 service departments, 3 regulatory servi administrative staff. Located out in the major agricultural areas ~ 21 substations and 9 field laboratories. In addition, there are l4- i‘ stations owned by other agencies. Cooperating agencies includ Forest Service, Came and Fish Commission oi Texas, Texas Pri‘ U. S. Department of Agriculture, University of Texas, Texas T, College, Texas College of Arts and Industries and the King R Q experiments are conducted on farms and ranches and in rural ho THE TEXAS STATION is conducting about 4-00 active research proj in 25 programs, which include all phases of agriculture in Tex these are: Conservation and improvement of soil Conservation and use of water Grasses and legumes Grain crops Cotton and other fiber crops Vegetable crops Citrus and other subtropical fruits Fruits and nuts Oil seed crops Ornamental plants Brush and weeds Insects Beef cattle Dairy cattle Sheep and goats Swine g Chickens and turkeys ‘ Animal diseases and - Fish and game I Farm and ranch eng" Farm and ranch busi g Marketing agricultural y Rural home economi Rural agricultural eco‘, Plant diseases * Two additional programs are maintenance and upkeep, and cen‘ AGRICULTURAL RESEARCH seeks the WHA WHYS, the WHENS. the WHERES and the HO hundreds oi problems which coniront oper g iarms and ranches. and the many industries d t ing on or serving agriculture. Workers oi the Station and the iield units oi the Texas Agri -{ Experiment Station seek diligently to iind soluti these problems. v