APR 1 1 94 b University of California College of Agriculture Agricultural Experiment Station Berkeley, California i A STUDY OF THE RELATIONSHIP BETWEEN THE DAIRY INDUSTRY OF THE SOUTHERN SAN JOAQUIN VALLEY AND THE LOS ANGELES MILK MARKET Conclusions and Recommendations Based on the Above Study by J. M. Tinley Associate Agricultural Economist August 1932 Contribution from the G-iannini Foundation of Agricultural Economics i * THE STUDY OF THE' RELATIONSHIP BETWEEN THE DAIRY INDUSTRY OF THE SOUTHERN SAN JOAQUIN VALLEY AND THE LOS ANGELES MILK MARKET Reasons for the Study This investigation was undertaken at the request of the dairy departments of the Kern, Kings, Tulare and Fresno county Farm Bureaus. The study was commenced in February, 1932. Purpose of the Study The investigation aimed at ascertaining: (.1) The extent to which these counties are or may become a part of the Los ^ngeles milk shed. (2) The relationship between the production of Grade A cream and Grade A market milk in these four counties. (3) What economies, if any, are possible in the handling and market- ing of bulk milk in any or all of the four counties. (4) Whether an organization of market milk and/or market cream dairy- men in any or all of these counties Is feasible and desirable and if so what form of organization would be most advantageous and workable. (5) Whether it would be desirable for dairymen to enter into the distribution of market milk if a reasonable agreement cannot be made with present distributors . Points Invest igated An attempt was made to obtain and analyze the following information: (1) The trend in the numbers of dairy cows in Kern, Kings, Tulare and Fresno counties since 1920. (2) The annual utilization of milk fat produced in each of the four counties, including quantities of milk and cream used locally and shipped to Los Angeles. (3) The number and size of herds in each of the four counties which have been certified as being free from tuberculosis. ) (4) The number and size of herds with permits to ship market milk and Grade A cream into Los Angeles. (0) The number and location of creameries shipping market milk and Grade A cream to Los Angeles. (6) The present and probable future costs of handling and shipping market milk to Los Angeles and other cities in Los Angeles County. (7) The "pick-up" or local hauling routes of the various creameries. (8) The effect of possible changes in the Los Angeles City and County health regulations and enforcement upon the quality and quantity of milk shipped to cities in Los i\.ngeles County from each of the four counties. Source of Information Information was obtained from the health departments of the cities of Pasadena and Los Angeles and of the Counties of Los Angeles, Kern, Kings, Tulare and Fresno; from the annual reports of the State Department of Agriculture; Bureau of Dairy Control; from the reports of the United States Department of Commerce; Bureau of the Census; from the various county Farm Bureau officials; from the various plant managers of creameries in the four counties and from the Southern Pacific Railroad. i I CONCLUSIONS 1. The volume of Grade A market milk produced in Kern, Kings, Tulare and Fresno counties is greatly in excess of local market milk requirements* While a great deal of this excess supply would under ordinary conditions be shipped to Los Angeles in the form of Grade A creaia, part of it would undoubtedly go to Los Angeles in the form of market milk whenever the price paid to dairymen in Los An- geles was sufficiently greater than the prices paid to dairymen in Kern, Kings, Tulare and Fresno counties to cover the costs of handling and transportation. 2. The cost of handling and transporting milk from Baker sfie Id to Los Angeles based on a 400-can load would be about 12 cents per pound milk fat (4 cents plant cost for cooling, etc. and 5 cents transportation costs). From Tulare and Fresno the cost would amount to about 14.9 and 15.7 a pound of milk fat respectively. With a smaller volume the costs would be somewhat greater. 3. As a result of an ordinance in Los Angeles County, all Grade A market cream must be produced from herds free from tuberculosis. The health and sanitary requirements for Grade A milk and Grade A cream are practically the same. All dairymen with permits to ship Grade A cream are automatically permitted to ship market milk to Los Angeles. The cost per pound of milk fat of transporting cream to Los Angeles is about l/lO as much as the cost of transporting market milk. 4. As the costs of producing market milk are greater than the costs of producing manufacturing milk, over a period of time producers of market milk must get a sufficiently higher price than producers of manufacturing milk to cover the higher costs of production. However, when once dairymen have equipped them- selves to produce market milk they will be prepared for a period of time to pro- duce market milk even if the price received does not cover such additional costs as interest on investment and depreciation on equipment; in other words, they will produce market milk for a time as long as the higher price covers the additional cash costs. Dairymen in Kern, Kings, Tulare and Fresno counties were induced orig- inally to equip themselves to produce Grade A milk and cream by receiving a price which they considered covered the additional cost of producing market milk. During the first few months of 1932, however, the price paid to market milk dairymen in these four counties was barely high enough to cover the additional cash costs of producing market milk over manufacturing milk and certainly was not enough to cover such supplementary costs as interest on investment and depreciation on equipment. 5. Distributors in Los Angeles maintain that the price paid to pro- ducers in that county and in adjacent counties must be based on the prices prevail- ing in Kern, Kings, Tulare and Fresno. Creameries in these four counties, which ship market milk to Los Angeles, in turn contend that they base their buying prices for market milk on the Los Angeles prices. If the buying prices in Los Angeles are high, they can pay a big premium to their patrons j if buying prices in Los Angeles are low, their premium must be low. 6. During the years prior to 1932 the buying prices for market milk in Los Angeles were high enough to enable creameries in Kern, Kings, Tulare and Fresno Counties to pay to their patrons a premium large enough to induce many of them to equip themselves to handle market mil]: and market cream. At the same time these creameries were able to sell market milk in Los Angeles at a lower price than was paid to producers in Los Angeles and adjacent counties (Riverside, Orange and San Bernardino counties), after allowing for costs of handling and shipping market milk to Los Angeles. These creameries were thus able to expand their sales in Los Angeles at the expense of distributors' purchasing milk from producers in Digitized by the Internet Archive in 2014 https://archive.org/details/studyofrelations15tinl the Los Angeles and adjacent territories. Distributors obtaining their market milk supplies from the creameries in the San Joaquin Valley at prices lower than those prevailing in the Valley tended to cut their resale prices to consumers and to stores in ordor to expand their business. The increased quantities of milk shipped in from the San Joaquin Valley (mainly Kern County) also tended to increase the surplus of milk handled by the California Milk Producers Association. The decline in butter prices at the same time induced more dairymen in the Southern San Joaquin Valley to equip themselves for market milk production and thus avail themselves of the relatively higher prices paid by creameries for market milk and market cream. 7. The loss of sales volume by distributors obtaining their supplies from producers in Los Angeles and adjacent counties forced them to reduce their buying prices to their patrons and to the California Milk Producers association to a point where they could compete with distributors obtaining milk supplies from Kern County. As the price in Los Angeles decreased, the prices paid by creameries in Kern, Kings, Tulare and Fresno were also decreased until the premium over the prices obtained by manufacturing milk was barely sufficient to cover the increased cash costs of producing market milk. .8. It is thus apparent that Kern, Kings, and Tulare counties are or may become part of the Los Angeles milk shed. Any decrease in transportation costs (as would result for instance as soon as the highway cut-off over the ^'e- hachapi Mountains is completed) would tend to widen the area from which milk may be shipped to cities in Los Angeles County. Prices paid to producers of market mill! south of the Tehachapi therefore cannot for any length of time be greater than prices paid to producers of market milk or market cream north of the Tehach- api, otherwise larger quantities of milk will bo shipped in from the Southern San Joaquin Valley. 9. Competitive conditions have resulted in prices to producers in Los Angeles and adjacent counties being lowered to meet the lower prices of milk shipped in from north of the Tehachapi. In turn prices to producers north of the Tehachapi have been lowered to meet the lower prices paid to producers in Los Angeles. The successive decreases in prices to producers north and south of the Tehachapi have resulted in prices to producers below what would seem to be jus- tified by economic conditions. Producers of market milk and market cream in Kern, Kings, Tulare and Fresno counties maintain that the prices they were re- ceiving during the first six months of 1932 were insufficient to meet all the additional costs incurred in producing market milk instead of manufacturing milk. 10. It would seem that prices paid to producers throughout the whole of the Los Angeles milk shed (the counties north of the Tehachapi as well as south) should be based on the base buying price (f.o.b. plant) in Los Angeles. The net price received by producers will be the Los Angeles base price less costs of trans- porting milk to Los Angeles. It is probable that the extreme northern limits of the Los Angeles milk shed will be Fresno County. The lower costs of shipping milk from counties south of Fresno wi 1 1 make it improbable that much milk will be shipped from as far north as Fresno County. 11. It was stated by numerous persons that the Los Angeles ^ity sani- tary requirements regarding the production of market milk were not being enforced as strictly in Kern, Kings, Tulare and Fresno counties as in Los Angeles, Orange, Riverside and San Bernardino Counties. It was not possible to ascertain whether % * \ or not this statement was correct. If the statement is true, the producers in the northern counties have an undue advantage over the producers in the four southern counties* It would seem only equitable that if a uniform buying price is to apply to the whole of the Los Angeles mill: shed that each and all producers of market milk be required to conform equally with established sanitary regulations. 12. As the Los Angeles and other city health regulations regarding the production of milk and cream will in future be much the same, it will be neces- sary to pay the same price to all producers who can qualify under the respective health regulations regardless of whether their mi lie is used for market milk or Grade A cream. Owing to the relatively lower costs of transporting cream to Los Angeles it is probable that milk will be shipped from Kern County and part of Tulare County and cream from points, further north. 13. It would seem that buying prices for market milk intended for sale in cities in Kern, Kings, Tulare or F re sno counties should be based on the Los Angeles base buying prices except insofar as such cities have different sani- tary requirements. Resale prices (to stores or direct to the consumer) should be somewhat lower in such cities than the resale prices in Los Angeles because of the difference in transportation and handling costs. 14. While producers of market milk and Grade A cream in Kern, Kings, Tulare and Fresno counties arc unorganized or are members of cooperative associa- tions not primarily organized to ship market milk and market cream, it will be difficult if not impossible, to maintain a uniform and stable price structure In the Los Angeles milk shed. It was shown above that the interests of dairymen north of the Tohachapi were one with those of producers south of the Tehachapi in maintaining a stable price system based upon an interpretation of factors of demand and supply for market milk. The interests of all producers in the Los Angeles milk shed are thus complimentary and not antagonistic as has been regarded as the case in the past. 15. The organization of dairymen in Kern, Kings, Tulare and Fresno counties into a new association separate from, although perhaps affiliated with, the California Milk Producers Association is undesirable for experience has shown that it is difficult to avoid destructive competition between two or more coopera- tive organizations shipping milk to the same market. RECOMMENDATIONS 1. In view of the facts above mentioned, it is recommended that the California Milk Producers Association extend its membership into Kern, Kings, Tulare and Fresno counties and that an effort be made to get all or nearly all dairymen with permits to ship market milk and market cream to Los Angeles and other cities in Los Angeles County to join that organization. It is recommended further: 2. That the Farm Bureaus of the four counties assist in the fullest way possible the California Milk Producers Association to sign up dairymen in their respective counties, 3. That all prices to dairynen be based upon the Los Angeles buying price less costs of transporting milk to Los Angeles. 4. That the California Milk Producers Association also undertake to handle and sell cream. 5. That all milk and cream from the four counties be handled through the existing creameries in those counties. In other words, it is expressly con- sidered that the California Milk Producers Association should not erect any ad- ditional plants although it may be advantageous and desirable for the California Milk -Producers Association to purchase at some time in the future one or more of the existing plants. 6. That sales of market milk and cream in Los Angeles be made as far as possible from supplies nearest to that city. In other words, that marke^milk will be drawn into Los Angeles only if the nearby supplies are inadequate. Diver- sion of surplus milk to manufacturing plants should be made in the northern counties. However, all dairymen are to have their prices based on those in Ljs Angeles, regardless of whether or not their own particular supplies be used for manufacturing prices. 7. That in view of the somewhat larger seasonal variation of produc- tion in the four northern counties that all members be put on "averages" or "basic quotas". This will tend to encourage market milk and market cream pro- ducers in Kern, Kings, Tulare and -^resno counties to even out their production over the year. 8. That all dairymen in the whole of the Los Angeles milk shed bo required as far as possible to contribute equally to the cost of disposing of the surplus over and above their "basic quotas" or averages. 9. That producers be paid for their market milk and cream on the basis of quality. In other words, that the producers of poor quality milk (high bacteria, low solids, heavy sediment or faulty flavor) be penalized. In this way every inducement will be held out to dairymen to produce high quality milk. This is necessary if the California Milk Producers Association is to win and maintain the support of distributors to whom it sells milk and cream. 10. That the California Milk Producers Association undertake to supply all distributors in cities in Kern, Kings, Tulare and f'resno counties with market milk and cream, the Association to act merely as a collective sales agent and not to handle milk itself. 11. That distributors as far as possible be allowed to select their own dairymen patrons and that one dairyman be transferred from one distributor to .another only with the consent of both distributors and the Association. 12. That the California Milk Producers Association make every effort to establish close working arrangements with the various local cooperative asso- ciations affiliated with the Challenge Cream and Butter Association in order that matters of importance to both market milk and manufacturing milk dairymen be dealt with collectively. It is probable that in future the price of market milk will have to bear a very close relationship to that of manufacturing milk if stable marketing conditions are to be maintained in the Los Angeles milk shed. This will necessitate closer working arrangements between collective bargaining organization handling market milk and cooperative associations handling manufacturing milk. 13.. That the California Milk Producers Association make every effort *o establish friendly working arrangements with distributors. Both producers and distributors have much to gain by the establishment of stable marketing conditions 14. In conclusion it is suggested that the details, of the plans for extending the membership of the California Milk Producers Association to Kern, Kings, Tulare and Fresno counties be worked out by a series of conferences between officials of the California Milk Producers Association, the Farm Bureaus of the four counties and creamery operators and distributors. ALT ERNAT IVE RECOMMKNDAT IONS Should it be impossible for some reason or another for the California Milk Producers Association to extend its membership to Kern, Kings, Tulare and Fresno counties, it Is recommended that dairymen in the four counties producing market milk and Grade A cream form a collective bargaining association to under- take the sale of their milk. Every effort should be made to include in the mem- bership practically all market milk and market cream dairymen in the four counties Membership would be confined strictly to producers of Grade A milk. The associa- tion would take in the whole of the territory north of the Tehachapi which would come into the Los Angeles milk shed and should not be confined within county limit Upon the formation of such an association immediate efforts should be made to affiliate with the California Milk Producers Association and to develop the closest possible cooperation between the two organizations in the establish- ment of a stable price structure. Sales of milk to distributors and creameries in the four counties could be made as recommended in 5, 10 and 11 above.