Story, Robert P.

English

Research Papers in Economics

EXPERIENCE  WITH  THE  FEDERAL
MILK  MARKETING  ORDER  PROGRAM
Robert P. Story
Professor of  Marketing
Cornell University
THE  DEVELOPMENT  AND  USE  OF  MILK  MARKETING  ORDERS
More than  40 percent  of the  milk sold by farmers  to plants  and
dealers  is  marketed  under  the  terms  of  the  more  than  80  federal
orders.  These  markets now extend throughout the nation and include
more than half the urban population.  In the Northeastern states nearly
all of the commercial milk supply is marketed under the terms of either
state  or federal  milk marketing  orders.
The  classified  pricing  system  used  in  federal  orders  is  ideally
suited  to  a  product  like  milk.  Its  adaptability  stems  from  several
peculiar  characteristics  of  milk:
1.  The  perishability  of  milk  in  fluid  form  and  the  favorable
medium that  it provides  for  disease  organisms.
2.  The  bulk  of  milk  and  high  cost  of  transportation  relative
to  value.
3.  The importance  of milk in the diet.
4.  The  multiple  products  of  milk which  are  readily  identifiable
but cannot be produced efficiently in the farm or in the home.
5.  The variability of different  milk products in their storage life,
transportation  cost,  and  demand  characteristics.
6.  The  seasonal  nature  of  milk  production  relative  to  its  con-
sumption  in fluid form.
These characteristics  have important marketing  implications.  The
bargaining  position  of the  producer is basically  weak  because  of  the
perishability  of  the  product.  Milk  cannot  be withheld  from  market
even  for  short periods  except  at high  cost.
The perishability  of  milk,  the  need for  maintaining  rigid  control
over  sanitary conditions,  and the relatively  high  cost of  transporting
fluid  milk encouraged  the  development  of  local  production  facilities
to satisfy  the fluid  milk needs.  The production  of milk for manufac-
turing,  therefore, has been concentrated  in the lowest cost production
areas  while  the  production  of  milk  for  fluid  use,  in  general,  has
continued  in  areas  adjacent  to markets,  where  production  costs tend
to be higher.
79The  seasonal  nature of milk  production  results in  larger  supplies of  milk than  can  be  sold  as  fluid  milk  at certain times  in most local production  areas.  This  seasonally surplus milk must be manufactured and  marketed  in  competition  with  similar products  from  specialized low-cost production  areas.  This tends to result in disorderly marketing conditions  and  unstable  prices.
THE  EFFECT OF  MARKETING  ORDERS
Marketing orders have been highly successful in overcoming  many of  the  marketing  problems  connected  with  milk  which  arise  from its unusual characteristics.  They have helped to create orderly market- ing conditions  in fluid milk  markets  and have  stabilized prices.
The inelastic demand for fluid milk has made it possible to increase producer returns beyond  what they  otherwise would  be by increasing the wholesale  price of fluid  milk.
Prices  usually  have  not been  permitted  to exceed  the  theoretical cost of buying fluid milk  on  a  regular basis  from  surplus production areas.  During  much  of  the  1950's  this  pricing  standard  resulted  in a  widening  margin  in  order  markets  between  fluid  milk  prices  and manufacturing  milk prices.  During the war years when manufacturing milk  prices  were  at  their  peak,  marketing  orders  undoubtedly  held down fluid  milk prices.
In  recent  years  milk  production  has  increased  in  order  markets. Mostly,  this  response  has  been  limited  to  the  additional  supply  of fluid  milk  needed  by  growing  markets.  In  the  Northeastern  states milk  supplies  have  increased  more  than  the  growth  in  fluid  milk sales.  The  volume  of surplus  milk  has,  therefore,  increased.  While the  proportion  of milk  used  for  fluid  purposes  has  remained  about constant  in  this  region,  nationally  an  increasing  proportion  of  milk has  been  utilized  in  fluid  form.  This  decline  in  fluid  utilization  in the  Northeast  relative  to  the  nation  as  a  whole  was  due  not  only to  increased  milk  supplies  but  also  to  the relatively  slow  growth  in population  in  the  Northeast.
Producers  have  a  strong  incentive  to  meet  fluid  market  health requirements  and  shift  deliveries  to  order  markets  when  fluid  milk prices  are  high  relative  to  manufacturing  milk  prices.  Increases  in fluid milk in order markets, therefore,  does not necessarily indicate an increase in total  supply.
Marketing  orders  have  increased  fluid  milk prices  to  consumers and  as  a result have reduced  fluid milk consumption.  This reduction in  consumption  has  been  modest,  however,  because  of the  inelastic demand  for  fluid  milk.  Other  factors  affect  retail  prices  and  con-
80sumption more  than  marketing  orders  and  product  cost.  Marketing
margin  is  one  such  factor.  Margins  are  not  affected  by  marketing
orders,  but  by  such  factors  as  restrictive  licensing  and  the establish-
ment of minimum  resale  prices.
In summary,  without marketing  orders or some similiar program,
local milk supplies probably would not have increased as much in many
markets, and more milk would have been imported to meet the growing
need for fluid milk.  Fluid milk prices would have been somewhat lower
and  consumption  somewhat  higher.  Manufacturing  milk  supplies
would have been reduced,  and the difference between fluid and manu-
facturing milk prices would have been less.  Milk production over time
would have increased more in the lower cost production areas.
The increase in manufacturing  milk prices resulting from the sup-
port program  has more than offset the effect of any increase  in manu-
facturing  milk  supplies  due  to  the  marketing  order  program.  The
higher  the  support  price  level,  the lower  the  margin  that fluid  milk
prices need to have over manufacturing  milk prices to insure  adequate
supplies  of fluid milk in local markets.  Support prices for manufactur-
ing milk  thus have  tended to reduce  the difference between manufac-
turing and fluid milk prices.
MAIN  FUTURE  PROSPECTS  FOR  MARKETING  ORDERS
Marketing  orders  will  continue  to  be  important  instruments  for
maintaining  orderly  marketing  conditions  and  stable  prices  in  fluid
milk markets.  They are likely to be less effective in the years ahead in
improving producer  returns than in  the past.  Changing  technologies
in the processing  and distribution  of milk are broadening distribution
areas and are causing a trend toward regional rather than local market
orders.  This trend  is likely to continue and will alter  the geographic
patterns of production within regions.
The development  of new products,  such as instant nonfat dry milk
and concentrated  fresh or sterile milk may alter the demand character-
istics of fluid milk.  These new products, because of their reduced bulk,
will be less costly to transport than fluid milk and, if accepted by con-
sumers,  will improve  the  competitive  position of  low  cost producing
areas.  The progress made in reducing costs of processing and distribut-
ing fluid milk in local markets will have an important  bearing on the
competition  between  fluid milk  and  substitute  products.  If costs  of
producing fluid milk cannot be sufficiently reduced, substitute products
will capture a significant  share of this market,  and fluid market  pro-
ducers will lose some of the price advantage they now enjoy over man-
ufacturing milk producers.
81

EXPERIENCE WITH THE FEDERAL MILK MARKETING ORDER PROGRAM

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