>■ n-C\ Division of Agricultural Sciences UNIVERSITY OF CALIFORNIA ''".h;;Q A Study "i: in the Economics of Location L. B. FLETCHER and C. 0. McCORKLE, JR. ■lit CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 787 * 1 i X his bulletin examines the demand and supply conditions for fluid milk in California and Los Angeles County. It describes the structural character- istics of the Los Angeles milk market, and analyzes production and transport » tation costs in various present and potential supply areas. It analyzes producer prices, procurement practices, and location adjustments that have been made, and discusses supply adjustments likely to be made in the future. * JUNE, 1962 * i CONTENTS THE FINDINGS PAGE I. SETTING AND SCOPE OF THE STUDY 6 Demand and Supply Conditions for Fluid Milk in California and Los Angeles County 6 A Purposes of This Study 7-> Scope of the Analysis 7 The Economic Model 8 ^ Sources of Data 12 II. STRUCTURAL CHARACTERISTICS OF THE LOS ANGELES MILK MARKET 12* The California Milk Control Program 12 ^ Producer Pricing 13 Resale Pricing 14 v Unfair Trade Practices 14 Enforcement 14 1 Legal Status of the Control Program 15 The Demand Structure of the Los Angeles Milk Market 15* Number of Firms 15 Type of Ownership and Organization 17 C Sales Outlets 13 Sales Concentration 19 Market Type and Supply Adjustments 20 The Supply Structure of the Los Angeles Milk Market 21 The Southern Milkshed — Production Adjustment Within the Area 26* The Northern Milkshed — Production Trends in the San Joaquin Valley 30 Type of Production Organization 31 Number and Size of Dairies 31 I Producer Organizations 32 The Supply Adjustment Problem in the Los Angeles Milk Market 32 fl k HI. COSTS AND LOCATION ADJUSTMENTS 33 Plant Organization, Inputs, and Outputs 34 *. Output Per Cow 35 Number of Cows 37 * Approach to Estimation of Regional Production Costs 38 Labor Requirements 38 * Production Costs for the Los Angeles Milkshed 39 Plant Investments and Overhead Costs 39 Direct Production Costs 41 Plant Cost Curves and Long-Run Production Costs 43 Regional Production Cost Differentials 44 , Transport Costs 46 Least-Cost Location and Regional Locational Advantages 47 *IV. PRODUCER PRICES, PROCUREMENT PRACTICES, AND LOCATION ADJUSTMENTS 48 Demand and Prices for Market Milk at the Producer Level 48 r Producer-Distributor Contracts 49 Determination of Net Producer Prices 50 r Interregional Differences in Net Producer Prices 53 Procurement Practices, Use Patterns, and Policies of Los Angeles Distributors. . 56 ** Raw-Product Procurement : Purchasing and Concentration Patterns 57 Procurement and Use Policies of Regional Los Angeles Distributors 61 Role of Cooperatives in Market Supply Patterns 65 , Maximum-Profit Location : Implication for Supply Adjustments 66 Efficiency of Market Supply and Use Patterns 66 i / Regional Differentials in Net Returns to Producers 67 Implications for Supply Adjustments 68 V. SUPPLY ADJUSTMENTS— PAST, PRESENT, AND FUTURE 69 Supply Prospects in the Southern Milkshed 69 Los Angeles and Orange Counties 72 Chino Valley 75 Outlying Areas 78 Implications for Shifts in Market Supply Sources 78 Adjusting Regional Price Differentials 79 Increasing Producer Returns for Surplus Use 81 Market-wide Pooling 82 Modifying Distributors' Procurement Policies and Practices 83 i * APPENDIX A 85 1 APPENDIX B 85 i LITERATURE CITED 87 < This research project has been supported financially and in its conduct by the Bank of America N.T. & S.A. The assistance and counsel of Jesse W. Tapp, Earl Coke, and John A. Hopkin have been particularly helpful. The California State Department of Agriculture, Bureau of Milk Control, made available necessary data for much of the analysis contained in this study. THE AUTHORS: L. B. Fletcher is Assistant Professor of Economics at Iowa State University, previously at University of California, Los Angeles. C. 0. McCorkle, Jr., is Professor of Agricultural Economics and Agricultural Economist in the Experiment Station and on the Giannini Foundation, Davis. L. B. Fletcher • C. 0. McCorkle, Jr. GROWTH AND ADJUSTMENT OF The Los Angeles Milkshed A STUDY IN THE ECONOMICS OF LOCATION 1 THE FINDINGS * X his bulletin reports studies in the economics of location of the dairy indus- try in the Los Angeles milkshed. Tradi- . tionally, the major locational advantage in the production of fluid milk has been nearness to market. This study shows, however, that an industry may tend to remain where it was started even if the original reasons for starting in this par- ticular location have disappeared. Nearness to market, plenty of locally produced feed, and climate gave an early advantage to dairymen in Los Angeles County. After World War II the industry expanded because market demand in- creased as a result of rapid population growth and urbanization in southern California. Urbanization also put eco- nomic pressures on dairymen — in the form of rising land values and taxes, higher wage rates, and increasing feed * costs (as bulky hay had to be brought into the area) . By developing large, spe- cialized, factory-type operations — permit- „ ting intensive use of capital equipment, high labor efficiency, and maximum pro- duction per cow — dairymen in Los An- geles County kept their production costs competitive with other areas, and pro- duced a stable, high-quality supply of milk at low procurement costs for dis- * tributors. When market requirements for Los Angeles plants increased during the Ko- i rean War, dairymen in the San Joaquin 1 Submitted for publication July, 1961 Valley stepped up their share, and a new market structure emerged. It was based on the use of milk from the southern milk- shed for Class 1 purposes, on weekly and seasonal supplemental milk and cream shipments from the outlying northern re- gion, and on keeping surplus production in the outlying area for use in manufac- tured products. Such a use pattern is remarkably consistent with a theoretical organization that would result in low ag- gregate transport costs in the market. Therefore, the dairy industry in the Los Angeles milkshed was found to be effi- cient in using the resources presently committed to milk production. Comparisons of unit costs for compar- able synthesized operations in the com- peting supply regions showed that pro- duction cost differentials in the northern region more than offset added transport costs. This means that, for efficient long- term growth in industry output, the share of raw-product supply for Los Angeles plants from northern producers should be increased relative to production in the southern milkshed. Interregional prices to dairymen fol- lowing existing market supply patterns (as determined in a complex framework of minimum class prices established f.o.b. plant, individual plant pools, and pro- ducer contracts) differed by more than the higher transportation costs from the farther northern milkshed to Los Angeles plants. These differentials were sufficient [5] to overcome production cost differentials and make production more profitable for southern dairymen. This situation re- stricts the mobility of the dairymen; it encourages them to remain in high-cost areas or to move to locations where reve- nue conditions are unchanged. Therefore, manipulation of the pricing system to in- crease and stabilize average returns to dairymen has distorted its function in resource allocation. What is needed most to correct the misallocation of resources is to modify the pricing structure in a way to provide in- centives for distributors to procure larger quantities of milk from the lower-cost area, without destroying current incen- tives to use this milk efficiently. Northern dairymen have been unable to use their lower costs as a competitive advantage to obtain a larger share of the market. This demonstrates the "toughness" of a * marketing system that has grown up over a period of years in a framework of ad- ministrative pricing, and in which large vested interests have accumulated. These distorted interregional price re- lationships, so harmful to the efficient t long-term growth of industry output be- cause of their relationships to the alloca- tion of resources in the industry, do not exist because responsible public agencies want these distortions nor because their remedies are unknown. They exist largely j because the pricing arrangements and use patterns that caused them are deeply im- bedded in the historical and institutional relationships of the market in the Los Angeles milkshed. I. SETTING AND SCOPE OF THE STUDY DEMAND AND SUPPLY CONDITIONS FOR FLUID MILK -tliECENT studies have analyzed state and national economic trends affecting the future of the California dairy indus- try. Simmons (1959) estimated that per capita consumption of dairy products in California in 1955 exceeded per capita production by 177 pounds. He projects a 66 per cent increase in the 1955 deficit by 1975, to 292 pounds. Production in the state is expected to increase only suffi- ciently to meet consumption requirements for fluid milk, fluid cream, and ice cream, which are projected to total 12.6 billion pounds by 1975 — 62 per cent above the 1959 production of 7.8 billion pounds of milk. Deficit requirements will be met by increased inshipment of manufactured products from surplus-producing areas. If it is assumed that average production per cow will rise to 10,400 pounds per year, 1,209,900 cows would be required to achieve projected production levels by * 1975. That represents an increase of about 365,000 cows above the 945,000 re- ported for the state in 1958. (California -s Crop and Livestock Reporting Service, A1958, p. 9) . Dean and McCorkle (1960) < concluded that the productive resources » available to California dairymen should be sufficient to permit this build-up in the dairy herds. Los Angeles County provides a dra- matic example of the impact of rapid pop- j ulation growth and economic develop- ment on the dairy industry. Population *' exceeded 6 million in 1960, more than l w ice that of 1940, and growth is similar in surrounding counties. There is every i. reason to believe that Los Angeles and [6] adjacent counties will continue to share more than proportionately in California's future population growth (Calif. Depart- ment of Finance, 1959; Los Angeles Chamber of Commerce, 1959) . A recent study (Southern California Research Council, 1960) envisions a "Southern California Metropolis," — a giant, sprawl- ing metropolis extending along the Pa- cific Ocean from Santa Barbara to San Diego and inland beyond San Bernardino and Riverside, into the desert. The popu- lation of this metropolis is expected to approximate 15 million by 1975, two- * thirds more than the 9 million in 1960. Los Angeles County alone is expected to have a population of 9 million in 1975. What adjustments can be expected in sources of supply of dairy products in Los Angeles County (which, unlike the state as a whole, is deficit in the production of fluid milk as well as of milk for other uses) ? In 1959, consumption of fluid milk in the county was about 2 billion pounds, production slightly more than 1.3 billion pounds. The requirement anticipated by 1975 will exceed 3.5 billion pounds (based on a population of 9 million) . Milk production has also been greatly affected by the industrial and commercial activity in the county. Dairies have been squeezed into smaller and smaller areas. Producers have responded to economic pressures by moving outside the county or by developing an intensive type of pro- *- duction with larger herds on relatively little land. These adjustments, together with higher levels of production per cow, have permitted successively fewer dairies to produce more milk each year. At present, Los Angeles County is the leading county in the nation in terms of number of milk cows on farms, amount of milk sold, and value of milk produc- tion. However, further population in- r crease in the remaining milk-producing areas in the county may force dairy farms out completely. Thus, substantial adjust- 4 ments are likely in sources of supply of fluid milk for the Los Angeles market. PURPOSES OF THIS STUDY This is the broad context of economic change within which this study was un- dertaken. Specific objectives include: • A description of the structural char- acteristics of the Los Angeles milk market and supply area; • Identification and empirical analysis of what determines geographic pat- terns of production, utilization, and prices of fluid milk in the milkshed; and • Prediction of future adjustments in sources of supply for the Los Angeles market. The study touches areas of both private and public concern. Locational choices are important in the long-run commit- ment of individual resources to, and ad- justments in, agricultural production. But the locational choices of individual firms and public policies affecting market sup- ply patterns must be based on an under- standing of the basic economic forces that underlie industry production, utilization, and price relationships. This study at- tempts to provide a basis for understand- ing and evaluating factors influencing firm and regional adjustments in the Los Angeles milkshed. The findings are used to analyze the following types of questions: What fac- tors determine the direction and rate of adjustments in sources of supply for this market? What factors lag behind others in the process of locational adjustment? To what extent is it possible, through modification of the institutional organiza- tion of the market, to stimulate spatial mobility of resources that will increase the economic efficiency of the industry? SCOPE OF THE ANALYSIS This study focuses on the sources of supply for firms with milk plants in Los Angeles County. In June, 1959, more than 99 per cent of total sales of 15.2 million gallons of fluid milk in the Los Angeles County Marketing Area was made by [7] plants located in the county 2 (California Crop and Livestock Reporting Service, D1959, p. 10). In addition, Los Angeles plants sold directly to customers located in other marketing areas more than 2.5 million gallons of milk. Taken together, total sales of fluid milk by Los Angeles plants were nearly 18 million gallons, representing about 75 per cent of fluid milk sales in all of southern California, and about 45 per cent of sales in the state as a whole. Direct selling includes shipment and sale of processed and packaged milk by plants in Los Angeles County to customers in other marketing areas. In June, 1959, sales in other areas were about 17 per cent as large as those in Los Angeles Mar- keting Area. In that month direct ship- ments were made to nine other marketing areas, as follows: Marketing Area Per cent of total sales of fluid milk in the receiver's AREA Ventura 57 Orange 34 San Bernardino-Riverside 31 San Diego 29 Santa Barbara 17 Inyo-Mono 11 Kern 10 Imperial 8 San Luis Obispo 5 For comparison, in February 1954, di- rect sales of Los Angeles plants to other areas were only about 10 per cent as large as in the Los Angeles Marketing Area (Clarke, 1955, pp. 164-79). In addition to direct shipments to other 2 Prior to August, 1959, the Lcs Angeles County Marketing Area included all of Los Angeles County except a strip at the south- eastern corner. In that month, this marketing area and the ones adjacent were modified. The section of Los Angeles County north of the San Gabriel Mountains was incorporated into i In- San Bernardino-Riverside Marketing Area, as was the southern portion of Orange County. The remaining portions of Los Angeles and Orange counties were designated as the Los An r* lcs Marketing Area. areas, fluid milk is shipped between plants in different areas. Such interplant trans- fers may be bulk shipments of unproc- essed milk and cream as well as processed milk and milk products. The former are an important element in the raw-product procurement of distributing firms. The latter were only 2 per cent as large as , sales in the Los Angeles area in 1954 (Clarke, 1955). The substantial and increasing move- ment of fluid milk to other areas, as shown by the increase in direct sales by Los An- geles plants, has implications for the study of "milk markets" in California. It demonstrates the growing tendency of most large milk markets, including their supply areas, to become larger and more integrated. As urban areas expand, pro- ducers and distributors adopt technical advances in handling and processing . milk, the pattern of small milksheds around each market tends to disappear. Continuous expansion in consumption, due largely to increased size and popula- tion of market areas, has resulted in en- larged milksheds, with milk from large surplus areas moving into several con- suming centers. j The San Joaquin Valley, for example, has become a source from which milk is drawn by the major consuming areas to the north and south. Intermarket and inter-area integration of assembly, proc- essing, and distribution facilities has in some cases proceeded so far that only a i few large markets are now distinguishable in the state. THE ECONOMIC MODEL The ultimate objective of this study is to predict future area adjustments in sup- v ply patterns, against a background of rapidly increasing market requirements. i In broad terms, what is needed for this study is a theoretical framework appro- priate for analysis of adjustments, i through time, in geographic production and utilization patterns of fluid milk for h [8] s a large market. 3 First, past and present changes reflecting investment and operat- ing decisions at the firm level must be ex- plained. At the same time, the theoretical framework should provide a priori hy- potheses about the economic relationships at the industry level. Theoretical conclu- * sions as to economically efficient industry supply and utilization patterns may be es- tablished as norms against which actual performance can be measured. If devia- tions from theoretical optima are sub- stantial, factors encouraging or inhibiting fc desirable shifts can be examined, and pol- icy implications drawn. A distinctive feature of fluid milk pro- duction in the Los Angeles supply area is the presence of large, specialized firms utilizing corral feeding of cows with pur- chased feeds. This dry-lot production or- ganization, common in the southern por- tion of the milkshed, is being rapidly adopted by producers in its northern seg- ment. Under these conditions, the pro- duction unit may be thought of as a processing facility for conversion of raw materials into milk — a virtual milk fac- tory. The major raw material is feed. If r the dairyman specializes completely in milk production, and depends on feed supplies purchased off the farm, then he is faced with the locational problem of where to operate — at the source of feed supplies, at the market, or at some inter- mediate point. Further, the land requirements of this type of milk production are relatively small. Once a minimum acreage is ob- tained, rate of output can vary greatly through intensive adjustments requiring no increase in land area. Since land out- *> lays may be less critical in drylot milk production than in other types of agri- cultural production, it becomes corre- spondingly more important to investigate outlays on other factors. Labor, the other 3 For a review of alternative approaches to I the theory of location and a more detailed dis- cussion of the theoretical model used in this bulletin, see Fletcher (1960). major cash expense, is of major concern in establishing locational advantages. Capital costs, taxes, and economies and diseconomies of industry concentration are cost factors that are important ele- ments affecting locational choices of pro- ducers. The demand factor is also important in this study. Minimum class prices for fluid milk are determined administratively by a state agency, but net producer prices are affected by other factors, including an inter-firm contractual arrangement between producers and distributors. Indi- vidual producer prices are not independ- ent of quantity sold. Producer-level de- mand enters the analysis of locational choices as a relevant variable. Optimum locational choices for a firm must be ap- proached from the viewpoint of maxi- mum profit in which locational choices as well as levels of output reflect attempts by producers to obtain the widest spread between total revenues and costs. The best location is not necessarily that where a firm can produce a product at lowest unit costs, including transport to the market. If the seller faces different demands or different prices at different locations, then a given location may offer the greatest profit potential, even if costs at that location are higher than those elsewhere. Thus, demand at alternative locations becomes a variable to be an- alyzed along with cost factors in a model adequate to explain optimum firm loca- tional choices. At the aggregative level the concept of spatial equilibrium links firm loca- tional choices to geographic production and utilization patterns of the industry. The latter involves determination of the quantities traded and the price relation- ships of a homogeneous commodity be- tween surplus and deficit regions that are separated — though not isolated — by a transport cost per unit of product shipped, under conditions of pure compe- tition. A spatial equilibrium model and solu- [9] tion for the single-product, two-region case is illustrated in figure 1. Here, the supply and demand curves for Region I are plotted in conventional form on the right half of the diagram, but the supply and demand curves for Region II are re- versed on the left half. Thus, quantities are measured to the right of the origin for Region I, but to the left of the origin for Region II, and the quantity axis of Region II has been elevated to a position above that of Region I by an amount equal to the unit transfer cost between the two regions, t 12 . Prices in the two re- gions are measured on the common ordi- nate from the appropriate origin, 0' for Region II, for Region I. In the absence of trade between the two regions, equilib- rium prices and quantities in the two regions would be determined by inter- section of the regional demand and sup- ply curves. If these prices differ by more than transfer costs, i.e., they are not on a horizontal line on the back-to-back dia- gram, trade between the two regions would be profitable. Excess supply func- tions, which show the amounts by which the quantities offered in each region would exceed the quantities demanded at various prices, can be constructed for each region. These are illustrated by curves ESi and ESu, and their intersec- tion defines the equilibrium prices with trade (OP*, O'P*) , which differ between the regions by the unit transfer costs. The distance, O'B, shows the quantity traded, and this is equal to the quantity shipped by Region II (CD) and received by Region I (EF). Interregional price differentials that correspond exactly to the costs of trans- porting the product between the two re- gions are termed "efficient. " In this study, where shifting market supply pat- terns are the focus, the degree to which prices in the competing supply regions Region II Figure 1. Spatial equilibrium for the single-commodity two-region case. [10] reflect differences in transport costs is of interest primarily because of its relation to regional allocation of resources in producing the product. When such prices prevail and regional supply curves are theoretically obtained by horizontal sum- mation of the marginal cost curves for y all producers in the region, the marginal costs at the deficit market of the last unit obtained from each supply region are equal to each other and to the equilib- rium price of the product. Hence, the marginal cost of the last unit produced g in the deficit region equals marginal cost of production in the surplus region plus transfer costs. This allocation of production between regions will minimize the sum of produc- tion and transport costs for the total amount produced and used in the two ' areas ; it is impossible to reduce the com- bined costs of production and transport of total supply by adjusting regional pro- duction or the amount transferred be- tween regions. In addition, when factor as well as product markets are assumed to be per- fect, the values of the marginal products ' of factors employed in the competing supply regions will be equated to the price of the factors in each region. As- suming equal productivity of a factor between regions, the regional price of the product then becomes the principal de- terminant of the extent to which milk producers can compete for the services of the factor against the competition of alternative uses, as represented by fac- tor opportunity costs. Thus, this expanded model permits a more explicit statement of the efficiency ► norm adopted earlier. If the setting of the problem is assumed to be a purely competitive one, in the sense that no in- dividual firm or owner of resources can affect the market in which he is dealing, certain conclusions can be reached with respect to optimum choice of production location and spatial allocation of re- sources. Optimum choice in this sense im- plies regional levels of production and interregional movements of the product that minimize the combined costs of pro- ducing and transporting the total quan- tity produced and consumed. This study treats the problem of inter- regional competition involving shifting regional supply relationships. 4 Changes in basic determinants underlying re- gional supply, such as number and size of firms, are the critical elements in this analysis. In this sense, this is a study of long-run adjustment rather than of short- run regional supply relations involving given producing units with fixed loca- tions. The problem is generally one of assuming future levels of demand in the market area and, in light of this assump- tion, analyzing the factors affecting ad- justments in locational patterns of pro- duction and utilization. The nature of the competitive advantages in major com- peting regions, factors likely to change competitive relations in the future, and implications for supplies to be forthcom- ing in the competing producing areas, will each be studied. Moreover, any model designed to analyze long-run ad- justments in milk supply must incor- porate or, at least, recognize the presence of institutional pricing arrangements and of buying firms and groups of sellers with sufficient market power to influence regional demand or supply relations. The model does provide a convenient division of major factors contributing to locational adjustments in the Los An- geles supply area into two groups: those affecting supply or costs, and those affect- ing demand or revenues. Factors deter- mining relative regional production costs are investigated in Section III, since they are basic determinants of the quantity of milk that producers are willing to supply at given prices, and since they serve as criteria for projecting opti- 4 For a thorough review of the alternative ap- proaches and difficulties encountered in agricul- tural supply analysis, see Nerlove and Bachman (1960, pp. 531-554). [11] mum supply adjustments. The process by which producer returns are determined in the competing supply areas is investi- gated in Section IV. Future adjustments are then predicted based on alternative assumptions about cost and revenue vari- ables. Finally, modifications in institu- tional pricing arrangements that would encourage adjustments toward an eco- nomic optimum are explored (Sec- tion V) . SOURCES OF DATA In addition to data published by the California Crop and Livestock Reporting Service, a large body of primary data was provided by the Bureau of Milk Sta- bilization, California Department of Ag- riculture. Data obtained related to plant procurement of raw product, utilization, and payments to producers, and provided the basis for describing the market struc- ture and analyzing procurement and util- ization patterns in the milkshed. These reports were surveyed for six selected months spanning a three-year period. In light of seasonal patterns in plant re- ceipts and utilization, a spring and a fall month, June and October, were selected for each year. Data on geographic location, produc- tion, and disposition of milk by dairies in their inspection areas were provided by dairy inspection agencies of the Los Angeles City, Los Angeles County, Orange County, San Bernardino County, and Riverside County Health Depart- ments. In addition, supplementary in- * formation was provided on milk plants operated by producer-distributors, who are not required to submit monthly re- ports to California's Bureau of Milk Sta- bilization. Highly useful data were also obtained by interviews with numerous persons in- volved in verious phases of the dairy industry. These included executives of Los Angeles milk distributing firms, the planning commissions of Los Angeles, Orange, and San Bernardino counties, city officials of the incorporated dairy i areas, and officials of producer cooper- ative groups and bargaining associations. All data on production organization and equipment, input-output relation- ships, investments, and factor prices, used in this bulletin to derive relative production costs between competing areas of the milkshed, are from Davidson, J. R., * 1960. II. STRUCTURAL CHARACTERISTICS OF THE LOS ANGELES MILK MARKET X HE CHARACTERISTICS OF FLUID MILK marketing that derive from continuous production, perishability, and unsynchro- nized movements in supply and demand underlie the adoption of many of the structural and institutional elements that have come to typify such markets. This section describes certain structural char- acteristics of this market as a background for the empirical study of determinants of geographical production, utilization, and price patterns. -\ THE CALIFORNIA MILK CONTROL PROGRAM In the United States, state and federal participation in pricing is more extensive and direct in the marketing of fluid milk than that of any other agricultural com- modity, giving to large parts of the fluid [12] milk industry a quasi public-utility status. California is one of 11 states that regulate milk prices at both producer and resale levels (U. S. Dept. of Agric, 1959). The first statutory authority for estab- lishing minimum producer prices for I milk in a given area in California was contained in the Young Act, 1935. In 1937, the Desmond Act made establish- ment of minimum resale prices manda- tory in all marketing areas in which pro- ducers' prices are controlled. The Young and Desmond acts, as modified and re- vised subsequently, provide the legisla- tive basis for minimum prices to pro- ducers, minimum resale prices, and re- lated aspects of marketing of fluid milk in California. 5 The policy objectives of these acts clearly emphasize concern for the gen- eral welfare of the consumer as a basis for invoking the police power of the state, although the principal proponents of the laws were undoubtedly those groups most directly concerned with its operation — the producing and distribut- r ing segments of the dairy industry itself. For a detailed analysis of the history of state price control see Tinley (1938) and Clarke (1955). The objectives of the existing milk control law are : i 1. To ensure an adequate and continuous supply of pure fresh wholesome fluid milk and fluid cream to consumers at fair and reasonable prices; 2. To enable the dairy industry with the aid of the state to correct existing evils, and develop and maintain satisfactory marketing conditions; 3. To bring about and maintain a reason- able amount of stability and prosperity in the production and marketing of fluid milk and fluid cream; 4. To provide means for carrying on es- sential educational activities. 5 The provisions of these acts are presently contained in Chapter 17, Division 6, of the Ag- ricultural Code of the State of California. The director of agriculture is given wide discretionary powers in making rules and regulations he considers neces- sary in enforcing the provisions of this chapter. The legislature has stated, how- ever, that nothing in the chapter of the code containing the milk control law shall be construed as permitting or authorizing the development of conditions of mo- nopoly in the production or distribution of fluid milk or fluid cream. The follow- ing discussion focuses on the standards and procedures provided to guide the director in carrying out the objectives of the program. Producer Pricing The classified price plan. Classified pricing establishes separate prices for milk going to different ultimate uses in any given market. The Agricultural Code in California provides for milk to be classified into three categories. Class 1 comprises any fluid milk, fluid skim milk, or fluid cream supplied to consumers as market milk, market skim milk, market cream, or concentrated milk, or any com- bination of these fluid products, and any other dairy product in which the use of market milk is required by the Agricul- tural Code. Class 2 includes any fluid milk, fluid skim milk, or fluid cream used in the manufacture of a product for which a standard is described in Division 4 of the code and not included in Class 1 and 3. Generally, this category includes manufactured products that are relatively bulky and perishable, principally cottage cheese, frozen dairy products, and butter- milk. Class 3 includes milk, skim milk, or cream used for the manufacture of evap- orated milk, butter, cheese, or powder. Marketing areas. In administering the provisions of the law, the director is empowered to designate marketing areas, employing the standard or uniformity of conditions affecting production, distribu- tion, and sale of fluid milk within the des- ignated area. There are presently 32 [13 marketing areas, including virtually all inhabited parts of California. Stabilization and marketing plans. These are the basic instruments that the director uses in accomplishing the ob- jectives of the law. If a plan is desired by at least 65 per cent of the producers — by number and by volume of milk pro- duced — the director formulates a plan, subject to industry review before being placed in operation. For producers, the most critical pro- visions in the stabilization and market- ing plans are those relating to pricing. Each plan is required to establish mini- mum prices to be paid by distributors to producers for fluid milk by classes. These prices are to be in "reasonable and sound" economic relationship with the price of manufacturing milk. Prices are permitted to vary among areas be- cause of differences in costs of produc- tion, health regulations, transport costs, and other factors, but within any market- ing area the cost to distributors for fluid milk and fluid cream of similar quality must be uniform. Additional mandatory provisions re- lating to producer prices in each plan include : 1. A requirement that distributors shall not purchase more than 200 gallons monthly from any producer without entering into a written contract speci- fying certain conditions of purchase; 2. A requirement that no distributor pay less than the established minimum pro- ducer prices; and 3. Provisions whereby minimum prices will be established and paid for fluid milk that is received by a distributor in one marketing area and transported and used in another marketing area or in a locality for which no plan is in effect. Optional provisions that may be in- cluded in stabilization and marketing plans include: 1. Requirements that a distributor report to each producer from whom he buys milk, the volume of fluid milk re- ceived, the milk fat test, amount paid for in the various classes, and the prices paid; 2. Provision for pooling milk that is di- verted for manufacturing purposes di- rectly to a manufacturing plant in the area of production; and 3. Provisions for establishing equaliza- tion pools for all producers supplying fluid milk to distributors in the market- ing area involved, provided 65 per cent of the producers, by number and vol- ume, approve. No provision in any plan issued under this law is to prevent quality premiums, price differences due to transport differ- entials, or pooling of proceeds by cooper- atives. A specific prohibition is placed on any provision that would limit the production of fluid milk or cream. Resale Pricing In addition to minimum producer prices, six types of resale prices are es- tablished : a wholesale price for all whole- sale sales; a retail store price to con- sumers; a retail price to consumers for home delivery; a retail price to con- sumers at the producer's ranch ("cash and carry sales") ; a retail price to con- sumers at the distributor's plant ("dock sales") ; and a price for inter-distributor sales of processed and packaged milk in- cluding sales to peddlers. Unfair Trade Practices When the control legislation was en- acted, it was recognized that economic pressures within the industry led to de- structive trade practices as well as price wars. For this reason, the act providing for minimum resale prices also specifies a number of trade practices declared to be unfair and punishable by law. Enforcement Enforcement involves two broad phases. First, enforcement of minimum prices to producers requires the audit of payments made to producers by all [14 plants in the state. Second, enforcement of minimum resale prices and the unfair trade practices provisions of the law re- quire investigation of transactions be- tween distributors and their customers. In addition to the civil and criminal ju- dicial actions that can be brought against violators, the director may revoke or suspend the licenses of distributors in the case of aggravated or repeated violations of the law. Legal Status of the Control Program The control program now stands on firm legal grounds. 6 Yet court action does not represent the sole alternative for per- sons or groups seeking changes or repeal of the law. The state legislature, having established that the fluid milk industry is "vital to public health and welfare," can modify and even abolish the control pro- gram. For example, certain groups are trying to have the law amended to abol- ish "cash-and-carry" pricing which in some areas affects a significant propor- tion of total retail sales. Bills have been 6 A California Supreme Court ruling in 1940 ■ established the constitutionality of the resale price maintenance provisions of the Desmond Act. In two other cases, provisions of the law have been successfully challenged. An early case declared invalid the original provision of the Young Act whereby the authority to fix mini- - mum prices could be delegated to local control boards. Later, a provision whereby the director h could assess damages against distributors was held to be an improper delegation of judicial power. One other unfavorable decision held that the director could not establish price differen- tials between milk distributed in glass bottles and in fiber containers. Recently the Third District Court of Appeal upheld the state's right to permit cash-and-carry, or drive-in, dairies to sell milk at lower prices than retail grocery stores. This case arose when a group of Stockton grocers challenged the power of the director of agriculture to establish a differential between retail stores sales and f.o.b. plant or ranch sales in the San Joaquin * Marketing Area. The San Joaquin County Su- perior Court ruled against the grocer's group, h and the decision was upheld by the Appeal Court. introduced to prohibit price differentials between categories of consumer sales. These attempts are mentioned here merely to emphasize that a firm legal basis for the present program does not guarantee its indefinite continuance in its present form. Current implementation of the pro- gram, and its relationship to relative prices to producers within and among competing supply areas, are discussed in Section IV. The possibility of major changes in procedures, or even the revo- cation of the entire program in favor of an alternative system, means that the in- fluence and future of the institutional pricing program must be weighed care- fully in predicting future shifts in sources of supply. THE DEMAND STRUCTURE OF THE LOS ANGELES MILK MARKET The demand structure for milk at the farm level is more complex than a sim- ple relationship between prices of the product and quantities buyers are willing to buy. Purchasing firms use fluid milk in a number of final products, including manufactured products. The demand for fluid milk by a group of firms is further complicated by the fact that not all of the milk qualifying for fluid consump- tion can normally be used for that pur- pose, because of the unsynchronized movements in supply and demand. Number of Firms The number of milk dealers, or dis- tributors, has sharply declined in most milk markets in recent years, particularly among firms with small daily volumes. As a consequence the average volume per distributor has increased — a trend that has been further encouraged by increas- ing total valume in most major markets. Large-volume milk processing and dis- tribution plants have lower unit costs than small plants which may help explain the exit of smaller firms and the consoli- [15] elation of output among fewer and larger plants. The total number of plants in Cali- fornia decreased steadily throughout the period 1951-1957 (table 1), particularly those with daily sales of 150 gallons or less. Gains were registered in all size groups selling more than 250 gallons, with only one exception. The tabulation shows the number of fluid milk plants classified according to average daily sales in December. The number of plants is shown rather than number of firms since individual plants that are units of multi- plant firms are recorded separately. In Los Angeles County the total num- ber of plants increased from 1953. Start- ing in 1954, the number of plants de- clined until there were fewer in 1957 than in 1951 (table 1). Significant in- creases occurred in only two size cate- gories, one being large plants with aver- age daily sales of 5,000 gallons or more. The number and size of plants and firms distributing milk in Los Angeles County in 1960 were tabulated in a spe- cial survey for this study. A total of 125 firms engaged in distributing milk in the county operated a total of 146 plants. Thus, the number of plants is now sub- stantially larger than it was for 1957. The increase in number of firms over previous years is not known. Total sales from plants in Los Angeles County in June, 1959, indicate that 25 firms sold in excess of 100,000 gallons per month, 10 firms sold 50,000 to 100,000 gallons, 17 between 25,000 and 50,000, and 73 less than 25,000 gallons. In terms of the size categories pre- sented in table 1, increases in plant num- bers have been concentrated in the aver- age daily-volume range of 500-5,000 gal- lons. No increase has been noted in number of plants with average daily volumes of more than 5,000 gallons. This is explained by the fact that many of the new plants are operated by single- or multiple-plant firms that specialize in cash-and-carry distribution. Table 1. Number of Fluid Milk Plants According to Average Daily Sales of Fluid Milk in December Year Average daily sales of fluid milk in December (gallons) Under 50 50- 150 150- 250 250- 500 500- 1,000 1,000- 3,000 3,000- 5,000 5,000- and more Total 1951 1952 1953 1954 1955 1956 1957 1951 1952 1953 1954 1955 1956 1057 California 100 57 82 68 88 18 49 95 55 80 56 83 23 49 94 59 73 66 82 27 52 70 51 82 66 77 27 56 64 54 89 74 74 26 61 64 54 92 87 61 28 60 61 51 87 84 67 28 59 Los Angeles County 26 14 27 15 25 6 16 31 18 24 13 25 6 18 28 21 24 19 27 6 18 11 16 26 25 26 5 19 6 16 30 32 23 5 21 11 15 29 35 20 7 20 6 16 26 32 23 3 23 531 483 489 469 477 473 461 140 142 150 133 138 138 130 Source: California Crop and Livestock Reporting Service (A 1951-1957). [16 Type of Ownership and Organization The 125 firms operating plants in Los Angeles County in 1960 fall into three different types of organization and own- ership: regional distributors, coopera- y tives, local distributors. Regional distributors. Thus classified are seven firms, operating eight plants in the county. Their operation tends to be large-volume, but their distinctive feature is that they are part of large corporations operating on a regional or national basis. Each of these firms operates at least one other plant in California, and each has at least one plant in the San Joaquin Valley. The cooperatives comprise two firms, each operating a single plant in the county. The larger of the two, Challenge Cream and Butter Association, is a fed- erated sales organization owned by co- operative marketing associations located throughout the western states. It has eight member associations in California. The other cooperative marketing associa- tion operating a milk plant, Superior I Milk Producers Association, was organ- ized in 1942. Its plant was constructed in 1952. Before that time, it supplied milk to another distributor and owned no processing facilities itself. Local distributors include a total of 116 firms, operating 136 plants. Though most of these firms are quite small, 16 - have average sales volumes that place them in the largest-size category. More- over, 15 of these firms operate two or more plants. But, in the case of either the large-volume or multi-plant inde- pendents, their operation tends to be local, the basis of the present classifica- tion. Four of the distributing firms are owned by the supermarket chains, to which the products are distributed — the so-called "captive creameries." Two of these are wholly owned subsidiaries of ' two large grocery chains. One of these firms is considered a regional distributor since the chain operates other plants in California as well as in other states. The second firm operates only a single plant, and is classed as a local distributor. The remaining two distributing firms of this general type are classified as local dis- tributors; they are firms whose capital stock is owned by several supermarket chains, each of which operates inde- pendently. The firms integrated with retail stores provide low-cost handling for the large- volume outlets to whom they are linked. For example, delivery may be made only once daily to the store loading dock; the milk products are then carried into the store, and the refrigerated cabinets are stocked by store employees rather than the route drivers. Selling costs necessary to obtain and hold wholesale store ac- counts are eliminated, although the firm's brand name may be promoted to establish consumer acceptance. Other firms in wholesale distribution are ex- cluded from placing their products in stores linked to distributing firms in this fashion, unless full product lines are not carried by the "captive" or unless con- sumer preferences for particular brands force the chains to handle selected prod- ucts of other distributors. To counteract loss of wholesale ac- counts resulting from large-volume wholesale outlets becoming affiliated with captive creameries, several large dis- tributors have made substantial invest- ments in supermarkets to gain exclusive rights to supply these outlets. Although the magnitude of sales under tying ar- rangements of these types is not known, they tend to improve the efficiency of the firms, since exclusive supply of large- volume outlets lowers distribution costs. In contrast, remaining wholesale cus- tomers, especially retail food stores, are under pressure to divide their trade among several competing distributors to take advantage of consumer brand pref- erences. These multiple deliveries neces- sarily reduce the average volume of de- [17] livery per customer, thereby increasing available, cash-and-carry sales have distribution costs. shown a slight proportional increase, The importance of captive creameries sales to peddlers have shown little rela- to this discussion stems primarily from tive change, and federal government differences on the supply side rather than sales have shown a small proportional their impact on efficiency of distribution decrease. (Clarke, 1956, pp. 9-13). This is illus- These data must be accepted with cau- trated by the recent addition by one of tion. In the first place, routes of some the captives of approximately 60 retail distributors are "combination" routes; stores to the group to which it supplies hence, it is extremely likely that not all fluid milk products. These wholesale ac- reported sales are properly classified as counts were formerly supplied by other to types of trade. Secondly, the surveys distributors. If the captive firm's pro- do not include all plants in the county; curement pattern for raw product differs hence, the total sales figure is biased from the firms losing the store sales, then downward. In addition, plants excluded the change originating on the selling side are necessarily neither the same in num- is reflected in the buying market as a ber nor identity in succeeding years. 7 "shift" in market supply sources. Sales of plants not included in the sur- veys are primarily small-volume distrib- Sales Outlets utors wnose S8L \ es are largely cash-and- Sales of fluid milk and its products carry. Thus, cash-and-carry sales are by distributing firms have been classified likely to be relatively larger than shown by the California Crop and Livestock in the table, and other categories of Reporting Service as retail, wholesale, sales might also be overstated, cash-and-carry, peddler, and federal gov- By using additional information it ernment. was possible to estimate total sales of Retail sales are home-delivered sales fluid milk of all plants in the county at to final consumers. Wholesale outlets in- about 17,900,000 gallons for June 1959. elude food stores, restaurants, and insti- Percentages of total sales, by type of tutions. Cash-and-carry sales are sales to trade were: consumers at the producer's dairy or the distributor's plant. Sales to peddlers, Wholesale 57 , , L it., . Retail 26 commonly known as sub-distributors, in- Cash-and-carry 10 volve processed and packaged products Peddler 5 for redistribution. Federal government Federal government 2 sales are contract sales for use on mili- wn ., , . tary reservations. While this supports reservations concern- Tr, o c^^-,,1 j j r .1 m & tne accuracy of the data on sales In a special survey conducted for the , b , , / . . . .„ ,., , month of October in each year since *rough alternative outlets, it 1S still hkely 1951, .sales have been tabulated by type that * elr ^ ov " tlme should not be of trade for plants located in Los An- SI S"' ficantl y alte fd. geles County, regardless of the marketing ,. ^ nat " re of oudets of distributors area in which the sales were made (table dlreCtly mflue " ces existln g market SU PW ■ 2). Reported sales increased in every P atternS an , d th , e , ir P* ent ] a } adjustment, year except 1959. As a proportion of For exam P l e > a11 milk sold fob - ranch total sales, retail sales have declined 7 Each distributor who files a monthly statis- markedly. This has been offset by an in- tical re P° rt with the California Crop and Live- crease in the proportional amount of stock fP^ing Service is requested to submit , , , ! l ti i 1 a supplementary report for October of each year wholesale sales, lor the three years in to provide data on sales by type of trade. Com- i which a more detailed tabulation is pliance is voluntary. [18] (cash-and-carry) must be produced at point of sale. By contrast, such factors as weekly and seasonal sales variations and the desire to maintain reserve supplies of market milk to meet these needs en- courage distributors utilizing other out- lets to maintain sources of supply over a wider geographic area. Sales Concentration Concentration, as used in this bulletin, refers to the extent to which a specified number of firms accounts for a given proportion of the sales of the market group. It is concentration in this sense that, according to price theory, is an important determinant of the market power of an individual firm. Other things being equal, the exercise of monopoly power is more likely when a small num- ber of leading firms accounts for a large proportion of the total sales of their market group. Clarke (1956, p. 6) reports that in 1954 the three largest handlers accounted for the following percentages of total sales of fluid milk in the marketing areas indicated: Sacramento 66 Fresno 59 San Francisco 59 San Diego 47 Alameda-Contra Costa 44 Los Angeles 35 This degree of concentration of sales is not unique to California markets, nor is it tending to increase greatly over time. In fact, data for the Los Angeles Market- ing Area for June, 1959, indicate that the three largest distributors again ac- counted for 35 per cent of total fluid milk sales in the area. Thus, although con- centration in this area was already lower than in any other major market in Cali- fornia, it has shown no increase in the last several years. Half of the sales are made by the five largest firms, and the smallest 100 firms account for only about 10 per cent of sales (figure 2) . o t— OS CO o e i> >o f t-J^ OS CO CM CO co * H +» CD 1— * -*-=> t^ 3 CO o 00 OS CO CO iO ■* s OS lO CM CM CO *"* t— > •M £j Eh o O O -t-3 o> «* bjo CO ""5 as •i-i T3 as s ffl> ^H * * * UO CO CM U9 CO Sh tc O o o © Ss < ~e •"*< © U5 115 « * * _' OS tti CO CO ^3 t. »o O 2 ^ ■5 *e O -« •H a Tf 1 OS • fH >o CO tr- * * * 00 OS [a IC CO OS CO s O0 ti <£, CO c* Ph ? CD CM >> +3 CO « cj CO CO CO * * * OS o as lO CO as as cm" O CO CD CO I— 1 t^ CD CM bo i(5 CO OS * * * OS lf5 CO t^ fl *"i < cm" CO o J o US as >» lO lO N * ♦ * as rO as "0 CO OO CO a cm" •f-i s T3 •l-H j3 E U-4 o CO CD _a> i— i c« 3 Cft o *s CM CD CD >> c "m t—t H a C ,Q £ _o cS >a c "cj Eh c3 c 5 J£ -a J g C in — c3 m : cj it s ao J£ r^2 i — ' i i- 1 X £ $ a - 1 C - a ft 3 c cp-O * 0D 100 90 70 - 5 60 O S 50 < H 2 g 40 w 30 20 10 10 20 30 40 50 60 70 80 NUMBER OF FIRMS 90 100 110 120 Figure 2. Cumulative distribution of milk distributing firms in Los Angeles County by per- centage of fluid milk sales in the Los Angeles County marketing area, June 1959. Market Type and Supply Adjustments Although the number of buying firms included in this study is rather large, moderately high sales concentration indi- cates a market with a few large buyers and a substantial fringe of small firms. Mutual interdependence is undoubtedly recognized among the major firms who compete for large segments of wholesale and retail sales. While price theory sug- gests that a market of this type may offer a favorable setting for collusion, entry of new firms is easily induced and likely to be followed by periods of excessive competition, in which large firms at- tempt to consolidate their market position by forcing small competitors out of busi- ness. Enforcement of a minimum resale price program and control of unfair trade practices under state legislative authority has created an economic environment free of this type of structural instability, even in the face of excess industry ca- pacity and continuous entry. Since manipulation of price and non- price variables is highly restricted by institutional controls, making as many sales as possible — in a context of classi- fied pricing, fixed minimum gross mar- gins, and size economies — has become a major short-run objective of distributing firms. The buying firms want to procure a supply of milk which at any time is larger than the minimum required to ensure that all fluid requirements of the market are met. Procurement practices of buying firms [20] become an important factor in the sup- ply of milk forthcoming from a given producing district. Resulting geographic utilization patterns, together with cur- rent pricing and pooling procedures, have an important effect on prices re- ceived by producers relative to other producers and other areas. Net producer prices play an important role in firm decisions at the producer level, including location as well as level of production, and they affect the efficiency with which resources are allocated spatially to the production of market milk. THE SUPPLY STRUCTURE OF THE LOS ANGELES MILK MARKET In 1930, the supply structure in the Los Angeles Market was as follows (Spencer, 1931) : Almost the entire fluid milk supply came from producers within 60 miles of the city (figure 3). Fluid cream above that separated from locally produced milk, was regularly shipped into the market from plants 100 miles or more away. Slightly more than 1,400 dairies, with 80,000 cows, were approved to supply milk to the county (table 3) — 69 per cent of the approved dairies and cows were located in the county itself. In that year, 20 country plants were shipping market cream to Los Angeles. Of these, 7 were in Tulare, 3 each in Kern and Merced, and 2 each in Kings and Santa Barbara, and 1 each in Fresno, Ventura, and Imperial counties. Thus, 16 of the 20 plants shipping cream were in the San Joaquin Valley (figure 4). This situation was a classic example of the specialization of supply zones around an urban market. The most intensive pro- ducing area was in the county itself. Cream and manufactured dairy products were obtained from the outlying valley region. Regular milk shipments from Kern County, in the San Joaquin Valley, be- gan in September 1928 when a firm distributing milk and cream in Los Angeles began to ship milk to the city from a country plant in Kern County, 115 miles away. In December, 1930, another creamery in Kern County began to ship milk to Los Angeles, and a third prepared to do so (Spencer, 1931). Still, the great bulk of the supply for the county was produced in the local area, mostly in the southeast portion of the county and in El Monte, Pomona, Chino, and Ontario to the east, less than 50 miles from city plants. Distances for shipments from the San Joaquin Valley are at least twice that far. Consumption of fluid milk began to drop in 1929, as a result of the depres- sion. This postponed additional adjust- ments in the supply area for Los Angeles in the 1930's. Increased production, in Table 3. Number of Dairies Approved to Supply Milk to Los Angeles County, and Number of Cattle on Approved Dairies by County, 1930 County Los Angeles Orange Riverside San Bernardino Ventura Kern Total Dairies Cattle Per cent of dairies Per cent of cattle 978 105 70 172 2 82 1,409 55,290 5.147 4,498 11,232 391 3,347 r9,905 69 7 5 12 0.1 0.5 Source: Spencer (1931). [21 u c •••• ;• •••• o c W u w « & UJ > s the face of reduced consumption and drastic price decreases, placed the Los Angeles County dairy industry in a sur- plus position throughout the depression and early war years. In 1942, fluid milk deliveries by producers in Los Angeles County were 30 to 35 per cent above the needs of receiving plants. By 1943, mili- tary use and increasing civilian con- sumption led to resumption of shipments from the San Joaquin Valley to Los Angeles. In January 1944, shipments from the San Joaquin Valley were 12 per cent of the total supply for the mar- ket (Weeks, 1945, p. 108). This raised the question of whether the San Joaquin Valley should be looked upon only as a source of supplementary fluid milk for the Los Angeles area, or whether it was to become a competing source for the major supply. Southern California production- consumption balance. Despite great monthly variation and a pronounced seasonal pattern, the deficit of produc- tion of fluid milk in southern California generally increased until 1957 (figure 5). The deficit leveled ofT in that year, in- creased mildly in 1958, and dipped sharply in 1959. The balance is computed monthly by the California Crop and Livestock Re- porting Service for Los Angeles, Orange, San Bernardino, Riverside, San Luis Obispo, Santa Barbara, Ventura, San Diego, and Imperial counties. The figures show the extent to which this entire 9- county area must rely on surplus produc- tion in the San Joaquin Valley to meet its needs for fluid milk. San Joaquin Valley shipments. For the period in which data are available, bulk shipments from the San Joaquin Valley to southern California plants have represented 15 to 20 per cent of total use in the deficit region. As a percentage of use in the receiving region, the ship- ments show relatively little monthly variation, and only a mild seasonal pat- tern. 2,000 1,500 1,000 500 400 300 - 200 100 ULK TRANSF SO. CALIFORNIA FROM THE SAN JOAQUIN VALLEY CLASS 1 USE IN EXCESS OF PRODUCTION, SO. CALIFORNIA i i i | i i 1955 ' ' ' ' I I I l i l I 1956 l I i l l I I I I M 1957 I I I I 1958 1 I I I I I I I 11 1 1959 Figure 5. Monthly deficit of market milk fat in Southern California and bulk transfer from the San Joaquin Valley. Source: California Crop and Livestock Reporting Service (B1955-59). [24] The shipments are larger in any given month than the size of the deficit. In percentage terms, the deficit has varied from 22 to 67 per cent of shipments. The general seasonal pattern in the ship- ments is similar to that found in the consumption deficit; peaks and troughs in the deficit and shipments tend to oc- cur together (figure 6). More detailed data are needed to measure the importance of Los Angeles plants as receivers of Valley shipments. Receipts by Los Angeles plants of bulk shipments of milk and cream from the San Joaquin Valley were tabulated for 6 separate months spanning a 2-year period. A summer and a fall month were chosen for each year, in line with the seasonal variation for shipments ob- served above. Receipts by Los Angeles plants of bulk shipments from San Joaquin Valley plants were found to constitute the following percentages of total Valley shipments to Southern Cali- fornia for the months indicated: October 1956 94 June 1957 97 October 1957 96 June 1958 96 October 1958 92 June 1959 97 These results show that a very high proportion of all bulk transfers of milk and cream from the San Joaquin Valley to southern California is received in Los Angeles plants. Valley shipments are almost entirely plant-to-plant bulk trans- fers of milk and cream. This is in con- trast to much of the Valley milk pro- duction used in the San Francisco Bay • 9,000 8,000 7,000 6,000 5,000 i, \J < HIPMEN &> ff/ ft A/ \j* jj, \J * f r W I DEI 1CIT 1 *" fc p }J p/ p [V K v 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 Figure 6. Class 1 use, production of market milk fat, southern California, monthly, 1950- 1959. [25] Area, which is transported from a pro- ducer's dairy directly to a city plant without first being received at a Valley plant. The Southern Milkshed — Production Adjustment Within the Area The milkshed can be conveniently divided into two broad areas: a local producing region and an outlying Valley region, referred to here as the southern and northern supply regions. The impact of rapid population growth and economic development on milk production in the local portion of the milkshed is discussed in this section. Los Angeles County. The number of dairy cows in Los Angeles County is now about twice as great as in 1930, though there are less than half as many dairy farms. Milk production is the most important agricultural enterprise in the county. Districts of milk production are shown in figure 7 Dairy production in 1930 was widely dispersed throughout the county. The southeastern section was the most im- portant producing area, but the San Gabriel and San Fernando valleys and the southwestern section were also im- portant. By 1950, urban encroachment had forced large-scale movement of dairies from some sections, particularly the San Gabriel Valley and southwestern areas (table 4) . A continuing concentra- tion of dairy cattle in the southeastern district, brought about by an increase in herd size more than sufficient to offset the decrease in number of herds, in- creased the number of dairy cows in the county in 1960 over 1930, even in the face of declining numbers in all other areas except the San Fernando Valley. As population of the county is pro- jected to increase to 9 million by 1975, 50 per cent above 1960, the demand for fluid milk, unless consumption habits will change, will also continue to in- crease. At the same time, further popula- tion growth will intensify economic pres- sures on remaining dairy producers and may force them out of the county. Even though production has increased by 50 Table 4. Geographic Distribution of Commercial Dairies and Milk Cows, Los Angeles County, 1930, 1950, 1960 District Number of dairies Percentage increase or decrease 1930 1950 1960 1930-1960 1950-1960 Southeast 542 284 112 87 14 445 77 50 24 7 358 36 26 15 3 - 34 - 87 - 77 - 83 - 50 -20 -53 Southwest -48 —38 Antelope Valley -57 Total 1,039 603 438 - 58 -38 Number of cows + 179 - 48 - 6 + 32 - 11 27,405 14,300 5,700 4,400 700 69,319 11,075 5,605 5,948 775 76,535 7,430 5,335 5,795 625 + 10 -33 San Gabriel Valley Southwest - 5 - 3 Antelope Valley -19 Total 58,905 92,722 95,720 + 62 + 3 Sources: 1930— Spencer (1931, p. 21). 1950— County of Los Angeles (1951, p. 5). I960— Records of the Los Angeles City Health Department and Los Angeles County Health Depart- ment. [26] Figure 7. Major milk producing districts in Los Angeles County. per cent since 1941, the rate of increase has not been sufficient to match the growth rate of consumption. As a result, areas outside the county have become increasingly important as sources of the supply of fluid milk. Table 5 presents the changing produc- tion pattern for the entire Los Angeles southern milkshed (figure 8), from which Los Angeles plants receive milk directly from producers. Two areas stand out, in their importance as pro- [27] Table 5. Shifts in Location of Production, Los Angeles Southern Milkshed, 1930, 1950, 1960 District S. E. Los Angeles-Orange Chino Valley Mojave River Basin San Jacinto-Hemet Los Angeles, other Orange, other San Bernardino, other. . . Riverside, other S. E. Los Angeles-Orange Chino Valley Mojave River Basin San Jacinto-Hemet Los Angeles, other Orange, other San Bernardino, other. . . Riverside, other Number of commercial dairies 1930 577 117 * 33 497 70 31 1950 497 99 158 35 1960 449 230 13 905 Number of milk cows 29,305 7,600 * 1,500 25,100 3,500 2,000 3,000 77,430 15,000 27,403 101,685 48,810 2,440 4,060 19,185 10,235 5,540 3,675 195,630 Percentage change 1930-1960 - 22 + 98 - 17 - 84 - 36 + 29 - 37 +247 +542 + 171 - 24 +192 +177 + 22 1950-1960 - 10 +132 + 29 + 31 +225 30 * Data not available. Sources: 1930— Spencer (1931, p. 21). 1950— County of Los Angeles (1951, p. 4). 1960 — Health Departments, Los Angeles City, Los Angeles County, Orange County, San Bernardino County, Riverside County. ducing centers and in the changes they have undergone: the southeastern Los Angeles-Orange district, and the Chino Valley district. Southeastern Los Angeles-Orange district. The most concentrated dairy section, number of dairies, number of cows, and production of milk, includes the southeastern portion of Los Angeles County and the adjacent northwestern section of Orange County. The area is economically and geographically homo- geneous; it is close to large Los Angeles plants — 25 miles or less; it is a flat, low- lying plain with an all-year-around tem- perate and equable climate ; and is highly favorable to a stable, high-level produc- tion of milk. Its major disadvantage is its poor drainage, making it susceptible to flooding from heavy rains. The number of dairies in this area has declined moderately since both 1930 and 1950. In contrast, the number of cows has more than tripled since 1930; the increase has not been as sharp since 1950 and was probably highest between 1940 to 1950. Nevertheless, the number of cows in the area has increased by 30 per cent since 1950 — the period of the highest rate of population growth ever achieved in Los Angeles and Orange counties. Chino Valley district. This second- most important producing district in the southern milkshed includes the south- western part of San Bernardino County and the northwestern corner of Riverside County. It is bounded on the south by the Santa Ana River, on the north by the San Gabriel Mountains, on the west [28] by the city of Pomona and the Chino Hills. The district is part of the upper Santa Ana basin, usually called the San Bernardino Valley. The climate is only slightly less desirable than that of the southeastern Los Angeles-Orange area; summer temperatures are higher and winds stronger. Distance from Los Angeles City plants is about 50 miles, but freeway routes minimize additional transport problems. In 1930, the Chino Valley district con- tained 117 dairies and 7,600 cows on commercial dairy farms. By 1950, the number of cows had doubled, the dairy numbers declined to 99. Then, within ten years, the number of dairies more than doubled, and the number of cows more than tripled to 48,810. This in- crease was caused by dairymen moving in from Los Angeles County. Since 1950, the increase has averaged more than one dairy per month, bringing the total num- ber in this district to 230 dairies. Other producing areas. Two other areas, identified in this study, are the Mojave River Basin in the Mojave Desert north of the San Bernardino Mountains, about 125 miles from Los Angeles, and the San Jacinto-Hemet area in western Riverside County, about 90 miles from Los Angeles. Available data to measure changes in these areas are not complete, but both have declined moderately in number of dairies since 1930, while the number of cows has in- creased. Currently, 13 dairies and 2,440 cows are located in the Mojave River Basin, and 19 dairies and 4,060 cows are in the San Jacinto-Hemet area. They are included in this study mainly because of their potential as producing districts. The other producing areas in the southern milkshed cover the sections of the four counties not included in these major areas. At present, there are 80 dairies and 19,185 cows in Los Angeles County outside of the southeastern dis- trict. The number of dairies in this area since 1930 has declined drastically, but remaining herds have increased so that there was only a moderate decrease in number of cows (table 5). The remain- ing sections of Orange, Riverside, and San Bernardino counties total about 114 dairies and 19,450 cows, up from 8,500 in 1930. These tend to be clustered around the larger urban areas in the counties, including Santa Ana-West- minster, Riverside-Arlington, and San Bernardino-Redlands. The Northern Milkshed— Production Trends in the San Joaquin Valley In terms of total commercial milk fat production, the San Joaquin Valley is the most important dairy area in the state. In 1959, it provided 39.5 per cent of total commercial milk fat production in the state — up from 37.7 per cent in 1952. It is followed closely by the southern California region, which pro- duced 35.4 per cent in 1959 — up from 32.6 per cent in 1952. The relative posi- tions of the two would be reversed if only market milk production were con- sidered, reflecting the importance of the Valley area as a manufacturing as well as market milk producing area. How- ever, milk for market uses has increased, both absolutely and as a proportion of total production, while manufacturing milk production has declined in both senses. Dairying, although widespread throughout the Valley, is heavily con- centrated in the Tulare-Hanford-Fresno and Los Banos-Newman-Modesto areas. A smaller concentration is found in the Bakersfield area. On this basis, the Val- ley is sometimes divided into upper (northern) and lower (southern) sub- regions. The lower valley would include the counties of Madera, Fresno, Kings, Tulare, and Kern; the upper, Merced, Stanislaus, and San Joaquin. Shipments of market milk and cream to Los Angeles plants originate from as far north as Modesto, a distance of about 315 miles. 30 Other shipments originate in Bakersfield, a distance of about 110 miles. The bulk of shipments originate in the lower valley area. Type of Production Organization Market milk dairies in California show basically two types of production ac- tivities: 1. Dry-lot — a factory-type operation, wherein all feed is purchased from off the farm; no replacements are raised on the property, which necessitates extensive buying and selling of cows to maintain the milking herd and production level. 2. Pasture — size of herd is dependent on the carrying capacity of the pas- tures on the farm; hay and concen- trates are used to supplement pastures and may be purchased; replacement stock is raised on the farm. The dry-lot type developed first, and is now dominant, in the southeastern Los Angeles-Orange area, and in the re- mainder of Los Angeles County. It re- flects the high land values in this urban- ized area which led dairymen to conserve this expensive input. In the Chino Valley and outlying producing areas in Orange, San Bernardino, and Riverside counties, combination dry-lot and pasture opera- tions are more widespread. Here, some limited acreage is often used for irri- gated permanent pasture or other feed production. But the herd is typically larger than can be supported by on-farm feed production, requiring the purchase of supplemental hay and concentrates. Pasture is used for grazing by dry cows, and perhaps some replacement stock, and some home-grown forage may be avail- able for the milking cows. In both in- stances, the dairyman usually concen- trates his management almost exclusively on milk production. The dairy enterprise in the San Joa- quin Valley may represent only one of several enterprises on a farm, and may or may not dominate. Other enterprises may be related to the production of milk, such as feed production and raising re- placement animals, or unrelated, such as field crops and fruit and vegetable production. Historically, many producers in the San Joaquin Valley developed op- erations of this type. The trend in all major producing districts included in this study is toward some variant of the large, specialized dry-lot operation. Number and Size of Dairies On a statewide basis, the number of market milk dairies has recently de- clined very slowly, from 4,320 in 1953 to 4,146 in 1958. An estimated 1,708 of these were in the San Joaquin Valley, and a further decline to 1,703 in 1959 is reported. (California Crop and Live* stock Reporting Service, C 1958, E 1959) . In 1958, 905 of these dairies were located in the four-county southern area. The size of dairy herd varies signifi- cantly both within and between the two segments of the milkshed. Extremes ob- served in the southern milkshed range from a low of 20 to a high of 1,000 cows per herd. The average size of herd in this region is 216. Average herd size in the San Joaquin Valley is significantly smaller. Moreover, herds in the upper counties of the valley tend to be some- what smaller than herds in the lower val- ley counties. Since published data on numbers of dairy cows on farms do not differentiate between market and manu- facturing milk producers, precise herd sizes for market milk dairies in the San Joaquin Valley are not known. Annual averages for herds included in produc- tion cost surveys conducted quarterly (Bureau of Milk Stabilization, 1959) show 133 and 153 as respective average herd sizes in the upper and lower valley districts for 1959. Although the herds included in these surveys cannot be con- sidered as representative of the valley, the results should be sufficient to indi- cate broad inter-area differences in aver- age herd sizes. [31] In structural terms, even the largest producers are relatively small when com- pared to industry aggregates. For ex- ample, the 10 largest dairies in the south- eastern Los Angeles-Orange district in- clude a total of 7,350 cows, or about 7 per cent of milk cows in the district, and less than 4 per cent of cows in the south- ern milkshed. Results would be similar if concentration were measured in other producing areas. This implies that the number of firms on the supply side ap- proaches the theoretical large-numbers case, wherein each firm produces an in- significant proportion of the total indus- try output. But producers do not sell in a market characterized by pure competi- tion ; in fact, conditions of sale and price determination depart markedly from the competitive model, as will be discussed in Section IV. Producer Organizations Besides the two producer cooperative marketing associations that operate milk plants and are classified as distributors, there are three other producer organiza- tions in the Los Angeles area. Of these, two are cooperative bargaining associa- tions and the other is a general trade as- sociation. The largest of the cooperative bargain- ing associations, the Protected Milk Pro- ducers Association, was organized in 1938. In its current status, the organiza- tion acts as exclusive supplier of milk to the Los Angeles plant of Arden Farms. The organization now has 120 members, located in the four-county southern milk- shed. The second bargaining cooperative, Central Milk Sales Association, is the remnant of an organization formed in 1938, following the suspension of the Young and Desmond acts, as a federa- tion of 10 captive shipper groups. At that time, the organization handled 95 per cent of all milk produced in the Los An- geles area. When the control program was reinstated, the major purpose of the federated organization disappeared. By 1942, membership had declined and the Protected and Superior groups had with- drawn. The association presently has 41 members. It owns no marketing facili- ties, and sells all members' milk to six distributors as bulk unprocessed milk. Some members hold their own contracts, whereas others market their milk through the association. The Milk Producers Council, the gen- eral trade association, was organized in 1949. About 130 dairymen in the south- ern milkshed belong to this group whose main purpose is to represent the pro- i ducers in this area in actions by the Bu- reau of Milk Control. The association finances a cost-of-production survey, and assembles cost data for milk price hear- ings. THE SUPPLY ADJUSTMENT PROBLEM IN THE LOS ANGELES MILK MARKET Los Angeles milk plants currently re- ceive about 95 per cent of their total supply of unprocessed milk and cream from the northern and southern supply areas. The two areas will continue to be the major sources of supply. (See Sec- tion IV for a detailed analysis.) Most of the remaining 5 per cent is drawn from the coastal counties of Ven- tura, Santa Barbara, and San Luis Obispo. Production levels in these three coastal counties are not expected to in- < crease to an extent that would make them an important contributor to the supply for Los Angeles plants. Growth in local consumption will limit surplus production, especially in Ventura and Santa Barbara counties. Also, the limited land and water resources in these two counties are being devoted increasingly to urban and industrial uses, or planted to citrus and vegetables. Favorable cli- mate and natural pasture are influencing ^ production in the Santa Maria area. Even so, the supply of concentrates, sea- 4 sonal shortages in natural pasture, and a [32] scarcity of feed production on irrigated land indicate that the area could not achieve large-scale production increases without imported feedstuffs. In addition, distances to Los Angeles up to 200 miles, compound the locational disadvantages of milk producers in the area. Little more than modest expansions of production for outside markets can be expected in the three counties. However, this area is assuming some significance to the south- ern supply area as a source of replace- ment cattle. San Diego County, being at present both a feed and milk deficit area, is no potential source of supply. In fact, the San Joaquin Valley is currently supply- ing San Diego's deficit requirements. The presence of San Diego as a deficit market minimizes the potential develop- ment of the Imperial Valley as a source of supply for Los Angeles plants. Total commercial milk fat production in Im- perial Valley declined to 988,000 pounds in 1958, from a high of 1,236,000 pounds in 1954 (California Crop and Livestock Reporting Service, 1958, p. 23). Although the Imperial Valley is an important source of alfalfa hay for pro- ducers in the southern milkshed, extreme summer temperatures are unfavorable to milk production and handling. Also, Los Angeles plants are 215 miles away, and San Diego plants only 120 miles; this suggests that any production increase is likely to be absorbed in the nearer deficit market. Thus, within an over-all context of a level of production in California at least adequate to supply its requirements for fluid milk and cream, prevailing raw- product supply patterns for Los Angeles plants are likely to continue. Present supply areas will have to increase pro- duction to meet expanded fluid milk re- quirements, because population and per- capita consumption are expected to grow. The supplies to be forthcoming from the two major competing regions will be affected by these main factors : transport, feed, and labor costs, relative production efficiencies, investments, and alternative resource uses. Also considered must be distributor procurement policies and the state minimum-price control program. III. COSTS AND LOCATION ADJUSTMENTS JVIarket milk production costs for an individual producing unit at any given time are a complex function of: • location of production • quantity, quality, and prices of produc- tive inputs available to the firms • managerial ability of the operator, and • the internal operating efficiency as af- fected by the size of operation and choice of technology. Variations in these factors can lead to production costs that differ among firms or among producing regions. Production costs are difficult to calcu- late and interpret. Joint costs over time, for durable inputs and among products for multiple-enterprises operations, can be allocated in many ways — each as de- fensible and at the same time as arbitrary as the other. As residual claimants on the net income of the farm, operator's labor, management, and owned resources re- ceive returns that are "price determined" rather than "price determining." Long- run volume-cost relationships can be con- fused and combined with rates of utiliza- tion of fixed plants. [33] These factors create serious difficulties for study of changing regional supply re- lationships in a context of empirical cost of production comparisons between com- peting areas based on accounting data. Production costs relevant to area supply adjustments may have little connection with current costs in an accounting sense. This may be equally true for evaluation of the impact of shifting interregional supply relationships on the aggregate efficiency of the industry. A more valid approach involves syn- thesis of production costs for standard operations as a basis for interregional comparisons. Such synthesis uses input- output ratios expressed in physical terms. By applying appropriate rates, the esti- mates of physical input-output relations can be converted to estimates of produc- tion costs. If underlying input-output ratios are constructed on the basis of effi- cient production organization and utili- zation of inputs, then the cost relation- ships so obtained will show the lowest cost that can be attained with the speci- fied production organization and prices of the inputs. So determined, production cost esti- mates will provide a basis for finding the optimum location for a given unit based on cost considerations. In addition, area differentials in production costs can be allocated to underlying differences in resource productivity or geographic vari- ation in input prices. Locational advan- tages or disadvantages of the two com- peting regions can then be evaluated and used as a basis for projecting minimum- cost geographic production and utiliza- tion patterns for the milkshed. PLANT ORGANIZATION, INPUTS AND OUTPUTS A market milk "plant," for the spe- cialized factory-type production devel- oped in this milkshed, consists of a milk- ing barn; a milk house where milk is stored and cooled to await pickup ; a sys- tem of corrals and lanes for feeding, holding, and moving cows to and from the milking barn; auxiliary buildings, such as hay barns, other feed storage buildings, and calf barns; equipment to feed and handle animals, and to clean and maintain buildings and corrals; and fl finally, equipment to extract, cool, and store milk. Feedstuffs used in the production of milk are concentrates and forages, also called roughages. Most concentrates, such « as grains, seed meals, and molasses, are fed in commercially prepared mixtures of several components. Their nutritive content is high relative to bulk; they are usually the most expensive source of nu- trients. Forages, which have a lower nu- tritive content relative to bulk, may be fed as hay or green feed. Pasturing of , forages is common under other than dry- lot types of organization. Hay, usually alfalfa, is the main type of roughage fed to dairy cows in the milkshed. Normally, pasture is used only when it can be pro- duced on the farm. In some cases, fresh chopped alfalfa or other green feed is * fed to cows in corrals to replace some of the hay in the ration. Labor and management are required to coordinate and carry through the pro- duction process. The choice of plant and equipment greatly affects labor produc- ^ tivity; substitution between alternative technologies and labor is possible over a wide range. In addition, herd size and level of production affect the efficiency of labor use within a plant (Phelps, 1960) . The amount of milk produced by a given unit is, of course, a function of the level of output per cow and the num- ber of cows milked. Either of the under- lying determinants may conceivably be varied to adjust the firm's level of output per time period. Cost experiences would A differ with the manner in which output is varied. * [34] Output Per Cow Output of milk by a particular cow is a complex function of feeding and management practices — both past and present — age, breed, inherent productive capacity, and internal physiological fac- tors. External factors such as tempera- ture, humidity, and wind also can influ- ence a cow's production. The average level of output per cow of 10,400 pounds per year, which was used in cited studies as a basis for projecting total cow numbers in California by 1975, was approximately achieved or exceeded in 1958 by DHIA producers in all the important districts in the milkshed (table 6) . This could mean either that addi- tional expansion in production through increased output per cow is limited or that the average level of production fore- cast for 1975 is too conservative. DHIA figures indicate that average output per cow in 1959 increased by at least 5 per cent over 1958 levels in all important producing districts in the milkshed (Cali- fornia Dairyman, 1960, p. 26) . This sug- gests that the 1975 forecast is likely to be substantially exceeded. Production levels in the southern milk- shed generally exceed those in the north- ern region. This may be due to one or more of the following reasons: • The inherent quality and productive capacity of cows milked may differ. • Environment, particularly climatic con- ditions, may differ. • Feeding and management practices may differ. The importance of inherent quality on high production was recognized early by many producers in the Los Angeles area, particularly in dry-lot production. It led to an early emphasis on obtaining high- capacity stock. Of course, dependence on cows shipped in from other areas re- duces the degree of control that the pro- ducer can exercise over the quality of herd replacements. In recent years, herd improvement programs in the San Joa- quin Valley have expanded rapidly. In fact, the common practice whereby the Valley producer establishes an artificial breeding program and raises his own replacement animals now gives him a de- cided advantage in the control of quality of his animals. Recognition of this, and difficulty in securing large numbers of high-quality replacements, has led some producers in the southern milkshed to in- stitute an artificial breeding program and contract for raising replacement ani- mals in outlying areas. Differences in environment may be re- sponsible for different output when ani- mals of the same quality, fed and managed identically, are located in dif- ferent geographic areas. The mild and equable climate in the Table 6. Herd Size Production Levels, 1958 County Northern milkshed Madera Fresno Kings Tulare Kern Southern milkshed Los Angeles Orange Riverside San Bernardino. . Number of herds on test 118 54 236 40 132 29 22 63 Average number of cows per herd 131 152 101 74 165 246 242 164 215 Average pounds milk per cow per year 11.407 10.206 10,182 11,111 11,538 12.816 12,974 12,468 12.198 Average pounds milk fat per cow per year 447.0 410.3 388.4 417.5 440.6 481.3 482.5 476.7 461.3 Source: DHIA Records, Berkeley, California Agricultural Extension Service. [35] southeastern Los Angeles-Orange produc- ing district is ideal for high-level sus- tained production and far outweighs such climatic handicaps as winter rains and unseasonably low temperatures. No other major producing district is so favorably situated. The Chino Valley, though still in the coastal plain, experiences more ex- treme temperatures, both winter and summer, as well as high winds in certain seasons. The high and prolonged sum- mer temperatures in the San Joaquin Valley decrease production and create a problem in sustained year-round produc- tion. Adverse summer influences can be partially offset with various shade and cooling devices. Winter rains present the same problems found in Los Angeles. Feeding rates and composition of the ration are the third reason for regional differences in average production levels. Feeding practices show a pronounced variation in both level and composition of feeding. Currently, concentrates sup- ply about 38 per cent of total digestible nutrients in the local Los Angeles pro- ducing area, with alfalfa hay supplying the other 62 per cent (table 7). With present knowledge, much further in- crease in either total feed input or ratio of concentrate to hay cannot be expected in this area since present levels approach the stomach capacity of the animals (McCorkle, 1960, p. 6). However, recent experimental studies with high-energy rations on other types of livestock may lead to further changes in feeding prac- tices of dairy cows, provided product prices and feed costs make these changes profitable. In the lower San Joaquin Val- ley, the percentage of total digestible nutrients supplied by concentrates has increased in the past three years, to about 26 per cent. It is likely that at least part of this increase in concentrates is a re- sult of heavier rates of feeding associated with the increase in number of dry-lot operations. Feed input-output relationship. For the purposes of this study, a simplified feed input-output relationship is adapted from previous work (table 8) . Underly- ing this synthesized relationship are the following assumptions: The relationship is based on high-quality Holstein cows. Quality of milk cows and feed-conversion efficiency are considered to be uniform in both regions of the milkshed. The Table 7. Relative Importance of Hay, Pasture, and Concentrates in Dairy Rations in Selected Producing Areas in California, Quarterly, 1957-1959 Per cent total digestible nutrients per cwt. of milk Ration 1957 quarter 1958 quarter 1959 quarter 1 2 3 4 1 2 3 4 1 2 3 4 Metropolitan L. A. -Orange Alfalfa hay 65 35 78 22 80 20 64 36 55 25 20 50 30 20 64 36 65 10 25 50 28 22 63 37 66 10 24 66 12 22 63 37 66 8 26 74 5 21 63 37 65 10 25 37 40 23 63 37 65 10 25 45 31 24 62 38 70 5 25 68 10 22 62 38 74 26 80 20 62 38 68 7 25 44 35 21 62 38 66 8 26 44 35 21 62 Pasture Concentrates 38 Southern San Joaquin Alfalfa hay 74 Pasture Concentrates 26 Northern San Joaquin Alfalfa hay 72 Pasture 5 Concentrates 23 Source: Bureau of Milk Stabilization (1957-1959). [36] range of feeding alternatives is highly simplified: the specified ration is com- posed solely of a concentrate mixture of 75 per cent total digestible nutrients (TDN) and alfalfa hay of 50 per cent TDN. In practice, the individual pro- ducer may be able to substitute a wide range of purchased or home-grown com- ponents, especially in the northern milk- shed. Finally, the relationship should not be interpreted as an average for existing operations, but as a production relation- ship attainable with high-quality animals. Number of Cows Nearly instantaneous adjustments in output can be achieved by varying the number of cows milked, as contrasted with the slow output adjustments through higher rates of feeding or improvements in herd quality. The use of this method of output adjustment is facilitated by the large, well-organized market for replace- ment cattle that exists in the milkshed. Output variation through varying in- tensity of plant use involves given pro- ductive facilities which are subject to a greater or lesser degree of short-run in- tensification in use in a rate per time- period sense. For instance, larger barns may offer an opportunity for higher out- put per time period by increasing the number of milkers and milking units. However, some elements of a plant are frequently designed for a definite rate of use. For example, variations in the rate of milking may be limited by the milking equipment or by the limited ca- pacity of the cooling system. In addition, a fixed time element enters the milking process because of the interval required for extraction. Since the feeding of con- centrates is usually considered to be a part of the milking process, the minimum period required for feeding also limits upward adjustments in rate of plant use. Rates in excess of this upper limit, if maintained for a significant period, may lead to physical damage to the animals, and ultimately to reduced output and higher unit costs. On the other hand, more cows can usually be milked in a plant by extending the number of hours of milking per day, maintaining a given rate of operation per hour. Even so, some elements of a plant are usually designed with some upper limit on total herd size in mind. Thus, corrals and feed areas may be con- structed to handle a specified maximum Table 8. Estimated Annual Feed Input-Output Relationship, Los Angeles Milkshed Concentrate feed Hay consumed Estimated milk produced (3.5 per cent) Estimated milk fat produced Pounds 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 11,950 11,750 11,535 11,305 11,060 10,800 10,525 10,235 9,930 9,610 9,275 8,925 8,560 9,400 10,225 10,948 11,559 12,074 12.499 12,874 13,199 13,474 13,699 13,859 13.959 14.011 329.0 357.9 383.2 404.6 422.6 437.5 450.6 462.0 471.6 479.5 485.1 488.6 490.4 Source: Davidson (1960). 37 number of cows. Also, hours of operation may be limited because of limited tank capacity for milk storage or because of sanitation and cleanup problems. In practice, because the various stages of the production process must be kept in harmony with each other, the rate of operation may not be varied too much. However, if milking facilities (through design flexibility or easily alterable ca- pacity) can operate over a range of herd sizes, then output can be increased by enlarging herd size and increasing the hours of operation. As discussed above, bulk-tank capacity or corral and feeding space may place an effective limit on the herd size of a given operation at any time. Approach to Estimation of Regional Production Costs 8 To facilitate interregional compari- sons, costs of production will be com- puted for four standardized operations in each region. Each operation assumes a stanchion barn with 30, 60, 90, or 120 stanchions. Equipment for each plant is chosen to reflect full use of the most ad- vanced technology, including pipeline milking, automatic washers, and auto- matic feeders. Thus, the synthesized plants are not designed to be representa- tive of existing operations in any district of the milkshed. Rather, results of the estimation procedure should be inter- preted as minimum achievable cost levels with the given selection and organization of plant and equipment under specified factor cost rates. Each alternative plant is equipped to handle a milking herd four times as large as the number of stanchions in the barn in a maximum of nine hours of operation, which establishes output capacity for single-shift milking. Output per day in excess of this capacity implies equip- ment changes and operation beyond the 8 For a detailed description of methodology for synthesizing plant cost functions, see French etal. (1956). nine hours available under single-shift operation. The shape of the short-run cost func- tions for each plant will depend on the relationship of all cost variables on a per-cow basis to increases in the number of cows milked. If all variable cost items are constant or decrease on a unit basis as output increases, then the short- run cost curves can be expected to decline con- tinuously to capacity output, because overhead charges associated with the fixed plant are spread over more units. The long-run relationship of unit costs to volume produced can be determined by comparing unit costs for plants of differ- ent sizes. In initial development of production costs, cost rates for the southern milkshed are chosen to represent the southeastern Los Angeles-Orange producing district. Because of the wide variation in cost con- ditions in other districts of this region, the results are modified later to apply to other producing districts. The greater homogeneity of factor cost rates in the northern milkshed makes it possible to derive production costs considered typi- cal for the whole region. Labor Requirements In dry-lot milk production, possible choices between alternative combinations of plant and equipment permit substitu- tion between capital and labor in the production process. The following esti- mate of labor requirements recognizes three factors: choice of technology, size of milking barn, and number of cows milked. The milking process is defined to include preparation, movement of ani- mals, feeding, and cleaning of barn and equipment as well as the extraction of milk. For all plants considered, choice of equipment is designed for maximum effi- ciency in labor use. Labor requirements for milking are synthesized on the basis of one milking per cow for alternative barn and herd sizes (table 9) . Total [38] Table 9. Estimated Milking Labor Requirements by Barn and Herd Sizes, Per Milking Number of cows milked 30-stanchion barn 60-stanchion barn 90-stanchion barn 120-stanchion barn man lours 30 1.4 2.8 4.1 5.2 4.2 6.6 8.6 9.1 10.3 11.6 5.4 9.0 10.8 12.6 14.3 16.2 60 90 120 7 150 180 9 5 210 225 240 12 270 300 315 360 420 : 14.5 17.0 19 5 480 22 Source: Davidson (1960). daily milking labor requirements can be obtained by doubling the estimates to represent both milking periods in a single-shift operation. Labor requirements per cow for each barn size decline as herd size increases. At constant wage rates, this implies de- creasing labor costs per unit of output with increasing herd size. In practice, because lumpiness of the labor input may require that milking labor be employed in full man-day units, this volume-labor cost relationship may be obscured. It is assumed that the producer, in the long run, will find it possible to synchronize labor requirements with available man- hours, so that all labor is used fully. Note: The labor requirements pre- sented include only the milking opera- tion, and do not explicitly consider out- side labor requirements, such as feeding hay, cleaning corrals, and herd manage- ment. Factors affecting efficiency of labor in outside work include arrangement of corrals and alley, feeding facilities, and type and quantity of machinery and equipment. The amount of this type of labor varies widely in existing opera- tions (Phelps, 1960). Additional labor requirements are estimated to be one minute per day per cow. PRODUCTION COSTS FOR THE LOS ANGELES MILKSHED The preceding section dealt with labor input requirements for alternative plants and herd sizes. An earlier section estab- lished a feed input-output relationship attainable under improved breeding. By introducing regional factor costs, pro- duction costs can be generated for the synthesized plants for each region of the milkshed, and comparisons drawn to in- dicate optimum location on the basis of production costs. Plant Investments and Overhead Costs While investments per cow at plant ca- pacity decline at a decreasing rate with barn size in both regions, investment levels are more than twice as high in the southern milkshed (table 10). Area dif- ferences in investments primarily reflect differences in land values and construc- tion costs. [39] Table 10. Investments by Barn Size and Location, Los Angeles Milkshed (1959 price level) Investment category 30-stanchion barn 60-stanchion barn 90-stanchion barn 120-stanchion barn dollars Southern milkshed 10,260 10,280 24,500 17,270 15,290 33,240 24,210 19,150 40,125 29,600 22,975 Other buildings and equipment J 46,145 Total plant and equipment 45,040 36,000 65,800 72,000 83,485 108,000 98,720 144,000 81,040 675 8,770 10,280 17,400 137,800 574 14,800 15,290 23,740 191,485 532 20,180 19,150 28,660 242,720 Investment per cow at plant capacity . Northern milkshed 506 24,670 22,975 Other buildings and equipment! 32,960 Total plant and equipment 36,450 6,000 53,830 12,000 67,990 18,000 80,605 > 24,000 42,450 354 65,830 274 85,990 239 104,605 Investment per cow at plant capacity . 218 * Milking plant includes a milking barn, milk house, and bulk concentrate tank. t Equipment includes pipelines and other facilities to provide capacity in a single shift for a milking herd four times the number of stanchions. X Designed to handle a herd 25 per cent larger than the number of cows milked. Includes hay barns, water and waste disposal system, corrals and fences, concrete and asphalt paving, and miscellaneous buildings. § Land requirements estimated at 20 milking cows per acre. Costs estimated at $6,000 and $11,000 per acre in the southern and northern regions, respectively. Source: Adapted from Davidson (1960). Costs associated with the fixed plant are defined as overhead costs; they do not vary with short-term variations in rate of output. Costs classified as fixed when no plant changes are planned in- clude interest, depreciation, taxes, and insurance on buildings and equipment. Some charges for repairs and mainte- nance, utilities, and supplies are also incurred if any regular production is undertaken and are included in the fixed- cost category. Though theoretically unrelated to short-period output decisions, overhead costs are significant in two ways for the present study. First, since they are fixed in total, overhead costs necessarily de- cline on a unit basis as short-run output is increased. Thus, they are absorbed best at capacity operations. Second, their pres- ence sharpens a producer's incentive to locate where less capital investment is required per unit of output, other things being equal. Many fixed charges are unrelated to any chronological period but take on the nature of annual commitments because of the institutional nature of their de- termination. This is usually true of in- terest charges when they are contractual rather than inputed — reflecting external financing of investments in plant — and of insurance and taxes. All are estimated as annual costs and expressed as a con- stant with changes in herd size (table id. [40] Table 11. Estimated Annual Overhead Costs by Barn Size and Location Item 30-stanchion barn 60-stanchion barn 90-stanchion barn 120-stanchion barn dollars Southern milkshed Interest* Depreciation! 3,511.20 2,007.40 450.40 2,403.10 150.00 6,294.00 2,918.00 658.00 4,134.00 300.00 8,894.50 3,671.80 834.85 5,744.55 450.00 10,024.50 4,342.05 987 . 20 7,281 60 Other|| 600.00 Total 8,522.10 1,753.50 1,678.70 364.50 849.00 150.00 14,304.00 2,334.90 2,463.90 538.30 1,316.60 300.00 19,685.70 3,119.70 3,092.30 679.90 1,719.80 450.00 23,235.35 Northern milkshed Interest* 3,858.20 3,666.75 806.05 Taxes and insurance! 2,092.10 Other|| 600.00 Total 4,795.70 6,953.70 9,061.70 11,023.10 * Computed at 6 per cent on average investment, which is assumed to be one-half of the initial investment in plant and equipment plus the investment in land. t Milking plant is depreciated at 3 per cent of original cost per year, milking equipment at 7 per cent per year, and other buildings and equipment at 4 per cent. t Computed at 1 per cent of investment in plant and equipment. § Estimated at 3 per cent and 2 per cent of total investment, southern and northern milksheds, respectively. || Includes fixed portion of supplies and utilities computed at $5.00 per stanchion. Source: Adapted from Davidson (1960). Direct Production Costs About 85 per cent of total production costs of market milk can be considered' variable on a per-cow basis; feed alone usually accounts for at least 50 per cent of total production costs, and labor costs are usually about 20 per cent of the total. Also discussed are replacement costs, and other direct costs such as cow taxes, breeding and veterinary charges, and parts of utilities and supplies. Feed costs. Given the basic input- output relationship, and prices, feed costs per unit of output depend on the rate of feeding and the proportions in which concentrates and forage components are combined in the ration. Optimum feeding levels and combinations of components can be expected to vary with relative prices of the feedstuffs, and with prices received in the sale of the product. Pro- duction per cow is in turn affected by these factors, since heavier rates of feed- ing and/or higher proportions of concen- trates would be expected to increase pro- duction per cow, all other things being equal. To simplify determination of produc- tion costs, rates of feeding and propor- tions of concentrates and roughages in the rations are projected for each region. Production per cow is determined ac- cording to the feed input-output rela- tionship. Feed costs per hundredweight of milk are derived by applying regional costs of the ration components. Since the southern milkshed is a feed- deficit area, it is often concluded that all feed costs are higher. Hay prices are higher, mostly because hay needs to be transported into the southern milkshed from surplus producing areas such as the San Joaquin Valley. But prices for con- centrates are significantly lower than in the northern milkshed (table 12) prob- ably due to nearness of ocean ports, where ingredients from foreign and domestic sources can be received, large-volume de- liveries with short hauls, and intense com- [41 Table 12. Costs of Hay and Concentrates by Area, 1957 1959 (dollars per ton, f.o.b. dairy) Year 1957. 1958. 1959. Quarter Metro. L. A. -Orange Southern San Joaquin Alfalfa Concentrate Alfalfa Concentrate 35.00 65 00 31.00 70.00 32 00 62.00 24 00 68.00 29.00 60.00 23.25 64.50 33.00 57 00 28 00 63.00 32.00 57 00 27 00 62.00 32.40 57.00 28.00 62.00 31.00 59.00 24 00 62.00 31.00 61.50 26.00 64.00 34.00 66.25 27.00 70 00 33.00 64.50 27.00 67.50 32.00 63.00 28 00 65.00 34.25 63.00 31.33 65.50 Source: Bureau of Milk Stabilization (1957-1959). petition among feed dealers (McCorkle, 1960, p. 7). Since large-scale producers in the southern milkshed can be expected to continue to import large quantities of hay from other areas in the future, hay price differentials will continue to favor producers in the northern milkshed. Re- spective prices of $35.00 and $27.00 per ton are assumed, the differential reflect- ing approximately the current cost of transporting hay into the southern milk- shed from the northern region. Wide- spread use of pelleting or wafering tech- niques may reduce this differential un- less savings in transportation, waste and shrinkage are offset by pelleting costs. For concentrates, prices should con- tinue to favor producers in the southern milkshed, but by a decreasing relative margin. As production in the southern milkshed continues to be dispersed from the Los Angeles metropolitan area, the increased hauls can be expected to in- crease prices at the dairy. At the same time, continued adoption by feed com- panies in the northern milkshed of the large-volume processing and bulk-haul- ing techniques developed in the southern milkshed should contribute to a greater equality of relative prices. The respec- [ tive prices assumed in this study are $62.00 and $65.00 per ton. The northern milkshed has an abso- lute advantage in feed costs per unit of milk produced at all levels of feeding and feed costs considered relevant (table 13 ) . Tlif relative advantage of the north- ern region ((((lines, however, as the pro- portion of concentrates in the ration in- creases, reflecting the underlying re- gional price patterns for the ration com- ponent-. It now remains to specify regional feeding rates, to which will correspond feed costs per unit of output. This is an optimizing problem of great importance in itself. Since feeding rates that would minimize costs for any level of output depend on the price of the product as well as the input-output relation and feed prices, their derivation was not attempted here. It is assumed that the current yearly level of 4,500 pounds of concentrate per cow will be approximately maintained in the southern milkshed, together with a consumption of 9,610 pounds of hay. Corresponding milk production is 13,699 pounds. For the northern milkshed, 3,000 pounds of concentrates allows for an upward adjustment in the current level of feeding, and 10,525 pounds of 42] hay are assumed. This combination re- sults in 12,874 pounds of milk. This specification of constant feeding rates greatly facilitates the computation and interregional comparison of production costs, but the validity of the results rests in some measure on the accuracy of the projected feeding and production rates. Labor costs. Labor costs are projected using rates of $2.25 per hour in the southern milkshed and $2.00 per hour in the northern region and previously developed physical labor input require- ments. The assumed wage rates reflect a smaller interregional differential than exists currently. Since the existing differ- ential reflects both productivity and op- portunity cost factors, and since the labor requirements synthesized earlier implic- itly assume equal productivity in the two regions, some equalization of wage rates between the regions can be expected, although the opportunity cost factor is likely to sustain a reduced differential for an indefinite period in the future. Replacement costs. Replacement costs arise, cows need to be replaced with new stock after a certain period. Re- placement cost per cow is the cost of a new animal less the salvage value of the cow replaced, adjusted for death loss, and spread over expected years of use. The replacement rate and buying and selling prices are major factors determin- ing replacement cost on a per-cow basis. The optimum replacement rate is essen- tially an investment problem (Faris, 1960, pp. 755-66) . Based on an assumed replacement rate of 33 per cent and a purchase price of $300, salvage value of $150, and adjustments for death losses and calves sold, corresponding replace- ment costs per cow are $45 per year. The assumed replacement rate is con- siderably higher than that currently pre- vailing in the northern region. However, as dry-lot operations spread to the north- ern milkshed, associated heavier culling rates and higher prices where replace- ments are purchased are expected to jus- tify the replacement cost assumed. Other direct costs. This category in- cludes cow taxes, breeding charges, vet- erinary expenses, part of utilities and supplies, association dues, and similar miscellaneous items — all variable with herd size. Tax rates on cows are esti- mated at $10 per head per year in the southern region and $3 in the northern. The remaining categories of direct costs are assumed to total $22 per cow per year in both regions. Plant Cost Curves and Long-run Production Costs The previous analysis has been con- Table 13. Alternative Feeding Rates and Costs per Hundredweight of Milk, Northern and Southern Milksheds Concentrates fed Hay consumed Feed costs Milk produced pounds 2,000 2,500 3,000 3,500 4,000 4,500 5,000 11,060 10,800 10,525 10,235 9,930 9,610 9,275 12,074 12,499 12,874 13,199 13,474 13,699 13,859 Source: Basic data taken from tables 9 and 13. [43] cerned with estimating cost rates for fixed and variable factors for given barn sizes, when output is varied by varying the number of cows milked. This infor- mation also provides a basis for investi- gating the long-run relationships of costs and output in the milkshed. For each specified barn size and asso- ciated plant and equipment, short-run curves can be derived showing the re- sponse of unit costs to volume. These curves are expected to decline with vol- ume increases until capacity is reached, where capacity is the level of output asso- ciated with a number of milking cows four times as large as the number of stanchions for each alternative barn size. From these individual plant curves the economies-of-scale curve or long-run- average-cost curve can be approximated for the two producing regions. The latter curve indicates the size of plant that of- fers minimal unit costs for each level of output. Its shape in relation to volume indicates to what extent larger plants, offering greater capacity, can realize as low or lower unit costs than smaller plants, under the same restrictions with respect to hours of operation per day. Average costs of production by barn and herd sizes and region are given in table 14. (For details see Appendix B.) From these volume-cost data are derived approximations to the long-run average cost curves for each region (figure 9). Interregional differences are reflected in levels of the curves rather than shapes, so the same conclusions with respect to the presence of economies of scale are applic- able to both. For the range of barn sizes considered, larger plants, when operated at design capacity, offer the possibility of achiev- ing average costs as low as for any other plant size, and lower than the smallest plant included in the analysis. On the other hand, higher costs per hundred- weight of milk would occur for any large plant operated at less than the capacity level of the next smaller plant. Though economies of scale are shown to be mod- erate in the range of plant sizes con- sidered, there is no indication of the presence of diseconomies that might cause the long-run cost curves to turn up. Thus, for the range of output considered, approximately constant long-run average costs of production are indicated after initial economies are exploited. Regional Production Cost Differentials Average production costs for all plant and herd sizes are lower in the northern milkshed than in the southern. One im- portant source of this differential lies in Table 14. Average Costs of Production, by Barn and Herd Sizes and Region Number 30-stanchion barn 60-stanchion barn 90-stanchion barn 120-stanchion barn of cows milked Southern milkshed Northern milkshed Southern milkshed Northern milkshed Southern milkshed Northern milkshed Southern milkshed Northern milkshed dollars per hundredweight, 3.5 per cent milk 30 5.59 4.52 4.10 3.96 4.30 3.66 3.37 3.31 5.46 4.40 4.05 3.88 4.15 3.52 3.31 3.22 5.25 4.34 4.03 3.88 3.97 3.47 3.30 3.22 5.04 4.24 3.98 3.87 60 90 120 3 88 180 240 270 360 3.44 3 33 480 3 21 [44] 6.00 5.00 - .00 3.00 - t A. SOUTHERN MILKSHED COSTS FOR FIXED PLANTS — — r-^ ■. LONG-RUN COSTS < * 5.00 4.00 3.00 — 2,000 3,000 4,000 QUANTITY (1,000 LBS. PER. YEAR) B. NORTHERN MILKSHED 6,000 COSTS FOR FIXED PLANTS X LONG-RUN COSTS I I 1,000 2,000 3,000 4,000 QUANTITY (1,000 LBS. PER. YEAR) 5,000 6,000 Figure 9. Long-run production costs by region, Los Angeles milkshed. (Source: Appendix B, Tables 1-4) the fixed costs, since investment require- ments for identical plant organization and equipment are only about half as large in the northern milkshed as in the southern district, reflecting construction cost and levels of land values. In addition, unit costs for feed and labor are lower in the northern region. The relative advantage of the northern milkshed is greatest at lower volumes for each plant size, and least for capacity operations. The variation is from about 75 to 85 per cent of costs in the southern region for comparable northern opera- tions. This primarily reflects the fact that higher fixed costs in the southern milkshed are best absorbed at capacity operations. [45] A brief summary of some of the major assumptions underlying the synthesis of these cost data aids in interpreting the results. A basic feed input-output rela- tionship is assumed, representing attain- able feed conversion with high-quality stock. This relationship is applied in both regions, which implicitly assumes that cow productivity is the same in both re- gions. Thus, environmental conditions are not reflected in interregional productiv- ity, and differences in output per cow are explained solely by feeding practices. In reality, output per cow decreases in peri- ods of prolonged high summer tempera- tures in the northern region. Decreased production per cow, as well as any man- agement practices followed in efforts to mitigate the decline, would result in some increase in costs per unit of output, and perhaps modify the conclusions reached above with respect to interregional pro- duction cost differentials. All output increases are obtained by increasing the number of cows milked, which implies that marginal feed costs for output increments are constant. Ar- bitrary feeding rates, considering the further spread of drylot production to the northern milkshed and regional differ- ences in prices for concentrates and hay, are used to establish production per cow. Finally, capacity for each alternative plant is limited to a milking herd four times as large as the number of stan- chions in the barn. This is assumed to represent plant capacity for single-shift milking, with a maximum of 9 hours of operation per day. Output increases be- yond the specified herd size would re- quire organizational and equipment changes and extension of hours of opera- tion to double-shift milking. TRANSPORT COSTS Before conclusions can be drawn about least-cost location, it is necessary to de- termine to what extent regional produc- tion cost differentials are offset by costs of transporting the product. Again, the problem is one of estimat- ing "efficient" levels of costs for milk transport by production location under technological conditions expected to pre- vail. Transport costs considered include those associated with the movement of milk from the alternative supply regions until it is received at a Los Angeles plant. Bulk transport of milk from farm to plant prevails in all producing districts in this milkshed, and no important changes in this system of transport are anticipated. Factors that influence trans- port cost rates include distance from farm to plant, and production density. Since the fixed time elements involved in load- ing and unloading do not vary with farm- to-plant distances, transport costs are ex- pected to increase with distance at a de- creasing rate. The density factor reflects both the number of producers in a given area and the volume per producer; to- gether, these determine the distance and number of stops necessary for full load- ing of a tank truck. Daily and seasonal stability of production in a given area affects the degree of utilization of equip- ment and corresponding cost rates. The current rate for transport of milk by contract carriers to Los Angeles plants from the southeastern Los Angeles- Orange producing district is $.15 per hundredweight. This district is geograph- ically compact and includes a large num- ber of high-volume producers. Moreover, relatively short farm-to-plant hauls, which increase the importance of load- ing and unloading time relative to dis- tance traveled, lead to expectations of only modest savings in cost by a reor- ganization of routes designed to mini- mize total distance traveled. 9 The cur- rent rate is therefore used in this analysis. The northern milkshed presents a more complicated problem. Milk to be shipped to Los Angeles from the northern milkshed is first received at local plants 9 Interview with Mr. Joseph Perumean, Presi- dent, California Milk Transport. [46 and then reshipped to Los Angeles plants. Thus, transport charges are involved both for local assembly — currently $.15 per hundredweight — and for interplant shipments between regions — currently $.45 per hundredweight (Bureau of Milk Stabilization, 1959) . If direct shipments were adopted, whereby milk would move from pro- ducers' dairies to Los Angeles plants with no intervening stops at local plants, it is likely that some economies could be ob- tained over current cost levels, reflecting the elimination of hauls to local plants north of producers' dairies followed by reshipments to the south, as well as han- dling at country plants. At the same time, direct shipments may well require or- ganizational and equipment changes that could partially offset potential savings over current costs (Sosnick and Tinley, 1960). For present purposes, the trans- port cost adopted is $.60 per hundred- weight for shipments from the northern milkshed to Los Angeles plants, though this probably overstates the locational disadvantage of the northern milkshed in terms of product transport costs, under a minimum-cost organization of transport. LEAST-COST LOCATION AND REGIONAL LOCATIONAL ADVANTAGES By adusting unit costs of production to reflect product transport costs by region, interregional comparisons can be made on a basis of total costs f.o.b. Los Angeles plants. Since regional transport costs are specified as constant rates per hundred- weight of milk, their impact on regional cost curves is to elevate them by the amount of the unit cost of transport. For capacity operations with larger plants, relative combined costs in the northern milkshed increase from 83 to about 95 per cent of combined costs in the south- ern milkshed. Thus, while the inclusion of transport costs on the product does not eliminate the absolute cost advantage of the northern region, it does reduce its relative advantage by more than two- thirds. Recognition of regional differences in plant utilization provides an additional significant comparison. For example, a 60-stanchion barn in the southern milk- shed, when used for a maximum herd size of 240 cows, results in average costs of $3.88 per hundredweight, or combined unit costs of $4.03. If a similar size of barn is used in the northern milkshed for a milking herd of only 120 cows, then combined unit costs would be $4.12, or 102 per cent of combined unit costs in the southern region. This indicates that realized regional cost advantages also de- pend on the degree to which plants are used at capacity rates. To the extent that regional cost dif- ferentials reflect higher fixed costs in the southern milkshed, extending hours of operation to double-shift milking offers a possibility of reducing the gap. In many cases, this would require only a relatively small additional investment in terms of a larger bulk tank or more corral space, and may permit overhead costs to be reduced to as little as one-half of what they would be with single-shift operation. Double-shift milking cannot be expected to overcome regional feed and labor cost differentials, however. The general conclusion thus far is that advantages of producing close to the market, initially arising through perish- ability and high product transport costs, have tended to work themselves out and disappear. Adjustments of local pro- ducers to rising factor costs have in- cluded the development of specialized dry-lot operations, dependence on im- ported feeds, and increasing scale of operations to attain high labor efficiency and low unit costs. Currently, the adop- tion of these same productive techniques in the northern milkshed makes it pos- sible for milk to be produced and trans- ported to Los Angeles plants at a lower cost than can be achieved in the original supply area. [47] Thus, regional cost relationships indi- cate that shifts in market supply patterns in favor of the northern milkshed should be forthcoming, with producers in the southern milkshed contributing a con- stantly decreasing share of total market requirements. However, since adjust- ments in industry patterns must reflect decisions of individual producers with respect to location and level of output, as well as decisions of distributors with respect to supply and utilization patterns, demand factors are involved as well as cost considerations. Hence, it is necessary to place firm choices in a maximum-profit framework, where revenue conditions at the producer level are explicitly recog- nized. IV. PRODUCER PRICES, PROCUREMENT PRACTICES, AND LOCATION ADJUSTMENTS Jr rices paid TO producers in the sup- ply areas of the Los Angeles milkshed are not freely competitive but are af- fected importantly by the institutional pricing structure and the contracts that exist between producers and distributors. For these reasons performance of the market with respect to the determination of producer prices may diverge substan- tially from the competitive model and become an important element in firm and regional supply adjustments. The major hypothesis of this section is that supply adjustments in the milkshed are strongly influenced by producer price outcomes, reflecting the nature of price determina- tion and market utilization patterns. Testing this hypothesis will suggest the role of the revenue factor in future ad- justments in sources of supply. DEMAND AND PRICES FOR MARKET MILK AT THE PRODUCER LEVEL The term "derived demand" for com- modities in the buying market at the farm level suggests that producer-level demand is obtained by subtracting aver- age costs of marketing from the schedule of consumers' demand. This concept sug- gests correctly that ultimate demand by consumers is a basic determinant of producer-level demand, and also that marketing costs must be considered in translating consumer demand back to the farm level. These costs represent an important component of the retail price of most farm commodities; fluid milk is no exception, marketing charges usu- ally representing half of the retail store price of a quart of milk. Farm-level demand for milk represents the aggregation of a number of quite separate consumer demands. Important uses for market milk include fluid skim milk, flavored drinks, half-and-half, sour cream, fluid milk, and cream. In ad- dition, substantial quantities of market milk are used — although not required — for cottage cheese, frozen products, and buttermilk. Statistical studies have shown that price elasticity for fluid milk and cream is quite low — somewhat lower than for ice cream and cheese. This implies that the price elasticities of demand for milk at the farm level could vary sig- nificantly depending upon the disposition of the milk of a producer, group of pro- ducers, or area. Also, buyers do not typically play a passive role in the farm-level market for milk. Continuous production and the [48 perishability of milk make it impossible for distributors to bid for their daily needs in an open market, or for pro- ducers to sell their daily production there. This gives rise to relatively stable buying and selling relationships between producers and distributors. At the same time, buyers can be expected to exercise a measure of control over their buying policies and purchase terms, within the limits imposed by market power rela- tions. Quantity, quality, and stability are all features of a raw-product supply that create interdependence between procure- ment problems of distributors and pro- duction practices of producers. Equally important is the fact that de- mand cannot be fully expressed in a single static net price-quantity relation facing producers at alternative locations. Variation within and between supply areas, because of the complex institu- tional organization of the market, makes attainment of such precision practically impossible. The income position of an individual producer through time de- pends importantly on such factors as past level and stability of production, product quality, plant transport and handling deductions, and technical as- sistance by plant fieldmen. All these factors, plus future expectations about contract provisions, enter into the pro- ducer's determination of his present out- put. Producer-Distributor Contracts The California milk control program requires all stabilization and marketing plans to contain a provision that dis- tributors shall not purchase more than 200 gallons of market milk monthly from any producer or association of producers without a prior contract. Required pro- visions of the contract include: • Amount of fluid milk to be purchased for any period • Quantity of such milk to be paid for as Class 1 • Price to be paid for all milk received • Date and method of payment • Charges for transport if hauled by the distributors • Proviso to the effect that the producer shall not be obligated to deliver milk to be paid for at, or less than, the minimum price for Class 3 milk The contract amount, usually called the "quota," or "base," may be specified in terms of volume of milk fat and skim milk components separately. If the con- tract base is stated in terms of milk fat only, the quota for skim milk is specified to be that amount contained in sufficient whole milk to account for the milk fat quota, on the basis of the average monthly test of all milk received from the producer involved. Similarly, the quantity of milk to be paid for as Class 1, usually called the "Class 1 guarantee," may be stated separately for milk fat and skim milk, or for milk fat only, in the above manner. The code further provides that pro- ducer contracts may contain other pro- visions as long as they are not in conflict with the control legislation. Other pro- visions found in some contracts include: • a requirement that all milk must meet the standards for Grade A milk pre- scribed by the State of California, all local authorities, and those established by the distributor as to flavor, odor, sediment, bacterial count, temperature, solids-not-fat, and foreign materials • proportional reduction in Class 1 guarantees if deliveries for a given month are less than the contract amount • reduction in the contract amount if a producer's actual deliveries for a specified period are less than the con- tract amount • purchase of all milk produced by the producer's herd • termination of the contract in event of a "substantial change" in operation of the milk control law • mutual permission for the producer to check weighing and testing, and for [49] the distributor to inspect premises and take samples • diversion of excess milk directly to manufacturing plant, instead of going to the fluid milk plant first to become part of the plant payment pool • prohibition of producer membership in or affiliation with any producer organization engaged in handling, sale, or marketing of milk and/or with authority to negotiate terms of sale of producers' milk • specification that the contract is not assignable, and written permission of the distributor is required for its transfer Determination of Net Producer Prices The income position of the producer must be stated in terms of net product prices which are quite different from, though related to, minimum f.o.b. plant class prices. Net prices are determined both by the percentage of total produc- tion of milk paid for in the various classes and by the deductions that dis- tributors are authorized to make. The type of pooling system adopted in California markets affects producer prices directly. A pooling system is a necessary adjunct to any classified pric- ing program. It denotes an averaging process on some prearranged basis for distributing the proceeds from sales of milk to dealers at different prices. Except for producer associations, which are free to determine their own pooling arrangements, the system in California is basically individual plant pooling operated within the framework of producer-distributor contracts. Es- sentially, each producer participates in three separate "pools." Milk delivered to a plant within the Class 1 guarantee goes into the first pool. All of this milk (or milk fat and skim milk if contracted for and priced separately) is paid for at Class 1 prices. The third pool is com- posed of all milk shipped to a given plant that is in excess of the contractual base of each individual shipper. This pool is made up of milk over base with respect to the total contractual amount, not the Class 1 guarantee. Class 2 and 3 utilization of the plant is first applied to milk in the third pool, often called the "surplus" pool. The second, or inter- mediate, pool is made up of producer shipments to a given plant that are in excess of the Class 1 guarantee but within the contract base. To this second pool, and subsequently the third, is applied any Class 1 utilization of the plant not accounted for in the first pool. Thus, for shipments in excess of Class 1 guarantees, payment is on a usage basis, except that no overbase production is paid for at Class 1 until the plant's Class 1 utilization exceeds aggregate within-quota receipts. Minimum class prices for use in de- termining producer payments are es- tablished by the control authority and specified in the applicable stabilization and marketing plan, as determined by area of use of a producer's milk rather than area of origin. It is widely recog- nized that standards contained in the control legislation for setting minimum prices are far from specific; they are statements of general intent, providing only a broad frame of reference and requiring liberal administrative discre- tion in their application. (Clarke, 1955, pp. 63-75). A specific provision in the legislation requires that prices established for surplus uses (Class 2 and Class 3), less authorized deductions, must not be >» lower than f.o.b. ranch prices being paid for manufacturing milk. In the past, this provision has been applied in such a way that Class 2 and Class 3 prices were identical in each marketing area and based directly on manufacturing milk prices. In the summer of 1959, minimum prices for Class 2 milk in 21 marketing areas, including all San Joaquin Valley counties, were increased by $.002 per pound milk fat and $.20 per hundred- weight skim milk above the established minimum prices for Class 3 use. The lat- [50 ter continues to be directly related to prices for manufacturing milk. Class prices are established on an f.o.b. -plant basis. The law further re- quires that the stabilization and market- ing plans establish the maximum deduc- tions that can be charged for transport when the distributor transports milk, or contracts for its transport, from the producer's dairy. Maximum deductions for other services performed by the distributor are also required to be es- tablished, including charges for receiv- ing, refrigerating, separating, and ship- ping milk or cream from a country plant, and installing and/or maintaining holding tanks at the producer's dairy. An example may clarify determina- tion of blend prices to producers under the combined individual plant pool- contract system. Suppose producer A has a contract base of 3,000 gallons of milk per month — the normal accounting period — and a Class 1 guarantee of 2,700 gallons per month. Producer B has a contract for 2,000 gallons monthly but his Class 1 guarantee is only 1,000 gal- lons. Each of the two producers ships to the same plant; shipment during the last month is 4,000 gallons of milk by each. The milk shipped within their respective Class 1 guarantees — 2,700 gallons for A and 1,000 gallons for B — is placed in the plant's first pool. This milk is always paid for at Class 1 prices, regardless of the plant's use. Shipments that are "over- contract"— 1,000 gallons for A and 2,000 gallons for B — are placed in the plant's third pool. Surplus use by the plant is allocated first to this pool. Milk shipped within base, but in excess of the Class 1 guarantee, goes into the second pool — 300 gallons for A and 1,000 gallons for B. Class 1 use by the plant that is not accounted for in the first pool is allo- cated, in turn, to the second and third. When the entire Class 1 use by the plant has been allocated, the remainder of the milk is paid for at surplus prices. The example shows that the blend price for each producer depends on use by the plant to which he ships as well as the provisions of his own contract and his total shipments. The Class 1 guaran- tee establishes the lower limit to the amount that must be paid for as Class 1, even though Class 1 use by the plant falls short of its aggregate guarantees. If this were the case for the example above, A would have 2,700 gallons and B 1,000 gallons paid for at Class 1. Re- maining shipments of both — 1,300 gal- lons for A and 2,000 gallons for B — would be paid for at Class 2 and 3 prices. At what may be regarded as the other observable extreme, total Class 1 use by the plant may equal or exceed the aggre- gate contract base, i.e., the combined first and second pools. In this case, A would have at least 3,000 gallons paid for at Class 1 and not more than 1,000 at surplus prices; B would have 2,000 gallons Class 1 and 2,000 gallons surplus. A great variety of situations are pos- sible, especially since milk fat and skim milk may be priced separately, Class 2 and Class 3 price may not coincide, and various levels of base and shipments exist. The above example, however, illus- trates the method of pricing milk to pro- ducers, and the factors that affect blend prices; namely, Class 1 guarantee, con- tract base, amount shipped, and plant utilization. The determination of the blend prices to an individual producer is shown graphically in figure 10. Assume that Class 2 and 3 prices are identical, and that the producer receives the Class 1 price, P 19 only on the minimum guaran- teed amount, Q lm For this situation, the average revenue curve relevant to the individual producer is P X P. It is hori- zontal up to the guaranteed quantity, kinked downward at that point, and de- clines asymptotically to the price level for surplus uses, P 2 _ 3 . In turn, if it is assumed that the producer received the [51] minimum Class 1 price for the entire contract amount, Q c , then P X P' is the relevant average revenue curve. Here, the kink occurs at Q c and the curve again declines asymptotically to the P 2 _ 3 level. The average revenue structure for the individual producer will always be kinked downward at the quantity paid for at Class 1. We have seen that this amount depends on total Class 1 use by the plant as well as the Class 1 guarantee and contract base for the individual producer. Thus, the expected revenue structure depends on the producer's ex- pectations as to the total amount of milk for which he will be paid Class 1 prices in addition to his decision as to the total quantity to be produced. Assume that the producer ships the amount of his contract, Q c , and expects to receive Class 1 only on the guaranteed amount, Q t (figure 10). He receives a blend price of P b . What if he subsequently is paid Class 1 on a larger amount, Q/? The effect is to raise the blend prices from P b to P a , the latter determined with refer- ence to the revenue curve P-lP" and the quantity Q c . Shifts in expected revenue structures, as a result of changing ex- pectations about the amount of milk for which the Class 1 price will be paid, are termed horizontal revenue shifts. The above discussion considers only the determination of blend prices. An additional step is necessary to arrive at net producer prices, which cannot exceed but may be less than blend prices. Net producer prices equal blend prices less deductions that distributors are author- ized to make for transport and handling services provided. The effect of these deductions is to shift downward the net average revenue structure of the pro- ducer. If the deduction applies to the total quantity of milk shipped, as is the case for farm-to-plant transport charges, then the entire average revenue curve shifts downward and net price is below the blend price by the amount of the deduction. If the deduction applies to less than the total amount shipped — for P ($/cwt.) p, ^ 2-3 £b I i-^^H^^^E^^ i i i i i i i i i i i i i i i i i i i i i 1- 1 -L- > o Figure 10. contracts, Q. Q'x Qc Q (cwt. /month) Determination of blend prices for a producer under California classified pricing, plant-pooling, and f .o.b. plant prices. [52] example, the quantity paid for as Class 1 — then only the upper part of the reve- nue curve is affected, and the net price is reduced below the blend price by less than the unit amount of the deduction. Shifts in expected net revenue structures due to deductions for distributor services are termed vertical revenue shifts. The stability of producer revenue structures clearly depends on plant use and class prices. The policy has been that minimum class prices established are lower in the spring and summer (March-August) than in the fall and winter (September-December), reflect- ing seasonal movements in feed costs. All other factors being constant, this policy gives rise to corresponding vertical shifts in revenue structures. Some plants experience definite seasonal patterns in amount of Class 1 use, which are trans- mitted to their shippers as horizontal shifts in revenue structures. In addition, some unexpected changes in class usage may occur which result in realized blend prices which are different from the ex- pected prices. Throughout, reference has been made to average revenue structure rather than to demand structure. In a static situation, these are identical, and show price- quantity combinations realizable by the selling firm. The dynamic aspects of the relations between buyers and sellers in the price-making process being described are such, however, that minimum and/or maximum limits may be placed on the amount of milk a firm can produce in a given period without jeopardizing its future market position. The effect of this may be to void certain portions of the average revenue curve when viewed by a producer as a demand curve for the purpose of realistically choosing the optimum level of output over time. In the case of producer cooperatives, established minimum class prices apply to sales of the cooperative to its cus- tomers, and each association is permitted to formulate its own system for allocat- ing revenues to individual producer- members. Not unexpectedly, cooperative groups exhibit many of the character- istics discussed above, sharing sales pro- ceeds on the basis of established quotas and differential prices for within-quota and over-quota shipments by producers. Interregional Differences in Net Producer Prices Average prices received by producers in the southern milkshed consistently exceed average prices received by pro- ducers in the northern milkshed by more than the additional transport costs. Fur- thermore, the gap between the observed price differentials and the "efficient" dif- ferential has tended to increase in recent months (table 15) . The "efficient" differential is the ad- ditional cost of transporting milk to Los Angeles plants from the northern milk- shed above the farm-to-plant transporta- tion costs in the southern milkshed — about $.45 per hundredweight of milk. Referring again to the economic model developed, equilibrium prices to pro- ducers in the two supply regions would reflect the equation of aggregate demand and aggregate supply in both regions, and would differ by the additional trans- port costs. Existing regional price dif- ferentials reflect the "efficient" differen- tial only imperfectly. Using data obtained in the survey of plant reports, average net prices to pro- ducers were computed on a county basis to expose interregional differences. The plant reports show total payments to pro- ducers, less all deductions for transport and handling charges. Dividing this figure by producer receipts gave the average net price per hundredweight paid to producers by the plant. These prices were weighted by plant receipts from each county to give an average net price received by producers in the county (table 15). In turn, these weighted aver- age prices were adjusted by average milk-fat percentages to remove variations [53] Table 15. Average Prices Paid Producers for Market Milk in Selected Months, by County Southern milkshed Northern milkshed Month Los Angeles County Orange County San Ber- nardino County River- side County Kern County Kings County Tulare County Fresno County Madera County dollars per hundredweight, average Oct., 56 5.14 4.71 5.11 4.71 5.09 4.89 5.12 4.69 5.10 4.67 5.06 4.82 5.16 4.72 5.16 4.70 5.90 4.82 5.14 4.68 5.12 4.66 5.03 4.82 4.77 4.17 4.72 4.00 4.75 4.13 4.40 3.66 4.10 3.53 4.09 3.66 4.34 3.68 4.14 3.56 4.20 3.65 4.61 3.88 4.33 3.75 4.35 3.91 4.40 3.72 Oct., 57 4.19 3.75 Oct., 58 4.38 3.92 dollars per hundredweight, 3.8 per cent milk fat basis Oct., 56 June, 57 Oct., 57 June, 58 Oct., 58 5.36 5.24 5.28 5.28 5.43 5.43 5.32 5.32 5.35 5.24 5.43 5.43 5.28 4.94 5.28 5.13 5.36 5.28 5.32 5.09 5.32 5.13 5.36 5.32 4.83 4.41 4.67 4.33 4.79 4.45 4.37 3.95 4.18 3.95 4.22 4.03 4.41 4.10 4.23 4.03 4.25 4.10 4.64 4.14 4.29 3.95 4.41 4.27 4.48 4.14 4.25 4.07 4.48 4 26 Source: Survey of plant reports. due to that factor. This procedure results in the average prices by county shown in the lower part of table 15. The latter give the most valid measure of geo- graphical price patterns in the supply area. Geographical differences that ap- pear, in both levels and seasonal varia- tions, are due primarily to two factors: areal differences in the proportion of Class 1 and surplus uses of milk pro- duced; and differences in marketing costs, primarily transport and handling charges. San Joaquin Valley producers receive proportionally less Class 1 utilization than producers in Southern California, or in the state as a whole (figure 11). From the standpoint of relative price patterns, more important has been the growing surplus use of Valley milk, which now exceeds 40 per cent. This percentage has not only increased abso- lutely since 1956 but has also increased relative to increases in surplus use in Southern California and in the state. The second factor — marketing charges — relates to the deductions that distributors are authorized to make from minimum class prices. When purchasing milk f.o.b. plant, distributors are author- ized to deduct farm-to-plant transport costs, if the distributor provides, or con- tracts for, transport services. When mar- ket milk is received at one plant and shipped to another for Class 1 use, the cost of this additional transport may also be deducted from producer payments, subject to maximum transport allow- ances established by marketing area of use. Specifically, distributors may deduct additional transport charges for milk received at plants in the northern milk- shed and reshipped to a Los Angeles plant for Class 1 use. In addition, the Bureau of Milk Stabil- ization authorizes deduction of a hand- ling charge when market milk is received at a country plant and reshipped to a city plant for Class 1 purposes. This charge is currently a maximum of $.15 per hundredweight for milk. When milk is separated at a country plant and bulk [54] cream shipped for Class 1 use, the maxi- mum charge is $.035 per pound milk fat. This measurement of regional price differentials is on an average basis, but observed differences can be related to individual firm revenue structures and differentials allocated graphically be- tween horizontal and vertical revenue shifts (figure 12). Let P 1 be the Class 1 price in Los Angeles and let P 2 _ 3 be the surplus price for market milk, assumed to be equal in both supply areas. Let d.sPi be the farm-to-plant transport rate in the southern milkshed. Then, if a pro- ducer in the southern milkshed receives the Class 1 price for an amount Q 1? his corresponding average revenue curve is d s d s . If the producer ships a total quan- tity per period of Q t , he would receive a net price of P s . Now consider a producer in the north- ern milkshed supplying milk for Class 1 use in Los Angeles. Let d v d s represent the additional cost of transporting milk PERCENT 45 40 35 30 h 25 20 15 10 — _.»_ ' * • t i * S. J. VALLEY $ 9 m ■■ ■■ c^*/* * 1 1 1 1 X CALIFORNIA mwm +'* SO. CALIFORNIA 5 - 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 Figure 11. "Other than Class 1" use of market milk fat as a percentage of commercial production in California and in estimated percentages of production in Southern California and San Joaquin Valley, 1950-1959. Source: California Crop and Livestock Reporting Serv- ice, Sacramento. [55 p (l/cwt.) P'v Pv * 2-3 o Q'a Qi Q Q (cwt.) Figure 12. Horizontal and vertical shifts in producer-level average revenue functions, southern and northern milksheds. to Los Angeles and the country-plant handling charge. Then, if the producer receives the Class 1 price for an amount Q/, the relevant average revenue curve is d v d v . If the producer also ships a total quantity Q t , he will receive a net price of P v . If the producers in the two regions receive the Class 1 price for equal amounts, then d v d v ' becomes the revenue function for the producer in the northern region. For equal total production, P V 'P S is the corresponding difference in net prices that would be received by the two producers; it represents that part of the original difference resulting from a verti- cal shift of the revenue curves between areas due to additional transport and handling charges. Similarly, P V P V ' is that part of the original price differential that results from a horizontal shift in revenue structures between regions due to the varying proportions of production used for Class 1 purposes. The nature of the added transport and handling charges, and the extent to which the proportion of surplus use in the northern milkshed exceeds that in the southern, have already been indicated, and provide a basis for a later discussion of alternative methods of bringing inter- regional price differences more in line with the "efficient" differential. The basis for varying proportions of surplus use in the supply areas resides in market supply and utilization patterns, as de- termined by type and location of buying plants and procurement practices and policies of distributors. PROCUREMENT PRACTICES, USE PATTERNS, POLICIES OF LOS ANGELES DISTRIBUTORS Prices for market milk in the supply areas for Los Angeles plants are not de- termined in free markets by impersonal competitive forces; rather, they involve negotiated transactions between buyers and sellers in a complex institutional framework. As such, they may be con- trolled within bargaining limits set by the best alternative available to either [56] party. The present market organization and pricing structure provides an oppor- tunity for buying firms to affect prices in the alternative supply areas in a man- ner not possible in competitive markets. The use of this market power by buying firms is investigated in this section, and its relationship to revenue conditions in the competing supply areas determined. Raw-Product Procurement: Purchas- ing and Concentration Patterns Products for resale can be obtained by a given plant either by purchase of raw product for processing or by interplant transfers of processed and packaged products. The relative importance of these two procurement methods differs by firm and type of product. Generally, fluid products are processed in the plant from which they are distributed, whereas other products are frequently purchased from other plants for resale, particularly by smaller distributors. Some exceptions exist, especially among plants in different areas belonging to the same firm. An- other exception is a cooperative market- ing association in Los Angeles that realizes about 10 per cent of its sales in the form of inter-distributor transfers of processed and packaged milk. Data were not obtained on the amount of movement of processed milk products between plants in this market. Even so, broad, market-wide patterns can be es- tablished by types of products. Few plants in Los Angeles have facilities for the manufacture of dairy products other than ice cream and buttermilk. The pri- mary source of processed products, such as cottage cheese and butter, is plants in other areas. To obtain raw milk received at Los Angeles plants, two general methods are available: direct receipts from producers and bulk transfers of milk or cream from other plants. Direct producer receipts. During June 1959, the 142 Los Angeles plants received a total of 176,937,000 pounds of milk directly from producers located in nine different counties (table 16) . More than 60 per cent of direct receipts came from producers located in Los Angeles County. There were also sig- nificant percentages of direct receipts from the other three counties making up the southern milkshed. Small amounts were received from producers in five additional counties, but these represented less than 3 per cent of total direct re- ceipts. Direct receipts by Los Angeles plants are shown in Column 3 as a per- centage of market milk production in the county of origin. Only in the case of Ventura County does this percentage for Table 16. County Origin of Direct Producer Receipts of Los Angeles County Plants, June, 1959 County Direct shipments to Los Angeles County plants (1,000 pounds) Percentage of total direct receipts of Los Angeles County plants Direct receipts by Los Angeles County plants as percentage of total production in county of origin 107,671 25,615 27,660 11,278 2,735 919 380 342 337 60.6 14.3 15.8 6.4 1.7 .5 .2 .2 .2 100 Orange 75 San Bernardino 71 Riverside 67 Ventura 56 Santa Barbara 13 7 1 1 Source : Survey of plant reports. [57] a county not included in the southern milkshed approach that of a county so included. This primarily reflects, not importance as a source of supply, but the small total production in Ventura County — almost 50 per cent of which is produced by a Los Angeles distributor and used in its Los Angeles plant. In June 1959, milk was received directly from producers at 143 plants operated by 120 firms, leaving five plants that received no raw product as direct shipments from producers. When firms receiving direct shipments from pro- ducers were classified by the number of producers shipping, distribution was as shown in text table at bottom of page. The 101 firms buying from four or fewer producers accounted for 27 per cent of total direct receipts of Los Angeles plants. With only three exceptions, all of these 101 firms received milk only from producers located in Los Angeles County. For the survey month, these firms re- ceived 40 per cent of the County's market milk production. Since these plants tend to be specialized fluid milk processors, they typically realize 100 per cent Class 1 use for all milk received, except for small operating surpluses. Of the 120 plants operated by the 101 firms buying from no more than four pro- ducers, 114 had dairies located at the same site. In June 1959, these dairies accounted for 26 per cent of market milk production in Los Angeles County. Al- though the dairy herd and processing plant may be under the same ownership, it is not unusual to find separate owner- ships. In the survey month, 80 firms, op- erating 90 plants, obtained their entire milk supply from dairies located on the premises; this involved 15 per cent of Los Angeles County production. These operations are largely cash-and-carry and milk production is closely geared to the Class 1 needs of the plant. Moreover, pro- ducers receive f.o.b. -plant prices since no local transport is involved. Thus, for pro- duction in this category, net prices to pro- ducers can be expected to approach the minimum Class 1 price established by the state. For the 19 firms with plants purchas- ing from five or more producers, the num- ber of shippers per plant ranges up to a maximum of 120. These 19 firms include the seven regional distributors, the two cooperative marketing associations, and 10 local distributors. In total, these 19 firms accounted for 73 per cent of direct producer shipments in the survey month. Concentration in the purchase of raw milk is somewhat greater in the Chino district, and fewer firms in total receive milk produced in that area as compared with the southeastern Los Angeles- Orange district (figure 13). In each of the producing regions, however, five firms buy more than 50 per cent of milk produced, and the largest 10 purchasers buy at least 75 per cent. In each area, no plant located outside Los Angeles County ranked among the 10 largest pur- chasers. In these calculations, the total number of plants purchasing milk in the two areas were considered, whether or not they were located in Los Angeles County. Inter-plant transfers of bulk milk and cream. The other source of market milk to be processed and packaged for resale is bulk supplies from other plants. A total of 32 firms operating 34 plants re- Number of Number of plants Number OF FIRMS PRODUCERS Number Cum ulative total Number Cumulative total 1 71 71 71 71 2 22 93 16 87 3 15 108 10 97 4 12 120 4 101 5 or more 23 143 19 120 [58] 100 90 ^r ^> CHINO VALLEY 80 70 60 - l/v. >OUTHEAST I OS ANGELES , ORANGE 50 -II 30 20 10 1 .-...I 1 , L - 20 30 40 50 60 NUMBER OF FIRMS Figure 13. Cumulative frequency distribu- tion of distributing firms by percentage of district production purchased, June, 1959. ported milk or cream receipts from other plants in the survey month. As noted ear- lier, five of these firms received no milk directly from producers; the remaining 27 firms received both producer ship- ments and inter-plant transfers. In total, 2,115,000 pounds of milk fat were re- ported as bulk receipts in milk or cream from other plants, which is 34 per cent as large as direct producer receipts. If bulk shipments and direct receipts were added together to get a total figure for Los Angeles plants' receipts, some would be counted twice because move- ments of milk or cream among Los An- geles plants are also reported by the trans- ferring plants as direct receipts or bulk shipments from other areas. Intra-county plant transfers of milk and cream in- volved 591,000 pounds of milk fat in June 1959. After deduction of this amount, 1,524,000 pounds of milk fat was received as bulk transfers by Los Angeles plants from outside the county. Adding this to direct receipts gives 7,574,000 pounds of milk fat as the total raw prod- uct received by Los Angeles County plants in June 1959. The geographic origins of bulk inter- plant transfers of milk and cream, in ad- dition to intra-county shipments, are southern California, coastal, and San Joa- quin Valley counties. The first includes Orange, San Bernardino, Riverside, and San Diego counties; the second, Santa Barbara and San Luis Obispo counties; and the third, all San Joaquin Valley counties. For June 1959, bulk receipts of market milk fat by Los Angeles plants from these three areas were shown in text table below. Intra-county plant transfers are basic- ally of two types. The first is the irregular movement of milk between plants and be- tween firms to compensate for unpredic- table shortages and surpluses. Milk mov- ing between plants on this basis is not an important element in the procurement patterns of plants concerned. Although in any given month the number of trans- actions may be large, the volume of milk is relatively small. The second type of intra-county move- ment of bulk milk and cream between plants arises when one firm procures raw product from another firm on a regular basis. Five firms obtain their entire sup- ply of unprocessed milk and cream in this fashion. In these five cases, purchases are made from only a single supplier — in each instance one of the two cooperative Los Angeles plant Percentage Receipts of Region (pounds milk fat) total Intra-county 591,000 28 Southern California 86,000 4 Coastal 99,000 5 San Joaquin Valley 1,339,000 63 [59] marketing associations operating plants in the county. In June 1959, purchases of market milk fat by the five firms amounted to 188,000 pounds, or 32 per cent of total intra-county plant transfers. In the survey month, more than 80 per cent of the amount of milk fat purchased by the five firms went to a single plant — one of the captive creameries. Sales of this firm rank it among the 10 largest in the county. The other four are small- volume firms. Further study of procurement patterns reveals that an additional 12 firms pur- chase bulk milk or cream on a regular basis from the two cooperative associa- tions. Contracts are usually for 100 per cent Class 1 use, although some provide for limited amounts of Class 2 use. In each of these cases, the purchases usually represent only a relatively small part of the buying firm's total supply ; the buyers are all among the 25 largest firms in the county. In the survey month, sales of this type totaled 343,000 pounds of milk fat, or 58 per cent of intra-county transfers. When combined with the plant transfers discussed earlier, intra-county transfers of the two cooperatives accounted for about 90 per cent of the total. This type of sales made up about 50 per cent of total milk fat sales of one cooperative, and about 60 per cent of total milk fat sales of the other. Shipments from plants in other south- ern California counties tend to be numer- ous but small and of irregular magni- tude. They are essentially part of the balancing operation, which also accounts for a part of the inter-plant transfers among Los Angeles plants. Shipments from the coastal counties are usually accounted for by a single plant, which was the case for the month studied. At most, three Los Angeles firms receive milk or cream from this area, and it is only for the single firm that the ship- ments are substantial and regular. In total, 13 firms reported bulk receipts from plants in the San Joaquin Valley in the survey month. Records indicate that two other firms frequently procure milk from Valley plants, though they received none during June 1959. Inter-plant shipments from the San Joaquin Valley originate from proprie- tary and cooperative plants, and may be further classified as intra- or inter-firm. The relative importance of the various types of plant-to-plant shipments for a 6-month period is shown in table 17. Lack of more adequate time series pre- cludes generalizations about changes in the level and proportions of the various types of plant transfers. The intra-firm transfers of proprietary firms involve the seven regional distribu- tors operating plants in Los Angeles County, and have constituted more than 60 per cent of total shipments from the San Joaquin Valley in each month for which data were obtained. It appears that six plants in the northern milkshed fulfill country-plant functions for six re- gional firms. These are at Bakersfield, Tipton, Tulare, Visalia, Hanford, and Lemoore. The seventh regional distribu- tor operates a plant at Bakersfield, but it is primarily a fluid-milk processing plant and does not ship a significant por- tion of the raw-product supply for the firm's Los Angeles plant. The importance of the six country plants in the shipment of milk from the northern milkshed to Los Angeles is shown in the last column of table 19. In the six months covered, the shipments of the country plants accounted for 50 to 75 per cent of the total. Intra-firm transfers by cooperatives originate from plants of member asso- ciations of the federated sales coopera- tives in the San Joaquin Valley. Al- though they are tabulated as receipts by the Los Angeles plant of the coopera- tive, they frequently go directly to the Los Angeles plant of a distributor who purchases unprocessed milk or cream from the association. Inter-firm transfers by cooperatives involve sales to Los An- [60] Table 17. Classification of Inter-plant Transfers of Bulk Milk and Cream from the San Joaquin Valley to Los Angeles in Selected Months Month Proprietary plants Intrafirm Interflrm Cooperative plants Intrafirm Interfirm Total valley shipments Shipments of 6 country plants Percent- age of total -pounds milk fat June, 1959 Percentage of total Oct., 1958 Percentage of total June, 1958 Percentage of total Oct., 1957 Percentage of total June, 1957 Percentage of total Oct., 1956 Percentage of total 992,000 65,000 170,000 112,000 74 5 13 8 1,030,000 32,000 251,000 336,000 62 2 15 20 1,099,000 23,000 147,723 147,254 78 2 10 10 1,057,000 57,000 165,743 254,850 69 4 11 17 827,000 29,000 208,254 211,770 65 2 16 17 1,168,000 41,000 257,018 249,778 68 2 15 15 1,339,000 1,649,000 1,417,000 1,535,000 1,276,000 1,716,000 912,000 925,000 1,062,000 937,000 999,000 923,000 Source : Survey of plant reports. geles plants by three other cooperative associations in the San Joaquin Valley. They are received at proprietary plants, since the latter producer groups are not affiliated with the federated sales cooper- ative. Procurement and Use Policies of Regional Los Angeles Distributors 10 The basis for current procurement policies of these Los Angeles firms is considered here within a context of the development of the market supply struc- ture. The San Joaquin Valley, originally a supplier of cream to the Los Angeles market, became a source of milk and cream when the state adopted a Grade A ordinance and a statewide coordinated program for sanitary control. The gen- eral surplus situation during the 1930's and early 1940's placed the Valley again in the role of supplying only cream to the city market. This situation changed dras- tically during World War II. Because supply was short, all market milk in the 10 This section is based on interviews with officials of the regional firms and with Martin Blank, Consulting Agricultural Economist, Los Angeles. state was able to find a Class 1 market. At the same time, regional distributors moved out facilities for handling surplus milk, converting their Los Angeles plants to specialized operations for processing fluid products and, in some cases, ice cream and buttermilk. This use pattern was encouraged by area differentials in prices of milk for surplus use that were sufficient to provide lower at-market costs for products such as cottage cheese and ice cream mixes when they were proc- essed in the northern milkshed and trans- ported to Los Angeles. The regional price differential between Class 2 and Class 3 use has been continued. In June 1959, it was $.43 per hundredweight of milk. After the war the raw-product supply remained tight. Regional distributors de- veloped a supply for their country plants based on a 50 per cent Class 1 guarantee. Actual Class 1 use of milk fat received at country plants usually exceeded this fig- ure, reaching as high as 90 per cent in the "short" months. A seller's market ex- isted through the Korean War period. Any producer who could qualify for Grade A production was able to obtain a contract. During the Korean period, at [61] least one regional distributor and one cooperative obtained cottage cheese from outside the state. In 1953, the supply situation eased considerably in California, mainly be- cause market milk production expanded in the San Joaquin Valley. Country plants would no longer take any pro- ducer who wished to produce market milk. Also, separate pricing of milk fat and skim milk had been adopted. Con- tracts for country-plant shippers were es- tablished with the contract amount based on the producer's shipping record and the total quantity the plant could handle profitably. Guarantees for Class 1 milk fat use were set at 50 per cent. Since Class 1 use in country plants is typically less for skim milk than for milk fat, guarantees for skim milk were lower, usually not more than one-half the milk fat guarantee. Other differences existed between poli- cies of regional distributors in the south- ern and northern milksheds. In the southern milkshed, producers were held to base and given what approximated a 100 per cent Class 1 market for milk pro- duced. Although some variations existed between distributors, overbase milk would usually be accepted only if the dis- tributor could handle it as Class 1. While contracts were usually written for not more than 90 per cent Class 1 guarantee, payments were actually as high as 100 per cent of base, and sometimes higher. The number of shippers per plant tended to decline because of liquidation of some dairies and consolidation of herds into larger units. Increases in plant sales were reflected in larger contractual quan- tities for existing shippers more than in a larger number of shippers. In the northern milkshed the coun- try plants were basically used to provide milk to meet weekly and seasonal sales variations, cream for Class 1 utilization, curd and cream for cottage cheese, and fat and nonfat solids for ice cream. Class 1 milk fat and skim milk guarantees es- tablished at below-minimum-use levels provided needed flexibility to meet weekly, seasonal, and random variations in sales in the city market. Equipment was provided so that excess milk could be used for Class 3 purposes (butter, powder) . The more storable Class 2 prod- ucts permitted using a fluctuating supply in filling varying Class 1 demands with- out causing a deficit in supply of Class 2 products. Another important difference was the willingness of firms to take on new ship- pers to county plants rather than in- crease receipts through larger bases for existing shippers. Several factors influ- enced this policy. Perhaps most impor- tant were those assuring a stable supply to meet expanding future needs. Other factors include obligations of firms to established Grade B shippers wishing to convert to market milk production, and the fear of concentrating control of the plant's supply among a few large pro- ducers. Also, conversion of Grade B pro- ducers could eliminate the need for main- taining dual receiving facilities and pro- vide a large supply of high-quality milk for Class 2 products, at no penalty to distributors as long as surplus class prices were kept in line with prices for manu- facturing milk. It is not possible, how- ever, to prove that large numbers of pro- ducers have been added to country-plant shippers. Data since 1956 indicate that only two country plants had more ship- pers in 1959; the other four had fewer. In the aggregate, decreases outweighed increases by 3 to 1. The important con- clusion is that the firms during this period were willing to accept new pro- ducers, although withdrawals and con- solidations have resulted in little change in number of shippers. Policies with respect to overbase ship- ments have also varied between the south- ern and northern milksheds. Country plants tend to receive more overbase milk than city plants (table 18). Lack of fa- cilities to process large volumes of Class [62 Table 18. Comparative Levels of Overbase Receipts, Los Angeles and Country Plants, June, 1959 Plant Monthly contract base Class 1 guar- antee milk fat Total producer receipts June 1959 Producer re- ceipts as a percentage of contract base Producers Los Angeles A B C D E pounds milk fat per cent pounds milk fat per cent number 903,780 439,110 488,790 384,750 273,300 195,600 10,014,030t 423,870 144,720 249,570 299,550 141,900 100 90 86 90 75 85 50 50 50 75 50 50 929,399 563,677 520,365 419,378 275,661 211,249 13,121,207t 469,946 195,447 293,323 314,854 173,431 103 128 106 109 101 108 131 111 135 118 105 122 123* 50 53 65 36 F 32 Country A 101 B 126 C 42 D 47 E 76 F 29 * Single contract for supply from a cooperative bargaining association. t Pounds milk. Source : Survey of plant reports. 2 and 3 products force distributors to restrict producers in the southern milk- shed to contract amounts and discourage overbase shipments unless the milk can be used for Class 1 purposes. It is fre- quently asserted that an entirely oppo- site policy has been followed by some country plants — that implicit require- ments for overbase shipments are en- forced by distributors under threat of base reductions or contract cancellation. Data in table 18 show contract bases, Class 1 guarantees, and total receipts for the city and country plants of 6 major distributors in June 1959. Only for firm B were overbase shipments to a city plant relatively larger than for the correspond- ing country plant. The explanation for this case is that the firm has surplus- handling facilities (butter churns) at its Los Angeles plant, whereas its Valley plant is specialized for cottage cheese production and has no standby facilities. Thus, the distributor is reluctant to re- ceive more milk at his country plant than can be reshipped for Class 1 use or used in Class 2 products. The lack of standby equipment is even more strongly opera- tive in the country plant showing the lowest percentage of overbase shipments. For each plant, contracts tend to be standardized with respect to Class 1 guar- antees and other general provisions. The major item showing variation among a given plant's shippers is the contract base. This strongly affects the comparative net returns of a plant's producers. Recall that, for two producers shipping identi- cal amounts of milk to the same plant and receiving equal percentage of base in Class 1, the blend price will be higher to the producer with the larger base than to the producer with the smaller base, be- cause of the differences in proportions of total shipments that are paid for in Class 1 use. Thus, the determination of base becomes the major item for negotiation between the buyer and seller. Some dis- tributors have followed a policy of uni- formly adusting bases on a percentage basis; others have followed a policy of granting periodic increases in base to producers who consistently produce a stable supply of high quality milk, or [63 shippers who have demonstrated a will- ingness to produce large quantities of overbase milk. Variation in contractual provisions for plants within and between areas is sig- nificantly large, reflecting primarily the processing and supply function of the individual plant and producing district. Plant use depends on the type of products processed and/or shipped. Individual plants may experience wide seasonal variation in the proportion of class uses of milk fat and skim milk. It seems rea- sonable to expect a consistently higher Class 1 use of a single component of milk to be reflected in the level of guarantee. For example, Class 1 guarantees in coun- try plants that typically realize a lower Class 1 use are lower for skim milk than for milk fat. In Los Angeles plants skim milk guarantees more nearly approxi- mate the level for milk fat. The more useful comparisons are of prices paid producers by Los Angeles and country plants (table 19) . Differ- ences in prices between country and city plants of the same firm tend to be much larger than differences among the city plants and among the country plants. The same increase in the regional differential in prices received by producers in the northern and southern milksheds is evi- dent here, as well as in the data based on average prices presented in table 15. For a period following the Korean War, country-plant producers continued to enjoy Class 1 use of contracted milk fat of 70 to 90 per cent, although Class 1 skim milk use frequently dropped to sum- mer lows of 25 to 30 per cent. The year 1956 was favorable for country-plant shippers. Some plants paid Class 1 prices for as high as 80 per cent of total ship- ments, including overbase. The total vol- ume of milk procured from the Valley for Class 1 use in Los Angeles seemed to be on the increase. Some observers spec- ulated that production in the southern milkshed, especially in Los Angeles County, where producers were faced with rising labor costs and land values, had reached its peak and would decline. In this economic environment San Joa- quin Valley country-plant producers formed a new producer bargaining co- operative. Expanding in membership through 1956, the organization militantly attempted to gain control of the Valley supply and dictate purchase terms to buyers. Reaction by distributors was swift. Some began to increase contract bases of producers in the southern milk- Table 19. Average Net Prices Paid Market Milk Producers in Selected Months, Los Angeles and Country Plants Plant October 1956 June 1957 October 1957 Tune 1958 October 1958 June 1959 dollars per hundredweight Los Angeles Pi 5.07 4.94 5.15 4.96 5.30 5.17 4.41 4.40 4.38 4.45 4.39 4.29 4.62 4.56 4.70 4.53 4.91 4.91 3.49 3.86 3.64 4.03 3.67 3.82 5.09 4.92 5.10 4.95 5.35 5.35 4.17 4.29 4.12 4.52 4.06 4.24 4.59 4.49 4.67 4.45 4.76 4.81 3.35 3.69 3.33 3.85 3.61 3.87 5.04 4.89 5.03 4.83 5.14 5.21 4.26 4.21 3.88 4.61 3.99 4.26 4.78 P 2 4.64 P 3 4.76 P 4 4.58 Ps 4.82 P 6 4.95 Country P! 3.48 P 2 3.87 P 3 3 76 P 4 4 04 ]':, 3 80 P 6 3 84 Source: Survey of plant reports. [64] shed because they themselves were con- cerned about stability of the Valley sup- ply. Some large distributors actively opposed participation of their country- plant shippers in the bargaining group; in a few cases, contracts were actually canceled when producers would not with- draw their membership. In retrospect, it is clear that the major factor vitiating the bargaining position of the Valley group was the unsuspected eagerness of producers in the southern milkshed to buy cows and increase their production of milk. The opportunity to decrease average costs through increas- ing the number of cows milked when ex- isting plants were not being operated at capacity rates partly explains their inter- est. Subsequently, the bargaining group found itself unable to develop alternative market outlets for its members' milk, lost membership, and is no longer regarded as an effective instrument for increasing the bargaining power of Valley pro- ducers. The recent deterioration in the income position of country-plant shippers to Los Angeles distributors, and northern pro- ducers in general, cannot be attributed solely to the conflict over the bargaining cooperative. Undoubtedly, the decision of some distributors to expand local sup- plies did decrease the total amount of milk demanded from the Valley for Class 1 use. In addition, producers increased rather than decreased the flow of market milk, in spite of deterioration in net prices. The present high surplus levels are the result. The over-all impact of the joint operation of these forces has been: (1) failure of distributors to increase bases and permit expansion of Valley producers; (2) virtual elimination of entry through conversion from manufac- turing to market milk production, except within some cooperative groups; and (3) cancellation of some contracts. Currently, regional distributors have generally returned to the policy of re- stricting producers in the southern milk- shed to base and discouraging overbase shipments. Moreover, at least two firms have instituted base reductions — one by 10 per cent and the other by cancelling a normal 6 per cent seasonal increase in base. One cooperative association has found it necessary to ship some milk north into the San Joaquin Valley for disposition in manufacturing uses; con- sequently, it has taken stronger measures to hold its producers to base. Even more significant, some country- plant firms recently appear to have de- parted from their policy of encouraging overbase shipments by Valley producers. The supply of milk received at some country plants is exceeding the amount that is needed for Class 1 purposes and that can be used in Class 2 products. Some of the plants have no Class 3 facili- ties, and for firms that possess them the profitability of processing these prod- ucts is questionable. At least three firms have taken steps to restrict Valley ship- pers to base. In addition, one distributor in the Valley is experimenting with con- tracts that would not obligate the dis- tributor to accept overbase shipments and would not penalize the Class 1 guarantee of a producer shipping less than his con- tract amount for a given month. In the past, contracts have provided for propor- tional reductions in guaranteed amounts if shipments are under quota. Under the new policy, it is theoretically possible for a producer to ship only the amount of his Class 1 guarantee; hence, he would re- ceive Class 1 price for the entire amount. A nearby producer shipping to the same plant may continue to produce large quantities of overbase milk, which would cause his blend price to be significantly lower than that of his neighboring pro- ducer. Role of Cooperatives in Market Supply Patterns Five local distributors, besides the re- gional distributors and the federated co- operatives, reported receiving bulk ship- [65] merits of milk or cream from plants in the San Joaquin Valley in June 1959. All of these shipments were from the plants of three cooperative associations. The primary motivating force behind these purchases is the same as that be- hind those of regional distributors buy- ing from the Los Angeles cooperatives: a need to establish supply patterns offering the flexibility necessary to meet fluctua- tions in demand. Perhaps this is best il- lustrated in the case of the two local dis- tributors who procure relatively larger proportions of their supplies from Valley cooperatives and who are captive firms specializing in distribution of milk through retail stores. The pronounced weekly cycle in sales of these firms im- plies that supplies of raw products on Thursdays and Fridays must substan- tially exceed supplies on other days. Hence, they need correspondingly greater supplies to supplement daily re- ceipts from direct shippers. Similarly, distributing firms with a high propor- tion of school sales experience above aver- age seasonal variation in demand which may be reflected in purchases from a cooperative plant supplying the firm. Thus, cooperatives play for local dis- tributors much the same equalizing role that country plants do for regional dis- tributors. To the extent that seasonal and weekly sales variations are reflected in the timing and level of purchases from cooperatives, cooperative producers will experience greater variation and propor- tionally less Class 1 use than direct ship- pers to local distributors. Since minimum class prices apply to the sales of producer cooperatives to distributors — and under current supply conditions, the minimum prices prevail — procurement of weekly and seasonal supplemental supplies in this way may result in net costs for the buying firms being lower than if their entire supply was purchased directly from individual producers. The latter im- plies that the distributors would be faced with the necessity of handling weekly and/or seasonal surpluses, in addition to normal operating reserves. MAXIMUM-PROFIT LOCATION: IMPLICATION FOR SUPPLY ADJUSTMENTS Efficiency of Market Supply and Use Patterns For aggregate transportation costs to be minimized, shipments of fluid milk to Los Angeles from the northern milkshed should originate from producers nearest the market. In June 1959, a total of 1,339,000 pounds of market milk fat was shipped to Los Angeles plants as bulk milk and cream. For the same month, about 1,850,000 pounds of market milk- fat in excess of local Class 1 use was pro- duced in Kern, Tulare, and Kings coun- ties, California Crop and Livestock Re- porting Service (D 1959). The move- ment of individual units of milk could not be traced with available data, but it did show that plants shipping to Los Angeles purchased 46, 93, and 77 per cent, respectively, of the production in those counties. However, these plants also received 66 per cent of production in Fresno County and 70 per cent in Ma- dera County, as well as smaller percent- ages of production in Merced, Stanislaus, and San Joaquin counties. It appears on this basis that transport costs are above the minimum level that could be achieved by optimum organiza- tion of shipments, although the precise amount by which transport costs exceed the theoretical minimum is not known. In contrast, the industry closely ap- proximates the theoretical ideal for use patterns. A very high proportion of all milk produced in the southern milkshed is used for fluid purposes. Supplies in the northern milkshed, when not required for fluid purposes, are held at local plants for processing into Class 2 and 3 prod- ucts. This is an efficient result, because [66 of transport economies in shipping the processed products. Thus, it can be concluded that use pat- terns in this supply area are of the type that location theory indicates would re- flect desirable performance in the indus- try, even though transport costs for milk shipped to Los Angeles are somewhat above their theoretical minimum. Asso- ciated with existing use and supply pat- terns, however, are the regional differen- tials in net prices received by producers. These are intimately bound up in loca- tional choices of individual firms, and are investigated in this section to de- termine their relation to maximum-profit location. Regional Differentials in Net Returns to Producers The analysis in this section uses pre- viously developed cost and revenue data to indicate net returns for synthesized operations in the two areas of the milk- shed. To facilitate comparisons, a 60- stanchion barn is used with varying herd sizes. Most barns in the southern milk- shed are larger, and many in the north- ern milkshed are smaller, but the ex- istence of essentially constant long-run average costs of production makes it pos- sible to generalize conclusions based on comparisons with a single barn size. Prices used are established minimum class prices for the Los Angeles and Kings County marketing areas. Table 20 indicates net returns to pro- ducers per hundredweight of milk for varying herd sizes. It is assumed that the specified percentages of Class 1 and sur- plus uses apply to total production. Thus, production of the larger herds involves the same proportion of Class 1 use as does production of the smaller herds. This as- sumption is made because the primary interest is in interregional comparisons, rather than intra-regional differences in net revenues as a result of increasing pro- duction in the face of fixed contract bases. In the latter case, blend prices would decline as herd size increases, rather than remain constant as in the example, because of the larger propor- tion of production going into surplus uses. Table 21 suggests that only for the Table 20. Average Costs, Producer Prices, and Net Returns with 60-Stanchion Barn and Alternative Herd Sizes, by Region Southern milkshed Northern milkshed Item 120 cows milking 180 cows milking 240 cows milking 120 cows milking 180 cows milking 240 cows milking dollars per hundredweight, 3.5 per cent milk 4.40 5.04 .15 .49 4.05 5.04 .15 .84 3.88 5.04 .15 1.01 3.52 4.30 .40 .38 3.31 4.30 .40 .59 3.22 4.30 Transportation and handling charges}. . .40 .68 * Southern milkshed: 90 per cent Class 1 use, milk fat and skim milk; Class 1 prices, $1.00 per pound milk fat and $1.75 per hundredweight skim milk; Class 2 and 3 prices, $.66 per pound milk fat and $1.43 per hundred- weight skim milk. Northern milkshed: 65 per cent Class 1 use, milk fat and 35 per cent skim milk; Class 1 prices. $1.00 per pound milk fat and $1.40 per hundredweight skim milk; Class 2 and 3 prices, $.66 per pound milk fat and $1.00 per hundredweight skim milk, t Southern milkshed: $.15 per hundredweight farm-to-plant. Northern milkshed: $.15 per hundredweight farm-to-plant; Class 1 use, $.15 per hundredweight or $.035 per pound milk fat country-plant handling charges, $.45 per hundredweight transportation to Los Angeles. [67] smallest herd size considered would net returns in the northern milkshed equal those that could be obtained by a com- parable operation in the southern milk- shed. When compared to capacity production in the southern milkshed, re- turns for producers in the northern re- gion are only 60 to 80 per cent as large, depending on herd size. In all cases, producer price differentials are at least sufficient to offset higher production costs in the southern milkshed. Per-unit transport and handling charges computed for the northern milk- shed are not as large as the "efficient" interregional price differential based on the economic model. This results from the fact that country-plant handling and Los Angeles transport charges are de- ducted only from milk shipped for Class 1 purposes; milk used at country plants for processed products has only farm-to- plant transport charges deducted. Under the assumptions of the model, however, the lower regional price would apply to all milk produced in the surplus region. Implications for Supply- Adjustments Although, for the case considered, the vertical shift in producer revenue curves between regions is not as large as would be expected under perfect competition, a large horizontal shift to the right is suffi- cient to offset production cost differen- tials, and render the southern milkshed the most advantageous location for pro- ducers with large herds. Thus, it would pay a producer to locate in the southern region even though production costs are lower in the northern milkshed by more than enough to offset added transport costs. The market organization that has evolved is based on use of production in the southern milkshed for fluid purposes, procurement of weekly and seasonal sup- plemental supplies from the northern milkshed, and retention of surplus pro- duction in the northern region for proc- essing into products. Such patterns are quite consistent with minimization of aggregate transport costs, and with maxi- mization of the value of the raw product, given the location of production and min- imum class prices. In terms of desirable adjustments in spatial allocation of resources, this situa- tion is clearly one of a distorted inter- regional supply which is inconsistent with efficient long-term growth in indus- try output. It is basically a situation in which the factors originally responsible for locating an industry have worked themselves out and disappeared, while the industry has tended to remain where it was started. Adjustments of southern producers to rising factor costs, includ- ing conservation of expensive land, de- pendence on imported feed, and large, specialized operations, also resulted in the production of a stable high-quality supply of milk that minimized procure- ment problems for buyers, generating strong vested interests in existing supply patterns. Institutional pricing procedures have provided no incentives for distribu- tors to seek lower-cost sources of supply. Thus, supply and use patterns, and re- sulting producer revenue relationships are deeply imbedded in the market or- ganizational, institutional, and historical relationships. Their net effect is to en- courage production to persist in the original — and at present high-cost — loca- tion, or to restrict locational choices of producers to areas in which no horizon- tal movement of their revenue curve takes place. Expansion of existing producers in, or movement of new producers into, the low-cost region is discouraged. This clearly raises important policy questions with respect to the role of in- stitutional pricing arrangements in main- taining the distorted supply relationships, and alternative procedures designed to encourage supply adjustments more in line with the optimum. The final section is devoted to these and related questions. [68 V. SUPPLY ADJUSTMENTS- PAST, PRESENT, AND FUTURE A? ROM A TOTAL POPULATION of 9 mil- lion in 1960, the seven-county southern California Metropolis is expected to reach 13 million in 1970 and 16.7 million in 1980. Future population growth is likely to center in four distinct areas of the extended metropolis: Los Angeles- Orange, San Bernardino-Riverside, Ven- tura-Santa Barbara, and San Diego. The 1980 population is projected to be dis- tributed among the four areas as follows (Southern California Resource Council, 1960, p. 12) : Los Angeles-Orange 11.9 million San Bernardino-Riverside 2.0 million Ventura-Santa Barbara .8 million San Diego 2.0 million Total consumption of milk and dairy products in a market area is closely asso- ciated with population. This indicates that the consumption levels in the metropolis and its constituent areas can be expected to increase rapidly. Other factors that will encourage higher levels of consumption include rising real per capita incomes and a higher proportion of the popula- tion in the 0—24 age group — 50 per cent as compared to 38 per cent in 1950 (Southern California Research Council, 1960, p. 15). The latter factor will have an even more important bearing on the market demand for a product such as milk, which is widely regarded as a nec- essary item in the diet of children, ado- lescents, and young adults. Los Angeles plants currently receive about 70 per cent of their supply of un- processed milk and cream direct from producers. Of total producer receipts, 97 per cent comes from producers in the four-county area composed of Los An- geles, Orange, San Bernardino, and Riv- erside counties. The other source of unprocessed milk and cream for Los An- geles plants — bulk transfers of milk and cream from other plants — provides about 30 per cent of their total supply. Plants in the San Joaquin Valley supply about 90 per cent of bulk receipts from outside Los Angeles County. Los Angeles plants are likely to con- tinue to draw the greatest part of their raw product supply from these two areas, the southern and northern milksheds. Empirical analysis of the balance of com- petition between the major supply re- gions indicates that cost differentials in the northern milkshed now more than offset the advantage of production close to consumption. Regional differences in net prices received, however, are such that a producer in the southern region may, with operations similar in plant organization and herd size, realize larger net returns than a lower-cost producer in the northern milkshed. This regional price advantage, deriv- ing from the institutional pricing struc- ture and market supply and use patterns, is of great importance in predicting fu- ture supply sources. Assuming a continu- ation of the present market organization and pricing structure, the relevant ques- tion becomes the extent to which urbani- zation may limit milk production in the southern milkshed. Such a limitation would imply procurement of larger quan- tities of milk from the northern milkshed for Class 1 purposes, and a corresponding diminution in regional price differences, all other things being equal. The follow- ing section considers the prospects for production in the southern milkshed, under the assumption that favorable price differentials will continue. SUPPLY PROSPECTS IN THE SOUTHERN MILKSHED There are several ways in which pop- ulation growth and industrial develop- [69] merit tend to "limit" directly milk pro- duction in an area. One way in which urbanization applies pressures on dairymen to relocate is through conflicts between dairymen and their residential neighbors over odors, flies, and animal and dairy noises. Com- plaints to local officials have sometimes forced dairymen to reduce operations, and in some cases permits have been revoked. Dairymen have often been forced to undertake costly programs to control the sources of complaints, thereby reducing profits. In other cases, dairymen have found themselves in the position of prior nonconforming uses when residen- tial or commercial zoning is applied to their area. The result may be to deny the producer the right to expand or improve his operation for greater efficiency and profitability. Finally, nearby open areas which had been used for waste disposal no longer can be so used because of sub- divisions, raising a serious and poten- tially costly waste disposal problem. The second way in which urbaniza- tion encourages relocation of dairies is through inflation of land values, increas- ing the fixed costs of established opera- tions through higher taxes and tempting producers to sell their land to capitalize on rising values. Values of dairy land are reported to have reached as high as $20,000 per acre in some parts of Los Angeles County. Since assessments for property taxes are designed to reflect the "fair market value" of the property, tax burdens would increase even with a static tax rate. Rising tax rates have been the rule, accelerating the increase in taxes. At the extreme, taxes might rise to the point where net returns over direct costs of production only barely cover, if at all, the taxes assessed against the pro- ducer's land, improvements, and cattle. This, in effect, would force the producer to liquidate his holdings and move to a new location. In response to this situation, efforts were initiated as early as 1940 to zone areas for the needs of the dairy industry. Early efforts died because dairymen were opposed and the objectives and advan- tages of comprehensive zoning were mis- understood. The efforts were continued after World War II, with the support of local officials, and finally succeeded in 1955 and 1956 when three separate areas were incorporated within the southeastern Los Angeles-Orange producing district to retain them for the use of market milk producers (figure 14). The first area to incorporate was Dairyland in Orange County. The city, about two square miles, has no residen- tial, industrial, or commercial districts within its boundaries. The entire city is zoned A-2 — heavy agricultural — with a one-acre minimum tract size. Farm and complementary buildings, as well as resi- dences for dairy workers, are permitted. City ordinances establish a maximum of 20 cows per acre. Since its incorporation, in October, 1955, the city has been gain- ing dairies at the rate of two or three per year, and in 1960 contained 32 dairies with about 8,300 cows, and produced some 34,000 gallons of milk daily. The second area to incorporate, and the largest of the three, is in Los Angeles County. Dairy Valley, incorporated in 1956, contains 8.75 square miles. The entire city is zoned A-2-5, except for 35 acres permitting commercial uses, in the southeast corner. The main difference in zoning in Dairyland and Dairy Valley is that the latter specifies a 5-acre mini- mum tract size. Also, Dairy Valley does not limit the concentration of cows. Since incorporation, except for some dairies forced to vacate their holdings for free- way routes, additional dairies have moved into the city. In 1959, six new operations were initiated, and three new ones were established in early 1960. The city now contains 241 active dairies with about 53,000 cows, and produces about 217,000 gallons of milk daily. The third of the special-purpose incor- porations, Cypress, in Orange County, [70 Figure 14. Incorporated dairy areas, Los Angeles and Orange counties. was incorporated in July 1956, with an area of 7 square miles. Of the total area, 900 acres are zoned industrially, 165 for commercial use, 200 for recreation, and the remainder A-2-1. Similar to Dairy- land, the city has an ordinance govern- ing density. For a unit of 15 acres or less, the maximum number of cows per- [71] mitted per acre is 10, unless the dairy is connected with a sewer, in which case the maximum is increased to 20. For dairies of more than 15 acres, the maximum number of cows per acre is 15, regard- less of whether the dairy is on a sewer. Eight new dairies have moved into the area since incorporation. The city now contains 50 dairies with about 14,000 cows, and produces about 57,000 gallons of milk daily. Advantages that dairymen have gained from protective zoning under localized control have been twofold. First, the establishment of the "cities" created areas in which dairies are auto- matically allowed, thus eliminating spe- cial permit requirements, and in which a producer could expand or improve his facilities without fear of unnecessary de- lay or expense. Nuisance complaints from residential areas may continue, especially against producers on the edge of the dairy zones, but the concentration of dairies tends to establish "reasonable- ness" for the objectionable operations. The second way in which zoning can be advantageous to dairymen concerns taxes. Theoretically, since residential subdivisions, commercial uses, and indus- trial developments are excluded, land values in the zoned areas should reflect a discounted stream of future net earn- ings in agricultural uses. This would tend to stabilize land prices and hold assessed values lower than if assessments were based on highly inflated values reflecting potential subdivision or commercial or industrial use of the land. At the same time, since the need for urban services is minimized, municipal tax rates can be held low or eliminated. How successful the special-purpose in- corporations have been and their role in future supply adjustments in the milk- shed are considered below. Los Angeles and Orange Counties Of the 80 commercial dairies in Los Angeles County, outside the southeastern [72 district, 66 have plants located at the dairy, and engage in cash-and-carry or producer-distributor operations. Thus, only 14 dairies outside southeast Los An- geles County ship to a distributor's plant at another location. Similarly, of the 45 dairies in Orange County outside the major producing district, 22 have plants located at the dairies. In total, 70 per cent of producers in these areas are en- < gaged in cash-and-carry or producer- distributor sales. This type of distribution is increasing because the dairymen can earn a higher return when he produces, processes, and sells his milk at the dairy, as a result of 100 per cent Class 1 use and savings on local transport costs. In addition, when the entire operation is under a single ownership, he can make profits from distributive functions as well as from production. Higher returns so obtained are likely to enable the producer to resist < longer the pressures of rising land values and increasing taxes. Once a dairyman has invested in a processing plant — which would be worthless to the subdividers or industries that would buy the land — he is likely to resist sale until land values and taxes are significantly higher than those required to induce other dairymen to relocate. It is anticipated that almost all 37 wholesale dairies, now in Los Angeles and Orange counties outside the major producing district, will relocate, prob- ably before 1980. There is a strong possi- bility, however, that some of these dairies will be converted to cash-and-carry out- lets, and additional cash-and-carry oper- ations will be established. A possible exception to this general pattern is the Antelope Valley — the large, arid portion of Los Angeles County north „ of the San Gabriel Mountains where in- adequate water, extreme summer heat, and high winds have retarded agricul- tural and urban development. Its poten- tial, however, if and when adequate water is supplied, has led to an extremely spec- ] ulative land market. Periodically, inter- est arises in increasing milk production by encouraging additional dairies to lo- cate there. Available land and local pro- duction of irrigated feed are used to en- courage milk production, but efforts have so far been unsuccessful. As indicated, only three dairies, including 625 cows, are now in operation in the area; both the number of dairies and of cows have declined since 1950. While an increase in production is possible, it is not likely in the foreseeable future because areas much better suited to dairying are avail- able. Southeastern Los Angeles-Orange. Of the 449 dairies in this district, 50 have plants at the same location, leaving 399 in the wholesale dairy category. The cash-and-carry dairies tend to be con- centrated in areas that once were im- portant centers for milk production — such as Downey, Norwalk, Paramount, Bellflower, and Lakewood — but that now are devoted primarily to residential and commercial uses. Only seven cash-and- carry outlets operate within the limits of the three zoned dairy cities. In con- trast, 316 (72 per cent) of all wholesale dairies in Los Angeles and Orange coun- ties are contained in the three zoned dis- tricts. Thus, the future stability of the dairy cities is of most vital significance to any predictions about supply adjust- ments in the southern milkshed. The three cities have to date been quite successful in retaining land for dairies. Because of the nature of the zoning power vested in the individual city coun- cils, this retention should continue until zoning ordinances are modified to permit industrial, commercial, and/or residen- tial uses. In an interview with officials of the Re- gional Planning Commission of Los An- geles County, the Director of Advance Planning indicated that an analysis by his staff points to elimination of dairies in Dairy Valley by 1980. However, in a recent publication, the Commission pro- jects population of southeast Los Angeles County to 1980 based on the assumption that no significant increases in popula- tion will occur in Dairy Valley (County of Los Angeles, 1959, p. 9). This means that the area either will be retained for dairies and associated uses or that it will change to some restrictive industrial classification. The publication does point out that if the area changes to residential zoning, Dairy Valley could support a population in excess of 37,000. In any event, restrictive agricultural zoning has imparted at least a short-run stability to the production of milk in Los Angeles and Orange counties. Since in- corporation of the dairy cities, producers have moved into the protected areas. Some additional relocation can be antici- pated. Land values have continued to rise, ranging at present from $4,500 to $6,500 per acre depending on the desir- ability of the site for dairy production. Further intensification of existing op- erations provides another method of in- creasing production with given facilities. Expansion of output by increasing herd size, and extending the hours of opera- tion of the milking plant, can be expected to show relatively constant, or decreas- ing, marginal costs up to plant capacity. The existence of decreasing unit costs for output expansion indicates a relatively high elasticity of supply in the producing district in the short-run. Past changes in output support this conclusion. Therefore, contract bases and distributors' policies with respect to acceptance and utilization of overbase shipments, may substantially limit output below the amount producers would be willing to offer at the blend prices being paid. In the long-run, in which the producer is free to change location as well as level of output, supply for the district is af- fected importantly by number of pro- ducers as well as output per producer. Within the southeastern Los Angeles- Orange district, a continuous decline can [73 be expected in the 83 wholesale dairies outside the zoned areas, with complete elimination likely by 1980. A moderate increase in the number of producers in the restricted areas can be expected in the immediate future. Increasing herd sizes, within the framework of capacity limitations, will also tend to offset the continued decline in the number of dairies in other areas of the two coun- ties. The extent and rate of this expansion in herd size will be determined in large part by the policies of distributors with respect to sources of supplies. Recent moves by two distributors to reduce bases, and continuing efforts by other dis- tributors and producer groups to reduce overbase production, do not support ex- pectations for more than moderate pro- duction increases in the district in the near future. The period for which the dairy cities will be retained for large-scale milk pro- duction cannot be estimated with any precision. Qualitative analysis suggests that continuing population growth and increasing land values — the latter being reflected, at least partially, in assessed values and taxes — will eventually lead to revocation of the restrictive zoning to permit urban uses. The buildup of these forces is most noticeable at present in Cypress, which already contains some nondairy uses. This supports the belief of many that the transition in this area may begin within the next three years. The optimum time for relocation is a complex problem in cost-substitution, in- volving factors such as salvage values on existing plants, investment costs, tax rates, and transport charges. In highly simplified terms, when total unit costs plus transport charges at a new location are less than direct production costs plus transport charges at the old location, re- location will be profitable, other things being equal. It is not likely, however, that all milk production will be forced out by 1980. Assuming that differential pricing is con- tinued for cash-and-carry sales, a signifi- cant conversion to cash-and-carry can be expected when transition from milk pro- duction to urban uses begins in the zoned areas. Volume of production in cash-and- carry and producer-distributor opera- tions can be expected to be closely geared to the sales outlets. The current herd sizes for the 116 dairies in Los Angeles County with plants on the premises are : Size of Number of herd dairies 9-99 27 100-199 54 200-299 22 300-399 6 400 and more 7 The average herd size is 175 cows. As- suming that the average herd size in cash- and-carry operations will increase to 200, and that the number of cash-and-carry producers in Los Angeles and Orange counties will also increase to as many as 200 by 1980, a total of 40,000 cows, or less than half as many as are currently on commercial dairy farms in Los An- geles County, can be projected for the two-county area. Operations synthesized in Section III for the southern milkshed assumed a pro- duction per cow of 13,699 pounds of milk per year. If this figure is used as average production for 1980, the projected 40,000 cows would produce 548 million pounds of milk. Since projected total require- ments in the two counties are 4.6 billion pounds — based on population growth to 11.9 million and per capita consumption of 390 pounds per year — a deficit of more than 4 billion pounds of milk is in- dicated for fluid milk alone. Such reasoning underlies the frequent assertions that the San Joaquin Valley can be expected to contribute the major share of fluid milk supplies for Los An- geles plants in the future. The validity of this conclusion depends on not only the accuracy of the projections as to require- ments and supply adjustments in the two 74 counties but also on the extent to which additional productive capacity will be established in other areas of the southern milkshed by relocation of producers from Los Angeles and Orange counties. The following section considers some of the factors affecting relocation, again on the assumption that regional price differen- tials will persist. Chino Valley In the following discussion it is as- sumed that future liquidation of dairy operations in Los Angeles and Orange counties will involve their relocation in some other area. This reinvestment is encouraged by the capital-gains tax struc- ture, as well as the desire of producers and their families to remain in the milk producing business. Since 1950, Chino Valley has emerged as an important source of milk supply for Los Angeles plants. The production potential of this area is arrived at by estimating maximum production, and then considering economic factors that will determine the degree to which this maximum can be realized. The desirable features of the Chino Valley for milk production include good drainage and an adequate water supply. Summer temperatures are higher and winds more prevalent than in the coastal region, but these handicaps are of minor significance. The primary dairy region is contained in the 70-square-mile southwestern cor- ner of San Bernardino County and the 15-square-mile northwestern corner of Riverside County (figure 15). Of this total area, about 60 square miles are suit- able for dairy location. The part in San Bernardino County is under county zon- ing for general agricultural use. Other uses are severely restricted. The only significant nonagricultural uses are an airport and state-operated penal institu- tions. A county ordinance currently speci- fies a minimum tract of 5 acres, but an increase to 10 acres — 5 of which to be kept clear for waste disposal — is being considered. As an indication of maximum poten- tial, production can be projected to 1980 based on an intensity of production in terms of cows per acre equal to that cur- rently found in Dairy Valley — nine cows per acre. This assumes the development of a strictly dry-lot operation, and the disappearance of crop agriculture. Under these conditions, the 38,400-acre district could hold a total of 345,000 cows which, at an average annual production of 13,- 699 pounds per cow, would represent a total production of milk of about 4.7 bil- lion pounds per year. Based on a projected population of 13.9 million and a per capita consump- tion of 390 pounds of fluid milk per year, total requirements in 1980 for all of Los Angeles, Orange, San Bernardino, and Riverside counties would be about 5.4 billion pounds. Thus, maximum produc- tion in the Chino district, plus the re- sidual production projected for Los An- geles and Orange counties, would enable the southern milkshed to supply almost its entire fluid milk requirements in 1980. The extent to which maximum milk production is realized in the Chino dis- trict depends upon: (1) additional move- ment of dairymen from Los Angeles and Orange counties into the area, and (2) retention of the area as an intensive milk- producing district. Critical to meeting both conditions is continuation of the regional net price differential. Within a cost-substitution framework for locational choices, relocation of a dairy to Chino from Los Angeles involves • Higher product transport costs • Higher feed costs • Lower wage rates • Lower investments • Lower taxes Because freeways are available, added product transport costs are only $.05 per hundredweight over charges in the south- eastern Los Angeles-Orange area. Feed costs tend to be higher because of trans- 75 e port costs for concentrates from Los An- geles. It is unlikely that the feed supply industry will move to Chino, since it is more economical to remain near ocean transportation and by-products sources, to utilize existing plants, and to transport bulk mixed feeds to Chino. Added charges are about $1.00 per ton. Hay prices are about the same as in Los An- geles. Existing differentials in wage rates be- tween Los Angeles and Chino are likely to narrow and disappear. Wages in the Chino district will go up as a result of larger and more numerous dairies and increasing industrial competition. Lower investments reflect lower land values, which are currently in the range of $2,500-$4,000 per acre. Lower taxes re- flect both lower rates and lower assess- ments. Increases in the former can un- doubtedly be expected. The current pol- icy of the San Bernardino County As- sessor, however, is to assess agricultural lands as such rather than at higher values reflecting potential urban uses (Los An- geles Times, April 17, 1960, p. 29) . Con- tinuance of this policy would be highly favorable to additional location of dairy- men in the district. Retention of the Chino district for milk production is also dependent on indus- trial and population growth patterns in San Bernardino and Riverside counties. At present, some 90 per cent of the esti- mated 809,000 residents of the two coun- ties live in the San Bernardino and Riverside valleys of the upper Santa Ana Basin. Significant industrial growth is well under way, primarily in a well- planned tract in San Bernardino County, northeast of Chino between Ontario and Fontana. Additional development into a major industrial complex can be antici- pated. The result would be an encroach- ment of urban and industrial uses in the area, and creation of economic pressures to increase land values and taxes on dairymen, much the same as [77 occurred in Los Angeles after World War II. At present, production costs can be lowered by relocating Los Angeles- Orange producers in the Chino district but these costs are likely to increase rela- tive to cost levels in the northern milk- shed. Hence, the future supply price for output expansion in the Chino district will be close to that in the southeastern Los Angeles-Orange district, and will exceed that required to call forth additional production from northern producers. Further expansion, as compared to pro- curement of additional supplies from the northern milkshed, is not desirable from the viewpoint of increasing efficiency in the industry and allocation of resources in line with relative production costs. However, public officials, especially in San Bernardino County, are actively en- couraging expansion of dairying and re- tention of the Chino Valley as an intensive milk-producing district, and for two reasons. First, retention of the Chino district would provide open area close to points where population growth is anticipated to be greatest. This seems desirable to alleviate congestion and to promote a more pleasant urban environ- ment. Second, large-scale commercial dairying makes a substantial contribution to the area's economy relative to the serv- ices it requires. The value of products sold is only a partial measure of the im- portance of the industry. The large dairy investment represents an important ele- ment in the tax base. Many local busi- nesses, such as equipment dealers, hay brokers, and by-product industries, cater to the needs of dairymen. Wages for hired labor, which are very high in com- parison with other agricultural wanes. contribute to the purchasing power of the area and stimulate other commercial ac- tivities. Perhaps even more important, demands for public services, such as water supply and disposal, streets and highways, schools, and recreational facili- ties, are minimum in comparison with demands in residential development. Thus, dairying in the Chino area ap- pears at present to be a desirable land use, particularly since any immediate residential expansion would result pri- marily from population spilling out of Los Angeles County. Dairy production creates a "buffer zone" against popula- tion movement out of Los Angeles County. Outlying Areas Other possibilities for dairy location in the southern milkshed include outlying valley and desert areas in San Bernar- dino and Riverside counties, such as the Mojave River Basin and San Jacinto- Hemet, discussed earlier. The Mojave River Basin lies north of the San Bernardino Mountains. The most favorable dairy area, between Victor- ville and Barstow, includes the Hinkley Valley, a high desert area, with lower temperatures than the low desert areas. On the other hand, it experiences tem- peratures below freezing and occasional snowfalls in winter. Water of mountain origin now supports irrigated alfalfa and grain production. With one exception, dairies in the area supply San Bernardino plants. Distance from Los Angeles, to which milk from one Barstow dairy is now being shipped, is 100 to 135 miles. The transport rate is $.35 per hundred- weight, but this is a special rate involving a back-haul of processed products. The possibility of fast, efficient transport of larger quantities of milk via freeway routes indicates that at least as low a rate could prevail for additional shipments to Los Angeles. Land prices are reported to be $1,000 to $1,500 per acre, which com- pare favorably to the San Joaquin Valley. The San Jacinto-Hemet area lies south- east of Riverside, about 90 miles from Los Angeles. Currently, nine dairies are shipping milk to Los Angeles plants, at a charge of $.26 per hundredweight. There are possibly 25 square miles of land suitable for dairies in terms of phys- ical and climatic conditions. Present water supplies are adequate, and addi- tional water is expected from the Metro- politan Water District. Year-round pro- duction of irrigated forage crops now prevails in the area ; some green-chopped alfalfa is being marketed in the Los An- geles district. Current land values are $1,500 to $2,500 per acre. A third possible area for dairy loca- tion lies between Perris and Temecula, in western Riverside County. Farm land primarily produces dry-land grain. Though present water supplies are inade- quate for large-scale dairying, additional water from the Metropolitan Water Dis- trict could permit location on as much as 60 to 70 square miles. Much of High- way 395 is now freeway, offering the possibility of fast, efficient transport to Los Angeles at rates that should be com- parable to those from San Jacinto. Land values, now $500 to $1,000 per acre, can be expected to rise if water supplies are increased. No significant competition for land and water resources from urban and industrial uses is anticipated in this, or any other of the outlying areas. When compared to the Chino Valley, the outlying areas should permit produc- tion expansion at about equal combined production and transport costs. Some- what lower land costs in these areas tend to be offset by higher feed costs and added costs of transporting the product to Los Angeles plants. Hence, it may be ' concluded that the supply price required to induce expansion of output in these areas to meet increased market needs will be higher in the long-run than is neces- sary in the northern milkshed. Implications for Shifts in Market Supply Sources Great potential thus exists for increas- ing production in the southern area of the milkshed if Los Angeles and Orange county producers relocate in other dis- tricts of San Bernardino and Riverside 78 counties. This analysis assumes that the producer's demand conditions are un- changed when he relocates within the southern milkshed. Hence, the locational choices of the firm may be treated in a cost-substitution framework, and the lo- cation problem is resolved into a search for the least-cost location. At the same time, a great potential for increased production exists in the San Joaquin Valley either through expansion in output of existing units, which can be accomplished with economies in cost per unit of output, or by increasing the num- ber of dairies. Thus, the relevant question with respect to the requirements of the Los Angeles market for fluid milk in 1980 is one of alternative sources. Existing regional price differentials imply that resources used in milk pro- duction in the northern milkshed will earn a lower return than equivalent re- sources in the southern milkshed, since factor payments depend on prices re- ceived as well as on productivity. Thus, producers in the northern milkshed find themselves handicapped in bidding for productive resources against alternative enterprises, leading to spatial imperfec- tions in the allocation of resources to milk production. The differential advantage in the southern milkshed is rapidly being capi- talized into the value of cows, a phenom- enon known as the sale of "shipping rights." Originally, this practice began in connection with the transfer of base within producer cooperatives. In recent years it has spread to producers shipping to regional and local distributors, and reached a point where prices exceeding $1,000 per cow were reported for sale of herds involving the transfer of a con- tract. Recently, action has been taken by distributors and producer groups to re- duce the value of these "rights." The value of comparable animals bought for replacement ordinarily does not exceed $300. The attachment of prices to "ship- ping rights" is based on the economic concept whereby any asset, intangible as well as tangible, is valued by discounting the future stream of net revenues that can be derived from it — the same valua- tion mechanism that capitalizes cotton and tobacco allotments into the value of southern farms and irrigation water rights into California farm land values. Therefore, differential contracts benefit producers in the southern milkshed through higher net returns and value ap- preciation of plant and herd resulting from capitalization of the higher returns anticipated if and when they dispose of their herds. Over a period of time, though, as herds are bought and sold, producers will not benefit from the differ- ential contracts — they will have paid a price for their herd that includes its capi- talized value. Further, they will be de- pendent on a continuation of the con- tracts to sustain normal profits on their operation. In terms of interregional com- petition, anything that raises capital re- quirements for entry into the southern milkshed threatens future generations of producers in that region with a legacy of heavy fixed costs, and reduces any com- parative advantages in location, climate, etc., that the region may have over the northern milkshed. Ultimately, the differ- ential returns may be completely dissi- pated. The resulting inflated cost struc- ture will place the producers at a greater disadvantage in terms of relative produc- tion costs in the competing area, and make them dependent on the differential contracts for their existence. ADJUSTING REGIONAL PRICE DIFFERENTIALS Efforts to stabilize the California mar- ket milk industry in recent decades have included much public intervention in the pricing system, including direct price- fixing at producer and resale levels. The impact of this intervention on market performance in the industry is of para- mount interest. Though the purpose of this study is not to propose sweeping [79] changes in the pricing program to solve economic problems and conflicts in the industry, the critical role of the admin- istered pricing structure in market sup- ply adustments places the ends and means of the pricing system properly within this study's purview. The legislation establishing the Cali- fornia milk control program had several objectives. Among them were higher re- turns to producers, stabilization of the pricing system and industry structure, and "fair and reasonable prices" to con- sumers. Two additional objectives were equity, both in terms of uniformity of raw-product costs to distributors and uni- formity of returns to producers; and growth in industry output — to ensure the production and maintenance of an "ade- quate" supply of milk. The means used under the control pro- gram often achieve several of these ob- jectives simultaneously. For example, the classified pricing system and control of unfair and destructive trade practices — such as improper testing or accounting for milk purchased from producers- — not only directly support stabilization but also promote industry efficiency and growth. Efficiency may be increased by providing orderly and economical means of disposing of milk produced but not required for fluid purposes or for any other purpose having mandatory quality requirements. Similarly, the growth ob- jective may be furthered by removal of the frequent and extreme price fluctua- tions that, under the classical supply- demand model, accompany the alternate shortages and surpluses that usually char- acterize fluid milk markets. Greater price certainty would encourage production expansion by establishing an economic climate more favorable for production planning in an industry requiring large- scale, long-term investments. In other cases, certain means, methods, or techniques may further one or more objectives while working against others. For instance, procedures facilitating the best use of resources currently committed to the industry may not be consistent with the objective of promoting the most effi- < cient long-term growth in industry output. Current industry procurement and use patterns were judged to be acceptably efficient in the first sense. Although ag- gregate transport costs are higher than their theoretical minimum, because milk shipments do not always originate from producers closest to Los Angeles, no seri- ous departures from efficient organization for existing production units were found. The situation with respect to the equity objective, however, is somewhat different. * Under current application of the control legislation, blend prices are based on the use patterns of individual plants. Dis- ( tributors pay producers uniformly with respect to surplus use only if their milk is physically commingled — which implies that the milk is received at the same plant. Since Valley country plants and cooperative plants as a group have a proportion of Class 1 use consistently lower than that obtained by Los Angeles plants as a group, the argument is that, on equity grounds, producers in the northern milkshed bear a share of the burden of the surplus that is dispropor- tionate in comparison with producers in the southern milkshed who ship directly to city plants. i Equity arguments are admittedly sub- jective, and frequently outside the prov- ince of economic analysis. Since they Y involve here the problem of distribution of income, it may be suggested that equity in the present case would imply treating each producer "fairly," i.e., per- mitting each the same proportion of Class 1 use. Others may argue that equity is achieved when each producer is paid sur- v plus prices when in fact his milk is used for manufacturing. While it is true that economic analysis cannot resolve pure equity questions, it can be directly rele- vant when other objectives, such as effi- ciency and growth, are integral parts of £ [80] the question of equity. This appears to be true in the present case. Lower returns in the northern milk- shed, the low-cost producing region, re- duce the ability of producers to compete for resources against alternative uses and to expand production. Capitalization of the higher returns in the southern milk- shed increases capital requirements and inflates the structure of production costs in the region, raising the supply price in the long-run for additional output. Both of these factors are inconsistent with ef- ficient growth of industry output. Al- ternative approaches could be followed in eliminating regional price differentials that do not reflect transport costs. Each of these must be evaluated not only in equity terms but also in terms of its im- plication for efficient industry growth. Increasing Producer Returns for Surplus Use One technique for bringing interre gional differentials in net producer prices more in line with transport costs, is to increase returns to producers for market milk going into manfacturing uses. Since the proportion of milk used for these pur- poses is larger in the northern milkshed, increased returns for surplus use would tend to reduce the current differential in net producer prices. One way to raise net prices to northern producers is to increase minimum class prices for surplus use. As noted above, this policy was implemented in 1959 by increasing minimum prices for Class 2 use over those for Class 3 use in all San Joaquin Valley areas. Since manufac- turing-grade milk can be used for all Class 2 products, the effectiveness of the procedure will depend on the extent to which distributors continue to receive the same amount of milk in excess of their needs for Class 1 use and necessary re- serves. If distributors decrease the amount of market milk they are willing to receive when there is no possibility that it will find a Class 1 use, then fewer pro- [81 ducers or smaller shipments per producer will be required to supply their plants. The Class 2 price increase in 1959 did re- sult in the cancellation of some contracts; one plant dropped 22 producers. This result of increasing surplus-class prices raises another equity problem. The increased class prices will benefit only the producers who are able to retain their market milk outlet ; hence, increased net prices to some producers may be gained largely at the expense of other producers who lose their fluid market and are forced to sell their milk directly for manufacturing. A further considera- tion is the uncertain economic justifica- tion of differential pricing of milk that can be legally used for the same purposes. The latter poses the problem of non-uni- formity of raw-product costs to buyers, since market milk purchased for manu- facturing of Class 2 products would have to be paid for at substantially higher prices than manufacturing milk used for the same products. A second method of increasing rela- tive returns to northern producers is to reclassify some of the products that Grade B milk can now be used in making to require use of Grade A milk. The pro- duction of cottage cheese and ice cream are good examples, since a large pro- portion of surplus Grade A skim milk and milk fat in the northern milkshed go into these products. By reclassifying cot- tage cheese and ice cream so that Grade A milk is required, a larger proportion of milk produced in the area would be paid for at higher class prices, and net prices would increase accordingly. Of course it is implied that the retail prices of the reclassified products will increase to compensate distributors for higher raw-product costs. Since Class 2 and Class 3 products are more concentrated and less perishable than milk, distributors could bring in the products from out-of-state sources more cheaply than by using local Grade A supplies. For instance, it may be possi- ble for desiccated curd or ice cream mix to be processed from surplus Grade A milk and shipped from Arizona, Utah, or Idaho at a lower at-market cost than from processing the same products in the northern milkshed with Class 1 milk. A related problem is the influence of increased prices of the products con- cerned on per capita consumption. Since the dairy industry is interested in in- creased consumption of its products, this procedure may not be desirable, es- pecially because products such as ice cream and cottage cheese are thought to have a greater elasticity of demand with respect to price than do fluid milk or cream. Even the concept of higher prices, in view of current production levels, may be questioned. Though the industry model indicates the "efficient" differential in re- gional prices, it also implies an equi- librium price level that would clear the market. Therefore, an approximation to equilibrium price levels in the present case would be unlikely to imply higher prices at any point in the supply area. Rather, it would more likely imply lower prices in both regions, but a larger rela- tive decline in prices in the deficit area to bring the regional differential into line with transport costs. Market-wide Pooling A second technique for reducing re- gional price differentials is market-wide pooling to redistribute the benefits of Class 1 as compared to surplus use. The important feature of this type of pooling is that each producer is paid a blend price based on the proportion of Class 1 use in the entire market, which tends to distribute the benefits of class pricing equally over all producers participating in the pool. It is not necessary, however, that all price differentials disappear, since net prices could be adjusted to reflect differences in milk fat content and transport costs. This is the situation that many observers suggest would fulfill completely the equity objective. The most important problems with respect to the efficiency and growth ob- jectives involve the impact of market- wide pooling on the effectiveness of prices in guiding producer and distributor de- cisions about production and use. The present contract-pooling transmits to the individual producer the effect of in- - creased production over Class 1 needs, be- cause of the rapid decline in net prices received for surplus production. Under market-wide pooling, blend prices depend on production and use in the entire mar- ket; hence, no individual producer is likely to recognize any interdependence between his total production and net price received. Of course, the present contract system, in the form of a base-surplus plan, could be adapted for market-wide pooling, to retain controls on excess pro- duction. However, a uniform policy A would have to be established with respect to entry of new producers, overbase ship- ments, and base increases, rather than leaving their determination to individual distributors. A related problem involves maintain- ing efficient use patterns in the milkshed. Since blend prices paid to producers * by individual plants would no longer de- pend on the use pattern of the particular plant, plant managers would be under no competitive pressures to obtain sufficient Class 1 use to enable the plant to pay prices comparable to those being paid by y other plants obtaining supplies from the same producing district. Therefore, the supply of milk for the plant would not de- pend directly on blend prices that reflect the plant's disposition of its receipts. The net result is very likely to be the use of more milk from the southern milkshed in manufactured products, increased shipments of milk from the northern milkshed, and higher transport costs for the market as a whole. In turn the aggre- gate net value of the raw product is 82] lowered, even though it is distributed "equitably" over all producers. Modifying Distributors' Procurement Policies and Practices The third — and perhaps simplest — general technique for bringing interre- gional differentials in net producer prices more in line with transport costs is to modify market supply patterns so that a greater proportion of Class 1 use of Los Angeles plants is supplied by producers in the northern milkshed. To maintain efficient use patterns, this method would involve either an absolute decrease in receipts or a decreasing share of total supply from southern producers. The lat- ter implies that supplies to meet increas- ing market requirements would be ob- tained largely from northern producers. Available data do not support the sup- position that the northern milkshed has been supplying a growing relative share of market requirements since the Korean War. In fact, there is more reason to be- lieve that the reverse is true. Hence, the possibility arises of influencing distribu- tors' procurement policies and practices within the existing institutional frame- work. At the most mechanical level, regula- tions could be imposed that establish minimum Class 1 guarantees for pro- ducers' contracts. For instance, lower limits of 75 per cent milk fat and 50 per cent skim milk could be imposed in the northern milkshed. But, as long as con- tract bases are determined through bi- lateral bargaining between a distribu- tor and each producer, a distributor could maintain the same aggregate Class 1 guarantee by merely adusting contract bases downward. This is to say, as long as the pooling system is unchanged and the Class 1 use of the plant remains the same, then restrictions on contract pro- visions can have no real impact on aver- age net returns to producers in a given area. A more promising area for influencing procurement patterns involves country plants. Important aspects of distributors' policies on country-plant producers in- clude: a historical willingness to accept new producers rather than obtain in- creased requirements from existing pro- ducers; base and Class 1 guarantee re- ductions for under-quota production; and implicit requirements for overbase pro- duction to qualify for base increases. In view of the interest of these distributors in maintaining adequate supplies of milk not only for Class 1 use but also for Class 2 purposes, these policies seem perfectly rational — especially in light of decreas- ing Grade B production. At the same time, enormous vested interests in the present market supply patterns have ac- cumulated in the southern milkshed. The fact that supplies at some country plants now exceed not only Class 1 re- quirements but also Class 2 needs has led some distributors to discourage overbase shipments to country plants, and to elim- inate contract penalties for underbase production. However, this does not mean a reversal of the historical role of coun- try plants in market supply patterns; lower levels of surplus production in the future would very likely lead to a return to past policies. An organizational change in the mar- ket structure that would contribute to breaking down historical supply patterns is direct shipments from northern pro- ducers to Los Angeles plants, as is done in the case of shipments to plants in the San Francisco Bay Area. Because of the higher proportion of Class 1 use, such shipments would increase net returns to producers, even though transport charges to Los Angeles were deducted from total production. In addition, the country- plant handling charge would be elim- inated. The impact of direct shipments on the efficiency of market use depends on the degree to which they are limited to milk required for Class 1 purposes. Shipments 83] in excess, which must be diverted to man- ufacturing at Los Angeles plants or back- hauled to northern plants, would raise aggregate transport costs in the market, and reduce the net value of the raw product below its theoretical maximum. Several factors prevent adoption of this practice. First, firms with country plants are unlikely to permit direct shipments as long as they are permitted, legally and by the competitive situation in the buy- ing market, to deduct a handling charge for reshipment of milk and cream from northern plants. At the same time, ship- ments from the northern milkshed would be increased only if the charge is high enough to encourage distributors to in- crease their use of milk from the north- ern milkshed in order to secure lower raw-product costs. In addition, direct shipments would create serious competi- tive difficulties between producers ship- ping direct and those required to ship to a country plant. The necessary costs of maintaining country plants to handle surpluses might fall completely on pro- ducers not shipping direct. Finally, strong vested interests, as represented by the bargaining cooperative serving as the sole direct supplier for the Los An- geles plant of a regional distributor, would increase the reluctance of dis- tributors to alter current procurement practices. The most effective method of influenc- ing distributors' procurement practices would be to provide some economic in- centive for them to obtain increased sup- plies of milk for Class 1 use from the northern milkshed. Minimum pricing, f.o.b. the plant, has made it impossible for northern producers to turn their more favorable production cost structures into a competitive advantage in the raw- product market. Hence, procurement pat- terns largely reflect historical supply re- lationships that are deeply imbedded in the organization of the market and have resulted in the current distortion in in- terregional price differentials. If future requirements are such that production will be sufficient only to meet Class 1 needs and necessary operating reserves, it seems highly likely that cur- rent policies of regional distributors will be altered. The interim need is for changes in the institutional pricing struc- ture that will generate incentives for ex- pansion of production in low-cost areas, with no additional expansion, if not ab- solute decline, in the high-cost areas. This would tend to restore the function of the pricing system in guiding adjust- ments in allocation of resources based on fundamental cost advantages in the com- peting supply regions. A recent development in the pricing program may also affect the competitive position of producers in the northern milkshed. The Bureau of Milk Stabiliza- tion recently advanced the opinion that cooperatives, as well as proprietary dis- tributors, must return full minimum class prices to their members. Although these prices have applied in the past to the sale of milk by cooperatives to other dis- tributors, the new ruling implies sale at above-minimum prices. At present, no action has been taken to enforce this opinion. Were action to be taken, this major avenue of access to Class 1 use by Los Angeles plants might be jeopardized, since the distributors involved might very well attempt to induce producers in the southern milkshed to supply their full needs in order to maintain current raw- product costs. [84] APPENDIX A > Table A-l. Commercial Market Milk Fat Production, 1946-1959 Year Los Angeles County Orange County San Bernardino County Riverside County Total southern milkshed San Joaquin Valley thousand pounds 1946 37,941 39,657 39,720 39,992 40,163 41,793 42,709 45,158 45,179 45,569 46,839 48,077 45,812 45,385 4,828 5,703 5,671 6,082 6,880 8,786 9,089 9,825 10,770 11,574 11,953 12,678 13,711 14,354 5,700 6,412 5,845 5,833 6,080 6,660 6,559 7,032 7,856 9,504 11,566 13,341 14,908 16,707 2,104 1,994 1,737 1,555 1,730 1,870 2,312 2,837 2,993 3,206 3,728 5,145 6,205 7,185 50,573 53,765 52,973 53,462 54,853 59,109 60,669 64,852 66,798 69.853 74,086 79,241 80,636 83,631 31,962 1947 34,525 1948 34,612 1949 36,341 1950 38,784 1951 40,509 1952 41,053 1953 45,951 1954 50,396 1955 53,447 1956 59,457 1957 69,761 1958 72,299 1959 79,298 Sources: California Crop and Livestock Reporting Service (A 1946-58 and B 1959). APPENDIX B Table B-l. Costs of Production for 30- Stanchion Barn and Varying Herd Sizes, by Region Cost item Herd size — Southern milkshed Herd size — Northern milkshed 30 60 90 120 30 60 90 120 dollars Fixed costs Variable costs Feed 8,522.10 9,246.80 2,876.20 1,350.00 960.00 8,522.10 18,493.65 5,544.35 2,700.00 1,920.00 8,522.10 27,740.50 7,391.25 4,050.00 2,880.00 8,522.10 36,987.30 10,347.75 5,400.00 3,840.00 4,795.70 7,145.05 2,554.80 1,350.00 750.00 4,795.70 14,290.15 4,963.60 2.700.00 1.500.00 4.795.70 21,435.20 6,569.50 4.050.00 2,250.00 4,795.70 28,580 30 9,418 25 Replacements Other 5,400.00 3,000 00 Total costs 22,955.10 37,180.10 50,583.85 65,097.15 16,595.55 28,249.45 39,100.40 51,194.25 Production (lbs. milk) Unit cost ($/cwt.) 410,970 5.59 821,940 4.52 1,232,910 4.10 1,643,880 3.96 386,220 4.30 772.440 3.66 1,158,660 3.37 1,544.880 3.31 [85] Table B-2. Costs of Production for 60-Stanchion Barn and Varying Herd Sizes, by Region Herd size — Southern milkshed Herd size — Northern milkshed Cost item 60 120 180 240 60 120 180 240 dollars 14,304.00 18,493.65 7,475.20 2,700.00 1,920.00 14,304.00 36,987.30 11,826.00 5,400.00 3,840.00 14,304.00 55,480.95 16,180.45 8,100.00 5,760.00 14,304.00 73,974.60 20,943.70 10,800.00 7,680.00 6,953.70 14,290.15 6,644.50 2,700.00 1,500.00 6,953.70 28,580.30 10,511.20 5,400.00 3,000.00 6,953.70 42,870.40 14,381.90 8,100.00 4,500.00 6,953.70 Variable costs Feed 57,160.55 18,615.60 Replacements Other 10,800.00 6,000.00 Total costs 44,892.85 72,357.30 99,825.40 127,702.30 32,088.35 54,445.20 76,806.00 99,529.85 Production (lbs. milk) Unit cost (S/cwt.) 821,940 5.46 1,643,880 4.40 2,465,820 4.05 3,287,760 3.88 772,440 4.15 1,544,880 3.52 2,317,320 3.31 3,089,760 3.22 Table B-3. Costs of Production for 90-Stanchion Barn and Varying Herd Sizes, by Region Cost item Herd size — Sou thern milkshed Herd size— Northern milkshed 90 180 270 360 90 180 270 360 dollars 19,685.70 27,740.50 10,347.75 4,050.00 2,880.00 19,685.70 55,480.95 17,903.25 8,100.00 5,760.00 19,685.70 83,221.40 25,294.50 12,150.00 8,640.00 19,685.70 110,961.90 32,796.70 16,200.00 11,520.00 9,061.70 21,435.20 9,197.30 4,050.00 2,250.00 9,061.70 42,870.40 15,912.80 8,100.00 4,500.00 9,061.70 64,305.65 22,482.30 12,150.00 6,750.00 9,061 70 Variable costs Feed 85,740 80 29,126 80 Replacements Other 16,200.00 9 000 00 Total costs 64,703.95 106,929.90 148,991.60 191,164.30 45,994.20 80,449.90 114,748.65 149 129 35 Production (lbs. milk) Unit cost ($/cwt.) 1,232,910 5.25 2,465,820 4.34 3,698,730 4.03 4,931,640 3.88 1,158,660 3.97 2,317,320 3.47 3,475,980 3.30 4,634,640 3.22 86 Table B-4. Costs of Production for 120-Stanchion Barn and Varying Herd Sizes, by Region Cost item Herd size — Southern milkshed Herd size — -Northern milkshed 120 240 360 480 120 240 360 480 dol ars 23,235.35 36,987.30 13,388.20 5,400.00 3,840.00 23,235.35 73,974.60 23,816.25 10,800.00 7,680.00 23,235.35 110,961.90 34,083.70 16,200.00 11,520.00 23,235.35 150,587.20 44,347.50 21,600.00 15,360.00 11,023.10 28,580.30 11,900.10 5,400.00 3,000.00 11,023.10 57,160.55 21,168.40 10,800.00 6,000.00 11,023.10 87,740.85 30,294.70 16,200.00 9,000.00 11,023.10 Variable costs Feed Labor Replacements Other 114,321.10 39,417.05 21,600.00 12,000.00 Total costs 82,850.85 139,506.20 196,000.95 255,130.05 59,903.50 106,152.05 154,258.65 198,091.25 Production (lbs. milk) Unit cost (t/cwt.) 1,643,880 5.04 3,287,760 4.24 4,931,640 3.98 6,575,520 3.87 1,544,880 3.88 3,089,760 3.44 4,634,640 3.33 6,179,520 3.21 LITERATURE CITED Bureau of Milk Stabilization 1957-59. Standard production cost survey for market milk. Calif. State Dept. of Agr. Quarterly. California Crop and Livestock Reporting Service A 1946-59. Manufactured dairy products, milk production, utilization, and prices. Calif. State Dept. of Agr., Dairy Industry Statistics. Annual. B 1955-59. Dairy Inform. Bui. Calif. Dept. of Agr. Monthly. C 1958. Dairy Inform. Bui. Calif. Dept. of Agr. 15 ( 4 ) . D 1959. Dairy Inform. Bui. Calif. Dept. of Agr. 16(6). E 1959. Dairy Inform. Bui. Calif. Dept. of Agr. 16(7). California Dairyman 1960. DHIA production continues to rise. June 8. California Department of Finance 1959. California's population in 1959. August. Clarke, D. A., Jr. 1955. Fluid milk price control in California: a report to the Joint Legislative Committee on Agri- culture and Livestock Problems. Calif. Agric. Exper. Sta. 1956. Milk delivery costs and volume pricing procedure in California. Calif. Agric. Exper. Sta. Bui. 757. County of Los Angeles 1951. Where now brown cow? Regional Planning Commission. 1959. The southeast area, an area land use plan. Regional Planning Commission. Davidson, J. R. 1960. Economic efficiency and firm adjustment for market milk products in the southern metro- politan milkshed of California. University of California, unpublished Ph.D. dissertation. Dean, G. W. and C. O. McCorkle, Jr. 1960. Projections relating to California agriculture in 1975. Calif. Agric. Exper. Sta. Bui. 778. Faris, J. E. 1960. Analytical techniques used in determining the optimum replacement pattern. Jour, of Farm Econ. 42(4). [87 1 LITERATURE CITED, Continued Fletcher, L. B. 1960. Growth and adjustment of the Los Angeles milkshed: a study in the economics of location. University of California, unpublished Ph.D. dissertation. | French et al. 1956. Economic efficiency in plant operation with special reference to the marketing of California pears. Hilgardia 24(19). Los Angeles Chamber of Commerce 1959. Population projections to 1980, 14 southern California counties. McCorkle, C. 0., Jr. 1960. Some structural changes in California's market milk industry. Unpublished paper. Nerlove and Bachman 1960. The analysis of changes in agricultural supply: problems and approaches. Jour, of Farm Econ.42(8). Phelps, H. F. 1960. Dairy labor use in southern California, 1959. Calif. Agric. Ext. Serv., Riverside. Simmons, R. L. 1959. Optimum adjustments of the dairy industry of the western region to economic conditions of 1975. University of California, unpublished Ph.D. dissertation. Sosnick, S. H. and J. M. Tinley 1960. Marketing Problems of San Joaquin Valley cooperatives. University of California, Giannini Foundation mimeo report 228. Southern California Research Council 1960. Southern California metropolis. Los Angeles. Spencer, L. 1931. An economic survey of the Los Angeles milk market. University of California Agric. Exper. Sta. Bui. 513. Tinley, J. M. 1938. Public regulation of milk marketing in California. University of California Press. U. S. Department of Agriculture 1959. The dairy situation. Agricultural Marketing Service. Sept. Weeks, D. 1945. Economic location as illustrated by the southern California dairy industry. Proceedings of the Institute of Economics and Finance, Occidental. 6m-6,'62(C6901)J.F. «^^» m