An example of the differences in the seasonal variation of production of individual producers is indicated by an analysis of figures secured by the Dairy Section of the Agricultural Adjustment Administration pertaining to shipments by producers supplying milk to the Baltimore, Md., market. The measure of seasonal variation used is the percentage that production during the month of low deliveries is of production during the months of high deliveries. This measure, though admittedly open to some objection, nevertheless serves fairly well as an indication of the seasonal variation in production of individual producers. These figures are shown in the form of a cross classification in table 25, the other variable being size, as measured by the total volume of milk delivered during the year. Over half of the producers in the sample fall within the group wherein deliveries during the month of low deliveries range from 50 percent to 79 percent of deliveries during the month of high deliveries. The range in evenness in production of the producers in the sample varied markedly. Three of the producers fell within the group wherein the percentage deliveries during the month of low deliveries were only 10 to 19 percent of deliveries during the month of high deliveries, and two fell within the 80 to 89 percent range." 69 TABLE 25. Frequency distribution of percentage that production during the month of low deliveries is of production during the month of high deliveries, for 104 producers supplying milk to the Baltimore market in 1934, classified according to volume delivered 0-9 Size group-production (1,000 pounds) Percentage that deliveries in low month are of deliveries in high month 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90-99 Number of producers Compiled from unpublished data in the files of the Division of Marketing and Marketing Agreements, Agricultural Adjustment Administration. 69 The percentages relate to production by individual producers. The figures show that there tends to be a positive relationship between evenness of production, and the total volume produced during the year, the larger producers tending to show less seasonal variation in production. This is true in spite of the fact that only one factor, size, has been related to evenness in production and, as was pointed out before, many factors are associated with seasonal variation in production. That other factors also influence seasonal variation in production is indicated by the fact that producers falling within the same frequency, as regards the percentage that production during the month of low deliveries is of production during the month of high deliveries, vary extremely in size as measured by total annual deliveries. III. THE SEASONAL EXCESS As was pointed out in the preceding sections of this chapter, there is some seasonal variation in the sales of milk to consumers. Also, there are significant variations in production from season to season in many milk markets. Thus sales of milk to consumers remain relatively constant throughout the year and production varies markedly in many cases, with the result that during the season of flush production the volume of milk produced within the supply area is materially in excess of the volume sold to consumers in the form of fluid milk. This excess in supply over the volume sold by distributors as milk is termed the seasonal excess in this treatise. Examples of the seasonal excess are set forth below, most of the data and information used being taken from published studies. In table 26 are shown figures relating to the volume of milk produced by members of the Maryland State Dairymen's Association, Baltimore, Md., fluid-milk sales of distributors purchasing milk from the association, and the percentage such fluid-milk sales are of the total volume produced by association members, during the period January 1929 to December 1931, inclusive. Total production and total fluid-milk sales were markedly constant during this period. Total production amounted to 27,000,000 gallons, 27,000,000 gallons, 28,000,000 gallons, and 27,300,000 gallons, while fluid-milk sales totaled 18,800,000 gallons, 18,900,000 gallons, 18,500,000 gallons, and 17,600,000 gallons in 1928, 1929, 1930, and 1931, respectively. However, the situation with respect to seasonal production and sales was quite different. Fluid-milk sales were markedly constant, while production varied markedly. Fluid-milk sales usually were a smaller proportion of milk production during May and a higher proportion during the winter months. The sales and production data given in table 26 are graphically depicted in figure 15. It is obvious that fluid-milk sales were relatively constant, while the seasonal increases and decreases in production were reflected in increases and decreases in the volume of milk sold in excess of fluid-milk sales. Similar results are secured when data with respect to the Twin Cities, Minn., Los Angeles, Calif., Boston Mass., and Chicago, Ill., markets are analyzed. These data are set forth in the order above named in appendix A, tables 74–77. FIGURE 15.-Purchases and fluid-milk sales of distributors purchasing from members of the Maryland State Dairymen's Association, Baltimore, Md., 1928-32. TABLE 26.-Production and fluid-milk sales to distributors, Maryland State Dairymen's Association, 1928 to 1931, inclusive, by months TABLE 26.-Production and fluid-milk sales to distributors, Maryland State Dairymen's Association, 1928 to 1931, inclusive, by months-Continued Compiled from History of Maryland State Dairymen's Association, History Series No. 2, The National Cooperative Milk Producers' Federation, appendix, table 6. IV. THE DAILY EXCESS The facts and considerations set forth in the preceding sections of this chapter show that there is considerable daily variation in the demand for milk. Distributors have found it necessary to have available a supply of milk sufficient at all times to meet the daily variation in the demand for milk. This supply, in excess of average daily sales, may be termed the operating reserve. It varies according to the nature of the distributors' business, but it appears that a volume of about 10 percent in excess of the average daily sales of distributors is probably necessary in order to meet daily variations in the demand for milk. V. SUMMARY The data and information presented in this chapter may be summarized as follows: (1) The sales of milk to consumers following changes in prices vary inversely to price changes, other factors being the same, and the change in milk sales appears to be less than proportional to the change in prices. It appears, therefore, that the demand for milk is relatively inelastic. (2) There is considerable daily variation in the demand for milk, on account of changes in the weather, holidays, etc. (3) There is some seasonal variation in the demand for milk, because of such factors as seasonal changes in weather conditions, the vacation movement, and other factors. (4) Seasonal variation in production is quite marked in many milksheds. (5) There are wide differences in the seasonal variation of production in different sections of the areas supplying milk to many large milk markets, because of differences in the type of farming and other factors. (6) There are wide differences in the seasonal variation of production of individual producers, largely because of such factors as differences in type of farming and feeding practices. (7) The relatively small seasonal variation in fluid-milk sales as compared with the seasonal variation in milk production in many milk supply areas results in a seasonal excess of milk production over fluid-milk sales. The size of this excess depends upon the seasonal variation in fluid-milk sales relative to production and is generally larger in those areas wherein the seasonal variation in production is large. (8) There are rather marked daily variations in the demand for milk. As a result, distributors find it necessary to have on hand a volume of milk somewhat in excess of average daily sales. This daily excess or operating reserve probably amounts to about 10 percent of average daily sales, depending upon the nature of the distributors' business and upon other factors. CHAPTER 4 THE GENERAL THEORY OF MILK PRICES The preceding chapters have developed certain facts and information concerning the dairy industry in the country as a whole, concerning the size of business units and as regards cooperative associations, concerning their price-making activities, the development and some indication of the extent of classified-price plans and various pooling devices, and some details regarding supply and demand in fluid-milk markets. In this chapter the general theory of milk prices will be developed in an effort to ascertain the general economic principles underlying the structure of milk markets at the present time. Use will be made of certain concepts and terms that are the tools of the economist, and only so much discussion of such concepts will be presented as appears necessary in the interest of clarity of presentation. In developing the theory it is desirable to start with a very simple market structure. In this connection it may appear that the theory wanders far afield from the actual situation found in milk markets at the present time. However, there may be markets, particularly small markets where the supply is not organized and distributors are numerous and small, to which such theory definitely applies. In any case it is probably much easier to understand the complicated market structures found in many milk markets if the nature of the structure prior to its evolution to a complicated form is understood. This type of approach to the development of a general theory of milk prices. has been used because it is thought that it will lead to a more thorough understanding of the complicated price structure obtaining in many milk markets, and because it furnishes one basis of comparison and appraisal of the price structure. I. THE GENERAL THEORY OF MILK PRICES IN SIMPLE MARKETS In this section is presented the general theory of milk prices for milk markets in which the output of individual producers and individual distributors is such a small portion of the volume produced and sold in the market that it has no practical effect upon the market price, and in which there is no product differentiation. In such markets, which for convenience may be termed simple markets, the producer or distributor will sell as much or as little as will return to him the largest profit (or the least loss) in view of the ruling market price. The volume he will produce or sell will be a function of his costs, on the one hand, and of the ruling market price on the other. Thus assume the market price to be pk in figure 16, ac the average cost per unit of a marginal producer (a producer who would tend to go out of production if the price were lower) or the cost curve including rents of a submarginal producer, and mc the marginal cost curve (the cost per each additional unit produced). The average |