OPERATING PROBLEMS of a COOPERATIVE POULTRY and FEED H. E. Erdman CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 759 As part of its plan for modernization, in September, 1957, the P.P.C.C. moved its main office from the congested downtown area of San Francisco to San Leandro. In the new building, all aspects of egg handling, including packing in cartons, have been mechanized. As of September 1, 1957, all of the Asso- ciation's Egg Department operations were consolidated in two mechanized plants— one at San Leandro, the other at Sacramento— which have replaced the 13 egg-handling plants referred to in the text. This aerial view of the San Leandro plant was taken May 2, 1957, when the building was nearing com- pletion. (All photographs courtesy of the Poultry Producers of Central California.) THE AUTHORS: James M. Tinley is Professor of Agricultural Economics and Agricultural Economist in the Experiment Station and on the Giannini Foundation, Davis. Henry E. Erdman, Professor of Agricultural Economics, Emeritus, was in the Experiment Station and on the Giannini Foundation, Berkeley. DECEMBER, 1957 OPERATING PROBLEMS OF A COOPERATIVE POULTRY AND FEED ASSOCIATION J. M. TINLEY H. E. ERDMAN XjLow a cooperative marketing agency adjusts to economic changes is described in this case study of the Poultry Producers of Central California. Since 1916, the year of its establishment, the P.P.C.C. has had to adapt itself to two types of changes: 1) those occurring within the industry as the result of scientific advances and improved practices — for example, the shift from seasonal fluctuation in egg production to a steady, year-round supply; and 2) general changes affecting many aspects of our economy, such as population growth and the rise of chain stores and supermarkets. Both kinds of changes have contributed to increasingly keener competition and to an accompanying need for streamlined operations and greater efficiency. The study presented here is based on the situation of the P.P. C.C. in 1953, a year when the need for a re -evaluation of its poli- cies and practices became critical. This bulletin outlines the growth of the Association, analyzes its various operations as they were being conducted in that year, and recommends means for improvement, most of which have already been adopted, while others are still under study. Findings and Recommendations 1 . . . a summary The poultry industry of California ex- panded rapidly between 1900 and 1920. Egg production increased at such a rate that a considerable surplus of eggs be- came available for shipment to eastern markets. However, with the remarkable growth of population of the state since 1920, and especially since 1940, Cali- fornia has become an importer of eggs. Although egg production has continued to expand, the expansion has not kept pace with increased needs resulting from growing population. Within recent years, changes in production practices have considerably modified the seasonal pat- tern of egg production — so much so that in central California it is no longer neces- sary to place large quantities of eggs in storage during the spring months, pre- viously months of flush production. Up to about 1940 the great bulk of meat chickens was supplied from out of state. Since 1940, however, there has been a very considerable expansion in the production of meat varieties of chickens, especially fryers and broilers, and turkeys. Since the beginning of the present century, the number of dairy cows in the state has also increased. As a result of these expansions in the poul- try and dairy industries, a large and growing market has developed for dairy and poultry feeds. The number of locally owned mills has increased, and, in addi- tion, several nation-wide corporations have established feed-milling and -mer- chandising facilities. It is to be expected, then, that competition in the sale of feed and supplies to livestock producers will be intensified. Competition is likely to be 1 Submitted for publication September 19. 1956. particularly keen for the business of poultrymen and dairymen with large en- terprises. The growth of the P.P.C.C. The Poultry Producers of Central Cali- fornia was organized in 1916 to receive, grade, package, and merchandise eggs received from member-producers. By stressing quality and service, the Asso- ciation has built up an enviable reputa- tion for its eggs in the consuming centers in central California. In 1926 the Association established feed-milling facilities to provide an extra service for members. It also supplies members with needed farm supplies. Feeds and supplies are sold exclusively to members. Membership includes not only egg producers but also some producers of broilers, fryers, and turkeys, as well as smaller numbers of producers of other types of livestock. The Association as such has not entered directly into the financing of producers. The total membership of the Associa- tion numbered about 11,600 in 1954, of whom only about one third were active egg shippers. All persons who wish to join, however, are required to sign an egg-marketing agreement whether or not they are producing eggs. This provision excludes from membership, and hence from patronage of the feed and supply services, any egg producers who do not wish to sell eggs through the Association. During 1954 eggs were graded and candled at some 13 branches. With the installation of automatic egg-handling facilities at Modesto, however, grading and packaging have since been discon- [4 tinued at two branches. Automatic equip- ment is soon to be installed in several areas, thus permitting a further reduction in the number of branches performing this function. The Association operates six feed mills strategically located throughout the territory it serves. Includ- ing the egg-grading stations and the feed mills, the Association sells feed and sup- plies and receives eggs at 44 branch warehouses and through 6 agencies. In 1953 the total volume of business transacted by the Association amounted to about $60,000,000, approximately half being from the sale of eggs and half from the sale of feed and supplies. The capital required for the acquisition of facilities and for operating and inventory purposes was supplied wholly by mem- bers. Capital for the Egg Department is secured concurrently from members through a deduction on each dozen eggs delivered. Capital for the operation of the Feed Department is obtained by allo- cating up to 50 per cent of the net over- age (or savings) made annually in the sale of feed and supplies. The amounts contributed by members to capital are thus proportionate to their use of the Association's services. The funds con- tributed are revolved back to the mem- bers about every two years. In addition to these two main revolving capital funds, the Association in 1953 provided for a General Capital Fund to which members could subscribe. By the end of 1953, some 900 members had subscribed nearly $3,500,000 to the General Capital Fund. The Association found itself with capital resources in excess of its needs, and further contributions to the Fund were temporarily suspended. Although in many important respects the Association appears to have adjusted its operations to meet the changes in en- vironmental conditions, the prospect of stronger competition in the years ahead indicates a need for further streamlining of operations and eliminating, wherever possible, certain high-cost practices. One of the most fundamental and im- mediate problems facing the Association is the need for a more realistic and equit- able method of dealing with large- and small-scale producers in both the Egg and the Feed Departments. All information analyzed points to the fact that servicing costs per member are high for those whose patronage is small in relation to those whose patronage is large. Under the cost-allocation procedures in force when this study was made, it was evident that large member-patrons were to some ex- tent subsidizing business with small ones. This weakens the competitive position of the Association in securing and main- taining the patronage of producers with large poultry and dairy enterprises. These members, although they constitute only a small proportion of the total mem- bership, contribute the bulk of the pa- tronage of both the Feed and Egg De- partments. Finally, there is much evidence that the Association needs to develop a more comprehensive plan for promoting mem- ber relations and securing new members. In the past the Association appears to have relied primarily on its long- and well-established reputation for service to recruit new members. Because of the highly competitive situation in prospect, this is not enough. Misunderstandings arise and must be cleared up. Patrons sooner or later die or retire from active operations. If the Association is to go ahead, a constant stream of new members is necessary to replace those who drop out. The specific recommendations that fol- low are suggested with a view to improv- ing both the operations of the Egg and Feed Departments and the over-all posi- tion of the P.P.C.C. Feed and Supply Department In order to increase the effectiveness of the Feed and Supply Department, it is important that special efforts be made to increase the volume handled and, where- [5] ever possible, to effect internal economies in the processing and distribution of feeds and supplies. Increased volume. In order to in- crease patronage, it will be necessary for the Association to adopt more effective means of obtaining new members. For this purpose it is recommended that the Association establish a field-service de- partment staffed by persons trained in membership relations and with a knowl- edge of poultry and dairy production techniques. It is also important that branch managers work more closely with field-service men in helping members and in recruiting new members. It also seems desirable to remove some of the existing restrictions on member- ship, especially the requirement that every member sign an egg-marketing agreement. Only members who wish to utilize the services of the Egg Depart- ment should be required to sign the agreement. Egg producers who have other outlets for their eggs would thus be permitted to patronize the Feed and Supply Department. In order to discour- age egg-shipping members from with- drawing from the contract, it is suggested that a member who withdraws his pa- tronage from the Egg Department be re- quired to wait for two years before he may again sign an egg-marketing agree- ment and ship eggs through the Associa- tion. All reasonable means should be adopted to expand feed sales to turkey, broiler, and fryer raisers. In view of the risks involved, it seems unwise for the Association to finance more liberal credit terms to meat-bird producers and dairy- men. At the same time it should be real- ized that by far the most important reser- voir of potential additional feed business is with these two groups. It is recom- mended, therefore, that the Association explore all means whereby it can aid such producers in arranging for financing through commercial banks, production- credit institutions, and other lending agencies. The Association may well re- consider the advisability of sponsoring a grower-financed, production-credit cor- poration for the meat-bird producers. Milling costs. Every effort should be made to reduce milling costs. Increased volume is a prime requirement. It is recommended specifically that all mills be equipped to handle bulk feeds. As soon as this has been done, the Association should revise its bulk-feed pricing policy | so that these prices may reflect more accurately the actual costs of milling and distributing feed in bulk. At the same time every encouragement should be given to members to equip their poultry and dairy enterprises to handle bulk feeds. Milling costs (and also branch oper- ating costs) could undoubtedly be re- duced by decreasing the number of mixed feeds handled by the Association — espe- cially those of a medicinal nature. The annual sales of many of the special mixed feeds constitute only a very small propor- tion of all mixed feeds sold, and turn- over of such feeds in branches is slow. Branch operations. The volume of feeds and supplies handled through many of the branches is so small in relation to capacity that costs of handling feed in such branches are relatively high. The problem of maintaining volume of feed in branches is likely to be aggravated as the volume of bulk sales direct from mills increases. Factors other than volume cause the cost of handling feed in some branches to be high. It is recommended that the Associa- tion give careful and continuous study to ways and means of reducing branch operating costs. Some branches should perhaps be discontinued. It may also be possible to extend the system of oper- ating two or more branches under a single branch manager. Although agency arrangements for the sale of feed and [6] * fc^ l£ ^ The bulk storage facilities at the Petaluma mill. A scale is installed beneath these large tanks. Trucks are loaded by gravity. collection of eggs have not proved very satisfactory in the past, the Association may well consider fuller use of the agency method in areas where members are scattered and have small enterprises. Handling of members' accounts. Considerable expense is involved in mak- ing sales of feed and supplies in small quantities and of small total value. These costs involve the time spent by a branch manager in making the sale, posting, billing members twice a month, and servicing delinquent or overdue ac- counts. It is recommended that the Association consider a plan under which members would settle accounts on the basis of in- voices rather than bi-monthly state- ments. Such a plan is already used, ap- parently with satisfactory results, by two large feed-selling cooperatives on the Pacific Coast. Egg Department operations For a number of years a service charge of 50 cents has been levied on all member accounts with the Egg Depart- ment. This charge is made to cover the estimated cost of handling each mem- ber's account regardless of the number of cases delivered weekly. This charge was based on estimates made prior to 1950. It is recommended that the Asso- ciation consider raising the service charge from 50 to 75 cents per member account. This would partly reflect the increased costs of handling member ac- counts and would also defray some of the additional costs involved in picking up at the ranch small lots of two or three cases of eggs at a time. As an alternative, if an increase in the service charge is deemed inexpedient, the Association might consider two size pools. All members delivering less than, say, 10 cases of eggs a week would be [7] placed in one pool, all other members in the other. The higher costs of picking up eggs and the administrative and han- dling charges involved in small deliveries could then be assessed against the small- shipment pool. Capital funds It is recommended that the Board of Directors give careful consideration to two possible changes in its methods of obtaining capital from members. The General Capital Fund has provided the Association with more funds than are needed to finance the purchase of Egg and Feed Capital Fund certificates from members who need ready cash. The ex- cess in the General Capital Fund could be used by the Association to finance feed- and egg-storage operations and for other purposes. However, with the changed seasonal pattern of egg produc- tion, egg-storage operations in the future are likely to be nominal. Heavy advance purchases of feed and supplies are likely to be highly intermittent. It would seem to be sounder policy for the Asso- ciation to borrow from commercial banks and other lending institutions to meet exceptional seasonal needs for ad- ditional funds. Because of the Associa- tion's excellent financial condition, it should be possible to borrow funds for short-term needs at much lower rates of interest than the 5 per cent now paid to small numbers of members who have in- vested in the General Capital Fund. The Board of Directors might also consider extending the period of revolu- tion of Egg and Feed Capital Funds. The Association would be able to make somewhat higher current returns to members for eggs delivered or to reduce prices on feed (or increase annual cash patronage refunds) if annual member contributions to these funds were re- duced. Personnel It is recommended that the Associa- tion revise its personnel recruitment and training program so as to ensure that each year it will recruit one or more young men who have had training in economics and in livestock and poultry production. The in-service training of these young men should be designed to test their aptitudes for more important positions in the Association. Some of these young men should be of such cali- bre that they can eventually fill top- management positions. The Association should also consider the advisability of establishing an eco- nomics section headed by a well-trained economist. Purpose and Scope of the Study An opportunity to study the opera- tions of a cooperative marketing agency arose in 1953, when the Poultry Produc- ers of Central California 2 asked if the Giannini Foundation of the College of 2 Known colloquially as the P.P.C.C. This abbreviated designation and also the term "Association" will be used in this report inter- changeably with the longer title. Agriculture, University of California, might undertake an economic analysis of its organization and operations. One long-term research objective of the Department of Agricultural Eco- nomics is the study of operations of marketing agencies — including agricul- tural cooperative associations engaged in marketing farm products — with a [8] view to determining ways to increase handling and marketing efficiency. An important consideration is the extent to which such agencies are able to adjust their operating practices to conform to fundamental changes in the economic en- vironment in which they operate. Because of the great economic changes that have taken place in recent years, a comprehensive survey and appraisal of the Association's operations was felt to be in order, both in the interest of the Association and that of the economists concerned with the means by which a co- operative adjusts to changes occurring both within the industry and in the gen- eral economic scene. The problems of operation and adjustment faced by that agency were in many respects similar to those faced by many other marketing agencies, both cooperative and indepen- dent, in California as well as in other states. An analysis of the operations of the P.P.C.C, which had professed its willingness to cooperate fully in such a study, thus offered the Department of Agricultural Economics a case study in the broad field of efficiency in marketing farm products. Since a broad study of egg marketing was already under way in the Depart- ment of Agricultural Economics, this function of the Association has been dealt with only as its relates to other phases of the organization. Among the operations specifically analyzed were certain aspects of member relations, the marketing contract, credit policies, vol- ume of egg and feed business done with large and small producers, certain as- pects of milling operations, operation of branch plants, handling of investment funds, and finally the suitability of the present form of organization. Results of the study as it progressed, with recommendations, were made avail- able to the Board of Directors of the P.P.C.C. so that action could be taken in matters requiring immediate decision. Work was begun early in 1954, and two progress reports were made to the Board of Directors — one in June, 1954, the second in August, 1954. Both reports were considered in detail by the Board of Directors and the management of the Association, and appropriate action has been taken on some of the suggestions made. The final report, presented herein, embodies the contents of the progress re- ports, certain background information relative to the development of the As- sociation, and additional material not covered in the progress reports. Sources of data. The information on which this report is based was ob- tained mainly from the records of the Association and from interviews with its directors, personnel, and members. Dur- ing the survey, over 80 individual poultrymen (both members and non- members) were interviewed in regard to membership relations. The authors also contacted members of the Federal- State Market News Service, secretaries of production-credit associations, and officials of other financial institutions such as banks. Supplemental data on credit policy were obtained from other poultry associations in the western states. Some material was also drawn from a separate study of membership contracts of other California coopera- tive Associations. 3 3 Only brief reference to the study of mem- bership contracts will be made in this report. More detailed information will be included in a comprehensive report on this subject to be issued later. [9] The P.P.CC, Its Origin and Development Historical background From 1900 to 1915 egg production in the western states expanded rapidly, the predominant breed of chicken being the White Leghorn, noted for its egg-laying qualities. By the end of that period, pro- duction in the western states exceeded the requirements of the area, and im- portant quantities were being shipped to eastern markets, mainly to New York City. In the San Francisco Bay area, where similar conditions prevailed, marketing conditions were far from satisfactory from the producers' standpoint. Most of the eggs were purchased from producers on an ungraded basis at prices based on the quotations established by trading on the San Francisco Wholesale Dairy Pro- duce Exchange. Prices had tended to fluctuate widely as the market changed seasonally from a deficit to a surplus condition. Poultrymen generally believed that the dealers manipulated these quo- tations and profited unduly by the cold storage of eggs as well as by the eastern shipping business which had been de- veloping for a number of years. Little effort was being made to improve qual- ity, to improve and standardize grading and packing, or to develop regular east- ern outlets. These unsatisfactory market conditions led to the organization of a number of egg-producers' cooperative associations in California and other western states. Among these was the Poultry Producers of Central California, which was organ- ized in the fall of 1916. In the early days most of its membership was located in Marin and Sonoma counties, but the or- ganization soon began to expand into [10 other counties of central California. The Association now serves some 30-odd counties in central and northern Cali- fornia (see figure 1). When the Association began business late in January, 1917, it contracted to sell its eggs to a group of San Francisco dealers at prices to be established by trading on the Exchange. The supply was to be allocated to the dealers in proportion to their previous year's pur- chases. In 1918 the Association under- took its own marketing, selling partly to some of the dealers it had supplied dur- ing the past year but also developing sales to retailers and to eastern outlets. By 1919 it was able to announce the establishment of an agency in New York City. In 1922 the Association joined four other Pacific Coast associations in form- ing the Pacific Egg Producers Coopera- tive, Inc., a New York agency, to market its members' eggs in eastern markets. The Association very early began to en- courage its members to improve quality and to develop standardized grading and packing of eggs in its packing plants. The attention given to standardized grad- ing and packing in this and the other as- sociations, and the availability of large quantities of eggs through "P.E.P.," as the eastern marketing agency came to be known, soon established an enviable reputation for western eggs in eastern markets. Such eggs regularly sold at premiums over prices paid for eggs from nearby sources. The success of the Association in sell- ing its members' eggs led many mem- bers who were dissatisfied with prevail- ing quality and prices of feeds to urge the Association to undertake the han- ] © Egg packing plants j~~l Feed mills • Branches X Head office Fig. 1. Area served by Poultry Producers of Central California showing location of branches. [11] dling of poultry feeds. Moreover, many local feed dealers also purchased eggs, so that members of the Association were under continual pressure to transfer their egg business to their feed suppliers. At the annual meeting early in 1926, the members voted by a large majority to establish a Feed and Supply Depart- ment, and the necessary bylaw changes were made. Facilities were soon acquired where needed, and by July 1 the Associa- tion was ready to supply feeds. 4 Feeds and supplies were sold to both members and nonmembers, sales to nonmembers being made through the Producers Company, Ltd., a subsidiary corporation. In order to make more ade- quate use of milling and branch-ware- house facilities, feed was sold also to dairy producers, hog raisers, and turkey producers. Later, because of possible legal (income tax) complications, the Association decided to discontinue sales of feed to nonmembers. Farmers who were not egg producers were permitted to become regular members of the As- sociation by signing the egg-marketing contract — even though they were not, or had no intention of, producing eggs in commercial quantities. Although the Association nominally also handled supplies other than feed, no particular efforts were made to ex- pand sales of such supplies. In 1939 the Farm Credit Administration, at the re- quest of the Board of Directors, made an analysis of the Association's feed and supply business and recommended that the Association give more attention to promoting sales of supplies to mem- bers. 5 In some measure this has been done. In 1953 sales of supplies, includ- ing petroleum products, amounted to 'NulaidNews, 3(11) :9-13; 4(5) :5. 6 Knapp, Joseph G., Survey on Possibilities of Expanding Supply Operations of the Poultry Producers of Central California, San Francisco, California (Washington: 1940), p. 2. (U. S. Farm Credit Administration, Cooperative Re- search and Service Division, Special Report A73.) about 9 per cent of the total value of feed and supplies sold, as compared with 1.3 per cent in 1939. The Association has made several ef- forts to handle poultry meat as an ad- ditional service for members. A Poultry Department was authorized in February, 1926, and established soon thereafter. 6 Before the war it operated killing and dressing facilities for a time. This service proved unprofitable, however, and was finally discontinued. After the war the Association also established a poultry auction at which members could sell chickens not needed for egg production. This activity, too, was not well supported and was discontinued. The Association has financed its op- erations almost from the start under what is known as the revolving-fund method of capitalization. 7 Under this method individual members contribute to capital funds annually on the basis of patronage. Evidence of contributions is in the form of certificates of interest, which are numbered chronologically. As soon as sufficient capital has been ac- cumulated to meet the needs for facility and operating capital, earlier issues of certificates of interest are retired as new contributions are made by the patrons. The plan has had the effect of drawing capital from proceeds of sales in pro- portion to business contributed by the individual members (see pages 52-56). Nature of the present organization and its operations The Poultry Producers of Central Cali- fornia is now organized as a nonstock cooperative association under Chapter 4, Division VI, of the Agricultural Code of the State of California. It is what is 6 NulaidNews, 3(11) :9-13; 4(5) :5. 7 Actually, the revolving feature was not in- troduced until the Association changed its form of organization to the nonstock form in 1923. The original plan for building capital by means of a one-cent-a-dozen deduction from proceeds was discontinued for a short time before the reorganization. [12] known as a centralized type of associa- tion in that individual producers hold membership directly in the Association rather than in local units. Branches, in- cluding feed mills, egg-receiving and candling units, and local warehouses, are owned and operated by the Associa- tion and not by local associations of members who may patronize such branches. The main office of the Association is located in San Francisco where all permanent records are kept and where most business activities center. These in- clude such matters as the handling of capital funds, local sales of eggs, pur- chases of feeds and supplies, and the mailing of weekly checks for eggs. IBM machines have been installed to speed up and reduce the cost of calculating the weekly returns to members. In 1954 the Association was operating six feed mills located at Petaluma, Yuba City, Stockton, Turlock, Merced, and Salinas (figure 1). Feed processed at these mills was distributed not only to members in the immediate vicinity of the mills but also to nearby branches and agencies. 8 Feed and supplies were distributed through some 54 branches, including the six mills and the six agencies. All of these branches also served as points at which eggs produced by members were assembled — with the exception that eggs were not received at the Turlock mill building but at the Tur- lock branch, a separate facility in that town. Eggs assembled at local branches were sent to some 13 stations or branches 9 for candling, grading, and packing. The 13 branches handled sales 8 The Association had agency agreements with merchants in six localities (Eureka, Fort Bragg, Mendocino, Fairfield, Arbuckle and Woodland) for the sale of feed to members and the assembly of eggs from members. 9 At the time this study was made, automatic sizing, counting, and cartoning equipment was being installed at Modesto. It was anticipated that at a later date one or more candling and packing stations (for example, those at Merced to grocery stores, restaurants, hotels, and institutions in surrounding towns and shipped any excess over local needs to one of the branches located in the larger urban areas. Some of the smaller branches were operated only two or three days a. week. In such cases one manager could supervise two branches. The membership of the Association amounted to about 11,400 in 1954, only about a third of whom shipped eggs. About 29 per cent of the total member- ship is located in the north coast area (Humboldt, Mendocino, Lake, Sonoma, Marin, Napa, and Solano counties) ; just under 14 per cent in the coastal area including San Francisco (Contra Costa, Alameda, San Mateo, Santa Clara, Santa Cruz, Monterey, and San Benito coun- ties) ; almost 31 per cent in the Sacra- mento Valley area; and 26 per cent in the San Joaquin area (south to Merced County). A fairly large proportion of the members in the San Joaquin area are dairymen and turkey producers who do not produce chicken eggs in commercial quantities. The bylaws provide that voting rights of members are unequal. Each member is entitled to one vote by virtue of mem- bership, plus additional votes based on patronage during the fiscal year just closed. The units of patronage on which additional votes are allowed are: egg de- liveries, $250; poultry, including tur- keys, $250; and feed and supplies pur- chased, $500. Thus, a member who has sold through the Association during the past year eggs to the value of $3,000 and poultry to the value of $500, and who has purchased $2,000 worth of feed and sup- plies, would be entitled to a total of 1 + 12 + 2 + 4 = 19 votes. This method of voting, not uncommon among farmers' cooperative associations, is designed to give members who make considerable and Stockton) could be discontinued, and the larger volume could be concentrated at Mo- desto. Plans were also under way to install automatic equipment at Sacramento. [13] use of an association's services a greater voice in determining its policies and af- fairs than those who make less use of its services. As pointed out elsewhere, the members whose patronage is largest also contribute proportionately more to the capital needs of the Association. The business affairs and corporate powers of the Association are vested in a board of 11 directors, including one director-at-large, nominated annually by the Vice-President, Agricultural Sci- ences, of the University of California, or by the Director of Agriculture, Califor- nia State Department of Agriculture, and approved by the Board of Directors and elected at the annual meeting. The term of office of the director-at-large is one year. All other directors are elected for a period of two years, five retiring each year. Directors are nominated and elected by districts before the annual meeting. There are six districts in all. The first, or North Bay district, has five directors. The others have one director each. Only members residing in a given district may nominate and vote for the director or di- rectors in that district. The bylaws (Article IV, Section 3) provide that a director, in order to be qualified, "shall have been engaged in the commercial poultry business for a period of not less than three (3) years, and at the time of election shall be a poultry producer and a member of the association." A general manager, appointed by and responsible to the Board of Directors, is in charge of the executive or administra- tive affairs of the Association. During the year 1953 the total volume of business transacted by the Association amounted to $61,011,000. Of this amount, sales of eggs accounted for $31,- 076,000, or about 50.9 per cent; sales of poultry (including turkeys), $227,- 000, or 0.4 per cent; and sales of feed and supplies, $29,708,000, or 48.7 per cent. 10 The condensed statement of the bal- ance sheet as at the end of the year 1953 shows the Association to be in a very strong financial position. Current assets exceed current liabilities by about 3% to 1. Even if patronage refunds for 1953 ($2,221,000) are added to current li- abilities, the ratio would still be greater than 2 to 1. 10 During 1954 sales of eggs grossed $25,241,- 000 and of feed and supplies $26,952,000, or a total of $52,193,000. Comparable figures for 1955 were $27,453,000, $26,675,000, and $54,- 128,000, respectively. Condensed balance sheet as of December 31, 1953 Assets Current $11,331,000 Investments 104,000 Fixed assets 3,731,000 Deferred charges 219,000 Total $15,385,000 Liabilities Current $ 3,317,000 Producers Company, Ltd 155,000 MEMBERS EQUITY Membership Capital Fund 116,000 General Capital Fund 3,451,000 Egg Capital Fund 928,000 Feed Capital Fund 4,141,000 Poultry Capital Fund 18,000 Reservations for contingencies .... 1,038,000 Due members as patronage refunds for 1953 2,221,000 Total $15,385,000 [14] Changes in the economic setting Before proceeding to an analysis of the internal operating policies and pro- grams of the Association, it seems de- sirable to discuss briefly a few of the more important economic changes that have occurred in central California since the Association was first organized. These economic factors have an impor- tant bearing not only on the poultry in- dustry of the area but also on the organi- zation and operations of the Association itself. Relative growth of population and of the chicken business. The data in table 1 show an irregular rate of growth in the state's population and its poultry industry. Thus, in the period 1910-1920 the population increased 44 per cent while the number of chickens increased 84 per cent. It was during this period that the Association was organ- ized and California changed from an in- shipment to an out-shipment basis. In the next decade both population and the industry increased at about the same rate, but in the decade 1930-1940, popu- lation continued to grow whereas chicken numbers actually decreased. By 1938 the state was on a net in-shipment basis. 11 The decrease for the decade is shown both in the census data (items (a) in column 3) and in the crop estimates data (items (b) in columns 3 and 5). In the period 1940-1954 population increased rapidly while the numbers of chickens and egg production were tending to catch up, though the state still remained on an in-shipment basis. u Erdman, H. E., G. B. Alcorn, and A. T. Mace, Egg Marketing in the Los Angeles Area, California Agr. Exp. Sta. Bui. 656, 1941, p. 63. The Economic Environment Table 2 shows the remarkable growth in California of broiler and turkey rais- ing. Each offers a big opportunity for increased sales of poultry feeds and sup- plies. Much of this expansion has been in fairly large commercial enterprises. Retail outlets. Before World War I (and even during the 1920's), most eggs reaching consumers were merchandised through a large number of independently owned neighborhood grocery stores. To- day a large proportion is handled by chain grocery stores or supermarkets. In most large centers of consumption milk distributors also distribute eggs on their milk routes. In a few instances the larger chain store firms have undertaken the purchase of eggs directly from pro- ducers and now operate their own grad- ing and packing plants. The significance of these changes is that the chains and supermarkets require large volumes of uniformly graded and packaged eggs and the assurance of a continued supply. By the same token, the loss of a. chain store customer or group of supermarkets may be a serious loss of volume for an egg-packing firm. Handling of feed. Although orig- inally most of the poultry cooperatives in the western states were organized pri- marily to market eggs, most of them now operate extensive feed-milling and mar- keting operations. In order to ensure more efficient use of feed-milling and dis- tribution facilities, all of these associa- tions have extended their operations to livestock producers generally. So im- portant has the feed (and supply) busi- ness become for many of these associa- tions that the value of feed and supplies equals or exceeds the value of eggs mar- keted. In recognition of the importance [15] of the feed and supply business, several of the associations have changed their corporate names so as to de-emphasize the poultry aspects of their operations. Of special significance within recent years has been the shift from sales of sacked feeds to feeds in bulk. Handling of feeds in bulk permits important sav- ings in deliveries to the medium-to-large poultry and dairy enterprises. Moreover, the use of mechanical equipment for dis- tributing feed on poultry and dairy farms has resulted in even greater econ- omies by reducing the man-hours of labor required in feeding. Competitive conditions. Competi- tion in the marketing of eggs and feeds in central California has been relatively keen for many years. Since the end of the war the entrance of several national firms into feed milling and distribution in California has introduced a new com- petitive factor into the feed business. In addition, many locally owned feed firms have expanded their facilities and areas of marketing. Many of these are willing Table 1. Population, Chickens on Farms, and Egg Production in California, Selected Years, 1910-1954 Population Chickens on farms Egg production Year Number Percentage change from previous period Number Percentage change from previous period Number Percentage change from previous period 1 2 3 4 5 6 1910.... 1920.... 1930.... 1940 1950 1954.... thousands 2,378 3,427 5,677 6,907 10,586 12,554 per cent 44 66 22 53 19 thousands 5,666(a) 10,427(a) 17,467(a) 21,300(b) 13,283(a) 15,654(b) 17.938(a) 23,416(c) 28,349(c) per cent +84 +67 -24 -26 +35 +50 +25 millions Not available Comparable data not available 2,242 1,761 3,314 4,577 per cent -21.4 +88.2 +38.1 Sources : Column 1: For 1910-1950, inclusive, U.S. Bureau of the Census, "1950 Census of Population" (Wash- ington: Govt. Print. Off.), Vol. I, p. 1-8. For 1954, U.S. Bureau of the Census, "Current Population Reports, Population Estimates," series P-25, no. 125 (Washington: Govt. Print. Off., December, 1954). Columns 2, 4, and 6: Computed by authors of this report. Column 3: (a) For 1910, U.S. Bureau of the Census, "Sixteenth Census of Agriculture (Washington: Govt. Print. Off., 1940), Vol. Ill, p. 667. For 1920, 1930, 1940, and 1950, U.S. Bureau of the Census, 1950 Census of Agriculture, California" (Washington: Govt. Print. Off.), Vol. I, part 33, p. 11. (b) U.S. Department of Agriculture, "Farm Production, Disposition, and Income from Chickens and Eggs, 1909-1944 (Washing- ton: Govt. Print. Off., 1953), Statistical Bulletin 133, p. 17. Processed, (c) U.S. Department of Agriculture, "Farm Production, Disposition, and Income from Chickens and Eggs, 1909-1944" (Washington: Govt. Print. Off.), yearly issues. The (b) and (c) figures are probably the more accurate. Column 5: Years 1930 and 1940 from source for column 3 (b), p. 13. Years 1950 and 1954 from annual issues used for column 3 (c). [16] Table 2. Estimated Production of Broilers and Turkeys in California, Selected Years, 1934-1955 Year Broilers Turkeys 1934 1940 1954 1955 thousands 1,000 6,000 50,179 48,516 1,691 3,340 10,170 10,164 Sources: Broilers: For 1934 and 1940, U.S. Department of Agriculture, "Farm Production, Disposition, and In- come from Chickens and Eggs, 1909-1944" (Washington: Govt. Print. Off.), p. 93. For 1954 and 1955, U.S. Department of Agriculture, "Farm Production, Disposition, Cash Receipts, and Gross Income, Chickens and Eggs, 1954-1955" (Washington: Govt. Print. Off., April, 1956), p. 10. Processed. Turkeys: For 1934 and 1940, U.S. Department of Agriculture, "Farm Production, Disposition, and In- come from Turkeys, 1929-1944" (Washington: Govt. Print. Off., 1953), p. 44. Processed. For 1954 and 1955, U.S. Department of Agriculture, "Farm Production, Disposition, Cash Receipts, and Gross Income, Turkeys, 1955-1956" (Washington: Govt. Print. Off., March, 1956), p. 2 and 3. Processed. to finance producer customers (in whole or in part) by the sale of feed and sup- plies on extended credit. It is significant that noncobperative feed concerns do most of the business with fryer and broiler and turkey producers. In other words, cooperative associations in cen- tral California have not participated pro- portionally in the growing, but ad- mittedly more risky, sale of feeds on credit to producers of meat types of poultry. It is significant that nearly all independent feed dealers, while not neglecting the small poultryman, are most aggressive in soliciting the patron- age of producers with large poultry enterprises. There are, without question, many advantages and economies in sell- ing feed to the larger poultry enterprises. These are usually better financed and operated than many small ones. It is easier to supervise credit granted to a few large enterprises than to a. large number of small producers. Bookkeep- ing, solicitation, and delivery costs are reduced. A somewhat parallel situation exists in the procurement and mechandising of eggs. During the last few years at least one larsre chain store company has entered the egg procurement and pack- aging field in central California. Its basis of paying for eggs is such as to at- tract large, rather than small, poultry producers. On the egg-merchandising front, in- dependent egg handlers also appear to concentrate much of their sales effort on large retail store outlets or larger hotels and restaurants. Because it is undoubt- edly less expensive to deliver eggs in volume to large stops than to small ones, independent dealers are often willing to make attractive price concessions for such business. 12 Effect of environmental conditions on Association operations The changes in environmental condi- tions and especially in the nature of competition in the egg and feed indus- tries, outlined briefly in the preceding pages, lead to the inevitable conclusion that if the Association is to continue to provide effective service to its member 12 A similar situation obtains in the wholesale and retail delivery of milk in California cities. The California Bureau of Market Milk Control attempted in 1956 to introduce resale price schedules for market milk to reflect differences in cost of delivering milk to customers taking varying quantities of milk per stop. [17] patrons, it must adapt its operating policies and practices to meet the changed conditions. In order to improve or even to maintain its status in the egg and feed industries of central California, the Association's operating policies and practices must be such as (1) to main- tain efficient operations at both the ad- ministrative and operating levels and (2) to ensure that costs of doing busi- ness are fairly and equitably appor- tioned among patrons with operations of varying sizes. It would be inequitable and in conflict with the basic cooperative principles to have a cost-apportioning system under which small producers subsidize large ones. On the other hand, a cost-appor- tioning system that subsidizes the small producer at the expense of producers with larger enterprises is likely to place the Association in a progressively less favorable competitive position. Such a policy, if followed, would permit com- peting egg buyers and feed dealers eventually to obtain the "cream" of the egg and feed business, leaving the Asso- ciation to service mainly the small, high- cost patrons together with a few loyal larger producers. 13 It cannot be argued logically that basic cooperative prin- ciples and philosophy require completely equal treatment of all members regard- less of the size of a member's operation and his location in the area served by the Association. A nostalgic adherence to policies and practices that may have been effective in the past will not necessarily ensure ef- ficient future operation. On the contrary, it may handicap an association in ad- justing to changed conditions. What is 13 Similar developments appear to have taken place in the market milk industry of the state. The larger proprietary milk-distributing firms have attached to themselves, by means of favor- able marketing contracts, dairymen with large dairy enterprises. In contrast, most of the local dairy cooperatives have a considerable propor- tion of dairymen patrons with small- and medium-sized enterprises. needed is a bold and realistic outlook. Adoption of more practical and realistic policies would seem to call for a rather drastic change in attitude of a good many members of the Association, who cling to the idea that the P.P.C.C. is primarily and predominantly an egg-marketing as- sociation and that no policies should be considered which may lessen the rela- tive status and influence of egg-produc- ing members. It is not intended to minimize the im- portance of the egg-shipping member to the Association. The Association was built by the patronage of such members. The value of eggs sold still constitutes more than 50 per cent of the total an- nual sales of eggs, feed, and supplies. Egg-shipping patrons also purchase a large, if not the major, proportion of all feeds and supplies sold annually. It would also be unrealistic and unwise to underestimate the importance of non- egg-shipping patrons. Indeed, the Asso- ciation might detract from its full effec- tiveness if it met changing conditions by regarding the non-egg-shipping patron as a sort of "poor relation." To attain its full effectiveness and to maintain efficient use of its facilities, the Association needs the loyal support and active patronage of both egg-shipping and other mem- bers. Many members seem to consider the Feed and Supply Department only a means whereby the Association can ren- der additional services to its egg-supply- ing members. This may have been true in 1926 when the Association first under- took to handle feeds and supplies. Now that sales in the two departments are about equal, a more realistic view would be to think of the two departments as offering joint services to the members. The departments are supplementary to each other in that each makes possible a fuller utilization of some of the man- power and facilities needed by the other. They are complementary to each other in that the successful operation of one [18] tends to bring patrons to the other. The availability of both services undoubtedly aids in getting new members and keeping the support of old ones. Although the egg-merchandising and the feed and supply operations are the two main joint services available to members, each department should — as a long-run policy — be self-supporting. In other words, if the Association is to op- erate efficiently and effectively, neither department should subsidize the other. Every effort should be made to ensure that each department operates efficiently within the framework of conditions gov- erning the marketing of eggs and of feed and supplies. Perhaps certain practices that would increase the efficiency of the Feed and Supply Department would not be adaptable to the Egg Department and vice versa. On the other hand, caution is necessary in adopting policies to im- prove the operation of one department which may have an adverse effect upon the operation of the other. With these broader considerations as a background, attention may now be di- rected more specifically to an evaluation of several of the operating problems and practices of the Association. The oper- ating problems of the Feed and Supply Department will be discussed first, partly because some of these problems were im- portant reasons for this study, partly be- cause some problems of the Egg Depart- ment can best be discussed after those of the Feed and Supply Department have been presented. Feed operations Milling operations. During the pe- riod from 1930-1953, the volume of feed handled by the Association has in- creased somewhat irregularly from a low of 124,700 tons in 1933 to a peak of about 326,000 in 1952 (figure 2). In 1953, however, the volume of feed dropped to about 297,000 tons — a de- cline of about 9 per cent from the amount handled during the previous two years. 14 The total value of sales of the Feed and Supply Department increased from about $6,900,000 in 1940 to $34,700,000 in 1952, an increase of 403 per cent. This increase is explained by an increase 14 In 1954 the volume of feed handled de- clined still further to 282,000 tons, mainly be- cause of decreased sales of dairy feed. In 1954 the milk-feed ratio was so unfavorable that dairymen greatly restricted their purchases of concentrated feeds. In 1955, however, volume of feed sold increased to 292,000 tons. Feed Operations and Policies in physical volume during this period (66 per cent increase in feed tonnage), an increase in feed prices of about 250 per cent, and an increase in sales of sup- plies. In 1953 the total sales value of feed and supplies declined to about $30,500,- 000 reflecting a decline both in physical volume and in prices of feeds sold. The decline in volume since 1952 is of par- ticular concern to the Association be- cause several new mills have been erected, and facilities in other mills have been expanded and modernized since the end of the war. In table 3 is summarized the variation in costs per ton of handling and milling feed in the several mills during the month of December, 1953. These data show rather wide variations in the costs per ton of handling and milling feed in the several mills. These costs do not ap- pear to be related directly to volume of [19] 350 300 250 200 150 l00 /M^ Tons of feed sold Price per fon 140 120 - 100 - 80 60 40 20 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 Fig. 2. Volume of feed sold annually and average price per ton— 1930 to 1953. raw materials or feed milled or to hours of operation during the month. Analysis shows that numerous factors other than volume influence operating costs (see page 21). Costs of operating the various mills are reported to be under constant study and every effort is being made to keep such costs at a minimum. It was estimated that, exclusive of the small mill at Turlock which produces mainly feed for turkeys, the five mills at Petaluma, Yuba City, Stockton, Merced, and Salinas in 1954 had a combined an- nual capacity of 360,000 tons or about 25 per cent above the volume handled in 1953. Table 4 shows the capacity of the five mills on a four-week (20-day) basis, working on an 8-hour shift and a 16- hour shift, and the actual volume han- dled in December, 1953. It is possible to operate a. mill on a 24-hour basis for a short period of time. Such a continuous operation, however, involves many operating problems and some additional expenses. It is more normal procedure to operate mills on a 16-hour basis, which allows ample time for cleanup and for minor repairs and adjustments. In December, 1953, only the Petaluma and Merced mills operated Table 3. Volumes and Operating Costs of Handling and/or Milling Feeds, December, 1953 Location of mill Raw materials handled Feed milled Hours of operation during month Feed milled per hour tons dollars per ton tons dollars per ton tons Petaluma 8,866 1.19 7,161 2.21 368.0 19.5 Yuba City 4,384 0.87 2,351 2.30 181.0 13.0 Stockton 7,083 1.42 2,930 2.84 202.0 14.5 Turlock 332 1.06 570 2.25 117.5 4.9 Merced 3,497 1.04 2,652 2.58 301.0 8.8 Salinas 2,081 0.62 1,317 1.67 177.0 7.4 [20] Table 4. Capacity of Five Mills and Volume Handled, December, 1953 Mill 8-hour shift 16-hour shift Volume milled Petaluma Yuba City tons 3,760 2,160 2,240 1,440 1,120 tons 7,520 4,320 4,480 2,880 2,240 tons 7,161 2,351 Stockton Merced Salinas 2,930 2,652 1,316 near full capacity on a double-shift basis ; the Yuba City, Stockton, and Salinas mills handled only slightly more than the capacity on an 8-hour shift. Fixed costs per unit of feed handled would be con- siderably reduced if all mills could be operated on a full double-shift basis. In order to equip mills to operate most efficiently (especially if bulk sales of feed are increased), some additional capital expenditures may be necessary. This in- crease in capital expenditures, however, would be more than offset by the de- crease in labor and other operating costs. Operation of branches. Of equal, if not greater, significance than in the case of the mills is the effect of volume on the costs of handling feeds in the 44- odd branch plants of the Association (exclusive of agencies). The average cost of handling and milling feed in all branches increased from $1.73 a ton in 1949 to $1.92 in 1950, to $1.94 in 1951, to $2.10 in 1952, and to $2.28 in 1953. Costs per ton in 1953 were thus about a third higher than in 1949. Part of this increase arose out of the increase in labor and other costs since 1949. The decline in volume between 1952 and 1953 was doubtless a factor in the in- crease of that year. The importance of studying branch operating costs becomes clear when at- tention is directed to variations in such costs per ton between branches. Al- though the average cost per ton for all branches was $2.28 in 1953, costs varied from $1.36 at Salinas to $3.90 at Red Bluff. Although there appears to be some relation between unit operating costs and volume of feeds handled, it is diffi- cult to account for costs variations be- tween branches on the basis of volume alone. For example, in branches handling less than 3,000 tons in 1953, costs per ton varied from $2.21 to $3.87. Simi- larly, in branches handling between 3,- 000 and 6,000 tons in 1953, costs per ton ranged from $1.91 to $3.90 (see figure 3). Economic studies in other industries indicate that the two most important fac- tors responsible for variations in unit costs between similarly operated units are (1) volume and (2) percentage of capacity utilized. It was shown above that although the unit handling costs are lower for most of the larger branches than for the smaller ones, volume alone gives no clue to the significant variations in costs between branches having sub- stantially similar volume. Unfortunately, the data available relative to capacity of individual branches were inadequate, and time did not permit an attempt to rate individual plants on the basis of capacity utilized. It is doubtful, moreover, whether any such comparison would have been particularly significant, especially since other factors may be responsible for the variations in costs between branches. [21] o O 2 -•• •• — * • ■•••■» • • • • Feed sold per branch (thousand tons) Fig. 3. Volume handled and unit costs of handling feed in branches— 1953. These include differences in salary and wage scales, the proportion of bulk feed sales, the types of feeds sold, the volume of feed sold per customer, degree of ob- solescence of plant and equipment, the suitability of layout to present opera- tions, and percentage of capacity utilized. The volume of sale per customer ap- pears to be of considerable significance. Most of the member-patrons served out of the Red Bluff and Concord branches make relatively small purchases at a time. On the other hand, fairly large volumes of feed per customer are sold out of the Modesto, Turlock, Merced, Stockton, and Petaluma branches, which have moder- ately low unit costs per ton. There appears to be little flexibility in the operation of most of the smaller branches, the majority of which are in the high unit cost range. Most of these small branches have only one or two em- ployees who divide their time between sales, accounting, loading, and unload- ing. The personnel of such branches can- not be decreased if the volume of feed sold declines; on the other hand, the number of employees would not have to be increased if somewhat larger volumes in feed were handled. This conclusion is supported by the data in table 5. The five branches that handled a larger volume of feed in 1953 than in 1952 had unit costs averaging 17 cents per ton less in 1953 than in 1952. On the other hand, the branches that handled less feed in 1953 than in 1952 experienced increases in costs per ton. Moreover, the increase in costs per ton was greatest for branches experiencing the largest percentage decrease in vol- ume. These data indicate rather force- fully the adverse effect upon branch operating costs of a decrease in the volume of feed handled. By the same token, they indicate that an increase in volume would serve to reduce branch unit costs. Volume of sales per member. An analysis made by the Accounting De- partment of the Association relative to the value of feed and supplies sold in 22] 1953 to members through individual branches is summarized in table 6. These data indicate that about 62 per cent of all member-patrons accounted for only 8 per cent of the total value of feeds and supplies sold. On the other hand, about 7 per cent of the members, purchasing over $10,000 worth of feed and supplies in 1953, accounted for about 43 per cent of all sales. In the lowest size group about 3,100 members (27.5 per cent of all members) purchased less than $17 worth of feed and supplies a month — about 5,300, less than $42 a month. Many patrons may make several purchases each month, each one representing only a few dollars per sale. Considerable expense is involved in servicing each sale of feed and supplies. It takes just about as long for the branch manager or warehouseman to make a sale of 200 pounds of feed as one of 500 pounds or more. The same is true of making out invoices, posting, sending out Table 5. Relationship between Volume of Feeds Handled per Branch and Change in Unit Costs, 1952 and 1953 Percentage change in volume between 1952 and 1953 Increase : 15-19 10-14 5-9 0-4 Decrease : 0-4 5-9 10-14. 15-19 20-24 25 and over. Number of branches 15 Names of branches Grass Valley Livermore Oroville and Morgan Hill Yuba City Cotati, Paradise, Modesto, Lodi, Patterson, Ripon, and San Jose Petaluma, Penngrove, Santa Rosa, Sebastopol, Calistoga, Lakeport, Elk Grove, Dixon, Corning, Oakdale, Turlock, Santa Cruz, Salinas, Hollister, and Concord Healdsburg, Auburn, and Stockton St. Helena, Sacramento, Willows, Chico, Merced, and Gustine Sonoma, Napa, Ukiah, Orland, and Gilroy Novato (30 per cent), Red Bluff (27 per cent), and Jamestown (63 per cent) Change in unit costs per ton Average decrease 17 cents Average increase 11 cents Average increase : 23 cents Average increase : 47 cents Average increase 61 cents [23] T3 43 3 qo^q -a V CO 03 h m «i aid d CO IO o eo 9 3 83 *2 ri N 1< CO 6 M o ca T3 4) tH «A c PL, CL tS 3 u «« o o •a II o o o o o o m o o o o o o o o N _3 > £ «o © m © to cm a O rH W l> O iH ^1 co t/5 to ^ •3 CO C- (N M H CO io H X H CO to (N of £ CO •3 io a> o io co co q CO T-i co CO o cn "^ co co as o 4- O ft »H c o E *■ o s Q. o 1 S3 io h q 't n » t-^ as io -^ ^ co N H H N O 8 Q ft 0) ft iH _>» a a 3 n CO CO tO CO CO iO Oi o 3 0) H m d 3 C 3 eS V 3 CO . . . . • > . . • • o • • CTS CW ^h © ■ 05 OS g £L 2? £ ^~ of ™ VT OS OS | | Q ^f«ooo ® A X o o o ■3 § 8 5 <=> © " N IO H W H P <*> 3 o H monthly statements, and accepting pay- ment. An estimate made in the Sacra- mento branch indicated that the cost of posting and sending out statements to member-patrons twice a month was above 13 cents a patron. If the patron is not prompt in settling his account, further expense is involved in sending out fol- low-up statements and in writing letters and making calls on seriously delinquent accounts. Several branch managers stated that in their experience members who make irregular purchases of small quan- tities of feed are less prompt than regular patrons in paying their bills. The costs of posting and sending out bills by no means represent all the costs involved in handling sales to patrons. Just about as much time is involved in getting a new member, whether he will be large or small (as regards volume of patronage). Capital is tied up in all feed and supplies sold on credit. Volume dis- counts for larger purchases probably do not nearly compensate for the difference in costs of servicing large and small ac- counts. To the extent that this is true, the members purchasing large quantities of feed and supplies annually are sub- sidizing the smaller producer-patrons. Bulk sales. The practice of distribut- ing feed in bulk directly from mill to poultryman has increased rapidly in re- cent years. The Association began han- dling feeds in bulk in 1951 when 4,000 tons of bulk feed were sold. This repre- sented only 1.22 per cent of the total quantity of feed handled that year. In 1953 the volume had risen to 23,450 tons, or 7.81 per cent. Available evidence in- dicates that this method of handling feeds results in substantial economies over handling feeds in sacks at the mill, as well as economies in transportation and in operations on individual poultry enterprises. Equipment such as storage tanks and conveyor belts has been de- veloped which, when installed on me- dium-sized as well as large poultry enter- prises, permits substantial reductions in [24] The alfalfa dehydrator at Vorden, above, and a second one at Ryer Island produce about 10,000 tons of dehydrated alfalfa each year. man-hours of labor. This is of special importance in the poultry industry in which labor inputs are relatively large. Many of the large feed firms and several cooperative associations 1 ' in the Pacific Coast states have promoted aggressively the sale of feed in bulk. One of the meth- ods used to promote such sales is to finance the purchase and installation of the necessary equipment on individual enterprises. In view of these industry-wide develop- ments, it would appear that the Associa- tion might well have promoted bulk sales of feed to members more aggressively. Discussions with the management of the Association indicate that there were three main reasons for its reluctance to pro- mote bulk sales of feed. First, all mills are not equipped to handle feed in bulk. Second, this method of handling feeds would not be suitable for the many thousands of member-patrons with small poultry and livestock enterprises. Third, 15 Information obtained from the Poultry- men's Cooperative Association of Southern California indicates that in 1953 that Associa- tion distributed approximately 60 per cent of all feed sold in bulk. an expansion of bulk sales of feed would further reduce the volume of feed moving through branches and hence would in- crease the unit costs of handling feed in such branches. These considerations weighed heavily in the decision of the Board of Directors 16 to price bulk feeds on the basis of sacked feed less quantity and sacking discounts. To the extent that the Association's pric- ing of bulk feeds results in a price that is much above the actual cost of milling and delivery in bulk, it is "holding an umbrella" over its competitors. The latter are given a margin of protection which permits them to make special "deals," especially with producers with large poultry and dairy enterprises. Thus, a more realistic pricing policy in regard to sales of bulk feeds seems necessary if the Association is to hold or improve its position in the feed business. In spite of numerous difficulties, it appears clear that the Association should not delay any longer equipping all its mills to handle bulk feed. It is realized, 36 Minutes of the Board meeting, December 2, 1952. [25] of course, that a material expansion in sales of feed in bulk will complicate the problem of economical operation of many of the branch warehouses. The so- lution of this problem will require care- ful study. Even now the volume of feed handled in many branches is so low that unit costs are high. Consideration might well be given to closing down some of the branches, especially in the northern part of the Sacramento Valley (e.g., at Red Bluff, Orland, and Corning). In many instances it may be possible (as is done now) to operate some of the branches for only two or three days a week. In this way a single warehouse crew could serv- ice two or three branches. Consideration might also be given to establishing more "agency" relationships in areas where membership is more scattered. Although such "agency" operations have not been very satisfactory in the past, the Asso- ciation might well explore the possibility of using the local distribution facilities of other farmers' organizations. Another possibility would be to provide members in such areas detailed price lists and order blanks for feed and supplies to be shipped once or twice a month from a few strategically located branch ware- houses. Even if the Association can expand the total volume of feed milled and can effect economies in handling its smaller accounts, the transition to bulk selling of feeds will require careful study of ways to change branch operations to meet the needs of members not equipped to handle feed in bulk. 17 Pricing policy on feeds. Over the course of years, the Association has developed an elaborate and detailed ac- counting procedure by which it can de- termine with reasonable accuracy the 17 In 1954 and 1955 the Association pushed more vigorously the sale of feed in bulk. In 1954 some 34,000 tons of feed or 12.4 per cent of all feeds were sold in bulk; in 1955 there were 64,000 tons or 22.4 per cent. All feed mills have been equipped to handle bulk feed. costs to the Association of raw materials and manufacturing operations for each type of feed in each of its mills. The cus- tomary pricing procedure is to add to the cost of raw materials in each feed the direct milling costs for that feed, plus a pro rata of administrative and branch operating costs per ton. To the figure so obtained is added a customary markup of 8 per cent — a sort of margin of safety. This then becomes the base price per ton which applies at branches where mills are located and a number of nearby branches. Differentials are then added to the base price to cover differential transportation and handling costs on mixed feeds, grains, etc., from the mills to the more distant branches with some equalization factors on transportation and branch selling expense. In addition, member-patrons at each branch are allowed quantity discounts or service savings for quantity purchases in order to encourage members to make larger purchases at a time. In 1954 mem- bers purchasing less than 500 pounds of feed at a time paid the base price. For purchases of from 500 to 3,999 pounds, members received a discount of 10 cents per hundredweight, and for purchases of 4,000 pounds or more, a discount of 15 cents a hundredweight. These differen- tials are based on a careful study made several years ago of differential costs in- volved in handling transactions of dif- ferent volumes. The base prices for mixed feeds, grains, and other supplies may be changed from time to time to reflect changes in basic ingredients, to meet competitive conditions, or to reduce in- ventory. The fact that the Association has been able to build up and maintain a high volume of sales indicates that its pricing policy results in prices that com- pare favorably with those charged cur- rently by competitors. In fact, there is evidence that, in most areas served by the Association, it is in a position of price leadership and that some competi- [26] tors tend to base their prices in each sec- tion on the posted prices of the Associa- tion. Members are able to purchase reliable feeds carefully adapted to varying needs 18 at prices generally competitive and, in addition, have the benefit of an annual patronage refund based on savings in the operations of the Feed and Supply De- partment. These patronage refunds vary somewhat for the different classes of feeds and supplies handled. In 1953 members received a patronage refund of 9.5 per cent on all poultry feeds pur- chased, 7 per cent on dairy feeds, 3 per cent on grains, 4.5 per cent on petroleum products, and 12 per cent on farm sup- plies. Since the end of the war, patron- age refunds on poultry feeds have varied from about 5 per cent in 1946 to 12 per cent in 1947 and 1951. The average pa- tronage refund on poultry feeds for the years 1946-1953 was about 6 to 9 per cent. The Association has always placed great stress in its membership relations on the size of its annual patronage re- fund. For some of its larger producer- patrons, the refund may run into several thousands of dollars. A large part of the annual patronage refund is derived from the 8 per cent customary markup on feeds and supplies. Milling, administra- tive, and branch operating costs may also run below the markups placed on these operations. Finally, exceptionally favor- able purchases of raw materials may con- tribute to the annual overage (proceeds of sales less costs) on feeds and supplies. The question may well be raised as to the wisdom of the 8 per cent markup and the emphasis on a substantial annual patronage refund. To the extent that competitors relate their selling prices to the published or posted prices of the 18 The Association maintains a quality con- trol laboratory which carefully tests all mixed feeds in regard to basic nutritional ingredients. The laboratory also constantly analyzes pro- posed new feeds and mixes. Association, the 8 per cent markup gives them substantial protection in their operations. They are thus afforded con- siderable leeway in extending price dis- counts in order to obtain customers. It has been suggested that two advantages would arise if the Association reduced its markup, say, from 8 to 5 per cent. First, members would receive price bene- fits immediately rather than in one sum at the end of the year. Second, and per- haps more important, competitors would lose that much "protection" of their margin. 19 The disadvantage of operating on a lower percentage markup would be a lower margin of safety and smaller annual patronage refunds. Thus, part of the benefits brought by the Association would disappear as narrower margins brought lower feed prices to members and nonmembers alike. This is an important matter of policy which merits careful study by the Board of Directors. The prospects are that the population of California will continue to grow in the decade ahead — a situation that will lend encouragement to the poul- try and dairy industry of the state. If milling facilities in central California (both cooperative and private) are now more than adequate to meet growth needs, it would appear unwise for existing milling concerns (among which the Asso- ciation is a leader) to continue to follow pricing policies that would encourage an expansion of milling facilities. Although no attempt was made in this study to analyze in detail the feed-milling and merchandising operations of the As- sociation, one defect in the milling oper- ations was clearly evident. The minutes of meetings of the Board of Directors 19 The President of the Grange League Fed- eration of New York (a cooperative association selling feeds and supplies to members) has stated that the Grange League Federation has always followed a policy of operating on the lowest possible margin. He claimed that this policy has discouraged the establishment of additional feed mills in the New England states. [27] and of the Feed Committee contain fre- quent reference to the large number of feeds carried. A retail price list issued on August 6, 1954, made reference to nearly 50 separate poultry feeds (mashes and pellets) and to nearly 25 turkey feeds. Some of these are medicated and have to be carried to meet needs of in- dividual enterprises that have disease problems. Many of the mixes were based on special formulae which certain pro- ducers considered more effective than the standard formula recommended by the Feed and Supply Department. Sales of some of the feeds constituted only a very small percentage of total feeds sold. 20 Turnover in branches of some of the special feeds was slow. Most persons on the Feed Committee in the Feed and Supply Department and in the quality control laboratory who were in- terviewed deprecated the fact that the Association handled such a large number of feeds. The preparation and handling of such a long list of feeds undoubtedly result in higher milling and branch costs than would be the case if the num- ber of feeds could be reduced. It would appear to be highly desirable for the As- sociation to re-evaluate carefully its poli- cies regarding feeds with a view to reduc- ing the number of separate feeds milled and carried. Credit sales of feed Credit in the feed trade. It is quite likely true that the Association's rather tight credit policy has tended to restrict its volume of sales of feeds and supplies. In competitive selling of feed and sup- plies, credit is often a deciding factor. ao For example, of some 30 nonmedicated poultry feed mashes and pellets sold in 1953 ( pellets are usually sold at 10 cents more a bag than mashes), 10 feeds (5 mashes plus 5 pel- lets) accounted for nearly 80 per cent of all nonmedicated poultry feeds sold. In the case of medicated poultry feeds, sales of 3 out of 25 medicated feeds carried accounted for 92 per cent of all medicated feeds. A similar situation prevailed for turkey and dairy feeds. The more liberal the credit policy, the easier it is to make sales and to expand volume. A liberal credit policy, however, involves risks and disadvantages as well as advantages. The extension of credit involves "credit terms" and the "credit line." The "credit term" is the length of time al- lowed a customer for payment after a bill is rendered. The "credit line" is the amount of credit that will be extended to an individual buyer. These two terms are interrelated. The more or less uniform credit term is usually applied to all buy- ers who are entitled to credit under the rules in effect. In a business firm which makes sales fairly regularly (as in the case of poultry and dairy feeds), the credit line commonly varies with the size of the enterprise as evidenced by volume of purchases made by each buyer per week or per month, due consideration being given to payment record. In the poultry and dairy feed business, buyers of feed may be grouped into sev- eral classes according to frequency of purchases and settlement of accounts and the magnitude of risks involved. Egg producers who sell their eggs through a cooperative association or to a local feed dealer who extends credit are generally regarded as the best credit risks. Their credit term is also short. They make weekly deliveries of eggs, and the weekly egg check normally cov- ers the weekly feed bill. In a cooperative association, there is usually additional security for feed sales in the annual pa- tronage refunds and in equities in re- volving funds. Dairymen are also generally re- garded as good credit risks, although their credit term may be longer than that for egg producers. Dairymen are usually paid for milk deliveries every 15 days or once a month. They generally settle for their feed accounts once a month. Broiler raisers are usually consid- ered high credit risks. Their credit term is usually three to four months. Broiler [28] prices tend to fluctuate rather widely from week to week and from month to month. In addition to the hazards of price declines, there is the ever-present threat that disease may wipe out a whole flock before it is ready for market. Many broiler raisers are "big operators." The output for any individual broiler raiser may be intermittent. An operator may buy 10,000 day-old chicks, feed them for about 10 weeks, and then sell the entire lot at one time. If the operation proves to be unprofitable, the feed dealer may be unable to collect unless the broiler raiser has other resources which may be at- tached. In order to protect his invest- ment, the feed dealer may undertake to extend credit for another "raise." Thus, the credit term for feed supplied to broiler raisers may vary anywhere from 2% to 5 months. Turkey producers are also consid- ered to be high credit risks, and their credit term is usually even longer than that for broiler raisers. It takes several months to bring a turkey poult to a mar- ketable stage. Although scientific ad- vances have greatly reduced the hazard of heavy disease losses, these have not been eliminated. Furthermore, there is the ever-present danger of price declines at the time turkeys are ready for the market. Other livestock producers. Feed is also sold to cattlemen, sheepmen, hog raisers, and even rabbit producers, whose incomes are usually intermittent, some- times coming only once a year. Such pro- ducers may also be classed as high credit risks, and their credit term may be for several months. From information gathered from branch managers, feed dealers, and local bank managers, it is apparently a com- mon trade practice of independent feed dealers to extend liberal credit to live- stock producers — the credit terms rang- ing from one to several months depending upon the nature of the live- stock operation. Independent feed dealers finance such credit extension in various ways and require a variety of collateral credit. Some dealers borrow commodity capital at the banks and extend credit to selected patrons. In the case of broiler and turkey raisers, dealers usually take chattel mortgages on the birds and other movable assets. In some cases dealers merely guarantee, with appropriate re- strictions, their customers' accounts at a local bank which makes loans to pro- ducers. In all such cases, the producer's operations are closely supervised by fieldmen employed by the feed dealers. It is usual for feed dealers to charge higher prices for feed sold on credit than for feed sold for cash in order to cover the additional costs of credit extension, in- cluding risks involved and supervision of operations. Some feed dealers charge up to $1.00 a ton additional on credit sales of feed, the funds so obtained being placed in a "reserve for credit losses." The credit policy of the Associa- tion. The credit term of the Poultry Producers of Central California is stated to be 15 days, although there is no very clear definition as to just what the 15 days imply. Branch managers are ex- pected to send out bills to members on the 15th and 30th of each month for feed purchased during the preceding 15 days. The member then has 15 days in which to pay before his account becomes overdue. In other words, the member is expected to settle his account before the next billing date. It should be pointed out that under such an arrangement it is possible for a producer, by planning his purchases, to have a credit term of nearly 30 days. He may make his purchases, say, on the 1st of the month. Although he will be billed on the 15th, he may delay payment until a day or two before the end of the month. It should be pointed out that the 15- day credit term was established many years ago with the needs of the egg pro- ducer in mind. Egg-shipping members are paid for eggs delivered on a weekly [29] basis and thus experience no difficulty in keeping their accounts current. In fact, many of them settle for their feed bills on a weekly or even cash basis. The 15-day credit term is also suitable for the dairyman who is paid twice a month for milk deliveries, but it does not meet the credit requirements of dairymen who are paid only once a month. Experience in the various branches has shown that most dairymen prefer to settle their accounts once a month. Some of them are resentful at being billed twice a month. Nor does the 15-day term meet the credit needs of other groups (for example, broiler raisers and turkeymen) unless they have funds of their own or can borrow else- where. Over the course of years, branch man- agers have modified the Association's over-all credit policy to some extent in order to meet conditions in the areas served by the given branches. In 1954 the manager of the Credit Department of the Association sent a questionnaire to all branch managers, asking for informa- tion on billing and payment practices actually followed. Replies were obtained from about 45 branch managers, al- though some of them did not answer all questions. The first question dealt with the num- ber of bills or statements for feed and supplies sent out to patrons. The tabu- lated results from all branches indicated that about 5,600 statements were sent out on the 15th and about 6,440 on the 30th. 21 In 33 branches, approximately the same number of statements was sent on the 15th of the month as on the 30th. In 8 branches, however, considerably more statements were sent out on the 30th of the month. This was particularly true of branches located in important dairy sec- tions. 21 These figures are for 45 branches only. If data were available from all the branches, the number of statements sent out each 15 days would come closer to 7,500. The second question dealt with the number of patrons who paid their bills regularly within 15 days after statements were rendered and the number who paid on a monthly or longer basis. On an aver- age for all branches, 44 per cent of the patrons paid regularly each 15 days, whereas 56 per cent paid on a monthly or longer basis. Only 9 branches indi- cated that 70 per cent or more bills were paid within 15 days. On the other hand, 17 branches indicated that 70 per cent or more of all accounts were paid on a monthly or longer basis. It should be pointed out that in many of the smaller branches the managers perform all the work of posting sales invoices and sending out statements. Such work takes several hours each month. If it could be reduced by sending out monthly statements, the branch man- agers would be free for other work (for example, membership relations) which is of considerable importance to the As- sociation (page 49). Although it is a widespread practice in the poultry and dairy feed industry for dealers and mills to finance the produc- tion operations of poultrymen and turkey producers through sales of feed on credit and by other devices, the Association has not undertaken such financing largely because of the risk of credit losses and the additional costs of underwriting and supervising credit. The management of the Association points out that the great bulk of its feeds and supplies is sold to egg producers and dairymen who are able to pay their bills regularly out of sales of eggs and milk. An expansion of sales of feed and supplies on credit to broiler and turkey raisers might, in case of adverse business conditions, result in losses which their egg-producing and dairy patrons would have to bear — unless, of course, some method could be developed to handle the credit business separately. The Board of Directors has maintained the position that the basic functions of [30] the Association are to market eggs and supply feed to the members and that other agencies are better suited to under- write the financing of production opera- tions. Producers (mainly turkey and broiler raisers) are encouraged to ar- range for production financing through these other agencies and then to avail themselves of the feed and other services of the Association. Members of the Asso- ciation have access to the following sources of credit : (a) The Association has an arrange- ment with several San Francisco banks to lend to turkey and broiler patrons who will assign their patronage refunds as security. Each loan would be separate; risks would not be pooled. In addition, a number of San Francisco banks have agreed to finance members of the Asso- ciation on the security of Revolving Fund Certificates bearing interest at the rate of 5 per cent. (b) A number of members and em- ployees of the Association have organ- ized the Poultry Producers Federal Credit Union, which can make loans to participating members for a variety of purposes. Any member of the Associa- tion may join the Credit Union and may borrow funds on the basis of an accept- able credit statement. A producer who holds membership in both organizations may borrow money up to his credit line to pay feed bills as they fall due or to purchase needed supplies. The Credit Union makes the necessary arrange- ments with each borrower for the repay- ment of the loan. (c) Many members are in a position to borrow needed operating capital from production-credit associations. Some pro- duction-credit associations, however, ap- pear to be averse to financing broiler and turkey raisers for a number of reasons. In the first place, these farmer- owned-and-operated associations are re- quired by law to charge a uniform rate of interest to all farmer borrowers. They are thus unwilling to make loans to farmers engaged in a somewhat risky and speculative activity, such as raising broilers and turkeys. The production- credit associations, however, frequently lend to dairymen and to egg-producing poultrymen who are in a sound financial position. The arrangements described above have been of considerable help to a rela- tively small number of members of the Association. At the same time, it must be recognized that the Association's rela- tively restrictive credit policy has pre- vented it from participating to any great extent in the growing feed and supply business with broiler and turkey raisers that has developed in the past decade. Hindsight, which is better than fore- sight, suggests that if the Association had provided more liberal but adequately guarded credit facilities for broiler and turkey raisers after the end of World War II, it could have materially increased its sales of feed and supplies. Prices of poultry products (especially meats) tended to rise until 1953. Under such cir- cumstances, credit losses would have been reduced to a minimum — unless rash credit policies had been followed. The year 1954, however, was a most difficult time for the poultry and dairy industries. The feed-price ratios were very unfavor- able. The year 1955 also promised to be a "difficult" year in which the poultry industry would have to adjust to a lower level of production. In such periods, some poultrymen are usually forced out of business. Credit becomes harder to get, and many feed dealers are likely to incur substantial credit losses. Under the circumstances, it would have seemed inadvisable for the Associa- tion to embark on a more liberal credit or financing policy in 1954, even though both milling and sales branches could well have handled a larger volume of business. Meanwhile, it was not inappro- priate for the management to continue to [31] study possible new credit devices and arrangements." Cash discounts. A special aspect of the credit problem is that of cash dis- counts. Some members have suggested that the Association would be able to increase its volume of sales of feed and supplies and to reduce handling costs if it allowed a discount for cash. It is claimed that many feed dealers allow cash discounts. Apparently, however, the word "cash" has a number of meanings. The manager of a small supply associa- tion stated that his association allowed members a 2 per cent discount for cash. Further inquiry, however, brought out the fact that "cash" meant payment within 15 days after a statement was rendered. Another manager (of an alfalfa hay association in California) stated that "cash customers" were billed im- mediately after sale and that payment within 30 days was considered "cash." "That," said he, "is as near 'cash' as you can get." Another poultry feed associa- tion in California gives members a "cash" discount for payment within 10 days of delivery. The usual practice in this association is for the deliveryman to pick up the check for the previous week's sale of feed at the time he makes the current delivery. Still another asso- ciation allows members a cash discount of 10 cents a bag of feed. In this case, however, "cash" meant full payment at the time of sale or delivery. Proponents of a discount for payment in full at the time of delivery point out that extension of credit involves addi- tional costs in making sales. Although it is difficult to determine the exact differ- ences in costs between cash and credit sales, these differences would be related to credit losses, extra record keeping, 22 Among these would be the plan formulated by the former manager of the Association's Credit Department, for the establishment of an agricultural credit corporation among broiler and/or turkey raisers to be operated for the benefit of members of the Association. costs of billing, making collections, and servicing delinquent accounts, and inter- est on money invested in receivables. Such costs would probably vary over time and would also depend upon meth- ods of operation and skill in extending credit. It is difficult not only to evaluate the merits of a "discount for cash on de- livery" but also to determine how much the discount should be in order to reflect with reasonable accuracy the differential cost of cash and credit business. Con- sideration needs also to be given to pre- vailing trade practices and attitudes of members. Many large buyers at times phone in their orders for feed and are often not on their ranches when feed is delivered. The question would arise whether in such a case the buyer who sent in his check two or three days after feed was delivered should be regarded as having made a cash purchase. In many ways the introduction of a strict cash discount on delivery would raise more problems than it would solve. It is, nevertheless, definite that prompt settle- ment of accounts would result in cost re- ductions which, though small per ac- count, would amount to considerable proportions on a full year's operation. 23 Handling of members' accounts. Considerable expense is involved in making sales of feed and supplies in small quantities and of small total value. These costs involve the time spent by a branch manager in making the sale, post- ing, billing members twice a month, and servicing delinquent or overdue accounts. It is recommended that the Associa- tion consider a plan under which mem- bers would settle accounts on the basis 23 For example, if 7,500 statements were sent out to members twice a month (or 15,000 a month), the number of statements rendered annually would amount to 15,000 x 12, or 180,- 000. If it cost 6 cents to render each statement (a conservative estimate), the annual cost for sending out statements would amount to about $10,800. [32] of invoices rather than bi-monthly state- ments. Such a plan is already used, ap- parently with satisfactory results, by two large feed-selling cooperatives on the Pacific Coast. The system is also used extensively by many business corporations and by some public institutions. The method involves making out a sales invoice for each member at the time a sale is made. Mem- bers receive a copy of each invoice — another copy is retained in the office. At the end of each day or two the office copies, numbered consecutively, are totaled for control purposes and sorted into dockets, one for each member. Mem- bers pay for feed and supplies either cash on delivery or once a week or 10 days. Appropriate notation of payments is made on invoices, which are then withdrawn from the docket. Members are billed only once a month and then only if their accounts are overdue. If some such system were adopted, the number of statements to be mailed out to members would undoubtedly be re- duced to only a small proportion of those now mailed out each month. In the larger branches, the time saved would permit some reduction of personnel; in the smaller branches, it would free some of the manager's time for membership or other more important work. It is sug- gested that such a system of payment by invoice be tried out experimentally in one large and one small branch so that weaknesses may be discovered and cor- rected. In order to reduce still further the ex- pense involved in handling a multiplicity of small accounts, it is recommended that all members whose purchases of feeds and supplies do not average a certain minimum amount a month (say $25.00) be placed on a strictly c.o.d. basis. This change could be made whether or not the invoice system was introduced. It would, however, dovetail very well into that sys- tem. In order to take some of the sting out of requiring a fairly large number of members to pay cash for purchases, a moderate discount might be granted for cash payment or payment within 7 or 10 days. Such a discount would, of course, also apply to members whose purchases exceed the minimum. It would, more- over, be in addition to the volume dis- counts already allowed to members. (In- cidentally, two cooperative associations in the western states at present grant members a discount for cash.) At least part of the resulting reduced net value of sales (especially in the case of the pur- chasers of small monthly quantities of feed and supplies) would be offset by the decreased costs of handling small ac- counts. If the cash discount is also al- lowed to members whose purchases greatly exceed the minimum, the annual net overage or net profit will undoubt- edly be reduced somewhat. This may necessitate some decrease in the percent- age of patronage refunds made annually to members on their feed and supply purchases. This, in and of itself, may not be undesirable, as it is a moot point whether it is more advantageous to sell members feed and supplies currently at lower price or sell at a higher current price and pay a substantial patronage refund once a year. A lower cash price paid by members currently would place the Association in a stronger competitive position. Feed and supply merchandising policies of other cooperatives As an aid in evaluating the credit and related policies of the Association, it was decided to obtain information on the feed and supply merchandising policies of other cooperatives in western states. A three-page questionnaire (see Appendix B) was sent to 11 feed-selling coopera- tives in this region. Eight associations returned completed questionnaires, and in most instances, the managers also wrote in more detail about the over-all problems of merchandising feed and sup- plies. This is an indication that the prob- [33] •O co a> a> OOOOOtNOOO ■ c8 • • in a> a) OOOOOOOOO OOOOOOOOO o *H "g o o o o o © o^ ©_ o_ 4- N t> O © B t> O* H OO" ItO^OOlOcNOJO HN , "l ° t "L'^ lf ^'* , "lO» t ~l c* i-H CO irt 0) 4 OOOOOOOOO S 8* §2 OOOOOOOOO OOHOONtflCOOBN «« o ^OOiHWCOcNCiiO c St NH^COMOOOCOtO •■■ 3 O" CN M "3 i-H > > *■ S 000000808 u 00000 000 0) ?2 Tji'tdcNt^cs'-^o'cdcd CDOCOOCOOOOlO Q. o :0 9 OOC^CO©_COCOCO'cdo«d'THt-r > i-H cN (N c CO •o OOOOOOOOO Z CD OOOOOOOOO .S-tf ^ oi 10 q oo^ w o\ <* H- •oo ^ t»" ^" d d d d h t-" o g« WHCOIflNC'^HOi i-l i-l i-H U) s CO W O o *3» o he to g^ H OOOOOOOOO 3 Tj' 73 fl OMCOOi^OSOlOOO CO (OOliOtQN^tOOOU tflNO(fiMCOt-H05 2* ih H CD 3 cS j3 « W p, lOiOOO^OOOO O'J'MOMOIONO ■o tH (N ^* H H CO" N O) c CO fc^ 0) o o to S3 « WiOOO-tfiHOO© Ik ■0*2 flJ^WOC0l>ON^ C tH n io H 00 (O n h CO i-l 8 X in V. o -Q E '» h • "H O K o So J) 2 >> S K- < pqi O PwfeOtHoi o w «n O "O c s d) c o u c o in c o 4» in O 3 • 00 5 bo ,£3 S5 bo .11 £1 CD +3 o g 9 *S6 2 P4 > O S o a •- fc 3 O C € Pk > O S 3 3 £ CO ° a A £> 3 o »-. W M N r-i S © c a efl O €«■ & m «"« O fi >* ° M t. ^ ft ft o o 00 £V fctf - ' f w '■% - * % 31I1P jfllflf If -SI tammMz Wij does not, of course, include the cost of operating trucks or the wages of the driv- ers while on the main highways. A small service charge is made by the Association for picking up small quan- tities of eggs at the farm. In view of the foregoing information, it would ap- pear desirable for the Association to re- consider its policy with regard to the pickup service charge. Quality related to size of delivery Another study made in 1954 by the Accounting Department of the Associa- tion throws still more light on the rela- tionship between members making de- liveries of varying volumes of eggs. The data in this study are summarized in table 13. In view of the higher costs involved in handling small weekly deliveries of eggs and the generally lower quality of such eggs, the Board of Directors of the Association might well consider oper- ating two or more pools related to size of deliveries. It may be possible by such means to allocate to each pool the dif- ferential costs of handling. Other alterna- tives would be to raise the minimum weekly delivery quota or to raise the minimum volume of patronage required of a member above the $200 (for feed and eggs) in force in 1953. 28 28 In line with the factual information pre- sented above, the Board of Directors of the Association, at its monthly meeting held on November 4, 1954, resolved to raise the mini- mum required patronage (for eggs delivered and/or feed purchased) from $200 to $500 a year. This action will undoubtedly result in some reduction of membership during 1955 and perhaps also during subsequent years. This re- duction in membership, however, would result in only a small reduction in volume of eggs handled and volume of feed sold. The small loss of patronage should be more than offset by a reduction in operating costs by the elimina- tion of some high cost accounts. The net oper- ating position of both the Feed and Supply and the Egg Departments is thus likely to improve rather than to deteriorate. Membership Problems In the preceding sections, it was indi- cated that an increase in sales of feed and supplies should tend to reduce costs of milling and of operating the branches. Attention was also drawn to a number of ways by which the Association could re- duce the costs of handling feeds and at the same time improve its competitive position in the feed business. Among other suggestions was one to place mem- bers who purchase less than a stated minimum volume of feed supplies monthly on a strictly cash basis. It was not considered wise at the time of this study to attempt to expand the volume of feed and supplies by any drastic re- laxation of credit policy, particularly if this were to involve extended credit on sales to broiler (fryer) and turkey rais- ers. These restrictions would appear to place the Association on the horns of a dilemma. Actually, however, there is a solution. The Association needs addi- tional active membership. Information obtained during the course of this survey indicates that there are considerable numbers of commercial poultry and live- stock producers in central California who are not members of the Association but who might be induced to join. Two fac- tors or policies of the Association have in the past tended to limit its member- ship. These are the membership egg- marketing agreement and the lack of ef- fective field-service work. [45 The egg-marketing agreement As was stated earlier, the Association was organized originally as an egg- marketing association. In order to carry out effective egg marketing, it was deemed necessary to ensure a continuous supply of eggs by requiring all members to sign an egg-marketing agreement or contract. 29 Under this agreement each member is required to deliver all eggs produced by him (except eggs for family use and eggs sold to hatcheries) when- ever he has enough to make minimum deliveries of not less than 30 dozen a week. The contract is binding for a pe- riod of 15 years but provides that a member may end the agreement by writ- ten notice sent to the Association within a specified period in any year. The Association has regarded this agreement as the very foundation upon which it operates. In 1926 it undertook to handle feeds and supplies as addi- tional services to members and later also sold feeds to livestock producers other than egg producers. However, it required any non-egg producers to sign the egg- marketing agreement as a condition of membership even though they had no in- tention of producing eggs. This require- ment has kept out of the Association that considerable group of egg producers who happen to have outlets for their eggs which they, in their particular circum- stances, prefer to the marketing service offered by the Association. Yet many of these would quite certainly patronize the Feed and Supply Department if per- mitted to do so. In the meantime, the egg-shipping members are free to shop around for feeds and supplies, often using the Association's quotations to get lower prices elsewhere. We are convinced that patrons of the Egg Department would benefit if the As- sociation eliminated the present require- 29 This is a common procedure among agri- cultural cooperative associations processing and merchandising products on behalf of members. ment that all members sign the market- ing agreement. One way to do this would be to amend the bylaws to provide for two classes of members. In the first class would be all members who wish to ship eggs to the Association. These would be required to sign the present egg-market- ing agreement in order to provide a de- pendable supply of eggs on which the Association may base its merchandising program. The second class would include turkey and broiler raisers, dairymen, producers of other livestock, and egg producers who do not wish to take ad- vantage of the Association's egg-market- ing service. This second class of mem- bers, along with the first, would be the patrons of the Feed and Supply Depart- ment. In order to discourage egg-shipping members in class one from withdrawing from the egg-marketing agreement to become class two members, the amended bylaws may well provide that any mem- ber who has withdrawn from the egg- marketing agreement may not re-estab- lish himself as an egg-shipping member for a period of two years from the date of withdrawal. In order to re-establish himself, such a member would then have to sign the egg-marketing agreement. No eggs would be accepted from persons who have not signed such agreement. In support of the suggested changes, we may point out that increased com- mercialization of egg production has put more emphasis on the supply-buying as- pect of egg production. Moreover, much of the overhead cost of administration and many of the costs of operating branches are shared by the Feed and Supply Department and the Egg De- partment. Any increase in the operations of the Feed and Supply Department which leads to reduced costs or to im- provements in needed services will bene- fit egg producers not only as feed and supply buyers but as egg sellers as well. The fear expressed by some that many egg producers would withdraw assumes [46] that these producers stay with the As- sociation only because they wish to buy its feeds. This fear does not seem well founded in view of the fact that a good many egg-shipping members now pa- tronize other feed suppliers, including four smaller cooperative associations. It is, of course, not possible to foresee to what extent present egg shippers would decide to try independent egg buy- ers for a year or two if they could still buy feed from the Association. Some may do so, particularly those who ob- ject to the Association's clean-egg pro- gram. A few have withdrawn each year to accept outside offers (some apparently to their regret) . The present contract re- quirement actually "throws these pro- ducers into the laps of competing feed sellers" — private or cooperative. If they could continue to patronize the Asso- ciation's feed and supply facilities, the periodic contacts might easily lead to a renewal of the egg-marketing agree- ment. How well egg producers will support the Egg Department will depend largely on whether the Association's egg-market- ing services continue to meet or beat those of its competitors. The fact that the Nulaid brand of eggs regularly sells at a premium in the markets of central Cali- fornia would attest to the Department's effectiveness in merchandising eggs. It is entirely possible that although the As- sociation is performing an efficient merchandising service, its grading poli- cies may be so severe and its administra- tive and handling costs in receiving and packaging branches may be so high that members actually receive little price benefit as compared with nonmembers. The Association has for years been in a position of leadership in regard to quality standards of production. Much of its educational work among members has been directed to improvement in methods of production and handling of eggs on the ranch. Because of the ad- verse effects of washing on the interior quality of eggs, the Association has for many years conducted an educational program against the washing of eggs. A "Clean Egg Program" was started of- ficially in 1951, when a monetary award for unwashed eggs was introduced. More recently it was announced that produc- ers who wash eggs will no longer be ac- cepted as new members. Most other egg buyers have not as yet adopted a similar policy with regard to egg washing. At the time of this study (summer of 1954) , well over 90 per cent of all eggs received by the Association were unwashed. In the beginning this new quality program met with some opposition and criticism. Now that members have become ac- customed to the new policy, opposition seems largely to have disappeared. Few members have withdrawn from the As- sociation because of the "unwashed"-egg policy. Apparently the great majority of members who are in the commercial egg- producing business fully agree with and support the Association's quality pro- grams. It is, therefore, necessary to rely upon certain "prima facie" evidence of the effectiveness of the Association's egg- handling operations. In the first place, numerous independent egg buyers ap- pear to base their prices to producers on the returns currently being made by the Association to its members. This would seem to indicate that independent buyers must at least meet the Asociation's prices to stay in business. In the second place, a large proportion of the members of the Association have patronized its Egg Department for many years. It is extremely doubtful whether such members would have continued their loyal support for any length of time if they were convinced that they could get a better "deal" outside the Associa- tion. Although some producers have withdrawn from the Association because of the lure of better "deals" from inde- pendent buyers, many of these have later rejoined. [47] Eggs are candled before passing to the electro-mechanical equipment, which automatically tabulates, weighs, and packs them in cartons. After the mechanical brain has recorded the weight and interior grade, the eggs are pack- aged. As the conveyor belt moves along, eggs are dropped from the pocket into the correct carton. When a carton has been filled, it is automatically brought forward and replaced with another. -- . ■' *.■--•■ i In the third place, perhaps the most convincing argument that the Associa- tion is doing an effective job of mer- chandising eggs is the fact that some of its most loyal egg-shipping members are feed-buying members of feed and supply associations in their respective districts. The conclusion, therefore, appears to be justified that the Egg Department of the Poultry Producers of Central Cali- fornia is functioning with reasonable ef- ficiency, that a modification of the mar- keting-agreement policy to permit some egg producers to purchase feed and sup- plies without being required to ship their eggs would not cause any considerable loss of present egg-shipping members, and that some who now have more desir- able egg outlets would then buy feed and supplies of the Association. Membership relations and field service Unlike many other cooperative associ- ations, the Poultry Producers of Central California has not established a mem- bership or field-service department. To a considerable extent, the Association has relied on its well-established reputation for the recruitment of new members. Contacts with members have been main- tained through a weekly newsletter and a monthly house organ, Nulaid News. Branch managers provide additional con- tacts with members mostly when mem- bers visit a branch to deliver eggs or purchase feeds. There are also occasional visits to individual members by directors and office personnel, and, of course, the periodic district meetings provide nu- merous contacts. A comparatively small number of the original members of the Association are still active. Most of the present members have been with the Association for less than 20 years. Each year several hundred members drop out for a variety of reasons to be replaced by several hun- dred new ones. These new members can- not be expected to have the same spirit of loyalty to the Association as those who have been members continuously for 10 years or more. In the meantime, old as well as new members are being contacted continu- ously by representatives of independent feed dealers and by egg buyers. Even more important is the fact that up to 1954 the Association had no adequate, regular, and organized means to contact persons who had recently become poultry producers and dairymen in the various areas. Such new poultrymen and dairy- men are often solicited by independent dealers even before they actually get into production. Information obtained from members of the Association and from branch managers during this survey indicated rather clearly that many producers (members and nonmembers alike) had a very imperfect understanding of the op- erations of the Association and of the advantages of its services not only to member-patrons but also to the poultry and livestock industries. Misunderstand- ings frequently arose among members in regard to the handling of their products, or feeds or accounts. Means of correcting such misunderstandings ap- peared to be inadequate. Too many live- stock producers in the area seemed to regard the Association as "just another feed agency," rather than as an organiza- tion owned and operated by them for their benefit. Such a situation may prove very dis- advantageous to the Association if com- petition, already very keen, becomes even keener in the years ahead. The Associa- tion can ill afford to lose any of its present membership to competitors — especially if such members have large poultry or dairy enterprises. Equally im- portant, however, is the fact that the Association should aim at obtaining a constant stream of new members to re- place older ones who may retire or sell their poultry enterprises. It is not enough for the Association to rely upon [49] its past reputation for service and its other inadequate means of contact as a means of maintaining or expanding membership. It must adopt a more posi- tive and effective program of member- ship relations and expansion. In recognition of this need, the As- sociation in 1953 assigned to one of its Head Office personnel the task of work- ing with and through branch managers in a survey of members and non-mem- bers in the areas served by the various branches. As far as possible, personal contacts were made with poultrymen, dairymen, and other livestock producers in each area. Much useful information was obtained from or about each person contacted in regard to size of operations, the source of feed purchases, the sales outlet for products, etc. This survey seemed to bear out the fact that there was still a considerable untapped reser- voir of potential members. Branch man- agers have also been urged to devote some time each month to field contracts with producers in their areas. This is undoubtedly an important step in the right direction. It is considered, however, that in view of the importance of building up membership morale and gaining the support of new members, more effective membership activities are necessary. In many areas the local managers are fully occupied with serv- icing members at the branch and with supervising egg collection and the sale of feeds and supplies. They have little spare time to devote to regular field work among members and nonmembers. This is particularly true in the smaller branches and where two branches are operated by a single manager. In addi- tion, while the managers of most of the branches are undoubtedly capable and loyal employees of the Association, most branch managers do not have the per- sonality and training necessary for ef- fective field-service work. It is strongly recommended that the Association appoint two or more field representatives, each to serve a rather extensive territory. Five or six field rep- resentatives at most would probably be adequate to service the whole region served by the Association. Such field representatives should be carefully se- lected and trained. The nature of their activities should be somewhat similar to that of county farm advisors or exten- sion agents. They should have an ade- quate knowledge of the techniques of poultry and livestock production, in- cluding an acquaintance with feeds and feeding, poultry and livestock diseases, etc. They should also be thoroughly familiar with the nature of organization and the operating practices and policies of the Association. They cannot be ef- fective salesmen for the Association and its services unless they have an intimate knowledge of its objectives, operations, and policies and have a favorable atti- tude toward the cooperative way of do- ing business. Above all, such field repre- sentatives should be able to get along with people, especially with farmers and other groups living in rural areas. Important as the establishment of a membership-relations or field-service de- partment may be, the development of such work should be approached with some caution. Great care should be exer- cised in the selection of personnel and in the detailed planning of the scope and nature of the work of field-service repre- sentatives. It would seem wise for the Association to appoint one or two men, with what appear to be the necessary qualifications, to service areas of the territory that most urgently need such work. This could be regarded as an ex- perimental trial. At the end of a year or two, the Board of Directors could review and reassess the effectiveness of the work already done and the need for expanding it. [50] Personnel Relations Although this study did not include a detailed analysis of personnel relations, a few aspects deserve attention because of their over-all relation to the long-term efficiency of the Association. It is taken for granted that the top-level personnel (general manager and departmental managers) are performing efficiently the responsible tasks assigned to them. At no stage in the study did there appear to be anything that would cause question in this respect. There did appear to be some question, however, as to the capability and effec- tiveness of a few branch managers. Dur- ing the first six months of 1954, practically every branch manager was contacted. Nearly all of them were re- quested to furnish information regard- ing the operations of their branches, including accounting practices, member relations, and problems and relations involving the Head Office in San Fran- cisco. The impression was gained that the majority of the branch managers were loyal and capable employees. On the other hand, it was apparent that some were men of limited ability and vision. A goal of increased efficiency would seem to call for a conscious effort to raise the level of ability and training as replacements are made. Numerous persons acquainted with the agricultural cooperative movement in the United States have indicated from time to time that cooperative associa- tions have not developed an effective program for the recruitment and train- ing of persons who may one day be suitable for senior executive positions. The senior executive personnel in many of these associations, after many years of service, are approaching retirement age in increasing numbers. In all too [51 many instances no provision has been made for the training of younger men to fill the senior positions. There was evi- dence of a somewhat similar situation in the Poultry Producers of Central Cali- fornia. It is highly desirable that such young men, preferably with a university education, 30 start "at the bottom" and obtain during their first few years some training in all the major departments and subdepartments. In this way they should acquire a well-rounded knowledge of the various operations of the Associa- tion. Their progress and ability should be analyzed carefully at stated intervals so that at a later stage men with par- ticular talents may be directed into fields of work for which they show greatest aptitude. A few branch managers felt that they were too isolated from the Head Office and from the top-level administration of the Association. Visits from departmental managers were infrequent; visits by branch managers to the Head Office were equally infrequent. Some of these branch managers felt it difficult to regard them- selves as an integral part of a large or- ganization. If there is substance to such complaints and criticism, the Board of Directors and top management should 30 The suggestion has been made that the poultry cooperatives of the western states estab- lish one or more scholarships for students at agricultural colleges. The training of such stu- dents could be so organized that, when they graduate, they will have a reasonably advanced knowledge of poultry (or livestock) production, feeds and feeding, as well as a working ac- quaintance with the economics and business principles of a livestock cooperative association. Similar specialized scholarships could well be established by other groups of cooperative asso- ciations. It should be pointed out in this con- nection that many large business corporations in the United States have for years supported scholarships of this nature. ] consider remedial measures. Effective personnel relations are important to a smoothly operating organization. Suggestions from some of the em- ployees in the Head Office were some- what similar. 31 It was stated that employees in one department or section had little knowledge of other departments or sections and of how their particular work fitted into the over-all plan of the Association. Experience in large business firms has demonstrated that employees work more effectively if they know how their particular work dovetails into that of other sections. The management has been aware of this defect in its internal organization for some time. In 1954 it decided to prepare an office manual set- ting forth the functions and responsi- bilities of each department and section. It is suggested that in addition periodic meetings by departments and sections be held at which employees may be briefed regarding changes in policy and pro- cedure. Employees should also be en- couraged to make suggestions for improvement in procedures. Finally, it is recommended that the Association establish an Economics De- partment or Section to undertake eco- 31 It should be stressed that none of the per- sonnel made a special effort to register com- plaints and criticisms. All employees contacted were merely asked to make any suggestions they saw fit that might contribute to more effec- tive organization and operation. nomic analysis of the operation of the Association and of the economic environ- ment in which it operates. In this connection, it should be pointed out that much of the accounting and other data used in this study were already available in the records of the Association or were obtained with little delay. The data merely required further analysis for economic purposes. A competent econo- mist employed by the Association could maintain running records of sales and prices of feeds, of branch-operating prac- tices and costs, and of general market conditions. Such an official could also undertake specific economic analyses at the request of the Board of Directors or the management. Information available from coopera- tives in other parts of California indi- cates that very few associations, even those with a considerable volume of business, have seen the necessity so far for establishing a branch or section to undertake economic analyses. This is in marked contrast to what is done in many large business corporations. In these days of rapid economic and technological change, constant evaluation of opera- tional and marketing methods by competently trained personnel would enable many cooperative associations to anticipate and adjust to changing condi- tions. This should result in an improve- ment of the services rendered by an association on behalf of its members. Some Financial Problems An analysis of the annual operating statements and balance sheets indicates that by usual business standards the Association is in excellent financial condition. The Association, which means its members, owns outright all physical facilities. Reserves for depreciation, [ inventory decline, and bad debts appear to be adequate. Accounts receivable are in a healthy condition. Monies con- tributed by members to the Revolving Egg and Feed Capital Funds are revolved normally in two or three years. Two aspects of the financial policy of 32 the Association, however, merit recon- sideration by the Board of Directors. These are (1) the General Capital Fund and (2) the period of revolution of the revolving funds. Revolving fund plan The revolving finance plan as set up in 1923 looked like an ideal plan for financing a cooperative association. The needed capital was built up by withhold- ing one cent per dozen from the proceeds of each member's egg deliveries. As evidence of his contributions, each mem- ber was given Advance Fund Certificates covering the amount of his contribution during the past quarter. These at first bore 6 per cent interest and more re- cently 5 per cent. The certificates were to be redeemed periodically as the con- tinued withholdings built the fund be- yond the required amounts. Thus, each member contributed capi- tal in proportion to his use of the Association's facilities. As the plan con- tinued, his interest in the accumulated capital continually approached this "proportion to use" ideal as he increased or decreased his patronage. When the Feed Department was estab- lished in 1926, a somewhat similar plan was developed for financing it. In this case, patronage dividends on feed sales were to be withheld until the Feed Capi- tal Fund reached a stated amount. There- after, each new patronage dividend would be used to repay the oldest out- standing contributions to the fund as in the Egg Fund. Certificate purchase plan It soon became evident that some producers were under pressure for ready cash to pay feed and other bills. Com- peting feed dealers were finding various ways to use the certificates as collateral when selling feed on credit. Perhaps even more important, they frequently pointed out to such financially pressed members that private dealers do not ask farmers to finance the feed business. In 1928, the Association arranged to purchase up to $20,000 worth of such certificates from members who needed cash and to resell these to investors. In 1930, arrangements were made to sell the certificates to its subsidiary, Producers Company, Ltd. The latter shortly devel- oped a plan for issuing "Investment Cer- tificates" for sale to investors. There were secured by Revolving Fund Certificates which the Company had purchased from farmers. 32 At first the Investment Certifi- cates were sold to investors generally, but the demand for them among members was such that sale was later restricted to members or employees. In 1953 it was decided to suspend operations of Producers Company, Ltd., and soon thereafter the Company was in process of liquidation. To replace this Company's financing operations, the members voted to establish a General Capital Fund within the Poultry Pro- ducers of Central California to which members could contribute directly by purchasing General Capital Fund Cer- tificates" for sale to investors. These were to be used by the Association to purchase Egg and Feed Capital Fund Certificates from members who needed ready cash to finance egg- and feed-storage opera- tions, and to meet other legitimate needs. It was anticipated that the existence of such a General Capital Fund would re- duce, though not preclude, the borrow- ing of short-term capital from banks and other lending institutions. Members sub- scribing to the General Capital Fund Certificates were to receive interest of not less than 3 per cent per annum and not more than 6 per cent per annum, as determined from time to time by the 32 For a fuller description of the plan and its operation, see Erdman, H. E., "Shifting the Financing Burden Among Members of Cooper- atives," American Cooperation, 1946 (Washing- ton: American Institute of Cooperation), pp. 562-566. [53] Board of Directors — the interest paid to be regarded as an operating expense for the Association. So popular was the General Capital Fund that by the end of 1953 about $3,451,000 had been subscribed, and it was found necessary to limit, temporarily at least, further contributions. As of August 31, 1954, the Fund stood at $3,- 423,000. It is important to note, however, that this amount had been subscribed by only 873 members, or about 7.5 per cent of the total membership of around 11,600. Even among these 873 sub- scribers, there was a wide variation in individual contributions to the Fund (table 14.) About 185 members, or 20 per cent of all subscribers, contributed less than $1,000 each and together ac- counted for only 2.5 per cent of the total amount subscribed as of August 31, 1954. On the other hand, 260 members, or 29.7 per cent of all subscribers, con- tributed together 64.9 per cent of the total amount subscribed. These data would indicate that a small proportion of the total membership regarded the Gen- eral Capital Fund as an excellent invest- ment opportunity. Laudable as may be the desire to be independent of borrowing from banks, it should be pointed out that unless the capital subscribed can be utilized fully and continuously, members who are pa- tronizing the egg and feed services are being called upon to pay interest on unused capital. Furthermore, a business concern in a good financial condition is usually able to borrow money to meet short-term operating capital at very low rates of interest — lower than that paid by the Association on General Capital Fund Certificates. An analysis of the balance sheet of the Association as of January 2, 1954, indi- cates that current assets amounted to $11,331,000 and current liabilities to $3,- 317,000, a ratio of about 3.4 to 1. A ratio of like proportions was maintained during the first eight months of the year but was reduced somewhat by year's end. (Cash assets alone were approximately equal to total current liabilities.) Nor- mally, for a business concern of good Table 14. Distribution of Holdings of Certificates in the General Capital Fund as of August 31, 1954 Range of holdings Less than $500 $500-999 $1,000-1,499.. $1,500-1,999. . $2,000-2,999.. $3,000-3,999. . $4,000-4,999. . . $5,000-9,999. . . Over $10,000 . . Totals Subscribers Number 88 87 122 40 136 73 67 174 86 873 Per cent of total 10.0 10.0 14.0 4.6 15.6 8.4 7.7 19.9 9.8 100.0 Accumu- lated per cent 10.0 20.0 34.0 38.6 54.2 62.6 70.3 90.2 100.0 Volume of holdings Amount dollars 23,800 57,375 152,500 70,000 340,000 255,500 301,500 1,305,000 917,495 3,423,170 Per cent of total 0.8 1.7 4.4 2.0 9.9 7.5 8.8 38.1 26.8 100.0 Accumu- lated per cent 0.8 2.5 6.9 8.9 18.8 26.3 35.1 73.2 100.0 [54] financial standing, a ratio of 2:1 of cur- rent assets to current liabilities would be regarded as adequate. It appears that during 1954 the Association maintained a considerable unused cash balance in the commercial banks. Such cash bal- ances earned no interest and yet mem- bers utilizing the services of the Associa- tion were indirectly paying interest at 5 per cent on the balance in the General Capital Fund. Several factors seemed to have con- tributed to the conditions described above. The year 1953 was a very favor- able year for the poultry industry. As a result, many members had ready cash (much of it from patronage refunds on eggs delivered and feed purchased) which they were eager to invest. At any rate, investment in the General Capital Fund greatly exceeded expectations. On the other hand, because 1953 had been a good year, fewer members found it necessary to sell their Feed and Egg Revolving Fund Certificates. In addition, the increased uniformity in seasonal production of eggs made it unnecessary for the Association to undertake exten- sive egg-storage operations. Finally, in- ventories of feed were reduced because the Association did not find it advisable to purchase and store large quantities of feed over and above current needs. Whatever the reasons may have been, the Association found itself during much of 1954 with large capital funds inade- quately utilized. As a part of its long- term policy of service to members, the Association should undoubtedly continue to stand ready to purchase Egg and Feed Revolving Fund Certificates from mem- bers in need of ready cash. It would seem, however, that the General Capital Fund should be limited to an amount adequate for this purpose only. It is questionable whether it is good financial strategy to attempt to finance operating capital and commodity capital out of such a permanent fund. The cost to pa- trons would be reduced if short-term capital needs were borrowed as needed from commercial banks or other lending institutions. It is recommended that the Board of Directors reconsider its policy with re- gard to the General Capital Fund, and, if feasible, take appropriate measures to reduce it more nearly to cover needs for the purchase of Egg and Feed Revolving Fund Certificates as these are offered by members. Period of revolution of capital As was pointed out earlier, contribu- tions to both the Egg and Feed Capital Funds are revolved back to members in two or three years, the shorter period being the more usual. Information avail- able from other cooperative associations in California indicates that the majority of associations revolve capital in five to seven years. A few associations revolve capital in less than five years, a few in over seven years. The rate or speed of revolution of capi- tal under the revolving-capital method is related to the size of current deductions contributed by members on business transacted with the association. If the capital needs and the volume of business transacted remained more or less con- stant, the period of revolution would be doubled if the amount of deductions were halved and vice versa. Thus, the Asso- ciation could slow up the rate of revolu- tion of its capital funds merely by decreasing the deduction per dozen of eggs in the Egg Capital Fund and allocating a smaller proportion of the annual overage in the Feed Department to the Feed Capital Fund. There are advantages and dis- advantages to a short versus a longer period of revolution of capital funds. The main advantage of a short period is that members may expect earlier repayment of capital contributions. This is of special importance for associations which do not pay interest on monies contributed to such funds. Also, if there [55] is a relatively rapid turnover in member- ship, the contributions of persons who have ceased to be members will be re- turned in a shorter period of time. This latter consideration has not been im- portant in the P.P.C.C. because members have had the option of selling their Revolving Fund Certificates to the Association. The most important advantage of a longer period of revolution is that im- mediate returns to members can be increased. For example, if the Associa- tion decided to double its period of revolution of the Egg Capital Fund, it could reduce the deduction for capital from 1 cent to % cent per dozen and increase weekly pool payments by a like amount. This should improve the Asso- ciation's competitive position in the procurement of eggs from members to that extent. In regard to Feed Capital Funds, the Association could reduce its markup of 8 per cent to, say, 6 per cent or 5 per cent — thereby being in a posi- tion to lower its current prices on feed and supplies. This would result in a lower annual overage on operations of the Feed Department. As a result, the annual patronage refund would be re- duced, and the rate of revolution of Feed Capital Certificates would be reduced. Again, such a change in policy should tend to improve the Association's im- mediate competitive position in regard to the sale of feeds and supplies. In times of stress (as in 1954 and probably also in 1955), large numbers of members are more interested in immediate cash re- turns than in deferred patronage refunds of doubtful size. The cost of issuing and redeeming certificates would be reduced if the period of revolution were in- creased. It is recommended that the Board of Directors seriously considered lengthen- ing the period of revolution of Egg and Feed Capital Funds. Federated Versus Centralized Organization In a memorandum on the scope of the proposed study of the operations of the Association, the general manager had raised two questions about its form of organization. The first was whether or not an association of its size was likely to be less flexible under its present cen- tralized form of organization than it would be if reorganized as a federated type of association. The second asked whether the interests of members would be more adequately served if the feed and supply activities and the egg-market- ing activities were placed in two separate cooperative associations. These questions arose from the fact that three smaller independent local feed and supply associations have operated successfully for many years in the same territory as that served by the P.P.C.C. In addition, a local egg-marketing asso- ciation (the Poultry Producers of Northern California) has operated suc- cessfully for many years in Humboldt County, although it is also a member of the P.P.C.C. — a sort of federated ar- rangement. In the course of interviews with mem- bers, branch managers, and others, three plans of organization most often came up for discussion as possible alternatives to the present plan. The first suggestion [56] was that a number of regional associa- tions (within the area now served by the Poultry Producers of Central California) be formed to handle both the receipt, packaging, and local sale of eggs, and the milling and sale of feed and the sale of supplies to members. The regional associations would be affiliated with an area-wide federated association for the sale of eggs in the Bay area cities and for the volume purchasing of feeds and supplies. The second plan suggested was a separate centralized association to handle the egg business and another to handle feeds and supplies. The third proposal was that the egg business continue on a centralized basis as hereto- fore but that the feed and supply business be reorganized in a number of separate, more or less independent regional asso- ciations. It may be well at this point to examine briefly some of the conditions under which federated and centralized types of organization have been most successful. The federated type of organization has been particularly well adapted to a situ- ation in which the assembly, processing, and packaging of a product are com- pleted at the local level, the product then moving on to one or more distant markets for merchandising under the unified direction of a single federated organization. In California this was notably true of the fruit- and nut-ship- ping industries in the early days. In the case of citrus fruits, fresh deciduous fruits, and fresh grapes, the fruit needed to be assembled, graded, packed, loaded on railroad cars, and shipped for ulti- mate sale in midwestern and eastern markets. Experience showed that these operations could be performed efficiently and expeditiously by locally owned and operated associations. At the same time, experience showed that distribution of fruit over time and distance and selling, except for local use, could be performed most efficiently through a central mar- keting organization of which the local associations were members. At the local level the central association (for exam- ple, Sunkist Growers, Inc.) advised on and supervised grading and packing to the extent that a central brand (for example, Sunkist) was used. In the early days the federated plan of organization also worked well for the cooperative handling of almonds, wal- nuts, butter, and cheese. When it became necessary to process a large part of each year's almond crop, the California Almond Exchange changed over from a federated to a centralized form of organ- ization. The buildings and other facilities of some of the old local associations were taken over by the Exchange and operated as local receiving stations. The California Walnut Growers Association has con- tinued to operate as a federated organ- ization, although a growing proportion of each year's crop is being processed at a central plant for sale in retail packages. The Challenge Cream and Butter As- sociation, with headquarters in Los Angeles and selling branches in several urban centers in California, has long operated successfully as a federation of local creameries whose major product was butter and skim-milk by-products. In recent years, however, the present federated plan of organization has proved to be less well suited to meet the modern type of competition in the dairy industry. The large modern dairy-prod- ucts merchandising concerns handle a variety of dairy products including market milk, market cream, ice cream, evaporated milk, butter, cheese, and so on. Under the conditions that exist in California today, the federated plan does not appear to provide the degree of co- ordination needed between raw-product handling and sales activities. This seems to call for a small number of multiple- product plants at the local level or a multiple group of specialized plants so that the raw product (whole milk) may be diverted readily from one use to [57] another without regard to place of origin as demand and supply conditions change the price structure. Unfortunately, local associations, each with its own ambitions as embodied in local management and local pride, have usually been unwilling to adjust to the new competitive situation. The result is an unhappy competitive picture which may weaken the bargaining position of dairy producers. The centralized type of cooperative association has worked well where there was a need for processing that could be done most economically in plants large enough to serve rather extensive areas. The Sun-Maid Raisin Growers' Associa- tion and the California Prune and Apri- cot Growers' Association are cases in point. Sun-Maid has been a centralized association since it was first organized. The California Prune and Apricot Asso- ciation, organized originally on a central- ized basis, was reorganized on a federated basis during the 1920's. Actually, however, it is still largely a centralized type of organization with processing concentrated in a plant at San Jose. In both cases elaborate processing and packaging equipment is provided at headquarters where all fruit is prepared and shipped. The local associations in the one case serve largely as assembly and storage plants. The federated type of organization is often said to be more "flexible" than the centralized plan in the sense that local associations can adjust policies and operations more readily to reflect changes in local conditions or member- ship wishes and attitudes. Bylaws can be changed with the minimum of delay and expense; financing can be arranged to meet local needs; pooling can be adapted to local conditions or members' whims; members exercise direct control over the erection and operation of processing facilities — they can be frugal or extrav- agant; and they can hire or fire the manager. It is claimed that possession of these rights and privileges by members of local associations tends to develop local pride and a sense of achievement. Some of these close contacts and inter- ests are lost, or difficult to maintain, in a centralized association which operates over a wide territory. Members in a lo- cality served by a branch of a centralized association have no direct voice in the hiring or firing of the local manager or in the nature of the facilities provided. It is difficult at times to modify over-all policy to meet special local conditions with regard to such matters as pooling and the various services provided. There are definite psychological and other ad- vantages in local autonomy. On the other hand, it is important to realize that the overwhelming considera- tion is the development of an effective marketing program. Costs of local assem- bly, processing, and packaging normally constitute only a small proportion of the price obtained for products in the whole- sale markets of large consuming centers. Local assembly and processing must be coordinated with the over-all selling policy and program. If this is not done, much of the effectiveness of collective effort by farmers may be lost or dissi- pated. Local autonomy may be an expen- sive luxury if it interferes with or hampers the important task of merchan- dising. Even in a centralized association, it is possible to meet most of the desires and wishes of members in the various areas served through an effective program of member relations or field service. As was pointed out earlier, the Poul- try Producers of Central California operates in an overlapping supply and consumption area in regard to the mar- keting of eggs. It has built up an enviable reputation for its Nulaid brand of eggs. This has been done by establishing high grading standards and developing a sys- tem of grading which makes the output of the various egg-candling and packing branches as uniform as possible. Further- [58] more, as was pointed out earlier (p. 42) , there are often differences in the propor- tion of eggs produced in different areas that fall into the various size and quality categories. In addition, some of the local consuming centers in the area served prefer eggs of particular sizes and grades. Production in such local areas is often inadequate to meet the local demand by size and quality. Because it operates over such a wide territory, the Association is able to shift eggs from one branch to another to meet local supply and demand conditions. Moreover, the Association can shift eggs from one branch to another when operations in one branch are temporarily handicapped by breakdown of equipment or by local epidemics among employees. This gives the Association considerable flexibility in its important task of selling eggs. The Association can also maintain a similar high degree of flexibility and coordination of its feed operations. Be- cause it purchases feed in large volume to serve a wide territory, it is able to gain many of the advantages of large- scale buying. It can employ highly trained men to undertake the buying of raw materials and equally well-trained men to operate the mills and merchandise the feed. It can utilize a control depart- ment, competently staffed, for the purpose of improving the quality of feeds. Because it operates several feed mills strategically located, it can use and maintain output even if operations in one mill are temporarily suspended for repairs. It can also make effective use of processing-in-transit privileges applied to out-of-state rail receipts of grain. Again, because of centralized supervi- sion and control, the Association can maintain uniform standards in feed produced in the several mills. Finally, the weight of evidence appears to be in favor of joint handling of eggs and feed through a single organization. Most of the feed mills are in the same buildings as the egg-candling and pack- aging branches. The local branches served by the mills are collection centers for eggs and distribution centers for feed and supplies. Many of the trucks used to distribute feed to individual poul- try enterprises also pick up eggs. From the main office down to the branches, there is a joint use of both facilities and personnel. Although there is some difference of opinion among members and even groups of members as to possible modifications in the operational struc- ture of the Poultry Producers of Central California, there is no widespread and universal demand for a change. The views expressed by members were more in the form of questions — wouldn't this or that change or modification lead to more efficient operation? It was also evident that personalities tended to color the views of particular producers. One producer would be highly critical of a local branch manager or of egg grading or of the price and quality of feed. The majority of other members in the area, however, would appear to be well satis- fied with operations. Personal likes and dislikes are to be found in all organiza- tions — local, federated, or centralized. Unless there is a large and well-defined indication that change or modification is necessary, it would be a wise policy to maintain the status quo. The Poultry Producers of Central Cali- fornia has had a long history of success- ful operation. This is not to say that improvements in operations and prac- tices cannot and should not be made. In the preceding pages many instances have been pointed out where greater efficiency can be attained. There is every indication also that the Board of Direc- tors and top-level management are con- stantly seeking ways and means to streamline and improve operating prac- tices. The fact that the Association proposed this study and that certain of the recommendations have already been [59] put into effect should be ample proof of this point. There is every reason to believe that if the P.P.C.C. develops an effective member-relations or field-serv- ice system and introduces improvements in its internal operations as needed, it will continue to serve members as well in the future as it has in the past. ACKNOWLEDGMENTS The authors wish to acknowledge the splendid cooperation received from members of the Board of Directors of the Poultry Producers of Central California and from the management and per- sonnel of the Association. Appreciation of their assistance in providing supplementary information is also expressed to the many poultrymen and representatives of other organizations and institu- tions, who contributed to this study. APPENDIX A During the past year or so positive action has been taken by the Board of Directors on several of the recommenda- tions made. Action on several other recommendations has been delayed since in some instances, adoption would depend upon suitable amendment of the Association's bylaws. Positive action taken is as follows: 1. Field-service representatives. Two field-service representatives were appointed in 1954 and steps are being taken to select two additional men. 2. Producer financing. The Poultry Producers Federal Credit Union has been encouraged to increase its loanable funds by soliciting funds from members. The Association has also made invest- ment funds available to the Union. These increased funds will enable the Union to aid individual members in their seasonal credit needs. Commercial banks, production-credit institutions, and Federal Land Banks have also been asked to encourage greater activity in production financing. 3. Milling costs. All mills have been equipped to handle bulk feeds. As of January 1, 1957, bulk and sacked feed was to be priced separately. Bulk-feed prices were to be based f.o.b. the mill, plus proportionate sales costs and actual mill-to-ranch delivery costs. Through publicity and aid in financing the in- stallation of feed bins, members are be- ing encouraged to equip to handle bulk feeds. 4. Branch operations. One branch has been closed. Four branches are op- erated part time under two branch man- agers. Two additional branches also are operated on a part-time basis, thus al- lowing more time for the branch man- agers to undertake field work among members. 5. Members' accounts. Members whose purchases of feed and supplies do not average a minimum of $25.00 a month have been placed on a cash basis. The payment by invoice of members' ac- counts was tested at three branches but did not prove to be feasible. In January, 1957, the Board of Direc- tors announced two important changes in operating policy and procedure which tended to implement still further the recommendations made in this report. First, the deduction to cover egg-han- dling costs was to be reduced from 7 to 6 cents a dozen. Second, it was an- nounced that sales of feed and farm sup- plies would be made to nonmembers as well as to members. Each nonmember would be required to sign a letter of agreement setting forth his duties and obligations. This is to be regarded as a temporary and experimental arrange- ment pending a possible later amend- ment of the bylaws. Several other modifications of operat- ing practices are still under considera- tion, but nearly all of the major recom- mendations have now been implemented — in modified form in some instances — or found by later investigation not to be feasible. APPENDIX B University of California, Davis, California Department of Agricultural Economics July 27, 1954 Questionnaire on Credit 1. Name of Association 2. Number of Members Feed patrons 3. Tons of feed (all types) sold last year 4. Tons of mixed feeds sold 5. Total value of sales of feed sold last year $ Supplies $... 6. Sales last year: Cash $ Credit $ 7. How often are patrons billed for feed and supplies sold on credit? Weekly Twice a month Monthly 8. What percentage of patrons pay regularly? Weekly Twice a month Monthly Comments: ). Do patrons receive discounts for cash? Yes No If so, what is the rate Do patrons receive a discount for payment within a specified period after billing? Yes.. No If so, what is the rate Do you charge patrons for overdue accounts? Yes No If so, what is the rate. Comments: 10. Do patrons receive volume discounts? Yes No If so, kindly indicate practice 11. Does your association have a reserve for bad debts? Yes No If so, what is the amount % Comments: 12. What per cent of total sales in 1953 was bad debts What per cent of total sales was bad debts over the past 10 years — or for such other period for which you have tabulated data 13. Do you sell to egg producers only? Yes No If not, to what other groups of producers do you sell? (E.g., turkey producers, dairymen.) 14. Do you have different credit terms for different groups of producers? Yes No. If so, kindly indicate differences 15. Do your bad debt losses run more heavily for fryer (broiler) or turkey producers than for egg producers? Yes No If so, indicate experience 16. Do you finance fryer (broiler) and turkey producers? Yes No If so, indicate basis If not, how are such producers normally financed [62] 17. What steps are normally taken to service delinquent accounts? 18. Do you believe that the credit policy of your association places you at a competitive disadvan- tage with independent feed dealers? Yes No Comments: 19. Do you believe that a more liberal credit policy would enable your association to increase its volume of sales of feed and supplies? Yes No If the answer is yes, what would be the disadvantages If you liberalize credit policy would you expect heavier bad debts? 20. Does your association employ field men (or feed salesmen) ? Yes No What is the nature of their functions? Do they play a role in servicing patrons' accounts? 21. General comments: In order that the information in our publications may be more intelligible it is sometimes necessary to use trade names of products or equipment rather than complicated descriptive or chemical identifications. In so doing it is unavoidable in some cases that similar products which are on the market under other trade names may not be cited. No endorsement of named products is intended, nor is criticism implied of similar products which are not mentioned. 5m-12,'57(C6164)BEB Consider"tJrfj| Future in Agricultural Economics Agricultural economics applies SCIENCE to the BUSINESS OF FARMING ... to the marketing of farm products, to the use of agri- cultural and range resources. If agriculture is to continue as an important segment of our na- tional economy, farmers must be adequately trained in the business of farming. The University of California's course of study in agricul- tural economics is a step toward that goal. The curriculum . . . presented on the Davis campus, places major emphasis on Farm Management . . . but also provides instruction in Marketing, Co-operative Marketing, Agricultural Finance, Policy, and related subjects. Supplementary work may also be taken in such branches of agriculture as Agronomy, Animal Husbandry, Pomology, Agricultural Engineering, and the like. The faculty ... is comprised of trained, experienced economists, many with national and international reputations in their fields. The staff is active in service and research work in all of the Western States. Job opportunities . . . can best be understood by pointing to positions now occupied by graduates. The largest percentage are farmers. Other lines of endeavor include: Farm Managers • Credit work ■ Farmer Organizations Marketing Organizations • Agricultural Extension work State and Federal Departments of Agriculture work College teaching and research • High school teaching For more information: Write to the Department of Agricultural Economics, University of California, Davis. or: See your University of California Farm Advisor for college entrance requirements.