April 1967 A. E. Res. 216

An Economic Evaluation of Methods Used

Under Marketing Order Legislation (Voluntary Organizations and Marketing Boards)

by

Olon D. Forker

Brenda A. Anderson

Department of Agricultural Economics

Cornell University Agricultural Experiment Station

New York State Caller Qf Aij . ~ Ifni

The purpose of this report is threefold:

L To provide a ba.sis for discussion and partial evaluation of the feasi­bility of using existing authorized methods to manipulate marketings and prices of specific commodities.

2. To evaluate the potential economic benefits and consequences of using such methods.

3. To provide a basis for consideration and evaluation of alternative systems of egg pricing.

The study is presented in partial fulfillment of the objectives of State Project 105 and Hatch Project 525 and was done in cooperation with the Economic Re­search Service of the United States Department of Agriculture. This is part of a larger project to develop some feasible alternatives to the existing system of price determination for eggs.

The authors wish to thank: Dr. B. A. Dominick. Jr. and Dr. L. B. Darrah of Cornell University; Dr. K. Farrell of the University of California; and Dr. L. Voss of the U.S.D.A., who generously gave their time to review the manuscript and offer helpful advice and criticism. Respcnsibility for any defects in the manuscript lies solely with the authors. The opinions expressed are those of the authors and do not necessarily reflect, in any way, those of the Department of Agricultural Economics, Cornell University.

AN ECONO~nC EVALUATION OF METHODS USED UNDER MARKET(NG ORDER LEGISLATION

(Voluntary Organizations and Marketing Boards)

by

Olan D. Fouer and Brenda A. Anderson*

Legisiation enabling producers to form themselves into groups to influence the ma rketing of their products has been in effect since the passing of the Capper-Volstead Act in 1922. This Act authorizes farmers to legally form cooperatives to strengthen their bargaining position in the market. Marketing order legislation was initially contained in the Agricultural Adjustment Act of 1933, which was later modified and incorporated in the Agricultural Marketing Agreement Act of 1937. The purpose, of this paper- is to evaluate the methods that producers may use to regulate marketing, under the above acts as amended, and under the state legislation of New York. The methods are defined and dis­cussed on the basis of the purpose they are intended to serve, and the conditions or factors that influence their effectiveness.

Enabling Legislation

The Agricuitural Marketing Agreement Act of 1937 as amended, authorizes the establishment of federal marketing orders and agreements . .!/ In New York State, authority for state orders is contained in Article 25. Laws of 1957. Nine other states have enabling legislation': California, Colorado. Florida, Georgia, Michigan, Pennsylvania, Utah, Washington and Wisconsin. California has used the marketing order legislation more extensively than any other _state and is therefore discussed in some detail in this report. Enabling legislation for California state orders is contained in the Agricultural Prorate Law of 1933 and the California Marketing Act of 1937.

The authority for milk marketing orders is contained in the Federal Agri­cultural Marketing Act, whereas in New York it is embodied in Article 21 of the Agricultural Code, Laws of 1933 and in California, in the Yoong Act of 1935 (minimum producer prices) and the Desmond Act of 1937 (minimum resale prices). The main aim of all such legislation is to create a, more orderly mar­keting system, to enhance producer income, and to minimize the waste of agri­cultural resources.

Associate Professor of Marketing and Research Associate respectiveLy in the Department of Agricultural Economlcs. Cornen University.

1. A marketing order is binding on all producers and handlers within the speci­fied area. while a marketing agreement is only binding on signatories to it.

2

Geographical Scope. Price Goals and Vote Requirements

The specifications of the above acts pertaining to geographical scope, price goals. and vote requirements are presented in summa rized form in Table 1. The geographical scope of federal orders is greater than that of state orders, since state orders are applicable only to the production and handling of commodities within their boundaries. Federal orders extend to commodities in interstate and export trade, and also to a commodity in intrastate trade, if it is in compe­tition wi th interstate business in that commodi ty.

Under federal legislation, the price goal is speCifically defined to be the parity price of the product. This is the maximum price possible under federal orders in that the order has to be terminated if prices rise above that leveL Parity price is not speCifically mentioned in either the New York or California legislation. The purpose is referred to in vaguer terms such as "stable" or "reasonable" prices. Both specify that the price must be adequate to maintain supply equal to demand.

The procedure for obtaining an order is app roximately the same in all cases. Producers must petition the Secretary of Agriculture for a federal order, or his equivalent in the state legislature for a state order. who must then investigate the industry. hold hearings. and conduct a referendwn. For a federal or New York State order to be instigated. the results of the referendum must show that 2/3 of the producers voting assented. Both California acts require the assent of 65 percent of the producers voting who produced over 51 percent of the total quantity marketed in the immediately preceding period by those producers vot­ing assent, or conversely, 51 percent or more by number and 65 percent or more by volume. In addition. an order maybe issued only if 40 percent or more of the total number of producers votes, Furthermore, any order that directly affects or regulates handlers requires the written assent of 65 percent or more of the qualified handlers by volume or value.

With the exception of' milk in New York State. termination or amendment of both the federal and state orders requires the assent of 50 percent of the pro­ducers affected. Termination of New York milk orders requires the assent of only 35 percent of the producers affected. The Secreta ry of Agriculture (or his state equivalent) may also terminate an order. if he finds that it obstructs the policy of. or fails to achieve the objectives of. the enabling legislation.

Eligible Commodities

The federal legislation covers a smaller range of commodities than the corresponding state legislation (Table 2). Fruits and vegetables for canning and freezing, apart from a few exceptions. cannot be regulated by federal orders. However, they can be covered by state orders in New York, providing the proc­essing is done by producers. Almost all commodities are eligible under Cali­fornia legislation.

Table 1. tmlSlATION E!li\JlUNCl PROIlUCE:R GROUPS 10 REGUUT€ 1'HE MAAlCETIIIC OF TIIS:tR morom

CAJ..II'ORl<Ii\

A.M.A. 193';;/ ArtIcle 25 Ml.tk C~nt ~ol A.PJ'J.L.Y 1933 C.M.A • .1' 1937 e~ aroended 1.0"" of' 1957 La""" 19~3 Young Act 1935 DesmCind Ad 1937

Tho~. H"",<1lon: Hanllir", Producers: ProduceiS:' Producers and P'T'o:iuC:'!':"'s and Whol ~so.lers and Regulo.ted Cor:mDc..jiti~s C=odiU •• St.ate or state of h. nell "rs : hDf'ldlers: retailt!1"s: UK! in int ent.ne hA('l~ed .. .so'!.d n~\I Yorl<. Cal ifcrtlia. State of Slol·, .,r Sta te of:

Geogrepni cal- .& e:<por t t.rade- bo4ght or Ce.lHornia. California. Ch.l"5.fDrniA. Scope & In iotra.tate produced in

if in cO(IIpeti- II"" YOTk. Hen ~th

interstate or export trede.

I

Pr1co ParHy Pr1ce:- Stable producer Fair and Aileqllgte p~odllcer prioe&. Adequate Adequ"t~ Go>al Order sU4'Pended pr l ;;e.s'". e QU i t.abl e DIi Ilimum producer- re-s:ale priCE-50.

if pl"C<iC!cer producer pricez. price •• pr ~ r:es ~:tce~ c Dr re spond.!ng par i ty level.

Pr'ocedUl"e Produeero ~et t t t on PrcdUC<l!TS :pet!tico COD!ilissioner of. Pl"odu~er < \>e U "Ion 01 rc<>tor of Ao"ku1turc, PeU ticl) b ~IU5l D" Sec of Ag., "h" Ac;rieW. t~e ~n1 Y.arl<ets, 'IIho ..mo lnv.;,;tige,tes the Indllstr.l, IloLls h~Rr l.nC;s Oi!"'ect..or., ~hl.."") enforced H lovestigauo invest iga tes t.he industry, holdiS and re-ferendUID.. holds hew-lng. m.ini 1i\\.!l'.1 producer iO'iUJltry, holdt hearil\8S and fi refer~nd\lOl. lUlU re fa-t"e rHium. tirlC~5 ~n.fOTced.

be!l1' !ngs & I Deds i on ',n thin rete re:ndum.. 30 claY" of hearing.

vote aj 2/3 of

I

.. ) 2/3 of producers A) 2/3 Ol- producer. ,,) 65 -peroent of Th" s .... !ltIe as B) 65 p"rcent (by Reqllir...,~nu produ~ers vet! ns. ~ot l ne· h) 50 voting. bj 35 prc..duG'ers vctin~ \iho A.P . fl.!.. Also n"",ber and. by

3/J, if CAlif"arnla percent fer percent of produce 51 p~""~nt Assent of 65 vclul"l"le Cor milk • ~ approval. citrus or terr.Una tien or prGdu~er3 f'Or of production, or l'ercent of" .uppliecl) , of \.h~ b tenn1natlon inl1ividual E<l<eMD.ent. t e rn.i no f.l <on • 51 p~nent 0 1 ru.ndler< . oJ'fected prr.lucers.

handler p ooJ.. prodl1eers who b) Petit.\on of Handll'r S of ?~oduN 65 !>.r~nt 65 per"""t of ;0 p~rceT\t of of pro..'luct,\ O[l . produ~rs -ror vol\.L71e If!USt. sign b) 50 percent of terminat Ion or Ill1 agreCDll:nt . produ"~rs for &I1lI!ndm~",t • b) 50 percelIt of t.2tinl'natiorl or 'proclue.ers: for '3.:r:iendmenl. t,~noinatlon or BffIendJnent.

4

Table 2. COMMODITIES ELIGIBLE FOR MARKETING ORDERS:

Act

Federal Marketing Act 1937 as amended, Section 802

New York Article 25: Laws 1957: Section 293

Article 21: Laws 1933: Section 258M

California Agricultural Marketing Act 1937

Agricu lcural Producers Marketing Law: 1933

FEDERA L, NEW YORK. CALIFORNIA, 1966

Commodities Eligible

1. The fpllowing agricultural commodities and products thereoe./: milk, fruits~/, hops, honey bees and naval stores. 2. Any agricultural comtnodity~/. including tur­keys, tu rkey hatching eggs, but not the products thereof. including canned or frozen commodities or products.

All commodities and prod'ucts derived therefrom if proc­essed by producers. except milk, hay. barley, corn for grain, livestock, grains: and legumes.

Milk

All commodities. except milk for consumption in fresh form and products thereof. Green ripe olives are exempt from orders that regulate total volume marketed or pro­vide for stabilization and surplus pools.

All commodities and products thereof, except figs for canning, grapes in certain NortheTIl California counties, milk and milk products. Green ripe olives are exempt from orders that regulate total volume marketed or pro­vide for stabilization and surplus pools.

1. Exemptions:- canned or frozen grapefruit, cherries, apples. or cranberries, products of naval stores, and huney bee~.

2. Exemptions:- apples 10 certain states, fruits and vegetables for canning and freezing. including apples produced in Washington, Idaho, and Oregon, other t.han olives, grapefruit, cranberries. and aspa rag1.ls.

3. Exemptions:- most staple crops, honey. wool, mohair, livestock, poultry eggs. fruits and vegetables for canning and freezing, potatoes for dehycirat­ing. and apples,

Source: Food and Agriculture Act of 1962. 87th Congress, 2d Session, House of Representatives, Reprint No. 1691. pp. 86-87.

Article 25, Agriculture and Markets Law, New York Department of Agriculture and Marl<ets. Bulletin 398, 1958) pp. 296-300.

U. S. National Commission on Food Marketing. Federal and State En­abling Legislation for Fruit and Vegetable MarketingOrders: Evolution and Current Status. SUpp. NO.3 to Tech. Study No.4, June. 1966.

5

Methods Provided

Both federai and state legislation authorize the use of some of the same methods. There are, however, some important differences (Table 3) The New York law does not contain fair trade or price-posting provisions.!.! The pro­vision for collection of funds for advertising and promotion under federal orders is limited to producers of avocados. carrots, citrus, cherries. onions. tokay grapes, fresh! pears, dates. plums, nectarines. celery, sweet corn, limes. olives and pecans.~

Table 3. PROVlSIONS CONTAINED IN THE FEDERAL, NEW YORK. AND CALIFORNIA MARKETING ORDER LEGISLATION. 1966

Provision Federal New York California

Total quantity and/ or surplus X X X

Rate of flow X X X

Price fixin~/ X X X

Advertising and xQ/ promotion X X

Grade. size, maturi ty. inspection X X X

Pack and container X X X

Fair trade X X

Price posting X X

Research X X X

a. Applies only to milk. b. Authorized only for specified commodities.

1. Price posting requires handlers to post prices and to sell at those prices during the specified period.

2. Paid advertising for cherries was authorized W1der Food and Agriculture Act, 1962, P. L. 87.703, and for the other commodi ties under the Food and Agri­culture Act, 1965. P. L. 89.330 (S.2092).

6

Producers of many commodities have made and do make use of the methods authorized (Table 4). Although regulation of quality Ls the most commonly used provision, the marketing order is also used extensively to collect funds for pro­motion and advertising.

Price fixing applies only to milk and is not listed in Table 4. At the begin­ning of 1966. 74- federal milk orders were in effect, all of which established minimum producer prices. Twenty states had enabling legislation authorizing the establisnment of minimurr. producer prices, of which nineteen actually had established such prices, while 13 states h,d established resale prices for milk at either the retail or the wholesale level..!.

Tota I-Quanti ty Regulations

Total-quantity regulations are intended to provide a means whereby the total quantity of the commodity marketed can be controlled. The purpose is to en­hance or stabilize price, and thus improve or stabilize income, Such regulations include provisions for determination, regulation and disposal of either tempo~ary or chronic surplus. In addition, this provision may be used to limit the flow of the comm9dity to one or more markets and to divert the balance to another market, so as to bring about diffe rent :trices and thus enhance total returns from the marketing of the available supply._1 The diverted quantity may be destroyed or moved into a non-competitive market.

The extent to which this method can be used to enhance price. and thus returns, depends on the conditions and characteristics of the market, the type of markets available, and the existence of alternative supplies or substitutes. It is likely to be most effective in raising prices and income if the total available supply to the market(s) is regulated by the ma rketing order. Por the greatest enhancement of price, the product market should have relatively price inelastic demand and supply schedules, and low or zero cross-elastici ties of supply. In addition, if a surplus provision is to be used to discriminate among markets, two or more separable markets with di fferent demanci elasticities or character­istics must exist for the commodi ty.

Since production cannot be controlled under most existing orders, the method can be used only on whatever q.lantity Is produced. Therefore, any gains result­ing from a short-term price increase may well be offset by subsequent pro­duction increases and consequent lower prices, or a more burdensome supply to manage.

1, U. S. National Comm ission on Food Marketing. Organization and Competition in the Dairy Industry, Technical Study No.3, June 1966. pp. 40-44.

2. "Market" I as used here, refers to markets in space or product form. Econ­omists call this action "market or price cUscrimination", because to maxi­mize returns the markets must be treated differently to bring about different prices in the markets.

7

Table 4. SUMMARY OF PRINCIPAL PROVISIONS AUTHORIZED IN MARKETING ORDERS FOR FRmTS AND VEGETABLES EFFECTIVE

IN THE UNiTED STATES [N JANUARY 1966

Number of orders containing provision for-- a / Total- Rate Promotion

Type of commodity Quality quantity of flow and ad-and order regulation regulation regulation vertising Research

Citrus: Federal 7 6 6 State 1 1 1

Deciduous tree fruit: Federal 13 1 1 10 State 12 6 15 17

Semitropical tree fruit: Federal 3 1 3 State 2 2 4 4

Berries: Federal 1 1 1 State 1 4 4

Grapes and grape products: Federal 2 1 1 2 State 2 2

Edible tree nuts: Federal 3 3 1 State

Potatoes: Federal 8 1 2 State 2 1 4 4

Other vegetables: Federal 7 1 1 6 State 6 5 2 7 7

All commodities: Federal 44 9 9 31 State 24 14 2 37 39

Total 68 23 11 37 70

a. Price-setting is omitted because it applies only to mLlk.

Source: U. S. National Commission on Food Marketing. ORGANIZATION AND COMPETITION IN THE FRUIT AND VEGETABLE INDUSTRY, Tech. Study No . 4. June 1966. p. 299.

8

An a.ctive group. such as a cooperative within t.he industry. that will sponsor and ensure continuation of the order is a helpful but not necessary condition. These market conditions are explained and discussed in the following para­graphs .

Degree of Control Over Available Supply

For maximum effectiveness. the order should cover the entire supply of the product. such that efforts to increase prices will not be undermined by Wlreg­ulated supplies. For if the total quanti ty that the regulated producers may market is limited, and price subsequently increases, unregulated supplies will move to the higher price market. and thus mitigate the effect of the action. This would, in turn, result in a lower price for the commodity. and hence in lower incomes for the regulated producers. Even if the action did result in some price increase. the cost burden of regulation or diversion would fall on the regulated producers.

The California cling peach order. the California Brussel sprouts for freez­ing order, and the federal raisin order, have alJ used the total-quantity-regula­tion provision and have been moderately successful in raising and stabilizing prices. These are unique commodities, however. for California produces almost 100 percent of the cling peaches and raisin grapes, and 90 percent of the Brussel sprouts in the United States. Thus almost the entire supply is covered by the orders. In addition, the prod:.lction within the state 1S concent.rated in a rela­tively small geographic area. Economic and production conditions are quite homogeneous, therefore problems of equity and administration are minimized.

Each of the above-mentioned orders used a different method to enhance price. A 11 three industries, before initiation of the orders, suffered from lIDstable prices and excess supplies on the mark.et. Currently, three cling peach orders are operative in California .. !/ One regulates producers, another processors and the other both producers and processors. Use of the total-quantity provision is authorized by the producer order and the jOint order. which provide for elimin­ation of excess supplies by "green-dropping", Le., removing immature peaches from the trees. and by removal of bearing trees. Both also provide for diver­sion into non-competitive outlets if necessary.

The California Brussel sprouts for freezing order provides for the issuance of an allotment to current producers. thereby fixing the quantity of the com­modity that may be marketed through the frozen market during a given season . The total quantity marketed is effectively controlled, since only producers with allotments are allowed to mark.et their produce. A:.though the order also pro­vides for allotments to new producers, no additional allotment may be granted in yea rs of excess production. Thus new producers would not be able to market

1. U. S. National Commission on Food Marketing, Federal and State Enabling Legislation for Fruit and Vegetable Orders: Evolution and Current Status, Supp. No.3 to Tech. Report No.4. LTune 1966, p. 12.3.

9

their production through this outlet. The federal ralsm order administrators limit the total quantity marketed by establishing a reserve tonnage, a free tonnage and a surplus tonnage. Handlers may sell the free tonnage as they please. but are requi red to hold the reserve and surplus tonnage for the account of the advisory committee. If deemed necessary. the advisory committee may release part or all of the reserve tonnage to handlers. but may release the surplus only for export or sale in non-competitive markets. The industry also combined a quality improvement program with the total quantity regulation. According' to several research reports, the order has been successful in en­hancing prices, which increased from $131 per ton in 1949 to $204 per ton in 1963, and in introducing mo re stability into the markets .1:./

If complete control of supply is not possible. use of the total quantLty pro­vision may prove effective if certain other conditions exist. The supply under the control of a market order may represent the needs of an entire sector of a market, the needs of a geographically separated market, or the needs of a particular user or group of users, such that the method can be used effectively. The upper limit to manipulation in a geographically separated market. would be the price existing in the nearest surplus producing area or market. plus the transfer cost of moving the product from there to the regulated market.

A quality program combined with a total quantity control provision. which would assure distributors of a consistent quality and quantity of the commodity, could be used to differentLate regulated supplies from noo- regulated supplies. Distributors could plan their marketing programs more efficiently and reduce the risks of uncertainty. The fact that the program would benefit dist:ributors as well as producers. may provide the incentive for them to support the adoption of an order. In this case, partial control of the supply could be beneficial. The degree to which price could be improved would depend on the degree of differ­entiation achieved and the value of this differentiation to the distributor or first purchaser,

Price-Inelastic Demand Schedules

If a regulated commodity has an inelastic demand schedule in a market, and thus no close substitutes. the total quantity provision may be used to increase total returns from a g'iven quantity of the commodity, A commodity has a price­inelastic demand if relatively large changes in price are 'associated with rela­tively small changes in the total quantity consumers buy. If the supply of the commodity available to the market is decreased, a net increase in producer incomes will occur because buyers will be willing to pay a high enough price to more than compensate for the loss in value of the diverted supply.

1. K. Zellner-Townsend, The California Raisin Industry. U.S.D.A" ERS. Agri­cultural Economics Report No. 11. Washington. D. C .. July 1962; N. T. Pritchard, The Federal Rai.sin Marketing Order, U.S.D.A .• ERS. Report No. 198, October 1964.

10

A high price elasticity of demand indicates that the product faces stiff compe­tition from close substitutes. Thus if the regulated commodity has a high price elasticity of demand. attempts by a producer group to increase net income by decreasing the quantity marketed wlll faiL In fact. they would result in lower net income. as consumers would turn to substitutes rather than pay a higher price for the regulated product. Total-quantity regulations are, therefore, more effective in enhancing total returns if the demand for the commodity is relatively price- inelastic.

A vailabi tHy of C lose Subs ti tutes

Demands for various commodities may be interrelated, so that an increase in the price of one may lead to an increase in the quantity consumed of another. ThiS is referred to as "cross elasticity of demand". A high positi ve!/ cross elastici ty of demand between two products indicates that one is a close sub­stitute for the other. and vice versa. Thus a total quantity regulation is likely to be more effective in bringing about an increase in -price if cross elasticities between the regulated product and other products are low or zero. If the cross elasticities are high, a curtailed movement of one product wi 11 cause conswners to turn to the close substitute, which will limit the extent to which price can be manipulated. A limitation on marketings of the commodity or product may cause a permanent change in preferences that will -:-esuit in reducing the long­run demand for the product. The use of the total-quantity tool thus requi res knowledge of the extent to which price will be changed by manipulating quantity movements to a market as mitigated by available substitute products, and alternative sources of supply of the same commodity.

Supply Response Over Time

If the quantity manipulation is effective in enhancing total and average re­turns, regulated and non- regulated producers may be expected to increase production the follOwing seasw. particularly if changes in the quantity prod".lced are easily brought about. i\ considerable lag will occur, of course, if the com­modity is a tree crop such as apples or cherries. High prices may induce heavier plantings than normal, but the full effects will not be felt for several years. Thus the effectiveness of the action would be of relatively short duration. Use of quantity regulations for a commodity. the production of which responds quickly to price changes, will prove more effective if entry of new resources into production are controlled. The extent to which this is necessary depends greatly Oll the price policy or target price adopted by the administrators of the orcler. Both long- run and short- run goals and consequences of alternative action should be considered.

1. A negative cross elasticity indicates that the commodities are complements; i.e., an increase in the consumption of one will cause an increase in con­sumption of the other.

11

A supply response may also be expected from the producers of close substi­tutes. For an increase io the price of the regulated product will result in an increase in price, and thus the production, of any product that is a close substi­tute for it.

Expansion of production or supplies wi thin the controlled area wi 11 result in a greater percentage of the production having to be diverted or destroyed in future periods. Expansion generated by entry of new resources in other pro­ducing area.s may make it impossible for administrators to increase price in future periods. In fact, it may result in lower prices than would have occurred without the adoption of the provision.

The former situation has occurred under the California cling peach order. Prices have been maintained by use of the <i green drop" provision since the early 1950's, but in 1960 production had increased to the point where the industry faced chronic surplus. Hence the percentage of total production subject to "green drop" and diversion to non-competitive outlets has steadily increased, as has the dissatisfaction felt by growers and processors within the industry. More realistic, lower price goals approximz ting the longer- run forces of supply and demand would have resulted in smaller gains to cling peach growers during the earTier years of the order, but the net return in later years probably would have been higher, because of lower total acreage and less "green drop".

Ease of Entry

Under existing legislaLon. it is not possible technically to regulate produc­tion. Various devices have been used, however, to restrict the entry of new producers into the market. In many milk markets, new producers must apply for a license from the local health officer before they can sell milk for fluid consumption. Sometimes such licenses are issued only if more milk is re­qui red. Some federal m ilk orders contain marketing base plans. which provide that new producers may be paid the lowest classified price for their milk for several months after they request permission to participate in the order's pay­ment pool. This may dissuade some from entering milk production. Under the Brussel sprouts for freezing order, new allotments will not be given in years of excess production. Thus, new producers are restl'ict.ed from entry to the frozen Brussel sprouts market.

Usually entry into production, is restricted only to the extent that heavy capital investments and special skills are required. However, this barrier may be quite inSignificant, particularly for producers already producing similar products. Of course, entry into the production of some commodities may be restricted by the necesslty for special soils, or growing conditions. Administra­tors of an order. therefore. need to know something about the magnitude of the barriers to entry (or ease of entry), if they are to use the quantity control method effectively.

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Cost of Surplus Removal

The provision for determination. regulation and disposal of specified sur­pluses is a necessary part of total-quantity regulations. in that this provides the administ.rator with the power to regulate or control marketings. Specified excess supplies must be moved into non-competitive markets. stored. or de­stroyed if the purpose of the diversion is to be achieved . Use of any of these methods involves a certain amount of cost; thus the net revenue obtained after imposition of the total-quantity reglliation, must be larger than that which would have been obtained, had the entire supply been sold through the normal channels. Analysis of the potential benefits and costs is necessary. Destruction of the specified surplus may generate the greatest increase in revenue under condi­tions of a highly inelastic demand and no available non-competitive markets for the surplus.

Quantity Diversion Among Markets

The quantity- regulation provision provides the power to disc rim inate among markets. Increases in total revenue are possible if two or more markets, with varying elasticities and separable in either space or form, exist for the com­modity. The markets must have different demand elasticities, otherwise dis­crimination is pointless. They must be separable, otherwise movement between the markets will cause prices to equate. Price dlfferences in geographically or physically separated markets can be manipulated only wi.thin the limits of the unit cost of transferring the product between the rna rl<ets . The following hypo­thetical diversion program for California egg production illustrates the practice of market discrimination based on spatial separability.~/

Assume that the entire California egg production, which constitutes about 10 percent of the total United States production. is regulated. Thus a 10 pe!'cent diversion from the California market would increase supplies in other markets only one percent. Given a price elasticity for eggs of -.3, a 2 percent diversion from the California market would increase local prices 6 percent, but would decrease the price elsewhere by only 0.6 percent.

Assume further that egg production in California is 20 percent greater than table egg consumption, and this 20 percent is either sold to brealcers or ex­ported. The following calculations. based on 1963 data. assumes that 2 percent is diverted from the table egg market, to bring about a 6 percent. increase in the price.

1. A detailed discussion of this was published in an article. "The Pros and Cons of Two Price Systems", by O. D. Forker in Pacific Poultryman, March 1964. Subsequently a VOluntary cooperative with over 60 percent of Southern Cali­fornia's egg production under contract was formed to create more orderly conditions. Quantity diversion to distant markets was part of their plan.

Production: (dozen)

Tahle eggs Other uses

Price received for:

Table eggs Other uses

Cash farm income:

Table eggs Other uses

Total

Current

617,000.000

476,130,000 140,870.000

31.2 ¢/doz. 31.2 ¢/doz.

$148,552,560 43,951.440

$192.504,000

Diversion

617,000,000

465,510,000 151,490,000

33.2 ¢/doz. 31.0 ¢/doz.

$154,549,320 46,961,900

$201,511,220

13

Percentage Change

-2.0 2.0

6.4 -.64

4.0 6.9

4.6

Such a diversion program would have increased farmers cash incomes in total by approximately nine million dollars. The success of the program would depend on the diverted and exported eggs not moving back into the table egg market; and on a target price low enough so as not to induce imports of eggs from other areas, or expansion of procluction.

In this case, the target price was 0.9 cent per dozen below the reported U. S. average price. A transportation cost of approximately two cents per dozen existed between the supply area and the closest alternative surplus production area of eggs in 1964. The extent to which a given surplus area could thus in­fluence price depends on the si ze of its own ma rket in relation to the total m a r­ket and the di stance from alternative sources of supply.

Extensive use has been made of this type of discrimination LU1der federal orders. Those for almonds. raisins, dried prunes, filberts, and walnuts provide for allocation between the domestic and export market. Demand in the export market tends to be more eiastic than that in the domestic market: thus discrim­ination is possible. Also the transport differential, in addition to any tariff or trade barriers that may exist, effectively separates the markets so that leak­ages from one to another 2...re practically impOSSible. The export market there­fore, often provides the outlet that makes the operation of total-quantity regula-tions on the domestic markets successful. -

The Pacific Coast walnut order. in addition to the use of spatial discrimina­tion, incorporates discrimination based on product differentiation. Walnuts are allocated between in-shell, shelled. and by-product markets, by means of

14

qualtity regulation. (Most of the above orders provide for diversion to non­competitive by-product markets if possible) . Discrimination based on product differentiation is essentially the same as that based on a geographical separa­tion . In the illustration above. eggs were diverted from one market into another; here , walnuts would be diverted from the in-shell to the shelled market. Any additional excess would be diverted to the by-product market. Elasticities of the three markets differ; the by-product and shelled markets have a more elastic demand than the in-shell markets. hence exploitation of these differ­ences led to enhanced producer incomes.

Milk is diverted from the relatively demand inelastic fluid milk market to the more demand-elastic manufacturing market by classification and by estab­lishment of higher minimum prices for milk used for the fluid market. Many commodities eligible for marketing orders are sold in the fresh and processed [arms; hence if the market demand characteristics are significantly different and the markets separable. market discrimination may be used to increase total revenue.

Even if several markets with varying elasticities separable in space or form exist for the prorJuct, returns to producers will be maximi zed only if an adequate proportion of the total supply is sold in the higher-priced market . Returns to producers may be increased even if the proportion diverted to the more elastic market moves at a zero or a negative pric.e . This is possible if the revenue from the regulated market is increased proportionately more than the revenue lost in the zero or negative price market, giving a higher total revenue than would ot.herwise have been realized. If the surplus supplies are destroyed they obviously receive negative returns. since no returns are gained but there is a cost to destroy them. An example of this is the 10 state cranberry order. The administrators established a 12 percent set-aside in 1962. Although some of this was diverted to other rna rkets. the rest was physically destroyed because alternative outlets could not be found . Prices rose from 9 cents per pound in 1961 to 11.3 cents per pound in 1964. and the administrators of the order main­tain that the set-aside helped to increase and stabilize prices and improve producer income.

Role of Cooperatives

Historical evidence suggests that an active group within the industry, willing to play an important role in the formulation and operation of the order. provides the basis for potential success and continuation of the order . Cooperatives played a major role in the citrus. walnut. almond, raiSin, dried prune and olive industries, before thei r orders were initiated. and have put thei r strength be­hind the adoption and continuation of the order in each case . All of these orders have been considered successful in that prices and incomes within the industries have become relatively rna re stable than they were before the adoption of the order , Strong judicial management is particularly important if this quantity control device is to be used, Prudent. wise management based on the best in­formation available is necessaTY if this method is to be used to its fullest

15

potential. Cooperatives may have the necessary personnel and organization structure to conduct initial feasibility studies and to develop plans.

Evaluation

Relatively accurate information of the demand characteristics of markets must be known and adequate control of supply rr.ust be achieved to bring about price changes through quantity manipulation. The extent to which revenue and prices can be manipulated is a matter of degree. and depends on many factors. Most commodities produced in New York compete directly with quantities pro­duced in other supply areas. A mult.istate order would be necessa ry for most New York-produced commodities to gain adequate control over supplies, except for maple syrup, of which New York produces over 90 percent of the total supply. However. multistate orders are tUldoubtedly more complex to inaugurate and administer than single state orders. Although very few orders cover more than two or three states, this does not mean it cannot be done or is not feasible. An e.'<ception is the 10 state cranberry order, which regulates 90 percer.t of th, total supply and appears to have stabilized conditions within the industry.'!'

Historically, commodity groups have pushed for rather dramatic prioe in­creases tUlder market orders. Sometimes the price goals were achieved in one or more marketing periods, but this generated more production in future periods than otherwise would have occurred. As a consequence either larger, more costly quantity programs became necessary, or net returns fell, unrest devel­oped in the industry, and the order was terminated.

Quantity-control programs designed to coordlnate marketings with the needs and characteristics of the marketing system and of the ultimate consumer would probably generate the most long-rW1 benefits to a. commodity group. To be effective over time, a program necessarily needs reasonable price goals in proper perspective with supply response potentials, and potential substitution of existing or potential products. Estimates of demand characteristics (including price elasticities and cross-elasticitieS~lre necessary to provide estimates of what can be expected from manipulation._

1. The marketing of cranberries was, and is dominated by a single, multiplant cooperative which had tUldoubtedly facilitated the administration of the order: U. S. National Commission on Food Marketing, Organization and Competition in the Fruit and Vegetable Industry, Tech. Study NO.4. JtUle 1966, p. 318.

2. Much work has been done in this area. Although published works are not always satisfactory for specific questions, they may provide some helpful indicatlon of relationships. Some references are G. E. Brandow, Inter­relations Among Demands for Farm Products and Implications for Control of Market Supply, Pennsylvania State University Bulletin 680. August 1966; Western Extension Marketing Committee, A Handbook on the Elasticity of Demand for Farm Products, (In process).

16

It is the authors' conclusion that the use of this method has greater potential than has been realized. Subtle. more sophisticated use based on detailed analysis of the consequences of alternative actions. and establishment of reasonable price goals is necessary for ~he total-quantity regulation provision to be used effective ly,

Rate-of- Plow Provisions

Rate-of-flow regulations. as the name suggests. allow producer groups to regulate the amount of the commodity marketed at anyone time or over a period of time. The time periods may vary from one day to the whole season. This provision does not actually lim'.t the total quantity that may be marketed. merely when it may be marketed .. U Such regulations have two purposes, First, [hey may be used to provide for Wliform. more orderly shipments to market during the year. to prevent a glut on the market at harvest time and a shortage later in the season. Second, they may be used to manipulate the flow to market so as to exploit demand differences thai may exist at different times during a year.

Many agricultural commodLties are marketed in such a way that the bulk of the supply is put on the market at harvest time. resulting in low prices for the commodity. Higher prices tend to be realized later in the season as available supplies become scarce. Use of the rate-of-flow regulations helps to alleviate this problem either by distributing supplies lUliformly over the season. or by attempting to distribute the supplies to coincide with the peaks and troughs of consumer demand.

Large scale retailers prefer a uniform source of supply, or supply move­ments that correspond with the rate of customer purchases. They attempt to utilize their facilities at capacity with relatively uniform level's of volume of the various commodities handled, Regulation of flows to retailers coordinated with thelr needs and ability to handle the commodity. may result in higher re­turns for the total quantity marketed. This service should provide added value to the commodity, although the cost of producing and marketing it will increase.

The extent to which the rate-of-flow method is successful in affecting price and thus enhancing producer income wi II be influenced by the same forces that influence the success of total-quantity regulations. Relatively price-inelastic demand schedules, low or zero cross-elasticities of demand. and 'regulation of almost the entire supply are neces sary condi Oons for the best resu 1 ts.

In addition. the regulation may be used to exploit differences in intraseasonal demands for the product. To do this, some knowledge of the nature of how demand changes during the season is imperative. Studies have been conducted

L However. the rate-of-flow t.ool may be combined with a total-quantity pro­vision to permit manipulation in the market dimensions of time. form, and space.

17

to determht the existrce of ~1raseasonal demrdS for certain products such as plums,.!. turkeys3 c1trus,","", and broilers,! but such analyses have been made for relatively few products.

The administrators of the four Arizona-California orders for citrus fruits, who have sponsored empirical research studies on the demand parameters for their products. have relied heavily on weekly proration of supply to the market to improve producer incomes. They authorize the allocation of supply between fresh and processed use by regulating the volume placed in the fresh markets each week. The program is operated so as to maintain comparative inter­seasonal stability in the volume of lemons marketed for fresh consumption, with allowances for shifts in demand over time. The quantity remaining each week is stored or moved to processing outlets. Most of the lemon production comes tmder the order. and thus the program can be and Is effectuated; how­ever. all U. S, orange production is not covered by the order. Florida is the major orange-producing state, therefore attempts to exploit weekly differences in demand or to influence price under the Arizona-California order by regulat­ing flow to market will depend on the seasonal nature of production in Florida, the size of Florida's crop, and the location and size of alternative outlets for the production of both areas.

Grade, Size, and Maturity Regulations

In 1964, of the 48 federal orders in effect for fruits and vegetables, 44 con­tained some kind of quality provisions, which indicates that these methods are the most commonly used under existing legislation. Quality regulations allow producer groups to Impose mandatory grade standards on all producers and handlers of the commodity covered by the order. In New York, the legislation speCifies that federal-state grades are to be used. while in California the industry may formulate its own grade standards oruse the federal-state grades. Under federal orders, federal grade standards are used.

Mandatory grade standards may be imposed to bring about quality reform in the industry. The extent to which the administrators of a federal or New York

1. Jerry Foytick, "Characteristics of Demand for California Plums", Hilgardia. Vol. 21, No. 3D, April 1951.

2. Herman Bluestone and Anthony S, Rojko, "Forecasting Farm Turkey Prices In and Out of the Main Marketing Period", Agrjcultural Economic Research, Apri11966. Vol. XVIII, No.2.

3. Sidney Hoos and George Kuznets, Impact of Lemon Product Imports on Do­mestic Lemon Markets, Giannini Foundation Mimeo Report No. 254. June 1962.

4. B. F. Stanton, t 'Seasonal Demand for Beef, Pork and Broilers· J, Agricultural

Economics Research, Vol. XID, No.1, Jan. 1961.

18

State order may alter existing grade standards to conform more neariy with market specifications is limited, however, because federal or federal-state grades must be used. This tends to make the method less flexible than it would be otherwise. It is also possible to e>"'P1oit demand differences that may exist for different grades by manipulating the standards. Such regulations may be used to eliminate a lower grade, in order to transfer demand for that grade to that of higher grades. such that a higher average price is realized. This may also be done to remove any poor-quality image attributed to the industry and thus improve the demand for the product.. Lim itation of a certain portion of all grades and sizes moving to market, over time or among markets, is essentially a total-quantity regulation achieved through a quality provision.

Imposition of mandatory grade standards Wlder t;"e authority of a marketing order may benefit producers in several ways. If the changed quality has a higher market value, buyers will pay an increased price. Today. producers face fewer buyers, whose demands are far more specific than they were formerly. Such regulations may enable producers to meet these demands more nearly. thus rendering the marketing process mOTe efficient and perhaps returning the added value of the changed commodity to the prOducers of the commodity. The buyers may also benefit by being assured ofa specific quality product. Grade standards can be '.lsed to reduce loss as the product moves through the channels of trade.

If the purpose is to bring about quality refonn. some producers may suffer initially if a large part of their crop is below the minimum grade standards. This would provide the incentive for change, for these producers will leave the industry or improve their production practices. Either move would be to the benefit of the industry as a whole, as the existence of a large quantity of low­quality product on the market may depress the price of the higher-qua,lity product.

One important qualification to imposing quality standards is that they must be des! gned to reflect the needs an d desi res of wholesalers and/or consume rs. Buyers benefit from quality control only if they are able to purchase a c'om­modity that more nearly fits their needs. Attempts to apply wholesale st,andards at the retail level have proved unsatisfactory for retail specification .. !.! Grade names, particularly state grade names. are numerous at the consumer leveL Too many are apt to confuse the consumer and she may thus ignore them com­p)etely.~

Grades and standards must have meaning to the trade and to consumers if they are to be used to exploit demand differences. Likewise, knowledge of the demand characteristics of the different grades and sizes is desirable if one

1. L. B. Darrah. Food Marketing, The Ronald Press Co .• New York, 1967, pp. 182-186.

2. F. A. Harper, "The Problem of Grade Names", Farm Economics, Cornell University. Vol. 8, No. 146. May 1945.

19

grade or size Is to be eliminated from the market. Some feel that the average price may be increased if the lowest grades and sizes are prohibited from being marketed. This may not be true if a strong demand exists for the lower grades and sizes, for consumers may respond by turning to alternatives rather than to the higher grades. Thus if taking them off the market creates a void, which is not filled by the higher grades, total revenue and thus average returns to pro­ducers, may be lower than if the action had not been taken.

Restriction of the quantity of one or several grades marketed assumes that separable demands exist for the various grades. The effectiveness of such regulation will depend on the extent to which demands are separable. and the extent to which separate grades have different demand characteristics. Theo­retically. net returns to producers can be increased by allocating quantities among each quality grouping in such a way that demand differences are e).-ploited. Intensive research studies on the characteristics of the demand on the appro­priate classifications or groupings, and on interrelationships between demands for different grades, are needed to provide the necessary infonnation for appro­p riate use of this provision.

Advertising and Promotion

The provision for collection of funds for advertiSing and promotion contained in most state enabling legislation. and more recently fOT certain commodities in the federal legislation. has become increasingly popular over the years. The main aim of advertising is the enhancement or stabilization of producer income. While the methods discussed earlier are used to manipulate supplies, the pur­pose of advertising and promotion is to change the nature of demand or to in­crease the quantity that will move into the market at any given price. The objective may be to make demand more elastic, so that any change in quantity will result in smaller variations in price and revenue, or to render it more inelastic so that relatively small changes in price will not greatly affect the quantity bought. But. conversely, this means that relatively small changes in quantity will rest:.lt in relatively large changes in price.

Those considering advertising and promotion plans to enhance incomes. should realize that a supply response may occur if the plans are effective. An increase in price generated by effective advertising in one season may stimulate an increase in available supply in the following season. The effective change in net revenue from advertising depends not only on the change in the demand response, but also on th,l:l elasticity of supply and the external economies and diseconomies that exist.Y

1. M. Nerlove and F. V. Waugh, "Advertising Without Supply Control: Some Implications of a Study on the Advertising of Oranges", Journal of Farm Economics XLIII. 4. Part 1. November 1961, pp. 813-37.

20

Use of advertising and promotion requires the ability to differentiate the commoclity in the eyes of the consumer. Advertising is successful only when the conswner recalls the product and has it in mind when he shops. For example, a state product may be advertised. such as New York State apples or California grapefruit. Fresh produce is frequently marketed in such a way that the conswner has very little idea of where it originated. Therefore if producer groups are advertising a state product, they must have a coordinated program. Media. advertising may be strengthened by in-store promotion and displays. Frequent store checks to ensure that retailers are displaying prominently their point-of-sale material and their product may be necessary. If the advertising program is linked with a quality-control program, the product may be more easily differentiated. and thus the advertising more efficient in building consumer loyalty to expand demand.

Before lUidertaking an advertising program, the producer group must be sure that they have sufficient ftmds to make it worthwhile. Unlike most of the in­dustrial advertising firms, they have no control over the total amotmt available because maximum assessment rates are fixed under the enabling legislation. Most orders provide for assessment on a wit basis: thus if production varies greatly from year to year, so does the revenue for advertising. One result of thls is that sometimes the funds available are not adequate to finance an effici.ent medla-advertising program . The administrators must decide, therefore, whether their funds are adequate. or whether they could be spent more profitably on such things as store promotion or package design. Proper management of funds is one of the most important determinWlts of success in the use of the advertis­ing and promotion provision.

A provision that enables the order administrators to vary advertising expend­iture with size of crop will render the method more efficient . As noted above. if assessment is on a unit basis, the advertising budget will automatically vary with size of crop. However, available fWlds in a shOrt-CTOp year may still be more than adequate to advertise efficiently in that year. In this event the administrators should be empowered to ca.rry over the excess funds to a heavier crop year. It is also possible that some part of the advertiSing program should be continuous; Le., the budget should be constant, regardless of the size of crop. In this case the administrators should be allowed to carryover ftmds to keep that part of the budget constant. An aove,rtising program will be more effective if correlated with market-supply conditions.

Several studies indicate that advertising and promotion are more successful in bringing a,bout expansion in demand, if the demand for the product is already increasing . .!.! Advertising and promotion may help to arrest a declin.ing trend in consumption of a product, but probably will not reverse that trend. Con­sumption i.s increasing for frozen-concentrate citrus juices, processed fruits and vegetables. poultry and nuts, and is declining for fluid milk, potatoes, eggs,

i. Edwa~d Dailey, Guide Lines. Advertising and Promotion of Farm Products, Cooperative Extension Service, Purdue University, Lafayette .. Indiana.

21

and J.11ost fresh fruits and vegetables. The administrators of the order must appraise the demand trend of the product. If the demand is declining. advertis­ing may not be able to increase producer income. although it may be able to maintain it. The strength of demand may be analyzed on the basis of trends to determine whether advertising is feasible .. !.!

Studies also indicate tl;l.at advertising wi II be more useful if the product enjoys an elastic demand~/, because products with a high elasticity of demand have many substitutes; thus consumer preferences are weaJ<. and easily trans­ferred between products. This does not imply that advertising of commodities with an inelastic demand is pOintless, but merely that it will be more difficult to cause consumers to shift. On the other hand, the price effect of a relatively small shift in quantity demanded will be greatest for a commodity with a rela­tively inelastic demand.

Measurement of the efficiency of an advertising program is complicated because the advertising variable is difficult to isolate. particularly if it is combined with quality and quantity regulations. The effectiveness of the actual advertisements may be measured fairly efficiently by consumer recall tests. but recall tests do not measure changes in actual purchases. However, recall tests may be va.luable in evaluating alternative approaches.

Ex--perimentation and study may extend over several years before any logical or reasonable conclusions can be reached. EA-penditure of fW1ds on advertising and promotion will be most. effective if it is part of a coordinated program using the other methods of quality, quantity, and rate-of-flow regulations.

Research Provisions

Collection of funds for research enables producer groups to sponsor two types of research: that which may be necessary to effectuate the provisions of the order. and that which will lead to a more efficient industry. The former type of research has been mentioned throughout this paper. Such studies in­fluence prices indirectly in that they help to ensure effective application of the authorized tools.

The latter type of research studies are intended to reduce W1it costs through improved production or marketing techniques. In the short run the extent to which the application of such research directly enhances producer incomes depends on whether lower unit costs are passed on to the consumer in t.he form

1. O. P. Blaich. Strength of Demand for 120 MaTket Categories of Food, 1957-g. California Agricultural Extension Service, 1963.

2. N. Borden. The Economic Effects of AdvertiSing, Richard D. Invin. Inc" Homewood. Illinois, 1947. and P. L. Henderson. "Efficacy of Prodllct Pro­motion'), Mimeo paper presented for the Association of Southern Agricul­t.lral workers. February 1962.

22

of lower prices. This in turn will depend on the relative elasticities of supply and demand. If the dem~nd for the com.m.odity is pe1'£ectly elR.st.i('. R.nd thp. supply perfectly inelastic, all benefits would accrue to the producer. Conversely if the demand is perfectly inelastic and supply perfectly elastic, all benefits would be gained by the consumer. In most instances, the relative elasticities will fall within these limits rather than on them; henceboth producers and conswners will benefit to some extent. Improved production techniques may have a destabiliz,­ing effect on the industry. For if some producers find that they can increase yields substantially at lower unit costs they will expand production. If demand is not shifting proportionately, lower prices will result. This will create hard­ship for farmers who have not adopted the lower-cost production techniques. Product differentiation and innovation. may allow farmers to expand the market for their product, realize lower production and distribution costs, and may lead to increased producer returns, if production response does not result in in­creased quantities which reduce price proportionately more than supplies are increased.

Information Services

Marketing orders can be used to provide funds for the dissemination of infor­mation. The main aim of clisseminating information is to provide all segments of the industry with accurate economic information. The purpose is to improve coordination in the industry and give all participants a better basis on which to form decisions and take action. Accurate information on average price levels in the industry and on prevailing conditions, helps to prevent a producer from accepting a low price for his crop when he could have sold at a higher price elsewhere. Similarly. information on current technological progress may help to induce the introduction of new cost- reducing techniques into the i ndust ry. It is generally held that if information is accurate, meaningful, relevant to those receiving it, and delivered at the appropriate time, it can be only beneficial to all concerned. Needless to say, if the information is inaccurate, irrelevant and mistimed, it is likely to hinder rather than help.

Many economists feel that the provision for dissemination of information is one of the most important methods contained in the enabling legislation, Haas said, "It may well be that in the long run the spread of "economic literacy" will prove to be the most significant result emerging from the institution of marketing orders. In the meantime, commodity groups may derive a measure of psychi9 income from the belief that thei r economic destiny rests in their own hands.",Y

1. Sidney Hoos, Economic Objectives and Operation of California Agricultural Marketing Orders, California Agricultural Experiment Station, Giannini Foundation of Agricultural Economics, Mimeo Report No, 196. May 1957.

23

Price-Control Provisions

The provls lOn for price control. which enables producer groups to estab lish minimum producer prices, is available only to the milk industry. Some states, including New Jersey, Pennsylvania, and California. also permit the establish­ment of minimum resale prices on milk sales. The main aim of such a pro­vision is to ensure reasonable income for producers, such that an adequate and continuing supply of milk for consumers is forthcoming. Minimum prices for each class of milk according to use are established in all instances.

The reasons for making such a device available to milk producers may be found in the structure of the milk industry prior to the ~nabling marketing order legislation. Producer cooperatives have been prevalent in the milk industry since the beginning of the twentieth century, and W1til the depression had suc­cessfully maintained their members' incomes. They realized that two separable demands existed for milk; that they could sell milk at a relatively high price in the fresh market without significantly affecting sales, and that the remai.nder could be sold in the manufacturing market at no significant change in price. Milk is highly perishable, and at that time could not be transported over long distances, hence markets were effectively isolated. Higher prices were estab­lished for fluid milk on the justification that higher costs were involved in satisfying the stricter sanitary requirements of the fluid milk market. Pooling arrangements to ensure payment to producers were developed by cooperative bargaining associations. The system disintegrated, however, in the depression, because some members found private agreements with distributors more bene­ficial to them individually. Mandatory compliance was ensured under the marketing order legislation of the 1930's.

Price-fixing is justified in federal and state legislation, on the basis that milk is an essential food. Thus such control is specified to be in the public interest. Although almost all milk is produced under sanitary conditions so that it qualifies for the fluid market, significantly higher prices are set for the portion used for fluid purposes. The system of classifying milk according to use, and of establishing and enforcing payment of higher prices for the different uses, is an effective way of differentiating among markets (uses). The more inelastic demand for milk for fluid use, and the relatively more elastic demand for manufacturing use, penn it the industry through mandatory price discrimina­tion to generate a higher return from the sale of a given supply of milk than would occur without such regulation.

Several factors are conducive to price differentiation. Fluid milk markets have been historically loca.lized. Although long-distance buil{ transportation is now feaSible, transportation over long distances is costly. Thus each market has a transportation cost barrier to entry from distant supply sources.

Order legislation permits control over the entire supply moving to a market. Most states have established rigid sanitary requirements, which must be met before a producer can sell his milk. These coupled with a federal marketing

24

order may provide a sort of barrier to entry to new and distant producers. Price-setting at the producer level in the milk industry is considered a neces­sity, and is normally accepted with little question by the trade. However. pro­ducer pressure has often generated relatively high class prices for fluid use. The generated higher returns encourage production beyond what it would have been without such price control. mitigating the effect on producers' average returns over time.

Voluntary Producer Groups

Thus far the discussion has been limited to marketing orders in which, once the order has been instigated. the provisions are binding on all producers in the specified area. In certain circumstances it may be, and has been, possible for voluntary producer groups to use the same tools, particularly in the short run. All the conditions that affect implementation under marketing orders apply. A vollmtary group must have the support of the producers of the major part of the supply in the region; otherwise their efforts to improve their members' incomes are likely to be undermined by actions of non-members. This is particularly true where efforts are made to curtail the quantity going to market. A recent publicat~on stated that supply limitation without adequate control was almost impossible, for a cooperative because, itA pattern of market conduct leading to an artificial supply limitation of one sort or another is highly collusive in nature and must be supported by either a few large firms who recognize their inter­dependence and are Wlj'lling to do something about it. or by industry-wide govern-, mental programs. "l

Effectiveness requires handler cooperation, and perhaps an agreement with the handlers in the region. The bargaining power the cooperative is able to exert depends largely on the numbe.r of first handlers (distributors, dealers, etc.), of the commodity. If the cooperative has to deal with several buyers only, they are likely to be more successful in negotiating prices favorable to them than if they have to deal with many buyers. Thus u .... as the degree of compe­titioo among processor buyers approaches the limit of perfect competition. the potential for farmer gains erodes away and disappears in the long rWl. ,,~/ Generally the number of buyers in agriculture in relation to the number of sellers (farmers), is relatively small, hence cooperatives should be able to achieve improvements in member incomes. In addition, producers may derive a certain amount of psychological sati sfaction in that thei r membership is vol­untary rather than mandatory.

1. p. G, Helroberger and S. Hoos. Cooperative Bargaining in Agriculture. Uni­verSity of California. Division of Agricultural Sciences, 1965. p. 59.

2. Ibid. p. 181.

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The National Grape Cooperative Association is recognized as one of the most successful in the United States .. !/ This grower cooperative formed in 1945, first entered into a profit-sharing agreement with the management of the Welch Grape Juice Company, the largest processor of grape products, in that year, and in 1956 purchased complete control of it. They acquired a processing plant and the goodwill attached to a well established brand name. The agreement provides for the purchase of its members' U. S. No.1 concord grapes , which in turn are purchased by the Welch Grape Juice Company. Approximately 50 percent of the U. S. concord grape production is controlled by the association. Prices paid to growers have been consistently higher than the average price. For example, New York growers received an average price of $103 per ton in 1961 and $110 in 1962; the association's members received $158 in 1961 and $180 in 1962 .~7 The association attributes its success to skilled management and" grower under­standing and acceptance of the nee9 to produce quality grapes in controlled quantities for market consumption . "~ Its success is primarily due to acquisi­tion of an established brand name and the ability to restrict membership to supply only the quantity and quality of grapes needed.

A similar program, although not as ambitious, was undertaken by the Michi­gan Milk Producers Association (MMPA). This bargaining association guaran­tees a market and payment for all members' milk, produced and delivered which conforms to health and sanitary requirements. In 1964, the 11 ,014 members of the association marketed 57 percent of Michigan's total milk output, which accounted for approximately three-fourths of the state's grade A milk supply.!/ Thus they control a major part of the supply. They also operate manufacturing plants and market their own dairy products. The association is therefore in a strong position, and through its power and hard bargaining techniques has main­tained member incomes above what they might have been . In 1964, the MMPA claims that price negotiations added over $17 million to Michigan dairy farm­ers' milk income, of which $13,172,000 went to members of the MMPA. This they maintain is $1,223 per member higher than would have been received under federal order pricing.~i' They accomplished this by negotiating with handlers in the market a premium over the established federal order price.

1. Other examples of voluntary marketing groups that have influenced or man­ipulated the market for their commOdity with varying degrees of success are: Pennsylvania Farm Bureau (Tobacco Sales); Pure Milk Association of Chicago; Great Lakes Cherry Producers Marketing Cooperative; Florida Citrus Mutual. There are many others.

2. The Building of an Agricultural Enterprise, National Grape Cooperative Association, Inc., 1965, p. 44.

3. Ibid, p. 41.

4. Michigan Milk Messenger, Vol. 46, No.8, June 1965, p. 17.

5. Ibid, p. 41.

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The Southwestern Egg Producers Association (SWEP) of California, operates differently from the two cooperatives mentioned above. SWEP controls over 60 percent of the southern California egg production through yearly contracts signed with handlers and producers. The association claims that they have succeeded in raising producer incomes above what they were, by a rather moderate price policy. An agreement assures the handlers of an adequate supply of eggs at prices slightly below those they would have to pay to obtain them elsewhere. These prices, although about equal or a little below the national average price, are probably higher than producers would have received without the diversion. The association essentially diverts all quantities that will not move at their quoted price to non-competitive markets. This stabilizes the southern California market for both handlers and producers. The producers realize higher returns for the local sales but carry the cost of moving eggs to non-competitive markets at lower prices.

Marketing Boards

The National Commission on Food Marketing recently recommended the adoption of marketing boards .. !.! These would be available only to all producers of one commodity produced over a substantial area, and would be administered by an appointee of the Secretary of Agriculture. The administrator(s) of the order would be vested with the authority granted under federal marketing orders, plus that to regulate production or marketing, and to negotiate prices and other terms of trade. The commission expressed the opinion that marketing boards would allow more complete control of the nation's supply, which is not currently possible, would allow more efficient planning, and would generally give rise to more orderly marketing.

Lack of complete control of the supply has prevented many producer groups from using the provisions authorized under the marketing order legislation successfully, but the administrative and equity problems associated with such control, where the product is produced in many states on both sides of the continent, would be complex.

Some additional negative aspects of the proposal exist. Some form of polic­ing and enforcement would be necessary. Use of such tools as total-quantity and rate-of-flow regulations might give rise to serious equity problems, since production and marketing conditions vary greatly among states and regions. The negotiation of prices might prove exceedingly complex. Instigation of one nationwide price for a commodity might result in inequities if production costs differ among the producing areas. On the other hand, differentiated prices would undoubtedly cause dissatisfaction among producers in other parts of the country.

1. U. S. National Commission on Food Marketing, Food From Farmer to Con­sumer, Washington, D. C., June 1966, pp. 110-111.

27

Extensive use has been made of marketing boards in Australia, Canada, and the United Kingdom. The main powers of Canadian marketing boards are pro­vided for under provincial legislation, while the Federal legislation authorizes extension of these powers to provincial and export trade. In 1966, there wer€~ 80 producer marketing boards, 36 of which had their powers so extended.Y Thus the marketing boards are on a regional rather than a national basis . Canadian marketing boards may take the form of either negotiating agencies or marketing agencies. Negotiating agencies simply establish minimum prices and conditions of sale. Marketing agencies have all the powers provided in Amer­ican marketing order legislation and in addition take title to the commodity and direct its marketing. The latter type of board is presumably that envisaged by the U. S. National Commission on Food Marketing for adoption in the United States.

Canadian experience suggests that the negotiating boards are more accept­able to producers than are marketing agency boards. Negotiating boards have been used for fruits and vegetables, sugar beets, seed corn, soya beans and winter wheat. Such boards have been particularly beneficial in the Ontario horticultural industry. It is claimed that high-cost, inefficient producers have been eliminated, grade standards have given rise to a higher-quality product, and producers have been encouraged to adopt improved practices.~/

Marketing agencies have encountered more opposition because producers object to giving up title to their commodity, and to not being able to determine where and when it should be marketed. From an economic point of view, this should facilitate the boards' task of improving farm income because the product is almost completely controlled. Various marketing-agency schemes set up in Ontario for vegetables, such as the Bradford-Marsh Fresh Vegetable Growers' Marketing Scheme inaugurated )'n 1952, failed because of jealousy and misunder­standing among the growers.~ In this case, the board agreed to buy all sur­pluses of members, in order to maintain the market price. Being assured of a market, several growers merely sold to the board without pregrading their produce or handling it properly. Consequently, the board was encumbered with an unnecessary and costly quantity of low-quality produce, and the scheme was dropped in 1955. Thus, as with the market order, producers must be fully aware of the purposes and limits of a marketing board, and quality standards and specific rules and regulations must be imposed.

The Ontario Hog Scheme encountered many of the problems cited above, but finally adopted a teletype marketing system in 1960 , which so far seems to be

1. C. R. Phillips, "Government Assistance to Agriculture" in Canada Agricul­ture, Journal of the Canada Department of Agriculture, Fall 1966 .

2. G. F. Perkin, Marketing Milestones in Ontario, 1935-1960, Ontario Depart­ment of Agriculture, Parliament BUildings, Toronto .

3. Ibid, pp. 74-75 .

28

well accepted by both producers and packers .. !/ Hogs are assembled at desig­nated points and sold by teletype auction from the board's central office in Toronto. Packers pay the board, which after deducting levies, etc., pays the producer. This is primarily a trading center, price determining process, and could be classified as a system to provide more information to the buyer and seller. Whether the board will continue to be successful is of course not certain. Similarly it is too early to evaluate the Ontario Broiler Board, established in 1964, which uses a system of quotas to influence prices. The board operates on the premise that the demand for agricultural products is fairly constant in the short-run, hence price can be influenced by regulating the supply. Average broiler prices in Ontario were higher in 1965 and 1966, the two years after the adoption of the scheme, than they were in preceding years.~/

It has been said that the principal difference between a voluntary cooperative and a marketing board is that, "Voluntary cooperatives represent an attempt by producers to improve the market by entering it as one of a number of competi­tors. Marketing boards represent an attempt to improve the market by overall action not in it, but on it. ".Y

In America, the main differences between a marketing board and a marketing order are that marketing boards would be government-controlled bargaining associations with complete control over the nation's supply of a product, and possibly might be granted power to regulate production in some manner. Mar­keting orders must be confined to the smallest practicable area, usually do not cover the entire production, and may not control production. It would seem that marketing order legislation could be extended to provide the powers that would be authorized under marketing board legislation. This might prove more accept­able to producers in that the mechanics of marketing orders have already been tested.

Summary and Conclusions

Although the enabling legislation has endowed producer groups with methods to manipulate the marketing of their products, certain conditions are necessary for effective use. Total quantity, quality, and rate-of-flow regulations will be most feasible for industries in which the follOwing conditions apply:-

1) Price-inelastic demand schedules, so that consumers will bid up the price of the commodity proportionately more than the manipulated decrease in quantity marketed.

1. Ibid, p. 65.

2. Poultry and Eggs Weekly, April 1, 1967, p. 8.

3. D. R. Campbell, "Voluntary and Compulsory Cooperatives" , Canadian Journal of Agricultural Economics, Vol. V, No.2 , 195.7, p. 11.

29

2) Low or zero cross-elasticities of demand, so that consumers will not turn to alternatives, and increased supplies of the alternative commodities will not be induced by the decrease in the available quantity of the regulated product.

3) Relatively complete control of supply, so that any increase in price will not attY'act supplies from other sources. Partial control may be effective, if the regulated share fills the needs of an entire sector of the market, or if alternative sources are geographically separated from the market . The limit on price manipulation will be the size of the transfer cost of buying supplies from alternative non-regulated sources.

4) Supply concentrated in a relatively small area, so that economic and production characteristics are homogeneous. A small number of relatively homogeneous large producers generates fewer equity problems in sharing the costs and benefits of market manipulation.

5) Some limitation on entry to production and marketing. Although produc­tion restriction is not directly possible under existing legislation, it may be possible by the indirect means of limiting access to the market or limiting participation in the benefits to those covered by the order.

6) Knowledge of the nature of the demand and supply conditions (elasticities) of the commodity, so that a reasonable price policy based on both short-run and long-run consequences can be evolved. Undue enhancement of the short-run price may cause increased supplies over time so as to offset, or more than off­set, the short-run gain.

7) Knowledge of existing or potential substitutes for the commodity under regulation may prevent unwise price policies that would result in permanent loss of market.

8) The existence of a group such as a cooperative, already active within the industry, that will support the order, inform growers of the benefits, and con­tinue to play a major role once the order has been accepted, will facilitate the operation of an order.

Effective use of advertising and promotion to enhance incomes, will be most feasible if the above conditions exist. In addition, the following conditions may be necessary:

1) The product must have distinctive characteristics, so that it can be differentiated in promotion and in the minds of consumers.

2) Adequate funds should be available to support the type of program that will influence demand.

The provision for dissemination of information is considered useful, if the information is accurate, well-timed and effectively communicated. This spread

30

of economic information may well be the most important method authorized by legislation; thus its use potential should be explored.

Research studies fall into two categories: those necessary to develop other authorized tools, and those that lead to reduced unit costs of production and marketing. The latter type of research has not been, and probably will not be, conducted to any large extent under this enabling legislation at producer expense, because it is already carried out at public expense in the state universities.

Milk producers are currently the only groups that may use price-fixing. Control of milk prices has been feasible because:

1) The system established under the federal and state orders had already been in use by the milk industry. Handlers and producers thus had some experi­ence in administering it.

2) Supplies and markets for fluid milk were and are localized.

3) Distinct and separable demands exist for milk. The fluid milk market is relatively more inelastic than the dairy-product market; hence, price differen­tiation is possible. Leakage from the product market into the fluid market at the first-handler level is eliminated by enforcing the minimum-price provision.

4) Barriers to entry of new producers, in the form of sanitary requirements and licensing, have helped maintain control over supplies.

Most of the provisions available to producer groups under the marketing order legislation were first used by voluntary groups. If the supply and demand conditions permit increases in prices through manipulation of marketing, then a voluntary group with the support of producers of the major part of the produc­tion, may prove effective in raising member incomes. Even if the voluntary group does not have complete control of the production, control of a market or a sector of the market, or a geographically separated supply, may make it possible to realize moderate improvements in producer returns.

Marketing boards, which would allow complete control of the production and marketing of a commodity produced in the United States would provide for more direct and effective application of the methods now available under existing legislation. Expansion of the marketing order legislation to authorize regula­tion of production and entry to the industry, however, would provide comparable power.

Marketing orders provide only the methods; they cannot increase returns. The methods, to be effective, must be Skillfully applied, in the proper place and at the proper time . Producer groups must be aware of the prevailing conditions within their industry to use any of the provisions efficiently. A well-coordinated production and marketing program, incorporating several of the authorized methods , would benefit a commodity group more than would attempts to use one method alone.

31

Implications for New York State

New York producers benefit to some extent from their location. Not only are they close to the largest market in the United States, but also to the markets of Buffalo, Rochester, Boston, and Cleveland. Some producers in surrounding states have a location superior to that of western New York producers insofar as supplying New York City is concerned, but much of the western production moves ' into Buffalo, Rochester and Cleveland rather than into New York City. New York producers do not dominate these markets, however, but share them with producers from other states. Nor do they produce the major part of the supply of any commodity except maple syrup. Therefore the quantity provisions provided under the New York legislation could be used only to a limited degree. Those provided under the federal legislation may be of more value, if New York producers and the producers of the same commodities in other states were willing to enter into multi state federal orders, which would enable them to control the major part of the supply. For example, 90 percent of the supply of sour cherries is concentrated in five states: Michigan, New York, Pennsylvania, Wisconsin and Ohio. Since the sour cherry crop is subject to severe fluctua­tions because of weather conditions, and producers have suffered c;l.eclining markets in recent years, such an order may prove beneficial to them.,Y

In several instances, New York producers have protected their markets by erecting barriers to entry. The Buffalo and Rochester milk orders essentially prevent producers other than those covered by the order from selling fluid milk in those markets, through state market-order regulation and licensing, and thus stabilize and perhaps enhance returns. New York producers under the federal milk order and licenSing provisions share the metropolitan New York market with Pennsylvania and New Jersey producers but use price-setting to stabilize prices, perhaps to enhance price, and to prevent manufacturing supplies from disrupting the market. New England milk producers effectively limit entry of new milk into their New England market, and maintain a slight price and return advantage over neighboring produqtion areas.

Except for eggs, maple syrup, and apples, grapes, and potatoes in closed packages,~/ the grade standards in New York are voluntary. If quality improve­ments are necessary or if quality differentiation is feaSible. a marketing order may be used to make the standards mandatory for all growers in the industry. Commodities that fall below certain grade standards could be eliminated from the market, and the consumer may be more favorably inclined toward the com­modity knowing that it will be of a certain standard. Also farmers may be encouraged to adopt improved practices if they are paid a premium for quality.

1. B. A. Anderson, The Tart Cherry Industry-.,..Its Structure and Market Prob­lems, Department of Agricultural Economics, Cornell UniverSity Experiment Station, A. E. Res. 198, March 1966, pp. 3-4.

2. Articles 12A-13B, New York Agriculture and Markets Law, New York Depart­ment of Agriculture and Markets, Bulletin 398, 1958, pp. 159-169.

32

If the New York commodity can be differentiated in some way, the use of the quality-control provision has merit. Use of the quality standards to regulate the quantity marketed, is subject to the same limitations as those discussed for the quantity tool. It would probably prove effective only if a multi state order were adopted that regulated almost the entire market supply.

The provisions of advertising and promotion, dissemination of information, and research are probably more useful to New York producers. In fact, apart from the milk orders, only two others have been adopted in New York State: the New York State sour cherry order and the New York apple order. Both orders provide only for the tools of advertising and promotion, research, and dissemination of information. Advertising and promotion may be used for any commodity, which has a differentiable characteristic. Many of the New York products are also produced in adjoining states; thus New York producers may encounter difficulties (but not insurmountable ones) in persuading consumers that their products are any different from those produced in other states. Agri­cultural commodities before processing are difficult to advertise efficiently, owing to the homogeneity of commodities. Most state orders use a state label as the method of differentiation. This is effective only if a coordinated quality­control and advertising program is used, so that the state name becomes asso­ciated with a quality image. The extent to which advertising and promotion is effective in expanding demand depends on the degree to which the product can be differentiated, the extent to which supplies and quality-control tools are used to coordinate availability, and uniformity with the thrust of the promotion.

An order used to collect funds to facilitate the collection and dissemination of information could be beneficial by:-

a) improving coordination between the segments of the industry,

b) improving the baSis on which those in the industry form their decisions,

c) acquainting farmers with new techniques and encouraging progress,

d) acquainting farmers with prices and market conditions in their markets and surrounding markets.

Such information would broaden the lmowledge of those in the industry and perhaps help to persuade them that their individual actions are important, that they do not exist in a vacuum, and that cooperative effort is essential to develop long-run solutions to their problems.

Under New York order legislation, producer groups may collect funds for research. It may be to their advantage to use this provision to broaden their knowledge of the market. Such information could then be disseminated to growers so that they could immediately benefit from it. Research sponsored in this way could be focused on the problems the producer group feels are most

33

important. Results would probably be attained more quickly than if they wait for the state university to find an opportunity to carry out the research.

Price setting, which has been used for milk under New York State orders, has succeeded because of the historic local nature of markets, the existence of some barriers to entry of shipments of fluid milk, the existence of differentiable uses of milk, and the long experience the industry had in using the methods now authorized. For other commodities the method could not be used effectively for approximately the same reasons that the quantity-control regulations effective­ness is limited.

Theoretically, effective manipulation of the marketing process is possible in New York, if a coordinated program making full use of all the available methods is adopted. In practice, however, producer groups tend to expect the marketing order to solve rapidly all their problems. Thus they stress short-run policies at the expense of long run policies, and may find their position considerably worse after the order has been in operation several years . Marketing orders were not designed to be an overall cure for all the problems of an industry, but merely to provide a set of methods that the industry could use to develop a more organized system of marketing and distribution within the constraints of the existing or potential characteristics of the commodity, the market, and the resource availability.

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