UNIVERSITY OF CALIFORNIA COLLEGE OF AGRICULTURE AGRICULTURAL EXPERIMENT STATION BERKELEY, CALIFORNIA AN ANALYSIS OF THE FRESNO MILK MARKET J. M. TINLEY BULLETIN 559 OCTOBER, 1933 CONTRIBUTION FROM THE GIANNINI FOUNDATION OF AGRICULTURAL ECONOMICS UNIVERSITY OF CALIFORNIA BERKELEY, CALIFORNIA CONTENTS PAGE Foreword 4 Introduction 5 General business conditions and the market-milk industry 6 Consumption 8 Population 8 Consumption of market milk 9 Seasonal variation of consumption 12 Sanitary requirements 13 Production 14 Seasonal variation of production 16 Size of herds 16 Years dairymen have shipped market milk 17 Location of herds 17 Hauling 19 Buying prices of market milk 20 Distribution 25 Number and capacity of distributing plants 27 Distributor's margins 29 Financial aspects of market-milk distribution in Fresno 34 Incomes and expenditures of distributors in Fresno 35 Delivery 39 Bottle losses and expense of collection 45 Retail-store margins 47 The problem of distribution 49 Summary, conclusions, and recommendations 53 Consumption and prices paid by consumers 53 Prices paid to dairymen 54 Distribution: margins and costs 55 Recommendations for improvements 57 Acknowledgments 59 FOREWORD This bulletin represents the third of a series of studies on milk-market- ing in California made by the Giannini Foundation of Agricultural Economics, College of Agriculture, University of California, during the years 1930, 1931, and 1932. The results of the first study dealing with the Los Angeles milk market were presented in California Agricultural Experiment Station Bulletin 513. The second study, appearing in Bulle- tin 534, dealt with the East Bay milk market. The three studies cover problems common to all milk markets in the state as well as problems peculiar to each separate market. The fact that only four distributors operated in Fresno at the time this study was conducted made it possible to make a more detailed analysis of the system of distribution than was possible in the two earlier studies. Special stress was placed on the system of distribution in Fresno, more- over, because the inefficiency of the system in that city appeared to be one of the prime factors responsible for the troubles of the market-milk industry of that area. These studies have, of course, emphasized problems that are pressing during periods of declining demand and falling prices. Conditions in many milk markets have, however, been aggravated by factors which had their origin during the so-called period of prosperity and stable price levels prior to 1929. All the studies have attempted to show that the best interests of both producers and distributors are concerned with the maintenance of a high level of per-capita consumption of market milk. This can be done only if prices paid by consumers for market milk are kept at all times at the lowest possible level consistent with good quality and the adequate protection of the health of consumers. If this objective is to be attained, it is necessary that every effort be made to increase the efficiency of production and distribution of market milk. This problem warrants the cooperation of all groups interested in the market-milk industry of California. It is hoped that the three bulletins will be useful to all in the state who are directly or indirectly interested in the economic problems of market- milk production and distribution. These bulletins have emphasized especially the economic factors which have a bearing on the long-time stability of the market-milk industry in the different parts of the state. It is suggested that this bulletin be read in conjunction with bulletins 513 and 534. Much of the analysis developed in those bulletins relative to the economic interrelations between production, consumption, and distribution have not been repeated in the present bulletin. [3] AN ANALYSIS OF THE FRESNO MILK MARKET 12 J. M. TINLEY 3 INTRODUCTION During the past two years different groups have voiced complaints from time to time about the prices paid by consumers for market milk in Fresno and about the prices received by dairymen. At the same time very few persons seemed to have had any very definite ideas as to the factors responsible for the alleged unsatisfactory state of affairs. Several groups representative of different interests in the Fresno milk market requested the Giannini Foundation of Agricultural Economics, College of Agriculture, University of California, to make an economic analysis of the Fresno milk market. In response to this request, a study was commenced early in December, 1932. This report represents the in- formation collected during the course of the study, the conclusions reached, and the recommendations made. The purposes of the study were (1) to analyze the economic factors affecting the long-time stability of the Fresno milk market, and (2) to ascertain whether it would be possible to effect any economies in or reor- ganization of the present methods of handling milk which would lead to an immediate and lasting improvement of milk-marketing conditions in Fresno. The information on which this study is based was obtained from the records of the four milk distributors in Fresno, from the records of the Bureau of Dairy Control, California Department of Agriculture, Sacra- mento, and from the records of the Health Department of the city of Fresno. 4 Personal interviews were held with numerous producers, sev- 1 Eeceived for publication May 1, 1933. 2 Paper No. 43, the Giannini Foundation of Agricultural Economics. 3 Associate Agricultural Economist in the Experiment Station and Associate Agricultural Economist on the Giannini Foundation. 4 The firm of Burdick and Freeland, accountants and auditors of Fresno, assisted the author in securing information from the records of the four distributors in Fresno, and from the records of the Health Department of the city of Fresno. The services of this firm were paid for out of a contribution of $400 subscribed equally by producers and distributors in Fresno. [5] 6 University op California — Experiment Station eral retail-grocery merchants, city officials, and officers connected with the various distributing plants. No attempt was made to analyze in detail costs of producing and distributing market milk because it was considered that such data as could be obtained on costs would be of little assistance in determining "fair" margins for distributors and "fair" prices for dairymen. Moreover, the collection of such data was likely to be a long and costly undertaking. Information was obtained from the distributors, however, concerning the importance of some of the chief cost factors entering into the production of market milk. In addition, each of the distributors made available copies of their profit and loss statements for 1930, 1931, and 1932. GENERAL BUSINESS CONDITIONS AND THE MARKET-MILK INDUSTRY The economic life of all commercial countries seems to be characterized by periodical advances and declines in business conditions. Many of these advances and declines, known as secular movements, cover long periods of time and are said to result from long-time changes in the relation between the volume of money and the volume of trade. In addi- tion, there are shorter and somewhat more regular cyclical movements of business conditions known as business cycles. In both these types of movements the upswings of business conditions are characterized by increases in prices generally, rising business profits, expansion of indus- try and volume of trade, a high level of employment, and higher wage scales. The reverse is true in the case of business recessions. The years 1921-1929 marked a period of comparative business pros- perity, although some industries, especially some branches of agricul- ture, did not share in the generally prosperous conditions. One of the most severe business depressions this country has ever experienced began toward the end of 1929. Prices of nearly all commodities fell rapidly and unemployment increased. Even those who were employed had their earnings greatly curtailed. The effects of the business recession were felt most severely in those industries in which productive capacity had been expanded greatly in excess of consumption requirements and in those industries which produced luxury or convenience goods. The prosperity of the dairy industry is closely related to general business conditions. A large part of the annual milk-fat production in the United States is converted into butter, the demand for which increases when business conditions are good and there is a high level of employment and declines when business conditions are adverse and there Bul. 559] Analysis of Fresno Milk Market is much unemployment. Figure 1 shows clearly the close relation between butter prices and the index of employment. The wholesale and retail prices of other dairy products in turn bear some relation to the prices of butter, although the prices of some of them, and especially those of market milk, do not react as rapidly to changed business conditions as do butter prices. This is illustrated by the relation between wholesale butter prices in San Francisco 5 and the 55 50 o c § ^40 u 9 Q. 5 1 £ ®30 -P -p 2 o 25 20 Emplc inde yment •X _ Pri bu ce of tter p i •< J. -H iVii«j( i»**/j ••f " 1 VJ v \r * i • Xr 1 Ml Jt'i • I / *J •• 1 *l • • • A A * 1 i ~ 120 110 100 I o o •-» r* II p. lO 90 I o! «-• >» JL ». to 80° o a o 60 S c M 50 0) 4 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 Fig. 1. — Butter prices rise and fall with increases or decreases in employment. (From Agr. Ext. Cir. 71.) retail prices of market milk in the East Bay cities (table 1). Similar conditions hold for other milk markets. The tardiness of retail prices of market milk in changing with business conditions and with the prices of butter were to a large extent responsible for the numerous milk wars and unsettled milk-marketing conditions in many cities of California and other parts of the United States during the years 1930, 1931, and 1932. "While the city of Fresno had not experienced a milk war during these three years, conditions in the market-milk industry in that city were very unsettled at the time this study was undertaken. Producers were complaining that the prices they received were insufficient to enable them to operate without incurring severe losses. Consumption of market milk in the city of Fresno had declined appreciably since 1929. 5 Butter is usually retailed at a fixed differential over wholesale prices. 8 University of California — Experiment Station TABLE l Monthly Wholesale Prices of Butter at San Francisco and Ketail Prices of Market Milk in the East Bay Cities, 1929-1932 Year and month 1929 January February- March April May June July August September October November. December.. 1930 January February.... March April May June July August September October November. December.. Butter Market milk Actual price Per cent of aver- age 1929 Actual price Percent of aver- age 1929 cents per lb. per cent cents per qt* per cent 45.9 100.4 14.0 100 47.5 103.9 14.0 100 44.6 97.6 14.0 100 43.1 94.3 14.0 100 45.0 98.5 14.0 100 44.8 98.0 14.0 100 45.0 98.5 14.0 100 46.1 100.9 14.0 100 48.7 106.6 14 100 48.3 105.7 14.0 100 48.0 105.0 14.0 100 41.7 91.2 14.0 100 36.5 79.9 14.0 100 37.6 82.3 14.0 100 37.7 82.5 14.0 100 38.8 84.9 14.0 100 36.7 80.3 14.0 100 34.0 74.4 14.0 100 33.9 74.2 14.0 100 37.2 81.4 14.0 100 39 85.3 14.0 100 37.1 81.2 12.0 85.7 34.1 74.6 11.0 78.6 33.1 72.4 10.0 71.4 Year and month 1931 January February... March April May June July August September October November. December.. 1932 January February.... March April May June July August September October November. December.. Butter Actual price cents per lb. 26.2 28.5 28.2 24.3 25.3 25.0 26.2 29.6 30.5 31.9 32.0 29.7 24.4 24.0 22.9 20.0 19.5 17.9 18.9 20.7 21.0 21.9 25.7 26.9 Per cent of aver- age 1929 per cent 57.3 62.4 61.7 53.2 55.4 54.7 57.3 64.8 66.7 69.8 70.0 65.0 53.4 52.5 50.1 43.8 42.7 39.2 41.4 45.3 46.0 47.9 56.2 58.9 Market milk Actual price cents per qt* 11.4 13.0 13.0 13.0 13.0 13.0 13.0 13.0 13.0 13.0 13.0 13.0 12.5 12.0 12.0 12.0 12.0 12.0 12 12.0 12.0 12.0 12 12.0 Per cent of aver- age 1929 per cent 81.4 92.9 92.9 92.9 92.9 92.9 92.9 92.9 92.9 92.9 92.9 92.9 89.3 85.7 85.7 85.7 85.7 85.7 85.7 85.7 85.7 85.7 85.7 85.7 * Delivered to home of consumers. Sources of data: Butter prices: Average of daily prices published by the U. S. Dept. Agr. Market News Service (San Francisco office). Market-milk prices: Records of distributors in East Bay cities. CONSUMPTION Population. — The incorporated city of Fresno is situated in Township 3 in Fresno County. The population of the city of Fresno in 1930 was 52,513, which was 36.4 per cent of the population of the county. The city of Fresno is surrounded by a number of suburbs, nearly all of which are situated in Township 3, the urban population of which was 69,643. It is probable that most of the difference between the urban population of Township 3 and the incorporated city of Fresno was to be accounted for by the population of the suburbs of Fresno. The population of Fresno County increased from 128,779 in 1920 to 144,379 in 1930, a percentage Bul. 559] Analysis op Fresno Milk Market increase of 12.1. The population of the incorporated city of Fresno increased during the same period from 45,086 to 52,513, an increase of 16.5 per cent. 6 There are no figures available as to the increase in the population of the suburbs of Fresno, but statements made by officials of the city indicate that most of the suburbs have been built up largely since 1920. It is difficult to ascertain with any degree of accuracy what the trend in population of the incorporated city of Fresno has been since 1930. It is probable, however, that the population has shown little increase since 1930 and may even have shown some decline. 7 Consumption of Market Milk. — The volume of market milk distrib- uted in Fresno County increased more or less steadily from 1926 to 1930 (table 2). In 1931 there was a decrease of over 130,000 gallons. TABLE 2 Volume of Milk Distributed in Fresno County, Fresno and Suburbs, and Fresno City, 1926-1932 (In gallons) Fresno County Fresno and suburbs City of Fresno (4 plants) Year Annual Daily Annual Daily Annual Daily 1926 2,052,000 2,433,000 2,426,000 2,645,000 2,684,000 2,550,000 2,375,000* 5,622 6,666 6,628 7,246 7,353 6,986 6,507 1,757,000 1,743,000 1,871,000 1,813,000 1,803,000 1,852,000 t 4,814 4,775 5,112 4,967 4,940 5,074 t 1927 1928 1929 1,708,000 1,627,000 1,580,000 1,455,000 4,679 1930 4,458 1931 4,329 1932 3,986 * Preliminary. t Figures not available. Sources of data: Fresno County: California State Dept. of Agr. Bur. of Dairy Control. Statistical reports of California dairy records. Annual issues, 1926-1931. Fresno and suburbs: Estimates based on records of California Dept. Agr. Bur. of Dairy Control. City of Fresno: Data from records of milk distributors in Fresno and records of State Dept. of Agr. Bur. of Dairy Control. There was a further decrease in volume distributed in 1932. Over 70 per cent of the milk distributed in Fresno County in 1931 was handled by plants situated in Fresno and its suburbs; over 60 per cent of the county total was distributed by plants situated within the Fresno city limits. The volume of milk handled by these plants has declined appre- ciably since 1929. It is probable that this decline in volume distributed 6 See: U. S. Dept. Com. Bur. of the Census. Fourteenth and Fifteenth Censuses of the United States. Population. 7 This conclusion is borne out by statements made by various officials of the city of Fresno and by several business firms. 10 University of California — Experiment Station has been due partly to a decline in per-capita consumption, and partly, as will be shown later, to a loss of trade to distributors in the suburbs of Fresno. No reliable figures are available relative to the per-capita consumption in either Fresno County, or the city of Fresno. There are large numbers of dairy farmers in Fresno County, most of whom undoubtedly consume milk produced on their own farms, and this milk would not be shown in the totals in table 2. In 1930 several of the plants situated outside the TABLE 3 Trend in Prices of Most Important Agricultural Products of Fresno County Product Price used Unit 1928 1929 1930 1931 1932 Decline of 1932 from 1928 Apricots Farm price Ton dollars 50.00 26.00 25.00 40.00 0.46 1.07 133.00 19.65 dollars 63.00 35 00 35.00 61.00 0.46 0.86 115.00 20.80 dollars 39.00 20.00 20.00 59.00 0.36 0.99 88.00 16.20 dollars 29.00 35.00 19.00 60.00 0.28 0.87 100.00 14.80 dollars 18.00 16.00 12.00 39.00 0.22 0.62 59 00 12.25t per cent 64.0 Grapes (table).... Farm price Ton 38.5 Grapes (wine).... Farm price Ton 52.0 Raisins .... Farm price Dry ton : 2.5 Butter, extra Wholesale price San Francisco Pound 52 3 Cantaloupes Farm price Crate 42.0 Watermelons ... Farm price 1,000 melons Ton 55.6 Alfalfa* Wholesale price San Francisco U.S. No. 1 37.7 * Crop-year basis. t Nine months average, April to December. Sources of data: Table and wine grapes and raisins: California Crop Reporting Service, Summary of California annual fruit and nut crop, mimeographed reports. Butter: Monthly reports of U. S. Bur. Labor Statistics. Wholesale prices. Cantaloupes and watermelons: California Crop Reporting Service. Annual mimeographed sum- mary of the vegetable acreage. Alfalfa: Braun, E. W. Alfalfa. California Agr. Exp. Sta. Bui. 521: 34, table 15. 1931. Fresno city limits distributed milk in that city. But although their total volume of production is known, it is not possible to estimate how much of it was distributed within the city limits during that year. While figures on the volume of milk distributed within the Fresno city limits are available for the years 1931 and 1932, there are no reliable estimates relative to the trend in population since 1930. A large part of the population of Fresno County is engaged in agri- culture. The prosperity of the farmers in the country surrounding the city of Fresno is bound to affect the prosperity of the city of Fresno and vice versa. Since 1929 the prices of most agricultural commodities pro- duced in Fresno County have declined appreciably (see table 3). The decrease in purchasing power of the farm population has in turn ad- Bul. 559] Analysis of Fresno Milk Market 11 versely affected the purchasing power of the population of the city of Fresno. With a decrease in purchasing power, it would be expected that a lower volume of market milk would be sold at the retail prices pre- vailing in 1929. Or, if the volume sold is to be maintained, prices would have to be reduced appreciably. A comparison of percentage changes of market milk prices in Fresno and of retail food prices in San Francisco which can be expected to have changed in much the same ratio as those in Fresno, is given in table 4 for the period January, 1929, to December, 1932. As will be shown TABLE 4 Eelative Changes in Eetail Prices of Foodstuffs in San Francisco and Prices Paid for Market Milk by Consumers in Fresno, 1929-1932 (Average relatives of prices for 1929 = 100) Year and month 1929: January April July October 1930: January April July October Retail prices of foodstuffs in San Francisco Prices paid by consumers for market milk in Fresno 99.3 98.0 97.0 100.0 100 100.0 103.7 100.0 100.1 100.0 98.8 100.0 93.6 78.6 94.1 78.6 Year and month 1931: January. April July October. 1932: January April July October. Retail prices of foodstuffs in San Francisco 86.6 82.5 78.8 78.4 73.1 71.0 67.2 69.2 Prices paid by consumers for market milk in Fresno 78.6 78.6 78.6 78.6 78.6 78.6 71.4 71.4 Sources of data: Retail prices of foodstuffs in San Francisco: U. S. Dept. of Labor Bur. Labor Statistics. Monthly bulletin on prices, wholesale and retail and costs of living. Monthly issues. Market-milk prices: Calculations based on information supplied by distributors in Fresno. later (page 40), approximately 61 per cent of the market milk sold in Fresno is distributed through retail grocery stores. Because of this, store prices of market milk are used instead of prices on milk delivered to the door of the consumer. It will be seen that prices of market milk declined practically in the same proportion as prices of foodstuffs gen- erally. It is significant that while there has probably been an appreciable decline in consumption of market milk in Fresno since 1929, the decline has not been as marked as in some of the other cities in the United States, where consumption has declined as much as 30-40 per cent. 8 s Bartlett, E. W. Economic problems in the retail distribution of market milk, p. 9. Illinois Agr. Exp. Sta. Mimeographed release. 1932. 12 University of California — Experiment Station Retail prices of market milk (sold through stores and delivered to the door of the consumer) were 12 cents a quart up to February, 1929. In March, 1929, prices were increased to 14 cents, owing to the payment of higher prices to dairymen for milk produced under the more rigid sanitary requirements which came into effect at that date. In May, 1930, delivered prices were reduced to 13 cents a quart and store prices to 11 cents a quart. A further reduction of delivered and store prices to 12 and 10 cents respectively took place in July, 1931. In November, 1931, delivered prices were again reduced to 11 cents, but no change took place in store prices. Although prices paid by consumers in Fresno for market milk de- clined about as much as prices of foodstuffs generally during the years 1929 to 1932, it is possible, as will be shown later, that if distributive facilities had been more closely adjusted to consumption requirements and if methods of handling milk had been more economical and efficient, prices paid by consumers could have been reduced still further and more rapidly. If the volume of milk distributed in Fresno is to be increased, or if a further decrease is to be avoided, it is highly desirable that every effort be made to effect a further decrease in the prices paid by consumers. The price paid by the consumer is made up of the price paid to the producer of milk, charges for hauling from the dairy farms to city plants, and distributors' margins for processing and selling milk. These various prices, charges, and margins will be analyzed with a view to determining whether it would be possible to effect any economies which could be reflected back to the consumer in the form of a lower price. Seasonal Variation of Consumption. — Consumption is lowest during the month of January and highest during the months September to November (table 5). There does not appear to be much variation in consumption during the months February to August. Ordinarily it would be expected that the volume of milk consumed during the summer months would increase, because of an increase in per-capita consump- tion. In the case of Fresno, however, large numbers of permanent residents, especially school children, leave for summer resorts. The decline in the number of consumers during the summer months thus tends to offset any increase in per-capita consumption. The appreciable increase in consumption during the months September to November is due largely to the seasonal increase in population occasioned by the influx of large numbers of fruit-pickers and workers in fruit-packing sheds. Bul. 559] Analysis of Fresno Milk Market 13 TABLE 5 Seasonal Variation op Consumption* in the City of Fresno, 1930-1932 Month January February... March April May June July August September October November. December.. Total... 1930 gallons 123,476 127,990 134,036 132,167 141,924 136,785 133,022 129,500 138,221 143,341 143,227 143,685 1,627,374 1931 gallons 130,379 123,322 132,392 131,478 139,097 128,060 135,449 134,058 135,438 137,440 122,400 130,106 1,579,619 1932 gallons 114,319 111,393 123,178 120,166 124,008 118,060 118,239 120,040 125,485 127,181 125,147 117,403 1,444,619 Total for 3 years gallons 368,174 362,705 389,606 383,811 405,029 382,905 386,710 383,598 399,144 407,962 390,774 391,194 4,651,612 Indexes of seasonal variation t 91.0 98.7 97.5 99.6 101.9 99.9 98.1 97.7 105.5 104.8 104.1 101.2 100.0 * Figures are for gallons of milk distributed, the volume distributed being regarded as equal to the volume consumed. t Corrected for trend. Source of data: Calculations based upon records of distributors. During 1930 and the first four months of 1931 some milk was distributed in the city by plants situated in the suburbs. The volume of milk dis- tributed by these plants in Fresno was so small that it would probably not modify the above figures greatly. SANITARY REQUIREMENTS Prior to March, 1929, the sanitary regulations of the city of Fresno governing the production and distribution of different grades of market milk were substantially the same as those provided for in the Pure Milk Act of the State of California. 9 In March, 1929, however, stricter sani- tary regulations regarding market milk were introduced by the Health Department of the city of Fresno. 10 These regulations were still in effect at the time this study was made. The new regulations prohibit the sale in Fresno of ungraded raw or pasteurized milk. All grade-A milk, whether raw or pasteurized, is required to be produced from healthy, nonreacting tuberculin-tested cows. Cows are inspected at least once each month and are tuberculin- tested at least every six months. All reacting cows have to be removed immediately. Dairies are required to score at least 80 per cent on the dairy-farm score card adopted by the Department of Agriculture, State of California. Milk has to be cooled to 55° Fahrenheit immediately after milking and kept at that temperature until delivered to the consumer. 9 Approved June 3, 1927. Statutes 1927, p. 1944. io Ordinance 969, of the city of Fresno. 14 University of California — Experiment Station Pasteurized milk may not exceed 50,000 bacteria per cubic centimeter before pasteurization and not more than 15,000 when delivered to the consumer. Many of the sanitary requirements regarding the production of grade-A milk appear to be stricter than those prevailing in most other cities in California. All plants distributing grade-A pasteurized milk in Fresno have to be located within the city limits. All such plants are required to pay a fee monthly to the city of Fresno. This fee varies from $50 a month for plants receiving less than 6,000 gallons monthly to $200 a month for plants receiving 45,000 gallons or more monthly. It is provided further- more that a milk inspector be stationed by the Board of Health in every pasteurization plant, the inspector to devote his whole time to the inspection of such plant. In the latter part of May, 1931, there was an outbreak of diphtheria in some of the smaller towns in Fresno County. All employees in distribut- ing plants in Fresno were examined and it was found that several of them were diphtheria carriers. As a result, the City Health Officer issued an order prohibiting the sale of grade-A raw milk. This order has not been revoked. As a result no grade-A raw milk has been sold in Fresno since June, 1931. During the fiscal year 1931-32 some 848 herds with 17,073 dairy cows were tested for tuberculosis, 501 reactors being removed. 11 The number of dairy cows tested for tuberculosis greatly exceeds the number of cows required to furnish market milk to the city of Fresno. PRODUCTION The city of Fresno is situated within one of the most important dairy counties in California. In 1931 dairymen in Fresno County produced some 6,099,000 pounds of milk fat, of which less than 877,000 pounds, or about 12 per cent of the county production of milk fat, was sold in the form of market milk. Most of the balance was converted into butter, of which over 7,000,000 pounds were produced in 1931. Only a very small percentage of the dairymen in Fresno County are engaged in the production of market milk or market cream. In October, 1932, the Fresno market-milk supply was obtained from some 66 dairy herds with a combined total of 2,676 cows in milk (table 7). ii Letter dated August 8, 1932, from Dr. M. E. McDonald, Chief of the Bureau of Tuberculosis Control, California Department of Agriculture, Sacramento. Bul. 559] Analysis op Fresno Milk Market 15 TABLE 6 Indexes of Seasonal Variation in the Daily Average of Milk Fat in the Fresno, Los Angeles, and East Bay Milk Sheds Milk shed Month Milk shed Month Fresno, 1930-1932 (120 shippers) Los Angeles 1925-1930 (all shippers) East Bay, 1928-1930 (118 shippers) Fresno, 1930-1932 (120 shippers) Los Angeles, 1925-1930 (all shippers) East Bay, 1928-1930 (118 shippers) January 89.5 95.1 103.3 110.4 104.7 103.1 98.9 100.7 99.4 100.9 101.7 101.1 105.1 106.1 104.6 103.0 99.6 98.3 July 106.0 106.2 100.5 95.4 93.4 92.4 99.9 98.8 97.6 98.0 100.8 102.4 96.3 February August 94.4 March September... October November .... December 94.4 April 97.7 May 100.1 June 100.4 Sources of data: Fresno: Calculations based upon information supplied by the four distributors. Los Angeles: Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bul. 513: 101. 1931. East Bay: Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. Cali- fornia Agr. Exp. Sta. Bul. 534: 31. 1931. SEASONAL VARIATION IN THE PRODUCTION OF MILK FAT PER DAIRY IN THE FRESNO, LOS ANGELES, AND EAST BAY MILK SHEDS 120 JAN. FEB MAR APR. MAY JUNE JULY AUG SEPT. OCT. NOV. DEC Fig. 2. — There is a greater seasonal variation in the production of market milk in the Fresno market than in the Los Angeles and East Bay cities. (Data from table 6.) 16 University of California — Experiment Station Seasonal Variation of Production. — There is a considerable variation in the production of milk fat in Fresno County, the variation being greater than in the Los Angeles and East Bay milk sheds. (See table 6 and fig. 2.) The months of highest consumption in Fresno are usually September to November, whereas the months of highest production are usually April to August. During the late spring and summer there is thus likely to be a considerable surplus of production. A uniform monthly price for all milk produced does not offer any inducement for dairymen to develop a more uniform monthly supply of milk. It would appear to be desirable in the circumstances to introduce some sort of a basic production plan. Under such a plan each dairyman would have his monthly or daily basic quota determined by his average production dur- ing the months when production is more nearly adjusted to consumption requirements. Each individual would be credited with the full monthly base buying price on the quantity of milk supplied as quota milk and a lower price, depending on the amount received, for all surplus milk sent to manufacturing plants. The determination of basic surpluses for individual daymen could be done by each distributor or preferably by a producers' association. It is desirable that the basis of determination be uniform for all dairymen no matter which distributor they ship their milk to. Size of Herds. — The average-sized herd supplying market milk to Fresno in October, 1932, was 40 cows. The two largest herds had an average of 128 cows and the two smallest an average of only 9 cows. Two- TABLE 7 Size of Dairy Herds Supplying Market Milk to Fresno, October 31, 1932 Number of cows per herd Number of herds Number of cows in group Average of group 10 or less 2 9 14 19 6 5 2 4 3 2 66 18 153 360 678 257 272 129 303 259 257 9 11-20 17 21-30 26 31-40 36 41-50 43 51-60 54 61-70 64 71-80 76 81-90 86 91-100 100 and over 128 Total 2,076 40 Source of data: Records of the Health Department of the city of Fresno. Bul. 559] Analysis of Fresno Milk Market 17 thirds of the herds had less than 40 cows per herd (table 7). The herds supplying market milk to Fresno are much smaller than those in the East Bay and Los Angeles milk sheds, which average 103 and 56 cows per herd respectively. 12 Years Dairymen Have Shipped Market Milk. — The production of a consistently high-quality market milk in conformance with the rigid sanitary standards of the Fresno City Health Department requires that TABLE 8 Number of Years Dairymen Have Shipped Market Milk to Fresno Number of years — — -i Number of dairymen Less than 1 4 1 5 2 5 3 11 4 2 5 5 6 2 7 5 8 and over 26* Total 64 * Two dairymen who have shipped milk for over 8 years operate 2 herds each. Source of data: Records of the Health Department of the city of Fresno. dairymen make certain heavy fixed investments and that they have a considerable experience in market-milk production. A rapid turnover of dairymen is undesirable from the standpoint of the city of Fresno and of distributors and also from the standpoint of dairymen who have made the necessary investments. Thirty-eight out of 64 dairymen had been shipping market milk to Fresno for five years and longer ; 26 had shipped for eight years and more (table 8) . Location of Herds. — Fifty-six out of the 66 dairy herds supplying market milk to Fresno are located within 15 miles of the city (table 9) . These fifty-six herds supplied 5,501 gallons of milk daily in October, 1932, or over 86 per cent of the total milk shipped into Fresno daily to the four distributing plants. All herds are located less than 35 miles from Fresno (fig. 3). 12 Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. California Agr. Exp. Sta. Bul. 534:35-36. Table 5. 1932. 18 University of California — Experiment Station TABLE 9 Location of Dairy Herds and Milk Supply of Fresno, October, 1932 Distance from Fresno, in miles Number of herds Amount shipped Average amount per herd Under 5 18 26 12 2 4 2 2 66 gallons 1,301 3,085 1,115 215 360 125 145 gallons 78 6-10 119 11-15 93 16-20 107 21-25 90 26-30 62 31-35 72 Total 6,346 96 Source of data: Records of the Health Department of the city of Fresno. LOCATION «•. SIZE OF HERDS SHIPPING MARKET MILK TO FRESNO , OCT 1932 LEGEND SIZE OF DAIRY HERD o - so cows o SI - 100 © \. IOI -ISO " • ISI - zoo o 201 - 2S0 ® 251 - 300 C w 3 01 AND UP " • > .CXNUBA Fig. 3. — The majority of the dairy herds supplying market milk to Fresno are situated within a radius of 15 miles from the city. Bul. 559] Analysis of Fresno Milk Market 19 It is interesting to compare the location of dairy herds supplying market milk to Fresno and the volume of milk produced by them with similar data for the East Bay cities (table 10). In the latter case less than 6 per cent of the total available supply of market milk was obtained within a radius of 15 miles from Oakland, where most of the plants supplying milk in the East Bay cities are located ; over 67 per cent was produced 46 miles and more from Oakland. TABLE 10 Location" of Dairy Herds and Milk Supply of Oakland, June, 1931 Distance from Oakland, in miles Number of herds Amount shipped Average amount per herd Under 15 9 41 5 60 55 170 gallons 1,965 7,910 1,404 10,118 13,094 gallons 218 3 16-30 192.9 31-45 280.8 46-60 168.6 Over 60 238.1 Total 34,491 202.9 Source of data: Summarized from: Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. California Agr. Exp. Sta. Bul. 534: 74. table 23. 1932. Hauling. — Milk is purchased by distributors in Fresno f.o.b. their plants. A few dairymen haul their own milk to Fresno, but the bulk of the milk is hauled by independent truck owners on a contract basis, the contracts being made between distributors and truck owners. There are 9 hauling routes covered by the same number of trucks. Hauling rates vary between distributors and seem to depend upon the distance to be covered by the truck owner. Until recently hauling rates varied from 2 to 3 cents per gallon, or 20 to 30 cents per 10-gallon can. During the past year (1932) the hauling rates for some dairymen were reduced to 1.5 cents per gallon, or 15 cents per 10-gallon can. Hauling rates in Fresno seem to be appreciably above those which prevailed in the East Bay cities during June, 1931. Much of the milk supply of the East Bay cities obtained from up to 40 miles from Oakland was hauled for less than 20 cents per 10-gallon can ; some milk was hauled over 70 miles for 30 cents a can. In the East Bay study the con- clusion was arrived at that the hauling rates appeared to be higher than would be necessary under a more economical system of hauling. 13 A is Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. California Agr. Exp. Sta. Bul. 534:72-77. 1932. 20 University of California — Experiment Station similar conclusion can be drawn relative to hauling rates in the Fresno milk shed, although in the case of the Fresno milk market a lower volume of milk per dairyman may justify somewhat higher rates per gallon for each mile of haul than in the case of the East Bay milk shed. It is necessary to point out that since milk is hauled to Fresno on a contract basis, distributors do not derive any net income from hauling. It would seem advisable for both producers and distributors to consider the possibility of negotiating new hauling rates with independent truck haulers and also of consolidating several routes. The consolidation of hauling routes would be facilitated by the formation of a dairymen's collective-bargaining association. During the last six months of 1932 extremely low prices prevailed for milk fat. Savings that could be ef- fected by means of reduced hauling rates would contribute to an increase in the net returns to market-milk dairymen or to a reduction in prices to consumers. BUYING PRICES OF MARKET MILK For several years prior to March, 1929, dairymen were paid 24 cents a gallon for milk testing 3.6 per cent milk fat or better and 22 cents for milk testing 3.4 and 3.5 per cent. Milk with a test of 3.3 per cent and lower was purchased at a premium over the butter market. In March, 1929, buying prices were increased to 28 cents a gallon for milk testing 3.6 per cent milk fat or better and produced from herds free from tuber- culosis. Many dairymen were reluctant to make the necessary adjust- ments in their dairy herds even for the higher price offered unless they were assured of a market for several years. In order to insure an ade- quate supply of milk from tested herds, distributors made contracts with individual dairymen during 1929 and the first two or three months of 1930. These contracts varied as to length of time they were to be in operation. They also varied as to prices to be paid and provisions for adjustment of prices. The contracts negotiated towards the end of 1929 and early in 1930, when butter prices had declined appreciably, were usually for lower prices than the earlier contracts. Early in 1930 it became apparent that there would be an adequate supply of market milk from tested herds. The lower prices paid for manufacturing milk made dairymen anxious to comply with the health requirements in order to sell their milk as market milk. Buying prices for market milk were reduced from time to time during the years 1930 to 1932, although the prices of contract milk were reduced more slowly than milk not bought under contract. During part of 1932 some of the distributors purchased as market milk only a part of the milk supplied Bul. 559] Analysis of Fresno Milk Market 21 by their patrons who did not have contracts ; the balance (about 25 per cent of the production of each individual patron) was purchased prac- tically at manufacturing-milk prices. The other distributors took all the milk supplied by their patrons at market-milk prices. The average prices paid by each of the four distributors for all milk purchased from dairy- men during the latter half of 1932, however, were just about equal. These conditions resulted especially during 1930, 1931, and the first half of 1932 in a wide range of prices paid by different distributors and in a wide range of prices received by individual dairymen. Information was obtained from each of the distributors in Fresno as to the monthly prices paid by them for milk. One distributor listed the actual prices paid to individual dairymen for the years 1930 to 1932. Two distributors listed the average monthly prices paid to all patrons. The fourth distributor supplied information on the total number of pounds of milk fat received monthly and the amounts paid for it. On the basis of this information monthly buying prices were calculated for each distributor for the years 1926 to 1932. A combined price series per pound of milk fat was obtained by weighting each distributor's monthly prices by his proportion of the total purchases of milk fat by all distri- butors. 14 The differential between buying prices of market milk and manufac- turing milk f.o.b. plants in Fresno is shown in table 11 and figure 4. During the years 1926 to 1928 the differential declined from 21.9 cents per pound of milk fat to 17.2 cents, largely because of a somewhat higher price for manufacturing milk. During the last ten months of 1929 the differential increased to 31.1 cents per pound of milk fat, because of the higher price paid for milk from tested herds. During 1930 and 1931 the average annual differentials between the buying prices of market milk and of manufacturing milk were 29.8 and 27.3 cents per pound of milk fat respectively. In 1932, however, the prices paid for market milk de- clined absolutely more than the prices of manufacturing milk, the dif- ferential in 1932 being almost 10 cents per pound of milk fat lower than in 1931. This differential appears to be somewhat lower than the dif- ferentials in the years 1926 to 1928 when milk was not required to be produced from tested herds and when dairymen were not required to meet the strict sanitary requirements existing since March, 1929. The average differential for the last six months of 1932 (13.1 cents a pound of milk fat) was little higher than the average differential for the last i4 Prices per gallon were converted to a milk-fat basis by dividing by 0.318 on the assumption (borne out to a certain extent by an inspection of distributors' records) that the average milk-fat test on milk purchased from patrons was about 3.7 per cent. 22 University of California — Experiment Station CO o Oi 3 i— i p E-i u p ft M p 1 +3 O S3 o ft o ft 3 5 o OQ W « pH o P P PQ * * 4) O—i 1 OS OcO 1 "* ooo 1 ^ o as 1 '"' OS >-H 1 °° N^ 1 C ° CON. 1 ai > lO CO —H lO CO 00 ION 1 t - t^ N OS CON OS O CO t^ ■»»< CO N < n »o 1 (M N «5 -H t^- IO 1 —1 oo m 1 CM t- T»< 1 CM CO CO 1 CM Tt< CM 6 ooo 1 "^ C-*t« 1 * O CO 1 "* oo 1 ° y-< t~- 1 '* CM OS 1 e * 5 c io 1 *° 9i P -HOO CM — 'O o »-l CM 00 i~- •*< CO OS i— ' N- N CO o CM CO 00 n »o 1 i— < N CD ^.co oo »o 1 CO CO •** 1 CM i« CO 1 CM Tf CO > OC© 1 "^ OCO 1 *^ o oi 1 ^ O-H 1 "^ O OS 1 ^ OS CO 1 CO ON 1 eo o j ooo 1 ^ OO 1 ° OCM 1 °° OiO 1 *° eon 1 N T*< O 1 ^ i-l CM 1 ^ o COlO **■ COO CO COTf 00 N- <-H "9 OS 00 i-H t~00 OS OS N 1 ^ N lO t ■— ' N CO 1 »~ ' t^ CO O0 CO 1 CM CO-^< 1 CM in co *"< CO CM 1 i-i oo 1 ° OCO 1 *"" ON 1 CO OCM 1 00 OS-* 1 ^ *-H 1 CO i-c N 1 ^ to co o CO 00 t^ CO CM CO N»-i "9 oo O CON 1—1 l-H CO 1 ■* m n »o 1 CM N lO rH t-, CO 00 CO 1 CM t^ «5 1 CM K5CO 1 CM ■*i CM 1 —i ti O cm 1 °° Oco 1 ^ Oi-H 1 a ' OcO 1 "* «5 CM 1 CO •^ H 1 °° t^ rH 1 ~ 3 >0-*f< <=> KJ* O »C O: »" N00 OO CM 00 "* OS ■>* lO c >o "9 ^ n >o 1 CM n »o 1 CM t^ »o 1 *— ' 00 lO 1 CM t>.^< 1 CM >o CO 1 CM ■^ CM 1 — H >> OiO 1 "* 0-* 1 *° ON 1 CO oo 1 ° CO o 1 CO CM CM 1 ° 1O00 1 t ~ 3 NO CO NCN ■^ N CO 1 = n r- <= CO m oo ^HC T^ C CM N t-B N lO 1 CM n >o 1 CM t>. 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S ates b : Pric em to 4) i "c3 h u 3 7- +j cv ► U-i ♦s 3 +3 B C6 03 a milk: E cturing conve S OJ CJ 0) Cv 1 X. a E a 3. OJ Si C3 OJ > <5 :es of data: Market Manufa !reamery, 1 u & Bul. 559] Analysis of Fresno Milk Market 23 six months of the year 1928 (12.8 cents) a year of record high prices for manufacturing milk; it was nearly half of the average differential of the last six months of the previous three years. Usually buying prices for market milk do not fluctuate seasonally as do buying prices of manufacturing milk. 15 The decline in market-milk DIFFERENTIAL BETWEEN MANUFACTURING AND MARKET MILK IN FRESNO _i a z D o Q. or Ui Ol m h- Z Ul O 1926 1927 1928 1929 1930 1931 1932 Fig. 4. — The average annual differential of buying prices of market milk over those of manufacturing milk during 1932 was considerably lower than the differential during the three preceding years and somewhat lower than during the years 1926 and 1927. prices during the last three months of the years 1926, 1927, and 1928 was due not to a change in basic buying prices but to the seasonal decline in the milk-fat content of milk, which resulted in the purchase of more milk at 22 cents a gallon instead of 24 cents a gallon (page 20). There was practically no change in prices for most of 1929 and a part of 1930. Buying prices of market milk, however, declined steadily between May, 1930, and June, 1932. is Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. California Agr. Exp. Sta. Bul. 534:46. 1932. 24 University of California — Experiment Station The reason for this steady decline in price of market milk in contrast to the seasonal variation in prices of manufacturing milk is that manu- facturing-milk prices respond more rapidly to changes in business con- ditions and to changes in volume of production, whereas market-milk prices tend to lag. Manufacturing-milk prices declined to a lower annual average level each year since 1929. Market-milk prices, however, fell less rapidly because of the existence of the numerous contracts at higher prices. The steady decline in market-milk prices since May, 1930, was therefore a process of gradual downward adjustment to bring market- milk prices into closer adjustment with those of manufacturing milk. The downward movement of market-milk prices seems to have been ar- rested in June, 1932, for during the last six months of that year there was no further decline in market-milk prices ; on the contrary there was a slight rise in prices during the last few months of 1932 owing largely to a decline in surplus deductions made by distributors. In the absence of any marked improvement in general business con- ditions during 1933, it is probable that manufacturing-milk prices will maintain about the same level during 1933 as during 1932, or perhaps a slightly lower level. 16 It is probable, moreover, that in the absence of any improvement in milk-marketing conditions in Fresno the level of prices for market milk prevailing during the last six months of 1932 will continue for most of 1933. In this event, the average differential between market-milk and manufacturing-milk prices in Fresno for 1933 will be several cents below that for 1932, which was shown above to have been lower than for any year since 1926 except the year 1928. Although many of the expense factors of production, such as dairy feed and labor, have declined considerably since 1928, the stricter sani- tary requirements since 1929 have tended to increase production ex- penses, especially for those dairymen who had, in good faith, equipped their farms to conform with the stricter regulations during 1929 and the early part of 1930 before prices of building material, machinery, and wages had fallen to any appreciable extent. Several of the distribu- tors stated that many manufacturing-milk dairymen had offered during 1931 and 1932 to equip their farms to supply market milk to Fresno at lower prices than were paid to the market-milk dairymen. Any dairyman who equipped his farm to supply market milk in 1932 would have had a distinct advantage over those dairymen who had equipped their farms earlier, for he could have purchased machinery and building material at much lower prices. Nevertheless, it is extremely doubtful whether the is Wellman, H. R., et al. The 1933 agricultural outlook for California. California Agr. Ext. Circular 71: 62. 1933. Bul. 559] Analysis of Fresno Milk Market 25 prices paid for market milk during the latter half of 1932 would have attracted many manufacturing-milk dairymen, especially if such dairy- men were fully aware of the higher fixed and current expenses they would have to incur in producing market milk. Many of the market-milk dairymen interviewed during the course of this investigation stated emphatically that if these prices were continued much longer they would either have to discontinue dairying or change to the production of manu- facturing milk. In either event such dairymen would sustain a severe loss on the additional equipment installed by them to produce market milk. Moreover, if a number of market-milk dairymen discontinued pro- duction of market milk, the city of Fresno would run the risk of having its milk supplies curtailed, especially since it is extremely unlikely that many manufacturing-milk dairymen will be attracted into the Fresno milk market if the prices which prevailed during the latter half of 1932 are continued for any length of time. Some increase in buying prices of market milk over those prevailing during the latter half of 1932 would therefore appear to be essential if the market-milk supplies of Fresno are to be maintained. It would also appear desirable from the point of view of both pro- ducers and distributors that buying practices and prices paid to dif- ferent market-milk dairymen for similar grades of milk be more uni- form. Dairymen tend to become dissatisfied if they know that other dairymen are receiving a higher net price for the same quality of milk than they are. Uniform buying prices and uniform methods of disposing of surplus milk can best be insured by the negotiation of prices and buy- ing conditions between a dairymen's collective-bargaining association and distributors. Such an association, while its primary objective is to represent the interests of its members, can nevertheless be of value to distributors by assisting them to maintain uniform resale prices and trade practices. The existence of such an association, moreover, tends to give dairymen a better insight into all the problems affecting the market-milk industry, including the problems of distribution. DISTRIBUTION As was shown above (page 12) it is desirable from the point of view of the market-milk industry of Fresno that every effort be made to re- duce prices paid by consumers for market milk and to increase prices paid to dairymen. It was shown, furthermore, that a more efficient sys- tem of hauling would result in some saving of hauling costs (page 20). Any further decrease in prices to consumers or increase in prices to 26 University of California — Experiment Station dairymen can come only from economies in the system of market-milk distribution. Special efforts were made in this study to ascertain to what extent competition or lack of competition among distributors was re- sponsible for the unsettled conditions in the market-milk industry of Fresno, whether and to what extent the distribution of market milk was profitable to individual distributors, and what improvements, if any, could be made in the distribution of market milk in Fresno. All business concerns, including market-milk distributors, aim at ob- taining a return from the sale of the products handled by them which, after covering their expenditure for raw and finished products pur- chased and all costs of processing and handling (including depreciation on plant and equipment and administrative expenses), will provide for a return on their capital investment. The difference between the pro- ceeds of sale and the cost of the materials is known as gross profit. Net profit is the difference between gross profit and all the costs of processing and handling. The size of the gross profit for any one concern is a prod- uct of the difference between the selling and buying price per unit of product sold (also known as the margin) and the number of units sold. Similarly the size of the net profit of any concern is the product of the net profit per unit (the gross profit per unit less the processing and operating cost per unit) and the number of units sold. A business concern's gross profit may be increased by an increase in its margin per unit and by an increase in the number of units sold. Its net profit may be increased by an increase in its margin per unit, by a reduction of unit costs, and by an increase in the number of units sold. Unit costs may be reduced by a decrease in the price of any or all of the cost factors of production (labor, fuel, power, equipment, etc.) and by an increase in the number of units handled without a corresponding in- crease in costs. Conversely gross and net operating profits may be de- creased by a decrease in margins per unit, by a decrease in volume sold, and by an increase in the price of some or all of the cost factors of pro- duction, or by all three. If all distributors in Fresno distributed market milk only and always sold market milk of the same quality and in only one size of container, it would be a comparatively easy matter to determine their margins per unit and their unit costs of operation. All of the distributors, however, sell other products besides milk. Some of them do not show in their total proceeds of sales how much is obtained from the sale of milk and how much from the sale of other products. It would also be a very difficult matter to segregate the different costs of processing and handling the various products. Furthermore, it is impossible to obtain detailed oper- Bul. 559] Analysis of Fresno Milk Market 27 ating statements for all the plants that operated during the period covered in this survey, namely 1926 to 1932. Much information relative to the efficiency of distribution can be ob- tained in a more direct although somewhat less accurate manner. In- formation is available on the number of distributors operating each year, the total volume of milk distributed annually in Fresno, the prices paid to dairymen, the prices paid by consumers, the trend in volume of milk sold wholesale and retail, and the trend in prices of some of the main factors of production. Furthermore an analysis can be made of some of the existing operating practices of distributors. Finally the in- formation so obtained can be compared with such financial statements of distributors as are available. Number and Capacity of Distributing Plants. — The number of plants distributing milk in Fresno and suburbs at the end of each of the years 1926 to 1932 is shown in table 12. Prior to March, 1929, all plants located TABLE 12 Plants Distributing Market Milk in the City of Fresno and Suburbs Firms handling pasteurized grade A Firms handling all other milk* Year Located within city limits Located in suburbs Located within city limits Located in suburbs Total 1926 2 9 8 11 1927 1928 i i 3 4 4 4 I J 2 1 3 3 11 9 1929 7 5 4 10 12 1930 10 1931 11 1932 17 * Includes grade A, raw, ungraded raw, and ungraded pasteurized. Source of data: Estimates based on records of the Bureau of Dairy Control and the Health Department of the city of Fresno. in Fresno and its suburbs, which handled milk that complied with the State Pure Milk Law, were permitted to sell milk in the city of Fresno. In 1928, 3 plants distributed grade-A pasteurized milk and 6 distributed other milk (grade-A raw, ungraded raw, and ungraded pasteurized). Two of the 3 pasteurizing plants were situated in the Fresno city limits. In March, 1929, with the passing of the new Fresno city market-milk ordinance all pasteurizing plants situated outside the Fresno city limits and all other plants not handling milk from herds tested for tuberculosis were automatically precluded from selling milk in Fresno. 28 University of California — Experiment Station One new pasteurizing plant was erected in Fresno in 1929 so that there were 3 plants distributing pasteurized milk at the end of that year. In 1930, 2 new pasteurizing plants were erected in Fresno, one of these having operated previously in the suburbs of Fresno. One small pas- teurizing plant, however, went out of business during the first half of 1930. At the end of that year there were thus 4 pasteurizing plants located in Fresno. These same plants continued in operation during 1931 and 1932. Up to May, 1931, several of the smaller plants situated in the suburbs distributed grade-A raw milk in Fresno but the total amount distributed by them was probably a very small proportion of the total volume of milk sold in Fresno. The ruling of the Fresno City Health Office prohibiting the sale of grade-A raw milk reduced the number of plants selling milk in Fresno to the 4 pasteurizing plants. The records of the Bureau of Dairy Control, State Department of Agriculture, show an increase since 1930 and especially in 1932 of plants distributing milk outside the city limits of Fresno. In 1930 there were 6 plants, in 1932, 13. Of this number 10 were handling raw milk, most of which was grade-A. In 1928 over 90 per cent of all the market milk (nearly 1,900,000 gallons) distributed in Fresno and its suburbs was handled by the 2 pasteurizing plants located within the Fresno city limits, and over 80 per cent by only 1 of these. The 3 plants which started operating in 1929 and 1930 expanded their volume of business at the expense of the 2 plants operating in 1928, one of which went out of business in 1930. The 4 distributors together have experienced a decline in total volume of milk distributed since 1930. In that year they handled 1,620,000 gallons; in 1931 not quite 1,580,000 gallons, and in 1932 only about 1,440,000 gallons. Part of the decline is undoubtedly due to a decline in per-capita consumption. 17 Part may be due to a decline in population. Part is probably due to a loss of business to distributors operating in the suburbs of Fresno. The last "surprise test" inspection of the State Dis- trict Dairy Inspector made during the latter half of 1932 indicates that the volume of the plants operating outside Fresno has increased appre- ciably during the past year. Several individuals interviewed stated that many consumers in Fresno purchase milk regularly outside the city limits. While plants not situated in Fresno may not distribute milk in Fresno, there is nothing to prevent consumers from going to the outside plants or to stores handling their milk and buying supplies. It is stated that many consumers desire grade-A raw milk and go outside the city 17 This has been the case in several other cities in California. Bul. 559] Analysis of Fresno Milk Market 29 for it. In other cases the lower prices prevailing in the suburbs have at- tracted consumers inside the city. Any one of three of the 4 distributing plants could probably handle all the market milk in Fresno. As a matter of fact, one of the existing plants handled more milk in 1928 than the combined volume of 4 plants in 1932. The low volume of milk in relation to capacity handled by each of the plants results in higher unit operating costs than if fewer plants were operating. Not only this but, as will be shown later, the keen com- petition to maintain or increase volume by the individual distributors has brought into existence many costly trade practices. Such practices, adopted to meet temporary competition, after a while tend to become firmly established and are to some extent responsible for reductions in prices paid to dairymen. In Fresno they seem to have added materially to the unit cost of distribution (see page 45) . Distributors' Margins. — The distributors' margin, as stated above, is the difference between the price received and the price paid for a unit of milk sold. Actual margins may vary from one distributor to another in any one year, or from year to year for any one distributor, for a num- ber of reasons, such as differences in price paid to dairymen, differences in net resale prices (after deduction of special and quantity discounts), volume of milk sold in different containers, volume sold wholesale or retail, and milk-fat content of milk sold. It would be an extremely dif- ficult matter to compute the actual margins for each distributor over a period of time. Average margins for all the distributors, however, can be computed, and these give a fairly accurate reflection of the trend of each individual distributor's margins. It is customary to compute distributors' margins on a basis of quart bottles of milk because the bulk of the milk distributed is sold in this size of container and margins on other sizes of containers are usually so ad- justed as to cover any differences in costs of handling them. In Fresno nearly 84 per cent of all milk distributed in 1932 was sold in quart bottles, about 10 per cent in bulk, and the balance in pints, y^-quart, and i/^-pint bottles. The volume sold in quart bottles has increased since 1930 and the volume sold in the smaller containers has decreased (table 13) . This is probably due largely to the higher proportionate price paid by consumers for the smaller containers. The average milk-fat test of milk sold in Fresno increased from 3.6 per cent in 1926 to 4.0 per cent in 1931 and 1932. Distributors thus were supplying consumers with a higher quality of milk, as regards milk fat, 30 University of California — Experiment Station in 1932 than they did during the earlier years. This, in the absence of any decrease in prices to producers, would have increased the cost of milk to distributors. The proportion of milk sold wholesale has increased steadily since the beginning of 1930. During the last six months of 1932 about 85 per cent of all milk sold was wholesale. About the same percentage of the milk sold by each distributor is wholesale. It is thus possible to compute for all four distributors an average margin for combined wholesale and retail sales. Retail margins increased more or less continuously from the beginning of 1929 to June, 1932, since which date they have declined appreciably. Wholesale margins were reduced considerably in June, 1930, but increased up to June, 1932, since which date they have also TABLE 13 Volume and Percentage of Milk Sold in Various Containers Container February, 1931 July, 1931 February, 1932 July, 1932 Bulk gallons 13,471 87,740 4,552 2,109 1,942 per cent of total 12.27 79.90 4.14 1.92 1.77 gallons 9,702 75,977 4,724 2,711 1,519 per cent of total 10.25 80.29 4.99 2.86 1.61 gallons 10,364 85,205 3,327 1,407 1,643 per cent of total 10.17 83.58 3.26 1.38 1.61 gallons 11,340 91,704 3,082 1,306 1,911 per cent of total 10.37 Quart bottles Pint bottles 83.87 2 82 i^-quart bottles ... J^-pint bottles 1.19 1.75 109,814 100.00 94,633 100.00 101,946 100 00 109,343 100.00 Source of data: Records of four distributors in Fresno. declined. Average margins (retail and wholesale) increased appreciably in March, 1929, when selling prices of milk were increased 2 cents. Dur- ing the last 7 months of 1930 and the whole of 1931 average margins de- clined appreciably for three reasons : selling prices were decreased more rapidly than buying prices ; the proportion of milk sold wholesale was increasing; the milk-fat content of milk was increased. Average mar- gins increased appreciably during the first six months of 1932 but de- clined during the last six months (table 14) . While the absolute average margins of distributors were not much greater during 1932 than during the years 1926 to 1928, the margins as a percentage of the prices paid by consumers have increased appreciably. Based on the price of milk delivered to the door of consumers, the per- centage margin increased from about 52 per cent during the years 1926 to 1932 to over 67 per cent during 1932. Based on the price of milk paid by consumers to stores, the comparable figures are 35 per cent and 44 per cent respectively. Bul. 559] Analysis of Fresno Milk Market 31 EH CO OS »— ! I CM OS M o g H O P 3 M «4 CQ M O M h- 1 Eh s a t3 a> H. to Average distribu- tor's margin o all milk sold, retail an< wholesal so >-* CM US c>5 O "5 »0 00 00 -el* iO e» n oo IO T»< ^ N N O id * f 03 to ,_, ^,2 ©» o o o © © © © >o O IO IO CS-7S ,d 03 ■•—i k <» a •o IO >c >o IO iO CO t— 00 00 oo d « SiH •M PL, G * '3 s o o o © © © © >o © IO >o -fi IC id >o IO IO IO -^ CM CM >-( i-H CD S-. tf 5 a s » -♦* '3-d Ov-i £ o o o t~ CO © CM iO >o © © Distributor's ma as a per cent of price paid by consumer: o VI LO «o o »— 1 CO W 00 ^ * ® ■* m ft CO CO CO CO CO CO CM CO * '3 OS u r^ t^ o CO 00 CO © © IO N W -m T—H <-i o oo t^- © Tt< C5 00 H N CD to iO ira «o Tt< -*)1 ^ iO CD K en 2 5d to J2 tH •eg oo w * to '3 &•"£ Ol *< 5 ^ to CO CD CD »0 CO (O N N 00 00 t^ to S- i to CO co S3 O O O © CM CM © OS © 00 oo X! o3 i — i T-H ,-H 1— < 1—1 •H £ ■ to to o o (h "S O CD to a ~ a a^ M 2 3 K5 co S3 C5 CM CM CM ^f T5 ..d cd o3 PQ 60 £ to CO t^. 00 00 OS OS © © © © it to <5* to CO CO CO CO CO co m * -*<■<*< •* ttJ+j !- a to M _ dta Buyin price per pou milk f ■^ CO S to o US o © © © © os © © © iO *—i i^ © © © 00 © CM t^ t^. t^ t~ 00 » N ffl ^ ^ TP i- o ^2 a os 9? ^j at u 3 -2 CD e 03 CD J* >h d ^9 i c s9 y-June etober.. ber-De 03 -d SQ a 3 g « 03 •• 3 CD 13 s Janu July- Nove CC t^ 00 OS « 5 o ^ « w 03 d -h CM (M CM CM CM •~S *""S CO CO a c- OS OS OS © OS ^- r— ,-H •"• T— ( 9 > •«j Q <0 ft co 01 N CM i-H o T3 ■*3 d 03 CD ,— i -»J i-H d d CO B 03 1 -u >» CO 0> J2 u T3 CO C-. S ■*iOJ o ■-J— 1 ^ CO O O S 5 5 5 O O O0O "3 cu acd O 02 MMfl • 03 o3 gj CO -+J +j M • d an 'Ti 0) 0) . a o S o o oa ^ a ft^ d o3 o3 O 09 CD (3 05 OO CD H o3 03 bo ft ft ©t^oo g . . . CD 03 o'o'o ►* "cD ooo^ i— < 03 00 OS © oo OS t-< •" 1 s hQ TJ CD i- CD "cD T3 O d o O 6 >> d.s S =« l Q d° 03 3 OPQ d C .2o Q CD 5t3 ^^ d a2 ^ O 03 *- 1 So • CD7? • cm'^ 8 ^ ^^ S"c3 a dm >h m d 03-O 1 " 2 o 3-g-s.a - u-r d o . ^rH ' -g CNCtN 3 -l^-a-a „ o o o o oOOOO OS i H d o CO 32 University of California — Experiment Station Superficially both retail and wholesale margins in Fresno appear to be higher than in Los Angeles and Oakland (table 15) . Such a compari- son of margins, however, is unsatisfactory because buying and market- ing conditions in Fresno are markedly different from those in Los Angeles and Oakland. In Fresno about 85 per cent of all milk distributed is sold wholesale, whereas in Los Angeles and Oakland the percentages are about 40 and 65 per cent respectively. Moreover, in Fresno each of the distributors handles about the same proportion of retail and whole- sale business. In Los Angeles and Oakland, on the other hand, some dis- tributors sell practically all their milk wholesale, whereas others sell TABLE 15 Distribution Margins per Quart of Milk in Fresno, Los Angeles, and Oakland, December, 1932 Buying price Selling price per quart Distributors' mar- gins per quart Per cent milk sold City Per pound milk fat Per quart Retail Wholesale Retail Wholesale Retail Wholesale Fresno cents 42 55 63 cents 3.6 4.7 5.4 cents 11 11 12 cents 8 8 8 cents 7.4 6.3 6.6 cents 4.4 3.3 2.6 per cent 15 60 35 per cent 85 Los Angeles 40 Oakland 65 Sources of data: Fresno: From table 14. Los Angeles: From calculations based on information supplied by California Milk Producers Association. Oakland: Calculations based on information supplied by distributors in Oakland. practically all their milk retail. Unit costs of distributing milk wholesale are somewhat lower for a distributor selling all his milk wholesale, than they are for a distributor selling part of his milk wholesale and part retail. Similarly unit costs of distributing milk retail tend to be lower for a distributor selling all of his milk retail, than for a distributor sell- ing part wholesale and part retail. In Fresno distributors purchase all the milk produced by their pa- trons. These distributors bear the cost of disposing of milk purchased in excess of what they can dispose of as market milk and market cream. In both Los Angeles and Oakland distributors purchase from producers' associations at the basic buying price only such milk as is required for sale as market milk. The following statement taken from the records of one of the distributors and covering several months during the latter half of 1932, shows how this distributor's margin would have been af- fected if he had not carried any surplus. Bul. 559] Analysis of Fresno Milk Market 33 Milk fat purchased from patrons = 27,300 pounds Total cost of purchases =$10,870 Average price per pound = 40 cents Surplus sold to manufacturing plant = 5,000 pounds Proceeds of sales =$1,100 Average price per pound = 22 cents Loss on milk sold, 5,000x(40 cents-22 cents=18 cents) =$900 If this distributor had purchased only such milk as was required for market-milk and market-cream purposes he would have purchased 27,300-5,000 = 22,300 pounds of milk and paid therefor $10,870- $900 = $9,970, or 44.7 cents per pound of milk fat without altering the financial results of his operations. The price received by dairymen per quart of milk would have been increased from 3.44 cents to 3.85 cents and the distributors' average margin on milk sold both wholesale and retail would have been reduced from 5.16 cents to 4.75 cents a quart. Thus distributors' margins, retail and wholesale, would have compared somewhat more favorably with margins in Los Angeles and the East Bay cities. Distributors in Fresno pay the same price for milk fat utilized in market cream or cottage cheese as they do for milk fat in market milk. During 1931 the four distributors in Fresno purchased $842,000 pounds of milk fat (table 16) . Only 543,000 pounds, or 64.5 per cent of the total milk fat purchased, was sold as market milk ; 143,000 pounds, or 17.0 per cent, was sold in market cream. The balance, 156,000 pounds, or 18.5 per cent, was used in manufacturing milk products by the distributors themselves, sold to manufacturing-milk plants, or was lost in the plant. Distributors in Los Angeles and Oakland purchase milk fat for market cream and milk fat for manufacturing purposes at lower prices than they pay for market milk. Data are inadequate to make a numerical com- parison of margins per pint bottle of market cream but such evidence as there is indicates that in 1932 the margin on market cream was higher in Los Angeles and Oakland than in Fresno. To the extent to which this was the case distributors in Los Angeles and Oakland could afford to dis- tribute milk on a somewhat lower margin than distributors in Fresno. It is, moreover, difficult to ascertain to what extent special and quan- tity discounts are made by distributors in different markets. Such dis- counts tend to reduce the resale prices below that on the established schedules of prices. In view of all these facts,- it is difficult to say whether or not margins in Fresno are really higher than they are in other cities. It is possible to 34 University of California — Experiment Station state, however, that it would be possible for distributors in Fresno to reduce their margins if the system of distribution were made more efficient. TABLE 16 Eeceipts and Disposals of Milk Fat by Distributors in Fresno 1929 1930 Disposals in per cent of total sold 1931 Purchases, in pounds Producers 785,000 15,000 906,000 12,000 842,000 Other sources Total 800,000 918,000 842,000 Disposals, in poui ids Market milk 555,000 134,000 99,000 12,000 537,000 165,000 156,000 60,000 543,000 Market cream 143,000 Manufacturing 124,000 All other* 32,000 Total 800,000 918,000 842,000 Market milk 69.4 16.6 12.2 1.8 58.4 18 17.0 6.6 64.5 Market cream 17.0 Manufacturing 14 7 All other* 3.8 Total 100.0 100.0 100.0 * Chocolate milk, buttermilk, sold to other milk plants, manufacturing shortage. Financial Aspects of Market-Milk Distribution in Fresno. — The com- bined assets of all four distributors in Fresno amounted to some $1,273,600 as of December 31, 1931 (table 17) . Current assets accounted for 15.4 per cent of the total ; fixed assets less depreciation for 43.0 per cent; goodwill, patents, and trade-marks and stock in other companies for 39.3 per cent; accumulated losses for 2.0 per cent, and deferred charges for 0.3 per cent. Three companies show items for goodwill. The operations for the three years 1930 to 1932, indicate, however, that good- will is an asset of very doubtful value. It seems to be impossible in the market-milk business to ensure that the volume of business in previous years, which is used to justify the sale of a business for more than the value of its tangible assets, will or can be maintained in future years. Bul. 559] Analysis of Fresno Milk Market 35 Goodwill in the market-milk industry often attaches to individuals as well as to firms. Individuals who start up in business again may take away all the volume of business that justified the payment of goodwill. It is desirable from the standpoint of the long-time stability of the market-milk industry that firms contemplating the purchase of existing plants in cities in future exercise extreme caution in the valuation of goodwill. The operations of the four distributors during the years 1930 to 1932 resulted in substantial losses. There was thus no money to pay dividends on capital invested in fixed assets, let alone capital invested in goodwill. TABLE 17 Combusted Balance Sheet: Four Distributors in Fresno, December 31, 1931 Assets Current $ 196,400.00 Fixed: Land, buildings, and equipment $578,700.00 Bottles, cans, cases, and supplies 54,800.00 Trucks and automo- biles 137,400.00 770,900.00 Less depreciation $223,800.00 547,100.00 Stock in other companies, goodwill, trade-marks, patents 500,500.00 Deferred charges 3,600.00 Accumulated loss 26,000.00 $1,273,600.00 Liabilities Current $ 69,500.00 Operating reserves 6,600.00 Net worth: Issued and subscribed capital or company contract account $1 , 174 , 800 . 00 Surplus 22,700.00 1,197,500.00 $1,273,600.00 About 94 per cent, or $1,197,500, of the combined liabilities of the four distributors was in the form of capital stock or company capital and surplus. The combined net worth of the four companies was 101.7 per cent of capital stock and company capital. The combined surplus was reduced during 1931. The operations for the year 1932 showed a still further decrease of surplus. It is evident that if the conditions existing in Fresno during the years 1930 to 1932 are continued for any length of time, it will seriously undermine the financial integrity of some plants in that city. Incomes and Expenditures of Distributors in Fresno. — The prices of many of the chief items of expense in production such as labor (wages) , automobiles and parts, gasoline and oil, machinery and parts, have de- clined considerably during the past few years. The big increase in store 36 University of California — Experiment Station sales would usually result in some decrease in delivery costs. If these were the only factors which affect the cost of operation of distributing plants, it could be expected that unit costs of distribution would show some decline since 1928 and 1929 or that profits of distributors have increased. Several factors, however, have tended to increase per unit costs of distribution, most important of which is a marked decline in the total volume of milk distributed and an increase in the number of distributors. Two of the four plants operating in 1932 also operated in 1929. These two plants in 1929 handled about 150,000 gallons more than the four plants in 1932. The largest plant in 1928 handled just about the same quantity of milk as was handled by the four plants in 1932. The result has been a great decline in the volume per plant. As was stated pre- viously, any one of three plants could have handled all the milk dis- tributed in Fresno during 1932. The low volume handled per plant relative to capacity has tended to increase unit costs to a greater extent than the decline in the prices of many items of expense have decreased them. Furthermore, competition between the various distributors to increase their volume has resulted in the introduction of a number of practices which have increased unit costs still further. The operating statements of all four distributors for the years 1930 to 1932 were combined in table 18 so as to show the net results of opera- tion by the four distributors during these years. It will be seen that in each of the three years there was a net loss. Two plants showed a loss in 1930 and 1931 and two a small profit. In 1932 all four plants showed a loss. In 1930 the loss of two distributors exceeded the amount set aside for depreciation. In each of the years 1931 and 1932 one distributor incurred a loss in excess of the amount set aside for depreciation. Sales of all commodities declined in value (1930 to 1932) by 16.2 per cent. During the three years the volume of milk distributed declined 10.6 per cent, wholesale prices per quart 19.6 per cent, and retail prices per quart 9.6 per cent. The decline in the value of sales is not as great as would be expected from the decline in the price and volume of milk. Several of the distributors have increased the range of other dairy pro- ducts sold through their milk-distributing plant in order to spread operating costs over more commodities (table 19). The cost of raw and finished goods in relation to sales declined from 1930 to 1932. The higher cost in the first two years was due in large measure to the fact that resale prices of market milk were reduced more rapidly than buying prices. Bul. 559] Analysis of Fresno Milk Market 37 00 ffl < Eh o w W O P 03 p o o E-i K S Eh «l O i— i EH «l Oh O Q oa o O h ra k e r ce tot pen co t- c 1 « 1 CO —1 Tf O 1 o V. rt Kl << H CD <*H X CO ^ O 4) a +s G m gj ® s <*> O m i m m 1 O <** 03 V) 1 5 S O <= C oooo o o o o rS ° c c oooo o oo o S N OC •*t OSOSCOOS CO OSCO CO O "e --i co b~ CO t CM i—i h o m 1 Ttl I— 1 Tf co ^ ^H CD Ph ?i. i— l o c o c e c c c o c o +3 o o a o c c c c o c o d co 3 O a 5s o c c c c c CC c O G o ,S o c a o c C CC c O C o ES >o c m a- ec CC CM t-- m CM o -w 00 IC CO oc c^: r^ -*>■ ■^ O o oo t— ^H CC cv: r- "* CM »-i 1— t OS Ifl "* ■* W 03 03 e CO 1 m 05 CC o 1 ° CO ■^ i — e; CM <= (- c: Tt »— 1 o a>w-< x CO pL, O cd A -t-S fl * g g«4-. 4> co O t^ I CO T— oc C 1 c t^ 1 co [ 53 <« o m ■"* CC Ot l> IC (M !>. o co *- O CO 1 CO T— p- 1 ■* 1 : CO Ph a 1—1 o o o c o C o c O c o <0° ° c o e c; CC c o c o 3 o a < h o o ►2 o o o c e C c c o c o o o e cr o c o o o S ^ 00 CO ■<• CM >c CC oo t-. 1— 1 o "a cm ^h c c C cC CC l> CO CO en m "<* CC CC l> u-: T— t>. I- OS CO CO r* ■^f *— • 03 CD »rH -t-s T3 > > O (- • a a. > X r~l 03 a o +s ca p 1 s= a V. B 03 t 03 a. co ••J S3 c c 03 6J c c ) 03 o c S '£ 03 "S s t 1 1 C c & c a t - | £ CD *- ^ I ° a a. — S3 cp c I o £ C W 5? c u o a 03 03 t-t o =! Xi CO M o CO V t-, 01 c3 3 o o C3 43 W 38 University of California — Experiment Station Expenses were grouped under four heads. As the income and expense accounts of the four distributors were prepared in different form, it was necessary to make certain adjustments with the assistance of the ac- countants of the individual firms in order to get the data in comparable form. In some cases where expenses could not be exactly segregated, approximations were used. While the data in table 18 are not strictly accurate, they nevertheless serve to give a fairly correct picture of the relative importance of the various expense groups. The total expense figures (to the nearest hundred dollars) conform to the combined total expenses as shown in the records of the four distributors. TABLE 19 Approximate Value of Products Sold by Three* Milk Distributors in Fresno, January-October, 1932 Product Market milk ... Market cream . Buttermilk Cottage cheese Butter Allotherf Total dollars 365,400.00 86,900.00 15,400 00 14,400 00 50,600.00 34,000.00 566,700.00 Per cent of total sales per cent 64.5 15 4 2.7 2.5 8.9 6.0 100.0 * Sales could not be segregated for the fourth distributor. t Includes evaporated milk, ice cream, powdered skim milk, powdered buttermilk, malted milk, ice cream mix, ice cream, cheese, eggs, Kayo, liquid skim, and chocolate milk. Source of data: Records of three distributors in Fresno. The most important expense item was that of selling and delivery, which varied from about 42 per cent of all expenses in 1930 and 1931 to 44 per cent in 1932. Manufacturing expenses accounted for about 31 per cent of all expenses in each of the three years. Administrative ex- penses varied from 16.1 per cent in 1931 to 13.7 per cent in 1932. De- preciation varied from 10 to 12 per cent. Selling and delivery expenses have declined least in the three years. This was due in large measure to the intense competition of the individual distributors to retain or in- crease volume. From data obtained from three distributors it appears that labor costs (including salaries) account for about 40 to 60 per cent of all expenses, the average for the three firms being about 50 per cent. Expenses per dollar of sales increased from 42.0 per cent in 1930 to 42.8 per cent in 1931, and to 47.3 per cent in 1932. Bul. 559] Analysis of Fresno Milk Market 39 All operating costs can be grouped under two general headings, prime and supplementary. Prime costs are the annual cash expenses for wages, repairs, power, and any other expenses which are met out of current in- come. Supplementary expenses include interest on investment and de- preciation. The prime costs have to be met out of current gross income or out of accumulated reserves ; otherwise the business will soon find its working capital depleted. All supplementary costs have to be met over a period of time depending upon the lifetime of the various articles of plant and equipment. It is possible, however, for a business concern to operate for several years even if its annual gross income does not cover its supplementary as well as its prime costs. During periods of business stress it is often necessary for business concerns to operate for several years without meeting their supplementary costs. In view of the fact that the volume of milk distributed in Fresno has declined appreciably since 1929, whereas the number of plants has in- creased, most of the distributors in Fresno are fortunate in that they were able to meet at least a part of their supplementary costs, namely depreciation. Distributors are no more justified in claiming that the annual returns from their business must under all circumstances cover both prime and supplementary costs than are dairymen. That most of the distributors in Fresno covered at least part of their depreciation costs is due to the fact that they were able to pass on to dairymen most of the decline in retail prices of market milk. Delivery. — It was pointed out above that selling and delivery costs, including depreciation, accounted for over 40 per cent of the total operating expenses of the four plants in each of the three years, 1930 to 1932. Administrative and manufacturing efficiency is an internal matter for each plant, and it is to be expected that plants will exercise every care to keep expenses for these operations down to a minimum. Selling and delivery expenses, however, are governed to a large extent by condi- tions in the market, over which distributors as individuals have less control. These conditions include such factors as concentration of popu- lation, volume of milk sold wholesale and retail, services rendered to customers, and keenness of competition. Data are not available as to the proportions of the total volume of milk sold wholesale and retail prior to 1930. One of the distributors who has had long experience in the Fresno milk market estimates that roughly 50 per cent was sold wholesale during the years 1926 to 1929. The proportion of milk sold wholesale in Fresno up to 1929 seems to have been higher than in other milk markets in California such as Los Angeles, San Francisco, and Oakland, although prior to May, 1930, 40 University of California — Experiment Station there was no difference between store and retail prices in Fresno. The reason advanced for the comparatively high proportion of wholesale business in the latter city was that Fresno has for many years had a big transient population, especially during the fruit-picking season. Most of the transient laborers during the fruit-picking season purchase their milk from stores or with meals at restaurants. Prior to 1930 over 70 per cent of the milk distributed in Fresno and surrounding territory and practically all the wholesale business was in the hands of one firm. In 1930 two important competitors came into the market and actively solicited business. One of the new competitors con- centrated on store trade and the other in the beginning on retail trade. The older firm in an attempt to retain its wholesale trade agreed to a reduction of its prices to stores to 4 cents below retail prices ; store prices of milk to customers were at the same time reduced to 2 cents below retail delivered prices. Corresponding changes were made for milk sold in pint, %-pint, and %-quart bottles. The other three distributors adopted similar price differentials. It is important to note that the price differentials introduced in Fresno in 1930 were similar to those already existing in Los Angeles and the San Francisco Bay cities. The differential between the store and retail delivered prices caused a large number of consumers, many of whom had experienced a decline in purchasing power, to purchase their milk supplies from stores. It is estimated that by October, 1930, wholesale sales exceeded 60 per cent of the total volume of milk sold. The proportion gradually increased until in October, 1932, over 85 per cent of all milk sold was wholesale (table 20). It is probable that the trend of sales through stores is still TABLE 20 Percentage of Total Volume of Milk Distributed Wholesale and Retail in Fresno Date Wholesale Retail Date Wholesale Retail 1929* per cent 50.0 65.0 71.2 81.6 per cent 50.0 35.0 28.8 18.4 February, 1932 July, 1932 October, 1932 per cent 79.6 84.7 85.5 per cent 20.4 October, 1930* February, 1931 July, 1931 15.3 14.5 * Estimated. Source of data: Records of four distributors in Fresno. increasing. There was a slight decline of store sales between July, 1931,' and February, 1932. About 72 per cent of milk sold wholesale, or 61 per cent of all milk distributed, goes to retail stores, 15 per cent to hotels and restaurants, Bul. 559] Analysis of Fresno Milk Market 41 8 per cent to various public institutions, and the rest to drug stores, soda fountains, bakeries, meat markets, billiard saloons, etc. Most of the milk sold to stores is in quart and pint bottles, quart bottles predominating. Bulk milk (milk in cans) is sold to hotels, restaurants, and public insti- tutions such as schools and hospitals. One-third-quart and V2-P m "t bottles are sold mainly to hotels and restaurants. Table 13 gives the percentages of all milk sold in various containers. Bulk milk accounts for over 10 per cent of all milk. This percentage is somewhat greater than in Los Angeles and the East Bay cities. 18 TABLE 21 Number of Distributors in" Fresno Delivering Milk to Grocery Stores and Restaurants, June, 1932 Number of distribu- Stores* - ■ ■■■ ..j Restaurants and hotels tors delivering Number Stops t Number Stop8f 4 15 38 86 134 273 60 114 172 134 480 1 7 155 163 3 3 2 14 1 155 Total 172 * Each unit in a chain system is regarded as a separate store. t Each store to which milk is delivered is regarded as a separate stop. Each time milk is delivered to a store, a "stop" is regarded as a separate delivery. Source of data: Computations made by a distributor in Fresno. The large proportion of milk sold to stores and restaurants warrants an examination of the service rendered by distributors to these groups. In most cities in California stores are required to purchase milk in quan- tities of a case (12 quarts) or more at a time. As a rule each store is served by only one distributor. Most stores have only one delivery of milk a day and are expected to take a sufficient quantity at each delivery to care for their day's sales. Stores handling milk are expected to have proper refrigeration so as to preserve the quality of milk until it is sold to consumers. The quantity sale of milk to stores generally is considered to result in sufficient saving over retail delivery to justify a price to stores of 4 cents a quart below retail prices. In Fresno 15 stores received milk in June, 1932, from all four distribu- tors, 38 stores were served by three distributors, and 86 by two (table 21) . The remainder of the stores, 134 in number, were served by only one !8 Spencer, Leland. An economic analysis of the Los Angeles milk market. Cali- fornia Agr. Exp. Sta. Bul. 513:45, table 23, 1931 ; and: Tinley, J. M., and Martin H. Blank. An analysis of the East Bay milk market. California Agr. Exp. Sta. Bul. 534:83, table 25. 1932. 42 University of California — Experiment Station AVERAGE AMOUNT OF MILK DELIVERED DAILY TO STORES AND RESTAURANTS IN FRESNO JUNE 1932 STORES LESS THAN 1 CASE 1-2 CASES 2-3 it 3-4 >t 4-5 a 5-6 a 6-7 a 7-6 a 6-9 a 9-10 a 10-11 a 11-12 1 1 12-13 1 1 NUMBER PER CENT OF TOTAL 46 16. 6 74 27.7 53 19.4 46 16.6 22 60 15 5.5 6 29 6 2.2 I 0.4 1 0.4 0.0 0.0 1 0.4 273 100.0 I 10 20 30 40 50 60 70 80 90 100 RESTAURANTS 1-3 QUARTS 4-6 7-9 10-12 13-15 16-18 19-21 22-24 25-27 26-30 OVER 30 NUMBER PER CENT OF TOTAL 39 23J9 43 26.5 22 13.5 17 10.4 15 9.2 4 24 6 3.7 4 2.4 2 1.2 6 3.7 5 3.1 163 10 20 30 40 50 60 70 100.0 60 90 100 Fig. 5. — Many stores and restaurants purchase very small quantities of milk a day from distributors. Bul. 559] Analysis of Fresno Milk Market 43 distributor. Over half of the stores received milk from two or more distributors. There were fewer instances of duplication in serving hotels and restaurants. One restaurant received milk from three distributors, 7 from two distributors ; the remainder, 155, were served by only one distributor. There were only 172 separate stops for 163 restaurants. TABLE 22 Number of Distributors in Fresno Serving Milk to Certain Selected Stores (Selected days in July and August, 1932) Number of distributors delivering Number of deliveries by all distribu- tors per day Number of quarts delivered by all distributors Store Total per day Average per delivery A 3 4 3 1 1 3 2 1 3 4 3 3 4 4 2 3 3 2 1 3 4 2 3 2 1 1 7 9 5 3 4 6 6 7 6 10 7 5 9 6 4 4 5 4 4 3 6 4 6 4 5 4 120 114 66 36 48 72 72 75 60 102 72 48 84 54 34 30 37 24 24 18 36 20 32 20 24 6 17.0 B 13.0 C 13.0 D 12.0 E 12 F 12.0 G 12.0 H 11.0 I 10 J 10.0 K 10.0 L 10.0 M 9.0 N 9.0 8.5 P 7.5 Q 7.0 R 6.0 S 6.0 T 6.0 U 6.0 V 5.0 W 5.0 X 5.0 Y 5.0 Z 1 5 Source of data: Records of distributors in Fresno. Many of the stores and restaurants received very small quantities of milk a day. Forty-six, or 16.8 per cent of all the stores, took less than 1 case (12 quarts) of milk a day ; 74 stores took between 1 and 2 cases, and 53 between 2 and 3 cases (fig. 5) . In other words, nearly two-thirds of the stores took less than 3 cases of milk a day each ; 39, or 23.9 per cent 44 University of California — Experiment Station TABLE 23 Quantities of Milk and Cream Delivered per Day to Certain Selected Stores and Eestaurants (Selected days in July and August, 1932) Number of deliveries Milk Cream Purchaser Quarts Pints Yz pints \i pints All other i 1 1 1 1 1 1 6 36 6 12 12 8 74 5 5 9 8 17 9 2 11 Store A 1 gallon buttermilk k c 1 1 1 1 1 5 12 6 4 6 28 3 3 Store B k k ( StoreC 1 1 1 1 4 6 6 1 10 23 2 2 4 1 1 2 1 1 2 1 quart cottage cheese 1 gallon buttermilk 2 quarts cottage cheese 1 gallon buttermilk - 1 1 1 1 4 2 2 2 6 2 2 1 quart cottage cheese Store D 1 quart cottage cheese > ( 1 1 1 3 12 6 12 30 Store E .< i. r 1 1 1 1 1 5 6 4 6 6 2 24 Store F \ / 1 1 1 3 6 6 12 24 3 3 Restaurant 1 Source of data: Records of distributors in Fresno. Bul. 559] Analysis of Fresno Milk Market 45 of the restaurants, took under 3 quarts of milk a day ; 19 43 took between 4 and 6 quarts ; and 22 between 7 and 9 quarts. Nearly two-thirds of the restaurants took less than 9 quarts a day. Many of the stores and restaurants have inadequate cooling facilities and take minimum quantities of milk at a time. If their supply of milk runs out they merely call up one or another of the distributors supply- ing them and a special delivery is made. Table 22 shows the number of distributors serving selected stores and the total and average quantity of milk per individual delivery. Many of the stores are served 8, 9, and 10 times a day; in many instances the number of quarts per delivery is below 6. As a rule stores receive cream, buttermilk, cottage cheese, and other dairy products as well as milk. The total purchases for one day are shown in table 23, for several stores and one restaurant which purchased their supplies from only one distributor. The state of affairs described above, which greatly increases the unit cost of delivery, has come about as the result of unrestricted competition between the four distributors. Each firm in an effort to build up volume of sales is continuously approaching retail grocery stores and restaur- ants, especially those served by only one competitor, to carry some of their milk or to transfer their patronage. In order to win or retain such patronage each distributor must stand ready to deliver milk or cream at any time a store or restaurant may desire it. Moreover, most of the distributors allow some stores special discounts on the prevailing prices. Several of the distributors show substantial sums in the profit and loss statements for discounts allowed. Some of this undoubtedly was for discounts on milk. Another weakness of the trade conditions as they exist in Fresno is that losses from bad accounts may be and probably are increased. Distributors fearing to lose a customer are loath to press for the payment of overdue accounts. These unsatisfactory conditions have come about through competi- tion, and yet it is evident that the relative volume of trade handled by the various distributors has not changed much during recent months. If distributor A succeeds in taking away some business in store X from distributor B, the latter succeeds in taking some business from dis- tributor A in store Y. Both producers and consumers would benefit if distributors in Fresno put an end to this unbeneficial competition. Bottle Losses and Expense of Collection. — All four distributors stated that their losses on bottles were extremely high. Figures supplied by two of the distributors bear this out. In addition, the collection of is Much of this in pint, %-pint, and % -quart bottles. 46 University of California — Experiment Station bottles is an expensive and unsatisfactory undertaking. Three of the distributors depend upon a bottle exchange for the collection of bottles from stores ; the fourth distributor makes his own arrangements for such collections. Each distributor calls for his own bottles delivered to his retail customers. The expense of collection and the high bottle losses arise out of the fact that the distributors do not have a universal store bottle and do not require customers purchasing milk from stores to make a deposit on bottles. As a result there is no incentive on the part of the customer to return bottles purchased by them. Most of the larger cities in California have found that the introduc- tion of a universal store bottle with a deposit charge decreased the cost of collection and bottle losses appreciably. The two following statements bear this out : ". . . . We have found it [the universal bottle] to be a great help in reducing an excessive bottle expense, both in quantity of new glass bought and the bottle- exchange costs." 20 "Of course, just the use of a [universal] store bottle would cut down this loss tremendously, as in the case of the Alameda County Milk Dealers' Association in 1922 when they all adopted a store bottle with a uniform deposit charge. The number of bottles handled through the exchange dropped from over 100,000 a month to less than 30,000 a month."2i The use of a universal store bottle handled by an association to which all distributors belong has several other advantages besides the decrease in bottle expense. Harmony among dealers is promoted as a result of their working together. They are thus able to build up a better trade ethics. The existence of a dealers' association handling a universal store bottle tends, to discourage new competitors from entering the field. New distributors entering a market frequently attempt to build up a volume of business by price-cutting. They would either have to join the association and agree to abide by established trade practices or they would be subject to higher expenses of bottle collection. If a trade- marked universal store bottle strays to other parts of the state, it would be returned by the bottle exchanges operating in other cities, whereas a privately owned bottle would not. This would be an important con- sideration in Fresno, which has a very large transient population during certain times of the year. By having a universal store bottle it is easier 20 Excerpt from a statement made on November 18, 1926 at the Pacific Slope Dairy Show by Mr. Harry Walsh, at that time Secretary of the Southern California Milk Dealers' Association. 2i Extract from a letter dated January 11, 1932 from Mr. W. H. Moebus, at one time manager of the Bottle Exchange in the East Bay cities. Bul. 559] Analysis op Fresno Milk Market 47 to introduce a deposit charge. Individual distributors could not do this. After a while the public comes to recognize the universal store bottles as a mark of quality. 22 Retail-Store Margins. — In December, 1932, the following was the dis- tribution of the money paid by the consumer for a quart bottle of milk : Service performed Store margin 2.00 cents Daily storage and sale of milk. Sometimes delivery to consumer. Distributor's margin 4.39 Eeceiving, pasteurizing, bottling, and delivery. Producer's price 3.61 Production and delivery to dis- tributor's plant. Paid by consumer 10.00 cents In a large number of cities in the United States, stores have a 2-cent spread between the buying and selling price per quart. This spread has existed in Fresno for a long period of years. It is important to realize, however, that in many of the other cities in the United States the pro- portion of milk sold through stores is far smaller than in Fresno. In this city, while the prices received by producers and the wholesale margins of distributors have declined since 1929, the absolute store margin per quart bottle has remained the same. On a percentage basis (based on the price paid by stores) the store margin has actually in- creased. In 1929 stores paid 12 cents a quart for milk and sold it for 14 cents — a spread of 16.66 per cent. During the last six months of 1932 stores purchased milk at 8 cents a quart and sold it at 10 cents — a spread of 25 per cent. Moreover, the volume of milk handled by stores has increased greatly since 1929. Several operators of grocery stores inter- viewed during the course of this study stated that they handled several times more milk in 1932 than they did in 1929. Many other comodities are handled on much lower margins than market milk. In fact, several operators stated that the margin on many goods handled by them was so low that they depended largely on the margin on milk and some other commodities to meet their operating costs. From a point of view of comparative service rendered by the three agents — dairymen, distributors, and retail stores — in getting milk to the consumer, it would seem that the store margin on milk is out of line with the margins and prices received by the other two groups. Producers receive only 3.61 cents a quart, which price has to meet all the costs incurred in producing and delivering milk to the plants of distributors. 22 From a letter dated January 11, 1932, from Mr. W. H. Moebus. 48 University of California — Experiment Station Distributors receive 4.39 cents for pasteurizing, bottling, and selling milk to stores and collecting empty bottles. Stores receive 2 cents for receiving and selling milk, much of which is sold for cash. They have a daily turnover, with no losses through spoilage, and milk is sold in the same containers in which received. The percentage margins taken by retail stores on different commodi- ties vary considerably. As a rule margins are lowest on commodities which comply with the following conditions : (1) rapid turnover (daily for commodities like bread and milk), (2) very small investment in stocks of that commodity, (3) minimum of loss through spoilage, (4) constant volume of sales from day to day, (5) the commodity must be one that attracts customers to the stores, (6) minimum of credit losses and (7) minimum of service and investment for handling. Market milk complies with practically all these requirements, and yet the margin on which it is handled by stores is wider, relatively, than on many other commodities which do not comply with these conditions. Any reductions in such margin, however, will be strenuously opposed by many retail-store operators, as they have adjusted their operations to this margin. Many retail stores could show that their earnings from the sale of milk are vital to their remaining in business. On the other hand, it is equally important if the consumption of market milk is to be stimulated that every effort be made to reduce the prices consumers pay for milk. Moreover, if the consumers in Fresno are to be assured of an adequate supply of milk, it is essential that dairymen receive a price which will induce them to produce the high quality of milk required under city health regulations. It is considered that those in the market-milk industry in Fresno would be justified in making an effort to induce retail grocery stores to handle market milk on a narrower margin. In this connection, it is inter- esting to note that during 1932 the spread between the price paid by stores and the price at which milk was sold to consumers was reduced from 2 cents to 1 cent in Los Angeles. In the East Bay cities consumers purchasing 3 or more quarts of milk at a time paid only 9 cents a quart, the store paying 8 cents a quart. All milk sold in quantities of 3 quarts or more at a time is thus handled on a 1-cent margin. Under conditions' described above it is evident that wholesale delivery costs in Fresno are much greater than in cities like Los Angeles and Oakland, where stores as a rule are served by only one distributor ; where deliveries are made only once or at most twice daily ; and where stores are required to purchase a minimum of one case (12 quarts) of milk a delivery. It would seem most desirable that distributors use every Bul. 559] Analysis of Fresno Milk Market 49 effort to reduce the amount of service rendered in delivering milk to stores. It seems most regrettable that distributors in Fresno, while they have all realized and deprecated the unsatisfactory conditions in the distribution of market milk, have been so tardy in bringing about improved conditions and eliminating undesirable trade practices. Each individual distributor has hesitated to make suggestions for the improve- ment of delivery methods, fearing that any suggestion made may be used by his competitors to injure his business with stores and restaur- ants. As a result, matters have been allowed to drift to the disadvantage of producers and consumers and even of distributors themselves. The Problem of Distribution. — One of the most serious problems facing agriculture at the present time is that of more economical methods of distributing agricultural products. This applies to other branches of agriculture as well as to milk marketing. In most instances the farm prices have fallen absolutely and relatively to a greater extent than wholesale or retail prices. Put in another way, costs of distribution have not declined to nearly the same extent as prices paid to producers. The reasons for the failure of these costs to decline proportionately to prices of farm products vary for different industries. Relatively rigid railroad and other transportation rates, high labor costs, excess of productive and distributive capacity over volume being handled with a resultant increased unit cost of distribution, and inefficient and uneco- nomic methods of handling are some of the chief causes. Furthermore, margins of processors or handlers of agricultural products tend to become established on a fixed absolute basis (during periods of stable price levels) . During periods of falling price levels these same processors, because of their relatively small numbers as compared with producers of agricultural commodities and because all proceeds of sales pass through their hands, are able, for a time at least, to resist any decrease in their absolute margins. Some of these conditions obtain in the market-milk industry. The problem of any further decreases in prices to consumers or increases in prices to producers thus becomes a problem of more efficient and less costly methods of distribution. It is necessary here to distinguish between inefficiency of the whole system of distribution and inefficiency of individual distributors. It is probable that while the system may be most inefficient and uneconomical, individual plants may be and often are operating with the utmost inter- nal efficiency. It is also necessary to point out that all the responsibility for the inefficiency of a system cannot fairly be placed upon the indi- 50 University of California — Experiment Station viduals operating under that system. Such individuals may be affected adversely because of the inefficiency of a system just as much as other groups. For these reasons it is desirable to concentrate upon an analysis of means of improving the system as a whole. Such improvement in the market-milk industry may and often does require the united efforts not only of distributors but of all other interested groups, including pro- ducers and consumers. There is a widespread belief that free competition in distribution is necessarily in the best interests of consumers, that the freedom of any person or firm to enter the market necessarily means low distribution costs. While this may be true over a long period of years, temporarily (maybe for several years) the results of free competition may be just the opposite. Experience has shown that for certain types of service the public interest is served best by limitation of the number of firms or organizations supplying those services. For this reason such services as water supply, electricity and gas supply, railroads, street cars, and garbage removal have been made public utilities. Standardization of methods of operation and type of service characterize most of those public utilities. This study and other studies made in different cities in California and the United States indicate that free competition in the distribution of market milk does not under all conditions work to the best interests of producers and consumers. In the long run free competition in any industry is assumed to result in the elimination of inefficient operators and plants and to stimulate the remaining operators to function as economically as possible. Under such conditions most of the savings effected by improved and more economical methods of operation are passed on to consumers in the form of lower prices, thus resulting in increased consumption. In the short run, however, free competition in an industry may have results which are the opposite of the long-run effects. A new operator who enters a market or industry appears to base his calculations as to his probable costs of operation and return on investment, not so much on the conditions as they will come to prevail after the new plant has been erected as on a basis of conditions prior to his entrance into the market. The new conditions may be and frequently are greatly different from the earlier conditions. Competition among the new and older plants to maintain or increase volume of business may result in price- cutting and trade practices which may make it difficult for both the new and the older plants to operate economically. Bul. 559] Analysis of Fresno Milk Market 51 Conditions after the entrance of the new plant may be further com- plicated if consumption and therefore the total volume handled by all the plants declines as a result of unfavorable business conditions such as have prevailed since the end of 1929. After a while all the plants may agree to eliminate price-cutting and to work on a margin which may enable all the plants, both the old and new, both efficient and inefficient, to meet operating costs and to secure a return on invested capital. The increased operating costs as a result of decreased volume consumed and the increase in the number of plants may result in the establishment of new margins as high or higher than before, notwithstanding the possible introduction of more economical methods of operation or a decline in the prices of some of the cost factors of production. Such conditions almost inevitably result in the attraction of still more plants into the market. Trade agreements which aim at establishing margins on a basis which will enable all operators, inefficient as well as efficient, to continue in operation tend to curb the free working of competition for a time. Eventually, but perhaps not for many years, such unsound trade agree- ments will break down and free competition will again become estab- lished. Furthermore, even if there is no impediment to the working of free competition, inefficient operators and plants may not be eliminated rapidly. As was pointed out above (page 39), an inefficient operator may continue in business for several years even if the returns from his operations do not cover both current cash costs and depreciation on plant and equipment. Moreover, while an operator may be forced out of business, the physical plant may continue to be operated by a new owner. The conditions relative to competition above described seem to have obtained in Fresno as well as in many other milk markets since 1929. While there have been other factors which led to the entrance of new distributors into the Fresno milk market since 1929, the relative profit- ableness of distribution in that market prior to 1929 was undoubtedly one of the prime reasons. Since 1929 the number of plants operating in Fresno has increased and the volume of milk handled per plant has declined to such an extent that distributors' margins, while they are about as wide as in 1929, are no longer adequate to cover operating costs including depreciation and provide for a return on investment. The firms that entered the market since 1929, have found that the antici- pated profits have not been forthcoming. The competition resulting from an increase in distributive capacity has been one of the chief factors contributing to inefficiency in distribution and high unit costs of distri- bution. Conversely, a decrease in the number of distributors would lead, 52 University of California — Experiment Station under existing conditions, to an elimination of inefficient trade prac- tices and a reduction of unit costs of distribution. It would appear to be desirable in the interests of more efficient operation for the four distributors in Fresno to agree to the elimination of one or more of the existing plants and to compensate in some equitable manner the owners of the plants eliminated. This would enable the remaining distributors to decrease operating expenses and to work on a narrower margin. Such a step, however, in the absence of any other forms of restriction, would not prevent the entry into the market of new distributors. 23 For this reason the four distributors are adverse to taking any steps toward consolidation. It does not appear that the problems of the market-milk industry in Fresno will be solved by allowing numbers of dairymen, who can comply with the necessary sanitary requirements, to distribute grade-A raw milk. It is not the purpose of this study to analyze the relative food value and sanitary merits of grade-A raw and grade-A pasteurized milk. It is necessary, however, to point out the probable economic consequences of such a step. The first few dairymen who equip themselves to distribute raw milk will possibly benefit for a time. Eventually, however, as more and more dairymen undertake to distribute their own milk, competition among the various raw-milk producer-distributors themselves and between them and distributors of pasteurized milk, who will not unreasonably make every effort to safeguard their business, will result in conditions which will be disadvantageous to the Fresno market-milk industry, including the raw-milk producer-distributors. Price-cutting and the introduction of undesirable trade practices may and probably will result immediately in a milk war. Such practices together with the in- crease in distributive capacity, will eventually result in higher unit costs for all distributors. One or more of the existing distributors of pasteur- ized milk may be forced into liquidation, but as was pointed out above this does not mean that the operation of the physical plants will cease. Furthermore, it is improbable that even under the most favorable conditions, all the milk distributed* in Fresno will be grade-A raw milk. 24 It is unlikely, moreover, that the opening of the Fresno market to raw milk will greatly increase the total volume of milk distributed. There- 23 In spite of the fact that the four distributors in Fresno operated at losses in 1932, a new distributor entered the market in January, 1933. 24 In Los Angeles County, where conditions relative to the distribution of grade-A raw milk seem to have been more favorable than in any other county in California, less than 40 per cent of all the milk distributed in 1931 was grade-A raw milk. Bul. 559] Analysis of Fresno Milk Market 53 fore, as the volume of raw milk distributed is increased, a greater burden in disposing of surplus milk will be thrown on the producers of milk for pasteurizing purposes, who will probably always constitute the bulk of the dairymen supplying milk to Fresno. If there is a persistent demand on the part of consumers in Fresno for grade-A raw milk and if this can be produced under sanitary conditions which will safeguard the health of the consuming public, it would be better from the point of view of all dairymen for grade-A raw milk to be distributed through the existing distributive channels, or for raw-milk producers to organize a new raw-milk distributing company. If permanent improvement is to be introduced into the Fresno market- milk industry, it will be necessary for all groups to explore every possible means of restricting the number of new distributing units and even of decreasing the number of existing plants. Reduction of margins as a result of elimination of inefficient methods of delivery, the intro- duction of a universal store bottle and deposit requirement, the forma- tion of a strong producers' bargaining organization, and an educational campaign among consumers promoted by the market-milk industry as a whole as to the possible results of any further increase in distributive facilities will have much influence in discouraging the entry of new competitors. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS Consumption and Prices Paid by Consumers. — The volume of milk distributed by the four plants in Fresno has declined appreciably since 1930. Part of this decline can be ascribed to some loss of trade to dis- tributors operating outside the city limits of Fresno; part may be due to a decline of transient fruit-picking and packing population during the fruit-picking season; part is undoubtedly due to some decline in per- capita consumption as a result of a decrease in purchasing power. About 60 per cent of the milk distributed in Fresno is sold through retail grocery stores and only 15 per cent directly to the homes of con- sumers. The rest is sold to hotels and restaurants, public institutions, and bakeries, drug stores, etc. Prior to June, 1930, store prices to con- sumers and retail prices for milk were equal. Since June, 1930, store prices have been 2 cents below retail delivered prices. Taking these facts into consideration, prices paid by consumers have declined from 14 cents in 1929 to 10 cents (store price) in 1932, a decrease of 28.5 per cent, which compares favorably with the decline in retail prices of foodstuffs generally in San Francisco. Moreover, as the average milk fat content 54 University op California — Experiment Station of market milk increased from 3.7 per cent in 1929 to 4 per cent in 1931 and 1932, consumers are receiving the benefit of a higher quality of milk. It is nevertheless strongly recommended that producers and distrib- utors exert every possible effort to effect still further reductions in prices paid by consumers. In the absence of an appreciable improvement in business conditions, a reduction in prices paid by consumers would assist materially in increasing per-capita consumption or in retarding a further decline. Concerted industry advertising would also appear to be of value. It is particularly important that both producers and dis- tributors develop some means of bringing before the consuming public the problems and difficulties confronting the market-milk industry. Such educational and public-contact work would do much to prevent future adverse publicity. Prices Paid to Dairymen. — Prior to 1929 dairymen producing market milk were paid 24 cents a gallon for milk testing 3.6 per cent milk fat and over. In March, 1929, the prices were increased to 28 cents a gallon for milk from herds free from tuberculosis. At the same time stricter sanitary requirements were introduced. Since the beginning of 1930 prices to dairymen have declined more or less steadily. The absolute de- cline in buying prices for market milk since 1929 has been greater than that for manufacturing milk, so much so that in 1932 the average yearly differential of market-milk prices over those of manufacturing milk was as low or lower than the differentials prevailing during the years 1926 to 1928, prior to the introduction of the strict sanitary re- quirements now prevailing. While the prices of some of the cost factors in market-milk production such as feed and labor have declined since 1928, it is probable that compliance with the stricter sanitary require- ments has tended to increase the differences in unit costs of producing market milk and manufacturing milk since 1928. Market-milk dairymen were emphatic in stating that they could not continue for any length of time producing milk for the prices they were receiving during the last few months of 1932. It is possible that if these prices continue much longer the milk supply of Fresno may be jeopardized. The data collected during the course of this study indicate that some increase in buying prices to dairymen would be justified. It is recom- mended that every effort be made to bring this about. An increase in buying prices to dairymen by increasing prices paid by consumers would not be warranted under existing conditions, for this would tend to still further decrease consumption. Any increase in buying prices would thus have to be effected through economies in the handling and distribution Bul. 559] Analysis op Fresno Milk Market 55 of market milk. Some reduction of hauling rates and a more efficient system of hauling would seem to offer some prospects of savings which could be used to increase the net returns to market-milk dairymen. Distribution : Margins and Costs. — While the volume of milk distrib- uted in Fresno has declined appreciably since 1929, the number of dis- tributors has increased. In 1929 two distributors handled more milk than the four distributors together in 1932. Both of the distributors operating in 1929 handled considerably less milk in 1932 than they did in 1929. All four distributors in 1932 were operating well below capacity. When consideration is given to the fact that the proportion of milk sold wholesale increased from about 50 per cent in 1929 to about 85 per cent in 1932 and that the milk-fat content of market milk also was in- creased from 3.7 per cent in 1929 to 4 per cent in 1932, distributors' margins during the last half of 1932 were little if any greater than in the years prior to 1929. Owing to the differences in the conditions of market-milk distribution in various cities, it is extremely difficult to ascertain whether distribution costs and margins are higher in Fresno than in other cities. It is possible to state, however, that a more efficient system of distribution in Fresno would result in a substantial reduction in both margins and costs. Although distributors' margins during the years prior to 1929 were probably adequate to meet unit operating expenses and to provide for an attractive return on invested capital, margins in 1930, 1931, and 1932 proved inadequate to meet even the operating expenses of the four distributors. Two distributors made a small profit in 1930 and 1931 after provision had been made for depreciation. Two distributors made a loss in both years. In 1932 all four distributors showed a net operating loss. The losses of some of the distributors during some of the years were in excess of the amounts set aside for depreciation. In these cases dis- tributors incurred actual cash losses. The combined assets of the four distributors exceeded one and a quarter million dollars. Included in the assets of three of the distributors were amounts for goodwill. None of the four distributors were able to pay dividends on capital invested during the past three years out of earnings made on the operations of their plants in Fresno. From an industry viewpoint the system of market-milk distribution in Fresno is uneconomical. This has resulted in the failure of individual firms to make any profits on their operations during the past three years in spite of the fact that margins have not declined to any extent and that the prices of many of the cost factors of production have declined. 56 University of California — Experiment Station In the first place the capacity of each of the four pasteurizing plants is far in excess of the volume of milk and other products being handled by them individually. As a result unit costs of processing and delivery of each plant are higher than they would be if each plant were operating more nearly to capacity. It is probable that all the milk sold in Fresno could be handled adequately by one or at most two plants. In the second place competition between individual distributors to build up or maintain volume of business has resulted in the introduction of practices in the delivery of milk which apparently have not resulted in benefit to a single distributor and which at the same time have tended to increase unit costs of selling and delivery. The lowering of the store price to consumers to 2 cents a quart below retail delivered prices in 1930 was one of the prime factors responsible for the large increase in consumer purchasing through stores. As a result of efforts by distributors to gain store trade over half of the stores were being served by two or more distributors in 1932 and stores and restaurants were receiving several deliveries each day. In many instances the quantities of milk delivered each day and with each delivery were extremely small. Nearly all distributors have at one time or another granted special discounts to stores over and above the agreed-upon schedules of wholesale prices. It would appear that some reduction of store margins and the services given stores by distributors would help to place the market-milk indus- try of Fresno on a more rational and economical basis. Relative store margins on market milk have increased since 1929 and 1930 notwith- standing the fact that nearly all stores handled a much greater volume of milk in 1932 than they did in 1929. Relative store margins on milk, moreover, are wider than on many other commodities ; in fact several grocery store operators claim that they rely upon the wide margins on milk to operate on narrow margins on some other goods. For a point of view of the comparative service rendered by producers, distributors, and stores, the store margin is out of line with the prices and margins of the other two groups. All responsibility for the uneconomic methods of handling market milk in Fresno cannot with any fairness be placed on any one group or individual. Similar conditions prevail in a large number of milk markets throughout the United States and in fact in most other industries as well. It would seem, however, that distributors in Fresno as a group can be criticized for their tardiness in eliminating undesirable trade prac- tices, which all distributors were aware were operating to the disad- vantage of the industry. Certain definite steps can be taken to improve Bul. 559] Analysis of Fresno Milk Market 57 conditions in the market-milk industry of Fresno. The attainment of such improvements will require the combined efforts and cooperation of all groups in the Fresno market-milk industry, producers, consumers, distributors, retail store operators, and public health authorities. Recommendations for Improvements. — It is not considered that the distribution of raw milk by individual dairymen would prove either of immediate or ultimate benefit to the industry. Such a step would tend to increase still further plant and delivery facilities without increasing to any appreciable extent the volume of milk being sold. Competition between the various distributors would be intensified and more unde- sirable and uneconomic trade practices are likely to result. If raw milk is to be distributed, it would be preferable, from an industry standpoint, for it to be handled through the existing distributive channels, provided, of course, that distributors would not exact too wide a margin for hand- ling raw milk, or through a company to be formed by the raw-milk producers themselves. On the contrary, a decrease in the number of plants operating in Fresno would be more likely to be of immediate and ultimate benefit to the industry. It is strongly recommended that all groups interested in the Fresno market-milk industry explore every possible means for effect- ing a decrease in the number of distributing plants and in discouraging the entrance of new distributors. The most effective means under exist- ing conditions for discouraging the entrance of new competitors would be for distributors to effect a substantial reduction in their unit costs and margins. An amalgamation of one or more of the existing plants would be a step in the right direction. The greater volume handled by the remaining plants would enable them to operate on a lower unit- cost basis. It is suggested, furthermore, that costs of distribution can be reduced : 1. By requiring that the established wholesale price of milk to stores and restaurants apply only to minimum purchasers of a case of milk at a time, purchases of less than a case at a time to be on a somewhat higher basis. 2. By restricting deliveries at the lowest rates per case by any one distributor to twice daily during the summer months and to once daily during winter months, a higher price to be charged on special deliveries. 3. By providing that the established lower prices apply only in the case of stores and restaurants purchasing milk regularly from a dis- tributor. This would prevent stores and restaurants from ordering milk 58 University of California — Experiment Station occasionally from another than their regular supplier in order to obtain the benefits of a lower price. 4. By trading business, whenever it can be equitably arranged to the satisfaction of all parties. Under such a plan store X, which purchases milk from distributors A and B, will receive all its milk from A. Store C, which also receives its milk from A and B, would receive milk only from B. Such an arrangement would be facilitated if there were fewer dis- tributors. 5. By the elimination of all special discounts of whatever nature. 6. By attempts to get retail store operators to handle market milk on a somewhat lower margin. 7. By introducing a universal store bottle which only the present dis- tributors would be allowed to use and by requiring consumers to pay a deposit on all bottles purchased from stores. Another means of discouraging the entrance of new distributors would be the establishment of a milk trade board consisting of repre- sentation of distributors, dairymen, retail stores, restaurants, and the general public. The functions of this board would be to investigate all matters of dispute between the various groups interested in the Fresno market-milk industry, to collect and analyze data relative to the eco- nomics of milk-marketing and suggest means for the more economical handling of milk, to assist dairymen and distributors in determining from time to time buying prices and resale prices of market milk, and disseminate such information to the consuming public as will result in a better general understanding of the problems of milk-marketing. It is suggested, furthermore, that the dairymen supplying market milk to Fresno form a collective bargaining association whose functions it will be to represent all members in negotiations with distributors, the milk board, and the consuming public, to establish from time to time and in collaboration with distributors and the milk trade board buying and resale prices for market milk, to establish basic quotas for individual members, to arrange for the best possible disposal of all milk produced by members in excess of requirements of distributors, and to arrange for methods and rates of hauling milk from members' farms to city plants. It would not be the purpose of such an association to restrict its member- ship to only those dairymen who are at present shipping milk to Fresno. Membership would be open to all dairymen who can comply with the necessary sanitary requirements and who are prepared to produce market milk for the established buying prices. Under such a plan dis- Bul. 559] Analysis of Fresno Milk Market 59 tributes would still be allowed to select the dairymen from whom they would receive milk. The milk of one dairyman would be transferred from one distributor to another only with the consent of both distrib- utors and the association. ACKNOWLEDGMENTS The author wishes to acknowledge the many helpful suggestions given by Professors H. R. Tolley and E. C. Voorhies in the analysis of this study. Dr. J. P. Benson, Farm Advisor, and A. F. Gillette, Assistant Farm Advisor in Fresno County, also supplied many useful suggestions and assisted in making local contacts with dairymen and others. Mayor Z. S. Leymel of Fresno gave liberally of his time and helped the author in making contacts with the various distributors. Mr. Hilliard S. Giffin of the firm of Burdick and Freeland, Accountants and Auditors, Fresno, assisted in collecting the information used in this study. The author wishes especially to thank Mr. J. S. Canhan of Canhan's Dairies, Inc., Mr. W. H. Lockhart of the Golden State Co., Ltd. (Fresno plant), Mr. A. Nonini of Fresno Dairy Products Inc., Mr. D. C. Carlsen of the Jersey Farm Dairy, Mr. J. R. Murphy of the Danish Creamery Association, Dr. D. F. Coyner of the Fresno City Health Department, and Mr. 0. A. Ghiggoile of the Bureau of Dairy Control, State Depart- ment of Agriculture, Sacramento, for their cooperation in supplying much of the information on which this study was based. Supplemental information was also supplied on the operation of their Fresno plants by Bordens Farm Products, Inc. of Oakland and by the Golden State Company, Ltd. of San Francisco. Mr. W. H. Moebus of the Pacific Dairy Review supplied much useful information relative to the operation of bottle exchanges and the advantages of the universal store bottle. Finally the author wishes to express his appreciation to the many market-milk dairymen and to several retail-grocery-store operators in Fresno for their valuable assistance in supplying information about their respective operations. 8Jm-10,'33