alternatively, producers were abruptly dropped by dealers. 17/ The potential for large and, for farmers, undesirable swings in the price of milk due to seasonal variation became particularly noticeable in the 19101914 period. Throughout the war years, 1914 to 1918, increased export demand for manufactured milk products absorbed the domestic surplus while maintaining the price. 18/ However, the grade A surplus problem was to reappear after the conflict.

D. Producer Response to Changing Market Conditions

As health regulation developed and spread, farmers were faced with seasonal surpluses which lead to unstable prices and left the individual farmer with little power. Cooperative organization became the answer for the farmer. During the first quarter of this century, farmers and agricultural leaders became convinced that by means of cooperatives they could materially improve their economic

position through collective bargaining. 19/

Over time, the principal thrust of cooperative efforts was to raise the price of milk to dealers which they sought to accomplish by imposing a classified pricing scheme upon dealers.

17/ Beal, p. 215.

18/ John D. Black, The Dairy Industry and the AAA (Wash., The Brookings Inst., 1935) p. 36.

D. C.:

As health regulations were imposed upon a market, two phenomenon occurred: only a certain portion of the milk on the market qualified for fluid use, at an added cost, and there was a surplus in the market of grade A milk at certain times of the year. 20/ The surplus resulted because grade A farmers increased their production levels in response to the Class I prices being paid for grade A milk. This "surplus" went into manufacturing purposes. Prior to any concerted attempts by farmers to affect prices received, dealers would pay farmers a price for their milk that roughly approximated the "blend" of the two prices graded and ungraded based on the individual dealer's utilization of the graded milk. 21/

-

Producers were dissatisfied with this approach for various reasons. The information on which the grade A

price was determined was solely within the purview of the handler. Further, some dealers

efficient ones

-

-

arguably, the more

purchased only the supply needed by them for their fluid sales. This meant they could pay their farmers a higher flat price than a dealer processing fluid and manufacturing milk. Finally, there were charges that farmers were being dropped by dealers, often to

20/ Id., 215-16; T. G. Stitts & W. C. Weldon, "Economic Analysis of Bargaining Aspects of Milk Cooperatives," Farm Credit Adm. Cir. C-104 (April 1937), p. 5.

21/ Id., pp. 215-16.

"discipline" farmers to accept lower prices. 22/

Prior to the war, experimental pricing plans were initiated by farmer cooperatives in an effort to raise the price of milk sold to handlers. The cooperative's position was that they should be paid according to the price or value of the production to which their milk was put. In the case of graded milk, the difference in resale value between manufactured and fluid milk was not completely explained by the differences in costs of production. The higher price was achieved because of the different demands for milk in its various forms, artificial barriers, and the operation of a blend price. 23/ The demand for fluid milk at retail was perceived as relatively inelastic while the demand for manufactured milk products seemed relatively elastic. Thus, with any market power, artificially

higher prices could be extracted at retail for fluid

milk than could be extracted for manufactured milk, raising consumer expenditures on milk products.

Farmers

supplying graded milk 24/ wanted to share in these higher

22/ Id.

The

23/ If a farmer produced grade A milk, it could be used by the dealer in part for lower value manufactured products. blend, or average, price the farmer would receive would have to be high enough to meet the added cost of producing graded milk. For example, assume it costs $0.20 more to produce graded milk, and a farmer sells half his graded milk at a high, fluid price, and half at the lower manufacturing grade price. That farmer would have to receive $0.40 more for his milk going into fluid use than the manufacturing price to meet his costs. 24/ It should be remembered that, with the advent of milk regulations, graded milk was the only milk qualified for consumption in fluid form.

receipts. If farmers had market power, either through collective action or because of legal restrictions, they could control the amount of graded milk available in the market, thus sharing in the higher fluid receipts. In the absence of market power, the dealers could realize the increased receipts if they had market power.

To realize some of the profits of the varied milk use demands, farmer organizations developed several schemes to charge dealers for milk according to the use to which the milk was put. These schemes, called classified pricing systems, were of two general types: pool or blend price payment plan, or the base-surplus payment plan. Under a pool or blend payment system, each dealer is charged for the milk he buys according to its actual use. The farmer organization is paid for all milk delivered, and then determines what the average price of milk sold was for the period involved. Each farmer receives for all his milk this average or "blend" price for each unit of graded milk production, regardless of the actual use to which his milk is ultimately put. The farmers may be paid based upon either a marketwide pool where all farmers in the area receive the same price, or an individual dealer pool, where farmers delivering to the same dealer received a blend price according to that one dealer's usage of milk. Under the individual dealer pool,

farmers delivering to different dealers in the same market may receive different prices for their milk depending upon the variation among dealers in their usage. 25/

Under a base-surplus payment system, each farmer is allocated a quantity of milk production, known as his

"base" amount, or "quota," for which the farmer organization pays him the base price. This base price corresponds to the price the cooperative charges dealers for fluid use milk. All milk delivered by a farmer in excess of his base is surplus milk, for which the farmer is paid a price corresponding to the price the cooperative charged the dealers for milk used in manufacturing. 26/

There is evidence that some type of classified pricing system was used as early as 1898, and that sporadic

attempts to enforce classified pricing were made in isolated markets before the war. 27/ However, the system of pricing

milk according to the form in which it was sold by dealers

was first used extensively in the post-war markets of

Boston, Washington, D. C. and Philadelphia. 28/ The

25/ See Report of the FTC on the Sale and Distribution of Milk Products, 74th Cong., 1st Sess., H. Doc. No. 152 (April 5, 1935), p. 28.

26/ Id., p. 28-29.

27/ Bartlett, p. 31-39.

28/ Gaumnitz a..d Reed, p. 31.