The distribution process has become slightly more complicated as shown in Figure 12. Also, American consumers purchase a wider variety of dairy and non-dairy products than they did in the 1930's (Figure 13). Soft drinks and frozen juices are increasingly competitive with drinking milk, margarine has replaced butter in many households, "non-dairy" frozen products (whose primary ingredient is often sodium casineate derived from powdered milk) have gained wide consumer acceptance. Since World War II, brand preference that once gave dairies a secure niche in the market appears to have declined, permitting food chains to successfully introduce store labels. On the other hand, mergers among dairy companies in the 1940's and 1950's established chains in many cities. At the same time, dairy cooperatives have expanded their membership and, in the fifties, started to become regional rather than local. These changes in the milk industry have implications for the geographic size of the market, the bargaining power of dairy farmers and their coops versus processors and distributors, and the concepts of orderly marketing and stability of prices. Each of these will be investigated in turn. Finally, this paper will look at the general welfare of farmers, the primary concern of the Agricultural Marketing Agreement Act of 1937 authorizing Federal Milk Marketing Orders. LOCAL MILKSHEDS TURNING INTO ONE NATIONAL MARKET Expanding geographic markets are a function of improved sanitation (in farm equipment, milk transporting, processing, and final distribution in grocery stores); the improved road network connecting farmers and processors and interlinking markets; technological change in transportation; and decisions in the courts reducing or eliminating local and state barriers to intermarket movements of milk, such as the Lehigh Valley Decision and the recent Arcadia Decision. Evolution to a national market means that local submarkets are more stable and more predictable-local production short falls or excesses can be balanced by changes in shipments from other markets. MARKET POWER OF DAIRY FARMERS VERSUS PROCESSORS AND/OR DISTRIBUTORS The expanding geographic size of the market, by itself, increases the number of dairy farmers and processors-distributors who can make contracts with each other, thus diminishing the market power of the processors from the 1930's when there were just a handful around each city. Dairy farmers' bargaining power has been further increased by the growth of large regional cooperatives during the 1960's. Cooperatives currently market over 80 percent of all Grade A milk produced, and in a majority of city markets one coop markets over 90 percent of the Grade A milk. The U.S. Department of Justice has deemed coop bargaining power to be excessive at least when used to coerce processors-distributors or non-member dairy farmers. Recently, the Department of Justice has been involved in cases against cooperatives including the Associated Milk Producers, Inc. (AMPI), Mid-American Dairymen, Inc. (MidAm), and Dairymen Inc. (D.I.). The court records and final judgments in consent decrees have helped to clarify cooperative powers under the Capper-Volstead Act and act as a deterrent to further abuse market power (74). From the late forties through the early fifties national processing and distributing companies went through a flurry of mergers. While not as dramatic as in the twenties, this consolidation substantially increased market control by the leading companies (155, pp. 13–14). After determining that economic efficiencies were not the primary causes of mergers, The Federal Trade Commission (FTC) intervened in 1952 to prohibit the top 4 processors-distributors from further merger activity for the next decade (155, p. 94). That is still FTC policy. Guidelines published in the Federal Register state that the Commission must be notified 60 days in advance of any merger involving any company processing more than 300 million pounds of Class I milk annually (by itself or in combination with the acquired company) where a) the acquisition will be located within 500 miles of the company or b) the acquired processor-distributor has fluid sales over $25 million or processes more than 26 million pounds of Class I milk (156, p. 17771). According to the guidelines, all mergers by the leading 4 regional dairy companies and those violating the merger guidelines published by the Department of Justice in 1968 will be investigated and challenged. The size of the markets controlled by the largest processors-distributors can be measured in a variety of ways. I favor the market 83-944-78-36 definition of Dr. Alden Manchester, former Chief of the Animal Products Branch of the USDA's Economic Research Service. He drew a 250 mile radius around a central city and estimated the market share of the four largest processors-distributors within that production region, reasoning that even if the processors-distributors are not directly supplying the central city, transportation costs are low enough that they could easily enter the market if there were a profit to be made.73 According to this definition, the four largest processors averaged slightly over 40 percent of the processing within the marketing area for all such areas in the U.S. (121, p. 12). The Federal Trade Commission prefers two other methods, both of which give an appearance of greater control by processors. By one of these methods, the four largest processors' share from plants located within the Federal Milk Marketing Area is computed; in 1965 it averaged 72 percent. By the other method, the share of the four largest suppliers within the Federal Order, regardless of where the milk was processed, is computed-yielding a slightly lower concentration averaging 66 percent (155, p. 46). The Federal Trade Commission Report comments on these concentration ratios: The levels of concentration would indicate a likelihood of competitive problems. Economic studies generally have indicated that four-firm concentration above 40% begins to indicate oligopolistic performance. Concentration in the over 60 percent range indicates tight-knit oligopoly where some form of price leadership is generally used to set prices above competitive levels (155, pp. 46–7). But Manchester rejoins: U.S. fluid milk markets have not become highly concentrated. Only in smaller markets-those with a total volume of less than fifty million pounds per monthwere more than half of the sales made by the four largest potential competitors. In the largest markets, the market share of the four largest competitors average less than 25 percent (12, p. v). The increasing size of Federal Order areas as they are merged by the USDA (confirmed by dairy farmer voting) is a manifestation of the interdependence of dairy markets. As these markets become larger, competition among processors-distributors increases. For this reason Manchester's analysis seems more accurate: processors-distributors have some market power worth noting, but it is only moderate in the average market.74 Still another factor limits processor market power. During the last decade, a striking change in the marketing of milk has occurred: the backward integration of supermarkets into milk processing. Their share of total milk sales was only 2.9 percent in 1964, but it rose to 8.2 percent in 1970 and it is still rising (Table 11) (121, p. v.). It is primarily the largest processor-distributors who are affected by the supermarket integration, since supermarkets often received their supplies from a large national processor before they started processing their own (155, p. 9). 73 Entry into a nearby city is easy because sales to a dozen supermarkets can fill a moderate sized truck. 74 A recent example of the dangers of small numbers of processors surfaced in Arizona where 4 dairies supplying 90 percent of milk sold in Arizona pleaded no contest to price fixing charges from 1965 to 1975. Judge Carl Muecke ordered the dairies to print notices on their milk cartons informing the public that they were defendants in a price-fixing suit. However, the order was stayed on appeal (28). In summary, dairy farmers have much more market power vis-a-vis the processors-distributors than they did in the 1930's. This is largely a result of cooperative growth and regionalization into larger bargaining units. Contributing factors are Department of Justice and Federal Trade Commission policing of the market power of the national dairy firms plus the entry of supermarkets into processing, which provides dairy farmers with other outlets for milk and is a brake on the power of processors-distributors. TABLE 11.-SALES OF FRESH MILK PRODUCTS, BY TYPE OF PROCESSOR-DISTRIBUTOR, 1964 AND 1970 1 Organization and Competition in the Dairy Industry, National Commission on Food Marketing, Technical Study No. 3, 1966, p. 177. (Original data from Farmer Cooperative Service, USDA.) 2 Firms whose primary business is operating supermarkets. 3 Most milk sales through own stores. • Substantial sales through outlets other than own stores. Source: 121. ORDERLY MARKETING CONDITIONS AND STABILITY The alleged benefits of "orderly marketing" have been used by the government and by dairy interests to defend Federal milk price regulations.75 But it is a term both confusing and self-serving. According to the 1962 independent Federal Milk Order Study Committee under Chairman Nourse: A stable peace or at least peaceful coexistence was demanded under the slogan "orderly marketing" of milk. To attain this end and to raise the income of their members, the fluid milk cooperatives launched a two-pronged program. First, they sought to improve their bargaining power by amassing a significantly large volume of supply. Second, they devised concepts and practice of "classified" pricing. But here it should be noted that, behind the handsome facade of their tall, opaque word orderly, there appeared from time to time to be a lurking desire among some groups to build up such bargaining power as would enable the cooperative to dominate the price-making process and raise prices for their group above a true competitive level (Emphasis in original) (142, p. 8). Indeed, the report continues, "the basic concept of 'orderliness' in the economic sense is still not clearly understood or fully agreed to by all parties" (142, p. 9)76 The Nourse report concludes that the objective of Federal Orders is: "To promote orderly marketing conditions for farmers specializing in the production of fluid milk and thereby improve their income situation at least in the long run (142, p. 12)." But the Federal Milk Order Study Committee does not render the word transparent. "Order 75 The Report of the Federal Trade Commission on Agricultural Income Inquiry, submitted to the Congress on Mar. 2, 1937, states on p. 16 that "most of the early cooperative associations adopted the principle of 'orderly marketing,' which means, chiefly, the avoidance of dumping the crop on the market without regard to the price." 76 See Appendix B for the full text under "The Concept of Orderly Marketing." |