production incentives ancl payment methods in MAJOR TEXAS FLUID MILK MARKETS TEXAS A8¢M UNIVERSITY Texas Agricultural Experiment Station a; A H. O. Kunkel, Acting Director, College Station, Texas 8-1068 September I967 Summary Contents Milk marketing orders frequently ing and payment provisions to provide i_ incentives for adjusting production rather; sumption. These provisions include sup adjusters, Class I price differentials, base-ex and fall-premium plans. Analysis of data in? Texas markets revealed wide differences a alities of Class I sales and production. - visions alone were not sufficient to obtain a -j shift in seasonality. Incentives to adjust A production were greatest in the two markets‘; restrictive base-excess plans. These pr . _ level of base milk to that of Class I sal market adopting this plan prior to the p ' production was in a stable and close rela Class I sales. In the second market a chan from an unrestricted to a restricted base-ex the change, production increased more ' sales. Following the change the relationshih until annual production and sales were clog Production was not more responsive to market with individual handler blend pri w‘? the one with blend pricing and market-wi In two markets having several changes in - of handlers, and hence producers, it was _ evaluate changes or even general patte j of 786 producers continually delivering market for l0 years provided results nfl market-wide data, indicating that unless; sudden large changes in the number off market-wide data properly reflect prod ments. t Summary .................. --; . Introduction ................................................... .. ' Problems ............................................. .. Objectives ........................................... .. Methodology ...................................... .. Analysis of Adjustments .............................. Imbalance Between Annual Producer’ oDeliveries and Class I Sales_.___ ' Different Payment Programs ........ .. Producer Growth Rates .................. -. Changes in Producer Number and Production Seasonality ................. .." Comparative Analysis of Market-wide and i Individual Producer Adjustments ........ .. a Comparison of Producer Adjustmen L Comparisons of Market Data and o] Continuously on the Market... t Conclusions ............................................... .. Suggestions for Adjustments ................. .. p Seasonal Adjustment ............................. .. Provision for New Producers ............. ..‘-_ production incentives and payment methods, in MAJOR TEXAS tun: MILK MARKETS A. B. Krienke Randall Stelly* FEDERAL MILK MARKETING ORDERS are legal instruments which establish rules with which handlers must comply in purchasing milk from dairymen. The basic purpose of these orders is to establish marketing con- ditions which will assure consumers a continual and dependable supply of high quality milk. This goal is accomplished by stabilizing market conditions for fluid milk. They reduce much of the uncertainty which existed in many markets before regulation. The many provisions of the orders can be sum- marized into four groups. First, the order establishes a means for pricing milk to handlers. The order establishes the method of determining minimum prices to producers and the time of payment. It establishes certain definitions such as the market area, qualifi- cations to become a regulated handler, the obligation of other handlers selling milk in the area but not meeting regulation qualifications, producer qualifica- tions and the treatment of “other-source-milk” which does not meet the requirements of producer milk. Finally, the order provides for an administrator, to be supported by handler assessments based on volume of Class I sales, who is obligated to safeguard the order provisions through auditing records to determine compliance. The provisions of an order are developed and amended through public hearings where handlers, producers, consumers and other interested parties must provide evidence in support of their proposals. The Secretary of Agriculture is charged with evalu- ating these and preparing the order. Once an order is in effect, data concerning the operation of the market such as producer deliveries, importation of milk from other areas, sales by type of product and prices are assimilated and made available to any interested party. However, production and other data concerning individual handlers cannot be released. Federal regulation of milk marketing in the United States has increased rapidly since enactment of the Agricultural Marketing Agreement Act of 1937. The first Texas milk market to be regulated by a federal order was North Texas late in 1951. Since that time all major Texas markets except one have obtained a marketing order. From the beginning, orders have been concerned with the problem of adjustments in producer deliv- eries. Most orders contain a combination of provisions which are designed, at least in part, to encourage adjustment. In addition, many producer marketing cooperatives have supplemental programs to further encourage adjustment. ' ‘ One of the primary features of federal orders is the so-called classified price system under which the minimum price which handlers must pay producers for milk depends on the broad classes of products in *Respectively, former assistant professor and associate professor, Department of Agricultural Economics and Sociology, Texas A8¢M University. which the milk is utilized. Most markets have only two classes of utilization. However, in some instances there are three or four classes. The justification for a classified pricing system is based on several concepts. First, state and local health authorities have established different standards for milk and the product form in which it is sold. Gen- erally, fluid milk products must be made from Grade A milk meeting higher sanitary requirements than milk used in manufactured dairy products. Conse- quently, it is assumed that the cost of producing Grade A milk is greater than the cost of producing manufac- turing milk, and if equilibrium conditions are to be achieved, there must be a differential in the price of the various types of milk. The second factor is the difficulty in adjusting deliveries of Grade A milk. Historically, production has been highly seasonal because of the calving and lactation cycle. Furthermore, consumption of fluid products is seasonal, and during certain months of the year large volumes of Grade A milk must be used in manufactured dairy products. The price elasticity of demand for fluid milk products is low. Therefore, even with extreme fluctu- ations in the price for Grade A milk, it may be difficult to obtain desired adjustments in consumption. For this reason, at least during certain seasons, some Grade A milk competes with manufacturing milk for use in non-Grade A products. There are also day-to-day variations in sales of fluid products. This indicates that a reserve is needed throughout the year if retail price stability of fluid products is to be provided. The two-price system is intended to provide a market for both the necessary reserve and any seasonal or annual surplus. Class I use is the designation given to disposition of milk in certain products which usually must be made from Grade A milk because of local or state quality and standards codes. The primary products in this category are fluid whole milk, skim milk, cream and flavored milk. Milk used in these products re- ceives a higher price than milk used in other products. This is called the Class I price, and under an order it is the minimum price which handlers must pay for milk used in these products. Originally, the minimum Class I price was fixed under the order, but it was subject to change by the amendment process. Formulas were developed which were expected to make the price automatically respon- sive to changing market conditions. The value of producer milk, therefore, was affected by fluctuations in the class prices and the proportion that was used in each class. Several producer payment methods have been developed which not only define an equitable means for allocating Class I and Class II sales to individual producers but which also are expected to provide the incentive for certain types of production adjustments. 4 Problems Milk market administration personnel A producer cooperatives are interested in 7 various methods of pricing milk and paying to determine which are most effective in s l‘ desired adjustments. They are also int ascertaining whether any maladjustments h that can be attributed to the program. It is assumed that Grade A producers I ested in producing only for the Class I m realizing that a l0 to 20 percent reserve may =q to insure an adequate availability of milk l term increases in sales. ‘ It is possible to analyze the producti, ment problem on the basis of seasonality of deliveries and rate of growth. Ideally, the of producer deliveries should coincide wi sonality of Class I sales. Likewise, the t ‘f ducer deliveries should coincide with that sales but remain 10-20 percent higher to p =0 quate reserves. Many authorities assume of 10-20 percent is required. There are also‘? periods during which the Class I sales u‘ siderably. For example, when schools o; tember the Class I needs normally increa quently, additional reserves during some u i permit some reduction in the yearly reserv- tion variations may occur in two ways: by entering and leaving the market and thro y, in producer output. Objectives ;_ The purposes of this study are to detq problem of maladjustment of producer d Class I sales in major Texas fluid milk n _ to evaluate alternative pricing and payment =_, as means for providing incentives for in - responsiveness of producer delivery pattems. sales. ' The specific objectives of this study f, _ l. Determine the effects of the various; and payment systems on seasonal and y deliveries and producer prices in Texas. 2. Evaluate various alternative plans and determine which ones would bet cient in obtaining an adjustment of milk . market milk demand. ‘ » Methodology . Five markets in Texas are analyzed _ pricing mechanisms and payment provisi‘ response of producer deliveries as related j sales. These five markets are North Tel Waco, San Antonio, Corpus Christi and j All markets except the South Texas mar ~‘__ rently regulated by federal orders. These located in the major Texas dairy-produci ;;, have a variety of programs. For example, North Texas employed a, program under a market pool. Recently ‘m was substituted by a blend pricing _ the Austin-Waco market an individual Xcess program was used originally, but ter switched to a more restrictive pro- j the major producer cooperative in the i Antonio has used a market pool with payment program, while the Corpus used an individual handler pool with f. used in the analysis include monthly 'veries and Class I sales for the regulated producer deliveries of members of the f3; the Austin-Waco and the South Texas 1c i_ payment and pricing mechanisms, along Fges and the reasons for the changes, and iconceming the actual class prices and ’ l. by months for each market is examined i-TNorth Texas market, data concerning t were 0n the market continuously for y, 'od are analyzed to determine the char- _ ose which have adjusted their deliveries Ycloser to changes in Class I sales. To iogeneity of the data, deliveries by pro- ' g and leaving the market have been personnel of some dairy cooperative ave expressed the opinion that base plans f for-base.” If this were true, the produc- iucer would increase more rapidly in i‘ -_ base systems than in markets using a f; system. Analysis of trends in producer markets provides a measure of the exist- for-base} _'ty and changes in Class I, Class II and are compared with seasonality and roduction to determine the relationship i} production. al producer data for producers in the f; market for a 10-year period are analyzed _»_ty and production growth. This informa- .- a good indication of the existence of a It also eliminates the effect of pro- 2' g and leaving the market. Analysis by Flocation and date of conversion from cans A tank system provides an indication of is that could be related to adjustments in if individual producers. AAANALYSIS or ADJUSTMENTS i iiween Annual Producer - Class I Sales the four federal order markets included ,. became effective over about 5 years, from , each of them had 90 percent or more I " refers to the extra efforts of some producers to '1 ‘mum volume of milk during the base-forming A to be able to sell a constant or increasing volume i} -= during the period of peak production. TABLE 1. AVERAGE PERCENTAGE OF PRODUCER MlLK DELIVERIES UTlLlZED AS CLASS I, BY MARKETS, 1952-1964 North San Corpus Austin- South Year Texas Antonio Christi Waco Texas — — — — -— -— Percentage -—- — —— — — -— 1952 90.5 1953 81.3 96.3 1954 81.7 96.6 1955 82.6 96.6 91.8‘ 1956 77.7 95.7 93.1 89.1 84.2 1957 76.5 95.2 94.2 87.6 83.4 1958 76.6 88.4 94.9 92.9 81.1 1959 70.7 91.0 92.4 93.3 81.6 1960 73.8 87.0 92.1 93.2 80.2 1961 69.5 80.3 86.8 90.3 81.1 1962 69.9 87.6 86.5 92.2 81.7 1963 75.9 87.8 88.7 94.8 84.8 1964 72.5 80.2 87.8 93.5 83.2 ‘Data were available only for February through December 1955. January 1955 was estimated prior to determination of the average. of producer milk utilized as Class I during the first year of operation. The general tendency in these four markets was for the percentage of producer milk utilized as Class I to decline during the first few years of operation under an order (Table 1). The major exception to this trend was the Austin-Waco market. The percentage in this market declined during the years that producers were paid according to the base- excess provisions of the order. Following the develop- ment of a type of restricted base-excess or quota pro- gram by the major cooperative in this market, the percentage increased to a level higher than the first year and remained at a high level through 1964. The utilization percentage for the major producer cooperative in South Texas did not decline appreciably from 1956 through 1964. The producer payment provisions of this cooperative had been in effect for several years before 1956. Apparently, adjustments to this program had preceded this period. If orders result in more stable market conditions and improved farm prices, a decline can ‘be expected in the percentage during the first few years. The reduction of variation and uncertainty in the price of a product normally is expected to result in greater profits and improved planning. Since expected future prices do not have to be discounted as much where price stability is improved, total production would be higher under equilibrium conditions provided the price stability was not gained at the expense of lower- ing the average price. However, if producer adjust- ments are made over a period of time, several years might be required to obtain a stable relationship between producer deliveries and Class I sales. Different Payment Programs Several different producer payment programs have been used in the five markets studied. The Corpus Christi market employed an individual handler pool with blend pricing so that all producers delivering to a given handler received the same price. However, the price to producers differed among handlers in the 5 market due to different utilization percentages in Class I. This method of payment gives more incentive to expand to those producers delivering to rapidly expanding handlers than to those delivering their milk to a handler that is expanding at a slower rate. The San Antonio market also employed a blend price technique, but it was based on a market-wide pool instead of an individual handler pool. This method does not discriminate among producers on the basis of the handler that receives the milk since pay- ments ‘by all handlers are pooled and a single uniform price is determined for all producers. The original federal order for the Austin-Waco market provided for a base-excess payment method. This method was terminated after 5 years and replaced by an individual handler pool with blend or uniform pricing. This new program was essentially the same as the one used in the Corpus Christi market. How- ever, in the middle of the fourth year of the order the major producer cooperative in the market formed its own base-excess program. This cooperative re- pooled payments to its members. The producer members then received payment on the basis of the prices determined by the cooperative. Whenever total deliveries of members exceeded 110 percent of the Class I utilization allocated to the producer deliveries, base-excess prices were determined. At all other times producers were paid a blend price based on the funds in the cooperative pool. Another feature of the cooperative program in the Austin-Waco market was that the producer mem- ber’s base was detennined by a 3-year moving average of deliveries during the base-forming period. This meant that it took 3 years before the impact of a producer's increased production on his allotted base was fully realized. Finally, the allotted base was readjusted when payment was made by the base-excess pricing method. The producers’ bases were proportionally reduced so that the total volume of base was only about 102 percent of the allotted Class I utilization. This re- sulted in the base price being composed of 98 percent of the Class I price and 2 percent of the Class II price. Hence, the only way for the volume of producer milk to reduce the base price was by its effect on the Class I price through the supply-demand adjuster. The North Texas market “employed market-wide pooling and the base-excess payment method during the spring. During months in which payments were not made according to the base and excess provisions, a market-wide blend price to producers was deter- mined. Changes were made in both the base-forming period and the base-paying period during the time covered by the study. Since there was no federal order for the South Texas market, the analysis was limited to the activities of the major producer cooperative in that market. This cooperative employed a restrictive base-excess 6 x program that was more like the method ad TABLE 2. AVERAGE DAILY DELIVERIES PER PRODUCER, i, IN FIVE TEXAS MARKETS, 1952-1964 q Year South Corpus North San . Texas Christi Texas Antonio { — — — — -—~ — Pounds — -— -—- 1952 543 i 1953 ‘ 558 869 ‘h, 1954 584 874 f_ 1955 ' ’“ 642 915 1956 718 752 688 961 1957 771 898 718 999 1958 818 916 744 1078 1959 892 1031 864 1185 1960 933 1168 950 1278 . 1961 976 1263 1058 1331 t 1962 1079 1269 1137 1534 t 1963 1134 1371 1169 1619 _‘ 1964 1214 1524 1325 1783 W ‘The calculation for 1955 was based on an estimate f_ and actual deliveries for February through December ‘_ the leading cooperative in the Austin-Waco than like the method employed under the No = federal order. The principal provisions of gram were to establish a new base each ye f establish the base price at about the level cooperative price (essentially a Class I type fluid milk to handlers. It did not provide t» v base-forming period. Producers could not be absolutely cert' actual base-forming period since the rec =i< liveries during a stipulated number of w“, producer deliveries were lowest was used to the established base. However, the seasonal- of deliveries indicates that the period used, record probably did not vary much. The g using the period of lowest deliveries almost”, the cooperative that the base deliveries in. -~ii would be less than the Class I type sales. ducer deliveries were more seasonal than Cl Additionally, in actually determining the all I the deliveries on record for the period w tionately reduced to a level that was expe less than Class I type sales. i r. Producer Growth Rates _. In 1964, the average daily deliveries of ranged from 1,214 pounds per day for Sou to 1,783 pounds for San Antonio (Table 2). the average daily deliveries per producer -, (688 pounds) for North Texas. There are _ why the growth rate of producers in the N market could be expected to be greater th i! markets. The first and most obvious rea the small producers would need to expand faster to take advantage of technological a; production and transportation. Second, excess program might have created a -‘ which would result in greater expansion a seasonal shift in deliveries. ors except payment methods were the at the markets, hypothetically, the producer ‘would. be expected to be greatest in the market, followed by San Antonio and ‘ti. j These last two markets used blend primary difference was that Corpus “ an “individual handler pool and San c ‘ket-wide pool. Although some people ucers in individual handler pool markets g1 irect encouragement from handlers t0 on’ in line with the handler’s needs, the g these markets do not support this The change in the percentage of producer I to‘ Class I sales was not significantly een Corpus Christi and San Antonio. ~ i‘ th rate of South Texas and Austin-Waco , ‘d’ be expected to be lower than for the s, because of the restrictive quota plans fajor cooperatives in these two markets. , barriers to entry were greater in these levproducers might have been able to "pidly as in the other markets without percentage of their milk utilized in 3, daily deliveries per producer are fa percentage of 1956 to facilitate com- ative change in size. This indicates that, e foregoing hypotheses, producer size for increased more on a percentage basis Vkets except Austin-Waco. By 1964 de- roducer in the North Texas market had g 192 percent of 1956. The percentage Q-South Texas was the lowest of all the ‘was hypothesized. lysis of growth rates does not indicate or-base incentive in the North Texas _l sufficient to result in a greater growth l’ urred in other markets. It does not jypothesis that the growth rate for Austin- 1 be less than. for the other markets nor AGE DAILY DELIVERIES PER PRODUCER AS A PER- 956, BY MARKETS, 1952-1964 ‘uth Corpus North San Austin- , exas Christi Texas Antonio Waco — — — — -— -—— Percent — — — ~ — —-— — " 78.92 81.10 90.43 84.88 90.95 93.31 95.21 91.80‘ 100.00 100.00 100.00 100.00 119.41 104.36 103.95 105.82 121.814". 108.14 112.17 121.43 137.10‘ 125.58 123.31 134.13 155.32 138.08 132.99 136.64 167.95 153.78 138.50 139.29 168.75 165.26 159.62 177.38 ~ . 182.31 169.91 168.47 192.59 69.08 202.66 192.59 185.54 213.89 for’1955 was based on actual percentage for "a December; January was estimated. the hypothesis that the rate for Corpus Christi would be the same, or lower, than that for San Antonio. Despite the fact that the utilization percentage for Austin-Waco had remained rather high, the growth rate in daily deliveries per producer was greater than in the other four markets. This might have been the result of increases in Class I sales or because of reduc- tion in the number of producers. Although the major producer cooperative in the Austin-Waco market de- veloped a restrictive quota plan early in the period, it is possible that this had little impact on producer growth after the first 2 years of its operation. This plan was in operation only when producer deliveries exceeded Class I sales by a certain percentage. Except for this early period, the percentage did not exceed this level. After 1958, members of this cooperative received payment based on blend pricing. Conse- quently, the increased production did not result in producers receiving an excess price. INCENTIVES! It was assumed in the analysis that a major goal of federal milk marketing orders and milk producer cooperatives was to provide incentives to bring about adjustments between Class I sales and producer deliveries on both an annual and seasonal basis. Because of the inelastic nature of consumer demand for Class I products, it was assumed that in order to preserve relatively stable prices to consumers most of the adjustments would be required from pro- ducer deliveries rather than from changes in Class I sales. Upon acceptance of these goals it becomes the proper function of federal orders and producer co- operatives to develop programs which will provide incentives for obtaining adjustments in the level of annual producer deliveries and their seasonality to coincide with the level and pattern of Class I sales. The specific objective of base-excess payment tech- niques is to provide additional incentive for producers to adjust their deliveries seasonally so that a greater proportion is in the base-forming period. The more restrictive base-excess programs such as those employed by the Austin-Waco and South Texas cooperatives were expected to provide an additional incentive for regulating the annual rate of increase in producer deliveries. These methods provide higher prices to producers that restrict their rate of growth because the base price is not affected directly by the increase in total producer deliveries. The typical federal order base-excess program does not restrict the volume of base milk to a per- centage of Class I sales. Consequently, over time the ‘base price may be reduced to a low level with an increasing proportion of Class II milk allotted to base. The method of Class I pricing, plus the changes in the percentage of producer milk utilized as Class I should provide some incentive for adjustment both seasonally and in the general level of deliveries. Sea- sonal components were built into the Class I price 7 formula through ‘the use of the prices in the northern dairy states, the Class I price differential and the supply-demand adjuster. However, since the northern prices used to de- termine the basic formula price and the Class I utilization percentage used to determine the supply- demand adjuster were always obtained from recent history, it is possible to obtain a Class I price which lags changes in producer deliveries instead of proceed- ing them or coinciding with them. Much of this difficulty can be overcome by using a Class I price differential that varies more than the Class I basic formula price and the supply-demand adjuster. It was found that the four federal order markets analyzed in this study all had a high percentage utili- zation of producer milk as Class I during the first year of the order. A decline in the percentage over time was experienced in these markets. The only exception to this was the producer deliveries of the Austin-Waco market. In this market the percentage declined until the producer cooperative established its own restrictive base-excess plan for payment to its members. There- after, it increased to a high level of Class I utilization. Although the South Texas market was not regu- lated, deliveries by the producer association in that market were analyzed. The utilization percentages were not strictly comparable between this market and the federal order markets. However, it appeared that this utilization percentage stabilized at a level below that of the other markets with a similar restrictive base- excess program. This lower level might be due to the fact that the excess price of the South Texas coopera- tive may have been greater than that of the Austin- Waco cooperative. The management of the South Texas cooperative had stated that frequently the base deliveries were less than Class I sales and that these funds remaining in the cooperative pool were used to increase the excess price. Had the excess price been lower, the utilization percentage might have stabilized at a higher level. However, a utilization percentage of 80 percent cannot be considered a major problem. If producers in a market are to provide their own reserves for fluctuations in the needs of handlers which cannot be achieved through seasonal adjustments, the excess quantity of milk in the South Texas market probably was not much greater than that which was required. SEASONALITY! Class I sales in all markets exhibited a high fall and winter pattern of seasonality, with sales below average in the spring and summer. How- ever, the seasonal patterns were by no means smooth. It is probable that different consuming habits exist between the summer and winter months and that special holidays also have important effects. The school year also has an important impact as a result of the school lunch program. These characteristics indicate that there would be some difficulty in adjust- 8 ing milk deliveries to Class I needs even if I the sole objective of all producers. 5 Although year-to-year variations exist, seasonality of Class I sales for each market, little indication that the seasonal patterns ing. The total deviations of the medi vf indicated the following ranking of the five. according to the magnitude of the sea o» Class I sales, from the most seasonal to the sonal pattern: (1) Austin-Waco, (2) No r (3) South Texas, (4) Corpus Christi and i) Antonio. 7 The seasonality of producer deliveries - peaked in the spring and was low in the fa eries by Texas producers on the North Te f: were found to have been reduced in seasona the period studied. With the inclusion of . the base-forming period, the seasonality I increase, although the amount of data availa ing this change was insufficient to ascertai this was just a temporary fluctuation in Q The nature of the change in seasona f North Texas market agreed almost entirely, expected incentives of the base-excess pr P erally, indices increased for months in _' forming period and decreased during the the base-paying period. There was a te deliveries to increase seasonally in the m r the base-forming period and to decrease in before and immediately following the period. A Although deliveries in the North T1, were more seasonal than in the other mar , possibly for the San Antonio market) du f years of the North Texas order, the sea peared to be reduced to a level below that y markets before 1960. ‘I Changes in Producer Number and Production Seusonolity g Changes in the number of producers serve only as a rough indicator of entry P The information contained in Table 4 w the percentage decline in number of p not been the same for all markets. It is virtually impossible for produceri their seasonality of production to a patt variable as the seasonality of Class I sales. tain a minimal and uniform percentage Class II, producer deliveries should reach‘; low in June, rise rapidly to a peak in i’ then gradually decline. f The analysis of seasonality of deliverii‘, producers on the North Texas market a shift in seasonality has occurred in the in the spring to more in the fall. This c-y 5 RAGE NUMBER or PRODUCERS IN EACH MARKET AGE or 1955 l if orth San Corpus Austin- South ilTexas Antonio Christi Waco Texas — — — — — — Percent — — — — — — —— 8.21 ._-1.27 87.01 0.15 90.94 7.14 94.29 115.82‘ 0.00 100.00 100.00 100.00 100.00 1- 1.72 103.54 115.03 90.52 95.55 97.43 101.18 110.88 80.85 89.20 90.55 105.51 105.74 74.51 84.53 13.25 107.87 97.41 53.28 81.43 81.54 105.10 93.01 71.29 77.53 j 8.28 90.15 95.11 52.50 73.10 3.28 83.45 87.55 59.37 55.55 ;8.00 81.10 81.86 54.49 60.11 for 1955 was based on actual numbers for jggh December; January was estimated. j 'ty of deliveries since the spring had been "f greatest deliveries and the fall the period rage deliveries. _ the base program of the cooperative in gexas market had been in effect for several uction in the total deviations indicated y‘ deliveries were becoming less seasonal lperiod. Since both the North Texas and " producers operated under a producer l‘ w; am which rewarded producers that v y from a high-spring seasonal pattern and A‘ rkets did not exhibit a tendency for a ,1 seasonality, it can be concluded that this " . 11 provides more incentive for reduction TIVE ANALYSIS OF MARKET-WIDE and IDUAL PRODUCER ADJUSTMENTS ual producer data were obtained on a 5's for 786 Texas resident producers in the market who delivered milk every month =jl0-year period 1953-1962. These 786 pro- ‘tised 25 percent of all producers delivering Q North Texas market in 1953 and 35 per- roducers in 1962. Analysis of these data d with two primary questions in mind. a was the nature of the differences in pro- Qments during this 10-year period? The tion was concerned with the adequacy p, 'de data in depicting the adjustment of liveries and with whether the long-term those continuously on the market for 10 ed in a manner that coincided with the grved in the ldata for the whole market. _l of Producer Adjustments tive analysis of adjustments by those 786 ucers continually on the North Texas 120 months from 1953 through 1962 was done on the basis of four variables: (1) average daily milk deliveries during the first year of the series, (2) percentage change in size or volume of milk de- liveries during the 10-year period, (3) the date that producers converted from 10-gallon milk cans to the bulk tank system of operation and (4) seasonal pattern of production during the 10-year period. Producers whose deliveries in 1962 were below their 1953 level represented 6 percent of all the pro- ducers studied. Those that delivered from 100 to 199 percent of their 1953 level represented 46 percent of producers, while 31 percent of the producers de- livered from 200 to 299 percent as much milk in 1962 as they did in 1953. Producers whose deliveries in 1962 were in the range of 300-399 percent of their 1953 output represented ll percent of the total. Four percent increased their deliveries from 400 to 499 per- cent of the 1953 level, and the remaining 2 percent increased by 500 percent or more. The third variable considered was the year in which the producer changed from 10-gallon milk cans to a bulk milk tank. By the end of 1954, 5 percent of the producers had bulk tanks (Table 5). An addi- tional 29 percent obtained bulk tanks in the period 1955-56. During the next 2 years 38 percent obtained tanks. Bulk tanks were obtained by an additional 23 percent of the producers during 1959-1960. Five per- cent of the producers either obtained tanks only in the last 2 years or had not obtained tanks during the 10-year period. The comparison between the year a bulk tank was installed and the size of the producer in 1953 indicates that small producers generally installed tanks later than larger producers (Table 5). The last variable considered was the seasonal pattern of production. Producers were divided into three groups according to their average pattern of deliveries during the 10-year period. The first pattern consisted of those producers with deliveries that peaked TABLE 5. COMPARISON OF YEAR BULK TANK WAS INSTALLED AND PRODUCER SIZE 1N 1953 Pounds of milk delivered per day in 1953 Year bulk Less 1,500 tank than 500- 1,000- and All installed 500 999 1,499 abovel producers -— -—- —- —- Percent of producers —— — -— ——- 1953-1954 2 4 18 1 1 5 1955-1956 15 4O 40 47 29 1957-1958 41 38 30 34 38 1959-1960 33 16 12 8 23 1961-1962’ 9 2 0 0 5 Total 100 100 100 100 100 Number of producers 378 297 73 38 786 Percent of producers 48 38 9 5 100 lTwo producers in excess of 5,000 pounds. zlncludes four producers that had not installed bulk tanks. TABLE 6. COMPARISON BETWEEN THE YEAR OF INSTALLATION OF BULK TANK AND PRODUCER GROWTH 1962 I962 . Productiw Year bulk tank installed Production Pmmds per d” m 1953 as a as a Less 1,500.; percentage 1953- 1955 I957 1959 1961 All percentage than 500- I,0O0- and of I953 I954 I956 I958 I960 I962 producers of I953 500 999 1,499 above —— —- —- — Percent of producers — — —— —- — -— —- — Percent of producers — * Less than 100 6 2 8 8 10 6 Less than I00 3 '7 i 11 21 100-199 5O 47 41 5O 44 46 I00-I99 37 51 62 58 200-299 36 30 33 29 29 31 200-299 35 29 25 21 300-399 2 13 11 10 10 11 300-399 15 10 1 0 . 400-499 6 5 5 I 5 4 400-499 7 2 l 0 "i 500 and above 0 3 2 2 2 2 500 and above‘ 3 I O 0 Total 100 100 100 100 100 100 Total I00 100 100 100 Percent of Number of producers 5 29 38 23 5 100 producers 378 297 73 38 Percent of producers 48 38 9 5 I ' in the spring and tended to be low in the fall and winter. A total of 39 percent of the producers were in this category. The second group included pro- ducers whose deliveries peaked in the spring and also those whose deliveries tended to have a double peak: in the spring and in the fall or winter. This group composed 40 percent of the producers. The third group comprised producers whose deliveries tended to peak in the fall or winter but exhibited little tendency for a secondary peak in the spring. Included in this category were the remaining 21 percent of producers. There appeared to be little or no relationship between the level of deliveries in 1962 compared to 1953 and the date that bulk tanks were installed (Table 6). However, the date of installation of the bulk tanks appeared to be related to the seasonal pattern of producer deliveries (Table 7). This rela- tionship tends to confirm the hypothesis that the date of tank installation might be a rough indicator of managerial ability. Of the producers that installed TABLE 7. COMPARISON BETWEEN DATE BULK TANK INSTALLED AND SEASONAL PATTERN‘ OF PRODUCTION Years bulk tank installed Seasonal production 1953- 1955- I 957- 1959- 1961- All pattern 1954 1956 1958 1960 1962‘ producers -— -— -— -—- Percent of producers —— — —— -— A’ 31 33 36 50 54 39 B3 44 43 42 32 34 40 c‘ ' 25 24 22_ I8 12 21 Total I 00 100 100 I 00 100 I00 Number of producers 36 224 301 184 41 786 Percent of producers 5 29 38 23 5 100 ‘Includes four producers that had not installed tanks by the end of 1962. zThe 10-year average daily deliveries peaked in March through May, with deliveries for September through December being at a low level compared to the other months. ‘The 10-year average daily deliveries peaked in the period June through August or there was a tendency for a double peak, one in the spring and one in the fall or winter. ‘The 10-year average daily deliveries peaked in the fall or winter months. . 10 -market during the first 2 years of the ord TABLE 8. COMPARISON BETWEEN PRODUCER SIZE IN I PRODUCER GROWTH é ‘Ten producers out of 17 in this class had deliveries in I were between 500 and 599 percent of their 1953 deli f a bulk tank in the 1953-1954 period, 69i appeared to have a seasonal pattern differ‘ the high-spring, low-fall pattern which exist percentage dropped to 67, 64, 5O and 46, res: in the consecutive 2-year periods of bulk"? stallations. * I On a percentage basis small producers l in size more than large producers (Table 1*; 3 percent of the producers under 500 smaller deliveries in 1963 than in 1953.: I centage increased to 7, ll and 21, respec producers in the other three size categories. p excluded producers that quit dairying d period. It is probable that a greater pro p‘ the small producersleft the market than €_ producers. TABLE 9. COMPARISON or PRODUCER SIZE m 195a; SONAL PATTERN or PRODUCTION 1 Pounds per day in 195 Seasonal Less 1,500‘: production than 500- 1,000 and ; = pattern 500 599 1,499 above“ —- -— -— -— Percent of producers A‘ 42 3c- 35 34g B’ 37 40 51 53‘ c‘ 21 24 14 I3 Total I00 100 100 100 Number of I T; producers 378 297 73 38 "- Percent of 3 producers 48 38 9 5 _i ‘The I0-year average daily deliveries peaked in Y“ May, with deliveries for September through December i low level compared to the other months. zThe 10-year average daily deliveries peaked in the“. through August or there was a tendency for a dou_ in the spring and one in the fall or winter. v “The 10-year average daily deliveries peaked in th months. . -portion of the producers with a seasonal l peaked the spring and was low in the ter was greatest for the producers with 'es of less than 500 pounds in 1953 (Table i centage was less for each succeeding class. pge of producers who appeared to have 41¢ of deliveries in die fall or winter did with the size. However, the percentage V; g-high and fall-spring double high pattern 'th the larger size group. t comparison, between seasonality and iwth, also indicates some interesting rela- able l0). A high percentage, 72 percent, ucers that had smaller deliveries in 1962 possessed a high-spring, low-fall pattern ity. This value was only 46 percent for ~ that were at least as large but not twice ‘the last year compared to the first. For _, 300-399, 400-499 and the 500-and-above i rcentages of producers with a high-spring, g. em was 34, 20, 16 and 18 percent, respec- 8 percent of the producers that had _ cries in 1962 than 1953 possessed a high- V’ _g pattern. This percentage was greater ceeding class. Of the producers whose 1962 were at least 500 percent of 1953, 51;. ssessed a high-fall or winter pattern with [i pop in the spring. :1- _ . of Market Data and Producers on the Market , average daily deliveries per producer for exas market were 558 pounds (Table l1). daily deliveries per producer in 1953 for i oducers that delivered milk to this market COMPARISON BETWEEN PRODUCER GROWTH AND _Tl'ERN , Producer growth‘ l less 500 [than 100- 200- 300- 400- and All ' 10o 199 299 399 499 aboveproducers :'-l._. __ _ — Percent of producers -— — —— -—- 72 46 34 20 l6 18 39 . 2O 41 42 41 39 23 40 ‘i a 13 24 39 4s 59 21 1 .100 100 100 100 100 100 100 49 356 245 88 31 17 786 6 46 31 11 4 2 100 V1962 deliveries were of 1953. . i: average daily deliveries peaked in March through lveries for September through December being at a pared to the other months. A flaverage daily deliveries peaked in the period June 11' or there was a tendency for a double peak——one fund one in the fall or winter. leverage daily deliveries peaked in the fall or winter TABLE 11. AVERAGE DAILY DELIVERIES PER PRODUCER FOR ALL PRODUCERS ON THE MARKET AND 78s PRODUCERS CONTINUOUSLY ON THE MARKET 1o YEARs, NORTH TExAs, 1953-1962 786 Producers 786 All as a percent of Years Producers producers Difference all producers -—- -— —— — Percent — — — — — -— —- Percent 1953 658 558 100 117.9 1954 695 584 111 119.0 1955 777 642 125 121.0 1956 860 688 182 125.0 1957 901 718 193 125.5 1958 956 744 212 128.5 1959 1,054 864 190 122.0 1960 1,117 950 167 117.6 1961 1,220 1,058 162 115.3 1962 1,294 1,137 157 113.8 continuously from 1953 through 1962 were 658 pounds. The average deliveries for these 786 producers were greater than the average for all producers for the entire 10-year period, 1953 through 1962. The difference was at least 100 pounds per day throughout this period. This indicates that, on the average, new producers coming on the market as well as old producers leaving the market were considerably smaller than these long- term producers. The compound growth rate for these 786 pro- ducers was 7.87 percent, while the growth rate for all producers on the market was 8.02 percent. Hence, the difference amounted to only .15 percent even though a considerable difference existed in the average size. Therefore, at least in this case, the growth rate ob- tained from the market data provides a useful indica- tion of the tendency of producers to increase in size over time. The effect of smaller-than-average pro- ducers leaving the market evidently was slight, or it could have partially offset by newer producers having a slower rate of growth than the 786 producers in the special study. The 786 producers grew at a higher average rate than the average for the whole market through 1958. After 1958 the rate for the whole market grew faster. This suggests that the more recent producers in the market were growing faster than the producers that had been on the market longer. Analysis of the data indicates that there was a decline in seasonality of deliveries by the 786 pro- ducers. However, median indices of seasonality for this group and the Texas producer data on the North Texas market indicate a close agreement between the two series. This suggests that eliminating the impact of producers leaving and coming on the market may not contribute much to a better understanding of producer data. However, differences may be much greater for a small market such as Corpus Christi which has greater short-term variation in the number of pro- ducers. This type of variation may be reduced by using average daily deliveries per producer rather than average daily deliveries. ll Although the rate of change in seasonality ap- peared to be greater for the North Texas market producer data than for the 786 Texas producer data, these differences were generally small and a significant difference existed for only l month during the 10-year period. It was found that in the North Texas market the seasonal pattern for Texas producer data was similar to the seasonal pattern of deliveries of the 786 Texas producers that were continuously on the market for a 10-year period. The individual producer data for the North Texas market also indicated that the average producer growth rate can be determined adequately from market data. However, market data may slightly over estimate the growth rate since many producers leaving the market can be expected to be smaller than the average producer for the market. LIMITATIONSI Major limitations of the analysis were (1) the frequent major changes in the pricing and payment provisions in several of the markets over a relatively short time, (2) the short period for which data were available for some markets and (3) the disturbances resulting from factors such as changes in the number of handlers regulated in some markets which appeared to have a major impact on both producer deliveries and Class I sales. These problems not only made it difficult to evaluate the seasonal and growth patterns of the markets but also restricted detailed evaluation of changes in seasonality and com- parisons among markets. CONCLUSIONS Historically, a malalignment has existed between the seasonality of production of Grade A milk and consumption of Class I products. Additionally, many markets have been faced with a more rapid increase in producer deliveries than in sales. Since the demand for these products is highly inelastic, large price fluc- tuations are required to match consumption with production patterns. Without such adjustment, it is accepted practice to price excess production competi- tively with manufacturing grade milk. Milk marketing orders frequently include pricing and payment provisions to provide additonal incen- tives for adjusting production rather than consump- tion. These provisions include supply-demand adjust- ers, Class I price differentials, base-excess quotas and fall-premium plans. Five Texas milk markets (North Texas, Austin- Waco, San Antonio, Corpus Christi and South Texas) were studied because they contained a variety of pro- visions and represented the major Texas fluid milk markets. Data were obtained from federal market order administrators and producer cooperatives in Texas. The analysis covered the period from the first year of operation of the respective orders through 1964, a period of 9 to l3 years. Since there is no order in the South Texas market, data were restricted to the 9-year period of cooperative records: 1956-1964. 12 It was thought that entry and exit of pr on a market might seriously distort market-wi sonality and growth characteristics. In two I‘ having several changes in the number of handl hence producers, it was difficult to evaluate v or even general patterns. Analysis of 786 pr continually delivering to another market for l_ provided results similar to thejmarket-wide f cating that unless there are. sudden large ch t the number of producers, market-wide data n reflect producer adjustments. ' Analysis revealed wide differences in sea I, of Class I sales and production. Pricing p were not sufficient to obtain a discernible seasonality. A significant shift in seasonality‘ duction was found only in one market empl base-excess system. The shifts agreed with th tives of this program. p. Another market using a restrictive b plan did not possess a shift, but the plan exist to the period covered by the data. Seaso i producer deliveries in this market was lower i the other markets. i Incentives to adjust the level of producti greatest in the two markets employing restric j excess plans. These programs tied the level milk to that of Class I sales. In the market its plan before the period studied, produ J in a stable and close relationship to Class I Y the second market a change was made fro) restricted to a restricted base-excess system. t: the change, production increased more rapi sales. Following the change the relationship g until annual production and sales were closely‘ Production was not more responsive to? the market with individual handler blend than in the one with blend pricing and u. i pooling. A race-for-base in unrestricted b programs contributing to a higher growth l producers is frequently a criticism of these q However, the growth rate in this type of || not statistically greater than in the mark blend pricing. i Finally, this analysis indicates the exist wide variety of seasonal patterns and gro ' between producers. Clearly, all producers do‘ the incentives for adjustment in a similar This suggests the need for major educational among producers concerning the advantages- advantages of various alternative adjustment resulting from market order provisions. A wide variation in producer size, grog‘ and seasonal patterns were found to exist in Texas market. The following characteri f found: (1) A greater proportion of the small had higher growth rates than large produc “ter proportion of the producers that i cries in 1953 appeared to maintain a f» -fall seasonal pattern throughout the the case with large producers. 9' roportion of the producers having a f -fall pattern of deliveries was lower l5 ups that had greater growth rates. urths of the producers whose deliveries than in 1953 had an average pattern ‘w-spring deliveries. Only 17 percent J .~ whose deliveries in 1962 were at least ‘f, 1953 level had an average pattern of ; -fall deliveries. iproportion of producers with a high- _, pattern was greater among producers , eir first bulk farm milk tank late in if 'ed. froportion of producers installing bulk ‘i. first 4 years of the study (including installed a tank before the period j 'ghest among the larger producers. ings indicate that there is a close rela- n adjustments of producers to both j improved equipment, seasonal adjust- eliveries and growth rates. It suggests *astute managers adjust more quickly to in t improve income. Additionally, the j seasonal pattern which more closely l, n rket requirements probably placed _ in a more favorable position to in- f5» more rapidly than other producers. ta suggest the need for concentrated orts among some producers concerning 'efits of different seasonal patterns of ‘s points up the need for further re- ircomparative costs of producing certain 's of milk under alternative seasonal ~ marketing cooperatives and many yment programs are concerned with the tment problem, the complete benefits of the programs can be made known if production costs and returns for j seasonal patterns are known. ESTIONS FOR ADJUSTMENT _ stment indicates that it is difficult to determine attems for Class I sales and producer rkets that have frequent changes in regulated handlers. This is especially ‘changes in number result from changes “on of Grade A products which handlers lated market. e markets studied the base-excess pay- appears to be the most effective payment loyed to obtain a seasonal adjustment gliveries to seasonal pattern of Class I ' of the nature of the adjustment prob- lem, a base-forming period of September through January is recommended. There was little indication of a change in sea- sonality of producers’ deliveries for the Austin-Waco market or by members of the major producer coopera- tive. This was also true of the producer deliveries for the San Antonio and Corpus Christi markets. However, there was a significant change in three of the indices of seasonality of producer deliveries for the major producer cooperative in the South Texas market. Additionally, the total deviations of the indices from 100 were smaller each succeeding year. The lack of conclusive evidence of a change in season- ality for this market may be related to the adoption of a restrictive base-excess program several years before the period for which data were available. Production could be expected to increase season- ally in August, and perhaps in July, as producers attempted to prepare for the base-forming period. By having the base-forming period continue through January the tendency for a premature reduction in deliveries for the spring months would be reduced. A base-paying period of March through July would provide a l-month separation between the base- forming and base-paying period in which no penalty would be incurred by receiving the excess price or by having the deliveries included for record in construct- ing the new base. A blend pricing system could be used during the months which were not established as the base-paying period. If deliveries were eventually switched to the point that seasonally they were too high in the base-forming period, the base-paying period could be extended to cover the entire year. Producers who had over-adjusted their seasonal pattern would then receive an excess price for part of their deliveries during the base- forming period. If this were not sufficient incentive for seasonally reducing deliveries in the fall, the sea- sonality of the Class I price differential could be reduced. Critics of the quota system argue that it penalizes the producers who attempt to increase their efficiency by becoming larger. They also contend that it reduces the incentive for producers to adopt new technological developments. This objection can be reduced with a base-excess program such as that employed by the cooperative in the Austin-Waco market. The 3-year moving average of daily deliveries during the base- forming period provides a base which results in a pro- ducer accepting the impact of his additional deliveries for a longer period of time. It would take 3 years before a given increase in deliveries would be fully realized in the producer’s allotted base. Provision For New Producers The 3-year moving base creates a problem with new producers. New producers would receive an l3 excess allocation for a large part of their deliveries the first, and even the second year, unless base was purchased from existing producers. This problem could be overcome in part by arbitrarily assigning a base to a new producer, since orders are not ‘designed to prohibit entry of new producers. For example, one method could be to assume that a new producer would adopt a compound growth rate of l0 percent and would have a seasonal pattern which would average 10 percent more deliveries per day during the base- paying period than during the base-forming period. If the new producer came on the market after the base- forming period was over, he could then be provided an allocation of 80 percent of his deliveries as base and 20 percent as excess. The following year the producer's effectiveibase could be established as 90 percent of his average de- liveries during the base-forming period. This would account for a l0 percent growth rate and the deliveries during the base-forming period would establish the proper effect of his seasonal pattern. If. the new pro- ducer started delivering milk early in the base-forming period, this procedure would be followed during his first base-payment period instead of using the method described in the preceding paragraph. The next year the producer's base would be one- third of the sum of 1.90 times his average deliveries the first base-forming period, plus the average for the second base-forming period. Finally, the next year the producer would have delivered milk during the base- forming period for three consecutive years so his base could be calculated in the same manner as for all other producers. The last suggested proposal for the base-excess payment program contained a provision intended to protect the producer from a base price which would decline over time as a result of expansion of base deliveries. One method of protecting the producer would be to determine his base price from the level 14 of his. deliveries relative to his assigned base i proportion of total market base deliveries A assigned to Class II. Under this method the Y that delivered his entire allotted base d? month would receive the base price for his g liveries. However, by delivering less than his f base the producer could receive up to the Clad The Class I price would be received if the of his assigned base which was actually deli a no greater than the percentage of the total u deliveries assigned a Class I utilization. I Base deliveries between the two extre s _ receive the proper proportional value of C' Class II prices. For example, if 80 perc - market base deliveries were Class I and a; delivered 90 percent of his assigned base receive the Class I price for 80 percent of h’ base, or about 90 percent of his actual deliv remainder would be valued at the Class II A Another alternative to this method w ‘I proportionately reduce the assigned base for» ducer so that the base price could not fa specified relationship between the Class I . ~- prices. This method was used by the coo ” the Austin-Waco market. Both of these} would provide additional incentives for pr: regulate their growth rates. "1 The programs proposed should not be to provide the greatest level of adjustments i’ situations. Modifications of the pr . probably be required from time to time in a kets. However, to insure that the pr - i‘ respond to features of any pricing and pa visions in the way anticipated, producer kn__ the provisions and their implications on is crucial. Without intensive educatio' attainment of adjustments would be expe 3 a longer period of time and perhaps never ~_ potential. ‘ [Blank Page in Original Bulletin] Texas Agricultural Expcfimmt Station Texas A8cM University College Station, Texas 77843 H. O. Kunkel, Acting Director- Publication a s ",1